<PAGE>
FLEXIBLE PREMIUM
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACTS
ISSUED BY
LINCOLN BENEFIT LIFE COMPANY
IN CONNECTION WITH
LINCOLN BENEFIT LIFE VARIABLE ANNUITY ACCOUNT
STREET ADDRESS: 206 SOUTH 13TH ST., LINCOLN, NE 68508-1993
MAILING ADDRESS: P. O. BOX 82532, LINCOLN, NE 68501-2532
TELEPHONE NUMBER: 1-800-865-5237
This prospectus describes a Flexible Premium Individual Deferred Variable
Annuity Contract ("Contract") offered by Lincoln Benefit Life Company ("we" or
"Lincoln Benefit"). Lincoln Benefit is owned by Allstate Life Insurance Company.
The Contract is a deferred annuity contract designed to aid you in long-term
financial planning. You may purchase it on either a tax qualified or non-tax
qualified basis.
Because this is a flexible premium annuity contract, you may pay multiple
premiums. We allocate your premium to the investment options under the Contract
and our Fixed Account in the proportions that you choose. The Contract currently
offers thirty-seven investment options, each of which is a subaccount of the
Lincoln Benefit Life Variable Annuity Account ("Separate Account"). Each
Subaccount invests exclusively in shares of one of the following Portfolios:
JANUS ASPEN SERIES: Flexible Income Portfolio, Balanced Portfolio, Growth
Portfolio, Aggressive Growth Portfolio, Worldwide Growth Portfolio
FEDERATED INSURANCE MANAGEMENT SERIES: Utility Fund II, Fund for U.S. Government
Securities II, High Income Bond Fund II
FIDELITY VARIABLE INSURANCE PRODUCTS FUND: Money Market Portfolio, Equity-Income
Portfolio, Growth Portfolio, Overseas Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II: Asset Manager Portfolio,
Contrafund Portfolio, Index 500 Portfolio
THE ALGER AMERICAN FUND: Income and Growth Portfolio, Small Capitalization
Portfolio, Growth Portfolio, MidCap Growth Portfolio, Leveraged AllCap Portfolio
SCUDDER VARIABLE LIFE INVESTMENT FUND: Bond Portfolio, Balanced Portfolio,
Growth and Income Portfolio, Global Discovery Portfolio, International Portfolio
STRONG VARIABLE INSURANCE FUNDS, INC.: Discovery Fund II, Growth Fund II
STRONG OPPORTUNITY FUND II, INC.: Opportunity Fund II
T. ROWE PRICE INTERNATIONAL SERIES, INC.: International Stock Portfolio
T. ROWE PRICE EQUITY SERIES, INC.: New America Growth Portfolio, Mid-Cap Growth
Portfolio, Equity Income Portfolio
MFS VARIABLE INSURANCE TRUST: Growth with Income Series, Research Series,
Emerging Growth Series, Total Return Series, New Discovery Series
We may make available other investment options in the future.
You may not purchase a Contract if either you or the Annuitant are 90 years old
or older before we receive your application.
Your Contract Value will vary daily as a function of the investment performance
of the Subaccounts to which you have allocated Purchase Payments and any
interest credited to the Fixed Account. We do not guarantee any minimum Contract
Value for amounts allocated to the Subaccounts. Benefits provided by this
Contract, when based on the Fixed Account, are subject to a Market Value
Adjustment, which may result in an upwards or downwards adjustment in withdrawal
benefits, death benefits, settlement values, transfers to the Subaccounts, or
periodic income payments.
In certain states the contract may be offered as a group contract with
individual ownership represented by Certificates. The discussion of Contracts in
this prospectus applies equally to Certificates under group contracts, unless
the context specifies otherwise.
This prospectus sets forth the information you ought to know about the Contract.
You should read it before investing and keep it for future reference.
We have filed a Statement of Additional Information with the Securities and
Exchange Commission ("SEC"). The current Statement of Additional Information is
dated July 23, 1998. The information in the Statement of Additional Information
is incorporated by reference in this prospectus. You can obtain a free copy by
writing us or calling us at the telephone number given above. The Table of
Contents of the Statement of Additional Information appears on page 40 of this
prospectus.
