-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBZzfh1tvXfniJJGstIoAR19JzsgYK1v6oExpEmWb4lUtK31l2B5Om2ZRa5cVlRu vsg2cGHQOAGH1jdYk5uVEw== 0000950131-98-002805.txt : 19980430 0000950131-98-002805.hdr.sgml : 19980430 ACCESSION NUMBER: 0000950131-98-002805 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19980428 EFFECTIVENESS DATE: 19980428 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E CENTRAL INDEX KEY: 0000804223 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 350472300 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-26032 FILM NUMBER: 98602489 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-04882 FILM NUMBER: 98602490 BUSINESS ADDRESS: STREET 1: P O BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46801 BUSINESS PHONE: 2194273018 MAIL ADDRESS: STREET 1: P O BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46801 485BPOS 1 POST-EFFECTIVE AMENDMENT #13 TO FORM N-4 As filed with the Securities and Exchange Commission on April 28, 1998 Registration No. 33-26032 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / / Post-Effective Amendment No. 13 / X / AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / / AMENDMENT NO. 17 / X / LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E ------------------------------------------- (Exact Name of Registrant) THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ------------------------------------------- (Name of Depositor) 1300 South Clinton Street Fort Wayne, Indiana 46802 -------------------------- (Address of Depositor's Principal Executive Offices) Depositor's Telephone Number, including Area Code: (219)455-2000 JACK D. HUNTER, ESQ. 200 East Berry Street Fort Wayne, Indiana 46802 ------------------------- (Name and Address of Agent for Service) Copy to: Kimberly J. Smith Sutherland, Asbill & Brennan LLP 1275 Pennsylvania Ave., N.W. Washington, D.C. 20004 --------------------------------------- Title of secrities being registered: Interests in a separate account under individual flexible premium deferred variable annuity contracts. --------------------------------------- It is proposed that this filing will become effective immediately upon filing pursuant to paragraph (b) of Rule 485 --- X On April 30, 1998*, pursuant to paragraph (b) of Rule 485 --- 60 days after filing pursuant to paragraph (a)(1) of Rule 485 --- On , 1998 Pursuant to paragraph (a)(1) of Rule 485 --- LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E CROSS REFERENCE SHEET (PURSUANT TO RULE 495 OF REGULATION C UNDER THE SECURITIES ACT OF 1933) RELATING TO ITEMS REQUIRED BY FORM N-4
N-4 ITEM CAPTION IN PROSPECTUS (PART A) - -------- ------------------------------ 1. Cover Page 2. Special terms 3. (a) Expense Table (b) Not Applicable (c) Not Applicable (d) For Your Information (top of page 2) 4. (a) Condensed Financial Information (b) Not Applicable (c) Financial Statements 5. (a) Cover Page; The Lincoln National Life Insurance Company; (b) Variable Annuity Account; Investments of the Variable Annuity Account; Cover Page (c) Investments of the Variable Annuity Account (d) Cover Page (e) Voting Rights (f) Not Applicable 6. (a) For Your Information; Charges and Other Deductions (b) Charges and Other Deductions (c) Charges and Other Deductions (d) Charges and Other Deductions (e) Charges and Other Deductions (f) Charges and Other Deductions (g) Not Applicable 7. (a) The Contracts; Investments of the Variable Annuity Account; Annuity Payouts; Voting Rights; Return Privilege (b) Investments of the Variable Annuity Account; The Contracts; Cover Page (c) The Contracts (d) The Contracts
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) Cover Page; Annuity Payouts (f) The Contracts; Annuity Payouts 9. (a) The Contracts; Annuity Payouts (b) The Contracts; Annuity Payouts 10. (a) The Contracts; Cover Page; Charges and Other Deductions (b) The Contracts; Investments of the Variable Annuity Account (c) The Contracts (d) Distribution of the Contracts 11. (a) The Contracts (b) Restrictions Under the Texas Optional Retirement Program (c) The Contracts (d) The Contracts (e) Return Privilege 12. (a) Federal Tax Status (b) Cover Page; Federal Tax Status (c) Federal Tax Status 13. Legal Proceedings 14. Table of Contents to the Statement of Additional Information (SAI) for Lincoln National Variable Annuity Account E
N-4 ITEM CAPTION IN STATEMENT OF ADDITIONAL - -------- INFORMATION (PART B) ---------------------------------- 15. Cover Page for Part B 16. Cover Page for Part B 17. (a) Not Applicable (b) Not Applicable (c) General Information and History of The Lincoln National Life Insurance Company Lincoln Life (Lincoln Life)
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
N-4 ITEM CAPTION IN STATEMENT OF ADDITIONAL - ---------- 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. Not Applicable 22. Annuity Payouts [Also see that heading in the Prospectus] 23. (a) Financial Statements -- Lincoln National Variable Annuity Account E (b) Financial Statements -- The Lincoln National Life Insurance Company
THE AMERICAN LEGACY LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E INDIVIDUAL VARIABLE ANNUITY CONTRACTS issued by: Lincoln National Life Insurance Co. 1300 South Clinton Street Fort Wayne, Indiana 46802 This Prospectus describes the individual flexible premium deferred variable annuity contract (contract or variable annuity contract) issued by Lincoln Na- tional Life Insurance Co. (Lincoln Life). It is for use with the following re- tirement plans qualified for special tax treatment (qualified plans) under the Internal Revenue Code of 1986, as amended (the code): 1. Public school systems and certain tax-exempt organizations 403(b); 2. Qualified corporate employee pension and profit-sharing trusts and quali- fied annuity plans; 3. Corresponding plans of self-employed individuals (H.R. 10 or Keogh); 4. Individual retirement annuities (IRA); 5. Government deferred compensation plans (457); and 6. Simplified employee pension plans (SEP). Section 403(b) business under number (1.) will normally be accepted only for purchase payments qualifying as 403(b) lump sum transfers or rollovers. The contract described in this Prospectus is also offered to plans established by persons who are not entitled to participate in one of the previously men- tioned plans (nonqualified contracts). The contract offers you the accumulation of contract value and payment of pe- riodic annuity benefits. These benefits may be paid on a variable or fixed ba- sis or a combination of both. Benefits start at an annuity commencement date which you select. If the annuitant dies before the annuity commencement date, the greater of: 1) the contract value; or 2) the guaranteed minimum death ben- efit (GMDB) or, if in effect, the enhanced guaranteed minimum death benefit (EGMDB) will be paid to the beneficiary. (See Death benefit before the annuity commencement date) The minimum initial purchase payment for the contract is: 1. $1,500 for a nonqualified plan and a 403(b) transfer/rollover or 2. $300 for a qualified plan. The minimum subsequent purchase payment for the contract is $25 per payment, subject to a $300 annual minimum. All investments (purchase payments) for benefits on a variable basis will be placed in Lincoln National Variable Annuity Account E (Variable annuity ac- count [VAA]). The VAA is a segregated investment account of Lincoln Life, which is the depositor. Based upon your instructions, the VAA invests purchase payments (at net asset value) in shares of a class of one or more specified funds of the American Variable Insurance Series (series): Global Growth Fund, Global Small Capitalization Fund, Growth Fund, International Fund, Growth-In- come Fund, Asset Allocation Fund, High-Yield Bond Fund, Bond Fund, U.S. Government/AAA-Rated Securities Fund and Cash Management Fund. (See Descrip- tion of the series). Both the value of a contract before the annuity commence- ment date and the amounts applied for afterward will depend upon the invest- ment performance of the fund(s) selected. Investments in these funds are nei- ther insured or guaranteed by the U.S. Government nor by any other person or entity. Purchase payments for benefits on a fixed basis will be placed in the fixed side of the contract, which is part of our General Account. However, this Pro- spectus deals only with those elements of the contracts relating to the VAA, except where reference to the fixed side is made. Special limits apply to withdrawals and transfers from the fixed side of the contract. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Prospectus details the information regarding the VAA that you should know before investing. This booklet also includes a current Prospectus of the se- ries. Both should be read carefully before investing and kept for future ref- erence. A statement of additional information (SAI), dated April 30, 1998, concerning the VAA has been filed with the SEC and is incorporated by this reference into this Prospectus. If you would like a free copy, complete and mail the enclosed card, or call 1-800-942-5500. A table of contents for the SAI appears on the last page of this Prospectus. This Prospectus is dated April 30, 1998. TABLE OF CONTENTS
Page - ---------------------------------------------------------------------- Special terms 3 - ---------------------------------------------------------------------- Expense tables 4 - ---------------------------------------------------------------------- Synopsis 6 - ---------------------------------------------------------------------- Condensed financial information for the variable annuity account 8 - ---------------------------------------------------------------------- Financial statements 9 - ---------------------------------------------------------------------- Lincoln National Life Insurance Co. 9 - ---------------------------------------------------------------------- Fixed side of the contract 9 - ---------------------------------------------------------------------- Variable annuity account (VAA) 9 - ---------------------------------------------------------------------- Investments of the variable annuity account 9 - ---------------------------------------------------------------------- Charges and other deductions 11 - ---------------------------------------------------------------------- The contracts 13 - ---------------------------------------------------------------------- Annuity payouts 17
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Page - -------------------------------------------------------------- Federal tax status 18 - -------------------------------------------------------------- Voting rights 19 - -------------------------------------------------------------- Distribution of the contracts 20 - -------------------------------------------------------------- Return privilege 20 - -------------------------------------------------------------- State regulation 20 - -------------------------------------------------------------- Restrictions under the Texas Optional Retirement Program 20 - -------------------------------------------------------------- Records and reports 21 - -------------------------------------------------------------- Other information 21 - -------------------------------------------------------------- Statement of Additional Information table of contents for Separate Account E 22
- -------------------------------------------------------------------------------- 2 SPECIAL TERMS (Throughout this Prospectus, in order to make the following documents more un- derstandable to you, we have italicized the special terms.) Account or variable annuity account (VAA) -- The segregated investment ac- count, Account E, into which Lincoln Life sets aside and invests the assets for the variable side of the contract offered in this Prospectus. Accumulation unit -- A measure used to calculate contract value for the vari- able side of the contract before the annuity commencement date. See The con- tracts. Advisor or investment advisor -- Capital Research and Management Co. (CRMC), which provides investment management services to the series. See Investment advisor. Annuitant -- The person upon whose life the annuity benefit payouts made after the annuity commencement date will be based. Annuity commencement date -- The valuation date when funds are withdrawn or converted into annuity units or fixed dollar payout for payout of annuity ben- efits under the annuity payout option selected. For purposes of determining whether an event occurs before or after the annuity commencement date, the an- nuity commencement date is deemed to begin at close of business on the valua- tion date. Annuity payout option -- An optional form of payout of the annuity available within the contract. See Annuity payouts. Annuity payout -- An amount paid at regular intervals after the annuity com- mencement date under one of several options available to the annuitant and/or any other payee. This amount may be paid on a variable or fixed basis, or a combination of both. Annuity unit -- A measure used to calculate the amount of annuity payouts af- ter the annuity commencement date. See Annuity payouts. Beneficiary -- The person whom you designate to receive the death benefit, if any, in case of the annuitant's death. Cash surrender value -- Upon surrender, the contract value less any applicable charges, fees and taxes. Code -- The Internal Revenue Code of 1986, as amended. Contract (variable annuity contract) -- The agreement between you and us pro- viding a variable annuity. Contractowner (you, your, owner) -- The person who has the ability to exercise the rights within the contract (decides on investment allocations, transfers, payout options; designates the beneficiary, etc.). Usually, but not always, the contractowner is also the annuitant. Contract value -- At a given time, the total value of all accumulation units for a contract plus the value of the fixed side of the contract. Contract year -- Each one-year period starting with the effective date of the contract and starting with each contract anniversary after that. Death benefit -- The amount payable to your designated beneficiary if the an- nuitant dies before the annuity commencement date. See The contracts. Depositor -- Lincoln National Life Insurance Co. Enhanced guaranteed minimum death benefit (EGMDB) -- The EGMDB is the greater of: (1) contract value as of the day on which Lincoln Life approves the pay- ment of a death benefit claim; or (2) the highest contract value on any policy anniversary date (including the inception date) from the time the EGMDB takes effect up to and including the annuitant's age 75. The highest contract value so determined is then increased by purchase payments and decreased by partial withdrawals, partial annuitizations, and any premium taxes made, effected or incurred subsequent to the anniversary date on which the highest contract value is obtained. Flexible premium deferred contract -- An annuity contract with an initial pur- chase payment, allowing additional purchase payments to be made, and with an- nuity payouts beginning at a future date. Fund -- Any of the underlying investment options available in the series in which your purchase payments are invested. Guaranteed minimum death benefit (GMDB) -- The GMDB is equal to the sum of all purchase payments plus any attributable gain, minus any withdrawals, partial annuitizations and premium taxes incurred. We determine the attributable gain separately for each contract year on its seventh anniversary (once its surren- der charge period has expired). See Death benefit before the annuity commence- ment date. Home office -- The headquarters of Lincoln National Life Insurance Co., lo- cated at 1300 South Clinton Street, Fort Wayne, Indiana 46802. Lincoln Life (we, us, our) -- Lincoln National Life Insurance Co. Purchase payments -- Amounts paid into the contract. Series -- American Variable Insurance Series (series), the funds in which pur- chase payments are invested. Statement of additional information (SAI) -- A document required by the SEC to be provided upon request to a prospective purchaser of a contract, you. This free document gives more information about Lincoln Life, the VAA and the vari- able annuity contract. Subaccount -- That portion of the VAA that reflects investments in accumula- tion and annuity units of a class of a particular fund. There is a separate subaccount which corresponds to each class of a fund under the contracts. Surrender -- A contract right that allows you to terminate your contract and receive your cash surrender value. See The contracts. Valuation date -- Each day the New York Stock Exchange (NYSE) is open for trading. Valuation period -- The period starting at the close of trading (currently 4:00 pm New York time) on each day that the NYSE is open for trading (valua- tion date) and ending at the close of such trading on the next valuation date. Withdrawal -- A contract right that allows you to obtain a portion of your cash surrender value. 3 EXPENSE TABLES CONTRACTOWNER TRANSACTION EXPENSES: The maximum contingent deferred sales charge (as a percentage of purchase payments surrendered/withdrawn): 6% The contingent deferred sales charge percentage is reduced over time. The later a redemption occurs, the lower the contingent deferred sales charge with re- spect to that surrender or withdrawal. See Contingent deferred sales charges. (Note: This charge may be waived in certain cases. See Contingent deferred sales charges.) - -------------------------------------------------------------------------------- ANNUAL CONTRACT FEE: $35 This is a single charge assessed against the contract value on the last valua- tion date of each contract year and upon full surrender; it is not a separate charge for each subaccount. - -------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT E ANNUAL EXPENSES (as a percentage of average account value for each subaccount*).
Contracts with EGMDB Contracts without EGMDB Mortality and expense risk fees 1.25% 1.25% EGMDB charge 0.15% -- ----- ----- Total Account E annual expenses 1.40% 1.25%
ANNUAL EXPENSES OF THE FUNDS FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997 (as a percentage of each fund's average net assets):
Management + Other = Total fees expenses expenses - -------------------------------------------------------------------------- 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
- -------------------------------------------------------------------------------- *The VAA is divided into ten separately-named subaccounts, which are available under the contracts. Each subaccount, in turn, invests purchase payments in its respective fund. **These expenses are estimated amounts for the current fiscal year. 4 EXAMPLES (reflecting expenses both of The American Legacy subaccounts and of the funds): If you surrender your contract at the end of the applicable time period, you would pay the following expenses* on a $1,000 investment, assuming a 5% annual return:
1 year 3 years 5 years 10 years - ------------------------------------------------------------------- 1. Global Growth $80 $113 $139 $237 - ------------------------------------------------------------------- 2. Global Small Capitalization** 81 116 144 248 - ------------------------------------------------------------------- 3. Growth 77 103 121 197 - ------------------------------------------------------------------- 4. International 79 110 134 224 - ------------------------------------------------------------------- 5. Growth-Income 76 101 118 192 - ------------------------------------------------------------------- 6. Asset Allocation 77 104 123 202 - ------------------------------------------------------------------- 7. High-Yield Bond 78 106 126 208 - ------------------------------------------------------------------- 8. Bond 78 107 128 212 - ------------------------------------------------------------------- 9. U.S. Govt./AAA-Rated Securities 78 106 126 209 - ------------------------------------------------------------------- 10. Cash Management 77 104 123 202
- -------------------------------------------------------------------------------- If you do not surrender your contract, you would pay the following expenses* on a $1,000 investment, assuming a 5% annual return:
1 year 3 years 5 years 10 years - ------------------------------------------------------------------- 1. Global Growth $20 $63 $109 $237 - ------------------------------------------------------------------- 2. Global Small Capitalization** 21 66 114 248 - ------------------------------------------------------------------- 3. Growth 17 53 91 197 - ------------------------------------------------------------------- 4. International 19 60 104 224 - ------------------------------------------------------------------- 5. Growth-Income 16 51 88 192 - ------------------------------------------------------------------- 6. Asset Allocation 17 54 93 202 - ------------------------------------------------------------------- 7. High-Yield Bond 18 56 96 208 - ------------------------------------------------------------------- 8. Bond 18 57 98 212 - ------------------------------------------------------------------- 9. U.S. Govt./AAA-Rated Securities 18 56 96 209 - ------------------------------------------------------------------- 10. Cash Management 17 54 93 202
- -------------------------------------------------------------------------------- *These expenses, calculated as mandated by the SEC, reflect the annual contract fee as the ratio of the total contract fees collected in the most recent fiscal year to the total average net assets of the account. **These expenses are estimated for the current fiscal year. All of the figures provided under the subheading annual expenses of the funds and part of the data used to produce the figures in the examples were supplied by the underlying portfolio company (series) through the VAA's principal under- writer, American Funds Distributors, Inc. We have not independently verified this information. These examples are provided to assist you in understanding the various costs and expenses that you will bear directly or indirectly. These examples reflect expenses both of the VAA and of the underlying funds. These examples reflect expenses assuming that the EGMDB is NOT in effect. If the EGMDB is in effect, these expenses will be higher. For more complete descriptions of the various costs and expenses involved, see Charges and other deductions in this Prospectus, and Fund Organization and Man- agement in the Prospectus for the series. Premium taxes may also be applicable, although they do not appear in the table. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN. These examples are unaudited. 5 SYNOPSIS WHAT TYPE OF CONTRACT AM I BUYING? It is an individual annuity contract issued by Lincoln Life. It may provide for a fixed annuity and/or a variable annuity. This Prospectus is intended to provide disclosure only about the variable por- tion of the contract. See The contracts. WHAT IS THE VARIABLE ANNUITY ACCOUNT (VAA)? It is a segregated asset account established under Indiana insurance law, and registered with the SEC as a unit investment trust. The assets of the VAA are allocated to one or more subaccounts, according to your investment choice. Those assets are not charge- able with liabilities arising out of any other business which Lincoln Life may conduct. See Variable annuity account. WHAT ARE MY INVESTMENT CHOICES? Through its various subaccounts, the VAA uses your purchase payments to purchase series shares, at your direction, in one or more of the following investment funds of the series: Global Growth, Global Small Capitalization, Growth, International, Growth-Income, Asset Allocation, High-Yield Bond, Bond, U.S. Government/ AAA-Rated Securities and Cash Manage- ment. In turn, each fund holds a portfolio of securities consistent with its own particular investment policy. See Investments of the variable annuity ac- count and Description of the series. WHO INVESTS MY MONEY? The investment advisor for the series is CRMC, Los Ange- les, California. CRMC is a long-established investment management organization, and is registered as an investment advisor with the SEC. See Investments of the variable annuity account and Investment advisor. HOW DOES THE CONTRACT WORK? Once we approve your application, you will be is- sued your individual annuity contract. During the accumulation period, while you are paying in, purchase payments will buy accumulation units under the con- tract. Should you decide to annuitize (that is, change your contract to a pay- out mode rather than an accumulation mode), your accumulation units will be converted to annuity units. Your periodic annuity payout will be based upon the number of annuity units to which you became entitled at the time you decided to annuitize, and the value of each unit on the valuation date. See The contracts. WHAT CHARGES ARE ASSOCIATED WITH THIS CONTRACT? At the end of each contract year and at the time of surrender, we will deduct $35 from your contract value as a maintenance charge. Should you decide to withdraw contract value before your purchase payments have been in your contract for a certain minimum period, you will incur a contingent deferred sales charge of anywhere from 1% to 6%, depending upon how many full contract years those payments have been in the contract. (Note: This sales charge is not assessed upon: the first withdrawal of contract value during a contract year to the extent the withdrawal does not exceed 10% of the purchase payments (this 10% withdrawal exception does not apply to a surrender of the contract); automatic withdrawals, not in excess of 10% of the purchase payments during a contract year, made by non-trustee contractowners who are at least 59 1/2; a surrender of a contract or withdrawal of contract value as a result of the annuitant's permanent and total disability [as defined in Section 22(e)(3) of the code], after the effective date of the contract and before the annuitant's 65th birthday; a surrender of the contract as a result of the death of the annuitant; or annuitization. If your state assesses a premium tax with respect to your contract, then at the time the tax is incurred (or at such other time as we may choose), we will de- duct those amounts from purchase payments or contract value, as applicable. We assess an annual charge in the amount of 1.25% as a mortality and expense risk charge against the daily net asset value of the VAA, including that por- tion of the account attributable to your purchase payments. If the EGMDB is in effect, the aggregate charge against the VAA is 1.40% consisting of a 1.25% mortality and expense risk charge and a 0.15% risk charge for the EGMDB. For a complete discussion of the charges associated with the contract, see Charges and other deductions. The series pays a fee to its investment advisor, CRMC, based upon the average daily net asset value of each fund in the series. (See Investments of the vari- able annuity account-Investment advisor.) In addition, there are other expenses associated with the daily operations of the series. These are more fully de- scribed in the Prospectus for the series. HOW MUCH MUST I PAY, AND HOW OFTEN? Subject to the minimum and maximum payments stated on the first page of the Prospectus, the amount and frequency or your payments are completely flexible. See The contracts--Purchase payments. HOW WILL MY ANNUITY PAYOUTS BE CALCULATED? If you decide to annuitize, you elect an annuity payout option. Once you have done so, your periodic payout will be based upon a number of factors. If you participate in the VAA, the changing values of the funds in which you have invested will be one factor. See Annuity payouts. REMEMBER THAT PARTICIPANTS IN THE VAA BENEFIT FROM ANY GAIN, AND TAKE A RISK OF ANY DROP, IN THE VALUE OF THE SECURITIES IN THE FUNDS' PORT- FOLIOS. WHAT HAPPENS IF I DIE BEFORE I ANNUITIZE? If you are the annuitant and also the contractowner, then the beneficiary whom you designate will receive either the GMDB, or the then current value of the contract, whichever is greater. If the EGMDB is in effect, the beneficiary 6 will receive either the EGMDB or the then current value of the contract, which- ever is greater. Your beneficiary will have certain options for how the money is to be paid out. If a contractowner is not also the annuitant, certain spe- cial rules apply. See The contracts--Death benefit before the annuity commence- ment date and Death of contractowner. MAY I TRANSFER CONTRACT VALUE BETWEEN FUNDS IN THE SERIES? Yes; however, there are limits on how often you may do so. See The contracts--Transfers between subaccounts on or before the annuity commencement date and Transfers after the annuity commencement date. MAY I TRANSFER CONTRACT VALUE FROM THE FIXED TO THE VARIABLE SIDE OF THE CON- TRACT, AND VICE-VERSA? Yes, subject once again to specific restrictions in the contract. See The contracts--Transfers of accumulation units to and from the General Account. MAY I SURRENDER THE CONTRACT OR MAKE A WITHDRAWAL? Yes, subject to contract re- quirements and to restrictions imposed under certain qualified retirement plans for which the contract is purchased. See The contracts--Surrenders and with- drawals. If you surrender the contract or make a withdrawal, certain charges may be as- sessed, as discussed above and under Charges and other deductions. In addition, the Internal Revenue Service (IRS) may assess a 10% premature withdrawal pen- alty tax. A surrender or a withdrawal may be subject to 20% withholding. See Federal tax status and withholding. DO I GET A FREE LOOK AT THIS CONTRACT? Yes. If within 20 days (or a longer pe- riod if required by law) of the date you first receive the contract you return it, postage pre-paid to the home office of Lincoln Life, it will be canceled. However, except in some states, during this period, you assume the risk of a market drop with respect to purchase payments which you allocate to the vari- able side of the contract. See Return privilege. 7 CONDENSED FINANCIAL INFORMATION FOR THE VARIABLE ANNUITY ACCOUNT ACCUMULATION UNIT VALUES (FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD) The following information relating to accumulation unit values and number of accumulation units for The American Legacy subaccounts for each of the ten years in the period ended December 31, 1997 comes from the VAA's financial statements. It should be read in conjunction with the VAA's financial state- ments and notes which are all included in the SAI.
