<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 2000
1933 ACT REGISTRATION NO. 333-43107
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 5 TO
REGISTRATION STATEMENT
ON
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE
SEPARATE ACCOUNT R
(EXACT NAME OF REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
1300 South Clinton Street, Fort Wayne, Indiana 46802
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
Depositor's Telephone Number, including Area Code
(219) 455-2000
<TABLE>
<S> <C>
Elizabeth Frederick, Esquire COPY TO:
The Lincoln National Life Insurance Company Jeremy Sachs, Esquire
1300 South Clinton Street The Lincoln National Life
P.O. Box 1110 Insurance Company
Fort Wayne, Indiana 46802 350 Church St.
(NAME AND ADDRESS OF AGENT FOR SERVICE) Hartford, CT 06103
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: Continuous
INDEFINITE NUMBER OF UNITS OF INTEREST IN VARIABLE LIFE INSURANCE CONTRACTS
(TITLE OF SECURITIES BEING REGISTERED)
An indefinite amount of the securities being offered by the Registration
Statement has been registered pursuant to Rule 24f-2 under the Investment
Company Act of 1940. The Form 24f-2 for Registrant for the fiscal year
ending December 31, 1999 was filed March 24, 2000.
It is proposed that this filing will become effective:
<TABLE>
<CAPTION>
<C> <S>
- -- immediately upon filing pursuant to Rule 485(b).
X on May 1, 2000 pursuant to Rule 485(b).
- -- 60 days after filing pursuant to Rule 485(a).
</TABLE>
<PAGE>
CROSS REFERENCE SHEET
(RECONCILIATION AND TIE)
REQUIRED BY INSTRUCTION 4 TO FORM S-6
<TABLE>
<CAPTION>
ITEM OF FORM N-8B-2 LOCATION IN PROSPECTUS
- ------------------- ----------------------
<S> <C>
1 Cover Page Highlights
2 Cover Page
3 *
4 Distribution of Policies
5 Lincoln Life, the Separate Account and the
General Account
6(a) Lincoln Life, the Separate Account and the
General Account
6(b) *
9 Legal Proceedings
10(a)-(c) Right-to-Examine Period; Surrenders; Accumulation
Value; Reports to Policy Owners
10(d) Right to Exchange the Policy; Policy Loans;
Surrenders; Allocation of Net Premium Payments
10(e) Lapse and Reinstatement
10(f) Voting Rights
10(g)-(h) Substitution of Securities
10(i) Premium Payments; Transfers; Death Benefits;
Payment of Death Benefit Proceeds; Policy Values;
Settlement Options
11 The Funds
12 The Funds
13 Charges; Fees
14 Issuance
15 Premium Payments; Transfers
16 Lincoln Life, the Separate Account and the
General Account
17 Surrenders
18 Lincoln Life, the Separate Account and the
General Account
19 Reports to Policy Owners
20 *
21 Policy Loans
22 *
23 Lincoln Life, the Separate Account and the
General Account
24 Incontestability; Suicide; Misstatement of Age or
Gender
25 Information about Lincoln Life and the Separate
Account
26 Fund Participation Agreements
27 Lincoln Life, the Separate Account and the
General Account
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM OF FORM N-8B-2 LOCATION IN PROSPECTUS
- ------------------- ----------------------
<S> <C>
28 Directors and Officers of Lincoln Life
29 Lincoln Life, the Separate Account and the
General Account
30 *
31 *
32 *
33 *
34 *
35 *
37 *
38 Distribution of Policies
39 Distribution of Policies
40 *
41(a) Distribution of Policies
42 *
43 *
44 The Funds; Premium Payments
45 *
46 Surrenders
47 Lincoln Life, the Separate Account and the
General Account; Surrenders, Transfers
48 *
49 *
50 Lincoln Life, the Separate Account and the
General Account
51 Cover Page; Highlights; Premium Payments; Right
to Exchange the Policy
52 Substitution of Securities
53 Tax Matters
54 *
55 *
</TABLE>
* Not Applicable
<PAGE>
PROSPECTUS 1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
HOME OFFICE LOCATION:
1300 SOUTH CLINTON STREET
P.O. BOX 1110
FORT WAYNE, INDIANA 46802
(800) 454-6265
ADMINISTRATIVE OFFICE
PERSONAL SERVICE CENTER MVLI
350 CHURCH STREET
HARTFORD, CT 06103-1106
(800) 444-2363
- --------------------------------------------------------------------------------
A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
BENEFITS PAYABLE ON DEATH OF SECOND OF TWO INSUREDS
- --------------------------------------------------------------------------------
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 provides death
benefits when the second of the two named Insureds dies (a "Second Death
Policy").
The Policy features include: 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.
You may allocate net premiums to the Sub-Accounts of our Flexible Premium
Variable Life Account R ("Separate Account"). Each Sub-Account invests in one of
the Funds listed below:
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS FRANKLIN TEMPLETON VARIABLE INSURANCE
AIM V.I. Capital Appreciation Fund PRODUCTS TRUST
AIM V.I. Diversified Income Fund Templeton Asset Strategy Fund -- Class 1
AIM V.I. Growth Fund (formerly Templeton Asset Allocation Fund)
AIM V.I. Value Fund Templeton Growth Securities Fund -- Class 1
DELAWARE GROUP PREMIUM FUND (formerly Templeton Stock Fund)
Emerging Markets Series Templeton International Securities Fund --
Small Cap Value Series Class 1
Trend Series (formerly Templeton International Fund)
DEUTSCHE ASSET MANAGEMENT VIT FUNDS LINCOLN NATIONAL MONEY MARKET FUND, INC.
(formerly BT Insurance Funds Trust) Money Market Fund
Equity 500 Index Fund MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE
TRUST
FIDELITY VARIABLE INSURANCE PRODUCTS FUND MFS Emerging Growth Series
Equity-Income Portfolio -- Initial Class MFS Total Return Series
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II MFS Utilities Series
Asset Manager Portfolio -- Initial Class OCC ACCUMULATION TRUST
Investment Grade Bond Portfolio -- Initial Global Equity Portfolio
Class Managed Portfolio
</TABLE>
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, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
PROSPECTUS DATED: MAY 1, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
- -------- --------
<S> <C>
HIGHLIGHTS............................ 3
Initial Choices To Be Made.......... 3
Level or Varying Death Benefit...... 3
Amount of Premium Payment........... 4
Selection of Funding Vehicles....... 4
Charges and Fees.................... 5
Changes in Specified Amount......... 5
LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT.................. 6
BUYING VARIABLE LIFE INSURANCE........ 7
Replacements........................ 8
APPLICATION........................... 8
OWNERSHIP............................. 9
BENEFICIARY........................... 9
INSUREDS.............................. 9
THE POLICY............................ 10
Policy Specifications............... 10
PREMIUM FEATURES...................... 10
Planned Premiums; Additional
Premiums........................... 10
Limits on Right to Make Payments
of Additional and Planned
Premiums......................... 11
Premium Load; Net Premium
Payment.......................... 11
RIGHT-TO-EXAMINE PERIOD............... 11
TRANSFERS AND ALLOCATION AMONG
ACCOUNTS............................. 11
Allocation of Net Premium
Payments........................... 11
Transfers........................... 12
Optional Sub-Account Allocation
Programs........................... 12
Dollar Cost Averaging............. 12
Automatic Rebalancing............. 13
POLICY VALUES......................... 13
Accumulation Value.................. 14
Separate Account Value.............. 14
Variable Accumulation Unit
Value............................ 14
Variable Accumulation Units....... 14
Fixed Account and Loan Account
Value.............................. 15
Net Accumulation Value.............. 15
FUNDS................................. 15
Substitution of Securities.......... 18
Voting Rights....................... 18
Fund Participation Agreements....... 19
CHARGES AND FEES...................... 19
Deductions from Premium Payments.... 19
Deductions Made Monthly............. 19
Monthly Deduction................. 20
Cost of Insurance Charge.......... 20
Mortality and Expense Risk
Charge........................... 20
Mortality and Expense Risk Charge
and Fund Expenses.................. 21
Surrender Charges................... 23
Transaction Fee for Excess
Transfers.......................... 23
DEATH BENEFITS........................ 24
Death Benefit Options............... 24
Changes in Death Benefit Options and
Specified Amount................... 25
</TABLE>
<TABLE>
<CAPTION>
CONTENTS PAGE
- -------- --------
<S> <C>
Federal Income Tax Definition of
Life Insurance..................... 25
NOTICE OF DEATH OF INSUREDS........... 25
PAYMENT OF DEATH BENEFIT PROCEEDS..... 25
Settlement Options.................. 26
POLICY LIQUIDITY...................... 26
Policy Loans........................ 26
Partial Surrender................... 27
Surrender of the Policy............. 28
Surrender Value................... 28
Deferral of Payment and Transfers... 28
ASSIGNMENT; CHANGE OF OWNERSHIP....... 28
LAPSE AND REINSTATEMENT............... 29
Lapse of a Policy................... 29
No Lapse Provision................ 29
Reinstatement of a Lapsed Policy.... 30
COMMUNICATIONS WITH LINCOLN LIFE...... 30
Proper Written Form................. 30
Telephone Transaction Privileges.... 30
OTHER POLICY PROVISIONS............... 30
Issuance............................ 30
Date of Coverage.................... 30
Right to Exchange the Policy........ 31
Incontestability.................... 31
Misstatement of Age or Gender....... 31
Suicide............................. 32
Nonparticipating Policies........... 32
Riders.............................. 32
TAX ISSUES............................ 32
Taxation of Life Insurance Contracts
in General......................... 32
Policies which are MECS............. 33
Policies which are not MECS......... 34
Last Survivor Contract.............. 35
Other Considerations................ 35
Tax Status of Lincoln Life.......... 36
FAIR VALUE OF THE POLICY.............. 36
DIRECTORS AND OFFICERS OF LINCOLN
LIFE................................. 37
DISTRIBUTION OF POLICIES.............. 38
CHANGES OF INVESTMENT POLICY.......... 38
OTHER CONTRACTS ISSUED BY LINCOLN
LIFE................................. 39
STATE REGULATION...................... 39
REPORTS TO OWNERS..................... 39
ADVERTISING........................... 39
LEGAL PROCEEDINGS..................... 40
EXPERTS............................... 40
REGISTRATION STATEMENT................ 40
Appendix 1............................ 41
Corridor Percentages................ 41
Appendix 2............................ 42
Illustration of Accumulation Values,
Surrender Values, and Death Benefit
Proceeds........................... 42
Financial Statements..................
Separate Account.................... R-1
Lincoln Life........................ S-1
</TABLE>
2
<PAGE>
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. Your Policy insures two Insureds. If one
of the Insureds dies, the Policy pays no death benefit. Your
Policy will pay the death benefit only when the second
Insured dies. A "second-to-die" policy might be suitable
when both of the Insureds have income of their own and only
want to provide financial support for their dependents if
both of them should die, or to provide liquidity to heirs
when the second Insured dies. If replacement income or
immediate cash liquidity is needed upon the death of one
Insured, this type of policy may not be suitable.
The Policy's 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
"second-to-die" variable life insurance policy. As a death
benefit is only paid upon the second Insured's death, this
Policy may, or may not, be appropriate for your financial
goals. The value of the Policy and, under one option, the
death benefit amount, depends 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.
If you are entitled to favorable tax treatment, you should
satisfy yourself that this Policy meets your other financial
goals before you purchase it.
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. You, as the Owner, have three 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.
LEVEL OR VARYING DEATH BENEFIT
The Death Benefit is the amount Lincoln pays to the
Beneficiary(ies) when the second 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 of the second Insured's death.
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.
3
<PAGE>
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 second Insured
died (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. The
Net Accumulation Value is the total of the balances in the
Fixed Account and the Separate Account minus any outstanding
Loan Account amounts.
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 when
the second Insured died; or
2) the Corridor Death Benefit.
See "DEATH BENEFITS," page 24, for more details.
AMOUNT OF PREMIUM PAYMENT
When you apply for your Policy, you must decide how much
premium to pay. Premium payments may be changed within
certain limits. (See "PREMIUM FEATURES," page 11.)
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 "CHARGES AND
FEES," page 20) increase as the Insureds get older.
If your Policy lapses because your Monthly Premium Deduction
is larger than the Net Accumulation Value, you may reinstate
your Policy. (See "LAPSE AND REINSTATEMENT," 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" time period. Use this time
to review your Policy and make sure that it meets your
needs. During this time 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
"RIGHT-TO-EXAMINE PERIOD," page 11.)
SELECTION OF FUNDING VEHICLES
VARIABLE ACCOUNT
This Prospectus focuses on the Separate Account investment
information that makes up the "variable" part of the Policy.
If you put money into the variable funds, you take 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 they 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. These "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 "FUNDS," page 15.)
4
<PAGE>
FIXED ACCOUNT
You may also use Lincoln Life's Fixed Account to fund your
Policy. Net Premium Payments made into the Fixed Account:
- become part of Lincoln Life's 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 Lincoln Life's
discretion. For additional information, see the
"GENERAL ACCOUNT," page 7.
CHARGES AND FEES
We deduct a premium load of 8% from each Premium Payment. We
make monthly deductions for administrative expenses
(currently, $12.50 per month for the first Policy Year and
$5 per month afterwards), the Cost of Insurance and any
riders that are placed on your Policy. For Policy Years
1-20, a monthly charge of $0.09 per $1,000 of Specified
Amount is deducted. If the No-Lapse Provision is selected,
there will be an additional monthly charge of $0.01 per
$1,000 of Specified Amount (Note: the No-Lapse provision is
not available in IL, MA, MD, NJ and TX). (See "CHARGES AND
FEES," page 20.)
Daily deductions are subtracted from the Separate Account
for mortality and expense risk. Currently, this charge is at
an annual rate of .80%. (See "CHARGES AND FEES," page 21.)
Each Fund has its own management fee charge, also deducted
daily. Each Fund's expense levels will affect its investment
results. The table under "CHARGES AND FEES," page 22, shows
you the current expense levels for each Fund.
Each Policy Year you will be allowed to make 12 transfers
between funding options. Beyond 12, a $25 fee may apply.
(See "TRANSFERS," page 12.)
You may surrender the Policy in full or withdraw part of its
value. A Surrender Charge is applied if the Policy is
surrendered totally and is the amount retained by us if the
Policy is surrendered. We charge you an administrative fee
of $25, but not more than 2% of the amount withdrawn, each
time you request a partial surrender of your Policy. If you
totally surrender your Policy within the first 15 years, a
surrender charge will be deducted in computing what will be
paid you. If you surrender your Policy within the first 15
years after an increase in the Specified Amount, a surrender
charge will also be imposed, in addition to any existing
surrender charge. (See "CHARGES AND FEES," page 24.) The
maximum surrender charge payable is $37.48 per $1,000 of
Specified Amount.
You may borrow within described limits against the Policy.
If you borrow against your Policy, interest will be charged
to the Loan Account. Currently, the annual interest rate is
8%. For the first ten Policy Years interest will be credited
to the Loan Account Value at the annual rate of interest
charged for a loan minus 1%. For Policy Years eleven and
beyond, interest will be credited at an annual rate equal to
the current interest charged. (See "POLICY LIQUIDITY," page
27.)
CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount is the amount originally chosen
by the Policy Owner and is equal to the Death Benefit.
5
<PAGE>
Within certain limits, you may decrease or, with
satisfactory evidence of insurability, increase the
Specified Amount. The minimum specified amount is currently
$250,000. Such changes will affect other aspects of your
Policy. (See "DEATH BENEFITS," page 25.)
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 R
("Account R") is a "separate account" of the company
established on December 2, 1997. Under Indiana law, the
assets of Account R 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 R income, gains,
and losses are credited to or charged against Account R
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
("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 R's or our management, investment
practices, or policies. We have numerous other registered
separate accounts which fund our variable life insurance
policies and variable annuity contracts.
Account R 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),
Net Premium Payments allocated to Account R will be invested
in Fund shares at net asset value, and monies necessary to
pay for deductions, charges, transfers and surrenders from
Account R are raised by selling Fund shares at net asset
value.
The Funds are listed with their investment objectives, which
they may or may not achieve. (See "FUNDS," pages 15-18.)
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, and 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 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
6
<PAGE>
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.
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, if elected, 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 fund options available, it is possible to
finetune 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.
And 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
7
<PAGE>
life insurance. Unless a policy has become a "modified
endowment contract", an Owner can borrow Policy values
tax-free, without surrender charges and at very low net
interest cost. (See "TAX ISSUES," page 32.) 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 Insureds' ages. (See "DEATH BENEFITS," 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.
Certain costs and expenses of variable life insurance
ownership which are directly related to Policy values (i.e.
asset based costs) are not unlike those incurred through
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 2) 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, a number of matters should be considered
by the applicant. 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? For example, the
Insureds may no longer be insurable, or the contestability
period may have elapsed with respect to the existing policy,
while the Policy could be contested. The Owner 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 an
application on a form provided by Lincoln Life.
A complete application identifies the prospective Insureds
and provides sufficient information about them to permit
Lincoln Life to begin underwriting the risks under the
Policy. We require a medical history and examination of each
of the Insureds. Lincoln Life may decline to provide
insurance on the lives of the Insureds or, if it agrees to
provide insurance, it may place one or both Insureds 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 Insureds.
The applicant will select the Beneficiary or Beneficiaries
who are to receive Death Benefit Proceeds payable on the
Second Death, the initial face amount (the "Initial
Specified Amount") of the Death Benefit and which of two
methods of computing the
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Death Benefit is to be used. (See "DEATH BENEFITS.") The
applicant will also indicate both the frequency and amount
of Premium Payments. (See PREMIUM FEATURES). The applicant
must also determine 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 Insureds are 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 lives of each of the Insureds
under applicable state law. The Owner may be either or both
of the Insureds, or any other natural person or non-natural
entity. The Owner owns and exercises the rights under the
Policy prior to the Second Death.
The Owner is the person who is ordinarily entitled to
exercise the rights under the Policy so long as either of
the Insureds is living. These rights include the power to
select the Beneficiary 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 is a person other than the last surviving
Insured, and that Owner dies before the Second Death, the
Owner's rights in the Policy will belong to the Owner's
estate, unless otherwise specified to Lincoln Life.
BENEFICIARY
The Beneficiary is designated by the Owner or the Applicant
and is the person who will 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 Beneift under the Policy.
Multiple Beneficiaries will be paid in equal shares, unless
otherwise specified to Lincoln Life.
Except when Lincoln Life has acknowledged an assignment of
the Policy or an agreement not to change the Beneficiary,
the Owner may change the Beneficiary at any time while
either of the Insureds is living. Any request for a change
in the Beneficiary must be in a written form satisfactory to
Lincoln Life and submitted to Lincoln Life. Unless the Owner
has reserved the right to change the Beneficiary, such a
request must be signed by both the Owner and the
Beneficiary. On recordation, the change of Beneficiary 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 Lincoln Life as to any payment made or
action taken by Lincoln Life before it was recorded.
If any Beneficiary dies before the Second Death, the
Beneficiary's potential interest shall pass to any surviving
Beneficiaries, unless otherwise specified to Lincoln Life.
If no named Beneficiary survives the Second Death, any Death
Benefit Proceeds will be paid to the Owner or the Owner's
executor, administrator or assignee.
INSUREDS
There are two Insureds under the Policy. At the Date of
Issue of the Policy the Owner must have an insurable
interest in each of the Insureds. On the Second Death, a
Death Benefit is payable under the Policy.
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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. A Policy Year is the
twelve month period, beginning on 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, a Policy will be delivered to the Owner. The
Policy sets forth the terms of the Policy, as applicable to
the Owner, and should be reviewed by the Owner on receipt 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
the books and records of Lincoln Life. Possession of the
Policy does not represent ownership or the right to exercise
the incidents of ownership with respect to the Policy. If
the Owner loses the form of Policy, Lincoln Life will issue
a replacement on request. Lincoln Life may impose a Policy
replacement fee.
POLICY SPECIFICATIONS
The Policy includes a "Policy Specifications" page, with
supporting schedules, in which is set forth certain
information applicable to the specific Policy. This
information includes the identity of the Owner, the Date of
Issue, the Initial Specified Amount, the Death Benefit
Option selected, the Insureds, the issue Ages, the
Beneficiary, the initial Premium Payment, the Surrender
Charges, Expense Charges and Fees, Guarantee Maximum Cost of
Insurance Rates, and the No Lapse Premium if the No Lapse
Provision has been selected.
PREMIUM FEATURES
The Policy permits flexible premium payments, meaning that
the frequency and the amount of Premium Payments may be
selected by the Owner. After the Initial Premium Payment is
paid there is no minimum premium required, unless to
maintain the No Lapse Provision. (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 or, if selected, the No Lapse Premium.
If at least one of the Insureds is still living when the
younger Insured attains or would have attained Age 100, and
the Policy has not been surrendered, there are certain
changes under the Policy. We will no longer accept Premium
Payments, and will make no further monthly deductions.
Policy Values held in the Separate Account will be
transferred to the Fixed Account. We will no longer transfer
amounts to the Sub-Accounts. The Policy will remain in force
until surrender or the Second Death.
PLANNED PREMIUMS; ADDITIONAL PREMIUMS
"Planned Premiums" are the amount of premium (as shown in
the Policy Specifications) the applicant chooses to pay
Lincoln Life on a scheduled basis. This is the amount for
which we send a premium reminder notice.
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Any subsequent Premium Payments ("Additional Premiums") must
be sent directly to the Administrative Office. Additional
Premiums will be credited only when actually received by
Lincoln Life. Premium Payments may be billed with an annual,
semiannual, or quarterly frequency. 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.
LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
The Owner may increase Planned Premiums, or pay Additional
Premiums, subject to the following limitations and Lincoln
Life's right to limit the amount or frequency of Additional
Premiums.
Lincoln Life 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 Lincoln Life is unwilling to
accept the risk, the increase in premium will be refunded
without interest and without participation of such amounts
in any underlying investment.
Lincoln Life may also decline 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. The
excess amount would be returned.
PREMIUM LOAD; NET PREMIUM PAYMENT
Lincoln Life deducts 8.0% from each Premium Payment. This
amount, sometimes referred to as "premium load," covers
certain Policy-related state tax and federal income tax
liabilities and a portion of the sales expenses incurred by
Lincoln Life. The Premium Payment, net of the premium load,
is called the "Net Premium Payment."
RIGHT-TO-EXAMINE PERIOD
The Owner may return the Policy to Lincoln Life for
cancellation as follows. If the Owner mails or delivers the
Policy 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) and notice of surrender rights to the Owner,
Lincoln Life will refund to the Owner all Premium Payments.
Any Premium Payments received by Lincoln Life 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 a
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 any
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. An Owner may change the allocation of future
Net
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Premium Payments at any time. In any allocation, the amount
allocated to any Sub-Account must be in whole percentages.
No allocation can be made which would result in a
Sub-Account Value of less than $50 or a Fixed Account Value
of less than $2,500. Lincoln Life, at its sole discretion,
may waive minimum balance requirements on the Sub-Accounts.
TRANSFERS
The Owner may make transfers among the Sub-Accounts, on the
terms set forth below, at any time before the younger
Insured reaches or would have reached Age 100. The Owner
should carefully consider current market conditions and each
Sub-Account's investment policies and related risks before
allocating money to the Sub-Accounts.
Transfer of amounts of at least $500 from one Sub-Account to
another or from the Sub-Accounts to the Fixed Account are
possible at any time. Within 30 days after each anniversary
of the Date of Issue, the Owner may transfer up to 20% of
the Fixed Account Value (as of the preceding anniversary of
the Date of Issue) to one or more Sub-Accounts. 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 a Sub-Account after a
transfer must be at least $500. Lincoln Life reserves the
right to impose a charge for each transfer request in excess
of 12 requests in any Policy Year. Lincoln Life may further
limit transfers from the Fixed Account at any time.
Transfers must be made in proper written form, unless the
Owner has given written authorization to Lincoln Life to
accept telephone transactions. Authorization to engage in
telephone transactions and permitted telephone transactions
must be made in accordance with the procedures 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
effected 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 $500 will 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
The Owner may elect to participate in programs providing for
Dollar Cost Averaging or Automatic Rebalancing, but may
participate in only one program at any time.
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
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, an Owner may reduce exposure to market
volatility. Dollar Cost Averaging will not assure a profit
or protect against a declining market.
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If the Owner elects 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 a request from the Owner 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. Lincoln Life may, in its sole
discretion, 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.
Currently, there is no charge for Dollar Cost Averaging, but
Lincoln Life reserves the right to impose a charge.
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 changed by the
Owner. If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts will be subject to
Automatic Rebalancing.
The Owner 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 upon receipt by the
Administrative Office of a request in proper written form or
by telephone, if adequately authenticated.
Currently, there is no charge for Automatic Rebalancing, but
Lincoln Life reserves the right to impose a charge.
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 fund 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 which remain credited to
the Policy, the current Accumulation Unit values, the
Sub-Account values, the Fixed Account Value and the Loan
Account Value.
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ACCUMULATION VALUE
The portion of a Premium Payment, after the 8.0% reduction
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 the 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.
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 thereafter 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
A "Variable Accumulation Unit" is a unit of measure used in
the calculation of the value of each Sub-Account. The
Variable Accumulation Unit value will be as determined for
the Valuation Period during which a Premium Payment or
request for transfer is received by Lincoln Life. The
Variable Accumulation Unit value for a Sub-Account for any
later 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 (2) is divided by the number of Variable
Accumulation Units outstanding at the beginning of the
Valuation Period.
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The daily charges imposed on a Sub-Account for any Valuation
Period are 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 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 Lincoln Life's general account through
payment of premiums or through transfers from the Separate
Account. Lincoln Life guarantees 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.
FUNDS
Each of the Sub-Accounts of the Separate Account is invested
solely in the shares of one of the Funds available under the
Policies. Each of the Funds, in turn, is an investment
portfolio of one of the trusts or corporations listed below.
Each portfolio described below is an investment vehicle for
one or more insurance company separate accounts. A given
portfolio may have a similar investment objective and
principal investment strategy to those for another mutual
fund managed by the same investment advisor or subadvisor.
However, because of timing of investments and other
variables we cannot guarantee there will be any correlation
between the two investments. Even though the management
objectives of the fund are similar, the investment results
may vary.
The portfolios, their investment advisers and distributors,
and the Funds within each that are available under the
Policies:
AIM Variable Insurance Funds 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. Capital Appreciation Fund;
AIM V.I. Diversified Income Fund;
AIM V.I. Growth Fund;
AIM V.I. Value Fund.
Delaware Group Premium Fund, managed by Delaware
Management Company and distributed by Delaware
Distributors, L.P., 1818 Market Street, Philadelphia, PA
19103;
Emerging Markets Series;
Small Cap Value Series;
Trend Series.
Deutsche Asset Management VIT Funds Trust (formerly BT
Insurance Funds Trust), managed by Bankers Trust
Company, Bankers Trust Plaza, New York, NY 10006, and
distributed by
Equity 500 Index Fund.
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Fidelity Variable Insurance Products Fund, and Variable
Insurance Products Fund II managed by Fidelity
Management & Research Company and distributed by
Fidelity Distributors Corporation, 82 Devonshire Street,
Boston, MA 02109;
Equity-Income Portfolio -- Initial Class
Asset Manager Portfolio -- Initial Class
Investment Grade Bond Portfolio -- Initial Class
Franklin Templeton Variable Insurance Products Trust,
managed by Templeton Investment Counsel, Inc., Broward
Financial Centre, STE 2100, Fort Lauderdale FL 33394 and
its Templeton and Franklin affiliates and distributed by
Franklin Templeton Distributors, Inc., 777 Mariners
Island Blvd. San Mateo CA 94403-7777;
Templeton Asset Strategy Fund -- Class 1;
Templeton International Securities Funds -- Class 1;
Templeton Growth Securities Fund -- Class 1.
Lincoln National Money Market Fund, Inc., managed by
Lincoln Investment Management, Inc. and distributed by
Lincoln Financial Advisors Corp. 350 Church Street,
Hartford, CT 06103.
Money Market Fund
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.
OCC Accumulation Trust, managed by OpCap Advisors and
distributed by OCC Distributors, 1345 Avenue of the
Americas New York, NY 10105
Global Equity Portfolio;
Managed Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown listed under "Fund Expenses" in this
Prospectus.
There follows 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.
The investment objectives and policies of certain Trusts are
similar to the investment objectives and policies of other
funds that may be managed by the same investment adviser.
The investment results of the Trusts, however, may be higher
or lower than the results of such other funds. There can be
no assurance, and no representation is made, that the
investment results of any of the Trusts will be comparable
to the investment results of any other fund, even if the
other fund has the same investment adviser.
AIM V.I. CAPITAL APPRECIATION FUND Seeks growth of capital
through investment in common stocks, with emphasis on medium
and small-sized growth companies. The investment advisor
will be particularly interested in companies that are likely
to benefit from new or innovative products, services or
processes as well as those that have experienced
above-average, long term growth in earnings and have
excellent prospects for future growth.
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<PAGE>
AIM V.I. DIVERSIFIED INCOME FUND: Seeks to achieve a high
level of current income primarily by investing in a
diversified portfolio of foreign and U.S. government and
corporate debt securities, including lower rated high yield
debt securities (commonly known as "junk bonds").
AIM V.I. GROWTH FUND: Seeks growth of capital primarily by
investing in seasoned and better capitalized companies
considered to have strong earnings momentum. Focus is on
companies that have experienced above-average growth in
earnings and have excellent prospects for future growth.
AIM V.I. VALUE FUND: 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.
DEUTSCHE VIT EQUITY 500 FUND: Seeks to replicate as closely
as possible the performance of the Standard & Poor's 500
Composite Stock Price Index, an index emphasizing large-
capitalization stocks, before the deduction of Fund
expenses.
DELAWARE EMERGING MARKETS SERIES: An international fund
which seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located
or operating in emerging or developing countries.
DELAWARE SMALL CAP VALUE SERIES: Seeks growth by investing
in stocks of small cap companies whose market values appear
low relative to underlying value or future earnings and
growth potential.
DELAWARE TREND SERIES: Seeks long-term growth by investing
primarily in small-cap common stocks and convertible
securities of emerging and other growth-oriented companies.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- INITIAL CLASS:
Seeks high total return with reduced risk over the long-term
by allocating its assets among domestic and foreign stocks,
bonds and short-term money market instruments.
FIDELITY VIP II INVESTMENT GRADE BOND PORTFOLIO -- INITIAL
CLASS: Seeks as high a level of current income as is
consistent with the preservation of capital by investing in
U.S. dollar-denominated investment-grade bonds.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- INITIAL CLASS :
Seeks reasonable income by investing primarily in
income-producing equity securities, with some potential for
capital appreciation, seeking a yield that exceeds the
composite yield on the securities comprising the Standard
and Poor's 500 Index (S&P 500).
LINCOLN MONEY MARKET FUND: 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.
MFS EMERGING GROWTH SERIES: Seeks to provide long-term
growth of capital.
MFS TOTAL RETURN SERIES: Seeks primarily to obtain
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.
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MFS UTILITIES SERIES: Seeks capital growth and current
income (income above that available from a portfolio
invested entirely in equity securities).
TEMPLETON ASSET STRATEGY FUND -- CLASS 1: Seeks a high level
of total return. Invests in stocks of companies in any
nation, bonds of companies and governments of any nation,
and in money market instruments including emerging markets.
Assets are allocated among different investments depending
upon worldwide market and economic conditions.
TEMPLETON GROWTH SECURITIES FUND -- CLASS 1: Seeks long-term
capital growth. Invests primarily in stocks of companies in
various nations throughout the world including the U.S. and
emerging markets. Templeton Global Advisors Limited serves
as the Fund's investment advisor.
TEMPLETON INTERNATIONAL SECURITIES FUND -- CLASS 1: Seeks
long-term capital growth. It invests primarily in stocks of
companies outside the United States, including emerging
markets. Templeton Investment Counsel, Inc. serves as the
Fund's investment advisor.
OCC ACCUMULATION TRUST GLOBAL EQUITY PORTFOLIO: Seeks
long-term capital appreciation through a global investment
strategy primarily involving equity securities.
OCC ACCUMULATION TRUST MANAGED PORTFOLIO: Seeks growth of
capital over time through investment in a portfolio of
common stocks, bonds and cash equivalents, the percentage of
which will vary based on management's assessments of
relative investment values.
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 Fund Prospectuses carefully.
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. Owners should 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 the terms and
conditions imposed by Lincoln Life (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 the judgment of
Lincoln Life, 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, Lincoln Life may substitute shares of
another Fund. A substituted Fund may have higher charges
than the one it replaces. There will be no substitution of
securities in any Sub-Account without prior approval of the
Commission.
VOTING RIGHTS
Lincoln Life 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
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<PAGE>
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 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
Trust 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.
To determine how many votes each Policy owner is entitled to
direct with respect to a Fund, first Lincoln Life will
calculate the dollar amount of your account value
attributable to that Fund. Second we will divide that amount
by $100.00. The result is the number of votes you may
direct.
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
Lincoln Life deducts charges in connection with the Policy
to compensate it for providing the insurance benefit set
forth in the Policy, administering the Policy, assuming
certain risks in connection with the Policy and for
incurring expenses associated with the distribution of the
Policy.
The nature and amount of these charges are as follows:
DEDUCTIONS FROM PREMIUM PAYMENTS
We deduct a premium charge of 8% from each Premium Payment.
DEDUCTIONS MADE MONTHLY
We make various expense deductions monthly. The Monthly
Deduction, including the Cost of Insurance Charge is made
from the Net Accumulation Value.
The Monthly Deductions are deducted proportionately from the
value of each underlying investment subject to the charge.
For Sub-Accounts, Variable Accumulation Units are canceled
and the value of the canceled Variable Accumulation Units is
withdrawn in the same proportion as their respective values
have to the Net Accumulation Value. The 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, 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").
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<PAGE>
If either Insured is still living when the younger Insured
would have attained Age 100 and the Policy has not been
surrendered, no further Monthly Deductions will be made and
the Separate Account Value will be transferred to the Fixed
Account. The Policy will then remain in force until
surrender or the Second Death.
MONTHLY DEDUCTION
There is a flat dollar Monthly Deduction of $12.50 until the
first Policy Anniversary and, currently, $5 thereafter
(guaranteed not to exceed $10 after the first Policy Year).
In addition there is a Monthly Deduction charge of $0.09
per $1000 of Specified Amount for the first twenty years of
the Policy and for the first twenty years following an
increase in Specified Amount. If the No Lapse Provision is
in effect there will also be a Monthly Deduction of $0.01
per $1000 of Specified Amount. (Note: the No Lapse provision
is not available in IL, MA, MD, NJ and TX.)
These charges compensate Lincoln Life 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" charge is the portion of the Monthly
Deduction designed to compensate Lincoln Life 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,
underwriting category and gender (in accordance with state
law) of both Insureds and the current "Net Amount at Risk"
(Death Benefit minus the Accumulated Value). The rate on
which the Monthly Deduction for the Cost of Insurance is
based will generally increase as the Insureds age, although
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 previous Monthly Anniversary Day by
1.0032737 (the monthly equivalent of an annual rate of 4%),
subtracting the Accumulation Value at the previous Monthly
Anniversary Day, and multiplying the result (the Net Amount
at Risk) by the applicable Cost of Insurance Rate as
determined by Lincoln Life. The Guaranteed Maximum Cost of
Insurance Rates, per $1,000 of Net Amount at Risk, for
standard risks are based on the 1980 Commissioners Standard
Ordinary Mortality Tables, Age Nearest Birthday (1980 CSO,
Male or Female); or, for unisex rates, on the 1980 CSO-B
Table.
MORTALITY AND EXPENSE RISK CHARGE
Lincoln Life deducts a daily charge as a percentage of the
assets of the Separate Account as a mortality and expense
risk charge. The mortality risk assumed is that insureds may
live for a shorter period than estimated, and therefore, a
greater amount of death benefit will be payable. The expense
risk assumed is that expenses incurred is issuing and
administering the policies will be greater than estimated.
The mortality and expense risk charge is currently at an
annual rate of 0.80% per year, and is guaranteed not to
exceed 0.90% per year.
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<PAGE>
MORTALITY AND EXPENSE RISK CHARGE AND FUND EXPENSES
The purpose of the following Table is to help purchasers and prospective
purchasers understand the costs and expenses that are borne, directly and
indirectly, by purchasers assuming that all Net Premium Payments are allocated
to the Separate Account. The table reflects expenses of the Separate Account as
well as of the individual Funds underlying the Sub-Accounts. The Mortality and
Expense Risk Charge shown is the currently charged rate during the first twelve
Policy Years. It currently declines to .55% per year thereafter and is
guaranteed not to exceed .90% per year.
FEE TABLE
<TABLE>
<CAPTION>
TOTAL FUND
TOTAL ANNUAL FUND OPERATING
OPERATING EXPENSES EXPENSES WITH
MANAGEMENT OTHER WITHOUT WAIVERS OR TOTAL WAIVERS WAIVERS AND
FUND FEES(1) 12(B)1 FEE EXPENSES REDUCTIONS AND REDUCTIONS REIMBURSEMENTS
---- ----------- ---------- -------- ------------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Capital
Appreciation Fund......... 0.62% N/A 0.11% 0.73% N/A 0.73%
AIM V.I. Diversified Income
Fund...................... 0.60 N/A 0.23 0.83 N/A 0.83
AIM V.I. Growth Fund....... 0.63 N/A 0.10 0.73 N/A 0.73
AIM V.I. Value Fund........ 0.61 N/A 0.15 0.76 N/A 0.76
Delaware Emerging Markets
Series -- Standard
Class(2a)................. 1.19 N/A 0.28 1.53 (0.06) 1.47
Delaware Small Cap Value
Series -- Standard
Class(2b)................. 0.75 N/A 0.10 0.85 N/A 0.85
Delaware Trend Series
Standard Class(2c)........ 0.75 N/A 0.07 0.82 N/A 0.82
Deutsche VIT Equity 500
Index Fund(3)............. 0.14 N/A 0.16 0.43 (0.13) 0.30
Fidelity VIP Asset Manager
Portfolio -- Initial
Class(4).................. 0.53 N/A 0.10 0.63 N/A 0.63
Fidelity VIP Equity-Income
Portfolio -- Initial
Class(4).................. 0.48 N/A 0.09 0.57 N/A 0.57
Fidelity VIP Investment
Grade Bond Fund -- Initial
Class(4).................. 0.43 N/A 0.11 0.54 N/A 0.54
LN Money Market Fund....... 0.48 N/A 0.11 0.59 N/A 0.59
MFS Emerging Growth
Series(5)................. 0.75 N/A .09(1) 0.84 N/A 0.84
MFS Total Return
Series(5)................. 0.75 N/A 0.15(1) 0.90 N/A 0.90
MFS Utilities Series(5).... 0.75 N/A 0.16(1) 0.91 N/A 0.91
OCC Accum Trust Global
Equity Portfolio.......... 0.80 N/A 0.30 1.10 N/A 1.10
OCC Accum Trust Managed
Portfolio................. 0.77 N/A 0.06 0.83 N/A 0.83
Templeton Asset Strategy
Fund Class 1(6c).......... 0.60 N/A 0.18 0.78 N/A 0.78
Templeton Growth Securities
Fund Class 1(6a,b)........ 0.83 N/A 0.05 0.88 N/A 0.88
Templeton International
Securities Fund Class
1(6d)..................... 0.69 N/A 0.19 0.88 N/A 0.88
</TABLE>
- ------------------------------
(1) Certain of the fund advisers reimburse the company for administrative costs
incurred in connection with administering the funds as variable funding
options under the contract. These reimbursements are generally paid out of
the management fees and are not charged to investors.
(2) (a) The investment advisor for the Emerging Markets Series is Delaware
International Advisers Ltd. ("DIAL"). Effective May 1, 2000 through
October 31, 2000, DIAL has voluntarily agreed to waive its management
fee and reimburse the Series for expenses to the extent that total
expenses will not exceed 1.50%. Without such an arrangement, the total
annual operating expenses for the Series
21
<PAGE>
would have been 1.53%. Under its Management Agreement, the Series pays
a management fee based on average daily net assets 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.