(continued on next page)
- --------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES NOR HAS IT PASSED ON THE ACCURACY OR THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY 23, 1998.
1
<PAGE>
At least once each year we will send you an annual statement. The annual
statement details values and specific information for your Contract. It does not
contain our financial statements. Our financial statements begin on page F-1 of
this prospectus. Lincoln Benefit will file annual and quarterly reports and
other information with the SEC. You may read and copy any reports, statements or
other information we file at the SEC's public reference room in Washington, D.C.
You can obtain copies of these documents by writing to the SEC and paying a
duplicating fee. Please call the SEC at 1-800-SEC-0330 for further information
as to the operation of the public reference room. Our SEC filings are also
available to the public on the SEC Internet site (http://www.sec.gov).
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES
FOR THE PORTFOLIOS LISTED ABOVE. IF ANY OF THESE PROSPECTUSES IS MISSING OR
OUTDATED, PLEASE CONTACT US AND WE WILL SEND YOU THE PROSPECTUS YOU NEED.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR YOUR FUTURE REFERENCE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
DEFINITIONS................................... 5
QUESTIONS AND ANSWERS ABOUT YOUR CONTRACT..... 6
FEE TABLES.................................... 10
EXAMPLES...................................... 12
EXPLANATION OF FEE TABLES AND EXAMPLES........ 12
CONDENSED FINANCIAL INFORMATION............... 13
DESCRIPTION OF THE CONTRACTS.................. 13
Summary....................................... 13
Contract Owner................................ 13
Annuitant..................................... 13
Modification of the Contract.................. 13
Assignment.................................... 13
Free Look Period.............................. 13
PURCHASES AND CONTRACT VALUE.................. 13
Minimum Purchase Payment...................... 13
Automatic Payment Plan........................ 13
Allocation of Purchase Payments............... 14
Contract Value................................ 14
Separate Account Accumulation Unit Value...... 14
Transfer During Accumulation Period........... 14
Transfers Authorized by Telephone............. 15
Automatic Dollar Cost Averaging Program....... 15
Portfolio Rebalancing......................... 15
THE INVESTMENT AND FIXED ACCOUNT OPTIONS...... 16
Separate Account Investments.................. 16
The Portfolios................................ 16
Voting Rights................................. 19
Additions, Deletions, and Substitutions of
Securities................................... 20
The Fixed Account............................. 20
General....................................... 20
Guaranteed Maturity Fixed Account Option...... 20
Market Value Adjustment....................... 22
Dollar Cost Averaging Fixed Account Option.... 22
ANNUITY BENEFITS.............................. 22
Annuity Date.................................. 22
Annuity Options............................... 22
Other Options................................. 23
Annuity Payments: General..................... 23
Variable Annuity Payments..................... 23
Fixed Annuity Payments........................ 24
Transfers During Annuity Period............... 24
Death Benefit During Annuity Period........... 24
Certain Employee Benefit Plans................ 24
OTHER CONTRACT BENEFITS....................... 24
Death Benefit................................. 24
Beneficiary................................... 25
Contract Loans for 401(a), 401(k), and 403(b)
Contracts.................................... 26
Withdrawals (Redemptions)..................... 27
Substantially Equal Periodic Payments......... 28
Systematic Withdrawal Program................. 28
ERISA Plans................................... 28
Minimum Contract Value........................ 28
CONTRACT CHARGES.............................. 28
Mortality and Expense Risk Charge............. 28
Administrative Charges........................ 29
Contract Maintenance Charge................. 29
Administrative Expense Charge............... 29
Transfer Fee................................ 29
Premium Taxes................................. 29
Deduction for Separate Account Income Taxes... 29
Other Expenses................................ 29
TAXES......................................... 29
General....................................... 29
Withholding Tax on Distributions.............. 30
Tax Treatment of Assignments.................. 31
Tax Treatment of Withdrawals.................. 31
Qualified Plans............................. 31
Non-Qualified Plans......................... 32
DESCRIPTION OF LINCOLN BENEFIT LIFE COMPANY
AND THE SEPARATE ACCOUNT...................... 32
Lincoln Benefit Life Company.................. 32
Financial Statements of Lincoln Benefit....... 32
Selected Financial Data....................... 32
Investments by Lincoln Benefit................ 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operation.................................... 33
Management's Discussion and Analysis of
Financial Condition and Results of Operation
-- First Quarter 1998........................ 36
Competition................................... 38
Employees..................................... 38
Properties.................................... 38
Executive Officers and Directors of Lincoln
Benefit...................................... 38
Executive Compensation........................ 40
State Regulation of Lincoln Benefit........... 41
Separate Account.............................. 41
ADMINISTRATION................................ 41
MARKET TIMING AND ASSET ALLOCATION SERVICES... 41
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
DISTRIBUTION OF CONTRACTS..................... 41
LEGAL PROCEEDINGS............................. 42
LEGAL MATTERS................................. 42
EXPERTS....................................... 42
REGISTRATION STATEMENT........................ 43
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL
INFORMATION................................... 43
FINANCIAL STATEMENTS.......................... F-1
APPENDIX A - PORTFOLIOS AND PERFORMANCE
DATA.......................................... A-1
APPENDIX B - EXAMPLES OF MARKET VALUE
ADJUSTMENTS................................... B-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. WE DO NOT AUTHORIZE ANYONE TO PROVIDE
ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS
PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS.