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - --------------------------------------------------------------------------------------------------------- Global Growth subaccount*+ Accumulation unit value .Beginning of period............................................................................ $ 1.000 .End of period.................................................................................. 1.077 Number of accumulation units .End of period (000's omitted).................................................................. 3,207 - --------------------------------------------------------------------------------------------------------- Growth subaccount Accumulation unit value .Beginning of period.... $ .818 .925 1.200 1.133 1.492 1.632 1.875 1.861 2.450 2.743 .End of period.......... $ .925 1.200 1.133 1.492 1.632 1.875 1.861 2.450 2.743 3.525 Number of accumulation units .End of period (000's omitted)............... 54,124 93,979 99,094 106,335 110,169 111,230 105,312 101,710 90,842 79,939 - --------------------------------------------------------------------------------------------------------- International subaccount* Accumulation unit value .Beginning of period.................................................... $ 1.000 1.001 1.114 1.294 .End of period.......................................................... $ 1.001 1.114 1.294 1.393 Number of accumulation units .End of period (000's omitted).......................................... 27,787 31,592 38,351 36,787 - --------------------------------------------------------------------------------------------------------- Growth-Income subaccount Accumulation unit value .Beginning of period.... $ .842 .952 1.180 1.136 1.392 1.484 1.646 1.659 2.180 2.556 .End of period.......... $ .952 1.180 1.136 1.392 1.484 1.646 1.659 2.180 2.556 3.177 Number of accumulation units .End of period (000's omitted)............... 111,918 195,478 199,880 203,868 201,913 199,178 183,608 172,288 158,861 144,738 - --------------------------------------------------------------------------------------------------------- Asset Allocation subaccount* Accumulation unit value .Beginning of period.................................................... $ 1.000 .986 1.262 1.443 .End of period.......................................................... $ .986 1.262 1.443 1.717 Number of accumulation units .End of period (000's omitted).......................................... 3,807 5,168 7,199 9,568 - --------------------------------------------------------------------------------------------------------- High-Yield Bond subaccount Accumulation unit value .Beginning of period.... $ .974 1.103 1.204 1.234 1.543 1.714 1.971 1.819 2.188 2.447 .End of period.......... $ 1.103 1.204 1.234 1.543 1.714 1.971 1.819 2.188 2.447 2.716 Number of accumulation units .End of period (000's omitted)............... 23,858 34,050 29,430 28,254 27,823 29,951 25,988 23,867 20,767 18,911 - --------------------------------------------------------------------------------------------------------- Bond subaccount** Accumulation unit value .Beginning of period.................................................................... $ 1.000 1.046 .End of period.......................................................................... $ 1.046 1.137 Number of accumulation units .End of period (000's omitted).......................................................... 1,681 2,352 - --------------------------------------------------------------------------------------------------------- U.S. Government/AAA-Rated subaccount Accumulation unit value .Beginning of period.... $ .948 1.012 1.108 1.187 1.359 1.444 1.586 1.498 1.707 1.738 .End of period.......... $ 1.012 1.108 1.187 1.359 1.444 1.586 1.498 1.707 1.738 1.862 Number of accumulation units .End of period (000's omitted)............... 26,477 42,915 43,779 44,335 42,291 39,387 31,118 29,062 22,652 18,125 - --------------------------------------------------------------------------------------------------------- Cash Management subaccount Accumulation unit value .Beginning of period.... $ 1.037 1.097 1.179 1.256 1.309 1.335 1.353 1.388 1.447 1.502 .End of period.......... $ 1.097 1.179 1.256 1.309 1.335 1.353 1.388 1.447 1.502 1.560 Number of accumulation units .End of period (000's omitted)............... 26,381 31,446 29,312 19,913 21,963 13,982 14,312 10,001 9,605 7,318
- -------------------------------------------------------------------------------- *The International subaccount and Asset Allocation subaccount began operations on January 3, 1994. **The Bond subaccount began operations on January 2, 1996 so the figures for 1996 represent experience of less than one year. *+The Global Growth subaccount began operations on April 30, 1997 so the figures for 1997 represent experience of less than one year. There is a Global Small Capitalization subaccount but it is not in the chart because it did not begin activity until 1998. Unit Values are for contracts without the EGMDB. For those contracts with the EGMDB, the unit values are lower. 8 FINANCIAL STATEMENTS The financial statements for the VAA and Lincoln Life are located in the SAI. If you would like a free copy, complete and mail the enclosed card, or call 1- 800-942-5500. LINCOLN NATIONAL LIFE INSURANCE CO. Lincoln Life was founded in 1905 and is organized under Indiana law. We are one of the largest stock life insurance companies in the United States. We are owned by Lincoln National Corp. (LNC) which is also organized under Indiana law. LNC's primary businesses are insurance and financial services. FIXED SIDE OF THE CONTRACT Purchase payments allocated to the fixed side of the contract become part of Lincoln Life's general account, and DO NOT participate in the investment expe- rience of the VAA. The general account is subject to regulation and supervi- sion by the Indiana Insurance Department as well as the insurance laws and regulations of the jurisdictions in which the contracts are distributed. In reliance on certain exemptions, exclusions and rules, Lincoln Life has not registered interests in the general account as a security under the Securities Act of 1933 and has not registered the general account as an investment com- pany under the 1940 Act. Accordingly, neither the general account nor any in- terests therein are subject to regulation under the 1933 Act or the 1940 Act. Lincoln Life has been advised that the staff of the SEC has not made a review of the disclosures which are included in this Prospectus which relate to our general account and to the fixed account under the contract. These disclo- sures, however, may be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in Prospectuses. This Prospectus is generally intended to serve as a disclosure document only for aspects of the contract involving the VAA, and therefore contains only selected information regarding the fixed side of the contract. Complete details regarding the fixed side of the contract are in the contract. Purchase payments allocated to the fixed side of the contract are guaranteed to be credited with a minimum interest rate, specified in the contract, of at least 3.0%. A purchase payment allocated to the fixed side of the contract is credited with interest beginning on the next calendar day following the date of receipt if all data is complete. Lincoln Life may vary the way in which it credits interest to the fixed side of the contract from time to time. ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN ADVANCE IN LINCOLN LIFE'S SOLE DISCRETION, CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF 3.0% WILL BE DECLARED. VARIABLE ANNUITY ACCOUNT (VAA) On September 26, 1986, the VAA was established as an insurance company sepa- rate account under Indiana law. It is registered with the SEC as a unit in- vestment trust under the provisions of the Investment Company Act of 1940 (1940 Act). The SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated investment account, meaning that its assets may not be charged with liabilities resulting from any other business that we may conduct. Income, gains and losses, whether realized or not, from assets allocated to the VAA are, in accordance with the applicable annuity contracts, credited to or charged against the VAA. They are credited or charged without regard to any other income, gains or losses of Lincoln Life. The VAA satisfies the defini- tion of separate account under the federal securities laws. We do not guaran- tee the investment performance of the VAA. Any investment gain or loss depends on the investment performance of the funds. YOU ASSUME THE FULL INVESTMENT RISK FOR ALL AMOUNTS PLACED IN THE VAA. INVESTMENTS OF THE VARIABLE ANNUITY ACCOUNT You decide the subaccount(s) to which you allocate purchase payments. There is a separate subaccount which corresponds to each class of each fund in the se- ries. You may change your allocation without penalty or charges. Shares of the funds will be sold at net asset value with no initial sales charge to the VAA in order to fund the contracts. The series is required to redeem fund shares at net asset value upon our request. We reserve the right to add, delete or substitute funds. INVESTMENT ADVISOR The investment advisor for the series is CRMC, 333 South Hope Street, Los An- geles, California 90071. CRMC is one of the nation's largest and oldest in- vestment management organizations. As compensation for its services to the se- ries, the investment advisor receives a fee from the series which is accrued daily and paid monthly. This fee is based on the net assets of each fund, as defined under Purchases and redemptions of shares, in the Prospectus for the series. 9 DESCRIPTION OF THE SERIES The series was organized as a Massachusetts business trust in 1983 and is reg- istered as a diversified, open-end management investment company under the 1940 Act. Diversified means not owning too great a percentage of the securi- ties of any one company. An open-end company is one which, in this case, per- mits Lincoln Life to sell its shares back to the series when you make a with- drawal, surrender the contract or transfer from one fund to another. Manage- ment investment company is the legal term for a mutual fund. These definitions are very general. The precise legal definitions for these terms are contained in the 1940 Act. The series has ten separate portfolios of funds. The series has adopted a plan pursuant to Rule 18f-3 under the 1940 Act to permit the series to establish a multiple class distribution system for all of its portfolios. The series' Board of Trustees may at any time establish additional funds or classes, which may or may not be available to the VAA. Fund assets are segregated and a shareholder's interest is limited to those funds in which the shareholder owns shares. Under the multi-class system adopted by the series, shares of each multi-class fund represent an equal pro rata interest in that fund and, generally, have identical voting, dividend, liquidation and other rights, preferences, powers, restrictions, limitations, qualifications and terms and conditions, except that: (1) each class has a different designation; (2) each class of shares bears its class expenses; (3) each class has exclusive voting rights on any matter submitted to shareholders that relates solely to its distribution ar- rangement; and (4) each class has separate voting rights on any matter submit- ted to shareholders in which the interests of one class differ from the inter- ests of any other class. Expenses currently designated as class expenses by the series' Board of Trustees under the plan pursuant to Rule 18f-3 include, for example, service fees paid under a 12b-1 plan to cover servicing fees paid to dealers selling the contracts. Each fund has two classes of shares, designated as Class 1 and Class 2 shares. Class 1 and 2 differ primarily in that Class 2 but not Class 1 shares are sub- ject to a 12b-1 plan. Only Class 1 shares are available under the contracts. The investment objectives and policies of certain funds are similar to the in- vestment objectives and policies of portfolios, other than the funds, that are advised by the advisor. The investment results of the funds, however, may be higher or lower than the other portfolios that are advised by the advisor. There can be no assurance, and no representation is made, that the investment results of any of the funds will be comparable to the investment results of any other portfolio advised by the advisor. Following are brief summaries of the investment objectives and policies of the funds. Each fund is subject to certain investment policies and restrictions which may not be changed without a majority vote of shareholders of that fund. More detailed information may be obtained from the current Prospectus for the series, which is included in this booklet. PLEASE BE ADVISED THAT THERE IS NO ASSURANCE THAT ANY OF THE FUNDS WILL ACHIEVE THEIR STATED OBJECTIVES. 1. Global Growth Fund--The investment objective is to achieve long-term growth of capital by investing in securities of issuers domiciled around the world. The fund will invest primarily in common stocks but may invest in other securities such as preferred stock, debt securities and securities convertible into common stock. PLEASE NOTE: THIS FUND IS NOT YET AVAILABLE IN CALIFORNIA. PLEASE CONSULT YOUR INVESTMENT DEALER FOR CURRENT INFORMA- TION ABOUT THE GLOBAL GROWTH FUND'S AVAILABILITY. 2. Global Small Capitalization Fund--This fund seeks long-term growth of capi- tal by investing primarily in equity securities of companies domiciled around the world with relatively small market capitalizations (share price times the number of equity securities outstanding). The fund may also in- vest in securities convertible into common stocks, straight debt securi- ties, government securities or nonconvertible preferred stocks. PLEASE NOTE: THIS FUND IS NOT YET AVAILABLE IN ALL STATES. PLEASE CONSULT YOUR IN- VESTMENT DEALER FOR CURRENT INFORMATION ABOUT ITS AVAILABILITY. 3. Growth Fund--This fund seeks to provide growth of capital. Whatever current income is generated by the fund is likely to be incidental to the objective of capital growth. Ordinarily, accomplishment of the fund's objective of capital growth will be sought by investing primarily in common stocks or securities with common stock characteristics. 4. International Fund--The investment objective is long-term growth of capital by investing primarily in securities of issuers domiciled outside the United states. 5. Growth-Income Fund--The investment objective is growth of capital and in- come. In the selection of securities for investment, the possibilities of appreciation and potential dividends are given more weight than current yield. Ordinarily, the assets of the Growth-Income Fund consist principally of a diversified group of common stocks, but other types of securities may be held when deemed advisable including preferred stocks and corporate bonds, including convertible bonds. 6. Asset Allocation Fund--This fund seeks total return (including income and capital gains) and preservation of capital over the long-term by investing in a diversified portfolio of securities. These securities 10 can include common stocks and other equity-type securities (such as convert- ible bonds and preferred stocks), bonds and other intermediate and long-term fixed-income securities and money market instruments. 7. High-Yield Bond Fund--The investment objective is a fully managed, diversi- fied bond portfolio. It seeks high current income and secondarily seeks capital appreciation. This fund will generally be invested substantially in intermediate-and long-term corporate obligations, with emphasis on higher yielding, higher risk, lower rated or unrated securities. 8. Bond Fund--The fund seeks a high level of current income as is consistent with the preservation of capital by investing in a broad variety of fixed income securities including: marketable corporate debt securities, loan participations, U.S. Government securities, mortgage-related securities, other asset-backed securities and cash or money market instruments. 9. U.S. Government/AAA-Rated Securities Fund--This fund seeks a high level of current income consistent with prudent investment risk and preservation of capital by investing primarily in a combination of securities guaranteed by the U.S. Government and other debt securities rated AAA or Aaa. 10. Cash Management Fund--The investment objective is high yield while pre- serving capital by investing in a diversified selection of money market instruments. SALE OF FUND SHARES BY THE SERIES We will purchase shares of the funds at net asset value and direct them to the appropriate subaccounts of the VAA. We will redeem sufficient shares of the appropriate funds to pay annuity payouts, death benefits, surrender/ with- drawal proceeds or for other purposes described in the contract. If you want to transfer all or part of your investment from one subaccount to another, we may redeem shares held in the first and purchase shares of the other. The shares are retired, but they may be reissued later. Shares of the funds are not sold directly to the general public. They are sold to Lincoln Life, and may be sold to other insurance companies, for investment of the assets of the subaccounts established by those insurance companies to fund variable annuity and variable life insurance contracts. When the series sells shares in any of its funds both to variable annuity and to variable life insurance separate accounts, it is said to engage in mixed funding. When the series sells shares in any of its funds to separate accounts of unaffiliated life insurance companies, it is said to engage in shared fund- ing. The series currently engages in mixed and shared funding. Therefore, due to differences in redemption rates or tax treatment, or other considerations, the interests of various contractowners participating in a fund could conflict. The series' Board of Trustees will monitor for the existence of any material conflicts, and determine what action, if any, should be taken. See the Pro- spectus for the series. REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS All dividend and capital gain distributions of the funds are automatically re- invested in shares of the distributing funds at their net asset value on the date of distribution. Dividends are not paid out to contractowners as addi- tional units, but are reflected in changes in unit values. ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS We reserve the right, within the law, to make additions, deletions and substi- tutions for the series and/or any funds within the series in which the VAA participates. (We may substitute shares of other funds for shares already pur- chased, or to be purchased in the future, under the contract. This substitu- tion might occur if shares of a fund should no longer be available, or if in- vestment in any fund's shares should become inappropriate, in the judgment of our management, for the purposes of the contract.) No substitution of the shares attributable to your account may take place without notice to you and before approval of the SEC, in accordance with the 1940 Act. CHARGES AND OTHER DEDUCTIONS We will deduct the charges described below to cover our costs and expenses, services provided and risks assumed under the contract. We incur certain costs and expenses for the distribution and administration of the contracts and for providing the benefits payable thereunder. Our administrative services in- clude: processing applications for and issuing the contracts, processing pur- chases and redemptions of fund shares as required (including dollar cost aver- aging, cross-reinvestment, and automatic withdrawal services), maintaining records, administering annuity payouts, furnishing accounting and valuation services (including the calculation and monitoring of daily subaccount val- ues), reconciling and depositing cash receipts, providing contract confirma- tions, providing toll-free inquiry services and furnishing telephone fund transfer services. The benefits we provide include death benefits, annuity payout benefits and cash surrender value benefits. The risks we assume in- clude: the risk that the actual life span of persons receiving annuity payouts under contract guarantees will exceed the assumptions reflected in our guaran- teed rates (these rates are incorporated in the contract and cannot be changed); the risk that death benefits paid under the EGMDB or GMDB, will ex- ceed actual contract value; the 11 risk that more owners than expected will qualify for waivers of the contingent deferred sales charge; and the risk that our costs in providing the services will exceed our revenues from contract charges (which cannot be changed by us). The amount of a charge may not necessarily correspond to the costs asso- ciated with providing the services or benefits indicated by the designation of the charge or associated with a particular contract. For example, the contin- gent deferred sales charge collected may not fully cover all of the sales and distribution expenses actually incurred by us. MAINTENANCE CHARGE We will deduct a contract maintenance charge of $35 per contract year. This charge will be deducted from the contract value on the last valuation date of each contract year. This charge will also be deducted from the contract value upon surrender. CONTINGENT DEFERRED SALES CHARGE A contingent deferred sales charge applies (except as described below) to sur- renders and withdrawals of purchase payments that have been invested for the periods indicated as follows:
Number of complete contract years that a purchase payment has been invested - --------------------------------------------------------------------------------- Less At than least 2 2 3 4 5 6 7+ Contingent deferred sales charge as a percentage of the surrendered or withdrawn purchase payments 6% 5 4 3 2 1 0
A contingent deferred sales charge does not apply to: 1. A surrender or withdrawal of purchase payments that have been invested at least seven full contract years. 2. The first withdrawal of contract value during a contract year to the extent the withdrawal does not exceed 10% of the purchase payments (this 10% with- drawal exception does not apply to a surrender of a contract); 3. Automatic withdrawals, not in excess of 10% of the purchase payments during a contract year, made by non-trustee contractowners who are at least 59 1/2; 4. A surrender of a contract or withdrawal of contract value as a result of the annuitant's permanent and total disability [as defined in Section 22(e)(3) of the code], after the effective date of the contract and before the annuitant's 65th birthday. 5. A surrender of a contract or withdrawal of contract value of a contract is- sued to employees and registered representatives of any member of the sell- ing group and their spouses and minor children, or to officers, directors, trustees or bona-fide full-time employees of Lincoln National Corp. or The Capital Group, Inc. or their affiliated or managed companies (based upon the contractowner's status at the time the contract was purchased); and 6. A surrender of the contract as a result of the death of the annuitant. However, the contingent deferred sales charge is not waived as a result of the death of a contractowner who is not the annuitant. The contingent deferred sales charge is calculated separately for each con- tract year's purchase payments to which a charge applies. (FOR PURPOSES OF CALCULATING THIS CHARGE, WE ASSUME THAT PURCHASE PAYMENTS ARE WITHDRAWN ON A FIRST IN-FIRST OUT BASIS, AND THAT ALL PURCHASE PAYMENTS ARE WITHDRAWN BEFORE ANY EARNINGS ARE WITHDRAWN.) The contingent deferred sales charges associated with surrender or withdrawal are paid to us to compensate us for the loss we experience on contract distribution costs when contractowners surrender or withdraw before distribution costs have been recovered. DEDUCTIONS FROM THE VAA FOR ASSUMPTION OF MORTALITY AND EXPENSE RISKS We deduct from the VAA an amount, computed daily, which is equal to an annual rate of 1.25% of the daily net asset value as a mortality and expense risk charge. For those contracts which include the EGMDB, the aggregate charge against the VAA is 1.40% consisting of a 1.25% mortality and expense risk charge and a 0.15% risk charge for the EGMDB. DEDUCTIONS FOR PREMIUM TAXES Any premium tax or other tax levied by any governmental entity as a result of the existence of the contracts or the VAA will be deducted from the contract value when incurred, or at another time of our choosing. The applicable premium tax rates that states and other governmental entities impose on the purchase of an annuity are subject to change by legislation, by administrative interpretation or by judicial action. These premium taxes gen- erally depend upon the law of your state of residence. The tax ranges from 0.5% to 4.0%. OTHER CHARGES AND DEDUCTIONS There are deductions from and expenses paid out of the assets of the under- lying series that are described in the Prospectus for the series. ADDITIONAL INFORMATION The administrative and contingent deferred sales charges described previously may be reduced or eliminated for any particular contract. However, these charges will be reduced only to the extent that we anticipate lower distribu- tion and/or administrative expenses, or that we perform fewer sales or admin- istrative services than those originally contemplated in establishing the level of those charges. Lower distribution and administrative expenses may be the result of economies associated with (1) the use of mass enrollment proce- dures, (2) the performance of administrative or sales functions by the employ- er, (3) the use by an em- 12 ployer of automated techniques in submitting deposits or information related to deposits on behalf of its employees or (4) any other circumstances which reduce distribution or administrative expenses. The exact amount of administrative and contingent deferred sales charges applicable to a particular contract will be stated in that contract. THE CONTRACTS PURCHASE OF CONTRACTS If you wish to purchase a contract, you must apply for it through a sales rep- resentative authorized by us. The completed application is sent to us and we decide whether to accept or reject it. If the application is accepted, a con- tract is prepared and executed by our legally authorized officers. The contract is then sent to you through your sales representative. See Distribution of the contracts. If a completed application and all other information necessary for processing a purchase order are received, an initial purchase payment will be priced no later than two business days after we receive the order. While attempting to finish an incomplete application, we may hold the initial purchase payment for no more than five business days. If the incomplete application cannot be com- pleted within those five days, you will be informed of the reasons, and the purchase payment will be returned immediately (unless you specifically autho- rize us to keep it until the application is complete). Once the application is complete, the initial purchase payment must be priced within two business days. WHO CAN INVEST? To apply for a contract, you must be of legal age in a state where the con- tracts may be lawfully sold and also be eligible to participate in any of the qualified or nonqualified plans for which the contracts are designed. The annu- itant cannot be older than age 85 (or older than age 80 in Pennsylvania). PURCHASE PAYMENTS Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $1,500 for non- qualified contracts and Section 403(b) transfers/rollovers; and $300 for quali- fied contracts. The minimum annual amount for subsequent purchase payments is $300 for nonqualified and qualified contracts, with a minimum of $25 per pay- ment. Purchase payments in total may not exceed $1 million for each annuitant. If you stop making purchase payments, the contract will remain in force as a paid-up contract as long as the total contract value is at least $300. Payments may be resumed at any time until the annuity commencement date, the surrender of the contract, the maturity date, the death of the contractowner or the death of the annuitant, whichever comes first. VALUATION DATE Accumulation and annuity units will be valued once daily at the close of trad- ing (currently 4:00 p.m., New York time) on each day the NYSE is open (valua- tion date). On any date other than a valuation date, the accumulation unit value and the annuity unit value will not change. ALLOCATION OF PURCHASE PAYMENTS Purchase payments are placed into the VAA's subaccounts, each of which invests in shares of the class of its corresponding fund of the series, according to your instructions. The minimum amount of any purchase payment which can be put into any one subaccount is $20 under the contract. Upon allocation to the appropriate subaccount, purchase payments are converted into accumulation units. The number of accumulation units credited is determined by dividing the amount allocated to each subaccount by the value of an accumulation unit for that subaccount on the valuation date on which the purchase payment is received at the home office if received before 4:00 p.m., New York time. If the purchase payment is re- ceived at or after 4:00 p.m., New York time, we will use the accumulation unit value computed on the next valuation date. The number of accumulation units de- termined in this way shall not be changed by any subsequent change in the value of an accumulation unit. However, the dollar value of an accumulation unit will vary depending not only upon how well the investments perform, but also upon the expenses of the VAA and the underlying funds. VALUATION OF ACCUMULATION UNITS Purchase payments allocated to the VAA are converted into accumulation units. This is done by dividing each purchase payment by the value of an accumulation unit for the valuation period during which the purchase payment is allocated to the VAA. The accumulation unit value for each subaccount was or will be estab- lished at the inception of the subaccount. It may increase or decrease from valuation period to valuation period. The accumulation unit value for a subaccount for a later valuation period is determined as follows: (1) The total value of the fund shares held in the subaccount is calculated by multiplying the number of fund shares owned by the subaccount at the begin- ning of the valuation period by the net asset value per share of the fund at the end of the valuation period and adding any dividend or other distri- bution of the fund if an ex-dividend date occurs during the valuation peri- od; minus (2) The liabilities of the subaccount at the end of the valuation period; these liabilities include daily charges imposed on the subaccount, and may in- clude a charge or credit with respect to any taxes paid or reserved for by us that we determine result from the operations of the VAA; and 13 (3) The result of (2) is divided by the number of subaccount units outstanding at the beginning of the valuation period. The daily charge imposed on a subaccount for any valuation period are equal to the daily mortality and expense risk charge multiplied by the number of calen- dar days in the valuation period. Because a different daily charge is made for contracts with the EGMDB than for those without, each of the two types of con- tracts will have different corresponding accumulation unit values on any given day. TRANSFERS BETWEEN SUBACCOUNTS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE You may transfer all or a portion of your investment from one subaccount to another. A transfer involves the surrender of accumulation units in one subaccount and the purchase of accumulation units in the other subaccount. A transfer will be done using the respective accumulation unit values as of the valuation date we receive your request provided that your request is received by 4 p.m. New York time. If your request is received after 4 p.m. New York time, the transfer will be done using the accumulation unit values as of the next valuation date. Transfers between subaccounts are restricted to six times every contract year. We reserve the right to waive this six-time limit. This limit does not apply to transfers made under a dollar cost averaging or cross-reinvestment program elected on forms available from us. The minimum amount which may be trans- ferred between subaccounts is $300 (or the entire amount in the subaccount, if less than $300). If the transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total balance of the subaccount. A transfer may be made by writing to the home office or, if a telephone ex- change authorization form (available from us) is on file with us, by a toll- free telephone call. In order to prevent unauthorized or fraudulent telephone transfers, we may require the caller to provide certain identifying informa- tion before we will act upon their instructions. We may also assign the contractowner a Personal Identification Number (PIN) to serve as identifica- tion. We will not be liable for following telephone instructions we reasonably believe are genuine. Telephone requests may be recorded and written confirma- tion of all transfer requests will be mailed to the contractowner on the next valuation date. Telephone transfers will be processed on the valuation date that they are received when they are received at our customer service center before 4 p.m. New York time. When thinking about a transfer of contract value, you should consider the in- herent risk involved. Frequent transfers based on short-term expectations may increase the risk that a transfer will be made at an inopportune time. TRANSFERS TO AND FROM THE GENERAL ACCOUNT ON OR BEFORE THE ANNUITY COMMENCEMENT DATE You may transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract. These transfers cannot be elected more than six times every contract year. We reserve the right to waive this six-time limit. The minimum amount which can be transferred to the fixed side is $300 or the total amount in the subaccount, if less than $300. However, if a trans- fer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total amount to the fixed side. You may also transfer all or any part of the contract value from the fixed side of your contract to the various subaccount(s) subject to the following restrictions: (1) the sum of the percentages of fixed value transferred is limited to 25% of the value of the fixed side in any 12 month period; (2) the minimum amount which can be transferred is $300 or the amount in the fixed ac- count; and (3) a transfer cannot be made during the first 30 days after the issue date of the contract. These transfers cannot be elected more than six times every contract year. We reserve the right to waive these restrictions. These restrictions do not apply to transfers made under a dollar cost averaging or cross-reinvestment program elected on forms available from us. TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE You may transfer all or a portion of your investment in one subaccount to an- other subaccount or to the fixed side of the contract. Those transfers will be limited to three times per contract year. However, no transfers are allowed from the fixed side of the contract to the subaccounts. DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE You may designate a beneficiary during the life of the annuitant and change the beneficiary by filing a written request with the home office. Each change of beneficiary revokes any previous designation. We reserve the right to re- quest that you send us the contract for endorsement of a change of beneficia- ry. If the annuitant dies before the annuity commencement date, a death benefit equal to the greater of: (1) the GMDB or, if elected, the EGMDB; or (2) the current value of the contract, will be paid to your designated beneficiary. The value of the death benefit will be determined as of the date on which the death claim is approved for payment. This payment will occur upon receipt of: (1) Proof, satisfactory to us, of the death of the annuitant; (2) Written au- thorization for payment; and (3) Our receipt of all required claim forms, fully completed. 