(b) The investment advisor for the Small Cap Value Series is Delaware
Management Company ("DMC"). Effective May 1, 2000 through October 31,
2000, DMC has voluntarily agreed to waive its management fee and
reimburse the Series for expenses to the extent that total expenses will
not exceed 0.85%. Under its Management Agreement, the Series pays a
management fee based on average daily net assets 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.
(c) The investment advisor for the Trend Series is Delaware Management
Company ("DMC"). Effective May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and reimburse the Series
for expenses to the extent that total expenses will not exceed 0.85%.
Under its Management Agreement, the Series pays a management fee based
on average daily net assets 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.
(3) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"), the
fund will pay an advisory fee at an annual percentage rate of 0.20% of the
average daily net assets of the Equity 500 Index Fund. These fees are
accrued daily and paid monthly. The Advisor has voluntarily undertaken to
waive its fee and to reimburse the fund for certain expenses so that the
fund's total operating expenses will not exceed 0.30% of average daily net
assets. Without the reimbursement to the Funds for the year ended 12/31/99
total expenses would have been 0.43% for the Equity 500 Index Fund.
(4) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain funds',
or FMR on behalf of certain funds' custodian, credits realized as a result
of uninvested cash balances were used to reduce a portion of each applicable
fund's expenses. The total operating expenses, after reimbursement would
have been:
Equity-Income 0.56% (initial); Asset Manager 0.62% (initial).
(5) Each series has an expense offset arrangement which reduces the series'
custodian fee based on the amount of cash maintained by the series with its
custodian and dividend disbursing agent. Each series may enter into other
such arrangement and directed brokerage arrangements, which would also have
the effect of reducing the series' expenses. "Other Expenses" do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series. Had the fee reductions been taken into
account, "Net Expenses" would be lower for certain series and would equal:
0.83% for Emerging Growth Series
0.89% for Total Return Series
0.90% for Utilities Series
(6) (a) The fund administration fee is paid indirectly through the management
fee.
(b) On 2/8/00, a merger and reorganization was approved that combined the
fund with a similar fund of the Templeton Variable Products Series Fund,
effective 5/1/00. The table shows total expenses based on the fund's
assets as of 12/31/99, and not the assets of the combined fund. However,
if the table reflected combined assets, the fund's expenses after
5/01/00 would be estimated as: Management Fees 0.80%, Other Expenses
0.05%, and Total Fund Operating Expenses 0.85%.
(c) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton Global Asset Allocation Fund. The
shareholders of that fund approved new management fees, which apply to
the combined fund effective 5/1/00. The table shows restated total
expenses for the fund based on the new fund fees and the combined assets
of the two funds as of 12/31/99, even though the merger and the new fees
did not become effective until 5/1/00. The table shows restated total
expenses based on the new fees and the assets of the fund as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Management Fees 0.60%, Other
Expenses 0.14%, and Total Fund Operating Expenses 0.74%.
(d) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton International Equity Fund effective
5/01/00. The shareholders of that fund had approved new management fees,
which apply to the combined fund effective 5/1/00. The table shows
restated total expenses based on the new fees and the assets of the fund
as of 12/31/99, and not the assets of the combined fund. However, if the
table reflected both the new fees and the combined assets, the fund's
expenses after 5/1/00 would be estimated as: Management Fees 0.65%,
Other Expenses 0.20%, and Total Fund Operating Expenses 0.85%.
Other Expenses of the Trusts shown in the table are based on expenses incurred
by each Trust for the year ending December 31, 1999. Future Fund expenses will
vary. The table does not reflect the monthly deductions for the cost of
insurance and any riders, nor does it reflect the monthly deduction of $15
during the first Policy Year, and currently, $5 thereafter for administrative
expenses. The information set forth should be considered together with the
information provided in this Prospectus under the heading "Charges and Fees",
and in each Fund's Prospectus. All expenses are expressed as a percentage of
average account value.
22
<PAGE>
SURRENDER CHARGES
A generally declining Surrender Charge will 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 Insureds, 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 2 by
subtracting "Surrender Value" from "Total Accumulation
Value" on any chosen set of investment return assumptions.
The surrender charge under a Policy is proportional to the
face amount of the Policy. Expressed as a percentage of face
amount, it is higher for older than for younger issue ages.
For example, assuming issue ages 80 (the oldest possible
issue ages for a Policy), the first year surrender charge is
$37.40 per $1000 of face amount. At issue ages 65 it is
$25.10 per $1000 of face amount, at issue ages 55 it is
$13.68 per $1000 of face amount, and at issue ages 25 it is
$2.87 per $1000 of face amount. These calculations assume
both insureds are the same age. The surrender charge cannot
exceed Policy value but may equal Policy value, especially
during the first two Policy Years. All surrender charges
decline to zero over the 15 years following issuance of the
Policy. See, for example, the illustrations in Appendix 2
for issue ages 55 and 65.
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. Lincoln Life 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 surrenders, full or partial, may result in tax
implications. SEE TAX ISSUES
Based on its actuarial determination, Lincoln Life does 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 which
Lincoln Life 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 the general account of Lincoln Life, which
supports insurance and annuity obligations.
TRANSACTION FEE FOR EXCESS TRANSFERS
Lincoln Life reserves 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.
23
<PAGE>
DEATH BENEFITS
The Death Benefit Proceeds is the amount payable to the
Beneficiary upon the Second Death (the death of the second
of the two Insureds to die), 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 $250,000 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 on the Second Death and the Owner's
ability to make Premium Payments. In evaluating this
decision, the applicant should consider that the greater the
Net Amount at Risk, the greater the monthly deductions for
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 Second Death, less (in each case) any
indebtedness 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 younger
Insured reaches or would have reached Age 40 and decreases
in accordance with the table in Appendix I of this
Prospectus to 100% when the younger Insured reaches or would
have reached Age 95.
Death Benefit Option 1 provides Death Benefit Proceeds equal
to the Specified Amount (a minimum of $250,000). If Option 1
is selected, the Policy pays level Death Benefit Proceeds
until 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 Accumulation
Value as of the date of the Second Death. 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. The ability of
the Owner to support the Policy 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 from the value of the Policy to pay the
Cost of Insurance.
Owners who prefer insurance coverage that generally does not
vary in amount and generally has lower Cost of Insurance
Charges should elect Option 1. Owners who prefer to have
favorable investment experience reflected in increased
insurance coverage should select Option 2. Under Option 1,
any Surrender Value at the time of the Second Death will
revert to Lincoln Life.
24
<PAGE>
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
amount of increase in Specified Amount currently permitted
is $1,000. If requested, a supplemental application and
evidence of insurability must also be submitted to Lincoln
Life.
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.
Lincoln Life may at its discretion decline any request for a
change between Death Benefit Options or increase in the
Specified Amount. Lincoln Life may at its discretion 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 insurance under each of the
Death Benefit Options is equal to the product of the
Accumulation Value and the applicable Corridor Percentage. A
table of Corridor Percentages is in Appendix I.
NOTICE OF DEATH OF INSUREDS
Due Proof of Death must be furnished to Lincoln Life at the
Administrative Office as soon as reasonably practicable
after the death of each 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 Lincoln
Life.
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 both Insureds. SEE
SETTLEMENT OPTIONS. The amount of the Death Benefit Proceeds
under
25
<PAGE>
Option 2 will be determined as of the date of the Second
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.
The Owner may elect a Settlement Option before the Second
Death; after the Second Death, if the Owner has not
irrevocably selected a Settlement Option, the Beneficiary
may elect one of the Settlement Options. 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, Lincoln
Life will pay any amount due the assignee in one lump sum.
Any remaining Death Benefit Proceeds will be paid as
elected.
A request to elect, change, or revoke a Settlement Option
must be received in proper written form by the
Administrative Office 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. Payments after the
first payment will be made 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.
Under the third Settlement Option, Lincoln Life makes
monthly payments for a stated number of years, at least
five but no more than thirty.
The fourth Settlement Option, provides that Lincoln Life
pays interest annually on the sum left with Lincoln Life
at a rate of at least 3% per year, and pays the amount
on deposit on the payee's death.
Any other Settlement Option offered by Lincoln Life at the
time of election may also be selected.
POLICY LIQUIDITY
The Policy provides only limited liquidity. Subject to
certain limitations, however, the Owner 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
The Owner may at any time contract for Policy Loans up to an
aggregate amount not to exceed 90% of the Surrender Value at
the time a Policy Loan is made. It is a condition to
securing a Policy Loan that the Owner execute a loan
agreement and that the Policy be assigned to Lincoln Life
free of any other assignments. The Loan Account is the
account in which Policy indebtedness (outstanding Loans and
interest) accrues once it
26
<PAGE>
is transferred out of the Fixed Account or Sub-Accounts.
Interest on Policy Loans accrues at an annual rate of 8%,
and loan interest is payable to Lincoln Life (for its
account) 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
in advance, any loan interest due will be transferred 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.
During the first ten Policy Years, Lincoln Life's current
practice is to credit interest to the Loan Account Value at
an annual rate equal to the interest rate charged on the
loan minus 1% (guaranteed not to exceed 2%). Beginning with
the eleventh Policy Year, Lincoln Life's current practice is
to credit interest at an annual rate equal to the interest
rate charged on the loan, less 0% annually (guaranteed not
to exceed 1%). In no case will the annual credited interest
rate be less than 6% in each of the first ten Policy Years
and 7% thereafter.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, transfers from each for loans and
loan interest will be made in proportion to the assets in
each Sub-Account at that time, unless Lincoln Life is
instructed otherwise in proper written form at the
Administrative Office. 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, whether or not repaid, affects the proceeds
payable upon the Second Death and the Accumulation Value.
The longer a Policy Loan is outstanding, the greater the
effect is likely to be. While 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.")
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 before the
Second Death by request to the Administrative Office in
proper written form or by telephone, if telephone
transactions have been authorized by the Owner. A $25
transaction fee 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 $250,000, the partial surrender will
not be permitted by Lincoln Life. 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.
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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 Lincoln Life is instructed
otherwise in proper written form at the Administrative
Office. Lincoln Life may at its discretion decline any
request for a partial surrender.
SURRENDER OF THE POLICY
You may surrender the Policy at any time. On surrender of
the Policy, Lincoln Life will pay you, or assignee, the
Surrender Value next computed after receipt of the request
in proper written form at the Administrative Office. All
coverage under the Policy will automatically terminate if
the Owner makes a full surrender.
SURRENDER VALUE
The "Surrender Value" of a Policy is the amount the Owner
can receive in a lump sum by surrendering the Policy. The
Surrender Value is the Net Accumulation Value less the
Surrender Charge (See "Charges and Fees"). All or part of
the Surrender Value may be applied to one or more of the
Settlement Options. Surrender Values are illustrated in
Appendix 2.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any
Sub-Accounts will be made within 7 days. Payment or transfer
from the Fixed Account may be deferred up to six months at
Lincoln Life's option. If Lincoln Life exercises its right
to defer any payment from the Fixed Account, 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 either Insured is living, the Owner may assign the
Owner's rights in the Policy, including the right to change
the beneficiary designation. The assignment must be in
proper written form, signed by the Owner and recorded at the
Administrative Office. No assignment will affect, or
prejudice Lincoln Life as to, any payment made or action
taken by Lincoln Life before it was recorded. Lincoln Life
is not responsible for any assignment not submitted for
recording, nor is Lincoln Life responsible for the
sufficiency or validity of any assignment. Any assignment is
subject to any indebtedness owed to Lincoln Life at the time
the assignment is recorded and any interest accrued on such
indebtedness after recordation of any assignment.
Once recorded, the assignment remains effective until
released by the assignee in proper written form. So long as
an effective assignment remains outstanding, the Owner will
not be permitted to take any action with respect to the
Policy without the consent of the assignee in proper written
form.
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So long as either Insured is living, the Owner 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 Lincoln Life as to, any payment made or
action taken by Lincoln Life before it was recorded. Lincoln
Life may require that the Policy be submitted to it 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, the Policy is subject to lapse and
automatic termination of all coverage under the Policy. 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 Lincoln Life has 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, Lincoln Life
will send a written notice to the Owner 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
Lincoln Life 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. If the
Second Death occurs during the Grace Period, Death Benefit
Proceeds will be paid, but will be reduced, in addition to
any other reductions, by any unpaid Monthly Deductions. If
the Second Death occurs after the Policy has lapsed, no
Death Benefit Proceeds will be paid.
NO LAPSE PROVISION
(Note: the No Lapse provision is not available in IL, MA,
MD, NJ and TX.)
The applicant may elect the No Lapse Provision at issue of
the Policy. If this provision is elected and 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 (the cumulative premium required to have been
paid by each Monthly Anniversary Day, as indicated in the
Policy Specifications) due since the Date of Issue of the
Policy, the Policy will not lapse. 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.
The No Lapse Provision will be terminated 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.
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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, and assuming the No-Lapse Provision does not apply,
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 both
insureds is furnished to Lincoln Life and it agrees to
accept the risk, (d) Lincoln Life receives 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 Lincoln Life
approves the application for reinstatement. Surrender
Charges will be reinstated as of the Policy Year in which
the Policy lapsed.
If the Policy is reinstated, such reinstatement is effective
on the Monthly Anniversary Day following Lincoln Life
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 in writing, in form and
substance reasonably satisfactory to Lincoln Life, received
at the Administrative Office.
TELEPHONE TRANSACTION PRIVILEGES
Telephone transactions are permitted only if authorized in
proper written form by the applicant or Owner. To effect a
permitted telephone transaction, the Owner or his or her
authorized representative must call the Administrative
Office and provide, as identification, his or her policy
number, a requested portion of his or her Social Security
number, and such other information as Lincoln Life may
require to authenticate the authority of the caller. If
permitted and adequately authenticated, a customer service
representative will accept the telephone transaction
request. Lincoln Life disclaims all liability for losses
resulting from unauthorized or fraudulent telephone
transactions, but acknowledges that if it does not follow
these procedures, which it believes to be reasonable, it 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 both
Insureds are at least Age 18 but are less than Age 80.
DATE OF COVERAGE
The date of coverage will be the Date of Issue, provided
both Insureds are alive and prior to any change in the
health and insurability of the Insureds as represented in
the application.
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RIGHT TO EXCHANGE THE POLICY
The Owner may, within the first two Policy Years, exchange
the Policy for a permanent life insurance policy then being
offered by Lincoln Life. The benefits for the new policy
will not vary with the investment experience of the Separate
Account. The exchange must be elected within 24 months from
the Date of Issue. No evidence of insurability will be
required.
The Owner, the Insureds and the Beneficiary under the new
policy will be the same as those under the exchanged Policy
on the date of the exchange. The Accumulation Value under
the new Policy will be equal to the Accumulation Value under
the old Policy on the date the exchange request is received.
The new policy will have a Death Benefit on the exchange
date not more than the Death Benefit of the original Policy
immediately prior to the exchange date. If the Accumulation
Value is insufficient to support the Death Benefit, the
Owner will be required to make additional Premium Payments
in order to effect the exchange. The new Policy will have a
Date of Issue and issue Ages as of the date of exchange. The
initial Specified Amount and any increases in Specified
Amount will have the same rate class as those of the
original Policy. Any indebtedness may be transferred to the
new policy.
The exchange may be subject to an equitable adjustment in
rates and values to reflect variances, if any, in the rates
and values between the two Policies. After adjustment, if
any excess is owed the Owner, Lincoln Life will pay the
excess to the Owner in cash. The exchange may be subject to
federal income tax withholding.
If at any time while both Insureds are alive, a change in
the Internal Revenue Code would result in a less favorable
tax treatment of the Insurance provided under the policy or
if the Insureds are legally divorced while the policy is in
force, the Owner may exchange the policy for separate single
life policies on each of the Insureds subject to the
following conditions: (a) evidence of insurability
satisfactory to Lincoln Life is furnished, (b) the amount of
insurance of each new Policy is not larger than one half of
the amount of insurance then in force under the policy, (c)
the premium for each new policy is determined according to
Lincoln Life's rates then in effect for that policy based on
each Insured's then attained age and sex, and (d) any other
requirements as determined by Lincoln Life are met. The new
policy will not take effect until the date all such
requirements are met.
INCONTESTABILITY
Lincoln Life will not contest payment of the Death Benefit
Proceeds based on the initial Specified Amount after the
Policy has been in force for two years from the Date of
Issue so long as both Insureds were alive during those two
years. For any increase in Specified Amount requiring
evidence of insurability, Lincoln Life will not contest
payment of the Death Benefit Proceeds based on such an
increase after it has been in force for two years from its
effective date so long as both Insureds were alive during
those two years.
MISSTATEMENT OF AGE OR GENDER
If the Age or gender of either of the Insureds 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 Second
Death;
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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 Second
Death.
SUICIDE
If the Second Death is by suicide, while sane or insane,
within two years from the Date of Issue, Lincoln Life will
upon the Second Death pay no more than the sum of the
premiums paid, less any indebtedness and the amount of any
partial surrenders. If the Second Death is by suicide, while
sane or insane, within two years from the date an
application is accepted for an increase in the Specified
Amount, Lincoln Life will upon the Second Death pay no more
than a refund of the monthly charges for the cost of such
additional benefit.
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
The No-Lapse provision, discussed under "Lapse and
Reinstatement," is available for an additional charge under
the Policy. However, it must be elected with the original
Policy application; it cannot be elected subsequently; and
once lost, cannot be reinstated. Riders may be offered and
we may charge for them.
TAX ISSUES
INTRODUCTION. The Federal income tax treatment of the policy
is complex and sometimes uncertain. The Federal income tax
rules may vary with your particular circumstances. This
discussion does not include all the Federal income tax
rules that may affect you and your policy, and is not
intended as tax advice. This discussion also does not
address other Federal tax consequences, or state or local
tax consequences, associated with the policy. As a result,
you should always consult a tax adviser about the
application of tax rules to your individual situation.
TAXATION OF LIFE INSURANCE CONTRACTS IN GENERAL
TAX STATUS OF THE POLICY. Section 7702 of the Code
establishes a statutory definition of life insurance for
Federal tax purposes. We believe that the policy will meet
the statutory definition of life insurance, which places
limitations on the amount of premium payments that may be
made and the contract values that can accumulate relative to
the death benefit. As a result, the death benefit payable
under the policy will generally be excludable from the
beneficiary's gross income, and interest and other income
credited under the policy will not be taxable unless certain
withdrawals are made (or are deemed to be made) from the
policy prior to the insured's death, as discussed below.
This tax treatment will only apply, however, if (1) the
investments of the Separate Account are "adequately
diversified" in accordance with Treasury Department
regulations, and (2) we, rather than the you, are considered
the owner of the assets of the Separate Account for Federal
income tax purposes.
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INVESTMENTS IN THE SEPARATE ACCOUNT MUST BE DIVERSIFIED. For
a policy to be treated as a life insurance contract for
Federal income tax purposes, the investments of the Separate
Account must be "adequately diversified." IRS regulations
define standards for determining whether the investments of
the Separate Account are adequately diversified. If the
Separate Account fails to comply with these diversification
standards, you could be required to pay tax currently on the
excess of the contract value over the contract premium
payments. Although we do not control the investments of the
subaccounts, we expect that the subaccounts will comply with
the IRS regulations so that the Separate Account will be
considered "adequately diversified."
RESTRICTION ON INVESTMENT OPTIONS. Federal income tax law
limits your right to choose particular investments for the
policy. Because the IRS has not issued guidance specifying
those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed
those limits. If so, you would be treated as the owner of
the assets of the Separate Account and thus subject to
current taxation on the income and gains from those assets.
We do not know what limits may be set by the IRS in any
guidance that it may issue and whether any such limits will
apply to existing policies. We reserve the right to modify
the policy without your consent to try to prevent the tax
law from considering you as the owner of the assets of the
Separate Account.
NO GUARANTEES REGARDING TAX TREATMENT. We make no guarantee
regarding the tax treatment of any policy or of any
transaction involving a policy. However, the remainder of
this discussion assumes that your policy will be treated as
a life insurance contract for Federal income tax purposes
and that the tax law will not impose tax on any increase in
your contract value until there is a distribution from your
policy.
TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In
general, the amount of the death benefit payable from a
policy because of the death of the insured is excludable
from gross income. Certain transfers of the policy for
valuable consideration, however, may result in a portion of
the death benefit being taxable.
If the death benefit is not received in a lump sum and is,
instead, applied under one of the settlement options,
payments generally will be prorated between amounts
attributable to the death benefit which will be excludable
from the beneficiary's income and amounts attributable to
interest (accruing after the insured's death) which will be
includible in the beneficiary's income.
TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing
provisions of the Code, except as described below, any
increase in your contract value is generally not taxable to
you unless amounts are received (or are deemed to be
received) from the policy prior to the insured's death. If
there is a total withdrawal from the policy, the surrender
value will be includible in the your income to the extent
the amount received exceeds the "investment in the
contract." (If there is any debt at the time of a total
withdrawal, such debt will be treated as an amount received
by the owner.) The "investment in the contract" generally is
the aggregate amount of premium payments and other
consideration paid for the policy, less the aggregate amount
received under the policy previously to the extent such
amounts received were excludable from gross income. Whether
partial withdrawals (or other amounts deemed to be
distributed) from the policy constitute income to you
depends, in part, upon whether the policy is considered a
"modified endowment contract" (a "MEC") for Federal income
tax purposes.
POLICIES WHICH ARE MECS
CHARACTERIZATION OF A POLICY AS A MEC. A policy will be
classified as a MEC if premiums are paid more rapidly than
allowed by a "7-pay test" under the tax law or if
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the policy is received in exchange for another policy that
is a MEC. In general, this policy will constitute a MEC
unless (1) it was received in exchange for another life
insurance contract which was not a MEC, and (2) no premium
payments (other than the exchanged contract) are paid into
the policy during the first seven contract years. In
addition, even if the policy initially is not a MEC, it may
in certain circumstances become a MEC. These circumstances
would include a later increase in benefits, any other
material change of the policy (within the meaning of the tax
law), and a withdrawal or reduction in the death benefit
during the first seven contract years.
TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES
UNDER MECS. If the policy is a MEC, withdrawals from the
policy will be treated first as withdrawals of income and
then as a recovery of premium payments. Thus, withdrawals
will be includible in income to the extent the contract
value exceeds the investment in the policy. The Code treats
any amount received as a loan under a policy, and any
assignment or pledge (or agreement to assign or pledge) any
portion of your contract value, as a withdrawal of such
amount or portion. Your investment in the policy is
increased by the amount includible in income with respect to
such assignment, pledge, or loan.
PENALTY TAXES PAYABLE ON WITHDRAWALS. A 10% penalty tax may
be imposed on any withdrawal (or any deemed distribution)
from your MEC which you must include in your gross income.
The 10% penalty tax does not apply if one of several
exceptions exists. These exceptions include withdrawals or
surrenders that: you receive on or after you reach age
59 1/2, you receive because you became disabled (as defined
in the tax law), or you receive as a series of substantially
equal periodic payments for your life (or life expectancy).
SPECIAL RULES IF YOU OWN MORE THAN ONE MEC. In certain
circumstances, you must combine some or all of the life
insurance contracts which are MECs that you own in order to
determine the amount of withdrawal (including a deemed
withdrawal) that you must include in income. For example, if
you purchase two or more MECs from the same life insurance
company (or its affiliates) during any calendar year, the
Code treats all such policies as one contract. Treating two
or more policies as one contract could affect the amount of
a withdrawal (or a deemed withdrawal) that you must include
in income and the amount that might be subject to the 10%
penalty tax described above.
POLICIES WHICH ARE NOT MECS
TAX TREATMENT OF WITHDRAWALS. If the policy is not a MEC
(described below), the amount of any withdrawal from the
policy will generally be treated first as a non-taxable
recovery of premium payments and then as income from the
policy. Thus, a withdrawal from a policy that is not a MEC
will not be includible in income except to the extent it
exceeds the investment in the policy immediately before the
withdrawal.
CERTAIN DISTRIBUTIONS REQUIRED BY THE TAX LAW IN THE FIRST
15 POLICY YEARS. Section 7702 places limitations on the
amount of premium payments that may be made and the contract
values that can accumulate relative to the death benefit.
Where cash distributions are required under Section 7702 in
connection with a reduction in benefits during the first 15
years after the policy is issued (or if withdrawals are made
in anticipation of a reduction in benefits, within the
meaning of the tax law, during this period), some or all of
such amounts may be includible in income. A reduction in
benefits may occur when the face amount is decreased,
withdrawals are made, and in certain other instances.
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TAX TREATMENT OF LOANS. If your policy is not a MEC, a loan
you receive under the policy is generally treated as your
indebtedness. As a result, no part of any loan under such a
policy constitutes income to you so long as the policy
remains in force. Nevertheless, in those situations where
the interest rate credited to the loan account equals the
interest rate charged to you for the loan, it is possible
that some or all of the loan proceeds may be includible in
your income. If a policy lapses (or if all contract value is
withdrawn) when a loan is outstanding, the amount of the
loan outstanding will be treated as withdrawal proceeds for
purposes of determining whether any amounts are includible
in the your income.
LAST SURVIVOR CONTRACT
Although we believe that the policy, when issued as a last
survivor contract, complies with Section 7702 of the Code,
the manner in which Section 7702 should be applied to last
survivor contracts is not directly addressed by Section
7702. In the absence of final regulations or other guidance
issued under Section 7702 regarding this form of contract,
there is necessarily some uncertainty whether a last
survivor contract will meet the Section 7702 definition of a
life insurance contract. As a result, we may need to return
a portion of your premium (with earnings) and impose higher
cost of insurance charges in the future.
Due to the coverage of more than one insured under the
policy, there are special considerations in applying the
7-pay test. For example, a reduction in the death benefit at
any time, such as may occur upon a partial surrender, may
cause the policy to be a MEC. Also and more generally, the
manner of applying the 7-pay test is somewhat uncertain in
the case of policies covering more than one insured.
OTHER CONSIDERATIONS
INSURED LIVES PAST AGE 100. If the insured survives beyond
the end of the mortality table used to measure charges under
the policy, which ends at age 100, we believe the policy
will continue to qualify as life insurance for Federal tax
purposes. However, there is some uncertainty regarding this
treatment, and it is possible that you would be viewed as
constructively receiving the cash value in the year the
insured attains age 100.
COMPLIANCE WITH THE TAX LAW. We believe that the maximum
amount of premium payments we have determined for the
policies will comply with the Federal tax definition of life
insurance. We will monitor the amount of premium payments,
and, if the premium payments during a contract year exceed
those permitted by the tax law, we will refund the excess
premiums within 60 days of the end of the policy year and
will pay interest and other earnings (which will be
includible in income subject to tax) as required by law on
the amount refunded. We also reserve the right to increase
the death benefit (which may result in larger charges under
a policy) or to take any other action deemed necessary to
maintain compliance of the policy with the Federal tax
definition of life insurance.
DISALLOWANCE OF INTEREST DEDUCTIONS. If an entity (such as a
corporation or a trust, not an individual) purchases a
policy or is the beneficiary of a policy issued after June
8, 1997, a portion of the interest on indebtedness unrelated
to the policy may not be deductible by the entity. However,
this rule does not apply to a policy owned by an entity
engaged in a trade or business which covers the life of an
individual who is a 20-percent owner of the entity, or an
officer, director, or employee of the trade or business, at
the time first covered by the policy. This rule also does
not apply to a
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policy owned by an entity engaged in a trade or business
which covers the joint lives of the 20% owner of the entity
and the owner's spouse at the time first covered by the
policy.
FEDERAL INCOME TAX WITHHOLDING. We will withhold and remit
to the IRS a part of the taxable portion of each
distribution made under a policy unless you notify us in
writing at or before the time of the distribution that tax
is not to be withheld. Regardless of whether you request
that no taxes be withheld or whether the Company withholds a
sufficient amount of taxes, you will be responsible for the
payment of any taxes and early distribution penalties that
may be due on the amounts received. You may also be required
to pay penalties under the estimated tax rules, if your
withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
CHANGES IN THE POLICY OR CHANGES IN THE LAW. Changing the
owner, exchanging the contract, and other changes under the
policy may have tax consequences (in addition to those
discussed herein) depending on the circumstances of such
change. The above discussion is based on the Code, IRS
regulations, and interpretations existing on the date of
this Prospectus. However, Congress, the IRS, and the courts
may modify these authorities, sometimes retroactively.
TAX STATUS OF LINCOLN LIFE
Under existing Federal income tax laws, Lincoln Life does
not pay tax on investment income and realized capital gains
of the Separate Account. Lincoln Life does not expect that
it will incur any Federal income tax liability on the income
and gains earned by the Separate Account. We, therefore, do
not impose a charge for Federal income taxes. If Federal
income tax law changes and we must pay tax on some or all of
the income and gains earned by the Separate Account, we may
impose a charge against the Separate Account to pay the
taxes.
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 Lincoln Life's 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 Insureds grow older. Moreover,
on the death of the first of the Insureds to die, it tends
to increase significantly. The Owner should consult with his
or her advisors for guidance as to the appropriate
methodology for determining the fair value of the Policy for
a particular purpose.
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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 five 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], The
Lincoln National Life Insurance Company.
ROLAND C. BAKER Vice President [1/95-present] The Lincoln
VICE PRESIDENT National Life Insurance Co., President and
1801 S. Meyers Rd. Director, First Penn Pacific Life
Oakbrook Terrace, IL 60181 Insurance Company.
JON A. BOSCIA President, Chief Executive Officer and
PRESIDENT AND DIRECTOR Director, Lincoln National Corporation
1500 Market Street, Suite 3900 [1/98-present], Formerly: President, Chief
Philadelphia, PA 19102 Executive Officer and Director
[10/96-1/98] and President and Chief
Operating Officer [5/94-10/96], The
Lincoln National Life Insurance Company.
JOHN H. GOTTA Chief Executive Officer of Life Insurance,
CHIEF EXECUTIVE OFFICER OF LIFE Senior Vice President and Assistant
INSURANCE, SENIOR VICE PRESIDENT Secretary [12/99-present] The Lincoln
AND ASSISTANT SECRETARY National Life Insurance Company. Formerly:
350 Church Street Senior Vice President and Assistant
Hartford, CT 06103 Secretary [4/98-12/99]; Senior Vice
President [2/98-4/98]; Vice President and
General Manager [1/98-2/98] The Lincoln
National Life Insurance Co. Formerly:
Senior Vice President, Connecticut General
Life Insurance Company [3/96-12/97]; Vice
President, Connecticut (Massachusetts
Mutual) Mutual Life Insurance Company
[8/94-3/96].
J. MICHAEL HEMP President and Director [7/97-present],
SENIOR VICE PRESIDENT Lincoln Financial Advisors Inc.; Senior
350 Church Street Vice President [formerly Vice President]
Hartford, CT 06103 [10/95-present], The Lincoln National Life
Insurance Company.
STEPHEN H. LEWIS Interim Chief Executive Officer of
INTERIM CHIEF EXECUTIVE OFFICER OF Annuities and Senior Vice President,
ANNUITIES AND SENIOR VICE [12/99-present]. Formerly: Senior Vice
PRESIDENT President, [5/94-12/99] The Lincoln
National Life Insurance Company.
H. THOMAS MCMEEKIN President and Director 5/94-present,
DIRECTOR Lincoln Investment Management, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
GARY W. PARKER Senior Vice President [4/00-present], Vice
SENIOR VICE PRESIDENT President, Product Management, [7/98-3/00]
350 Church Street The Lincoln National Life Insurance
Hartford, CT 06103 Company. Formerly: Senior Vice President,
Life Products [10/97-6/98]; Vice
President, Marketing Services [9/89-10/97]
Life of Virginia.
LAWRENCE T. ROWLAND Executive Vice President [10/96-present]
EXECUTIVE VICE PRESIDENT AND Formerly: Senior Vice President
DIRECTOR [1/93-10/96], The Lincoln National Life
One Reinsurance Place Insurance Company. Chairman, Chief
1700 Magnavox Way Executive Officer, President and Director
Fort Wayne, IN 46802 [10/96-present], Formerly: Senior Vice
President [10/95-10/96].
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
<S> <C>
KEITH J. RYAN Vice President, Controller and Chief
VICE PRESIDENT, CONTROLLER AND Accounting Officer [1/96-present] The
CHIEF ACCOUNTING OFFICER Lincoln National Life Insurance Company.
TODD R. STEPHENSON Senior Vice President, Chief Financial
SENIOR VICE PRESIDENT, CHIEF Officer and Assistant Treasurer
FINANCIAL OFFICER AND ASSISTANT [3/99-present] The Lincoln National Life
TREASURER Insurance Company. Formerly: Senior Vice
President and Chief Operating Officer
[1/98-3/99] Lincoln Life & Annuity
Distributors, Inc.; Senior Vice President
and Chief Operating Officer [1/98-3/99]
Lincoln Financial Advisors Corp.; Senior
Vice President, Treasurer, Chief Financial
Officer and Director, American States
Insurance Co. [2/95-12/97].
RICHARD C. VAUGHAN Executive Vice President and Chief
DIRECTOR Financial Officer, Lincoln National
Centre Square Corporation [1/95-present].
West Tower
1500 Market Street
Suite 3900
Philadelphia, PA 19102
MICHAEL R. WALKER Senior Vice President [1/98-present], Vice
SENIOR VICE PRESIDENT President [1/96-1/98] The Lincoln National
350 Church Street Life Insurance Company. Formerly: Vice
Hartford, CT 06103 President [3/93-1/96] Employers Health
Insurance Co.
ROY V. WASHINGTON Vice President [7/96-present] formerly,
VICE PRESIDENT Associate Counsel [2/95-7/96] The Lincoln
National Life Insurance Company.
</TABLE>
*Unless otherwise indicated, the principal business address
is 1300 South Clinton Street, Fort Wayne, Indiana 46801.
DISTRIBUTION OF POLICIES
Lincoln Life intends to offer the Policy in all
jurisdictions where it is licensed to do business. Lincoln
Life, also the principal underwriter for the Policies, is
registered with the Commission under the Securities Exchange
Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers ("NASD"). The
principal business address of Lincoln Life is 1300 South
Clinton Street, Fort Wayne, Indiana 46802.
The Policy may be sold by individuals, who in addition to
being appointed as life insurance agents for Lincoln Life,
are also registered representatives of Lincoln Financials
Advisors Corp., a registered broker-dealer affiliated with
Lincoln Life, or other broker-dealers. These representatives
ordinarily receive commission and service fees up to 60% of
the first year premium, plus up to 5% of all other premiums
paid. 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 Lincoln Life's resources, which
include sales charges made under this Policy.
CHANGES OF INVESTMENT POLICY
Lincoln Life may materially change the investment policy of
the Separate Account. Lincoln Life 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 Lincoln
38
<PAGE>
Life's 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
Lincoln Life on the life of the Insureds. 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. Lincoln Life will not require evidence of
insurability for this conversion.
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
Lincoln Life from time to time offers other variable annuity
contracts and variable life insurance policies with benefits
which vary in accordance with the investment experience of a
separate account of Lincoln Life.
STATE REGULATION
Lincoln Life is 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 the operation of Lincoln Life for the preceding
year and its financial condition as of the end of such year.
Regulation by the Insurance Department includes periodic
examination to determine Lincoln Life's contract liabilities
and reserves so that the Insurance Department may certify
the items are correct. Lincoln Life's books and accounts are
subject to review by the Insurance Department at all times
and a full examination of its 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
Lincoln Life maintains 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.
Owners will also be sent annual reports containing financial
statements for the Separate Account and annual and
semi-annual reports of the Funds as required by the 1940
Act.
In addition, Owners will receive 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
We are also 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 our financial strength or claims-paying
ability. The ratings are not intended to reflect the
investment experience or financial strength of the Variable
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 Lincoln Life or
the Policies. Furthermore, we may 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.
39
<PAGE>
We are a member of the Insurance Marketplace Standards
Association ("IMSA") and may include the IMSA logo and
information about IMSA membership in our advertisement.
Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services
for individually sold life insurance and annuities.
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 several 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 any 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 financial statements of the Separate Account and the
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.
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.
REGISTRATION STATEMENT
A Registration Statement has been filed with the 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
CORRIDOR PERCENTAGES
<TABLE>
<CAPTION>
ATTAINED AGE OF THE YOUNGER
INSURED (NEAREST BIRTHDAY) CORRIDOR 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>
41
<PAGE>
APPENDIX 2
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 show 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, and that the
No-Lapse Provision is not selected.
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 current mortality and expense risk
charges are equivalent to an annual effective rate of 0.80%
of the daily net asset value of the Separate Account. The
mortality and expense risk charge is guaranteed never to
exceed an annual effective rate of 0.90% of the daily net
asset value of the Separate Account. 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 0.80% 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, 1999.
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
-1.59%, 4.32% and 10.22% on a current basis, -1.69%, 4.21%
and 10.11% on a guaranteed basis.
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 8.0% 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 $12.50 per month
in the first year. Current values reflect a current flat
dollar monthly administrative expense charge of $5 (and
guaranteed values, $10) in subsequent Policy Years. The
charge also includes $0.09 per $1,000 of Specified Amount
during the first twenty Policy Years.
Upon request, the Company will furnish a comparable
illustration based on the proposed insureds' ages, gender
classification, smoking classification, risk classification
and premium payment requested.
42
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,733 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS
ACCUMULATED SURRENDER VALUE
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
-- ------- --------- --------- --------- ------- ------- --------- ------- -------
1 14,420 1,000,000 1,000,000 1,000,000 11,130 11,840 12,550 0 0
2 29,560 1,000,000 1,000,000 1,000,000 21,939 24,047 26,240 8,673 10,780
3 45,458 1,000,000 1,000,000 1,000,000 32,375 36,577 41,125 19,621 23,823
4 62,150 1,000,000 1,000,000 1,000,000 42,413 49,415 57,301 30,207 37,209
5 79,678 1,000,000 1,000,000 1,000,000 52,029 62,544 74,867 40,301 50,816
6 98,081 1,000,000 1,000,000 1,000,000 61,188 75,936 93,933 50,076 64,823
7 117,405 1,000,000 1,000,000 1,000,000 69,846 89,552 114,605 59,968 79,675
8 137,695 1,000,000 1,000,000 1,000,000 77,940 103,338 136,992 69,297 94,695
9 158,999 1,000,000 1,000,000 1,000,000 85,386 117,214 161,197 77,978 109,806
10 181,369 1,000,000 1,000,000 1,000,000 92,090 131,089 187,331 85,917 124,916
11 204,857 1,000,000 1,000,000 1,000,000 97,950 144,864 215,525 93,011 139,926
12 229,519 1,000,000 1,000,000 1,000,000 102,861 158,437 245,935 99,157 154,733
13 255,415 1,000,000 1,000,000 1,000,000 106,717 171,702 278,752 104,247 169,233
14 282,605 1,000,000 1,000,000 1,000,000 109,414 184,559 314,214 108,179 183,324
15 311,155 1,000,000 1,000,000 1,000,000 110,809 196,869 352,582 110,809 196,869
20 476,799 1,000,000 1,000,000 1,000,000 88,056 240,688 599,423 88,056 240,688
25 688,208 0 1,000,000 1,062,815 0 214,564 1,012,205 0 214,564
30 958,025 0 0 1,785,419 0 0 1,700,399 0 0
<CAPTION>
<S> <C> <C>
END OF
POLICY SURRENDER
YEAR GROSS 12% CHARGE
-- --------- ------
1 0 13,676
2 12,974 13,266
3 28,372 12,753
4 45,094 12,206
5 63,140 11,728
6 82,821 11,112
7 104,728 9,877
8 128,349 8,643
9 153,789 7,408
10 181,158 6,173
11 210,586 4,939
12 242,231 3,704
13 276,283 2,469
14 312,980 1,235
15 352,582 0
20 599,423 0
25 1,012,205 0
30 1,700,399 0
</TABLE>
All 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. Guaranteed cost of insurance
rates assumed. Guaranteed 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 guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.80% per
year. See "Fund Expenses" at page 21 of this
Prospectus.
