As filed with the Securities and Exchange Commission on May 28, 1999
1933 Act Registration No. 333-74325
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
Pre-Effective Amendment No. 1 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
-------------
LLANY Separate Account S for
Flexible Premium Variable Life Insurance
(Exact Name of Registrant)
Lincoln Life & Annuity Company of New York
(Name of Depositor)
120 Madison Street, Suite 1700, Syracuse, NY 13202
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code
(888) 223-1860
-------------
<TABLE>
<S> <C>
Robert O. Sheppard, Esquire Copy to:
Lincoln Life & Annuity Company of New York George Gingold, Esquire
120 Madison Street, Suite 1700 197 King Philip Drive
Syracuse, NY 13202 West Hartford, CT 06117-1409
(Name and Address of Agent for Service)
</TABLE>
-------------
Approximate date of proposed public offering:
As soon as practicable after the effective date of the registration statement.
Indefinite Number of Units of Interest in Variable Life Insurance Contracts
(Title of Securities Being Registered)
-------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
================================================================================
<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 LLANY, the Separate Account and the General Account
6(a) LLANY, the Separate Account and the General Account
6(b) *
9 Legal Matters
10(a)-(c) Right to Examine the Policy; Surrenders; Accumulation Unit Value; Reports to Policyowners
10(d) Policy Loans; Partial Surrenders; Allocation of Premiums
10(e) Reinstatement of a Lapsed Policy
10(f) Right to Instruct Voting of Fund Shares
10(g)-(h) *
10(i) Premium Payments; Allocations and Transfers; Death Benefit; Policy Values; Settlement Options
11 Separate Account-Funds
12 Separate Account-Funds
13 Charges and Fees
14 Policy Rights
15 Premium Payments; Allocations and Transfers
16 Separate Account-Funds
17 Partial Surrenders
18 Separate Account-Funds
19 Reports to Policyowners
20 *
21 Policy Loans
22 *
23 The Company
24 Age; Incontestability; Suicide
25 The Company
26 Fund Participation Agreements
27 The Variable Account
28 Directors and Officers of LLANY
29 The Company
30 *
31 *
32 *
33 *
34 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item of Form N-8B-2 Location in Prospectus
------------------- ----------------------
<S> <C>
35 *
37 *
38 Distribution of Policies
39 Distribution of Policies
40 *
41(a) Distribution of Policies
42 *
43 *
44 Separate Account-Funds; Premium Payments
45 *
46 Partial Surrenders
47 The Variable Account; Partial Surrenders, Allocations and Transfers
48 *
49 *
50 The Variable Account
51 Highlights; Premium Payments
52 LLANY, the Separate Account and the General Account
53 Tax Matters
54 *
55 *
</TABLE>
- ---------------
* Not Applicable
<PAGE>
Lincoln Life & Annuity Company of New York
LLANY Separate Account S for Flexible Premium Variable Life Insurance
Home Office Location: Administrative Office:
120 Madison Street Lincoln Corporate Specialty Markets
Suite 1700 350 Church Street
Syracuse, NY 13202 Hartford, CT 06103-1106
(888) 223-1860 (860) 466-1561
================================================================================
This Prospectus describes a flexible premium variable life insurance contract
(the "Policy") offered by Lincoln Life & Annuity Company of New York. The
Policy is available only in New York. The Policies are available for purchase
by corporations or other groups where the individuals share a common employer
or affiliation with the group or sponsoring organization.
The policy features:
o flexible Premium Payments
o a choice of one of three death benefit options
o 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 this Policy.
This prospectus is intended to describe the variable options used to fund this
Policy through the Separate Account. The variable funding options
(collectively, the "Funds") currently available through the Separate Account
are:
American Century Variable Products Group, Inc.
o VP Income & Growth Fund
o VP International Fund
Baron Capital Funds Trust
o Baron Capital Asset Fund-Insurance Shares
BT Insurance Funds Trust
o EAFE(R) Equity Index Fund
o Equity 500 Index Fund
o Small Cap Index Fund
Delaware Group Premium Fund, Inc.
o Delchester Series
o Devon Series
o International Series
o REIT Series
o Small Cap Value Series
Fidelity Variable Insurance Products Fund Service Class
o Growth Portfolio
Fidelity Variable Insurance Products Fund II Service Class
o Asset Manager Portfolio
o Contrafund Portfolio
Janus Aspen Series
o Aggressive Growth Portfolio
o Balanced Portfolio
o Worldwide Growth Portfolio
Lincoln National (LN) Funds
o LN Bond Fund, Inc.
o LN Capital Appreciation Fund, Inc.
(Subadviser: Janus Capital Corp.)
o LN Equity-Income Fund, Inc.
(Subadviser: Fidelity Management Trust Co.)
o LN Money Market Fund, Inc.
o LN Social Awareness Fund, Inc.
(Subadviser: Vantage Investment Advisors, Inc.)
MFS(R) Variable Insurance Trust
o MFS Capital Opportunities Series
o MFS Research Series
o MFS Total Return Series
o MFS Utilities Series
Neuberger Berman Advisers Management Trust
o Mid-Cap Growth Portfolio
o Partners Portfolio
OCC Accumulation Trust
o Managed Portfolio
OppenheimerFunds
o Oppenheimer Main Street Growth and Income Fund/VA
Templeton Variable Products Series Fund
o Templeton Asset Allocation Fund-Class 2
o Templeton International Fund-Class 2
o Templeton Stock Fund-Class 2
Read this prospectus and the prospectuses of the Funds available as investment
options through the separate account under the Policy offered by this prospectus
carefully. Keep them 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.
Prospectus Dated XXX
<PAGE>
Table of Contents
<TABLE>
<S> <C>
HIGHLIGHTS ................................................. 3
A Flexible Premium Variable Life Insurance Policy ......... 3
Initial Choices to be Made ................................ 3
Amount of Premium Payment ................................. 3
Death Benefit Options ..................................... 3
Selection of Funding Vehicles ............................. 4
Charges and Fees .......................................... 4
Underlying Funds Expenses ................................. 6
Policy Loans, Withdrawals and Surrenders .................. 8
Changes in Specified Amount ............................... 8
LLANY, THE SEPARATE ACCOUNT AND THE GENERAL
ACCOUNT .................................................... 8
BUYING VARIABLE LIFE INSURANCE ............................. 9
ALLOCATION OF PREMIUMS ..................................... 10
Fixed Account ............................................. 10
Separate Account-Funds .................................... 11
Mixed and Shared Funding .................................. 15
Fund Participation Agreements ............................. 16
CHARGES & FEES ............................................. 16
Premium Load .............................................. 16
Premium Load Refund ....................................... 16
Premium Tax Charge ........................................ 17
Charges and Fees Assessed Against the Total
Account Value ............................................ 17
Mortality and Expense Risk Charge ......................... 17
Reduction of Charges ...................................... 18
POLICY CHOICES ............................................. 18
Premium Payments .......................................... 18
Death Benefit Options ..................................... 20
Allocations and Transfers to Funding Options .............. 21
POLICY VALUES .............................................. 21
Total Account Value ....................................... 21
Accumulation Unit Value ................................... 22
Maturity Value ............................................ 22
Surrender Value ........................................... 23
POLICY RIGHTS .............................................. 23
Partial Surrenders ........................................ 23
Reinstatement of a Lapsed Policy .......................... 24
Policy Loans .............................................. 24
Policy Changes ............................................ 25
Right to Examine the Policy ............................... 25
</TABLE>
<TABLE>
<S> <C>
DEATH BENEFIT .............................................. 25
POLICY SETTLEMENT .......................................... 26
Settlement Options ........................................ 26
TERM INSURANCE RIDER ....................................... 27
THE COMPANY ................................................ 28
Directors and Officers of LLANY ........................... 28
ADDITIONAL INFORMATION ..................................... 30
Reports to Policyowners ................................... 30
Right to Instruct Voting of Fund Shares ................... 30
Disregard of Voting Instructions .......................... 31
State Regulation .......................................... 31
Legal Matters ............................................. 31
The Registration Statement ................................ 31
Distribution of the Policies .............................. 31
Records and Accounts ...................................... 32
Experts ................................................... 32
Advertising ............................................... 32
Preparing for Year 2000 ................................... 32
TAX MATTERS ................................................ 34
General ................................................... 34
Federal Tax Status of the Company ......................... 34
Life Insurance Qualification .............................. 34
General Rules ............................................. 35
Modified Endowment Contracts .............................. 35
Diversification Standards ................................. 36
Investor Control .......................................... 36
Other Tax Considerations .................................. 37
MISCELLANEOUS POLICY PROVISIONS ............................ 37
Payment of Benefits ....................................... 38
Age ....................................................... 38
Incontestability .......................................... 38
Suicide ................................................... 38
Coverage Beyond Maturity .................................. 38
Nonparticipation .......................................... 38
Appendix A --
Illustrations of Death Benefits, Total Account Values
and Surrender Values ...................................... 39
Appendix B --
Applicable Percentages for Cash Value Accumulation
Test ...................................................... 47
Financial Statements of the Company
December 31, 1998 Audited Financials ...................... S-1
March 31, 1999 Unaudited Financials ....................... F-1
</TABLE>
2
<PAGE>
HIGHLIGHTS
A Flexible Premium Variable Life Insurance Policy
This Prospectus describes a flexible premium variable life insurance contract
(the "Policy") offered by Lincoln Life & Annuity Company of New York ("LLANY",
the "Company", "we", "us", "our") through LLANY Separate Account S for Flexible
Premium Variable Life Insurance (the "Separate Account" or "Account S"). The
Policy may be useful in: funding non-qualified executive deferred compensation;
funding salary continuation programs; funding death benefit liabilities or cash
flow obligations for executive retirement plans.
The value of your Policy and, under one option, the death benefit amount depends
on the investment results of the funding options you select.
Initial Choices to be Made
The Policyowner (the "Owner" or "you") is the person named in the "Policy
Specifications" who has all of the Policy ownership rights. If no Owner is
named, the Insured (the person whose life is insured under the Policy) will be
the Owner of the Policy. You, as the Owner, have important choices to make when
the Policy is first purchased. You need to choose:
o the amount of premium you want to pay (see page 18);
o one of three death benefit options (see page 20);
o the amount of the Net Premium Payment to be placed in each of the funding
options selected. The Net Premium is the balance of each Premium Payment that
remains after certain charges are deducted from it.
Amount of Premium Payment
One of your initial decisions is how much premium to pay. Premium Payments may
be changed within the limits described on page 19. If the Policy lapses because
your monthly deduction is larger than the Net Accumulation Value, you may
reinstate the Policy. See page 24.
You may use the value of your Policy to pay the premiums due and continue the
Policy in force if sufficient values are available. 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 increase (see page 17) as the Insured
gets older.
When you first receive your Policy, you will have 10 days to look it over. This
is called the "Right To Examine Period". Use this time to review your Policy and
make sure it meets your needs. During this time period, your initial premium
payment will be allocated to the funding options you initially select, unless
your state requires a full refund of premiums. If you then decide you do not
want the Policy, you will receive a refund. See page 25.
Death Benefit Options
The Death Benefit is the amount we pay the Beneficiary(ies) when the Insured
dies. Before we pay the Beneficiary(ies), any outstanding loan account balances
or outstanding amounts due are subtracted from the Death Benefit. We calculate
the
3
<PAGE>
Death Benefit payable as of the date the Insured died. We will pay the Death
Benefit in one lump sum or under one of the annuity settlement options.
The three death benefit options available usually provide a level, varying or
increasing death benefit, depending on the option selected. See page 20 for more
details on death benefit options.
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 favorable
federal tax treatment. The Company reserves the right to return your premium
payment if it results in your Policy's failing to meet federal tax law
requirements.
If you have surrendered a portion of your Policy, any surrendered amount will
reduce your initial death benefit. If you borrow against your Policy or
surrender a portion of your Policy, the Loan Amount balance and any surrendered
amount will reduce your initial death benefit.
Selection of Funding Vehicles
This Prospectus focuses on the Separate Account investment information that
makes up the "variable" part of the contract. If you put money into the variable
funding options, you 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) (Sub-Account(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 page 11.
You may also choose to place the Net Premium Payment or part of it into the
Fixed Account. Net Premium Payments put into the Fixed Account:
o become part of the Company's General Account;
o do not share the investment experience of the Separate Account; and
o have a guaranteed minimum interest rate of 4.0% per year.
For additional information on the Fixed Account, see page 10.
Charges and Fees
A premium load is deducted from all of your premium payments. (See page 16)
Currently, the premium load is:
<TABLE>
<S> <C>
Policy Year(s)
1 10.5%
2-5 7.5%
6-7 3.5%
8+ 1.5%
</TABLE>
4
<PAGE>
If you fully surrender your Policy within 24 months after Date of Issue, you may
be entitled to receive partial credit for premium loads deducted from your
Policy. (See page 16).
For these purposes, an increase in Specified Amount is treated as a newly issued
policy.
An explicit premium tax charge equal to the state and municipal taxes associated
with premiums received is also deducted from premium payments.
A Monthly Deduction is made from the total account value on the same day of each
month beginning with the date of issue. The Monthly Deduction includes the Cost
of Insurance and any charges for supplemental riders or benefits. Once a policy
is issued, monthly deductions will begin as of the date of issue, even if the
Policy's issuance was delayed due to the underwriting requirements or other
reasons. The Monthly Deduction also includes a monthly administrative expense
charge during all policy years. The monthly Administrative Expense is currently
$6, and is guaranteed not to exceed $10. See page 17.
A daily deduction is made from the assets of Account S for mortality and expense
risk, currently at an annual rate of:
<TABLE>
<S> <C>
Policy Year(s)
1-10 0.70%
11+ 0.35%
</TABLE>
The Company reserves the right to increase the mortality and expense risk charge
but it will never exceed 1.25% annually during Policy Years 1-10 and 0.90%
annually during Policy Years 11 and thereafter. (See page 17).
Each Fund has its own management fee charge, also deducted daily. Investment
results for the Funds you choose will be affected by the fund management charges
and other fund expenses. The table on pages 6 - 7 shows you the current charges
and expenses.
Before the Maturity Date you may make transfers between funding options. The
Company allows twelve transfers each Policy Year; but, after the first 18 months
from Date of Issue, a $25 charge may apply for each additional transfer within
that Policy Year. Within 45 days after each Policy Anniversary, you may also
transfer to the Separate Account 25% of the greatest amount held in the Fixed
Account Value during the prior 5 years or $1000 if greater. See page 21.
There are no Surrender Charges for your Policy.
5
<PAGE>
Underlying Funds 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.
The following table illustrates the investment advisory fees, other expenses and
total expenses paid by each of the Funds as a percentage of average net assets
based on figures for the year ended December 31, 1998 unless otherwise
indicated. Future fund expenses will vary.
<TABLE>
<CAPTION>
Management 12b-1 Other
Fees Fees Expenses
Fund ------------ ---------- ----------
<S> <C> <C> <C>
American Century VP Income & Growth Fund 0.70% -- --
American Century VP International Fund (1) 1.48% -- --
Baron Capital Asset Fund--Insurance Shares (2) 1.00% 0.25% 6.37%
BT EAFE(R) Equity Index Fund (3) 0.45% -- 1.21%
BT Equity 500 Index Fund (4) 0.20% -- 0.99%
BT Small Cap Index Fund (5) 0.35% -- 1.23%
Delaware Group Delchester Series (6) 0.65% -- 0.10%
Delaware Group Devon Series (6) 0.65% -- 0.06%
Delaware International Equity Series (8) 0.82% -- 0.13%
Delaware Group REIT Series (9) 0.75% -- 0.27%
Delaware Group Small Cap Value Series (9) 0.75% -- 0.10%
Fidelity VIPII Asset Manager Portfolio--Service Class
(10) 0.54% 0.10% 0.14%
Fidelity VIPII Contrafund Portfolio--Service Class (10) 0.59% 0.10% 0.11%
Fidelity VIP Growth Portfolio--Service Class (10) 0.59% 0.10% 0.11%
Janus Aspen Series Aggressive Growth (11) 0.72% -- 0.03%
Janus Aspen Series Balanced Portfolio (11) 0.72% -- 0.02%
Janus Aspen Series Worldwide Growth Portfolio (11) 0.67% -- 0.07%
Lincoln National Bond Fund, Inc. 0.44% -- 0.13%
Lincoln National Capital Appreciation Fund, Inc. 0.76% -- 0.07%
Lincoln National Equity-Income Fund, Inc. 0.72% -- 0.07%
Lincoln National Money Market Fund, Inc. 0.48% -- 0.11%
Lincoln National Social Awareness Fund, Inc. 0.34% -- 0.04%
MFS Capital Opportunities Series (12) 0.75% -- 0.36%
MFS Research Series (12) 0.75% -- 0.11%
MFS Total Return Series (12) 0.75% -- 0.16%
MFS Utilities Series (12) 0.75% -- 0.26%
NB AMT MidCap Growth Portfolio (13)(14) 0.85% -- 0.58%
NB AMT Partners Portfolio (13)(14) 0.78% -- 0.06%
OCC Trust Managed Fund (15)(16) 0.78% -- 0.04%
Oppenheimer Main Street Growth and Income Fund/
VA (17) 0.74% -- 0.05%
Templeton Asset Allocation Fund--Class 2 (18) 0.60% 0.25% 0.18%
Templeton International Fund--Class 2 (18) 0.69% 0.25% 0.17%
Templeton Stock Fund--Class 2 (18) 0.70% 0.25% 0.19%
<CAPTION>
Total
Annual
Fund Total Fund
Operating Operating
Expenses Total Expenses
Without Waivers with
Waivers or and Waivers or
Reductions Reductions Reductions
Fund ------------ ------------ -----------
<S> <C> <C> <C>
American Century VP Income & Growth Fund 0.70% -- 0.70%
American Century VP International Fund (1) 1.48% (0.01%) 1.47%
Baron Capital Asset Fund--Insurance Shares (2) 7.62% (6.17%) 1.45%
BT EAFE(R) Equity Index Fund (3) 1.66% (1.01%) 0.65%
BT Equity 500 Index Fund (4) 1.19% (0.89%) 0.30%
BT Small Cap Index Fund (5) 1.58% (1.13%) 0.45%
Delaware Group Delchester Series (6) 0.75% -- 0.75%
Delaware Group Devon Series (6) 0.71% -- 0.71%
Delaware International Equity Series (8) 0.95% -- 0.95%
Delaware Group REIT Series (9) 1.02% (0.17%) 0.85%
Delaware Group Small Cap Value Series (9) 0.85% -- 0.85%
Fidelity VIPII Asset Manager Portfolio--Service Class
(10) 0.78% -- 0.78%
Fidelity VIPII Contrafund Portfolio--Service Class (10) 0.80% -- 0.80%
Fidelity VIP Growth Portfolio--Service Class (10) 0.80% -- 0.80%
Janus Aspen Series Aggressive Growth (11) 0.75% -- 0.75%
Janus Aspen Series Balanced Portfolio (11) 0.74% -- 0.74%
Janus Aspen Series Worldwide Growth Portfolio (11) 0.74% (0.02%) 0.72%
Lincoln National Bond Fund, Inc. 0.57% -- 0.57%
Lincoln National Capital Appreciation Fund, Inc. 0.83% -- 0.83%
Lincoln National Equity/Income Fund, Inc. 0.79% -- 0.79%
Lincoln National Money Market Fund, Inc. 0.59% -- 0.59%
Lincoln National Social Awareness Fund, Inc. 0.38% -- 0.38%
MFS Capital Opportunities Series (12) 1.11% (0.09%) 1.02%
MFS Research Series (12) 0.86% -- 0.86%
MFS Total Return Series (12) 0.91% -- 0.91%
MFS Utilities Series (12) 1.01% -- 1.01%
NB AMT MidCap Growth Portfolio (13)(14) 1.43% (0.43%) 1.00%
NB AMT Partners Portfolio (13)(14) 0.84% -- 0.84%
OCC Trust Managed Fund (15)(16) 0.82% -- 0.82%
Oppenheimer Main Street Growth and Income Fund/
VA (17) 0.79% -- 0.79%
Templeton Asset Allocation Fund--Class 2 (18) 1.03% -- 1.03%
Templeton International Fund--Class 2 (18) 1.11% -- 1.11%
Templeton Stock Fund--Class 2 (18) 1.14% -- 1.14%
</TABLE>
(1.) American Century Investment Management, Inc. voluntarily waived a portion
of its management fee from October 1, 1998 through November 16, 1998. In
the absence of the waiver, the average ratio of operating expenses to
average net assets would have been 1.48% for the year ended December 31,
1998. The annualized fee schedule for the fund, effective November 17,
1998, is as follows: 1.50% on the first $250 million; 1.20% on the next
$250 million; and 1.10% thereafter.
6
<PAGE>
(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 October 1, 1998 through December 31, 1998 would have been
7.62%.
(3.) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"),
the Fund will pay an advisory fee at an annual percentage rate of 0.45% 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 the Fund's total operating
expenses will not exceed 0.65% of average daily net assets.
(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 Fund. These funds are accrued daily
and paid monthly. The Advisor has voluntarily undertaken to waive its fee
and to reimburse the Fund for certain expenses so the Fund's total
operating expenses will not exceed 0.30% of average daily net assets.
(5.) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"),
the Fund will pay an advisory fee at an annual percentage rate of 0.35% of
the average daily net assets of the Funds. 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 the Fund's total
operating expense will not exceed 0.45% of average daily net assets.