4
<PAGE>
DEFINITIONS
Please refer to this list for the meaning of the following terms:
ACCUMULATION PERIOD - The period, beginning on the Issue Date, during which
Contract Value builds up under your Contract.
ACCUMULATION UNIT - A unit of measurement which we use to calculate Contract
Value.
ANNUITANT - The natural person on whose life the annuity benefits under a
Contract are based.
ANNUITIZATION - The process to begin annuity payments under the Contract.
ANNUITIZED VALUE - The Contract Value adjusted by any applicable Market Value
Adjustment and less any applicable taxes.
ANNUITY DATE - The date on which annuity payments are scheduled to begin.
ANNUITY PERIOD - The period during which annuity payments are paid. The Annuity
Period begins on the Annuity Date.
ANNUITY UNIT - A unit of measurement which we use to calculate the amount of
Variable Annuity payments.
BENEFICIARY(IES) - The person(s) designated to receive any death benefits under
the Contract.
COMPANY ("WE," "US," "OUR," "LINCOLN BENEFIT") - Lincoln Benefit Life Company.
CONTRACT ANNIVERSARY - Each anniversary of the Issue Date.
CONTRACT OWNER ("YOU") - The person(s) having the privileges of ownership
defined in the Contract. If your Contract is issued as part of a retirement
plan, your ownership privileges may be modified by the plan.
CONTRACT VALUE - The sum of the values of your interests in the Subaccounts of
the Separate Account and the Fixed Account.
CONTRACT YEAR - Each twelve-month period beginning on the Issue Date and each
Contract Anniversary.
CONTRIBUTION YEAR - Each twelve-month period beginning on the date a Purchase
Payment is allocated to a Subaccount, or each anniversary of that date.
FIXED ACCOUNT - The portion of the Contract Value allocated to our general
account.
FIXED ANNUITY - A series of annuity payments that are fixed in amount.
GUARANTEE PERIODS - A period of years for which we have guaranteed a specific
effective annual interest rate on an amount allocated to the Fixed Account.
ISSUE DATE - The date when the Contract becomes effective.
LATEST ANNUITY DATE - The latest date by which you must begin annuity payments
under the Contract.
LOAN ACCOUNT - An account established for amounts transferred from the
Subaccounts or the Fixed Account as security for outstanding Contract loans.
MARKET VALUE ADJUSTMENT - An amount added to or subtracted from certain
transactions involving your interest in the Fixed Account, to reflect the impact
of changing interest rates.
NET INVESTMENT FACTOR - The factor used to determine the value of an
Accumulation Unit and Annuity Unit in any Valuation Period. We determine the Net
Investment Factor separately for each Subaccount.
NON-QUALIFIED PLAN - A retirement plan which does not receive special tax
treatment under Sections 401, 403(b), 408, 408A or 457 of the Tax Code.
PORTFOLIO(S) - The underlying mutual funds in which the Subaccounts invest. Each
Portfolio is an investment company registered with the SEC or a separate
investment series of a registered investment company.