43
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,733 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS
ACCUMULATED SURRENDER VALUE
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
-- ------- --------- --------- --------- ------- ------- --------- ------- -------
1 14,420 1,000,000 1,000,000 1,000,000 11,204 11,916 12,629 0 0
2 29,560 1,000,000 1,000,000 1,000,000 22,296 24,420 26,631 9,029 11,154
3 45,458 1,000,000 1,000,000 1,000,000 33,185 37,443 42,050 20,432 24,690
4 62,150 1,000,000 1,000,000 1,000,000 43,871 51,004 59,029 31,665 38,798
5 79,678 1,000,000 1,000,000 1,000,000 54,355 65,123 77,725 42,627 53,395
6 98,081 1,000,000 1,000,000 1,000,000 64,634 79,820 98,313 53,521 68,707
7 117,405 1,000,000 1,000,000 1,000,000 74,706 95,116 120,983 64,829 85,238
8 137,695 1,000,000 1,000,000 1,000,000 84,572 111,033 145,948 75,929 102,390
9 158,999 1,000,000 1,000,000 1,000,000 94,227 127,593 173,441 86,819 120,185
10 181,369 1,000,000 1,000,000 1,000,000 103,670 144,821 203,721 97,497 138,647
11 204,857 1,000,000 1,000,000 1,000,000 112,897 162,739 237,074 107,958 157,800
12 229,519 1,000,000 1,000,000 1,000,000 121,830 181,301 273,750 118,126 177,597
13 255,415 1,000,000 1,000,000 1,000,000 130,435 200,504 314,073 127,966 198,035
14 282,605 1,000,000 1,000,000 1,000,000 138,643 220,310 358,377 137,408 219,076
15 311,155 1,000,000 1,000,000 1,000,000 146,421 240,719 407,074 146,421 240,719
20 476,799 1,000,000 1,000,000 1,000,000 175,200 349,763 733,888 175,200 349,763
25 688,208 1,000,000 1,000,000 1,342,171 180,350 471,348 1,278,258 180,350 471,348
30 958,025 1,000,000 1,000,000 2,268,824 121,260 590,068 2,160,785 121,260 590,068
<CAPTION>
<S> <C> <C>
END OF
POLICY SURRENDER
YEAR GROSS 12% CHARGE
-- --------- ------
1 0 13,676
2 13,365 13,266
3 29,297 12,753
4 46,823 12,206
5 65,998 11,728
6 87,201 11,112
7 111,105 9,877
8 137,305 8,643
9 166,033 7,408
10 197,548 6,173
11 232,135 4,939
12 270,046 3,704
13 311,604 2,469
14 357,142 1,235
15 407,074 0
20 733,888 0
25 1,278,258 0
30 2,160,785 0
</TABLE>
All 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 current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.80% per year. See "Fund
Expenses" at page 21 of this Prospectus.
44
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,655 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS
ACCUMULATED SURRENDER VALUE
AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT
END OF 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF RETURN OF
POLICY YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
-- ---------- ---------- ---------- ---------- ------- -------- ---------- ------- --------
1 22,738 1,000,000 1,000,000 1,000,000 18,009 19,143 20,277 0 0
2 46,612 1,000,000 1,000,000 1,000,000 34,937 38,302 41,803 10,878 14,242
3 71,681 1,000,000 1,000,000 1,000,000 50,637 57,312 64,541 27,647 34,321
4 98,003 1,000,000 1,000,000 1,000,000 64,994 76,038 88,495 43,042 54,086
5 125,640 1,000,000 1,000,000 1,000,000 77,878 94,329 113,666 56,995 73,445
6 154,660 1,000,000 1,000,000 1,000,000 89,119 111,988 140,034 69,274 92,143
7 185,131 1,000,000 1,000,000 1,000,000 98,484 128,759 167,536 80,844 111,119
8 217,125 1,000,000 1,000,000 1,000,000 105,650 144,290 196,050 90,215 128,855
9 250,719 1,000,000 1,000,000 1,000,000 110,196 158,130 225,393 96,965 144,900
10 285,993 1,000,000 1,000,000 1,000,000 111,622 169,749 255,363 100,597 158,723
11 323,030 1,000,000 1,000,000 1,000,000 109,380 178,561 285,774 100,560 169,741
12 361,920 1,000,000 1,000,000 1,000,000 102,868 183,925 316,483 96,253 177,310
13 402,753 1,000,000 1,000,000 1,000,000 91,432 185,138 347,414 87,022 180,728
14 445,629 1,000,000 1,000,000 1,000,000 74,328 181,399 378,557 72,123 179,194
15 490,648 1,000,000 1,000,000 1,000,000 50,585 171,667 409,907 50,585 171,667
20 751,845 0 0 1,000,000 0 0 567,734 0 0
25 1,085,207 0 0 1,000,000 0 0 763,305 0 0
30 1,510,670 0 0 1,267,962 0 0 1,255,408 0 0
<CAPTION>
<S> <C> <C>
END OF SURRENDER
POLICY YEAR GROSS 12% CHARGE
-- ---------- ------
1 0 25,098
2 17,743 24,060
3 41,550 22,991
4 66,542 21,953
5 92,783 20,883
6 120,189 19,845
7 149,896 17,640
8 180,615 15,435
9 212,163 13,230
10 244,338 11,025
11 276,954 8,820
12 309,868 6,615
13 343,004 4,410
14 376,352 2,205
15 409,907 0
20 567,734 0
25 763,305 0
30 1,255,408 0
</TABLE>
All 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. Guaranteed cost of insurance
rates assumed. Guaranteed 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 guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.80% per
year. See "Fund Expenses" at page 21 of this
Prospectus.
45
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,655 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS
ACCUMULATED SURRENDER VALUE
AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT
END OF 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF RETURN OF
POLICY YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
-- ---------- ---------- ---------- ---------- ------- -------- ---------- ------- --------
1 22,738 1,000,000 1,000,000 1,000,000 18,315 19,460 20,604 0 0
2 46,612 1,000,000 1,000,000 1,000,000 36,277 39,704 43,269 12,218 15,644
3 71,681 1,000,000 1,000,000 1,000,000 53,814 60,689 68,125 30,823 37,699
4 98,003 1,000,000 1,000,000 1,000,000 70,908 82,424 95,380 48,955 60,471
5 125,640 1,000,000 1,000,000 1,000,000 87,552 104,930 125,270 66,669 84,047
6 154,660 1,000,000 1,000,000 1,000,000 103,738 128,227 158,060 83,892 108,381
7 185,131 1,000,000 1,000,000 1,000,000 119,454 152,337 194,044 101,813 134,697
8 217,125 1,000,000 1,000,000 1,000,000 134,690 177,285 233,552 119,254 161,850
9 250,719 1,000,000 1,000,000 1,000,000 149,434 203,097 276,952 136,204 189,867
10 285,993 1,000,000 1,000,000 1,000,000 163,673 229,800 324,658 152,648 218,775
11 323,030 1,000,000 1,000,000 1,000,000 177,392 257,426 377,135 168,572 248,606
12 361,920 1,000,000 1,000,000 1,000,000 190,115 285,585 434,552 183,500 278,970
13 402,753 1,000,000 1,000,000 1,000,000 201,721 314,218 497,448 197,310 309,808
14 445,629 1,000,000 1,000,000 1,000,000 211,846 343,069 566,331 209,641 340,864
15 490,648 1,000,000 1,000,000 1,000,000 220,042 371,832 641,850 220,042 371,832
20 751,845 1,000,000 1,000,000 1,217,003 215,503 505,748 1,159,050 215,503 505,748
25 1,085,207 1,000,000 1,000,000 2,107,844 114,737 635,724 2,007,470 114,737 635,724
30 1,510,670 0 1,000,000 3,414,981 0 772,561 3,381,169 0 772,561
<CAPTION>
<S> <C> <C>
END OF SURRENDER
POLICY YEAR GROSS 12% CHARGE
-- ---------- ------
1 0 25,098
2 19,209 24,060
3 45,135 22,991
4 73,427 21,953
5 104,366 20,883
6 138,214 19,845
7 176,403 17,640
8 218,116 15,435
9 263,722 13,230
10 313,633 11,025
11 368,315 8,820
12 427,936 6,615
13 493,038 4,410
14 564,126 2,205
15 641,850 0
20 1,159,050 0
25 2,007,470 0
30 3,381,169 0
</TABLE>
All 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 current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.80% per year. See "Fund
Expenses" at page 21 of this Prospectus.
46
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
R-1
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1999
<TABLE>
<CAPTION>
AIM AIM AIM
V.I. 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>
-----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$10,660,427) $11,462,859 $ -- $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated (Cost
$38,199,966) 43,749,667 1,443,841 780,164 4,852,254 170,973 5,505,605
---------------------------------- ----------- ---------- ---------- ---------- ----------- ----------
Total Investments 55,212,526 1,443,841 780,164 4,852,254 170,973 5,505,605
Dividends Receivable 366 -- -- -- -- --
TOTAL ASSETS 55,212,892 1,443,841 780,164 4,852,254 170,973 5,505,605
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 1,180 31 17 98 4 118
---------------------------------- ----------- ---------- ---------- ---------- ----------- ----------
NET ASSETS $55,211,712 $1,443,810 $ 780,147 $4,852,156 $ 170,969 $5,505,487
---------------------------------- =========== ========== ========== ========== =========== ==========
Percent of net assets 100.00% 2.62% 1.41% 8.79% 0.31% 9.97%
---------------------------------- =========== ========== ========== ========== =========== ==========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period 91,495 80,631 210,456 -- 253,088
Unit value $ 15.780 $ 9.675 $ 15.611 $ -- $ 14.991
---------------------------------- ---------- ---------- ---------- ----------- ----------
1,443,810 780,147 3,285,427 -- 3,793,945
LSVUL Policies:
Units in accumulation period -- -- 125,580 11,222 144,470
Unit value $ -- $ -- $ 12.476 $ 15.235 $ 11.847
---------------------------------- ---------- ---------- ---------- ----------- ----------
-- -- 1,566,729 170,969 1,711,542
---------------------------------- ---------- ---------- ---------- ----------- ----------
NET ASSETS $1,443,810 $ 780,147 $4,852,156 $ 170,969 $5,505,487
---------------------------------- ========== ========== ========== =========== ==========
<CAPTION>
BARON BT BT
CAPITAL EAFE BT EQUITY SMALL
ASSET EQUITY INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
-------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$10,660,427) $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated (Cost
$38,199,966) 222,847 173,327 9,997,669 107,219
------------------------------- --------- ----------- ---------- ---------
Total Investments 222,847 173,327 9,997,669 107,219
Dividends Receivable -- -- -- --
TOTAL ASSETS 222,847 173,327 9,997,669 107,219
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 4 4 212 2
------------------------------- --------- ----------- ---------- ---------
NET ASSETS $ 222,843 $ 173,323 $9,997,457 $ 107,217
------------------------------- ========= =========== ========== =========
Percent of net assets 0.40% 0.31% 18.12% 0.19%
------------------------------- ========= =========== ========== =========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period -- -- 556,772 --
Unit value $ -- $ -- $ 13.283 $ --
------------------------------- --------- ----------- ---------- ---------
-- -- 7,395,845 --
LSVUL Policies:
Units in accumulation period 19,736 13,894 236,119 9,395
Unit value $ 11.291 $ 12.474 $ 11.018 $ 11.413
------------------------------- --------- ----------- ---------- ---------
222,843 173,323 2,601,612 107,217
------------------------------- --------- ----------- ---------- ---------
NET ASSETS $ 222,843 $ 173,323 $9,997,457 $ 107,217
------------------------------- ========= =========== ========== =========
</TABLE>
See accompanying notes.
R-2
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DELAWARE DELAWARE FIDELITY
DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE DELAWARE VIP
PREMIUM PREMIUM EMERGING SMALL PREMIUM PREMIUM EQUITY-
DELCHESTER DEVON MARKETS CAP VALUE REIT TREND INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market--Affiliated
(Cost $10,660,427) $ 171,649 $ 31,477 $ 292,419 $1,152,083 $ 4,105 $2,450,120 $ --
Investments at
Market--Unaffiliated (Cost
$38,199,966) -- -- -- -- -- -- 2,131,776
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
Total Investments 171,649 31,477 292,419 1,152,083 4,105 2,450,120 2,131,776
Dividends Receivable 366 -- -- -- -- -- --
TOTAL ASSETS 172,015 31,477 292,419 1,152,083 4,105 2,450,120 2,131,776
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 4 1 6 25 -- 53 46
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
NET ASSETS $ 172,011 $ 31,476 $ 292,413 $1,152,058 $ 4,105 $2,450,067 $2,131,730
----------------------------------- ========= ========= ========= ========== ========= ========== ==========
Percent of net assets 0.31% 0.06% 0.53% 2.09% 0.01% 4.44% 3.86%
----------------------------------- ========= ========= ========= ========== ========= ========== ==========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period -- -- 22,036 89,408 -- 89,905 197,459
Unit value $ -- $ -- $ 11.243 $ 9.164 $ -- $ 18.641 $ 10.796
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
-- -- 247,739 819,295 -- 1,675,877 2,131,730
LSVUL Policies:
Units in accumulation period 18,224 3,444 3,692 35,187 446 49,691 --
Unit value $ 9.438 $ 9.139 $ 12.096 $ 9.458 $ 9.196 $ 15.580 $ --
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
172,011 31,476 44,674 332,763 4,105 774,190 --
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
NET ASSETS $ 172,011 $ 31,476 $ 292,413 $1,152,058 $ 4,105 $2,450,067 $2,131,730
----------------------------------- ========= ========= ========= ========== ========= ========== ==========
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP II VIP II VIP II
ASSET CONTRAFUND INVESTMENT
MANAGER SERVICE CLASS GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
--------------------------------
ASSETS
Investments at Market--Affilia
(Cost $10,660,427) $ -- $ -- $ --
Investments at
Market--Unaffiliated (Cost
$38,199,966) 534,793 841,733 2,103,802
-------------------------------- --------- ---------- ----------
Total Investments 534,793 841,733 2,103,802
Dividends Receivable -- -- --
TOTAL ASSETS 534,793 841,733 2,103,802
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 12 18 46
-------------------------------- --------- ---------- ----------
NET ASSETS $ 534,781 $ 841,715 $2,103,756
-------------------------------- ========= ========== ==========
Percent of net assets 0.97% 1.52% 3.81%
-------------------------------- ========= ========== ==========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period 45,700 -- 204,605
Unit value $ 11.702 $ -- $ 10.282
-------------------------------- --------- ---------- ----------
534,781 -- 2,103,756
LSVUL Policies:
Units in accumulation period -- 73,429 --
Unit value $ -- $ 11.463 $ --
-------------------------------- --------- ---------- ----------
-- 841,715 --
-------------------------------- --------- ---------- ----------
NET ASSETS $ 534,781 $ 841,715 $2,103,756
-------------------------------- ========= ========== ==========
</TABLE>
See accompanying notes.
R-3
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
FIDELITY JANUS
VIP III JANUS ASPEN
GROWTH ASPEN SERIES LN LN
OPPORTUNITIES SERIES WORLDWIDE LN CAPITAL EQUITY-
SERVICE CLASS BALANCED GROWTH BOND APPRECIATION INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market--Affiliated
(Cost $10,660,427) $ -- $ -- $ -- $ 799,959 $ 525,071 $ 161,150
Investments at
Market--Unaffiliated (Cost
$38,199,966) 220,244 1,208,164 1,334,584 -- -- --
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
Total Investments 220,244 1,208,164 1,334,584 799,959 525,071 161,150
Dividends Receivable -- -- -- -- -- --
TOTAL ASSETS 220,244 1,208,164 1,334,584 799,959 525,071 161,150
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 5 25 28 17 11 3
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET ASSETS $ 220,239 $1,208,139 $1,334,556 $ 799,942 $ 525,060 $ 161,147
----------------------------------- =========== ========== ========== ========= ========== =========
Percent of net assets 0.40% 2.19% 2.42% 1.45% 0.95% 0.29%
----------------------------------- =========== ========== ========== ========= ========== =========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period -- -- -- -- -- --
Unit value $ -- $ -- $ -- $ -- $ -- $ --
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
-- -- -- -- -- --
LSVUL Policies:
Units in accumulation period 21,913 106,218 88,482 81,026 40,651 16,398
Unit value $ 10.050 $ 11.374 $ 15.083 $ 9.873 $ 12.916 $ 9.827
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
220,239 1,208,139 1,334,556 799,942 525,060 161,147
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET ASSETS $ 220,239 $1,208,139 $1,334,556 $ 799,942 $ 525,060 $ 161,147
----------------------------------- =========== ========== ========== ========= ========== =========
<CAPTION>
LN
GLOBAL LN LN MFS
ASSET MONEY SOCIAL EMERGING
ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
--------------------------------
ASSETS
Investments at Market--Affilia
(Cost $10,660,427) $ 38,992 $5,734,236 $ 101,598 $ --
Investments at
Market--Unaffiliated (Cost
$38,199,966) -- -- -- 4,076,388
-------------------------------- --------- ---------- --------- ----------
Total Investments 38,992 5,734,236 101,598 4,076,388
Dividends Receivable -- -- -- --
TOTAL ASSETS 38,992 5,734,236 101,598 4,076,388
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 1 126 2 87
-------------------------------- --------- ---------- --------- ----------
NET ASSETS $ 38,991 $5,734,110 $ 101,596 $4,076,301
-------------------------------- ========= ========== ========= ==========
Percent of net assets 0.07% 10.39% 0.18% 7.38%
-------------------------------- ========= ========== ========= ==========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period -- 297,512 -- 153,406
Unit value $ -- $ 10.623 $ -- $ 20.052
-------------------------------- --------- ---------- --------- ----------
-- 3,160,610 -- 3,076,151
LSVUL Policies:
Units in accumulation period 3,607 251,134 9,065 60,639
Unit value $ 10.810 $ 10.248 $ 11.207 $ 16.493
-------------------------------- --------- ---------- --------- ----------
38,991 2,573,500 101,596 1,000,150
-------------------------------- --------- ---------- --------- ----------
NET ASSETS $ 38,991 $5,734,110 $ 101,596 $4,076,301
-------------------------------- ========= ========== ========= ==========
</TABLE>
See accompanying notes.
R-4
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
OCC
MFS AMT ACCUMULATION OCC
TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market--Affiliated
(Cost $10,660,427) $ -- $ -- $ -- $ -- $ -- $ --
Investments at Market--Unaffiliated
(Cost $38,199,966) 1,200,068 1,368,036 111,303 59,959 653,337 1,037,980
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
Total Investments 1,200,068 1,368,036 111,303 59,959 653,337 1,037,980
Dividends Receivable -- -- -- -- -- --
TOTAL ASSETS 1,200,068 1,368,036 111,303 59,959 653,337 1,037,980
LIABILITY--
Payable to The Lincoln National Life
Insurance Company 26 30 2 1 14 23
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS $1,200,042 $1,368,006 $ 111,301 $ 59,958 $ 653,323 $ 1,037,957
------------------------------------------- ========== ========== ========= ========= =========== ===========
Percent of net assets 2.17% 2.48% 0.20% 0.11% 1.18% 1.88%
------------------------------------------- ========== ========== ========= ========= =========== ===========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period 72,807 80,427 -- -- 53,136 101,945
Unit value $ 10.622 $ 14.003 $ -- $ -- $ 12.295 $ 10.182
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
773,365 1,126,206 -- -- 653,323 1,037,957
LSVUL Policies:
Units in accumulation period 43,385 19,873 7,387 6,305 -- --
Unit value $ 9.834 $ 12.167 $ 15.066 $ 9.509 $ -- $ --
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
426,677 241,798 111,301 59,958 -- --
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS $1,200,042 $1,368,004 $ 111,301 $ 59,958 $ 653,323 $ 1,037,957
------------------------------------------- ========== ========== ========= ========= =========== ===========
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
ASSET TEMPLETON INTERNATIONAL TEMPLETON STOCK
ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------------------
ASSETS
Investments at Market--Affiliated
(Cost $10,660,427) $ -- $ -- $ -- $ -- $ --
Investments at Market--Unaffiliated
(Cost $38,199,966) 294,607 2,709,708 377,526 175,334 56,426
------------------------------------------- --------- ----------- ----------- --------- ---------
Total Investments 294,607 2,709,708 377,526 175,334 56,426
Dividends Receivable -- -- -- -- --
TOTAL ASSETS 294,607 2,709,708 377,526 175,334 56,426
LIABILITY--
Payable to The Lincoln National Life
Insurance Company 6 59 8 4 1
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS $ 294,601 $ 2,709,649 $ 377,518 $ 175,330 $ 56,425
------------------------------------------- ========= =========== =========== ========= =========
Percent of net assets 0.53% 4.91% 0.68% 0.32% 0.10%
------------------------------------------- ========= =========== =========== ========= =========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period 24,492 230,299 -- 14,786 --
Unit value $ 12.028 $ 11.766 $ -- $ 11.857 $ --
------------------------------------------- --------- ----------- ----------- --------- ---------
294,601 2,709,649 -- 175,330 --
LSVUL Policies:
Units in accumulation period -- -- 33,516 -- 4,890
Unit value $ -- $ -- $ 11.264 $ -- $ 11.538
------------------------------------------- --------- ----------- ----------- --------- ---------
-- -- 377,518 -- 56,425
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS $ 294,601 $ 2,709,649 $ 377,518 $ 175,330 $ 56,425
------------------------------------------- ========= =========== =========== ========= =========
</TABLE>
See accompanying notes.
R-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF OPERATIONS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED AIM V.I. INTERNATIONAL AIM 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 (Loss):
Dividends from investment income $ 59,265 $ 405 $ 12,573 $ 1,681 $ -- $ 2,872
Dividends from net realized gains
on investments 89,117 7,166 4,012 31,515 -- 25,401
Mortality and expense
guarantees--SVUL I (15,398) (506) (443) (837) -- (993)
----------------------------------- ---------- ---------- --------- --------- ----------- ---------
NET INVESTMENT INCOME (LOSS) 132,984 7,065 16,142 32,359 -- 27,280
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 20,588 1,131 5 474 -- 2,596
Net change in unrealized
appreciation or depreciation on
investments 647,779 44,813 (11,427) 81,846 -- 83,876
----------------------------------- ---------- ---------- --------- --------- ----------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 668,367 45,944 (11,422) 82,320 -- 86,472
----------------------------------- ---------- ---------- --------- --------- ----------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 801,351 $ 53,009 $ 4,720 $ 114,679 $ -- $ 113,752
----------------------------------- ========== ========== ========= ========= =========== =========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 533,766 $ 939 $ 46,589 $ 7,873 $ 883 $ 12,942
Dividends from net realized gains
on investments 598,007 29,289 -- 138,013 3,707 67,676
Mortality and expense guarantees:
SVUL I (200,572) (6,113) (5,638) (13,644) -- (16,954)
LSVUL (23,989) -- -- (1,499) (204) (1,889)
----------------------------------- ---------- ---------- --------- --------- ----------- ---------
NET INVESTMENT INCOME (LOSS) 907,212 24,115 40,951 130,743 4,386 61,775
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 270,353 15,800 (17,904) 32,609 528 25,532
Net change in unrealized
appreciation or depreciation on
investments 5,704,354 365,138 (55,300) 625,753 31,276 685,386
----------------------------------- ---------- ---------- --------- --------- ----------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 5,974,707 380,938 (73,204) 658,362 31,804 710,918
----------------------------------- ---------- ---------- --------- --------- ----------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $6,881,919 $ 405,053 $ (32,253) $ 789,105 $ 36,190 $ 772,693
----------------------------------- ========== ========== ========= ========= =========== =========
<CAPTION>
BARON BT EAFE
CAPITAL EQUITY BT EQUITY BT SMALL
ASSET INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
--------------------------------
PERIOD FROM JUNE 18, 1998 TO DEC
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ 2,407 $ --
Dividends from net realized gain
on investments -- -- 15,403 --
Mortality and expense
guarantees--SVUL I -- -- (1,229) --
-------------------------------- --------- --------- ---------- ---------
NET INVESTMENT INCOME (LOSS) -- -- 16,581 --
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments -- -- 5,733 --
Net change in unrealized
appreciation or depreciation
investments -- -- 103,650 --
-------------------------------- --------- --------- ---------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS -- -- 109,383 --
-------------------------------- --------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ -- $ -- $ 125,964 $ --
-------------------------------- ========= ========= ========== =========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ -- $ 2,757 $ 62,072 $ 960
Dividends from net realized gain
on investments 11 5,151 29,190 2,749
Mortality and expense guarantees
SVUL I -- -- (38,431) --
LSVUL (236) (399) (4,725) (128)
-------------------------------- --------- --------- ---------- ---------
NET INVESTMENT INCOME (LOSS) (225) 7,509 48,106 3,581
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 6,139 220 72,816 910
Net change in unrealized
appreciation or depreciation
investments 22,579 17,123 981,969 7,446
-------------------------------- --------- --------- ---------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 28,718 17,343 1,054,785 8,356
-------------------------------- --------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATI $ 28,493 $ 24,852 $1,102,891 $ 11,937
-------------------------------- ========= ========= ========== =========
</TABLE>
See accompanying notes.
R-6
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF OPERATIONS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
DELAWARE DELAWARE
DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE DELAWARE FIDELITY
PREMIUM PREMIUM EMERGING SMALL CAP PREMIUM PREMIUM VIP EQUITY-
DELCHESTER DEVON MARKETS VALUE REIT TREND INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- -- -- -- -- --
Mortality and expense
guarantees--SVUL I -- -- (250) (396) -- (258) (643)
------------------------------------ --------- --------- --------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) -- -- (250) (396) -- (258) (643)
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments -- -- (11) 344 -- (131) 3,229
Net change in unrealized
appreciation or depreciation on
investments -- -- 7,148 38,453 -- 30,649 51,071
------------------------------------ --------- --------- --------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS -- -- 7,137 38,797 -- 30,518 54,300
------------------------------------ --------- --------- --------- --------- --------- --------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ -- $ -- $ 6,887 $ 38,401 $ -- $ 30,260 $ 53,657
------------------------------------ ========= ========= ========= ========= ========= ========= ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 1,189 $ -- $ 3,238 $ 4,144 $ -- $ 39 $ 11,959
Dividends from net realized gains on
investments -- -- -- 1,700 -- -- 26,436
Mortality and expense guarantees:
SVUL I -- -- (1,363) (4,380) -- (5,642) (11,234)
LSVUL (86) (18) (46) (478) (8) (961) --
------------------------------------ --------- --------- --------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) 1,103 (18) 1,829 986 (8) (6,564) 27,161
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments (350) (4) 2,183 1,695 (2) 29,968 4,508
Net change in unrealized
appreciation or depreciation on
investments (300) 386 74,521 (25,551) 18 646,621 2,110
------------------------------------ --------- --------- --------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (650) 382 76,704 (23,856) 16 676,589 6,618
------------------------------------ --------- --------- --------- --------- --------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 453 $ 364 $ 78,533 $ (22,870) $ 8 $ 670,025 $ 33,779
------------------------------------ ========= ========= ========= ========= ========= ========= ==========
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP II VIP II VIP II
ASSET CONTRAFUND INVESTMENT
MANAGER SERVICE CLASS GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
---------------------------------
PERIOD FROM JUNE 18, 1998 TO DECE
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ --
Dividends from net realized gains
investments -- -- --
Mortality and expense
guarantees--SVUL I (217) -- (856)
--------------------------------- --------- ---------- ----------
NET INVESTMENT INCOME (LOSS) (217) -- (856)
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments (21) -- 259
Net change in unrealized
appreciation or depreciation o
investments 9,349 -- 6,838
--------------------------------- --------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 9,328 -- 7,097
--------------------------------- --------- ---------- ----------
NET INCREASE IN NET ASSETS RESULT
FROM OPERATIONS $ 9,111 $ -- $ 6,241
--------------------------------- ========= ========== ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 8,457 $ -- $ 33,693
Dividends from net realized gains
investments 10,712 -- 10,570
Mortality and expense guarantees:
SVUL I (3,211) -- (12,471)
LSVUL -- (1,289) --
--------------------------------- --------- ---------- ----------
NET INVESTMENT INCOME (LOSS) 15,958 (1,289) 31,792
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 429 150 (12,166)
Net change in unrealized
appreciation or depreciation o
investments 26,389 76,811 (49,719)
--------------------------------- --------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 26,818 76,961 (61,885)
--------------------------------- --------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIO $ 42,776 $ 75,672 $ (30,093)
--------------------------------- ========= ========== ==========
</TABLE>
See accompanying notes.
R-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF OPERATIONS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
FIDELITY
VIP III JANUS ASPEN
GROWTH JANUS ASPEN SERIES LN LN
OPPORTUNITIES SERIES WORLDWIDE CAPITAL EQUITY-
SERVICE CLASS BALANCED GROWTH LN BOND APPRECIATION INCOME
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 (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ -- $ --
Dividends from net realized gains
on investments -- -- -- -- -- --
Mortality and expense
guarantees--SVUL I -- -- -- -- -- --
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET INVESTMENT INCOME (LOSS) -- -- -- -- -- --
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments -- -- -- -- -- --
Net change in unrealized
appreciation or depreciation on
investments -- -- -- -- -- --
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS -- -- -- -- -- --
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ -- $ -- $ -- $ -- $ -- $ --
----------------------------------- =========== ========== ========== ========= ========== =========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ -- $ 12,578 $ 9 $ 30,770 $ -- $ 238
Dividends from net realized gains
on investments -- -- -- -- -- --
Mortality and expense guarantees:
SVUL I -- -- -- -- -- --
LSVUL (143) (1,685) (1,133) (1,702) (499) (202)
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET INVESTMENT INCOME (LOSS) (143) 10,893 (1,124) 29,068 (499) 36
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 2,188 9,778 10,312 (961) 8,084 1,395
Net change in unrealized
appreciation or depreciation on
investments 3,874 84,840 205,233 (28,119) 44,431 7,515
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 6,062 94,618 215,545 (29,080) 52,515 8,910
----------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 5,919 $ 105,511 $ 214,421 $ (12) $ 52,016 $ 8,946
----------------------------------- =========== ========== ========== ========= ========== =========
<CAPTION>
LN GLOBAL MFS
ASSET LN MONEY LN SOCIAL EMERGING
ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
--------------------------------
PERIOD FROM JUNE 18, 1998 TO DEC
Net Investment Income (Loss):
Dividends from investment income $ -- $ 37,695 $ -- $ --
Dividends from net realized gain
on investments -- -- -- --
Mortality and expense
guarantees--SVUL I -- (6,329) -- (599)
-------------------------------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) -- 31,366 -- (599)
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments -- -- -- 5,876
Net change in unrealized
appreciation or depreciation
investments -- -- -- 99,056
-------------------------------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS -- -- -- 104,932
-------------------------------- --------- --------- --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ -- $ 31,366 $ -- $ 104,333
-------------------------------- ========= ========= ========= ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 8 $ 229,922 $ 932 $ --
Dividends from net realized gain
on investments -- -- -- --
Mortality and expense guarantees
SVUL I -- (35,526) -- (11,719)
LSVUL (40) (4,113) (103) (986)
-------------------------------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) (32) 190,283 829 (12,705)
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 1 -- 4,360 54,037
Net change in unrealized
appreciation or depreciation
investments 1,470 -- 5,190 1,352,531
-------------------------------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 1,471 -- 9,550 1,406,568
-------------------------------- --------- --------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATI $ 1,439 $ 190,283 $ 10,379 $1,393,863
-------------------------------- ========= ========= ========= ==========
</TABLE>
See accompanying notes.
R-8
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF OPERATIONS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
OCC
AMT ACCUMULATION OCC
MFS TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED
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 (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ 1,632 $ --
Dividends from net realized gains on
investments -- -- -- -- 5,620 --
Mortality and expense guarantees--SVUL I (200) (314) -- -- (267) (122)
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET INVESTMENT INCOME (LOSS) (200) (314) -- -- 6,985 (122)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 103 43 -- -- 280 32
Net change in unrealized appreciation or
depreciation on investments 6,369 11,452 -- -- 13,659 4,507
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 6,472 11,495 -- -- 13,939 4,539
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 6,272 $ 11,181 $ -- $ -- $ 20,924 $ 4,417
-------------------------------------------- ========= ========= ========= ========= =========== ===========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 7,732 $ 7,132 $ -- $ -- $ 8,573 $ 5,941
Dividends from net realized gains on
investments 14,339 35,861 -- -- 89,807 13,331
Mortality and expense guarantees:
SVUL I (3,905) (5,351) -- -- (3,491) (5,724)
LSVUL (483) (304) (54) (74) -- --
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET INVESTMENT INCOME (LOSS) 17,683 37,338 (54) (74) 94,889 13,548
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 319 9,255 40 64 3,350 355
Net change in unrealized appreciation or
depreciation on investments (4,094) 209,232 11,917 1,746 7,284 7,071
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (3,775) 218,487 11,957 1,810 10,634 7,426
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 13,908 $ 255,825 $ 11,903 $ 1,736 $ 105,523 $ 20,974
-------------------------------------------- ========= ========= ========= ========= =========== ===========
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
ASSET TEMPLETON INTERNATIONAL TEMPLETON 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 (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- -- -- --
Mortality and expense guarantees--SVUL I (166) (703) -- (70) --
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET INVESTMENT INCOME (LOSS) (166) (703) -- (70) --
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 120 402 -- 124 --
Net change in unrealized appreciation or
depreciation on investments 11,550 53,289 -- 1,631 --
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 11,670 53,691 -- 1,755 --
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 11,504 $ 52,988 $ -- $ 1,685 $ --
-------------------------------------------- ========= =========== =========== ========= =========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 3,047 $ 28,066 $ -- $ 1,084 $ --
Dividends from net realized gains on
investments 16,954 97,494 -- 5,017 --
Mortality and expense guarantees:
SVUL I (1,438) (13,463) -- (874) --
LSVUL -- -- (475) -- (27)
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET INVESTMENT INCOME (LOSS) 18,563 112,097 (475) 5,227 (27)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 977 2,171 690 875 2
Net change in unrealized appreciation or
depreciation on investments 19,172 283,148 31,111 25,689 2,457
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 20,149 285,319 31,801 26,564 2,459
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 38,712 $ 397,416 $ 31,326 $ 31,791 $ 2,432
-------------------------------------------- ========= =========== =========== ========= =========
</TABLE>
See accompanying notes.
R-9
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED AIM V.I. INTERNATIONAL AIM V.I.
APPRECIATION INCOME GROWTH EQUITY VALUE
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 132,984 $ 7,065 $ 16,142 $ 32,359 $ -- $ 27,280
Net realized gain (loss) on
investments 20,588 1,131 5 474 -- 2,596
Net change in unrealized
appreciation or depreciation on
investments 647,779 44,813 (11,427) 81,846 -- 83,876
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 801,351 53,009 4,720 114,679 -- 113,752
Change From Unit Transactions:
Participant purchases 16,601,606 274,025 388,335 530,958 -- 615,727
Participant withdrawals (4,569,117) (21,505) (22,806) (51,518) -- (48,176)
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 12,032,489 252,520 365,529 479,440 -- 567,551
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
TOTAL INCREASE IN NET ASSETS 12,833,840 305,529 370,249 594,119 -- 681,303
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET ASSETS AT DECEMBER 31, 1998 12,833,840 305,529 370,249 594,119 -- 681,303
----------------------------------- ============ ========== ========= ========== =========== ==========
Changes From Operations:
Net investment income (loss) 907,212 24,115 40,951 130,743 4,386 61,775
Net realized gain (loss) on
investments 270,353 15,800 (17,904) 32,609 528 25,532
Net change in unrealized
appreciation or depreciation on
investments 5,704,354 365,138 (55,300) 625,753 31,276 685,386
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS 6,881,919 405,053 (32,253) 789,105 36,190 772,693
Change From Unit Transactions:
Participant purchases 59,275,780 815,226 497,713 3,707,852 143,720 4,349,013
Participant withdrawals (23,779,827) (81,998) (55,562) (238,920) (8,941) (297,522)
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 35,495,953 733,228 442,151 3,468,932 134,779 4,051,491
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
TOTAL INCREASE IN NET ASSETS 42,377,872 1,138,281 409,898 4,258,037 170,969 4,824,184
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET ASSETS AT DECEMBER 31, 1999 $ 55,211,712 $1,443,810 $ 780,147 $4,852,156 $ 170,969 $5,505,487
----------------------------------- ============ ========== ========= ========== =========== ==========
<CAPTION>
BARON BT EAFE
CAPITAL EQUITY BT EQUITY BT SMALL
ASSET INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
--------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ -- $ 16,581 $ --
Net realized gain (loss) on
investments -- -- 5,733 --
Net change in unrealized
appreciation or depreciation o
investments -- -- 103,650 --
-------------------------------- --------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS -- -- 125,964 --
Change From Unit Transactions:
Participant purchases -- -- 1,356,215 --
Participant withdrawals -- -- (64,871) --
-------------------------------- --------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTI -- -- 1,291,344 --
-------------------------------- --------- --------- ---------- ---------
TOTAL INCREASE IN NET ASSETS -- -- 1,417,308 --
-------------------------------- --------- --------- ---------- ---------
NET ASSETS AT DECEMBER 31, 1998 -- -- 1,417,308 --
-------------------------------- ========= ========= ========== =========
Changes From Operations:
Net investment income (loss) (225) 7,509 48,106 3,581
Net realized gain (loss) on
investments 6,139 220 72,816 910
Net change in unrealized
appreciation or depreciation o
investments 22,579 17,123 981,969 7,446
-------------------------------- --------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATI 28,493 24,852 1,102,891 11,937
Change From Unit Transactions:
Participant purchases 208,725 155,932 7,967,537 163,391
Participant withdrawals (14,375) (7,461) (490,279) (68,111)
-------------------------------- --------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTI 194,350 148,471 7,477,258 95,280
-------------------------------- --------- --------- ---------- ---------
TOTAL INCREASE IN NET ASSETS 222,843 173,323 8,580,149 107,217
-------------------------------- --------- --------- ---------- ---------
NET ASSETS AT DECEMBER 31, 1999 $ 222,843 $ 173,323 $9,997,457 $ 107,217
-------------------------------- ========= ========= ========== =========
</TABLE>
See accompanying notes.
R-10
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
DELAWARE DELAWARE
DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE DELAWARE FIDELITY
PREMIUM PREMIUM EMERGING SMALL CAP PREMIUM PREMIUM VIP EQUITY-
DELCHESTER DEVON MARKETS VALUE REIT TREND INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ -- $ (250) $ (396) $ -- $ (258) $ (643)
Net realized gain (loss) on
investments -- -- (11) 344 -- (131) 3,229
Net change in unrealized
appreciation or depreciation on
investments -- -- 7,148 38,453 -- 30,649 51,071
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS -- -- 6,887 38,401 -- 30,260 53,657
Change From Unit Transactions:
Participant purchases -- -- 139,569 270,284 -- 359,010 647,390
Participant withdrawals -- -- (12,021) (16,136) -- (12,328) (33,532)
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS -- -- 127,548 254,148 -- 346,682 613,858
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
TOTAL INCREASE IN NET ASSETS -- -- 134,435 292,549 -- 376,942 667,515
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1998 -- -- 134,435 292,549 -- 376,942 667,515
----------------------------------- ========= ========= ========= ========== ========= ========== ==========
Changes From Operations:
Net investment income (loss) 1,103 (18) 1,829 986 (8) (6,564) 27,161
Net realized gain (loss) on
investments (350) (4) 2,183 1,695 (2) 29,968 4,508
Net change in unrealized
appreciation or depreciation on
investments (300) 386 74,521 (25,551) 18 646,621 2,110
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS 453 364 78,533 (22,870) 8 670,025 33,779
Change From Unit Transactions:
Participant purchases 177,779 32,143 90,190 949,742 4,509 1,479,071 1,583,764
Participant withdrawals (6,221) (1,031) (10,745) (67,363) (412) (75,971) (153,328)
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 171,558 31,112 79,445 882,379 4,097 1,403,100 1,430,436
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 172,011 31,476 157,978 859,509 4,105 2,073,125 1,464,215
----------------------------------- --------- --------- --------- ---------- --------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1999 $ 172,011 $ 31,476 $ 292,413 $1,152,058 $ 4,105 $2,450,067 $2,131,730
----------------------------------- ========= ========= ========= ========== ========= ========== ==========
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP II VIP II VIP II
ASSET CONTRAFUND INVESTMENT
MANAGER SERVICE CLASS GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
--------------------------------
Changes From Operations:
Net investment income (loss) $ (217) $ -- $ (856)
Net realized gain (loss) on
investments (21) -- 259
Net change in unrealized
appreciation or depreciation o
investments 9,349 -- 6,838
-------------------------------- --------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 9,111 -- 6,241
Change From Unit Transactions:
Participant purchases 234,377 -- 797,504
Participant withdrawals (6,369) -- (35,597)
-------------------------------- --------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTI 228,008 -- 761,907
-------------------------------- --------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 237,119 -- 768,148
-------------------------------- --------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1998 237,119 -- 768,148
-------------------------------- ========= ========== ==========
Changes From Operations:
Net investment income (loss) 15,958 (1,289) 31,792
Net realized gain (loss) on
investments 429 150 (12,166)
Net change in unrealized
appreciation or depreciation o
investments 26,389 76,811 (49,719)
-------------------------------- --------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATI 42,776 75,672 (30,093)
Change From Unit Transactions:
Participant purchases 289,746 803,479 1,474,805
Participant withdrawals (34,860) (37,436) (109,104)
-------------------------------- --------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTI 254,886 766,043 1,365,701
-------------------------------- --------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 297,662 841,715 1,335,608
-------------------------------- --------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1999 $ 534,781 $ 841,715 $2,103,756
-------------------------------- ========= ========== ==========
</TABLE>
See accompanying notes.
