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THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
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HOME OFFICE LOCATION: ADMINISTRATIVE OFFICE
1300 SOUTH CLINTON STREET PERSONAL SERVICE CENTER MVLI
P.O. BOX 1110 350 CHURCH STREET
FORT WAYNE, INDIANA 46802 HARTFORD, CT 06103-1106
(800) 942-5500 (800) 444-2363
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A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
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This Prospectus describes a flexible premium variable life insurance
contract (the "Policy"), offered by The Lincoln National Life Insurance Company
("Lincoln Life", "Company", "we", "us", "our").
The Policy features flexible premium payments; a choice of one of two death
benefit options; and a choice of underlying investment options.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with the Policy. This
Prospectus and the Prospectuses of the Funds, furnished with this Prospectus,
should be read carefully to understand the Policy being offered.
The mutual funds ("Funds") available through our Flexible Premium Variable
Life Account M ("Separate Account") are:
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
AMERICAN VARIABLE INSURANCE SERIES
Global Small Capitalization Fund -- Class 2
Growth Fund -- Class 2
Growth-Income Fund -- Class 2
BARON CAPITAL FUNDS TRUST
Baron Capital Asset Fund -- Insurance Shares
BT INSURANCE FUNDS TRUST
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
DELAWARE GROUP PREMIUM FUND, INC.
Delchester Series
Devon Series
Emerging Markets Series
REIT Series
Small Cap Value Series
Trend Series
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Contrafund Portfolio -- Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III
Growth Opportunities Portfolio -- Service Class
JANUS ASPEN SERIES
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Worldwide Growth Portfolio
LINCOLN NATIONAL (LN)
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc.
LN Equity-Income Fund, Inc.
LN Global Asset Allocation Fund, Inc.
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc.
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton International Fund -- Class 2
Templeton Stock Fund -- Class 2
TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES
WITH IT. KEEP ALL FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
THIS POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS ONLY OFFERS THE
POLICY FOR SALE IN JURISDICTIONS WHERE ITS OFFER AND SALE ARE LAWFUL.
PROSPECTUS DATED: OCTOBER 4, 1999
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TABLE OF CONTENTS
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CONTENTS PAGE
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HIGHLIGHTS............................ 3
Initial Choices To Be Made.......... 3
Level or Varying Death Benefit...... 3
Amount of Premium Payments.......... 4
Selection of Funding Vehicles....... 4
No Lapse Provision.................. 4
Charges and Fees.................... 5
Fund Expenses....................... 5
Changes in Specified Amount......... 8
LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT.................. 8
BUYING VARIABLE LIFE INSURANCE........ 9
Replacements........................ 10
APPLICATION........................... 10
OWNERSHIP............................. 11
BENEFICIARY........................... 11
THE POLICY............................ 12
Policy Specifications............... 12
PREMIUM FEATURES...................... 12
Planned Premiums Additional
Premiums........................... 12
Limits on Right to Make Payments of
Additional and Planned Premiums.... 13
Premium Load; Net Premium Payment... 13
RIGHT-TO-EXAMINE PERIOD............... 13
TRANSFERS AND ALLOCATION AMONG
ACCOUNTS.............................. 13
Allocation of Net Premium
Payments........................... 13
Transfers........................... 13
Optional Sub-Account Allocation
Programs........................... 14
Dollar Cost Averaging............. 14
Automatic Rebalancing............. 15
POLICY VALUES......................... 15
Accumulation Value.................. 15
Separate Account Value.............. 15
Variable Accumulation Unit
Value............................ 16
Variable Accumulation Units....... 16
Fixed Account and Loan Account
Value.............................. 16
Net Accumulation Value.............. 16
FUNDS................................. 17
Substitution of Securities.......... 22
Voting Rights....................... 22
Fund Participation Agreements....... 22
CHARGES AND FEES...................... 22
Deductions Made Monthly............. 22
Administrative Expenses........... 23
Cost of Insurance Charge.......... 23
Mortality and Expense Risk Charge... 23
Surrender Charges................... 24
Reduction of Charges -- Purchases on
a Case Basis; Exchanges............ 24
Transaction Fee for Excess
Transfers.......................... 25
DEATH BENEFITS........................ 25
Death Benefit Options............... 25
Changes in Death Benefit Options and
Specified Amount................... 26
Federal Income Tax Definition of
Life Insurance..................... 26
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CONTENTS PAGE
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NOTICE OF DEATH OF INSURED............ 27
PAYMENT OF DEATH BENEFIT PROCEEDS..... 27
Settlement Options.................. 27
POLICY LIQUIDITY...................... 28
Policy Loans........................ 28
Partial Surrender................... 28
Surrender of the Policy............. 29
Surrender Value..................... 29
Deferral of Payment and Transfers... 29
ASSIGNMENT; CHANGE OF OWNERSHIP....... 29
LAPSE AND REINSTATEMENT............... 30
Lapse of a Policy................... 30
No Lapse Provision.................. 30
Reinstatement of a Lapsed Policy.... 31
COMMUNICATIONS WITH LINCOLN LIFE...... 31
Proper Written Form................. 31
Telephone Transaction Privileges.... 31
OTHER POLICY PROVISIONS............... 31
Issuance............................ 31
Date of Coverage.................... 32
Incontestability.................... 32
Misstatement of Age or Gender....... 32
Suicide............................. 32
Nonparticipating Policies........... 32
Riders.............................. 32
TAX ISSUES............................ 32
Tax Treatment of Death Benefit...... 32
Federal Income Tax Considerations... 33
Taxation of Lincoln Life............ 34
Other Considerations................ 34
FAIR VALUE OF THE POLICY.............. 34
DIRECTORS AND OFFICERS OF LINCOLN
LIFE................................. 34
DISTRIBUTION OF POLICIES.............. 36
CHANGES OF INVESTMENT POLICY.......... 36
OTHER CONTRACTS ISSUED BY LINCOLN
LIFE................................. 37
STATE REGULATION...................... 37
REPORTS TO OWNERS..................... 37
ADVERTISING........................... 37
PREPARING FOR YEAR 2000............... 38
LEGAL PROCEEDINGS..................... 39
EXPERTS............................... 39
REGISTRATION STATEMENT................ 40
APPENDIX 1: MONTHLY CHARGE............ 41
APPENDIX 2: GUARANTEED MAXIMUM COST OF
INSURANCE RATES...................... 42
APPENDIX 3: ILLUSTRATION OF SURRENDER
CHARGES.............................. 43
APPENDIX 4: CORRIDOR PERCENTAGES...... 45
APPENDIX 5: ILLUSTRATION OF
ACCUMULATION VALUES, SURRENDER VALUES
AND DEATH BENEFIT PROCEEDS........... 46
FINANCIAL STATEMENTS
SEPARATE ACCOUNT 12/31/98........... M-1
LINCOLN LIFE 12/31/98............... S-1
SEPARATE ACCOUNT 6/30/99............ I-1
LINCOLN LIFE 6/30/99................ L-1
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HIGHLIGHTS
This section is an overview of key Policy features.
(Regulations in your state may vary the provisions of your
own Policy.) Your Policy is a flexible premium variable life
insurance policy under which flexible premium payments are
permitted and the Death Benefit and Policy values may vary
with the investment performance of the funding option(s)
selected. Its value may change on a:
1) fixed basis;
2) variable basis; or a
3) combination of both fixed and variable bases.
Review your personal financial objectives and discuss them
with a qualified financial counselor before you buy a
variable life insurance policy. This Policy may, or may not,
be appropriate for your individual financial goals. The
value of the Policy and, under one option, the death benefit
amount depend on the investment results of the funding
options you select.
At all times, your Policy must qualify as life insurance
under the Internal Revenue Code of 1986 (the "Code") to
receive favorable tax treatment under Federal law. If these
requirements are met, you may benefit from such tax
treatment. Lincoln Life reserves the right to return your
premium payments if they result in your Policy failing to
meet Code requirements.
INITIAL CHOICES TO BE MADE
The Policy Owner (the "Owner" or "you") is the person named
in the "Policy Specifications" who has all of the Policy
ownership rights. If no Owner is named, the Insured (the
person whose life is insured under the Policy) will be the
Owner of the Policy. You, as the Owner, have four important
choices to make when the Policy is first purchased. You need
to choose:
1) one of the two Death Benefit Options;
2) the amount of premium you want to pay; and
3) the amount of your Net Premium Payment to be placed in
each of the funding options you select. The Net Premium
Payment is the balance of your Premium Payment that
remains after certain charges are deducted from it.
4) whether to elect the No Lapse Provision.
LEVEL OR VARYING DEATH BENEFIT
The Death Benefit is the amount Lincoln pays to the
Beneficiary(ies) when the Insured dies. Before we pay the
Beneficiary(ies), any outstanding loan account balances or
outstanding amounts due are subtracted from the Death
Benefit. We calculate the Death Benefit payable as of the
date on which the Insured died.
When you purchase your Policy, you must choose one of two
Death Benefit Options:
1) a level death benefit; or
2) a varying death benefit.
If you choose the level Death Benefit Option, the Death
Benefit will be the greater of:
1) the "Specified Amount", which is the amount of the death
benefit in effect for the Policy when the Insured died, less
any indebtedness and partial surrenders (The Specified
Amount may be found on the Policy's Specification Page); or
2) the "Corridor Death Benefit", which is the death benefit
calculated as a percentage of the Accumulation Value.
If you choose the varying Death Benefit Option, the Death
Benefit will be the greater of:
1) the Specified Amount plus the Net Accumulation Value,
less any loan interest accrued, but not yet charged, when
the Insured died; or
2) the Corridor Death Benefit.
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(The "Net Accumulation Value" is the total of the balances
in the Fixed Account and the Separate Account. It does not
include any outstanding Loan Account amounts).
See page 25.
If you have borrowed against your Policy or surrendered a
portion of your Policy, your Death Benefit will be reduced
by the Loan Account balance, by any loan interest accrued,
but not yet charged, and any surrendered amount.
AMOUNT OF PREMIUM PAYMENT
When you apply for your Policy, you must decide how much
premium to pay. Premium payments may be changed within the
limits described on page 13.
You may use the value of the Policy to pay the premiums due
and continue the Policy in force if sufficient values are
available for premium payments. Be careful; if the
investment options you choose do not do as well as you
expect, there may not be enough value to continue the Policy
in force without more premium payments. Charges against
Policy values for the cost of insurance (see page 23)
increase as the Insured gets older.
If your Policy lapses because your Monthly Premium Deduction
is larger than the Net Accumulation Value, you may reinstate
your Policy. The Policy will not lapse if, on each Monthly
Anniversary while the No Lapse Provision is in effect, the
Owner has met the No Lapse Premium Requirement. See
page 30.
When you first receive your Policy you will have 10 days to
look it over, unless state law requires a greater time. This
is called the "Right-to-Examine" period. Use this time to
review your Policy and make sure it meets your needs. During
this period, your Initial Premium Payment will be deposited
in the Money Market Sub-Account. If you then decide you do
not want your Policy, we will return all Premium Payments to
you with no interest paid. See page 13.
SELECTION OF FUNDING VEHICLES
This Prospectus focuses on the Separate Account investment
information that makes up the "variable" part of the
contract. If you put money into the variable funding
options, you assume all the investment risk on that money.
This means that if the mutual fund(s) you select go up in
value, the value of your Policy, net of charges and
expenses, also goes up. If those funds lose value, so does
your Policy. Each fund has its own investment objective. You
should review each fund's Prospectus before making your
decision.
You must choose the Fund(s) in which you want to place each
Net Premium Payment. The Sub-Accounts make up the Separate
Account. Each Sub-Account invests in shares of a certain
Fund. A Sub-Account is not guaranteed and will increase or
decrease in value according to the particular Fund's
investment performance. See page 17.
You may also use our Fixed Account to fund your Policy. Net
Premium payments put into the Fixed Account:
- become part of our General Account;
- do not share the investment experience of the Separate
Account; and
- have a guaranteed minimum interest rate of 4% per year.
Interest beyond 4% is credited at our discretion. For
additional information on the Fixed Account, see page 9.
NO LAPSE PROVISION
If elected on the application, this policy contains a
ten-year "No Lapse Provision". This means that the Policy
will not lapse during its first ten years regardless of the
gains or losses of the Funds you select as long as you pay
the specified No Lapse Premium. Therefore, the Initial Death
Benefit under your Policy will be guaranteed for ten years
4
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even though your Net Accumulation Value is insufficient to
pay your current Monthly Deductions. Loans or Partial
Surrenders may jeopardize the No Lapse Provision. See
page 30. Availability of the No Lapse Provision may vary in
some states.
CHARGES AND FEES (Fees Charged by the Company)
We deduct charges in connection with the Policy to
compensate us for providing the Policy's insurance benefit,
administering the Policy, assuming certain risks under the
Policy and for sales-related expenses we incur.
DEDUCTION FROM PREMIUM PAYMENTS. We deduct a premium charge
of 5% from each Premium Payment.
MONTHLY DEDUCTION. There is a Monthly Deduction which
includes administrative expenses, a cost of insurance charge
and charges for riders that are placed on your policy.
ADMINISTRATIVE EXPENSES. We deduct a flat dollar Monthly
Deduction of $10 for administrative expenses.
In addition, for the first two Policy Years, we deduct a
monthly charge per $1,000 of Specified Amount. This
monthly charge will vary with the insured's age as
described on page 23 and as shown in Appendix 1. This
monthly charge also applies, for 24 months, to any
increase in Specified Amount.
The maximum for this additional monthly charge would be
$0.4242 per $1,000 of Specified Amount. This would apply
only if the insured's age as of the birth date nearest
the Policy's issue date (or increase in specified
amount) is 81 or older.
COST OF INSURANCE CHARGE. A monthly deduction is made
for the Cost of Insurance charge. This charge varies by
policy duration and insured's age, gender and premium
class. The maximum monthly deductions are listed in
Appendix 2.
Mortality and Expense Risk Charge. We make daily charges
against the Separate Account for mortality and expense risk.
This charge is guaranteed at an annual rate of 0.90% for
Policy Years 1-19 and 0.20% for Policy Years 20 and beyond.
Transfer Charge. Each Policy Year you may make 12 transfers
between funding options without charge. Beyond 12, a $25 fee
may apply.
SURRENDER CHARGES. FULL SURRENDER. If you totally surrender
your Policy within the first 15 Policy Years, the Surrender
Charge is the amount retained by us. Calculation of the
Surrender Charge is described in Appendix 3. This charge is
based on age, gender and policy duration. The maximum
Surrender Charge will never exceed $46.82 per $1,000 of
Specified Amount. PARTIAL SURRENDER. Each time you request a
partial surrender of your Policy, we charge you $25, but not
more than 2% of the amount withdrawn. See page 24.
Loans. You may borrow within described limits against the
Policy. If you borrow against your Policy, interest will be
charged on the Loan Account Value at an annual interest rate
of 8%. As a benefit to you Lincoln Life will credit interest
of 7% per year on the Loan Account Value. See page 28.
REDUCTION OF CHARGES. Charges and fees may be reduced in
some circumstances. See page 24.
FUND EXPENSES
The investment advisor for each of the Funds deducts a daily
charge as a percent of the net assets in each fund as an
asset management charge. The charge reflects asset
management fees of the investment advisor (Management Fees),
and other expenses incurred by the funds (including 12b-1
fees for Class 2 shares and Other Expenses). The charge has
the effect of reducing the investment results credited to
the Sub-Accounts. Future Fund expenses will vary.
5
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PORTFOLIO EXPENSE TABLE
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TOTAL
ANNUAL
FUND TOTAL FUND
OPERATING OPERATING
EXPENSES TOTAL EXPENSES
WITHOUT WAIVERS WITH
MANAGEMENT 12B-1 OTHER WAIVERS OR AND WAIVERS OR
FUND FEES FEES EXPENSES REDUCTIONS REDUCTIONS REDUCTIONS
--------------------------- ----------- -------- -------- ---------- ---------- ----------
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AIM V.I. Growth Fund....... 0.64% -- 0.08% 0.72% -- 0.72%
AIM V.I. International
Equity Fund.............. 0.75% -- 0.16% 0.91% -- 0.91%
AIM V.I. Value Fund........ 0.61% -- 0.05% 0.66% -- 0.66%
AVIS Global Small
Capitalization (13)...... .79% .25% 0.03% 1.07% -- 1.07%
AVIS Growth................ .40% .25% 0.01% 0.66% -- 0.66%
AVIS Growth-Income......... .35% .25% 0.01% 0.61% -- 0.61%
Baron Capital Asset
Fund--Insurance Shares
(1)...................... 1.00% 0.25% 6.37% 7.62% (6.17%) 1.45%
BT EAFE Index Fund (2)..... 0.45% -- 1.21% 1.66% (1.01%) 0.65%
BT Equity 500 Index Fund
(2)...................... 0.20% -- 0.99% 1.19% (0.89%) 0.30%
BT Small Cap Index Fund
(2)...................... 0.35% -- 1.23% 1.58% (1.13%) 0.45%
Delaware Group Delchester
Series (3)............... 0.65% -- 0.10% 0.75% -- 0.75%
Delaware Group Devon
Series (3)............... 0.65% -- 0.06% 0.71% -- 0.71%
Delaware Group Emerging
Markets Series (4)....... 1.25% -- 0.42% 1.67% (0.17%) 1.50%
Delaware Group REIT
Series (5)............... 0.75% -- 0.27% 1.02% (0.17%) 0.85%
Delaware Group Small Cap
Value Series (6)......... 0.75% -- 0.10% 0.85% -- 0.85%
Delaware Group Trend
Series (6)............... 0.75% -- 0.10% 0.85% (0.04%) 0.81%
Fidelity VIPII Contrafund
Portfolio -- Service
Class (7)................ 0.59% 0.10% 0.11% 0.80% -- 0.80%
Fidelity VIPIII Growth
Opportunities Portfolio
-- Service Class (7)..... 0.59% 0.10% 0.11% 0.80% -- 0.80%
Janus Aspen Series Balanced
Portfolio (8)............ 0.72% -- 0.02% 0.74% -- 0.74%
Janus Aspen Series
Worldwide
Growth Portfolio (8)..... 0.67% -- 0.07% 0.74% (0.02%) 0.72%
LN Bond Fund............... 0.44% -- 0.13% 0.57% -- 0.57%
LN Capital Appreciation
Fund..................... 0.76% -- 0.07% 0.83% -- 0.83%
LN Equity-Income Fund...... 0.72% -- 0.07% 0.79% 0.79%
LN Global Asset Allocation
Fund..................... 0.72% -- 0.19% 0.91% -- 0.91%
LN Money Market Fund....... 0.48% -- 0.11% 0.59% -- 0.59%
LN Social Awareness Fund... 0.34% -- 0.04% 0.38% -- 0.38%
MFS Emerging Growth
Series (9)............... 0.75% -- 0.10% 0.85% -- 0.85%
MFS Total Return
Series (9)............... 0.75% -- 0.16% 0.91% -- 0.91%
MFS Utilities
Series (9)............... 0.75% -- 0.26% 1.01% -- 1.01%
AMT Mid-Cap Growth
Portfolio (10)(11)....... 0.85% -- 0.58% 1.43% (0.43%) 1.00%
AMT Partners Portfolio
(10)(11)................. 0.78% -- 0.06% 0.84% -- 0.84%
Templeton International
Fund -- Class 2 (12)..... 0.69% 0.25% 0.17% 1.11% -- 1.11%
Templeton Stock Fund --
Class 2 (12)............. 0.70% 0.25% 0.19% 1.14% -- 1.14%
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(1) The Adviser is contractually obligated to reduce its
fee to the extent required to limit Baron Capital Asset
Fund's total operating expenses to 1.5% for the first
$250 million of assets in the Fund, 1.35% for Fund
assets over $250 million, and 1.25% for Fund assets
over $500 million. Without the expense limitations,
total operating expenses for the Fund for the period
October 1, 1998 through December 31, 1998 would have
been 7.62%
(2) Under the Advisory Agreement with Bankers Trust Company
(the "Advisor"), the Funds will pay an advisory fee at
an annual percentage rate of 0.45%, 0.20% and 0.35% of
the average daily net assets of the Funds for the EAFE
Equity Index Fund, Equity 500 Index Fund and Small Cap
Index Fund, respectively. These fees are accrued daily
and paid monthly. The Advisor has voluntarily
undertaken to waive its fees
6
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and to reimburse the Funds for certain expenses so that
the Funds' total operating expenses will not exceed
0.65%, 0.30% and 0.45% of average daily net assets for
the EAFE Equity Index Fund, Equity 500 Index Fund and
Small Cap Index Fund, respectively.
(3) The investment advisor for the Devon Series and
Delchester Series is Delaware Management Company, Inc.
("DMC"). Effective May 1, 1999 through October 31,
1999, DMC has voluntarily agreed to waive its
management fees and reimburse each Series for expenses
to the extent that total expenses will not exceed 0.80%
for the Devon Series and 0.80% for the Delchester
Series. Pursuant to a vote of the Fund's shareholders
on March 17, 1999, a new management fee structure based
on average daily net assets was approved as follows:
0.65% on the first $500 million, 0.60% on the next
$500 million, 0.55% on the next $1,500 million, 0.50%
on assets in excess of $2,500 million; all per year.
(4) The investment advisor for the Emerging Markets Series
is Delaware International Advisors, Limited ("DIAL").
Effective May 1, 1999 through October 31, 1999, DIAL
has voluntarily agreed to waive its management fees and
reimburse the Series for expenses to the extent that
total expenses will not exceed 1.50% for the Emerging
Market Series. Pursuant to a vote of the Fund's
shareholders on March 17, 1999, a new management fee
structure based on average daily net assets was
approved as follows: 1.25% on the first $500 million,
1.20% on the next $500 million, 1.15% on the next
$1,500 million, 1.10% on assets in excess of
$2,500 million; all per year.
(5) The investment advisor for the REIT Series is Delaware
Management Company, Inc. ("DMC"). Effective May 1, 1999
through October 31, 1999, DMC has voluntarily agreed to
waive its management fees and reimburse the Series for
expenses to the extent that total expenses will not
exceed 0.85% for the REIT Series. There is no change to
the current management fee structure.
(6) The investment advisor for the Trend Series and Small
Cap Value Series is Delaware Management Company, Inc.
("DMC"). Effective May 1, 1999 through October 31,
1999, DMC has voluntarily agreed to waive its
management fee and reimburse each Series for expenses
to the extent that total expenses will not exceed 0.85%
for the Trend Series and 0.85% for the Small Cap Value
Series. Pursuant to a vote of the Fund's shareholders
on March 17, 1999, a new management fee structure based
on average daily net assets was approved as follows:
0.75% on the first $500 million, 0.70% on the next $500
million, 0.65% on the next $1,500 million, 0.60% on
assets in excess of $2,500 million; all per year.
(7) A portion of the brokerage commissions that certain
funds pay was used to reduce funds expenses. In
addition, certain funds, or Fidelity Management &
Research on behalf of certain funds, have entered into
arrangements with their custodian whereby realized as a
result of uninvested cash balances were used to reduce
custodian expenses. Including these reductions, the
total operating expenses presented in the table would
have been 0.75% for the VIP II Contrafund Portfolio and
0.79% for the VIP III Growth Opportunities Portfolio.
(8) All expenses are stated both with and without
contractual waivers and fee reductions by Janus
Capital. Fee reductions for the Worldwide Growth and
Balanced Portfolios reduce the Management Fee to the
level of the corresponding Janus retail fund. Other
waivers, if applicable, are first applied against the
Management Fee and then against Other Expenses. Janus
Capital has agreed to continue the waivers and fee
reductions until at least the annual renewal of the
advisory agreement.
(9) Each series has an expense offset arrangement which
reduces the series' custodian fee based upon the amount
of cash maintained by the series with its custodian and
disbursing agent. Each series may enter into other such
arrangements and directed brokerage arrangements, which
would also have the effect of reducing the series'
expenses. Expenses do not take into account these
expense reductions, and are therefore higher than the
actual expenses of the series.
(10) Neuberger Berman Advisers Management Trust is divided
into portfolios ("Portfolios"), each of which invests
all of its net investable assets in a corresponding
series ("Series") of Advisers Managers Trust. The
figures reported under "Investment Management and
Administration Fees" include the aggregate of the
administration fees paid by the Portfolio and the
management fees paid by its corresponding Series.
Similarly, "Other Expenses" includes all other
expenses of the Portfolio and its corresponding
Series.
(11) NBMI has undertaken to reimburse certain operating
expenses, including the compensation of NBMI (except
with respect to Partners Portfolio) and excluding
taxes, interest, extraordinary expenses, brokerage
commissions and transaction costs, that exceed, in the
aggregate, 1% of the Mid-Cap Growth and Partners
Portfolios' average daily net asset value. These
expense reimbursement agreements are subject to
termination upon 60 days written notice with respect
to the Mid-Cap Growth and Partners Portfolios, and
there can be no assurance that these policies will be
continued thereafter.
(12) Class 2 of the Fund has a distribution plan or
"Rule 12b-1 plan" which is described in the Fund's
prospectus.
(13) These expenses are annualized. The Fund did not begin
operations until April 30, 1998.
7
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CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount you choose is the initial Death
Benefit.
Within certain limits, you may decrease or, with
satisfactory evidence of insurability, increase the
Specified Amount. The minimum Specified Amount is currently
$100,000. Such changes will affect other aspects of your
Policy. See page 26.
LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT
Lincoln Life, an Indiana life insurance company incorporated
in 1905, is among the nation's largest writers of annuities,
individual life insurance and life reinsurance. Wholly-
owned by Lincoln National Corporation ("LNC"), a publicly
held Indiana insurance holding company incorporated in 1968,
it is licensed in all states (except New York), the District
of Columbia, Guam, and the Commonwealth of the Northern
Mariana Islands. Its principal office is at 1300 South
Clinton Street, Fort Wayne, IN 46802. Lincoln Life, LNC and
their affiliates comprise the "Lincoln Financial Group"
which provides a variety of wealth accumulation and
protection products and services.
Lincoln Life Flexible Premium Variable Life Account M
("Account M") is a "separate account" of the company
established on December 2, 1997. Under Indiana law, the
assets of Account M attributable to the Policies, though our
property, are not chargeable with liabilities of any other
business of Lincoln Life and are available first to satisfy
our obligations under the Policies. Account M income, gains,
and losses are credited to or charged against Account M
without regard to our other income, gains, or losses. Its
values and investment performance are not guaranteed. It is
registered with the Securities and Exchange Commission (the
"Commission") as a "unit investment trust" under the 1940
Act and meets the 1940 Act's definition of "separate
account". Such registration does not involve supervision by
the Commission of Account M's or our management, investment
practices, or policies. We have numerous other registered
separate accounts which fund other variable life insurance
policies and variable annuity contracts.
Account M is divided into Sub-Accounts, each of which is
invested solely in the shares of one of the Funds available
as funding vehicles under the Policies. On each Valuation
Day, (any day on which the New York Stock Exchange is open
and trading is unrestricted) Net Premium Payments allocated
to Account M will be invested in Fund shares at net asset
value, and monies necessary to pay for deductions, charges,
transfers and surrenders from Account M are raised by
selling Fund shares at net asset value.
The Funds and their investment objectives, which they may or
may not achieve are on pages 17-21. More Fund information is
in the Funds' prospectuses, which must accompany or precede
this prospectus and should be read carefully. Some Funds
have investment objectives and policies similar to those of
other funds managed by the same investment adviser. Their
investment results may be higher or lower than those of the
other funds. There can be no assurance, and no
representation is made, that a Fund's investment results
will be comparable to the investment results of any other
fund.
We reserve the right to add, withdraw or substitute Funds,
subject to the conditions of the Policy and to compliance
with regulatory requirements if, in our sole discretion,
legal, regulatory, marketing, tax or investment
considerations so warrant or in the event
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a particular Fund is no longer available for investment by
the Sub-Accounts. No substitution will take place without
prior approval of the Commission, to the extent required by
law.
Shares of the Funds may be used by us and other insurance
companies to fund both variable annuity contracts and
variable life insurance policies. While this is not
perceived as problematic, the Funds' governing bodies
(Boards of Directors/Trustees) have agreed to monitor events
to identify any material irreconcilable conflicts which
might arise and to decide what responsive action might be
appropriate. If a Sub-Account were to withdraw its
investment in a Fund because of a conflict, a Fund might
have to sell portfolio securities at unfavorable prices.
A Policy may also be funded in whole or in part through the
"Fixed Account", part of Lincoln Life's General Account
supporting its insurance and annuity obligations. We will
credit interest on amounts held in the Fixed Account as we
determine from time to time, but not less than 4% per year.
Interest, once credited, and Fixed Account principal are
guaranteed. Interests in the Fixed Account have not been
registered under the 1933 Act in reliance on exemptive
provisions. The Commission has not reviewed Fixed Account
disclosures, but they are subject to securities law
provisions relating to accuracy and completeness.
BUYING VARIABLE LIFE INSURANCE
The Policies this Prospectus offers are variable life
insurance policies which provide death benefit protection.
Investors not needing death benefit protection should
consider other forms of investment, as there are extra costs
and expenses of providing the insurance feature. Further,
life insurance purchasers who are risk-aversive or want more
predictable premium levels and benefits may be more
comfortable buying more traditional, non-variable life
insurance. However, variable life insurance is a flexible
tool for financial and investment planning for persons
needing death benefit protection and willing to assume
investment risk and to monitor investment choices they have
made.
Flexibility starts with the ability to make differing levels
of premium payments. A young family just starting out may
only be able to pay modest premiums initially but hope to
increase premium payments over time. At first, this family
would be paying primarily for the insurance feature (perhaps
at ages where the insurance cost is relatively low) and
later use a Policy more as a savings vehicle. A customer at
peak earning capacity may wish to pay substantial premiums
for a limited number of years prior to retirement, after
which Policy values may suffice, based on future expected
return results, though not guaranteed, to keep the Policy
inforce for the expected lifetime and to provide, through
loans, supplemental retirement income. A customer may be
able to pay a large single premium, using the Policy
primarily as a savings and investment vehicle for potential
tax advantages. A parent or grandparent may find a policy on
the life of a child or grandchild a useful gifting
opportunity over a period of years and the basis of an
investment program for the donee. A business may be able to
use a Policy to fund non-qualified executive compensation or
business continuation plans.
Sufficient premiums must always be paid to keep a policy
inforce, and there is a risk of lapse if premiums are too
low in relation to the insurance amount and if investment
results are less favorable than anticipated. The No Lapse
Provision, while in effect, may help to assure a death
benefit even if investment results are unfavorable.
Flexibility also results from being able to select, monitor
and change investment choices within a Policy. With the wide
variety of funding options available, it is possible to fine
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tune an investment mix and change it to meet changing
personal objectives or investment conditions. Policy owners
should be prepared to monitor their investment choices on an
ongoing basis.
Variable life insurance has significant tax advantages under
current tax law. A transfer of values from one fund to
another within the Policy generates no taxable gain or loss.
Any investment income and realized capital gains within a
fund are automatically reinvested without being taxed to the
Policy owners. Policy values therefore accumulate on a tax-
deferred basis. These situations would normally result in
immediate tax liabilities in the case of direct investment
in mutual funds.
While these tax deferral features also apply to variable
annuities, liquidity (the ability of Policy owners to access
Policy values) is normally more easily achieved with
variable life insurance. Unless a policy has become a
"modified endowment contract" (see page 32), an Owner can
borrow Policy values tax-free, without surrender charges and
at very low net interest cost. Policy loans can be a source
of retirement income. Variable annuity withdrawals are
generally taxable to the extent of accumulated income, may
be subject to surrender charges, and will result in penalty
tax if made before age 59 1/2.
Depending on the death benefit option chosen, accumulated
Policy values may also be part of the eventual death benefit
payable. If a Policy is heavily funded and investment
performance is very favorable, the death benefit may
increase even further because of tax law requirements that
the death benefit be a certain multiple of Policy value,
depending on the Insured's age (see page 25). The death
benefit is income-tax free and may, with proper estate
planning, be estate-tax free. A tax advisor should be
consulted.
There are costs and expenses of variable life insurance
ownership which are directly related to Policy values (i.e.
asset based costs), as is true with investment in mutual
funds or variable annuities. A significant additional cost
of variable life insurance is the "cost of insurance" charge
which is imposed on the "amount at risk" (the death benefit
less Policy value) and increases as the insured grows older.
This charge varies by age, underwriting classification,
smoking status and in most states by gender. The effect of
its increase can be seen in illustrations in this Prospectus
(see Appendix 5) or in personalized illustrations available
upon request. Surrender Charges, which decrease over time,
are another significant additional cost if the Policy is not
retained.
REPLACEMENTS
Before purchasing the Policy to replace, or to be funded
with proceeds borrowed or withdrawn from, an existing life
insurance policy, an applicant should consider a number of
matters. Will any commission be paid to an agent or any
other person with respect to the replacement? Are coverages
and comparable values available from the Policy, as compared
to his or her existing policy? The Insured may no longer be
insurable, or the contestability period may have elapsed
with respect to the existing policy, while the Policy could
be contested. You should consider similar matters before
deciding to replace the Policy or withdraw funds from the
Policy for the purchase of funding a new policy of life
insurance.
APPLICATION
Any person who wants to buy a Policy must first complete our
application form.
A completed application identifies and provides sufficient
information about the prospective insured to permit us to
begin underwriting the risks under the Policy. We require a
medical history and examination of the Insured. We may
decline to provide
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insurance, or may place the Insured into a special
underwriting category (these include preferred, non-smoker
standard, smoker standard, non-smoker substandard and smoker
substandard). The amount of the Cost of Insurance deducted
monthly from the Policy value after issue varies among the
underwriting categories as well as by Age and, in most
states, gender of the Insured.
The applicant will initially select the Beneficiary or
Beneficiaries who are to receive Death Benefit Proceeds, the
initial face amount (the "Initial Specified Amount") of the
Death Benefit and which of two methods of computing the
Death Benefit is to be used. (See DEATH BENEFITS, Death
Benefit Options). The applicant will also indicate both the
frequency and amount of Premium Payments, (see PREMIUM
FEATURES), and how Policy values are initially to be
allocated among the available funding options following the
expiration of the Right-to-Examine Period. (See
RIGHT-TO-EXAMINE PERIOD).
OWNERSHIP
The Owner is the person or persons named as "Owner" in the
application, and on the Date of Issue will usually be
identified as "Owner" in the Policy Specifications. If no
person is identified as Owner in the Policy Specifications,
then the Insured is the Owner. The person or persons
designated to be Owner of the Policy must have, or hold
legal title for the sole benefit of a person who has, an
"insurable interest" in the life of the Insured under
applicable state law. The Owner may be the Insured, or any
other natural person or non-natural entity.
The Owner is entitled to exercise rights under the Policy so
long as the Insured is living. These rights include the
power to select and change the Beneficiary, except as state
law may restrict, and the Death Benefit Option. The Owner
generally also has the right to request policy loans, make
partial surrenders or surrender the Policy. The Owner may
also name a new owner, assign the Policy or agree not to
exercise all of the Owner's rights under the Policy.
If the Owner predeceases the Insured, the Owner's rights in
the Policy will belong to the Owner's estate, unless
otherwise specified to us.
BENEFICIARY
The Beneficiary is designated by the Owner or the Applicant
to receive the Death Benefit proceeds payable under the
Policy. The person or persons named in the application as
"Beneficiary" are the Beneficiaries of the Death Benefit
under the Policy, unless subsequently changed. Multiple
Beneficiaries will be paid in equal shares, unless otherwise
specified to us.
Except when we have acknowledged an assignment of the Policy
or an agreement not to change the Beneficiary, or when state
law restricts, the Owner may change the Beneficiary at any
time while the Insured is living. Any request for a change
in the Beneficiary must be submitted to us in a written form
satisfactory to us. When we have recorded the change of
Beneficiary, it will be effective as of the date of
signature or, if there is no such date, the date recorded.
No change of Beneficiary will affect or prejudice us as to
any payment made or action taken by us before it was
recorded.
If any Beneficiary dies before the Insured, the
Beneficiary's potential interest shall pass to any surviving
Beneficiaries, unless otherwise specified to us. If no named
Beneficiary survives the Insured, any Death Benefit Proceeds
will be paid to the Owner or the Owner's executor,
administrator or assignee.