14 The GMDB is equal to the sum of all purchase payments plus any attributable gain, minus any withdrawals, partial annuitizations and premium taxes in- curred. We determine the attributable gain separately for each contract year on its seventh anniversary (once its surrender charge period has expired). The attributable gain consists of the earnings on a contract year's net purchase payment(s) [purchase payment(s) minus any withdrawals and partial annuitizations, applied on a first-in-first-out basis] as of the valuation date just before its seventh anniversary. This amount will then be included in the GMDB calculation. If contract conditions are met, the GMDB will be increased automatically by us according to the prescribed formula based upon the contract's internal rate of return. For this to occur, the annuitant, as of the seventh anniversary of each eligible contract year, must still be living and must be less than 81 years of age. For more information about GMDB calculations, please refer to the SAI. The EGMDB is an alternative to the GMDB for owners of nonqualified contracts or contracts used under an IRA plan. Under the EGMDB, the death benefit pay- able is the amount equal to the greater of: (1) contract value as of the day on which Lincoln Life approves the payment of the claim; or (2) the highest contract value which the contract attains on any policy anniversary date (in- cluding the inception date) from the time the EGMDB takes effect up to and in- cluding the annuitant's age up to and including 75. The highest contract value so determined is then increased by purchase payments and decreased by partial withdrawals, partial annuitizations and any premium taxes made, effected or incurred subsequent to the anniversary date on which the highest contract value is obtained. You can elect the EGMDB during a limited period ending six months after the benefit is approved in your state or ending December 31, 1997, whichever is later. Please see your investment dealer for assistance. If you elect the EGMDB during this limited period, the benefit will take ef- fect as of the valuation time on the next policy anniversary date following our receipt of the election of this benefit, and we will begin deducting the charge for the EGMDB as of that date. If we receive an election for this bene- fit on a policy anniversary date, the EGMDB will take effect and we will begin deducting the charge for the benefit at the valuation time on that date. If you elect the EGMDB, you may discontinue the benefit at any time by com- pleting the Enchanced Guaranteed Minimum Death Benefit Discontinuance form and sending it to Lincoln Life. The benefit will be discontinued effective at the valuation time on the next policy anniversary date after we receive the re- quest, and we will cease deducting the charge for the benefit as of that date. If the benefit is discontinued on the policy anniversary date, the benefit and the charge will terminate at the valuation time on that date. If you discon- tinue the benefit, it cannot be reinstated. If you do not elect the EGMDB or you discontinue the benefit after electing it, the GMDB will apply instead and will determine what death benefit is payable. If the death benefit becomes payable, the beneficiary may elect to receive payment either in the form of a lump-sum settlement or an annuity payout. Fed- eral tax law requires that an annuity election be made no later than 60 days after we receive satisfactory notice of death as discussed previously. If a lump-sum settlement is requested, the proceeds will be mailed within seven days of receipt of satisfactory claim documentation as discussed previ- ously, subject to the laws and regulations governing payment of death bene- fits. If an election has not been made by the end of the 60-day period, a lump-sum settlement will be made to the beneficiary at that time. This payment may be postponed as permitted by the 1940 Act. Payment will be made in accordance with applicable laws and regulations gov- erning payment of death benefits. Unless otherwise provided in the beneficiary designation, one of the following procedures will take place on the death of a beneficiary: 1. If any beneficiary dies before the annuitant, that beneficiary's interest will go to any other beneficiaries named, according to their respective in- terests (There are no restrictions on the beneficiary's use of the pro- ceeds.); and/or 2. If no beneficiary survives the annuitant, the proceeds will be paid to the contractowner or to his/her estate, as applicable. JOINT/CONTINGENT OWNERSHIP If a joint owner is named in the application, the joint owners shall be treated as having equal undivided interests in the contract. Either owner, in- dependently of the other, may exercise any ownership rights in this contract. A contingent owner may not exercise ownership rights in this contract while the contractowner is living. DEATH OF CONTRACTOWNER If the contractowner of a nonqualified contract dies before the annuity com- mencement date, then, in compliance with the code, the cash surrender value of the contract will be paid as follows: 1. Upon the death of a non-annuitant contractowner, the cash surrender value shall be paid to any surviving joint or contingent owner(s). If no joint or contingent owner has been named, then the cash surrender value shall be paid to the annuitant named in the contract; and 2. Upon the death of a contractowner, who is also the annuitant, the death will be treated as death of the annuitant and the provisions of this con- tract regarding 15 death of annuitant will control. If the beneficiary is the surviving spouse of the contractowner, the contract may be continued in the name of that spouse as the new contractowner. If the surviving spouse elects to continue the con- tract, the contract will continue as though no death benefit had been payable. The code requires that any distribution be paid within five years of the death of the contractowner unless the beneficiary begins receiving, within one year of the contractowner's death, the distribution in the form of a life annuity or an annuity for a designated period not exceeding the beneficiary's life expec- tancy. SURRENDERS AND WITHDRAWALS Before the annuity commencement date, we will allow the surrender of the con- tract or a withdrawal of the contract value upon your written request, subject to the rules discussed below. Surrender or withdrawal rights after the annuity commencement date depend upon the annuity payout option you select. Special restrictions on surrenders/withdrawals apply if your contract is pur- chased as part of a retirement plan of a public school system or 501(c)(3) or- ganization under Section 403(b) of the code. Beginning January 1, 1989, in or- der for a contract to retain its tax-qualified status, Section 403(b) prohibits a withdrawal from a 403(b) contract of post-1988 contributions (and earnings on those contributions) pursuant to a salary reduction agreement. However, this restriction does not apply if the annuitant (a) attains age 59 1/2, (b) sepa- rates from service, (c) dies, (d) becomes totally and permanently disabled and/or (e) experiences financial hardship (in which event the income attribut- able to those contributions may not be withdrawn). Pre-1989 contributions and earnings through December 31, 1988, are not subject to the previously stated restriction. Funds transferred to the contract from a 403(b)(7) custodial account will be subject to the restrictions. The contract value available upon surrender/withdrawal is the cash surrender value of the contract at the end of the valuation period during which the writ- ten request for surrender/withdrawal is received at the home office. Unless a request for withdrawal specifies otherwise, withdrawals will be made from all subaccounts within the VAA and from the General Account in the same proportion that the amount of withdrawal bears to the total contract value. The minimum amount which can be withdrawn is $300, and the remaining contract value must be at least $300. Unless prohibited, surrender/withdrawal payments will be mailed within seven days after we receive a valid written request at the home office. The payment may be postponed as permitted by the 1940 Act. There are charges associated with the surrender of a contract or withdrawal of contract value. You may specify whether these charges are deducted from the amount you request to be withdrawn or from the remaining contract value. See Charges and other deductions. The tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal tax status. Participants in the Texas Optional Retirement Program should refer to Restric- tions under the Texas Optional Retirement Program, later in this Prospectus booklet. If the total contract value is less than $300, and if no purchase payments have been made for at least two years, we reserve the right to terminate the con- tract. REINVESTMENT PRIVILEGE You may elect to make a reinvestment purchase with any part of the proceeds of a surrender/withdrawal, and we will recredit the surrender/withdrawal charges previously deducted. This election must be made within 30 days of the date of the surrender/withdrawal, and the repurchase must be of a contract covered by this Prospectus. A representation must be made that the proceeds being used to make the purchase have retained their tax-favored status under an arrangement for which the contracts offered by this Prospectus are designed. The number of accumulation units which will be credited when the proceeds are reinvested will be based on the value of the accumulation unit(s) on the next valuation date. This computation will occur following receipt of the proceeds and request for reinvestment at the home office. You may utilize the reinvestment privilege only once. For tax reporting purposes, we will treat a surrender/withdrawal and a subsequent reinvestment purchase as separate transactions. You should consult a tax advisor before you request a surrender/withdrawal or subsequent reinvest- ment purchase. AMENDMENT OF CONTRACT We reserve the right to amend the contract to meet the requirements of the 1940 Act or other applicable federal or state laws or regulations. You will be noti- fied in writing of any changes, modifications or waivers. COMMISSIONS The maximum commission which will be paid to dealers is equal to 4.0% of each purchase payment; plus an annual continuing commission equal to 0.25% of the value of contract purchase payments invested for at least 15 months; plus an annual persistency bonus equal to 0.40% of each contract year's increased GMDB (regardless of whether or not the EGMDB is in effect), paid over a period of eight years. At times, additional sales incentives (up to 0.30% of purchase payments and up to 0.05% of the contract value in the VAA while the EGMDB is in effect) may be provided to dealers maintaining certain sales volume levels. In addition, the equivalent of 4.0% of contract value can be paid to dealers upon annuitization. These commissions are not deducted from purchase payments or contract value; they are paid by us. OWNERSHIP As contractowner, you have all rights under the contract. According to Indiana law, the assets of the VAA are held for the exclusive benefit of all contractowners and their designated beneficiaries; and the assets of the VAA are not chargeable with liabilities arising from any other business that we may conduct. Qualified contracts may not be assigned or transferred except as per- mitted by the Employee Retirement Income Security Act (ERISA) of 1974 and upon written notification to us. Non-qualified contracts may not be collaterally as- signed. We assume no responsibility for the validity or effect of any assign- ment. Consult your tax advisor about the tax consequences of an assignment. 16 CONTRACTOWNER QUESTIONS The obligations to purchasers under the contracts are those of Lincoln Life. Questions about your contract should be directed to us at 1-800-942-5500. ANNUITY PAYOUTS When you apply for a contract, you may select any annuity commencement date permitted by law. (PLEASE NOTE THE FOLLOWING EXCEPTION: Contracts issued under qualified employee pension and profit-sharing trusts [described in Section 401(a) and tax exempt under Section 501(a) of the code] and qualified annuity plans [described in Section 403(a) of the code], including H.R.10 trusts and plans covering self-employed individuals and their employees, provide for an- nuity payouts to start at the date and under the option specified in the plan.) The contract provides optional forms of payouts of annuities (annuity op- tions), each of which is payable on a variable basis, a fixed basis or a com- bination of both. The contract provides that all or part of the contract value may be used to purchase an annuity. You may elect annuity payouts in monthly, quarterly, semiannual or annual in- stallments. If the payouts from any subaccount would be or become less than $50, we have the right to reduce their frequency until the payouts are at least $50 each. Following are explanations of the annuity options available: ANNUITY OPTIONS LIFE ANNUITY. This option offers a periodic payout during the lifetime of the annuitant and ends with the last payout before the death of the annuitant. This option offers the highest periodic payout since there is no guarantee of a minimum number of payouts or provision for a death benefit for beneficia- ries. HOWEVER, THERE IS THE RISK UNDER THIS OPTION THAT THE ANNUITANT WOULD RECEIVE NO PAYOUTS IF HE/SHE DIES BEFORE THE DATE SET FOR THE FIRST PAYOUT; ONLY ONE PAYOUT IF DEATH OCCURS BEFORE THE SECOND SCHEDULED PAYOUT, AND SO ON. LIFE INCOME WITH PAYOUTS GUARANTEED FOR DESIGNATED PERIOD. This option guaran- tees periodic payouts during a designated period, usually 10 or 20 years, and then continues throughout the lifetime of the annuitant. The designated period is selected by the contractowner. JOINT LIFE ANNUITY. This option offers a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. The payouts con- tinue during the lifetime of the survivor. JOINT LIFE ANNUITY WITH GUARANTEED PERIOD. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and continues dur- ing the joint lifetime of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. The designated period is selected by the contractowner. JOINT-AND-TWO-THIRDS SURVIVOR ANNUITY. This option provides a periodic payout during the joint lifetime of the annuitant and a designated joint annuitant. When one of the joint annuitants dies, the survivor receives two thirds of the periodic payout made when both were alive. UNIT REFUND LIFE ANNUITY. This option offers a periodic payout during the lifetime of the annuitant with the guarantee that upon death a payout will be made of the value of the number of annuity units (see Variable annuity payouts) equal to the excess, if any, of: (a) the total amount applied under this option divided by the annuity unit value for the date payouts begin, di- vided by (b) the annuity units represented by each payout to the annuitant multiplied by the number of payouts paid before death. The value of the number of annuity units is computed on the date the death claim is approved for pay- ment by the home office. GENERAL INFORMATION None of the options listed above currently provide withdrawal features, per- mitting the contractowner to withdraw commuted values as a lump sum payment. Other options, with or without withdrawal features, may be made available by us. Options are only available to the extent they are consistent with the re- quirements of the contract as well as Sections 72(s) and 401(a)(9) of the code, if applicable. The mortality and expense risk charge will be assessed on all variable annuity payouts, including options that may be offered that do not have a life contingency and therefore no mortality risk. The annuity commencement date is usually on or before the annuitant's 85th birthday. You may change the annuity commencement date, change the annuity op- tion or change the allocation of the investment among subaccounts up to 30 days before the scheduled annuity commencement date, upon written notice to the home office. You must give us at least 30 days notice before the date on which you want payouts to begin. If proceeds become available to a beneficiary in a lump sum, the beneficiary may choose any annuity payout option. Unless you select another option, the contract automatically provides for a life annuity with annuity payouts guaranteed for 10 years (on a fixed, vari- able or combination fixed and variable basis, in proportion to the account al- locations at the time of annuitization) except when a joint life payout is re- quired by law. Under any option providing for guaranteed payouts, the number of payouts which remain unpaid at the date of the annuitant's death (or sur- viving annuitant's death in case of a joint life annuity) will be paid to your beneficiary as payouts become due. 17 VARIABLE ANNUITY PAYOUTS Variable annuity payouts will be determined using: 1. The contract value on the annuity commencement date; 2. The annuity tables contained in the contract; 3. The annuity option selected; and 4. The investment performance of the fund(s) selected. To determine the amount of payouts, we make this calculation: 1. Determine the dollar amount of the first periodic payout; then 2. Credit the contract with a fixed number of annuity units equal to the first periodic payout divided by the annuity unit value; and 3. Calculate the value of the annuity units each period thereafter. We assume an investment return of 4% per year, as applied to the applicable mortality table. The amount of each payout after the initial payout will depend upon how the underlying fund(s) perform, relative to the 4% assumed rate. There is a more complete explanation of this calculation in the SAI. FEDERAL TAX STATUS This section is a discussion of the Federal income tax rules applicable to the contracts as of the date of this Prospectus. More information is provided in the SAI. THESE DISCUSSIONS AND THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE. This section does not discuss the Federal tax consequences resulting from every possible situation. No attempt has been made to consider any applicable state, local or foreign tax law, other than the imposition of any state premium taxes (See Deductions for premium taxes). If you are concerned about the tax implica- tions with respect to the contracts, you should consult a tax advisor. The fol- lowing discussion is based upon our understanding of the present Federal income tax laws as they are currently interpreted by the IRS. No representation is made about the likelihood of continuation of the present Federal income tax laws or their current interpretations by the IRS. TAXATION OF NONQUALIFIED CONTRACTS You are generally not taxed on increases in the value of your contract until a distribution occurs. This distribution can be in the form of a lump sum payout received by requesting all or part of the cash surrender value (i.e. surrenders/withdrawals) or as annuity payouts. For this purpose, the assignment or pledge of, or the agreement to assign or pledge, any portion of the value of a contract will be treated as a distribution. A transfer of ownership of a con- tract, or designation of an annuitant (or other beneficiary) who is not also the contractowner, may also result in tax consequences. The taxable portion of a distribution (in the form of a lump sum payout or an annuity) is taxed as or- dinary income. For purchase payments made after February 28, 1986, a contractowner who is not a natural person (for example, a corporation), subject to limited exceptions, will be taxed on any increase in the contract's cash value over the investment in the contract during the taxable year, even if no distribution occurs. [See Section 72(u) of the code.] The next discussion ap- plies to contracts owned by natural persons. In the case of a surrender under the contract or withdrawal of contract value, generally amounts received are first treated as taxable income to the extent that the cash value of the contract immediately before the surrender exceeds the investment in the contract at that time. Any additional amount withdrawn is not taxable. The investment in the contract generally equals the portion, if any, of any purchase payment paid by or on behalf of an individual under a con- tract which is not excluded from the individual's gross income. Even though the tax consequences may vary depending on the form of annuity pay- out selected under the contract, the contractowner of an annuity payout gener- ally is taxed on the portion of such payout that exceeds the investment in the contract. For variable annuity payouts, the taxable portion is determined by a formula that establishes a specific dollar amount of each payout that is not taxed. The dollar amount is determined by dividing the investment in the con- tract by the total number of expected periodic payouts. For fixed annuity payouts, there generally is no tax on the portion of each payout that repre- sents the same ratio that the investment in the contract bears to the total ex- pected value of payouts for the term of the annuity; the remainder of each pay- out is taxable. For individuals whose annuity starting date is after December 31, 1986, the entire distribution (whether fixed or variable) will be fully taxable once the recipient is deemed to have recovered the dollar amount of the investment in the contract. All or a portion of a withdrawal may be taxable. Additionally, there may be im- posed a penalty tax on distributions equal to 10% of the amount treated as tax- able income. The penalty tax is not imposed in certain circumstances, which generally are distributions: 1. Received on or after the contractowner attaining age 59 1/2; 2. Made as a result of death or disability of the contractowner; 3. Received in substantially equal periodic payments such as a life annuity (subject to special recapture rules if the series of payouts is subsequently modified); 4. Under a qualified funding asset in a structured settlement; 18 5. Under an immediate annuity contract as defined in the code; 6. Under a contract purchased in connection with the termination of certain retirement plans. TAXATION OF QUALIFIED CONTRACTS The contracts may be purchased in connection with the following types of tax- favored retirement plans: 1. Contracts purchased for employees of public school systems and certain tax- exempt organizations, qualified under Section 403(b) of the code (normally for transfers or rollovers only); 2. Pension and profit-sharing plans of self-employed individuals (H.R. 10 or Keogh plans) or corporations, qualified under Section 401(a) or 403(a) of the code; 3. IRAs, qualified under Section 408 of the code; 4. Deferred compensation plans of state or local governments, qualified under Section 457 of the code; and/or 5. SEPs, qualified under Section 408(k) of the code. The tax rules applicable to these plans, including restrictions on contribu- tions and benefits, taxation of distributions and any tax penalties, vary ac- cording to the type of plan and its terms and conditions. Participants under such plans, as well as contractowners, annuitants and beneficiaries, should be aware that the rights of any person to any benefits under such plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the contracts. Purchasers of contracts for use with any qualified plan, as well as plan participants, should consult counsel and other advisors as to the suitability of the contracts to their specific needs, and as to applicable code limitations and tax consequences. MULTIPLE CONTRACTS All contracts entered into after October 21, 1988, and issued by the same in- surance company (or its affiliates) to the same contractowner during any cal- endar year will be treated as a single contract for tax purposes. INVESTOR CONTROL The Treasury Department has indicated that guidelines may be issued under which a variable annuity contract will not be treated as an annuity contract for tax purposes if the contractowner has excessive control over the invest- ments underlying the contract. They may consider the number of investment op- tions or the number of transfer opportunities available between options as relevant when determining excessive control. The issuance of those guidelines may require us to impose limitations on your right to control the investment. We do not know whether any such guidelines would have a retroactive effect. Section 817(h) of the code and the related regulations that the Treasury De- partment has adopted require that assets underlying a variable annuity con- tract be adequately diversified. The regulations provide that a variable annu- ity contract which does not satisfy the diversification standards will not be treated as an annuity contract, unless the failure to satisfy the regulations was inadvertent, the failure is corrected, and the contractowner or we pay an amount to the IRS. The amount will be based on the tax that would have been paid by the contractowner if the income, for the period the contract was not diversified, had been received by the contractowner. If the failure to diver- sify is not corrected in this manner, the contractowner of an annuity contract will be deemed to be the owner of the underlying securities and will be taxed on the earnings of his or her account. We believe, under our interpretation of the code and regulations thereunder, that the investments underlying this con- tract meet these diversification standards. WITHHOLDING Generally, pension and annuity distributions are subject to withholding for the recipient's Federal income tax liability at rates that vary according to the type of distribution and the recipient's tax status. Recipients, however, generally are provided the opportunity to elect not to have tax withheld from distributions. Under the Unemployment Compensation Amendments of 1992 (UCA), 20% income tax withholding may apply to eligible rollover distributions. All taxable distributions from qualified plans (except IRAs) and Section 403(b) annuities are eligible rollover distributions, except (1) annuities paid out over life or life expectancy, (2) installments paid for a period spanning 10 years or more, and (3) required minimum distributions. The UCA imposes a man- datory 20% income tax withholding on any eligible rollover distribution that the contractowner does not elect to have paid in a direct rollover to another qualified plan, Section 403(b) annuity or individual retirement account. Dis- tributions from Section 457 plans are subject to the general wage withholding rules. VOTING RIGHTS As required by law, we will vote the series shares held in the VAA at meetings of the shareholders of the series. The voting will be done according to the instructions of contractowners who have interests in any subaccounts which in- vest in funds of the series. If the 1940 Act or any regulation under it should be amended or if present interpretations should change, and if as a result we determine that we are permitted to vote the series shares in our own right, we may elect to do so. The number of votes which you have the right to cast will be determined by ap- plying your percentage interest in a subaccount to the total number of votes attributable to the subaccount. In determining the number of votes, fractional shares will be recognized. After the an- 19 nuity commencement date, the votes attributable to a contract will decrease. Series shares of a class held in a subaccount for which no timely instructions are received will be voted by us in proportion to the voting instructions which are received for all contracts participating in that subaccount. Voting instructions to abstain on any item to be voted on will be applied on a pro- rata basis to reduce the number of votes eligible to be cast. Whenever a shareholder's meeting is called, each person having a voting inter- est in a subaccount will receive proxy voting material, reports and other ma- terials relating to the series. Since the series engages in shared funding, other persons or entities beside Lincoln Life may vote series shares. See Sale of fund shares by the series. DISTRIBUTION OF THE CONTRACTS American Funds Distributors, Inc. (AFD), 333 South Hope Street, Los Angeles, Ca 90071, is the distributor and principal underwriter of the contracts. They will be sold by properly licensed registered representatives of independent broker-dealers which in turn have selling agreements with AFD and have been licensed by state insurance departments to represent us. AFD is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the National Association of Securities Dealers (NASD). Lincoln Life will offer contracts in all states where it is licensed to do business. RETURN PRIVILEGE Within the free-look period after you receive the contract, you may cancel it for any reason by delivering or mailing it postage pre-paid, to the home of- fice at P.O. Box 2348, 1300 South Clinton Street, Fort Wayne, Indiana, 46801. A contract canceled under this provision will be void. With respect to the fixed portion of a contract, we will return purchase payments. With respect to the VAA, except as explained in the following paragraph, we will return the contract value as of the date of receipt of the cancellation, plus any con- tract maintenance and administrative fees and any premium taxes which had been deducted. No contingent deferred sales charge will be assessed. A purchaser who participates in the VAA is subject to the risk of a market loss during the free-look period. For contracts written in those states whose laws require that we assume this market risk during the free-look period, a contract may be canceled, subject to the conditions explained before, except that we will return only the pur- chase payment(s). STATE REGULATION As a life insurance company organized and operated under Indiana law, we are subject to provisions governing life insurers and to regulation by the Indiana Commissioner of Insurance. Our books and accounts are subject to review and examination by the Indiana Insurance Department at all times. A full examination of our operations is conducted by that Department at least every five years. RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM Title 8, Section 830.105 of the Texas Government Code, consistent with prior interpretations of the Attorney General of the State of Texas, permits partic- ipants in the Texas Optional Retirement Program (ORP) to redeem their interest in a variable annuity contract issued under the ORP only upon: 1. Termination of employment in all institutions of higher education as de- fined in Texas law; 2. Retirement; or 3. Death. Accordingly, participants in the ORP will be required to obtain a certificate of termination from their employer(s) before accounts can be redeemed. 20 RECORDS AND REPORTS As presently required by the 1940 Act and applicable regulations, we are re- sponsible for maintaining all records and accounts relating to the VAA. We have entered into an agreement with the Delaware Management Company, 2005 Mar- ket Street, Philadelphia, PA 19203, to provide accounting services, to the VAA. We will mail to you, at your last known address of record at the home of- fice, at least semiannually after the first contract year, reports containing information required by the 1940 Act or any other applicable law or regula- tion. OTHER INFORMATION A Registration Statement has been filed with the SEC, under the Securities Act of 1933 as amended, for the contracts being offered here. This Prospectus does not contain all the information in the Registration Statement, its amendments and exhibits. Please refer to the Registration Statement for further informa- tion about the VAA, Lincoln Life and the contracts offered. Statements in this Prospectus about the content of contracts and other legal instruments are summaries. For the complete text of those con- tracts and instruments, please refer to those documents as filed with the SEC. Lincoln National Variable Annuity Account H and Lincoln National Flexible Pre- mium Variable Life Accounts F, G and J (all registered as investment companies under the 1940 Act) and Lincoln National Flexible Premium Group Variable Annu- ity Accounts 50, 51 and 52 are all segregated investment accounts of Lincoln Life which also invest in the series. The series also offers shares of the funds to other segregated investment accounts. PREPARING FOR YEAR 2000 Lincoln Life, as part of its year 2000 updating process, is responsible for the updating of the VAA related computer systems. An affiliate of Lincoln Life, Delaware Service Company (Delaware), provides substantially all of the necessary accounting and valuation services for the VAA. Delaware, for its part, is responsible for updating all of its computer systems, including those which service the VAA, to accommodate the year 2000. Lincoln Life and Delaware have begun formal discussions with each other to assess the requirements for their respective systems to interface properly in order to facilitate the ac- curate and orderly operation of the VAA beginning in the year 2000. The year 2000 issue is pervasive and complex and affects virtually every as- pect of the businesses of both Lincoln Life and Delaware (the Companies). The computer systems of the Companies and their interfaces with the computer sys- tems of vendors, suppliers, customers and other business partners are particu- larly vulnerable. The inability to properly recognize date-sensitive elec- tronic information and to transfer data between systems could cause errors or even complete failure to systems, which would result in a temporary inability to process transactions correctly and engage in normal business activities for the VAA. The Companies respectively are redirecting significant portions of their internal information technology efforts and are contracting, as needed, with outside consultants to help update their systems to accommodate the year 2000. Also, in addition to the discussions with each other noted above, the Companies have respectively initiated formal discussions with other critical parties that interface with their systems to gain an understanding of the pro- gress by those parties in addressing year 2000 issues. While the Companies are making substantial efforts to address their own systems and the systems with which they interface, it is not possible to provide assurance that operational problems will not occur. The Companies presently believe that, with the modi- fication of existing computer systems, updates by vendors and conversion to new software and hardware, the year 2000 issue will not pose significant oper- ations problems for their respective computer systems. In addition, the Compa- nies are incorporating potential issues surrounding year 2000 into their con- tingency planning process, in the event that, despite these substantial ef- forts, there are unresolved year 2000 problems. If the remediation efforts noted above are not completed timely or properly, the year 2000 issue could have a material adverse impact on the operation of the businesses of Lincoln Life or Delaware, or both. The cost of addressing year 2000 issues and the timeliness of completion will be closely monitored by management of the respective Companies and, for each company, will be based on its management's best estimates which are derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. Nevertheless, there can be no guarantee either by Lincoln Life or by Delaware that estimated costs will be achieved, and actual results could dif- fer significantly from those anticipated. Specific factors that might cause such differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer problems, and other uncertainties. LEGAL PROCEEDINGS Lincoln Life is involved in various pending or threatened legal proceedings arising from the conduct of its business. Most of these proceedings are rou- tine and in the ordinary course of business. In some instances these proceed- ings include claims for unspecified or substantial punitive damages and simi- lar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that the ultimate lia- bility, if any, under these suits will not have a material adverse effect on the financial position of Lincoln Life. 21 Two lawsuits involve alleged fraud in the sale of interest-sensitive universal and whole life insurance policies. These two suits have been filed as class ac- tions against Lincoln Life, although as of the date of this Prospectus the court had not certified a class in either case. Plaintiffs seek unspecified damages and penalties for themselves and on behalf of the putative class. Although the relief sought in these cases is substantial, the cases are in the early stages of litigation, and it is premature to make assessments about potential loss, if any. Management intends to defend these suits vigorously. The amount of liability, if any, which may arise as a result of these suits cannot be reasonably estimated at this time. STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS FOR SEPARATE ACCOUNT E
Item - ----------------------------------------- General information and history of Lincoln Life - ----------------------------------------- Special terms - ----------------------------------------- Services - ----------------------------------------- Principal underwriter - ----------------------------------------- Purchase of securities being offered - -----------------------------------------
For a free copy of the SAI please see page one of this booklet.