(6.) The investment advisor for the Devon Series and Delchester Series is
Delaware Management Company, Inc. ("DMC"). Effective May 1, 1999 through
October 31, 1999, DMC has voluntarily agreed to waive its management fees
and reimburse each Series for expenses to the extent that total expenses
will not exceed 0.80% for the Devon Series and 0.80% for the Delchester
Series. Pursuant to a vote of the Fund's shareholders on March 17, 1999, a
new management fee structure based on average daily net assets was
approved as follows: 0.65% on the first $500 million, 0.60% on the next
$500 million, 0.55% on the next $1,500 million, 0.50% on assets in excess
of $2,500 million; all per year.
(7.) The investment advisor for the Small Cap Value Series is Delaware
Management Company, Inc. ("DMC"). Effective May 1, 1999 through October
31, 1999, DMC has voluntarily agreed to waive its management fees and
reimburse the Series for expenses to the extent that total expenses will
not exceed 0.85% for the Small Cap Value Series. Pursuant to a vote of the
Fund's shareholders on March 17, 1999, a new management fee structure
based on average daily net assets was approved as follows: 0.75% on the
first $500 million, 0.70% on the next $500 million, 0.65% on the next
$1,500 million, 0.60% on assets in excess of $2,500 million; all per year.
(8.) The investment advisor for the International Equity Series is Delaware
International Advisors, Limited ("DIAL"). Effective May 1, 1999 through
October 31, 1999, DIAL has voluntarily agreed to waive its management fees
and reimburse the Series for expenses to the extent that total expenses
will not exceed 0.95% for the International Equity Series. Pursuant to a
vote of the Fund's shareholders on March 17, 1999, a new management fee
structure based on average daily net assets was approved as follows: 0.85%
on the first $500 million, 0.80% on the next $500 million, 0.75% on the
next $1,500 million, 0.70% on assets in excess of $2,500 million; all per
year.
(9.) The investment advisor for the REIT Series is Delaware Management
Company, Inc. ("DMC"). Effective May 1, 1999 through October 31, 1999,
DMC has voluntarily agreed to waive its management fees and reimburse the
Series for expenses to the extent that total expenses will not exceed
0.85% for the REIT Series. There is no change to the current management
fee structure.
(10.) A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds, or Fidelity Management
& Research on behalf of certain funds, have entered into arrangements with
their custodian whereby credits realized as a result of uninvested cash
balances were used to reduce custodian expenses. Including these
reductions, the total operating expenses presented in the table would have
been 0.77% for the VIP II Asset Manager Portfolio, 0.75% for the VIP
Growth Portfolio and for the VIP II Contrafund Portfolio.
(11.) All expenses are stated both with and without contractual waivers and fee
reductions by Janus Capital. Fee reductions for the Aggressive Growth,
Worldwide Growth and Balanced Portfolios reduce the Management Fee to the
level of the corresponding Janus retail fund. Other waivers, if
applicable, are first applied against the Management Fee and then against
Other Expenses. Janus Capital has agreed to continue the waivers and fee
reductions until at least the next annual renewal of the advisory
agreement.
(12.) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with
its custodian and disbursing agent. Each series may enter into other such
arrangements and directed brokerage arrangements, which would also have
the effect of reducing the series' expenses. Expenses do not take into
account these expense reductions, and are therefore higher than the actual
expenses of the series.
(13.) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in
a corresponding series ("Series") of Advisers Managers Trust. The figures
reported under "Management Fees" include the aggregate of the
administration fees paid by the Portfolio and the management fees paid by
its corresponding Series. Similarly, "Other Expenses" includes all other
expenses of the Portfolio and its corresponding Series.
(14.) NBMI has undertaken to reimburse certain operating expenses, including the
compensation of NBMI (except with respect to Partners) and excluding
taxes, and interest, extraordinary expenses, brokerage commissions and
transaction costs, that exceed, in the aggregate, 1% of the Mid-Cap Growth
and Partners Portfolios' average daily net asset value. These expense
reimbursement agreements are subject to termination upon 60 days written
notice with respect to the Mid-Cap Growth, and Partners Portfolios.
(15.) Other Expenses are shown gross of expense offsets afforded the Portfolios
which effectively lowered overall custody expenses.
(16.) Total Portfolio Expenses for the Managed Portfolio are limited by OpCap
Advisors so that the respective annualized operating expenses (net of any
expense offsets) do not exceed 1.00% of average daily net assets.
(17.) The Fund's total returns should not be expected to be the same as the
returns of other funds, whether or not both funds have the same portfolio
managers and/or similar names.
(18.) Class 2 of the Fund has a distribution plan or "Rule 12b-1 plan" which is
described in the Fund's prospectus.
7
<PAGE>
Policy Loans, Withdrawals and Surrenders
You may borrow, within described limits, against the Policy. You may surrender
your Policy in full or withdraw part of its value. Upon the maturity of your
Policy, you may select one of the annuity settlement options or, prior to
maturity, you may apply the value of your Policy, minus surrender charges and
loan account amounts, to one of the annuity settlement options.
If you borrow against your policy, interest will accrue at an annual rate which
will be the monthly average (Moody's Investors Service, Inc. Composite Yield on
Corporate Bonds) for the calendar month which ends two months prior to the
Policy Anniversary month, or 5.0% if greater.
Interest will be credited on the Loan Account Value at an annual rate that is
the interest charged on the loan minus a rate not to exceed 0.90%. The minimum
interest credited will be no less than 4.0% annually. See page 24.
Changes in Specified Amount
Within certain limits, you may increase or decrease the specified amount.
Increases may require evidence of insurability. Currently, the minimum Specified
Amount is $100,000. Such changes will affect other aspects of your Policy. See
page 25.
LLANY, THE SEPARATE ACCOUNT AND THE GENERAL ACCOUNT
LLANY is a life insurance company chartered under New York law on June 6, 1996.
Wholly-owned by The Lincoln National Life Insurance Company ("Lincoln Life") and
in turn by Lincoln National Corporation ("LNC"), a publicly held Indiana
insurance holding company incorporated in 1968, it is licensed to sell life
insurance policies and annuity contracts in New York. Its principal office is at
120 Madison Street, Suite 1700, Syracuse, NY 13202. LLANY, Lincoln Life, LNC and
their affiliates comprise the "Lincoln Financial Group" which provides a variety
of wealth accumulation and protection products and services.
Account S is a "separate account" of the Company established on March 2, 1999.
Account S was established for the purpose of segregating assets attributable to
the variable portion of life insurance contracts from other assets of the
Company. Under New York law, the assets of Account S attributable to the
Policies, through the property of LLANY, are not chargeable with liabilities of
any other business of LLANY and are available first to satisfy LLANY's
obligations under the Policies. Account S income, gains, and losses are credited
to or charged against Account S without regard to other income, gains, or losses
of LLANY. The values and investment performance of Account S are not guaranteed.
Account S is registered with the Securities and Exchange Commission
("Commission") as a "unit investment trust" under the Investment Company Act of
1940, as amended ("1940 Act") and meets the 1940 Act's definition of "separate
account". The Commission does not supervise the management, investment
practices, or policies of LLANY or Account S. LLANY has numerous other
registered separate accounts which fund its variable life insurance policies and
variable annuity contracts.
Account S is divided into Sub-Accounts, each of which is invested solely in the
shares of one of the mutual funds available as funding vehicles under the
Policies.
8
<PAGE>
On each Valuation Day, Net Premium Payments allocated to Account S will be
invested in Fund shares at net asset value, and monies necessary to pay for
deductions, charges, transfers and surrenders from Account S are raised by
selling Fund shares at net asset value.
The Funds now available in Account S and their investment objectives are on
pages 11 - 15. More Fund information is in the Funds' prospectuses, which must
accompany or precede this prospectus and should be read carefully. The Funds may
or may not achieve their investment objectives.
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.
LLANY reserves the right to add, withdraw or substitute Funds, subject to the
conditions of the Policy and to compliance with regulatory requirements, if in
its sole discretion, legal, regulatory, marketing, tax or investment
considerations so warrant or in the event a particular Fund is no longer
available to LLANY 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 LLANY and other insurance companies to fund
both variable annuity contracts and variable life insurance policies. While this
is not perceived as problematic, the Funds' governing bodies (Boards of
Directors/Trustees) have agreed to monitor events to identify any material
irreconcilable conflicts which might arise and to decide what responsive action
might be appropriate. If a separate 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 LLANY's General Account supporting its insurance and annuity
obligations. The General Account is the Company's general asset account, in
which assets attributable to the non-variable portion of the Policies are held.
Amounts held in the Fixed Account will be credited with interest at rates LLANY
determines 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 Securities Act of 1933, as amended
("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. Policy owners should be prepared to monitor
their investment choices on an ongoing basis.
The Policy is available for purchase by corporations or groups where individuals
share a common employer or affiliation with a group or sponsoring organization.
Each Policy covers a single insured. The Policy may be useful in: funding
non-qualified executive deferred compensation; funding salary continuation
programs; funding
9
<PAGE>
death benefit liabilities or cash flow obligations for executive retirement
plans. The Policy should not be considered for employer pension or profit
sharing programs.
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.
Unless a policy has become a "Modified Endowment Contract" (see page 35), an
owner can borrow Policy values tax-free, without surrender charges and at low
net interest cost. Policy loans can be a source of retirement income.
Depending on the death benefit option chosen, accumulated Policy values may also
be part of the eventual death benefit payable. If a Policy is heavily funded and
investment performance is very favorable, the death benefit may increase even
further because of tax law requirements that the death benefit be a certain
multiple of Policy value, depending on the Insured's age (see page 20).
ALLOCATION OF PREMIUMS
You may allocate all or a part of your Net Premiums to the Fixed Account (part
of the Company's General Account) or to the Funds currently available through
the Separate Account in connection with the Policy. In addition, the Company may
add, withdraw or substitute Funds, subject to the conditions in the Policy and
to compliance with regulatory requirements. The investment results of the Funds,
whose objectives are described below, are likely to differ significantly. Except
where otherwise indicated, all of the Funds are diversified, as defined in the
1940 Act.
Any monies received prior to policy issue will be credited with the return
attributable to the Money Market Fund from the date of receipt until the day the
Policy is issued.
During the Right to Examine Period, the first Net Premium will be allocated in
its entirety as of the issue date to the Money Market Fund, regardless of the
Policy owner's premium allocation percentages. Any other Net Premium received
prior to the expiration of the Right to Examine Period will also be allocated to
the Money Market Fund. On the day following the expiration of the Right to
Examine Period, the policy value and future Net Premiums will be allocated in
accordance with the Policy owner's selected premium allocation percentages.
Fixed Account
The Fixed Account is the only investment option offered with a guaranteed
return. Amounts held in the Fixed Account will be credited with interest at
rates of not less than 4.0% per year. Additional excess interest of up to 0.5%
may be credited to the Fixed Account Value beginning in Policy Year 11. Credited
interest rates reflect the Company's return on Fixed Account invested assets and
the amortization of any realized gains and/or losses which the Company may incur
on these assets.
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<PAGE>
Separate Account
Funds
Each of the Sub-Accounts is invested solely in the shares of one of the Funds
available under the Policies. Each of the Funds is a Maryland corporation or a
series of a Massachusetts or Delaware business trust or a Maryland corporation.
Each such trust or corporation is registered as an open-end management
investment company under the 1940 Act. All of the Funds except for the Delaware
Group REIT Series are diversified under the 1940 Act.
Listed below are the Fund groups, their investment advisors and distributors,
and the Funds within each that are available under the Policies.
American Century Variable Products Group, Inc., managed and distributed by
American Century Investments, 4500 Main Street, Kansas City, MO 64141-6200
VP Income & Growth Fund
VP International Fund
Baron Capital Funds Trust, managed by BAMCO, Inc. and distributed by Baron
Capital Inc., 767 Fifth Avenue, New York, NY 10153
Baron Capital Asset Fund--Insurance Shares
BT Insurance Funds Trust, managed by Bankers Trust Company, 130 Liberty Street
(One Bankers Trust Plaza), New York, NY 10006 and distributed by First Data
Distributors, Inc., 4400 Computer Drive, Westborough, MA 01581
EAFE(R) Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
Delaware Group Premium Fund, Inc., managed by Delaware Management Company, Inc.,
One Commerce Square, Philadelphia, PA 19103 and for International, Delaware
International Advisors, LTD., 80 Cheapside, London, England ECV2 6EE and
distributed by Delaware Distributors, L.P., 1818 Market Street, Philadelphia, PA
19103
Delchester Series
Devon Series
International Series
REIT Series
Small Cap Value Series
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 02103
VIP Growth Portfolio-Service Class
VIP II Asset Manager Portfolio-Service Class
VIP II Contrafund Portfolio-Service Class
Janus Aspen Series, managed and distributed by Janus Capital, 100 Fillmore St.,
Denver, CO 80206-4928
Aggressive Growth Portfolio
Balanced Portfolio
Worldwide Growth Portfolio
11
<PAGE>
Lincoln National Funds, managed by Lincoln Investment Management, Inc., 200
East Berry Street, Fort Wayne, IN 46802 and distributed by Lincoln Financial
Advisors, Inc., 350 Church Street, Hartford, CT 06103. Subadvisers are also
noted.
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc. (Subadvised by Janus Capital Corp.)
LN Equity-Income Fund, Inc. (Subadvised by Fidelity Management Trust Co.)
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc. (Subadvised by Vantage Investment Advisors
Inc.)
MFS(R) Variable Insurance Trust, managed by Massachusetts Financial Services
Company and distributed by MFS Fund Distributors, Inc., 500 Boylston Street,
Boston, MA 02116
MFS Capital Opportunities Series
MFS Research Series
MFS Total Return Series
MFS Utilities Series
Neuberger Berman Advisors Management Trust, managed and distributed by NB
Management Incorporated, 605 Third Avenue, 2nd Floor, New York, NY 10158-0006
Mid-Cap Growth Portfolio
Partners Portfolio
OCC Accumulation Trust, managed by OpCap Advisors and distributed by OCC
Distributors, One Financial Center, New York, NY 10281
OCC Trust Managed Portfolio
OppenheimerFunds, managed and distributed by OppenheimerFunds, Inc., Two World
Trade Center, New York, NY 10048
Oppenheimer Main Street Growth and Income Fund/VA
Templeton Variable Products Series Fund, managed by Templeton Investment
Counsel, Inc. and its Templeton and Franklin affiliates and distributed by
Franklin Templeton Distributors, Inc., 100 Fountain Parkway, St. Petersburg, FL
33716-1205
Templeton Asset Allocation Fund-Class 2
Templeton International Fund-Class 2
Templeton Stock Fund-Class 2
The investment advisory fees charged the Funds by their advisors are shown on
pages 6 - 7.
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.
o American Century VP Income & Growth Fund (Large Cap Stocks): Seeks dividend
growth, current income and capital appreciation by investing in a diversified
portfolio of U.S. stocks.
o American Century VP International Fund (International): Seeks capital
appreciation over time by investing in the common stocks of foreign companies
that exhibit accelerating growth.
o Baron Capital Asset Fund-Insurance Shares (Mid-Cap Stocks): Seeks capital
appreciation through investments in securities of small sized companies with
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<PAGE>
market capitalizations of approximately $100 million to $1.5 billion, and
medium sized companies with market capitalizations of $1.5 billion to $5
billion, with undervalued assets or favorable growth prospects.
o BT EAFE(R) Equity Index Fund (International): Seeks to replicate as closely as
possible (before the deduction of expenses) the total return of the Europe,
Australia, Far East Index (the EAFE Index), a capitalization-weighted index
containing approximately 1,100 equity securities of companies located outside
the United States.
o BT Equity 500 Index Fund (Large Cap Stocks): Seeks to replicate as closely as
possible the performance of the Standard & Poor's 500 Composite Stock Price
Index, before the deduction of Fund expenses.
o BT Small Cap Index Fund (Small Cap Stocks): Seeks to replicate as closely as
possible (before the deduction of expenses) the total return of the Russell
2000 Small Stock Index (the "Russell 2000"), an index consisting of
approximately 2,000 small-capitalization common stocks.
o Delaware Group Delchester Series (High Yield Bonds): Seeks as high a current
income as possible by investing in rated and unrated corporate bonds
(including high yield bonds commonly known as junk bonds), U.S. government
securities and commercial paper. An investment in this Series may involve
greater risks than an investment in a portfolio comprised primarily of
investment grade bonds.
o Delaware Group Devon Series (Large Cap Stocks): Seeks current income and
capital appreciation by investing primarily in income-producing common stocks
that the investment manager believes have the potential for above-average
dividend increases over time. Under normal circumstances, the Series will
invest at least 65% of its total assets in dividend paying common stocks.
o Delaware Group International Equity Series (International): Seeks long-term
growth without undue risk to principal by investing primarily in equity
securities of foreign issuers providing the potential for capital appreciation
and income.
o Delaware Group REIT Series (Specialty): Seeks to achieve maximum long-term
total return. Capital appreciation is a secondary objective. It seeks to
achieve its objectives by investing in securities of companies primarily
engaged in the real estate industry.
o Delaware Group Small Cap Value Series (Small Cap Stocks): Seeks capital
appreciation by investing primarily in small to mid-cap common stocks whose
market value appears low relative to their underlying value or future earnings
and growth potential. Emphasis will also be placed on securities of companies
that may be temporarily out of favor or whose value is not yet recognized by
the market.
o Fidelity VIP Growth Portfolio--Service Class (Large Cap Stocks): Seeks
long-term capital appreciation. The portfolio normally purchases common
stocks.
o Fidelity VIP II Asset Manager Portfolio--Service Class (Large Cap Stocks):
Seeks high long-term return with reduced risk by using a broad diversified mix
of stocks, bonds and short-term money market investments.
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<PAGE>
o Fidelity VIP II Contrafund Portfolio--Service Class (Large Cap Stocks): Seeks
long-term capital appreciation by investing primarily in securities of
companies whose value the adviser believes is not truly recognized by the
public.
o Janus Aspen Series Aggressive Growth Portfolio (Mid-Cap Stocks): Seeks
long-term growth of capital by investing in medium sized companies whose
market capitalizations fall within the range of the MidCap 400 Index.
o Janus Aspen Series Balanced Portfolio (Large Cap Stocks): 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.
o Janus Aspen Series Worldwide Growth Portfolio (Large Cap Stocks): Seeks
long-term growth of capital in a manner consistent with the preservation of
capital by investing primarily in common stocks of foreign and domestic
issuers.
o Lincoln National Bond Fund, Inc. (Long Term Bonds): Seeks maximum current
income consistent with prudent investment strategy. The Fund invests primarily
in medium and long-term corporate and government bonds.
o Lincoln National Capital Appreciation Fund, Inc. (Large Cap Stocks): Seeks
long-term growth of capital in a manner consistent with preservation of
capital. The fund invests in a large number of companies of all sizes if the
companies are competing well and if their products and services are in high
demand. It may also buy some money market securities and bonds, including junk
(high risk) bonds.
o Lincoln National Equity-Income Fund, Inc. (Large Cap Stocks): Seeks to achieve
reasonable income by investing primarily in income-producing equity
securities. The fund invests mostly in high-yielding bonds (including junk
bonds).
o Lincoln National Money Market Fund, Inc. (Money Market): Seeks maximum current
income consistent with the preservation of capital. The Fund allocates its
assets among several categories of equity and fixed-income securities, both of
U.S. and foreign insurers.
o Lincoln National Social Awareness Fund, Inc. (Mid-Large Cap Stocks): Seeks
long-term capital appreciation with income as a secondary objective by
investing in companies which meet the Fund's "Social Criteria".
o MFS Capital Opportunities Series (Large Cap Stocks): Seeks capital
appreciation. Dividend income, if any, is a consideration incidental to the
Portfolio's objective of capital appreciation.
o MFS Research Series (Large Cap Stocks): Seeks long-term growth of capital and
future income by investing in equity securities of companies believed to
possess better than average prospects for long-term growth.
o MFS Total Return Series (Balanced or Total Return): Seeks primarily to obtain
above-average income (compared to a portfolio entirely in equity securities)
consistent with the prudent employment of capital, and secondarily to provide
a reasonable opportunity for growth and income.
o MFS Utilities Series (Specialty): Seeks capital growth and current income
(income above that available from a portfolio invested entirely in equity
securities)
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<PAGE>
by investing, under normal circumstances, at least 65% of its assets in
equity and debt securities of utility companies.
o Neuberger Berman AMT Mid-Cap Growth Portfolio (Mid-Cap Stocks): Seeks growth
of capital through an investment approach that is designed to increase capital
with reasonable risk. It invests mainly in common stocks of mid-to-large
capitalization companies.
o Neuberger Berman AMT Partners Portfolio (Mid-Large Cap Stocks): Seeks growth
of capital and invests mainly in common stocks of mid-to-large capitalization
companies.
o OCC Trust Managed Portfolio (Balanced or Total Return): 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.
o Oppenheimer Main Street Growth and Income Fund/VA (Large Cap Stocks): Seeks a
high total return (which includes growth in the value of its shares as well as
current income) from equity and debt securities. From time to time the Fund
may focus on small to medium capitalization common stocks, bonds and
convertible securities.
o Templeton Asset Allocation Fund--Class 2 (Global Stocks): Seeks a high level
of total return. Invests in stocks of companies in any nation, debt securities
of companies and governments of any nation, and in money market instruments.
Assets are allocated among different investments depending upon worldwide
market and economic conditions.
o Templeton International Fund--Class 2 (International Stocks): Seeks long- term
capital growth. Invests primarily in stocks of companies outside the United
States, including emerging markets. Any income realized will be incidental.
o Templeton Stock Fund--Class 2 (Global Stocks): Seeks long-term capital growth.
Invests primarily in equity securities issued by companies, large and small,
in various nations throughout the world, including the United States and
emerging markets.