R-11
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
FIDELITY
VIP III JANUS ASPEN
GROWTH JANUS ASPEN SERIES LN LN
OPPORTUNITIES SERIES WORLDWIDE CAPITAL EQUITY-
SERVICE CLASS BALANCED GROWTH LN BOND APPRECIATION INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ -- $ -- $ -- $ -- $ --
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) (143) 10,893 (1,124) 29,068 (499) 36
Net realized gain (loss) on
investments 2,188 9,778 10,312 (961) 8,084 1,395
Net change in unrealized
appreciation or depreciation on
investments 3,874 84,840 205,233 (28,119) 44,431 7,515
---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 5,919 105,511 214,421 (12) 52,016 8,946
Change From Unit Transactions:
Participant purchases 227,211 1,156,698 1,168,743 833,214 500,709 160,167
Participant withdrawals (12,891) (54,070) (48,608) (33,260) (27,665) (7,966)
---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 214,320 1,102,628 1,120,135 799,954 473,044 152,201
---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
TOTAL INCREASE IN NET ASSETS 220,239 1,208,139 1,334,556 799,942 525,060 161,147
---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET ASSETS AT DECEMBER 31, 1999 $ 220,239 $1,208,139 $1,334,556 $ 799,942 $ 525,060 $ 161,147
---------------------------------- =========== ========== ========== ========= ========== =========
<CAPTION>
LN GLOBAL MFS
ASSET LN MONEY LN SOCIAL EMERGING
ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
-------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ 31,366 $ -- $ (599)
Net realized gain (loss) on
investments -- -- -- 5,876
Net change in unrealized
appreciation or depreciation
investments -- -- -- 99,056
------------------------------- --------- ------------ --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS -- 31,366 -- 104,333
Change From Unit Transactions:
Participant purchases -- 9,020,245 -- 449,620
Participant withdrawals -- (4,135,288) -- (31,756)
------------------------------- --------- ------------ --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS -- 4,884,957 -- 417,864
------------------------------- --------- ------------ --------- ----------
TOTAL INCREASE IN NET ASSETS -- 4,916,323 -- 522,197
------------------------------- --------- ------------ --------- ----------
NET ASSETS AT DECEMBER 31, 1998 -- 4,916,323 -- 522,197
------------------------------- ========= ============ ========= ==========
Changes From Operations:
Net investment income (loss) (32) 190,283 829 (12,705)
Net realized gain (loss) on
investments 1 -- 4,360 54,037
Net change in unrealized
appreciation or depreciation
investments 1,470 -- 5,190 1,352,531
------------------------------- --------- ------------ --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 1,439 190,283 10,379 1,393,863
Change From Unit Transactions:
Participant purchases 37,764 21,708,528 202,020 2,320,043
Participant withdrawals (212) (21,081,024) (110,803) (159,802)
------------------------------- --------- ------------ --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 37,552 627,504 91,217 2,160,241
------------------------------- --------- ------------ --------- ----------
TOTAL INCREASE IN NET ASSETS 38,991 817,787 101,596 3,554,104
------------------------------- --------- ------------ --------- ----------
NET ASSETS AT DECEMBER 31, 1999 $ 38,991 $ 5,734,110 $ 101,596 $4,076,301
------------------------------- ========= ============ ========= ==========
</TABLE>
See accompanying notes.
R-12
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
OCC
AMT ACCUMULATION OCC
MFS TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (200) $ (314) $ -- $ -- $ 6,985 $ (122)
Net realized gain (loss) on investments 103 43 -- -- 280 32
Net change in unrealized appreciation or
depreciation on investments 6,369 11,452 -- -- 13,659 4,507
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 6,272 11,181 -- -- 20,924 4,417
Change From Unit Transactions:
Participant purchases 142,732 220,459 -- -- 140,963 104,839
Participant withdrawals (8,826) (11,394) -- -- (13,510) (7,476)
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 133,906 209,065 -- -- 127,453 97,363
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 140,178 220,246 -- -- 148,377 101,780
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1998 140,178 220,246 -- -- 148,377 101,780
------------------------------------------- ========== ========== ========= ========= =========== ===========
Changes From Operations:
Net investment income (loss) 17,683 37,338 (54) (74) 94,889 13,548
Net realized gain (loss) on investments 319 9,255 40 64 3,350 355
Net change in unrealized appreciation or
depreciation on investments (4,094) 209,232 11,917 1,746 7,284 7,071
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 13,908 255,825 11,903 1,736 105,523 20,974
Change From Unit Transactions:
Participant purchases 1,127,962 1,005,547 103,175 62,239 430,399 966,244
Participant withdrawals (82,006) (113,612) (3,777) (4,017) (30,976) (51,041)
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 1,045,956 891,935 99,398 58,222 399,423 915,203
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 1,059,864 1,147,760 111,301 59,958 504,946 936,177
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1999 $1,200,042 $1,368,006 $ 111,301 $ 59,958 $ 653,323 $ 1,037,957
------------------------------------------- ========== ========== ========= ========= =========== ===========
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
ASSET TEMPLETON INTERNATIONAL TEMPLETON STOCK
ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------------------
Changes From Operations:
Net investment income (loss) $ (166) $ (703) $ -- $ (70) $ --
Net realized gain (loss) on investments 120 402 -- 124 --
Net change in unrealized appreciation or
depreciation on investments 11,550 53,289 -- 1,631 --
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 11,504 52,988 -- 1,685 --
Change From Unit Transactions:
Participant purchases 90,655 779,469 -- 39,230 --
Participant withdrawals (1,916) (30,242) -- (3,850) --
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 88,739 749,227 -- 35,380 --
------------------------------------------- --------- ----------- ----------- --------- ---------
TOTAL INCREASE IN NET ASSETS 100,243 802,215 -- 37,065 --
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS AT DECEMBER 31, 1998 100,243 802,215 -- 37,065 --
------------------------------------------- ========= =========== =========== ========= =========
Changes From Operations:
Net investment income (loss) 18,563 112,097 (475) 5,227 (27)
Net realized gain (loss) on investments 977 2,171 690 875 2
Net change in unrealized appreciation or
depreciation on investments 19,172 283,148 31,111 25,689 2,457
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 38,712 397,416 31,326 31,791 2,432
Change From Unit Transactions:
Participant purchases 184,054 1,639,823 365,049 126,161 55,693
Participant withdrawals (28,408) (129,805) (18,857) (19,687) (1,700)
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 155,646 1,510,018 346,192 106,474 53,993
------------------------------------------- --------- ----------- ----------- --------- ---------
TOTAL INCREASE IN NET ASSETS 194,358 1,907,434 377,518 138,265 56,425
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS AT DECEMBER 31, 1999 $ 294,601 $ 2,709,649 $ 377,518 $ 175,330 $ 56,425
------------------------------------------- ========= =========== =========== ========= =========
</TABLE>
See accompanying notes.
R-13
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION
THE VARIABLE ACCOUNT:
Lincoln Life Flexible Premium Variable Life Account R (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.
SVUL I
LSVUL
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 from any other business of
Lincoln Life.
BASIS OF PRESENTATION:
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in
the United States for unit investment trusts.
INVESTMENTS:
The assets of the Variable Account are divided into variable
subaccounts 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 subaccounts 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 Service Class Portfolio
Investment Grade Bond Portfolio
R-14
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION (CONTINUED)
Fidelity Variable Insurance Products Fund III:
Growth Opportunities Service Class Portfolio
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 Class 2 Fund
Templeton Stock Fund
Templeton Stock Class 2 Fund
Investments in the variable subaccounts are stated at the
closing net asset value per share on December 31, 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 subaccounts 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.
R-15
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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%. The mortality and
expense risk charges for each of the variable subaccounts
are reported in the statements of operations.
Prior to the allocation of premiums to the Variable Account,
Lincoln Life deducts a premium load of 8% of each premium
payment to cover state taxes and federal income tax
liabilities and a portion of the sales expenses incurred by
Lincoln Life. The premium loads for the year ended
December 31, 1999 and for the period ended December 31, 1998
amounted to $2,728,737 and $886,635, respectively.
Lincoln Life charges a monthly administrative fee of $12.50
in the first policy year and $5 in subsequent policy years.
In addition, there is a monthly charge of $0.09 per $1,000
of specified amount for the first twenty years of the policy
and for the first twenty years following an increase in
specified amount. If the no lapse provision is in effect
there will also be a monthly charge of $0.01 per $1,000 of
specified amount. This charge is for items such as premium
billing and collection, policy value calculation,
confirmations and periodic reports. Administrative fees for
the year ended December 31, 1999 and the period ended
December 31, 1998 amounted to $1,309,450 and $188,856,
respectively.
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
subaccount 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. The cost of
insurance charges for the year ended December 31, 1999 and
the period ended December 31, 1998 amounted to $245,689 and
$19,118, respectively.
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 subaccounts. For
the year ended December 31, 1999 and the period ended
December 31, 1998, no transfer fees were deducted from the
variable subaccounts.
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 face amount of the policy and the
issue 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 subaccounts for the year ended December 31,
1999 and the period ended December 31, 1998 were $2,725 and
$0, respectively.
R-16
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS
The following is a summary of net assets owned at December 31, 1999.
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED AIM V.I. INTERNATIONAL AIM V.I.
APPRECIATION INCOME GROWTH EQUITY VALUE
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $47,528,442 $ 985,748 $ 807,680 $3,948,372 $ 134,779 $4,619,042
- ---------------------------------- ----------- ---------- --------- ---------- ----------- ----------
Accumulated net investment income
(loss) 1,040,196 31,180 57,093 163,102 4,386 89,055
- ---------------------------------- ----------- ---------- --------- ---------- ----------- ----------
Accumulated net realized gain
(loss) on investments 290,941 16,931 (17,899) 33,083 528 28,128
- ---------------------------------- ----------- ---------- --------- ---------- ----------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 6,352,133 409,951 (66,727) 707,599 31,276 769,262
----------- ---------- --------- ---------- ----------- ----------
$55,211,712 $1,443,810 $ 780,147 $4,852,156 $ 170,969 $5,505,487
=========== ========== ========= ========== =========== ==========
<CAPTION>
BARON BT EAFE
CAPITAL EQUITY BT EQUITY BT SMALL
ASSET INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $ 194,350 $ 148,471 $8,768,602 $ 95,280
- ---------------------------------- --------- --------- ---------- ---------
Accumulated net investment income
(loss) (225) 7,509 64,687 3,581
- ---------------------------------- --------- --------- ---------- ---------
Accumulated net realized gain
(loss) on investments 6,139 220 78,549 910
- ---------------------------------- --------- --------- ---------- ---------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 22,579 17,123 1,085,619 7,446
--------- --------- ---------- ---------
$ 222,843 $ 173,323 $9,997,457 $ 107,217
========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE
DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE DELAWARE
PREMIUM PREMIUM EMERGING SMALL CAP PREMIUM PREMIUM
DELCHESTER DEVON MARKETS VALUE REIT TREND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $ 171,558 $ 31,112 $ 206,993 $1,136,527 $ 4,097 $1,749,782
- ---------------------------------- --------- --------- --------- ---------- --------- ----------
Accumulated net investment income
(loss) 1,103 (18) 1,579 590 (8) (6,822)
- ---------------------------------- --------- --------- --------- ---------- --------- ----------
Accumulated net realized gain
(loss) on investments (350) (4) 2,172 2,039 (2) 29,837
- ---------------------------------- --------- --------- --------- ---------- --------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS (300) 386 81,669 12,902 18 677,270
--------- --------- --------- ---------- --------- ----------
$ 172,011 $ 31,476 $ 292,413 $1,152,058 $ 4,105 $2,450,067
========= ========= ========= ========== ========= ==========
<CAPTION>
FIDELITY FIDELITY FIDELITY FIDELITY
VIP VIP II VIP II VIP II
EQUITY- ASSET CONTRAFUND INVESTMENT
INCOME MANAGER SERVICE CLASS GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $2,044,294 $ 482,894 $ 766,043 $2,127,608
- ---------------------------------- ---------- --------- ---------- ----------
Accumulated net investment income
(loss) 26,518 15,741 (1,289) 30,936
- ---------------------------------- ---------- --------- ---------- ----------
Accumulated net realized gain
(loss) on investments 7,737 408 150 (11,907)
- ---------------------------------- ---------- --------- ---------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 53,181 35,738 76,811 (42,881)
---------- --------- ---------- ----------
$2,131,730 $ 534,781 $ 841,715 $2,103,756
========== ========= ========== ==========
</TABLE>
R-17
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY JANUS
VIP III JANUS ASPEN
GROWTH ASPEN SERIES
OPPORTUNITIES SERIES WORLDWIDE LN CAPITAL LN EQUITY
SERVICE CLASS BALANCED GROWTH LN BOND APPRECIATION INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $ 214,320 $1,102,628 $1,120,135 $ 799,954 $ 473,044 $ 152,201
- ---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
Accumulated net investment income
(loss) (143) 10,893 (1,124) 29,068 (499) 36
- ---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
Accumulated net realized gain
(loss) on investments 2,188 9,778 10,312 (961) 8,084 1,395
- ---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 3,874 84,840 205,233 (28,119) 44,431 7,515
----------- ---------- ---------- --------- ---------- ---------
$ 220,239 $1,208,139 $1,334,556 $ 799,942 $ 525,060 $ 161,147
=========== ========== ========== ========= ========== =========
<CAPTION>
LN GLOBAL MFS
ASSET LN MONEY LN SOCIAL EMERGING
ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $ 37,552 $5,512,461 $ 91,217 $2,578,105
- ---------------------------------- --------- ---------- --------- ----------
Accumulated net investment income
(loss) (32) 221,649 829 (13,304)
- ---------------------------------- --------- ---------- --------- ----------
Accumulated net realized gain
(loss) on investments 1 - 4,360 59,913
- ---------------------------------- --------- ---------- --------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 1,470 - 5,190 1,451,587
--------- ---------- --------- ----------
$ 38,991 $5,734,110 $ 101,596 $4,076,301
========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
OCC
AMT ACCUMULATION OCC TEMPLETON
MFS TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION ASSET
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ----------------------------
Accumulation units $1,179,862 $1,101,000 $ 99,398 $ 58,222 $ 526,876 $ 1,012,566 $ 244,385
- ---------------------------- ---------- ---------- --------- --------- ----------- ----------- ---------
Accumulated net investment
income (loss) 17,483 37,024 (54) (74) 101,874 13,426 18,397
- ---------------------------- ---------- ---------- --------- --------- ----------- ----------- ---------
Accumulated net realized
gain (loss) on
investments 422 9,298 40 64 3,630 387 1,097
- ---------------------------- ---------- ---------- --------- --------- ----------- ----------- ---------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 2,275 220,684 11,917 1,746 20,943 11,578 30,722
---------- ---------- --------- --------- ----------- ----------- ---------
$1,200,042 $1,368,006 $ 111,301 $ 59,958 $ 653,323 $ 1,037,957 $ 294,601
========== ========== ========= ========= =========== =========== =========
<CAPTION>
TEMPLETON TEMPLETON
TEMPLETON INTERNATIONAL TEMPLETON STOCK
INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------
UNIT TRANSACTIONS:
- ----------------------------
Accumulation units $ 2,259,245 $ 346,192 $ 141,854 $ 53,993
- ---------------------------- ----------- ----------- --------- ---------
Accumulated net investment
income (loss) 111,394 (475) 5,157 (27)
- ---------------------------- ----------- ----------- --------- ---------
Accumulated net realized
gain (loss) on
investments 2,573 690 999 2
- ---------------------------- ----------- ----------- --------- ---------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 336,437 31,111 27,320 2,457
----------- ----------- --------- ---------
$ 2,709,649 $ 377,518 $ 175,330 $ 56,425
=========== =========== ========= =========
</TABLE>
R-18
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
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
1999.
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE COST PROCEEDS FROM
OF PURCHASES SALES
----------------------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund $ 898,561 $ 141,201
------------------------------------------------------------
AIM V.I. Diversified Income Fund 1,034,132 551,038
------------------------------------------------------------
AIM V.I. Growth Fund 4,093,892 494,132
------------------------------------------------------------
AIM V.I. International Equity Fund 144,758 5,589
------------------------------------------------------------
AIM V.I. Value Fund 4,415,189 301,820
------------------------------------------------------------
Baron Capital Asset Fund 251,268 57,139
------------------------------------------------------------
BT EAFE Equity Index Fund 161,585 5,601
------------------------------------------------------------
BT Equity 500 Index Fund 8,667,623 1,142,078
------------------------------------------------------------
BT Small Cap Index Fund 243,302 144,439
------------------------------------------------------------
Delaware Premium Delchester Series 205,857 33,558
------------------------------------------------------------
Delaware Premium Devon Series 31,264 169
------------------------------------------------------------
Delaware Premium Emerging Markets Series 98,908 17,637
------------------------------------------------------------
Delaware Premium Small Cap Value Series 989,552 106,174
------------------------------------------------------------
Delaware Premium REIT Series 4,136 47
------------------------------------------------------------
Delaware Premium Trend Series 1,582,829 186,248
------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 1,565,652 108,024
------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 335,521 64,680
------------------------------------------------------------
Fidelity VIP II Contrafund Service Class Portfolio 774,389 9,617
------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 1,820,932 423,427
------------------------------------------------------------
Fidelity VIP III Growth Opportunities Service Class
Portfolio 369,606 155,424
------------------------------------------------------------
Janus Aspen Series Balanced Portfolio 1,341,281 227,735
------------------------------------------------------------
Janus Aspen Series Worldwide Growth Portfolio 1,271,038 151,999
------------------------------------------------------------
LN Bond Fund 864,566 35,527
------------------------------------------------------------
LN Capital Appreciation Fund 564,150 91,594
------------------------------------------------------------
LN Equity-Income Fund 275,524 123,284
------------------------------------------------------------
LN Global Asset Allocation Fund 37,687 166
------------------------------------------------------------
LN Money Market Fund 18,220,298 17,402,502
------------------------------------------------------------
LN Social Awareness Fund 380,863 288,815
------------------------------------------------------------
MFS Emerging Growth Series 2,617,099 469,487
------------------------------------------------------------
MFS Total Return Series 1,170,589 106,927
------------------------------------------------------------
MFS Utilities Series 1,149,028 219,739
------------------------------------------------------------
AMT Mid-Cap Growth Portfolio 99,935 589
------------------------------------------------------------
AMT Partners Portfolio 63,580 5,431
------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 525,174 30,854
------------------------------------------------------------
OCC Accumulation Managed Portfolio 1,008,995 80,228
------------------------------------------------------------
Templeton Asset Allocation Fund 199,675 25,479
------------------------------------------------------------
Templeton International Fund 1,720,759 98,602
------------------------------------------------------------
Templeton International Class 2 Fund 357,482 11,757
------------------------------------------------------------
Templeton Stock Fund 125,860 14,157
------------------------------------------------------------
Templeton Stock Class 2 Fund 54,114 147
------------------------------------------------------------
----------- -----------
$59,736,653 $23,333,061
=========== ===========
</TABLE>
R-19
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
The following is a summary of investments owned at
December 31, 1999.
<TABLE>
<CAPTION>
NET
SHARES ASSET VALUE OF
OUTSTANDING VALUE SHARES COST OF SHARES
---------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 40,580 $35.58 $ 1,443,841 $ 1,033,890
------------------------------------------------------------
AIM V.I. Diversified Income Fund 77,551 10.06 780,164 846,891
------------------------------------------------------------
AIM V.I. Growth Fund 150,457 32.25 4,852,254 4,144,655
------------------------------------------------------------
AIM V.I. International Equity Fund 5,837 29.29 170,973 139,697
------------------------------------------------------------
AIM V.I. Value Fund 164,346 33.50 5,505,605 4,736,343
------------------------------------------------------------
Baron Capital Asset Fund 12,541 17.77 222,847 200,268
------------------------------------------------------------
BT EAFE Equity Index Fund 12,744 13.60 173,327 156,204
------------------------------------------------------------
BT Equity 500 Index Fund 658,608 15.18 9,997,669 8,912,050
------------------------------------------------------------
BT Small Cap Index Fund 9,235 11.61 107,219 99,773
------------------------------------------------------------
Delaware Premium Delchester Series 23,133 7.42 171,649 171,949
------------------------------------------------------------
Delaware Premium Devon Series 2,311 13.62 31,477 31,091
------------------------------------------------------------
Delaware Premium Emerging Markets Series 34,811 8.40 292,419 210,750
------------------------------------------------------------
Delaware Premium Small Cap Value Series 75,005 15.36 1,152,083 1,139,181
------------------------------------------------------------
Delaware Premium REIT Series 473 8.67 4,105 4,087
------------------------------------------------------------
Delaware Premium Trend Series 72,790 33.66 2,450,120 1,772,850
------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 82,916 25.71 2,131,776 2,078,595
------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 28,645 18.67 534,793 499,055
------------------------------------------------------------
Fidelity VIP II Contrafund Service Class Portfolio 28,926 29.10 841,733 764,922
------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 173,010 12.16 2,103,802 2,146,683
------------------------------------------------------------
Fidelity VIP III Growth Opportunities Service Class
Portfolio 9,526 23.12 220,244 216,370
------------------------------------------------------------
Janus Aspen Series Balanced Portfolio 43,272 27.92 1,208,164 1,123,324
------------------------------------------------------------
Janus Aspen Series Worldwide Growth Portfolio 27,949 47.75 1,334,584 1,129,351
------------------------------------------------------------
LN Bond Fund 69,953 11.44 799,959 828,078
------------------------------------------------------------
LN Capital Appreciation Fund 16,687 31.47 525,071 480,640
------------------------------------------------------------
LN Equity-Income Fund 7,310 22.05 161,150 153,635
------------------------------------------------------------
LN Global Asset Allocation Fund 2,322 16.79 38,992 37,522
------------------------------------------------------------
LN Money Market Fund 573,424 10.00 5,734,236 5,734,236
------------------------------------------------------------
LN Social Awareness Fund 2,294 44.29 101,598 96,408
------------------------------------------------------------
MFS Emerging Growth Series 107,443 37.94 4,076,388 2,624,801
------------------------------------------------------------
MFS Total Return Series 67,610 17.75 1,200,068 1,197,793
------------------------------------------------------------
MFS Utilities Series 56,624 24.16 1,368,036 1,147,352
------------------------------------------------------------
AMT Mid-Cap Growth Portfolio 4,581 24.30 111,303 99,386
------------------------------------------------------------
AMT Partners Portfolio 3,053 19.64 59,959 58,213
------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 39,454 16.56 653,337 632,394
------------------------------------------------------------
OCC Accumulation Managed Portfolio 23,780 43.65 1,037,980 1,026,402
------------------------------------------------------------
Templeton Asset Allocation Fund 12,606 23.37 294,607 263,885
------------------------------------------------------------
Templeton International Fund 121,785 22.25 2,709,708 2,373,271
------------------------------------------------------------
Templeton International Class 2 Fund 17,059 22.13 377,526 346,415
------------------------------------------------------------
Templeton Stock Fund 7,189 24.39 175,334 148,014
------------------------------------------------------------
Templeton Stock Class 2 Fund 2,323 24.29 56,426 53,969
------------------------------------------------------------ ----------- -----------
$55,212,526 $48,860,393
=========== ===========
</TABLE>
R-20
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, LN Social Awareness 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.
R-21
<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 R
We have audited the accompanying statement of assets and
liability of Lincoln Life Flexible Premium Variable Life Account
R ("Variable Account") (comprised of the AIM V.I. Capital
Appreciation, AIM V.I. Diversified Income, AIM V.I. Growth, AIM
V.I. International Equity, AIM V.I. Value, Baron Capital Asset,
BT EAFE Equity Index, BT Equity 500 Index, BT Small Cap Index,
Delaware Premium Delchester, Delaware Premium Devon, Delaware
Premium Emerging Markets, Delaware Premium Small Cap Value,
Delaware Premium REIT, Delaware Premium Trend, Fidelity VIP
Equity-Income, Fidelity VIP II Asset Manager, Fidelity VIP II
Contrafund Service Class, Fidelity VIP II Investment Grade Bond,
Fidelity VIP III Growth Opportunities Service Class, Janus Aspen
Series Balanced, Janus Aspen Series Worldwide Growth, Lincoln
National Bond, Lincoln National Capital Appreciation, Lincoln
National Equity-Income, Lincoln National Global Asset
Allocation, Lincoln National Money Market, Lincoln National
Social Awareness, MFS Emerging Growth, MFS Total Return, MFS
Utilities, Neuberger Berman Advisers Management Trust (AMT)
Mid-Cap Growth, Neuberger Berman Advisers Management Trust (AMT)
Partners, OCC Accumulation Global Equity, OCC Accumulation
Managed, Templeton Variable Products Asset Allocation, Templeton
Variable Products International, Templeton Variable Products
International Class 2, Templeton Variable Products Stock and
Templeton Variable Products Stock Class 2 subaccounts), as of
December 31, 1999 and the related statements of operations and
changes in net assets for the year ended December 31, 1999 and
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 audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. 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, 1999, by correspondence
with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of each of the respective subaccounts constituting the Lincoln
Life Flexible Premium Variable Life Account R at December 31,
1999, and the results of their operations and the changes in
their net assets for the year ended December 31, 1999 and for
the period from June 18, 1998 to December 31, 1998, in
conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 24, 2000
R-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
- ------------------------------------------------------------
Preferred stocks 253.8 236.0
- ------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
- ------------------------------------------------------------
Affiliated common stocks 604.7 322.1
- ------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
- ------------------------------------------------------------
Real estate 254.0 473.8
- ------------------------------------------------------------
Policy loans 1,652.9 1,606.0
- ------------------------------------------------------------
Other investments 426.6 434.4
- ------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
- ------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
- ------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
- ------------------------------------------------------------
Accrued investment income 435.3 432.8
- ------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
- ------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
- ------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
- ------------------------------------------------------------
Goodwill 43.1 49.5
- ------------------------------------------------------------
Other admitted assets 66.7 89.3
- ------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
- ------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
- ------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
- ------------------------------------------------------------
Asset valuation reserve 490.9 484.5
- ------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
- ------------------------------------------------------------
Other liabilities 627.0 504.5
- ------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
- ------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
- ------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
- ------------------------------------------------------------
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 1,250.0
- ------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
- ------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
- ------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
- ------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
- ------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
- ------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
- ------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
- ------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
- ------------------------------------------------------------
Other income 88.8 31.3 21.3
- ------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
- ------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
- ------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
- ------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
- ------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
- ------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
- ------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
- ------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
- ------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
- ------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
- ------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
- ------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
- ------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
- ------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
- ------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
- ------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
- ------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
- ------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
- ------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
- ------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
- ------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
- ------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
- ------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
- ------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
- ------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
- ------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
- ------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
- ------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
- ------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
- ------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
- ------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
- ------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
- ------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
- ------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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 a 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
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred 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 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 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 are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
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
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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 reserves released and 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 the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent 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.
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") effective January 1, 2001. 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.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
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
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</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 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
---------------------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
---------------------------------------------------
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
---------------------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-------------------------------------------------
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
------------------------------------------------
<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>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
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, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, 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 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in 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
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
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
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 "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<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>
7. ANNUITY RESERVES
At December 31, 1999, 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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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 Corporation ("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
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, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("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, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
- ----------- -------------- -------------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $500.0 $500.0 $32.8 $65.1 $ --
- --------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
- --------------------------------
</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,
1999, 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, 1999 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. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. 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-19
<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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, 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.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented 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. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances, companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. 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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American States 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 LNY reinsured 100% of a block of individual life
insurance and annuity business from 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 $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
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.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable 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 September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. 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 $2,813,800,000
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 LNY 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.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, 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, 1999, 29% of such mortgages ($1,212,700,000) 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 $70,000,000.
At December 31, 1999, 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 certain 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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, 1999 and 1998 were $25,900,000 and $30,900,000, 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, 1999 and 1998.
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 and foreign exchange
risks. In addition, the Company is subject to the risks associated with
changes in the value of its derivatives; however, such changes in value
generally are offset by changes in the value of the items being hedged by
such contracts.
Outstanding derivatives with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values,
are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
------------------------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
------------------------------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
------------------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
INTEREST RATE CAPS SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 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
investments (amortized cost of $12.2 million as of December 31, 1999) 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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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 blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. However, the Company does
not anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
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-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
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.
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 $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, 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 none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
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
1999 1998 1997
-------------------------------------
(IN MILLIONS)
-------------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included 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 Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards
generally accepted in the United States. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
January 31, 2000
S-32
<PAGE>
PROSPECTUS 2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
HOME OFFICE LOCATION:
1300 SOUTH CLINTON STREET
P.O. BOX 1110
FORT WAYNE, INDIANA 46802
(800) 454-6265
ADMINISTRATIVE OFFICE
PERSONAL SERVICE CENTER MVLI
350 CHURCH STREET
HARTFORD, CT 06103-1106
(800) 444-2363
- --------------------------------------------------------------------------------
A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
BENEFITS PAYABLE ON DEATH OF SECOND OF TWO INSUREDS
- --------------------------------------------------------------------------------
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 provides death
benefits when the second of the two named Insureds dies (a "Second Death
Policy").
The Policy features include:
- 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.
You may allocate net premiums to the Sub-Accounts of our Flexible Premium
Variable Life Account R ("Separate Account"). Each Sub-Account invests in one of
the Funds listed below:
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
AMERICAN FUNDS INSURANCE SERIES
(ALSO KNOWN AS 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
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
(FORMERLY BT INSURANCE FUNDS TRUST)
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
DELAWARE GROUP PREMIUM FUND
Devon Series -- Standard Class
Emerging Markets Series -- Standard Class
High Yield Series -- Standard Class
(formerly Delchester Series)
REIT Series -- Standard Class
Small Cap Value Series -- Standard Class
Trend Series -- Standard Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Growth Portfolio -- Service Class
High Income Portfolio -- Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Contrafund Portfolio -- Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III
Growth Opportunities Portfolio -- Service Class
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Templeton Growth Securities Fund -- Class 2
(formerly Templeton Stock Fund)
Templeton International Securities Fund -- Class 2
(formerly Templeton International Fund)
JANUS ASPEN SERIES
Janus Aspen Balanced Portfolio -- Institutional Shares
Janus Aspen Global Technology Portfolio -- Service Shares
Janus Aspen Worldwide Growth Portfolio -- Institutional Shares
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
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, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
PROSPECTUS DATED: MAY 1, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
- -------- --------
<S> <C>
HIGHLIGHTS............................ 3
Initial Choices To Be Made.......... 3
Level or Varying Death Benefit...... 3
Amount of Premium Payment........... 4
Selection of Funding Vehicles....... 4
Charges and Fees.................... 5
Changes in Specified Amount......... 6
LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT.................. 6
BUYING VARIABLE LIFE INSURANCE........ 7
Replacements........................ 8
APPLICATION........................... 8
OWNERSHIP............................. 9
BENEFICIARY........................... 9
INSUREDS.............................. 10
THE POLICY............................ 10
Policy Specifications............... 10
PREMIUM FEATURES...................... 10
Planned Premiums; Additional
Premiums........................... 10
Limits on Right to Make Payments
of Additional and Planned
Premiums......................... 11
Premium Load; Net Premium
Payment.......................... 11
RIGHT-TO-EXAMINE PERIOD............... 11
TRANSFERS AND ALLOCATION AMONG
ACCOUNTS............................. 12
Allocation of Net Premium
Payments........................... 12
Transfers........................... 12
Optional Sub-Account Allocation
Programs........................... 12
Dollar Cost Averaging............. 13
Automatic Rebalancing............. 13
POLICY VALUES......................... 13
Accumulation Value.................. 14
Separate Account Value.............. 14
Variable Accumulation Unit
Value............................ 14
Variable Accumulation Units....... 14
Fixed Account and Loan Account
Value.............................. 15
Net Accumulation Value.............. 15
FUNDS................................. 15
Substitution of Securities.......... 20
Voting Rights....................... 21
Fund Participation Agreements....... 21
CHARGES AND FEES...................... 21
Deductions from Premium Payments.... 21
Deductions Made Monthly............. 21
Monthly Deduction................. 22
Cost of Insurance Charge.......... 22
Mortality and Expense Risk Charge
and Fund Expenses................ 22
Fund Expenses....................... 23
Surrender Charges................... 26
Transaction Fee for Excess
Transfers.......................... 27
DEATH BENEFITS........................ 27
Death Benefit Options............... 27
Changes in Death Benefit Options and
Specified Amount................... 28
Federal Income Tax Definition of
Life Insurance..................... 28
</TABLE>
<TABLE>
<CAPTION>
CONTENTS PAGE
- -------- --------
<S> <C>
NOTICE OF DEATH OF INSUREDS........... 29
PAYMENT OF DEATH BENEFIT PROCEEDS..... 29
Settlement Options.................. 29
POLICY LIQUIDITY...................... 30
Policy Loans........................ 30
Partial Surrender................... 31
Surrender of the Policy............. 31
Surrender Value................... 31
Deferral of Payment and Transfers... 31
ASSIGNMENT; CHANGE OF OWNERSHIP....... 32
LAPSE AND REINSTATEMENT............... 32
Lapse of a Policy................... 32
No Lapse Provision................ 32
Reinstatement of a Lapsed Policy.... 33
COMMUNICATIONS WITH LINCOLN LIFE...... 33
Proper Written Form................. 33
Telephone Transaction Privileges.... 33
OTHER POLICY PROVISIONS............... 34
Issuance............................ 34
Date of Coverage.................... 34
Right to Exchange the Policy........ 34
Incontestability.................... 34
Misstatement of Age or Gender....... 35
Suicide............................. 35
Nonparticipating Policies........... 35
Riders.............................. 35
TAX ISSUES............................ 35
Taxation of Life Insurance Contracts
in General......................... 36
Policies which are MECS............. 37
Policies which are not MECS......... 38
Last Survivor Contract............ 38
Other Considerations................ 38
Tax Status of Lincoln Life.......... 39
Other Considerations................ 39
FAIR VALUE OF THE POLICY.............. 40
DIRECTORS AND OFFICERS OF LINCOLN
LIFE................................. 40
DISTRIBUTION OF POLICIES.............. 42
CHANGES OF INVESTMENT POLICY.......... 42
OTHER CONTRACTS ISSUED BY LINCOLN
LIFE................................. 42
STATE REGULATION...................... 42
REPORTS TO OWNERS..................... 43
ADVERTISING........................... 43
LEGAL PROCEEDINGS..................... 43
EXPERTS............................... 43
REGISTRATION STATEMENT................ 44
APPENDIX 1............................ 45
CORRIDOR PERCENTAGES................ 45
APPENDIX 2............................ 46
ILLUSTRATION OF ACCUMULATION VALUES,
SURRENDER VALUES, AND DEATH BENEFIT
PROCEEDS........................... 46
FINANCIAL STATEMENTS..................
Separate Account.................... R-1
Lincoln Life........................ S-1
</TABLE>
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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. Your Policy insures two Insureds. If one
of the Insureds dies, the Policy pays no death benefit. Your
Policy will pay the death benefit only when the second
Insured dies. A "second-to-die" policy might be suitable
when both of the Insureds have income of their own and only
want to provide financial support for their dependents if
both of them should die, or to provide liquidity to heirs
when the Second Insured dies. If replacement income or
immediate cash liquidity is needed upon the death of one
Insured, this type of policy may not be suitable.
The Policy's 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
"second-to-die" variable life insurance policy. As a death
benefit is only paid upon the second Insured's death, this
Policy may, or may not, be appropriate for your financial
goals. The value of the Policy and, under one option, the
death benefit amount, depends 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.
If you are entitled to favorable tax treatment, you should
satisfy yourself that this Policy meets your other financial
goals before you purchase it.
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. You, as the Owner, have three 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.
LEVEL OR VARYING DEATH BENEFIT
The Death Benefit is the amount Lincoln pays to the
Beneficiary(ies) when the second 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 of the second Insured's death.
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.
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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 second Insured
died (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. The
Net Accumulation Value is the total of the balances in the
Fixed Account and the Separate Account minus any outstanding
Loan Account amounts.
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 when
the second Insured died; or
2) the Corridor Death Benefit.
See "Death Benefits," page 27, for more details.
AMOUNT OF PREMIUM PAYMENT
When you apply for your Policy, you must decide how much
premium to pay. Premium payments may be changed within
certain limits (See "Premium Features," page 11.)
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 "Charges and
Fees," page 21.) increase as the Insureds get older.
If your Policy lapses because your Monthly Premium Deduction
is larger than the Net Accumulation Value, you may reinstate
your Policy. ("See Lapse and Reinstatement," page 32.)
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" time period. Use this time
to review your Policy and make sure that it meets your
needs. During this time 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
"Right-to-Examine Period," page 11.)
SELECTION OF FUNDING VEHICLES
VARIABLE ACCOUNT
This Prospectus focuses on the Separate Account investment
information that makes up the "variable" part of the Policy.
If you put money into the variable funds, you take all the
investment risk on that money. This means that if the mutual
funds(s) you select go up in value, the value of your
Policy, net of charges and expenses, also goes up. If they
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. These "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 "Funds," beginning on
page 15.)
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<PAGE>
FIXED ACCOUNT
You may also use Lincoln Life's Fixed Account to fund your
Policy. Net Premium Payments made into the Fixed Account:
- become part of Lincoln Life's 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 Lincoln Life's
discretion. For additional information, see the "General
Account".
CHARGES AND FEES
We deduct a premium load of 8% from each Premium Payment. We
make monthly deductions for administrative expenses
(currently, $12.50 per month for the first Policy Year and
$5 per month afterwards), the Cost of Insurance and any
riders that are placed on your Policy. For Policy Years
1-20, a monthly charge of $0.09 per $1,000 of Specified
Amount is deducted. If the No-Lapse Provision is selected,
there will be an additional monthly charge of $0.01 per
$1,000 of Specified Amount. (Note: the No-Lapse provision is
not available in IL, MA, MD, NJ and TX.) (See "Charges and
Fees," page 21.)
Daily deductions are subtracted from the Separate Account
for mortality and expense risk. Currently, this charge is at
an annual rate of .80%. (See "Charges and Fees," page 21.)
Each Fund has its own management fee charge, also deducted
daily. Each Fund's expense levels will affect its investment
results. The table under "Charges and Fees," page 23, shows
you the current expense levels for each Fund.
Each Policy Year you will be allowed to make 12 transfers
between funding options. Beyond 12, a $25 fee may apply.
(See "Transfers," page 12.)
You may surrender the Policy in full or withdraw part of its
value. A Surrender Charge is applied if the Policy is
surrendered totally and is the amount retained by us if the
Policy is surrendered. We charge you an administrative fee
of $25, but not more than 2% of the amount withdrawn, each
time you request a partial surrender of your Policy. If you
totally surrender your Policy within the first 15 years, a
surrender charge will be deducted in computing what will be
paid you. If you surrender your Policy within the first 15
years after an increase in the Specified Amount, a surrender
charge will also be imposed, in addition to any existing
surrender charge. (See "Charges and Fees," page 26.) The
maximum surrender charge payable is $37.48 per $1,000 of
Specified Amount.
You may borrow within described limits against the Policy.
If you borrow against your Policy, interest will be charged
to the Loan Account. Currently, the annual interest rate is
8%. For the first ten Policy Years interest will be credited
to the Loan Account Value at the annual rate of interest
charged for a loan minus 1%. For Policy Years eleven and
beyond, interest will be credited at an annual rate equal to
the current interest charged. (See "Policy Liquidity," page
30.)
CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount is the amount originally chosen
by the Policy Owner and is equal to the Death Benefit.
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<PAGE>
Within certain limits, you may decrease or, with
satisfactory evidence of insurability, increase the
Specified Amount. The minimum specified amount is currently
$250,000. Such changes will affect other aspects of your
Policy. (See "Death Benefits," page 27.)
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 R
("Account R") is a "separate account" of the company
established on December 2, 1997. Under Indiana law, the
assets of Account R 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 R income, gains,
and losses are credited to or charged against Account R
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
("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 R's or our management, investment
practices, or policies. We have numerous other registered
separate accounts which fund our variable life insurance
policies and variable annuity contracts.
Account R 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),
Net Premium Payments allocated to Account R will be invested
in Fund shares at net asset value, and monies necessary to
pay for deductions, charges, transfers and surrenders from
Account R are raised by selling Fund shares at net asset
value.
The Funds are listed with their investment objectives, which
they may or may not achieve (See "Funds," pages 15-20.) 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, and 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 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
6
<PAGE>
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.
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, if elected, 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 fund options available, it is possible to
finetune 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.
And 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
7
<PAGE>
life insurance. Unless a policy has become a "modified
endowment contract" (See "Tax Issues," page 37.) 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 Insureds' ages. (See "Death Benefit," page
27.) The death benefit is income-tax free and may, with
proper estate planning, be estate-tax free. A tax advisor
should be consulted.
Certain costs and expenses of variable life insurance
ownership which are directly related to Policy values (i.e.
asset based costs) are not unlike those incurred through
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 2) 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, a number of matters should be considered
by the applicant. 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? For example, the
Insureds may no longer be insurable, or the contestability
period may have elapsed with respect to the existing policy,
while the Policy could be contested. The Owner 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 an
application on a form provided by Lincoln Life.
A complete application identifies the prospective Insureds
and provides sufficient information about them to permit
Lincoln Life to begin underwriting the risks under the
Policy. We require a medical history and examination of each
of the Insureds. Lincoln Life may decline to provide
insurance on the lives of the Insureds or, if it agrees to
provide insurance, it may place one or both Insureds 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 Insureds.
The applicant will select the Beneficiary or Beneficiaries
who are to receive Death Benefit Proceeds payable on the
Second Death, 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.") The applicant will also indicate
8
<PAGE>
both the frequency and amount of Premium Payments. (See
PREMIUM FEATURES). The applicant must also determine 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 Insureds are 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 lives of each of the Insureds
under applicable state law. The Owner may be either or both
of the Insureds, or any other natural person or non-natural
entity. The Owner owns and exercises the rights under the
Policy prior to the Second Death.
The Owner is the person who is ordinarily entitled to
exercise the rights under the Policy so long as either of
the Insureds is living. These rights include the power to
select the Beneficiary 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 is a person other than the last surviving
Insured, and that Owner dies before the Second Death, the
Owner's rights in the Policy will belong to the Owner's
estate, unless otherwise specified to Lincoln Life.
BENEFICIARY
The Beneficiary is designated by the owner or the Applicant
and is the person who will 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 Beneift under the Policy.
Multiple Beneficiaries will be paid in equal shares, unless
otherwise specified to Lincoln Life.
Except when Lincoln Life has acknowledged an assignment of
the Policy or an agreement not to change the Beneficiary,
the Owner may change the Beneficiary at any time while
either of the Insureds is living. Any request for a change
in the Beneficiary must be in a written form satisfactory to
Lincoln Life and submitted to Lincoln Life. Unless the Owner
has reserved the right to change the Beneficiary, such a
request must be signed by both the Owner and the
Beneficiary. On recordation, the change of Beneficiary 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 Lincoln Life as to, any payment made or
action taken by Lincoln Life before it was recorded.
If any Beneficiary dies before the Second Death, the
Beneficiary's potential interest shall pass to any surviving
Beneficiaries, unless otherwise specified to Lincoln Life.
If no named Beneficiary survives the Second Death, any Death
Benefit Proceeds will be paid to the Owner or the Owner's
executor, administrator or assignee.
INSUREDS
There are two Insureds under the Policy. At the Date of
Issue of the Policy the Owner must have an insurable
interest in each of the Insureds. On the Second Death, a
Death Benefit is payable under the Policy.
9
<PAGE>
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. A Policy Year is the
twelve month period, beginning on 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, a Policy will be delivered to the Owner. The
Policy sets forth the terms of the Policy, as applicable to
the Owner, and should be reviewed by the Owner on receipt 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
the books and records of Lincoln Life. Possession of the
Policy does not represent ownership or the right to exercise
the incidents of ownership with respect to the Policy. If
the Owner loses the form of Policy, Lincoln Life will issue
a replacement on request. Lincoln Life may impose a Policy
replacement fee.
POLICY SPECIFICATIONS
The Policy includes a "Policy Specifications" page, with
supporting schedules, in which is set forth certain
information applicable to the specific Policy. This
information includes the identity of the Owner, the Date of
Issue, the Initial Specified Amount, the Death Benefit
Option selected, the Insureds, the issue Ages, the
Beneficiary, the initial Premium Payment, the Surrender
Charges, Expense Charges and Fees, Guarantee Maximum Cost of
Insurance Rates, and the No Lapse Premium if the No Lapse
Provision has been selected.
PREMIUM FEATURES
The Policy permits flexible premium payments, meaning that
the frequency and the amount of Premium Payments may be
selected by the Owner. After the Initial Premium Payment is
paid there is no minimum premium required, unless to
maintain the No Lapse Provision. (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 or, if selected, the No Lapse Premium.
If at least one of the Insureds is still living when the
younger Insured attains or would have attained Age 100, and
the Policy has not been surrendered, there are certain
changes under the Policy. We will no longer accept Premium
Payments, and will make no further monthly deductions.
Policy Values held in the Separate Account will be
transferred to the Fixed Account. We will no longer transfer
amounts to Sub-Accounts. The Policy will remain in force
until surrender or the Second Death.
PLANNED PREMIUMS; ADDITIONAL PREMIUMS
"Planned Premiums" are the amount of premium (as shown in
the Policy Specifications) the applicant chooses to pay
Lincoln Life on a scheduled basis. This is the amount for
which we send a premium reminder notice.
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<PAGE>
Any subsequent Premium Payments ("Additional Premiums") must
be sent directly to the Administrative Office. Additional
Premiums will be credited only when actually received by
Lincoln Life. Premium Payments may be billed with an annual,
semiannual, or quarterly frequency. 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.
LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
The Owner may increase Planned Premiums, or pay Additional
Premiums, subject to the following limitations and Lincoln
Life's right to limit the amount or frequency of Additional
Premiums.
Lincoln Life 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 Lincoln Life is unwilling to
accept the risk, the increase in premium will be refunded
without interest and without participation of such amounts
in any underlying investment.
Lincoln Life may also decline 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. The
excess amount would be returned.
PREMIUM LOAD; NET PREMIUM PAYMENT
Lincoln Life deducts 8.0% from each Premium Payment. This
amount, sometimes referred to as "premium load," covers
certain Policy-related state tax and federal income tax
liabilities and a portion of the sales expenses incurred by
Lincoln Life. The Premium Payment, net of the premium load,
is called the "Net Premium Payment."
RIGHT-TO-EXAMINE PERIOD
The Owner may return the Policy to Lincoln Life for
cancellation as follows. If the Owner mails or delivers the
Policy 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) and notice of surrender rights to the Owner,
Lincoln Life will refund to the Owner all Premium Payments.
Any Premium Payments received by Lincoln Life 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 a
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 any
refund of a Premium Payment made by check may be delayed
until the check clears.
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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. An Owner may change the allocation of future
Net Premium Payments at any time. In any allocation, the
amount allocated to any Sub-Account must be in whole
percentages. No allocation can be made which would result in
a Sub-Account Value of less than $50 or a Fixed Account
Value of less than $2,500. Lincoln Life, at its sole
discretion, may waive minimum balance requirements on the
Sub-Accounts.
TRANSFERS
The Owner may make transfers among the Sub-Accounts, on the
terms set forth below, at any time before the younger
Insured reaches or would have reached Age 100. The Owner
should carefully consider current market conditions and each
Sub-Account's investment policies and related risks before
allocating money to the Sub-Accounts.
Transfer of amounts of at least $500 from one Sub-Account to
another or from the Sub-Accounts to the Fixed Account are
possible at any time. Within 30 days after each anniversary
of the Date of Issue, the Owner may transfer up to 20% of
the Fixed Account Value (as of the preceding anniversary of
the Date of Issue) to one or more Sub-Accounts. 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 a Sub-Account after a
transfer must be at least $500. Lincoln Life reserves the
right to impose a charge for each transfer request in excess
of 12 requests in any Policy Year. Lincoln Life may further
limit transfers from the Fixed Account at any time.
Transfers must be made in proper written form, unless the
Owner has given written authorization to Lincoln Life to
accept telephone transactions. Authorization to engage in
telephone transactions and permitted telephone transactions
must be made in accordance with the procedures 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
effected 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 $500 will 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
The Owner may elect to participate in programs providing for
Dollar Cost Averaging or Automatic Rebalancing, but may
participate in only one program at any time.
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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
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, an Owner may reduce exposure to market
volatility. Dollar Cost Averaging will not assure a profit
or protect against a declining market.
If the Owner elects 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 a request from the Owner 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. Lincoln Life may, in its sole
discretion, 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.
Currently, there is no charge for Dollar Cost Averaging, but
Lincoln Life reserves the right to impose a charge.
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 changed by the
Owner. If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts will be subject to
Automatic Rebalancing.
The Owner 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 upon receipt by the
Administrative Office of a request in proper written form or
by telephone, if adequately authenticated.
Currently, there is no charge for Automatic Rebalancing, but
Lincoln Life reserves the right to impose a charge.
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 fund 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
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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 which remain credited to
the Policy, the current Accumulation Unit values, the
Sub-Account values, the Fixed Account Value and the Loan
Account Value.
ACCUMULATION VALUE
The portion of a Premium Payment, after the 8.0% reduction
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 the 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.
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 thereafter 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
A "Variable Accumulation Unit" is a unit of measure used in
the calculation of the value of each Sub-Account. The
Variable Accumulation Unit value will be as determined for
the Valuation Period during which a Premium Payment or
request for transfer is received by Lincoln Life. The
Variable Accumulation Unit value for a Sub-Account for any
later 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
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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 (2) is divided by the number of Variable
Accumulation Units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation
Period are 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 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 Lincoln Life's general account through
payment of premiums or through transfers from the Separate
Account. Lincoln Life guarantees 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.
FUNDS
Each of the Sub-Accounts of the Separate Account is invested
solely in the shares of one of the Funds available under the
Policies. Each of the Funds, in turn, is an investment
portfolio of one of the trusts or corporations listed below.
Each portfolio described below is an investment vehicle for
one or more insurance company separate accounts. A given
portfolio may have a similar investment objective and
principal investment strategy to those for another mutual
fund managed by the same investment advisor or subadvisor.
However, because of timing of investments and other
variables we cannot guarantee there will be any correlation
between the two investments. Even though the management
objectives of the fund are similar, the investment results
may vary.
The portfolios, their investment advisers and distributors,
and the Funds within each that are available under the
Policies:
AIM VARIABLE INSURANCE FUNDS, 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
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<PAGE>
AMERICAN FUNDS INSURANCE SERIES (FORMERLY 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
AFIS Global Small Capitalization Fund -- Class 2
AFIS Growth Fund -- Class 2
AFIS 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
DELAWARE GROUP PREMIUM FUND, managed by Delaware Management
Company, One Commerce Square, Philadelphia, PA 19103 and for
International and Emerging Markets, Delaware International
Advisers, Ltd., 80 Cheapside, London, England ECV2 6EE, and
distributed by Delaware Distributors, L.P., 1818 Market
Street, Philadelphia, PA 19103
Devon Series -- Standard Class
Emerging Markets Series -- Standard Class
High Yield Series -- Standard Class (formerly Delchester
Series)
REIT Series -- Standard Class
Small Cap Value Series -- Standard Class
Trend Series -- Standard Class
DEUTSCHE ASSET MANAGEMENT VIT FUNDS TRUST (FORMERLY BT
INSURANCE FUNDS TRUST), managed by Bankers Trust Company,
130 Liberty Street (One Bankers Trust Plaza), New York, NY
10006 and distributed by Provident Distributors, Inc., Four
Falls Corporate Center, West Conshohocken PA 19428
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
FIDELITY VARIABLE INSURANCE PRODUCTS FUND, 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 Growth -- Service Class
Fidelity VIP High Income -- Service Class
Fidelity VIP II Contrafund Portfolio -- Service Class
Fidelity VIP III Growth Opportunities Portfolio --
Service Class
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST,
managed by Templeton Investment Counsel, Inc. Broward
Financial Centre, STE 2100 Fort Lauderdale FL 33394 and its
Templeton and Franklin affiliates and distributed by
Franklin Templeton Distributors, Inc. 777 Mariners Island
Blvd. San Mateo CA 94403-7777
Templeton Growth Securities Fund -- Class 2 (formerly
Templeton International Fund)
Templeton International Securities Fund -- Class 2
(formerly Templeton Stock Fund)
JANUS ASPEN SERIES, managed by Janus Capital and distributed
by Janus Distributors, Inc., 100 Fillmore Street, Denver, CO
80206-4928.
Janus Aspen Series Balanced Portfolio -- Institutional
Shares
Janus Aspen Series Global Technology Portfolio --
Service Shares
Janus Aspen Series Worldwide Growth Portfolio --
Institutional Shares
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<PAGE>
LINCOLN NATIONAL FUNDS, managed by Lincoln Investment
Management, Inc., 200 East Berry Street, Fort Wayne IN
46802, and distributed by Lincoln Financial
Advisors, Corp., 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.)
Lincoln Investment Management, Inc. (Lincoln Investment) has
informed the funds to which it provides advisory services
that it intends to merge into a newly created series of its
affiliate, Delaware Management Business Trust, during the
second or third quarter of 2000. Lincoln Investment does not
expect the merger to result in any change in the level of
advisory services that it currently provides to these funds,
although there may be some changes in, and additions to,
personnel. See the prospectuses for these funds for more
information.
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 Neuberger Berman Management Inc., 605 Third
Avenue, 2nd Floor, New York, NY 10158-0006
NB AMT Mid-Cap Growth Portfolio
NB AMT Partners Portfolio
The investment advisory fees charged the Funds by their
advisers are shown listed under "Fund Expenses" in 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.
The investment objectives and policies of certain trusts are
similar to the investment objectives and policies of other
funds that may be managed by the same investment adviser.
The investment results of the Trusts, however, may be higher
or lower than the results of such other funds. There can be
no assurance, and no representation is made, that the
investment results of any of the Trusts will be comparable
to the investment results of any other Fund, even if the
other fund has the same investment adviser.
AIM V.I. GROWTH FUND: Seeks growth of capital primarily by
investing in seasoned and better capitalized companies
considered to have strong earnings momentum. Focus is on
companies that have experienced above-average growth in
earnings and have excellent prospects for future growth.
AIM V.I. INTERNATIONAL EQUITY FUND: 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.
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<PAGE>
AIM V.I. VALUE FUND: 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.
AFIS GLOBAL SMALL CAPITALIZATION 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 capitalization 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.
AFIS GROWTH FUND: Seeks to make you investment grow over
time 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.
AFIS GROWTH-INCOME 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: Seeks to
purchase stocks judged by the advisor to have the potential
of increasing their value at least 50% over two subsequent
years, although that goal may not be achieved.
DELAWARE GROUP HIGH YIELD SERIES: Seeks total return and as
a secondary objective, high current income. The Series
invests in rated and unrated corporate bonds, (including
high-risk, high yield bonds commonly known as junk bonds),
foreign 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: Seeks growth and income by
investing primarily in income-producing stocks that the
manager believes have the potential for above-average
dividend increases over time. This fund blends traditional
growth and value investment styles.
DELAWARE GROUP EMERGING MARKETS SERIES: Seeks long-term
growth by investing primarily in stocks of companies located
or operating in emerging or developing countries.
DELAWARE GROUP REIT SERIES: Seeks to achieve maximum
long-term total return by investing primarily in the
securities of real estate investment trusts and real estate
operating companies.
DELAWARE GROUP SMALL CAP VALUE SERIES: Seeks growth by
investing primarily in stocks of small cap companies whose
market values appear low relative to underlying value or
future earnings and growth potential.
DELAWARE GROUP TREND: Seeks long-term growth by investing
primarily in stocks of small companies and convertible
securities of emerging and other growth-oriented companies.
DEUTSCHE VIT EAFE-REGISTERED TRADEMARK- FUND: 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 of the United
States.
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<PAGE>
DEUTSCHE VIT EQUITY 500 FUND: Seeks to replicate as closely
as possible the performance of the Standard & Poor's 500
Composite Price Index, before the deduction of the Fund
expenses.
DEUTSCHE VIT SMALL CAP INDEX FUND: 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.
FIDELITY VIP GROWTH PORTFOLIO: Seeks long-term capital
appreciation. The portfolio normally purchases common
stocks.
FIDELITY VIP HIGH INCOME PORTFOLIO: Seeks high current
income by investing at least 65% of total assets in
income-producing debt securities, with an emphasis on lower
quality securities.
FIDELITY VIP II CONTRAFUND PORTFOLIO -- SERVICE CLASS: 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: Seeks capital growth by investing primarily in common
stocks.
JANUS ASPEN SERIES BALANCED PORTFOLIO: 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 GLOBAL TECHNOLOGY: Seeks long-term growth
of capital. The Portfolio invests primarily in equity
securities of U.S. and foreign companies, selected for their
growth potential. Normally, it invests at least 65% of its
total assets in securities or companies that the portfolio
manager believes will benefit significantly from
advancements or improvements in technology.
JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO: Seeks
long-term growth of capital in a manner consistent with the
preservation of capital by investing primarily in common
stocks of companies of any size throughout the world. The
Portfolio normally invests in insurers from at least 5
different countries, including the U.S. The Portfolio may at
times invest in fewer than five countries or even a single
country.
LINCOLN NATIONAL BOND FUND: Seeks maximum current income
consistent with prudent investment strategy. The fund
invests primarily in medium-and long-term corporate and
government bonds.
LINCOLN NATIONAL CAPITAL APPRECIATION FUND: 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: 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: 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.
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<PAGE>
LINCOLN NATIONAL MONEY MARKET FUND: 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: 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: Seeks to provide long-term
growth of capital.
MFS TOTAL RETURN SERIES: 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: Seeks capital growth and current
income (income above that available from a portfolio
invested entirely in equity securities).
NB AMT MID-CAP GROWTH PORTFOLIO: 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: Seeks growth of capital and
invests mainly in common stocks of mid-to-large
capitalization companies, using the value-oriented
investment approach.
TEMPLETON INTERNATIONAL SECURITIES FUND -- CLASS 2: Seeks
long-term capital growth. It invests primarily in stocks of
companies outside the United States, including emerging
markets. Templeton Investment Counsel, Inc. serves as Fund's
investment advisor.
TEMPLETON GROWTH SECURITIES FUND -- CLASS 2: Seeks long-term
capital growth. Invests primarily in stocks of companies in
various nations throughout the world including the U.S. and
emerging markets. Templeton Investment Counsel, Inc. serves
as the Fund's investment advisor.
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.
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. Owners should 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 the terms and
conditions imposed by Lincoln Life (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 the judgment of
Lincoln Life, 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, Lincoln Life may substitute shares of
another Fund. A substituted Fund may have higher charges
than the one it replaces. There will be no substitution of
securities in any Sub-Account without prior approval of the
Commission.
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<PAGE>
VOTING RIGHTS
Lincoln Life 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
Trust 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.
To determine how many votes each Policy Owner is entitled to
direct with respect to a Fund, first Lincoln Life will
calculate the dollar amount of your account value
attributable to that Fund. Second we divide that amount by
$100.00. The result is the number of votes you may direct.
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
Lincoln Life deducts charges in connection with the Policy
to compensate it for providing the insurance benefit set
forth in the Policy, administering the Policy, assuming
certain risks in connection with the Policy and for
incurring expenses associated with the distribution of the
Policy.
The nature and amount of these charges are as follows:
DEDUCTIONS FROM PREMIUM PAYMENTS
We deduct a premium charge of 8% from each Premium Payment.
DEDUCTIONS MADE MONTHLY
We make various expense deductions monthly. The Monthly
Deduction, including the Cost of Insurance Charge is made
from the Net Accumulation Value.
The Monthly Deductions are deducted proportionately from the
value of each underlying investment subject to the charge.
For Sub-Accounts, Variable Accumulation Units are canceled
and the value of the canceled Variable Accumulation Units is
withdrawn in the same proportion as their respective values
have to the Net Accumulation Value. The 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, 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.
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<PAGE>
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").
If either Insured is still living when the younger Insured
would have attained Age 100 and the Policy has not been
surrendered, no further Monthly Deductions will be made and
the Separate Account Value will be transferred to the Fixed
Account. The Policy will then remain in force until
surrender or the Second Death.
MONTHLY DEDUCTION
There is a flat dollar Monthly Deduction of $12.50 until the
first Policy Anniversary and, currently, $5 thereafter
(guaranteed not to exceed $10 after the first Policy Year).
In addition there is a Monthly Deduction charge of $0.09
per $1000 of Specified Amount for the first twenty years of
the Policy and for the first twenty years following an
increase in Specified Amount. If the No Lapse Provision is
in effect there will also be a Monthly Deduction of $0.01
per $1000 of Specified Amount. (Note: the No Lapse provision
is not available in IL, MA, MD, NJ and TX.)
These charges compensate Lincoln Life 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" charge is the portion of the Monthly
Deduction designed to compensate Lincoln Life 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,
underwriting category and gender (in accordance with state
law) of both Insureds and the current "Net Amount at Risk"
(Death Benefit minus the Accumulated Value). The rate on
which the Monthly Deduction for the Cost of Insurance is
based will generally increase as the Insureds age, although
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 previous Monthly Anniversary Day by
1.0032737 (the monthly equivalent of an annual rate of 4%),
subtracting the Accumulation Value at the previous Monthly
Anniversary Day, and multiplying the result (the Net Amount
at Risk) by the applicable Cost of Insurance Rate as
determined by Lincoln Life. The Guaranteed Maximum Cost of
Insurance Rates, per $1,000 of Net Amount at Risk, for
standard risks are based on the 1980 Commissioners Standard
Ordinary Mortality Tables, Age Nearest Birthday (1980 CSO,
Male or Female); or, for unisex rates, on the 1980 CSO-B
Table.
MORTALITY AND EXPENSE RISK CHARGE
Lincoln Life deducts a daily charge as a percentage of the
assets of the Separate Account as a mortality and expense
risk charge. The mortality risk assumed is that insureds may
live for a shorter period than estimated, and therefore, a
greater amount of death benefit will be payable. The expense
risk assumed is that expenses incurred is issuing and
administering the policies will be greater than estimated.
The mortality and expense risk charge is currently at an
annual rate of 0.80% per year, and is guaranteed not to
exceed 0.90% per year.
22
<PAGE>
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.
<TABLE>
<CAPTION>
TOTAL
ANNUAL
FUND
OPERATING TOTAL FUND
EXPENSES TOTAL OPERATING
WITHOUT WAIVERS EXPENSES WITH
MANAGEMENT 12B-1 OTHER WAIVERS OR AND WAIVERS AND
FUND FEES(1) FEES EXPENSES REDUCTIONS REDUCTIONS REIMBURSEMENTS
------------------------- ----------- -------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Growth Fund..... 0.63% N/A 0.10% 0.73% N/A 0.73%
AIM V.I. International
Equity Fund............ 0.75% N/A 0.22% 0.97% N/A 0.97%
AIM V.I. Value Fund...... 0.61% N/A 0.15% 0.76% N/A 0.76%
AFIS Global Small
Capitalization Fund
Class 2................ 0.78% 0.25% 0.03% 1.06% N/A 1.06%
AFIS Growth Fund
Class 2................ 0.38% 0.25% 0.01% 0.64% N/A 0.64%
AFIS Growth Income Fund
Class 2................ 0.34% 0.25% 0.01% 0.60% N/A 0.60%
Baron Capital Asset
Fund (2)............... 0.62% 0.25% 0.63% 1.88% (0.38%) 1.50%
Delaware GPF Devon
Series -- Standard
Class (3a)............. 0.65% N/A 0.10% 0.75% N/A 0.75%
Delaware GPF Emerging
Markets Series --
Standard Class (3b).... 1.19% N/A 0.28% 1.53% (0.06%) 1.47%
Delaware GPF High Yield
Series (formerly
Delchester) Standard
Class (3c)............. 0.65% N/A 0.07% 0.72% N/A 0.72%
Delaware GPF REIT Series
Standard Class (3d).... 0.64% N/A 0.21% 0.96% (0.11%) 0.85%
Delaware GPF Small Cap
Value Series Standard
Class (3e)............. 0.75% N/A 0.10% 0.85% N/A 0.85%
Delaware GPF Trend Series
Standard Class (3f).... 0.75% N/A 0.07% 0.82% N/A 0.82%
Deutsche VIT EAFE Index
Fund (4)............... 0.26% N/A 0.39% 1.15% (0.50%) 0.65%
Deutsche VIT Equity 500
Index Fund (4)......... 0.14% N/A 0.16% 0.43% (0.13%) 0.30%
Deutsche VIT Small Cap
Index Fund (4)......... 0.13% N/A 0.32% 1.18% (0.73%) 0.45%
Fideilty VIP ContraFund
Portfolio -- Service
Class (5).............. 0.58% 0.10% 0.10% 0.78% N/A 0.78%
Fideilty VIP Growth
Portfolio Service
Class (5).............. 0.58% 0.10% 0.09% 0.77% N/A 0.77%
Fideilty VIP Growth
Opportunities Portfolio
Service Class (5)...... 0.58% 0.10% 0.11% 0.79% N/A 0.79%
Fideilty VIP High Income
Portfolio Service
Class (5).............. 0.58% 0.10% 0.11% 0.79% N/A 0.79%
Janus Aspen Series
Balanced Portfolio
(Institutional
Shares) (6)............ 0.65% N/A 0.02% 0.67% N/A 0.67%
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
TOTAL
ANNUAL
FUND
OPERATING TOTAL FUND
EXPENSES TOTAL OPERATING
WITHOUT WAIVERS EXPENSES WITH
MANAGEMENT 12B-1 OTHER WAIVERS OR AND WAIVERS AND
FUND FEES(1) FEES EXPENSES REDUCTIONS REDUCTIONS REIMBURSEMENTS
------------------------- ----------- -------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Janus Aspen Series Global
Technology Portfolio
(Service
Shares) (6)............ 0.65% 0.25% 0.13% 1.03% N/A 1.03%
Janus Aspen Series
Worldwide Growth
Portfolio (6).......... 0.65% N/A 0.05% 0.70% N/A 0.70%
LN Bond Fund............. 0.45% N/A 0.08% 0.53% N/A 0.53%
LN Capital Appreciation
Fund................... 0.72% N/A 0.06% 0.78% N/A 0.78%
LN Equity-Income Fund.... 0.72% N/A 0.07% 0.79% N/A 0.79%
LN Global Asset
Allocation Fund........ 0.72% N/A 0.19% 0.91% N/A 0.91%
LN Money Market Fund..... 0.48% N/A 0.11% 0.59% N/A 0.59%
LN Social Awareness
Fund................... 0.33% N/A 0.05% 0.38% N/A 0.38%
MFS Emerging Growth
Series (7)............. 0.75% N/A 0.09%(1) 0.84% N/A 0.84%
MFS Total Return
Series (7)............. 0.75% N/A 0.15%(1) 0.90% N/A 0.90%
MFS Utilities
Series (7)............. 0.75% N/A 0.16%(1) 0.91% N/A 0.91%
Neuberger Berman AMT Mid-
Cap Growth
Portfolio (8).......... 0.85% N/A 0.15% 1.08% (0.08%) 1.00%
Neuberger Berman AMT
Partners
Portfolio (8).......... 0.80% N/A 0.07% 0.87% N/A 0.87%
Templeton Growth
Securities Fund
Class 2 (9 a,b,c)...... 0.83% 0.25% 0.05% 1.13% N/A 1.13%
Templeton International
Securities Fund
Class 2 (9 b,d)........ 0.69% 0.25% 0.19% 1.13% N/A 1.13%
</TABLE>
---------------------------------------------------
(1) Certain of the fund advisers reimburse the company for
administrative costs incurred in connection with
administering the funds as variable funding options
under the contract. These reimbursements are generally
paid out of the management fees and are not charged to
investors.
(2) 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
January 1, 1999 through December 31, 1999 would have
been 1.88%.
(3) (a)The investment advisor for the Devon Series is
Delaware Management Company ("DMC"). Effective
May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and
reimburse each Series for expenses to the extent
that total expenses will not exceed 0.80%. Under its
Management Agreement, the Series pays a management
fee based on average daily net assets 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.
(b)The investment advisor for the Emerging Markets
Series is Delaware International Advisers Ltd.
("DIAL"). Effective May 1, 2000 through October 31,
2000, DIAL has voluntarily agreed to waive its
management fee and reimburse the Series for expenses
to the extent that total expenses will not exceed
1.50%. Without such an arrangement, the total annual
operating expenses for the Series would have been
1.53%. Under its Management Agreement, the
Series pays a management fee based on average daily
net assets 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.
(c)The investment advisor for the High Yield Series is
Delaware Management Company ("DMC"). Effective
May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and
reimburse the Series for expenses to the extent that
total expenses will not
24
<PAGE>
exceed 0.80%. Under its Management Agreement, the
Series pays a management fee based on average daily
net assets 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.
(d)The investment advisor for the REIT Series is
Delaware Management Company ("DMC"). Effective
May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and
reimburse the Series for expenses to the extent that
total expenses will not exceed 0.85%. Without such
an arrangement, the total annual operating expenses
for the Series would have been 0.96%. Under its
Management Agreement, the Series pays a management
fee based on average daily net assets 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.
(e)The investment advisor for the Small Cap Value
Series is Delaware Management Company ("DMC").
Effective May 1, 2000 through October 31, 2000, DMC
has voluntarily agreed to waive its management fee
and reimburse the Series for expenses to the extent
that total expenses will not exceed 0.85%. Under its
Management Agreement, the Series pays a management
fee based on average daily net assets 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.
(f)The investment advisor for the Trend Series is
Delaware Management Company ("DMC"). Effective
May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and
reimburse the Series for expenses to the extent that
total expenses will not exceed 0.85%. Under its
Management Agreement, the Series pays a management
fee based on average daily net assets 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.
(4) Under the Advisory Agreement with Bankers Trust Company
(the "Advisor"), the fund will pay an advisory fee at
an annual percentage rate of 0.20% of the average daily
net assets of the Equity 500 Index Fund. These fees are
accrued daily and paid monthly. The Advisor has
voluntarily undertaken to waive its fee and to
reimburse the fund for certain expenses so that the
fund's total operating expenses will not exceed 0.30%
of average daily net assets. Under the Advisory
Agreement with the "Advisor", the Small Cap Index Fund
will pay an advisory fee at an annual percentage rate
of 0.35% of the average daily net assets of the fund.
These fees are accrued daily and paid monthly. The
Advisor has voluntarily undertaken to waive its fee and
to reimburse the fund for certain expenses so that the
fund's total operating expenses will not exceed 0.45%
of average daily net assets. Under the Advisory
Agreement the "Advisor", the EAFE Equity Index Fund
will pay an advisory fee at an annual percentage rate
of 0.45% of the average daily net assets of the fund.
These fees are accrued daily and paid monthly. The
Advisor has voluntarily undertaken to waive its fee and
to reimburse the fund for certain expenses so that the
fund's total operating expenses will not exceed 0.65%
of average daily net assets. Without the reimbursement
to the Funds for the year ended 12/31/99 total expenses
would have been 0.43% for the Equity 500 Index Fund,
1.18% for the Small Cap Index Fund and 1.15% for the
EAFE Equity Index Fund.
(5) A portion of the brokerage commissions that certain
funds pay was used to reduce fund expenses. In
addition, through arrangements with certain funds', or
FMR on behalf of certain funds' custodian, credits
realized as a result of uninvested cash balances were
used to reduce a portion of each applicable fund's
expenses. The total operating expenses, after
reimbursement would have been: Growth 0.75% (service);
Contrafund 0.75% (service); Growth Opportunities 0.78%
(service).
(6) Expenses (except for Global Technology Portfolio) are
based upon expenses for the fiscal year ended
December 31, 1999, restated to reflect a reduction in
the management fee for Growth, Aggressive Growth,
Worldwide Growth, and Balanced Portfolios. Expenses for
Global Technology Portfolio are based on the estimated
expenses that the Portfolio expects to incur in its
initial fiscal year. All expenses are shown without the
effect of expense offset arrangements.
(7) Each series has an expense offset arrangement which
reduces the series' custodian fee based on the amount
of cash maintained by the series with its custodian and
dividend disbursing agent. Each series may enter into
other such arrangement and directed brokerage
arrangements, which would also have the effect of
reducing the series' expenses. "Other Expenses" do not
take into account these expense reductions, and are
therefore higher than the actual expenses of the
series. Had the fee reductions been taken into account,
"Net Expenses" would be lower for certain series and
would equal:
0.83% for Emerging Growth Series
0.89% for Total Return Series
0.90% for Utilities Series
(8) Expenses reflect expense reimbursement. Neuberger
Berman Management Inc. ("NBMI") has undertaken through
May 1, 2001 to reimburse certain operating expenses,
including the compensation of NBMI and
25
<PAGE>
excluding taxes, interest, extraordinary expenses,
brokerage commissions and transaction costs, that
exceed in the aggregate, 1.0% of the AMT Mid-Cap Growth
Portfolio's average daily net asset value. Absent such
reimbursement, Total Annual Expenses for the portfolio
for the year ended December 31, 1999 would have been
1.08%.
(9) (a)The fund administration fee is paid indirectly
through the management fee.
(b)The fund's class 2 distribution plan or "rule 12b-1
plan" is described in the fund's prospectus. While
the maximum amount payable under the fund's class 2
rule 12b-1 plan is 0.35% per year of the fund's
average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust
has set the current rate at 0.25% per year.
(c)On 2/8/00, a merger and reorganization was approved
that combined the fund with a similar fund of the
Templeton Variable Products Series Fund, effective
5/1/00. The table shows total expenses based on the
fund's assets as of 12/31/99, and not the assets of
the combined fund. However, if the table reflected
combined assets, the fund's expenses after 5/01/00
would be estimated as: Management Fees 0.80%, Other
Expenses 0.05%, and Total Fund Operating Expenses
0.85%.
(d)On 2/8/00, shareholders approved a merger and
reorganization that combined the fund with the
Templeton International Equity Fund. The
shareholders of that fund approved new management
fees, which apply to the combined fund effective
5/1/00. The table shows restated total expenses
based on the new fees and the assets of the fund as
of 12/31/99, and not the assets of the combined
fund. However, if the table reflected both the new
fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Management Fees
0.65%, Distribution and Service Fees 0.25%, Other
Expenses 0.20%, and Total Fund Operating Expenses
1.10%.
SURRENDER CHARGES
A generally declining Surrender Charge will 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 Insureds, 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 2 by
subtracting "Surrender Value" from "Total Accumulation
Value" on any chosen set of investment return assumptions.
The surrender charge under a Policy is proportional to the
face amount of the Policy. Expressed as a percentage of face
amount, it is higher for older than for younger issue ages.
For example, assuming issue ages 80 (the oldest possible
issue ages for a Policy), the first year surrender charge is
$37.40 per $1000 of face amount. At issue ages 65 it is
$25.10 per $1000 of face amount, at issue ages 55 it is
$13.68 per $1000 of face amount, and at issue ages 25 it is
$2.87 per $1000 of face amount. These calculations assume
both insureds are the same age. The surrender charge cannot
exceed Policy value but may equal Policy value, especially
during the first two Policy years. All surrender charges
decline to zero over the 15 years following issuance of the
Policy. See, for example, the illustrations in Appendix 2
for issue ages 55 and 65.
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. Lincoln Life may change this at any time.
If the Specified Amount is decreased while the Surrender
Charge applies, the Surrender Charge will remain the same.
26
<PAGE>
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 surrenders, full or partial, may result in tax
implications. (SEE "TAX ISSUES.")
Based on its actuarial determination, Lincoln Life does 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 which
Lincoln Life 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 the general account of Lincoln Life, which
supports insurance and annuity obligations.
TRANSACTION FEE FOR EXCESS TRANSFERS
Lincoln Life reserves 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 Second Death (the death of the second
of the two Insureds to die), 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 $250,000 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 on the Second Death and the Owner's
ability to make Premium Payments. In evaluating this
decision, the applicant should consider that the greater the
Net Amount at Risk, the greater the monthly deductions for
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 Second Death, less (in each case) any
indebtedness 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 younger
Insured reaches or would have reached Age 40 and decreases
in accordance with the table in Appendix I of this
Prospectus to 100% when the younger Insured reaches or would
have reached Age 95.
Death Benefit Option 1 provides Death Benefit Proceeds equal
to the Specified Amount (a minimum of $250,000). If Option 1
is selected, the Policy pays level Death Benefit Proceeds
until 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 Accumulation
Value as of the date of the Second Death. If
27
<PAGE>
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. The ability of
the Owner to support the Policy 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 from the value of the Policy to pay the
Cost of Insurance.
Owners who prefer insurance coverage that generally does not
vary in amount and generally has lower Cost of Insurance
Charges should elect Option 1. Owners who prefer to have
favorable investment experience reflected in increased
insurance coverage should select Option 2. Under Option 1,
any Surrender Value at the time of the Second 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
amount of increase in Specified Amount currently permitted
is $1,000. If requested, a supplemental application and
evidence of insurability must also be submitted to Lincoln
Life.
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.
Lincoln Life may at its discretion decline any request for a
change between Death Benefit Options or increase in the
Specified Amount. Lincoln Life may at its discretion 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
28
<PAGE>
insurance under each of the Death Benefit Options is equal
to the product of the Accumulation Value and the applicable
Corridor Percentage. A table of Corridor Percentages is in
Appendix I.
NOTICE OF DEATH OF INSUREDS
Due Proof of Death must be furnished to Lincoln Life at the
Administrative Office as soon as reasonably practicable
after the death of each 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 Lincoln
Life.
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 both Insureds. SEE
SETTLEMENT OPTIONS. The amount of the Death Benefit Proceeds
under Option 2 will be determined as of the date of the
Second 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.
The Owner may elect a Settlement Option before the Second
Death; after the Second Death, if the Owner has not
irrevocably selected a Settlement Option, the Beneficiary
may elect one of the Settlement Options. 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, Lincoln
Life will pay any amount due the assignee in one lump sum.
Any remaining Death Benefit Proceeds will be paid as
elected.
A request to elect, change, or revoke a Settlement Option
must be received in proper written form by the
Administrative Office 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. Payments after the
first payment will be made 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.
Under the third Settlement Option, Lincoln Life makes
monthly payments for a stated number of years, at least
five but no more than thirty.
The fourth Settlement Option, provides that Lincoln Life
pays interest annually on the sum left with Lincoln Life
at a rate of at least 3% per year, and pays the amount
on deposit on the payee's death.
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Any other Settlement Option offered by Lincoln Life at the
time of election may also be selected.
POLICY LIQUIDITY
The Policy provides only limited liquidity. Subject to
certain limitations, however, the Owner 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
The Owner may at any time contract for Policy Loans up to an
aggregate amount not to exceed 90% of the Surrender Value at
the time a Policy Loan is made. It is a condition to
securing a Policy Loan that the Owner execute a loan
agreement and that the Policy be assigned to Lincoln Life
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 loan interest is payable to
Lincoln Life (for its account) 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
in advance, any loan interest due will be transferred 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.