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THE POLICY
The Policy is the life insurance contract described in the
Prospectus. The Date of Issue is the date on which we begin
life insurance coverage under a Policy, assuming the initial
premium has been paid. A Policy Year is each twelve month
period, beginning with the Date of Issue, during which the
Policy is in effect. The Policy Anniversary is the day of
the year the Policy was issued.
On issuance, we will deliver a life insurance contract
("Policy") to you. Please promptly review the Policy to
confirm that it sets forth the features specified in the
application. The ownership and other options set forth in
the Policy are registered, and may be transferred, solely on
our books and records. Mere possession of the Policy does
not imply ownership rights. If you lose the Policy, we will
issue a replacement on request and may charge a fee.
POLICY SPECIFICATIONS
The Policy includes a "Policy Specifications" page, with
supporting schedules, stating Policy information including
the identity of the Owner, the Date of Issue, the Initial
Specified Amount, the Death Benefit Option selected, the
Insured, the Issue Age, the Beneficiary, the initial Premium
Payment, the Surrender Charges, Expense Charges and Fees,
Guaranteed Maximum Cost of Insurance Rates, and the No Lapse
Premium, if elected.
PREMIUM FEATURES
You may select and vary the frequency and the amount of
Premium Payments and the allocation of Net Premium Payments.
After the Initial Premium Payment is made there is no
minimum premium required, except to maintain the No Lapse
Provision, if elected. (See LAPSE AND REINSTATEMENT No Lapse
Provision). The initial Premium Payment is due on the
Effective Date (the date on which the initial premium is
applied to the Policy) and must be equal to or exceed the
amount necessary to provide for two Monthly Deductions. If
the Insured is still living upon attaining Age 100, and the
Policy has not lapsed or been surrendered, there are certain
changes under the Policy. We will no longer accept Premium
Payments or transfer amounts to the Sub-Accounts, and will
make no further monthly deductions. Policy Values held in
the Separate Account will be transferred to the Fixed
Account. The Policy will remain in force until surrender or
the Insured's Death.
PLANNED PREMIUMS; ADDITIONAL PREMIUMS
"Planned Premiums" are the amount of premiums (as shown in
the Policy Specifications) the Applicant chooses to pay on a
scheduled basis. This is the amount for which we send a
premium reminder notice.
Any subsequent Premium Payments ("Additional Premiums") must
be sent directly to the Administrative Office. We credit
Additional Premiums when we receive them. Premium Payments
may be billed annually, semiannually, or quarterly.
Pre-authorized automatic Additional Premium Payments can
also be arranged at any time.
Unless specifically otherwise directed, any payment received
(other than any Premium Payment necessary to prevent, or
cure, Policy lapse) will be applied first to reduce Policy
indebtedness. There is no premium load on such payments to
the extent applied to reduce indebtedness.
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LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
You may increase Planned Premiums, or pay Additional
Premiums, subject to the following limitations and our right
to limit the amount or frequency of Additional Premiums.
We may require evidence of insurability if any payment of
Additional Premium (including Planned Premium) would
increase the difference between the Death Benefit and the
Accumulation Value. If we are unwilling to accept the risk,
we will refund the increase in premium without interest and
without participation of such amounts in any underlying
investment.
We may also decline, and would return, any Additional
Premium (including Planned Premium) or a portion thereof
that would result in total Premium Payments exceeding the
maximum limitation for life insurance under federal tax
laws.
PREMIUM LOAD; NET PREMIUM PAYMENT
We deduct a "premium load" of 5% from each Premium Payment,
for certain Policy-related state tax and federal income tax
liabilities and a portion of our sales expenses. The Premium
Payment, net of the premium load, is called the "Net Premium
Payment."
RIGHT-TO-EXAMINE PERIOD
If you mail or deliver the Policy for cancellation to the
Administrative Office on or before 10 days (20 to 30 days in
some states) after delivery of the Policy (longer for
Policies issued in replacement of other insurance), (the
"Right-to-Examine Period"), we will refund to you all
Premium Payments.
Any Premium Payments we receive before the end of the
Right-to-Examine Period will be held in the Money Market
Sub-Account, and will be allocated to the Sub-Accounts
designated by the Owner at the end of the Right-to-Examine
Period. If the Policy is returned for cancellation within
the Right-to-Examine Period, we will return any Premium
Payments within seven days, although refund of a Premium
Payment made by check may be delayed until the check clears.
TRANSFERS AND ALLOCATION AMONG ACCOUNTS
ALLOCATION OF NET PREMIUM PAYMENTS
The allocation of Net Premium Payments among the Fixed
Account and Sub-Accounts may be set forth in the
application. You may change it at any time. The amount
allocated to any Sub-Account must be in whole percentages
and result in a Sub-Account Value of at least $100 or a
Fixed Account Value of $2,500. We may waive minimum balance
requirements on the Sub-Accounts.
TRANSFERS
You may make transfers among the Sub-Account and to the
Fixed Account as set forth below, until the Insured reaches
Age 100. Carefully consider current market conditions and
each Sub-Account's investment policies and related risks
before allocating money to the Sub-Accounts.
Within 30 days after each anniversary of the Date of Issue,
you may transfer up to 20% of the Fixed Account Value (as of
that anniversary date) to one or more Sub-Accounts.
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The cumulative amount of transfers from the Fixed Account
within any such 30 day period cannot exceed 20% of the Fixed
Account Value on the most recent Policy Anniversary. Up to
12 transfer requests (a request may involve more than a
single transfer) may be made in any Policy Year without
charge, and any value remaining in the Fixed Account or in a
Sub-Account after a transfer must be at least $100. We may
impose a minimum transfer amount and a charge for each
transfer request in excess of 12 requests in any Policy
Year, and may further limit transfers from the Fixed Account
at any time.
Transfers must be made in proper written form, unless you
have given us written authorization to accept telephone
transactions. Telephone transaction authorization and
procedures are described in COMMUNICATIONS WITH LINCOLN
LIFE, Telephone Transaction Privileges. Written transfer
requests or adequately authenticated telephone transfer
requests received at the Administrative Office by the close
of the New York Stock Exchange (usually 4:00 PM ET) on a
Valuation Day will be effective as of that day. Otherwise,
requests will be effective as of the next Valuation Day.
Any transfer among the Sub-Accounts or to the Fixed Account
will result in the crediting and cancellation of
Accumulation Units based on the Accumulation Unit values
next determined after the Administrative Office receives a
request in proper written form or adequately authenticated
telephone transfer requests. Any transfer made which causes
the remaining value of Accumulation Units for a Sub-Account
or the Fixed Account to be less than $100 may result in
those remaining Accumulation Units being canceled and their
aggregate value reallocated proportionately among the other
Sub-Accounts and the Fixed Account to which Policy values
are then allocated.
OPTIONAL SUB-ACCOUNT ALLOCATION PROGRAMS
You may participate either in Dollar Cost Averaging or
Automatic Rebalancing programs, currently without charge,
but not in both at once.
DOLLAR COST AVERAGING
Dollar Cost Averaging systematically transfers specified
dollar amounts from the Money Market Sub-Account. Transfer
allocations may be made to one or more of the Sub-Accounts
(not the Fixed Account) on a monthly or quarterly basis.
These transfers do not count against the free transfers
available. By making allocations on a regularly scheduled
basis, instead of on a lump sum basis, you may reduce
exposure to market volatility. Dollar Cost Averaging will
not assure a profit or protect against a declining market.
In Dollar Cost Averaging, the value in the Money Market
Sub-Account must be at least $1,000 initially. The minimum
amount that may be allocated is $50 monthly.
An election for Dollar Cost Averaging is effective after the
Administrative Office receives your request in proper
written form or by telephone, if adequately authenticated.
An election is effective within ten business days, but only
if there is sufficient value in the Money Market
Sub-Account. We may waive Dollar Cost Averaging minimum
deposit and transfer requirements.
Dollar Cost Averaging terminates automatically: (1) if the
number of designated transfers has been completed; (2) if
the value in the Money Market Sub-Account is insufficient to
complete the next transfer; (3) within one week after the
Administrative Office receives a request for termination in
proper written form or by telephone, if adequately
authenticated; or (4) if the Policy is surrendered.
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AUTOMATIC REBALANCING
Automatic Rebalancing periodically restores to a
pre-determined level the percentage of Policy value
allocated to each Sub-Account (e.g. 20% Money Market, 50%
Growth, 30% Utilities). The Fixed Account is not subject to
rebalancing. The pre-determined level is the allocation
initially selected on the application, until you change it.
If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts will be subject to
Automatic Rebalancing.
You may select Automatic Rebalancing on a quarterly,
semi-annual or annual basis. Automatic Rebalancing may be
elected, terminated or the allocation may be changed at any
time, effective within ten business days after our
Administrative Office receives your request in proper
written form or by telephone, if adequately authenticated.
POLICY VALUES
The Accumulation Value is the sum of the Fixed Account
Value, Separate Account Value and the Loan Account Value.
The Accumulation Value of the Policy depends on the
performance of the underlying investments. Policy values are
used to pay for Policy fees and expenses, including the Cost
of Insurance. Premium Payments to meet your objectives will
vary based on the investment performance of the underlying
investments. A market downturn, affecting the Sub-Accounts
upon which the Accumulation Value of a particular Policy
depends, may require Additional Premium Payments beyond
those expected (unless the No Lapse Provision requirements
have been satisfied) to maintain the level of coverage or to
avoid lapse of the Policy. We strongly suggest you review
periodic statements to determine if Additional Premium
Payments may be necessary to avoid lapse of the Policy.
We will tell you at least annually the Accumulation Value,
the number of Accumulation Units credited to the Policy,
current Accumulation Unit values, Sub-Account values, the
Fixed Account Value and the Loan Account Value.
ACCUMULATION VALUE
The portion of a Premium Payment, after deduction of 5.0%
for the premium load, is the Net Premium Payment. It is the
Net Premium Payment that is available for allocation to the
Fixed Account or Sub-Accounts.
We credit Net Premium Payments to the Policy as of the end
of the Valuation Period in which it is received at the
Administrative Office. The Valuation Period is the time
between Valuation Days, and a Valuation Day is every day on
which the New York Stock Exchange is open and trading is
unrestricted. Accumulation Units are valued on every
Valuation Day.
The "Accumulation Value" of a Policy is determined by:
(1) multiplying the total number of Variable Accumulation
Units credited to the Policy for each Sub-Account by its
appropriate current Variable Accumulation Unit Value;
(2) if a combination of Sub-Accounts is elected, totaling
the resulting values; and (3) adding any values attributable
to the Fixed Account and the Loan Account. The Accumulation
Value will be affected by Monthly Deductions.
SEPARATE ACCOUNT VALUE
The Separate Account Value is the portion of the
Accumulation Value attributable to the Separate Account.
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VARIABLE ACCUMULATION UNIT VALUE
All or a part of a Net Premium Payment allocated to a
Sub-Account is converted into Variable Accumulation Units by
dividing the amount allocated by the value of the Variable
Accumulation Unit for the Sub-Account next calculated after
it is received at the Administrative Office. The Variable
Accumulation Unit Value for each Sub-Account was initially
established at $10.00. It may increase or decrease from one
Valuation Period to the next. Allocations to Sub-Accounts
are made only as of the end of a Valuation Day.
VARIABLE ACCUMULATION UNITS
The "Variable Accumulation Unit" is a unit of measure used
in the calculation of the value of each Sub-Account. The
Variable Accumulation Unit value for a Sub-Account for a
Valuation Period is determined as follows:
1. The total value of Fund shares held in the Sub-Account
is calculated by multiplying the number of Fund shares
owned by the Sub-Account at the beginning of the
Valuation Period by the net asset value per share of
the Fund at the end of the Valuation Period, and
adding any dividend or other distribution of the Fund
if an ex-dividend date occurs during the Valuation
Period; minus
2. The liabilities of the Sub-Account at the end of the
Valuation Period; such liabilities include daily
charges imposed on the Sub-Account, and may include a
charge or credit with respect to any taxes paid or
reserved for by Lincoln Life that Lincoln Life
determines result from the operations of the Separate
Account; and
3. The result of (1) minus (2) is divided by the number
of Variable Accumulation Units outstanding at the
beginning of the Valuation Period.
The daily charge imposed on a Sub-Account for any Valuation
Period is equal to the daily mortality and expense risk
charge multiplied by the number of calendar days in the
Valuation Period. The amount of Monthly Deduction allocated
to each Sub-Account will result in the cancellation of
Variable Accumulation Units that have an aggregate value on
the date of such deduction equal to the total amount by
which the Sub-Account Value is reduced.
The number of Variable Accumulation Units credited to a
Policy will not be changed by any subsequent change in the
value of a Variable Accumulation Unit. Such value may vary
from Valuation Period to Valuation Period to reflect the
investment experience of the Fund used in a particular
Sub-Account and fees and charges under the Policy.
FIXED ACCOUNT AND LOAN ACCOUNT VALUE
The Fixed Account Value and the Loan Account Value reflect
amounts allocated to our general account through payment of
premiums, through transfers from the Separate Account or
loans and interest charged. We guarantee the Fixed Account
Value.
NET ACCUMULATION VALUE
The "Net Accumulation Value" is the Accumulation Value less
the Loan Account Value. The Net Accumulation Value
represents the net value of the Policy and is the basis for
calculating the Surrender Value.
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FUNDS
Each of the Sub-Accounts of the Separate Acount is invested
solely in the shares of one of the Funds available under the
Policies. Each of the Funds is a series of one of sixteen
Massachusetts or Delaware business trusts or Maryland
corporations, collectively referred to below as the
"Trusts." Each such trust or corporation is registered as an
open-end management investment company under the 1940 Act.
All of the Funds except for the Delaware Group REIT Series
and the Delaware Group Emerging Market Series are
diversified under the 1940 Act.
Listed below are the Trusts, their investment advisers and
distributors, and the Funds within each that are available
under the Policies:
AIM VARIABLE INSURANCE FUNDS, INC., managed by A I M
Advisors, Inc., and distributed by A I M Distributors Inc.,
11 Greenway Plaza, Suite 100, Houston, TX 77046-1173
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
AMERICAN VARIABLE INSURANCE SERIES, managed by Capital
Research and Management Company and distributed by American
Funds Distributors, Inc., 333 South Hope Street, Los
Angeles, CA 90071
AVIS Global Small Capitalization Fund -- Class 2
AVIS Growth Fund -- Class 2
AVIS Growth-Income Fund -- Class 2
BARON CAPITAL FUNDS TRUST, managed by BAMCO, Inc. and
distributed by Baron Capital Inc. 767 Fifth Avenue, New
York, NY 10153
Baron Capital Asset Fund -- Insurance Shares
BT INSURANCE FUNDS TRUST, managed by Bankers Trust Company,
130 Liberty Street (One Bankers Trust Plaza), New York, NY
10006 and distributed by First Data Distributors, Inc., 4400
Computer Drive, Westborough, MA 01581
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
DELAWARE GROUP PREMIUM FUND, INC., managed by Delaware
Management Company, Inc., One Commerce Square, Philadelphia,
PA 19103 and for International and Emerging Markets,
Delaware International Advisors, Ltd., 80 Cheapside, London,
England ECV2 6EE, and distributed by Delaware Distributors,
L.P., 1818 Market Street, Philadelphia, PA 19103
Delchester Series
Devon Series
Emerging Markets Series
REIT Series
Small Cap Value Series
Trend Series
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FIDELITY VARIABLE INSURANCE PRODUCTS FUND II, AND VARIABLE
INSURANCE PRODUCTS FUND III, managed by Fidelity
Management & Research Company and distributed by Fidelity
Distributors Corporation, 82 Devonshire Street, Boston, MA
02109
Fidelity VIP II Contrafund Portfolio -- Service Class
Fidelity VIP III Growth Opportunities Portfolio --
Service Class
JANUS ASPEN SERIES, managed by Janus Capital, 100 Fillmore
St. Denver, CO 80206-4928, and self-distributed.
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Worldwide Growth Portfolio
LINCOLN NATIONAL FUNDS, managed by Lincoln Investment
Management, Inc., 200 East Berry Street, Fort Wayne IN
46802, and distributed by Lincoln Financial Advisors, Inc.,
350 Church Street, Hartford CT 06103. Sub-advisors are also
noted.
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc. (Sub-advised by Janus
Capital Corp.)
LN Equity-Income Fund, Inc. (Sub-advised by Fidelity
Management Trust Co.)
LN Global Asset Allocation Fund, Inc. (Sub-advised by
Putnam Investment Management, Inc.)
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc. (Sub-advised by Vantage
Investment Advisors, Inc.)
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST, managed
by Massachusetts Financial Services Company and distributed
by MFS Fund Distributors, Inc., 500 Boylston Street, Boston,
MA 02116
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST, managed and
distributed by NB Management Incorporated, 605 Third Avenue,
2nd Floor, New York, NY 10158-0006
NB AMT Mid-Cap Growth Portfolio
NB AMT Partners Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND, managed by
Templeton Investment Counsel, Inc. and its Templeton and
Franklin affiliates and distributed by Franklin/ Templeton
Distributors, Inc., 100 Fountain Parkway, St. Petersburg, FL
33716-1205
Templeton International Fund -- Class 2
Templeton Stock Fund -- Class 2
The investment advisory fees charged the Funds by their
advisers are shown on page 6 of this Prospectus.
Below is a brief description of the investment objective and
program of each Fund. There can be no assurance that any of
the stated investment objectives will be achieved.
AIM V.I. GROWTH FUND (Large Cap Stocks): Seeks growth of
capital primarily by investing in seasoned and better
capitalized companies considered to have strong earnings
momentum. Current income will not be a criterion of
investment selection, and any such income should be
considered incidental.
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AIM V.I. INTERNATIONAL EQUITY FUND (Large Cap Stocks --
International): Seeks to provide long-term growth of capital
by investing in a diversified portfolio of international
equity securities whose issuers are considered to have
strong earnings momentum. The fund seeks to meet this
objective by investing at least 70% of its total assets in
marketable equity securities of foreign companies that are
listed on a recognized foreign securities exchange or traded
in a foreign over-the-counter market.
AIM V.I. VALUE FUND (Large Cap Stocks): Seeks to achieve
long-term growth of capital by investing primarily in equity
securities judged by its investment advisor to be
undervalued relative to the investment advisor's appraisal
of current or projected earnings of the companies issuing
the securities, or relative to current market values of
assets owned by the companies issuing the securities or
relative to the equity markets generally. Income is a
secondary objective and would be satisfied principally from
the interest (interest and dividends) generated by the
common stocks, convertible bonds and convertible preferred
stocks that make up the Fund's portfolio.
AVIS-GLOBAL SMALL CAPITALIZATION FUND (International Global
Stocks): The fund seeks to make your investment grow over
time by investing primarily in stocks of smaller companies
located around the world that typically have market
capitalizations of $50 million to $1.2 billion. The fund is
designed for investors seeking capital appreciation through
stocks. Investors in the fund should have a long-term
perspective and be able to tolerate potentially wide price
fluctuations.
AVIS-GROWTH FUND (Large Cap U.S. Stocks): The fund seeks to
make your investment grow by investing primarily in common
stocks of companies that appear to offer superior
opportunities for growth of capital. The fund is designed
for investors seeking capital appreciation through stocks.
Investors in the fund should have a long-term perspective
and be able to tolerate potentially wide price fluctuations.
AVIS-GROWTH-INCOME FUND (Large Cap U.S. Stocks): The fund
seeks to make your investment grow and provide you with
income over time by investing primarily in common stocks or
other securities which demonstrate the potential for
appreciation and/or dividends. The fund is designed for
investors seeking both capital appreciation and income.
BARON CAPITAL ASSET FUND -- INSURANCE SHARES (Small/Medium
Cap U.S. Stocks): Seeks capital appreciation through
investments in securities of small sized companies with
market capitalizations of approximately $100 million to $1.5
billion, and medium sized companies with market
capitalizations of $1.5 billion to $5 billion, with
undervalued assets or favorable growth prospects.
BT EAFE-REGISTERED TRADEMARK- FUND (Large Cap Stocks --
International): Seeks to replicate as closely as possible
(before the deduction of Expenses) the total return of the
Europe, Australia, Far East Index (the
EAFE-Registered Trademark- Index) , a
capitalization-weighted index containing approximately 1,100
equity securities of companies located outside the United
States.
BT EQUITY 500 INDEX FUND (Large Cap U.S. Stocks): Seeks to
replicate as closely as possible the performance of the
Standard & Poor's 500 Composite Stock Price Index, before
the deduction of Fund expenses.
BT SMALL CAP INDEX FUND (Small/Medium Cap U.S. Stocks):
Seeks to replicate as closely as possible (before the
deduction of Expenses) the total return of the Russell 2000
Small Stock Index (the "Russell 2000"), an index consisting
of approximately 2,000 small-capitalization common stocks.
DELAWARE GROUP DELCHESTER SERIES (High Yield Bonds): Seeks
as high a current income as possible by investing in rated
and unrated corporate bonds (including high yield
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bonds commonly known as junk bonds), U. S. government
securities and commercial paper. An investment in this
Series may involve greater risks than an investment in a
portfolio comprised primarily of investment grade bonds.
DELAWARE GROUP DEVON SERIES (Large Cap U.S. Stocks): Seeks
current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on
common stocks that the investment manager believes have the
potential for above-average dividend increases over time.
Under normal circumstances, the Series will invest at least
65% of its total assets in dividend paying common stocks.
DELAWARE GROUP EMERGING MARKETS SERIES (Emerging Markets
Stocks): Seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located
or operating in emerging counties. The Series is an
international fund. As such, under normal market conditions,
at least 65% of the Series' assets will be invested in
equity securities of issuers organized or having a majority
of their assets or deriving a majority of their operating
income in at least three countries that are considered to be
emerging or developing.
DELAWARE GROUP REIT SERIES (Small/Medium Cap U.S.
Stocks/Specialty): Seeks to achieve maximum long-term total
return. Capital appreciation is a secondary objective. It
seeks to achieve its objectives by investing in securities
of companies primarily engaged in the real estate industry.
DELAWARE GROUP SMALL CAP VALUE SERIES (Small/Medium Cap U.S.
Stocks): Seeks capital appreciation by investing primarily
in small cap common stocks whose market value appears low
relative to their underlying value or future earnings and
growth potential. Emphasis will also be placed on securities
of companies that may be temporarily out of favor or whose
value is not yet recognized by the market.
DELAWARE GROUP TREND SERIES (Small/Medium Cap U.S. Stocks):
Seeks long-term capital appreciation by investing primarily
in small-cap common stocks and convertible securities of
emerging and other growth-oriented companies. These
securities will have been judged to be responsive to changes
in the marketplace and to have fundamental characteristics
to support growth. Income is not an objective.
FIDELITY VIP II CONTRAFUND PORTFOLIO -- SERVICE CLASS (Large
Cap U.S. Stocks): Seeks capital appreciation by investing
primarily in securities of companies whose value the advisor
believes is not fully recognized by the public.
FIDELITY VIP III GROWTH OPPORTUNITIES PORTFOLIO -- SERVICE
CLASS (Large Cap U.S. Stocks): Seeks capital growth by
investing primarily in common stocks.
JANUS ASPEN SERIES BALANCED PORTFOLIO (Balanced): Seeks long
term growth of capital, consistent with the preservation of
capital and balanced by current income. The Portfolio
normally invests 40-60% of its assets in securities selected
primarily for their growth potential and 40-60% of its
assets in securities selected primarily for their income
potential.
JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO (Large Cap
Stocks -- Global): Seeks long-term growth of capital in a
manner consistent with the preservation of capital by
investing primarily in common stocks of foreign and domestic
insurers.
LINCOLN NATIONAL BOND FUND (Investment Grade Bonds): Seeks
maximum current income consistent with prudent investment
strategy. The fund invests primarily in medium-and long-term
corporate and government bonds.
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LINCOLN NATIONAL CAPITAL APPRECIATION FUND (Large Cap U.S.
Stocks): Seeks long-term growth of capital in a manner
consistent with preservation of capital. The fund invests in
a large number of companies of all sizes if the companies
are competing well and if their products and services are in
high demand. It may also buy some money market securities
and bonds, including junk (high risk) bonds.
LINCOLN NATIONAL EQUITY-INCOME FUND (Large Cap U.S. Stocks):
Seeks to achieve reasonable income by investing primarily in
income-producing equity securities. The fund invests mostly
in high-yielding bonds (including junk bonds)
LINCOLN NATIONAL GLOBAL ASSET ALLOCATION FUND (Balanced --
International): Seeks long-term total return consistent with
preservation of capital. The fund allocates its assets among
several categories of equity and fixed-income securities,
both of U.S. and foreign insurers.
LINCOLN NATIONAL MONEY MARKET FUND (Money Market): Seeks
maximum current income consistent with the preservation of
capital. The fund invests in short term obligations issued
by U.S. corporations, the U.S. government, and
federally-chartered banks and U.S. branches of foreign
banks.
LINCOLN NATIONAL SOCIAL AWARENESS FUND (Large Cap U.S.
Stock/Specialty): Seeks to achieve long-term capital
appreciation, by investing in stocks of established
companies which adhere to certain specific social criteria.
MFS EMERGING GROWTH SERIES (Small/Medium Cap U.S. Stocks):
Seeks to provide long-term growth of capital.
MFS TOTAL RETURN SERIES (Balanced): Seeks primarily to
provide above-average income (compared to a portfolio
invested entirely in equity securities) consistent with the
prudent employment of capital, and secondarily to provide a
reasonable opportunity for growth of capital and income.
MFS UTILITIES SERIES (Small/Medium Cap U.S.
Stocks/Specialty): Seeks capital growth and current income
(income above that available from a portfolio invested
entirely in equity securities).
NB AMT MID-CAP GROWTH PORTFOLIO (Small/Medium Cap U.S.
Stocks): Seeks growth of capital through an investment
approach that is designed to increase capital with
reasonable risk. It invests mainly in common stocks of
mid-to-large capitalization companies.
NB AMT PARTNERS PORTFOLIO (Small/Medium Cap U.S. Stocks):
Seeks growth of capital and invests mainly in common stocks
of mid-to-large capitalization companies using the
value-oriented investment approach.
TEMPLETON INTERNATIONAL FUND -- CLASS 2 (Large Cap
Stocks -- International): Seeks long-term capital growth. It
invests primarily in stocks of companies outside the United
States, including emerging markets. Any income realized will
be incidental.
TEMPLETON STOCK FUND -- CLASS 2 (Large Cap Stocks --
Global): Seeks long-term capital growth. Invests primarily
in equity securities issued by companies, large and small,
in various nations throughout the world, including the
United States and emerging markets.
Several of the Funds may invest in non-investment grade,
high-yield, high-risk debt securities (commonly referred to
as "junk bonds"), as detailed in the individual Fund
Prospectuses. Please review the prospectuses carefully.
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There is no assurance that the investment objective of any
of the Funds will be met. You assume all of the investment
performance risk for the Sub-Accounts you select. There is
investment performance risk in each of the Sub-Accounts,
although the amount of such risk varies significantly among
the Sub-Accounts. Read each Fund's prospectus carefully and
understand the risks before making or changing investment
choices. Additional Funds may, from time to time, be made
available as underlying investments. The right to select
among Funds will be limited by terms and conditions we
impose (See "Allocation of Net Premium Payments").
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Separate Account or if, in our judgment,
further investment in such shares should cease to be
appropriate in view of the purpose of the Separate Account
or in view of legal, regulatory or federal income tax
restrictions, we may substitute shares of another Fund.
There will be no substitution of securities in any
Sub-Account without prior approval of the Commission.
VOTING RIGHTS
We will vote the shares of each Fund held in the Separate
Account at special meetings of the shareholders of the
particular Fund in accordance with instructions received by
the Administrative Office in proper written form from
persons having a voting interest in the Separate Account.
Lincoln Life will vote shares for which it has not received
instructions in the same proportion as it votes shares in
the Separate Account for which it has received instructions.
The Funds do not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will
be determined as of a date to be chosen by the appropriate
Fund not more than sixty (60) days prior to the meeting of
the particular Fund. Voting instructions will be solicited
by written communication at least fourteen (14) days prior
to the meeting.
FUND PARTICIPATION AGREEMENTS
Lincoln Life has entered into agreements with the various
Trusts and their advisers or distributors under which
Lincoln Life makes the Funds available under the Policies
and performs certain administrative services. In some cases,
the advisers or distributors may compensate Lincoln Life at
annual rates of between .10% and .25% of assets in a
particular Fund attributable to the Policies.
CHARGES AND FEES
We deduct charges in connection with the Policy to
compensate us for providing the Policy's insurance benefit,
administering the Policy, assuming certain risks under the
Policy and for sales-related expenses we incur.
The nature and amount of these charges are as follows:
DEDUCTIONS MADE MONTHLY
We make various expense deductions monthly. The Monthly
Deductions, including administrative expenses, the Cost of
Insurance Charges, and charges for supplemental riders or
benefits, if any, are deducted proportionately from the Net
Accumulation Value of each underlying investment subject to
the charge. For Sub-Accounts, Variable Accumulation Units
are canceled and the value of the canceled Units withdrawn
in the same proportion as their respective values have to
the Net Accumulation Value. The
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Monthly Deductions are made on the "Monthly Anniversary
Day", the Date of Issue and the same day of each month
thereafter, or if there is no such date in a given month,
then the first Valuation Day of the next month. If the day
that would otherwise be a Monthly Anniversary Day is not a
Valuation Day, then the Monthly Anniversary Day is the next
Valuation Day.
If the Net Accumulation Value is insufficient to cover the
current Monthly Deduction, you have a 61-day period ("Grace
Period") to make a payment sufficient to cover that
deduction. (See Lapse and Reinstatement: Lapse of a Policy)
If the Insured attains Age 100 with the Policy still in
effect, no further Monthly Deductions will be made, the
Separate Account Value will be transferred to the Fixed
Account, and Policy will then remain in force until
surrender or the Insured's death.
ADMINISTRATIVE EXPENSES
There is a flat dollar Monthly Deduction of $10.
In addition, during the first two Policy Years, and for 24
months after any increase in Specified Amount, there is a
monthly charge per $1000 of Specified Amount, or increase
therein, based on the Insured's age nearest birthday at the
Policy's issue date and the date of any increase. That
charge is $0.0283 for ages 15 through 30 (or $2.83 per month
for a Policy with a $100,000 Specified Amount) and rises
gradually to $0.07 for age 40, $0.12 for age 52, $0.2075 for
age 64, $0.32 for age 76, and $0.4242 for ages 81 and older.
A complete table is in Appendix 1.
These charges compensate us for administrative expenses
associated with Policy issue and ongoing Policy maintenance
including premium billing and collection, policy value
calculation, confirmations, periodic reports and other
similar matters.
COST OF INSURANCE CHARGE
The Cost of Insurance is the portion of the Monthly
Deduction designed to compensate us for the anticipated cost
of paying Death Benefits in excess of the Accumulation
Value, not including riders, supplementary benefits or
monthly expense charges.
The Cost of Insurance charge depends on the Age, policy
duration, underwriting category and gender (in accordance
with state law) of the Insured and the current Net Amount at
Risk. The Net Amount at Risk is the Death Benefit minus the
Accumulation Value. The rate on which the Monthly Deduction
for the Cost of Insurance is based will generally increase
as the Insured ages. The Cost of Insurance charge could
decline if the Net Amount at Risk drops relatively faster
than the Cost of Insurance Rate increases.
The Cost of Insurance charge is determined by dividing the
Death Benefit at the beginning of the Policy month by
1.0032737 (the monthly equivalent of an annual rate of 4%),
subtracting the Accumulation Value at the beginning of the
Policy month, and multiplying the result (the "Net Amount at
Risk") by the applicable Cost of Insurance Rate as
determined by us. The Guaranteed Maximum Cost of Insurance
Rates are in Appendix 2.
MORTALITY AND EXPENSE RISK CHARGE
Lincoln Life deducts a daily mortality and expense risk
charge as a percentage of the assets of the Separate
Account. The mortality risk assumed is that insureds may not
live as long as estimated, and therefore, a greater amount
of death benefit will be payable. The expense risk assumed
is that expenses incurred in issuing and
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administering the policies will be greater than estimated.
The mortality and expense risk charge is guaranteed at an
annual rate of 0.90% in Policy Years 1-19 and 0.20% in
Policy Years 20 and beyond.
SURRENDER CHARGES
A generally declining "Surrender Charge" may apply if the
Policy is totally surrendered or lapses during the first
fifteen years following the Date of Issue or the first
fifteen years following an increase in Specified Amount. The
Surrender Charge varies by Age of the Insured, the number of
years since the Date of Issue, and Specified Amount.
The charge is in part a deferred sales charge and in part a
recovery of certain first year administrative costs. The
maximum Surrender Charge is included in each Policy and is
in compliance with each state's nonforfeiture law. Examples
of the Surrender Charge can be seen in Appendix 3.
The surrender charge under a Policy is proportional to the
face amount of the Policy. As a percentage of face amount,
it is higher for older than for younger issue ages. The
surrender charge cannot exceed Policy value. All surrender
charges decline to zero over the 15 years following issuance
of the Policy. See, for example, the illustrations in
Appendix 5.
If the Specified Amount is increased, a new Surrender Charge
will be applicable, in addition to any existing Surrender
Charge. The Surrender Charge applicable to the increase
would be equal to the Surrender Charge on a new Policy whose
Specified Amount was equal to the amount of the increase.
Supplemental Policy Specifications will be sent to the Owner
upon an increase in Specified Amount reflecting the maximum
additional Surrender Charge in the Table of Surrender
Charges. The minimum allowable increase in Specified Amount
is $1,000. We may change this at any time.
If the Specified Amount is decreased while the Surrender
Charge applies, the Surrender Charge will remain the same.
No Surrender Charge is imposed on a partial surrender, but
an administrative fee of $25 (not to exceed 2% of the amount
surrendered) is imposed, allocated pro-rata among the
Sub-Accounts from which the partial surrender proceeds are
taken.
Any surrender may result in tax implications. SEE TAX
MATTERS
Based on its actuarial determination, we do not anticipate
that the Surrender Charge, together with the portion of the
premium load attributable to sales expense, will cover all
sales and administrative expenses we will incur in
connection with the Policy. Any such shortfall, including
but not limited to payment of sales and distribution
expenses, would be available for recovery from our general
account, which supports insurance and annuity obligations.
REDUCTION OF CHARGES -- PURCHASES ON A CASE BASIS; EXCHANGES
This Policy is available for purchases by corporations and
other groups or sponsoring organizations on a Case basis. We
reserve the right to reduce premium loads or any other
charges on certain cases, where it is expected that the
amount or nature of such cases will result in savings of
sales, underwriting, administrative or other costs.
Eligibility for these reductions and the amount of
reductions will be determined by a number of factors,
including but not limited to, the number of lives to be
insured, the total premiums expected to be paid, total
assets under management for the policy owner, the nature of
the relationship among the insured individuals, the purpose
for
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<PAGE>
which the Policies are being purchased, the expected
persistency of the individual policies and any other
circumstances which we believe to be relevant to the
expected reduction of expenses.
We also reserve the right to reduce premium charges or any
other charges under a Policy where it is expected that the
issuance of the Policy will result in savings of sales,
underwriting, administrative or other costs. In particular,
we would expect such savings to apply, and our expenses to
be reduced, whenever a Policy is issued in exchange for
another life insurance policy issued or administered by us,
or issued by a company which controls or is controlled by us
or is under common ownership and control with us.
Some of these reductions may be guaranteed, and others may
be subject to withdrawal or modification by us. In any
event, all such reductions as applicable will be uniformly
applied, and they will not be unfairly discriminatory
against any person, including the affected Policy Owners
funded by the Separate Account.
TRANSACTION FEE FOR EXCESS TRANSFERS
We reserve the right to impose a charge for each transfer
request in excess of 12 in any Policy Year. A single
transfer request, either in writing or by telephone, may
consist of multiple transactions.
DEATH BENEFITS
The Death Benefit Proceeds is the amount payable to the
Beneficiary upon the death of the Insured, in accordance
with the Death Benefit Option elected. Loans (if any) and
overdue deductions are deducted from the Death Benefit
Proceeds prior to payment.