There is no assurance that the Funds will achieve their investment objectives.
Policy owners bear the full investment risk of investments in the Funds
selected.
Some of the above Funds may use instruments known as derivatives as part of
their investment strategies, as described in their respective prospectuses. The
use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of leverage
in connection with derivatives can also increase risk of losses. See the
prospectuses for the Funds for a discussion of the risks associated with an
investment in those funds. You should refer to the accompanying prospectuses of
the Funds for more complete information about their investment policies and
restrictions.
Mixed and Shared Funding
Shares of the Funds are available to insurance company separate accounts which
fund variable annuity contracts and variable life insurance policies, including
the Policy described in this Prospectus. Because Fund shares are offered to
separate accounts of
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<PAGE>
both affiliated and unaffiliated insurance companies, it is conceivable that, in
the future, it may not be advantageous for variable life insurance separate
accounts and variable annuity separate accounts to invest in these Funds
simultaneously, since the interests of such Policyowners or contractholders may
differ. Although neither the Company nor the Funds currently foresees any such
disadvantages either to variable life insurance or to variable annuity
policyholders, each Fund's Board of Trustees/Directors has agreed to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in response
thereto. If such a conflict were to occur, one of the separate accounts might
withdraw its investment in a Fund. This might force that Fund to sell portfolio
securities at disadvantageous prices.
Fund Participation Agreements
LLANY has entered into agreements with the various Funds and their advisors or
distributors under which LLANY makes the Funds available under the Policies and
performs certain administrative services. In some cases, the advisors or
distributors may compensate LLANY at annual rates of between .11% and .25% of
assets in a particular Fund attributable to the Policies.
CHARGES & FEES
Premium Load
The premium load is deducted from your premium payments. This load represents
sales and administrative expenses associated with the startup and maintenance of
the policy.
1. Guaranteed Maximum Premium Load
The premium load is guaranteed to be no higher than the amounts shown in the
following table.
<TABLE>
<CAPTION>
For Premiums Paid up to For Premiums Paid greater than
Target Premium -- Target Premium --
load as a percentage of load as a percentage of
Policy Year(s) premium premium
- ---------------- ------------------------- -------------------------------
<S> <C> <C>
1 15% 6%
2-5 10% 6%
6 and after 6% 6%
</TABLE>
2. Current Premium Load
The premium load is currently as shown in the following table.
<TABLE>
<CAPTION>
For Premiums Paid up to For Premiums Paid greater than
Target Premium -- Target Premium --
load as a percentage of load as a percentage of
Policy Year(s) premium premium
- ---------------- ------------------------- -------------------------------
<S> <C> <C>
1 10.5% 2.5%
2-5 7.5% 1.5%
6-7 3.5% 1.5%
8 and after 1.5% 1.5%
</TABLE>
Premium Load Refund
Upon a full surrender of your Policy within the first 24 months if your Policy
is not in default you may be entitled to a credit for some or all of the premium
loads which have been deducted from your premium payments. To determine the
Surrender Value
16
<PAGE>
during the premium load refund period, the Total Account Value will be reduced
by the amount of any Loan Account Value, including accrued interest. That amount
would be increased by the applicable credit for the premium load. A decrease in
the specified amount in Policy Years 1 or 2 will proportionately decrease the
amount of the premium load refund.
For Policies surrendered during the first twelve months after the Date of Issue,
the refund is 7% of premium paid in the first Policy Year up to the Target
Premium and 3% of premium paid in the first Policy Year above Target Premium.
For months 13 through 24, the refund is 75% of the First Policy Year refund
amount.
Premium Tax Charge
An amount equal to the state and municipal taxes associated with premiums
received is deducted from premium payments. For Policies issued or delivered in
New York, this charge is currently 1.75% and is guaranteed not to exceed 5% of
premium received.
Charges and Fees Assessed Against the Total Account Value
A Monthly Deduction is made from the Total Account Value. The Monthly Deduction
is made as of the same day each month, beginning with the Date of Issue. The
Monthly Deduction includes the Cost of Insurance and any charges for
supplemental riders or benefits. The Cost of Insurance is the portion of the
monthly deduction attributable to the basic insurance coverage, not including
riders, supplemental benefits or monthly expense charges. The Cost of Insurance
depends on the Issue Age, risk class of the Insured and the number of Policy
Years elapsed and Specified Amount of the Policy.
Once a Policy is issued, Monthly Deductions, including Cost of Insurance
charges, will begin as of the Date of Issue, even if the Policy's issuance was
delayed due to underwriting requirements, and will be in amounts based on the
Specified Amount of the Policy issued, even if any temporary insurance coverage
provided during the underwriting period was for a lesser amount.
The Monthly Deduction also includes a monthly administrative expense charge of
$6 currently, guaranteed not to exceed $10 during all Policy Years.
The monthly administrative expense charge is for items such as premium billing
and collection, Policy value calculation, confirmations and periodic reports and
will not exceed our costs. The Monthly Deduction is deducted proportionately
from each funding option, if more than one is used. This is accomplished by
liquidating Accumulation Units and withdrawing the value of the liquidated
Accumulation Units from each funding option in the same proportion as their
respective values have to your Fixed Account and Separate Account Values.
Mortality and Expense Risk Charge
The Company deducts a daily charge from the assets of Account S for mortality
and expense risks assumed by it in connection with the Policy.
Currently, the amount of this charge, on an annualized basis, is the following
percentage of Policy value in the Separate Account:
17
<PAGE>
<TABLE>
<CAPTION>
Annualized Mortality and
Policy Years Expense Risk Charge
<S> <C>
1-10 0.70%
11 and later 0.35%
</TABLE>
The mortality and expense risk charge is assessed to compensate the Company for
assuming certain mortality and expense risks under the Policies. The Company
reserves the right to increase the mortality and expense risk charge if it
believes that circumstances have changed so that current charges are no longer
adequate. In no event will the charge exceed 1.25% of average daily net assets
in Policy Years 1-10 and 0.90% of average daily net assets in Policy Years 11
and thereafter, on an annualized basis.
Reduction of Charges
The Policies are available for purchase by corporations or other groups where
the individuals share a common employer or affiliation with the group or
sponsoring organization. Each Policy covers a single insured. We reserve the
right to reduce premium loads or any other charges on certain multiple life
sales ("cases") where it is expected that the amount or nature of such cases
will result in savings of sales, underwriting, administrative or other costs.
Eligibility for these reductions and the amount of reductions will be determined
by a number of factors, including the number of lives to be insured, the total
premiums expected to be paid, total assets under management for the Policy
owner, the nature of the relationship among the insured individuals, the purpose
for which the policies are being purchased, expected persistency of the
individual policies, and any other circumstances which we believe to be relevant
to the expected reduction of our expenses. Some of these reductions may be
guaranteed and others may be subject to withdrawal or modification by us on a
uniform case basis. Reductions in charges will not be unfairly discriminatory to
any Policy owners.
POLICY CHOICES
When you buy a Policy, you make several important choices:
o The amount of premium you intend to pay;
o Which one of the three Death Benefit Options you would like, and the Premium
Accumulation Rate you would like if you choose Death Benefit Option 3;
o The way your net premiums will be allocated to the Funds and/or the Fixed
Account.
Each of these choices is described in detail below:
Premium Payments
Planned Premiums are those premiums you choose to pay on a scheduled basis. We
will bill you annually, semiannually, or quarterly, or at any other agreed-upon
frequency. Additional Premiums are any premiums you pay in addition to Planned
Premiums.
Payment of Minimum Monthly Premiums, Planned Premiums, or Additional Premiums in
any amount will not guarantee that your Policy will remain in force. Conversely,
failure to pay Planned Premiums or Additional Premiums will not necessarily
cause
18
<PAGE>
your Policy to lapse. The Policy's surrender value must be sufficient to cover
the next Monthly Deduction.
At any time, you may increase your Planned Premium by written notice to us, or
pay Additional Premiums, except that:
o We may require evidence of insurability if the Additional Premium or the new
Planned Premium during the current Policy Year increases the difference
between the Death Benefit and the Total Account Value. If satisfactory
evidence of insurability is requested and not provided, we will refund the
increase in premium without interest and without investing such amounts in the
underlying funding options.
o If, at any time, a premium is paid which would result in total premiums
exceeding such maximum premium limitations, we will only accept that portion
of the premium which will make total premiums equal to the maximum. Any part
of the premium in excess of that amount will be returned or applied as
otherwise agreed and no further premiums will be accepted until allowed by the
then-current maximum premium limitations prescribed by law.
o If you make a sufficient premium payment when you apply for a Policy, and have
answered favorably to certain questions relating to the Insured's health, a
"temporary insurance agreement" in the amount applied for (subject to stated
maximums) will be provided.
o After your first premium payment all premiums must be sent to our
Administrative Office. Your premium payments received will be allocated as you
have directed and amounts allocated to the Funds will be credited at the
Accumulation Unit value determined at the end of the business day after each
payment is received.
You may reallocate your future premium payments at any time free of charge. Any
reallocation will apply to premium payments made after you have received written
verification from us.
Under limited circumstances, we may backdate a Policy, upon request, by
assigning a Date of Issue earlier than the date the application is signed, but
no earlier than six months prior to state approval of the Policy. The Date of
Issue is the date from which policy years, policy anniversaries and Attained Age
are determined. The Date of Coverage is the date on or after the Date of Issue
that the initial premium has been paid (1) while the Insured is alive and (2)
prior to any change in health and insurability, as represented in the
application. Issue Age is the Insured's age on his/her birthday closest to the
Policy Date of Issue. Backdating may be desirable, for example, so that you can
purchase a particular Specified Amount for lower cost of insurance rates, based
on a younger insurance age. For a backdated Policy, you must pay the minimum
premium payable for the period between the Date of Issue and the date the
initial premium is invested in the Separate Account. Backdating of your Policy
will not affect the date on which your premium payments are credited to the
Separate Account and you are credited with Accumulation Units. You cannot be
credited with Accumulation Units until your Net Premium Payment is actually
deposited in the Separate Account. (See "Policy Values.")
If we decline an application for a policy we will refund all premium payments
made.
This Policy must satisfy the Cash Value Accumulation testing method to qualify
as a life insurance contract for tax purposes under Section 7702 of the Code.
This
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<PAGE>
requires a life insurance policy to meet minimum ratios of life insurance
coverage to Total Account Value. We refer to the ratios as Applicable
Percentages. We refer to required life insurance coverage in excess of the Total
Account Value as the Death Benefit corridor.
The Cash Value Accumulation test does not limit premiums which may be paid but
has required Applicable Percentages. For example, Applicable Percentages for
Non-Smokers range from 730% at Attained Age 20 to 380% at Attained Age 40 to
100% at Attained Age 100.
The payment of higher premiums, which is associated with the Cash Value
Accumulation method, increases the possibility that the amount paid into the
Policy will exceed the amount that would have been paid had the Policy provided
for seven level annual premiums (the "7-pay test"). If premiums paid exceed such
limits during any 7-pay testing period, any partial surrender or Policy loan may
be subject to federal income taxation.
Death Benefit Options
At the time of purchase, you must choose from three available Death Benefit
Options. The amount payable under the option chosen will be determined as of the
date of the Insured's death. The Death Benefit may be affected by partial
surrenders. The Death Benefit for all three options will be reduced by the Loan
Account Value plus any accrued interest.
Under Option 1, the Death Benefit will be the greater of the Specified Amount or
Target Face Amount if a Term Insurance Rider is attached to the Policy (see
"Term Insurance Rider"), or the Applicable Percentage of the Total Account
Value. Option 1 generally provides a level Death Benefit.
Under Option 2, the Death Benefit will be the greater of the Specified Amount,
plus the Total Account Value or the Target Face Amount if a Term Insurance Rider
is attached to the Policy (see "Term Insurance Rider"), or the Applicable
Percentage of the Total Account Value. Option 2 provides a varying Death Benefit
which increases or decreases over time, depending on the amount of premium paid
and the investment performance of the underlying funding options you choose.
Under Option 3, the Death Benefit will be the greater of the Specified Amount
plus the Accumulated Premium(s) accumulated at the Premium Accumulation Rate or
Target Face Amount if a Term Insurance Rider is attached to the Policy (see
"Term Insurance Rider"), or the Applicable Percentage of the Total Account Value
but will not exceed the total Death Benefit paid under Option 2. This option may
only be selected at issue.
The Accumulated Premium is the sum of all the premiums paid from the Date of
Issue accumulated or the Premium Accumulation Rate. You select the Premium
Accumulation Rate at issue. Any rate requested in excess of 10% may be subject
to additional underwriting.
The choice of Death Benefit Option should be based upon the pattern of Death
Benefits which best matches the intended use of the Policy. For example, an
Option 1 Policy should be chosen for a simple, fixed, level total Death Benefit
need. Option 2 would be chosen to provide a level death benefit in addition to
the Policy Total
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<PAGE>
Account Value, and Option 3 would provide a level death benefit for the
Specified Amount plus a return of Accumulated Premiums.
Choosing the option which provides the lowest pattern of Death Benefits which
meets the desired need will be the most efficient for accumulating potential
cash value, since the lower Cost of Insurance charges will improve the growth or
preservation of the Total Account Value. Other than providing the appropriate
pattern of desired Death Benefits, there is no economic advantage of one option
over another, since the Cost of Insurance charges for all three Options are
based upon the amount at risk, the difference between the Death Benefit and the
Total Account Value each month.
The same is true for the choice of a Premium Accumulation Rate under Option 3.
Choice of a higher Premium Accumulation Rate will cause the death benefit to
increase more rapidly, but this will also generate higher Cost of Insurance
charges and lower the potential growth in Total Account Value.
Allocations and Transfers to Funding Options
At purchase, you must decide how to allocate your Net Premiums among the Funds
and/or the Fixed Account. Net Premiums must be allocated in whole percentages.
You should carefully consider current market conditions and each Fund's
investment policies and related risks before allocating money to or transferring
values among the Funds.
Before the Maturity Date, you may transfer Policy values from one Fund to
another at any time, or to the Fixed Account. After the first 18 months from
Date of Issue the Company reserves the right to charge $25 for each transfer
after the twelfth transfer per year. Within 45 days after each Policy
anniversary, and before the Maturity Date, you may also transfer a portion of
the Fixed Account Value to one or more Funds. A transfer from the Fixed Account
is allowed only once in the 45-day period after the Policy Anniversary and will
be effective as of the next Valuation Period after your request is received by
our Administrative Office. The amount of such transfer cannot exceed the greater
of 25% of the greatest amount held in the Fixed Account Value during the prior 5
years or $1000.
Any transfer among the Funds or to the Fixed Account will result in the
crediting and cancellation of Accumulation Units based on the Accumulation Unit
values determined at the end of the Valuation Period after your request is
received by our Administrative Office. (See "Accumulation Unit Value.") The
Valuation Period is the period of time from when the Company determines the
Accumulation Unit Value and Settlement Option Unit Value of a variable
investment option until the next time it determines such unit value. Currently,
the calculation occurs after the close of business of the New York Stock
Exchange on any normal business day, Monday through Friday, that the New York
Stock Exchange is open.
POLICY VALUES
Total Account Value
The Total Account Value is the sum of the Fixed Account Value, the Separate
Account Value and the Loan Account Value.
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<PAGE>
We will allocate each Net Premium (the premium paid, less both the premium load
and the premium tax charge) to a funding option in the Separate Account and
credit it in the form of Accumulation Units. An Accumulation Unit is used to
measure the value of a Policy owner's interest in each applicable funding option
used to calculate the value of the variable portion of the Total Account Value
before election of a settlement option. We will credit each Net Premium we
receive after your policy is issued to your Policy at the Accumulation Unit
Value for a selected Fund at the end of the business day we receive it. The
number of Accumulation Units credited is the Net Premium divided by that
Accumulation Unit Value. Shares in each Fund you select will be purchased for
the Separate Account at the Fund's net asset value next computed after we
receive the Net Premium. Since each Fund has its own Accumulation Unit value if
you choose a combination of funding options, you will have Accumulation Units
credited for each funding option.
Separate Account Value is the sum of values in each Separate Account funding
option which is the total number of Accumulation Units times the current
Accumulation Unit Value. To that we add any Fixed Account values and any Loan
Account Values to arrive at the Policy's Total Account Value.
The number of Accumulation Units you have is not changed by any change in the
value of an Accumulation Unit. The number is increased by contributions or
transfers and decreased by charges and withdrawals.
There is no guarantee that the Separate Account Value will equal or exceed Net
Premiums placed in the Separate Account.
We will notify you annually as to the number of Accumulation Units credited to
your Policy for each Fund, the current Accumulation Unit values, the Separate
Account Value, the Fixed Account Value, and the Total Account Value.
Accumulation Unit Value
We convert any Net Premium payment allocated to, or Policy Value transferred to
a Sub-Account into Accumulation Units. The Accumulation Unit Value for a
Sub-Account is determined by:
o multiplying the Fund shares owned by the Sub-Account at the beginning of the
business day by the Fund net asset value per share at the end of the
business day and adding any dividend or other distribution during the business
day; minus
o the daily Sub-Account charges, including any tax charge or credit; and
o dividing the result of the foregoing subtraction by the number of Accumulation
Units for that Sub-Account at the beginning of the business day.
The Accumulation Unit Value may increase or decrease from business day to
business day.
Maturity Value
The Maturity Date is the Policy Anniversary nearest the Insured's 100th
birthday.
The Maturity Value of the Policy is the Total Account Value on the Maturity
Date, less the Loan Account Value and any unpaid accrued interest.
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<PAGE>
Surrender Value
The Surrender Value of your Policy is the amount you can receive in cash by
surrendering the Policy. This equals the Total Account Value minus the Loan
Account Value and any accrued interest, plus any credit for premium loads paid.
All or part of the Surrender Value may be applied to one or more of the
Settlement Options.
POLICY RIGHTS
Partial Surrenders
A partial surrender may be made at any time after the first Policy Year. If, at
the time of a partial surrender your Total Account Value is attributable to more
than one funding option, the transaction charge and the amount paid to you upon
the surrender will be taken proportionately from the Accumulation Unit values in
each funding option.
The amount of a partial surrender may not exceed the Surrender Value on the date
the request is received and may not be less than $500.
Partial surrenders may only be made prior to election of a Settlement Option.
For an Option 1 Death Benefit Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value, Death Benefit, and
Specified Amount. The Specified Amount and Total Account Value will be reduced
by equal amounts and will reduce any past increases in the reverse order in
which they occurred.
For an Option 2 Death Benefit Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value and the Death Benefit,
but it will not reduce the Specified Amount.
For an Option 3 Death Benefit Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value, Death Benefit, and
Specified Amount. The Specified Amount and Total Account Value will be reduced
by equal amounts and will reduce any past increases in the reverse order in
which they occurred.
We will pay you on a full or partial surrender within seven calendar days after
we receive your written request in our Administrative Office in satisfactory
form. Payment may be postponed if the New York Stock Exchange has been closed or
trading has been restricted or an emergency exists. Your payment from the Fixed
Account Values may be deferred up to six months except when used to pay premiums
to the Company.
The Specified Amount remaining in force after a partial surrender may not be
less than $100,000. Any request for partial surrender that would reduce the
Specified Amount below this amount will not be granted. In addition, if,
following the 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
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<PAGE>
decrease may be limited to the extent necessary to meet the federal tax law
requirements.
Reinstatement of a Lapsed Policy
A lapse occurs if your Monthly Deduction is greater than the Policy's Surrender
Value and you make no payment to cover the deduction within 61 days of our
notifying you.
You can apply for reinstatement within five years after the date of lapse and
before the Maturity Date. To reinstate your Policy we will require satisfactory
evidence of insurability and an amount sufficient to pay for the current Monthly
Deductions, plus two additional Monthly Deductions. In the event of
reinstatement, the Policy will be reinstated on the Monthly Deduction day
following our approval. The Policy's Total Account Value at reinstatement will
be the net premium paid less the Monthly Deduction due that day. Any loan
Account Value will not be reinstated.
Policy Loans
The maximum loan amount is 90% of Total Account Value. The Loan Account Value,
which is the loan amount plus interest, reduces any proceeds payable.
Any loan made will be taken proportionally from the amount in each funding
option. Repayments on the loan will be allocated in proportion to current
premium allocations, and will reduce the Loan Account Value.
The annual rate we charge during any Policy Year will be:
o the monthly average (Moody's Investors Service, Inc. Composite Yield on
Corporate Bonds) for the calendar month which ends two months before the month
in which the Policy Anniversary occurs, or, if greater,
o 5%
This rate may increase only when it would be at least 0.5% higher than the prior
Policy Year's and decrease only when it would be at least 0.5% lower than the
prior Policy Year's.
When you take a loan, we will tell you the current policy loan interest rate. We
will tell you in advance of any interest rate change. You must pay interest on
the anniversary of the loan, or earlier upon surrender, payment of proceeds, or
maturity of a Policy. Any unpaid interest is added to the loan.
The Loan Account Value will earn interest at an annual rate equal to the greater
of:
o the policy loan interest rate less an annual rate not to exceed 0.90%; or
o 4.0%
The interest earned by the Loan Account Value will be added to the Fixed Account
Value and the Separate Account Value in the same proportion in which the loan
amount was originally deducted from these values.
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<PAGE>
Policy Changes
You may make changes to your Policy as described below by submitting a written
request to our Administrative Office in a form satisfactory to us.
Increases: You may increase the Specified Amount of your Policy any time subject
to satisfactory evidence of insurability which may be required.