PURCHASE PAYMENTS - Amounts paid to us as premium for the Contract by you or on
your behalf.
QUALIFIED PLAN - A retirement plan which receives special tax treatment under
Sections 401, 403(b), 408 or 408A of the Tax Code or a deferred compensation
plan for a state and local government or another tax exempt organization under
Section 457 of the Tax Code.
SEPARATE ACCOUNT - The Lincoln Benefit Life Variable Annuity Account, which is a
segregated investment account of the Company.
SUBACCOUNT - A subdivision of the Separate Account, which invests wholly in
shares of one of the Portfolios.
SURRENDER VALUE - The amount paid upon complete surrender of the Contract, equal
to the Contract Value, less any applicable premium taxes and the contract
maintenance charge and increased or decreased by any Market Value Adjustment.
TAX CODE - The Internal Revenue Code of 1986, as amended.
TREASURY RATE - The U.S. Treasury Note Constant Maturity Yield for the preceding
week as reported in Federal Reserve Bulletin Release H.15.
VALUATION DATE - Each day the New York Stock Exchange is open for business.
VALUATION PERIOD - The period of time over which we determine the change in the
value of the Subaccounts in order to price Accumulation Units and Annuity Units.
Each Valuation Period begins at the close of normal trading on the New York
Stock Exchange ("NYSE") currently 4:00 p.m. Eastern time on each Valuation Date
and ends at the close of the NYSE on the next Valuation Date.
VARIABLE ANNUITY - A series of annuity payments that vary in amount based on
changes in the value of the Subaccounts to which your Contract Value has been
allocated.
5
<PAGE>
QUESTIONS AND ANSWERS
ABOUT YOUR CONTRACT
THE FOLLOWING ARE ANSWERS TO SOME OF THE QUESTIONS YOU MAY HAVE ABOUT SOME OF
THE MORE IMPORTANT FEATURES OF THE CONTRACT. THE CONTRACT IS MORE FULLY
DESCRIBED IN THE REST OF THE PROSPECTUS. PLEASE READ THE PROSPECTUS CAREFULLY.
1. WHAT IS THE CONTRACT?
The Contract is a flexible premium deferred variable annuity contract. It is
designed for tax-deferred retirement investing. The Contract is available for
non-qualified or qualified retirement plans. The Contract, like all deferred
annuity contracts, has two phases: the Accumulation Period and the Annuity
Period. During the Accumulation Period, earnings accumulate on a tax-deferred
basis and are taxed as income when you make a withdrawal. The Annuity Period
begins when you begin receiving payments under one of the annuity payment
options described in the answer to Question 2. The amount of money accumulated
under your Contract during the Accumulation Period will be used to determine the
amount of your annuity payments during the Annuity Period.
Your premiums are invested in one or more of the Subaccounts of the Separate
Account or allocated to the Fixed Account, as you instruct us. You may allocate
your Contract Value to up to twenty-one options under the Contract, counting
each Subaccount and the Fixed Account as one option. We will treat all of your
Contract Value allocated to the Fixed Account as one option for purposes of this
limit, even if you have chosen more than one Guarantee Period. The value of your
Contract will depend on the investment performance of the Subaccounts and the
amount of interest we credit to the Fixed Account.
Each Subaccount will invest in a single investment portfolio (a "Portfolio") of
a mutual fund. The Portfolios offer a range of investment objectives, from
conservative to aggressive. You bear the entire investment risk on amounts
allocated to the Subaccounts. The investment policies and risks of each
Portfolio are described in the accompanying prospectuses for the Portfolios.
In some states, you may also allocate all or part your Contract Value to the
"Fixed Account", as described in the answer to Question 5.
2. WHAT ANNUITY OPTIONS DOES THE CONTRACT OFFER?
You may receive annuity payments on a fixed or a variable basis or a combination
of the two. We offer a variety of annuity options including:
- - a life annuity with payments guaranteed for five to twenty years;
- - a joint and full survivorship annuity, with payments guaranteed for five to
twenty years; and
- - fixed payments for a specified period of five to thirty years.
Call us to inquire about other options.