Item - ------------------------------------------------- Annuity payouts - ------------------------------------------------- Federal tax status - ------------------------------------------------- Automatic increase in the guaranteed minimum death benefit - ------------------------------------------------- Financial statements - -------------------------------------------------
22 THE AMERICAN LEGACY LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E (REGISTRANT) LINCOLN NATIONAL LIFE INSURANCE CO. (DEPOSITOR) STATEMENT OF ADDITIONAL INFORMATION (SAI) This SAI should be read in conjunction with the Prospectus of Lincoln National Variable Annuity Account E dated April 30, 1998. You may obtain a copy of the Account E Prospectus on request and without charge. Please write American Leg- acy Customer Service, Lincoln National Life Insurance Co., P.O. Box 2348, Fort Wayne, Indiana 46801 or call 1-800-942-5500. TABLE OF CONTENTS
Page - ------------------------------------------ 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 - ------------------------------------------
Page - ANNUITY PAYOUTS B-2 - FEDERAL TAX STATUS B-3 - AUTOMATIC INCREASE IN THE GUARANTEED MINIMUM DEATH BENEFIT B-6 - FINANCIAL STATEMENTS B-6 -
The date of this SAI is April 30, 1998. GENERAL INFORMATION AND HISTORY OF LINCOLN NATIONAL LIFE INSURANCE CO. (LINCOLN LIFE) The prior Depositor of the Account, Lincoln National Pension Insurance Compa- ny, was merged into Lincoln Life, effective January 1, 1989. Lincoln Life, or- ganized in 1905, is an Indiana stock insurance corporation, engaged primarily in the direct issuance of annuities and life and health insurance contracts, and is also a professional reinsurer. Lincoln Life is wholly owned by Lincoln National Corporation (LNC), a publicly held insurance holding company domi- ciled in Indiana. SPECIAL TERMS The special terms used in this SAI are the ones defined in the Prospectus. In connection with the term, valuation date, the NYSE is currently closed on weekends and on these holidays: New Year's Day, Martin Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. If any of these holidays occurs on a week- end day, the Exchange may also be closed on the business day occurring just before or just after the holiday. SERVICES INDEPENDENT AUDITORS The financial statements of the variable annuity account (VAA) and the statu- tory-basis financial statements and schedules of Lincoln Life appearing in this SAI and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports which also appear else- where in this document and in the Registration Statement. The financial state- ments and schedules audited by Ernst & Young, LLP have been included in this document in reliance on their report given on their authority as experts in accounting and auditing. KEEPER OF RECORDS All accounts, books, records and other documents which are required to be maintained for the VAA are maintained by Lincoln Life or by third parties re- sponsible to Lincoln Life. We have entered into an agreement with the Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide accounting services to the VAA. No separate charge against the assets of the VAA is made by Lincoln Life for this service. PRINCIPAL UNDERWRITER Lincoln Life has contracted with American Funds Distributors, Inc. (AFD), 333 South Hope St., Los Angeles, California 90071, a licensed broker-dealer, to distribute the contracts through certain legally authorized sales persons and organizations (brokers). AFD and its brokers are compensated under a standard compensation schedule. PURCHASE OF SECURITIES BEING OFFERED The contracts are no longer being offered. Although there are no special pur- chase plans for any class of prospectus buyers, the contingent deferred sales charge normally assessed upon surrender or withdrawal of contract value will be waived for officers, directors or bona fide full time employees of the LNC, the Capital Group, Inc., their affiliated or managed companies and certain other persons. See Contingent deferred sales charges in the Prospectus. Both before and after the annuity commencement date, there are exchange privi- leges between subaccounts, and from the VAA to the General Account, subject to restrictions set out in the Prospectus. See The contracts, in the Prospectus. No exchanges are permitted between the VAA and other separate accounts. ANNUITY PAYOUTS VARIABLE ANNUITY PAYOUTS Variable annuity payouts will be determined on the basis of: (1) the dollar value of the contract before the annuity commencement date; (2) the annuity tables contained in the contract; (3) the type of annuity option selected; and (4) the investment results of the fund(s) selected. In order to determine the amount of variable annuity payouts, Lincoln Life makes the following calcula- tion: first, it determines the dollar amount of the first payout; second, it credits the contract with a fixed number of annuity units based on the amount of the first payout; and third, it calculates the value of the annuity units each period thereafter. These steps are explained as follows. The dollar amount of the first periodic variable annuity payout is determined by applying the total value of the accumulation units credited under the con- tract valued as of the annuity commencement date (less any premium taxes) to the annuity tables contained in the contract. The first variable annuity pay- out will be paid 14 days after the annuity commencement date. This day of the month will become the day on which all future annuity payouts will be paid. Amounts shown in the tables are based on B-2 the 1971 Individual Annuity Mortality Tables, modified, with an assumed in- vestment return at the rate of 4% per annum. The first annuity payout is de- termined by multiplying the benefit per $1,000 of value shown in the contract tables by the number of thousands of dollars of value accumulated under the contract. These annuity tables vary according to the form of annuity selected and the age of the annuitant at the annuity commencement date. The 4% interest rate stated above is the measuring point for subsequent annuity payouts. If the actual net investment rate (annualized) exceeds 4%, the payout will in- crease at a rate equal to the amount of such excess. Conversely, if the actual rate is less than 4%, annuity payouts will decrease. If the assumed rate of interest were to be increased, annuity payouts would start at a higher level but would decrease more rapidly or increase more slowly. Lincoln Life may use sex distinct annuity tables in contracts that are not as- sociated with employer sponsored plans and where not prohibited by law. At the annuity commencement date, the contract is credited with annuity units for each subaccount on which variable annuity payouts are based. The number of annuity units to be credited is determined by dividing the amount of the first periodic payout by the value of an annuity unit in each subaccount selected. Although the number of annuity units is fixed by this process, the value of such units will vary with the value of the underlying fund. The amount of the second and subsequent annuity payouts is determined by multiplying the contractowner's fixed number of annuity units in each subaccount by the appro- priate annuity unit value for the valuation date ending 14 days before the date that payout is due. The value of each subaccount's annuity unit will be set initially at $1.00. The annuity unit value for each subaccount at the end of any valuation date is determined by multiplying the subaccount annuity unit value for the immedi- ately preceding valuation date by the product of: a. The net investment factor of the subaccount for the valuation period for which the annuity unit value is being determined, and b. A factor to neutralize the assumed investment return in the annuity table. The value of the annuity units is determined as of a valuation date 14 days before the payout date in order to permit calculation of amounts of annuity payouts and mailing of checks in advance of their due dates. Such checks will normally be issued and mailed at least three days before the due date. PROOF OF AGE, SEX AND SURVIVAL Lincoln Life may require proof of age, sex or survival of any payee upon whose age, sex or survival payouts depend. FEDERAL TAX STATUS GENERAL The operations of the VAA form a part of, and are taxed with, the operations of Lincoln Life under the Internal Revenue Code of 1986, as amended (the code). Investment income and realized net capital gains on the assets of the VAA are reinvested and taken into account in determining the accumulation and annuity unit values. As a result, such investment income and realized net cap- ital gain are automatically retained as part of the reserves under the con- tract. Under existing federal income tax law, Lincoln Life believes that the VAA investment income and realized net capital gain are not taxed to the ex- tent they are retained as part of the reserves under the contract. According- ly, Lincoln Life does not anticipate that it will incur any federal income tax liability attributable to the VAA, and therefore it does not intend to make any provision for such taxes. However, if changes in the federal tax laws or interpretations thereof result in Lincoln Life's being taxed on income or gain attributable to the VAA, then Lincoln Life may impose a charge against the VAA (with respect to some or all contracts) in order to make provision for payment of such taxes. TAX STATUS OF NONQUALIFIED CONTRACTS Section 817(h) of the code provides that separate account investments (or the investments of a mutual fund the shares of which are owned by separate ac- counts of insurance companies) underlying the contract be adequately diversi- fied in accordance with Treasury regulations in order for the contract to qualify as an annuity contract under Section 72 of the code. The VAA, through each of the funds, intends to comply with the diversification requirements prescribed in regulations, which affect how the assets in each of the funds in which the VAA invests may be invested. Capital Research and Management Company is not affiliated with Lincoln Life and Lincoln Life does not have control over the series or its investments. However, Lincoln Life believes that each fund in which the VAA owns shares will meet the diversification requirements and that therefore the contracts will be treated as annuities under the code. The regulations relating to diversification requirements do not provide guid- ance concerning the extent to which contractowners may direct their invest- ments to particular subaccounts of a separate account. When guidance is pro- vided, the contract may need to be modified to comply with that guidance. For these reasons, Lincoln Life reserves the right to modify the contract as nec- essary to prevent the contractowner from being considered the owner of the as- sets of the VAA. In addition, Section 72(s) of the code provides that contracts issued after January 18, 1995, will not be treated B-3 as annuity contracts for purposes of Section 72 unless the contract provides that (1) if any contractowner dies on or after the annuity starting date be- fore the time the entire interest in the contract has been distributed, the remaining portion of such interest must be distributed at least as rapidly as under the method of distribution in effect at the time of the contractowner's death; and (2) if any contractowner dies before the annuity starting date, the entire interest must be distributed within five years after the death of the contractowner. These requirements are considered satisfied if any portion of the contractowner's interest that is payable to or for the benefit of a desig- nated beneficiary is distributed over that designated beneficiary's life, or a period not extending beyond the designated beneficiary's life expectancy, and if that distribution begins within one year of the contractowner's death. The designated beneficiary must be a natural person. However, the contract may be continued in the name of the contractowner's surviving spouse as the contractowner. Contracts issued after January 18, 1995, contain provisions in- tended to comply with these code requirements. No regulations interpreting these requirements have yet been issued. Thus, no assurance can be given that the provisions contained in contracts issued after January 18, 1995 satisfy all such code requirements. However, Lincoln Life believes that such provi- sions in such contracts meet these requirements. Lincoln Life intends to re- view such provisions and modify them as necessary to assure that they comply with the requirements of Section 72(s) when clarified by regulation or other- wise. TAX STATUS OF CONTRACTS USED WITH CERTAIN PLANS The rules governing the tax treatment of contributions and distributions under qualified plans, as set forth in the code and applicable rulings and regula- tions, are complex and subject to change. These rules also vary according to the type of plan and the terms and conditions of the plan itself. Therefore, no attempt is made herein to provide more than general information about the use of contracts with the various types of plans, based on Lincoln Life's un- derstanding of the current federal tax laws as interpreted by the IRS. Pur- chasers of contracts for use with such a plan and plan participants should consult counsel and other competent advisors as to the suitability of the plan and the contract to their specific needs, and as to applicable code limita- tions and tax consequences. Participants under such plans, as well as contractowners, annuitants and beneficiaries, should also be aware that the rights of any person to any benefits under such plans may be subject to the terms and conditions of the plans themselves regardless of the terms and con- ditions of the contract. Following are brief descriptions of the various types of plans and of the use of contracts in connection therewith. PUBLIC SCHOOL SYSTEMS AND 501(C)(3) ORGANIZATIONS [SECTION 403(B) PLANS] Payments made to purchase annuity contracts by public school systems or 501(c)(3) organizations for their employees are excludable from the gross in- come of the employee to the extent that aggregate payments for the employee do not exceed the exclusion allowance provided by Section 403(b) of the code, the over-all limits for excludable contributions of Section 415 of the code or the limit on elective contributions. Furthermore, the investment results of the fund credited to the account are not taxable until benefits are received ei- ther in the form of annuity payments, in a single sum, or a withdrawal. If an employee's individual account is surrendered, usually the full amount received would be includable in income for that year at ordinary rates. QUALIFIED CORPORATE EMPLOYEE'S PENSION AND PROFIT-SHARING TRUSTS AND QUALIFIED ANNUITY PLANS Payments made by a corporate employer and the increments on all payments for qualified corporate plans are not taxable as income to the employee until dis- tributed. However, the employee may be required to include these amounts in gross income before distribution if the qualified plan or trust loses its qualification. Corporate plans qualified under Section 401(a) or 403(a) of the code are subject to extensive rules, including limitations on maximum contri- butions or benefits. For plan years beginning after December 31, 1996, tax ex- empt organizations, except state and local governments, may have 401(k) plans. Distributions of amounts in excess of nondeductible employee contributions are generally taxable as ordinary income. If an employee or beneficiary receives a lump-sum distribution, that is, if the employee or beneficiary receives in a single tax year the total amounts payable with respect to that employee, and the benefits are paid as a result of the employee's death or separation from service or after the employee attains 59 1/2, taxable gain may be eligible for special lump sum averaging treatment. These special tax rules are not avail- able in all cases. SELF-EMPLOYED INDIVIDUALS (H.R. 10 OR KEOGH) Under code provisions, self-employed individuals may establish plans commonly known as H.R. 10 or Keogh plans for themselves and their employees. The tax consequences to participants under such plans depend upon the plan itself. Such plans are subject to special B-4 rules in addition to those applicable to qualified corporate plans, although certain of these rules have been repealed or modified effective in 1984. Pur- chasers of the contracts for use with H.R. 10 plans should seek competent ad- vice as to suitability of plan documents and the funding contracts. INDIVIDUAL RETIREMENT ANNUITIES (IRA) Under Section 408 of the code, individuals may participate in a retirement program known as individual retirement annuity (IRA). An individual may make an annual IRA contribution of up to the lesser of $2,000 (or $4,000 if IRAs are maintained for both the individual and his nonworking spouse) or 100% of compensation. However, IRA contributions may be nondeductible in whole or in part if (1) the individual or his spouse is an active participant in certain other retirement programs and (2) the income of the individual (or of the in- dividual and his spouse) exceeds a specified amount. Distributions from cer- tain other IRA plans or qualified plans may be rolled over to an IRA on a tax deferred basis without regard to the limit on contributions, provided certain requirements are met. Distributions from IRA's are subject to certain restric- tions. Deductible IRA contributions and all IRA earnings will be taxed as or- dinary income when distributed. The failure to satisfy certain code require- ments with respect to an IRA may result in adverse tax consequences. DEFERRED COMPENSATION PLANS (SECTION 457 PLANS) Under the code provisions, employees and independent contractors (partici- pants) performing services for state and local governments and tax-exempt or- ganizations may establish deferred compensation plans. While participants in such plans may be permitted to specify the form of investment in which their plan accounts will participate, all such investments are owned by the sponsor- ing employer and are subject to the claims of its creditors. Plans of state or local governments established on August 20, 1996, or later, must hold all as- sets and income in trust (or custodial accounts or an annuity contract) for the exclusive benefit of participants and their beneficiaries. Section 457 plans that were in existence before August 20, 1996 are allowed until January 1, 1999 to meet this requirement. The amounts deferred under a plan which meet the requirements of Section 457 of the code are not taxable as income to the participant until paid or otherwise made available to the participant or bene- ficiary. Deferrals are taxed as compensation from the employer when they are actually or constructively received by the employee. As a general rule, the maximum amount which can be deferred in any one year is the lesser of $7,500 or 33 1/3% of the participant's includable compensation. However, in the lim- ited circumstances, up to $15,000 may be deferred in each of the last three years before retirement. SIMPLIFIED EMPLOYEE PENSION PLANS [SECTION 408(K)] An employer may make contributions on behalf of employees to a simplified em- ployee pension plan (SEP) as provided by Section 408(k) of the code. The con- tributions and distribution dates are limited by the code provisions. All dis- tributions from the plan will be taxed as ordinary income. Any distribution before the employee attains age 59 1/2 (except in the event of death or dis- ability) or the failure to satisfy certain other code requirements may result in adverse tax consequences. For tax years after 1996, salary reductions SEPs (SAR/SEP) may no longer be established. However, SAR/SEPs in existence before January 1, 1997 may continue to receive contributions. TAX ON DISTRIBUTIONS FROM QUALIFIED CONTRACTS The following rules generally apply to distributions from contracts purchased in connection with the plans discussed above, other than 457 Plans. The portion, if any, of any contribution under a contract made by or on behalf of an individual which is not excluded from the employee's gross income (gen- erally, the employee's own nondeductible contributions) constitutes his in- vestment in the contract. If a distribution is made in the form of annuity payouts, the employee's investment in the contract (adjusted for certain re- fund provisions) divided by his life expectancy (or other period for which an- nuity payouts are expected to be made) constitutes a tax-free return of capi- tal each year. The dollar amount of annuity payouts received in any year in excess of such return is taxable as ordinary income. However, for employees whose annuity starting date is after December 31, 1986, all distributions will be fully taxable once the employee is deemed to have recovered the dollar amount of his investment in the contract. Notwithstanding the above, if the employee's annuity starting date was on or before July 1, 1986 and if his in- vestment in the contract will be recovered within three years of his annuity starting date, no amount is included in income until he has fully recovered such investment. For amounts distributed after 1986, new rules generally pro- vide that all distributions which are not received as an annuity will be taxed as a pro rata distribution of taxable and nontaxable amounts (rather than as a distribution first of nontaxable amounts). If a surrender of or withdrawal from the contract is effected and a distribu- tion is made in a single payout, the proceeds may qualify for special lump-sum distribution treatment under certain qualified plans, as discussed previously. Otherwise, the amount by which the payout exceeds the investment in the con- tract (adjusted for any prior withdrawals) allocated to that payout, if any, will be taxed as ordinary income in the year of receipt. B-5 Distributions from qualified plans, 403(b) plans and IRAs will be subject to (1) a 10% penalty tax if made before age 59 1/2 unless certain other excep- tions apply, and (2) except during 1997, 1998, and 1999, a 15% penalty tax on combined annual distributions in excess of $150,000 (as indexed), subject to various special rules. Failure to meet certain minimum distribution require- ments for the above plans, as well as for Section 457 plans, will result in a 50% excise tax. Various other adverse tax consequences may also be potentially applicable in certain circumstances to these types of plans. Upon an annuitant's death, the taxation of benefits payable to his beneficiary generally follow these same principles, subject to a variety of special rules. OTHER CONSIDERATIONS It should be understood that the foregoing comments about the federal tax con- sequences under these contracts are not exhaustive and that special rules are provided with respect to other tax situations not discussed herein. Further, the foregoing discussion does not address any applicable state, local or for- eign tax laws. In recent years, numerous changes have been made in the federal income tax treatment of contracts and retirement plans, which are not fully discussed above. Before an investment is made in any of the above plans, a tax advisor should be consulted. AUTOMATIC INCREASE IN THE GUARANTEED MINIMUM DEATH BENEFIT Subject to the following terms and conditions, once a contract has been in force for a certain period, Lincoln Life will automatically increase the guar- anteed minimum death benefit (GMDB): Lincoln Life will automatically increase the GMDB, separately for each con- tract year's purchase payment(s), effective upon the seventh anniversary of each eligible contract year in which those payments were made (as the contin- gent deferred sales charge expires on those payments). The attributable gain (AG), used to increase the GMDB, will be calculated based on the contract value at the close of business on the last valuation date preceding the seventh anniversary of the contract year for which the in- crease is made. The AG will be the amount which results from allocating the total appreciation in the contract to each contract year's purchase payments adjusted by withdrawals on a first-in-first out (FIFO) basis based on Lincoln Life's internal rate of return (IRR) calculation (as described below). If a single purchase payment was deposited or multiple deposits were made in the first contract year only, then, upon adjustment, the increased GMDB will be the contract value on the seventh contract anniversary. However, if con- tract value is less than net purchase payments, the GMDB will not be adjusted. If purchase payments have been deposited in multiple contract years, then, upon adjustment, the increased GMDB will be the sum of all purchase payments plus any attributable gain, as calculated for each contract year which has reached its seventh anniversary, minus any withdrawals, partial annuitizations and premium taxes incurred. The IRR is the level compound rate of return, calculated by Lincoln Life, at which purchase payments less withdrawals will accumulate to the contract value on the contract anniversary beginning with the seventh anniversary. The appli- cation of the IRR methodology to any particular contract year could allocate gain, if any, in a manner which does not precisely correlate with the con- tract's actual investment experience for a particular contract year or subaccount. The calculation of the IRR assumes all purchase payments and with- drawals occur at the beginning of the contract year in which they were made. Once the IRR has been determined, the gain attributable to each contract year is calculated by applying the IRR to the purchase payments, less any withdraw- als applied on a FIFO basis. FINANCIAL STATEMENTS Financial statements for the VAA and Lincoln Life appear on the following pages. For more information about the financial statements for the company provided in this SAI, please see the cover page of this SAI. B-6 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E STATEMENT OF NET ASSETS DECEMBER 31, 1997
Percent Growth- of Net Income Growth Assets Combined Account Account - -------------------------------------------------------------------------------- ASSETS Investments in American Variable Insurance Series at net asset value: . Growth-Income Fund- 12,695,837,077 shares at $36.42 per share (cost- $309,899,216) 50.4% $462,382,386 $462,382,386 ------------------------------- . Growth Fund-6,295,754, 525 shares at $44.98 per share (cost-$194,316,712) 30.9 283,183,488 $283,183,488 ------------------------------- . Asset Allocation Fund- 1,085,551,796 shares at $15.32 per share (cost- $15,070,247) 1.8 16,630,654 ------------------------------- . High-Yield Bond Fund- 3,525,026,878 shares at $14.66 per share (cost- $47,845,751) 5.6 51,676,925 ------------------------------- . U.S. Government/AAA-Rated Securities Fund-3,057,872,962 shares at $11.10 per share (cost-$33,456,334) 3.7 33,940,170 ------------------------------- . Cash Management Fund- 1,044,378,380 shares at $11.01 per share (cost- $11,570,736) 1.3 11,498,606 ------------------------------- . International Fund- 3,553,046,565 shares at $14.48 per share (cost- $50,128,583) 5.6 51,448,114 ------------------------------- . Bond Fund-266,011,478 shares at $10.43 per share (cost- $2,709,839) 0.3 2,774,500 ------------------------------- . Global Growth Fund- 322,300,484 shares at $10.78 per share (cost-$3,487,921) 0.4 3,474,399 ------------------------------- ----- ------------ ------------ ------------ TOTAL INVESTMENTS AND TOTAL ASSETS (Cost-$668,285,139) 100.0 917,009,242 462,382,386 283,183,488 - -------------------------------- LIABILITY--Payable to The Lincoln National Life Insurance Company 0.0 31,374 15,813 9,661 - -------------------------------- ----- ------------ ------------ ------------ NET ASSETS 100.0% $916,977,868 $462,366,573 $283,173,827 ===== ============ ============ ============ Net assets are represented by: Legacy I without guaranteed minimum death benefit . Units in accumulation period 143,541,423 79,286,918 ------------------------------- . Annuity reserves units 807,815 395,292 ------------------------------- . Unit value $ 3.177 $ 3.525 ------------------------------- . Value in accumulation period 456,000,283 279,484,697 ------------------------------- . Annuity reserves 2,566,255 1,393,392 ------------------------------- ------------ ------------ 458,566,538 280,878,089 ------------ ------------ Legacy I with guaranteed minimum death benefit . Units in accumulation period 1,196,919 651,636 ------------------------------- . Unit value $ 3.175 $ 3.523 ------------------------------- . Value in accumulation period 3,800,035 2,295,738 ------------------------------- ------------ ------------ TOTAL NET ASSETS $462,366,573 $283,173,827 ============ ============
See accompanying notes. B-7
U.S. Government/ Asset High-Yield AAA-Rated Cash Global Allocation Bond Securities Management International Bond Growth Account Account Account Account Account Account Account - ------------------------------------------------------------------------------------ $16,630,654 $51,676,925 $33,940,170 $11,498,606 $51,448,114 $2,774,500 $3,474,399 ----------- ----------- ----------- ----------- ----------- ---------- ---------- 16,630,654 51,676,925 33,940,170 11,498,606 51,448,114 2,774,500 3,474,399 569 1,771 1,161 395 1,791 95 118 ----------- ----------- ----------- ----------- ----------- ---------- ---------- $16,630,085 $51,675,154 $33,939,009 $11,498,211 $51,446,323 $2,774,405 $3,474,281 =========== =========== =========== =========== =========== ========== ========== 9,518,993 18,707,397 17,974,764 7,105,104 36,401,025 2,350,047 3,197,019 117,167 112,784 105,204 52,457 132,812 87,195 19,619 $ 1.717 $ 2.716 $ 1.862 $ 1.560 $ 1.393 $ 1.137 $ 1.077 16,344,709 50,816,152 33,463,941 11,083,987 50,724,285 2,672,963 3,441,970 201,183 306,361 195,859 81,834 185,071 99,178 21,123 ----------- ----------- ----------- ----------- ----------- ---------- ---------- 16,545,892 51,122,513 33,659,800 11,165,821 50,909,356 2,772,141 3,463,093 ----------- ----------- ----------- ----------- ----------- ---------- ---------- 49,069 203,599 150,093 213,244 385,609 1,992 10,400 $ 1.716 $ 2.714 $ 1.860 $ 1.559 $ 1.393 $ 1.136 $ 1.076 84,193 552,641 279,209 332,390 536,967 2,264 11,188 ----------- ----------- ----------- ----------- ----------- ---------- ---------- $16,630,085 $51,675,154 $33,939,009 $11,498,211 $51,446,323 $2,774,405 $3,474,281 =========== =========== =========== =========== =========== ========== ==========
B-8 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
Growth- Asset Income Growth Allocation Combined Account Account Account - -------------------------------------------------------------------------------- Net Investment Income: .Dividends from investment income $ 19,279,249 $ 8,571,925 $ 1,541,526 $ 493,992 - --------------------------- .Dividends from net realized gains on investments 84,381,126 43,720,729 33,874,592 891,458 - --------------------------- Mortality and expense guarantees: .Legacy I without guaranteed minimum death benefit (11,003,344) (5,518,736) (3,334,730) (170,022) - --------------------------- .Legacy I with guaranteed minimum death benefit (19,520) (10,836) (4,653) (195) - --------------------------- ------------ ----------- ----------- ---------- NET INVESTMENT INCOME 92,637,511 46,763,082 32,076,735 1,215,233 - --------------------------- Net realized and unrealized gain (loss) on investments: .Net realized gain (loss) on investments 36,167,339 18,719,451 15,157,912 195,674 - --------------------------- .Net change in unrealized appreciation or depreciation on investments 47,580,272 29,836,639 19,220,263 818,918 - --------------------------- ------------ ----------- ----------- ---------- NET GAIN (LOSS) ON INVESTMENTS 83,747,611 48,556,090 34,378,175 1,014,592 - --------------------------- ------------ ----------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $176,385,122 $95,319,172 $66,454,910 $2,229,825 - --------------------------- ============ =========== =========== ==========