The applicant must select the Specified Amount of the Death
Benefit, which may not be less than $100,000, and the Death
Benefit Option. The two Death Benefit Options are described
below. The applicant must consider a number of factors in
selecting the Specified Amount, including the amount of
proceeds required when the Insured dies and the Owner's
ability to make Premium Payments. The ability of the Owner
to support the Policy, particularly in later years, is an
important factor in selecting between the Death Benefit
Options, because the greater the Net Amount at Risk at any
time, the more that will be deducted each month from the
value of the Policy to pay the Cost of Insurance.
DEATH BENEFIT OPTIONS
Two different Death Benefit Options are available under the
Policy. The Death Benefit Proceeds payable under the Policy
is the greater of (a) the Corridor Death Benefit or (b) the
amount determined under the Death Benefit Option in effect
on the date of the Insured's Death, less any indebtedness,
as applicable, under the Policy. In the case of Death
Benefit Option 1, the Specified Amount is reduced by the
amount of any partial surrender. The "Corridor Death
Benefit" is the applicable percentage (the "Corridor
Percentage") of the Accumulation Value (rather than by
reference to the Specified Amount) required to maintain the
Policy as a "life insurance contract" for Federal income tax
purposes. The Corridor Percentage is 250% through the time
the insured reaches Age 40 and decreases in accordance with
the table in Appendix 4 to 100% when the Insured reaches Age
95.
Death Benefit Option 1 provides Death Benefit Proceeds equal
to the Specified Amount (a minimum of $100,000). If
Option 1 is selected, the Policy pays level Death Benefit
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Proceeds, less indebtedness and any partial surrenders,
unless the Minimum Death Benefit exceeds the Specified
Amount. (See DEATH BENEFITS, Federal Income Tax Definition
of Life Insurance).
Death Benefit Option 2 provides Death Benefit Proceeds equal
to the sum of the Specified Amount plus the Net Accumulation
Value as of the date of the Insured's death, less loan
interest accrued but not yet charged. If Option 2 is
selected, the Death Benefit Proceeds increase or decrease
over time, depending on the amount of premium paid and the
investment performance of the underlying Sub-Accounts.
If for any reason the applicant fails to affirmatively elect
a particular Death Benefit Option, Death Benefit Option 1
shall apply until changed as provided below.
Owners who prefer insurance coverage that generally does not
vary in amount and generally has lower Cost of Insurance
Charges should elect Death Benefit Option 1. Owners who
prefer to have favorable investment experience reflected in
increased insurance coverage should select Death Benefit
Option 2. Under Option 1, any Surrender Value at the time of
the Insured's Death will revert to Lincoln Life.
CHANGES IN DEATH BENEFIT OPTIONS AND SPECIFIED AMOUNT
All requests for changes between Death Benefit Options and
changes in the Specified Amount must be submitted in proper
written form to the Administrative Office. The minimum
increase in Specified Amount currently permitted is $1,000.
If requested, a supplemental application and evidence of
insurability must also be submitted to us.
In a change from Death Benefit Option 1 to Death Benefit
Option 2, the Specified Amount shall be reduced so it
thereafter equals (a) the amount payable under the Death
Benefit Option in effect immediately before the change,
minus (b) the Accumulation Value immediately before the
change. In a change from Death Benefit Option 2 to Death
Benefit Option 1, the Specified Amount shall be increased so
that it thereafter equals the amount payable under the Death
Benefit Option in effect immediately before the change.
Any reductions in Specified Amount will be made against the
initial Specified Amount and any later increase in the
Specified Amount on a last in, first out basis. Any increase
in the Specified Amount will increase the amount of the
Surrender Charge applicable to the Policy.
We may decline any request for a change between Death
Benefit Options or an increase in the Specified Amount. We
may also decline any request for change of the Death Benefit
Option or reduction of the Specified Amount if, after the
change, the Specified Amount would be less than the minimum
Specified Amount or would reduce the Specified Amount below
the level required to maintain the Policy as life insurance
for purposes of Federal income tax law.
Any change is effective on the first Monthly Anniversary Day
on or after the date of approval of the request by Lincoln
Life, unless the Monthly Deduction Amount would increase as
a result of the change. In that case, the change is
effective on the first Monthly Anniversary Day on which the
Accumulation Value is equal to or greater than the Monthly
Deduction Amount, as increased.
FEDERAL INCOME TAX DEFINITION OF LIFE INSURANCE
The amount of the Death Benefit must satisfy certain
requirements under the Code if the policy is to qualify as
insurance for federal income tax purposes. The amount of the
Death Benefit Proceeds required to be paid under the Code to
maintain the Policy as life
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insurance under each of the Death Benefit Options (see
INSURANCE COVERAGE PROVISIONS, Death Benefit) is equal to
the product of the Accumulation Value and the applicable
Corridor Percentage. A table of Corridor Percentages is in
Appendix 4.
NOTICE OF DEATH OF INSURED
Due Proof of Death must be furnished to us at our
Administrative Office as soon as reasonably practical after
the death of the Insured. "Due Proof of Death" must be in
proper written form and includes a certified copy of an
official death certificate, a certified copy of a decree of
a court of competent jurisdiction as to the finding of
death, or any other proof of death satisfactory to us.
PAYMENT OF DEATH BENEFIT PROCEEDS
The Death Benefit Proceeds under the Policy will ordinarily
be paid within seven days, if in a lump sum, or in
accordance with any Settlement Option selected by the Owner
or the Beneficiary, after receipt at the Administrative
Office of Due Proof of Death of the Insured. SEE SETTLEMENT
OPTIONS. The amount of the Death Benefit Proceeds under
Option 2 will be determined as of the date of the Insured's
death. Payment of the Death Benefit Proceeds may be delayed
if the Policy is contested or if Separate Account values
cannot be determined.
SETTLEMENT OPTIONS
There are several ways in which the Beneficiary may receive
the Death Benefit Proceeds, or in which the owner may choose
to receive payments upon surrender of the Policy.
You may elect or change a Settlement Option while the
insured is alive. If you have not irrevocably selected a
Settlement Option, the Beneficiary may within 90 days after
the Insured dies. If no Settlement Option is selected, the
Death Benefit Proceeds will be paid in a lump sum.
If the Policy is assigned as collateral security, we will
pay any amount due the assignee in a lump sum. Any remaining
Death Benefit Proceeds will be paid as elected.
Our Administrative Office must receive your request to
elect, change, or revoke a Settlement Option in proper
written form before payment of the lump sum or under any
Settlement Option. The first payment under the Settlement
Option selected will become payable on the date proceeds are
settled under the option. We will make subsequent payments
on the first day of each month. Once payments have begun,
the Policy cannot be surrendered and neither the payee nor
the Settlement Option may be changed.
There are at least four Settlement Options:
The first Settlement Option is an annuity for the
lifetime of the payee.
The second Settlement Option is an annuity for the
lifetime of the payee, with monthly payments guaranteed
for 60, 120, 180, or 240 months.
The third Settlement Option, provides for monthly
payments for a stated number of years, at least five but
no more than thirty.
Under the fourth Settlement Option, we pay at least 3%
interest annually on the sum left on deposit, and pays
the amount on deposit on the payee's death.
Any other Settlement Option we offer at that time may also
be selected.
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POLICY LIQUIDITY
The accumulated value of the Policy is available for loans
or withdrawals. Subject to certain limitations, you may
borrow against the Surrender Value of the Policy, may make a
partial surrender of some of the Surrender Value of the
Policy and may fully surrender the Policy for its Surrender
Value.
POLICY LOANS
You may at any time borrow in the aggregate up to 100% of
the Surrender Value at the time a Policy Loan is made. We
may, however, limit the amount of the loan so that the total
Policy indebtedness will not exceed 90% of the amount of the
Accumulation Value less any Surrender Charge that would be
imposed on a full surrender. You must execute a loan
agreement and assign the Policy to us free of any other
assignments. The Loan Account is the account in which Policy
indebtedness (outstanding loans and interest) accrues once
it is transferred out of the Fixed Account or Sub-Accounts.
Interest on Policy Loans accrues at an annual rate of 8%,
and is payable once a year in arrears on each Policy
Anniversary, or earlier upon full surrender or other payment
of proceeds of a Policy.
The amount of a loan, plus any accrued but unpaid interest,
is added to the outstanding Policy Loan balance. Unless paid
before due, any loan interest due will be transferred
proportionately from the values in the Fixed Account and
each Sub-Account, and treated as an additional Policy Loan,
and added to the Loan Account Value.
We credit interest on the Loan Account Value of 7% per year
so the net cost of a Policy Loan is 1%.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, transfers from each for loans and
loan interest charged will be made in proportion to the
assets in each Sub-Account at that time, unless you instruct
our Administrative Office otherwise in proper written form.
Repayments on the loan and interest credited on the Loan
Account Value will be allocated according to the most recent
Premium Payment allocation at the time of the repayment.
A Policy Loan affects Death Benefit Proceeds payable and the
Accumulation Value. The longer a Policy Loan is outstanding,
the greater the effect is likely to be. An outstanding
Policy Loan reduces the amount of assets invested. Depending
on the investment results of the Sub-Accounts, the effect
could be favorable or unfavorable.
If at any time the total indebtedness against the Policy,
including interest accrued but not due, equals or exceeds
the then current Accumulation Value less Surrender Charges,
the Policy will terminate without value subject to the
conditions in the Grace Period Provision, unless the No
Lapse Provision is in effect. (SEE LAPSE AND REINSTATEMENT,
Lapse of a Policy)
If a Policy lapses while a loan is outstanding, adverse tax
consequences may result.
PARTIAL SURRENDER
You may make a partial surrender at any time while the
Insured is alive by request to the Administrative Office in
proper written form or by telephone, if you have authorized
telephone transactions. A $25 transaction fee (not to exceed
2% of the amount
28
<PAGE>
surrendered) is charged for each partial surrender. Total
partial surrenders may not exceed 90% of the Surrender Value
of the Policy. Each partial surrender may not be less than
$500. Partial surrenders are subject to other limitations as
described below.
Partial surrenders may reduce the Specified Amount and, in
each case, reduce the Death Benefit Proceeds. To the extent
that a requested partial surrender would cause the Specified
Amount to be less than $100,000, we will not permit the
partial surrender. In addition, if following a partial
surrender and the corresponding decrease in the Specified
Amount, the Policy would not comply with the maximum premium
limitations required by federal tax law, the surrender may
be limited to the extent necessary to meet the federal tax
law requirements.
The effect of partial surrenders on the Death Benefit
Proceeds depends on the Death Benefit Option elected under
the Policy. If Death Benefit Option 1 has been elected, a
partial surrender would reduce the Accumulation Value and
the Specified Amount. The reduction in the Specified Amount,
which would reduce any past increases on a last in, first
out basis, reduces the amount of the Death Benefit Proceeds.
If Death Benefit Option 2 has been elected, a partial
surrender would reduce the Accumulation Value, but would not
reduce the Specified Amount. The reduction in the
Accumulation Value reduces the amount of the Death Benefit
Proceeds.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, surrenders from each will be made
in proportion to the assets in each Sub-Account at the time
of the surrender, unless you instruct our Administrative
Office otherwise in proper written form. We may decline any
request for a partial surrender.
SURRENDER OF THE POLICY
You may surrender the Policy at any time. On surrender of
the Policy, we will pay you, or your assignee, the Surrender
Value next computed after our Administrative Office receives
the request in proper written form. Coverage under the
Policy will then automatically terminate.
SURRENDER VALUE
The "Surrender Value" of a Policy is the amount you can
receive in a lump sum by surrendering the Policy. The
Surrender Value is the Net Accumulation Value, less any loan
interest accrued, but not yet charged, less the Surrender
Charge (SEE CHARGES AND FEES, Surrender Charge). All or part
of the Surrender Value may be applied to one or more of the
Settlement Options. Surrender Values are illustrated in
Appendix 5.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any of the
Sub-Accounts will be made within seven days. We may defer
payment or transfer from the Fixed Account up to six months.
If we do so, interest will accrue and be paid as required by
law from the date the recipient would otherwise have been
entitled to receive the payment.
ASSIGNMENT; CHANGE OF OWNERSHIP
While the Insured is living, you may assign your rights in
the Policy, including the right to change the beneficiary
designation, in proper written form, signed by you and
recorded at the Administrative Office. No assignment will
affect, or prejudice us as to, any payment we make or action
we take before it was recorded. We are not responsible
29
<PAGE>
for any assignment not submitted for recording, or for the
sufficiency or validity of any assignment. Any assignment is
subject to any indebtedness owed us when the assignment is
recorded and any interest later accrued on such
indebtedness.
Once recorded, the assignment remains effective until
released by the assignee in proper written form. While it is
effective, the assignee must give written consent for you to
take any action with respect to the Policy.
So long as the Insured is living, you may name a new Owner
by recording a change in ownership in proper written form at
the Administrative Office. On recordation, the change will
be effective, as of the date of execution of the document of
transfer or, if there is no such date, the date of
recordation. No such change of ownership will affect, or
prejudice us as to, any payment we made or action we took
before it was recorded. We may require you to submit the
Policy for endorsement before making a change.
LAPSE AND REINSTATEMENT
LAPSE OF A POLICY
Except as provided by the No Lapse Provision, if at any time
the Net Accumulation Value is insufficient to pay the
Monthly Deduction, or if the amount of indebtedness exceeds
the Accumulation Value less the Surrender Charge(s), the
Policy is subject to lapse and automatic termination of all
Policy coverage. The Net Accumulation Value may be
insufficient (1) because it has been exhausted by earlier
deductions, (2) due to poor investment performance, (3) due
to partial surrenders, (4) due to indebtedness for policy
loans, or (5) because of some combination of the foregoing
factors.
If we have not received a Premium Payment or payment of
indebtedness on policy loans necessary so that the Net
Accumulation Value is sufficient to pay the Monthly
Deduction Amount on a Monthly Anniversary Day, we will send
a written notice to you and any assignee of record. The
notice will state the amount of the Premium Payment or
payment of indebtedness on Policy Loans necessary such that
the Net Accumulation Value is at least equal to two times
the Monthly Deduction Amount. If the minimum required amount
set forth in the notice is not paid to us on or before the
day that is the later of (a) 31 days after the date of
mailing of the notice, and (b) 61 days after the date of the
Monthly Anniversary Day with respect to which such notice
was sent (together, the "Grace Period"), then the Policy
shall terminate and all coverage under the Policy shall
lapse without value.
NO LAPSE PROVISION
The No Lapse Premium is the cumulative premium required to
have been paid by each Monthly Anniversary Day to prevent
the Policy from lapsing during the first ten Policy Years.
If this Policy has a No Lapse Premium shown on the
specifications, this Policy will not lapse during the first
ten Policy Years if, at each Monthly Anniversary Day, the
sum of all Premium Payments less any policy loans (including
any accrued loan interest) and partial surrenders is at
least equal to the sum of the No Lapse Premiums (as
indicated in the Policy Specifications) due since the Date
of Issue of the Policy. A Grace Period will be allotted
after each Monthly Anniversary Day on which insufficient
premiums have been paid (see preceding paragraph). The
payment of sufficient additional premiums during the Grace
Period will keep the No Lapse Provision in force.
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<PAGE>
The No Lapse Provision will be terminated after ten years or
earlier if you fail to meet the premium requirements, if
there is an increase in Specified Amount or if you change
the Death Benefit Option. Once the No Lapse Provision
terminates, it cannot be reinstated.
REINSTATEMENT OF A LAPSED POLICY
After the Policy has lapsed due to the failure to make a
necessary payment before the end of an applicable Grace
Period, it may be reinstated provided (a) it has not been
surrendered, (b) there is an application for reinstatement
in proper written form, (c) evidence of insurability of the
insured is furnished us and we agree to accept the risk,
(d) we receive a payment sufficient to keep the Policy in
force for at least two months, and (e) any accrued loan
interest is paid. The effective date of the reinstated
Policy shall be the Monthly Anniversary Day after the date
on which we approve the application for reinstatement.
Surrender Charges will be reinstated as of the Policy Year
in which the Policy lapsed.
Any Policy reinstatement is effective on the Monthly
Anniversary Day after our approval. The Accumulation Value
at reinstatement will be the Net Premium Payment then made
less all Monthly Deductions due.
If the Surrender Value is not sufficient to cover the full
Surrender Charge at the time of lapse, the remaining portion
of the Surrender Charge will also be reinstated at the time
of Policy reinstatement.
COMMUNICATIONS WITH LINCOLN LIFE
PROPER WRITTEN FORM
Whenever this Prospectus refers to a communication "in
proper written form," it means a written document, in form
and substance reasonably satisfactory to us, received at the
Administrative Office.
TELEPHONE TRANSACTION PRIVILEGES
We allow telephone transactions authorized in proper written
form by you or the applicant. To effect a permitted
telephone transaction, you or your authorized representative
must call the Administrative Office and provide, as
identification, your policy number, a requested portion of
your Social Security number, and such other authenticating
information as we may require. We disclaim all liability for
losses resulting from unauthorized or fraudulent telephone
transactions, but acknowledge that if we do not follow these
procedures, which we believe to be reasonable, we may be
liable for such losses.
OTHER POLICY PROVISIONS
ISSUANCE
A Policy may only be issued upon receipt of satisfactory
evidence of insurability, and generally only when the
Insured is at least Age 18 and at most Age 85.
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<PAGE>
DATE OF COVERAGE
The date of coverage will be the Date of Issue, provided the
initial premium has been paid, the Insured is alive and
prior to any change in the health and insurability of the
Insured as represented in the application.
INCONTESTABILITY
We will not contest payment of the Death Benefit Proceeds
based on the initial Specified Amount after the Policy has
been in force during the Insured's lifetime for two years
from the Date of Issue. We will not contest payment of the
Death Benefit Proceeds based on any increase in Specified
Amount requiring evidence of insurability after two years
after the increase's effective date.
MISSTATEMENT OF AGE OR GENDER
If the Age or gender of the Insured has been misstated, the
affected benefits will be adjusted. The amount of the Death
Benefit Proceeds will be 1. multiplied by 2. and then the
result added to 3. where:
1. is the Net Amount at Risk at the time of the Insured's
Death;
2. is the ratio of the monthly Cost of Insurance applied in
the Policy month of death to the monthly Cost of
Insurance that should have been applied at the true Age
and gender in the Policy month of death; and
3. is the Accumulation Value at the time of the Insured's
Death.
SUICIDE
If the Insured dies by suicide, within two years from the
Date of Issue, we will pay no more than the sum of the
premiums paid, less any indebtedness and partial surrenders.
If the Insured dies by suicide, within two years from the
date of any increase in the Specified Amount, we will pay no
more than a refund of the monthly Cost of Insurance charges
for the increased amount.
NONPARTICIPATING POLICIES
These are nonparticipating Policies on which no dividends
are payable. These Policies do not share in the profits or
surplus earnings of Lincoln Life.
RIDERS
A Waiver of Monthly Deduction Rider may be added to the
Policy. Under this Rider, we will maintain the Death Benefit
by paying covered monthly deductions during periods of
disability. Rider availability may vary by state.
TAX ISSUES
Section 7702 of the Code provides that if certain tests are
met, a Policy will be treated as a life insurance policy for
federal tax purposes. We will monitor compliance with these
tests. The Policy should thus receive the same federal
income tax treatment as fixed benefit life insurance.
TAX TREATMENT OF DEATH BENEFIT
The death proceeds payable under a Policy are excludable
from gross income of the Beneficiary under Section 101 of
the Code.
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<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Section 7702A of the Code defines modified endowment
contracts as those policies issued or materially changed on
or after June 21, 1988 on which the total premiums paid
during the first seven years exceed the amount that would
have been paid if the policy provided for paid up benefits
after seven level annual premiums. The Code provides for
taxation of surrenders, partial surrenders, loans,
collateral assignments and other pre-death distributions
from modified endowment contracts in the same way annuities
are taxed. Modified endowment contract distributions are
defined by the Code as amounts not received as an annuity
and are taxable to the extent the cash value of the policy
exceeds, at the time of distribution, the premiums paid into
the policy. A 10% tax penalty generally applies to the
taxable portion of such distributions unless the Owner is
over 59 1/2 years of Age or disabled.
The Policies offered by this Prospectus may or may not be
issued as modified endowment contracts. We will monitor
premiums paid and will notify you when the Policy is in
jeopardy of becoming a modified endowment contract. If a
Policy is not a modified endowment contract, a cash
distribution during the first 15 years after a Policy is
issued which causes a reduction in death benefits may still
become fully or partially taxable to you pursuant to
Section 7702(f)(7) of the Code. You should carefully
consider this potential effect and seek further information
before initiating any changes in the terms of the Policy.
Under certain conditions, a Policy may become a modified
endowment contract as a result of a material change or a
reduction in benefits as defined by Section 7702A(c) of the
Code. We will monitor compliance with these tests.
In addition to meeting the tests required under
Section 7702 and Section 7702A, Section 817(h) of the Code
requires that the investments of separate accounts such as
the Separate Account be adequately diversified. Regulations
issued by the Secretary of the Treasury set the standards
for measuring the adequacy of this diversification. A
variable life insurance policy that is not adequately
diversified under these regulations would not be treated as
life insurance under Section 7702 of the Code. To be
adequately diversified, each Sub-Account must meet certain
tests. We believe the Separate Account investments meet the
applicable diversification standards.
Should the Secretary of the Treasury issue additional
rules or regulations limiting the number of funds, transfers
between funds, exchanges of funds or changes in investment
objectives of funds such that the Policy would no longer
qualify as life insurance under Section 7702 of the Code, we
reserve the right to take steps required to remain in
compliance.
We will monitor compliance with these regulations and, to
the extent necessary, will change the objectives or assets
of the Sub-Account investments to remain in compliance. We
also reserve the right to make changes in this Policy or to
make distributions from the Policy to the extent it deems
necessary, in its sole discretion, to continue to qualify
this Policy as life insurance.
A total surrender or termination of the Policy by lapse may
have adverse tax consequences. If the amount received by you
plus total Policy indebtedness exceeds the premiums paid
into the Policy, the excess will generally be treated as
taxable income, whether or not the Policy is a modified
endowment contract.
Federal estate and state and local estate, inheritance and
other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Owner or
Beneficiary.
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<PAGE>
TAXATION OF LINCOLN LIFE
Lincoln Life is taxed as a life insurance company under the
Code. Since the Separate Account is not a separate entity
from Lincoln Life and its operations form a part of Lincoln
Life, it will not be taxed separately as a "regulated
investment company" under Sub-chapter M of the Code.
Investment income and realized capital gains on the assets
of the Separate Account are reinvested and taken into
account in determining the value of Variable Accumulation
Units.
Lincoln Life does not initially expect to incur any Federal
income tax liability that would be chargeable to the
Separate Account. Based upon these expectations, no charge
is currently being made against the Separate Account for
federal income taxes. If, however, Lincoln Life determines
that on a separate company basis such taxes may be incurred,
it reserves the right to assess a charge for such taxes
against the Separate Account.
Lincoln Life may also incur state and local taxes in
addition to premium taxes in several states. At present,
these taxes are not significant. If they increase, however,
additional charges for such taxes may be made.
OTHER CONSIDERATIONS
The foregoing discussion is general and is not intended as
tax advice. Counsel and other competent advisers should be
consulted for more complete information. This discussion is
based on our understanding of Federal income tax laws as
they are currently interpreted by the Internal Revenue
Service. No representation is made as to the likelihood of
continuation of these current laws and interpretations.
FAIR VALUE OF THE POLICY
It is sometimes necessary for tax and other reasons to
determine the "fair value" of the Policy. The fair value of
the Policy is measured differently for different purposes.
It is not necessarily the same as the Accumulation Value or
the Net Accumulation Value, although the amount of the Net
Accumulation Value will typically be important in valuing
the Policy for this purpose. For some but not all purposes,
the fair value of the Policy may be the Surrender Value of
the Policy. The fair value of the Policy may be impacted by
developments other than the performance of the underlying
investments. For example, without regard to any other
factor, it increases as the Insured grows older. Moreover,
on the death of the Insured, it tends to increase
significantly. You should consult with your advisors for
guidance as to the appropriate methodology for determining
the fair value of the Policy for a particular purpose.
DIRECTORS AND OFFICERS OF LINCOLN LIFE
The following persons are Directors and Officers of Lincoln
Life. Except as indicated below, the address of each is 1300
South Clinton Street, Fort Wayne, Indiana 46802, and each
has been employed by Lincoln Life or its affiliates for more
than 5 years.
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
<S> <C>
NANCY J. ALFORD Vice President [4/96-present], (formerly
VICE PRESIDENT Second Vice President [1/90-4/96]),
Lincoln National Life Insurance Co.
ROLAND C. BAKER President [1/95-present], First
VICE PRESIDENT AND DIRECTOR Penn-Pacific Life Insurance Co. Formerly:
1801 S. Meyers Road Chairman and CFO [7/88-1/95], Baker,
Oakbrook Terrace, Ill. 60181 Ralish, Shipley and Politzer, Inc.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
<S> <C>
JON A. BOSCIA President, CEO and Director, Lincoln
DIRECTOR National Corp. [1/98-present] (Formerly:
Centre Square, West Tower President and Chief Executive Officer
1500 Market Street, Suite 3900 [10/96-1/98] and Chief Operating Officer
Philadelphia, PA 19102 [5/94-10/96]), Lincoln National Life
Insurance Co.; President
[7/91-5/94]Lincoln Investment
Management, Inc.
JOHN GOTTA Senior Vice President and General Manager
SENIOR VICE PRESIDENT (formerly Vice President) [1/98-present]
AND ASSISTANT SECRETARY Lincoln National Life Insurance Co.
350 Church Street Formerly: Senior Vice President,
Hartford, CT 06103 Connecticut General Life Insurance Company
[3/96-12/97]; Vice President, Connecticut
Mutual Life Insurance Company [8/94-3/96];
Vice President, CIGNA [3/93-8/94]
J. MICHAEL HEMP President [11/96-Present], Lincoln
SENIOR VICE PRESIDENT Financial Advisors Corp.; Senior Vice
350 Church Street President (formerly Vice President)
Hartford, CT 06103 [10/95-Present], Lincoln National Life
Insurance Co. Formerly: Regional Chief
Executive Officer [11/79-10/95], Lincoln
Dallas RMO.
STEPHEN H. LEWIS Senior Vice President, [5/94-present]
SENIOR VICE PRESIDENT Lincoln National Life Insurance Co.
Formerly: President [2/85-5/94], First
Penn-Pacific Life Insurance Co.
H. THOMAS MCMEEKIN President [5/94-present], Lincoln
DIRECTOR Investment Management, Inc.; Executive
1818 Market Street Vice President [5/94-Present], Lincoln
Philadelphia, PA 19103-3682 National Corporation (formerly Senior Vice
President [11/92-5/94])
ARTHUR S. ROSS Vice President, Lincoln National Life
SENIOR VICE PRESIDENT Insurance Co.
LAWRENCE T. ROWLAND Executive Vice President [10/96-present]
EXECUTIVE VICE PRESIDENT AND (formerly Senior Vice President
DIRECTOR [1/93-10/96]), Lincoln National Life
One Reinsurance Place Insurance Co.
1700 Magnavox Way
Fort Wayne, Ind. 46804
KEITH J. RYAN Vice President and Controller
VICE PRESIDENT AND [4/99-present] Formerly: Senior Vice
CONTROLLER AND CHIEF President [2/98-4/99]; Vice President,
ACCOUNTING OFFICER Chief Financial Officer and Assistant
Treasurer [1/96-2/98]; Controller
[6/95-12/95], Business Controls Director
[11/90-6/95], Lincoln National Life
Insurance Company
GABRIEL L. SHAHEEN President and Chief Executive Officer
PRESIDENT, CHIEF EXECUTIVE OFFICER [1/98-present], Lincoln National Life
AND DIRECTOR Insurance Co. Formerly: Chairman and
Managing Director, Lincoln National (UK)
PLC [12/96-1/98]; President, Lincoln
National Reassurance Company [7-95-12/96];
Senior Vice President, Lincoln National
Life Reinsurance Company [1/93-7/95]
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
<S> <C>
TODD R. STEPHENSON Senior Vice President, Chief Financial
SENIOR VICE PRESIDENT, Officer and Assistant Treasurer
CHIEF FINANCIAL [4/99-present] Formerly: Vice President
OFFICER AND ASSISTANT TREASURER and Assistant Secretary [1/98-4/99],
Senior Vice President, Lincoln Financial
Advisors Corporation [1/98-4/99], Senior
Vice President, Treasurer and Chief
Financial Officer, American States
Insurance Company [2/95-12/97], and Vice
President -- Corp. Acct., American States
Insurance Company [5/92-2/95]
RICHARD C. VAUGHAN Executive Vice President and Chief
DIRECTOR Financial Officer [1/95-present] (formerly
200 East Berry Street Senior Vice President [4/92-1/95]),
Fort Wayne, Ind. 46802 Lincoln National Corp.
MICHAEL R. WALKER Vice President [1/96-present], Lincoln
SENIOR VICE PRESIDENT National Life Insurance Co. Formerly: Vice
President [3/93-1/96], Employers Health
Insurance Co.
ROY V. WASHINGTON Vice President [7/96-present], Lincoln
VICE PRESIDENT National Life Insurance Co. (formerly,
Associate Counsel [2/95-7/96]). Formerly:
Director of Compliance [8/94-2/95],
Lincoln Investment Management, Inc.;
Compliance Consultant [8/89-8/94], Lincoln
National Corp.
</TABLE>
DISTRIBUTION OF POLICIES
Lincoln Life intends to offer the Policy in all
jurisdictions where it is licensed to do business. Lincoln
Life, the principal underwriter for the Policies, is
registered with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 as a broker-dealer and
is a member of the National Association of Securities
Dealers ("NASD"). Our principal business address is 1300
South Clinton Street, Fort Wayne, Indiana 46802.
The Policy may be sold by individuals, who in addition to
being appointed as our life insurance agents, are also
registered representatives of Lincoln Life or other broker-
dealers. These representatives may receive commission and
service fees up to 60% of the first year premium, plus up to
5% of all other premiums paid. In lieu of premium-based
commission, Lincoln Life may pay equivalent amounts based on
Accumulation Value. The selling office receives additional
compensation on the first year premium and all additional
premiums. In some situations, the selling office may elect
to share its commission with the registered representative.
Selling representatives are also eligible for bonuses and
non-cash compensation if certain production levels are
reached. All compensation is paid from our resources, which
include sales charges made under this Policy.
CHANGES OF INVESTMENT POLICY
We may materially change the investment policy of the
Separate Account. We must inform the Owners and obtain all
necessary regulatory approvals. Any change must be submitted
to the various state insurance departments which shall
disapprove it if deemed detrimental to the interests of the
Owners or if it renders our operations hazardous to the
public. If an Owner objects, the Policy may be converted to
a substantially comparable fixed benefit life insurance
policy offered by us on the life of the Insured. The Owner
has the later of 60 days (6 months in Pennsylvania) from the
date of the investment policy change or 60 days (6 months in
Pennsylvania) from being informed of such change to make
this conversion. We will not require evidence of
insurability for this conversion.
36
<PAGE>
The new policy will not be affected by the investment
experience of any separate account. The new policy will be
for an amount of insurance not exceeding the Death Benefit
of the Policy converted on the date of such conversion.
OTHER CONTRACTS ISSUED BY LINCOLN LIFE
We offer other variable annuity contracts and other variable
life insurance policies with benefits which vary in
accordance with the investment experience of a separate
account of Lincoln Life.
STATE REGULATION
We are subject to the laws of Indiana governing insurance
companies and to regulation by the Indiana Insurance
Department. An annual statement in a prescribed form is
filed with the Insurance Department each year covering our
operation for the preceding year and its financial condition
as of the end of such year. The Insurance Department
periodically examines for accuracy our contract liabilities
and reserves. Our books and accounts are subject to review
by the Insurance Department at all times and a full
examination of our operations is conducted periodically by
the Indiana Department of Insurance. Such regulation does
not, however, involve any supervision of management or
investment practices or policies.
A blanket bond with a per event limit of $25 million and an
annual policy aggregate limit of $50 million covers all of
the officers and employees of the Company.
REPORTS TO OWNERS
We maintain Policy records and will mail to each Owner, at
the last known address of record, an annual statement
showing the amount of the current Death Benefit, the
Accumulation Value, and Surrender Value, premiums paid and
monthly charges deducted since the last report, the amounts
invested in each Sub-Account and any Loan Account Value.
You will also be sent annual reports containing financial
statements for the Separate Account, annual and semi-annual
reports of the Funds as required by the 1940 Act, and
statements of significant transactions, such as changes in
Specified Amount, changes in Death Benefit Option, transfers
among Sub-Accounts, Premium Payments, loans, loan
repayments, reinstatement and termination.
ADVERTISING
Lincoln Life is ranked and rated by independent financial
rating services, including Moody's, Standard & Poor's,
Duff & Phelps and A.M. Best Company. The purpose of these
ratings is to reflect the financial strength or
claims-paying ability of Lincoln Life. The ratings are not
intended to reflect the investment experience or financial
strength of the Separate Account. We may advertise these
ratings from time to time. In addition, we may include in
certain advertisements, endorsements in the form of a list
of organizations, individuals or other parties which
recommend us or the Policies. We may also occasionally
include in advertisements comparisons of currently taxable
and tax deferred investment programs, based on selected tax
brackets, or discussions of alternative investment vehicles
and general economic conditions.
We are a member of the Insurance Marketplace Standards
Association ("IMSA") and may include the IMSA logo and
information about IMSA membership in our advertisements.
Companies that belong to IMSA subscribe to a set of of
ethical standards covering the various aspects of sales and
services for individually sold life insurance and annuities.
37
<PAGE>
PREPARING FOR YEAR 2000
Many existing computer programs use only two digits in the
date field to identify the year. If left uncorrected these
programs, which were designed and developed without
considering the impact of the upcoming change in the
century, could fail to operate or could produce erroneous
results when processing dates after December 31, 1999. For
example, for a bond with a stated maturity date of July 1,
2000, a computer program could read and interpret the
maturity date as July 1, 1900. This problem is known by many
names, such as the "Year 2000 Problem", "Y2K", and the
"Millenium Bug".
The Year 2000 problem affects virtually all computer
programs worldwide. It can cause a computer system to
suddenly stop operating. It can also result in a computer
corrupting vital company records, and the problem could go
undetected for a long time. For our products, if left
unchecked it could cause such problems as purchase payment
collection and deposit errors; claim payment difficulties;
accounting errors; erroneous unit values; and difficulties
or delays in processing transfers, surrenders and
withdrawals. In a worst case scenario, this could result in
a material disruption to the operations both of Lincoln Life
and of Delaware Service Company Inc. (Delaware), the
provider of the accounting and valuation services for the
Separate Account.
However, both companies are wholly owned by Lincoln National
Corporation (LNC), which has had Year 2000 processes in
place since 1996. LNC projects aggregate expenditures in
excess of $92 million for its Y2K efforts through the
year 2000. Both Lincoln Life and Delaware have dedicated
Year 2000 teams and steering committees that are answerable
to their counterparts in LNC.
In light of the potential problems discussed above, Lincoln
Life, as part of its Year 2000 updating process, has assumed
responsibility for correcting all Information Technology
(IT) systems which service the Separate Account. Delaware is
responsible for updating all its IT systems to support these
vital services. The Year 2000 effort, for both IT and non-IT
systems, is organized into four phases:
- awareness-raising and inventory of all assets (including
third-party agent and vendor relationships);
- assessment and high-level planning and strategy;
- remediation of affected systems and equipment; and
- testing to verify Year 2000 readiness.
The high-priority IT processes and systems -- those Lincoln
Life uses to maintain its customers' records and
accounts -- have been assessed and repaired, and testing of
those processes and systems is more than 99% complete. Our
efforts will continue through the end of 1999 to ensure they
remain Y2K-ready. And, we continue to work closely with our
key business partners and suppliers so they can provide the
information and service we need from them. Both companies
are currently on schedule to have their high-priority non-IT
systems (elevators, heating and ventilation, security
systems, etc.) remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant
delays; however, some uncertainty remains. Specific factors
that give rise to this uncertainty include (but are
certainly not limited to) a possible loss of technical
resources to perform the work; failure to identify all
susceptible systems; and non-compliance by third parties
whose systems and operations impact Lincoln Life. In a
report dated February 26, 1999, entitled, INVESTIGATING THE
IMPACT OF THE YEAR 2000 TECHNOLOGY PROBLEM; S. Rpt. 106-10,
the U.S. Senate Special Committee on the Year 2000
Technology Problem expressed its
38
<PAGE>
concern that "Financial services firms...are particularly
vulnerable to...the risk that a material customer or
business partner will fail, as a result of the computer
problems, to meet its obligations".