Decreases: Generally, you may decrease the Specified Amount of your Policy;
however, no decrease may reduce the Specified Amount below the minimum for the
type of Policy (see "Death Benefit Options"), and the availability of decreases
before the eighth Policy Year is subject to approval of this feature by the New
York Insurance Department and to the Company's satisfaction that the decrease is
intended to meet a legitimate, non-insurance related business need of the Policy
owner.
The new Specified Amount will equal the Specified Amount less the Total Account
Value at the time of the change.
o Changes from Death Benefit Option 1 to Death Benefit Option 2 are allowed at
any time. The new Specified Amount will equal the Specified Amount less the
Total Account Value at the time of the change.
o Changes from Death Benefit Option 2 to Death Benefit Option 1 are allowed at
any time. The new Specified Amount will equal the Specified Amount plus the
Total Account Value as of the time of the change.
o Changes from Death Benefit Option 3 to Death Benefit Option 1 are allowed at
any time. The Specified Amount will be increased to equal the Specified Amount
prior to the change plus the lesser of the Accumulated Premiums or the Total
Account Value at the time of the change.
o Changes from Death Benefit Option 3 to Death Benefit Option 2 are allowed at
any time. The Specified Amount will be reduced to equal the Specified Amount
prior to the change minus the difference between the Total Account Value and
the sum of the Accumulated Premiums at the time of the change.
o Changes from Death Benefit Options 1 or 2 to Death Benefit Option 3 are not
allowed.
Right to Examine the Policy
The Policy has a "Right to Examine Period" during which you may examine the
Policy. If, for any reason, you are dissatisfied, it may be returned to our
Administrative Office for a refund. It must be returned within ten days after
you receive the Policy. If you return (cancel) the Policy, we will pay a refund
equal to all premiums paid, without interest. Refunds will usually occur within
seven days of notice of cancellation, although a refund of premiums you paid by
check may be delayed until the check clears your bank.
DEATH BENEFIT
The Death Benefit under the Policy will be paid in a lump sum within seven days
after we receive due proof of the Insured's death (a certified copy of the death
certificate), unless you or the beneficiary have elected that it be paid under
one or more of the Settlement Options or such options as we may choose to make
available
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<PAGE>
in the future. Payment of the Death Benefit may be delayed if the Policy is
being contested.
POLICY SETTLEMENT
Settlement Options
Proceeds in the form of Settlement Options are payable by the Company upon the
Insured's death, upon Maturity of the Policy, or upon election of one of the
Settlement Options.
Upon the death of the Insured, the proceeds of the Policy will be paid to the
Beneficiary(ies) in the form of an annuity in Settlement Option 1, 2 or 3 if the
Beneficiary(ies) so elect. An annuity is a series of payments for a definite
period of time or for the life of an individual. For Settlement Option 4,
payments of requested amounts are made at the request of the Payee or payments
may be through one of the other available Settlement Options.
All or part of the Proceeds of this Policy may be applied, under one or more of
the options described below. An election shall be made by written request to our
Administrative Office. The Payee of Proceeds may make this election if no prior
election has been made.
The Payee must designate whether the payments will be:
o on a fixed basis,
o on a variable basis, or
o a combination of fixed and variable bases.
Variable Settlement Options will be supported by the then available Funds of the
Company's Variable Annuity Account N (Account N), a separate account very
similar to the Separate Account, except that Account N supports variable annuity
benefits rather than variable life insurance benefits. We will provide an
Account N prospectus in connection with selection of a Settlement Option. That
prospectus will describe the available Funds, the cost and expenses of such
Funds and the charges imposed on Account N. The available Funds may be, and the
charges imposed on Account N are expected to be, different from those that
relate to the Separate Account prior to commencement of a Settlement Option.
Accordingly, you should review the Account N prospectus, as well as prospectuses
for Account N's underlying Funds, prior to selecting any variable payment
Settlement Option. A minimum monthly payment of $50 from each funding option
will be required.
You make transfers among Funds while receiving payments on a variable basis
under our administrative procedures in effect at the time. Currently, we limit
the number of transfers to three per calendar year, but we can change this limit
in the future.
If no designation is made, the Separate Account Value shall be used to provide a
variable payment, and the Fixed Account Value shall be used to provide a fixed
payment.
If a fixed annuity is chosen, the annuity purchase rate for the option chosen
will reflect at least the minimum guaranteed interest rate of 3.0%.
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<PAGE>
Annuity Payment Options:
Option 1 -- Life Annuity/Life Annuity with Guaranteed Period -- Fixed and/or
variable annuity payments will be made for the lifetime of the Annuitant with no
certain period, or life and a 10 year certain period, or life and a 20 year
certain period.
Option 2 -- Unit Refund Life Annuity -- Variable annuity payments will be made
for the lifetime of the Annuitant with the guarantee that upon death, if (a) the
number of the Fund settlement option annuity units initially purchased
(determined by dividing the total dollar amount applied to purchase this
settlement option by the Fund settlement option annuity unit value on the
Annuity Commencement Date) is greater than (b) the number of Fund settlement
option annuity units paid as part of each variable annuity benefit payment
multiplied by the number of annuity benefit payments paid prior to death; then a
refund payment equal to the number of Fund settlement option annuity units
determined by (a) minus (b) will be made. The refund payment value will be
determined using the Fund settlement option annuity unit value on the Valuation
Date on which the death claim is approved by us for payment after we have
received (1) proof of death acceptable to us; (2) written authorization for
payment; and (3) all claim forms, fully completed.
Option 3 -- Cash Refund Life Annuity -- Fixed annuity payments will be made for
the lifetime of the Annuitant with the guarantee that upon death, if (a) the
total dollar amount applied to purchase this option is greater than (b) the
fixed annuity benefit payment multiplied by the number of annuity benefit
payments paid prior to death; then a refund payment equal to the dollar amount
of (a) minus (b) will be made. The refund payment will be made on the Valuation
Date on which the death claim is approved by us for payment after we are in
receipt of (1) proof of death acceptable to us; (2) written authorization for
payment; and (3) all claim forms, fully completed.
Option 4 -- Joint Life Annuity/Joint Life Annuity with Guaranteed Period --
Fixed and/or variable payments will be made during the joint life of the
Annuitant and a Joint Annuitant of the Owner's choice. Payments will be made for
life with no certain period, or life and a 10 year certain period, or life and a
20 year certain period. Payments continue for the life of the survivor at the
death of the Annuitant or Joint Annuitant.
Other Options -- other options may be available as agreed upon in writing by us.
TERM INSURANCE RIDER
The Policy can be issued with a Term Insurance Rider as a portion of the total
Death Benefit. The Rider provides term life insurance on the life of the
Insured, which is annually renewable to Attained Age 100. This rider will
continue in effect unless explicitly canceled by the Policy owner. The Rider
provides a vehicle for short-term insurance protection for Policy owners who
desire lower required premiums under the Policy, in anticipation of growth in
Total Account Value to fund life insurance coverage in later Policy Years. The
amount of coverage provided under the Rider's Benefit Amount, varies from month
to month.
The Benefit Amount is the Target Face Amount minus the Specified Amount.
However, if the Death Benefit of the Policy is defined as a percentage of the
Total Account Value, the Benefit Amount is zero.
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<PAGE>
The cost of the Rider is added to the Monthly Deductions, and is based on the
Insured's premium class, Issue Age and the number of Policy Years elapsed. We
may adjust the monthly rider rate from time to time, but the rate will never
exceed the guaranteed cost of insurance rates for the Rider for that Policy
Year.
If the Policy's Death Benefit increases as a result of an increase in Total
Account Value (see "Life Insurance Qualification"), the Rider's Target Death
Benefit will be reduced by an equivalent amount to maintain the total desired
Death Benefit.
The Rider's Death Benefit is included in the total Death Benefit paid under the
Policy. (See "Death Benefit Options.")
THE COMPANY
Directors and Officers of LLANY
The following persons are Directors and Officers of LLANY. Except as indicated
below, the address of each is 120 Madison Street, Suite 1700, Syracuse, NY
13202, and each has been employed by LLANY or its affiliates for more than 5
years.
<TABLE>
<CAPTION>
Name, Address and
Position(s) with Registrant Principal Occupations Last Five Years
- ----------------------------- ------------------------------------------------------------
<S> <C>
Roland C. Baker President [1/95-present], First Penn-Pacific Life Insurance
Director Co. Formerly: Chairman and CEO [7/88-1/95], Baker,
1801 S. Meyers Road Rakish, Shipley & Politzer, Inc.
Oakbrook Terrace, IL 60181
J. Patrick Barrett Chairman and Chief Executive Officer, CARPAT
Director Investments
4605 Watergap
Manlius, NY 13104
David N. Becker Vice President and Chief Actuarial Officer, The
Second Vice President and Lincoln National Life Insurance Company
Appointed Actuary
1300 South Clinton Street
Fort Wayne, IN 46802
Thomas D. Bell, Jr. President and Chief Executive Officer [4/95-present],
Director Burson-Marstellar. Formerly: Vice Chairman
230 Park Avenue, South [3/94-5/95], Gulfstream Aerospace Corp.
New York, NY 10003
Jon A. Boscia President, Chief Executive Officer and Director, Lincoln
Director National Corp. [1/98-present], Formerly: President and
1300 South Clinton Street Chief Executive Officer [10/96-1/98], and Chief Operating
Fort Wayne, IN 46802 Officer [5/94-10/96], The Lincoln National Life Insurance
Co. Formerly: President [7/91-5/94] Lincoln Investment
Management Inc.
John H. Gotta Senior Vice President and General Manager (formerly
Second Vice President Vice President) [1/98-present], The Lincoln National Life
350 Church Street Insurance Co. Formerly: Senior Vice President,
Hartford, CT 06103 Connecticut General Life Insurance Company
[3/96-12/97]; Vice President, Connecticut Mutual Life
Insurance Company [8/94-3/96]; Vice President,
Connecticut General Life Insurance Company [3/93-8/94]
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Position(s) with Registrant Principal Occupations Last Five Years
- ----------------------------- -----------------------------------------------------
<S> <C>
Philip L. Holstein President and Treasurer, Lincoln Life & Annuity
President and Director Company of New York [7/96-present] Formerly:
President, [1/82-7/96] The Holstein Company, Inc.
Barbara S. Kowalczyk Senior Vice President, Corporation Planning
Director [5/94-present], Lincoln National Corp.; Formerly:
200 East Berry Street Senior Vice President [7/92-5-94], Lincoln
Fort Wayne, IN 46802 Investment Management Co.
Margeurite L. Lachman Managing Director, Schroder Real Estate Associates
Director
437 Madison Avenue
18th Floor
New York, NY 10022
Louis G. Marcoccia Senior Vice President, Business, Finance and
Director Administrative Services, Syracuse University
Skytop Office Building
Skytop Road
Syracuse, NY 13244-5300
Troy D. Panning Second Vice President and Chief Financial Officer
Second Vice President and [11/96-present], Lincoln Life & Annuity Company of
Chief Financial Officer New York; Formerly: Accountant [9/90-11/96], Ernst
& Young LLP
John M. Pietruski Chairman of the Board, Texas Biotechnology Corp.
Director
One Penn Plaza
Suite 3408
New York, NY 10119
Lawrence T. Rowland President [97-present] Lincoln Reinsurance,
Director Formerly: Senior Vice President (96), Vice President
One Reinsurance Place [94-95] Lincoln Reinsurance.
1700 Magnavox Way
Fort Wayne, IN 46804
Gabriel L. Shaheen President, Chief Executive Officer and Director
Director [1/98-present], The Lincoln National Life Insurance
1300 South Clinton Street Co. Formerly: Managing Director, Lincoln National
Fort Wayne, IN 46802 (UK) PLC [12/96-1/98]; President, Lincoln National
Reinsurance Company [7/94-12/96]; Senior Vice
President, Lincoln National Life Reinsurance
Company [1/93-7/95]
Robert O. Sheppard, Esq. Assistant Vice President, Lincoln Life & Annuity
Assistant Vice President Company of New York [7/97-present]; Second Vice
President, Unity Mutual Life Insurance Company
[2/86-7/97]
Richard C. Vaughan Executive Vice President and Chief Financial Officer
Director [1/95-present] Formerly: Senior Vice President
200 East Berry Street [5/92-1/95], Lincoln National Corp.
Fort Wayne, IN 46802
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Position(s) with Registrant Principal Occupations Last Five Years
- ----------------------------- -----------------------------------------------------
<S> <C>
C. Suzanne Womack Secretary, Lincoln Life & Annuity Company of New
Secretary York [7/96-present]; Second Vice President and
200 East Berry Street Secretary, Lincoln National Corporation
Fort Wayne, IN 46802 [5/97-present]; Second Vice President and
Secretary, The Lincoln National Life Insurance
Company [5/97-present]; Secretary, Lincoln Financial
Advisors Corporation [6/87-present]
</TABLE>
ADDITIONAL INFORMATION
Reports to Policyowners
Within 30 days after each Policy Anniversary and before proceeds are applied to
a Settlement Option, we will send you a report containing the following
information:
o a statement of changes in the Total Account Value and Surrender Value since
the prior report or since the Date of Issue, if there has been no prior
report. This includes a statement of Monthly Deductions and investment results
and any interest earnings for the report period;
o Surrender Value, Death Benefit, and any Loan Account Value as of the Policy
Anniversary;
o a projection of the Total Account Value, Loan Account Value and Surrender
Value as of the succeeding Policy Anniversary.
If you have Policy values funded in a Separate Account you will receive, in
addition, such periodic reports as may be required by the Commission.
Right to Instruct Voting of Fund Shares
In accordance with our view of present applicable law, we will vote the shares
of each of the Funds held in each Separate Account. The votes will be cast at
meetings of the shareholders of the Fund and will be based on instructions
received from Policy owners. However, if the 1940 Act or any regulations
thereunder should be amended or if the present interpretation thereof should
change, and as a result we determine that we are permitted to vote the shares of
the Fund in our own right, we may elect to do so.
The number of Fund shares which each Policy owner is entitled to direct a vote
is determined by dividing the portion of Total Account Value attributable to a
Fund, if any, by the net asset value of one share in the Fund. Where the value
of the Total Account Value or the Valuation Reserve relates to more than one
Fund, the calculation of votes will be performed separately for each Fund. The
number of shares which a person has a right to vote will be determined as of a
date to be chosen by us, but not more than 90 days before the meeting of the
Fund. Voting instructions will be solicited by written communication at least 14
days before such meeting. Fund shares for which no timely instructions are
received, and Fund shares which are not otherwise attributable to Policy owners,
will be voted by us in the same proportion as the voting instructions which are
received for all Policies participating in each Fund through Account S.
Policy owners having a voting interest will receive periodic reports relating to
the Fund, proxy material and a form for giving voting instructions.
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Disregard of Voting Instructions
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the shares be voted so as
to cause a change in the sub-classification or investment objectives of a Fund
or to approve or disapprove an investment advisory contract for a Fund. In
addition, we may disregard voting instructions in favor of changes initiated by
a Policy owner in the investment policy or the investment adviser of the Fund if
we reasonably disapprove of such changes.
A change would be disapproved only if the proposed change is contrary to state
law or prohibited by state regulatory authorities or we determined that the
change would have an adverse effect on the Separate Account in that the proposed
investment policy for a Fund may result in overly speculative or unsound
investments. In the event we do disregard voting instructions, a summary of that
action and the reasons for such action will be included in the next annual
report to Policy owners.
State Regulation
We are subject to regulation and supervision by the Insurance Department of the
state of New York, which periodically examines our affairs. The Policies have
been approved by the New York Insurance Department.
We are required to submit annual statements of our operations, including
financial statements, to the New York Insurance Department, for the purposes of
determining solvency and compliance with insurance laws and regulations.
Legal Matters
LLANY may be 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.
The Registration Statement
A Registration Statement under the 1933 Act has been filed with the Commission
relating to the offering described in this Prospectus. This Prospectus does not
include all the information set forth in the Registration Statement, certain
portions of which have been omitted pursuant to the rules and regulations of the
Commission. The omitted information may be obtained at the Commission's
principal office in Washington, DC, upon payment of the Commission's prescribed
fees.
Distribution of the Policies
The Policy will be sold by individuals and entities, who in addition to being
appointed as life insurance agents for LLANY are also registered representatives
of Lincoln Financial Advisors Corporation or of other registered broker-dealers
who maintain a selling relationship with LLANY. Registered broker-dealers and
registered representatives of broker-dealers ordinarily receive commission and
service fees up to 35% of the first year premium as defined and limited by
Internal Revenue Code Section 7702, plus up to 10% of all other premiums paid. A
registered representative or registered broker-dealer may be required to return
all or part of any commission if the Policy is not continued for a certain
period. All compensation is paid from LLANY resources, which include sales
charges made under this policy.
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<PAGE>
Records and Accounts
Andesa, TPA, Inc., Suite 502, 1621 N. Cedar Crest Boulevard, Allentown,
Pennsylvania, will act as a Transfer Agent on behalf of LLANY as it relates to
the policies described in this Prospectus. In the role of a Transfer Agent,
Andesa will perform administrative functions, such as decreases, increases,
surrenders and partial surrenders, fund allocation changes and transfers on
behalf of the Company.
All records and accounts relating to the Separate Account and the Funds shares
held in the Separate Account will be maintained by the Company. All financial
transactions will be handled by the Company. All reports required to be made and
information required to be given will be provided by Andesa on behalf of the
Company.
Experts
The statutory-basis financial statements of LLANY appearing in this prospectus
and registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report which also appears 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
report given on their authority as experts in accounting and auditing.
Legal matters included in this prospectus have been examined by Robert O.
Sheppard, Esq. as stated in the opinion filed as an exhibit to the registration
statement.
Actuarial matters included in this prospectus have been examined by Ronald D.
Franzluebbers, FSA as stated in the opinion filed as an exhibit to this
registration statement.
Advertising
We are a member of Insurance Marketplace Standards Association ("IMSA") and may
include the IMSA logo and information about IMSA membership in our
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services for individually
sold life insurance and annuities.
Preparing for Year 2000
Many existing computer programs use only two digits in the date field to
identify the year. If left uncorrected these programs, which were designed and
developed without considering the impact of the upcoming change in the century,
could fail to operate or could produce erroneous results when processing dates
after December 31, 1999. For example, a bond with a stated maturity date of July
1, 2000, a computer program could read and store the maturity date as July 1,
1900. This problem is known by many names, such as the "Year 2000 Problem",
"Y2K", and the "Millennium Bug".
The Year 2000 Problem affects virtually all computer programs worldwide. It can
cause a computer system to suddenly stop operating. It can also result in a
computer corrupting vital company records, and the problem could go undetected
for a long time. For our products, if left unchecked it could cause such
problems as contributions collection and deposit errors; claim payment
difficulties; accounting errors; erroneous unit values; and difficulties or
delays in processing transfers, surrenders and withdrawals. In a worst case
scenario, this could result in a material
32
<PAGE>
disruption to the operations of LLANY and of Lincoln Life and Delaware Services
Company Inc. (Delaware), affiliates of LLANY and providers of the accounting and
valuation services for the Separate Account.
However, both provider companies (Lincoln Life and Delaware) are wholly owned by
Lincoln National Corporation (LNC), which has had Year 2000 processes in place
since 1996. LNC projects aggregate expenditures in excess of $92 million for its
Y2K efforts through the year 2000. Both Lincoln Life and Delaware have dedicated
Year 2000 teams and steering committees that are answerable to their
counterparts in LNC. LLANY also has a dedicated Year 2000 team and is
coordinating its activities with those of Lincoln Life, Delaware and LNC.
In light of the potential problems discussed above, LLANY, as part of its Year
2000 updating process, has assumed responsibility for correcting all
high-priority Information Technology (IT) systems which service the Separate
Account. Delaware is responsible for updating all its high-priority IT systems
to support these vital services. The Year 2000 effort, for both IT and non-IT
systems, is organized into four phases:
o awareness-raising and inventory of all assets (including third-party agent and
vendor relationships);
o assessment and high-level planning and strategy;
o remediation of affected systems and equipment; and
o testing to verify Year 2000 readiness.
All three companies are currently on schedule to have their high-priority IT
systems remediated and tested to demonstrate readiness by June 30, 1999. During
the third and fourth quarters of 1999 additional testing of the environment will
continue. All three companies are currently on schedule to have their
high-priority non-IT systems (elevators, heating and ventilation, security
systems, etc.) remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant delays; however, some
uncertainty remains. Specific factors that give rise to this uncertainty include
(but are certainly not limited to) a possible loss of technical resources to
perform the work; failure to identify all susceptible systems; and
non-compliance by third parties whose systems and operations impact LLANY. In a
report dated February 26, 1999, entitled, Investigating the Impact of the Year
2000 Technology Problem, S. Rpt. 106-10, the U.S. Senate Special Committee on
the Year 2000 Technology Problem expressed its concern that "Financial services
firms . . . are particularly vulnerable to . . . the risk that a material
customer or business partner will fail, as a result of the computer problems, to
meet its obligations".
One important source of uncertainty is the extent to which the key trading
partners of LLANY, Lincoln Life and of Delaware will be successful in their own
remediation and testing efforts. LLANY, Lincoln Life and Delaware have been
monitoring the progress of their trading partners; however, the efforts of these
partners are beyond our control.
LLANY, Lincoln Life and Delaware expect to have completed their necessary
remediation and testing efforts prior to December 31, 1999. However, given the
nature and complexity of the problem, there can be no guarantee by any of the
three companies that there will not be significant problems after December 31,
1999.
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<PAGE>
TAX MATTERS
General
The following is a discussion of the federal income tax considerations relating
to the Policy. This discussion is based on the Company's understanding of
federal income tax laws as they now exist and are currently interpreted by the
Internal Revenue Service ("IRS"). These laws are complex, and tax results may
vary among individuals. A person or persons contemplating the purchase of or the
exercise of elections under the Policy described in this Prospectus should seek
competent tax advice.