See accompanying notes. B-9
U.S. Government/ High-Yield AAA-Rated Cash Global Bond Securities Management International Bond Growth Account Account Account Account Account Account - ---------------------------------------------------------------------------- $4,401,863 $2,398,267 $ 643,099 $ 1,074,837 $137,349 $ 16,391 535,506 -- -- 5,320,222 31,624 6,995 (634,880) (449,029) (160,929) (689,831) (28,226) (16,961) (907) (907) (1,075) (891) (15) (41) ---------- ---------- --------- ----------- -------- -------- 4,301,582 1,948,331 481,095 5,704,337 140,732 6,384 594,175 33,776 26,232 1,422,318 18,252 (451) 413,269 426,825 (17,868) (3,134,977) 30,725 (13,522) ---------- ---------- --------- ----------- -------- -------- 1,007,444 460,601 8,364 (1,712,659) 48,977 (13,973) ---------- ---------- --------- ----------- -------- -------- $5,309,026 $2,408,932 $ 489,459 $ 3,991,678 $189,709 $ (7,589) ========== ========== ========= =========== ======== ========
B-10 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 1997 AND 1996
Growth- Asset Income Growth Allocation Combined Account Account Account - --------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 1996 $785,886,436 $377,008,450 $250,263,703 $ 6,613,785 Changes from operations: . Net investment income 59,473,574 33,061,425 16,167,805 897,804 - -------------------------- . Net realized gain (loss) on investments 29,343,024 14,407,411 13,669,140 183,214 - -------------------------- . Net change in unrealized appreciation or depreciation on investments 15,593,387 14,952,347 (2,339,414) 111,594 - -------------------------- ------------ ------------ ------------ ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 104,409,985 62,421,183 27,497,531 1,192,612 - -------------------------- Net increase (decrease) from unit transactions (68,622,458) (33,352,157) (28,546,710) 2,581,154 - -------------------------- ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 35,787,527 29,069,026 (1,049,179) 3,773,766 - -------------------------- ------------ ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 1996 821,673,963 406,077,476 249,214,524 10,387,551 - -------------------------- Changes from operations: . Net investment income 92,637,511 46,763,082 32,076,735 1,215,233 - -------------------------- . Net realized gain (loss) on investments 36,167,339 18,719,451 15,157,912 195,674 - -------------------------- . Net change in unrealized appreciation or depreciation on investments 47,580,272 29,836,639 19,220,263 818,918 - -------------------------- ------------ ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 176,385,122 95,319,172 66,454,910 2,229,825 - -------------------------- Net increase (decrease) from unit transactions (81,081,217) (39,030,075) (32,495,607) 4,012,709 - -------------------------- ------------ ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 95,303,905 56,289,097 33,959,303 6,242,534 - -------------------------- ------------ ------------ ------------ ----------- NET ASSETS AT DECEMBER 31, 1997 $916,977,868 $462,366,573 $283,173,827 $16,630,085 - -------------------------- ============ ============ ============ ===========
See accompanying notes. B-11
U.S. Government/ High-Yield AAA-Rated Cash Global Bond Securities Management International Bond Growth Account Account Account Account Account Account - ---------------------------------------------------------------------------------- $52,323,004 $49,690,451 $14,771,446 $35,215,597 $ -- $ -- 3,902,701 2,646,843 501,647 2,257,758 37,591 -- 546,963 196,545 33,734 307,274 (1,257) -- 1,230,568 (2,286,249) 15,487 3,874,918 34,136 -- ----------- ----------- ----------- ----------- ---------- ---------- 5,680,232 557,139 550,868 6,439,950 70,470 -- (7,187,721) (10,873,838) (894,132) 7,963,293 1,687,653 -- ----------- ----------- ----------- ----------- ---------- ---------- (1,507,489) (10,316,699) (343,264) 14,403,243 1,758,123 -- ----------- ----------- ----------- ----------- ---------- ---------- 50,815,515 39,373,752 14,428,182 49,618,840 1,758,123 -- 4,301,582 1,948,331 481,095 5,704,337 140,732 6,384 594,175 33,776 26,232 1,422,318 18,252 (451) 413,269 426,825 (17,868) (3,134,977) 30,725 (13,522) ----------- ----------- ----------- ----------- ---------- ---------- 5,309,026 2,408,932 489,459 3,991,678 189,709 (7,589) (4,449,387) (7,843,675) (3,419,430) (2,164,195) 826,573 3,481,870 ----------- ----------- ----------- ----------- ---------- ---------- 859,639 (5,434,743) (2,929,971) 1,827,483 1,016,282 3,474,281 ----------- ----------- ----------- ----------- ---------- ---------- $51,675,154 $33,939,009 $11,498,211 $51,446,323 $2,774,405 $3,474,281 =========== =========== =========== =========== ========== ==========
B-12 [THIS PAGE INTENTIONALLY LEFT BLANK] B-13 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E NOTES TO FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES THE ACCOUNT: Lincoln National Variable Annuity Account E (the Variable Ac- count) is a segregated investment account of The Lincoln National Life Insur- ance Company (the Company) and is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. The Variable Account consists of one product offering a guaranteed minimum death benefit (GMDB) rider op- tion. INVESTMENTS: The Variable Account invests in the American Variable Insurance Series (AVIS) which consist of nine funds: Growth-Income Fund, Growth Fund, Asset Allocation Fund, High-Yield Bond Fund, U.S. Government/AAA Rated Securi- ties Fund, Cash Management Fund, International Fund, Bond Fund and Global Growth Fund (the Funds). Investments in the funds are stated at the closing net asset value per share on December 31, 1997. AVIS is registered as an open- ended management investment company. Investment transactions are accounted for on a trade date-basis and dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by the average-cost method. DIVIDENDS: Dividends paid to the Variable Account are automatically reinvested in shares of the Funds on the payable date. FEDERAL INCOME TAXES: Operations of the Variable Account form a part of and are taxed with operations of the Company, which is taxed as a "life insurance company" under the Internal Revenue Code. Using current law, no federal income taxes are payable with respect to the Variable Account's net investment income and the net realized gain on investments. ANNUITY RESERVES: Reserves on contracts not involving life contingencies are calculated using an assumed investment rate of 4%. Reserves on contracts in- volving life contingencies are calculated using a modification of the 1971 In- dividual Annuitant Mortality Table and an assumed investment rate of 4%. 2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATE Amounts are paid to the Company for mortality and expense guarantees at a per- centage of the Variable Account each day. The rates are as follows: . Legacy I at a daily rate of .0034247% (1.25% on an annual basis) . Legacy I with GMDB at a daily rate of .00383561643% (1.40% on an annual ba- sis) In addition, amounts retained by the Company from the proceeds of the sales of annuity contracts for contract charges and surrender charges were as follows during 1997. Growth-Income Account $358,605 - -------------------------------------------- Growth Account 234,360 - -------------------------------------------- Asset Allocation Account 8,549 - -------------------------------------------- High-Yield Bond Account 40,106 - -------------------------------------------- U.S. Government/AAA-Rated Securities Account 30,592 - -------------------------------------------- Cash Management Account 23,807 - -------------------------------------------- International Account 44,824 - -------------------------------------------- Bond Account 2,006 - -------------------------------------------- Global Growth 821 - -------------------------------------------- -------- $743,670 ========
Accordingly, the Company is responsible for all sales, general, and adminis- trative expenses applicable to the Variable Account. B-14 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E NOTES TO FINANCIAL STATEMENTS CONTINUED 3. NET ASSETS Net Assets at December 31, 1997 consisted of the following:
Growth- Asset Income Growth Allocation Combined Account Account Account - ------------------------------------------------------------------------------- Unit Transactions: Accumulation units $192,185,335 $ 82,238,133 $ 41,905,428 $11,842,135 - --------------------------- Annuity reserves 1,996,818 973,539 191,060 167,086 - --------------------------- ------------ ------------ ------------ ----------- 194,182,153 83,211,672 42,096,488 12,009,221 Accumulated net investment income 345,155,335 170,189,236 87,871,828 2,639,184 - --------------------------- Accumulated net realized gain (loss) on investments 128,916,277 56,282,495 64,338,735 421,273 - --------------------------- Net unrealized appreciation (depreciation) on investments 248,724,103 152,683,170 88,866,776 1,560,407 - --------------------------- ------------ ------------ ------------ ----------- $916,977,868 $462,366,573 $283,173,827 $16,630,085 ============ ============ ============ ===========
B-15
U.S. Government/ High-Yield AAA-Rated Cash Global Bond Securities Management International Bond Growth Account Account Account Account Account Account - ------------------------------------------------------------------------- $8,512,096 $2,700,471 $ 839,282 $38,270,884 $2,415,310 $3,461,596 186,782 141,164 54,983 163,014 98,916 20,274 - ----------- ----------- ----------- ----------- ---------- ---------- 8,698,878 2,841,635 894,265 38,433,898 2,514,226 3,481,870 36,672,962 28,029,342 9,448,894 10,119,182 178,323 6,384 2,472,140 2,584,196 1,227,182 1,573,712 16,995 (451) 3,831,174 483,836 (72,130) 1,319,531 64,861 (13,522) - ----------- ----------- ----------- ----------- ---------- ---------- $51,675,154 $33,939,009 $11,498,211 $51,446,323 $2,774,405 3,474,281 =========== =========== =========== =========== ========== ==========
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
Year Ended December 31 1997 1996 Units Amount Units Amount - ------------------------------------------------------------------------------- GROWTH-INCOME ACCOUNT Accumulation Units: Contract purchases 9,515,366 $27,854,605 10,540,136 $24,373,803 - -------------------------- Terminated contracts and transfers to annuity reserves (22,897,340) (67,107,967) (24,707,912) (57,905,158) - -------------------------- ----------- ----------- ----------- ----------- (13,381,974) (39,253,362) (14,167,776) (33,531,355) Annuity Reserves: Transfers from accumulation units and between accounts 186,169 569,607 216,750 490,036 - -------------------------- Annuity payments (121,199) (352,637) (106,398) (214,250) - -------------------------- Reimbursement of mortality guarantee adjustment 2,034 6,317 (38,281) (96,588) - -------------------------- ----------- ----------- ----------- ----------- 67,004 223,287 72,071 179,198 GROWTH ACCOUNT Accumulation Units: Contract purchases 7,413,667 23,374,570 12,024,738 30,187,898 - -------------------------- Terminated contracts and transfers to annuity reserves (17,898,720) (55,799,816) (23,311,473) (58,691,504) - -------------------------- ----------- ----------- ----------- ----------- (10,485,053) (32,425,246) (11,286,735) (28,503,606) Annuity Reserves: Transfers from accumulation units and between accounts 38,047 123,024 45,043 118,037 - -------------------------- Annuity payments (61,157) (192,532) (60,964) (162,288) - -------------------------- Receipt (reimbursement) of mortality guarantee adjustment (250) (853) 415 1,147 - -------------------------- ----------- ----------- ----------- ----------- (23,360) (70,361) (15,506) (43,104)
B-16 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E NOTES TO FINANCIAL STATEMENTS CONTINUED 4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
Year Ended December 31 1997 1996 Units Amount Units Amount - ------------------------------------------------------------------------------ ASSET ALLOCATION ACCOUNT Accumulation Units: Contract purchases 4,674,927 6,947,952 3,807,410 5,011,478 - --------------------------- Terminated contracts and transfers to annuity reserves (2,249,293) (3,037,757) (1,832,754) (2,404,180) - --------------------------- ---------- ----------- ---------- ----------- 2,425,634 3,910,195 1,974,656 2,607,298 Annuity Reserves: Transfers from accumulation units and between accounts 96,585 163,028 8,829 11,835 - --------------------------- Annuity payments (35,734) (60,514) (26,398) (37,979) - --------------------------- ---------- ----------- ---------- ----------- 60,851 102,514 (17,569) (26,144) HIGH-YIELD BOND ACCOUNT Accumulation Units: Contract purchases 2,099,112 5,624,882 1,860,645 4,292,963 - --------------------------- Terminated contracts and transfers to annuity reserves (3,877,455) (10,168,247) (5,038,600) (11,563,870) - --------------------------- ---------- ----------- ---------- ----------- (1,778,343) (4,543,365) (3,177,955) (7,270,907) Annuity Reserves: Transfers from accumulation units and between accounts 60,368 160,790 64,776 150,749 - --------------------------- Annuity payments (25,820) (67,342) (23,781) (55,464) - --------------------------- Reimbursement of mortality guarantee adjustment 196 530 (4,983) (12,099) - --------------------------- ---------- ----------- ---------- ----------- 34,744 93,978 36,012 83,186 U.S. GOVERNMENT/AAA-RATED SECURITIES ACCOUNT Accumulation Units: Contract purchases 1,124,622 1,975,014 2,518,074 4,157,391 - --------------------------- Terminated contracts and transfers to annuity reserves (5,581,799) (9,884,586) (8,997,754) (15,068,410) - --------------------------- ---------- ----------- ---------- ----------- (4,457,177) (7,909,572) (6,479,680) (10,911,019) Annuity Reserves: Transfers from accumulation units and between accounts 54,132 99,012 35,915 61,658 - --------------------------- Annuity payments (18,882) (33,755) (11,047) (19,166) - --------------------------- Receipt (reimbursement) of mortality guarantee adjustment 344 640 (3,051) (5,311) - --------------------------- ---------- ----------- ---------- ----------- 35,594 65,897 21,817 37,181
B-17 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E NOTES TO FINANCIAL STATEMENTS CONTINUED
Year Ended December 31 1997 1996 Units Amount Units Amount - ------------------------------------------------------------------------------- CASH MANAGEMENT ACCOUNT Accumulation Units: Contract purchases 9,588,206 14,793,214 12,030,851 17,751,903 - -------------------------- Terminated contracts and transfers to annuity reserves (11,786,541) (18,157,160) (12,515,148) (18,474,236) - -------------------------- ----------- ----------- ----------- ----------- (2,198,335) (3,363,946) (484,297) (722,333) Annuity Reserves: Transfers from accumulation units and between accounts 0 0 (79,045) (116,265) - -------------------------- Annuity payments (35,908) (55,568) (37,345) (55,673) - -------------------------- Receipt of mortality guarantee adjustment 54 84 92 139 - -------------------------- ----------- ----------- ----------- ----------- (35,854) (55,484) (116,298) (171,799) INTERNATIONAL ACCOUNT Accumulation Units: Contract purchases 9,147,633 13,126,908 14,756,117 17,417,127 - -------------------------- Terminated contracts and transfers to annuity reserves (10,589,509) (15,306,258) (8,119,189) (9,595,403) - -------------------------- ----------- ----------- ----------- ----------- (1,441,876) (2,179,350) 6,636,928 7,821,724 Annuity Reserves: Transfers from accumulation units and between accounts 39,020 56,495 143,251 166,145 - -------------------------- Annuity payments (29,121) (41,491) (25,552) (23,120) - -------------------------- Receipt (reimbursement) of mortality guarantee adjustment 111 151 (1,171) (1,456) - -------------------------- ----------- ----------- ----------- ----------- 10,010 15,155 116,528 141,569 BOND ACCOUNT Accumulation Units: Contract purchases 1,298,894 1,391,251 1,989,096 2,042,272 - -------------------------- Terminated contracts and transfers to annuity reserves (627,983) (663,594) (307,968) (354,619) - -------------------------- ----------- ----------- ----------- ----------- 670,911 727,657 1,681,128 1,687,653 Annuity Reserves: Transfers from accumulation units and between accounts 95,597 108,430 -- -- - -------------------------- Annuity payments (8,402) (9,514) -- -- - -------------------------- Receipt (reimbursement) of mortality guarantee adjustment -- 0 -- -- - -------------------------- ----------- ----------- ----------- ----------- 87,195 98,916 -- --
B-18 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E NOTES TO FINANCIAL STATEMENTS CONTINUED
Year Ended December 31 1997 1996 Units Amount Units Amount - ------------------------------------------------------------------------------- GLOBAL GROWTH ACCOUNT Accumulation Units: Contract purchases 3,805,637 4,125,375 -- -- - ----------------------------- Terminated contracts and transfers to annuity reserves (598,218) (663,779) -- -- - ----------------------------- --------- ------------ --------- ------------ 3,207,419 3,461,596 0 0 Annuity Reserves: Transfers from accumulation units and between accounts 22,542 23,364 -- -- - ----------------------------- Annuity payments (833) (898) -- -- - ----------------------------- Receipt (reimbursement) of mortality guarantee adjustment (2,090) (2,192) -- -- - ----------------------------- --------- ------------ --------- ------------ 19,619 20,274 -- -- NET DECREASE FROM UNIT TRANSACTIONS ($81,081,217) ($68,622,458) ============ ============
5. PURCHASES AND SALES OF SECURITIES The aggregate cost of investments purchased and the aggregate proceeds from investments sold were as follows for 1997.
Aggregate Aggregate Cost of Proceeds Purchases from Sales - ----------------------------------------------------------------------- Growth-Income Account $ 56,444,674 $ 49,129,296 - -------------------------------------------- Growth Account 41,512,387 42,191,755 - -------------------------------------------- Asset Allocation Account 6,717,167 1,499,629 - -------------------------------------------- High-Yield Bond Account 6,847,225 7,047,245 - -------------------------------------------- U.S. Government/AAA-Rated Securities Account 3,064,432 9,000,773 - -------------------------------------------- Cash Management Account 11,518,185 14,471,840 - -------------------------------------------- International Account 12,949,775 9,459,484 - -------------------------------------------- Bond Account 1,490,408 524,794 - -------------------------------------------- Global Growth 3,703,462 215,090 - -------------------------------------------- ------------ ------------ $144,247,715 $133,539,906 ============ ============
6. NEW INVESTMENT FUND Effective January 1, 1996, the AVIS Bond Fund became available as an investment option for Variable Account contract owners. Effective April 25, 1997, the AVIS Global Growth Fund became available as an investment option for Variable Ac- count contract owners. 7. DAILY VALUATION CALCULATIONS Effective October 1996, the daily unit value calculation process was transferred from the Company to the Delaware Group, an affiliate of the Company. Costs associated with the calculation of the unit value are paid by the Company. B-19 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors of The Lincoln National Life Insurance Company and Contract Owners of Lincoln National Variable Annuity Account E We have audited the accompanying statement of net assets of Lincoln National Variable Annuity Account E (Variable Account) as of December 31, 1997, and the related statement of operations for the year then ended, and the statements of changes in net assets for each of the two years in the period then ended. These financial statements are the responsibility of the Variable Account's manage- ment. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1997, by corre- spondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evalu- ating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lincoln National Variable An- nuity Account E at December 31, 1997, the results of its operations for the year then ended, and the changes in its net assets for each of the two years in the period then ended in conformity with generally accepted accounting princi- ples. Fort Wayne, Indiana April 7, 1998 B-20 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY BALANCE SHEETS -- STATUTORY BASIS
DECEMBER 31 1997 1996 --------- --------- (IN MILLIONS) -------------------- 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 - ------------------------------------------------------------------------------------ --------- --------- --------- ---------
See accompanying notes. S-1 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY STATEMENTS OF INCOME -- STATUTORY BASIS
YEAR ENDED DECEMBER 31 1997 1996 1995 --------- --------- --------- (IN MILLIONS) ------------------------------- 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 - ----------------------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
See accompanying notes. S-2 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
YEAR ENDED DECEMBER 31 1997 1996 1995 --------- --------- --------- (IN MILLIONS) ------------------------------- 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 - ----------------------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
See accompanying notes. S-3 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
YEAR ENDED DECEMBER 31 1997 1996 1995 ---------- ---------- ---------- (IN MILLIONS) ---------------------------------- 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 - ----------------------------------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes. S-4 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 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 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:
CAPITAL AND SURPLUS NET INCOME ----------------------------------------------------- DECEMBER 31 YEAR ENDED DECEMBER 31 1997 1996 1997 1996 1995 ----------------------------------------------------- (IN MILLIONS) ----------------------------------------------------- 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 - --------------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
S-7 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 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 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 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:
YEAR ENDED DECEMBER 31 1997 1996 1995 ------------------------------- (IN MILLIONS) ------------------------------- 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 - ------------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
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 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:
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------------------------------------------- (IN MILLIONS) ---------------------------------------------- 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 --------- ----------- ----------- --------- --------- ----------- ----------- ---------
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 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:
COST OR AMORTIZED FAIR COST VALUE -------------------- (IN MILLIONS) -------------------- 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 - ----------------------------------------------------------------------------- --------- --------- --------- ---------
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:
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------------------------------------------- (IN MILLIONS) -------------------------------------------- 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 - ----------------------------------------
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 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:
1997 1996 1995 ------------------------------- (IN MILLIONS) ------------------------------- 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 - ------------------------------------------------------------------------ --------- --------- --------- --------- --------- ---------
4. SUBSIDIARIES Statutory-basis financial information related to the Company's four wholly-owned subsidiaries is summarized as follows (in millions):
DECEMBER 31, 1997 -------------------------------------------- FIRST PENN LNH&C LNRAC LLANY -------------------------------------------- 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 - ----------------------------------------------------------- --------- ----------- --------- --------- --------- ----------- --------- ---------
DECEMBER 31, 1997 ------------------------------------------ FIRST PENN LNH&C LNRAC LLANY ------------------------------------------ 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 - ------------------------------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
S-14 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED) 4. SUBSIDIARIES (CONTINUED)
DECEMBER 31, 1996 ------------------------------------------------ FIRST PENN LNH&C LNRAC LLANY ------------------------------------------------ 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 - ----------------------------------------------------------- --------- ----------- ----------- ----------- --------- ----------- ----------- -----------
DECEMBER 31, 1996 ------------------------------------------------ FIRST PENN LNH&C LNRAC LLANY ------------------------------------------------ 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) - ------------------------------------------------------------- --------- ----------- ----------- ----------- --------- ----------- ----------- -----------
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 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:
DECEMBER 31 1997 1996 -------------------- (IN MILLIONS) -------------------- Insurance ceded $ 1,431.0 $ 1,154.5 - ------------------------------------------------------------------------------- Amounts recoverable from other insurers 35.9 16.0 - -------------------------------------------------------------------------------
Reinsurance transactions included in the income statement caption, "Premiums and Deposits," are as follows:
YEAR ENDED DECEMBER 31 1997 1996 1995 ------------------------------- (IN MILLIONS) ------------------------------- 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 - ------------------------------------------------------------------------ --------- --------- --------- --------- --------- ---------
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 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:
DECEMBER 31, 1997 ----------------------------------- NET OF GROSS LOADING LOADING ----------------------------------- (IN MILLIONS) ----------------------------------- 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 --------- --- ----- --------- --- -----
DECEMBER 31, 1996 ----------------------------------- NET OF GROSS LOADING LOADING ----------------------------------- (IN MILLIONS) ----------------------------------- 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 --------- --- ----- --------- --- -----
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 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:
AMOUNT PERCENT ---------------------- (IN MILLIONS) ---------------------- 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 - -------------------------------------------------------------------------------- --------- ---------
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 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 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): 1998 $ 18.5 - -------------------------------------- 1999 18.9 - -------------------------------------- 2000 20.1 - -------------------------------------- 2001 20.4 - -------------------------------------- 2002 20.7 - -------------------------------------- Thereafter 152.2 - -------------------------------------- --------- $ 250.8 --------- ---------
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 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:
NOTIONAL OR CONTRACT AMOUNTS -------------------- DECEMBER 31 -------------------- 1997 1996 -------------------- (IN MILLIONS) -------------------- Mortgage loan pass-through certificates $ 41.6 $ 50.3 - ------------------------------ Real estate partnerships -- .5 - ------------------------------ --------- --------- $ 41.6 $ 50.8 --------- --------- --------- ---------
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 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED) 10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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) ------------------------------------------------------- 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 -------- -------- -------- ----- -------- ------ -------- -------- -------- ----- -------- ------
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:
---------------------------------------------------------------- INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS 1997 1996 1997 1996 1997 1996 ---------------------------------------------------------------- (IN MILLIONS) ---------------------------------------------------------------- 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 - ----------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
FINANCIAL FUTURES INTEREST RATE SWAPS CONTRACTS ------------------------------------------ 1997 1996 1997 1996 ------------------------------------------ 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 $ -- - ------------------------------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
S-22 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED) 10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
FOREIGN CURRENCY DERIVATIVES ---------------------------------------------------------------- FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY FORWARD CONTRACTS OPTIONS SWAPS 1997 1996 1997 1996 1997 1996 ---------------------------------------------------------------- (IN MILLIONS) ---------------------------------------------------------------- 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 - -------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
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 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 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 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:
DECEMBER 31 ---------------------------------------------- 1997 1996 ---------------------------------------------- CARRYING CARRYING ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE - ----------------------------------------------------------------------------------------------- (IN MILLIONS) ---------------------------------------------- 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) - -----------------------------------------------
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 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:
YEAR ENDED DECEMBER 31 1997 1996 1995 ------------------------------- (IN MILLIONS) ------------------------------- Insurance assumed $ 11.9 $ 17.9 $ 17.6 - ---------------------- Insurance ceded 100.3 302.8 214.4 - ----------------------
S-27 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:
DECEMBER 31 1997 1996 -------------------- (IN MILLIONS) -------------------- 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 - ------------------------
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 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:
YEAR ENDED DECEMBER 31 1997 1996 ------------------------ (IN MILLIONS) ------------------------ 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 - ------------------------------------------------------------ --------- --------- --------- ---------
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.