One important source of uncertainty is the extent to which
the key trading partners of Lincoln Life and of Delaware
will be successful in their own remediation and testing
efforts. Lincoln Life and Delaware have been monitoring the
progress of their trading partners; however, the efforts of
these partners are beyond our control.
Lincoln Life and Delaware expect to have completed their
necessary remediation and testing efforts prior to
December 31, 1999. However, given the nature and complexity
of the problem, there can be no guarantee by either company
that there will not be significant computer problems after
December 31, 1999.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened
legal proceedings arising from the conduct of its business.
Most of these proceedings are routine and in the ordinary
course of business. In some instances they include claims
for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for equitable relief.
After consultation with legal counsel and a review of
available facts, it is management's opinion that the
ultimate liability, if any, under these suits will not have
a material adverse effect on the financial position of
Lincoln Life.
Lincoln Life is presently defending two lawsuits in which
Plaintiffs seek to represent national classes of
policyholders in connection with alleged fraud, breach of
contract and other claims relating to the sale of
interest-sensitive universal and participating whole life
insurance policies. As of the date of this prospectus, the
courts have not certified a class in either of the suits.
Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. Although the
relief sought in these cases is substantial, the cases are
in the preliminary stages of litigation, and it is premature
to make assessments about potential loss, if any. Management
is defending these suits vigorously. The amount of
liability, if any, which may ultimately arise as a result of
these suits cannot be reasonably determined at this time.
EXPERTS
The December 31, 1998 financial statements of the Separate
Account and the December 31, 1998 statutory-basis financial
statements of Lincoln Life appearing in this prospectus and
registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports
which also appear elsewhere in this document and in the
registration statement. The financial statements audited by
Ernst & Young LLP have been included in this document in
reliance on their reports given on their authority as
experts in accounting and auditing.
The June 30, 1999 financial statements of the Separate
Account and the June 30, 1999 statutory-basis financial
statements of Lincoln Life appearing in this prospectus and
registration statement have not been audited. The June 30,
1999 statutory-basis financial statements of Lincoln Life do
not contain complete notes.
Actuarial matters included in this prospectus have been
examined by Vaughn W. Robbins, FSA as stated in the opinion
filed as an exhibit to the registration statement.
Legal matters in connection with the Policies described
herein are being passed upon by Robert A. Picarello, Esq.,
as stated in the opinion filed as an exhibit to the
registration statement.
39
<PAGE>
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as
amended, with respect to the Policies offered hereby. This
Prospectus does not contain all the information set forth in
the Registration Statement and amendments thereto and
exhibits filed as a part thereof, to all of which reference
is hereby made for further information concerning the
Separate Account, Lincoln Life, and the Policies offered
hereby. Statements contained in this Prospectus as to the
content of Policies and other legal instruments are
summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
40
<PAGE>
APPENDIX 1 MONTHLY CHARGE
<TABLE>
<CAPTION>
INSURED'S EXPENSE
AGE AT ISSUE CHARGE
(NEAREST BIRTHDAY) PER $1,000
- ------------------ ----------
<S> <C>
0-12 0.0158
13 0.0200
14 0.0242
15-30 0.0283
31 0.0325
32 0.0367
33 0.0408
34 0.0450
35 0.0492
36 0.0533
37 0.0575
38 0.0617
39 0.0658
40 0.0700
41 0.0742
42 0.0783
43 0.0825
44 0.0867
45 0.0908
46 0.0950
47 0.0992
48 0.1033
49 0.1075
50 0.1117
51 0.1158
52 0.1200
53 0.1242
54 0.1283
55 0.1325
56 0.1408
57 0.1492
58 0.1575
59 0.1658
60 0.1742
61 0.1825
62 0.1908
63 0.1992
64 0.2075
65 0.2158
66 0.2242
67 0.2325
68 0.2408
69 0.2492
70 0.2575
71 0.2656
72 0.2742
73 0.2825
74 0.2908
75 0.2992
76 0.3200
77 0.3408
78 0.3617
79 0.3825
80 0.4033
81+ 0.4242
</TABLE>
41
<PAGE>
APPENDIX 2
GUARANTEED MAXIMUM COST OF INSURANCE RATES
The Guaranteed Maximum Cost of Insurance Rates, per $1,000
of Net Amount at Risk, for standard risks are set forth in
the following Table based on the 1980 Commissioners Standard
Ordinary Mortality Tables, Age Nearest Birthday (1980 CSO);
or for unisex rates, on the 1980 CSO-B Table.
<TABLE>
<CAPTION>
ATTAINED AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- --------- -------- -------- --------
<S> <C> <C> <C>
0 0.34845 0.24089 0.32677
1 0.08917 0.07251 0.08667
2 0.08251 0.06750 0.07917
3 0.08167 0.06584 0.07834
4 0.07917 0.06417 0.07584
5 0.07501 0.06334 0.07251
6 0.07167 0.06084 0.06917
7 0.06667 0.06000 0.06584
8 0.06334 0.05834 0.06250
9 0.06167 0.05750 0.06084
10 0.06084 0.05667 0.06000
11 0.06417 0.05750 0.06250
12 0.07084 0.06000 0.06917
13 0.08251 0.06250 0.07834
14 0.09584 0.06887 0.09001
15 0.11085 0.07084 0.10334
16 0.12585 0.07601 0.11585
17 0.13919 0.07917 0.12752
18 0.14836 0.08167 0.13502
19 0.15502 0.08501 0.14085
20 0.15836 0.08751 0.14502
21 0.15919 0.08917 0.14585
22 0.15752 0.09084 0.14419
23 0.15502 0.09251 0.14252
24 0.15189 0.09501 0.14085
25 0.14752 0.09668 0.13752
26 0.11419 0.09918 0.13585
27 0.14252 0.10168 0.13418
28 0.14169 0.10501 0.13418
29 0.14252 0.10635 0.13585
30 0.14419 0.11251 0.13752
31 0.14836 0.11668 0.14169
32 0.15252 0.12085 0.14585
33 0.15919 0.12502 0.15252
34 0.16889 0.13168 0.15919
35 0.17586 0.13752 0.16836
36 0.18670 0.14669 0.17837
37 0.20004 0.15752 0.19170
38 0.21505 0.17003 0.20588
39 0.23255 0.18503 0.22338
40 0.25173 0.20171 0.24173
41 0.27424 0.22005 0.26340
42 0.29675 0.23922 0.28508
43 0.32260 0.25757 0.31010
44 0.34929 0.27674 0.33428
45 0.37931 0.29675 0.36263
46 0.41017 0.31677 0.39182
47 0.44353 0.33761 0.42268
48 0.47856 0.36096 0.45437
49 0.51777 0.38598 0.49107
<CAPTION>
ATTAINED AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- --------- -------- -------- --------
<S> <C> <C> <C>
50 0.55948 0.41350 0.53028
51 0.60870 0.44270 0.57533
52 0.66377 0.47523 0.62539
53 0.72636 0.51276 0.68297
54 0.79730 0.55114 0.74722
55 0.87326 0.59118 0.81566
56 0.95591 0.63123 0.88996
57 1.04192 0.66961 0.96593
58 1.13378 0.70633 1.04609
59 1.23236 0.74556 1.13211
60 1.34180 0.78979 1.22817
61 1.46381 0.84488 1.33511
62 1.60173 0.91417 1.45796
63 1.75809 1.00267 1.59922
64 1.93206 1.10539 1.75725
65 2.12283 1.21731 1.92955
66 2.32623 1.33511 2.11195
67 2.54312 1.45461 2.30614
68 2.77350 1.57247 2.50878
69 3.02328 1.69955 2.72909
70 3.30338 1.84590 2.97466
71 3.62140 2.02325 3.25640
72 3.98666 2.24419 3.58279
73 4.40599 2.51548 3.95978
74 4.87280 2.83552 4.38330
75 5.37793 3.19685 4.84334
76 5.91225 3.59370 5.33245
77 6.46824 4.01942 5.84227
78 7.04089 4.47410 6.36948
79 7.64551 4.97042 6.92851
80 8.30507 5.52957 7.54229
81 9.03761 6.17118 8.22883
82 9.86724 6.91414 9.01216
83 10.80381 7.77075 9.90124
84 11.82571 8.72632 10.87533
85 12.91039 9.76952 11.92213
86 14.03509 10.89151 13.01471
87 15.18978 12.08770 14.15507
88 16.36948 13.35774 15.33494
89 17.57781 14.70820 16.56493
90 18.82881 16.15259 17.85746
91 20.14619 17.71416 19.23699
92 21.57655 19.43814 20.76665
93 23.20196 21.40786 22.49837
94 25.28174 23.63051 24.70915
95 28.27411 27.16158 27.82758
96 33.10577 32.32378 32.78845
97 41.68476 41.21204 41.45783
98 58.01259 57.81394 57.95663
99 90.90909 90.90909 90.90909
</TABLE>
42
<PAGE>
APPENDIX 3
ILLUSTRATION OF SURRENDER CHARGES
The initial Surrender Charge is calculated as (a) plus (b),
with that result not to exceed (c), minus (d), where
(a) is 1.25 times the curtate net level premium for the
Specified Amount of insurance, calculated using the 1980
Commissioners Standard Ordinary mortality table and 4%
interest;
(b) is $10 per $1000 of Specified Amount;
(c) is $50 per $1000 of Specified Amount; and
(d) is the total of the per thousand charges assessed in the
first 24 months.
Algebraically, this formula is equivalent to min{a+b,c}-d.
The Surrender Charge decreases from its initial amount
during the first 15 years. No Surrender Charge is applied in
the 16th policy year or beyond. In general terms, the
initial Surrender Charge is amortized in proportion to a
twenty year life contingent annuity due. In formulas, the
Surrender Charge at a point in time "t" years after issue is
(a) times (b), where
(a) is the initial Surrender Charge; and
(b) is the ratio of a life contingent annuity due beginning
at time t and ending 20 years after issue, divided by a
life contingent annuity due beginning at issue and
ending 20 years after issue, both calculated using the
1980 Commissioners Standard Ordinary mortality table and
4% interest.
EXAMPLE 1: A male, Age 45, purchases a policy with a
Specified Amount of $100,000.
The initial Surrender Charge is computed as follows:
curtate net level premium = $1,987.66
$10 per $1000 of Specified Amount = $1000
$50 per $1000 of Specified Amount = $5000
the total of the per thousand charges = $9.08 per month X 24
months = $217.92
initial Surrender Charge = (1.25 X $1987.66 + $1000) -
$217.92=
$3,484.57- $217.92 = $3,266.65. Note that $3,484.57 is less
than $5000.
This amount decreases as follows:
<TABLE>
<CAPTION>
YEARS INITIAL
AFTER SURRENDER ANNUITY SURRENDER
ISSUE CHARGE RATIO CHARGE
----- --------- ------- ---------
<S> <C> <C> <C>
0 3,266.65 1.00000 3,266.65
1 3,266.65 0.96609 3,155.89
2 3,266.65 0.93101 3,041.30
3 3,266.65 0.89471 2,922.71
4 3,266.65 0.85711 2,799.89
5 3,266.65 0.81818 2,672.70
6 3,266.65 0.77782 2,540.86
7 3,266.65 0.73600 2,404.26
8 3,266.65 0.69265 2,262.65
9 3,266.65 0.64769 2,115.79
10 3,266.65 0.60104 1,963.40
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
YEARS INITIAL
AFTER SURRENDER ANNUITY SURRENDER
ISSUE CHARGE RATIO CHARGE
----- --------- ------- ---------
<S> <C> <C> <C>
11 3,266.65 0.55257 1,805.05
12 3,266.65 0.50212 1,640.25
13 3,266.65 0.44952 1,468.41
14 3,266.65 0.39456 1,288.88
15 3,266.65 0.33701 1,100.90
16 0.00
</TABLE>
EXAMPLE 2: A female, Age 75, purchases a policy with a
Specified Amount of $200,000.
The initial Surrender Charge is computed as follows:
curtate net level premium = $15,727.74
$10 per $1000 of Specified Amount = $2,000
$50 per $1000 of Specified Amount = $10,000
the total of the per thousand charges = $59.84 per month X
24 months = $1,436.16
The value (1.25 X $15,727.74 + $2,000) exceeds $10,000, so
the initial Surrender Charge = $10,000 - $1,436.16 =
$8,563.84
This amount decreases as follows:
<TABLE>
<CAPTION>
YEARS INITIAL
AFTER SURRENDER ANNUITY SURRENDER
ISSUE CHARGE RATIO CHARGE
----- --------- ------- ---------
<S> <C> <C> <C>
0 8,563.84 1.00000 8,563.84
1 8,563.84 0.95375 8,167.79
2 8,563.84 0.90821 7,777.77
3 8,563.84 0.86329 7,393.11
4 8,563.84 0.81888 7,012.72
5 8,563.84 0.77490 6,636.15
6 8,563.84 0.73145 6,264.02
7 8,563.84 0.68868 5,897.71
8 8,563.84 0.64680 5,539.10
9 8,563.84 0.60603 5,189.95
10 8,563.84 0.56635 4,850.10
11 8,563.84 0.52753 4,517.67
12 8,563.84 0.48915 4,189.03
13 8,563.84 0.45058 3,858.68
14 8,563.84 0.41088 3,518.67
15 8,563.84 0.36873 3,157.74
16 0.00
</TABLE>
44
<PAGE>
APPENDIX 4
CORRIDOR PERCENTAGES
<TABLE>
<CAPTION>
ATTAINED AGE OF
THE INSURED CORRIDOR
(NEAREST BIRTHDAY) PERCENTAGE
- ------------------ ----------
<S> <C>
0-40 250%
41 243%
42 236%
43 229%
44 222%
45 215%
46 209%
47 203%
48 197%
49 191%
50 185%
51 178%
52 171%
53 164%
54 157%
55 150%
56 146%
57 142%
58 138%
59 134%
60 130%
61 128%
62 126%
63 124%
64 122%
65 120%
66 119%
67 118%
68 117%
69 116%
70 115%
71 113%
72 111%
73 109%
74 107%
75-90 105%
91 104%
92 103%
93 102%
94 101%
95-99 100%
</TABLE>
45
<PAGE>
APPENDIX 5
ILLUSTRATIONS OF ACCUMULATION VALUES, SURRENDER VALUES, AND
DEATH BENEFIT PROCEEDS
The illustrations in this Prospectus have been prepared to
help show how values under the Policies change with
investment performance. The illustrations illustrate how
Accumulation Values, Surrender Values and Death Benefit
Proceeds under a Policy would vary over time if the
hypothetical gross investment rates of return were a uniform
annual effective rate of either 0%, 6% or 12%. If the
hypothetical gross investment rate of return averages 0%,
6%, or 12% over a period of years, but fluctuates above or
below those averages for individual years, the Accumulation
Values, Surrender Values and Death Benefit Proceeds may be
different. The illustrations also assume there are no Policy
Loans or Partial Surrenders, no additional Premium Payments
are made other than shown, no Accumulation Values are
allocated to the Fixed Account, and there are no changes in
the Specified Amount or Death Benefit Option.
The amounts shown for the Accumulation Value, Surrender
Value and Death Benefit Proceeds as of each Policy
Anniversary reflect the fact that charges are made and
expenses applied which lower investment return on the assets
held in the Sub-Accounts. Daily charges are made against the
assets of the Sub-Accounts for assuming mortality and
expense risks. The mortality and expense risk charges are
equivalent to an annual effective rate of 0.90% of the daily
net asset value of the Separate Account in years 1-19 and
0.20% in years 20 and later. In addition, the amounts shown
also reflect the deduction of Fund investment advisory fees
and other expenses which will vary depending on which
funding vehicle is chosen but which are assumed for purposes
of these illustrations to be equivalent to an annual
effective rate of 0.82% of the daily net asset value of the
Separate Account. This rate reflects an arithmetic average
of total Fund portfolio annual expenses for the year ending
December 31, 1998.
Considering charges for mortality and expense risks and the
assumed Fund expenses, gross annual rates of 0%, 6% and 12%
correspond to net investment experience at annual rates of
-1.72%, 4.28% and 10.28% for years 1-19 and -1.02%, 4.98%
and 10.98% in years 20 and later.
The illustrations also reflect the fact that the Company
makes monthly charges for providing insurance protection.
Current values reflect current Cost of Insurance charges and
guaranteed values reflect the maximum Cost of Insurance
charges guaranteed in the Policy. The values shown are for
Policies which are issued as preferred and standard.
Policies issued on a substandard basis would result in lower
Accumulation Values and Death Benefit Proceeds than those
illustrated.
The illustrations also reflect the fact that the Company
deducts a premium load of 5% from each Premium Payment.
The Surrender Values shown in the illustrations reflect the
fact that the Company will deduct a Surrender Charge from
the Policy's Accumulation Value for any Policy surrendered
in full during the first fifteen Policy Years. Surrender
Charges reflect, in part, age and Specified Amount, and are
shown in the illustrations.
In addition, the illustrations reflect the fact that the
Company deducts a monthly administrative charge at the
beginning of each Policy Month. This monthly administrative
expense charge is a flat dollar charge of $10 per month in
the first year. The illustrations also reflect a monthly
charge per $1,000 of Specified Amount assessed during the
first two Policy Years.
Certain fund groups waive a portion of fund expenses or
reimburse the funds for such expenses. Those waivers or
reimbursements remain in effect for varying periods of time,
are usually reviewed at least yearly by each fund group, and
are within the fund group's
46
<PAGE>
control. The effect of discontinuing a waiver or
reimbursement arrangement could result in higher expense
levels for the affected fund, as shown in the "Portfolio
Expense Table". Assuming those waivers and reimbursements
were discontinued, the arithmetic average of the "Fund
Investment Advisory Fees and Other Expenses" listed in the
"Portfolio Expense Table" would be equivalent to an annual
effective rate of 1.12% of the daily net asset value of the
Separate Account.
Upon request, the Company will furnish a comparable
illustration based on the proposed insured's age, gender
classification, smoking classification, risk classification
and premium payment requested.
47
<PAGE>
MALE AGE 55 NONSMOKER
PREFERRED -- $8,605 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 9,035 500,000 500,000 500,000 4,647 5,025 5,404
2 18,522 500,000 500,000 500,000 6,143 7,098 8,104
3 28,483 500,000 500,000 500,000 7,922 9,587 11,427
4 38,942 500,000 500,000 500,000 9,160 11,666 14,573
5 49,924 500,000 500,000 500,000 9,821 13,276 17,486
6 61,455 500,000 500,000 500,000 9,847 14,331 20,082
7 73,563 500,000 500,000 500,000 9,166 14,725 22,253
8 86,276 500,000 500,000 500,000 7,681 14,325 23,859
9 99,625 500,000 500,000 500,000 5,279 12,970 24,726
10 113,641 500,000 500,000 500,000 1,845 10,488 24,659
15 194,961 0 0 500,000 0 0 1,563
20 298,749 0 0 0 0 0 0
25 431,212 0 0 0 0 0 0
30 600,272 0 0 0 0 0 0
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
6 0 0 1,913
7 0 0 5,046
8 0 0 7,644
9 0 0 9,533
10 0 0 10,522
15 0 0 0
20 0 0 0
25 0 0 0
30 0 0 0
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
48
<PAGE>
MALE AGE 55 NONSMOKER
PREFERRED -- $8,605 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 9,035 500,000 500,000 500,000 4,647 5,024 5,404
2 18,522 500,000 500,000 500,000 9,204 10,254 11,352
3 28,483 500,000 500,000 500,000 14,425 16,475 18,706
4 38,942 500,000 500,000 500,000 19,527 22,935 26,792
5 49,924 500,000 500,000 500,000 24,522 29,659 35,701
6 61,455 500,000 500,000 500,000 29,427 36,673 45,538
7 73,563 500,000 500,000 500,000 34,248 43,998 56,411
8 86,276 500,000 500,000 500,000 38,923 51,586 68,368
9 99,625 500,000 500,000 500,000 43,418 59,416 81,497
10 113,641 500,000 500,000 500,000 47,758 67,522 95,949
15 194,961 500,000 500,000 500,000 63,139 108,721 190,170
20 298,749 500,000 500,000 500,000 66,806 151,278 343,711
25 431,212 500,000 500,000 656,230 55,891 199,852 624,981
30 600,272 500,000 500,000 1,153,513 20,061 252,273 1,098,584
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ----------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 2,924 6,780
5 5,419 10,555 16,597
6 11,258 18,504 27,369
7 17,041 26,791 39,204
8 22,707 35,370 52,153
9 28,225 44,222 66,303
10 33,620 53,384 81,811
15 54,985 100,568 182,017
20 66,806 151,278 343,711
25 55,891 199,852 624,981
30 20,061 252,273 1,098,584
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
49
<PAGE>
MALE AGE 65 NONSMOKER
PREFERRED -- $13,988 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 14,687 500,000 500,000 500,000 6,503 7,084 7,670
2 30,109 500,000 500,000 500,000 4,621 5,954 7,371
3 46,302 500,000 500,000 500,000 2,748 4,777 7,074
4 63,305 0 500,000 500,000 0 2,115 5,304
5 81,157 0 0 500,000 0 0 1,724
6 99,903 0 0 0 0 0 0
7 119,585 0 0 0 0 0 0
8 140,252 0 0 0 0 0 0
9 161,952 0 0 0 0 0 0
10 184,737 0 0 0 0 0 0
15 316,934 0 0 0 0 0 0
20 485,654 0 0 0 0 0 0
25 700,989 0 0 0 0 0 0
30 975,816 0 0 0 0 0 0
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
6 0 0 0
7 0 0 0
8 0 0 0
9 0 0 0
10 0 0 0
15 0 0 0
20 0 0 0
25 0 0 0
30 0 0 0
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
50
<PAGE>
MALE AGE 65 NONSMOKER
PREFERRED -- $13,988 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 14,687 500,000 500,000 500,000 6,503 7,085 7,670
2 30,109 500,000 500,000 500,000 12,950 14,534 16,196
3 46,302 500,000 500,000 500,000 20,460 23,525 26,871
4 63,305 500,000 500,000 500,000 27,602 32,673 38,428
5 81,157 500,000 500,000 500,000 34,624 42,237 51,228
6 99,903 500,000 500,000 500,000 41,549 52,267 65,441
7 119,585 500,000 500,000 500,000 48,328 62,738 81,182
8 140,252 500,000 500,000 500,000 54,973 73,689 98,643
9 161,952 500,000 500,000 500,000 61,393 85,056 117,943
10 184,737 500,000 500,000 500,000 67,479 96,764 139,210
15 316,934 500,000 500,000 500,000 86,745 155,746 280,842
20 485,654 500,000 500,000 551,714 77,536 211,110 525,442
25 700,989 500,000 500,000 1,012,056 32,960 276,470 963,863
30 975,816 0 500,000 1,714,439 0 360,466 1,697,465
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ----------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 625 3,690 7,036
4 8,641 13,712 19,467
5 16,547 24,161 33,151
6 24,367 35,085 48,259
7 32,051 46,461 64,904
8 39,609 58,325 83,279
9 46,951 70,614 103,501
10 53,969 83,254 125,701
15 78,419 147,420 272,516
20 77,536 211,110 525,442
25 32,960 276,470 963,863
30 0 360,466 1,697,465
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
51
<PAGE>
FEMALE AGE 55 NONSMOKER
PREFERRED -- $6,925 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 7,271 500,000 500,000 500,000 3,492 3,788 4,085
2 14,906 500,000 500,000 500,000 5,311 6,074 6,876
3 22,922 500,000 500,000 500,000 7,680 9,061 10,580
4 31,340 500,000 500,000 500,000 9,814 11,981 14,470
5 40,178 500,000 500,000 500,000 11,703 14,818 18,553
6 49,458 500,000 500,000 500,000 13,322 17,541 22,827
7 59,202 500,000 500,000 500,000 14,612 20,083 27,252
8 69,433 500,000 500,000 500,000 15,496 22,356 31,767
9 80,176 500,000 500,000 500,000 15,867 24,236 36,278
10 91,456 500,000 500,000 500,000 15,649 25,624 40,713
15 156,901 500,000 500,000 500,000 4,461 22,888 60,453
20 240,428 0 0 500,000 0 0 67,729
25 347,031 0 0 500,000 0 0 19,991
30 483,087 0 0 0 0 0 0
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 2,953
6 0 2,705 7,991
7 569 6,040 13,209
8 2,275 9,135 18,546
9 3,498 11,866 23,909
10 4,161 14,136 29,225
15 0 16,394 53,960
20 0 0 67,729
25 0 0 19,991
30 0 0 0
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
52
<PAGE>
FEMALE AGE 55 NONSMOKER
PREFERRED -- $6,925 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 7,271 500,000 500,000 500,000 3,492 3,788 4,085
2 14,906 500,000 500,000 500,000 7,450 8,279 9,147
3 22,922 500,000 500,000 500,000 12,083 13,731 15,521
4 31,340 500,000 500,000 500,000 16,596 19,374 22,508
5 40,178 500,000 500,000 500,000 21,018 25,248 30,203
6 49,458 500,000 500,000 500,000 25,343 31,354 38,672
7 59,202 500,000 500,000 500,000 29,553 37,685 47,981
8 69,433 500,000 500,000 500,000 33,675 44,276 58,243
9 80,176 500,000 500,000 500,000 37,687 51,117 69,538
10 91,456 500,000 500,000 500,000 41,601 58,232 81,989
15 156,901 500,000 500,000 500,000 58,581 97,240 165,367
20 240,428 500,000 500,000 500,000 68,272 140,579 300,512
25 347,031 500,000 500,000 568,989 68,215 191,830 541,894
30 483,087 500,000 500,000 998,710 48,714 247,434 951,152
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 260 3,038 6,172
5 5,418 9,648 14,603
6 10,507 16,518 23,836
7 15,510 23,642 33,938
8 20,454 31,055 45,022
9 25,318 38,748 57,169
10 30,113 46,744 70,501
15 52,088 90,746 158,874
20 68,272 140,579 300,512
25 68,215 191,830 541,894
30 48,714 247,434 951,152
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
53
<PAGE>
FEMALE AGE 65 NONSMOKER
PREFERRED -- $11,501 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,076 500,000 500,000 500,000 6,056 6,555 7,058
2 24,756 500,000 500,000 500,000 7,579 8,830 10,149
3 38,070 500,000 500,000 500,000 9,701 11,862 14,256
4 52,049 500,000 500,000 500,000 11,144 14,380 18,145
5 66,728 500,000 500,000 500,000 11,856 16,304 21,745
6 82,140 500,000 500,000 500,000 11,726 17,488 24,917
7 98,323 500,000 500,000 500,000 10,570 17,706 27,433
8 115,316 500,000 500,000 500,000 8,123 16,636 28,961
9 133,158 500,000 500,000 500,000 4,065 13,883 29,080
10 151,892 0 500,000 500,000 0 9,010 27,311
15 260,584 0 0 0 0 0 0
20 399,307 0 0 0 0 0 0
25 576,356 0 0 0 0 0 0
30 802,320 0 0 0 0 0 0
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 3,599
6 0 263 7,691
7 0 1,424 11,151
8 0 1,318 13,643
9 0 0 14,745
10 0 0 13,977
15 0 0 0
20 0 0 0
25 0 0 0
30 0 0 0
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
54
<PAGE>
FEMALE AGE 65 NONSMOKER
PREFERRED -- $11,501 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,076 500,000 500,000 500,000 6,056 6,555 7,058
2 24,756 500,000 500,000 500,000 12,510 13,911 15,377
3 38,070 500,000 500,000 500,000 20,098 22,870 25,883
4 52,049 500,000 500,000 500,000 27,522 32,183 37,444
5 66,728 500,000 500,000 500,000 34,768 41,852 50,163
6 82,140 500,000 500,000 500,000 41,863 51,923 64,193
7 98,323 500,000 500,000 500,000 48,732 62,337 79,601
8 115,316 500,000 500,000 500,000 55,302 73,041 96,473
9 133,158 500,000 500,000 500,000 61,722 84,196 115,120
10 151,892 500,000 500,000 500,000 67,909 95,747 135,667
15 260,584 500,000 500,000 500,000 91,017 156,191 272,332
20 399,307 500,000 500,000 525,543 88,975 214,215 500,517
25 576,356 500,000 500,000 953,689 56,326 281,249 908,275
30 802,320 0 500,000 1,606,826 0 365,790 1,590,917
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ----------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 184 2,956 5,969
4 8,480 13,141 18,402
5 16,622 23,706 32,017
6 24,638 34,698 46,967
7 32,450 46,055 63,319
8 39,984 57,723 81,155
9 47,386 69,861 100,784
10 54,575 82,413 122,333
15 83,182 148,356 264,498
20 88,975 214,215 500,517
25 56,326 281,249 908,275
30 0 365,790 1,590,917
</TABLE>
Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
55
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
M-1
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1998
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $8,705,340) $5,229,751 $ -- $ --
Investments at
Market--Unaffiliated
(Cost $5,179,861) 9,158,303 467,148 180,276
--------------------------- ---------- ------------ -----------
TOTAL ASSETS 14,388,054 467,148 180,276
--------------------------- ---------- ------------ -----------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 329 10 4
--------------------------- ---------- ------------ -----------
NET ASSETS $14,387,725 $ 467,138 $ 180,272
--------------------------- ========== ============ ===========
Percent of net assets 100.00% 3.25% 1.25%
--------------------------- ========== ============ ===========
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 42,471 18,128
Unit value $ 10.999 $ 9.944
--------------------------- ------------ -----------
NET ASSETS $ 467,138 $ 180,272
--------------------------- ============ ===========
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
-------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $8,705,340) $ -- $4,598,486 $ --
Investments at
Market--Unaffiliated
(Cost $5,179,861) 449,361 -- 330,790
--------------------------- ---------- ---------- --------
TOTAL ASSETS 449,361 4,598,486 330,790
--------------------------- ---------- ---------- --------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 10 108 7
--------------------------- ---------- ---------- --------
NET ASSETS $ 449,351 $4,598,378 $330,783
--------------------------- ========== ========== ========
Percent of net assets 3.12% 31.96% 2.30%
--------------------------- ========== ========== ========
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 42,900 449,850 28,921
Unit value $ 10.474 $ 10.222 $ 11.437
--------------------------- ---------- ---------- --------
NET ASSETS $ 449,351 $4,598,378 $330,783
--------------------------- ========== ========== ========
</TABLE>
See accompanying notes.
M-2
<PAGE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE FIDELITY FIDELITY
AIM AIM BANKER'S PREMIUM DELAWARE PREMIUM VIP VIP II
V.I. V.I. TRUST EQUITY SMALL PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX CAP VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $8,705,340) $ -- $ -- $ -- $280,173 $337,348 $ 13,744 $ -- $ --
Investments at
Market--Unaffiliated
(Cost $5,179,861) 931,463 1,054,867 2,828,272 -- -- -- 864,119 81,432
- --------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
TOTAL ASSETS 931,463 1,054,867 2,828,272 280,173 337,348 13,744 864,119 81,432
- --------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 20 23 62 6 7 -- 18 2
- --------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
NET ASSETS $ 931,443 $ 1,054,844 $ 2,828,210 $280,167 $337,341 $ 13,744 $864,101 $81,430
- --------------------------- ========= =========== ============ ========= ======== ======== ======== =======
Percent of net assets 6.47% 7.33% 19.66% 1.95% 2.34% 0.10% 6.01% 0.57%
- --------------------------- ========= =========== ============ ========= ======== ======== ======== =======
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 79,949 90,608 254,031 28,766 30,607 1,778 84,425 7,669
Unit value $ 11.651 $ 11.642 $ 11.133 $ 9.740 $ 11.022 $ 7.729 $ 10.235 $10.618
- --------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
NET ASSETS $ 931,443 $ 1,054,844 $ 2,828,210 $280,167 $337,341 $ 13,744 $864,101 $81,430
- --------------------------- ========= =========== ============ ========= ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $8,705,340) $ -- $ -- $ -- $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated
(Cost $5,179,861) 601,997 328,049 96,910 183,104 36,989 628,292 95,234
- --------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
TOTAL ASSETS 601,997 328,049 96,910 183,104 36,989 628,292 95,234
- --------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 13 7 2 8 2 14 6
- --------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
NET ASSETS $601,984 $328,042 $ 96,908 $ 183,096 $ 36,987 $ 628,278 $ 95,228
- --------------------------- ======== ======== ============ ============ ========= ============= =========
Percent of net assets 4.18% 2.28% 0.67% 1.27% 0.26% 4.37% 0.66%
- --------------------------- ======== ======== ============ ============ ========= ============= =========
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 57,953 30,401 9,862 18,729 3,748 65,332 10,285
Unit value $ 10.387 $ 10.791 $ 9.827 $ 9.776 $ 9.869 $ 9.617 $ 9.258
- --------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
NET ASSETS $601,984 $328,042 $ 96,908 $ 183,096 $ 36,987 $ 628,278 $ 95,228
- --------------------------- ======== ======== ============ ============ ========= ============= =========
</TABLE>
M-3
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF OPERATIONS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
----------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $38,020 $ 508 $ 7,032
Dividends from net
realized gains on
investments 119,630 9,006 2,243
Mortality and expense
guarantees (12,114) (528) (244)
--------------------------- ------- ------------ -----------
NET INVESTMENT INCOME
(LOSS) 145,536 8,986 9,031
--------------------------- ------- ------------ -----------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 13,135 572 (231)
Net change in unrealized
appreciation or
depreciation on
investments 502,853 44,531 (7,193)
--------------------------- ------- ------------ -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 515,988 45,103 (7,424)
--------------------------- ------- ------------ -----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $661,524 $ 54,089 $ 1,607
--------------------------- ======= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
-----------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ -- $19,001 $ --
Dividends from net
realized gains on
investments -- -- --
Mortality and expense
guarantees (461) (3,216) (252)
--------------------------- ---------- -------- --------
NET INVESTMENT INCOME
(LOSS) (461) 15,785 (252)
--------------------------- ---------- -------- --------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 72 -- 592
Net change in unrealized
appreciation or
depreciation on
investments 5,094 -- 41,059
--------------------------- ---------- -------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 5,166 -- 41,651
--------------------------- ---------- -------- --------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ 4,705 $15,785 $ 41,399
--------------------------- ========== ======== ========
</TABLE>
See accompanying notes.