During the first ten Policy Years, Lincoln Life's current
practice is to credit interest to the Loan Account Value at
an annual rate equal to the interest rate charged on the
loan minus 1% (guaranteed not to exceed 2%). Beginning with
the eleventh Policy Year, Lincoln Life's current practice is
to credit interest at an annual rate equal to the interest
rate charged on the loan, less 0% annually (guaranteed not
to exceed 1%). In no case will the annual credited interest
rate be less than 6% in each of the first ten Policy Years
and 7% thereafter.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, transfers from each for loans and
loan interest will be made in proportion to the assets in
each Sub-Account at that time, unless Lincoln Life is
instructed otherwise in proper written form at the
Administrative Office. 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, whether or not repaid, affects the proceeds
payable upon the Second Death and the Accumulation Value.
The longer a Policy Loan is outstanding, the greater the
effect is likely to be. While 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.")
If a Policy lapses while a loan is outstanding, adverse tax
consequences may result.
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PARTIAL SURRENDER
You may make a partial surrender at any time before the
Second Death by request to the Administrative Office in
proper written form or by telephone, if telephone
transactions have been authorized by the Owner. A $25
transaction fee 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 $250,000, the partial surrender will
not be permitted by Lincoln Life. 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 Lincoln Life is instructed
otherwise in proper written form at the Administrative
Office. Lincoln Life may at its discretion decline any
request for a partial surrender.
SURRENDER OF THE POLICY
You may surrender the Policy at any time. On surrender of
the Policy, Lincoln Life will pay you, or assignee, the
Surrender Value next computed after receipt of the request
in proper written form at the Administrative Office. All
coverage under the Policy will automatically terminate and
may not be reinstated if the Owner makes a full surrender.
SURRENDER VALUE
The "Surrender Value" of a Policy is the amount the Owner
can receive in a lump sum by surrendering the Policy. The
Surrender Value is the Net Accumulation Value less the
Surrender Charge ("See Charges and Fees.") All or part of
the Surrender Value may be applied to one or more of the
Settlement Options. Surrender Values are illustrated in
Appendix 2.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any
Sub-Accounts will be made within 7 days. Payment or transfer
from the Fixed Account may be deferred up to six months at
Lincoln Life's option. If Lincoln Life exercises its right
to defer any payment from the Fixed Account, interest will
accrue and be paid as required by law from the date the
recipient would otherwise have been entitled to receive the
payment.
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ASSIGNMENT; CHANGE OF OWNERSHIP
While either Insured is living, the Owner may assign the
Owner's rights in the Policy, including the right to change
the beneficiary designation. The assignment must be in
proper written form, signed by the Owner and recorded at the
Administrative Office. No assignment will affect, or
prejudice Lincoln Life as to, any payment made or action
taken by Lincoln Life before it was recorded. Lincoln Life
is not responsible for any assignment not submitted for
recording, nor is Lincoln Life responsible for the
sufficiency or validity of any assignment. Any assignment is
subject to any indebtedness owed to Lincoln Life at the time
the assignment is recorded and any interest accrued on such
indebtedness after recordation of any assignment.
Once recorded, the assignment remains effective until
released by the assignee in proper written form. So long as
an effective assignment remains outstanding, the Owner will
not be permitted to take any action with respect to the
Policy without the consent of the assignee in proper written
form.
So long as either Insured is living, the Owner 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 Lincoln Life as to, any payment made or
action taken by Lincoln Life before it was recorded. Lincoln
Life may require that the Policy be submitted to it 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, the Policy is subject to lapse and
automatic termination of all coverage under the Policy. 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 Lincoln Life has 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, Lincoln Life
will send a written notice to the Owner 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
Lincoln Life 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. If the
Second Death occurs during the Grace Period, Death Benefit
Proceeds will be paid, but will be reduced, in addition to
any other reductions, by any unpaid Monthly Deductions. If
the Second Death occurs after the Policy has lapsed, no
Death Benefit Proceeds will be paid.
NO LAPSE PROVISION
(Note: the No Lapse provision is not available in IL, MA,
MD, NJ and TX).
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The applicant may elect the No Lapse Provision at issue of
the Policy. If this provision is elected and 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 (the cumulative premium required to have been
paid by each Monthly Anniversary Day, as indicated in the
Policy Specifications) due since the Date of Issue of the
Policy, the Policy will not lapse. 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.
The No Lapse Provision will be terminated 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, and assuming the No Lapse Provision does not apply,
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 both
insureds is furnished to Lincoln Life and it agrees to
accept the risk, (d) Lincoln Life receives 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 Lincoln Life
approves the application for reinstatement. Surrender
Charges will be reinstated as of the Policy Year in which
the Policy lapsed.
If the Policy is reinstated, such reinstatement is effective
on the Monthly Anniversary Day following Lincoln Life
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
When ever this Prospectus refers to a communication "in
proper written form," it means in writing, in form and
substance reasonably satisfactory to Lincoln Life, received
at the Administrative Office.
TELEPHONE TRANSACTION PRIVILEGES
Telephone transactions are permitted only if authorized in
proper written form by the applicant or Owner. To effect a
permitted telephone transaction, the Owner or his or her
authorized representative must call the Administrative
Office and provide, as identification, his or her policy
number, a requested portion of his or her Social Security
number, and such other information as Lincoln Life may
require to authenticate the authority of the caller. If
permitted and adequately authenticated, a customer service
representative will accept the telephone transaction
request. Lincoln Life disclaims all liability for losses
resulting from unauthorized or fraudulent telephone
transactions, but acknowledges that if it does not follow
these procedures, which it believes to be reasonable, it may
be liable for such losses.
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OTHER POLICY PROVISIONS
ISSUANCE
A Policy may only be issued upon receipt of satisfactory
evidence of insurability, and generally only when both
Insureds are at least Age 18 but are less than Age 80.
DATE OF COVERAGE
The date of coverage will be the Date of Issue, provided
both Insureds are alive and prior to any change in the
health and insurability of the Insureds as represented in
the application.
RIGHT TO EXCHANGE THE POLICY
The Owner may, within the first two Policy Years, exchange
the Policy for a permanent life insurance policy then being
offered by Lincoln Life. The benefits for the new policy
will not vary with the investment experience of the Variable
Account. The exchange must be elected within 24 months from
the Date of Issue. No evidence of insurability will be
required.
The Owner, the Insureds and the Beneficiary under the new
policy will be the same as those under the exchanged Policy
on the date of the exchange. The Accumulation Value under
the new Policy will be equal to the Accumulation Value under
the old Policy on the date the exchange request is received.
The new policy will have a Death Benefit on the exchange
date not more than the Death Benefit of the original Policy
immediately prior to the exchange date. If the Accumulation
Value is insufficient to support the Death Benefit, the
Owner will be required to make additional Premium Payments
in order to effect the exchange. The new Policy will have a
Date of Issue and issue Ages as of the date of exchange. The
initial Specified Amount and any increases in Specified
Amount will have the same rate class as those of the
original Policy. Any indebtedness may be transferred to the
new policy.
The exchange may be subject to an equitable adjustment in
rates and values to reflect variances, if any, in the rates
and values between the two Policies. After adjustment, if
any excess is owed the Owner, Lincoln Life will pay the
excess to the Owner in cash. The exchange may be subject to
federal income tax withholding.
If at any time while both Insureds are alive, a change in
the Internal Revenue Code would result in a less favorable
tax treatment of the Insurance provided under the policy or
if the Insureds are legally divorced while the policy is in
force, the Owner may exchange the policy for separate single
life policies on each of the Insureds subject to the
following conditions: (a) evidence of insurability
satisfactory to Lincoln Life is furnished, (b) the amount of
insurance of each new Policy is not larger than one half of
the amount of insurance then in force under the policy, (c)
the premium for each new policy is determined according to
Lincoln Life's rates then in effect for that policy based on
each Insured's then attained age and sex, and (d) any other
requirements as determined by Lincoln Life are met. The new
policy will not take effect until the date all such
requirements are met.
INCONTESTABILITY
Lincoln Life will not contest payment of the Death Benefit
Proceeds based on the initial Specified Amount after the
Policy has been in force for two years from the Date of
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Issue so long as both Insureds were alive during those two
years. For any increase in Specified Amount requiring
evidence of insurability, Lincoln Life will not contest
payment of the Death Benefit Proceeds based on such an
increase after it has been in force for two years from its
effective date so long as both Insureds were alive during
those two years.
MISSTATEMENT OF AGE OR GENDER
If the Age or gender of either of the Insureds 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 Second
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 Second
Death.
SUICIDE
If the Second Death is by suicide, while sane or insane,
within two years from the Date of Issue, Lincoln Life will
upon the Second Death pay no more than the sum of the
premiums paid, less any indebtedness and the amount of any
partial surrenders. If the Second Death is by suicide, while
sane or insane, within two years from the date an
application is accepted for an increase in the Specified
Amount, Lincoln Life will upon the Second Death pay no more
than a refund of the monthly charges for the cost of such
additional benefit.
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
The No-Lapse Provision discussed under "Lapse and
Reinstatement," is available for an additional charge under
the Policy. However, it must be elected with the original
Policy application; it cannot be elected subsequently; and
once lost, cannot be reinstated. Other riders may be offered
and we may charge for them.
TAX ISSUES
INTRODUCTION. The Federal income tax treatment of the policy
is complex and sometimes uncertain. The Federal income tax
rules may vary with your particular circumstances. This
discussion does not include all the Federal income tax
rules that may affect you and your policy, and is not
intended as tax advice. This discussion also does not
address other Federal tax consequences, or state or local
tax consequences, associated with the policy. As a result,
you should always consult a tax adviser about the
application of tax rules to your individual situation.
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TAXATION OF LIFE INSURANCE CONTRACTS IN GENERAL
TAX STATUS OF THE POLICY. Section 7702 of the Code
establishes a statutory definition of life insurance for
Federal tax purposes. We believe that the policy will meet
the statutory definition of life insurance, which places
limitations on the amount of premium payments that may be
made and the contract values that can accumulate relative to
the death benefit. As a result, the death benefit payable
under the policy will generally be excludable from the
beneficiary's gross income, and interest and other income
credited under the policy will not be taxable unless certain
withdrawals are made (or are deemed to be made) from the
policy prior to the insured's death, as discussed below.
This tax treatment will only apply, however, if (1) the
investments of the Separate Account are "adequately
diversified" in accordance with Treasury Department
regulations, and (2) we, rather than the you, are considered
the owner of the assets of the Separate Account for Federal
income tax purposes.
INVESTMENTS IN THE SEPARATE ACCOUNT MUST BE DIVERSIFIED. For
a policy to be treated as a life insurance contract for
Federal income tax purposes, the investments of the Separate
Account must be "adequately diversified." IRS regulations
define standards for determining whether the investments of
the Separate Account are adequately diversified. If the
Separate Account fails to comply with these diversification
standards, you could be required to pay tax currently on the
excess of the contract value over the contract premium
payments. Although we do not control the investments of the
subaccounts, we expect that the subaccounts will comply with
the IRS regulations so that the Separate Account will be
considered "adequately diversified."
RESTRICTION ON INVESTMENT OPTIONS. Federal income tax law
limits your right to choose particular investments for the
policy. Because the IRS has not issued guidance specifying
those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed
those limits. If so, you would be treated as the owner of
the assets of the Separate Account and thus subject to
current taxation on the income and gains from those assets.
We do not know what limits may be set by the IRS in any
guidance that it may issue and whether any such limits will
apply to existing policies. We reserve the right to modify
the policy without your consent to try to prevent the tax
law from considering you as the owner of the assets of the
Separate Account.
NO GUARANTEES REGARDING TAX TREATMENT. We make no guarantee
regarding the tax treatment of any policy or of any
transaction involving a policy. However, the remainder of
this discussion assumes that your policy will be treated as
a life insurance contract for Federal income tax purposes
and that the tax law will not impose tax on any increase in
your contract value until there is a distribution from your
policy.
TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In
general, the amount of the death benefit payable from a
policy because of the death of the insured is excludable
from gross income. Certain transfers of the policy for
valuable consideration, however, may result in a portion of
the death benefit being taxable.
If the death benefit is not received in a lump sum and is,
instead, applied under one of the settlement options,
payments generally will be prorated between amounts
attributable to the death benefit which will be excludable
from the beneficiary's income and amounts attributable to
interest (accruing after the insured's death) which will be
includible in the beneficiary's income.
TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing
provisions of the Code, except as described below, any
increase in your contract value is generally not taxable to
you unless amounts are received (or are deemed to be
received) from the policy prior to the
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insured's death. If there is a total withdrawal from the
policy, the surrender value will be includible in the your
income to the extent the amount received exceeds the
"investment in the contract." (If there is any debt at the
time of a total withdrawal, such debt will be treated as an
amount received by the owner.) The "investment in the
contract" generally is the aggregate amount of premium
payments and other consideration paid for the policy, less
the aggregate amount received under the policy previously to
the extent such amounts received were excludable from gross
income. Whether partial withdrawals (or other amounts deemed
to be distributed) from the policy constitute income to you
depends, in part, upon whether the policy is considered a
"modified endowment contract" (a "MEC") for Federal income
tax purposes.
POLICIES WHICH ARE MECS
CHARACTERIZATION OF A POLICY AS A MEC. A policy will be
classified as a MEC if premiums are paid more rapidly than
allowed by a "7-pay test" under the tax law or if the policy
is received in exchange for another policy that is a MEC. In
general, this policy will constitute a MEC unless (1) it was
received in exchange for another life insurance contract
which was not a MEC, and (2) no premium payments (other than
the exchanged contract) are paid into the policy during the
first seven contract years. In addition, even if the policy
initially is not a MEC, it may in certain circumstances
become a MEC. These circumstances would include a later
increase in benefits, any other material change of the
policy (within the meaning of the tax law), and a withdrawal
or reduction in the death benefit during the first seven
contract years.
TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES
UNDER MECS. If the policy is a MEC, withdrawals from the
policy will be treated first as withdrawals of income and
then as a recovery of premium payments. Thus, withdrawals
will be includible in income to the extent the contract
value exceeds the investment in the policy. The Code treats
any amount received as a loan under a policy, and any
assignment or pledge (or agreement to assign or pledge) any
portion of your contract value, as a withdrawal of such
amount or portion. Your investment in the policy is
increased by the amount includible in income with respect to
such assignment, pledge, or loan.
PENALTY TAXES PAYABLE ON WITHDRAWALS. A 10% penalty tax may
be imposed on any withdrawal (or any deemed distribution)
from your MEC which you must include in your gross income.
The 10% penalty tax does not apply if one of several
exceptions exists. These exceptions include withdrawals or
surrenders that: you receive on or after you reach age
59 1/2, you receive because you became disabled (as defined
in the tax law), or you receive as a series of substantially
equal periodic payments for your life (or life expectancy).
SPECIAL RULES IF YOU OWN MORE THAN ONE MEC. In certain
circumstances, you must combine some or all of the life
insurance contracts which are MECs that you own in order to
determine the amount of withdrawal (including a deemed
withdrawal) that you must include in income. For example, if
you purchase two or more MECs from the same life insurance
company (or its affiliates) during any calendar year, the
Code treats all such policies as one contract. Treating two
or more policies as one contract could affect the amount of
a withdrawal (or a deemed withdrawal) that you must include
in income and the amount that might be subject to the 10%
penalty tax described above.
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POLICIES WHICH ARE NOT MECS
TAX TREATMENT OF WITHDRAWALS. If the policy is not a MEC
(described below), the amount of any withdrawal from the
policy will generally be treated first as a non-taxable
recovery of premium payments and then as income from the
policy. Thus, a withdrawal from a policy that is not a MEC
will not be includible in income except to the extent it
exceeds the investment in the policy immediately before the
withdrawal.
CERTAIN DISTRIBUTIONS REQUIRED BY THE TAX LAW IN THE FIRST
15 POLICY YEARS. Section 7702 places limitations on the
amount of premium payments that may be made and the contract
values that can accumulate relative to the death benefit.
Where cash distributions are required under Section 7702 in
connection with a reduction in benefits during the first 15
years after the policy is issued (or if withdrawals are made
in anticipation of a reduction in benefits, within the
meaning of the tax law, during this period), some or all of
such amounts may be includible in income. A reduction in
benefits may occur when the face amount is decreased,
withdrawals are made, and in certain other instances.
TAX TREATMENT OF LOANS. If your policy is not a MEC, a loan
you receive under the policy is generally treated as your
indebtedness. As a result, no part of any loan under such a
policy constitutes income to you so long as the policy
remains in force. Nevertheless, in those situations where
the interest rate credited to the loan account equals the
interest rate charged to you for the loan, it is possible
that some or all of the loan proceeds may be includible in
your income. If a policy lapses (or if all contract value is
withdrawn) when a loan is outstanding, the amount of the
loan outstanding will be treated as withdrawal proceeds for
purposes of determining whether any amounts are includible
in the your income.
LAST SURVIVOR CONTRACT
Although we believe that the policy, when issued as a last
survivor contract, complies with Section 7702 of the Code,
the manner in which Section 7702 should be applied to last
survivor contracts is not directly addressed by Section
7702. In the absence of final regulations or other guidance
issued under Section 7702 regarding this form of contract,
there is necessarily some uncertainty whether a last
survivor contract will meet the Section 7702 definition of a
life insurance contract. As a result, we may need to return
a portion of your premium (with earnings) and impose higher
cost of insurance charges in the future.
Due to the coverage of more than one insured under the
policy, there are special considerations in applying the
7-pay test. For example, a reduction in the death benefit at
any time, such as may occur upon a partial surrender, may
cause the policy to be a MEC. Also and more generally, the
manner of applying the 7-pay test is somewhat uncertain in
the case of policies covering more than one insured.
OTHER CONSIDERATIONS
INSURED LIVES PAST AGE 100. If the insured survives beyond
the end of the mortality table used to measure charges under
the policy, which ends at age 100, we believe the policy
will continue to qualify as life insurance for Federal tax
purposes. However, there is some uncertainty regarding this
treatment, and it is possible that you would be viewed as
constructively receiving the cash value in the year the
insured attains age 100.
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COMPLIANCE WITH THE TAX LAW. We believe that the maximum
amount of premium payments we have determined for the
policies will comply with the Federal tax definition of life
insurance. We will monitor the amount of premium payments,
and, if the premium payments during a contract year exceed
those permitted by the tax law, we will refund the excess
premiums within 60 days of the end of the policy year and
will pay interest and other earnings (which will be
includible in income subject to tax) as required by law on
the amount refunded. We also reserve the right to increase
the death benefit (which may result in larger charges under
a policy) or to take any other action deemed necessary to
maintain compliance of the policy with the Federal tax
definition of life insurance.
DISALLOWANCE OF INTEREST DEDUCTIONS. If an entity (such as a
corporation or a trust, not an individual) purchases a
policy or is the beneficiary of a policy issued after June
8, 1997, a portion of the interest on indebtedness unrelated
to the policy may not be deductible by the entity. However,
this rule does not apply to a policy owned by an entity
engaged in a trade or business which covers the life of an
individual who is a 20-percent owner of the entity, or an
officer, director, or employee of the trade or business, at
the time first covered by the policy. This rule also does
not apply to a policy owned by an entity engaged in a trade
or business which covers the joint lives of the 20% owner of
the entity and the owner's spouse at the time first covered
by the policy.
FEDERAL INCOME TAX WITHHOLDING. We will withhold and remit
to the IRS a part of the taxable portion of each
distribution made under a policy unless you notify us in
writing at or before the time of the distribution that tax
is not to be withheld. Regardless of whether you request
that no taxes be withheld or whether the Company withholds a
sufficient amount of taxes, you will be responsible for the
payment of any taxes and early distribution penalties that
may be due on the amounts received. You may also be required
to pay penalties under the estimated tax rules, if your
withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
CHANGES IN THE POLICY OR CHANGES IN THE LAW. Changing the
owner, exchanging the contract, and other changes under the
policy may have tax consequences (in addition to those
discussed herein) depending on the circumstances of such
change. The above discussion is based on the Code, IRS
regulations, and interpretations existing on the date of
this Prospectus. However, Congress, the IRS, and the courts
may modify these authorities, sometimes retroactively.
TAX STATUS OF LINCOLN LIFE
Under existing Federal income tax laws, Lincoln Life does
not pay tax on investment income and realized capital gains
of the Separate Account. Lincoln Life does not expect that
it will incur any Federal income tax liability on the income
and gains earned by the Separate Account. We, therefore, do
not impose a charge for Federal income taxes. If Federal
income tax law changes and we must pay tax on some or all of
the income and gains earned by the Separate Account, we may
impose a charge against the Separate Account to pay the
taxes.
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
39
<PAGE>
discussion is based on Lincoln Life's 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 Insureds grow older. Moreover,
on the death of the first of the Insureds to die, it tends
to increase significantly. The Owner should consult with his
or her 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 five 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], The
Lincoln National Life Insurance Company.
ROLAND C. BAKER Vice President [1/95-present] The Lincoln
VICE PRESIDENT National Life Insurance Co., President and
1801 S. Meyers Rd. Director, First Penn Pacific Life
Oakbrook Terrace, IL 60181 Insurance Company.
JON A. BOSCIA President, Chief Executive Officer and
PRESIDENT AND DIRECTOR Director, Lincoln National Corporation
1500 Market Street [1/98-present], Formerly: President, Chief
Suite 3900 Executive Officer and Director
Philadelphia, PA 19102 [10/96-1/98] and President and Chief
Operating Officer [5/94-10/96], The
Lincoln National Life Insurance Company.
JOHN H. GOTTA Chief Executive Officer of Life Insurance,
CHIEF EXECUTIVE OFFICER OF LIFE Senior Vice President and Assistant
INSURANCE, SENIOR VICE PRESIDENT Secretary [12/99-present] The Lincoln
AND ASSISTANT SECRETARY National Life Insurance Company. Formerly:
350 Church Street Senior Vice President and Assistant
Hartford, CT 06103 Secretary [4/98-12/99]; Senior Vice
President [2/98-4/98]; Vice President and
General Manager [1/98-2/98] The Lincoln
National Life Insurance Co. Formerly:
Senior Vice President, Connecticut General
Life Insurance Company [3/96-12/97]; Vice
President, Connecticut (Massachusetts
Mutual) Mutual Life Insurance Company
[8/94-3/96].
J. MICHAEL HEMP President and Director [7/97-present],
SENIOR VICE PRESIDENT Lincoln Financial Advisors Inc.; Senior
350 Church Street Vice President [formerly Vice President]
Hartford, CT 06103 [10/95-present], The Lincoln National Life
Insurance Co.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
<S> <C>
STEPHEN H. LEWIS Interim Chief Executive Officer of
INTERIM CHIEF EXECUTIVE OFFICER OF Annuities and Senior Vice President,
ANNUITIES AND SENIOR VICE [12/99-present]. Formerly: Senior Vice
PRESIDENT President, [5/94-12/99] The Lincoln
National Life Insurance Company
H. THOMAS MCMEEKIN President and Director 5/94-present,
DIRECTOR Lincoln Investment Management, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
GARY W. PARKER Senior Vice President [4/00-present], Vice
SENIOR VICE PRESIDENT President, Product Management, [7/98-3/00]
350 Church Street The Lincoln National Life Insurance
Hartford, CT 06103 Company Formerly: Senior Vice President,
Life Products [10/97-6/98]; Vice
President, Marketing Services [9/89-10/97]
Life of Virginia.
LAWRENCE T. ROWLAND Executive Vice President [10/96-present]
EXECUTIVE VICE PRESIDENT AND Formerly: Senior Vice President
DIRECTOR [1/93-10/96], The Lincoln National Life
One Reinsurance Place Insurance Company Chairman, Chief
1700 Magnavox Way Executive Officer, President and Director
Fort Wayne, IN 46802 [10/96-present], Formerly: Senior Vice
President [10/95-10/96].
KEITH J. RYAN Vice President, Controller and Chief
VICE PRESIDENT, CONTROLLER AND Accounting Officer [1/96-present] The
CHIEF ACCOUNTING OFFICER Lincoln National Life Insurance Company
TODD R. STEPHENSON Senior Vice President, Chief Financial
SENIOR VICE PRESIDENT, CHIEF Officer and Assistant Treasurer
FINANCIAL OFFICER AND ASSISTANT [3/99-present] Formerly: Senior Vice
TREASURER President and Chief Operating Officer
[1/98-3/99] Lincoln Life & Annuity
Distributors, Inc.; Senior Vice President
and Chief Operating Officer [1/98-3/99]
Lincoln Financial Advisors Corp.; Senior
Vice President, Treasurer, Chief Financial
Officer and Director, American States
Insurance Co. [2/95-12/97].
RICHARD C. VAUGHAN Executive Vice President and Chief
DIRECTOR Financial Officer, Lincoln National
Centre Square Corporation [1/95-present].
West Tower
1500 Market Street
Suite 3900
Philadelphia, PA 19102
MICHAEL R. WALKER Senior Vice President [1/98-present], Vice
SENIOR VICE PRESIDENT President [1/96-1/98] The Lincoln National
350 Church Street Life Insurance Co. Formerly: Vice
Hartford, CT 06103 President [3/93-1/96] Employers Health
Insurance Co.
ROY V. WASHINGTON Vice President [7/96-present] formerly,
VICE PRESIDENT Associate Counsel [2/95-7/96] The Lincoln
National Life Insurance Company
</TABLE>
*Unless otherwise indicated, the principal business address is 1300 South
Clinton Street, Fort Wayne, Indiana 46801.
41
<PAGE>
DISTRIBUTION OF POLICIES
Lincoln Life intends to offer the Policy in all
jurisdictions where it is licensed to do business. Lincoln
Life, also the principal underwriter for the Policies, is
registered with the Commission under the Securities Exchange
Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers ("NASD"). The
principal business address of Lincoln Life is 1300 South
Clinton Street, Fort Wayne, IN 46802.
The Policy may be sold by individuals, who in addition to
being appointed as life insurance agents for Lincoln Life,
are also registered representatives of Lincoln Financial
Advisors Corp., a registered broker-dealer affiliated with
Lincoln Life or other broker-dealers. These representatives
ordinarily 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 Lincoln Life's resources, which
include sales charges made under this Policy.
CHANGES OF INVESTMENT POLICY
Lincoln Life may materially change the investment policy of
the Separate Account. Lincoln Life 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 Lincoln Life's
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 Lincoln Life on the
life of the Insureds. 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.
Lincoln Life will not require evidence of insurability for
this conversion.
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
Lincoln Life from time to time offers other variable annuity
contracts and variable life insurance policies with benefits
which vary in accordance with the investment experience of a
separate account of Lincoln Life.
STATE REGULATION
Lincoln Life is 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 the operation of Lincoln Life for the preceding
year and its financial condition as of the end of such year.
Regulation by the Insurance Department includes periodic
examination to determine Lincoln Life's contract liabilities
and reserves so that the Insurance Department may certify
the items are correct. Lincoln Life's books and accounts are
subject to review by the Insurance Department at all times
and a full examination of its 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.
42
<PAGE>
REPORTS TO OWNERS
Lincoln Life maintains 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.
Owners will also be sent annual reports containing financial
statements for the Separate Account and annual and
semi-annual reports of the Funds as required by the 1940
Act.
In addition, Owners will receive 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
We are also 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 our financial strength or claims-paying
ability. The ratings are not intended to reflect the
investment experience or financial strength of the Variable
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 Lincoln Life or
the Policies. Furthermore, we may 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 advertisement.
Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services
for individually sold life insurance and annuities.
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 several 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 any 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 financial statements of the Separate Account and the
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
43
<PAGE>
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.
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.
REGISTRATION STATEMENT
A Registration Statement has been filed with the 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.
44
<PAGE>
APPENDIX 1
CORRIDOR PERCENTAGES
<TABLE>
<CAPTION>
ATTAINED AGE OF THE YOUNGER
INSURED (NEAREST BIRTHDAY) CORRIDOR 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 2
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 show 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, and that the
No-Lapse Provision is not selected.
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 current mortality and expense risk
charges are equivalent to an annual effective rate of 0.80%
of the daily net asset value of the Separate Account. The
mortality and expense risk charge is guaranteed never to
exceed an annual effective rate of 0.90% of the daily net
asset value of the Separate Account. 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, 1999.
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
-1.61%, 4.30% and 10.20% on a current basis, -1.71%, 4.19%
and 10.09% on a guaranteed basis.
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 8.0% 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 $12.50 per month
in the first year. Current values reflect a current flat
dollar monthly administrative expense charge of $5 (and
guaranteed values, $10) in subsequent Policy Years. The
charge also includes $0.09 per $1,000 of Specified Amount
during the first twenty Policy Years.
Upon request, the Company will furnish a comparable
illustration based on the proposed insureds' ages, gender
classification, smoking classification, risk classification
and premium payment requested.
46
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,782 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS
ACCUMULATED TOTAL ACCUMULATION VALUE SURRENDER VALUE
AT ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
END OF 5% DEATH BENEFIT PROCEEDS OF OF
POLICY INTEREST ANNUAL INVESTMENT RETURN OF GROSS GROSS GROSS GROSS SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% 0% 6% GROSS 12% 0% 6% GROSS 12% CHARGE
-- ------- --------- --------- --------- ------- ------- --------- ------- ------- --------- ------
1 14,471 1,000,000 1,000,000 1,000,000 11,172 11,884 12,597 0 0 0 13,676
2 29,666 1,000,000 1,000,000 1,000,000 22,020 24,135 26,337 8,754 10,869 13,071 13,266
3 45,620 1,000,000 1,000,000 1,000,000 32,492 36,709 41,274 19,739 23,956 28,521 12,753
4 62,372 1,000,000 1,000,000 1,000,000 42,564 49,591 57,504 30,358 37,385 45,298 12,206
5 79,962 1,000,000 1,000,000 1,000,000 52,211 62,762 75,128 40,484 51,034 63,400 11,728
6 98,431 1,000,000 1,000,000 1,000,000 61,399 76,196 94,253 50,287 65,084 83,141 11,112
7 117,824 1,000,000 1,000,000 1,000,000 70,084 89,854 114,987 60,206 79,976 105,110 9,877
8 138,186 1,000,000 1,000,000 1,000,000 78,202 103,680 137,439 69,560 95,038 128,796 8,643
9 159,567 1,000,000 1,000,000 1,000,000 85,672 117,596 161,711 78,264 110,188 154,303 7,408
10 182,016 1,000,000 1,000,000 1,000,000 92,398 131,511 187,916 86,224 125,338 181,742 6,173
11 205,588 1,000,000 1,000,000 1,000,000 98,278 145,325 216,182 93,339 140,386 211,244 4,939
12 230,338 1,000,000 1,000,000 1,000,000 103,208 158,936 246,668 99,504 155,232 242,964 3,704
13 256,326 1,000,000 1,000,000 1,000,000 107,083 172,240 279,565 104,613 169,771 277,095 2,469
14 283,614 1,000,000 1,000,000 1,000,000 109,798 185,135 315,110 108,563 183,900 313,875 1,235
15 312,266 1,000,000 1,000,000 1,000,000 111,212 197,484 353,564 111,212 197,484 353,564 0
20 478,501 1,000,000 1,000,000 1,000,000 88,571 241,528 600,910 88,571 241,528 600,910 0
25 690,664 0 1,000,000 1,065,112 0 215,810 1,014,392 0 215,810 1,014,392 0
30 961,443 0 0 1,787,824 0 0 1,702,690 0 0 1,702,690 0
</TABLE>
All 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. Guaranteed cost of insurance
rates assumed. Guaranteed 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 guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.82% per
year. See "Fund Expenses" at page 23 of this
Prospectus.
47
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,782 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS
ACCUMULATED TOTAL ACCUMULATION VALUE SURRENDER VALUE
AT ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
END OF 5% DEATH BENEFIT PROCEEDS OF OF
POLICY INTEREST ANNUAL INVESTMENT RETURN OF GROSS GROSS GROSS GROSS SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% 0% 6% GROSS 12% 0% 6% GROSS 12% CHARGE
-- ------- --------- --------- --------- ------- ------- --------- ------- ------- --------- ------
1 14,471 1,000,000 1,000,000 1,000,000 11,246 11,961 12,676 0 0 0 13,676
2 29,666 1,000,000 1,000,000 1,000,000 22,377 24,509 26,728 9,110 11,243 13,462 13,266
3 45,620 1,000,000 1,000,000 1,000,000 33,302 37,576 42,199 20,549 24,822 29,446 12,753
4 62,372 1,000,000 1,000,000 1,000,000 44,022 51,180 59,232 31,816 38,973 47,026 12,206
5 79,962 1,000,000 1,000,000 1,000,000 54,536 65,340 77,985 42,809 53,613 66,258 11,728
6 98,431 1,000,000 1,000,000 1,000,000 64,844 80,079 98,632 53,732 68,967 87,519 11,112
7 117,824 1,000,000 1,000,000 1,000,000 74,942 95,415 121,362 65,065 85,537 111,485 9,877
8 138,186 1,000,000 1,000,000 1,000,000 84,831 111,371 146,390 76,189 102,728 137,747 8,643
9 159,567 1,000,000 1,000,000 1,000,000 94,508 127,969 173,947 87,100 120,561 166,539 7,408
10 182,016 1,000,000 1,000,000 1,000,000 103,969 145,232 204,293 97,796 139,059 198,119 6,173
11 205,588 1,000,000 1,000,000 1,000,000 113,213 163,184 237,712 108,274 158,246 232,773 4,939
12 230,338 1,000,000 1,000,000 1,000,000 122,161 181,779 274,455 118,457 178,075 270,751 3,704
13 256,326 1,000,000 1,000,000 1,000,000 130,779 201,012 314,844 128,310 198,543 312,375 2,469
14 283,614 1,000,000 1,000,000 1,000,000 138,998 220,846 359,213 137,763 219,611 357,978 1,235
15 312,266 1,000,000 1,000,000 1,000,000 146,785 241,280 407,974 146,785 241,280 407,974 0
20 478,501 1,000,000 1,000,000 1,000,000 175,594 350,409 735,049 175,594 350,409 735,049 0
25 690,664 1,000,000 1,000,000 1,343,332 180,770 472,005 1,279,364 180,770 472,005 1,279,364 0
30 961,443 1,000,000 1,000,000 2,269,016 121,765 590,664 2,160,968 121,765 590,664 2,160,968 0
</TABLE>
All 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 current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.82% per year. See "Fund
Expenses" at page 23 of this Prospectus.
48
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,713 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS
ACCUMULATED
AT TOTAL ACCUMULATION VALUE SURRENDER VALUE
END OF 5% DEATH BENEFIT PROCEEDS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ANNUAL INVESTMENT RETURN OF GROSS GROSS SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% 0% GROSS 6% GROSS 12% 0% GROSS 6% GROSS 12% CHARGE
-- ---------- ---------- ---------- ---------- ------- -------- ---------- ------- -------- ---------- ------
1 22,799 1,000,000 1,000,000 1,000,000 18,058 19,195 20,332 0 0 0 25,098
2 46,737 1,000,000 1,000,000 1,000,000 35,031 38,404 41,915 10,971 14,344 17,855 24,060
3 71,873 1,000,000 1,000,000 1,000,000 50,771 57,463 64,711 27,781 34,473 41,721 22,991
4 98,265 1,000,000 1,000,000 1,000,000 65,166 76,238 88,726 43,213 54,285 66,773 21,953
5 125,977 1,000,000 1,000,000 1,000,000 78,084 94,575 113,961 57,201 73,692 93,077 20,883
6 155,074 1,000,000 1,000,000 1,000,000 89,357 112,281 140,394 69,511 92,435 120,549 19,845
7 185,627 1,000,000 1,000,000 1,000,000 98,752 129,097 167,964 81,111 111,457 150,324 17,640
8 217,707 1,000,000 1,000,000 1,000,000 105,947 144,674 196,550 90,512 129,239 181,115 15,435
9 251,391 1,000,000 1,000,000 1,000,000 110,521 158,561 225,970 97,290 145,331 212,739 13,230
10 286,759 1,000,000 1,000,000 1,000,000 111,977 170,228 256,022 100,951 159,203 244,996 11,025
11 323,896 1,000,000 1,000,000 1,000,000 109,766 179,093 286,522 100,945 170,273 277,702 8,820
12 362,889 1,000,000 1,000,000 1,000,000 103,287 184,514 317,331 96,672 177,899 310,716 6,615
13 403,832 1,000,000 1,000,000 1,000,000 91,890 185,792 348,374 87,480 181,382 343,964 4,410
14 446,822 1,000,000 1,000,000 1,000,000 74,832 182,126 379,645 72,626 179,921 377,440 2,205
15 491,962 1,000,000 1,000,000 1,000,000 51,143 172,481 411,144 51,143 172,481 411,144 0
20 753,859 0 0 1,000,000 0 0 570,383 0 0 570,383 0
25 1,088,113 0 0 1,000,000 0 0 771,432 0 0 771,432 0
30 1,514,716 0 0 1,289,785 0 0 1,277,015 0 0 1,277,015 0
</TABLE>
All 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. Guaranteed cost of insurance
rates assumed. Guaranteed 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 guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.82% per
year. See "Fund Expenses" at page 23 of this
Prospectus.
49
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,713 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS
ACCUMULATED
AT TOTAL ACCUMULATION VALUE SURRENDER VALUE
END OF 5% DEATH BENEFIT PROCEEDS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
POLICY INTEREST ANNUAL INVESTMENT RETURN OF GROSS GROSS SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% 0% GROSS 6% GROSS 12% 0% GROSS 6% GROSS 12% CHARGE
-- ---------- ---------- ---------- ---------- ------- -------- ---------- ------- -------- ---------- ------
1 22,799 1,000,000 1,000,000 1,000,000 18,364 19,511 20,660 0 0 0 25,098
2 46,737 1,000,000 1,000,000 1,000,000 36,370 39,806 43,381 12,311 15,747 19,321 24,060
3 71,873 1,000,000 1,000,000 1,000,000 53,947 60,840 68,295 30,956 37,849 45,305 22,991
4 98,265 1,000,000 1,000,000 1,000,000 71,077 82,621 95,608 49,124 60,669 73,656 21,953
5 125,977 1,000,000 1,000,000 1,000,000 87,754 105,172 125,559 66,870 84,288 104,675 20,883
6 155,074 1,000,000 1,000,000 1,000,000 103,967 128,510 158,409 84,122 108,665 138,563 19,845
7 185,627 1,000,000 1,000,000 1,000,000 119,708 152,660 194,453 102,068 135,020 176,813 17,640
8 217,707 1,000,000 1,000,000 1,000,000 134,966 177,644 234,021 119,530 162,209 218,586 15,435
9 251,391 1,000,000 1,000,000 1,000,000 149,728 203,489 277,480 136,498 190,259 264,249 13,230
10 286,759 1,000,000 1,000,000 1,000,000 163,982 230,222 325,242 152,957 219,197 314,216 11,025
11 323,896 1,000,000 1,000,000 1,000,000 177,714 257,874 377,771 168,894 249,054 368,951 8,820
12 362,889 1,000,000 1,000,000 1,000,000 190,447 286,055 435,236 183,832 279,440 428,621 6,615
13 403,832 1,000,000 1,000,000 1,000,000 202,060 314,707 498,176 197,650 310,297 493,766 4,410
14 446,822 1,000,000 1,000,000 1,000,000 212,192 343,573 567,096 209,987 341,368 564,891 2,205
15 491,962 1,000,000 1,000,000 1,000,000 220,393 372,347 642,645 220,393 372,347 642,645 0
20 753,859 1,000,000 1,000,000 1,217,751 215,894 506,279 1,159,763 215,894 506,279 1,159,763 0
25 1,088,113 1,000,000 1,000,000 2,107,579 115,282 636,208 2,007,219 115,282 636,208 2,007,219 0
30 1,514,716 0 1,000,000 3,411,907 0 772,921 3,378,126 0 772,921 3,378,126 0
</TABLE>
All 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 current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.82% per year. See "Fund
Expenses" at page 23 of this Prospectus.
50
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
R-1
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1999
<TABLE>
<CAPTION>
AIM AIM AIM
V.I. V.I. AIM V.I.