You may change your annuity option at any time before annuitization. You may
select the date to annuitize the Contract. The date you select, however, may be
no later than the later of the tenth Contract Anniversary or the Annuitant's
90th birthday. If your Contract was issued in connection with a qualified plan,
different deadlines may apply.
If you select annuity payments on a variable basis, the amount of our payments
to you will be affected by the investment performance of the Subaccounts you
have selected. The fixed portion of your annuity payments, on the other hand,
generally will be equal in amount to the initial payment we determine. As
explained in more detail below, however, during the Annuity Period you will have
a limited ability to change the relative weighting of the Subaccounts on which
your variable annuity payments are based or to increase the portion of your
annuity payments consisting of Fixed Annuity payments.
3. HOW DO I BUY A CONTRACT?
You can obtain a Contract application from your Lincoln Benefit agent. You must
pay at least $25,000 in a lump sum as an initial Purchase Payment. Subsequent
Purchase Payments must be at least $500. We may lower these minimums at our sole
discretion. We will not issue a Contract to you if either you or the Annuitant
is age 90 or older before we receive your application.
4. WHAT ARE MY INVESTMENT CHOICES UNDER THE CONTRACT?
You can allocate and reallocate your investment among the Subaccounts, each of
which in turn invests in a single Portfolio. Under the Contract, the Separate
Account currently invests in the following Portfolios:
<TABLE>
<CAPTION>
Fund Portfolio(s)
- ------------------------------ ------------------------------
<S> <C>
- --------------------------------------------------------------
Janus Aspen Series Flexible Income Portfolio
Balanced Portfolio
Growth Portfolio
Aggressive Growth Portfolio
Worldwide Growth Portfolio
- --------------------------------------------------------------
Federated Insurance Management Utility Fund II
Series Fund for U.S. Government
Securities II
High Income Bond Fund II
- --------------------------------------------------------------
Fidelity Variable Insurance Money Market Portfolio
Products Fund Equity-Income Portfolio
Growth Portfolio
Overseas Portfolio
- --------------------------------------------------------------
Fidelity Variable Insurance Asset Manager Portfolio
Products Fund II Contrafund Portfolio
Index 500 Portfolio
- --------------------------------------------------------------
The Alger American Fund Income and Growth Portfolio
Small Capitalization Portfolio
Growth Portfolio
MidCap Growth Portfolio
Leveraged AllCap Portfolio
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Fund Portfolio(s)
- ------------------------------ ------------------------------
<S> <C>
- --------------------------------------------------------------
Scudder Variable Life Bond Portfolio
Investment Fund Balanced Portfolio
Growth and Income Portfolio
Global Discovery Portfolio
International Portfolio
- --------------------------------------------------------------
Strong Variable Insurance Discovery Fund II
Funds, Inc. Growth Fund II
- --------------------------------------------------------------
Strong Opportunity Fund II. Opportunity Fund II
Inc.
- --------------------------------------------------------------
T. Rowe Price International International Stock Portfolio
Series, Inc.
- --------------------------------------------------------------
T. Rowe Price Equity Series, New America Growth Portfolio
Inc. Mid-Cap Growth Portfolio
Equity Income Portfolio
- --------------------------------------------------------------
MFS Variable Insurance Trust Growth with Income Series
Research Series
Emerging Growth Series
Total Return Series
New Discovery Series
- --------------------------------------------------------------
</TABLE>
Each Portfolio holds its assets separately from the assets of the other
Portfolios. Each Portfolio has distinct investment objectives and policies which
are described in the accompanying prospectuses for the Portfolios.
5. WHAT IS THE FIXED ACCOUNT OPTION?
We offer two Fixed Account interest crediting options: the Guaranteed Maturity
Fixed Account Option and the Dollar Cost Averaging Fixed Account Option.
We will credit interest to amounts allocated to the Guaranteed Maturity Fixed
Account Option at a specified rate for a specified Guarantee Period. You select
the Guarantee Period for each amount that you allocate to the Guaranteed
Maturity Fixed Account Option. We will tell you what interest rates and
Guarantee Periods we are offering at a particular time. At the end of each
Guarantee Period, you may select a new Guarantee Period from among the choices
we are then making available or transfer or withdraw the relevant amount from
the Fixed Account without any Market Value Adjustment.