M-4
<PAGE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE FIDELITY FIDELITY
AIM AIM BANKER'S PREMIUM DELAWARE PREMIUM VIP VIP II
V.I. V.I. TRUST EQUITY SMALL PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX CAP VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ 2,314 $ 3,875 $ 4,231 $ -- $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments 43,375 34,275 27,082 -- -- -- -- --
Mortality and expense
guarantees (893) (797) (2,531) (247) (225) (17) (881) (73)
- --------------------------- --------- --------- ------------ --------- -------- -------- -------- -------
NET INVESTMENT INCOME
(LOSS) 44,796 37,353 28,782 (247) (225) (17) (881) (73)
- --------------------------- --------- --------- ------------ --------- -------- -------- -------- -------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 1,004 2,502 3,674 946 593 (75) 1,374 362
Net change in unrealized
appreciation or
depreciation on
investments 70,745 69,059 111,040 19,663 30,739 (512) 48,819 4,003
- --------------------------- --------- --------- ------------ --------- -------- -------- -------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 71,749 71,561 114,714 20,609 31,332 (587) 50,193 4,365
- --------------------------- --------- --------- ------------ --------- -------- -------- -------- -------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ 116,545 $ 108,914 $ 143,496 $ 20,362 $31,107 $ (604) $ 49,312 $ 4,292
- --------------------------- ========= ========= ============ ========= ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ -- $ -- $ 1,059 $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments -- -- 3,647 2 -- -- --
Mortality and expense
guarantees (451) (319) (104) (140) (45) (582) (108)
- --------------------------- ------- ------- ------------ ------------ --------- ------------- ---------
NET INVESTMENT INCOME
(LOSS) (451) (319) 4,602 (138) (45) (582) (108)
- --------------------------- ------- ------- ------------ ------------ --------- ------------- ---------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 599 600 660 85 234 (357) (71)
Net change in unrealized
appreciation or
depreciation on
investments 18,520 15,337 1,012 4,808 2,272 21,136 2,721
- --------------------------- ------- ------- ------------ ------------ --------- ------------- ---------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 19,119 15,937 1,672 4,893 2,506 20,779 2,650
- --------------------------- ------- ------- ------------ ------------ --------- ------------- ---------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $18,668 $15,618 $ 6,274 $ 4,755 $ 2,461 $ 20,197 $ 2,542
- --------------------------- ======= ======= ============ ============ ========= ============= =========
</TABLE>
M-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 145,536 $ 8,986 $ 9,031
Net realized gain (loss) on
investments 13,135 572 (231)
Net change in unrealized appreciation
or depreciation on investments 502,853 44,531 (7,193)
- --------------------------------------- ---------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 661,524 54,089 1,607
- --------------------------------------- ---------- ------------ -----------
Change From Unit Transactions:
Participant purchases 20,516,015 440,198 220,792
Participant withdrawals (6,789,814) (27,149) (42,127)
- --------------------------------------- ---------- ------------ -----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 13,726,201 413,049 178,665
- --------------------------------------- ---------- ------------ -----------
TOTAL INCREASE IN NET ASSETS 14,387,725 467,138 180,272
- --------------------------------------- ---------- ------------ -----------
NET ASSETS AT DECEMBER 31, 1998 $14,387,725 $ 467,138 $ 180,272
- --------------------------------------- ========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- -------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (461) $ 15,785 $ (252)
Net realized gain (loss) on
investments 72 -- 592
Net change in unrealized appreciation
or depreciation on investments 5,094 -- 41,059
- --------------------------------------- ---------- ---------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 4,705 15,785 41,399
- --------------------------------------- ---------- ---------- --------
Change From Unit Transactions:
Participant purchases 474,803 10,886,091 308,188
Participant withdrawals (30,157) (6,303,498) (18,804)
- --------------------------------------- ---------- ---------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 444,646 4,582,593 289,384
- --------------------------------------- ---------- ---------- --------
TOTAL INCREASE IN NET ASSETS 449,351 4,598,378 330,783
- --------------------------------------- ---------- ---------- --------
NET ASSETS AT DECEMBER 31, 1998 $ 449,351 $4,598,378 $330,783
- --------------------------------------- ========== ========== ========
</TABLE>
See accompanying notes.
M-6
<PAGE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE FIDELITY FIDELITY
AIM AIM BANKER'S PREMIUM DELAWARE PREMIUM VIP VIP II
V.I. V.I. TRUST EQUITY SMALL PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX CAP VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 44,796 $ 37,353 $ 28,782 $ (247) $ (225) $ (17) $ (881) $ (73)
Net realized gain (loss) on
investments 1,004 2,502 3,674 946 593 (75) 1,374 362
Net change in unrealized appreciation
or depreciation on investments 70,745 69,059 111,040 19,663 30,739 (512) 48,819 4,003
- --------------------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 116,545 108,914 143,496 20,362 31,107 (604) 49,312 4,292
- --------------------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
Change From Unit Transactions:
Participant purchases 871,193 1,007,254 2,738,345 278,003 316,822 15,958 874,010 86,282
Participant withdrawals (56,295) (61,324) (53,631) (18,198) (10,588) (1,610) (59,221) (9,144)
- --------------------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 814,898 945,930 2,684,714 259,805 306,234 14,348 814,789 77,138
- --------------------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
TOTAL INCREASE IN NET ASSETS 931,443 1,054,844 2,828,210 280,167 337,341 13,744 864,101 81,430
- --------------------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
NET ASSETS AT DECEMBER 31, 1998 $ 931,443 $ 1,054,844 $ 2,828,210 $280,167 $337,341 $13,744 $864,101 $81,430
- --------------------------------------- ========= =========== ============ ========= ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (451) $ (319) $ 4,602 $ (138) $ (45) $ (582) $ (108)
Net realized gain (loss) on
investments 599 600 660 85 234 (357) (71)
Net change in unrealized appreciation
or depreciation on investments 18,520 15,337 1,012 4,808 2,272 21,136 2,721
- --------------------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 18,668 15,618 6,274 4,755 2,461 20,197 2,542
- --------------------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
Change From Unit Transactions:
Participant purchases 608,312 323,546 96,433 188,146 37,943 643,263 100,433
Participant withdrawals (24,996) (11,122) (5,799) (9,805) (3,417) (35,182) (7,747)
- --------------------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 583,316 312,424 90,634 178,341 34,526 608,081 92,686
- --------------------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
TOTAL INCREASE IN NET ASSETS 601,984 328,042 96,908 183,096 36,987 628,278 95,228
- --------------------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
NET ASSETS AT DECEMBER 31, 1998 $601,984 $328,042 $ 96,908 $ 183,096 $ 36,987 $ 628,278 $ 95,228
- --------------------------------------- ======== ======== ============ ============ ========= ============= =========
</TABLE>
M-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION
THE ACCOUNT:
Lincoln Life Flexible Premium Variable Life Account M (the Variable Account)
is a segregated investment account of The Lincoln National Life Insurance
Company (Lincoln Life) and is registered as a unit investment trust with the
Securities and Exchange Commission under the Investment Company Act of 1940,
as amended. The operations of the Variable Account, which commenced on
June 18, 1998, are part of the operations of Lincoln Life.
The assets of the Variable Account are owned by Lincoln Life. The portion of
the Variable Account's assets supporting the variable life policies may not
be used to satisfy liabilities arising out of any other business of Lincoln
Life.
BASIS OF PRESENTATION:
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS:
The assets of the Variable Account are divided into variable sub-accounts
each of which is invested in shares of one of twenty portfolios (the Funds)
of eight diversified open-end management investment companies, each
portfolio with its own investment objective. The Funds in which the variable
sub-accounts invest are as follows:
AIM Variable Insurance Funds, Inc.:
AIM V.I. Capital Appreciation Fund
AIM V.I. Diversified Income Fund
AIM V.I. Growth Fund
AIM V.I. Value Fund
Banker's Trust:
Banker's Trust Equity 500 Index Fund
Delaware Group:
Delaware Premium Small Cap Value Series
Delaware Premium Trend Series
Delaware Premium Emerging Markets Series
Fidelity Variable Insurance Products Fund:
Fidelity VIP Equity-Income Portfolio
Fidelity Variable Insurance Products Fund II:
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Investment Grade Bond Portfolio
Lincoln National:
Lincoln National Money Market Account
MFS Variable Insurance Trust:
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
OCC Accumulation Trust:
OCC Accumulation Global Equity Portfolio
OCC Accumulation Managed Portfolio
Templeton Variable Product Series Fund:
Templeton Variable Product Asset Allocation Fund
Templeton Variable Product International Fund
Templeton Variable Product Stock Fund
Investments in the variable sub-accounts are stated at the closing net asset
value per share on December 31, 1998, which approximates fair value. The
difference between cost and fair value is reflected as unrealized
appreciation and depreciation of investments.
Investment transactions are accounted for on a trade date basis. 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. Dividend income is recorded on the
ex-dividend date.
FEDERAL INCOME TAXES:
Operations of the Variable Account form a part of and are taxed with
operations of Lincoln Life, which is taxed as a life insurance company under
the Internal Revenue Code. The Variable Account will not be taxed as a
regulated investment company under Subchapter M of the Internal Revenue
Code. Using current federal income tax law, no federal income taxes are
payable with respect to the Variable Account's net investment income and the
net realized gain on investments.
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
Amounts are paid to Lincoln Life for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day. The
current rate of deduction, stated as an annual percentage, is .80% during
the first twelve years and .55% thereafter. The mortality and expense risk
charges for each of the variable sub-accounts are reported in the statement
of operations.
Prior to the allocation of premiums to the Variable Account, Lincoln Life
deducts a premium load of 5% of each premium payment to cover state taxes
and federal income tax liabilities.
Lincoln Life charges a monthly administrative fee of $15 in the first policy
year and $5 in subsequent policy years. This charge is for items such as
premium billing and collection, policy value calculation, confirmations and
periodic reports.
M-8
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)
Lincoln Life assumes responsibility for providing the insurance benefit
included in the policy. Lincoln Life charges a monthly deduction of the cost
of insurance and any charges for supplemental riders. The cost of insurance
charge depends on the attained age, risk classification, gender
classification (in accordance with state law) and the current net amount at
risk. On a monthly basis, the administrative fee and the cost of insurance
charge are deducted proportionately for the value of each variable
sub-account and/or fixed account funding options. The fixed account is part
of the general account of Lincoln Life and is not included in these
financial statements.
Under certain circumstances, Lincoln Life reserves the right to charge a
transfer fee of up to $25 for transfers between variable sub-accounts. For
the period ended December 31, 1998, no transfer fees were deducted from the
variable sub-accounts.
The fees charged by Lincoln Life for premium loads (deducted from premium
payments), administrative fees and the amount deducted for the cost of
insurance, both of which are included in participant withdrawals in the
statement of changes in net assets, for variable sub-accounts for the period
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
COST OF
PREMIUM ADMINISTRATIVE INSURANCE
VARIABLE SUB-ACCOUNTS LOADS FEES DEDUCTION
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund $ 12,511 $1,318 $13,088
------------------------------------------------------------
AIM V.I. Diversified Income Fund 6,576 579 9,848
------------------------------------------------------------
AIM V.I. Growth Fund 27,791 1,999 26,346
------------------------------------------------------------
AIM V.I. Value Fund 29,764 2,668 28,268
------------------------------------------------------------
Banker's Trust Equity 500 Index Fund 19,568 2,403 30,914
------------------------------------------------------------
Delaware Premium Small Cap Value Series 6,727 1,193 10,079
------------------------------------------------------------
Delaware Premium Trend Series 4,396 678 5,483
------------------------------------------------------------
Delaware Premium Emerging Markets Series 520 134 957
------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 27,339 2,288 29,336
------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 3,083 348 5,696
------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 10,424 1,005 18,587
------------------------------------------------------------
Lincoln National Money Market Account 360,119 7,600 266,635
------------------------------------------------------------
MFS Emerging Growth Series 10,627 1,139 6,957
------------------------------------------------------------
MFS Total Return Series 12,776 1,072 10,983
------------------------------------------------------------
MFS Utilities Series 3,706 654 6,652
------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 3,165 226 2,406
------------------------------------------------------------
OCC Accumulation Managed Portfolio 4,301 410 4,987
------------------------------------------------------------
Templeton Variable Products Asset Allocation Fund 1,390 216 1,785
------------------------------------------------------------
Templeton Variable Products International Fund 14,696 1,880 18,356
------------------------------------------------------------
Templeton Variable Products Stock Fund 3,047 509 4,151
------------------------------------------------------------
</TABLE>
Lincoln Life, upon full surrender of a policy, may charge a surrender
charge. This charge is in part a deferred sales charge and in part a
recovery of certain first year administrative costs. The amount of the
surrender charge, if any, will depend on the amount of the death benefit,
the amount of premium payments made during the first two policy years and
the age of the policy. In no event will the surrender charge exceed the
maximum allowed by state or federal law. No surrender charge is imposed on a
partial surrender, but an administrative fee of $25 is imposed, allocated
pro-rata among the variable sub-accounts (and, where applicable, the fixed
account) from which the partial surrender proceeds are taken. Full surrender
charges and partial surrender administrative charges paid to Lincoln Life
attributable to the variable sub-accounts for the year ended December 31,
1998, were $3,674.
M-9
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS
The following is a summary of net assets owned at
December 31, 1998.
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- ------------------------------------------------------------------
UNIT TRANSACTIONS:
- --------------------------- ---------- ------------ -----------
Accumulation units $13,726,201 $ 413,049 $ 178,665
- --------------------------- ---------- ------------ -----------
Accumulated net investment
income (loss) 145,536 8,986 9,031
- --------------------------- ---------- ------------ -----------
Accumulated net realized
gain (loss) on
investments 13,135 572 (231)
- --------------------------- ---------- ------------ -----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 502,853 44,531 (7,193)
---------- ------------ -----------
$14,387,725 $ 467,138 $ 180,272
========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- -------------------------------------------------------------
UNIT TRANSACTIONS:
- --------------------------- ---------- ---------- --------
Accumulation units $ 444,646 $4,582,593 $289,384
- --------------------------- ---------- ---------- --------
Accumulated net investment
income (loss) (461) 15,785 (252)
- --------------------------- ---------- ---------- --------
Accumulated net realized
gain (loss) on
investments 72 -- 592
- --------------------------- ---------- ---------- --------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 5,094 -- 41,059
---------- ---------- --------
$ 449,351 $4,598,378 $330,783
========== ========== ========
</TABLE>
M-10
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DELAWARE DELAWARE FIDELITY FIDELITY
AIM AIM BANKER'S PREMIUM DELAWARE PREMIUM VIP VIP II
V.I. V.I. TRUST EQUITY SMALL PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX CAP VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- --------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
Accumulation units $ 814,898 $ 945,930 $ 2,684,714 $259,805 $306,234 $14,348 $814,789 $77,138
- --------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
Accumulated net investment
income (loss) 44,796 37,353 28,782 (247) (225) (17) (881) (73)
- --------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
Accumulated net realized
gain (loss) on
investments 1,004 2,502 3,674 946 593 (75) 1,374 362
- --------------------------- --------- ----------- ------------ --------- -------- -------- -------- -------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 70,745 69,059 111,040 19,663 30,739 (512) 48,819 4,003
--------- ----------- ------------ --------- -------- -------- -------- -------
$ 931,443 $ 1,054,844 $ 2,828,210 $280,167 $337,341 $13,744 $864,101 $81,430
========= =========== ============ ========= ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- --------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
Accumulation units $583,316 $312,424 $ 90,634 $ 178,341 $ 34,526 $ 608,081 $ 92,686
- --------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
Accumulated net investment
income (loss) (451) (319) 4,602 (138) (45) (582) (108)
- --------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
Accumulated net realized
gain (loss) on
investments 599 600 660 85 234 (357) (71)
- --------------------------- -------- -------- ------------ ------------ --------- ------------- ---------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 18,520 15,337 1,012 4,808 2,272 21,136 2,721
-------- -------- ------------ ------------ --------- ------------- ---------
$601,984 $328,042 $ 96,908 $ 183,096 $ 36,987 $ 628,278 $ 95,228
======== ======== ============ ============ ========= ============= =========
</TABLE>
M-11
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the
aggregate proceeds from investments sold were as follows for
1998.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
----------------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund $ 439,170 $ 17,125
------------------------------------------------------------
AIM V.I. Diversified Income Fund 242,542 54,842
------------------------------------------------------------
AIM V.I. Growth Fund 875,293 15,579
------------------------------------------------------------
AIM V.I. Value Fund 1,022,610 39,304
------------------------------------------------------------
Banker's Trust Equity 500 Index Fund 2,798,647 85,089
------------------------------------------------------------
Delaware Premium Small Cap Value Series 281,412 21,848
------------------------------------------------------------
Delaware Premium Trend Series 313,954 7,938
------------------------------------------------------------
Delaware Premium Emerging Markets Series 16,051 1,720
------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 842,814 28,888
------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 85,412 8,345
------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 464,126 19,931
------------------------------------------------------------
Lincoln National Money Market Account 9,331,050 4,732,564
------------------------------------------------------------
MFS Emerging Growth Series 296,021 6,882
------------------------------------------------------------
MFS Total Return Series 604,226 21,348
------------------------------------------------------------
MFS Utilities Series 334,841 22,729
------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 111,360 16,122
------------------------------------------------------------
OCC Accumulation Managed Portfolio 183,624 5,413
------------------------------------------------------------
Templeton Variable Products Asset Allocation Fund 39,192 4,709
------------------------------------------------------------
Templeton Variable Products International Fund 622,978 15,465
------------------------------------------------------------
Templeton Variable Products Stock Fund 96,625 4,041
------------------------------------------------------------
----------- ----------
$19,001,948 $5,129,882
=========== ==========
</TABLE>
M-12
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
The following is a summary of investments owned at
December 31, 1998.
<TABLE>
<CAPTION>
NET
SHARES ASSET VALUE OF COST OF
OUTSTANDING VALUE SHARES SHARES
-------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 18,538 $ 25.20 $ 467,148 $ 422,617
---------------------------------------------
AIM V.I. Diversified Income Fund 16,479 10.94 180,276 187,469
---------------------------------------------
AIM V.I. Growth Fund 37,559 24.80 931,463 860,718
---------------------------------------------
AIM V.I. Value Fund 40,185 26.25 1,054,867 985,808
---------------------------------------------
Banker's Trust Equity 500 Index Fund 222,174 12.73 2,828,272 2,717,232
---------------------------------------------
Delaware Premium Small Cap Value Series 17,032 16.45 280,173 260,510
---------------------------------------------
Delaware Premium Trend Series 17,081 19.75 337,348 306,609
---------------------------------------------
Delaware Premium Emerging Markets Series 2,366 5.81 13,744 14,256
---------------------------------------------
Fidelity VIP Equity-Income Portfolio 33,994 25.42 864,119 815,300
---------------------------------------------
Fidelity VIP II Asset Manager Portfolio 4,484 18.16 81,432 77,429
---------------------------------------------
Fidelity VIP II Investment Grade Bond
Portfolio 34,673 12.96 449,361 444,267
---------------------------------------------
Lincoln National Money Market Account 459,849 10.00 4,598,486 4,598,486
---------------------------------------------
MFS Emerging Growth Series 15,407 21.47 330,790 289,731
---------------------------------------------
MFS Total Return Series 33,223 18.12 601,997 583,477
---------------------------------------------
MFS Utilities Series 16,551 19.82 328,049 312,712
---------------------------------------------
OCC Accumulation Global Equity Portfolio 6,281 15.43 96,910 95,898
---------------------------------------------
OCC Accumulation Managed Portfolio 4,186 43.74 183,104 178,296
---------------------------------------------
Templeton Variable Products Asset Allocation
Fund 1,647 22.46 36,989 34,717
---------------------------------------------
Templeton Variable Products International Fund 30,367 20.69 628,292 607,156
---------------------------------------------
Templeton Variable Products Stock Fund 4,520 21.07 95,234 92,513
--------------------------------------------- ----------- -----------
$14,388,054 $13,885,201
=========== ===========
</TABLE>
M-13
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors of
The Lincoln National Life Insurance Company and
Contract Owners of Lincoln Life Flexible Premium Variable Life
Account M
We have audited the accompanying statement of assets and
liability of Lincoln Life Flexible Premium Variable Life Account
M ("Variable Account") (comprised of the AIM V.I. Capital
Appreciation, AIM V.I. Diversified Income, AIM V.I. Growth, AIM
V.I. Value, Banker's Trust Equity 500 Index, Delaware Premium
Small Cap Value, Delaware Premium Trend, Delaware Premium
Emerging Markets, Fidelity VIP Equity-Income, Fidelity VIP II
Asset Manager, Fidelity VIP II Investment Grade Bond, Lincoln
National Money Market, MFS Emerging Growth, MFS Total Return,
MFS Utilities, OCC Accumulation Global Equity, OCC Accumulation
Managed, Templeton Variable Products Asset Allocation, Templeton
Variable Products International, and Templeton Variable Products
Stock subaccounts), as of December 31, 1998, and the related
statements of operations and changes in net assets for the
period from June 18, 1998 to December 31, 1998. These financial
statements are the responsibility of the Variable Account's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of
December 31, 1998, by correspondence with the custodian. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides 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 each of the respective subaccounts constituting the Lincoln
Life Flexible Premium Variable Life Account M at December 31,
1998, and the results of their operations and the changes in
their net assets for the period from June 18, 1998 to
December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 26, 1999
M-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7
- ------------------------------------------------------------
Preferred stocks 236.0 257.3
- ------------------------------------------------------------
Unaffiliated common stocks 259.3 436.0
- ------------------------------------------------------------
Affiliated common stocks 322.1 412.1
- ------------------------------------------------------------
Mortgage loans on real estate 3,932.9 3,012.7
- ------------------------------------------------------------
Real estate 473.8 584.4
- ------------------------------------------------------------
Policy loans 1,606.0 660.5
- ------------------------------------------------------------
Other investments 434.4 335.5
- ------------------------------------------------------------
Cash and short-term investments 1,725.4 2,133.0
- ------------------------------------------------------------ --------- ---------
Total cash and investments 32,820.8 26,392.2
- ------------------------------------------------------------
Premiums and fees in course of collection 33.3 42.4
- ------------------------------------------------------------
Accrued investment income 432.8 343.5
- ------------------------------------------------------------
Reinsurance recoverable 171.6 71.1
- ------------------------------------------------------------
Funds withheld by ceding companies 53.7 44.1
- ------------------------------------------------------------
Federal income taxes recoverable from parent company 64.7 6.9
- ------------------------------------------------------------
Goodwill 49.5 52.4
- ------------------------------------------------------------
Other admitted assets 89.3 85.6
- ------------------------------------------------------------
Separate account assets 36,907.0 31,330.9
- ------------------------------------------------------------ --------- ---------
Total admitted assets $70,622.7 $58,369.1
- ------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9
- ------------------------------------------------------------
Other policyholder funds 16,647.5 16,360.1
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 897.6 878.2
- ------------------------------------------------------------
Funds held under reinsurance treaties 795.8 720.4
- ------------------------------------------------------------
Asset valuation reserve 484.5 450.0
- ------------------------------------------------------------
Interest maintenance reserve 159.7 135.4
- ------------------------------------------------------------
Other liabilities 504.5 294.7
- ------------------------------------------------------------
Short-term loan payable to parent company 140.0 120.0
- ------------------------------------------------------------
Net transfers due from separate accounts (789.0) (761.9)
- ------------------------------------------------------------
Separate account liabilities 36,907.0 31,330.9
- ------------------------------------------------------------ --------- ---------
Total liabilities 68,058.2 55,400.7
- ------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million
(owned by Lincoln National Corporation) 25.0 25.0
- ------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 --
- ------------------------------------------------------------
Paid-in surplus 1,930.1 1,821.8
- ------------------------------------------------------------
Unassigned surplus (deficit) (640.6) 1,121.6
- ------------------------------------------------------------ --------- ---------
Total capital and surplus 2,564.5 2,968.4
- ------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1
- ------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- -------- --------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $5,589.0 $7,268.5
- ------------------------------------------------------------
Net investment income 2,107.2 1,847.1 1,756.3
- ------------------------------------------------------------
Amortization of interest maintenance reserve 26.4 41.5 27.2
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 179.9 99.7 90.9
- ------------------------------------------------------------
Expense charges on deposit funds 134.6 119.3 100.7
- ------------------------------------------------------------
Separate account investment management and administration
service fees 396.3 325.5 244.6
- ------------------------------------------------------------
Other income 31.3 21.3 16.8
- ------------------------------------------------------------ --------- -------- --------
Total revenues 15,613.3 8,043.4 9,505.0
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 5,989.9
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 3,123.1
- ------------------------------------------------------------ --------- -------- --------
Total benefits and expenses 16,883.5 7,576.0 9,113.0
- ------------------------------------------------------------ --------- -------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments (1,270.2) 467.4 392.0
- ------------------------------------------------------------
Dividends to policyholders 67.9 27.5 27.3
- ------------------------------------------------------------ --------- -------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments (1,338.1) 439.9 364.7
- ------------------------------------------------------------
Federal income taxes (credit) (141.0) 78.3 83.6
- ------------------------------------------------------------ --------- -------- --------
Gain (loss) from operations before net realized gain on
investments (1,197.1) 361.6 281.1
- ------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 46.8 31.3 53.3
- ------------------------------------------------------------ --------- -------- --------
Net income (loss) $(1,150.3) $ 392.9 $ 334.4
- ------------------------------------------------------------ ========= ======== ========
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,968.4 $1,962.6 $1,732.9
- ------------------------------------------------------------
Correction of prior year's asset valuation reserve -- (37.6) --
- ------------------------------------------------------------
Correction of prior year's admitted assets -- (57.0) --
- ------------------------------------------------------------ -------- -------- --------
2,968.4 1,868.0 1,732.9
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 334.4
- ------------------------------------------------------------
Difference in cost and admitted investment amounts (304.8) (36.2) 38.6
- ------------------------------------------------------------
Nonadmitted assets (17.1) (0.4) (3.0)
- ------------------------------------------------------------
Regulatory liability for reinsurance (35.2) (3.9) 0.6
- ------------------------------------------------------------
Life policy reserve valuation basis (0.4) (0.9) (0.4)
- ------------------------------------------------------------
Asset valuation reserve (34.5) (36.9) (105.5)
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- ------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated
company in 1997 108.4 938.4 100.0
- ------------------------------------------------------------
Separate account receivable due to change in valuation -- (2.6) --
- ------------------------------------------------------------
Dividends to shareholder (220.0) (150.0) (135.0)
- ------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,564.5 $2,968.4 $1,962.6
- ------------------------------------------------------------ ======== ======== ========
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ---------- ----------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 8,059.4
- ------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) (767.5)
- ------------------------------------------------------------
Investment income received 2,003.9 1,798.8 1,700.6
- ------------------------------------------------------------
Separate account investment management and administration
service fees 396.3 325.5 244.6
- ------------------------------------------------------------
Benefits paid (7,395.8) (5,345.2) (4,050.4)
- ------------------------------------------------------------
Insurance expenses paid (2,909.7) (3,193.0) (3,216.8)
- ------------------------------------------------------------
Federal income taxes recovered (paid) 84.2 (87.0) (72.3)
- ------------------------------------------------------------
Dividends to policyholders (12.9) (28.4) (27.7)
- ------------------------------------------------------------
Other income received and expenses paid, net 207.0 (8.7) 117.0
- ------------------------------------------------------------ ---------- ---------- ----------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 1,986.9
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 12,542.0
- ------------------------------------------------------------
Purchase of investments (16,950.0) (10,345.0) (14,175.4)
- ------------------------------------------------------------
Other sources (uses) including reinsured policy loans (778.3) 529.1 (377.2)
- ------------------------------------------------------------ ---------- ---------- ----------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (2,010.6)
- ------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 100.0
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- ------------------------------------------------------------
Proceeds from borrowings from shareholder 140.0 120.0 100.0
- ------------------------------------------------------------
Repayment of borrowings from shareholder (120.0) (100.0) (63.0)
- ------------------------------------------------------------
Dividends paid to shareholder (220.0) (150.0) (135.0)
- ------------------------------------------------------------ ---------- ---------- ----------
Net cash provided by (used in) financing activities 1,158.4 (130.0) 2.0
- ------------------------------------------------------------ ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (21.7)
- ------------------------------------------------------------
Cash and short-term investments at beginning of year 2,133.0 759.2 780.9
- ------------------------------------------------------------ ---------- ---------- ----------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 759.2
- ------------------------------------------------------------ ========== ========== ==========
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1998, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Insurance Department"), which practices differ from generally
accepted accounting principles ("GAAP"). The more significant variances from
GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between cost and admitted
asset investment amounts are credited or charged directly to unassigned
surplus rather than to a separate surplus account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period in which the asset giving rise to the gain or loss is sold and
valuation allowances are provided when there has been a decline in value
deemed other than temporary, in which case, the provision for such declines
are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory-basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
period of the related policies using assumptions consistent with those used
in computing policy benefit reserves. For universal life insurance, annuity
and other investment-type products, deferred policy acquisition costs, to
the extent recoverable from future gross profits, are amortized generally in
proportion to the present value of expected gross profits from surrender
charges and investment, mortality and expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to annuity and other investment-type
contracts are reported as premium revenues; whereas, under GAAP, such
premiums and deposits are treated as liabilities and policy charges
represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Insurance Department to assume such business. Changes to
those amounts are credited or charged directly to unassigned surplus. Under
GAAP, an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner whereas under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
--------------------------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1998 1997 1998 1997 1996
--------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,564.5 $ 2,968.4 $(1,150.3) $ 392.9 $334.4
-------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
goodwill 3,085.2 958.3 48.5 (98.9) 66.7
----------------------------------------
Policy and contract reserves (2,299.9) (1,672.9) 1,743.4 (48.6) (57.1)
----------------------------------------
Interest maintenance reserve 159.7 135.4 24.4 58.7 (39.7)
----------------------------------------
Deferred income taxes 181.6 (13.0) (218.6) 70.3 1.8
----------------------------------------
Policyholders' share of earnings and
surplus on participating business (132.8) (79.8) 3.2 5.3 (.3)
----------------------------------------
Asset valuation reserve 484.5 450.0 -- -- --
----------------------------------------
Net realized gain (loss) on investments (174.1) (91.5) (116.7) (20.4) 78.7
----------------------------------------
Unrealized gain on investments 1,335.1 1,245.5 -- -- --
----------------------------------------
Nonadmitted assets, including nonadmitted
investments 119.1 61.0 -- -- --
----------------------------------------
Investments in subsidiary companies 490.4 188.8 41.3 (80.5) 29.9
----------------------------------------
Surplus notes and related interest (1,251.5) -- (1.5) -- --
----------------------------------------
Other, net (120.1) (162.5) 103.6 (35.0) (82.6)
---------------------------------------- --------- --------- --------- ------- ------
Net increase (decrease) 1,877.2 1,019.3 1,627.6 (149.1) (2.6)
------------------------------------------- --------- --------- --------- ------- ------
Amounts on a GAAP basis $ 4,441.7 $ 3,987.7 $ 477.3 $ 243.8 $331.8
------------------------------------------- ========= ========= ========= ======= ======
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the repurchase price. It is the Company's
policy to take possession of securities with a market value at least equal
to the securities loaned. Securities loaned are recorded at amortized cost
as long as the value of the related collateral is sufficient. The Company's
agreements with third parties generally contain contractual provisions to
allow for additional collateral to be obtained when necessary. The Company
values collateral daily and obtains additional collateral when deemed
appropriate.
GOODWILL
Goodwill, which represents the excess, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Insurance Department. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenerios indicate the need for such
reserves. If net premiums exceed the gross premiums on any insurance
in-force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums, benefits and claims and claim adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC and certain LNC subsidiaries.
Pursuant to an intercompany tax sharing agreement with LNC, the Company
provides for income taxes on a separate return filing basis. The tax sharing
agreement also provides that the Company will receive benefit for net
operating losses, capital losses and tax credits which are not usable on a
separate return basis to the extent such items may be utilized in the
consolidated income tax returns of LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus or net income previously reported.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements. Codification will require adoption by the various
states before it becomes the prescribed statutory-basis of accounting for
insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, the state of Indiana must
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the Insurance
Department. At this time, it is anticipated that Indiana will adopt
Codification, however, based on current guidance, management believes that
the impact of Codification will not be material to the Company's
statutory-basis financial statements.
The Company has received written approval from the Insurance Department to
record surrender charges applicable to separate account liabilities for
variable life and annuity products as a liability in the separate account
financial statements payable to the Company's general account. In the
accompanying financial statements, a corresponding receivable is recorded
with the related income impact recorded in the accompanying Statement of
Operations as a change in reserves or change in premium and other deposit
funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,714.3 $1,524.4 $1,442.2
------------------------------------------------------------
Preferred stocks 19.7 23.5 9.6
------------------------------------------------------------
Unaffiliated common stocks 10.6 8.3 6.5
------------------------------------------------------------
Affiliated common stocks 5.2 15.0 9.5
------------------------------------------------------------
Mortgage loans on real estate 323.6 257.2 269.3
------------------------------------------------------------
Real estate 81.4 92.2 114.4
------------------------------------------------------------
Policy loans 86.5 37.5 35.0
------------------------------------------------------------
Other investments 26.5 28.2 22.4
------------------------------------------------------------
Cash and short-term investments 104.7 70.3 48.9
------------------------------------------------------------ -------- -------- --------
Total investment income 2,372.5 2,056.6 1,957.8
------------------------------------------------------------
Expenses:
Depreciation 19.3 21.0 25.0
------------------------------------------------------------
Other 246.0 188.5 176.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 265.3 209.5 201.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,107.2 $1,847.1 $1,756.3
------------------------------------------------------------ ======== ======== ========
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
amounted to $2,600,000, consisting principally of interest
on bonds in default and mortgage loans. No accrued
investment income was nonadmitted at December 31, 1998.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Corporate $17,658.4 $1,159.8 $148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- -------- ------ ---------
$23,830.9 $1,480.8 $246.2 $25,065.5
========= ======== ====== =========
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- -------- ------ ---------
$18,560.7 $1,330.5 $ 92.6 $19,798.6
========= ======== ====== =========
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1998 and 1997 reflects adjustments of
$11,800,000 and $5,500,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 1999 $ 705.6 $ 712.6
------------------------------------------------------------
In 2000-2003 4,041.9 4,142.8
------------------------------------------------------------
In 2004-2008 6,652.0 6,860.1
------------------------------------------------------------
After 2008 8,119.3 8,899.7
------------------------------------------------------------
Mortgage-backed securities 4,312.1 4,450.3
------------------------------------------------------------ --------- ---------
Total $23,830.9 $25,065.5
------------------------------------------------------------ ========= =========
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1998,
1997 and 1996 were $9,395,000,000, $9,715,000,000 and
$10,996,900,000, respectively. Gross gains during 1998, 1997
and 1996 of $186,300,000, $218,100,000 and $169,700,000,
respectively, and gross losses of $138,000,000, $78,000,000
and $177,000,000, respectively, were realized on those
sales.
At December 31, 1998 and 1997, investments in bonds, with an
admitted asset value of $97,800,000 and $76,200,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks and preferred stocks are reported directly in
unassigned surplus and do not affect operations. The cost or
amortized cost, gross unrealized gains and losses and the
fair value of investments in unaffiliated common stocks and
preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
---------------------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
---------------------------------------------------
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
---------------------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
---------------------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1998 and 1997 reflects adjustments of
$5,800,000 and $4,000,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1998, the minimum and maximum lending rates for
mortgage loans were 6.41% and 8.08%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1998, the
Company did not hold any mortgages with interest overdue
beyond one year. All properties covered by mortgage loans
have fire insurance at least equal to the excess of the loan
over the maximum loan that would be allowed on the land
without the building.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The components of the Company's real estate are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 9.0 8.4
------------------------------------------------------------
Less accumulated depreciation (1.7) (1.2)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 9.8 9.7
------------------------------------------------------------
Other:
Land 93.2 124.1
------------------------------------------------------------
Buildings 413.0 491.6
------------------------------------------------------------
Other 7.9 8.1
------------------------------------------------------------
Less accumulated depreciation (50.1) (49.1)
------------------------------------------------------------ ------ ------
Net other real estate 464.0 574.7
------------------------------------------------------------ ------ ------
Net real estate $473.8 $584.4
------------------------------------------------------------ ====== ======
</TABLE>
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Realized capital gains $179.7 $209.3 $ 69.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credit) of $27.3, $54.0 and $(6.7) in 1998, 1997 and 1996,
respectively) 50.8 100.2 (12.4)
------------------------------------------------------------ ------ ------ ------
128.9 109.1 81.7
Less federal income taxes on realized gains 82.1 77.8 28.4
------------------------------------------------------------ ------ ------ ------
Net realized capital gains $ 46.8 $ 31.3 $ 53.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly owned insurance subsidiaries is
summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
-------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,221.1 $333.9 $403.6 $1,938.0
---------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,261.4 $365.2 $893.6 $2,208.2
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,149.8 $266.3 $281.8 $1,814.5
---------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
---------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,261.4 $365.2 $893.6 $2,208.2
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $310.4 $165.0 $150.3 $1,402.6
-----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
-----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ (0.5) $ 1.5 $ 10.7 $ (254.2)
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
-----------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,154.4 $284.8 $399.0 $796.3
-----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
----------------------------------------------------------- -------- ------ ------ ------
Total admitted assets $1,191.3 $362.1 $880.6 $972.1
----------------------------------------------------------- ======== ====== ====== ======
Insurance reserves $1,072.2 $266.7 $279.3 $588.7
-----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
-----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
-----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
----------------------------------------------------------- -------- ------ ------ ------
Total liabilities and capital and surplus $1,191.3 $362.1 $880.6 $972.1
----------------------------------------------------------- ======== ====== ====== ======
</TABLE>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $267.6 $ 135.4 $125.3 $230.0
------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
------------------------------------------------------------ ------ ------- ------ ------
Net income (loss) $ 5.1 $(108.2) $10.6 $ 5.5
------------------------------------------------------------ ====== ======= ====== ======
</TABLE>
The Company also owns three non-insurance subsidiaries, all
of which were formed or acquired in 1998. AnnuityNet, Inc.
was formed for the distribution of variable annuities over
the internet and is valued on the equity method with an
admitted asset value of $1,500,000 at December 31, 1998.