CAPITAL DIVERSIFIED V.I. INTERNATIONAL
APPRECIATION INCOME GROWTH EQUITY
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$10,660,427) $11,462,859 $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated (Cost
$38,199,966) 43,749,667 1,443,841 780,164 4,852,254 170,973
-------------------------------- ----------- ---------- ---------- ---------- ----------
Total Investments 55,212,526 1,443,841 780,164 4,852,254 170,973
Dividends Receivable 366 -- -- -- --
TOTAL ASSETS 55,212,892 1,443,841 780,164 4,852,254 170,973
LIABILITY--PAYABLE TO THE
LINCOLN NATIONAL LIFE
INSURANCE COMPANY 1,180 31 17 98 4
-------------------------------- ----------- ---------- ---------- ---------- ----------
NET ASSETS $55,211,712 $1,443,810 $ 780,147 $4,852,156 $ 170,969
-------------------------------- =========== ========== ========== ========== ==========
Percent of net assets 100.00% 2.62% 1.41% 8.79% 0.31%
-------------------------------- =========== ========== ========== ========== ==========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period 91,495 80,631 210,456 --
Unit value $ 15.780 $ 9.675 $ 15.611 $ --
-------------------------------- ---------- ---------- ---------- ----------
1,443,810 780,147 3,285,427 --
LSVUL Policies:
Units in accumulation period -- -- 125,580 11,222
Unit value $ -- $ -- $ 12.476 $ 15.235
-------------------------------- ---------- ---------- ---------- ----------
-- -- 1,566,729 170,969
-------------------------------- ---------- ---------- ---------- ----------
NET ASSETS $1,443,810 $ 780,147 $4,852,156 $ 170,969
-------------------------------- ========== ========== ========== ==========
<CAPTION>
AIM BARON BT BT
V.I. CAPITAL EAFE BT EQUITY SMALL
VALUE ASSET EQUITY INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$10,660,427) $ -- $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated (Cost
$38,199,966) 5,505,605 222,847 173,327 9,997,669 107,219
------------------------------- ---------- ----------- ----------- ----------- -----------
Total Investments 5,505,605 222,847 173,327 9,997,669 107,219
Dividends Receivable -- -- -- -- --
TOTAL ASSETS 5,505,605 222,847 173,327 9,997,669 107,219
LIABILITY--PAYABLE TO THE
LINCOLN NATIONAL LIFE
INSURANCE COMPANY 118 4 4 212 2
------------------------------- ---------- ----------- ----------- ----------- -----------
NET ASSETS $5,505,487 $ 222,843 $ 173,323 $ 9,997,457 $ 107,217
------------------------------- ========== =========== =========== =========== ===========
Percent of net assets 9.97% 0.40% 0.31% 18.12% 0.19%
------------------------------- ========== =========== =========== =========== ===========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period 253,088 -- -- 556,772 --
Unit value $ 14.991 $ -- $ -- $ 13.283 $ --
------------------------------- ---------- ----------- ----------- ----------- -----------
3,793,945 -- -- 7,395,845 --
LSVUL Policies:
Units in accumulation period 144,470 19,736 13,894 236,119 9,395
Unit value $ 11.847 $ 11.291 $ 12.474 $ 11.018 $ 11.413
------------------------------- ---------- ----------- ----------- ----------- -----------
1,711,542 222,843 173,323 2,601,612 107,217
------------------------------- ---------- ----------- ----------- ----------- -----------
NET ASSETS $5,505,487 $ 222,843 $ 173,323 $ 9,997,457 $ 107,217
------------------------------- ========== =========== =========== =========== ===========
</TABLE>
R-2
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DELAWARE DELAWARE
DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE
PREMIUM PREMIUM EMERGING SMALL PREMIUM
DELCHESTER DEVON MARKETS CAP VALUE REIT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$10,660,427) $ 171,649 $ 31,477 $ 292,419 $1,152,083 $ 4,105
Investments at
Market--Unaffiliated (Cost
$38,199,966) -- -- -- -- --
-------------------------------- ---------- ---------- ---------- ---------- ----------
Total Investments 171,649 31,477 292,419 1,152,083 4,105
Dividends Receivable 366 -- -- -- --
TOTAL ASSETS 172,015 31,477 292,419 1,152,083 4,105
LIABILITY--PAYABLE TO THE
LINCOLN NATIONAL LIFE
INSURANCE COMPANY 4 1 6 25 --
-------------------------------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 172,011 $ 31,476 $ 292,413 $1,152,058 $ 4,105
-------------------------------- ========== ========== ========== ========== ==========
Percent of net assets 0.31% 0.06% 0.53% 2.09% 0.01%
-------------------------------- ========== ========== ========== ========== ==========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period -- -- 22,036 89,408 --
Unit value $ -- $ -- $ 11.243 $ 9.164 $ --
-------------------------------- ---------- ---------- ---------- ---------- ----------
-- -- 247,739 819,295 --
LSVUL Policies:
Units in accumulation period 18,224 3,444 3,692 35,187 446
Unit value $ 9.438 $ 9.139 $ 12.096 $ 9.458 $ 9.196
-------------------------------- ---------- ---------- ---------- ---------- ----------
172,011 31,476 44,674 332,763 4,105
-------------------------------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 172,011 $ 31,476 $ 292,413 $1,152,058 $ 4,105
-------------------------------- ========== ========== ========== ========== ==========
<CAPTION>
FIDELITY FIDELITY FIDELITY FIDELITY
DELAWARE VIP VIP II VIP II VIP II
PREMIUM EQUITY- ASSET CONTRAFUND INVESTMENT
TREND INCOME MANAGER SERVICE CLASS GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$10,660,427) $2,450,120 $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated (Cost
$38,199,966) -- 2,131,776 534,793 841,733 2,103,802
------------------------------- ---------- ---------- ---------- ------------- ------------
Total Investments 2,450,120 2,131,776 534,793 841,733 2,103,802
Dividends Receivable -- -- -- -- --
TOTAL ASSETS 2,450,120 2,131,776 534,793 841,733 2,103,802
LIABILITY--PAYABLE TO THE
LINCOLN NATIONAL LIFE
INSURANCE COMPANY 53 46 12 18 46
------------------------------- ---------- ---------- ---------- ------------- ------------
NET ASSETS $2,450,067 $2,131,730 $ 534,781 $ 841,715 $ 2,103,756
------------------------------- ========== ========== ========== ============= ============
Percent of net assets 4.44% 3.86% 0.97% 1.52% 3.81%
------------------------------- ========== ========== ========== ============= ============
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period 89,905 197,459 45,700 -- 204,605
Unit value $ 18.641 $ 10.796 $ 11.702 $ -- $ 10.282
------------------------------- ---------- ---------- ---------- ------------- ------------
1,675,877 2,131,730 534,781 -- 2,103,756
LSVUL Policies:
Units in accumulation period 49,691 -- -- 73,429 --
Unit value $ 15.580 $ -- $ -- $ 11.463 $ --
------------------------------- ---------- ---------- ---------- ------------- ------------
774,190 -- -- 841,715 --
------------------------------- ---------- ---------- ---------- ------------- ------------
NET ASSETS $2,450,067 $2,131,730 $ 534,781 $ 841,715 $ 2,103,756
------------------------------- ========== ========== ========== ============= ============
</TABLE>
R-3
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
FIDELITY JANUS
VIP III JANUS ASPEN
GROWTH ASPEN SERIES LN
OPPORTUNITIES SERIES WORLDWIDE LN CAPITAL
SERVICE CLASS BALANCED GROWTH BOND APPRECIATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$10,660,427) $ -- $ -- $ -- $ 799,959 $ 525,071
Investments at
Market--Unaffiliated (Cost
$38,199,966) 220,244 1,208,164 1,334,584 -- --
-------------------------------- ------------- ------------ ------------ ---------- ------------
Total Investments 220,244 1,208,164 1,334,584 799,959 525,071
Dividends Receivable -- -- -- -- --
TOTAL ASSETS 220,244 1,208,164 1,334,584 799,959 525,071
LIABILITY--PAYABLE TO THE
LINCOLN NATIONAL LIFE
INSURANCE COMPANY 5 25 28 17 11
-------------------------------- ------------- ------------ ------------ ---------- ------------
NET ASSETS $ 220,239 $ 1,208,139 $ 1,334,556 $ 799,942 $ 525,060
-------------------------------- ============= ============ ============ ========== ============
Percent of net assets 0.40% 2.19% 2.42% 1.45% 0.95%
-------------------------------- ============= ============ ============ ========== ============
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period -- -- -- -- --
Unit value $ -- $ -- $ -- $ -- $ --
-------------------------------- ------------- ------------ ------------ ---------- ------------
-- -- -- -- --
LSVUL Policies:
Units in accumulation period 21,913 106,218 88,482 81,026 40,651
Unit value $ 10.050 $ 11.374 $ 15.083 $ 9.873 $ 12.916
-------------------------------- ------------- ------------ ------------ ---------- ------------
220,239 1,208,139 1,334,556 799,942 525,060
-------------------------------- ------------- ------------ ------------ ---------- ------------
NET ASSETS $ 220,239 $ 1,208,139 $ 1,334,556 $ 799,942 $ 525,060
-------------------------------- ============= ============ ============ ========== ============
<CAPTION>
LN
LN GLOBAL LN LN MFS
EQUITY- ASSET MONEY SOCIAL EMERGING
INCOME ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$10,660,427) $ 161,150 $ 38,992 $ 5,734,236 $ 101,598 $ --
Investments at
Market--Unaffiliated (Cost
$38,199,966) -- -- -- -- 4,076,388
------------------------------- ---------- ---------- ----------- ---------- ----------
Total Investments 161,150 38,992 5,734,236 101,598 4,076,388
Dividends Receivable -- -- -- -- --
TOTAL ASSETS 161,150 38,992 5,734,236 101,598 4,076,388
LIABILITY--PAYABLE TO THE
LINCOLN NATIONAL LIFE
INSURANCE COMPANY 3 1 126 2 87
------------------------------- ---------- ---------- ----------- ---------- ----------
NET ASSETS $ 161,147 $ 38,991 $ 5,734,110 $ 101,596 $4,076,301
------------------------------- ========== ========== =========== ========== ==========
Percent of net assets 0.29% 0.07% 10.39% 0.18% 7.38%
------------------------------- ========== ========== =========== ========== ==========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period -- -- 297,512 -- 153,406
Unit value $ -- $ -- $ 10.623 $ -- $ 20.052
------------------------------- ---------- ---------- ----------- ---------- ----------
-- -- 3,160,610 -- 3,076,151
LSVUL Policies:
Units in accumulation period 16,398 3,607 251,134 9,065 60,639
Unit value $ 9.827 $ 10.810 $ 10.248 $ 11.207 $ 16.493
------------------------------- ---------- ---------- ----------- ---------- ----------
161,147 38,991 2,573,500 101,596 1,000,150
------------------------------- ---------- ---------- ----------- ---------- ----------
NET ASSETS $ 161,147 $ 38,991 $ 5,734,110 $ 101,596 $4,076,301
------------------------------- ========== ========== =========== ========== ==========
</TABLE>
R-4
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
OCC
MFS AMT ACCUMULATION
TOTAL MFS MID-CAP AMT GLOBAL
RETURN UTILITIES GROWTH PARTNERS EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $10,660,427) $ -- $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated
(Cost $38,199,966) 1,200,068 1,368,036 111,303 59,959 653,337
-------------------------------- --------- --------- ---------- ---------- ------------
Total Investments 1,200,068 1,368,036 111,303 59,959 653,337
Dividends Receivable -- -- -- -- --
TOTAL ASSETS 1,200,068 1,368,036 111,303 59,959 653,337
LIABILITY--PAYABLE TO THE
LINCOLN NATIONAL LIFE
INSURANCE COMPANY 26 30 2 1 14
-------------------------------- --------- --------- ---------- ---------- ------------
NET ASSETS $1,200,042 $1,368,006 $ 111,301 $ 59,958 $ 653,323
-------------------------------- ========= ========= ========== ========== ============
Percent of net assets 2.17% 2.48% 0.20% 0.11% 1.18%
-------------------------------- ========= ========= ========== ========== ============
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period 72,807 80,427 -- -- 53,136
Unit value $ 10.622 $ 14.003 $ -- $ -- $ 12.295
-------------------------------- --------- --------- ---------- ---------- ------------
773,365 1,126,208 -- -- 653,323
LSVUL Policies:
Units in accumulation period 43,385 19,873 7,387 6,305 --
Unit value $ 9.834 $ 12.167 $ 15.066 $ 9.509 $ --
-------------------------------- --------- --------- ---------- ---------- ------------
426,677 241,798 111,301 59,958 --
-------------------------------- --------- --------- ---------- ---------- ------------
NET ASSETS $1,200,042 $1,368,006 $ 111,301 $ 59,958 $ 653,323
-------------------------------- ========= ========= ========== ========== ============
<CAPTION>
OCC TEMPLETON TEMPLETON TEMPLETON
ACCUMULATION ASSET TEMPLETON INTERNATIONAL TEMPLETON STOCK
MANAGED ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $10,660,427) $ -- $ -- $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated
(Cost $38,199,966) 1,037,980 294,607 2,709,708 377,526 175,334 56,426
------------------------------- ---------- ---------- ------------- ------------- ---------- ----------
Total Investments 1,037,980 294,607 2,709,708 377,526 175,334 56,426
Dividends Receivable -- -- -- -- -- --
TOTAL ASSETS 1,037,980 294,607 2,709,708 377,526 175,334 56,426
LIABILITY--PAYABLE TO THE
LINCOLN NATIONAL LIFE
INSURANCE COMPANY 23 6 59 8 4 1
------------------------------- ---------- ---------- ------------- ------------- ---------- ----------
NET ASSETS $1,037,957 $ 294,601 $ 2,709,649 $ 377,518 $ 175,330 $ 56,425
------------------------------- ========== ========== ============= ============= ========== ==========
Percent of net assets 1.88% 0.53% 4.91% 0.68% 0.32% 0.10%
------------------------------- ========== ========== ============= ============= ========== ==========
NET ASSETS ARE REPRESENTED BY:
SVUL I Policies:
Units in accumulation period 101,945 24,492 230,299 -- 14,786 --
Unit value $ 10.182 $ 12.028 $ 11.766 $ -- $ 11.857 $ --
------------------------------- ---------- ---------- ------------- ------------- ---------- ----------
1,037,957 294,601 2,709,649 -- 175,330 --
LSVUL Policies:
Units in accumulation period -- -- -- 33,516 -- 4,890
Unit value $ -- $ -- $ -- $ 11.264 $ -- $ 11.538
------------------------------- ---------- ---------- ------------- ------------- ---------- ----------
-- -- -- 377,518 -- 56,425
------------------------------- ---------- ---------- ------------- ------------- ---------- ----------
NET ASSETS $1,037,957 $ 294,601 $ 2,709,649 $ 377,518 $ 175,330 $ 56,425
------------------------------- ========== ========== ============= ============= ========== ==========
</TABLE>
See accompanying notes.
R-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF OPERATIONS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED AIM V.I.
APPRECIATION INCOME GROWTH
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ 59,265 $ 405 $ 12,573 $ 1,681
Dividends from net realized gains on
investments 89,117 7,166 4,012 31,515
Mortality and expense guarantees--SVUL I (15,398) (506) (443) (837)
-------------------------------------------- ---------- -------- --------- --------
NET INVESTMENT INCOME (LOSS) 132,984 7,065 16,142 32,359
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 20,588 1,131 5 474
Net change in unrealized appreciation or
depreciation on investments 647,779 44,813 (11,427) 81,846
-------------------------------------------- ---------- -------- --------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 668,367 45,944 (11,422) 82,320
-------------------------------------------- ---------- -------- --------- --------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 801,351 $ 53,009 $ 4,720 $114,679
-------------------------------------------- ========== ======== ========= ========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 533,766 $ 939 $ 46,589 $ 7,873
Dividends from net realized gains on
investments 598,007 29,289 -- 138,013
Mortality and expense guarantees:
SVUL I (200,572) (6,113) (5,638) (13,644)
LSVUL (23,989) -- -- (1,499)
-------------------------------------------- ---------- -------- --------- --------
NET INVESTMENT INCOME (LOSS) 907,212 24,115 40,951 130,743
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 270,353 15,800 (17,904) 32,609
Net change in unrealized appreciation or
depreciation on investments 5,704,354 365,138 (55,300) 625,753
-------------------------------------------- ---------- -------- --------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 5,974,707 380,938 (73,204) 658,362
-------------------------------------------- ---------- -------- --------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $6,881,919 $405,053 $ (32,253) $789,105
-------------------------------------------- ========== ======== ========= ========
<CAPTION>
AIM V.I. BARON
INTERNATIONAL AIM V.I. CAPITAL
EQUITY VALUE ASSET
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
--------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ 2,872 $ --
Dividends from net realized gains on
investments -- 25,401 --
Mortality and expense guarantees--SVUL I -- (993) --
-------------------------------------------- -------- -------- -------
NET INVESTMENT INCOME (LOSS) -- 27,280 --
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments -- 2,596 --
Net change in unrealized appreciation or
depreciation on investments -- 83,876 --
-------------------------------------------- -------- -------- -------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- 86,472 --
-------------------------------------------- -------- -------- -------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ -- $113,752 $ --
-------------------------------------------- ======== ======== =======
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 883 $ 12,942 $ --
Dividends from net realized gains on
investments 3,707 67,676 11
Mortality and expense guarantees:
SVUL I -- (16,954) --
LSVUL (204) (1,889) (236)
-------------------------------------------- -------- -------- -------
NET INVESTMENT INCOME (LOSS) 4,386 61,775 (225)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 528 25,532 6,139
Net change in unrealized appreciation or
depreciation on investments 31,276 685,386 22,579
-------------------------------------------- -------- -------- -------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 31,804 710,918 28,718
-------------------------------------------- -------- -------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 36,190 $772,693 $28,493
-------------------------------------------- ======== ======== =======
<CAPTION>
BT EAFE
EQUITY BT EQUITY BT SMALL
INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
--------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ 2,407 $ --
Dividends from net realized gains on
investments -- 15,403 --
Mortality and expense guarantees--SVUL I -- (1,229) --
-------------------------------------------- ------- ---------- --------
NET INVESTMENT INCOME (LOSS) -- 16,581 --
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments -- 5,733 --
Net change in unrealized appreciation or
depreciation on investments -- 103,650 --
-------------------------------------------- ------- ---------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- 109,383 --
-------------------------------------------- ------- ---------- --------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ -- $ 125,964 $ --
-------------------------------------------- ======= ========== ========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 2,757 $ 62,072 $ 960
Dividends from net realized gains on
investments 5,151 29,190 2,749
Mortality and expense guarantees:
SVUL I -- (38,431) --
LSVUL (399) (4,725) (128)
-------------------------------------------- ------- ---------- --------
NET INVESTMENT INCOME (LOSS) 7,509 48,106 3,581
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 220 72,816 910
Net change in unrealized appreciation or
depreciation on investments 17,123 981,969 7,446
-------------------------------------------- ------- ---------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 17,343 1,054,785 8,356
-------------------------------------------- ------- ---------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $24,852 $1,102,891 $ 11,937
-------------------------------------------- ======= ========== ========
</TABLE>
R-6
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF OPERATIONS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
DELAWARE DELAWARE
DELAWARE DELAWARE PREMIUM PREMIUM
PREMIUM PREMIUM EMERGING SMALL CAP
DELCHESTER DEVON MARKETS VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- -- --
Mortality and expense guarantees--SVUL I -- -- (250) (396)
-------------------------------------------- -------- -------- -------- --------
NET INVESTMENT INCOME (LOSS) -- -- (250) (396)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments -- -- (11) 344
Net change in unrealized appreciation or
depreciation on investments -- -- 7,148 38,453
-------------------------------------------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- -- 7,137 38,797
-------------------------------------------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ -- $ -- $ 6,887 $ 38,401
-------------------------------------------- ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 1,189 $ -- $ 3,238 $ 4,144
Dividends from net realized gains on
investments -- -- -- 1,700
Mortality and expense guarantees:
SVUL I -- -- (1,363) (4,380)
LSVUL (86) (18) (46) (478)
-------------------------------------------- -------- -------- -------- --------
NET INVESTMENT INCOME (LOSS) 1,103 (18) 1,829 986
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments (350) (4) 2,183 1,695
Net change in unrealized appreciation or
depreciation on investments (300) 386 74,521 (25,551)
-------------------------------------------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (650) 382 76,704 (23,856)
-------------------------------------------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 453 $ 364 $ 78,533 $(22,870)
-------------------------------------------- ======== ======== ======== ========
<CAPTION>
DELAWARE DELAWARE FIDELITY
PREMIUM PREMIUM VIP EQUITY-
REIT TREND INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
--------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- --
Mortality and expense guarantees--SVUL I -- (258) (643)
-------------------------------------------- ----- -------- --------
NET INVESTMENT INCOME (LOSS) -- (258) (643)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments -- (131) 3,229
Net change in unrealized appreciation or
depreciation on investments -- 30,649 51,071
-------------------------------------------- ----- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- 30,518 54,300
-------------------------------------------- ----- -------- --------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ -- $ 30,260 $ 53,657
-------------------------------------------- ===== ======== ========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ -- $ 39 $ 11,959
Dividends from net realized gains on
investments -- -- 26,436
Mortality and expense guarantees:
SVUL I -- (5,642) (11,234)
LSVUL (8) (961) --
-------------------------------------------- ----- -------- --------
NET INVESTMENT INCOME (LOSS) (8) (6,564) 27,161
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments (2) 29,968 4,508
Net change in unrealized appreciation or
depreciation on investments 18 646,621 2,110
-------------------------------------------- ----- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 16 676,589 6,618
-------------------------------------------- ----- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 8 $670,025 $ 33,779
-------------------------------------------- ===== ======== ========
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP II VIP II VIP II
ASSET CONTRAFUND INVESTMENT
MANAGER SERVICE CLASS GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
--------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- --
Mortality and expense guarantees--SVUL I (217) -- (856)
-------------------------------------------- -------- -------- --------
NET INVESTMENT INCOME (LOSS) (217) -- (856)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments (21) -- 259
Net change in unrealized appreciation or
depreciation on investments 9,349 -- 6,838
-------------------------------------------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 9,328 -- 7,097
-------------------------------------------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 9,111 $ -- $ 6,241
-------------------------------------------- ======== ======== ========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 8,457 $ -- $ 33,693
Dividends from net realized gains on
investments 10,712 -- 10,570
Mortality and expense guarantees:
SVUL I (3,211) -- (12,471)
LSVUL -- (1,289) --
-------------------------------------------- -------- -------- --------
NET INVESTMENT INCOME (LOSS) 15,958 (1,289) 31,792
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 429 150 (12,166)
Net change in unrealized appreciation or
depreciation on investments 26,389 76,811 (49,719)
-------------------------------------------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 26,818 76,961 (61,885)
-------------------------------------------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 42,776 $ 75,672 $(30,093)
-------------------------------------------- ======== ======== ========
</TABLE>
R-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF OPERATIONS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
FIDELITY
VIP III JANUS ASPEN
GROWTH JANUS ASPEN SERIES
OPPORTUNITIES SERIES WORLDWIDE
SERVICE CLASS BALANCED GROWTH LN BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- -- --
Mortality and expense guarantees--SVUL I -- -- -- --
-------------------------------------------- -------- -------- -------- --------
NET INVESTMENT INCOME (LOSS) -- -- -- --
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments -- -- -- --
Net change in unrealized appreciation or
depreciation on investments -- -- -- --
-------------------------------------------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- -- -- --
-------------------------------------------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ -- $ -- $ -- $ --
-------------------------------------------- ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ -- $ 12,578 $ 9 $ 30,770
Dividends from net realized gains on
investments -- -- -- --
Mortality and expense guarantees:
SVUL I -- -- -- --
LSVUL (143) (1,685) (1,133) (1,702)
-------------------------------------------- -------- -------- -------- --------
NET INVESTMENT INCOME (LOSS) (143) 10,893 (1,124) 29,068
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 2,188 9,778 10,312 (961)
Net change in unrealized appreciation or
depreciation on investments 3,874 84,840 205,233 (28,119)
-------------------------------------------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 6,062 94,618 215,545 (29,080)
-------------------------------------------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,919 $105,511 $214,421 $ (12)
-------------------------------------------- ======== ======== ======== ========
<CAPTION>
LN LN LN GLOBAL
CAPITAL EQUITY- ASSET
APPRECIATION INCOME ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
--------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- --
Mortality and expense guarantees--SVUL I -- -- --
-------------------------------------------- -------- ------- --------
NET INVESTMENT INCOME (LOSS) -- -- --
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments -- -- --
Net change in unrealized appreciation or
depreciation on investments -- -- --
-------------------------------------------- -------- ------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- -- --
-------------------------------------------- -------- ------- --------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ -- $ -- $ --
-------------------------------------------- ======== ======= ========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ -- $ 238 $ 8
Dividends from net realized gains on
investments -- -- --
Mortality and expense guarantees:
SVUL I -- -- --
LSVUL (499) (202) (40)
-------------------------------------------- -------- ------- --------
NET INVESTMENT INCOME (LOSS) (499) 36 (32)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 8,084 1,395 1
Net change in unrealized appreciation or
depreciation on investments 44,431 7,515 1,470
-------------------------------------------- -------- ------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 52,515 8,910 1,471
-------------------------------------------- -------- ------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 52,016 $ 8,946 $ 1,439
-------------------------------------------- ======== ======= ========
<CAPTION>
MFS
LN MONEY LN SOCIAL EMERGING
MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
--------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ 37,695 $ -- $ --
Dividends from net realized gains on
investments -- -- --
Mortality and expense guarantees--SVUL I (6,329) -- (599)
-------------------------------------------- -------- -------- ----------
NET INVESTMENT INCOME (LOSS) 31,366 -- (599)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments -- -- 5,876
Net change in unrealized appreciation or
depreciation on investments -- -- 99,056
-------------------------------------------- -------- -------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- -- 104,932
-------------------------------------------- -------- -------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 31,366 $ -- $ 104,333
-------------------------------------------- ======== ======== ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $229,922 $ 932 $ --
Dividends from net realized gains on
investments -- -- --
Mortality and expense guarantees:
SVUL I (35,526) -- (11,719)
LSVUL (4,113) (103) (986)
-------------------------------------------- -------- -------- ----------
NET INVESTMENT INCOME (LOSS) 190,283 829 (12,705)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments -- 4,360 54,037
Net change in unrealized appreciation or
depreciation on investments -- 5,190 1,352,531
-------------------------------------------- -------- -------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- 9,550 1,406,568
-------------------------------------------- -------- -------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $190,283 $ 10,379 $1,393,863
-------------------------------------------- ======== ======== ==========
</TABLE>
R-8
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF OPERATIONS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
OCC
AMT ACCUMULATION
MFS TOTAL MFS MID-CAP AMT GLOBAL
RETURN UTILITIES GROWTH PARTNERS EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ 1,632
Dividends from net realized gains
on investments -- -- -- -- 5,620
Mortality and expense
guarantees--SVUL I (200) (314) -- -- (267)
------------------------------------ ---------- ---------- ---------- ---------- ------------
NET INVESTMENT INCOME (LOSS) (200) (314) -- -- 6,985
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 103 43 -- -- 280
Net change in unrealized
appreciation or depreciation on
investments 6,369 11,452 -- -- 13,659
------------------------------------ ---------- ---------- ---------- ---------- ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 6,472 11,495 -- -- 13,939
------------------------------------ ---------- ---------- ---------- ---------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 6,272 $ 11,181 $ -- $ -- $ 20,924
------------------------------------ ========== ========== ========== ========== ============
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 7,732 $ 7,132 $ -- $ -- $ 8,573
Dividends from net realized gains
on investments 14,339 35,861 -- -- 89,807
Mortality and expense guarantees:
SVUL I (3,905) (5,351) -- -- (3,491)
LSVUL (483) (304) (54) (74) --
------------------------------------ ---------- ---------- ---------- ---------- ------------
NET INVESTMENT INCOME (LOSS) 17,683 37,338 (54) (74) 94,889
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 319 9,255 40 64 3,350
Net change in unrealized
appreciation or depreciation on
investments (4,094) 209,232 11,917 1,746 7,284
------------------------------------ ---------- ---------- ---------- ---------- ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (3,775) 218,487 11,957 1,810 10,634
------------------------------------ ---------- ---------- ---------- ---------- ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 13,908 $ 255,825 $ 11,903 $ 1,736 $ 105,523
------------------------------------ ========== ========== ========== ========== ============
<CAPTION>
OCC TEMPLETON
ACCUMULATION ASSET TEMPLETON
MANAGED ALLOCATION INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ --
Dividends from net realized gains
on investments -- -- --
Mortality and expense
guarantees--SVUL I (122) (166) (703)
------------------------------------ ------------ ---------- -------------
NET INVESTMENT INCOME (LOSS) (122) (166) (703)
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 32 120 402
Net change in unrealized
appreciation or depreciation on
investments 4,507 11,550 53,289
------------------------------------ ------------ ---------- -------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 4,539 11,670 53,691
------------------------------------ ------------ ---------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 4,417 $ 11,504 $ 52,988
------------------------------------ ============ ========== =============
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 5,941 $ 3,047 $ 28,066
Dividends from net realized gains
on investments 13,331 16,954 97,494
Mortality and expense guarantees:
SVUL I (5,724) (1,438) (13,463)
LSVUL -- -- --
------------------------------------ ------------ ---------- -------------
NET INVESTMENT INCOME (LOSS) 13,548 18,563 112,097
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 355 977 2,171
Net change in unrealized
appreciation or depreciation on
investments 7,071 19,172 283,148
------------------------------------ ------------ ---------- -------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 7,426 20,149 285,319
------------------------------------ ------------ ---------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 20,974 $ 38,712 $ 397,416
------------------------------------ ============ ========== =============
<CAPTION>
TEMPLETON TEMPLETON
INTERNATIONAL TEMPLETON STOCK
CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
------------------------------------
PERIOD FROM JUNE 18, 1998 TO
DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ --
Dividends from net realized gains
on investments -- -- --
Mortality and expense
guarantees--SVUL I -- (70) --
------------------------------------ ------------- ---------- ----------
NET INVESTMENT INCOME (LOSS) -- (70) --
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments -- 124 --
Net change in unrealized
appreciation or depreciation on
investments -- 1,631 --
------------------------------------ ------------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS -- 1,755 --
------------------------------------ ------------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ -- $ 1,685 $ --
------------------------------------ ============= ========== ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ -- $ 1,084 $ --
Dividends from net realized gains
on investments -- 5,017 --
Mortality and expense guarantees:
SVUL I -- (874) --
LSVUL (475) -- (27)
------------------------------------ ------------- ---------- ----------
NET INVESTMENT INCOME (LOSS) (475) 5,227 (27)
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 690 875 2
Net change in unrealized
appreciation or depreciation on
investments 31,111 25,689 2,457
------------------------------------ ------------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 31,801 26,564 2,459
------------------------------------ ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 31,326 $ 31,791 $ 2,432
------------------------------------ ============= ========== ==========
</TABLE>
See accompanying notes.
R-9
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED AIM V.I. INTERNATIONAL AIM V.I.
APPRECIATION INCOME GROWTH EQUITY VALUE
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 132,984 $ 7,065 $ 16,142 $ 32,359 $ -- $ 27,280
Net realized gain (loss) on
investments 20,588 1,131 5 474 -- 2,596
Net change in unrealized
appreciation or depreciation on
investments 647,779 44,813 (11,427) 81,846 -- 83,876
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 801,351 53,009 4,720 114,679 -- 113,752
Change From Unit Transactions:
Participant purchases 16,601,606 274,025 388,335 530,958 -- 615,727
Participant withdrawals (4,569,117) (21,505) (22,806) (51,518) -- (48,176)
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 12,032,489 252,520 365,529 479,440 -- 567,551
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
TOTAL INCREASE IN NET ASSETS 12,833,840 305,529 370,249 594,119 -- 681,303
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET ASSETS AT DECEMBER 31, 1998 12,833,840 305,529 370,249 594,119 -- 681,303
----------------------------------- ============ ========== ========= ========== =========== ==========
Changes From Operations:
Net investment income (loss) 907,212 24,115 40,951 130,743 4,386 61,775
Net realized gain (loss) on
investments 270,353 15,800 (17,904) 32,609 528 25,532
Net change in unrealized
appreciation or depreciation on
investments 5,704,354 365,138 (55,300) 625,753 31,276 685,386
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS 6,881,919 405,053 (32,253) 789,105 36,190 772,693
Change From Unit Transactions:
Participant purchases 59,275,780 815,226 497,713 3,707,852 143,720 4,349,013
Participant withdrawals (23,779,827) (81,998) (55,562) (238,920) (8,941) (297,522)
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 35,495,953 733,228 442,151 3,468,932 134,779 4,051,491
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
TOTAL INCREASE IN NET ASSETS 42,377,872 1,138,281 409,898 4,258,037 170,969 4,824,184
----------------------------------- ------------ ---------- --------- ---------- ----------- ----------
NET ASSETS AT DECEMBER 31, 1999 $ 55,211,712 $1,443,810 $ 780,147 $4,852,156 $ 170,969 $5,505,487
----------------------------------- ============ ========== ========= ========== =========== ==========
<CAPTION>
BARON BT EAFE
CAPITAL EQUITY BT EQUITY BT SMALL
ASSET INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
--------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ -- $ 16,581 $ --
Net realized gain (loss) on
investments -- -- 5,733 --
Net change in unrealized
appreciation or depreciation o
investments -- -- 103,650 --
-------------------------------- --------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS -- -- 125,964 --
Change From Unit Transactions:
Participant purchases -- -- 1,356,215 --
Participant withdrawals -- -- (64,871) --
-------------------------------- --------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTI -- -- 1,291,344 --
-------------------------------- --------- --------- ---------- ---------
TOTAL INCREASE IN NET ASSETS -- -- 1,417,308 --
-------------------------------- --------- --------- ---------- ---------
NET ASSETS AT DECEMBER 31, 1998 -- -- 1,417,308 --
-------------------------------- ========= ========= ========== =========
Changes From Operations:
Net investment income (loss) (225) 7,509 48,106 3,581
Net realized gain (loss) on
investments 6,139 220 72,816 910
Net change in unrealized
appreciation or depreciation o
investments 22,579 17,123 981,969 7,446
-------------------------------- --------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATI 28,493 24,852 1,102,891 11,937
Change From Unit Transactions:
Participant purchases 208,725 155,932 7,967,537 163,391
Participant withdrawals (14,375) (7,461) (490,279) (68,111)
-------------------------------- --------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTI 194,350 148,471 7,477,258 95,280
-------------------------------- --------- --------- ---------- ---------
TOTAL INCREASE IN NET ASSETS 222,843 173,323 8,580,149 107,217
-------------------------------- --------- --------- ---------- ---------
NET ASSETS AT DECEMBER 31, 1999 $ 222,843 $ 173,323 $9,997,457 $ 107,217
-------------------------------- ========= ========= ========== =========
</TABLE>
R-10
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
DELAWARE DELAWARE
DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE DELAWARE FIDELITY
PREMIUM PREMIUM EMERGING SMALL CAP PREMIUM PREMIUM VIP EQUITY-
DELCHESTER DEVON MARKETS VALUE REIT TREND INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ -- $ (250) $ (396) $ -- $ (258) $ (643)
Net realized gain (loss) on
investments -- -- (11) 344 -- (131) 3,229
Net change in unrealized
appreciation or depreciation on
investments -- -- 7,148 38,453 -- 30,649 51,071
----------------------------------- --------- --------- --------- ---------- ------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS -- -- 6,887 38,401 -- 30,260 53,657
Change From Unit Transactions:
Participant purchases -- -- 139,569 270,284 -- 359,010 647,390
Participant withdrawals -- -- (12,021) (16,136) -- (12,328) (33,532)
----------------------------------- --------- --------- --------- ---------- ------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS -- -- 127,548 254,148 -- 346,682 613,858
----------------------------------- --------- --------- --------- ---------- ------- ---------- ----------
TOTAL INCREASE IN NET ASSETS -- -- 134,435 292,549 -- 376,942 667,515
----------------------------------- --------- --------- --------- ---------- ------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1998 -- -- 134,435 292,549 -- 376,942 667,515
----------------------------------- ========= ========= ========= ========== ======= ========== ==========
Changes From Operations:
Net investment income (loss) 1,103 (18) 1,829 986 (8) (6,564) 27,161
Net realized gain (loss) on
investments (350) (4) 2,183 1,695 (2) 29,968 4,508
Net change in unrealized
appreciation or depreciation on
investments (300) 386 74,521 (25,551) 18 646,621 2,110
----------------------------------- --------- --------- --------- ---------- ------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS 453 364 78,533 (22,870) 8 670,025 33,779
Change From Unit Transactions:
Participant purchases 177,779 32,143 90,190 949,742 4,509 1,479,071 1,583,764
Participant withdrawals (6,221) (1,031) (10,745) (67,363) (412) (75,971) (153,328)
----------------------------------- --------- --------- --------- ---------- ------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS 171,558 31,112 79,445 882,379 4,097 1,403,100 1,430,436
----------------------------------- --------- --------- --------- ---------- ------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 172,011 31,476 157,978 859,509 4,105 2,073,125 1,464,215
----------------------------------- --------- --------- --------- ---------- ------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1999 $ 172,011 $ 31,476 $ 292,413 $1,152,058 $ 4,105 $2,450,067 $2,131,730
----------------------------------- ========= ========= ========= ========== ======= ========== ==========
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP II VIP II VIP II
ASSET CONTRAFUND INVESTMENT
MANAGER SERVICE CLASS GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
--------------------------------
Changes From Operations:
Net investment income (loss) $ (217) $ -- $ (856)
Net realized gain (loss) on
investments (21) -- 259
Net change in unrealized
appreciation or depreciation o
investments 9,349 -- 6,838
-------------------------------- --------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 9,111 -- 6,241
Change From Unit Transactions:
Participant purchases 234,377 -- 797,504
Participant withdrawals (6,369) -- (35,597)
-------------------------------- --------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTI 228,008 -- 761,907
-------------------------------- --------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 237,119 -- 768,148
-------------------------------- --------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1998 237,119 -- 768,148
-------------------------------- ========= ========== ==========
Changes From Operations:
Net investment income (loss) 15,958 (1,289) 31,792
Net realized gain (loss) on
investments 429 150 (12,166)
Net change in unrealized
appreciation or depreciation o
investments 26,389 76,811 (49,719)
-------------------------------- --------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATI 42,776 75,672 (30,093)
Change From Unit Transactions:
Participant purchases 289,746 803,479 1,474,805
Participant withdrawals (34,860) (37,436) (109,104)
-------------------------------- --------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT TRANSACTI 254,886 766,043 1,365,701
-------------------------------- --------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 297,662 841,715 1,335,608
-------------------------------- --------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1999 $ 534,781 $ 841,715 $2,103,756
-------------------------------- ========= ========== ==========
</TABLE>
R-11
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
FIDELITY
VIP III JANUS ASPEN
GROWTH JANUS ASPEN SERIES LN LN
OPPORTUNITIES SERIES WORLDWIDE CAPITAL EQUITY-
SERVICE CLASS BALANCED GROWTH LN BOND APPRECIATION INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ -- $ -- $ -- $ -- $ --
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) (143) 10,893 (1,124) 29,068 (499) 36
Net realized gain (loss) on
investments 2,188 9,778 10,312 (961) 8,084 1,395
Net change in unrealized
appreciation or depreciation on
investments 3,874 84,840 205,233 (28,119) 44,431 7,515
---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 5,919 105,511 214,421 (12) 52,016 8,946
Change From Unit Transactions:
Participant purchases 227,211 1,156,698 1,168,743 833,214 500,709 160,167
Participant withdrawals (12,891) (54,070) (48,608) (33,260) (27,665) (7,966)
---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 214,320 1,102,628 1,120,135 799,954 473,044 152,201
---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
TOTAL INCREASE IN NET ASSETS 220,239 1,208,139 1,334,556 799,942 525,060 161,147
---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET ASSETS AT DECEMBER 31, 1999 $ 220,239 $1,208,139 $1,334,556 $ 799,942 $ 525,060 $ 161,147
---------------------------------- =========== ========== ========== ========= ========== =========
<CAPTION>
LN GLOBAL MFS
ASSET LN MONEY LN SOCIAL EMERGING
ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
-------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ 31,366 $ -- $ (599)
Net realized gain (loss) on
investments -- -- -- 5,876
Net change in unrealized
appreciation or depreciation
investments -- -- -- 99,056
------------------------------- --------- ------------ --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS -- 31,366 -- 104,333
Change From Unit Transactions:
Participant purchases -- 9,020,245 -- 449,620
Participant withdrawals -- (4,135,288) -- (31,756)
------------------------------- --------- ------------ --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS -- 4,884,957 -- 417,864
------------------------------- --------- ------------ --------- ----------
TOTAL INCREASE IN NET ASSETS -- 4,916,323 -- 522,197
------------------------------- --------- ------------ --------- ----------
NET ASSETS AT DECEMBER 31, 1998 -- 4,916,323 -- 522,197
------------------------------- ========= ============ ========= ==========
Changes From Operations:
Net investment income (loss) (32) 190,283 829 (12,705)
Net realized gain (loss) on
investments 1 -- 4,360 54,037
Net change in unrealized
appreciation or depreciation
investments 1,470 -- 5,190 1,352,531
------------------------------- --------- ------------ --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 1,439 190,283 10,379 1,393,863
Change From Unit Transactions:
Participant purchases 37,764 21,708,528 202,020 2,320,043
Participant withdrawals (212) (21,081,024) (110,803) (159,802)
------------------------------- --------- ------------ --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 37,552 627,504 91,217 2,160,241
------------------------------- --------- ------------ --------- ----------
TOTAL INCREASE IN NET ASSETS 38,991 817,787 101,596 3,554,104
------------------------------- --------- ------------ --------- ----------
NET ASSETS AT DECEMBER 31, 1999 $ 38,991 $ 5,734,110 $ 101,596 $4,076,301
------------------------------- ========= ============ ========= ==========
</TABLE>
R-12
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
OCC
AMT ACCUMULATION OCC
MFS TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (200) $ (314) $ -- $ -- $ 6,985 $ (122)
Net realized gain (loss) on investments 103 43 -- -- 280 32
Net change in unrealized appreciation or
depreciation on investments 6,369 11,452 -- -- 13,659 4,507
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 6,272 11,181 -- -- 20,924 4,417
Change From Unit Transactions:
Participant purchases 142,732 220,459 -- -- 140,963 104,839
Participant withdrawals (8,826) (11,394) -- -- (13,510) (7,476)
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 133,906 209,065 -- -- 127,453 97,363
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 140,178 220,246 -- -- 148,377 101,780
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1998 140,178 220,246 -- -- 148,377 101,780
------------------------------------------- ========== ========== ========= ========= =========== ===========
Changes From Operations:
Net investment income (loss) 17,683 37,338 (54) (74) 94,889 13,548
Net realized gain (loss) on investments 319 9,255 40 64 3,350 355
Net change in unrealized appreciation or
depreciation on investments (4,094) 209,232 11,917 1,746 7,284 7,071
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 13,908 255,825 11,903 1,736 105,523 20,974
Change From Unit Transactions:
Participant purchases 1,127,962 1,005,547 103,175 62,239 430,399 966,244
Participant withdrawals (82,006) (113,612) (3,777) (4,017) (30,976) (51,041)
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 1,045,956 891,935 99,398 58,222 399,423 915,203
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 1,059,864 1,147,760 111,301 59,958 504,946 936,177
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1999 $1,200,042 $1,368,006 $ 111,301 $ 59,958 $ 653,323 $ 1,037,957
------------------------------------------- ========== ========== ========= ========= =========== ===========
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
ASSET TEMPLETON INTERNATIONAL TEMPLETON STOCK
ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------------------
Changes From Operations:
Net investment income (loss) $ (166) $ (703) $ -- $ (70) $ --
Net realized gain (loss) on investments 120 402 -- 124 --
Net change in unrealized appreciation or
depreciation on investments 11,550 53,289 -- 1,631 --
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 11,504 52,988 -- 1,685 --
Change From Unit Transactions:
Participant purchases 90,655 779,469 -- 39,230 --
Participant withdrawals (1,916) (30,242) -- (3,850) --
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 88,739 749,227 -- 35,380 --
------------------------------------------- --------- ----------- ----------- --------- ---------
TOTAL INCREASE IN NET ASSETS 100,243 802,215 -- 37,065 --
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS AT DECEMBER 31, 1998 100,243 802,215 -- 37,065 --
------------------------------------------- ========= =========== =========== ========= =========
Changes From Operations:
Net investment income (loss) 18,563 112,097 (475) 5,227 (27)
Net realized gain (loss) on investments 977 2,171 690 875 2
Net change in unrealized appreciation or
depreciation on investments 19,172 283,148 31,111 25,689 2,457
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 38,712 397,416 31,326 31,791 2,432
Change From Unit Transactions:
Participant purchases 184,054 1,639,823 365,049 126,161 55,693
Participant withdrawals (28,408) (129,805) (18,857) (19,687) (1,700)
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 155,646 1,510,018 346,192 106,474 53,993
------------------------------------------- --------- ----------- ----------- --------- ---------
TOTAL INCREASE IN NET ASSETS 194,358 1,907,434 377,518 138,265 56,425
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS AT DECEMBER 31, 1999 $ 294,601 $ 2,709,649 $ 377,518 $ 175,330 $ 56,425
------------------------------------------- ========= =========== =========== ========= =========
</TABLE>
See accompanying notes.