We may offer Guarantee Periods ranging from one to ten years in length. We are
currently offering Guarantee Periods of one, three, five, seven, and ten years
in length. In the future we may offer Guarantee Periods of different lengths or
stop offering some Guarantee Periods.
We will not change the interest rate credited to a particular allocation until
the end of the relevant Guarantee Period. From time to time, however, we may
change the interest rate that we offer to credit to new allocations to the
Guaranteed Maturity Fixed Account Option and to amounts rolled over in the Fixed
Account for new Guarantee Periods.
In addition, if you participate in our dollar cost averaging program, you may
designate amounts to be held in the Dollar Cost Averaging Fixed Account Option
until they are transferred to the Subaccounts or Guarantee Periods of your
choosing. When you make an allocation to the Fixed Account for this purpose, we
will set an interest rate applicable to that amount. We will then credit
interest at that rate to that amount until it has been entirely transferred to
your chosen Subaccounts or Guarantee Periods. We will complete the transfers
within one year of the allocation. In our discretion we may change the rate that
we set for new allocations to the Fixed Account for the dollar cost averaging
program. We will never, however, set a rate less than an effective annual rate
of 3%.
A Market Value Adjustment may increase or decrease the amount of certain
transactions involving the Fixed Account, to reflect changes in interest rates.
As a general rule, we will apply a Market Value Adjustment to the following
transactions:
(1) when you withdraw funds from the Guaranteed Maturity Fixed Account Option;
(2) when you transfer funds from the Guaranteed Maturity Fixed Account Option to
the Subaccounts;
(3) when you allocate part of your interest in the Guaranteed Maturity Fixed
Account Option to a new Guarantee Period before the end of the existing
Guarantee Period;
(4) when you annuitize your Contract; and
(5) when we pay a death benefit.
We will not apply a Market Value Adjustment to a transaction to the extent that:
(1) it occurs within 30 days after the end of a Guarantee Period applicable to
the funds involved in the transaction;
(2) it is part of a dollar cost averaging program; or
(3) it is necessary to meet IRS minimum withdrawal requirements.
We determine the amount of a Market Value Adjustment using a formula that takes
into consideration:
(1) whether current interest rates differ from interest rates at the beginning
of the applicable Guarantee Period; and
(2) how many years are left until the end of the Guarantee Period.
As a general rule, if interest rates have dropped, the Market Value Adjustment
will be an addition; if interest rates have risen, the Market Value Adjustment
will be a deduction. It is therefore possible that if you withdraw an amount
from the Fixed Account during a Guarantee Period, a Market Value Adjustment may
cause you to receive less than you initially allocated to the Fixed Account.
6. WHAT ARE MY EXPENSES UNDER THE CONTRACT?
CONTRACT MAINTENANCE CHARGE. During the Accumulation Period, each year we
subtract an annual contract
7
<PAGE>
maintenance charge of $35 from your Contract Value allocated to the Subaccounts.
We will waive this charge if you pay $50,000 or more in Purchase Payments or if
you allocate all of your Contract Value to the Fixed Account.
During the Annuity Period, we will subtract the annual contract maintenance
charge in equal parts from your annuity payments. We waive this charge if on the
Annuity Date your Contract Value is $50,000 or more or if all payments are Fixed
Annuity payments.
ADMINISTRATIVE EXPENSE CHARGE AND MORTALITY AND EXPENSE RISK CHARGE. We impose a
mortality and expense risk charge at an annual rate of 1.30% of average daily
net assets and an administrative expense charge at an annual rate of .10% of
average daily net assets. These charges are assessed each day during the
Accumulation Period and the Annuity Period. We guarantee that we will not raise
these charges.
TRANSFER FEE. Although we currently are not charging a transfer fee, the
Contract permits us to charge you up to $10 per transfer for each transfer after
the first transfer in each month.
PREMIUM TAXES. Certain states impose a premium tax on annuity purchase payments
received by insurance companies. Any premium taxes relating to the Contract may
be deducted from Purchase Payments or the Contract Value when the tax is
incurred or at a later time. State premium taxes generally range from 0% to
3.5%.