TOTAL CAPITAL ADMITTED TOTAL AND ASSETS LIABILITIES SURPLUS --------------------------------- 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 - ---------------------------------------- --------- ----------- -------- --------- ----------- --------
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 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 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 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA DECEMBER 31, 1997 (IN MILLIONS) 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 - ---------------------------------------------------------------------------------------------------- --------- ---------
S-32 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA (CONTINUED) DECEMBER 31, 1997 (IN MILLIONS) 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 ------------------------------------------------------------------------------------------ --------- ---------
S-33 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA (CONTINUED) DECEMBER 31, 1997 (IN MILLIONS) 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 ------------------------------------------------------------------------------------------ --------- ---------
S-34 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 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 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E POST-EFFECTIVE AMENDMENT ON FORM N-4 PART C - OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) List of Financial Statements 1. Part A. The Table of Condensed Financial Information is included in Part A of this Registration Statement. 2. Part B. The following Financial Statements of Account E are included in Part B of this Registration Statement: Statement of Net Assets -- December 31, 1997 Statement of Operations -- Year ended December 31, 1997 Statements of Changes in Net Assets -- Years ended December 31, 1997 and 1996 Notes to Financial Statements -- December 31, 1997 Report of Ernst & Young LLP, Independent Auditors 3. The following Statutory-Basis Financial Statements and Schedules of Lincoln National Life Insurance Company are included in the SAI: Balance Sheets -- Statutory Basis -- Years ended December 31, 1997 and 1996 Statements of Income -- Statutory Basis -- Years ended December 31, 1997, 1996, and 1995 Statements of Capital and Surplus -- Statutory Basis -- Years ended December 31, 1997, 1996, and 1995 Notes to Statutory-Basis Financial Statements -- December 31, 1997 Supplemental Schedule of Selected Statutory-Basis Financial Data -- December 31, 1997 Report of Ernst & Young LLP, Independent Auditors (b) List of Exhibits (1)(a) Resolutions of the Board of Directors of the Lincoln National Life Insurance Company establishing Separate Account E (1)(b) Establishing Resolution of Segregated Investment Account (2) None. (3)(a) Underwriting Agreement (3)(b) Amendment to Underwriting Agreement (3)(c) Selling Group Agreement incorporated herein by reference to Registration Statement on Form N-4 (33-27783) filed on March 27, 1998. (4)(a) Variable Annuity Contract (4)(b) Form of Rider to Variable Annuity Contract incorporated herein by reference to Registration Statement on Form N-4 (33-27783) filed on March 31, 1997. (5)(a) Application (6) Articles of Incorporation and Bylaws of Lincoln National Life Insurance Company are incorporated herein by reference to Registration Statement on Form N-4 (33-27783) filed on December 5, 1996. (7) Not applicable. (8)(a) Services Agreement between Delaware Management Holdings, Inc., Delaware Service Company, Inc. and Lincoln National Life Insurance Company is incorporated herein by reference to the Registration Statement on Form S-6 (333-40745 filed on November 21, 1997). (8)(b) Participation Agreement (9) Consent and Opinion of Jeremy Sachs, incorporated herein by reference to Post-Effective Amendment #12 filed on April 22, 1998. (10) Consent of Ernst & Young LLP, Independent Auditors (14) Other Exhibits: (a) Organizational Chart of the Lincoln National Insurance Holding Company System incorporated herein by reference to Registration Statement on Form N-4 (33-27783) filed on March 27, 1998. (b) Books and Records Report. Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR Name Positions and Offices with LNL - ---- ------------------------------ Gabriel L. Shaheen* President, Chief Executive Officer and Director Jon A. Boscia** Director Carolyn P. Brody* Vice President Thomas L. Clagg* Vice President and Associate General Counsel Kelly D. Clevenger* Vice President Jeffrey K. Dellinger* Vice President John H. Gotta**** Senior Vice President Jack D. Hunter* Executive Vice President and General Counsel Donald E. Keller* Vice President Stephen H. Lewis* Senior Vice President H. Thomas Mc Meekin** Director Reed P. Miller* Vice President Ian M. Rolland** Director Lawrence T. Rowland*** Executive Vice President Keith J. Ryan* Senior Vice President, Asst. Treasurer and Chief Financial Officer Richard C. Vaughan** Director Roy V. Washington* Vice President Janet C. Whitney** Vice President and Treasurer C. Suzanne Womack** Assistant Vice President and Secretary *Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana 46802. **Principal business address is 200 East Berry Street, Fort Wayne, Indiana 46802-2706. ***Principal business address is 1700 Magnavox Way, One Reinsurance Place, Fort Wayne, Indiana 46804. ****Principal business address is 900 Cottage Grove Road, Bloomfield, CT 06152-2321 Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR REGISTRANT See Exhibit 15(a): Organizational Chart of the Lincoln National Insurance Holding Company System Item 27. NUMBER OF CONTRACTOWNERS As of January 31, 1998, there were 14,102 Contract Owners (fixed and variable). Item 28. Indemnification Refer to the initial Registration Statement. Item 29. Principal Underwriter (a) American Funds Distributors, Inc., is also the Principal Underwriter of shares of: AMCAP Fund, Inc., American Balanced Fund, Inc., The American Funds Income Series, The American Funds Tax-Exempt Series I, The American Funds Tax- Exempt Series II, American High-Income Municipal Bond Fund, Inc., American High- Income Trust, American Mutual Fund, Inc., Capital Income Builder, Inc., Capital World Bond Fund, Inc., Capital World Growth and Income Fund, Inc., The Cash Management Trust of America, EuroPacific Growth Fund, Fundamental Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America, Inc., Intermediate Bond Fund of America, The Investment Company of America, Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New Perspective Fund, Inc., SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of America, Inc., The Tax-Exempt Money Fund of America, The U.S. Treasury Money Fund of America and Washington Mutual Investors Fund, Inc. (b) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter ------------------ --------------------- David L. Abzug Regional Vice President 27304 Park Vista Road Van Nuys, CA 91301 John A. Agar Regional Vice President 1501 N. University Drive, Suite 227A Little Rock, AR 72207 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 (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 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 (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 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 (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 (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 (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 (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 (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
(b) (1) (2) 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
- ------------- 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 30. Location of Accounts and Records Exhibit 15(b) is hereby expressly incorporated herein by this reference. Item 31. Management Services Not Applicable. 50 Item 32. Undertakings - --------------------- (a) Registrant undertakes that it will file a post-effective amendment to this registration statement as frequently as necessary to ensure that the audited financial statements in the registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted. (b) Registrant undertakes that it will include either (1) as part of any application to purchase a Certificate or an Individual Contract offered by the Prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a post card or similar written communication affixed to or included in the Prospectus that the applicant can remove to send for a Statement of Additional Information. (c) Registrant undertakes to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request to Lincoln Life at the address or phone number listed in the Prospectus. (d) Lincoln National Life Insurance Company hereby represents that the fees and charges deducted under the contract, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Lincoln National Life Insurance Company. Item 33. ( Additional Item) - Undertaking Concerning the Texas Optional Retirement Program Refer to the initial Registration Statement. Item 34. (Additional Item) - Undertaking Concerning Withdrawal Restrictions on IRC Section 403(b) Plan Participants Refer to initial Registration Statement. 51 SIGNATURES (a) As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of this Amendment and has caused this Amendment to the Registration Statement to be signed on its behalf, in the City of Fort Wayne and State of Indiana on this 27th day of April, 1998. LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E (Registrant) By: /s/ Stephen H. Lewis -------------------------------- Stephen H. Lewis (Signature-Officer of Depositor) Senior Vice President, LNL (Title) By: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (Depositor) By: /s/ Gabriel L. Shaheen -------------------------------- Gabriel L. Shaheen President (Title) (b) As required by the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ---- /s/ Gabriel L. Shaheen President, Chief Executive Officer April 27, 1998 - ---------------------- & Director (Principal Executive Gabriel L. Shaheen Officer) Executive Vice President April 27, 1998 - ---------------------- General Counsel and Director Jack D. Hunter Executive Vice President and April 27, 1998 - ---------------------- Director Lawrence T. Rowland /s/ Keith J. Ryan Senior Vice President, Chief April 27, 1998 - ---------------------- Financial Officer and Assistant Keith J. Ryan Treasurer (Principal Accounting Officer and Principal Financial Officer) /s/ Ian M. Rolland Director April 27, 1998 - ---------------------- Ian M. Rolland /s/ Jon A. Boscia Director April 27, 1998 - ---------------------- Jon A. Boscia /s/ H. Thomas McMeekin Director April 27, 1998 - ---------------------- H. Thomas McMeekin /s/ Richard C. Vaughan Director April 27, 1998 - ---------------------- Richard C. Vaughan
EX-99.1.A 2 RESOLUTION OF THE BOARD OF DIRECTORS Exhibit 1(a) I, Marilyn A. Vachon, hereby certify that I am the duly elected and qualified Secretary of Lincoln National Pension Insurance Company, that the following is a true and correct copy of a resolution adopted by the Board of Directors at their meeting of December 14, 1981, and that such resolution is in full force and effect as of the date hereof: RESOLVED, That Resolution No. 105 adopted by the Board of Directors on April 22, 1981, is hereby amended in its entirety to read as follows: RESOLVED, That the actions of the officers of the Company in establishing and utilizing a segregated investment account in accordance with the provisions of the Indiana Insurance Law, such segregated investment account being designated by the Company as "Lincoln National Pension Insurance Company Separate Account II", are hereby ratified and confirmed; and RESOLVED FURTHER, That the chief executive officer of the Company is hereby authorized in his discretion from time to time to establish one or more additional segregated investment accounts for such purpose or purposes as he may determine and as may be appropriate under the Indiana Insurance Law; and RESOLVED FURTHER, That if in the opinion of legal counsel of the Company it is necessary or desirable to register any of such additional accounts under the Investment Company Act of 1940 or to register a security issued by any such account under the Securities Act of 1933, or to make application to exemption from registration, the chief executive officer or such other officers as he may designate are hereby authorized to accomplish any such registration or to make any such application for exemption, and to perform all other acts as may be desirable or necessary in connection with the conduct of business of the Company with respect to any such account; and RESOLVED FURTHER, That the chief executive officer or such other officers are authorized to contribute to such segregated investment accounts on behalf of this Company an amount or amounts not exceeding $6,000,000 in the aggregate, such contribution to be in such form as the chief executive officer or such officers determine and to be in addition to amounts authorized under Resolution No. 118, adopted by the board of directors on December 14, 1981. /s/ Marilyn A. Vachon ---------------------------- Marilyn A. Vachon, Secretary October 1, 1986 [SEAL] EX-99.1.B 3 ESTABLISHING RESOLUTION Exhibit 1(b) ESTABLISHMENT OF SEGREGATED INVESTMENT ACCOUNT of THE LINCOLN NATIONAL PENSION INSURANCE COMPANY Pursuant to the authority given me by Resolution No. 119 of the Board of Directors of Lincoln National Pension Insurance Company (the "Company") dated December 14, 1981, I establish a segregated investment account designated "Lincoln National Pension Variable Annuity Account E" (the "Account"). The Account is to be used in connection with the issuance by the Company of variable annuity policies (the "Policies"). The Account will be registered as a unit investment trust with the Securities and Exchange Commission ("SEC") and shall invest in shares of investment companies which are registered with the SEC. The Account's investment objectives, policies, and limitations shall be, in accordance with (1) the registration statement for the Policies filed with the SEC under the Securities Act of 1933, (2) applicable provisions of Indiana Insurance Law and (3) other applicable legal requirements. Dated September 26, 1986 /s/ C. David Silletto ----------------------------- C. David Silletto EX-99.3.A 4 UNDERWRITING AGREEMENT PRINCIPAL UNDERWRITING AGREEMENT -------------------------------- THIS AGREEMENT is entered into on this 18th day of February, 1987 among LINCOLN NATIONAL PENSION INSURANCE COMPANY ("Lincoln National"), a life insurance company organized under laws of the State of Indiana on behalf of itself and SEPARATE ACCOUNT E OF LINCOLN NATIONAL PENSION INSURANCE COMPANY ("Separate Account"), a separate account established by Lincoln National pursuant to the Indiana Insurance Code and AMERICAN FUNDS DISTRIBUTORS, INC. ("AFD"), a corporation organized under the laws of the State of California. WITNESSETH: WHEREAS, Lincoln National proposes to issue to the public certain variable annuity contracts ("Contracts") and has, by resolution of its Board of Directors on September 26, 1986, authorized the creation of a segregated investment account in connection therewith; and WHEREAS, Lincoln National has established the Separate Account for the purpose of issuing the Contracts and has registered the Separate Account with the Securities and Exchange Commission ("Commission") as a unit investment trust under the Investment Company Act of 1940; and WHEREAS, the Contracts to be issued by Lincoln National are registered with the Commission for offer and sale to the public, and otherwise are in compliance with all applicable laws; and WHEREAS, AFD is a broker-dealer registered under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc., and proposes to form a selling group for the distribution of said Contracts; and WHEREAS, Lincoln National desires to obtain the services of AFD as principal underwriter of the Contracts issued by Lincoln National through the Separate Account; NOW THEREFORE, in consideration of the foregoing, and of the mutual covenants and conditions set forth herein, and for other good and valuable consideration, Lincoln National, the Separate Account and AFD hereby agree as follows: Duties of AFD - ------------- 1. AFD will form a selling group consisting of broker-dealers appointed by Lincoln National to distribute the Contracts which are issued by Lincoln National through the Separate Account and are registered with the Commission for offer and sale to the public. Broker-dealers listed in the attached Schedule of Excluded Broker-Dealers may not be members of such selling group. Said Schedule of Excluded Broker-Dealers may be amended from time to time by the mutual consent of the undersigned parties. 2. AFD will enter into and maintain a dealer agreement with each broker- dealer joining such selling group ("member"); an executed copy of each will be provided to Lincoln National. Any such dealer agreement expressly will be made subject to this Agreement. Any such dealer agreement will provide: (i) that each member will distribute the Contracts only in those jurisdictions in which the Contracts are registered or qualified for sale and only through duly licensed registered representatives of the members who are fully licensed with Lincoln National to sell the Contracts in the applicable jurisdiction(s), (ii) that all applications and initial and subsequent payments under the Contracts collected by the member will be remitted promptly by the member to Lincoln National at such address as it may from time to time designate and (iii) that each member will comply with all applicable federal and state laws, rules and regulations. 3. AFD will use reasonable efforts to provide information and marketing assistance to the members, including preparing and providing members with advertising materials and sales literature, and providing members with current Prospectuses of the Contracts and of American Pathway Fund (the "Fund"). AFD will use reasonable efforts to ensure that members deliver only the currently effective Prospectuses of the Contracts and the Fund. AFD and Lincoln National will cooperate in the development of advertising and sales literature, as requested. AFD will deliver to members, and use reasonable efforts to ensure that members use, only sales literature and advertising material which conforms to the requirements of federal and state laws and regulations which has been authorized by Lincoln National and AFD. AFD will be responsible for filing sales literature and advertising material, where necessary, with appropriate securities regulatory authorities, including the National Association of Securities Dealers, Inc. AFD will not distribute any Prospectus, sales literature, advertising material or any other printed matter or material relating to the Contracts or the Fund if, to its knowledge, any of the foregoing misstates the duties, obligations or liabilities of Lincoln National or AFD. AFD will not actively encourage any member to sell Contracts to employees of hospitals in the State of California that are members of the California Hospital Association. 4. AFD shall not be responsible for (i) taking or transmitting applications for the Contracts; (ii) examining or inspecting risks or approving, issuing or delivering Contracts; (iii) receiving, collecting or transmitting insurance premiums; (iv) assisting in the completion of applications for Contracts; (v) paying sales commissions to licensed broker-dealers and insurance agents; and (vi) otherwise offering and selling Contracts directly to the public. 5. AFD will bear all its expenses of providing services under this Agreement, including the cost of preparing, printing and mailing advertising and sales literature, and the cost of printing and mailing Fund and Contract Prospectuses which are used for sales purposes, except that AFD shall not bear the expenses of registering and qualifying shares or -2- Contracts for sale under federal and state laws and expenses of preparing, printing and mailing Prospectuses, proxies and shareholder reports to the extent authorized by law. It is understood that Lincoln National will not be required to bear the cost of printing and mailing Fund Prospectuses. AFD will, except with respect to agents and brokers with Lincoln National Sales Corporation ("LNSC"), reimburse Lincoln National for all state appointing fees and associated renewal fees incurred to enable members to sell the Contracts. 6. AFD will furnish to Lincoln National such information with respect to the Fund in such form and signed by such of its officers as Lincoln National may reasonably request, and will warrant that the statements therein contained when so signed will be true and correct. AFD will advise Lincoln National immediately of: (a) any request by the Commission (i) for amendment of the registration statement relating to the Contracts or the Fund or (ii) for additional information; (b) the issuance by the Commission of any stop order suspending the effectiveness of the registration statement of the Contracts or the Fund or the initiation of any proceedings for that purpose; (c) the institution of any proceeding, investigation or hearing involving the offer or sale of the Contracts or the Fund of which it becomes aware; or (d) the happening of any material event, if known, which makes untrue any statement made in the registration statement of the Contracts or the Fund or which requires the making of a change therein in order to make any statement made therein not misleading. 7. AFD will use reasonable efforts to have the Fund register for sale under the Securities Act of 1933 and, as required, under state securities laws, from time to time as necessary, such additional shares of the Fund as may reasonably be necessary for use as the funding vehicle for the Contracts. Duties of Lincoln National - -------------------------- 8. Lincoln National or its agent will receive and process applications and premium payments in accordance with the terms of the Contracts and the current Prospectuses. All applications for Contracts are subject to acceptance or rejection by Lincoln National in its sole discretion. Lincoln National will inform AFD of any such rejection and the reason therefor. 9. Lincoln National will be responsible for filing the Contracts, forms, sales literature and advertising material, where necessary, with appropriate insurance regulatory authorities. 10. Lincoln National will furnish to AFD such information with respect to the Separate Account and the Contracts in such form and signed by such of its officers as AFD may reasonably request, and will warrant that the statements therein contained when so signed will be true and correct. Lincoln National will advise AFD immediately of: (a) any request -3- by the Commission (i) for amendment of the registration statement relating to the Contracts or the Fund or (ii) for additional information; (b) the issuance by the Commission of any stop order suspending the effectiveness of the registration statement of the Contracts or the Fund or the initiation of any proceedings for that purposes; (c) the institution of any proceeding, investigation hearing or other action involving the offer or sale of the Contracts or the Fund of which it becomes aware; (d) the happening of any material event, if known, which makes untrue any statement made in the registration statement of the Contracts or the Fund or which requires the making of a change therein in order to make any statement made therein not misleading. 11. Lincoln National will use reasonable efforts to register for sale, from time to time as necessary, additional dollar amounts of the Contracts under the Securities Act of 1933 and, should it ever be required, under state securities laws and to file for approval under state insurance laws when necessary and will maintain the Investment Company Act of 1940 registration of the Separate Account. 12. Lincoln National will pay to members of this selling group such commissions as are from time to time set forth in dealer agreements. Such dealer agreements shall provide for the return of sales commissions by the members to Lincoln National if the Contracts are tendered for redemption to Lincoln National in accordance with the 20-day review provision in the Contract. 13. Lincoln National will bear its expenses of providing services under this Agreement, including the cost of preparing, printing and mailing Prospectuses of the Contracts to Contract owners, expenses and fees of registering or qualifying the Contracts and the Separate Account under federal or state laws, and any direct expenses incurred by its employees in assisting AFD in performing its duties hereunder. Lincoln National will pay to AFD such remuneration for its services and for the services of its salaried employees, and such reimbursement for its charges and expenses, as may be contained in such Schedules of Remuneration as may be adopted and appended to this Agreement from time to time. Said Schedule of Remuneration may be amended from time to time by the mutual consent of the undersigned parties; except that AFD may alter the ratio of commissions paid to dealers and remuneration paid to AFD as set forth in paragraph 25 of this Agreement. Warranties - ---------- 14. Lincoln National represents and warrants to AFD that: (i) a registration statement under the Securities Act of 1933 (File No. 33-09644) and under the Investment Company Act of 1940 (File No. 811-4882) on Form N-4 with respect to the Contracts and Separate Account has been filed with the Commission in the form previously delivered to AFD, and copies of any and all amendments thereto will be forwarded to AFD at the time that they -4- are filed with the Commission; (ii) the registration statement and any further amendments or supplements thereto will, when they become effective, conform in all material respects to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, and the rules and regulations of the Commission thereunder, and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statement or omission made in reliance upon and in conformity with information furnished in writing to Lincoln National by AFD expressly for use therein; (iii) Lincoln National is validly existing as a stock life insurance company in good standing under the laws of the State of Indiana, with power (corporate or other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification; (iv) the Contracts to be issued through the Separate Account have been duly and validly authorized and, when issued and delivered against payment therefor as provided in the Prospectuses and in the Contracts, will be duly and validly issued and will conform to the description of such Contracts contained in the Prospectuses relating thereto; (v) those persons who offer and sell the Contracts are appropriately licensed in a manner as to comply with the state insurance laws; (vi) the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms or provisions of, or constitute a default under any statute, any indenture, mortgage, deed of trust, note agreement or other agreement or instrument to which Lincoln National is a party or by which Lincoln National is bound, Lincoln National's Charter as a stock life insurance company or By-Laws, or any order, rule or regulation of any court or governmental agency or body having jurisdiction over Lincoln National or any of its properties; and no consent, approval, authorization or order of any court or governmental agency or body which has not been obtained by the effective date of this Agreement is required for the consummation by Lincoln National of the transactions contemplated by this Agreement; and (vii) there are no material legal or governmental proceedings pending to which Lincoln National or the Separate Account is a party or of which any property of Lincoln National or the Separate Account is the subject, other than as set forth in the Prospectus relating to the Contracts, and other than litigation incident to the kind of business conducted by Lincoln National which, if determined adversely to Lincoln National, would not individually or in the aggregate have a material adverse effect on the financial position, surplus or operations of Lincoln National; and (viii) any information furnished in writing by Lincoln National to AFD for use in the registration statement of the Fund or the Contracts will not result in the registration statement's failing to conform in all respects to the requirements of the Securities Act of 1933 and the rules and regulations thereunder or containing any untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading. -5- 15. AFD represents and warrants to Lincoln National that: (i) a registration statement under the Securities Act of 1933 (File No. 2-86838), and under the Investment Company Act of 1940 (File No. 811-3857) with respect to American Pathway Fund has been filed with the Commission in the form previously delivered to Lincoln National, and copies of any and all amendments thereto will be forwarded to Lincoln National at the time that they are filed with the Commission; (ii) the Fund's registration statement and any further amendments or supplements thereto will, when they become effective, conform in all material respects to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, and the rules and regulations of the Commission thereunder, and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to AFD by Lincoln National expressly for use therein; (iii) the performance of its duties under this Agreement by AFD will not result in a breach or violation of any of the terms or provisions or constitute a default under any statute, any indenture, mortgage, deed of trust, note agreement or other agreement or instrument to which AFD is a party or by which AFD is bound, the Certificate of Incorporation or By-Laws of AFD, or any order, rule or regulation of any court or governmental agency or body having jurisdiction over AFD or its property; and (iv) any information furnished in writing by AFD to Lincoln National for use in the registration statement of the Fund or the Contracts will not result in the registration statement's failing to conform in all respects to the requirements of the Securities Act of 1933 and the rules and regulations thereunder or containing any untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading. AFD further represents and warrants to Lincoln National that: (i) it is a broker-dealer duly registered with the Commission pursuant to the Securities Exchange Act of 1934 and a member in good standing of the National Association of Securities Dealers, Inc. and is in compliance with the securities laws in those states in which it conducts business as a broker-dealer; (ii) the performance of its duties under this Agreement by AFD will not result in a breach or violation of any of the terms or provisions of or constitute a default under any statute, any indenture, mortgage, deed or trust, note agreement or other agreement or instrument to which AFD is a party or by which AFD is bound, the Certificate of Incorporation or By-Laws of AFD, or any order, rule or regulation of any court or governmental agency or body having jurisdiction over AFD or its property; (iii) it will use reasonable efforts to ensure that no offering, sale or other disposition of the Contracts will be made until it has been notified by Lincoln National that the subject registration statements have been declared effective and the Contracts have been released for sale by Lincoln National, and that such offering, sale or other disposition shall be limited to those jurisdictions that have approved or otherwise permit the offer and sale of the Contracts by Lincoln National; (iv) any information furnished in writing by AFD to -6- Lincoln National for use in the registration statement of the Fund or the Contracts will not result in the registration statement's failing to conform in all respects to the requirements of the Securities Act of 1933 and the rules and regulations thereunder or containing any untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and (v) it will comply with the requirements of state broker-dealer regulations and the Securities Exchange Act of 1934 as each applies to AFD and shall conduct its affairs in accordance with the rules of Fair Practice of the National Association of Securities Dealers, Inc. Miscellaneous - ------------- 16. AFD makes no representation or warranty regarding the number of Contracts to be sold by licensed broker-dealers and insurance agents or the amount to be paid thereunder. AFD does, however, represent that it will actively engage in its duties under this Agreement on a continuous basis while the Agreement is in effect and there is an effective registration of the Contracts with the Commission. 17. AFD may act as principal underwriter, sponsor, distributor or dealer for issuers other than Lincoln National or its affiliates in connection with mutual funds or insurance products; except that AFD shall not, while this Agreement is in effect, act as principal underwriter, sponsor, distributor or dealer with respect to insurance contracts which are issued by insurance companies other than Lincoln National or its affiliates that are similar to the Contracts. While this Agreement is in effect, Lincoln National will neither issue any insurance contract similar to the Contracts which are distributed through broker-dealers (except LNSC and the broker-dealers listed in the attached Schedule of Excluded Broker-Dealers) without the written consent of AFD nor enter into an agreement with any other organization for the purpose of distributing the Contracts. It is understood that shares of American Pathway Fund may be sold to fund insurance contracts of issuers other than Lincoln National or its affiliates or to other shareholders in accordance with Internal Revenue Code Section 817(h) and the regulations thereunder. 18. Nothing in this Agreement shall obligate Lincoln National to appoint any member or registered representative of a member its agent for purposes of the distribution of the Contracts. Nothing in this Agreement shall be construed as requiring AFD to effect sales of the Contracts directly to the public or to act as an insurance agent or insurance broker on behalf of Lincoln National for purposes of state insurance laws. 19. AFD agrees to indemnify Lincoln National (or any control person, shareholder, director, officer or employee of Lincoln National) for any liability incurred (including costs relating to defense of any action) arising out of any AFD act or omission relating to (i) rendering services under this Agreement or (ii) the purchase, retention or surrender of a -7- Contract by any person or entity; provided, however, that indemnification will not be provided hereunder for any such liability that results from the willful misfeasance, bad faith or gross negligence of Lincoln National or from the reckless disregard by Lincoln National of the duties and obligations arising under this Agreement. 20. Lincoln National agrees to indemnify AFD (or any control person, shareholder, director, officer or employee of AFD) for any liability incurred (including costs relating to defense of any action arising out of any Lincoln National act or omission relating to (i) rendering services under this Agreement or (ii) the purchase, retention or surrender of a Contract by any person or entity; provided however, that indemnification will not be provided hereunder for any such liability that results from the willful misfeasance, bad faith or gross negligence of AFD or from the reckless disregard by AFD of the duties and obligations arising under this Agreement. 21. This Agreement will terminate automatically upon its assignment, as that term is defined in the Investment Company Act of 1940. The parties understand that there is no intention to create a joint venture in the subject matter of this Agreement. Accordingly, the right to terminate this Agreement and to engage in any activity not inconsistent with this Agreement is absolute. This Agreement will terminate, without the payment of any penalty by either party: (a) at the option of Lincoln National upon six months' advance written notice to AFD; or (b) at the option of AFD upon six months' advance written notice to Lincoln National; or (c) at the option of Lincoln National upon institution of formal proceedings against AFD by the National Association of Securities Dealers, Inc. or by the Commission; or (d) as otherwise provided in the Investment Company Act of 1940. 