Federal Tax Status of the Company
The Company is taxed as a life insurance company in accordance with the Code.
For federal income tax purposes, the operations of each Separate Account form a
part of the Company's total operations and are not taxed separately, although
operations of each Separate Account are treated separately for accounting and
financial statement purposes.
Under existing federal income tax law, the Company believes that the Separate
Account investment income and realized net capital gains will not be taxed to
the extent that such income and gains are applied to increase the reserves under
the contracts. Accordingly, the Company does not anticipate that it will incur
any federal income tax liability attributable to the Separate Account.
Therefore, the Company does not intend to make provisions for any such taxes.
However, the Company reserves the right to make a deduction for such taxes
should they be imposed with respect to such items in the future.
Life Insurance Qualification
Section 7702 of the Code includes a definition of life insurance for tax
purposes. The Code and IRS rules generally place limits on the amount of
premiums payable under the contract and the level of cash surrender value. In no
event may the total of all premiums paid exceed the then-current maximum premium
limitations established by federal law for a Policy to qualify as life
insurance. If, at any time, a premium is paid which would result in total
premiums exceeding such maximum premium limitation, we will only accept that
portion of the premium which will make total premiums equal the maximum. Any
part of the premium in excess of that amount will be returned or applied as
otherwise agreed and no further premiums will be accepted until allowed by the
then-current maximum premium limitations prescribed by law. The Secretary of the
Treasury has been granted authority to prescribe regulations to carry out the
purposes of Section 7702. Proposed regulations governing mortality charges were
issued in 1991. The Company believes that the Policy meets the statutory
definition of life insurance. As such, and assuming the diversification
standards of Section 817(h) (discussed below) are satisfied, then except in
limited circumstances (a) death benefits paid under the Policy should generally
be excluded from the gross income of the beneficiary for federal income tax
purposes under Section 101(a)(1) of the Code, and (b) a Policy owner should not
generally be taxed on the cash value under a Policy, including increments
thereof, prior to actual receipt. The principal exceptions to these rules are
corporations that are subject to the alternative minimum tax, and thus may be
subject to tax on increments in the Policy's Total Account Value, and
Policy owners who acquire a Policy in a "transfer for value" and thus can become
subject to tax on the portion of the Death Benefit which exceeds the total of
their cost of acquisition and subsequent premium payments.
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<PAGE>
The Company intends to comply with any future final regulations issued under
Sections 7702 and 817(h) of the Code, and therefore reserves the right to make
changes it deems necessary to ensure such compliance. Any such changes will
apply uniformly to affected Policy owners and will be made only after advance
written notice.
General Rules
Upon the surrender or cancellation of any Policy, whether or not it is a
Modified Endowment Contract, the Policy owner will be taxed on the Surrender
Value only to the extent that it exceeds the gross premiums paid less prior
untaxed withdrawals. The amount of any unpaid Policy Loans will, upon surrender,
be added to the Surrender Value and will be treated for this purpose as if it
had been received.
Assuming the Policy is not a Modified Endowment Contract, the proceeds of any
Partial Surrenders are generally not taxable unless the total amount received
due to such surrenders exceeds total premiums paid less prior untaxed Partial
Surrender amounts. However, Partial Surrenders made within the first 15 Policy
Years may be taxable in certain limited instances where the Surrender Value plus
any unpaid Policy debt exceeds the total premiums paid less the untaxed portion
of any prior Partial Surrenders. This result may occur even if the total amount
of any Partial Surrenders does not exceed total premiums paid to that date.
Loans received under the Policy will ordinarily be considered indebtedness of
the Policyowner, and assuming the Policy is not considered a Modified Endowment
Contract, Policy Loans will not be treated as current distributions subject to
tax. Generally, amounts of loan interest paid by individuals will be considered
nondeductible "personal interest."
Modified Endowment Contracts
A class of contracts known as "Modified Endowment Contracts" has been created
under Section 7702A of the Code. The tax rules applicable to loan proceeds and
proceeds of a Partial Surrender of any Policy that is considered to be a
Modified Endowment Contract will differ from the general rules noted above.
A contract will be considered a Modified Endowment Contract if it fails the
"7-pay test." A Policy fails the 7-pay test if, at any time in the first seven
Policy Years, the amount paid into the Policy exceeds the amount that would have
been paid had the Policy provided for the payment of seven (7) level annual
premiums. In the event of a distribution under the Policy, the Company will
notify the Policy owner if the Policy is a Modified Endowment Contract.
In addition, each Policy is subject to the 7-pay test during the first seven
Policy Years following the time a material change takes effect. A material
change, for these purposes, includes the exchange of a life insurance policy for
another life insurance policy or the conversion of a term life insurance policy
into a whole life or universal life insurance policy. In addition, an increase
in the future benefits provided constitutes a material change unless the
increase is attributable to (1) the payment of premiums necessary to fund the
lowest Death Benefit payable in the first seven Policy Years or (2) the
crediting of interest or other earnings with respect to such premiums. A
reduction in death benefits during the first seven Policy Years may also cause a
Policy to be considered a Modified Endowment Contract.
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If the Policy is considered to be a Modified Endowment Contract, the proceeds of
any Partial Surrenders, any Policy Loans and most assignments will be currently
taxable to the extent that the Policy's Total Account Value immediately before
payment exceeds gross premiums paid (increased by the amount of loans previously
taxed and reduced by untaxed amounts previously received). These rules may also
apply to Policy Loans or Partial Surrender proceeds received during the two-year
period prior to the time that a Policy becomes a Modified Endowment Contract. If
the Policy becomes a Modified Endowment Contract, it may be aggregated with
other Modified Endowment Contracts purchased by you from the Company (and its
affiliates) during any one calendar year for purposes of determining the taxable
portion of withdrawals from the Policy.
A penalty tax equal to 10% of the amount includable in income will apply to the
taxable portion of the proceeds of any Policy Surrender or Policy Loan received
by any Policyowner of a Modified Endowment Contract who is not an individual.
Taxable policy distributions made to an individual who has not reached the age
of 59-1/2 will also be subject to the penalty tax unless those distributions are
attributable to the individual becoming disabled, or are part of a series of
equal periodic payments made not less frequently than annually for the life or
life expectancy of such individual (i.e., an annuity).
Diversification Standards
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate accounts
of insurance companies) underlying the Policy must be "adequately diversified"
in accordance with Treasury regulations in order for the Policy to qualify as
life insurance. The Treasury Department has issued regulations prescribing the
diversification requirements in connection with variable contracts. The Separate
Account, through the Funds, intends to comply with these requirements.
Investor Control
In certain circumstances, owners of variable contracts may be considered the
owners for federal income tax purposes of the assets of the separate account
used to support their contracts. In those circumstances, income and gains from
separate account assets would be includable in the variable contract owner's
gross income. In several rulings published prior to the enactment of Section
817(h), the IRS stated that a variable contract owner will be considered the
owner of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations under Section 817(h) concerning diversification,
that those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor (i.e., you), rather than the insurance company, to be treated
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which Policy owners may direct their investments to particular Funds without
being treated as owners of the underlying assets." As of the date of this
Prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in certain
respects from those described by the IRS in pre-Section 817(h) rulings in which
it was determined that Policy owners were not owners of separate account assets.
For
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example, a Policy owner has additional flexibility in allocating premium
payments and account values. While the Company does not believe that these
differences would result in a Policy owner being treated as the owner of a pro
rata portion of the assets of the Separate Account, there is no regulation or
ruling of the IRS that confirms this conclusion. In addition, the Company does
not know what standards will be set forth, if any, in the regulations or rulings
which the Treasury Department has stated it expects to issue. The Company
therefore reserves the right to modify the Policy as necessary or to limit the
number of variable options available to attempt to prevent a Policy owner from
being considered the owner of a pro rata share of the assets of the Separate
Account.
Other Tax Considerations
Business-owned life insurance may be subject to certain additional rules.
Section 264(a)(1) of the Code generally prohibits employers from deducting
premiums on policies covering officers, employees or other financially
interested parties where the employer is a beneficiary under the Policy.
Additions to the Policy's Total Account Value may also be subject to tax under
the corporation alternative minimum tax provisions. In addition, Section
264(a)(4) of the Code limits the Policy owner's deduction for interest on loans
taken against life insurance covering the lives of officers, employees, or
others financially interested in the Policy owner's trade or business. Under
current tax law, interest may generally be deducted on an aggregate total of
$50,000 of loans per covered life only with respect to life insurance policies
covering each officer, employee or others who may have a financial interest in
the Policy owner's trade or business and are considered key persons.
Generally, a key person means an officer or a 20 percent owner. However, the
number of key persons will be limited to the greater of (a) 5 individuals, or
(b) the lesser of 5 percent of the total officers and employees of the taxpayer
or 20 individuals. Deductible interest for these contracts will be capped based
on applicable Moody's Corporate Bond Rate. Section 264 (f) of the Code denies a
deduction for a portion of a Policy owner's otherwise deductible interest that
is allocable to nonborrowed policy cash values. The nondeductible interest
amount is the amount that bears the same ratio to such interest as the company's
average nonborrowed cash values of life insurance and annuity policies issued
after June 8, 1997 bears to the sum of the average nonborrowed cash values of
policies plus the average adjusted tax basis of other assets owned by the
company. This provision does not apply to policies in which the insured is a 20
percent owner, officer, director or employee of the business, including policies
jointly covering such individual and his or her spouse. The rule also will not
apply where the Policy owner is a natural person, unless a trade or business is
directly or indirectly the beneficiary of the policy.
Depending on the circumstances, the exchange of a policy, a change in the
Policy's Death Benefit Option, a Policy Loan, a Full or Partial Surrender, a
change in Ownership or an assignment of the Policy may have federal income tax
consequences. In addition, federal, state and local transfer, estate,
inheritance and other tax consequences of policy ownership, premium payments and
receipt of policy proceeds depend on the circumstances of each Policyowner or
beneficiary. Any person concerned about these tax implications should consult a
competent tax advisor before initiating any transaction.
MISCELLANEOUS POLICY PROVISIONS
The Policy, including riders, which you receive and the application you make
when you purchase the Policy are the whole contract. A copy of the application
is attached to the Policy when it is issued to you. Any application for changes,
once approved by us, will become part of the Policy.
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Payment of Benefits
All benefits are payable by us. We may require submission of the Policy before
we grant loans, make changes or pay benefits.
Age
If age is misstated on the application, the amount payable on death will be that
which would have been purchased by the most recent monthly deduction at the
current age.
Incontestability
We will not contest coverage under the Policy after the Policy has been in force
during the lifetime of the insured for a period of two years from the Policy's
Date of Issue.
For coverage which takes effect on a later date (e.g., an increase in coverage),
we will not contest such coverage after it has been in force during the lifetime
of the Insured more than two years from its effective date.
Suicide
If the Insured commits suicide within two years from the Date of Issue, the only
benefit paid will be the sum of:
a) premiums paid less amounts allocated to the Separate Account; and
b) the Separate Account Value on the date of suicide, plus the portion of the
Monthly Deduction from the Separate Account Value, minus
c) the amount necessary to repay any loans in full and any interest earned on
the Loan Account Value transferred to the Separate Account Value, and any
surrenders from the Fixed Account.
If the Insured commits suicide within two years from the effective date of any
increase in coverage, we will pay as a benefit only the Monthly Deduction for
the increase, in lieu of the face amount of the increase.
All amounts described in (a) and (c) above will be calculated as of the date of
death.
Coverage Beyond Maturity
The New York Insurance Department does not permit coverage beyond the Maturity
Date.
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company. No
dividends are payable.
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Appendix A
Illustrations of Death Benefit, Total Account Values and Surrender Values.
The following tables illustrate how the Death Benefit, Total Account Values and
Surrender Values of a Policy change with the investment experience of the
variable funding options. The tables show how the Death Benefit, Total Account
Values and Surrender Values of a Policy issued with an insured of a given age
and a given premium would vary over time if the investment return on the assets
held in each Fund were a uniform, gross after tax annual rate of 0%, 6%, and
12%, respectively.
Tables I and II illustrate Policies issued on a unisex basis, age 45, in the
preferred nonsmoker rate class for fully underwriting issue. Tables III and IV
illustrate Policies issued on a unisex basis, age 45 in the nonsmoker rate class
for guaranteed issue underwriting. Tables V and VI illustrate Policies issued on
a unisex basis, age 45 in the nonsmoker rate class for simplified issue
underwriting. All Tables show values under the Cash Value Accumulation Test for
the definition of life insurance. The Death Benefit, Total Account Values, and
Surrender Values would be different from those shown if the gross annual
investment rates of return averaged 0%, 6%, and 12%, respectively, over a period
of years, but fluctuated above and below those averages for individual Policy
Years.
The second column of each table shows the accumulated values of the premiums
paid at an assumed rate of 5%. The third through fifth columns illustrate the
Death Benefit of a Policy over a designated period. The sixth through eighth
columns illustrate the Total Account Values, while the ninth through eleventh
columns illustrate the Surrender Values of each Policy over the designated
period. Tables I, III, and V assume the maximum Cost of Insurance allowable
under the Policy is charged in all Policy Years. These tables also assume that
the maximum allowable mortality and expense risk charge of 1.25% in Policy Years
1-10 and 0.90% in Policy Years 11 and thereafter on an annual basis, the maximum
allowable premium load of 15% up to the first year's Target Premium and 6% over
the Target Premium, are assessed in the first Policy Year; the maximum allowable
premium load of 10% up to the second year's Target Premium and 6% over the
Target Premium, are assessed in the second through fifth Policy Year and 6% on
all premium in all Policy years thereafter, and an assumed Premium Tax charge of
5% on all premium in all Policy Years.
Tables II, IV and VI assume that the current scale of Cost of Insurance rates
applies during all Policy Years. These tables also assume the current mortality
and expense risk charge of 0.70% on an annual basis for the first 10 Policy
Years, and 0.35% for Policy Years 11 and thereafter, the current premium load of
10.5% up to the first year's Target Premium and 2.5% over the Target Premium are
assumed in the first Policy Year, the current premium load of 7.5% up to the
second through the fifth years' Target Premiums and 1.5% over the Target
Premiums are assumed in the second through fifth Policy Years, the current load
of 3.5% up to the seventh year's Target Premiums and 1.5% over the Target
Premiums are assumed in the sixth and seventh Policy Years, 1.5% on all premiums
in all Policy Years thereafter, and an assumed Premium Tax charge of 1.75% on
all premiums in all Policy Years.
The amounts shown for Death Benefit, Surrender Values, and Total Account Values
reflect the fact that the net investment return is lower than the gross return
on the assets held in each Fund as a result of expenses paid by each Fund and
Separate Account charges levied.
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The values shown take into account the daily investment advisory fee and other
Fund expenses paid by each Fund. See individual prospectuses for each Fund for
more information.
In addition, these values reflect the application of the mortality and expense
risk charge, premium load and assumed premium tax charge described above. After
deduction of these amounts, the illustrated net annual return on a maximum
charge basis is -2.08%, 3.92% and 9.92% for Policy Years 1-10 and -1.73%, 4.27%
and 10.27% on a maximum charge basis for Policy Years 11 and thereafter. The
illustrated net annual return on a current charge basis is -1.53%, 4.47% and
10.47% for Policy Years 1-10 and -1.18%, 4.82% and 10.82% for Policy Years 11
and thereafter.
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 0.83% of the daily net asset value of the Separate
Account. This rate reflects an arithmetic average of total Fund portfolio annual
expenses for the year ending December 31, 1998.
Certain fund groups waive a portion of fund expenses or reimburse the funds for
such expenses. Those waivers or reimbursements remain in effect for varying
periods of time, are usually reviewed at least yearly by each fund group, and
are within the fund group's control. The effect of discontinuing a waiver or
reimbursement arrangement could result in higher expense levels for the affected
fund, as shown in the portfolio expense table. Assuming those waivers and
reimbursements were discontinued, the Fund investment advisory fees and other
expenses arithmetic average would be equivalent to an annual effective rate of
1.13% of the daily net asset value of the Separate Account.
The hypothetical values shown in the tables do not reflect any Separate Account
charges for federal income taxes, since we are not currently making such
charges. However, such charges may be made in the future, and in that event, the
gross annual investment rate of return would have to exceed 0%, 6% or 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit, Total Account Values, and Surrender Values illustrated.
The tables illustrate the Policy Values that would result based upon the
hypothetical investment rates of return if premiums were paid as indicated, if
all Net Premiums were allocated to Account S, and if no Policy loans have been
made. The tables are based on the assumptions that the Policyowner has not
requested an increase or decrease in the Specified Amount of the Policy, and no
partial surrenders have been made.
Upon request, we will provide an illustration based upon the proposed Insured's
age, and underwriting classification, the Specified Amount or premium requested,
the proposed frequency of premium payments and any available riders requested.
The hypothetical gross annual investment return assumed in such an illustration
will not exceed 12%.