Lincoln National Insurance Associates was purchased for
$600,000 and is valued on the equity method with an admitted
asset value of $600,000 at December 31, 1998. Sagemark
Consulting, Inc. ("Sagemark") was purchased in 1998 and is a
broker dealer acquired in connection with a reinsurance
transaction completed in 1998. Sagemark is valued on the
equity method with an admitted asset value of $5,700,000 at
December 31, 1998.
The carrying value of all affiliated common stocks, was
$322,100,000 and $412,100,000 at December 31, 1998 and 1997,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1998 and 1997 was $631,100,000 and
$466,200,000, respectively.
During 1998, 1997 and 1996 the Company's insurance
subsidiaries paid dividends of $5,200,000, $15,000,000 and
$10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
statements of operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1997 and 1996, federal income taxes incurred totaled
$78,300,000 and $83,600,000, respectively. In 1998, a
federal income tax net operating loss of $103,800,000 and
tax credits of $19,300,000 were incurred and carried back to
recover taxes paid in prior years.
The Company paid $2,300,000, $164,500,000 and $100,400,000
to LNC in 1998, 1997 and 1996, respectively, for federal
income taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other admitted assets", includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future policy
benefits and claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $4,081.8 $1,431.0
------------------------------------------------------------
Amounts recoverable from other insurers 79.9 35.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
Insurance assumed $9,018.9 $727.2 $241.3
------------------------------------------------------------
Insurance ceded 877.1 302.9 193.3
------------------------------------------------------------ -------- ------ ------
Net amount included in premiums $8,141.8 $424.3 $ 48.0
------------------------------------------------------------ ======== ====== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,098,800,000, $1,240,500,000 and $787,900,000 for 1998,
1997 and 1996, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,285.2 $16,201.8
------------------------------------------------------------
Undistributed earnings on participating business 348.4 142.0
------------------------------------------------------------
Other 13.9 16.3
------------------------------------------------------------ --------- ---------
$16,647.5 $16,360.1
========= =========
</TABLE>
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and fees in course of collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
NET OF
GROSS LOADING LOADING
----------------------------------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
------------------------------------------------------------
Group life 14.2 .2 14.0
------------------------------------------------------------ ------ ----- ------
$ 10.0 $14.9 $ (4.9)
====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $2.4 $ .8
------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
------------------------------------------------------------
Group life 10.6 .2 10.4
------------------------------------------------------------ ----- ---- -----
$31.6 $5.8 $25.8
===== ==== =====
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $11,900,000 and $13,400,000 in 1998 and 1997,
respectively. During 1996, LNC Administrative Services
Corporation, an affiliate, entered into a similar agreement
with the Company with direct premiums written amounting to
$7,000,000 and $7,200,000 in 1998 and 1997, respectively.
Authority granted by the managing general agents agreements
include underwriting, claims adjustment and claims payment
services.
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES
At December 31, 1998, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,659.5 5%
------------------------------------------------------------
At book value, less surrender charge 2,959.2 5
------------------------------------------------------------
At market value 35,472.0 63
------------------------------------------------------------ --------- ---
41,090.7 73
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 12,747.3 22
------------------------------------------------------------
Not subject to discretionary withdrawal 2,625.1 5
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund liabilities --
before reinsurance 56,463.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,683.8
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $54,779.3
------------------------------------------------------------ =========
</TABLE>
A reconciliation of the total net annuity reserves and
deposit fund liabilities to the amounts reported in the
Company's 1998 Annual Statement and the Company's Separate
Accounts Annual Statement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
-------------
<S> <C>
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 2,554.6
------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 26.0
------------------------------------------------------------
Exhibit 10, Column 1, Line 19 16,579.6
------------------------------------------------------------ ---------
19,160.2
------------------------------------------------------------ ---------
Per Separate Accounts Annual Statement
Exhibit 6, Column 2, Line 0299999 146.4
------------------------------------------------------------
Page 3, Line 3 35,472.7
------------------------------------------------------------ ---------
35,619.1
------------------------------------------------------------ ---------
Total net annuity reserves and deposit fund liabilities $54,779.3
------------------------------------------------------------ =========
</TABLE>
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA indemnity reinsurance transaction on January 5,
1998. This note calls for the Company to pay the principal amount of the
notes on or before March 31, 2028 and interest to be paid quarterly at an
annual rate of 6.56%. Subject to approval by the Indiana Insurance
Commissioner, LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the anniversary date of the
note, but not before January 5, 2003. Any payment of interest or
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS (CONTINUED)
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1998), and subject to approval by the Indiana Insurance
Commissioner. No interest payments were approved by the Indiana Insurance
Commissioner as of December 31, 1998 and, thus, no amounts were accrued at
that date.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna indemnity reinsurance transaction. This note calls
for the Company to pay the principal amount of the notes on or before
December 31, 2028 and interest to be paid quarterly at an annual rate of
6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also
has a right to redeem the note for immediate repayment in total or in part
once per year on the anniversary date of the note, but not before
December 18, 2003. Any payment of interest or repayment of principal may be
paid only out of the Company's earnings, only if the Company's surplus
exceeds specified levels ($2,379,600,000 at December 31, 1998), and subject
to approval by the Indiana Insurance Commissioner. No interest payments were
approved by the Indiana Insurance Commissioner as of December 31, 1998 and,
thus, no amounts were accrued at that date.
A summary of the terms of these surplus notes follows:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL CURRENT YEAR
DATE ISSUED AMOUNT OF NOTE OUTSTANDING INTEREST PAID
- ----------- -------------- ------------- -------------
<S> <C> <C> <C>
January 5, 1998 $500,000,000 $500,000,000 $32,300,000
- -----------------------------------------------------
December 18, 1998 750,000,000 750,000,000 --
- -----------------------------------------------------
</TABLE>
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in
October 1998, the Company assumed a block of individual life insurance
business from Aetna (SEE NOTE 10). The statutory accounting regulations do
not allow goodwill to be recognized on indemnity reinsurance transactions
and therefore, the related ceding commission was expensed in the
accompanying Statement of Operations and resulted in the reduction of
unassigned surplus. As a result of these transactions, the Company's
statutory-basis unassigned surplus is negative as of December 31, 1998 and
it will be necessary for the Company to obtain prior approval of the Indiana
Insurance Commissioner before paying any dividends to LNC until such time as
statutory-basis unassigned surplus is positive. It is expected that
statutory-basis unassigned surplus will return to a positive position within
two to three years from the closing of the Aetna transaction assuming a
level of statutory-basis earnings coinciding with recent earnings patterns.
If statutory-basis earnings are less then recent patterns due to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or other factors, or if dividends are approved and paid at amounts
higher than recent history, the statutory-basis unassigned surplus may not
return to a positive position as soon as expected. Although no assurance can
be given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1998, 885,252 and 504,369 shares of LNC common stock were
subject to options granted to Company employees and agents, respectively,
under the stock option incentive plans of which 430,053 and 87,160,
respectively, were exercisable on that date. The exercise prices of the
outstanding options range from $23.50 to $96.41. During 1998, 1997 and 1996,
136,469, 170,789 and 72,405 options were exercised, respectively, and
18,288, 1,846 and 10,950 options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1998 and 1997 is a net
liability of $670,100,000 and $516,900,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels and/or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves could be required in the future. Accordingly, this liability may
prove to be deficient or excessive. The Company reviews reserve levels on an
ongoing basis. However, it is management's opinion that such future
development will not materially affect the financial position of the
Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. As a result of this study, the reserve level
was deemed to be inadequate to meet future obligations if current incident
levels were to continue in the future. In order to address this situation,
the Company strengthened its disability income reserves by $80,000,000 in
1997.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1998, 1997 and 1996 was
$34,000,000, $29,300,000 and $26,400,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1999 $ 18.9
--------------------------------
2000 18.4
--------------------------------
2001 18.7
--------------------------------
2002 18.7
--------------------------------
2003 18.6
--------------------------------
Thereafter 116.6
-------------------------------- ------
$209.9
======
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 1998 were $54,800,000. Future minimum annual costs
range from $33,600,000 to $56,800,000, however future costs are dependent on
usage and could exceed these amounts.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Prior to December 31, 1997, the Company
limited its maximum coverage that it retained on an individual to
$3,000,000. Based on a review of the capital and business in-force effective
in January 1998, the Company changed the amount it will retain on an
individual to $10,000,000. Portions of the Company's deferred annuity
business have also been reinsured with other companies to limit its exposure
to interest rate risks. At December 31, 1998, the reserves associated with
these reinsurance arrangements totaled $1,608,500,000. To cover products
other than life insurance, the Company acquires other insurance coverages
with retentions and limits that management believes are appropriate for the
circumstances. The accompanying statutory-basis financial statements reflect
premiums, benefits and policy acquisition expenses net of reinsurance ceded.
The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American Statements Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LLANY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA Corporation ("CIGNA"). The Company
paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$1,127,700,000 in 1998, which is included in the Statement of Operations
line item "Underwriting, acquisition, insurance and other expenses." At the
time of closing, this block of business had statutory liabilities of
$4,658,200,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities.
Pursuant to the terms of the reinsurance agreement, the Company, LLANY and
CIGNA are in the final stages of agreeing to the statutory-basis values of
these assets and liabilities. Any changes to these values that may occur in
future periods will not be material to the Company's financial position.
Subsequent to this transaction, the Company and LLANY announced that they
had reached an agreement to sell the administration rights to a variable
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
annuity portfolio that had been acquired as part of the block of business
assumed on January 2, 1998. This sale closed on October 12, 1998 with an
effective date of August 1, 1998.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
On October 1, 1998, the Company and LLANY entered into an indemnity
reinsurance transaction whereby the Company and LLANY reinsured 100% of a
block of individual life insurance business from Aetna, Inc. The Company
paid $856,300,000 to Aetna on October 1, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$815,300,000 in 1998, which is included in the Statement of Operations line
item "Underwriting, acquisition, insurance and other expenses." At the time
of closing, this block of business had statutory liabilities of
$2,813,300,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities. The Company financed this reinsurance transaction with proceeds
from short-term debt borrowings from LNC until the December 18, 1998 surplus
note was approved by the Insurance Department. Subsequent to the Aetna
transaction, the Company and LLANY announced that they had reached an
agreement to retrocede the sponsored life business assumed for $87,600,000.
The retrocession agreement closed on October 14, 1998 with an effective date
of October 1, 1998.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1998, the Company has provided $44,900,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company has retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. Generally, such
amounts are offset by corresponding receivables from the ceding company,
which are secured by future profits on the reinsured business. However, the
Company is subject to the risk that the ceding company may become insolvent
and the right of offset would not be permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $43,400,000 and $8,200,000 at December 31, 1998
and 1997, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1998, 25% of such mortgages ($980,500,000) involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding
on any individual property does not exceed $58,200,000.
At December 31, 1998, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage will depend on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will not have a material adverse affect on the financial position of the
Company.
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four lawsuits involving alleged fraud in the sale of interest sensitive
universal life and whole life insurance have been filed as class actions
against the Company, although the court has not certified a class in any of
these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in
these cases is substantial, it is premature to make assessments about the
potential loss, if any, because the status of the cases ranges from the
early states of litigation to the dismissal and appeals stage. Management
intends to defend these suits vigorously. The amount of liability, if any,
which may arise as a result of these suits cannot be reasonably estimated at
this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks at December 31, 1998 relate to mortgage loan
pass-through certificates. The Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. The
outstanding guarantees as of December 31, 1998 and 1997 were $30,900,000 and
$41,600,000, respectively. It is management's opinion that the value of the
properties underlying these commitments is sufficient that in the event of
default the impact would not be material to the Company. Accordingly, both
the carrying value and fair value of these guarantees is zero at
December 31, 1998 and 1997.
The Company's wholly owned subsidiary, LNH&C, accepts personal accident
reinsurance programs from other insurance companies. Most of these programs
are presented to LNH&C by independent brokers who represent the ceding
companies. Certain excess of loss personal accident reinsurance programs
created in the London market during 1993 through 1996 have produced and have
potential to produce significant losses. At December 31, 1998 and 1997,
liabilities of $177,400,000 and $186,300,000, respectively, have been
established for such programs. These reserves are based on various estimates
that are subject to considerable uncertainty. Accordingly, this reserve may
prove to be deficient or excessive. However, it is management's opinion that
such future development will not materially affect the financial position of
the Company.
The Company and LNH&C continue to investigate the personal accident
reinsurance programs to determine if there are additional programs including
certain workers compensation programs, which may produce losses. At this
time, the Company and LNH&C do not have sufficient information to determine
whether or not it is probable that additional losses have been incurred nor
can the Company and LNH&C accurately estimate the ultimate cost or timing of
the outcome on these programs.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
government obligations, commodity risk, credit risk, increased liabilities
associated with reinsurance agreements and foreign exchange risks. In
addition, the Company is subject to the risks associated with changes in the
value of its derivatives; however, such changes in value generally are
offset by changes in the value of the items
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
------------------------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
------------------------------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
------------------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
---------------------------------
Swaptions 1,899.5 1,752.0 16.2 2.5 6.9 6.9
---------------------------------
Interest rate swaps 258.3 10.0 -- 9.9 -- (1.8)
---------------------------------
Put options 21.3 -- -- 2.2 -- --
--------------------------------- -------- -------- ----- ----- ----- ------
6,287.9 6,662.0 25.5 15.5 20.8 6.0
Foreign currency derivatives:
Forward contracts 1.5 163.1 -- -- 5.4 5.4
---------------------------------
Foreign currency swaps 47.2 15.0 -- .3 -- (2.1)
--------------------------------- -------- -------- ----- ----- ----- ------
48.7 178.1 -- .3 5.4 3.3
Commodity derivatives:
Commodity swaps 8.1 -- -- 2.4 -- --
--------------------------------- -------- -------- ----- ----- ----- ------
$6,344.7 $6,840.1 $25.5 $18.2 $26.2 $ 9.3
======== ======== ===== ===== ===== ======
</TABLE>
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
-----------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
-----------------------------------------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $4,900.0 $5,500.0 $ -- $ -- $1,752.0 $ 672.0
------------------------------------
New contracts 708.8 -- -- 50.0 218.3 1,080.0
------------------------------------
Terminations and maturities (1,500.0) (600.0) -- (50.0) (70.8) --
------------------------------------ -------- -------- ---------- ------ -------- --------
Balance at end of year $4,108.8 $4,900.0 $ -- $ -- $1,899.5 $1,752.0
------------------------------------ ======== ======== ========== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS INTEREST RATE SWAPS
----------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ 147.7 $ 10.0 $ --
------------------------------------------------------------
New contracts -- 88.3 2,226.6 10.0
------------------------------------------------------------
Terminations and maturities -- (236.0) (1,978.3) --
------------------------------------------------------------ ---------- ------- --------- -----
Balance at end of year $ -- $ -- $ 258.3 $10.0
------------------------------------------------------------ ========== ======= ========= =====
</TABLE>
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
--------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ -- $-- $ --
------------------------------------------------------------
New contracts 21.3 -- 8.1 --
------------------------------------------------------------
Terminations and maturities -- -- -- --
------------------------------------------------------------ ----- ---------- ---- ----------
Balance at end of year $21.3 $ -- $8.1 $ --
------------------------------------------------------------ ===== ========== ==== ==========
</TABLE>
<TABLE>
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
---------------------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
---------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------------------------------------------------------------------------
(IN MILLIONS)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 163.1 $ 251.5 $ -- $ 43.9 $15.0 $15.0
-------------------------------------------
New contracts 419.8 833.1 -- -- 39.2 --
-------------------------------------------
Terminations and maturities (581.4) (921.6) -- (43.9) (7.0) --
------------------------------------------- ------- ------- ---------- ------ ----- -----
Balance at end of year $ 1.5 $ 163.0 $ -- $ -- $47.2 $15.0
------------------------------------------- ======= ======= ========== ====== ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 1999 through 2006, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($9,300,000 as of December 31, 1998) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 1999 through 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of rising
interest rates. The premium paid for the swaptions is included in other
assets ($16,200,000 as of December 31, 1998) and is being amortized over the
terms of the agreements. This amortization is included in net investment
income.
SPREAD LOCK AGREEMENTS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURE CONTRACTS
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
fixed maturity securities. Financial futures contracts obligate the Company
to buy or sell a financial instrument at a specified future date for a
specified price. They may be settled in cash or through delivery of the
financial instrument. Cash settlements on the change in market values of
financial futures contracts are made daily.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the agreements the stream of variable coupon
payments generated from the bonds, and in turn, receives a fixed payment
from the counterparty at a predetermined interest rate. The net
receipts/payments from interest rate swaps are recorded in net investment
income.
The Company also uses interest rate swap agreements to hedge its exposure to
interest rate fluctuations related to the anticipated purchase of assets to
support newly acquired or assumed blocks of business. Once the assets are
purchased, the gains resulting from the termination of the swap agreements
are applied to the basis of the assets purchased. The gains are recognized
in earnings over the life of the assets.
PUT OPTION
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate a fixed income, fixed
maturity investment. The put options give the Company the right, but not the
obligation, to sell to the counterparty of the agreement the specified
securities on a specified date at a fixed price.
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
COMMODITY SWAP
The Company uses a commodity swap to hedge its exposure to fluctuations in
the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security. A
commodity swap is a contractual agreement to exchange a certain amount of a
particular commodity for a fixed amount of cash. The Company owns a fixed
income security that meets its coupon payment obligations in gold bullion.
The Company is obligated to pay to the counterparty the gold bullion, and in
return, receives from the counterparty a stream of fixed income payments.
The fixed income payments are the product of the swap notional multiplied by
the fixed rate stated in the swap agreement. The net receipts/payments from
commodity swaps are recorded in net investment income.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$10,000,000, $7,000,000 and $6,900,000 in 1998, 1997 and 1996, respectively.
Deferred losses of $48,200,000 as of December 31, 1998, were the result of:
1) terminated and expired spread-lock agreements and; 2) terminated interest
rate swaps. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, financial futures, interest rate swaps, put options and foreign
currency derivatives. However, the Company does not anticipate
nonperformance
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
by any of the counterparties. The credit risk associated with such
agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount of
such exposure is essentially the net replacement cost or market value for
such agreements with each counterparty if the net market value is in the
Company's favor. At December 31, 1998, the exposure was $21,100,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market prices, where
available. For preferred stock not actively traded, fair values are based on
values of issues of comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income. The ratings for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future policy benefits and
claims" and "Other policyholder funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
For short-term debt, the carrying value approximates fair value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
GUARANTEES
The Company's guarantees include guarantees related to mortgage loan
pass-through certificates. Based on historical performance where repurchases
have been negligible and the current status, which indicates none of the
loans are delinquent, the fair value liability for the guarantees related to
the mortgage loan pass-through certificates is zero.
DERIVATIVES
The Company employs several different methods for determining the fair value
of its derivative instruments. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices
for the foreign currency exchange contracts and financial future contracts
and; 2) industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock agreements, interest
rate swaps, commodity swaps and put options.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are
also reported at fair value in amounts equal to the separate account assets.
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1998 1997
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 23,830.9 $ 25,065.5 $ 18,560.7 $ 19,798.6
-----------------------------------------------
Preferred stocks 236.0 242.5 257.3 268.7
-----------------------------------------------
Unaffiliated common stocks 259.3 259.3 436.0 436.0
-----------------------------------------------
Mortgage loans on real estate 3,932.9 4,100.1 3,012.7 3,179.2
-----------------------------------------------
Policy loans 1,606.0 1,685.9 660.5 648.3
-----------------------------------------------
Other investments 434.4 434.4 335.5 335.5
-----------------------------------------------
Cash and short-term investments 1,725.4 1,725.4 2,133.0 2,133.0
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,845.8) (17,486.4) (17,324.2) (16,887.6)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (714.4) (738.2) (1,267.0) (1,294.6)
--------------------------------------------
Short-term debt (140.0) (140.0) (120.0) (120.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,335.1) -- --
-----------------------------------------------
Derivatives 25.5 18.2 26.2 9.3
-----------------------------------------------
Investment commitments -- (0.6) -- (0.5)
-----------------------------------------------
Separate account assets 36,907.0 36,907.0 31,330.9 31,330.9
-----------------------------------------------
Separate account liabilities (36,907.0) (36,907.0) (31,330.9) (31,330.9)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation affiliates. The bulk of
the transaction was completed in the form of an assumption reinsurance
transaction, which resulted in a ceding commission of $71,800,000. The
ceding commission resulted in admissible goodwill of $62,300,000, which is
being amortized on a straight-line basis over 10 years. LLANY was required
by the New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States to the Company. American States is a property casualty insurance
holding company of which LNC owned 83.3%. The contributed common stock was
accounted for as a capital contribution equal to the fair value of the
common stock received by the Company. Subsequently, the American States
common stock owned by the Company, along with all other American States
common stock owned by LNC and its affiliates, was sold. The Company received
proceeds from the sale in the amount of $1,175,000,000. The Company
recognized no gain or loss on the sale of its portion of the common stock
due to the receipt of the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity
Distributors, Inc. ("LLAD"), has a nearly exclusive general agent's contract
with the Company under which it sells the Company's products and provides
the service that otherwise would be provided by a home office marketing
department and regional offices. For providing these selling and marketing
services, the Company paid LLAD override commissions of $76,700,000 in 1998
and override commissions and operating expense allowances of $61,600,000 and
$56,300,000 in 1997 and 1996, respectively. LLAD incurred expenses of
$102,400,000, $5,500,000 and $15,700,000 in 1998, 1997 and 1996,
respectively, in excess of the override commissions and operating expense
allowances received from the Company, which the Company is not required to
reimburse. Effective in January 1998, the Company and LLAD agreed to
increase the override commission expense and eliminate the operating expense
allowance.
Cash and short-term investments at December 31, 1998 and 1997 include the
Company's participation in a short-term investment pool with LNC of
$383,600,000 and $325,600,000, respectively. Related investment income
amounted to $16,800,000, $15,500,000 and $15,300,000 in 1998, 1997 and 1996,
respectively. Short-term loan payable to parent company at December 31, 1998
and 1997 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $92,100,000, $48,500,000 and
$34,100,000 in 1998, 1997 and 1996, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 13.7 $ 11.9 $ 17.9
----------------------
Insurance ceded 290.1 100.3 302.8
----------------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 197.3 $ 245.5
------------------------
Future policy benefits
and claims ceded 1,125.0 997.2
------------------------
Amounts recoverable on
paid and unpaid losses 84.2 30.4
------------------------
Reinsurance payable on
paid losses 6.0 5.3
------------------------
Funds held under
reinsurance treaties --
net liability 1,375.4 1,115.4
------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $318,300,000 and $280,900,000 at December 31, 1998 and 1997,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1998 and 1997, LNC had guaranteed $237,000,000 and $229,100,000,
respectively, of these letters of credit. At December 31, 1998, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $122,400,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially all of the separate accounts do not
have any minimum guarantees and the investment risks associated with market
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$3,953,300,000, $4,821,800,000 and $4,148,700,000 in 1998, 1997
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
and 1996, respectively. Reserves for separate accounts with assets at fair
value were $36,145,900,000 and $30,560,700,000 at December 31, 1998 and
1997, respectively. All reserves are subject to discretionary withdrawal at
market value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,069.8) (2,943.8)
------------------------------------------------------------ --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= =========
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
----------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as reported in the
accompanying audited financial statements $50,016.6 $48,054.0 $1,962.6
------------------------------------------------------------
Effect of AVR errors -- 37.6 (37.6)
------------------------------------------------------------
Effect of change in investment limitations (57.0) -- (57.0)
------------------------------------------------------------ --------- --------- --------
Balance as of December 31, 1996 as reported in the 1997 NAIC
Annual Statement $49,959.6 $48,091.6 $1,868.0
------------------------------------------------------------ ========= ========= ========
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with outside consultants to update systems to address Year 2000
issues. Experts have been engaged to assist in developing work plans and
cost estimates and to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$26,300,000 to address this issue. This brings the expenditures for 1996
through 1998 to $34,200,000 million. The Company's financial plans for 1999
and 2000 include expected expenditures of an additional $38,300,000 bringing
estimated overall Year 2000 expenditures to $72,500,000. Because updating
systems and procedures is an integral part of the Company's on-going
operations, approximately 50% of expenditures shown above are expected to
continue after all Year 2000 issues have been resolved. Actual Year 2000
expenditures through December 31, 1998 and future Year 2000 expenditures are
expected to be funded from operating cash flows. The anticipated cost of
addressing Year 2000 issues is based on management's current best estimates
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. Such costs will be closely monitored
by management. Nevertheless, there can be no guarantee that actual costs
will not be higher than these estimated costs. Specific factors that might
cause such differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer problems and other uncertainties. The total
expenditures identified represent only the Company's portion of LNC's larger
expenditures to address the Year 2000 issue.
The current scope of the overall Year 2000 program includes the following
four major project areas: 1) addressing the readiness of business
applications, operating systems and hardware on mainframe, personal computer
and Local Area Network platforms (IT); 2) addressing the readiness of non-
IT embedded software and equipment (non-IT); 3) addressing the readiness of
key business partners and 4) establishing Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company has completed those four phases for over two-thirds of its high
priority IT systems, including those provided by software vendors. While the
Company's year 2000 program for nearly all high priority IT systems is
expected to be completed in the first quarter 1999, phase four, for a small
but important subset of these systems, will continue through the end of the
second quarter 1999. As of December 31, 1998, the status of projects
addressing readiness of IT assets is: 100% of IT assets have been
inventoried (Phase 1) and assessed (Phase 2); 94% of IT projects have been
through the remediation phase (Phase 3) with the last project scheduled for
completion by the end of March 1999; and 69% of IT projects have completed
the testing phase (Phase 4) with the last project scheduled to finish
testing by the end of June 1999. A portion of the effort that extends into
1999 is dependent on outside third parties and is behind the original
schedule. The Company is working with these parties to modify the completion
schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of
October 1999.
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve
Year 2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
S-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1998 and 1997, and the related statutory-basis statements of
operations, changes in capital and surplus and cash flows for
each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1998 and
1997, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1998.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 1, 1999
S-35
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF ASSETS AND LIABILITY
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $6,663,530) $6,936,165 $ -- $ --
Investments at
Market--Unaffiliated
(Cost $26,660,231) 28,676,804 1,951,657 337,495
--------------------------- ---------- ------------ ----------
TOTAL ASSETS 35,612,969 1,951,657 337,495
--------------------------- ---------- ------------ ----------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 759 42 7
--------------------------- ---------- ------------ ----------
NET ASSETS $35,612,210 $ 1,951,615 $ 337,488
--------------------------- ========== ============ ==========
Percent of net assets 100.00% 5.48% 0.95%
--------------------------- ========== ============ ==========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation
period -- 162,647 34,771
Unit value $ -- $ 12.00 $ 9.71
--------------------------- ---------- ------------ ----------
-- 1,951,615 337,488
--------------------------- ---------- ------------ ----------
LVUL POLICIES:
Units in accumulation
period -- --
Unit value $ -- $ -- $ --
--------------------------- ---------- ------------ ----------
-- -- --
--------------------------- ---------- ------------ ----------
NET ASSETS -- $ 1,951,615 $ 337,488
--------------------------- ========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
DELAWARE
DELAWARE DELAWARE PREMIUM
PREMIUM PREMIUM EMERGING
DELCHESTER DEVON MARKETS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
---------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $6,663,530) $1,635 $ 958 $ 189,519
Investments at
Market--Unaffiliated
(Cost $26,660,231) -- -- --
--------------------------- ---------- ---------- ----------
TOTAL ASSETS 1,635 958 189,519
--------------------------- ---------- ---------- ----------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company -- -- 4
--------------------------- ---------- ---------- ----------
NET ASSETS $1,635 $ 958 $ 189,515
--------------------------- ========== ========== ==========
Percent of net assets 0.01% 0.00% 0.53%
--------------------------- ========== ========== ==========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation
period -- -- 19,349
Unit value $ -- $ -- $ 9.74
--------------------------- ---------- ---------- ----------
-- -- 188,541
--------------------------- ---------- ---------- ----------
LVUL POLICIES:
Units in accumulation
period 167 94 94
Unit value $ 9.79 $10.20 $ 10.37
--------------------------- ---------- ---------- ----------
1,635 958 974
--------------------------- ---------- ---------- ----------
NET ASSETS $1,635 $ 958 $ 189,515
--------------------------- ========== ========== ==========
</TABLE>
See accompanying notes.
I-1
<PAGE>
<TABLE>
<CAPTION>
AIM
AIM V.I. AIM BARON BT BT BT
V.I. INTERNATIONAL V.I. CAPITAL EAFE EQUITY SMALL
GROWTH EQUITY VALUE ASSET EQUITY INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $6,663,530) $ -- $ -- $ -- $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated
(Cost $26,660,231) 2,721,477 968 3,877,477 939 960 7,434,241 2,147
- --------------------------- ---------- ------------- ------------- ---------- ------------ ------------ ----------
TOTAL ASSETS 2,721,477 968 3,877,477 939 960 7,434,241 2,147
- --------------------------- ---------- ------------- ------------- ---------- ------------ ------------ ----------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 58 -- 84 -- -- 160 --
- --------------------------- ---------- ------------- ------------- ---------- ------------ ------------ ----------
NET ASSETS $2,721,419 $ 968 $ 3,877,393 $ 939 $ 960 $ 7,434,081 $ 2,147
- --------------------------- ========== ============= ============= ========== ============ ============ ==========
Percent of net assets 7.64% 0.00% 10.89% 0.00% 0.00% 20.88% 0.01%
- --------------------------- ========== ============= ============= ========== ============ ============ ==========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation
period 205,016 -- 291,225 -- -- 597,406 --
Unit value $ 13.06 $ -- $ 13.27 $ -- $ -- $ 12.41 $ --
- --------------------------- ---------- ------------- ------------- ---------- ------------ ------------ ----------
2,678,406 -- 3,864,593 -- -- 7,415,875 --
- --------------------------- ---------- ------------- ------------- ---------- ------------ ------------ ----------
LVUL POLICIES:
Units in accumulation
period 4,125 94 1,221 94 94 1,770 209
Unit value $ 10.43 $ 10.30 $ 10.48 $9.99 $ 10.22 $ 10.29 $ 10.29
- --------------------------- ---------- ------------- ------------- ---------- ------------ ------------ ----------
43,013 968 12,801 939 960 18,206 2,147
- --------------------------- ---------- ------------- ------------- ---------- ------------ ------------ ----------
NET ASSETS $2,721,419 $ 968 $ 3,877,393 $ 939 $ 960 $ 7,434,081 $ 2,147
- --------------------------- ========== ============= ============= ========== ============ ============ ==========
</TABLE>
<TABLE>
<CAPTION>
FIDELITY
DELAWARE FIDELITY FIDELITY FIDELITY FIDELITY VIP III
PREMIUM DELAWARE DELAWARE VIP VIP II VIP II VIP II GROWTH
SMALL PREMIUM PREMIUM EQUITY- ASSET CONTRAFUND INVESTMENT OPPORTUNITIES
CAP VALUE REIT TREND INCOME MANAGER SERVICE CLASS GRADE BOND SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $6,663,530) $1,255,513 $ 938 $894,541 $ -- $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated
(Cost $26,660,231) -- -- -- 3,386,791 542,579 19,379 1,438,148 2,353
- --------------------------- ---------- ---------- ---------- ---------- ---------- ------------- ------------ -------------
TOTAL ASSETS 1,255,513 938 894,541 3,386,791 542,579 19,379 1,438,148 2,353
- --------------------------- ---------- ---------- ---------- ---------- ---------- ------------- ------------ -------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 27 -- 19 73 12 -- 31 --
- --------------------------- ---------- ---------- ---------- ---------- ---------- ------------- ------------ -------------
NET ASSETS $1,255,486 $ 938 $894,522 $3,386,718 $542,567 $ 19,379 $ 1,438,117 $ 2,353
- --------------------------- ========== ========== ========== ========== ========== ============= ============ =============
Percent of net assets 3.53% 0.00% 2.51% 9.51% 1.52% 0.06% 4.04% 0.01%
- --------------------------- ========== ========== ========== ========== ========== ============= ============ =============
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation
period 124,577 -- 67,274 294,773 48,736 -- 140,230 --
Unit value $ 10.06 $ -- $ 13.28 $ 11.49 $ 11.13 $ -- $ 10.26 $ --
- --------------------------- ---------- ---------- ---------- ---------- ---------- ------------- ------------ -------------
1,253,072 -- 893,454 3,386,718 542,567 -- 1,438,117 --
- --------------------------- ---------- ---------- ---------- ---------- ---------- ------------- ------------ -------------
LVUL POLICIES:
Units in accumulation
period 233 94 96 -- -- 1,880 -- 228
Unit value $ 10.35 $9.98 $ 11.10 $ -- $ -- $ 10.31 $ -- $ 10.31
- --------------------------- ---------- ---------- ---------- ---------- ---------- ------------- ------------ -------------
2,414 938 1,068 -- -- 19,379 -- 2,353
- --------------------------- ---------- ---------- ---------- ---------- ---------- ------------- ------------ -------------
NET ASSETS $1,255,486 $ 938 $894,522 $3,386,718 $542,567 $ 19,379 $ 1,438,117 $ 2,353
- --------------------------- ========== ========== ========== ========== ========== ============= ============ =============
</TABLE>
I-2
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF ASSETS AND LIABILITY
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
JANUS
JANUS ASPEN
ASPEN SERIES
SERIES WORLDWIDE LN
BALANCED GROWTH BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
---------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $6,663,530) $ -- $ -- $ 2,590
Investments at
Market--Unaffiliated
(Cost $26,660,231) 4,400 17,936 --
--------------------------- ---------- ---------- ----------
TOTAL ASSETS 4,400 17,936 2,590
--------------------------- ---------- ---------- ----------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company -- -- --
--------------------------- ---------- ---------- ----------
NET ASSETS $4,400 $17,936 $ 2,590
--------------------------- ========== ========== ==========
Percent of net assets 0.01% 0.05% 0.01%
--------------------------- ========== ========== ==========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation
period -- -- --
Unit value $ -- $ -- $ --
--------------------------- ---------- ---------- ----------
-- -- --
--------------------------- ---------- ---------- ----------
LVUL POLICIES:
Units in accumulation
period 436 1,727 260
Unit value $10.10 $ 10.38 $ 9.96
--------------------------- ---------- ---------- ----------
4,400 17,936 2,590
--------------------------- ---------- ---------- ----------
NET ASSETS $4,400 $17,936 $ 2,590
--------------------------- ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AMT
MFS MID-CAP AMT
UTILITIES GROWTH PARTNERS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
---------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $6,663,530) $ -- $ -- $ --
Investments at
Market--Unaffiliated
(Cost $26,660,231) 810,706 1,414 946
--------------------------- ---------- ---------- ----------
TOTAL ASSETS 810,706 1,414 946
--------------------------- ---------- ---------- ----------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 18 -- --
--------------------------- ---------- ---------- ----------
NET ASSETS $810,688 $1,414 $ 946
--------------------------- ========== ========== ==========
Percent of net assets 2.28% 0.00% 0.00%
--------------------------- ========== ========== ==========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation
period 68,747 -- --
Unit value $ 11.77 $ -- $ --
--------------------------- ---------- ---------- ----------
809,304 -- --
--------------------------- ---------- ---------- ----------
LVUL POLICIES:
Units in accumulation
period 135 137 94
Unit value $ 10.23 $10.33 $ 10.07
--------------------------- ---------- ---------- ----------
1,384 1,414 946
--------------------------- ---------- ---------- ----------
NET ASSETS $810,688 $1,414 $ 946
--------------------------- ========== ========== ==========
</TABLE>
See accompanying notes.