22. Each notice required by this Agreement shall be given in writing and delivered by certified mail-return receipt requested. 23. This Agreement shall be subject to the laws of the State of Indiana and construed so as to interpret the Contracts as insurance products written within the business operation of Lincoln National. 24. This Agreement covers and includes all agreements, oral and written (expressed or implied) between Lincoln National and AFD with regard to the marketing and distribution of the Contracts, and supersedes any and all Agreements between the parties with respect to the subject matter of this Agreement; except that this Agreement shall not affect the operation of any previous agreements entered into between Lincoln National and AFD unrelated to the subject matter of this Agreement. 25. This Agreement, along with any Schedule of Remuneration attached hereto and incorporated herein by reference, may be amended from time to time by the mutual agreement and consent of the undersigned parties, provided such amendment be in writing and duly executed; except that with respect to any Schedule of Remuneration, AFD in its sole discretion, may alter upon written notice to Lincoln National the ratio of commissions -8- paid to dealers and remuneration paid to AFD. AFD agrees to reimburse Lincoln National any remuneration previously received to the extent necessary to pay additional commissions to dealers due to a retroactive change of this ration. This Agreement shall become effective as of the effective date of the Form N-4 Registration Statement filed under the Securities Act of 1933 and the Investment Company Act of 1940 with respect to the Contracts. IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be duly executed and attested on the date first stated above. Lincoln National Pension Insurance Company on behalf of itself and Separate Account E of Lincoln National Pension Insurance Company Attest: /s/ Carolyn Bertz By: /s/ Robert A. Nickels - --------------------------------- --------------------------------- Carolyn Bertz Robert A. Nickels Attest: /s/ Michael Downer By: /s/ Hoyt J. Turner - --------------------------------- --------------------------------- Michael Downer Hoyt J. Turner -9- EX-99.3.B 5 AMENDMENT TO UNDERWRITING AGREEMENT Exhibit 3(b) AMENDMENT TO THE PRINCIPAL UNDERWRITING AGREEMENT This amendment, dated as of March 30, 1998 (this "Amendment"), to a certain Principal Underwriting Agreement effective on the 18th day of February, 1987 (the "Original Agreement"), is executed by and between LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Lincoln National"), a life insurance company organized under the laws of the State of Indiana, on behalf of itself and SEPARATE ACCOUNT E OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Separate Account"), a separate account established by Lincoln National pursuant to the Indiana Insurance Code, and AMERICAN FUNDS DISTRIBUTORS, INC. ("AFD"), a corporation organized under the laws of the State of California (collectively, the "Parties"). Unless otherwise specifically provided, this Amendment shall be effective as of September 1, 1997. WITNESSETH: WHEREAS, the Original Agreement provides for AFD to serve as principal underwriter for certain variable annuity contracts defined more fully therein and marketed under the name "The American Legacy" (the "Contracts"); and WHEREAS, the Original Agreement contains certain exclusivity provisions in Section 17 that the Parties desire to eliminate; and NOW THEREFORE, in consideration of the foregoing, and of the mutual covenants and conditions contained in the Original Agreement as well as herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Lincoln National, the Separate Account and AFD hereby agree as follows: A. Section 17. Section 17 of the Original Agreement is hereby replaced and Section 5 of the Original Agreement is hereby modified by the "Non-Exclusivity Provisions" set forth below. All other terms and conditions of the Original Agreement are hereby ratified and confirmed with respect to the Contracts. Non-Exclusivity Provisions. AFD may act as principal underwriter, sponsor, distributor or dealer for issuers other than Lincoln National or its affiliates in connection with mutual funds or insurance products. American Variable Insurance Series (the "Series") may be sold to fund insurance contracts, including those other than the Contracts, of issuers other than Lincoln National or its affiliates or to other shareholders in accordance with Internal Revenue Code Section 817(h) and the regulations thereunder. Lincoln National may issue through any broker-dealer any insurance contracts; however, Lincoln National will not enter into any agreement with any other organization for the purpose of distributing the Contracts. The foregoing is subject to the covenants and conditions set forth below: 1. Appointment Fees. The Original Agreement in the last sentence of Section 5 provides that AFD will be responsible for all state insurance appointing fees and associated insurance license renewal fees incurred to enable members to sell the Contracts ("appointment fees"). This sentence in Section 5 is hereby eliminated and it is agreed that Lincoln National will be responsible for any and all appointment fees as of September 1, 1997. Lincoln National will also assume the responsibility for deciding whether to pay appointment fees with respect to "non-producers." In the event Lincoln National determines to stop paying the appointment fees for any non-producer, AFD shall be given the option to pay such fees. 2. Lincoln Financial Advisors ("LFA"). The Schedule of Commissions to Dealers and and Remuneration to AFD attached to the Original Agreement is hereby amended to provide that sales through LFA (referred to in such schedule by its predecessor company"s name Lincoln National Sales Corporation or "LNSC") shall be at full reallowance to AFD and subject to standard Selling Group Agreement terms and conditions including remuneration for all new sales. This item will be implemented on January 1, 1998. B. Counterparts. This Amendment may be executed in two or more counterparts, each of which when so executed, shall be deemed to be an original, but such counterparts taken together shall constitute but one and the same contract. IN WITNESS WHEREOF, the undersigned parties have caused the Amendment to be duly executed and attested as follows: The Lincoln National Life Insurance Company for itself and Separate Account E of the Lincoln National Life Insurance Company Attest: ______________________ By: ____________________________ American Funds Distributors, Inc. Attest: ______________________ By: ____________________________ 2 EX-99.4.A 6 VARIABLE ANNUITY CONTRACT Exhibit 4(a) Abraham Lincoln XX-0123456 [Lincoln Head Logo] LINCOLN NATIONAL LIFE INSURANCE CO. A part of LINCOLN NATIONAL CORPORATION ANNUITY CONTRACT Deferred Variable Annuity or Variable and Fixed Annuity Benefit Payment Options Nonparticipating The Lincoln National Life Insurance Company (LNL) agrees to provide the benefits and other rights described in this Contract in accordance with the terms of this Contract. NOTICE OF 20-DAY RIGHT TO EXAMINE CONTRACT. Within 20 days after this Contract is first received, it may be cancelled for any reason by delivering or mailing it to the Home Office of LNL. Upon cancellation, this Contract shall be void from the beginning and LNL will return the value of any payments made to the Variable Account and/or any Purchase Payment paid under the fixed portion of the Contract. All payments and values provided by this Contract, when based on investment experience of a separate account, are variable and are not guaranteed as to fixed dollar amount. See pages 4 and 6. Signed for The Lincoln National Life Insurance Company at its Home Office in Fort Wayne, Indiana. /s/ Jon A. Boscia /s/ Nancy J. Alford Jon A. Boscia, President Nancy J. Alford, Vice President Form 23591 1/87
Table of Contents Article Page 1 Purchase Payments......................................... 4 2 Benefits.................................................. 5 3 Beneficiary............................................... 8 4 General Provisions........................................ 8 5 Annuity Purchase Rates under a Variable Payment Option....10 6 Annuity Purchase Rates under a Fixed Payment Option.......11 7 Guaranteed Values for Fixed Allocations...................12
Form 23591 1/87 CONTRACT DATA Contract Number Annuitant Age at Issue Contract Date Purchase Payment Purchase Payment Frequency Maturity Date Owner Beneficiary Designation AS NAMED IN APPLICATION OR SUBSEQUENT WRITTEN DESIGNATION Form 23591 Page 3 ARTICLE 1 PURCHASE PAYMENTS 1.01 WHERE PAYABLE All Purchase Payments must be made to LNL at its Home Office. 1.02 AMOUNT AND FREQUENCY Purchase Payments are made in an amount and at the frequency shown on page 3. Purchase Payments may be paid once each year, twice each year, four times each year, once each month, twice each month, or once each two weeks. The Owner may change the frequency or amount of Purchase Payments subject to LNL's rules in effect at the time of the change. The change is made by filing a written request to LNL at its Home Office. The minimum initial Purchase Payment is $1,500 for Non-Qualified Plans and $300 for Qualified Plans. The minimum annual amount of subsequent Purchase Payments is $300 for either Non-Qualified Plans or Qualified Plans. The minimum payment to the Contract at any one time must be at least $25.00. 1.03 VARIABLE ACCOUNT Purchase Payments under the Contract may be allocated to the Lincoln National Life Variable Annuity Account E (Variable Account) and/or to the fixed portion of the Contract. The Variable Account is for the exclusive benefit of persons entitled to receive benefits under variable annuity contracts. The Variable Account will not be charged with the liabilities arising from any other part of LNL's business. There are currently five sub-accounts in the Variable Account. The Owner may direct Purchase Payments under the Contract to any of the available sub-accounts subject to the following limitations. A minimum payment to any one sub-account must be at least $20. If the Owner elects to direct Purchase Payments to a new sub-account not previously selected, the election must be in writing to LNL. All the amounts allocated to each sub-account will be invested at net asset value in the shares of one of the Funds of the American Variable Insurance Series (Series). The Funds are: 1. Cash Management Fund 2. High-Yield Bond Fund 3. Growth-Income Fund 4. Growth Fund 5. U.S. Government Guaranteed/AAA-Rated Securities Fund 6. Other Funds made available by LNL. LNL reserves the right to eliminate the shares of any Fund and substitute the securities of a different Fund or investment company or mutual fund if the shares of a Fund are no longer available for investment, or, if in the judgment of LNL, further investment in any Fund should become inappropriate in view of the purposes of the Contract. LNL may add a new sub-account in order to invest the assets of a Fund in the Variable Account. LNL shall give the Owner written notice of the elimination and substitution of any Fund within five days after such substitution occurs. LNL shall use each Purchase Payment allocated to the Variable Account by the Owner to buy Accumulation Units in the sub-account(s) selected by the Owner. The number of Accumulation Units bought shall be determined by dividing the amount directed to the sub-account by the dollar value of an Accumulation Unit in such sub-account as of the day the Purchase Payment is received at the Home Office of LNL. The number of Accumulation Units held for the account of an Annuitant shall not be changed by any change in the dollar value of Accumulation Units in any sub-account. 1.04 NET INVESTMENT RATE AND NET INVESTMENT FACTOR The Variable Account value of an Owner's Contract at any time prior to the Annuity Commencement Date equals the sum of the values of the Accumulation Units credited in the Variable Account under the Contract. A "Valuation Date" is each day that the New York Stock Exchange is open for business. A "Valuation Period" is the period commencing at the close of business on the New York Stock Exchange on each Valuation Date and ending at the close of business on the next succeeding Valuation Date. Accumulation Units for each sub-account are valued separately. Initially the value of an Accumulation Unit was set at $1.00. Thereafter, the value of an Accumulation Unit in any sub-account on any Valuation Date equals the value of an Accumulation Unit in that sub-account for the current Valuation Period. In order to arrive at this factor, a "Gross Investment Rate" is first determined for each Series for the Valuation Period. Such rate for the Valuation Period is equal to: (a) the investment income of the Fund; plus (b) capital gains (realized and unrealized); minus (c) capital losses (realized and unrealized); minus (d) certain operational expenses of the Fund; minus (e) the reserve for federal taxes on realized capital gains (if applicable); minus (f) the investment advisory fee accrued by the Fund for each day of the Valuation Period - .60% of the first $30,000,000 of net assets on an annual basis and .50% of net assets above $30,000,000; divided by (g) the net Page 4 asset value of the Fund as of the beginning of the Valuation Period. The Gross Investment Rate may be positive or negative. The Net Investment Rate for each sub-account is equal to the Gross Investment Rate of the Fund minus a daily charge at an annual rate of 1.25% for each day of the Valuation Period, plus or minus an adjustment for any taxes attributable to the operation of the Variable Account. LNL makes the 1.25% deduction for administrative, mortality, and distribution expense risk guarantees. The method used to determine unit values may increase or decrease the dollar value of benefits under the Contract. The dollar value of benefits will not be adversely affected by expenses incurred by LNL. The Net Investment Factor for each sub-account is equal to 1.000000000 plus the Net Investment Rate for the period. 1.05 FIXED ALLOCATIONS Purchase Payments under the Contract may be allocated to the Variable Account and/or to the fixed portion of the Contract. A minimum payment to the fixed portion must be at least $20. Purchase Payments allocated to the fixed portion will be invested in the General Account of LNL. 1.06 CREDITING OF INTEREST Interest shall be credited daily on all Purchase Payments that are allocated to the fixed portion of this Contract. Prior to the time the Annuitant elects to receive Benefit Payments or the death of the Annuitant, whichever occurs first, LNL guarantees that it will credit interest on fixed allocations at an effective annual rate not less than 4.5% during the first five contract years, 4.0% during the next five contract years, and 3.5% after that. A table of guaranteed values for the fixed allocations may be found in Article 7. LNL may credit interest at rates in excess of the guaranteed rates at any time. 1.07 AUTOMATIC NONFORFEITURE OPTION In the event that Purchase Payments are stopped, this Contract will continue as a paid-up Contract until the earlier of the Maturity Date, surrender of the Contract, or death of the Annuitant. Purchase Payments may be resumed at any time prior to maturity, surrender, or death of the Annuitant. If the Contract continues as a paid-up Contract, the total account value must be at least $600.00. If not, and if Purchase Payments have not been paid for at least two years, LNL may surrender the Contract. 1.08 TRANSFERS Prior to the Annuity Commencement Date, the Owner may direct a transfer of assets from one sub-account to another sub-account or to the fixed portion of the Contract. The Owner may also direct a transfer of assets from the fixed portion of the Contract to one or more sub-accounts of the Variable Account. Such a transfer request must be in writing. Amounts transferred to the sub- account(s) will purchase Accumulation Units as described in the last paragraph of Section 1.03. The minimum transfer amount is $500 or the entire amount in the sub- account/fixed portion, whichever is less. If after the transfer the amount remaining under this Contract in the sub-account/fixed portion from which the transfer is taken is less than $500, the entire amount held in that sub- account/fixed portion will be transferred with the transfer amount. LNL reserves the right to limit the number of transfers to six (6) per Contract Year. For transfers between sub-accounts and from the sub-account(s) to the fixed portion of the Contract, there are no restrictions on the maximum amount which may be transferred. For transfers from the fixed portion of the Contract to the Variable Account, the sum of the percentages of fixed value transferred will be limited to 25% in any 12 month period. After the Annuity Commencement Date, the Owner may direct a transfer of assets from one sub-account to another sub-account or to the fixed portion of the Contract. Such transfers will be limited to three (3) times per Contract Year. ARTICLE 2 BENEFITS 2.01 ANNUITY PAYMENTS An election to receive proceeds under an Annuity Payment Option must be made by the Maturity Date. If an Annuity Payment Option is not chosen prior to the Maturity Date, payments will commence on the Maturity Date under the Annuity Payment Option providing a Life Annuity with Annuity Payments guaranteed for 10 years. However, upon written request by the Owner and any Beneficiary who cannot be changed, the Maturity Date may be deferred. The Maturity Date cannot be deferred Page 5 past the Contract Anniversary on which the attained age of the Annuitant is 85. Purchase Payments may be made until the new Maturity Date. 2.02 CHOICE OF ANNUITY PAYMENT OPTION By Owner While the Annuitant is alive, the Owner may choose any Annuity Payment Option or change any choice, if that right has been reserved, but only before the Maturity Date. The election must be made not later than thirty days prior to the Maturity Date. By Beneficiary At the time proceeds are payable, a Beneficiary may choose or change any Annuity Payment Option it proceeds are available to the Beneficiary in one sum. A choice or change must be in writing to LNL. 2.03 ANNUITY PAYMENT OPTIONS a. Life Annuity, Guaranteed Period -- Payments will be made for life with no certain period, or life and a 10 year certain period, or life and a 20 year certain period. b. Unit Refund Life Annuity -- An annuity payable monthly during the lifetime of the Annuitant, terminating with the last payment due prior to the death of the Annuitant, provided that, at such death, the Beneficiary will receive an additional payment of the then dollar value of the number of Annuity Units equal to the excess, if any of (a) over (b) where (a) is the total amount applied under the option divided by the Annuity Unit Value at the Annuity Commencement Date and (b) is the product of the number of Annuity Units represented by each payment and the number of payments made. c. Joint Life Annuity Guaranteed Period -- Payments will be made for life with no certain period, or life and a 10 year certain period, or life and a 20 year certain period. Payments will be made during the joint life of the Annuitant and a Joint Annuitant of the Annuitant's choice. Payments continue for the life of the survivor at the death of the Annuitant or Joint Annuitant. d Other options may be available as agreed upon by LNL. At the time Annuity Payments start under the provisions of this Contract, the Owner may elect to have the total value applied to provide a variable annuity a fixed annuity or a combination fixed and variable annuity If no election is made the value of the Annuitant's Variable Account shall be used to provide a variable annuity and the value of the Annuitant's fixed allocations shall be used to provide a fixed annuity. The amount of Annuity Payment will depend on the age of the Annuitant at the time the first payment is due. A choice may be made to receive payments once each month, four times each year, twice each year, or once each year The value used to effect benefit payments for an Annuitant will be calculated as of the fourteenth day prior to the date benefit payments start. The payment amounts shown in the option tables in Article 5 will be used to determine the first monthly payment under a variable payment option. The tables show the dollar amount of the first monthly payment which can be purchased with each $1,000 of account value, after deduction of any applicable premium taxes. Amounts shown use the 1971 individual Annuity Mortality Table, modified, with an assumed rate of return of 4% a per year. The payment amounts shown in the option tables in Article 6 will be used to determine the monthly payments under a fixed payment option. The tables show the dollar amount of the guaranteed monthly payments which can be purchased with each $1,000 of account value, after deduction of any applicable premium tax. Amounts shown use the 1971 Individual Annuity Mortality Table, modified, with an interest rate of 3.5% per year and a 2.5% expense load. At the time of annuitization, the annuity payments will be based on the greater of our current payment amounts or the payment amounts found in the option tables in Article 6. 2.04 DETERMINATION OF THE AMOUNT OF VARIABLE ANNUITY PAYMENTS AFTER THE FIRST Each Variable Annuity Payment after the first will be determined by multiplying the Annuity Unit Value for the date each payment is due by a constant number of Annuity Units. This constant is determined by dividing the amount of the first payment by the Annuity Unit Value for the date the first payment is due. The Annuity Unit Value for any Valuation Period for any sub-account is determined by multiplying the Annuity Unit Value for the immediately preceding Valuation Period by the product of (a) .9998926 raised to a power equal to the number of days in the current Valuation Period and (b) the Net Investment Factor of the sub-account for the Valuation Period containing the fourteenth day prior to the last day of the current Valuation Period. The valuation of all assets in the sub-account shall be Page 6 determined in accordance with the provisions of applicable laws, rules, and regulations. The method of determination by LNL of the value of an Accumulation Unit and of an Annuity Unit will be conclusive upon the Annuitant and any Beneficiary. LNL guarantees that the dollar amount of each installment after the first shall not be affected by variations in mortality experience from mortality assumptions on which the first installment is based. 2.05 PROOF OF AGE Payment will be subject to proof of age that LNL will accept. 2.06 AMOUNT REQUIREMENTS FOR ANNUITY PAYMENT OPTIONS AND PAYMENTS If the Annuity Payment Option chosen results in payments of less than $50 per sub-account, the frequency will be changed so that payments will be at least $50. For the purposes of this Section, the fixed portion of the Contract is considered a sub-account. 2.07 EVIDENCE OF SURVIVAL LNL has the right to ask for proof that the person on whom the payment is based is alive when each payment is due. 2.08 CHANGE IN ANNUITY PAYMENT Changes in Annuity Payments may not be made after Annuity Payments commence. 2.09 ASSIGNMENT This Contract may not be assigned. 2.10 ACCOUNT CHARGE On the last business day of each Contract Year; LNL will deduct $35.00 from the account value. At surrender the account charge will be deducted from the account value. The account value is the value of all the Accumulation Units in the name of the Owner plus the value of the fixed portion of the Contract. If the Annuitant has elected more than one sub-account, the deduction of the Account Charge shall be taken from each sub-account on a pro-rata basis. Each sub- account will be adjusted by an amount equal to a fraction of the charge. The fraction is equal to "a" divided by "b," where "a" is the account value of the sub-account and "b" is the value of all sub-accounts under the Contract. The fraction for each sub-account is applied to the deduction to determine each sub- account's deduction. For the purposes of this Section, the fixed portion of the Contract is considered a sub-account. 2.11 SURRENDER OPTION The Owner may surrender this Contract for its surrender value. On surrender, this Contract terminates. Surrender will be effective on the Valuation Date on which or next following the date LNL has received a written request at its Home Office. The surrender value will be the total account value on the Valuation Date, less a Contingent Deferred Sales Charge and the Account Charge. The Contingent Deterred Sales Charge is calculated separately for each Contract Year's Purchase Payment. The Contingent Deferred Sales Charge is calculated as a percentage of the Purchase Payments surrendered. This percentage is based on the number of completed Contract Years between the Contract Year of deposit and the Contract Year of surrender/withdrawal as shown in the following schedule:
Contract Year of Surrender/Withdrawal Charge as a % of Total Minus Contract Year of Purchase Payments Surrendered/ Purchase Payments Withdrawn in a Contract Year 0-1 6 2 5 3 4 4 3 5 2 6 1 7+ 0
The Contingent Deferred Sales Charge will be waived in the event the Contract is surrendered as a result of the death or total and permanent disability of the Annuitant. A Contract Year is the period from the Contract effective date (month and day) to the anniversary of the Contract effective date in the following year. Any cash payment will be mailed from LNLs Home Office within seven days after the date of surrender; however, LNL may be permitted to defer such payment under the Investment Company Act of 1940, as in effect at the time a request for surrender is received. The Surrender Option is not available after Annuity Payments have begun. 2.12 WITHDRAWAL OPTION The Owner may withdraw a part of the surrender value of this Contract, subject to the charges outlined under Surrender Option. The first partial withdrawal in any Contract Year will be free of withdrawal charges up to 10% of Purchase Payments. Withdrawals will be treated as first in-first out for purposes of calculating the with Page 7 drawal charge. Withdrawal will be effective on the Valuation date on which or next following the date LNL receives a written request at its Home Office. The minimum withdrawal is $300.00. If any withdrawal reduces the total account value to less than $300, LNL may surrender the Contract for its value. The remaining value will be subject to the charges as provided under Surrender Option. The request should specify from which sub-account the withdrawal will be made. If no sub-account is specified, LNL will withdraw, on a prorata basis from each sub- account, the amount requested. Any cash payment will be mailed from LNLs Home Office within seven days after the date of withdrawal; however, LNL may be permitted to defer such payment under the Investment Company Act of 1940, as in effect at the time such request for withdrawal is received. The Withdrawal Option is not available after Annuity Payments have begun. For purposes of this Section, the fixed portion of the Contract is considered a sub-account. 2.13 DEATH OF ANNUITANT On receipt of due proof of the death of the Annuitant before a choice is made to receive proceeds under an Annuity Payment Option, LNL will pay to the Beneficiary a Death Benefit equal to the greater of (a) the sum of all Purchase Payments minus any withdrawals, partial surrenders; or (b) the current value of the Contract as of the day on which written notice of death is received by LNL. Due proof of death shall be either the certificate of death, a certified copy of the statement of death from the attending physician, a certified copy of a decree of a court of competent jurisdiction as to the finding of death, or any other proof satisfactory to LNL. On receipt of due proof of death of the Annuitant after Annuity Payments have begun under an Annuity Payment Option, if any Annuity Payments remain under the Option they will be paid to the Beneficiary as provided by the Option. If the Beneficiary designated at the time of the Annuitant's death is a surviving spouse, the Contract may be continued in the name of the spouse as the Annuitant. For a Beneficiary other than a spouse, if the Annuitant dies before Annuity Payments have begun under the Contract, the amounts must be distributed to the designated Beneficiary within five years of the death of the Annuitant. For a Beneficiary other than a spouse, if the Annuitant dies after Annuity Payments have begun under the Contract, the remaining portion of the Annuitant's interest must either be distributed at least as rapidly as under the method of distribution being used as of the date of the Annuitant's death or distributed over the life of the Beneficiary or a period not extending beyond the life expectancy of the Beneficiary. The distribution of these amounts must begin not later than one year after the Annuitant's death. Unless otherwise provided in the Beneficiary designation, if no Beneficiary survives the Annuitant, the proceeds will be paid in one sum to the Owner, if living; otherwise, to the Owner's estate. ARTICLE 3 BENEFICIARY 3.01 DESIGNATION The Beneficiary named in the application for this Contract will receive the proceeds on the death of the Annuitant unless the Beneficiary has been changed by the Owner. 3.02 CHANGE The Owner may change any Beneficiary during the life of the Annuitant, unless otherwise provided in the previous designation. A change of Beneficiary will revoke any previous designation. A change may be made by filing a written request to LNL at its Home Office. The change will become effective upon receipt of the written request by LNL at its Home Office. 3.03 DEATH OF BENEFICIARY Unless otherwise provided in the Beneficiary designation, if any Beneficiary dies before the Annuitant, that Beneficiary's interest will pass to any other Beneficiaries according to their respective interests. If the Beneficiary dies while receiving any remaining Annuity Payments due after the death of the Annuitant, the value of the remainder of such Annuity Payments will be paid in one sum to the Beneficiary's estate. Page 8 ARTICLE 4 GENERAL PROVISIONS 4.01 THE CONTRACT This Contract, the application, and any riders attached to this Contract make up the whole Contract. Only the President, a Vice-President, the Secretary or an Assistant Secretary of LNL has the power, on behalf of LNL, to change, modify, or waive any provisions of this Contract. Any changes, modifications, or waivers must be in writing. LNL will not be bound by any promises or representations made by any representative or other person except as specified above. 4.02 CONTROL Consistent with the terms of any Beneficiary designation, the Owner may, during the life of the Annuitant, do any of the things described below. 1. Prior to the time when Annuity Payments have begun the Owner may surrender this Contract or withdraw a portion of the surrender value. 2. The Owner may change this Contract with the consent of LNL. 3. The Owner may exercise any right, receive any benefit, or enjoy any privilege contained in this Contract. 4.03 INCONTESTABILITY This Contract will not be contested. 4.04 MISSTATEMENT OF AGE If the age of the Annuitant has been misstated, the benefits available under this Contract will be those which the Purchase Payments would have purchased for the correct age. Any underpayments already made by LNL shall be made up immediately and any overpayments already made by LNL shall be charged against the Annuity Payments falling due after adjustment. 4.05 NONPARTICIPATING The Contract is nonparticipating and will not share in the surplus earnings of LNL. 4.06 VOTING RIGHTS The Owner shall have a right to vote at the meetings of the Fund. Ownership of this Contract shall not entitle any person to vote at any meeting of shareholders of LNL. Votes attributable to the Contract shall be cast in conformity with applicable law. 4.07 OWNERSHIP OF THE ASSETS LNL shall have exclusive and absolute ownership and control of its assets, including all assets in the Variable Account. 4.08 REPORTS At least once each Contract Year LNL shall mail a report to the Owner. The report shall be mailed to the last address known to LNL. The report shall include a statement of the number of units credited to the Variable Account under this Contract and the dollar value of such units as well as a statement of the value of the fixed portion of this Contract. The information in the report shall be as of a date not more than two months prior to the date of mailing the report. LNL shall also mail to the Owner at least once in each Contract Year a report of the investments held in the sub-accounts under this Contract. Page 9
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 - -------------------------------------------------------------------------------- No 120 240 Period Months Months Cash Age Certain Certain Certain Refund - -------------------------------------------------------------------------------- 60 $4.93 $4.86 $4.65 $4.67 61 5.02 4.95 4.71 4.74 62 5.13 5.04 4.78 4.82 63 5.24 5.14 4.84 4.90 64 5.36 5.25 4.91 4.99 65 5.48 5.36 4.97 5.09 66 5.62 5.48 5.04 5.19 67 5.77 5.61 5.10 5.29 68 5.93 5.75 5.16 5.40 69 6.11 5.89 5.22 5.52 70 6.30 6.04 5.27 5.64 71 6.51 6.20 5.32 5.77 72 6.73 6.36 5.37 5.90 73 6.97 6.53 5.41 6.04 74 7.24 6.71 5.45 6.19 75 7.52 6.89 5.48 6.35 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- $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 - -------------------------------------------------------------------------------
Page 10
ARTICLE 6 ANNUITY PURCHASE RATES UNDER A FIXED PAYMENT OPTION - -------------------------------------------------------------------------------- GUARANTEED DOLLAR AMOUNT OF MONTHLY PAYMENT WHICH IS PURCHASED WITH EACH $1,000 APPLIED - -------------------------------------------------------------------------------- SINGLE LIFE ANNUITIES - -------------------------------------------------------------------------------- No 120 240 Period Months Months Cash Age Certain Certain Certain Refund - -------------------------------------------------------------------------------- 60 $5.31 $5.17 $4.77 $4.83 61 5.43 5.27 4.83 4.92 62 5.56 5.38 4.89 5.01 63 5.70 5.50 4.95 5.10 64 5.85 5.62 5.01 5.20 65 6.00 5.74 5.07 5.31 66 6.17 5.88 5.13 5.42 67 6.35 6.01 5.18 5.53 68 6.55 6.16 5.24 5.65 69 6.75 6.30 5.29 5.79 70 6.98 6.46 5.34 5.92 71 7.21 6.63 5.38 6.06 72 7.47 6.79 5.42 6.22 73 7.75 6.96 5.46 6.37 74 8.04 7.13 5.49 6.54 75 8.36 7.31 5.52 6.73 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- $4.49 $4.48 $4.41 60 $5.01 $4.92 $4.64 4.58 4.57 4.48 61 5.11 5.01 4.71 4.67 4.65 4.55 62 5.23 5.11 4.77 4.76 4.75 4.62 63 5.35 5.22 4.84 4.86 4.85 4.69 64 5.48 5.33 4.90 4.97 4.95 4.77 65 5.62 5.45 4.97 5.09 5.06 4.84 68 5.76 5.58 5.03 5.21 5.18 4.92 67 5.92 5.71 5.09 5.34 5.31 4.99 68 6.09 5.85 5.15 5.49 5.44 5.07 69 6.27 5.99 5.21 5.64 5.58 5.14 70 6.46 6.14 5.27 5.80 5.73 5.21 71 6.67 6.30 5.32 5.98 5.89 5.27 72 6.90 6.46 5.37 6.17 6.06 5.33 73 7.14 6.63 5.41 6.37 6.23 5.38 74 7.40 6.81 5.45 6.59 6.41 5.43 75 7.67 6.99 5.49 - --------------------------------------------------------------------------------
Page 11 ARTICLE 7 GUARANTEED ACCUMULATED VALUES AND SURRENDER VALUES FOR FIXED ALLOCATIONS*