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Table I
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY UNISEX
ISSUE AGE 45 PREFERRED NONSMOKER RISK
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
FULLY UNDERWRITTEN
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $684,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Guaranteed Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $684,000 $684,000 $ 684,000 $ 17,328 $ 18,456 $ 19,585 $ 19,078 $ 20,206 $ 21,335
2 53,813 684,000 684,000 684,000 35,420 38,837 42,394 36,733 40,150 43,706
3 82,754 684,000 684,000 684,000 53,030 59,920 67,377 53,030 59,920 67,377
4 113,142 684,000 684,000 684,000 70,152 81,723 94,749 70,152 81,723 94,749
5 145,049 684,000 684,000 684,000 86,799 104,283 124,771 86,799 104,283 124,771
6 178,551 684,000 684,000 684,000 103,956 128,676 158,825 103,956 128,676 158,825
7 213,729 684,000 684,000 684,000 120,603 153,919 196,217 120,603 153,919 196,217
8 224,415 684,000 684,000 684,000 114,826 156,793 212,710 114,826 156,793 212,710
9 235,636 684,000 684,000 684,000 108,833 159,506 230,679 108,833 159,506 230,679
10 247,418 684,000 684,000 684,000 102,573 162,012 250,263 102,573 162,012 250,263
15 315,775 684,000 684,000 806,059 67,474 173,310 384,330 67,474 173,310 384,330
20 403,017 684,000 684,000 1,071,733 16,690 172,267 585,568 16,690 172,267 585,568
25 514,362 0 684,000 1,423,040 0 142,412 878,309 0 142,412 878,309
30 656,471 0 684,000 1,884,788 0 48,069 1,294,533 0 48,069 1,294,533
20 (Age 65) 403,017 684,000 684,000 1,071,733 16,690 172,267 585,568 16,690 172,267 585,568
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
41
<PAGE>
Table II
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY UNISEX
ISSUE AGE 45 PREFERRED NONSMOKER RISK
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
FULLY UNDERWRITTEN
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $684,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Guaranteed Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $684,000 $684,000 $ 684,000 $ 20,355 $ 21,629 $ 22,905 $ 22,105 $ 23,379 $ 24,655
2 53,813 684,000 684,000 684,000 40,904 44,773 48,797 42,217 46,086 50,110
3 82,754 684,000 684,000 684,000 60,932 68,747 77,200 60,932 68,747 77,200
4 113,142 684,000 684,000 684,000 80,483 93,632 108,429 80,483 93,632 108,429
5 145,049 684,000 684,000 684,000 99,605 119,518 142,842 99,605 119,518 142,842
6 178,551 684,000 684,000 684,000 119,329 147,544 181,940 119,329 147,544 181,940
7 213,729 684,000 684,000 684,000 138,688 176,798 225,160 138,688 176,798 225,160
8 224,415 684,000 684,000 684,000 134,353 182,589 246,789 134,353 182,589 246,789
9 235,636 684,000 684,000 684,000 129,921 188,526 270,655 129,921 188,526 270,655
10 247,418 684,000 684,000 720,992 125,357 194,589 296,953 125,357 194,589 296,953
15 315,775 684,000 684,000 1,002,040 100,700 229,616 477,774 100,700 229,616 477,774
20 403,017 684,000 684,000 1,398,847 67,246 267,220 764,294 67,246 267,220 764,294
25 514,362 684,000 684,000 1,988,123 27,413 312,227 1,227,083 27,413 312,227 1,227,083
30 656,471 0 684,000 2,857,516 0 361,351 1,962,633 0 361,351 1,962,633
20 (Age 65) 403,017 684,000 684,000 1,398,847 67,246 267,220 764,294 67,246 267,220 764,294
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charges may be reduced from
0.70% to 0.35% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.18%, 4.82%, and 10.82%.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
42
<PAGE>
Table III
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY UNISEX
ISSUE AGE 45 NONSMOKER RISK
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
GUARANTEED ISSUE
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $652,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Guaranteed Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $652,000 $652,000 $ 652,000 $ 17,431 $ 18,563 $ 19,695 $ 19,181 $ 20,313 $ 21,445
2 53,813 652,000 652,000 652,000 35,632 39,063 42,633 36,945 40,375 43,945
3 82,754 652,000 652,000 652,000 53,358 60,279 67,768 53,358 60,279 67,768
4 113,142 652,000 652,000 652,000 70,604 82,230 95,319 70,604 82,230 95,319
5 145,049 652,000 652,000 652,000 87,382 104,956 125,548 87,382 104,956 125,548
6 178,551 652,000 652,000 652,000 104,680 129,535 159,843 104,680 129,535 159,843
7 213,729 652,000 652,000 652,000 121,480 154,986 197,516 121,480 154,986 197,516
8 224,415 652,000 652,000 652,000 115,869 158,091 214,336 115,869 158,091 214,336
9 235,636 652,000 652,000 652,000 110,055 161,066 232,686 110,055 161,066 232,686
10 247,418 652,000 652,000 652,000 103,994 163,867 252,714 103,994 163,867 252,714
15 315,775 652,000 652,000 815,750 70,253 177,337 388,950 70,253 177,337 388,950
20 403,017 652,000 652,000 1,084,634 21,730 180,256 592,616 21,730 180,256 592,616
25 514,362 0 652,000 1,440,182 0 158,018 888,890 0 158,018 888,890
30 656,471 0 652,000 1,907,506 0 79,227 1,310,136 0 79,227 1,310,136
20 (Age 65) 403,017 652,000 652,000 1,084,634 21,730 180,256 592,616 21,730 180,256 592,616
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
43
<PAGE>
Table IV
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY UNISEX
ISSUE AGE 45 NONSMOKER RISK
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
GUARANTEED ISSUE
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $652,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Guaranteed Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $652,000 $652,000 $ 652,000 $ 19,995 $ 21,258 $ 22,522 $ 21,745 $ 23,008 $ 24,272
2 53,813 652,000 652,000 652,000 40,328 44,158 48,141 41,641 45,470 49,453
3 82,754 652,000 652,000 652,000 60,268 68,005 76,375 60,268 68,005 76,375
4 113,142 652,000 652,000 652,000 79,831 92,861 107,523 79,831 92,861 107,523
5 145,049 652,000 652,000 652,000 99,032 118,784 141,915 99,032 118,784 141,915
6 178,551 652,000 652,000 652,000 118,868 146,883 181,025 118,868 146,883 181,025
7 213,729 652,000 652,000 652,000 138,342 176,219 224,265 138,342 176,219 224,265
8 224,415 652,000 652,000 652,000 134,107 182,083 245,903 134,107 182,083 245,903
9 235,636 652,000 652,000 675,185 129,747 188,074 269,748 129,747 188,074 269,748
10 247,418 652,000 652,000 718,459 125,229 194,172 295,909 125,229 194,172 295,909
15 315,775 652,000 652,000 996,737 100,765 229,452 475,245 100,765 229,452 475,245
20 403,017 652,000 652,000 1,387,098 66,848 267,168 757,875 66,848 267,168 757,875
25 514,362 652,000 652,000 1,960,819 24,103 311,032 1,210,230 24,103 311,032 1,210,230
30 656,471 0 652,000 2,799,895 0 358,171 1,923,058 0 358,171 1,923,058
20 (Age 65) 403,017 652,000 652,000 1,387,098 66,848 267,168 757,875 66,848 267,168 757,875
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charges may be reduced from
0.70% to 0.35% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.18%, 4.82%, and 10.82%.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
44
<PAGE>
Table V
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY UNISEX
ISSUE AGE 45 NONSMOKER RISK
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
SIMPLIFIED ISSUE
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $656,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Guaranteed Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $656,000 $656,000 $ 656,000 $ 17,418 $ 18,549 $ 19,681 $ 19,168 $ 20,299 $ 21,431
2 53,813 656,000 656,000 656,000 35,606 39,035 42,603 36,918 40,347 43,915
3 82,754 656,000 656,000 656,000 53,317 60,234 67,719 53,317 60,234 67,719
4 113,142 656,000 656,000 656,000 70,547 82,167 95,247 70,547 82,167 95,247
5 145,049 656,000 656,000 656,000 87,310 104,872 125,451 87,310 104,872 125,451
6 178,551 656,000 656,000 656,000 104,590 129,428 159,716 104,590 129,428 159,716
7 213,729 656,000 656,000 656,000 121,371 154,852 197,354 121,371 154,852 197,354
8 224,415 656,000 656,000 656,000 115,738 157,929 214,133 115,738 157,929 214,133
9 235,636 656,000 656,000 656,000 109,902 160,871 232,435 109,902 160,871 232,435
10 247,418 656,000 656,000 656,000 103,816 163,635 252,408 103,816 163,635 252,408
15 315,775 656,000 656,000 814,590 69,906 176,833 388,397 69,906 176,833 388,397
20 403,017 656,000 656,000 1,083,090 21,100 179,257 591,773 21,100 179,257 591,773
25 514,362 0 656,000 1,438,131 0 156,067 887,624 0 156,067 887,624
30 656,471 0 656,000 1,904,788 0 75,332 1,308,269 0 75,332 1,308,269
20 (Age 65) 403,017 656,000 656,000 1,083,090 21,100 179,257 591,773 21,100 179,257 591,773
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
45
<PAGE>
Table VI
FLEXIBLE PREMIUM CORPORATE VARIABLE UNIVERSAL LIFE INSURANCE POLICY UNISEX
ISSUE AGE 45 NONSMOKER RISK
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
SIMPLIFIED ISSUE
$25,000 ANNUAL PREMIUM FOR SEVEN YEARS
CASH VALUE ACCUMULATION TEST
FACE AMOUNT $656,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Guaranteed Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 26,250 $656,000 $656,000 $ 656,000 $ 20,220 $ 21,491 $ 22,762 $ 21,970 $ 23,241 $ 24,512
2 53,813 656,000 656,000 656,000 40,768 44,624 48,635 42,080 45,937 49,948
3 82,754 656,000 656,000 656,000 60,908 68,705 77,138 60,908 68,705 71,138
4 113,142 656,000 656,000 656,000 80,657 93,789 108,566 80,657 93,789 108,566
5 145,049 656,000 656,000 656,000 100,024 119,934 143,247 100,024 119,934 143,247
6 178,551 656,000 656,000 656,000 120,005 148,243 182,650 120,005 148,243 182,650
7 213,729 656,000 656,000 656,000 139,599 177,773 226,185 139,599 177,773 226,185
8 224,415 656,000 656,000 656,000 135,460 183,816 248,126 135,460 183,816 248,126
9 235,636 656,000 656,000 681,506 131,168 189,967 272,274 131,168 189,967 272,274
10 247,418 656,000 656,000 725,315 126,680 196,198 298,733 126,680 196,198 298,733
15 315,775 656,000 656,000 1,005,272 101,583 231,554 479,314 101,583 231,554 479,314
20 403,017 656,000 656,000 1,395,789 66,066 268,571 762,623 66,066 268,571 762,623
25 514,362 656,000 656,000 1,972,293 22,723 312,362 1,217,313 22,723 312,362 1,217,313
30 656,471 0 656,000 2,816,393 0 359,592 1,934,389 0 359,592 1,934,389
20 (Age 65) 403,017 656,000 656,000 1,395,789 66,066 268,571 762,623 66,066 268,571 762,623
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
If a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charges may be reduced from
0.70% to 0.35% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.18%, 4.82%, and 10.82%.
These investment results are illustrative only and should not be considered a
representation of past or future investments 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 Fund's rate of return. The
Total Account Value and Cash Surrender Value for a Policy would be different
from those shown in 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 definitely be achieved for any one year or sustained over a period
of time.
46
<PAGE>
Appendix B
Applicable Percentages for Cash Value Accumulation Test
<TABLE>
<CAPTION>
Attained Age of Attained Age of
The Insured Corridor The Insured Corridor
(Nearest Birthday) Percentage (Nearest Birthday) Percentage
- ------------------------------------------------------------------------
<S> <C> <C> <C>
18 774% 61 198%
19 752% 62 193%
20 730% 63 188%
21 708% 64 183%
22 687% 65 178%
23 667% 66 174%
24 646% 67 170%
25 626% 68 166%
26 606% 69 162%
27 587% 70 158%
28 568% 71 155%
29 550% 72 152%
30 532% 73 149%
31 514% 74 146%
32 497% 75 143%
33 481% 76 140%
34 465% 77 138%
35 449% 78 136%
36 435% 79 133%
37 420% 80 131%
38 406% 81 129%
39 393% 82 128%
40 380% 83 126%
41 368% 84 124%
42 356% 85 123%
43 344% 86 121%
44 333% 87 120%
45 322% 88 119%
46 312% 89 118%
47 302% 90 117%
48 293% 91 116%
49 284% 92 114%
50 275% 93 113%
51 266% 94 112%
52 258% 95 111%
53 250% 96 109%
54 243% 97 108%
55 236% 98 106%
56 229% 99 104%
57 222% 100+ 100%
58 216%
59 210%
60 204%
</TABLE>
47
<PAGE>
Lincoln Life & Annuity Company of New York
Balance Sheets -- Statutory Basis
<TABLE>
<CAPTION>
December 31
1998 1997
-------------- ------------
<S> <C> <C>
Admitted assets
Cash and invested assets:
Bonds $1,435,882,019 $593,431,718
- ----------------------------------------------------------------------------
Common stocks 155,039 --
- ----------------------------------------------------------------------------
Mortgage loans on real estate 184,503,805 --
- ----------------------------------------------------------------------------
Policy loans 170,372,567 39,054,927
- ----------------------------------------------------------------------------
Cash and short-term investments 143,546,873 163,773,594
- ----------------------------------------------------------------------------
Other invested assets 60,000 --
- ----------------------------------------------------------------------------
Receivable for securities 3,477,120 34,804
- ---------------------------------------------------------------------------- -------------- ------------
Total cash and invested assets 1,937,997,423 796,295,043
- ----------------------------------------------------------------------------
Premiums and fees in course of collection 6,959,116 --
- ----------------------------------------------------------------------------
Accrued investment income 25,925,055 10,706,003
- ----------------------------------------------------------------------------
Other admitted assets 438,335 335,728
- ----------------------------------------------------------------------------
Separate account assets 236,861,781 164,721,012
- ---------------------------------------------------------------------------- -------------- ------------
Total admitted assets $2,208,181,710 $972,057,786
- ---------------------------------------------------------------------------- ============== ============
Liabilities and capital and surplus
Liabilities:
Future policy benefits and claims $ 851,746,596 $ 1,214,524
- ----------------------------------------------------------------------------
Other policyholder funds 962,725,311 587,465,491
- ----------------------------------------------------------------------------
Other liabilities 44,824,520 6,784,652
- ----------------------------------------------------------------------------
Federal income taxes recoverable (3,206,611) (342,378)
- ----------------------------------------------------------------------------
Asset valuation reserve 5,374,594 2,350,411
- ----------------------------------------------------------------------------
Interest maintenance reserve 5,051,304 2,594,552
- ----------------------------------------------------------------------------
Net transfers due from separate accounts (6,915,063) (5,582,705)
- ----------------------------------------------------------------------------
Separate account liabilities 236,861,781 164,721,012
- ---------------------------------------------------------------------------- -------------- ------------
Total liabilities 2,096,462,432 759,205,559
- ----------------------------------------------------------------------------
Capital and surplus:
Common stock, $100 par value:
Authorized, issued and outstanding -- 20,000 shares (owned by The Lincoln
National Life Insurance Company) 2,000,000 2,000,000
- ----------------------------------------------------------------------------
Paid-in surplus 384,128,481 227,407,481
- ----------------------------------------------------------------------------
Unassigned surplus -- deficit (274,409,203) (16,555,254)
- ---------------------------------------------------------------------------- -------------- ------------
Total capital and surplus 111,719,278 212,852,227
- ---------------------------------------------------------------------------- -------------- ------------
Total liabilities and capital and surplus $2,208,181,710 $972,057,786
- ---------------------------------------------------------------------------- ============== ============
</TABLE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
See accompanying notes. S-1
<PAGE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
Lincoln Life & Annuity Company of New York
Statements of Operations -- Statutory Basis
<TABLE>
<CAPTION>
Period from
June 6, 1996 to
Year Ended December 31 December 31,
1998 1997 1996
-------------- ------------ ---------------
<S> <C> <C> <C>
Premiums and other revenues:
Premiums and deposits $1,291,566,984 $184,112,330 $631,355,849
- -----------------------------------------------------------
Net investment income 105,083,579 43,953,796 10,769,172
- -----------------------------------------------------------
Surrender and administrative charges 2,834,073 1,334,705 310,991
- -----------------------------------------------------------
Mortality and expense charges on deposit funds 1,980,728 1,548,722 --
- -----------------------------------------------------------
Amortization of the interest maintenance reserve 579,137 370,129 205,255
- -----------------------------------------------------------
Other revenues 536,698 183,048 18,347
- ----------------------------------------------------------- -------------- ------------ -------------
Total revenues 1,402,581,199 231,502,730 642,659,614
- -----------------------------------------------------------
Benefits and expenses:
Benefits and settlement expenses 1,320,787,190 72,475,389 640,912,693
- -----------------------------------------------------------
Commissions 274,529,390 2,459,308 18,931,151
- -----------------------------------------------------------
Underwriting, insurance and other expenses 28,064,172 8,012,925 1,801,204
- -----------------------------------------------------------
Net transfers to separate accounts 33,875,951 141,027,195 --
- ----------------------------------------------------------- -------------- ------------ -------------
Total benefits and expenses 1,657,256,703 223,974,817 661,645,048
- ----------------------------------------------------------- -------------- ------------ -------------
Gain (loss) from operations before dividends to
policyholders, federal income taxes (benefit) and net
realized loss on investments (254,675,504) 7,527,913 (18,985,434)
- -----------------------------------------------------------
Dividends to policyholders 3,375,629 -- --
- ----------------------------------------------------------- -------------- ------------ -------------
Gain (loss) from operations before federal income taxes
(benefit) and net realized loss on investments (258,051,133) 7,527,913 (18,985,434)
- -----------------------------------------------------------
Federal income taxes (benefit) (4,561,826) 1,942,625 (391,144)
- ----------------------------------------------------------- -------------- ------------ -------------
Gain (loss) from operations before net realized loss on
investments (253,489,307) 5,585,288 (18,594,290)
- -----------------------------------------------------------
Net realized loss on investments (721,449) (73,398) (855)
- ----------------------------------------------------------- -------------- ------------ -------------
Net income (loss) $ (254,210,756) $ 5,511,890 $(18,595,145)
- ----------------------------------------------------------- ============== ============ =============
</TABLE>
See accompanying notes.
S-2
<PAGE>
Lincoln Life & Annuity Company of New York
Statements of Changes in Capital and
Surplus -- Statutory Basis
<TABLE>
<CAPTION>
Unassigned Total
Common Paid-in Surplus -- Capital and
Stock Surplus Deficit Surplus
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances at June 6, 1996 $ -- $ -- $ -- $ --
Add (deduct):
Capital paid-in 2,000,000 -- -- 2,000,000
- -------------------------------------------------
Surplus paid-in -- 69,000,000 -- 69,000,000
- -------------------------------------------------
Net loss -- -- (18,595,145) (18,595,145)
- -------------------------------------------------
Increase in nonadmitted assets -- -- (1,100,310) (1,100,310)
- -------------------------------------------------
Increase in asset valuation reserve -- -- (1,128,548) (1,128,548)
- ------------------------------------------------- ---------- ------------- ------------- -------------
Balances at December 31, 1996 2,000,000 69,000,000 (20,824,003) 50,175,997
Add (deduct):
Surplus paid-in -- 158,407,481 -- 158,407,481
- -------------------------------------------------
Net income -- -- 5,511,890 5,511,890
- -------------------------------------------------
Increase in nonadmitted assets -- -- (21,278) (21,278)
- -------------------------------------------------
Increase in asset valuation reserve -- -- (1,221,863) (1,221,863)
- ------------------------------------------------- ---------- ------------- ------------- -------------
Balances at December 31, 1997 2,000,000 227,407,481 (16,555,254) 212,852,227
Add (deduct):
Surplus paid-in -- 156,721,000 -- 156,721,000
- -------------------------------------------------
Net loss -- -- (254,210,756) (254,210,756)
- -------------------------------------------------
Increase in unrealized capital losses -- -- (178,648) (178,648)
- -------------------------------------------------
Decrease in nonadmitted assets -- -- 241,698 241,698
- -------------------------------------------------
Increase in asset valuation reserve -- -- (3,024,183) (3,024,183)
- -------------------------------------------------
Increase in liability for reinsurance in
unauthorized companies -- -- (682,060) (682,060)
- ------------------------------------------------- ---------- ------------- ------------- -------------
Balances at December 31, 1998 $2,000,000 $ 384,128,481 $(274,409,203) $ 111,719,278
- ------------------------------------------------- ========== ============= ============= =============
</TABLE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
See accompanying notes. S-3
<PAGE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
Lincoln Life & Annuity Company of New York
Statements of Cash Flows -- Statutory Basis
<TABLE>
<CAPTION>
Period from
June 6, 1996 to
Year Ended December 31 December 31,
1998 1997 1996
--------------- ------------ -------------
<S> <C> <C> <C>
Operating activities
Premiums, policy proceeds, and other considerations received $ 1,284,669,810 $184,112,330 $631,355,849
- ------------------------------------------------------------
Investment income received 96,331,551 43,781,378 1,837,439
- ------------------------------------------------------------
Benefits paid (83,399,329) (85,008,691) (23,169,165)
- ------------------------------------------------------------
Insurance expenses paid (351,272,500) (154,355,904) (20,919,059)
- ------------------------------------------------------------
Federal income taxes received (paid) 1,703,193 (1,893,859) --
- ------------------------------------------------------------
Dividends to policyholders 2,651,237 -- --
- ------------------------------------------------------------
Other income received and expenses paid, net 39,064,672 1,613,631 329,338
- ------------------------------------------------------------ --------------- ------------ -------------
Net cash provided by (used in) operating activities 989,748,634 (11,751,115) 589,434,402
- ------------------------------------------------------------
Investing activities
Sale, maturity or repayment of investments 249,409,117 272,961,178 366,021,652
- ------------------------------------------------------------
Purchase of investments (1,280,892,696) (265,700,363) (965,220,343)
- ------------------------------------------------------------
Net decrease (increase) in policy loans (131,317,640) 1,554,149 (40,609,076)
- ------------------------------------------------------------ --------------- ------------ -------------
Net cash provided by (used in) investing activities (1,162,801,219) 8,814,964 (639,807,767)
- ------------------------------------------------------------
Financing and miscellaneous activities
Capital and surplus paid-in 156,721,000 158,407,481 71,000,000
- ------------------------------------------------------------
Other (3,895,136) (11,032,743) (1,291,628)
- ------------------------------------------------------------ --------------- ------------ -------------
Net cash provided by financing activities 152,825,864 147,374,738 69,708,372
- ------------------------------------------------------------ --------------- ------------ -------------
Increase (decrease) in cash and short-term investments (20,226,721) 144,438,587 19,335,007
- ------------------------------------------------------------
Total cash and short-term investments at beginning of year 163,773,594 19,335,007 --
- ------------------------------------------------------------ --------------- ------------ -------------
Total cash and short-term investments at end of year $ 143,546,873 $163,773,594 $ 19,335,007
- ------------------------------------------------------------ =============== ============ =============
</TABLE>
See accompanying notes.
S-4
<PAGE>
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis
1. Organization and Operations and
Summary of Significant Accounting
Policies
Organization and Operations
Lincoln Life & Annuity Company of New York (the "Company") is a wholly owned
subsidiary of The Lincoln National Life Insurance Company ("Lincoln Life"),
which is a wholly owned subsidiary of Lincoln National Corporation ("LNC").
The Company was organized under the laws of the state of New York on June 6,
1996 as a life insurance company. The Company received approval from the New
York Insurance Department (the "Department") to operate as a licensed
insurance company in the state of New York on September 27, 1996.
The Company's principal business consists of underwriting annuities,
deposit-type contracts and life and health insurance sold through multiple
distribution channels. The Company is licensed to do business in New York
State.
Use of Estimates
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect amounts reported in
the statutory basis financial statements and accompanying notes. Actual
results could differ from these estimates.
Basis of Presentation
The accompanying statutory basis financial statements have been prepared in
conformity with accounting practices prescribed or permitted by the
Department. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future. In 1998, the NAIC adopted codified statutory
accounting principles ("Codification"). Codification will likely change, to
some extent, prescribed statutory accounting practices and may result in
changes to the accounting practices that the Company uses to prepare its
statutory basis financial statements. Codification will require adoption by
the various states before it becomes the prescribed statutory basis of
accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the
Department must adopt Codification as the prescribed basis of accounting on
which domestic insurers must report their statutory basis results. At this
time, it is unclear whether the Department will adopt Codification.
Management has not yet determined the impact of Codification to the
Company's statutory basis financial statements.
Existing statutory accounting practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
Investments
Bonds are reported at cost or amortized cost or fair value based on their
NAIC rating. For GAAP, the Company's bonds are classified as
available-for-sale and, accordingly, are reported at fair value with changes
in the fair values reported directly in shareholder's equity after
adjustments for related amortization of deferred acquisition costs,
additional policyholder commitment and deferred income taxes.
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 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
IMR. The asset valuation reserve ("AVR") is determined by an NAIC prescribed
formula and is reported as a liability rather than a reduction to unassigned
surplus. Under GAAP, realized capital gains and losses are reported in the
income statement on a pretax
Lincoln Life & Annuity Company of New York Statutory Financial Statements
S-5
<PAGE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
1. Organization and Operations and
Summary of Significant Accounting
Policies (continued)
basis in the period that the asset giving rise to the gain or loss is sold
and valuation allowances are provided when there has been a decline in value
deemed other than temporary, in which case, the provision for such declines
are charged to income.
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 start-up and
organizational costs and furniture and equipment, are excluded from the
accompanying balance sheets and are charged directly to unassigned surplus.
Premiums and Deposits
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
Benefit Reserves
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Benefits and Settlement Expenses
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 operations; whereas, under GAAP,
withdrawals are treated as a reduction of the policy or contract liabilities
and benefits would represent the excess of benefits paid over the policy
account value and interest credited to the account values.