R-13
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION
THE VARIABLE ACCOUNT:
Lincoln Life Flexible Premium Variable Life Account R (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.
SVUL I
LSVUL
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 from any other business of
Lincoln Life.
BASIS OF PRESENTATION:
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in
the United States for unit investment trusts.
INVESTMENTS:
The assets of the Variable Account are divided into variable
subaccounts 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 subaccounts 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 Service Class Portfolio
Investment Grade Bond Portfolio
R-14
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION (CONTINUED)
Fidelity Variable Insurance Products Fund III:
Growth Opportunities Service Class Portfolio
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 Class 2 Fund
Templeton Stock Fund
Templeton Stock Class 2 Fund
Investments in the variable subaccounts are stated at the
closing net asset value per share on December 31, 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 subaccounts 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.
R-15
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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%. The mortality and
expense risk charges for each of the variable subaccounts
are reported in the statements of operations.
Prior to the allocation of premiums to the Variable Account,
Lincoln Life deducts a premium load of 8% of each premium
payment to cover state taxes and federal income tax
liabilities and a portion of the sales expenses incurred by
Lincoln Life. The premium loads for the year ended
December 31, 1999 and for the period ended December 31, 1998
amounted to $2,728,737 and $886,635, respectively.
Lincoln Life charges a monthly administrative fee of $12.50
in the first policy year and $5 in subsequent policy years.
In addition, there is a monthly charge of $0.09 per $1,000
of specified amount for the first twenty years of the policy
and for the first twenty years following an increase in
specified amount. If the no lapse provision is in effect
there will also be a monthly charge of $0.01 per $1,000 of
specified amount. This charge is for items such as premium
billing and collection, policy value calculation,
confirmations and periodic reports. Administrative fees for
the year ended December 31, 1999 and the period ended
December 31, 1998 amounted to $1,309,450 and $188,856,
respectively.
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
subaccount 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. The cost of
insurance charges for the year ended December 31, 1999 and
the period ended December 31, 1998 amounted to $245,689 and
$19,118, respectively.
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 subaccounts. For
the year ended December 31, 1999 and the period ended
December 31, 1998, no transfer fees were deducted from the
variable subaccounts.
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 face amount of the policy and the
issue 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 subaccounts for the year ended December 31,
1999 and the period ended December 31, 1998 were $2,725 and
$0, respectively.
R-16
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS
The following is a summary of net assets owned at December 31, 1999.
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED AIM V.I. INTERNATIONAL AIM V.I.
APPRECIATION INCOME GROWTH EQUITY VALUE
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $47,528,442 $ 985,748 $ 807,680 $3,948,372 $ 134,779 $4,619,042
- ---------------------------------- ----------- ---------- --------- ---------- ----------- ----------
Accumulated net investment income
(loss) 1,040,196 31,180 57,093 163,102 4,386 89,055
- ---------------------------------- ----------- ---------- --------- ---------- ----------- ----------
Accumulated net realized gain
(loss) on investments 290,941 16,931 (17,899) 33,083 528 28,128
- ---------------------------------- ----------- ---------- --------- ---------- ----------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 6,352,133 409,951 (66,727) 707,599 31,276 769,262
----------- ---------- --------- ---------- ----------- ----------
$55,211,712 $1,443,810 $ 780,147 $4,852,156 $ 170,969 $5,505,487
=========== ========== ========= ========== =========== ==========
<CAPTION>
BARON BT EAFE
CAPITAL EQUITY BT EQUITY BT SMALL
ASSET INDEX 500 INDEX CAP INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $ 194,350 $ 148,471 $8,768,602 $ 95,280
- ---------------------------------- --------- --------- ---------- ---------
Accumulated net investment income
(loss) (225) 7,509 64,687 3,581
- ---------------------------------- --------- --------- ---------- ---------
Accumulated net realized gain
(loss) on investments 6,139 220 78,549 910
- ---------------------------------- --------- --------- ---------- ---------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 22,579 17,123 1,085,619 7,446
--------- --------- ---------- ---------
$ 222,843 $ 173,323 $9,997,457 $ 107,217
========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE
DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE DELAWARE
PREMIUM PREMIUM EMERGING SMALL CAP PREMIUM PREMIUM
DELCHESTER DEVON MARKETS VALUE REIT TREND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $ 171,558 $ 31,112 $ 206,993 $1,136,527 $ 4,097 $1,749,782
- ---------------------------------- --------- --------- --------- ---------- --------- ----------
Accumulated net investment income
(loss) 1,103 (18) 1,579 590 (8) (6,822)
- ---------------------------------- --------- --------- --------- ---------- --------- ----------
Accumulated net realized gain
(loss) on investments (350) (4) 2,172 2,039 (2) 29,837
- ---------------------------------- --------- --------- --------- ---------- --------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS (300) 386 81,669 12,902 18 677,270
--------- --------- --------- ---------- --------- ----------
$ 172,011 $ 31,476 $ 292,413 $1,152,058 $ 4,105 $2,450,067
========= ========= ========= ========== ========= ==========
<CAPTION>
FIDELITY FIDELITY FIDELITY FIDELITY
VIP VIP II VIP II VIP II
EQUITY- ASSET CONTRAFUND INVESTMENT
INCOME MANAGER SERVICE CLASS GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $2,044,294 $ 482,894 $ 766,043 $2,127,608
- ---------------------------------- ---------- --------- ---------- ----------
Accumulated net investment income
(loss) 26,518 15,741 (1,289) 30,936
- ---------------------------------- ---------- --------- ---------- ----------
Accumulated net realized gain
(loss) on investments 7,737 408 150 (11,907)
- ---------------------------------- ---------- --------- ---------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 53,181 35,738 76,811 (42,881)
---------- --------- ---------- ----------
$2,131,730 $ 534,781 $ 841,715 $2,103,756
========== ========= ========== ==========
</TABLE>
R-17
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY JANUS
VIP III JANUS ASPEN
GROWTH ASPEN SERIES
OPPORTUNITIES SERIES WORLDWIDE LN CAPITAL LN EQUITY
SERVICE CLASS BALANCED GROWTH LN BOND APPRECIATION INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $ 214,320 $1,102,628 $1,120,135 $ 799,954 $ 473,044 $ 152,201
- ---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
Accumulated net investment income
(loss) (143) 10,893 (1,124) 29,068 (499) 36
- ---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
Accumulated net realized gain
(loss) on investments 2,188 9,778 10,312 (961) 8,084 1,395
- ---------------------------------- ----------- ---------- ---------- --------- ---------- ---------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 3,874 84,840 205,233 (28,119) 44,431 7,515
----------- ---------- ---------- --------- ---------- ---------
$ 220,239 $1,208,139 $1,334,556 $ 799,942 $ 525,060 $ 161,147
=========== ========== ========== ========= ========== =========
<CAPTION>
LN GLOBAL MFS
ASSET LN MONEY LN SOCIAL EMERGING
ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------------
UNIT TRANSACTIONS:
- ----------------------------------
Accumulation units $ 37,552 $5,512,461 $ 91,217 $2,578,105
- ---------------------------------- --------- ---------- --------- ----------
Accumulated net investment income
(loss) (32) 221,649 829 (13,304)
- ---------------------------------- --------- ---------- --------- ----------
Accumulated net realized gain
(loss) on investments 1 - 4,360 59,913
- ---------------------------------- --------- ---------- --------- ----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS 1,470 - 5,190 1,451,587
--------- ---------- --------- ----------
$ 38,991 $5,734,110 $ 101,596 $4,076,301
========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
OCC
AMT ACCUMULATION OCC TEMPLETON
MFS TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION ASSET
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ----------------------------
Accumulation units $1,179,862 $1,101,000 $ 99,398 $ 58,222 $ 526,876 $ 1,012,566 $ 244,385
- ---------------------------- ---------- ---------- --------- --------- ----------- ----------- ---------
Accumulated net investment
income (loss) 17,483 37,024 (54) (74) 101,874 13,426 18,397
- ---------------------------- ---------- ---------- --------- --------- ----------- ----------- ---------
Accumulated net realized
gain (loss) on
investments 422 9,298 40 64 3,630 387 1,097
- ---------------------------- ---------- ---------- --------- --------- ----------- ----------- ---------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 2,275 220,684 11,917 1,746 20,943 11,578 30,722
---------- ---------- --------- --------- ----------- ----------- ---------
$1,200,042 $1,368,006 $ 111,301 $ 59,958 $ 653,323 $ 1,037,957 $ 294,601
========== ========== ========= ========= =========== =========== =========
<CAPTION>
TEMPLETON TEMPLETON
TEMPLETON INTERNATIONAL TEMPLETON STOCK
INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------
UNIT TRANSACTIONS:
- ----------------------------
Accumulation units $ 2,259,245 $ 346,192 $ 141,854 $ 53,993
- ---------------------------- ----------- ----------- --------- ---------
Accumulated net investment
income (loss) 111,394 (475) 5,157 (27)
- ---------------------------- ----------- ----------- --------- ---------
Accumulated net realized
gain (loss) on
investments 2,573 690 999 2
- ---------------------------- ----------- ----------- --------- ---------
NET UNREALIZED APPRECIATION
(DEPRECIATION) ON
INVESTMENTS 336,437 31,111 27,320 2,457
----------- ----------- --------- ---------
$ 2,709,649 $ 377,518 $ 175,330 $ 56,425
=========== =========== ========= =========
</TABLE>
R-18
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
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
1999.
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE COST PROCEEDS FROM
OF PURCHASES SALES
----------------------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund $ 898,561 $ 141,201
------------------------------------------------------------
AIM V.I. Diversified Income Fund 1,034,132 551,038
------------------------------------------------------------
AIM V.I. Growth Fund 4,093,892 494,132
------------------------------------------------------------
AIM V.I. International Equity Fund 144,758 5,589
------------------------------------------------------------
AIM V.I. Value Fund 4,415,189 301,820
------------------------------------------------------------
Baron Capital Asset Fund 251,268 57,139
------------------------------------------------------------
BT EAFE Equity Index Fund 161,585 5,601
------------------------------------------------------------
BT Equity 500 Index Fund 8,667,623 1,142,078
------------------------------------------------------------
BT Small Cap Index Fund 243,302 144,439
------------------------------------------------------------
Delaware Premium Delchester Series 205,857 33,558
------------------------------------------------------------
Delaware Premium Devon Series 31,264 169
------------------------------------------------------------
Delaware Premium Emerging Markets Series 98,908 17,637
------------------------------------------------------------
Delaware Premium Small Cap Value Series 989,552 106,174
------------------------------------------------------------
Delaware Premium REIT Series 4,136 47
------------------------------------------------------------
Delaware Premium Trend Series 1,582,829 186,248
------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 1,565,652 108,024
------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 335,521 64,680
------------------------------------------------------------
Fidelity VIP II Contrafund Service Class Portfolio 774,389 9,617
------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 1,820,932 423,427
------------------------------------------------------------
Fidelity VIP III Growth Opportunities Service Class
Portfolio 369,606 155,424
------------------------------------------------------------
Janus Aspen Series Balanced Portfolio 1,341,281 227,735
------------------------------------------------------------
Janus Aspen Series Worldwide Growth Portfolio 1,271,038 151,999
------------------------------------------------------------
LN Bond Fund 864,566 35,527
------------------------------------------------------------
LN Capital Appreciation Fund 564,150 91,594
------------------------------------------------------------
LN Equity-Income Fund 275,524 123,284
------------------------------------------------------------
LN Global Asset Allocation Fund 37,687 166
------------------------------------------------------------
LN Money Market Fund 18,220,298 17,402,502
------------------------------------------------------------
LN Social Awareness Fund 380,863 288,815
------------------------------------------------------------
MFS Emerging Growth Series 2,617,099 469,487
------------------------------------------------------------
MFS Total Return Series 1,170,589 106,927
------------------------------------------------------------
MFS Utilities Series 1,149,028 219,739
------------------------------------------------------------
AMT Mid-Cap Growth Portfolio 99,935 589
------------------------------------------------------------
AMT Partners Portfolio 63,580 5,431
------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 525,174 30,854
------------------------------------------------------------
OCC Accumulation Managed Portfolio 1,008,995 80,228
------------------------------------------------------------
Templeton Asset Allocation Fund 199,675 25,479
------------------------------------------------------------
Templeton International Fund 1,720,759 98,602
------------------------------------------------------------
Templeton International Class 2 Fund 357,482 11,757
------------------------------------------------------------
Templeton Stock Fund 125,860 14,157
------------------------------------------------------------
Templeton Stock Class 2 Fund 54,114 147
------------------------------------------------------------
----------- -----------
$59,736,653 $23,333,061
=========== ===========
</TABLE>
R-19
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
The following is a summary of investments owned at
December 31, 1999.
<TABLE>
<CAPTION>
NET
SHARES ASSET VALUE OF
OUTSTANDING VALUE SHARES COST OF SHARES
---------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 40,580 $35.58 $ 1,443,841 $ 1,033,890
------------------------------------------------------------
AIM V.I. Diversified Income Fund 77,551 10.06 780,164 846,891
------------------------------------------------------------
AIM V.I. Growth Fund 150,457 32.25 4,852,254 4,144,655
------------------------------------------------------------
AIM V.I. International Equity Fund 5,837 29.29 170,973 139,697
------------------------------------------------------------
AIM V.I. Value Fund 164,346 33.50 5,505,605 4,736,343
------------------------------------------------------------
Baron Capital Asset Fund 12,541 17.77 222,847 200,268
------------------------------------------------------------
BT EAFE Equity Index Fund 12,744 13.60 173,327 156,204
------------------------------------------------------------
BT Equity 500 Index Fund 658,608 15.18 9,997,669 8,912,050
------------------------------------------------------------
BT Small Cap Index Fund 9,235 11.61 107,219 99,773
------------------------------------------------------------
Delaware Premium Delchester Series 23,133 7.42 171,649 171,949
------------------------------------------------------------
Delaware Premium Devon Series 2,311 13.62 31,477 31,091
------------------------------------------------------------
Delaware Premium Emerging Markets Series 34,811 8.40 292,419 210,750
------------------------------------------------------------
Delaware Premium Small Cap Value Series 75,005 15.36 1,152,083 1,139,181
------------------------------------------------------------
Delaware Premium REIT Series 473 8.67 4,105 4,087
------------------------------------------------------------
Delaware Premium Trend Series 72,790 33.66 2,450,120 1,772,850
------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 82,916 25.71 2,131,776 2,078,595
------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 28,645 18.67 534,793 499,055
------------------------------------------------------------
Fidelity VIP II Contrafund Service Class Portfolio 28,926 29.10 841,733 764,922
------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 173,010 12.16 2,103,802 2,146,683
------------------------------------------------------------
Fidelity VIP III Growth Opportunities Service Class
Portfolio 9,526 23.12 220,244 216,370
------------------------------------------------------------
Janus Aspen Series Balanced Portfolio 43,272 27.92 1,208,164 1,123,324
------------------------------------------------------------
Janus Aspen Series Worldwide Growth Portfolio 27,949 47.75 1,334,584 1,129,351
------------------------------------------------------------
LN Bond Fund 69,953 11.44 799,959 828,078
------------------------------------------------------------
LN Capital Appreciation Fund 16,687 31.47 525,071 480,640
------------------------------------------------------------
LN Equity-Income Fund 7,310 22.05 161,150 153,635
------------------------------------------------------------
LN Global Asset Allocation Fund 2,322 16.79 38,992 37,522
------------------------------------------------------------
LN Money Market Fund 573,424 10.00 5,734,236 5,734,236
------------------------------------------------------------
LN Social Awareness Fund 2,294 44.29 101,598 96,408
------------------------------------------------------------
MFS Emerging Growth Series 107,443 37.94 4,076,388 2,624,801
------------------------------------------------------------
MFS Total Return Series 67,610 17.75 1,200,068 1,197,793
------------------------------------------------------------
MFS Utilities Series 56,624 24.16 1,368,036 1,147,352
------------------------------------------------------------
AMT Mid-Cap Growth Portfolio 4,581 24.30 111,303 99,386
------------------------------------------------------------
AMT Partners Portfolio 3,053 19.64 59,959 58,213
------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 39,454 16.56 653,337 632,394
------------------------------------------------------------
OCC Accumulation Managed Portfolio 23,780 43.65 1,037,980 1,026,402
------------------------------------------------------------
Templeton Asset Allocation Fund 12,606 23.37 294,607 263,885
------------------------------------------------------------
Templeton International Fund 121,785 22.25 2,709,708 2,373,271
------------------------------------------------------------
Templeton International Class 2 Fund 17,059 22.13 377,526 346,415
------------------------------------------------------------
Templeton Stock Fund 7,189 24.39 175,334 148,014
------------------------------------------------------------
Templeton Stock Class 2 Fund 2,323 24.29 56,426 53,969
------------------------------------------------------------ ----------- -----------
$55,212,526 $48,860,393
=========== ===========
</TABLE>
R-20
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, LN Social Awareness 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.
R-21
<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 R
We have audited the accompanying statement of assets and
liability of Lincoln Life Flexible Premium Variable Life Account
R ("Variable Account") (comprised of the AIM V.I. Capital
Appreciation, AIM V.I. Diversified Income, AIM V.I. Growth, AIM
V.I. International Equity, AIM V.I. Value, Baron Capital Asset,
BT EAFE Equity Index, BT Equity 500 Index, BT Small Cap Index,
Delaware Premium Delchester, Delaware Premium Devon, Delaware
Premium Emerging Markets, Delaware Premium Small Cap Value,
Delaware Premium REIT, Delaware Premium Trend, Fidelity VIP
Equity-Income, Fidelity VIP II Asset Manager, Fidelity VIP II
Contrafund Service Class, Fidelity VIP II Investment Grade Bond,
Fidelity VIP III Growth Opportunities Service Class, Janus Aspen
Series Balanced, Janus Aspen Series Worldwide Growth, Lincoln
National Bond, Lincoln National Capital Appreciation, Lincoln
National Equity-Income, Lincoln National Global Asset
Allocation, Lincoln National Money Market, Lincoln National
Social Awareness, MFS Emerging Growth, MFS Total Return, MFS
Utilities, Neuberger Berman Advisers Management Trust (AMT)
Mid-Cap Growth, Neuberger Berman Advisers Management Trust (AMT)
Partners, OCC Accumulation Global Equity, OCC Accumulation
Managed, Templeton Variable Products Asset Allocation, Templeton
Variable Products International, Templeton Variable Products
International Class 2, Templeton Variable Products Stock and
Templeton Variable Products Stock Class 2 subaccounts), as of
December 31, 1999 and the related statements of operations and
changes in net assets for the year ended December 31, 1999 and
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 audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. 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, 1999, by correspondence
with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of each of the respective subaccounts constituting the Lincoln
Life Flexible Premium Variable Life Account R at December 31,
1999, and the results of their operations and the changes in
their net assets for the year ended December 31, 1999 and for
the period from June 18, 1998 to December 31, 1998, in
conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 24, 2000
R-22
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
- ------------------------------------------------------------
Preferred stocks 253.8 236.0
- ------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
- ------------------------------------------------------------
Affiliated common stocks 604.7 322.1
- ------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
- ------------------------------------------------------------
Real estate 254.0 473.8
- ------------------------------------------------------------
Policy loans 1,652.9 1,606.0
- ------------------------------------------------------------
Other investments 426.6 434.4
- ------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
- ------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
- ------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
- ------------------------------------------------------------
Accrued investment income 435.3 432.8
- ------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
- ------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
- ------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
- ------------------------------------------------------------
Goodwill 43.1 49.5
- ------------------------------------------------------------
Other admitted assets 66.7 89.3
- ------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
- ------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
- ------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
- ------------------------------------------------------------
Asset valuation reserve 490.9 484.5
- ------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
- ------------------------------------------------------------
Other liabilities 627.0 504.5
- ------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
- ------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
- ------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
- ------------------------------------------------------------
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 1,250.0
- ------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
- ------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
- ------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
- ------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
- ------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
- ------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
- ------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
- ------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
- ------------------------------------------------------------
Other income 88.8 31.3 21.3
- ------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
- ------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
- ------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
- ------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
- ------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
- ------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
- ------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
- ------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
- ------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
- ------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
- ------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
- ------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
- ------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
- ------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
- ------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
- ------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
- ------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
- ------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
- ------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
- ------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
- ------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
- ------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
- ------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
- ------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
- ------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
- ------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
- ------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
- ------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
- ------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
- ------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
- ------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
- ------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
- ------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
- ------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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 a 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
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred 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 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 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 are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
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
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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 reserves released and 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 the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent 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.
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") effective January 1, 2001. 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.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
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
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</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 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
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
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<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>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
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, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, 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 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in 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
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
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
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 "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<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>
7. ANNUITY RESERVES
At December 31, 1999, 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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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 Corporation ("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
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, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("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, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</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,
1999, 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, 1999 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. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. 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-19
<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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, 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.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented 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. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances, companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. 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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American States 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 LNY reinsured 100% of a block of individual life
insurance and annuity business from 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 $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
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.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable 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 September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. 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 $2,813,800,000
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 LNY 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.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, 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, 1999, 29% of such mortgages ($1,212,700,000) 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 $70,000,000.
At December 31, 1999, 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 certain 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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, 1999 and 1998 were $25,900,000 and $30,900,000, 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, 1999 and 1998.
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 and foreign exchange
risks. In addition, the Company is subject to the risks associated with
changes in the value of its derivatives; however, such changes in value
generally are offset by changes in the value of the items being hedged by
such contracts.
Outstanding derivatives with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values,
are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
INTEREST RATE CAPS SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 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
investments (amortized cost of $12.2 million as of December 31, 1999) 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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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 blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. However, the Company does
not anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
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-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
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.
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 $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, 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 none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
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
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included 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 Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards
generally accepted in the United States. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
January 31, 2000
S-32
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the undersigned registrant
hereby undertakes to file with the Securities and Exchange
Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly
adopted pursuant to authority conferred in that section.
INDEMNIFICATION
(a)Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln
National Life Insurance Company (LNL) provides that LNL
will indemnify certain persons against expenses,
judgments and certain other specified costs incurred by
any such person if he/she is made a party or is
threatened to be made a party to a suit or proceeding
because he/she was a director, officer, or employee of
LNL, as long as he/she acted in good faith and in a
manner he/she reasonably believed to be in the best
interests of, or not opposed to the best interests of,
LNL. Certain additional conditions apply to
indemnification in criminal proceedings.
In particular, separate conditions govern indemnification
of directors, officers, and employees of LNL in
connection with suits by, or in the right of, LNL.
Please refer to Article VII of the By-Laws of LNL
(Exhibit No. 6(b) hereto) for the full text of the
indemnification provisions. Indemnification is permitted
by, and is subject to the requirements of, Indiana law.
(b)Undertaking pursuant to Rule 484 of Regulation C under
the Securities Act of 1933.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant
pursuant to the provisions described in Item 28(a) above
or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any
such action, suit or proceeding) is asserted by such
director, officer or controlling person in connection
with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
FEES AND CHARGES REPRESENTATION
Lincoln Life represents that the fees and charges deducted
under the Contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by Lincoln Life.
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment No. 5 to this registration
statement comprises the following papers and documents:
The facing sheet; A cross-reference sheet (reconciliation
and tie); Two prospectuses, Prospectus 1 consisting of 100
pages, and Prospectus 2, consisting of 104 pages; The
undertaking to file reports; Indemnification; The fees and
charges representation; The signatures; Power of Attorney.
Opinion and Consent of Vaughn Robbins, FSA
Opinion and Consent of Robert A. Picarello, Esq.
Consent of Ernst & Young LLP (Independent Auditors)
<PAGE>
<TABLE>
<S> <C> <C> <C>
1. The following exhibits correspond to those required by
paragraph A of the instructions as to exhibits in Form N-8B-2:
(1) Resolution of the Board of Directors of The Lincoln National Life
Insurance Company and related documents authorizing establishment
of the Account.(1)
(2) Not applicable.
(3) (a) Selling Agreement between the Lincoln National Life
Insurance Company and Lincoln Financial Advisors Corp. (12)
(b) Commission Schedule for Variable Life Policies.(5)
(4) Not applicable.
(5) (a) Form of Policy and Application.(1)
(b) Riders.(1)
(6) (a) Articles of Incorporation of The Lincoln National Life
Insurance Company.(7)
(b) Bylaws of The Lincoln National Life Insurance Company.(7)
(7) Not applicable.
(8) Fund Participation Agreements.
Forms of Agreements between The Lincoln National Life Insurance
Company and:
(a) AIM Variable Insurance Funds, Inc.(11)
(b) Baron Capital Funds Trust.(9)
(c) BT Insurance Funds Trust.(6)
(d) Delaware Group Premium Fund, Inc.(3)
(e) Fidelity Variable Insurance Products Fund.(4)
(f) Fidelity Variable Insurance Products Fund II.(4)
(g) Fidelity Variable Insurance Products Fund III.(13)
(h) Janus Aspen Series.(9)
(i) Lincoln National Funds.(8)
(j) MFS-Registered Trademark- Variable Insurance Trust.(5)
(k) Neuberger & Berman Advisers Management Trust.(9)
(l) Templeton Variable Products Series Fund.(10)
(m) OCC Accumulation Trust.(6)
(n) American Variable Insurance Series.(14)
(9) Services Agreement between The Lincoln National Life Insurance
Co. and Delaware Management Co.(2)
(10) See Exhibit 1(5).
2. See Exhibit 1(5).
3. Opinion and Consent of Robert A. Picarello, Esq.
4. Not applicable.
5. Not applicable.
6. Opinion and consent of Vaughn W. Robbins, F.S.A.
7. Consent of Ernst & Young LLP, Independent Auditors.
8. Not applicable.
</TABLE>
- ------------------------
(1) Incorporated by reference to Registrant's registration statement on
Form S-6 (File No. 333-43107) filed on December 23, 1997
(2) Incorporated by reference to Registration Statement on Form S-6 (File
No. 33-40745) filed on November 21, 1997.
(3) Incorporated by reference to Registration Statement on Form N-4 (File No.
33-25990) filed on April 22, 1998.
(4) Incorporated by reference to Registration Statement on Form N-4 (File No.
333-04999) filed on September 26, 1996.
(5) Incorporated by reference to Registration Statement on Form S-6 (File
No. 333-42479) filed on April 28, 1998.
(6) Incorporated by reference to Pre-Effective Admendment No. 1 to Registration
Statement on Form S-6 (File No. 333-42479) filed on May 12, 1998.
<PAGE>
(7) Incorporated by reference to Registration Statement on Form N-4 (File No.
33-27783) filed on December 5, 1996.
(8) LN Money Market Fund, Inc. incorporated by reference to Post-Effective
Amendment No. 20, Form N-12 (File No. 2-80743) filed April 16, 1999.
(9) Incorporated by reference to Post-Effective Amendment No. 3 (File No.
333-50817) filed on April 23, 1999.
(10) Incorporated by reference to Post-Effective Amendment No. 4 (File No.
333-40937) filed on December 17, 1999.
(11) Incorporated by reference to Post-Effective Amendment No. 3 (File No.
333-40937) filed on April 28, 1999.
(12) Incorporated by reference to Post-Effective Amendment No. 1 (File No.
333-82663) filed on 4/13/00.
(13) Incorporated by reference to Post-Effective Amendment No. 3 on Form N-4
(File No. 333-40937) filed on April 28, 1999.
(14) Incorporated by reference to Post-Effective Amendment No. 1 (File No.
333-72875) filed on October 15, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Lincoln Life Flexible Premium Variable Life Separate Account R (File
No. 333-43107), has caused this Post-Effective Amendment No. 5 to be signed on
its behalf by the undersigned duly authorized, in the City of Hartford and State
of Connecticut on the 18th day of April, 2000. Registrant certifies that this
amendment meets all of the requirements for effectiveness pursuant to
Rule 485(b) under the Securities Act of 1933.
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE
LIFESEPARATE ACCOUNT R (Registrant)
By: /s/ GARY W. PARKER
-----------------------------------
Gary W. Parker
SENIOR VICE PRESIDENT
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
(DEPOSITOR)
By: /s/ GARY W. PARKER
-----------------------------------
Gary W. Parker
SENIOR VICE PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 5 to this Registration Statement (File
No. 333-43107) has been signed below on April 18, 2000 by the following persons,
as officers and directors of the Depositor, in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JON A. BOSCIA* President and Director (Principal Executive
-------------------------------------- Officer)
Jon A. Boscia
/s/ JOHN H. GOTTA* Chief Executive Officer of Life Insurance, Senior
-------------------------------------- Vice President, Assistant Secretary, and Director
John H. Gotta
/s/ STEPHEN H. LEWIS* Interim Chief Executive Officer of Annuities,
-------------------------------------- Senior Vice President and Director
Stephen H. Lewis
/s/ LAWRENCE T. ROLAND*
-------------------------------------- Executive Vice President and Director
Lawrence T. Roland
/s/ TODD R. STEPHENSON* Senior Vice President, Chief Financial Officer and
-------------------------------------- Assistant Treasurer (Principal Financial Officer)
Todd R. Stephenson
/s/ KEITH J. RYAN* Vice President, Controller and Chief Accounting
-------------------------------------- Officer (Principal Accounting Officer)
Keith J. Ryan
/s/ H. THOMAS MCMEEKIN*
-------------------------------------- Director
H. Thomas McMeekin
/s/ RICHARD C. VAUGHAN*
-------------------------------------- Director
Richard C. Vaughan
</TABLE>
*By: /s/ GARY W. PARKER
----------------------------------
Gary W. Parker, pursuant to a
Power of Attorney
filed with this Post-Effective
Amendment No. 5
to the Registration Statement
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta, Robert
A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statements on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact to any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revokes any and all Powers of
Attorney previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 28th day of January, 2000.
<TABLE>
<CAPTION>
<C> <S>
/s/ JON A. BOSCIA
-------------------------------------- President and Director
Jon A. Boscia
/s/ JOHN H. GOTTA Chief Executive Officer of Life Insurance, Senior
-------------------------------------- Vice President, Assistant Secretary, and Director
John H. Gotta
/s/ STEPHEN H. LEWIS* Interim Chief Executive Officer of Annuities,
-------------------------------------- Senior Vice President and Director
Stephen H. Lewis
/s/ TODD R. STEPHENSON* Senior Vice President, Chief Financial Officer and
-------------------------------------- Assistant Treasurer
Todd R. Stephenson
/s/ H. THOMAS MCMEEKIN
-------------------------------------- Director
H. Thomas McMeekin
/s/ RICHARD C. VAUGHAN
-------------------------------------- Director
Richard C. Vaughan
*For: Stephen H. Lewis and Todd R. Stephenson
</TABLE>
<TABLE>
<C> <S>
STATE OF INDIANA SS:
COUNTY OF ALLEN
</TABLE>
Subscribed and sworn to before me this
28th day of January, 2000
/s/ JANET L. LINDENBERG
--------------------------------------
Janet L. Lindenberg
Notary Public
Commission Expires: 7-10-2001
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby severally constitute and appoint John H. Gotta,
Robert A. Picarello and Gary W. Parker, individually, our true and lawful
attorneys-in-fact, with full power to each of them to sign for us, in our names
and in the capacities indicated below, any and all Registration Statement on
Form S-6, Form N-8B-2 and/or Form N-6, or any successors to these Forms, and
amendments thereto, filed with the Securities and Exchange Commission under the
Securities Act of 1933, on behalf of the Company in its own name or in the name
of one of its Separate Accounts, hereby ratifying and confirming our signatures
as they may be signed by any of our attorneys-in-fact to any such Registration
Statement or amendment to said Registration Statement. The execution of this
document by each of the undersigned hereby revoke any and all Powers of Attorney
previously executed by said individual for this specific purpose.
WITNESS our hands and common seal on this 31st day of January, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ LAWRENCE T. ROWLAND*
-------------------------------------- Executive Vice President and Director
Lawrence T. Rowland
/s/ KEITH J. RYAN Vice President, Controller and Chief Accounting
-------------------------------------- Officer
Keith J. Ryan
* For Lawrence T. Rowland and Keith J. Ryan
</TABLE>
<TABLE>
<C> <S>
STATE OF INDIANA SS:
COUNTY OF ALLEN
</TABLE>
Subscribed and sworn to before me this
31st day of January, 2000
/s/ JANET L. LINDBERG
--------------------------------------
Janet L. Lindberg
Notary Public
Commission Expires: 7-10-2001
<PAGE>
[LOGO]
Robert A. Picarello
Vice President & Chief Counsel
350 Church Street
Hartford, CT 06103-1106
Telephone:(860) 466-1603
Facsimile:(860) 466-1778
April 18, 2000
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0506
Re: Lincoln Life Flexible Premium Variable Life Separate Account R ("Account")
The Lincoln National Life Insurance Company
Post-Effective Amendment Number 5, File No. 333-43107
Dear Sirs:
As Vice President & Chief Counsel of The Lincoln National Life Insurance Company
("Company"), I am familiar with the actions of the Board of Directors of the
Company establishing the Account and its method of operation and authorizing the
filing of a Registration Statement under the Securities Act of 1933 (and
amendments thereto) for the securities to be issued by the Account and the
Investment Company Act of 1940 for the Account itself.
In the course of preparing this opinion, I have reviewed the Certificate of
Incorporation and the By-Laws of the Company, the Board actions with respect to
the Account, and such other matters as I deemed necessary or appropriate. Based
on such review, I am of the opinion that the variable life insurance policies
(and interests therein) which are the subject of the Registration Statement
under the Securities Act of 1933, as amended, for the Account will, when issued,
be legally issued and will represent binding obligations of the Company, the
depositor for the Account.
I further consent to the use of this opinion as an Exhibit to Post-Effective
Amendment No. 5 to said Registration Statement and to the reference to me under
the heading "Experts" in said Registration Statement, as amended.
Very truly yours,
/s/ Robert A. Picarello
Robert A. Picarello
Vice President & Chief Counsel
<PAGE>
[LOGO]
The Lincoln National Life Insurance Company
350 Church Street
Hartford, CT 06103-1106
April 18, 2000
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0506
Re: Lincoln Life Flexible Premium Variable Life Separate Account R ("Account")
The Lincoln National Life Insurance Company
Post-Effective Amendment Number 5, File No. 333-43107
Dear Sirs:
This opinion is furnished in connection with the filing of the Registration
Statement on Form S-6 by The Lincoln National Life Insurance Company under the
Securities Act of 1933. The Prospectus included in said Registration Statement
describes flexible premium variable universal life insurance policies (the
"Policies"). The forms of Policies were prepared under my direction.
In my opinion, the illustrations of benefits under the Policies included in the
section entitled "Illustrations" in the Prospectus, based on assumptions stated
in illustrations, are consistent with the provisions of the forms of the
Policies. The ages selected in the illustrations are representative of the
manner in which the Policies operate.
I hereby consent to the use of this opinion as an Exhibit to the Registration
Statement and the reference to me under the heading "Experts" in the Prospectus.
Very truly yours,
/s/ Vaughn W. Robbins
Vaughn W. Robbins, FSA, MAAA
<PAGE>
Exh 99.7
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Post-Effective Amendment No. 5 to the Registration Statement (Form S-6
No. 333-43107) pertaining to the Lincoln Life Flexible Premium Variable Life
Account R, and to the use therein of our reports dated (a) January 31, 2000,
with respect to the statutory-basis financial statements of The Lincoln
National Life Insurance Company, and (b) March 24, 2000, with respect to the
financial statements of Lincoln Life Flexible Premium Variable Life Account R.
/s/ ERNST & YOUNG LLP
Fort Wayne, Indiana
April 17, 2000