- -------------------------------------------------------------------------------- $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 - -------------------------------------------------------------------------------- 1 $ 1,010.00 $ 950.00 1 $ 1,194.05 $ 1,122.05 2 2,065.45 1,945.45 2 2,441.84 2,297.84 3 3,168.40 2,998.40 3 3,745.78 3,541.78 4 4,320.98 4,110.98 4 5,108.39 4,856.39 5 5,525.42 5,285.42 5 6,532.32 6,244.32 6 6,751.44 6,491.44 6 7,984.46 7,672.46 7 8,026.50 7,756.50 7 9,494.68 9,170.68 8 9,352.56 9,082.56 8 11,065.31 10,741.31 9 10,731.66 10,461.66 9 12,698.77 12,374.77 10 12,165.93 11,895.93 10 14,397.56 14,073.56 11 13,591.74 13,321.74 11 16,089.11 15,765.11 12 15,067.45 14,797.45 12 17,839.86 17,515.86 13 16,594.81 16,324.81 13 19,651.88 19,327.88 14 18,175.63 17,905.63 14 21,527.33 21,203.33 15 19,811.78 19,541.78 15 23,468.41 23,144.41 16 21,505.19 21,235.19 16 25,477.44 25,153.44 17 23,257.87 22,987.87 17 27,556.78 27,232.78 18 25,071.90 24,801.90 18 29,708.90 29,384.90 19 26,949.42 26,679.42 19 31,936.34 31,612.34 20 28,892.65 28,622.65 20 34,241.74 33,917.74 21 30,903.89 30,633.89 21 36,627.83 36,303.83 22 32,985.53 32,715.53 22 39,097.44 38,773.44 23 35,140.02 34,870.02 23 41,653.48 41,329.48 24 37,369.92 37,099.92 24 44,298.98 43,974.98 25 39,677.87 39,407.87 25 47,037.08 46,713.08 26 42,066.60 41,796.60 26 49,871.00 49,547.00 27 44,538.93 44,268.93 27 52,804.12 52,480.12 28 47,097.79 46,827.79 28 55,839.89 55,515.89 29 49,746.21 49,476.21 29 58,981.92 58,657.92 30 52,487.33 52,217.33 30 62,233.92 61,909.92 31 55,324.39 55,054.39 31 65,599.74 65,275.74 32 58,260.74 57,990.74 32 69,083.36 68,759.36 33 61,299.87 61,029.87 33 72,688.90 72,364.90 34 64,445.37 64,175.37 34 76,420.65 76,096.65 35 67,700.96 67,430.96 35 80,283.00 79,959.00 36 71,070.96 70,800.96 36 84,280.54 83,956.54 37 74,557.96 74,287.96 37 88,417.98 88,093.98 38 78,167.49 77,897.49 38 92,700.24 92,376.24 39 81,903.35 81,633.35 39 97,132.38 96,808.38 40 85,769.97 85,499.97 40 101,719.65 101,395.65 41 89,771.92 89,501.92 41 106,467.47 106,143.47 42 93,913.94 93,643.94 42 111,381.46 111,057.46 43 98,200.93 97,930.93 43 116,467.44 116,143.44 44 102,637.96 102,367.96 44 121,731.43 121,407.43 45 107,230.29 106,960.29 45 127,179.66 126,855.66 - --------------------------------------------------------------------------------
* Guaranteed Accumulated Values and Guaranteed Surrender Values may be more or less than shown in the table because of the variable of the day of receipt of the Purchase Payment at the Home Office from period to period and the crediting of interest to the Annuitant's account on a daily basis. Values shown are based upon contributions equally spaced with interest occurring at the beginning of the year. These values do not provide for premium tax, if any. Page 12 ANNUITY CONTRACT Deferred Variable Annuity or Variable and Fixed Annuity Nonparticipating If you have any questions concerning this Contract, please contact your Lincoln National Life representative or the Home Office of LNL. THE LINCOLN NATIONAL LIFE INSURANCE COMPANY 1300 South Clinton Street P.O. Box 2348 Fort Wayne, Indiana 46801 800-942-5500 [Recycle LOGO] EX-99.5.A 7 APPLICATION Residents of Pennsylvania must use a special application. See your broker for details. - ------------------------------------------------------------------------------- THE AMERICAN LEGACY Lincoln National Life Variable Annuity Application Insurance Company - ------------------------------------------------------------------------------- INSTRUCTIONS FOR COMPLETING FORM--Please type or print in permanent black ink. This form will be photocopied. Make checks payable to Lincoln National Life Insurance Co. Send check and application to either your Broker/Dealer's home office or directly to Lincoln National Life Insurance Company, P.O. Box 2348, 1300 South Clinton St., Fort Wayne, IN 46801. - ------------------------------------------------------------------------------- 1. ANNUITANT (If no Contract Owner is specified in Box 2 below, the Annuitant will be the Contract Owner.) Name___________________________________________________________________________ Print full name, if no middle name, use NMN. Address________________________________________________________________________ Street ________________________________________________________________________ City State Zip Phone___________________________________________________________________________ Date of Birth__________________________________________________ Age:____________ Mo. Day Year Sex [_] Male [_] Female Soc. Sec. No.______________________________ - ------------------------------------------------------------------------------- 2. CONTRACT OWNER (Complete ONLY if different from Annuitant.) Name___________________________________________________________________________ Print full name, if no middle name, use NMN. Address________________________________________________________________________ Street ________________________________________________________________________ City State Zip Phone___________________________________________________________________________ Date of Birth__________________________________________________ Age:____________ Mo. Day Year Sex [_] Male [_] Female Soc. Sec. No.______________________________ - ------------------------------------------------------------------------------- 3. BENEFICIARY (MUST be completed. See instructions on reverse side.) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4. TYPE OF PLAN [_] Nonqualified [_] Qualified (Indicate type below.) [_] IRA (circle one): Regular Rollover Transfer [_] Self-Employed Retirement Plan (Keogh-type) (Please attach phototype agreement.) [_] Simplified Employee Pension IRA (Established by Employer) (Please attach prototype agreement.) [_] Sec. 401 Corporate Plan________________________________________________ [_] Sec. 457 Deferred Compensation Plan [_] _______________________________________________________________________ - ------------------------------------------------------------------------------- 5. PURCHASE PAYMENTS The minimum initial payment is $1,500 for nonqualified contracts and $300 for qualified contracts. The minimum subsequent payment for all contracts is $25. Initial Premium Payment. An initial payment of $__________________ is attached. Premium to be allocated to the _________________ calendar year. Periodic Purchase Payments [_] Annually [_] Semi-annually [_] Quarterly [_] Monthly [_] Semi-monthly [_] Biweekly Amount $________________________________ Start Date:___________________________ Note: If you wish to establish an Automatic Bank Draft for future payments please attach a bank authorization card and a voided check. - ------------------------------------------------------------------------------- 6. ALLOCATION OF PURCHASE PAYMENTS (Use whole percentages.) _______% Variable Growth Fund _______% Variable Growth-Income Fund _______% Variable High-Yield Bond Fund _______% Variable U.S. Govt. Guaranteed/AAA-Rated Securities Fund _______% Variable Cash Management Fund _______% The Fixed Account 100 % (If no allocations are indicated, the total Purchase Payment will be - ------- allocated to the Variable Cash Management Fund pending instructions from Owner.) - ------------------------------------------------------------------------------- 7. DOLLAR COST AVERAGING OPTION Please dollar cost average from the (check one): [_] Fixed Account [_] Cash Management Fund (Use whole percentages) _______% into the Growth Fund _______% into the Growth-Income Fund _______% into the High-Yield Bond Fund _______% into the U.S. Govt. Guaranteed/AAA-Rated Securities Fund over the period checked: [_] 12 months [_] 24 months [_] 36 months ($10,000 minimum) ($25,000 minimum) ($25,000 minimum) - ------------------------------------------------------------------------------- 8. TELEPHONE TRANSFER AUTHORIZATION [_] I hereby authorize and direct Lincoln National Life Insurance Company to accept telephone instructions from any person who can furnish proper identification to exchange units from subaccount to subaccount and/or change the allocation of future deposits. Neither LNLIC, American Funds Distributors, Inc. nor any of their affiliates nor any fund managed by such affiliates is liable for any losses arising from such instructions. - ------------------------------------------------------------------------------- 9. AUTOMATIC WITHDRAWAL OPTION (Available only after age 59 1/2) Amount of distribution _________________% (no more than 9% /year of total purchase payments) Check one: [_] Quarterly [_] Semi-annually [_] Annually Commence payments_______________________________________________________________ (Date) - ------------------------------------------------------------------------------- 10. REPLACEMENT Will the proposed contract replace any existing annuity or insurance contract? [_] No [_] Yes (List company name, plan and year issued.) ---------------------------------------------------------------------- - ------------------------------------------------------------------------------- 11. STATEMENT OF ANNUITANT & CONTRACT OWNER-APPLICANT All statements in this Application are true to the best of our knowledge and belief. We agree that this Application shall be a part of the annuity contract. We hereby verify our understanding that all payments and values provided by the contract, when based on investment experience of a fund series, are variable and not guaranteed as to dollar amount. We acknowledge receipt of current prospectuses for THE AMERICAN LEGACY and AMERICAN VARIABLE INSURANCE SERIES. Signed at_______________________________________________________________________ (City) _________________________________________on_____________________________________ (State) (Date) Under penalty of perjury, I (the Owner) certify that my Social Security (or taxpayer I.D.) number is correct as it appears in this Application. Signature of Annuitant_________________________________________________________ Signature of Owner_____________________________________________________________ - ------------------------------------------------------------------------------- 12. STATEMENT OF AGENT The Agent hereby certifies he/she witnessed the signature(s) in Box 11 and that his/her answer to the question below is true to the best of his/her knowledge and belief. Agent: Will this contract replace or change any other life insurance or annuity in this or any other company? [_] No [_] Yes If yes, please give details in Box 13. Signature of Agent_____________________________________________________________ - ------------------------------------------------------------------------------- 13. INSURANCE IN FORCE (For Agent only) If Agent's answer in Box 12 is yes (in New Jersey, if either yes or no), please list below the insurance in force on the life of the Proposed Annuitant.
Accidental Company Name Year Issued Amount Death - ------------------------------------------------------------------------------------------------------------- 1.___________________________________________________________________________________________________________ 2.___________________________________________________________________________________________________________ 3.___________________________________________________________________________________________________________
- -------------------------------------------------------------------------------- 14. AGENT INFORMATION (Please type or print) Agent's Name_________________________________________Agent's Code_______________ General Agent________________________________ LNLIC Performance Code Q__________ Branch Office Address___________________________________________________________ (Street) ___________________________________________________________ (City) (State) (Zip) Agent's Phone No. ( ) ______________________________________________________________ Broker/Dealer___________________________________________________________________ (Name) (City) (State) - -------------------------------------------------------------------------------- 15. ENDORSEMENT (For LNLIC office use only) No change shall be made in the amount of insurance, Issue Age, Plan of Insurance or any Benefits applied for by such endorsement without prior written approval by the Applicant. - -------------------------------------------------------------------------------- BENEFICIARY INSTRUCTIONS 1. The full name, age, relationship to the Annuitant and address of each beneficiary should be shown. 2. A married woman should indicate her own given name, not that of her husband. Example: Mary N. Jones, not Mrs. John B. Jones 3. Listed below are the most common types of beneficiary designations. IF THE BENEFICIARY WORDING DESIRED IS NOT INDICATED BELOW, PLEASE CONTACT LINCOLN NATIONAL LIFE INSURANCE COMPANY FOR ASSISTANCE. Designation Proper Wording ONE BENEFICIARY Jane Doe, wife of the Annuitant. TWO BENEFICIARIES John Doe, father of the Annuitant, and Anna Doe, mother of the Annuitant, equally, or to the survivor. ONE PRIMARY AND ONE CONTINGENT BENEFICIARY Jane Doe, wife of the Annuitant, if living; otherwise Richard Doe, son of the Annuitant. ONE PRIMARY AND TWO OR MORE CONTINGENT BENEFICIARIES Jane Doe, wife of the Annuitant, if living; otherwise Richard Doe, Mary Doe, and Robert Doe, children of the Annuitant, or the survivors, equally, or the survivor. ONE PRIMARY AND UNNAMED CHILDREN AS Jane Doe, wife of the Annuitant, if CONTINGENT BENEFICIARIES (EXCEPT ADOPTED living; otherwise the children CHILDREN) born of the marriage of the Annuitant and said wife, or the survivors, equally, or the survivor. ONE PRIMARY AND ONE OR MORE CHILDREN Jane Doe, wife of the Annuitant, if INCLUDING LEGALLY ADOPTED CHILDREN AS living; otherwise any children born CONTINGENT BENEFICIARIES of the marriage of or legally adopted by the Annuitant and said wife, or the survivors, equally, or the survivor.
- -------------------------------------------------------------------------------- Lincoln National Life Insurance Company, P.O. Box 2348, 1300 South Clinton St., Fort Wayne, IN 46801 EX-99.8.B 8 FUND PARTICIPATION AGREEMENT Exhibit 8(b) FUND PARTICIPATION AGREEMENT ---------------------------- THIS AGREEMENT, entered into on this lst day of October, 1986 among LINCOLN NATIONAL PENSION INSURANCE COMPANY ("Lincoln National"), a life insurance company organized under the laws of the State of Indiana for itself and on behalf of LINCOLN NATIONAL SEPARATE ACCOUNT E ("Account"), a separate account established by Lincoln National in accordance with the laws of the State of Indiana, and AMERICAN PATHWAY FUND ("Fund"), an open-end management investment company organized under the laws of the State of Massachusetts. WITNESSETH: WHEREAS, the Account has been established by Lincoln National pursuant to the Indiana Insurance Code in connection with certain flexible premium variable annuity contracts ("Contracts") proposed to be issued to the public by Lincoln National; and WHEREAS, the Account is being registered as a unit investment trust under the Investment Company Act of 1940; and WHEREAS, the income, gains and losses, whether or not realized, from assets allocated to the Account are, in accordance with the applicable Contracts, to be credited to or charged against such Account without regard to other income, gains or losses of Lincoln National; and WHEREAS, the Account is subdivided into various subaccounts ("Subaccounts") under which income, gains and losses, whether or not realized, from assets allocated to each such Subaccount are, in accordance with the applicable Contracts, to be credited to or charged against such Subaccounts without regard to other income, gains or losses of other Subaccounts or of Lincoln National; and WHEREAS, the Fund is divided into various series ("Series"), each Series being subject to separate investment policies and restrictions which may not be changed without a majority vote of the shareowners of such Series; and WHEREAS, certain Series will serve as the underlying investment medium for certain Subaccounts; and WHEREAS, American Funds Distributors, Inc., the principal underwriter for the Contracts to be funded by the Account, is a broker-dealer registered as such under the Securities Exchange Act of 1934; NOW THEREFORE, in consideration of the foregoing and. of mutual covenants and conditions set forth herein and for other good and valuable consideration, Lincoln National, the Account, and the Fund, hereby agree as follows: 1. The Contracts funded through the Account will provide for the allocation of net amounts among certain Subaccounts for investment in such shares of the Series as may be offered from -2- time to time in the prospectus of the Contracts. The selection of the particular Subaccount is to be made by the Contract Owner and such selection may be changed in accordance with the terms of the Contracts. 2. No representation is made as to the number or amount of such Contracts to be sold. American Fund Distributors, Inc. will make reasonable efforts to market such Contracts and will comply with all applicable federal or state laws in connection therewith. 3. Fund shares to be made available to certain Subaccounts shall be sold by the respective Series and purchased by Lincoln National for the corresponding Subaccount at the net asset value (without the imposition of a sales load) next- computed after receipt of each order, as established in accordance with the provisions of the then current prospectus of the Fund. Shares of a particular Series shall be ordered in such quantities and at such times as determined by Lincoln National to be necessary to meet the requirements of the Contracts. Orders or payments for shares purchased will be sent promptly to the Fund and will be made in the manner established from time to time by the Fund. The Fund reserves the right to delay transfer of its shares until the payment check has cleared. The Fund reserves the right to suspend sales if the Board of Trustees of the Fund deems it appropriate and in the best interests of the Fund or in response to the order of an appropriate regulatory authority. -3- 4. Transfer of the Fund's shares will be by book entry only. No stock certificates will be issued to the Account. Shares ordered from a particular Series will be recorded in an appropriate title for the corresponding Subaccount by Lincoln National. 5. The Fund shall furnish notice promptly to Lincoln National of any dividend or distribution payable on any shares underlying Subaccounts. All of such dividends and distributions as are payable on shares of a Series recorded in the title for the corresponding Subaccount shall be automatically reinvested in additional shares of that Series. The Fund shall notify Lincoln National of the number of shares so issued. 6. The Fund shall pay all expenses incident to its performance under this Agreement. The Fund shall see to it that all of its shares are registered and authorized for issue in accordance with applicable federal and state laws prior to their purchase for the Subaccount. The Fund shall bear the expenses for the cost of registration of its shares, preparation of its prospectuses, proxy materials and reports, the printing and distribution of such items to each Contract Owner who has allocated net amounts to any Subaccount, the preparation of all statements and notices required by any federal-or state law, or taxes on the issue -4- or transfer of the Fund's shares subject to this Agreement. 7. Lincoln National shall make no representations concerning the Fund's shares except those contained in the then current prospectus of the fund and in printed information subsequently issued on behalf of the Fund as supplemental to such prospectus. 8. From the effective date of this agreement, shares of the Fund will be offered exclusively to Anchor National's - American Pathway II - Separate Account and to LNP's Separate Account E for the purpose of funding variable annuity contracts. This exclusivity will apply as long as American Funds Distributors, Inc. remains the sole distributor of the Contracts. Shares of the Fund may be offered to variable life insurance separate accounts of various insurance companies in addition to Lincoln National. The Parties recognize that, due to differences in tax treatment or other considerations, the interests of various Contract (or policy) Owners participating in one or more Series might, at some time, be in conflict. Lincoln National shall consider whether disclosure in the Contract prospectus regarding the potential risks of mixed and shared funding is appropriate. Each Party shall report to the other Party any potential or existing conflicts of which it becomes aware. The Board of Trustees of the Fund shall promptly notify Lincoln National of the existence of an irreconcilable material conflict and its implications. If such a conflict exists, Lincoln National will, at its own expense, take whatever action is necessary to remedy such conflict; in any case, Contract Owners will not be required to bear such expenses. -5- 9. Lincoln National shall be responsible for assuring that the Account calculates pass-through voting privileges of Contract Owners in a manner consistent with the method of calculating pass-through voting privileges set forth in the current prospectus for American Pathway II. 10. This Agreement shall terminate: a. at the option of Lincoln National or of the Fund upon nine months' advance written notice to the other; b. at the option of Lincoln National upon institution of formal proceedings against the Fund by the Securities and Exchange Commission; c. upon requisite vote of the Contract Owners having an interest in a particular Subaccount to substitute the shares of another investment company for the corresponding Fund shares in accordance with the terms of the Contracts for which those Fund shares had been selected to serve as the underlying investment medium. Lincoln National will give 30 days' prior written notice to the Fund of the date of any proposed vote to replace Fund shares; and d. in the event the Fund's shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as an underlying investment for the Policies issued or to be issued by Lincoln National, prompt notice shall be given by Lincoln National or the Fund to the other. 11. The obligations of the Fund under this Agreement are not binding upon any of the Trustees, officers, employees, agents or shareholders of the Fund individually, but bind only the Fund's assets. Lincoln National and the Account agree to look solely to the assets of the Fund for the satisfaction of any liability of the Fund in respect of this Agreement and will -6- not seek recourse against the Fund's Trustees, officers, employees, agents or shareholders, or any of them, or any of their personal assets for such satisfaction. 12. This Agreement shall be construed in accordance with the laws of the state of California. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested as of the date first above written. LINCOLN NATIONAL PENSION INSURANCE COMPANY FOR ITSELF AND ON BEHALF OF LINCOLN NATIONAL SEPARATE ACCOUNT E Attest: __________________________________ By: ______________________________________ AMERICAN PATHWAY FUND Attest: __________________________________ By: ______________________________________ Paul G. Haaga, Jr. Vice President -7- EX-99.10 9 CONSENT OF INDEPENDENT AUDITORS Exhibit 10 Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the caption "Independent Auditors" in the Post Effective Amendment No. 13 to the Registration Statement (Form N-4 No. 33-26032) and the related Statement of Additional Information pertaining to Lincoln National Variable Annuity Account E, and to the use therein of our reports dated (a) February 5, 1998, with respect to the statutory-basis financial statements of The Lincoln National Life Insurance Company, and (b) April 7, 1998, with respect to the financial statements of Lincoln National Variable Annuity Account E. Fort Wayne, Indiana April 24, 1998 EX-99 10 EX-99 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 | | | -------------------------------------- ------------------------------- | | | 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 | | | --------------------------------------------
------------------------------- | | | 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 | ------------------------------------------
-------------------------------- | | | 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 | | | | ----------------------------------------------------
-------------------------------- | | | 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 | | | ------------------------------------------------ -------------------------------- | 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. | | | ------------------------------------------------------- -------------------------------- | 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) | | | | | --------------------------------------------------
-------------------------------- | 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 | | ------------------------------------------
-------------------------------- | 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 | --------------------------
-------------------------------- | | | 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 | -------------------------------------------------- -------------------------------- | | | 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. 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) 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. 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. 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. EX-99.14.B 11 BOOKS AND RECORDS REPORT Exhibit 14(b) BOOKS AND RECORDS LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940 Records to Be Maintained by Registered Investment Companies, Certain Majority- Owned Subsidiaries Thereof, and Other Persons Having Transactions with Registered Investment Companies. Reg. 270.31a-1. (a) Every registered investment company, and every underwriter, broker, dealer, or investment advisor which is a majority-owned subsidiary of such a company, shall maintain and keep current the accounts, books, and other documents relating to its business which constitute the record forming the basis for financial statements required to be filed pursuant to Section 30 of the Investment Company Act of 1940 and of the auditor's certificates relating thereto.
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 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 F&RM Eric Jones years in an easily accessible transactions place Portfolio Securities - -------------------- C-Port Purchase/ F&RM Eric Jones Permanently, the first two Sales Report years in an easily accessible place LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Receipts and Deliveries of Securities (units) - --------------------------------------------- Not Applicable. Portfolio Securities - -------------------- Not Applicable. Receipts and Disbursements of Cash and other Debits and Credits - --------------------------------------------------------------- Daily Journals CSRM & Nancy Alford Permanently, the first two F&RM. Eric Jones years in an easily accessible place (2) General and auxiliary ledgers (or other record) reflecting all asset, liability, reserve, capital, income and expense accounts, including: (i) Separate ledger accounts (or other records) reflecting the following: (a) Securities in transfer; (b) Securities in physical possession; (c) Securities borrowed and securities loaned; (d) Monies borrowed and monies loaned (together with a record of the collateral therefore and substitutions in such collateral); (e) Dividends and interest received; (f) Dividends receivable and interest accrued. Instructions. (a) and (b) shall be stated in terms of securities quantities only; (c) and (d) shall be stated in dollar amounts and securities quantities as appropriate; (e) and (f) shall be stated in dollar amounts only. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- General Ledger - -------------- LNL trial F&RM Eric Jones Permanently, the first two Balance (5000 years in an easily accessible series) place Securities in Transfer - ---------------------- Not Applicable. Securities in Physical Possession - --------------------------------- Not Applicable. Securities Borrowed and Loaned - ------------------------------ Not Applicable.
Not Applicable. LN-Record Location Person to Contact Retention - --------- -------- ----------------- -------------------------- Dividends and Interest Received - --------------------------------------------- LNL Trial F&RM Eric Jones Permanently, the first two Balance (5000 years in an easily accessible series) place Dividends Receivable and Interest Accrued - --------------------------------------------- LNL Trial F&RM Eric Jones Permanently, the first two Balance (5000 years in an easily accessible series) place
(ii) Separate ledger accounts (or other records) for each portfolio security, showing (as of trade dates), (a) the quantity and unit and aggregate price for each purchase, sale, receipt, and delivery of securities and commodities for such accounts, and (b) all other debits and credits for such accounts. Securities positions and money balances in such ledger accounts (or other records) shall be brought forward periodically but not less frequently than at the end of fiscal quarters. Any portfolio security, the salability of which is conditioned, shall be so noted. A memorandum record shall be available setting forth, with respect to each portfolio security accounts, the amount and declaration, ex-dividend, and payment dates of each dividend declared thereon. Ledger Account for each portfolio Security - ------------------------------------------ Not Applicable. (iii) Separate ledger accounts (or other records) for each broker-dealer, bank or other person with or through which transactions in portfolio securities are affected, showing each purchase or sale of securities with or through such persons, including details as to the date of the purchase or sale, the quantity and unit and aggregate prices of such securities, and the commissions or other compensation paid to such persons. Purchases or sales effected during the same day at the same price may be aggregated. Not Applicable. (iv) Separate ledger accounts (or other records), which may be maintained by a transfer agent or registrar, showing for each shareholder of record of the investment company the number of shares of capital stock of the company held. in respect of share accumulation accounts (arising from periodic investment plans, dividend reinvestment plans, deposit of issued shares by the owner thereof, etc.), details shall be available as to the dates and number of shares of each accumulation, and except with respect to already issued shares deposited by the owner thereof, prices of each such accumulation. Shareholder Accounts - --------------------
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. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Not Applicable (4) Corporate charters, certificates of incorporation or trust agreements, and bylaws, and minute books of stockholders' and directors' or trustees' meetings; and minute books of directors' or trustees' committee and advisory board or advisory committee meetings. Corporate Documents - ------------------- Not Applicable. (5) A record of each brokerage order given by or in behalf of the investment company for, or in connection with, the purchase or sale of securities, whether executed or unexecuted. Such record shall include the name of the broker, the terms and conditions of the order and of any modification or cancellation thereof, the time of entry or cancellation, the price at which executed, and the time of receipt of report of execution. The record shall indicate the name of the person who placed the order in behalf of the investment company. Order Tickets - ------------- UIT applica- Not Six years, the first two tions and Applicable years in an easily accessible daily reports place of securities transactions (6) A record of all other portfolio purchase or sales showing details comparable to those prescribed in paragraph 5 above. Commercial Paper - ---------------- Not Applicable. (7) A record of all puts, calls, spreads, straddles, and other options in which the investment company has any direct or indirect interest or which the investment company has granted or guaranteed; and a record of any contractual commitments to purchase, sell, receive or deliver securities or other property (but not including open orders placed with broker-dealers for the purchase or sale of securities, which may be cancelled by the company on notices without penalty or cost of any kind); containing at least an identification of the security, the number of units involved, the option price, the date of maturity, the date of issuance, and the person to whom issued. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Record of Puts, Calls, Spreads, Etc. - ------------------------------------ Not Applicable. (8) A record of the proof of money balances in all ledger accounts (except shareholder accounts), in the form of trial balances. Such trial balances shall be prepared currently at least once a month. Trial Balance - ------------- LNL Trial F&RM Eric Jones Permanently, the first two Balance (5000 years in an easily series) accessible place (9) A record for each fiscal quarter, which shall be completed within 10 days after the end of such quarter, showing specifically the basis or bases upon which the allocation of orders for the purchase and sale of portfolio securities to named brokers or dealers and the division of brokerage commissions or other compensation on such purchase and sale orders among named persons were made during such quarter. The record shall indicate the consideration given to (a) sales of shares of the investment company by brokers or dealers, (b) the supplying of services or benefits by brokers or dealers to the investment company, its investment advisor or principal underwriter or any persons affiliated therewith, and (c) any other considerations other than the technical qualifications of the brokers and the dealers as such. The record shall show the nature of their services or benefits made available, and shall describe in detail the application of any general or specific formula or other determinant used in arriving at such allocation of purchase and sales orders and such division of brokerage commissions or other compensation. The record shall also include the identifies of the person responsible for the determination of such allocation and such division of brokerage commissions or other compensation. Not Applicable. (10) A record in the form of an appropriate memorandum identifying the person or persons, committees, or groups authorizing the purchase or sale of portfolio securities. Where an authorization is made by a committee or group, a record shall be kept in the names of its members who participated in the authorization. There shall be retained a part of the record required by this paragraph any memorandum, recommendation, or instruction supporting or authorizing the purchase or sale of portfolio securities. The requirements of this paragraph are applicable to the extent they are not met by compliance with the requirements of paragraph 4 of this Rule 31a1(b). Advisory Law Division Sandy Lamp Six years, the first two Agreements years in an easily accessible place (11) Files of all advisory material received from the investment advisor, any advisory board or advisory committee, or any other persons from whom the investment company accepts investment advice publications distributed generally. Not Applicable. (12) The term "other records" as used in the expressions "journals (or other records of original entry)" and "ledger accounts (or other records)" shall be construed to include, where appropriate, copies of voucher checks, confirmations, or similar documents which reflect the information required by the applicable rule or rules in appropriate sequence and in permanent form, including similar records developed by the use of automatic data processing systems. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Correspondence CSRM Nancy Alford Six years, the first two years in an easily accessible place Proxy State- CSRM Nancy Alford Six years, the first two ments and years in an easily Proxy Cards accessible place Pricing Sheets F&RM Eric Jones Permanently, the first two years in an easily accessible place Bank Statements Treasurers Rusty Summers Six years, the first two years in an easily accessible place March 12, 1998 -----END PRIVACY-ENHANCED MESSAGE-----