Reinsurance
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory basis of accounting, the ceding commission is
expensed when paid.
Premiums, benefits and settlement expenses and policy benefits and contract
liabilities are reported in the accompanying financial statements net of
reinsurance amounts. Under GAAP, such amounts are reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Department to assume such business. Changes to those
amounts are credited or charged directly to unassigned surplus. Under GAAP,
an allowance for amounts deemed uncollectible is established through a
charge to income.
Income Taxes
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
Policyholder Dividends
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
S-6
<PAGE>
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
1. Organization and Operations and
Summary of Significant Accounting
Policies (continued)
Postretirement Benefits
For purposes of calculating the Company's postretirement benefit obligation,
only vested employees and current retirees are included in the actuarial
benefit valuation. Under GAAP, active employees not currently eligible would
also be included.
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
from the date of acquisition. Under GAAP, the corresponding captions of cash
and cash equivalents include cash balances and investments with initial
maturities of three months or less from the date of acquisition.
A reconciliation of the Company's capital and surplus and net income (loss)
determined on a statutory accounting basis with amounts determined in
accordance with GAAP is as follows:
<TABLE>
<CAPTION>
Capital and Surplus Net Income (Loss)
---------------------------------------------------------------
Period from
June 6, 1996 to
December 31 Year ended December 31 December 31,
1998 1997 1998 1997 1996
---------------------------------------------------------------
(in thousands)
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts as reported on a statutory
basis $111,719 $212,852 $(254,211) $5,512 $(18,595)
- -------------------------------------
GAAP adjustments:
Net unrealized gain on investments 27,851 14,327 -- -- --
- -------------------------------------
Interest maintenance reserve 5,051 2,595 (579) (370) 3,204
- -------------------------------------
Net realized gain (loss) on
investments (990) -- 3,050 (240) --
- -------------------------------------
Asset valuation reserve 5,375 2,350 -- -- --
- -------------------------------------
Policy and contract reserves (85,875) (19,204) 271,293 (3,667) (15,537)
- -------------------------------------
Present value of future profits,
deferred policy acquisition costs
and goodwill 336,568 37,605 6,091 524 37,081
- -------------------------------------
Policyholders' share of earnings
and surplus on participating
business (9,904) -- (100) -- --
- -------------------------------------
Deferred income taxes 35,280 (5,558) (12,696) 671 (1,215)
- -------------------------------------
Nonadmitted assets 880 1,122 -- -- --
- -------------------------------------
Other, net (1,705) -- (82) -- --
- ------------------------------------- -------- -------- --------- ------ --------
Net increase (decrease) 312,531 33,237 266,977 (3,082) 23,533
- ------------------------------------- -------- -------- --------- ------ --------
Amounts on a GAAP basis $424,250 $246,089 $ 12,766 $2,430 $ 4,938
- ------------------------------------- ======== ======== ========= ====== ========
</TABLE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
S-7
<PAGE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
1. Organization and Operations and
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.
Policy loans are reported at unpaid balances.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds and mortgage loans are credited or charged directly in
unassigned surplus.
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 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.
Premiums
Premiums for group tax-qualified annuity business are recognized as revenue
when deposited. Life insurance and individual annuity premiums are
recognized as revenue when due. Accident and health premiums are earned pro
rata over the contract term of the policies.
Benefit Reserves
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Department. The Company waives deduction of deferred fractional premiums on
the death of life and annuity policy insureds and returns any premium beyond
the date of death, except for policies issued prior to March 1977. Surrender
values on policies do not exceed the corresponding benefit reserves.
Additional reserves are established when the results of cash flow testing
under various interest rate scenarios 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 the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to policyholders' funds left on deposit with the Company
generally are equal to fund balances less applicable surrender charges.
S-8
<PAGE>
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
1. Organization and Operations and
Summary of Significant Accounting
Policies (continued)
Reinsurance Ceded and Assumed
Reinsurance premiums, benefits and settlement expenses are accounted for on
bases consistent with those used in accounting for the original policies
issued and the terms of the reinsurance contracts.
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.
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 the exclusive
benefit of variable annuity contractholders and for which the
contractholders, and not the Company, bears the investment risk. Separate
account contractholders have no claim against the assets of the general
account of the Company. Separate account assets are reported at fair value
and consist of unit investments in mutual funds. The detailed operations of
the separate accounts are not included in the accompanying financial
statements. The fees received by the Company for administrative and
contractholder maintenance services performed for these separate accounts
are included in the Company's statements of operations.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus-deficit or net income (loss) previously reported.
2. Investments
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Period from
June 6, 1996 to
Year Ended December 31 December 31,
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 78,205,686 $42,237,959 $ 9,427,203
---------------------------------------------------
Mortgage loans on real estate 14,304,385 -- --
---------------------------------------------------
Policy loans 7,981,377 1,990,613 439,305
---------------------------------------------------
Cash and short-term investments 5,893,453 315,328 1,024,525
--------------------------------------------------- ------------ ----------- -----------
Total investment income 106,384,901 44,543,900 10,891,033
- ------------------------------------------------------
Investment expenses 1,301,322 590,104 121,861
- ------------------------------------------------------ ------------ ----------- -----------
Net investment income $105,083,579 $43,953,796 $10,769,172
- ------------------------------------------------------ ============ =========== ===========
</TABLE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
S-9
<PAGE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
2. 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
----------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Corporate $1,148,083,966 $27,649,036 $(7,489,560) $1,168,243,442
----------------------------------
U.S. government 39,617,653 564,146 (119,394) 40,062,405
----------------------------------
Foreign government 19,532,744 994,331 (720,250) 19,806,825
----------------------------------
Mortgage-backed 225,005,162 6,239,684 (421,281) 230,823,565
----------------------------------
State and municipal 3,642,494 164,552 -- 3,807,046
---------------------------------- -------------- ----------- ----------- --------------
$1,435,882,019 $35,611,749 $(8,750,485) $1,462,743,283
============== =========== =========== ==============
At December 31, 1997:
Corporate $ 445,296,161 $12,163,765 $(1,677,849) $ 455,782,077
----------------------------------
U.S. government 12,326,095 191,925 -- 12,518,020
----------------------------------
Foreign government 17,131,754 636,803 (426,360) 17,342,197
----------------------------------
Mortgage-backed 115,611,907 3,369,970 (3,564) 118,978,313
----------------------------------
State and municipal 3,065,801 72,469 -- 3,138,270
---------------------------------- -------------- ----------- ----------- --------------
$ 593,431,718 $16,434,932 $(2,107,773) $ 607,758,877
============== =========== =========== ==============
</TABLE>
The carrying amount of investments in bonds in the balance sheet at December
31, 1998 reflects adjustments of $178,648 to decrease amortized cost as a
result of the Securities Valuation Office ("SVO") of the NAIC designating
certain investments as low or lower quality.
A summary of the cost or amortized cost and fair value of investments in
bonds at December 31, 1998, by contractual maturity, is as follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
------------------------------
<S> <C> <C>
Maturity:
In 1999 $ 29,182,134 $ 29,230,713
-----------------------------------------------------------------
In 2000-2003 358,100,253 362,502,042
-----------------------------------------------------------------
In 2004-2008 525,815,980 536,016,775
-----------------------------------------------------------------
After 2008 297,778,590 304,170,188
----------------------------------------------------------------
Mortgage-backed securities 225,005,062 230,823,565
----------------------------------------------------------------- -------------- --------------
Total $1,435,882,019 $1,462,743,283
- ------------------------------------------------------------------- ============== ==============
</TABLE>
The expected maturities may differ from the contractual maturities in the
foregoing table because certain borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
S-10
<PAGE>
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
2. Investments (continued)
Proceeds from sales of investments in bonds were $203,748,028, $274,742,319
and $365,646,000 in 1998, 1997 and 1996, respectively. Gross gains of
$3,612,434, $1,533,793 and $4,871,624, and gross losses of $1,529,149,
$1,922,165 and $2,433 during 1998, 1997 and 1996, respectively, were
realized on those sales. Net gains (losses) of $17,705, $(26) and $376,041
were realized on sales of short-term investments in 1998, 1997 and 1996,
respectively.
At December 31, 1998 and 1997, investments in bonds with an admitted asset
value of $500,129 and $500,177, respectively, were on deposit with the
Department to satisfy regulatory requirements.
During 1998, the minimum and maximum lending rates for mortgage loans were
6.62% and 10.29%, respectively. At the issuance of a loan, the percentage of
loan to value on any one loan does not exceed 75%. At December 31, 1998, the
Company did not hold any mortgages with interest overdue beyond one year.
All properties covered by mortgage loans have fire insurance at least equal
to the excess of the loan over the maximum loan that would be allowed on the
land without the building.
Realized capital gains and losses are reported net of federal income taxes
of $1,223,897, $55,541 and $1,836,682 in 1998, 1997 and 1996, respectively,
and amounts transferred to the interest maintenance reserve of $3,035,887,
$239,459 and $3,409,395 in 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic location.
3. Federal Income Taxes
The Company's federal income tax return is not consolidated with any other
entities. The effective federal income tax rate for financial reporting
purposes differs from the prevailing statutory tax rate principally due to
tax-exempt investment income, other pass through tax attributes from
investments, differences in ceding commissions, policy acquisition costs,
and policy and contract liabilities in the tax return versus the financial
statements.
In 1998, a federal income tax net operating loss of $76,192,977 was
incurred. The Company plans to utilize $9,161,743 of the net operating loss
to recover taxes paid in prior years. The remaining portion of the net
operating loss of $67,031,234 will be available for use to offset taxable
income in future years. The net operating loss carryforward of $67,031,234
will expire in 2018.
The Company paid $3,675,000 in 1997 for federal income taxes. No federal
income tax payments were made in 1998 or 1996.
4. Reinsurance
The Company cedes insurance to other companies, including affiliated
companies. The portion of risks exceeding the Company's retention limit is
reinsured with Lincoln Life. The Company limits its maximum risk that it
retains on an individual to $500,000. The Company remains obligated for
amounts ceded in the event that the reinsurers do not meet their
obligations. The Company did not cede or assume any business prior to
January 1, 1998. On January 2, 1998, the Company and Lincoln Life entered
into an indemnity reinsurance transaction whereby the Company and Lincoln
Life reinsured 100% of a block of individual life insurance and annuity
business of CIGNA Corporation. The Company paid $149,621,452 to CIGNA on
January 2, 1998 under the terms of the reinsurance agreement and recognized
a ceding commission expense of $149,714,239 in 1998, which is included in
the statements of operations line item "Commissions." At the time of
closing, this block of business had statutory liabilities of $779,551,235
which became the Company's obligation. The Company also received assets,
measured on a historical statutory basis, equal to the liabilities. Pursuant
to the terms of the reinsurance agreement, the Company, Lincoln Life and
CIGNA are in the final stages of agreeing to the statutory basis values of
these assets and liabilities. Any changes to these values which may occur in
future periods will not be material to the Company's financial position.
Subsequent to the CIGNA transaction, the Company and Lincoln Life 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
Lincoln Life & Annuity Company of New York Statutory Financial Statements
S-11
<PAGE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
4. Reinsurance (continued)
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 entered into an indemnity reinsurance
transaction whereby the Company and Lincoln Life reinsured 100% of a block
of individual life insurance business from Aetna, Inc. The Company paid
$143,721,000 to Aetna on October 1, 1998 under the terms of the reinsurance
agreement and recognized a ceding commission expense of $135,374,141 in
1998, which is included in the statements of operations line item
"Commissions." At the time of closing, this block of business had statutory
liabilities of $463,007,132 which became the Company's obligation. The
Company also received assets, measured on a historical statutory basis,
equal to the liabilities. Subsequent to the Aetna transaction, the Company
and Lincoln Life announced that they had reached an agreement to retrocede
the sponsored life business assumed for $87,600,000, of which $11,900,000
was received by the Company. The retrocession agreement was executed on
October 14, 1998 with an effective date of October 1, 1998.
In October 1996, the Company and Lincoln Life purchased a block of group
tax-qualified annuity business from UNUM Corporation's affiliates. The
transaction was completed in the form of an assumptive reinsurance
transaction, which resulted in the Company paying a ceding commission of
$15,675,206. Policy liabilities and related accruals of the Company
increased by $714,282,427 as a result of this transaction.
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," have been reduced for insurance ceded by $54,411,763
and $2,722,404, respectively, at December 31, 1998.
The caption "Premiums and deposits" in the statements of operations includes
$1,276,884,778 of insurance assumed and $52,443,264 of insurance ceded in
1998.
The caption "Benefits and settlement expenses" in the statements of
operations is net of reinsurance recoveries of $47,526,681 for 1998.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $682,060 at December 31, 1998. Amounts payable
or recoverable for reinsurance on policy and contract liabilities are not
subject to periodic or maximum limits. At December 31, 1998, the Company's
reinsurance recoverables are not material and no individual reinsurer owed
the Company an amount that was equal to or greater than 3% of the Company's
surplus.
5. Life and Annuity Reserves and
Deposit Fund Liabilities
At December 31, 1998, the Company had $1,092,753,902 of insurance in force
for which the gross premiums are less than the net premiums according to the
standard of valuation set by the State of New York. Reserves to cover the
above insurance totaled $6,937,379 at December 31, 1998.
At December 31, 1998, the Company's annuity reserves and deposit fund
liabilities, including separate accounts, that are subject to discretionary
withdrawal with adjustment, subject to discretionary withdrawal without
adjustment and not subject to discretionary withdrawal provisions are
summarized as follows:
S-12
<PAGE>
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
5. Life and Annuity Reserves and
Deposit Fund Liabilities (continued)
<TABLE>
<CAPTION>
Amount Percent
-------------- -------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value of investment $ 343,050,030 28.5%
---------------------------------------------------------------------------
At book value, less surrender charge 153,828,072 12.8
---------------------------------------------------------------------------
At market value 229,940,273 19.1
--------------------------------------------------------------------------- -------------- ------
726,818,375 60.4
Subject to discretionary withdrawal without adjustment:
At book value with minimal or no charge or adjustment 461,855,066 38.4
---------------------------------------------------------------------------
Not subject to discretionary withdrawal 13,848,286 1.2
- ----------------------------------------------------------------------------- -------------- ------
Total annuity reserves and deposit fund liabilities, before reinsurance 1,202,521,727 100.0%
======
Less reinsurance 2,991,673
- ----------------------------------------------------------------------------- --------------
Net annuity reserves and deposit fund liabilities, including separate
accounts $1,199,530,054
- ----------------------------------------------------------------------------- ==============
</TABLE>
A reconciliation of the total net annuity reserves and deposit fund liabilities
to the amounts reported in the Company's 1998 Annual Statement and the Company's
Separate Accounts Annual Statement is as follows:
<TABLE>
<S> <C>
December 31,
1998
--------------
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 9,955,624
------------------------------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 1,241,407
------------------------------------------------------------------------------------
Exhibit 10, Column 1, Line 19 958,392,750
------------------------------------------------------------------------------------ --------------
969,589,781
- --------------------------------------------------------------------------------------
Per Separate Accounts Annual Statement:
- --------------------------------------------------------------------------------------
Exhibit 6, Column 2, Line 0299999 --
------------------------------------------------------------------------------------
Page 3, Line 3 229,940,273
------------------------------------------------------------------------------------ --------------
229,940,273
--------------
Total net annuity reserves and deposit fund liabilities $1,199,530,054
- -------------------------------------------------------------------------------------- ==============
</TABLE>
Details underlying the balance sheet caption "Other policyholder funds" are as
follows:
<TABLE>
<S> <C> <C>
December 31
1998 1997
------------ ------------
Premium deposit funds $931,230,214 $587,465,491
- -------------------------------------------------------------------------
Undistributed earnings on participating business 30,772,519 --
- -------------------------------------------------------------------------
Other 722,578 --
- ------------------------------------------------------------------------- ------------ ------------
$962,725,311 $587,465,491
============ ============
</TABLE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
S-13
<PAGE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
6. Capital and Surplus
The Company was initially capitalized on August 12, 1996 with a capital
contribution from Lincoln Life in the amount of $2,000,000. Additional
paid-in surplus from Lincoln Life of $69,000,000, $158,407,481 and
$156,721,000 was received in September 1996, December 1997 and October 1998,
respectively.
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company requires 30 day advance notice to
the Department.
7. Employee Benefit Plans
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory basis statements of operations or
balance sheets 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 equal increments on the option issuance anniversary in
three to four years following issuance.
As of December 31, 1998, 16,600 shares of LNC common stock were subject to
options granted to Company employees under the stock option incentive plans
of which 2,399 were exercisable on that date. The exercise prices of the
outstanding options range from $58.94 to $89.85. During 1998, 137 options
were exercised. There were no options exercised during 1997.
8. Restrictions, Commitments and Contingencies
Leases
The Company leases office space and equipment under lease agreements that
expire at various intervals over the next five years and are subject to
renewal options at market rates prevailing at the time of renewal. Rental
expense for all operating leases was $281,947, $155,664 and $32,252 for
1998, 1997 and 1996, respectively. Future minimum rental commitments are as
follows:
<TABLE>
<S> <C>
1999 $225,596
- ------------------------------------
2000 162,908
- ------------------------------------
2001 161,564
- ------------------------------------
2002 161,564
- ------------------------------------
2003 148,100
- ------------------------------------ --------
$859,732
========
</TABLE>
Vulnerability From Concentrations
At December 31, 1998, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
Contingency Matters
The Company is occasionally involved in various pending or threatened legal
proceedings arising from the conduct of business. These proceedings are
routine in the ordinary course of business. In
S-14
<PAGE>
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
8. Restrictions, Commitments and
Contingencies (continued)
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.
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.
9. 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 the Company's
financial instruments.
Bonds and 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 common stocks are based on
quoted market prices.
Mortgage Loans On Real Estate
The estimated fair values of mortgage loans on real estate are established
using a discounted cash flow method based on credit rating, maturity and
future income. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
Policy Loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using U.S. Treasury interest rates
consistent with the maturity durations assumed. These durations were based
on historical experience.
Cash and Short-term Investments
The carrying value of cash and short-term investments approximates their
fair value.
Investment-type Insurance Contracts
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," include investment type insurance contracts (i.e.,
deposit contracts). The fair values for the deposit contracts are based on
their approximate surrender values.
The remainder of the balance sheet captions "Future policy benefits and
claims" and "Other policyholder funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other companies in the insurance industry are monitoring the related actions
of the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
Lincoln Life & Annuity Company of New York Statutory Financial Statements
S-15
<PAGE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
9. Fair Value of Financial Instruments
(continued)
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.
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------------------------
Carrying Carrying
Value Fair Value Value Fair Value
------------------------------------------------
December 31
1998 1997
------------------------------------------------
(in Thousands)
------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $1,435,882 $1,462,743 $ 593,432 $ 607,259
- -----------------------------------------------
Unaffiliated common stock 155 155 -- --
---------------------------------------------
Mortgage loans on real estate 184,504 185,694 -- --
---------------------------------------------
Policy loans 170,373 183,408 39,055 39,055
---------------------------------------------
Cash and short-term investments 143,547 143,547 163,774 163,774
---------------------------------------------
Other invested assets 60 60 -- --
---------------------------------------------
Investment-type insurance contracts (962,725) (938,191) (587,465) (587,465)
---------------------------------------------
Separate account assets 236,862 236,862 164,721 164,721
---------------------------------------------
Separate account liabilities (236,862) (236,862) (164,721) (164,721)
---------------------------------------------
</TABLE>
10. Transactions With Affiliates
The Company has entered into agreements with Lincoln Life to receive
processing and other corporate services. Fees paid to Lincoln Life for such
services were $18,504,450, $3,454,014 and $931,000 in 1998, 1997 and 1996,
respectively. The Company has also entered into an agreement with Lincoln
Life to provide certain processing services. Fees received from Lincoln Life
for such services were $273,952, $578,003 and $229,000 in 1998, 1997 and
1996, respectively.
The Company has an investment management agreement with an affiliate,
Lincoln Investment Management, Inc., for investment advisory and asset
management services. Fees paid for such investment services were $1,501,592,
$558,011 and $122,000 in 1998, 1997 and 1996, respectively.
The Company cedes business to two affiliated companies, Lincoln Life and
Lincoln National Reassurance Company. The caption "Premiums and deposits" in
the accompanying statements of operations has been reduced by the $2,095,019
of premiums paid on these contracts in 1998. The caption "Future policy
benefits and claims" has been reduced by $2,583,702 related to reserve
credits taken on these contracts as of December 31, 1998.
11. Separate Accounts
Separate account premiums, deposits and other considerations amounted to
$73,993,993 and $167,895,749 in 1998 and 1997, respectively. Reserves for
separate accounts with assets at fair value were $229,940,273 and
$159,132,918 at December 31, 1998 and 1997, respectively. All reserves are
subject to discretionary withdrawal at market value. All of the Company's
separate accounts are nonguaranteed. The investment risks associated with
market value changes are borne entirely by the policyholder.
S-16
<PAGE>
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
11. Separate Accounts (continued)
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997
---------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
Transfers to separate accounts $73,993,993 $167,895,749
- ------------------------------------------------------------ ----------- ------------
Transfers from separate accounts (40,118,042) (26,868,553)
- ------------------------------------------------------------ ----------- ------------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations $33,875,951 $141,027,195
- ------------------------------------------------------------ =========== ============
</TABLE>
12. Century Compliance (unaudited)
The Year 2000 issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with affiliate service providers, who have contracted with
outside consultants, to update systems to address Year 2000 issues. Experts
have been engaged to assist in developing work plans and cost estimates and
to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$235,809 to address this issue which represent all expenditures to date. The
Company's financial plans for 1999 and 2000 include expected expenditures of
an additional $410,000. Actual Year 2000 expenditures through December 31,
1998 and future Year 2000 expenditures are expected to be funded from
operating cash flows. The anticipated cost of addressing Year 2000 issues is
based on management's current best estimates which were derived utilizing
numerous assumptions of future events, including the continued availability
of certain resources, third party modification plans and other factors. Such
costs will be closely monitored by management. Nevertheless, there can be no
guarantee that actual costs will not be higher than these estimated costs.