I-3
<PAGE>
<TABLE>
<CAPTION>
LN
LN LN GLOBAL LN LN MFS MFS
CAPITAL EQUITY- ASSET MONEY SOCIAL EMERGING TOTAL
APPRECIATION INCOME ALLOCATION MARKET AWARENESS GROWTH RETURN
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $6,663,530) $ 1,263 $ 951 $ 948 $4,565,393 $21,916 $ -- $ --
Investments at
Market--Unaffiliated
(Cost $26,660,231) -- -- -- -- -- 1,342,442 1,483,022
- --------------------------- ------------ ---------- ---------- ----------- ---------- ----------- -----------
TOTAL ASSETS 1,263 951 948 4,565,393 21,916 1,342,442 1,483,022
- --------------------------- ------------ ---------- ---------- ----------- ---------- ----------- -----------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company -- -- -- 92 -- 29 32
- --------------------------- ------------ ---------- ---------- ----------- ---------- ----------- -----------
NET ASSETS $ 1,263 $ 951 $ 948 $4,565,301 $21,916 $1,342,413 $ 1,482,990
- --------------------------- ============ ========== ========== =========== ========== =========== ===========
Percent of net assets 0.00% 0.00% 0.00% 12.82% 0.06% 3.77% 4.17%
- --------------------------- ============ ========== ========== =========== ========== =========== ===========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation
period -- -- -- 399,285 -- 104,049 136,224
Unit value $ -- $ -- $ -- $ 10.41 $ -- $ 12.85 $ 10.88
- --------------------------- ------------ ---------- ---------- ----------- ---------- ----------- -----------
-- -- -- 4,156,256 -- 1,337,185 1,481,549
- --------------------------- ------------ ---------- ---------- ----------- ---------- ----------- -----------
LVUL POLICIES:
Units in accumulation
period 122 94 94 40,731 2,116 495 143
Unit value $ 10.35 $10.12 $10.09 $ 10.04 $ 10.36 $ 10.57 $ 10.07
- --------------------------- ------------ ---------- ---------- ----------- ---------- ----------- -----------
1,263 951 948 409,045 21,916 5,228 1,440
- --------------------------- ------------ ---------- ---------- ----------- ---------- ----------- -----------
NET ASSETS $ 1,263 $ 951 $ 948 $4,565,301 $21,916 $1,342,413 $ 1,482,990
- --------------------------- ============ ========== ========== =========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
OCC VARIABLE TEMPLETON VARIABLE TEMPLETON VARIABLE
ACCUMULATION OCC PRODUCTS VARIABLE PRODUCTS VARIABLE PRODUCTS
GLOBAL ACCUMULATION ASSET PRODUCTS INTERNATIONAL PRODUCTS STOCK
EQUITY MANAGED ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $6,663,530) $ -- $ -- $ -- $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated
(Cost $26,660,231) 299,063 449,600 139,822 2,086,965 16,394 306,533 950
- --------------------------- ------------ ------------ ---------- ------------- ------------- ---------- ----------
TOTAL ASSETS 299,063 449,600 139,822 2,086,965 16,394 306,533 950
- --------------------------- ------------ ------------ ---------- ------------- ------------- ---------- ----------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 6 10 3 46 -- 6 --
- --------------------------- ------------ ------------ ---------- ------------- ------------- ---------- ----------
NET ASSETS $299,057 $449,590 $139,819 $ 2,086,919 $ 16,394 $306,527 $ 950
- --------------------------- ============ ============ ========== ============= ============= ========== ==========
Percent of net assets 0.84% 1.26% 0.39% 5.86% 0.05% 0.86% 0.00%
- --------------------------- ============ ============ ========== ============= ============= ========== ==========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation
period 26,948 43,067 12,816 197,560 -- 29,510 --
Unit value $ 11.10 $ 10.44 $ 10.91 $ 10.56 $ -- $ 10.39 $ --
- --------------------------- ------------ ------------ ---------- ------------- ------------- ---------- ----------
299,057 449,590 139,819 2,086,919 -- 306,527 --
- --------------------------- ------------ ------------ ---------- ------------- ------------- ---------- ----------
LVUL POLICIES:
Units in accumulation
period -- -- -- -- 1,623 -- 94
Unit value $ -- $ -- $ -- $ -- $ 10.10 $ -- $ 10.12
- --------------------------- ------------ ------------ ---------- ------------- ------------- ---------- ----------
-- -- -- -- 16,394 -- 950
- --------------------------- ------------ ------------ ---------- ------------- ------------- ---------- ----------
NET ASSETS $299,057 $449,590 $139,819 $ 2,086,919 $ 16,394 $306,527 $ 950
- --------------------------- ============ ============ ========== ============= ============= ========== ==========
</TABLE>
I-4
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF OPERATIONS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE SIX-MONTH
PERIOD ENDED JUNE 30, 1999*
<TABLE>
<CAPTION>
AIM
AIM V.I. AIM V.I. AIM V.I. AIM
CAPITAL DIVERSIFIED V.I. INTERNATIONAL V.I.
APPRECIATION INCOME GROWTH EQUITY VALUE
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998
TO DECEMBER 31, 1998
Net Investment Income:
Dividends from investment
income $ 38,020 $ 508 $ 7,032 $ 2,314 $ -- $ 3,875
Dividends from net
realized gains on
investments 119,630 9,006 2,243 43,375 -- 34,275
Mortality and expense
guarantees
VUL I (12,114) (528) (244) (893) -- (797)
LVUL -- -- -- -- -- --
- --------------------------- --------- ------------ ---------- ---------- ------------- ----------
NET INVESTMENT INCOME 145,536 8,986 9,031 44,796 -- 37,353
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 13,135 572 (231) 1,004 -- 2,502
Net change in unrealized
appreciation or
depreciation on
investments 502,853 44,531 (7,193) 70,745 -- 69,059
- --------------------------- --------- ------------ ---------- ---------- ------------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 515,988 45,103 (7,424) 71,749 -- 71,561
- --------------------------- --------- ------------ ---------- ---------- ------------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ 661,524 $ 54,089 $ 1,607 $ 116,545 $ -- $ 108,914
- --------------------------- ========= ============ ========== ========== ============= ==========
SIX-MONTH PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
Net Investment Income:
Dividends from investment
income $ 482,512 $ -- $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments -- -- -- -- -- --
MORTALITY AND EXPENSE GUARANTEES
VUL I (92,965) (4,508) (998) (6,786) -- (9,807)
LVUL (84) -- -- (6) (1) (4)
- --------------------------- --------- ------------ ---------- ---------- ------------- ----------
NET INVESTMENT INCOME 389,463 (4,508) (998) (6,792) (1) (9,811)
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 77,579 8,321 (305) 15,708 -- 9,837
Net change in unrealized
appreciation or
depreciation on
investments 1,786,355 148,223 (6,162) 219,406 29 326,727
- --------------------------- --------- ------------ ---------- ---------- ------------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 1,863,934 156,544 (6,467) 235,114 29 336,564
- --------------------------- --------- ------------ ---------- ---------- ------------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $2,253,397 $ 152,036 $ (7,465) $ 228,322 $ 28 $ 326,753
- --------------------------- ========= ============ ========== ========== ============= ==========
</TABLE>
* Information with respect to the six-month period ended June 30, 1999 is
unaudited.
See accompanying notes.
I-5
<PAGE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE
BARON BT BT BT DELAWARE DELAWARE PREMIUM PREMIUM
CAPITAL EAFE EQUITY SMALL PREMIUM PREMIUM EMERGING SMALL
ASSET EQUITY INDEX 500 INDEX CAP INDEX DELCHESTER DEVON MARKETS CAP VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998
TO DECEMBER 31, 1998
Net Investment Income:
Dividends from investment
income $ -- $ -- $ 4,231 $ -- $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments -- -- 27,082 -- -- -- -- --
Mortality and expense
guarantees
VUL I -- -- (2,531) -- -- -- (17) (247)
LVUL -- -- -- -- -- -- -- --
- --------------------------- ------------ ------------ ---------- ---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME -- -- 28,782 -- -- -- (17) (247)
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- -- 3,674 -- -- -- (75) 946
Net change in unrealized
appreciation or
depreciation on
investments -- -- 111,040 -- -- -- (512) 19,663
- --------------------------- ------------ ------------ ---------- ---------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS -- -- 114,714 -- -- -- (587) 20,609
- --------------------------- ------------ ------------ ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ -- $ -- $ 143,496 $ -- $ -- $ -- $ (604) $ 20,362
- --------------------------- ============ ============ ========== ========== ========== ========== ========== ==========
SIX-MONTH PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
Net Investment Income:
Dividends from investment
income $ 12 $ -- $ -- $ -- $ 14 $ -- $ 747 $ 10,427
Dividends from net
realized gains on
investments -- -- -- -- -- -- -- --
MORTALITY AND EXPENSE GUARANTEES
VUL I -- -- (20,305) -- -- -- (173) (3,049)
LVUL (1) (1) (2) (1) (1) (1) (1) (1)
- --------------------------- ------------ ------------ ---------- ---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME 11 (1) (20,307) (1) 13 (1) 573 7,377
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- -- 57,791 -- (1) -- 203 (11,771)
Net change in unrealized
appreciation or
depreciation on
investments (12) 21 506,405 59 (34) 20 11,498 77,681
- --------------------------- ------------ ------------ ---------- ---------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS (12) 21 564,196 59 (35) 20 11,701 65,910
- --------------------------- ------------ ------------ ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ (1) $ 20 $ 543,889 $ 58 $ (22) $ 19 $ 12,274 $ 73,287
- --------------------------- ============ ============ ========== ========== ========== ========== ========== ==========
<CAPTION>
FIDELITY FIDELITY
DELAWARE DELAWARE VIP VIP II
PREMIUM PREMIUM EQUITY- ASSET
REIT TREND INCOME MANAGER
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ---------------------------
PERIOD FROM JUNE 18, 1998
TO DECEMBER 31, 1998
Net Investment Income:
Dividends from investment
income $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments -- -- -- --
Mortality and expense
guarantees
VUL I -- (225) (881) (73)
LVUL -- -- -- --
- --------------------------- ------------ ---------- ---------- ----------
NET INVESTMENT INCOME -- (225) (881) (73)
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- 593 1,374 362
Net change in unrealized
appreciation or
depreciation on
investments -- 30,739 48,819 4,003
- --------------------------- ------------ ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS -- 31,332 50,193 4,365
- --------------------------- ------------ ---------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ -- $ 31,107 $ 49,312 $ 4,292
- --------------------------- ============ ========== ========== ==========
SIX-MONTH PERIOD ENDED JUNE
(UNAUDITED)
Net Investment Income:
Dividends from investment
income $ -- $ 46 $ 58,626 $ 9,528
Dividends from net
realized gains on
investments -- -- -- --
MORTALITY AND EXPENSE GUARA
VUL I -- (2,198) (7,741) (1,111)
LVUL (1) (1) -- --
- --------------------------- ------------ ---------- ---------- ----------
NET INVESTMENT INCOME (1) (2,153) 50,885 8,417
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- 1,953 6,678 208
Net change in unrealized
appreciation or
depreciation on
investments (1) 133,052 206,718 9,020
- --------------------------- ------------ ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS (1) 135,005 213,396 9,228
- --------------------------- ------------ ---------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ (2) $ 132,852 $ 264,281 $ 17,645
- --------------------------- ============ ========== ========== ==========
</TABLE>
I-6
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF OPERATIONS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE SIX-MONTH
PERIOD ENDED JUNE 30, 1999*
<TABLE>
<CAPTION>
FIDELITY JANUS
FIDELITY FIDELITY VIP III JANUS ASPEN
VIP II VIP II GROWTH ASPEN SERIES
CONTRAFUND INVESTMENT OPPORTUNITIES SERIES WORLDWIDE LN
SERVICE CLASS GRADE BOND SERVICE CLASS BALANCED GROWTH BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998
TO DECEMBER 31, 1998
Net Investment Income:
Dividends from investment
income $ -- $ -- $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments -- -- -- -- -- --
Mortality and expense
guarantees
VUL I -- (461) -- -- -- --
LVUL -- -- -- -- -- --
- --------------------------- ------------- ---------- ------------- ---------- ---------- ----------
NET INVESTMENT INCOME -- (461) -- -- -- --
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- 72 -- -- -- --
Net change in unrealized
appreciation or
depreciation on
investments -- 5,094 -- -- -- --
- --------------------------- ------------- ---------- ------------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS -- 5,166 -- -- -- --
- --------------------------- ------------- ---------- ------------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ -- $ 4,705 $ -- $ -- $ -- $ --
- --------------------------- ============= ========== ============= ========== ========== ==========
SIX-MONTH PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
Net Investment Income:
Dividends from investment
income $ -- $ 27,955 $ -- $ 45 $ 3 $ --
Dividends from net
realized gains on
investments -- -- -- -- -- --
MORTALITY AND EXPENSE GUARANTEES
VUL I -- (3,642) -- -- -- --
LVUL (2) -- (1) (2) (2) (2)
- --------------------------- ------------- ---------- ------------- ---------- ---------- ----------
NET INVESTMENT INCOME (2) 24,313 (1) 43 1 (2)
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- (1,912) -- -- -- --
Net change in unrealized
appreciation or
depreciation on
investments 203 (44,481) 67 126 149 3
- --------------------------- ------------- ---------- ------------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 203 (46,393) 67 126 149 3
- --------------------------- ------------- ---------- ------------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ 201 $ (22,080) $ 66 $ 169 $ 150 $ 1
- --------------------------- ============= ========== ============= ========== ========== ==========
</TABLE>
* Information with respect to the six-month period ended June 30, 1999 is
unaudited.
See accompanying notes.
I-7
<PAGE>
<TABLE>
<CAPTION>
LN
LN LN GLOBAL LN LN MFS MFS
CAPITAL EQUITY ASSET MONEY SOCIAL EMERGING TOTAL MFS
APPRECIATION INCOME ALLOCATION MARKET AWARENESS GROWTH RETURN UTILITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998
TO DECEMBER 31, 1998
Net Investment Income:
Dividends from investment
income $ -- $ -- $ -- $ 19,001 $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments -- -- -- -- -- -- -- --
Mortality and expense
guarantees
VUL I -- -- -- (3,216) -- (252) (451) (319)
LVUL -- -- -- -- -- -- -- --
- --------------------------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME -- -- -- 15,785 -- (252) (451) (319)
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- -- -- -- -- 592 599 600
Net change in unrealized
appreciation or
depreciation on
investments -- -- -- -- -- 41,059 18,520 15,337
- --------------------------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS -- -- -- -- -- 41,651 19,119 15,937
- --------------------------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ -- $ -- $ -- $ 15,785 $ -- $ 41,399 $ 18,668 $ 15,618
- --------------------------- ============ ========== ========== ========== ========== ========== ========== ==========
SIX-MONTH PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
Net Investment Income:
Dividends from investment
income $ -- $ -- $ -- $ 78,330 $ -- $ -- $ 66,248 $ 42,942
Dividends from net
realized gains on
investments -- -- -- -- -- -- -- --
MORTALITY AND EXPENSE GUARANTEES
VUL I -- -- -- (14,034) -- (3,214) (4,433) (2,191)
LVUL (1) (1) (1) (34) (5) (2) (1) (1)
- --------------------------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME (1) (1) (1) 64,262 (5) (3,216) 61,814 40,750
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- -- -- -- -- 6,385 1,329 1,597
Net change in unrealized
appreciation or
depreciation on
investments 56 12 9 -- 449 104,048 1,232 14,760
- --------------------------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 56 12 9 -- 449 110,433 2,561 16,357
- --------------------------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ 55 $ 11 $ 8 $ 64,262 $ 444 $ 107,217 $ 64,375 $ 57,107
- --------------------------- ============ ========== ========== ========== ========== ========== ========== ==========
<CAPTION>
OCC
AMT ACCUMULATION OCC
MID-CAP AMT GLOBAL ACCUMULATION
GROWTH PARTNERS EQUITY MANAGED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ---------------------------
PERIOD FROM JUNE 18, 1998
TO DECEMBER 31, 1998
Net Investment Income:
Dividends from investment
income $ -- $ -- $ 1,059 $ --
Dividends from net
realized gains on
investments -- -- 3,647 2
Mortality and expense
guarantees
VUL I -- -- (104) (140)
LVUL -- -- -- --
- --------------------------- ---------- ---------- ------------ ------------
NET INVESTMENT INCOME -- -- 4,602 (138)
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- -- 660 85
Net change in unrealized
appreciation or
depreciation on
investments -- -- 1,012 4,808
- --------------------------- ---------- ---------- ------------ ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS -- -- 1,672 4,893
- --------------------------- ---------- ---------- ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ -- $ -- $ 6,274 $ 4,755
- --------------------------- ========== ========== ============ ============
SIX-MONTH PERIOD ENDED JUNE
(UNAUDITED)
Net Investment Income:
Dividends from investment
income $ -- $ -- $ 367 $ 12,908
Dividends from net
realized gains on
investments -- -- -- --
MORTALITY AND EXPENSE GUARA
VUL I -- -- (758) (1,235)
LVUL (1) (1) -- --
- --------------------------- ---------- ---------- ------------ ------------
NET INVESTMENT INCOME (1) (1) (391) 11,673
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments -- -- 395 306
Net change in unrealized
appreciation or
depreciation on
investments 69 8 24,058 10,873
- --------------------------- ---------- ---------- ------------ ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 69 8 24,453 11,179
- --------------------------- ---------- ---------- ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ 68 $ 7 $ 24,062 $ 22,852
- --------------------------- ========== ========== ============ ============
</TABLE>
I-8
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF OPERATIONS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE SIX-MONTH
PERIOD ENDED JUNE 30, 1999*
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
VARIABLE TEMPLETON VARIABLE TEMPLETON VARIABLE
PRODUCTS VARIABLE PRODUCTS VARIABLE PRODUCTS
ASSET PRODUCTS INTERNATIONAL PRODUCTS STOCK
ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998
TO DECEMBER 31, 1998
Net Investment Income:
Dividends from investment
income $ -- $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments -- -- -- -- --
Mortality and expense
guarantees
VUL I (45) (582) -- (108) --
LVUL -- -- -- -- --
- --------------------------- ---------- ------------- ------------- ---------- ----------
NET INVESTMENT INCOME (45) (582) -- (108) --
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 234 (357) -- (71) --
Net change in unrealized
appreciation or
depreciation on
investments 2,272 21,136 -- 2,721 --
- --------------------------- ---------- ------------- ------------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 2,506 20,779 -- 2,650 --
- --------------------------- ---------- ------------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ 2,461 $ 20,197 $ -- $ 2,542 $ --
- --------------------------- ========== ============= ============= ========== ==========
SIX-MONTH PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
Net Investment Income:
Dividends from investment
income $ 12,192 $ 144,834 $ -- $ 17,288 $ --
Dividends from net
realized gains on
investments -- -- -- -- --
MORTALITY AND EXPENSE GUARANTEES
VUL I (370) (5,641) -- (771) --
LVUL -- -- (4) -- (1)
- --------------------------- ---------- ------------- ------------- ---------- ----------
NET INVESTMENT INCOME 11,822 139,193 (4) 16,517 (1)
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments (135) (17,857) -- (1,151) --
Net change in unrealized
appreciation or
depreciation on
investments (3,463) 35,242 14 10,259 12
- --------------------------- ---------- ------------- ------------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS (3,598) 17,385 14 9,108 12
- --------------------------- ---------- ------------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS $ 8,224 $ 156,578 $ 10 $ 25,625 $ 11
- --------------------------- ========== ============= ============= ========== ==========
</TABLE>
* Information with respect to the six-month period ended June 30, 1999 is
unaudited.
See accompanying notes.
I-9
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
I-10
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE SIX-MONTH
PERIOD ENDED JUNE 30, 1999*
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I. AIM
CAPITAL DIVERSIFIED V.I.
APPRECIATION INCOME GROWTH
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income $ 145,536 $ 8,986 $ 9,031 $ 44,796
Net realized gain (loss) on
investments 13,135 572 (231) 1,004
Net change in unrealized appreciation
or depreciation on investments 502,853 44,531 (7,193) 70,745
- --------------------------------------- ----------- ------------ ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 661,524 54,089 1,607 116,545
- --------------------------------------- ----------- ------------ ---------- ----------
Change From Unit Transactions:
Participant purchases 20,516,015 440,198 220,792 871,193
Participant withdrawals (6,789,814) (27,149) (42,127) (56,295)
- --------------------------------------- ----------- ------------ ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 13,726,201 413,049 178,665 814,898
- --------------------------------------- ----------- ------------ ---------- ----------
TOTAL INCREASE IN NET ASSETS 14,387,725 467,138 180,272 931,443
- --------------------------------------- ----------- ------------ ---------- ----------
NET ASSETS AT DECEMBER 31, 1998 14,387,725 467,138 180,272 931,443
- --------------------------------------- =========== ============ ========== ==========
Changes From Operations:
Net investment income (loss) 389,463 (4,508) (998) (6,792)
Net realized gain (loss) on
investments 77,579 8,321 (305) 15,708
Net change in unrealized appreciation
or depreciation on investments 1,786,355 148,223 (6,162) 219,406
- --------------------------------------- ----------- ------------ ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 2,253,397 152,036 (7,465) 228,322
- --------------------------------------- ----------- ------------ ---------- ----------
Change From Unit Transactions:
Participant purchases 29,833,222 1,427,160 192,943 1,725,788
Participant withdrawals (10,862,134) (94,719) (28,262) (164,134)
- --------------------------------------- ----------- ------------ ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 18,971,088 1,332,441 164,681 1,561,654
- --------------------------------------- ----------- ------------ ---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 21,224,485 1,484,477 157,216 1,789,976
- --------------------------------------- ----------- ------------ ---------- ----------
NET ASSETS AT JUNE 30, 1999 (UNAUDITED) $35,612,210 $ 1,951,615 $ 337,488 $2,721,419
- --------------------------------------- =========== ============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE
DELAWARE PREMIUM PREMIUM DELAWARE
PREMIUM EMERGING SMALL PREMIUM
DEVON MARKETS CAP VALUE REIT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Changes From Operations:
Net investment income $ -- $ (17) $ (247) $ --
Net realized gain (loss) on
investments -- (75) 946 --
Net change in unrealized appreciation
or depreciation on investments -- (512) 19,663 --
- --------------------------------------- ---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS -- (604) 20,362 --
- --------------------------------------- ---------- ---------- ---------- ----------
Change From Unit Transactions:
Participant purchases -- 15,958 278,003 --
Participant withdrawals -- (1,610) (18,198) --
- --------------------------------------- ---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS -- 14,348 259,805 --
- --------------------------------------- ---------- ---------- ---------- ----------
TOTAL INCREASE IN NET ASSETS -- 13,744 280,167 --
- --------------------------------------- ---------- ---------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1998 -- 13,744 280,167 --
- --------------------------------------- ========== ========== ========== ==========
Changes From Operations:
Net investment income (loss) (1) 573 7,377 (1)
Net realized gain (loss) on
investments -- 203 (11,771) --
Net change in unrealized appreciation
or depreciation on investments 20 11,498 77,681 (1)
- --------------------------------------- ---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 19 12,274 73,287 (2)
- --------------------------------------- ---------- ---------- ---------- ----------
Change From Unit Transactions:
Participant purchases 1,000 177,119 975,868 1,000
Participant withdrawals (61) (13,622) (73,836) (60)
- --------------------------------------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 939 163,497 902,032 940
- --------------------------------------- ---------- ---------- ---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 958 175,771 975,319 938
- --------------------------------------- ---------- ---------- ---------- ----------
NET ASSETS AT JUNE 30, 1999 (UNAUDITED) $ 958 $ 189,515 $1,255,486 $ 938
- --------------------------------------- ========== ========== ========== ==========
</TABLE>
* Information with respect to the six-month period ended June 30, 1999 is
unaudited.
See accompanying notes.
I-11
<PAGE>
<TABLE>
<CAPTION>
AIM
V.I. AIM BARON BT BT BT
INTERNATIONAL V.I. CAPITAL EAFE EQUITY SMALL
EQUITY VALUE ASSET EQUITY INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income $ -- $ 37,353 $ -- $ -- $ 28,782 $ --
Net realized gain (loss) on
investments -- 2,502 -- -- 3,674 --
Net change in unrealized appreciation
or depreciation on investments -- 69,059 -- -- 111,040 --
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS -- 108,914 -- -- 143,496 --
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
Change From Unit Transactions:
Participant purchases -- 1,007,254 -- -- 2,738,345 --
Participant withdrawals -- (61,324) -- -- (53,631) --
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS -- 945,930 -- -- 2,684,714 --
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
TOTAL INCREASE IN NET ASSETS -- 1,054,844 -- -- 2,828,210 --
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
NET ASSETS AT DECEMBER 31, 1998 -- 1,054,844 -- -- 2,828,210 --
- --------------------------------------- ============= ============= ========== ============ ============ ==========
Changes From Operations:
Net investment income (loss) (1) (9,811) 11 (1) (20,307) (1)
Net realized gain (loss) on
investments -- 9,837 -- -- 57,791 --
Net change in unrealized appreciation
or depreciation on investments 29 326,727 (12) 21 506,405 59
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 28 326,753 (1) 20 543,889 58
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
Change From Unit Transactions:
Participant purchases 1,000 2,717,501 1,000 1,000 4,291,894 2,252
Participant withdrawals (60) (221,705) (60) (60) (229,912) (163)
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 940 2,495,796 940 940 4,061,982 2,089
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 968 2,822,549 939 960 4,605,871 2,147
- --------------------------------------- ------------- ------------- ---------- ------------ ------------ ----------
NET ASSETS AT JUNE 30, 1999 (UNAUDITED) $ 968 $ 3,877,393 $ 939 $ 960 $ 7,434,081 $ 2,147
- --------------------------------------- ============= ============= ========== ============ ============ ==========
<CAPTION>
DELAWARE
PREMIUM
DELCHESTER
SUBACCOUNT
<S> <C>
- ---------------------------------------
Changes From Operations:
Net investment income $ --
Net realized gain (loss) on
investments --
Net change in unrealized appreciation
or depreciation on investments --
- --------------------------------------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS --
- --------------------------------------- ----------
Change From Unit Transactions:
Participant purchases --
Participant withdrawals --
- --------------------------------------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS --
- --------------------------------------- ----------
TOTAL INCREASE IN NET ASSETS --
- --------------------------------------- ----------
NET ASSETS AT DECEMBER 31, 1998 --
- --------------------------------------- ==========
Changes From Operations:
Net investment income (loss) 13
Net realized gain (loss) on
investments (1)
Net change in unrealized appreciation
or depreciation on investments (34)
- --------------------------------------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS (22)
- --------------------------------------- ----------
Change From Unit Transactions:
Participant purchases 1,781
Participant withdrawals (124)
- --------------------------------------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 1,657
- --------------------------------------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,635
- --------------------------------------- ----------
NET ASSETS AT JUNE 30, 1999 (UNAUDITED) $ 1,635
- --------------------------------------- ==========
</TABLE>
<TABLE>
<CAPTION>
FIDELITY
FIDELITY FIDELITY FIDELITY FIDELITY VIP III JANUS
DELAWARE VIP VIP II VIP II VIP II GROWTH ASPEN
PREMIUM EQUITY- ASSET CONTRAFUND INVESTMENT OPPORTUNITIES SERIES
TREND INCOME MANAGER SERVICE CLASS GRADE BOND SERVICE CLASS BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income $ (225) $ (881) $ (73) $ -- $ (461) $ -- $ --
Net realized gain (loss) on
investments 593 1,374 362 -- 72 -- --
Net change in unrealized appreciation
or depreciation on investments 30,739 48,819 4,003 -- 5,094 -- --
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 31,107 49,312 4,292 -- 4,705 -- --
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
Change From Unit Transactions:
Participant purchases 316,822 874,010 86,282 -- 474,803 -- --
Participant withdrawals (10,588) (59,221) (9,144) -- (30,157) -- --
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 306,234 814,789 77,138 -- 444,646 -- --
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
TOTAL INCREASE IN NET ASSETS 337,341 864,101 81,430 -- 449,351 -- --
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
NET ASSETS AT DECEMBER 31, 1998 337,341 864,101 81,430 -- 449,351 -- --
- --------------------------------------- ========== ========== ========== ============= ============ ============= ==========
Changes From Operations:
Net investment income (loss) (2,153) 50,885 8,417 (2) 24,313 (1) 43
Net realized gain (loss) on
investments 1,953 6,678 208 -- (1,912) -- --
Net change in unrealized appreciation
or depreciation on investments 133,052 206,718 9,020 203 (44,481) 67 126
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 132,852 264,281 17,645 201 (22,080) 66 169
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
Change From Unit Transactions:
Participant purchases 464,896 2,415,862 477,114 22,255 1,086,880 2,467 4,488
Participant withdrawals (40,567) (157,526) (33,622) (3,077) (76,034) (180) (257)
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 424,329 2,258,336 443,492 19,178 1,010,846 2,287 4,231
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 557,181 2,522,617 461,137 19,379 988,766 2,353 4,400
- --------------------------------------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
NET ASSETS AT JUNE 30, 1999 (UNAUDITED) $ 894,522 $3,386,718 $ 542,567 $ 19,379 $ 1,438,117 $ 2,353 $ 4,400
- --------------------------------------- ========== ========== ========== ============= ============ ============= ==========
</TABLE>
I-12
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE SIX-MONTH
PERIOD ENDED JUNE 30, 1999*
<TABLE>
<CAPTION>
JANUS
ASPEN
SERIES LN
WORLDWIDE LN CAPITAL
GROWTH BOND APPRECIATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Changes From Operations:
Net investment income $ -- $ -- $ --
Net realized gain (loss) on
investments -- -- --
Net change in unrealized appreciation
or depreciation on investments -- -- --
- --------------------------------------- ---------- ---------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS -- -- --
- --------------------------------------- ---------- ---------- ------------
Change From Unit Transactions:
Participant purchases -- -- --
Participant withdrawals -- -- --
- --------------------------------------- ---------- ---------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS -- -- --
- --------------------------------------- ---------- ---------- ------------
TOTAL INCREASE IN NET ASSETS -- -- --
- --------------------------------------- ---------- ---------- ------------
NET ASSETS AT DECEMBER 31, 1998 -- -- --
- --------------------------------------- ========== ========== ============
Changes From Operations:
Net investment income (loss) 1 (2) (1)
Net realized gain (loss) on
investments -- -- --
Net change in unrealized appreciation
or depreciation on investments 149 3 56
- --------------------------------------- ---------- ---------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 150 1 55
- --------------------------------------- ---------- ---------- ------------
Change From Unit Transactions:
Participant purchases 20,721 2,815 1,345
Participant withdrawals (2,935) (226) (137)
- --------------------------------------- ---------- ---------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 17,786 2,589 1,208
- --------------------------------------- ---------- ---------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 17,936 2,590 1,263
- --------------------------------------- ---------- ---------- ------------
NET ASSETS AT JUNE 30, 1999 (UNAUDITED) $ 17,936 $ 2,590 $ 1,263
- --------------------------------------- ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
OCC
AMT ACCUMULATION
MID-CAP AMT GLOBAL
GROWTH PARTNERS EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Changes From Operations:
Net investment income $ -- $ -- $ 4,602
Net realized gain (loss) on
investments -- -- 660
Net change in unrealized appreciation
or depreciation on investments -- -- 1,012
- --------------------------------------- ---------- ---------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS -- -- 6,274
- --------------------------------------- ---------- ---------- ------------
Change From Unit Transactions:
Participant purchases -- -- 96,433
Participant withdrawals -- -- (5,799)
- --------------------------------------- ---------- ---------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS -- -- 90,634
- --------------------------------------- ---------- ---------- ------------
TOTAL INCREASE IN NET ASSETS -- -- 96,908
- --------------------------------------- ---------- ---------- ------------
NET ASSETS AT DECEMBER 31, 1998 -- -- 96,908
- --------------------------------------- ========== ========== ============
Changes From Operations:
Net investment income (loss) (1) (1) (391)
Net realized gain (loss) on
investments -- -- 395
Net change in unrealized appreciation
or depreciation on investments 69 8 24,058
- --------------------------------------- ---------- ---------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 68 7 24,062
- --------------------------------------- ---------- ---------- ------------
Change From Unit Transactions:
Participant purchases 1,453 1,000 197,117
Participant withdrawals (107) (61) (19,030)
- --------------------------------------- ---------- ---------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 1,346 939 178,087
- --------------------------------------- ---------- ---------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,414 946 202,149
- --------------------------------------- ---------- ---------- ------------
NET ASSETS AT JUNE 30, 1999 (UNAUDITED) $ 1,414 $ 946 $ 299,057
- --------------------------------------- ========== ========== ============
</TABLE>
* Information with respect to the six-month period ended June 30, 1999 is
unaudited.
See accompanying notes.
I-13
<PAGE>
<TABLE>
<CAPTION>
LN
LN GLOBAL LN LN MFS MFS
EQUITY- ASSET MONEY SOCIAL EMERGING TOTAL MFS
INCOME ALLOCATION MARKET AWARENESS GROWTH RETURN UTILITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income $ -- $ -- $ 15,785 $ -- $ (252) $ (451) $ (319)
Net realized gain (loss) on
investments -- -- -- -- 592 599 600
Net change in unrealized appreciation
or depreciation on investments -- -- -- -- 41,059 18,520 15,337
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS -- -- 15,785 -- 41,399 18,668 15,618
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
Change From Unit Transactions:
Participant purchases -- -- 10,886,091 -- 308,188 608,312 323,546
Participant withdrawals -- -- (6,303,498) -- (18,804) (24,996) (11,122)
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS -- -- 4,582,593 -- 289,384 583,316 312,424
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
TOTAL INCREASE IN NET ASSETS -- -- 4,598,378 -- 330,783 601,984 328,042
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
NET ASSETS AT DECEMBER 31, 1998 -- -- 4,598,378 -- 330,783 601,984 328,042
- --------------------------------------- ========== ========== ============ ========== =========== =========== ==========
Changes From Operations:
Net investment income (loss) (1) (1) 64,262 (5) (3,216) 61,814 40,750
Net realized gain (loss) on
investments -- -- -- -- 6,385 1,329 1,597
Net change in unrealized appreciation
or depreciation on investments 12 9 -- 449 104,048 1,232 14,760
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 11 8 64,262 444 107,217 64,375 57,107
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
Change From Unit Transactions:
Participant purchases 1,000 1,000 9,191,111 21,682 997,881 906,986 473,750
Participant withdrawals (60) (60) (9,288,450) (210) (93,468) (90,355) (48,211)
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 940 940 (97,339) 21,472 904,413 816,631 425,539
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 951 948 (33,077) 21,916 1,011,630 881,006 482,646
- --------------------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
NET ASSETS AT JUNE 30, 1999 (UNAUDITED) $ 951 $ 948 $ 4,565,301 $ 21,916 $ 1,342,413 $ 1,482,990 $ 810,688
- --------------------------------------- ========== ========== ============ ========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
VARIABLE TEMPLETON VARIABLE TEMPLETON VARIABLE
OCC PRODUCTS VARIABLE PRODUCTS VARIABLE PRODUCTS
ACCUMULATION ASSET PRODUCTS INTERNATIONAL PRODUCTS STOCK
MANAGED ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income $ (138) $ (45) $ (582) $ -- $ (108) $ --
Net realized gain (loss) on
investments 85 234 (357) -- (71) --
Net change in unrealized appreciation
or depreciation on investments 4,808 2,272 21,136 -- 2,721 --
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 4,755 2,461 20,197 -- 2,542 --
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
Change From Unit Transactions:
Participant purchases 188,146 37,943 643,263 -- 100,433 --
Participant withdrawals (9,805) (3,417) (35,182) -- (7,747) --
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 178,341 34,526 608,081 -- 92,686 --
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 183,096 36,987 628,278 -- 95,228 --
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1998 183,096 36,987 628,278 -- 95,228 --
- --------------------------------------- ============ ========== ============= ============= ========== ==========
Changes From Operations:
Net investment income (loss) 11,673 11,822 139,193 (4) 16,517 (1)
Net realized gain (loss) on
investments 306 (135) (17,857) -- (1,151) --
Net change in unrealized appreciation
or depreciation on investments 10,873 (3,463) 35,242 14 10,259 12
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 22,852 8,224 156,578 10 25,625 11
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
Change From Unit Transactions:
Participant purchases 272,955 105,763 1,421,861 16,709 205,805 1,000
Participant withdrawals (29,313) (11,155) (119,798) (325) (20,131) (61)
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 243,642 94,608 1,302,063 16,384 185,674 939
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 266,494 102,832 1,458,641 16,394 211,299 950
- --------------------------------------- ------------ ---------- ------------- ------------- ---------- ----------
NET ASSETS AT JUNE 30, 1999 (UNAUDITED) $ 449,590 $ 139,819 $ 2,086,919 $ 16,394 $ 306,527 $ 950
- --------------------------------------- ============ ========== ============= ============= ========== ==========
</TABLE>
I-14
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION
THE ACCOUNT:
Lincoln Life Flexible Premium Variable Life Account M (the Variable Account)
is a segregated investment account of The Lincoln National Life Insurance
Company (Lincoln Life) and is registered as a unit investment trust with the
Securities and Exchange Commission under the Investment Company Act of 1940,
as amended. The operations of the Variable Account, which commenced on
June 18, 1998, are part of the operations of Lincoln Life. The Variable
Account consist of two products which are listed below.