OTHER EXPENSES. In addition to our charges under the Contract, each Portfolio
deducts amounts from its assets to pay its investment advisory fees and other
expenses.
7. HOW WILL MY INVESTMENT IN THE CONTRACT BE TAXED?
You should consult a qualified tax adviser for personalized answers. Generally,
earnings under variable annuities are not taxed until amounts are withdrawn or
distributions are made. This deferral of taxes is designed to encourage
long-term personal savings and supplemental retirement plans. The taxable
portion of a withdrawal or distribution is taxed as ordinary income.
Special rules apply if the Contract is owned by a company or other legal entity.
Generally, such an owner must include in income any increase in the excess of
the Contract Value over the "investment in the contract" during the taxable
year.
8. DO I HAVE ACCESS TO MY MONEY?
At any time during the Accumulation Period, we will pay you all or part of the
value of your Contract, minus any applicable charge, if you surrender your
Contract or request a partial withdrawal. Under some plans, you may also take a
loan against the value of your Contract. Generally, a partial withdrawal must
equal at least $50, and after the withdrawal your remaining Contract Value must
at least equal $5,000.
Although you have access to your money during the Accumulation Period, certain
charges, such as the contract maintenance charge and premium tax charges, may be
deducted on a surrender or withdrawal. You may also incur federal income tax
liability or tax penalties. In addition, if you have allocated some of the value
of your Contract to the Fixed Account, the amount of your surrender proceeds or
withdrawal may be increased or decreased by a Market Value Adjustment.
After annuitization, under certain settlement options you may be entitled to
withdraw the commuted value of the remaining payments.
9. WHAT IS THE DEATH BENEFIT?
We will pay a death benefit while the Contract is in force and before the
Annuity Date, if the Contract Owner dies, or if the Annuitant dies and the
Contract Owner is not a natural person. To obtain payment of the Death Benefit,
the Beneficiary must submit to us written proof of death as specified in the
Contract.
The death benefit is the greatest of the following:
(1) your total Purchase Payments reduced proportionately for any prior partial
withdrawals;
(2) your Contract Value;
(3) the amount you would have received by surrendering your Contract; or
(4) your highest Contract Value on any Contract Anniversary, increased by the
total Purchase Payments since the most recent Contract Anniversary and reduced
proportionately by any partial withdrawals since the most recent Contract
Anniversary.
We will determine the value of the death benefit on the day that we receive all
of the information that we need to process the claim.
10. WHAT ELSE SHOULD I KNOW?
ALLOCATION OF PURCHASE PAYMENTS. You allocate your initial Purchase Payment
among the Subaccounts and the Fixed Account in your Contract application. You
may make your allocations in specific dollar amounts or percentages, which must
be whole numbers that add up to 100%. When you make subsequent Purchase
Payments, you may again specify how you want your payments allocated. If you do
not, we will automatically allocate the payment based on your most recent
instructions. You may not allocate Purchase Payments to the Fixed Account if it
is not available in your state.
TRANSFERS. During the Accumulation Period, you may transfer Contract Value among
the Subaccounts and from the Subaccounts to the Fixed Account. You may not make
a transfer, however, that would result in your allocating your Contract Value to
more than twenty-one options under the Contract. While you may also transfer
amounts from the Fixed Account, a Market Value Adjustment may apply. You may
instruct us to transfer Contract Value by writing or calling us.
8
<PAGE>
You may also use our automatic dollar cost averaging or portfolio rebalancing
programs. You may not use both programs at the same time.
Under the dollar cost averaging program, amounts are automatically transferred
at regular intervals from the Fixed Account or a Subaccount of your choosing to
up to eight options, including other Subaccounts or the Fixed Account. Transfers
may be made monthly, quarterly, or annually. You do not pay a Market Value
Adjustment on transfers that are part of a dollar cost averaging program.
Under the portfolio rebalancing program, you can maintain the percentage of your
Contract Value allocated to each Subaccount at a pre-set level. Investment
results will shift the balance of your Contract Value allocations. If you elect
rebalancing, we will automatically transfer your Contract Value back to the
specified percentages at the frequency (monthly, quarterly, semiannually,
annually) that you specify. You may not include the Fixed Account in a portfolio
rebalancing program. You also may not elect rebalancing after annuitization.