Specific factors that might cause such differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer problems and other
uncertainties. The total expenditures identified represent only the
Company's portion of Lincoln Life's and LNC's larger expenditures to address
the Year 2000 issue.
The current scope of the Company's and its affiliates overall Year 2000
program includes the following four major project areas: 1) addressing the
readiness of business applications, operating systems and hardware on
mainframe, personal computer and Local Area Network platforms (IT); 2)
addressing the readiness of non-IT embedded software and equipment (non-IT);
3) addressing the readiness of key business partners; and 4) establishing
Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company and its affiliates have completed those four phases for over
two-thirds of its high priority IT systems respectively, including those
provided by software vendors. While the Company's year 2000 program for
nearly all high priority IT systems is expected to be completed in the first
quarter 1999, phase four, for a small but important subset of these systems,
will continue through the end of the second quarter 1999. As of
S-17
Lincoln Life & Annuity Company of New York Statutory Financial Statements
<PAGE>
Lincoln Life & Annuity Company of New York Statutory Financial Statements
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory
Basis (continued)
12. Century Compliance (unaudited)
(continued)
December 31, 1998, the status of projects addressing readiness of IT assets
is: 100% of IT assets have been inventoried (Phase 1) and assessed (Phase
2); 94% of IT projects have been through the remediation phase (Phase 3)
with the last project scheduled for completion by the end of March 1999; and
69% of IT projects have completed the testing phase (Phase 4) with the last
project scheduled to finish testing by the end of June 1999. A portion of
the effort that extends into 1999 is dependent on outside third parties and
is behind the original schedule. The Company is working with these parties
to modify the completion schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
S-18
<PAGE>
Report of Independent Auditors
Board of Directors
Lincoln Life & Annuity Company of New York
We have audited the accompanying statutory-basis balance sheets of Lincoln Life
& Annuity Company of New York (a wholly owned subsidiary of The Lincoln National
Life Insurance Company) as of December 31, 1998 and 1997, and the related
statutory-basis statements of operations, changes in capital and surplus, and
cash flows for the years then ended and the period from June 6, 1996 (date of
incorporation) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the New York Insurance Department, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles and the effects on the accompanying
financial statements are described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Lincoln Life & Annuity Company of New York at December 31, 1998 and 1997, or
the results of its operations or its cash flows for the years then ended and the
period from June 6, 1996 (date of incorporation) to December 31, 1996.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Lincoln Life &
Annuity Company of New York at December 31, 1998 and 1997, and the results of
its operations and its cash flows for the years then ended and the period from
June 6, 1996 (date of incorporation) to December 31, 1996, in conformity with
accounting practices prescribed or permitted by the New York Insurance
Department.
/s/ Ernst & Young LLP
March 18, 1999
Lincoln Life & Annuity Company of New York Statutory Financial Statements
S-19
<PAGE>
Financial Statements -- Statutory Basis (Unaudited)
Lincoln Life & Annuity
Company of New York
Three months ended March 31, 1999 and 1998
F-1
<PAGE>
Lincoln Life & Annuity Company of New York
Financial Statements -- Statutory Basis (Unaudited)
Three months ended March 31, 1999 and 1998
Contents
Financial Statements
<TABLE>
<S> <C>
Balance Sheet -- Statutory Basis (Unaudited) ................................ F-3
Statements of Operations -- Statutory Basis (Unaudited) ..................... F-4
Statements of Changes in Capital and Surplus -- Statutory Basis (Unaudited) . F-5
Statements of Cash Flows -- Statutory Basis (Unaudited) ..................... F-6
Notes to Financial Statements -- Statutory Basis (Unaudited) ................ F-7
</TABLE>
F-2
<PAGE>
Lincoln Life & Annuity Company of New York
Balance Sheet -- Statutory Basis
(Unaudited)
<TABLE>
<CAPTION>
March 31,
1999
--------------
<S> <C>
Admitted assets
Cash and invested assets:
Bonds $1,594,994,356
- -----------------------------------------------------------------------------------------
Common stocks 155,039
- -----------------------------------------------------------------------------------------
Mortgage loans on real estate 182,995,990
- -----------------------------------------------------------------------------------------
Policy loans 173,407,311
- -----------------------------------------------------------------------------------------
Cash and short-term investments 21,915,505
- -----------------------------------------------------------------------------------------
Other invested assets 146,727
- -----------------------------------------------------------------------------------------
Receivable for securities 2,993,550
- ----------------------------------------------------------------------------------------- --------------
Total cash and invested assets 1,976,608,478
- -----------------------------------------------------------------------------------------
Premiums and fees in course of collection 5,409,172
- -----------------------------------------------------------------------------------------
Accrued investment income 31,992,004
- -----------------------------------------------------------------------------------------
Data processing equipment 156,741
- -----------------------------------------------------------------------------------------
Other admitted assets 52,577
- -----------------------------------------------------------------------------------------
Separate account assets 254,250,261
- ----------------------------------------------------------------------------------------- --------------
Total admitted assets $2,268,469,233
- ----------------------------------------------------------------------------------------- ==============
Liabilities and capital and surplus
Liabilities:
Policyholders' funds $ 971,017,195
- -----------------------------------------------------------------------------------------
Future policy benefits and claims 852,605,998
- -----------------------------------------------------------------------------------------
Other liabilities 73,105,225
- -----------------------------------------------------------------------------------------
Federal income taxes (3,206,611)
- -----------------------------------------------------------------------------------------
Asset valuation reserve 8,139,013
- -----------------------------------------------------------------------------------------
Interest maintenance reserve 5,516,718
- -----------------------------------------------------------------------------------------
Net transfers due from separate accounts (7,333,260)
- -----------------------------------------------------------------------------------------
Separate account liabilities 254,250,261
- ----------------------------------------------------------------------------------------- --------------
Total liabilities 2,154,094,539
- -----------------------------------------------------------------------------------------
Capital and surplus:
Common stock, $100 par value:
Authorized, issued and outstanding -- 20,000 shares (owned by The Lincoln National Life
Insurance Company) 2,000,000
- -----------------------------------------------------------------------------------------
Paid-in surplus 384,128,481
- -----------------------------------------------------------------------------------------
Unassigned surplus -- deficit (271,753,787)
- -----------------------------------------------------------------------------------------
Total capital and surplus 114,374,694
- ----------------------------------------------------------------------------------------- --------------
Total liabilities and capital and surplus $2,268,469,233
- ----------------------------------------------------------------------------------------- ==============
</TABLE>
See accompanying notes.
F-3
<PAGE>
Lincoln Life & Annuity Company of New York
Statements of Operations -- Statutory Basis
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
----------- --------------
<S> <C> <C>
Revenues:
Premiums and deposits $45,470,110 $ 816,637,545
- ----------------------------------------------------------------------------------------
Net investment income 34,062,279 25,053,059
- ----------------------------------------------------------------------------------------
Surrender charges 471,349 538,380
- ----------------------------------------------------------------------------------------
Amortization of the interest maintenance reserve 154,826 (274,446)
- ----------------------------------------------------------------------------------------
Other revenues 715,633 3,714
- ---------------------------------------------------------------------------------------- ----------- --------------
Total revenues 80,874,197 841,958,252
- ----------------------------------------------------------------------------------------
Benefits and expenses:
Benefits paid or provided to policyholders 53,064,351 824,140,895
- ----------------------------------------------------------------------------------------
Commissions 2,908,298 127,060,808
- ----------------------------------------------------------------------------------------
General expenses 8,847,461 6,178,564
- ----------------------------------------------------------------------------------------
Insurance taxes, licences and fees 978,768 1,331,384
- ----------------------------------------------------------------------------------------
Net transfers to separate accounts 8,516,397 8,144,219
- ---------------------------------------------------------------------------------------- ----------- --------------
Total benefits and expenses 74,315,275 966,855,870
- ---------------------------------------------------------------------------------------- ----------- --------------
Gain (loss) from operations before dividends to policyholders, federal income
taxes and net realized capital gains 6,558,922 (124,897,618)
- ----------------------------------------------------------------------------------------
Dividends to policyholders 1,229,461 323,154
- ---------------------------------------------------------------------------------------- ----------- --------------
Gain (loss) from operations before federal income taxes and net realized capital gains 5,329,461 (125,220,772)
- ----------------------------------------------------------------------------------------
Federal income taxes (458,861) 3,297,183
- ----------------------------------------------------------------------------------------
Gain (loss) from operations before net realized capital gains 5,788,322 (128,517,955)
- ----------------------------------------------------------------------------------------
Net realized capital gains 293,595 387,449
- ---------------------------------------------------------------------------------------- ----------- --------------
Net income (loss) $ 6,081,917 $(128,130,506)
- ---------------------------------------------------------------------------------------- =========== ==============
</TABLE>
See accompanying notes.
F-4
<PAGE>
Lincoln Life & Annuity Company of New York
Statements of Changes in Capital and Surplus -- Statutory Basis (Unaudited)
<TABLE>
<CAPTION>
Unassigned Total
Common Paid-in Surplus -- Capital and
Stock Surplus Deficit Surplus
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1999 $2,000,000 $384,128,481 $(274,409,203) $ 111,719,278
Add (deduct):
Net income -- -- 6,081,917 6,081,917
- ----------------------------------------
Increase in unrealized capital losses -- -- (720,000) (720,000)
- ----------------------------------------
Increase in nonadmitted assets -- -- 57,918 57,918
- ----------------------------------------
Increase in asset valuation reserve -- -- (2,764,419) (2,764,419)
- ---------------------------------------- ---------- ------------ -------------- -------------
Balances at March 31, 1999 $2,000,000 $384,128,481 $(271,753,787) $ 114,374,694
- ---------------------------------------- ========== ============ ============== =============
Balances at January 1, 1998 $2,000,000 $227,407,481 $ (16,555,254) $ 212,852,227
Add (deduct):
Net loss -- -- (128,130,506) (128,130,506)
- ----------------------------------------
Decrease in nonadmitted assets -- -- 181,667 181,667
- ----------------------------------------
Increase in asset valuation reserve -- -- (2,292,050) (2,292,050)
- ---------------------------------------- ---------- ------------ -------------- -------------
Balances at March 31, 1998 $2,000,000 $227,407,481 $ (146,796,143) $ 82,611,338
- ---------------------------------------- ========== ============ ============== =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Lincoln Life & Annuity Company of New York
Statements of Cash Flows -- Statutory Basis
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
------------- -------------
<S> <C> <C>
Operating activities
Premiums, policy proceeds and other considerations received $ 47,896,149 $ 812,264,625
- --------------------------------------------------------------
Investment income received 27,994,049 14,181,918
- --------------------------------------------------------------
Benefits paid (50,767,413) (39,023,842)
- --------------------------------------------------------------
Insurance expenses paid (16,741,740) (143,976,536)
- --------------------------------------------------------------
Federal income taxes paid 45,141 --
- --------------------------------------------------------------
Dividends to policyholders (1,246,215) (320,853)
- --------------------------------------------------------------
Other income received and expenses paid, net 2,311,117 974,119
- -------------------------------------------------------------- ------------- -------------
Net cash provided by operating activities 9,491,088 644,099,431
- --------------------------------------------------------------
Investing activities
Sale, maturity or repayment of investments 65,246,193 63,304,006
- --------------------------------------------------------------
Purchase of investments (222,333,185) (751,836,058)
- --------------------------------------------------------------
Net increase in policy loans (2,802,035) (1,920,966)
- -------------------------------------------------------------- ------------- -------------
Net cash used in investing activities (159,889,027) (690,453,018)
- --------------------------------------------------------------
Financing and miscellaneous activities
Other 28,766,571 (57,706,156)
- -------------------------------------------------------------- ------------- -------------
Net cash provided by (used in) financing activities 28,766,571 (57,706,156)
- -------------------------------------------------------------- ------------- -------------
Decrease in cash and short-term investments (121,631,368) (104,059,743)
- --------------------------------------------------------------
Total cash and short-term investments at beginning of period 143,546,873 163,773,594
- -------------------------------------------------------------- ------------- -------------
Total cash and short-term investments at end of period $ 21,915,505 $ 59,713,851
- -------------------------------------------------------------- ============= =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
Lincoln Life & Annuity Company of New York
Notes to Financial Statements -- Statutory Basis (Unaudited)
1. Basis of Presentation
The accompanying statutory-basis financial statements of Lincoln Life &
Annuity of New York (the "Company") have been prepared in accordance with
accounting practices prescribed or permitted by the New York Insurance
Department (the "Department"), except that they do not contain complete
notes. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ
from state to state, may differ from company to company within a state and
may change in the future. These financial statements are unaudited and
include all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the results, in accordance with the accounting
basis described above. For further information, refer to the
statutory-basis financial statements and notes as of December 31, 1998 and
1997 and for the years ended December 31, 1998 and 1997 and the period from
June 6, 1996 to December 31, 1996, included in this registration statement.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the entire
year ending December 31, 1999.
F-7
<PAGE>
This Prospectus and other information about Variable Life Account S filed with
the Securities and Exchange Commission ("Commission") can be found in the SEC's
web site at http://www.sec.gov. You can get copies of this information by
visiting the Commission's Public Reference Room or writing the Commission's
Public Reference Section, Washington, D.C. 20549-6009 and paying a duplicating
fee. You can get information on the operation of the Public Reference Room by
calling 1-800-SEC-0330.
To be valid, this Prospectus must have the current mutual funds' Prospectuses
with it. You should read the Prospectus and the attached prospectus for any
available Fund if you are considering buying a Policy or exercising elections
under a Policy. You should also keep them for future reference. You can obtain
any fund's Statement of Additional Information (SAI), which provides more
information about a fund, by calling (860) 466-1561.
<PAGE>
Part II
FEES AND CHARGES REPRESENTATION
Lincoln Life & Annuity Company of New York represents that the fees and charges
deducted under the Policies, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks assumed
by Lincoln Life & Annuity Company of New York.
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 Lincoln Life & Annuity
Company of New York (LLANY) provides that LLANY 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 LLANY, 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, LLANY.
Certain additional conditions apply to indemnification in criminal
proceedings.
In particular, separate conditions govern indemnification of
directors, officers, and employees of LLANY in connection with suits
by, or in the right of, LLANY.
Please refer to Article VII of the By-Laws of LLANY (Exhibit No. 6(b)
hereto) for the full text of the indemnification provisions.
Indemnification is permitted by, and is subject to the requirements of
New York 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.
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
<PAGE>
The facing sheet;
A cross-reference sheet (reconciliation and tie);
The prospectus, consisting of 74 pages;
The undertaking to file reports;
The signatures;
Written consents of the following persons:
Robert O. Sheppard, Esq.
Vaughn W. Robbins, FSA
Ernst & Young, LLP
<TABLE>
<S> <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 Lincoln Life & Annuity Company of New York and related documents authorizing
establishment of the Account.*
(2) Not applicable.
(3) (a) Form of Selling Group Agreement.*
(b) Commission Schedule for Variable Life Policies.*
(4) Not applicable.
(5) (a) Proposed Form of Policy and Application--LN920NY and B10392NY through B10395NY.(3)
(b) Riders.
(6) (a) Articles of Incorporation of Lincoln Life & Annuity Company of New York.(1)
(b) Bylaws of Lincoln Life & Annuity Company of New York.(1)
(7) Not applicable.
(8) Fund Participation Agreements.
Agreements between Lincoln Life & Annuity Company of New York and:
(a) American Century Variable Products Group, Inc.*
(b) Baron Capital Funds Trust*
(c) BT Insurance Funds Trust(2)
(d) Delaware Group Premium Fund, Inc.(2)
(e) Fidelity Variable Insurance Products Fund(2)
(f) Fidelity Variable Insurance Products Fund II(2)
(g) Janus Aspen Series*
(h) Lincoln National Funds*
(i) MFS(R) Variable Insurance Trust(2)
(j) Neuberger & Berman Advisers Management Trust*
(k) OCC Accumulation Trust(2)
(l) OppenheimerFunds*
(m) Templeton Variable Products Series Fund(2)
(9) Form of Services Agreement between Lincoln Life & Annuity Company of New York and Delaware Management Co. is
incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-38007) filed on October 16, 1997.
(10) See Exhibit 1(5).
See Exhibit 1(5).
Opinion and Consent of Robert O. Sheppard, Esq.
Not applicable.
Not applicable.
Opinion and consent of Vaughn Robbins, F.S.A.
Consent of Ernst & Young, LLP, Independent Auditors.
Not applicable.
*To be filed by amendment.
</TABLE>
(1) Incorporated by reference to Registration Statement on Form N-4 (File No.
333-38007) filed on October 16, 1997.
(2) Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement S-6 (File No. 333-42507) filed on February 26, 1999.
(3) Incorporated by reference to Registration Statement on Form S-6 filed on
March 12, 1999.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, as amended, the Registrant,
Lincoln Life & Annuity Company of New York, has duly caused this Pre-Effective
Amendment No. 1 to its Registration Statement on Form S-6 (File No. 333-74325)
to be signed on its behalf by the undersigned thereunto duly authorized, in the
City of Syracuse and State of New York, on the 26th day of May, 1999.
LLANY Separate Account S for
Flexible Premium Variable Life
Insurance
(Name of Registrant)
By: /s/ Philip L. Holstein
------------------------------------
Philip L. Holstein
President, Treasurer and Director
Lincoln Life & Annuity Company of New
York
(Name of Depositor)
By: /s/ Philip L. Holstein
------------------------------------
Philip L. Holstein
President, Treasurer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to this Registration Statement (File No.
333-74325) has been signed below on May 26, 1999 by the following persons, as
officers and directors of the Depositor, in the Capacities indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Philip L. Holstein President, Treasurer and Director
- ------------------------------- (Principal Executive Officer)
Philip L. Holstein
/s/ Troy D. Panning * Second Vice President and Chief Financial
- ------------------------------- Officer (Principal Financial Officer and
Troy D. Panning Principal Accounting Officer)
/s/ Jon A. Boscia * Director
- -------------------------------
Jon A. Boscia
/s/ Richard C. Vaughan * Director
- -------------------------------
Richard C. Vaughan
/s/ Thomas D. Bell, Jr. * Director
- -------------------------------
Thomas D. Bell, Jr.
/s/ Roland C. Baker * Director
- -------------------------------
Roland C. Baker
/s/ Barbara Steury Kowalczyk * Director
- -------------------------------
Barbara Steury Kowalczyk
/s/ Marguerite Leanne Lachman* Director
- -------------------------------
Marguerite Leanne Lachman
/s/ John M. Pietruski * Director
- -------------------------------
John M. Pietruski
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Lawrence T. Roland * Director
- -------------------------------
Lawrence T. Roland
/s/ J. Patrick Barrett * Director
- -------------------------------
J. Patrick Barrett
/s/ Louis G. Marcoccia * Director
- --------------------------
Louis G. Marcoccia
/s/ Gabriel L. Shaheen * Director
- --------------------------
Gabriel L. Shaheen
(A majority of the Directors)
by
/s/ Philip L. Holstein
-----------------------------
Philip L. Holstein
Attorney-in-Fact
</TABLE>
Robert O. Sheppard Lincoln Financial Group
Corporate Counsel Lincoln Life & Annuity
Company of New York
120 Madison Street, Suite 1700
Syracuse, New York 13202-2802
Telephone: (315) 428-8420
Facsimile: (315) 428-8419
May 26, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: LLANY Separate Account S for Flexible Premium Variable Life Insurance (the
"Account")
Lincoln Life & Annuity Company of New York
Pre-Effective Amendment No. 1, File No. 333-74325
Dear Sirs:
As Corporate Counsel of the Lincoln Life & Annuity Company of New York (the
"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 Charter 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 Pre-Effective
Amendment No. 1 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 O. Sheppard
Robert O. Sheppard
Corporate Counsel
[logo] Lincoln
-------
Financial Group
Lincoln Life
[letterhead
The Lincoln National Life Insurance Company
350 Church Street
Hartford, CT 06103-1106]
May 26, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: LLANY Separate Account S for Flexible Premium Variable Life Insurance (the
"Account")
Registration Statement on Form S-6, Pre-Effective Amendment No. 1
File No. 333-74325
Dear Sirs:
This opinion is furnished in connection with Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-6 filed by Lincoln Life & Annuity Company
of New York ("LLANY") under the Securities Act of 1933, as amended, for the
flexible premium variable universal life insurance policies (the "Policies")
funded through the Account. The Prospectus included in said Registration
Statement describes flexible premium variable life insurance policies (the
"Policies"). Lincoln, by whom I am employed, is responsible to LLANY for the
development of the policies covered by this Pre-Effective Amendment.
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, as amended, and the reference to me under the heading "Experts" in
the Prospectus.
Very truly yours,
/s/ Vaughn W. Robbins
Vaughn W. Robbins, FSA, MAAA
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Pre-Effective Amendment No. 1 to the Registration Statement (Form S-6 No.
333-74325) pertaining to the LLANY Separate Account S for Flexible Premium
Variable Life Insurance, and to the use therein of our report dated March 18,
1999, with respect to the statutory-basis financial statements of Lincoln Life &
Annuity Company of New York.
/s/ Ernst & Young, LLP
Fort Wayne, Indiana
May 24, 1999