VUL I
LVUL
The assets of the Variable Account are owned by Lincoln Life. The portion of
the Variable Account's assets supporting the variable life policies may not
be used to satisfy liabilities arising out of any other business of Lincoln
Life.
BASIS OF PRESENTATION:
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS:
The assets of the Variable Account are divided into variable sub-accounts
each of which is invested in shares of one of forty portfolios of thirteen
diversified open-end management investment companies, each portfolio with
its own investment objective. The variable sub-accounts are:
AIM Variable Insurance Funds, Inc.:
AIM V.I. Capital Appreciation Fund
AIM V.I. Diversified Income Fund
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
Baron Capital Funds Trust:
Baron Capital Asset Fund
BT Insurance Funds Trust:
EAFE Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
Delaware Group Premium Fund, Inc.:
Delchester Series
Devon Series
Emerging Markets Series
REIT Series
Small Cap Value Series
Trend Series
Fidelity Variable Insurance Products Fund:
Equity-Income Portfolio
Fidelity Variable Insurance Products Fund II:
Asset Manager Portfolio
Contrafund Portfolio--Service Class
Investment Grade Bond Portfolio
Fidelity Variable Insurance Products Fund III:
Growth Opportunities Portfolio--Service Class
Janus Aspen Series:
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Worldwide Growth Portfolio
Lincoln National (LN):
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc.
LN Equity-Income Fund, Inc.
LN Global Asset Allocation Fund, Inc.
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc.
MFS Variable Insurance Trust:
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
Neuberger Berman Advisers Management Trust (AMT):
AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
OCC Accumulation Trust:
OCC Accumulation Global Equity Portfolio
OCC Accumulation Managed Portfolio
Templeton Variable Products Series Fund:
Templeton Asset Allocation Fund
Templeton International Fund
Templeton International Fund--Class 2
Templeton Stock Fund
Templeton Stock Fund--Class 2
Investments in the variable sub-accounts are stated at the closing net asset
value per share on June 30, 1999, which approximates fair value. The
difference between cost and fair value is reflected as unrealized
appreciation and depreciation of investments.
Investment transactions are accounted for on a trade date basis. 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 variable sub-accounts on the payable date. Dividend income is
recorded on the ex-dividend date.
I-15
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION (CONTINUED)
FEDERAL INCOME TAXES:
Operations of the Variable Account form a part of and are taxed with
operations of Lincoln Life, which is taxed as a "life insurance company"
under the Internal Revenue Code. The Variable Account will not be taxed as a
regulated investment company under Subchapter M of the Internal Revenue
Code. Using current federal income tax law, no federal income taxes are
payable with respect to the Variable Account's net investment income and the
net realized gain on investments.
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
Amounts are paid to Lincoln Life for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day. The
mortality and expense risk charges for each of the variable sub-accounts are
reported in the statement of operations. The rates are as follows for the
two policy types within the Variable Account.
VUL I is currently at an annual rate of .80% for policy years one through
twelve and .55% thereafter.
LVUL is currently at an annual rate of .75% for policy years one through
ten, .35% for policy years eleven through twenty and .20% thereafter.
Prior to the allocation of premiums to the Variable Account, Lincoln Life
deducts a premium load of 5% of each premium payment to cover state taxes
and federal income tax liabilities and a portion of the sales expenses
incurred by Lincoln Life.
Lincoln Life charges a monthly administrative fee for items such as premium
billings and collection, policy value calculation, confirmations and
periodic reports. The fees are as follows for the two policy types within
the Variable Account.
VUL I and LVUL are currently $15 per month for the first policy year and
$5 per month thereafter, guaranteed not to exceed $10 after the first
policy year.
Lincoln Life assumes responsibility for providing the insurance benefit
included in the policy. Lincoln Life charges a monthly deduction of the cost
of insurance and any charges for supplemental riders. The cost of insurance
charge depends on the attained age, risk classification, gender
classification (in accordance with state law) and the current net amount at
risk. On a monthly basis, the administrative fee and the cost of insurance
charge are deducted proportionately for the value of each variable
sub-account and/or fixed account funding options. The fixed account is part
of the general account of Lincoln Life and is not included in these
financial statements.
Under certain circumstances, Lincoln Life reserves the right to charge a
transfer fee of $25 for each transfer after the twelfth transfer per year
between variable sub--accounts. For the period ended June 30, 1999, no
transfer fees were deducted from the variable sub--accounts.
The fees charged by Lincoln Life for premium loads (deducted from premium
payments), administrative fees and the amount deducted for the cost of
insurance, both of which are included in participant withdrawals in the
statement of changes in net assets, for variable sub-accounts for the period
ended June 30, 1999 were as follows:
<TABLE>
<CAPTION>
COST OF
PREMIUM ADMINISTRATIVE INSURANCE
VARIABLE SUB-ACCOUNTS LOADS FEES DEDUCTION
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Subaccount $ 26,853 $ 6,349 $ 61,511
------------------------------------------------------------
AIM V.I. Diversified Income Subaccount 6,355 1,810 19,961
------------------------------------------------------------
AIM V.I. Growth Subaccount 42,606 10,507 111,022
------------------------------------------------------------
AIM V.I. International Equity Subaccount 50 3 8
------------------------------------------------------------
AIM V.I. Value Subaccount 57,081 14,219 144,860
------------------------------------------------------------
Baron Capital Asset Subaccount 50 3 7
------------------------------------------------------------
BT EAFE Equity Index Subaccount 50 3 8
------------------------------------------------------------
BT Equity 500 Index Subaccount 54,165 14,303 161,371
------------------------------------------------------------
BT Small Cap Index Subaccount 113 8 42
------------------------------------------------------------
Delaware Premium Delchester Subaccount 89 6 29
------------------------------------------------------------
Delaware Premium Devon Subaccount 50 3 8
------------------------------------------------------------
</TABLE>
I-16
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)
<TABLE>
<CAPTION>
COST OF
PREMIUM ADMINISTRATIVE INSURANCE
VARIABLE SUB-ACCOUNTS LOADS FEES DEDUCTION
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware Premium Emerging Markets Subaccount $ 7,637 $ 707 $ 5,268
------------------------------------------------------------
Delaware Premium REIT Subaccount 50 3 8
------------------------------------------------------------
Delaware Premium Small Cap Value Subaccount 17,477 5,609 48,276
------------------------------------------------------------
Delaware Premium Trend Subaccount 11,121 3,331 26,109
------------------------------------------------------------
Fidelity VIP Equity-Income Subaccount 35,663 11,363 110,468
------------------------------------------------------------
Fidelity VIP II Asset Manager Subaccount 9,826 2,169 21,361
------------------------------------------------------------
Fidelity VIP II Contrafund Service Class Subaccount 1,111 32 1,934
------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Subaccount 17,224 4,693 54,062
------------------------------------------------------------
Fidelity VIP III Growth Opportunities Service Class
Subaccount 121 10 49
------------------------------------------------------------
Janus Aspen Subaccount Balanced Subaccount 153 16 87
------------------------------------------------------------
Janus Aspen Subaccount Worldwide Growth Subaccount 1,034 25 1,876
------------------------------------------------------------
LN Bond Subaccount 141 12 73
------------------------------------------------------------
LN Capital Appreciation Subaccount 67 10 60
------------------------------------------------------------
LN Equity-Income Subaccount 50 3 8
------------------------------------------------------------
LN Global Asset Allocation Subaccount 50 3 8
------------------------------------------------------------
LN Money Market Subaccount 292,474 12,569 434,972
------------------------------------------------------------
LN Social Awareness Subaccount 50 9 151
------------------------------------------------------------
MFS Emerging Growth Subaccount 27,930 7,223 58,316
------------------------------------------------------------
MFS Total Return Subaccount 28,010 5,606 55,455
------------------------------------------------------------
MFS Utilities Subaccount 14,901 3,149 29,567
------------------------------------------------------------
AMT Mid-Cap Growth Subaccount 60 7 39
------------------------------------------------------------
AMT Partners Subaccount 50 3 8
------------------------------------------------------------
OCC Accumulation Global Equity Subaccount 3,834 1,478 13,716
------------------------------------------------------------
OCC Accumulation Managed Subaccount 4,264 1,879 23,167
------------------------------------------------------------
Templeton Asset Allocation Subaccount 2,824 864 7,462
------------------------------------------------------------
Templeton International Subaccount 27,629 8,443 79,507
------------------------------------------------------------
Templeton International Class 2 Subaccount 163 16 146
------------------------------------------------------------
Templeton Stock Subaccount 5,240 2,000 12,741
------------------------------------------------------------
Templeton Stock Class 2 Subaccount 50 3 8
------------------------------------------------------------
</TABLE>
Lincoln Life, upon full surrender of a policy, may charge a surrender
charge. This charge is in part a deferred sales charge and in part a
recovery of certain first year administrative costs. The amount of the
surrender charge, if any, will depend on the amount of the death benefit,
the amount of premium payments made during the first two policy years and
the age of the policy. In no event will the surrender charge exceed the
maximum allowed by state or federal law. No surrender charge is imposed on a
partial surrender, but an administrative fee of $25 is imposed, allocated
pro-rata among the variable sub-accounts (and, where applicable, the fixed
account) from which the partial surrender proceeds are taken. Full surrender
charges and partial surrender administrative charges paid to Lincoln Life
attributable to the variable sub-accounts for the periond ended June 30,
1999, were $40,170.
I-17
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. NET ASSETS
The following is a summary of net assets owned at June 30, 1999.
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- ------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------
Accumulation units $32,697,289 $ 1,745,490 $ 343,346
- --------------------------- ---------- ------------ ----------
Accumulated net investment
income 534,999 4,478 8,033
- --------------------------- ---------- ------------ ----------
Accumulated net realized
gain (loss) on
investments 90,714 8,893 (536)
- --------------------------- ---------- ------------ ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 2,289,208 192,754 (13,355)
- --------------------------- ---------- ------------ ----------
$35,612,210 $ 1,951,615 $ 337,488
========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE
DELAWARE PREMIUM PREMIUM
PREMIUM EMERGING SMALL
DEVON MARKETS CAP VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- ---------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------
Accumulation units $ 939 $ 177,845 $1,161,837
- --------------------------- ---------- ---------- ----------
Accumulated net investment
income (1) 556 7,130
- --------------------------- ---------- ---------- ----------
Accumulated net realized
gain (loss) on
investments -- 128 (10,825)
- --------------------------- ---------- ---------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 20 10,986 97,344
- --------------------------- ---------- ---------- ----------
$ 958 $ 189,515 $1,255,486
- --------------------------- ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JANUS
ASPEN
SERIES LN
WORLDWIDE LN CAPITAL
GROWTH BOND APPRECIATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- -----------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------
Accumulation units $ 17,786 $ 2,589 $ 1,208
- --------------------------- ---------- ---------- ------------
Accumulated net investment
income 1 (2) (1)
- --------------------------- ---------- ---------- ------------
Accumulated net realized
gain (loss) on
investments -- -- --
- --------------------------- ---------- ---------- ------------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 149 3 56
- --------------------------- ---------- ---------- ------------
$ 17,936 $ 2,590 $ 1,263
========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
OCC
AMT ACCUMULATION
MID-CAP AMT GLOBAL
GROWTH PARTNERS EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- -----------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------
Accumulation units $ 1,346 $ 939 $ 268,721
- --------------------------- ---------- ---------- ------------
Accumulated net investment
income (1) (1) 4,211
- --------------------------- ---------- ---------- ------------
Accumulated net realized
gain (loss) on
investments -- -- 1,055
- --------------------------- ---------- ---------- ------------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 69 8 25,070
- --------------------------- ---------- ---------- ------------
$ 1,414 $ 946 $ 299,057
========== ========== ============
</TABLE>
I-18
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
AIM
AIM V.I. AIM BARON BT BT BT
V.I. INTERNATIONAL V.I. CAPITAL EAFE EQUITY SMALL
GROWTH EQUITY VALUE ASSET EQUITY INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------
Accumulation units $2,376,552 $ 940 $ 3,441,726 $ 940 $ 940 $ 6,746,696 $ 2,089
- --------------------------- --------- ------------- -------------- ---------- ------------ ------------- ----------
Accumulated net investment
income 38,004 (1) 27,542 11 (1) 8,475 (1)
- --------------------------- --------- ------------- -------------- ---------- ------------ ------------- ----------
Accumulated net realized
gain (loss) on
investments 16,712 -- 12,339 -- -- 61,465 --
- --------------------------- --------- ------------- -------------- ---------- ------------ ------------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 290,151 29 395,786 (12) 21 617,445 59
- --------------------------- --------- ------------- -------------- ---------- ------------ ------------- ----------
$2,721,419 $ 968 $ 3,877,393 $ 939 $ 960 $ 7,434,081 $ 2,147
========= ============= ============== ========== ============ ============= ==========
<CAPTION>
DELAWARE
PREMIUM
DELCHESTER
SUBACCOUNT
<S> <C>
- ---------------------------
UNIT TRANSACTIONS:
- ---------------------------
Accumulation units $ 1,657
- --------------------------- ----------
Accumulated net investment
income 13
- --------------------------- ----------
Accumulated net realized
gain (loss) on
investments (1)
- --------------------------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS (34)
- --------------------------- ----------
$ 1,635
==========
</TABLE>
<TABLE>
<CAPTION>
FIDELITY
FIDELITY FIDELITY FIDELITY FIDELITY VIP III JANUS
DELAWARE DELAWARE VIP VIP II VIP II VIP II GROWTH ASPEN
PREMIUM PREMIUM EQUITY- ASSET CONTRAFUND INVESTMENT OPPORTUNITIES SERIES
REIT TREND INCOME MANAGER SERVICE CLASS GRADE BOND SERVICE CLASS BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------
Accumulation units $ 940 $ 730,563 $3,073,125 $ 520,630 $ 19,178 $ 1,455,492 $ 2,287 $ 4,231
- --------------------------- ---------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
Accumulated net investment
income (1) (2,378) 50,004 8,344 (2) 23,852 (1) 43
- --------------------------- ---------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
Accumulated net realized
gain (loss) on
investments -- 2,546 8,052 570 -- (1,840) -- --
- --------------------------- ---------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS (1) 163,791 255,537 13,023 203 (39,387) 67 126
- --------------------------- ---------- ---------- ---------- ---------- ------------- ------------ ------------- ----------
$ 938 $ 894,522 $3,386,718 $ 542,567 $ 19,379 $ 1,438,117 $ 2,353 $ 4,400
========== ========== ========== ========== ============= ============ ============= ==========
</TABLE>
<TABLE>
<CAPTION>
LN
LN GLOBAL LN LN MFS MFS
EQUITY- ASSET MONEY SOCIAL EMERGING TOTAL MFS
INCOME ALLOCATION MARKET AWARENESS GROWTH RETURN UTILITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------
Accumulation units $ 940 $ 940 $ 4,485,254 $ 21,472 $ 1,193,797 $ 1,399,947 $ 737,963
- --------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
Accumulated net investment
income (1) (1) 80,047 (5) (3,468) 61,363 40,431
- --------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
Accumulated net realized
gain (loss) on
investments -- -- -- -- 6,977 1,928 2,197
- --------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 12 9 -- 449 145,107 19,752 30,097
- --------------------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------
$ 951 $ 948 $ 4,565,301 $ 21,916 $ 1,342,413 $ 1,482,990 $ 810,688
========== ========== ============ ========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
VARIABLE TEMPLETON VARIABLE TEMPLETON VARIABLE
OCC PRODUCTS VARIABLE PRODUCTS VARIABLE PRODUCTS
ACCUMULATION ASSET PRODUCTS INTERNATIONAL PRODUCTS STOCK
MANAGED ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------
Accumulation units $ 421,983 $ 129,134 $ 1,910,144 $ 16,384 $ 278,360 $ 939
- --------------------------- ------------ ---------- ------------- ------------- ---------- ----------
Accumulated net investment
income 11,535 11,777 138,611 (4) 16,409 (1)
- --------------------------- ------------ ---------- ------------- ------------- ---------- ----------
Accumulated net realized
gain (loss) on
investments 391 99 (18,214) -- (1,222) --
- --------------------------- ------------ ---------- ------------- ------------- ---------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 15,681 (1,191) 56,378 14 12,980 12
- --------------------------- ------------ ---------- ------------- ------------- ---------- ----------
$ 449,590 $ 139,819 $ 2,086,919 $ 16,394 $ 306,527 $ 950
============ ========== ============= ============= ========== ==========
</TABLE>
I-19
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for the period ending June 30, 1999.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
----------------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund $ 1,498,514 $ 170,549
------------------------------------------------------------
AIM V.I. Diversified Income Fund 177,621 13,935
------------------------------------------------------------
AIM V.I. Growth Fund 1,698,737 143,837
------------------------------------------------------------
AIM V.I. International Equity Fund 945 6
------------------------------------------------------------
AIM V.I. Value Fund 2,624,207 138,161
------------------------------------------------------------
Baron Capital Asset Fund 957 6
------------------------------------------------------------
BT EAFE Equity Index Fund 945 6
------------------------------------------------------------
BT Equity 500 Index Fund 5,175,198 1,133,425
------------------------------------------------------------
BT Small Cap Index Fund 2,113 25
------------------------------------------------------------
Delaware Premium Delchester Series 1,686 16
------------------------------------------------------------
Delaware Premium Devon Series 944 6
------------------------------------------------------------
Delaware Premium Emerging Markets Series 166,930 2,856
------------------------------------------------------------
Delaware Premium REIT Series 945 6
------------------------------------------------------------
Delaware Premium Small Cap Value Series 1,165,714 256,284
------------------------------------------------------------
Delaware Premium Trend Series 453,518 31,330
------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 2,558,300 249,024
------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 500,195 48,276
------------------------------------------------------------
Fidelity VIP II Contrafund Service Class Portfolio 19,186 10
------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 1,114,699 79,519
------------------------------------------------------------
Fidelity VIP III Growth Opportunities Service Class
Portfolio 2,292 6
------------------------------------------------------------
Janus Aspen Series Balanced Portfolio 4,280 6
------------------------------------------------------------
Janus Aspen Series Worldwide Growth Portfolio 17,793 6
------------------------------------------------------------
LN Bond Fund 2,618 31
------------------------------------------------------------
LN Capital Appreciation Fund 1,213 6
------------------------------------------------------------
LN Equity-Income Fund 945 6
------------------------------------------------------------
LN Global Asset Allocation Fund 945 6
------------------------------------------------------------
LN Money Market Fund 6,897,665 6,930,758
------------------------------------------------------------
LN Social Awareness Fund 21,476 9
------------------------------------------------------------
MFS Emerging Growth Series 965,326 64,107
------------------------------------------------------------
MFS Total Return Series 990,957 112,493
------------------------------------------------------------
MFS Utilities Series 535,995 69,695
------------------------------------------------------------
AMT Mid-Cap Growth Portfolio 1,350 5
------------------------------------------------------------
AMT Partners Portfolio 944 6
------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 188,469 10,769
------------------------------------------------------------
OCC Accumulation Managed Portfolio 270,049 14,732
------------------------------------------------------------
Templeton Asset Allocation Fund 112,638 6,207
------------------------------------------------------------
Templeton International Fund 1,746,045 304,757
------------------------------------------------------------
Templeton International Class 2 Fund 16,400 20
------------------------------------------------------------
Templeton Stock Fund 244,993 42,802
------------------------------------------------------------
Templeton Stock Class 2 Fund 944 6
------------------------------------------------------------
----------- ----------
$29,184,691 $9,823,710
=========== ==========
</TABLE>
I-20
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. INVESTMENTS
The following is a summary of investments owned at June 30, 1999.
<TABLE>
<CAPTION>
NET
SHARES ASSET VALUE OF COST OF
OUTSTANDING VALUE SHARES SHARES
-------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 70,712 $ 27.60 $ 1,951,657 $ 1,758,903
---------------------------------------------
AIM V.I. Diversified Income Fund 31,483 10.72 337,495 350,850
---------------------------------------------
AIM V.I. Growth Fund 97,474 27.92 2,721,477 2,431,326
---------------------------------------------
AIM V.I. International Equity Fund 47 20.49 968 939
---------------------------------------------
AIM V.I. Value Fund 129,077 30.04 3,877,477 3,481,691
---------------------------------------------
Baron Capital Asset Fund 60 15.66 939 951
---------------------------------------------
BT EAFE Equity Index Fund 83 11.64 960 939
---------------------------------------------
BT Equity 500 Index Fund 521,701 14.25 7,434,241 6,816,796
---------------------------------------------
BT Small Cap Index Fund 198 10.85 2,147 2,088
---------------------------------------------
Delaware Premium Delchester Series 202 8.07 1,635 1,669
---------------------------------------------
Delaware Premium Devon Series 63 15.14 958 938
---------------------------------------------
Delaware Premium Emerging Markets Series 26,432 7.17 189,519 178,533
---------------------------------------------
Delaware Premium REIT Series 100 9.37 938 939
---------------------------------------------
Delaware Premium Small Cap Value Series 75,001 16.74 1,255,513 1,158,169
---------------------------------------------
Delaware Premium Trend Series 37,444 23.89 894,541 730,750
---------------------------------------------
Fidelity VIP Equity-Income Portfolio 124,286 27.25 3,386,791 3,131,254
---------------------------------------------
Fidelity VIP II Asset Manager Portfolio 30,672 17.69 542,579 529,556
---------------------------------------------
Fidelity VIP II Contrafund Service Class
Portfolio 744 26.06 19,379 19,176
---------------------------------------------
Fidelity VIP II Investment Grade Bond
Portfolio 119,052 12.08 1,438,148 1,477,535
---------------------------------------------
Fidelity VIP III Growth Opportunities Service
Class Portfolio 100 23.62 2,353 2,286
---------------------------------------------
Janus Aspen Series Balanced Portfolio 176 24.95 4,400 4,274
---------------------------------------------
Janus Aspen Series Worldwide Growth Portfolio 548 32.74 17,936 17,787
---------------------------------------------
LN Bond Fund 212 12.21 2,590 2,587
---------------------------------------------
LN Capital Appreciation Fund 50 25.11 1,263 1,207
---------------------------------------------
LN Equity-Income Fund 42 22.74 951 939
---------------------------------------------
LN Global Asset Allocation Fund 60 15.72 948 939
---------------------------------------------
LN Money Market Fund 456,540 10.00 4,565,393 4,565,393
---------------------------------------------
LN Social Awareness Fund 534 41.01 21,916 21,467
---------------------------------------------
MFS Emerging Growth Series 55,427 24.22 1,342,442 1,197,335
---------------------------------------------
MFS Total Return Series 81,935 18.10 1,483,022 1,463,270
---------------------------------------------
MFS Utilities Series 40,074 20.23 810,706 780,609
---------------------------------------------
AMT Mid-Cap Growth Portfolio 85 16.60 1,414 1,345
---------------------------------------------
AMT Partners Portfolio 46 20.72 946 938
---------------------------------------------
OCC Accumulation Global Equity Portfolio 17,138 17.45 299,063 273,993
---------------------------------------------
OCC Accumulation Managed Portfolio 10,087 44.57 449,600 433,919
---------------------------------------------
Templeton Asset Allocation Fund 6,623 21.11 139,822 141,013
---------------------------------------------
Templeton International Fund 105,137 19.85 2,086,965 2,030,587
---------------------------------------------
Templeton International Class 2 Fund 829 19.77 16,394 16,380
---------------------------------------------
Templeton Stock Fund 14,405 21.28 306,533 293,553
---------------------------------------------
Templeton Stock Class 2 Fund 45 21.21 950 938
--------------------------------------------- ----------- -----------
$35,612,969 $33,323,761
=========== ===========
</TABLE>
I-21
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. NEW INVESTMENT FUNDS
Effective May 3, 1999, the AIM V.I. International Equity Fund, Baron Capital
Asset Fund, BT EAFE Equity Index Fund, BT Small Cap Index Fund, Delaware
Premium Delchester Series, Delaware Premium Devon Series, Delaware Premium
REIT Series, Fidelity VIP II Contrafund Service Class Portfolio, Fidelity
VIP III Growth Opportunities Service Class Portfolio, Janus Aspen Series
Balanced Portfolio, Janus Aspen Series Worldwide Growth Portfolio, LN Bond
Fund, LN Capital Appreciation Fund, LN Equity-Income Fund, LN Global Asset
Allocation Fund, AMT Mid-Cap Growth Portfolio, AMT Partners Portfolio,
Templeton International Class 2 Fund and Templeton Stock Class 2 Fund became
available as investment options for the Variable Account policyholders.
I-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1998 1997 1999
--------- --------- -----------
(UNAUDITED)
(IN MILLIONS)-----------
-----------------------------------
<S> <C> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7 $24,259.7
- ------------------------------------------------------------
Preferred stocks 236.0 257.3 243.2
- ------------------------------------------------------------
Unaffiliated common stocks 259.3 436.0 162.6
- ------------------------------------------------------------
Affiliated common stocks 322.1 412.1 330.3
- ------------------------------------------------------------
Mortgage loans on real estate 3,932.9 3,012.7 4,088.2
- ------------------------------------------------------------
Real estate 473.8 584.4 440.9
- ------------------------------------------------------------
Policy loans 1,606.0 660.5 1,609.9
- ------------------------------------------------------------
Other investments 434.4 335.5 440.9
- ------------------------------------------------------------
Cash and short-term investments 1,725.4 2,133.0 1,414.6
- ------------------------------------------------------------ --------- --------- ---------
Total cash and investments 32,820.8 26,392.2 32,990.3
- ------------------------------------------------------------
Premiums and fees in course of collection 33.3 42.4 (71.0)
- ------------------------------------------------------------
Accrued investment income 432.8 343.5 473.0
- ------------------------------------------------------------
Reinsurance recoverable 171.6 71.1 221.3
- ------------------------------------------------------------
Funds withheld by ceding companies 53.7 44.1 36.5
- ------------------------------------------------------------
Federal income taxes recoverable from parent company 64.7 6.9 89.5
- ------------------------------------------------------------
Goodwill 49.5 52.4 47.6
- ------------------------------------------------------------
Other admitted assets 89.3 85.6 81.7
- ------------------------------------------------------------
Separate account assets 36,907.0 31,330.9 41,079.4
- ------------------------------------------------------------ --------- --------- ---------
Total admitted assets $70,622.7 $58,369.1 $74,948.3
- ------------------------------------------------------------ ========= ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9 $12,399.1
- ------------------------------------------------------------
Other policyholder funds 16,647.5 16,360.1 16,705.8
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 897.6 878.2 1,217.8
- ------------------------------------------------------------
Funds held under reinsurance treaties 795.8 720.4 810.6
- ------------------------------------------------------------
Asset valuation reserve 484.5 450.0 488.4
- ------------------------------------------------------------
Interest maintenance reserve 159.7 135.4 122.5
- ------------------------------------------------------------
Other liabilities 504.5 294.7 427.3
- ------------------------------------------------------------
Short-term loan payable to parent company 140.0 120.0 --
- ------------------------------------------------------------
Net transfers due from separate accounts (789.0) (761.9) (789.2)
- ------------------------------------------------------------
Separate account liabilities 36,907.0 31,330.9 41,079.4
- ------------------------------------------------------------ --------- --------- ---------
Total liabilities 68,058.2 55,400.7 72,461.7
- ------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million
(owned by Lincoln National Corporation) 25.0 25.0 25.0
- ------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 -- 1,250.0
- ------------------------------------------------------------
Paid-in surplus 1,930.1 1,821.8 1,942.6
- ------------------------------------------------------------
Unassigned surplus (deficit) (640.6) 1,121.6 (731.0)
- ------------------------------------------------------------ --------- --------- ---------
Total capital and surplus 2,564.5 2,968.4 2,486.6
- ------------------------------------------------------------ --------- --------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1 $74,948.3
- ------------------------------------------------------------ ========= ========= =========
</TABLE>
See accompanying notes. L-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30 JUNE 30
1998 1997 1999 1998
----------- ----------- -------- ---------
(UNAUDITED)
--------------------
(IN MILLIONS)
------------------------------------------------
<S> <C> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $5,589.0 $3,666.0 $ 7,753.7
- ------------------------------------------------------------
Net investment income 2,107.2 1,847.1 1,100.7 1,050.7
- ------------------------------------------------------------
Amortization of interest maintenance reserve 26.4 41.5 12.9 11.7
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 179.9 99.7 380.7 82.2
- ------------------------------------------------------------
Expense charges on deposit funds 134.6 119.3 83.8 83.3
- ------------------------------------------------------------
Separate account investment management and administration
service fees 396.3 325.5 210.3 195.7
- ------------------------------------------------------------
Other income 31.3 21.3 68.8 11.6
- ------------------------------------------------------------ --------- -------- -------- ---------
Total revenues 15,613.3 8,043.4 5,523.2 9,188.9
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 4,459.7 7,875.4
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 635.7 2,140.2
- ------------------------------------------------------------ --------- -------- -------- ---------
Total benefits and expenses 16,883.5 7,576.0 5,095.4 10,015.6
- ------------------------------------------------------------ --------- -------- -------- ---------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments (1,270.2) 467.4 427.8 (826.7)
- ------------------------------------------------------------
Dividends to policyholders 67.9 27.5 41.3 28.6
- ------------------------------------------------------------ --------- -------- -------- ---------
Gain (loss) from operations before federal income taxes and
net realized gain on investments (1,338.1) 439.9 386.5 (855.3)
- ------------------------------------------------------------
Federal income taxes (credit) (141.0) 78.3 104.3 (29.7)
- ------------------------------------------------------------ --------- -------- -------- ---------
Gain (loss) from operations before net realized gain on
investments (1,197.1) 361.6 282.2 (825.6)
- ------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 46.8 31.3 58.4 44.2
- ------------------------------------------------------------ --------- -------- -------- ---------
Net income (loss) $(1,150.3) $ 392.9 $ 340.6 $ (781.4)
- ------------------------------------------------------------ ========= ======== ======== =========
</TABLE>
See accompanying notes.
L-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30 JUNE 30
1998 1997 1999 1998
----------- ----------- -------- --------
(UNAUDITED)
-------------------
(IN MILLIONS)
-----------------------------------------------
<S> <C> <C> <C> <C>
Capital and surplus at beginning of year $2,968.4 $1,962.6 $2,564.5 $2,968.4
- ------------------------------------------------------------
Correction of prior year's asset valuation reserve -- (37.6) -- --
- ------------------------------------------------------------
Correction of prior year's admitted assets -- (57.0) -- --
- ------------------------------------------------------------ -------- -------- -------- --------
2,968.4 1,868.0 2,564.5 2,968.4
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 340.6 (781.4)
- ------------------------------------------------------------
Difference in cost and admitted investment amounts (304.8) (36.2) (4.9) (154.9)
- ------------------------------------------------------------
Nonadmitted assets (17.1) (0.4) (12.1) (3.1)
- ------------------------------------------------------------
Regulatory liability for reinsurance (35.2) (3.9) -- --
- ------------------------------------------------------------
Life policy reserve valuation basis (0.4) (0.9) -- --
- ------------------------------------------------------------
Asset valuation reserve (34.5) (36.9) (3.9) (64.3)
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- -- 500.0
- ------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 108.4 938.4 12.4 100.0
- ------------------------------------------------------------
Separate account receivable due to change in valuation -- (2.6) -- --
- ------------------------------------------------------------
Dividends to shareholder (220.0) (150.0) (410.0) (110.0)
- ------------------------------------------------------------ -------- -------- -------- --------
Capital and surplus at end of year $2,564.5 $2,968.4 $2,486.6 $2,454.7
- ------------------------------------------------------------ ======== ======== ======== ========
</TABLE>
See accompanying notes. L-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30 JUNE 30
1998 1997 1999 1998
---------- ---------- --------- ---------
(UNAUDITED)
---------------------
(IN MILLIONS)
-----------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 3,914.2 $ 8,030.1
- ------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) 190.0 (192.9)
- ------------------------------------------------------------
Investment income received 2,003.9 1,798.8 1,040.9 984.5
- ------------------------------------------------------------
Separate account investment management and administration
service fees 396.3 325.5 210.3 195.7
- ------------------------------------------------------------
Benefits paid (7,395.8) (5,345.2) (4,282.8) (3,823.9)
- ------------------------------------------------------------
Insurance expenses paid (2,909.7) (3,193.0) (804.3) (2,684.9)
- ------------------------------------------------------------
Federal income taxes recovered (paid) 84.2 (87.0) (128.5) 34.1
- ------------------------------------------------------------
Dividends to policyholders (12.9) (28.4) (38.8) (30.3)
- ------------------------------------------------------------
Other income received and expenses paid, net 207.0 (8.7) 210.5 (551.4)
- ------------------------------------------------------------ ---------- ---------- --------- ---------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 311.5 1,961.0
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 3,448.9 5,113.9
- ------------------------------------------------------------
Purchase of investments (16,950.0) (10,345.0) (3,848.4) (8,920.8)
- ------------------------------------------------------------
Other sources (uses) including reinsured policy loans (778.3) 529.1 314.7 766.8
- ------------------------------------------------------------ ---------- ---------- --------- ---------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (84.8) (3,040.1)
- ------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 12.5 600.0
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- -- --
- ------------------------------------------------------------
Proceeds from borrowings from shareholder 140.0 120.0 -- --
- ------------------------------------------------------------
Repayment of borrowings from shareholder (120.0) (100.0) (140.0) (120.0)
- ------------------------------------------------------------
Dividends paid to shareholder (220.0) (150.0) (410.0) (110.0)
- ------------------------------------------------------------ ---------- ---------- --------- ---------
Net cash provided by (used in) financing activities 1,158.4 (130.0) (537.5) 370.0
- ------------------------------------------------------------ ---------- ---------- --------- ---------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (310.8) (709.1)
- ------------------------------------------------------------
Cash and short-term investments at beginning of year 2,133.0 759.2 1,725.4 2,133.0
- ------------------------------------------------------------ ---------- ---------- --------- ---------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 1,414.6 $ 1,423.9
- ------------------------------------------------------------ ========== ========== ========= =========
</TABLE>
See accompanying notes.
L-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying statutory-basis financial statements have been prepared in
conformity with accounting practices prescribed or permitted by the Indiana
Department of Insurance ("Insurance Department"), except that they do not
contain complete notes. These financial statements are unaudited and include
all adjustments (consisting of normal recurring accruals) necessary for a
fair presentation of the results. For further information, refer to the
statutory-basis financial statements and notes as of December 31, 1998,
1997, and 1996 and for each of the three years in the period ended
December 31, 1998 included in this registration statement.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 1999.
2. ACQUISITIONS AND SALES OF SUSIDIARIES
In May 1999, the Company and LLANY announced its intention to transfer a
block of direct individual disability income business to MetLife. Under an
indemnity reinsurance agreement, MetLife will provide administrative
services and assume liability for the Company's approximately $65 million of
annual disability income premium. At closing, the Company will transfer cash
equal to statutory reserves, net of ceding commissions, of approximately
$500 million. Closing is targeted for the fourth quarter of 1999. The
Company stopped writing disability income insurance in early 1996 but
acquired additional disability income business in the 1998 transaction where
the Company acquired the individual life insurance and annuity business of
CIGNA.
L-5