During the Annuity Period, you may not make any transfers for the first six
months after the Annuity Date. Thereafter, you may make transfers among the
Subaccounts or from the Subaccounts to increase your Fixed Annuity payments.
Your transfers, however, must be at least six months apart. You may not convert
any portion of your right to receive Fixed Annuity payments into Variable
Annuity payments.
FREE-LOOK PERIOD. You may cancel the Contract by returning it to us within 10
days after you receive it, or after whatever longer period may be permitted by
state law. You may return it by delivering it or mailing it to us. If you return
the Contract, the Contract terminates and, in most states, we will pay you an
amount equal to the Contract Value on the date we receive the Contract from you.
The Contract Value may be more or less than your Purchase Payments. In some
states, we are required to send you the amount of your Purchase Payments. Since
state laws differ as to the consequences of returning a Contract, you should
refer to your Contract for specific information about your circumstances.
11. WHO CAN I CONTACT FOR MORE INFORMATION?
You can write to us at Lincoln Benefit Life Company, P.O. Box 82532, Lincoln,
Nebraska 68501-2532, or call us at (800) 865-5237.
9
<PAGE>
FEE TABLES
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Charge -- None.
ANNUAL CONTRACT MAINTENANCE CHARGE.................................... $ 35.00
TRANSFER FEE (Applies solely to the second
and subsequent transfers within a calendar month.
We are currently waiving the transfer fee)............................ $ 10.00
SEPARATE ACCOUNT EXPENSES (AS A PERCENTAGE OF DAILY NET ASSET VALUE
DEDUCTED FROM EACH OF THE SUBACCOUNTS OF THE SEPARATE ACCOUNT)
Mortality and Expense Risk Charge............................. 1.30%
Administrative Expense Charge................................. 0.10%
--------
Total Separate Account Annual Expenses........................ 1.40%
</TABLE>
PORTFOLIO COMPANY ANNUAL EXPENSES
(AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
AGGRESSIVE WORLDWIDE
JANUS ASPEN SERIES FLEXIBLE INCOME BALANCED(1) GROWTH(1) GROWTH(1) GROWTH(1)
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Management (after fee waivers or
reductions): 0.65% 0.76% 0.73% 0.66% 0.65%
Other (after fee waivers or reductions): 0.10% 0.07% 0.03% 0.08% 0.05%
Total (after fee waivers or reductions): 0.75% 0.83% 0.76% 0.74% 0.70%
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERN-
MENT SECURI- HIGH INCOME
FEDERATED INSURANCE MANAGEMENT SERIES UTILITY II(2) TIES II(2) BOND II(2)
--------------- --------------- ---------------
<S> <C> <C> <C>
Management (after fee waiver or expense
reimbursements): 0.48% 0.15% 0.51%
Other (after fee waiver or expense reim-
bursements): 0.37% 0.65% 0.29%
Total (after fee waiver or expense
reimbursements): 0.85% 0.80% 0.80%
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE PRODUCTS EQUITY-
FUND MONEY MARKET INCOME(3) GROWTH(3) OVERSEAS(3)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Management: 0.21% 0.50% 0.60% 0.75%
Other: 0.10% 0.08% 0.09% 0.17%
Total 0.31% 0.58% 0.69% 0.92%
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE PRODUCTS ASSET MAN-
FUND II AGER(3) CONTRAFUND(3) INDEX 500
--------------- --------------- ---------------
<S> <C> <C> <C>
Management: 0.55% 0.60% 0.24%
Other: 0.10% 0.11% 0.04%
Total 0.65% 0.71% 0.28%
</TABLE>
<TABLE>
<CAPTION>
INCOME AND SMALL CAPITAL- LEVERAGED
THE ALGER AMERICAN FUND GROWTH IZATION GROWTH MIDCAP GROWTH ALLCAP(4)
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Management: 0.625% 0.85% 0.75% 0.80% 0.85%
Other: 0.115% 0.04% 0.04% 0.04% 0.15%
Total 0.740% 0.89% 0.79% 0.84% 1.00%
<CAPTION>
GROWTH AND GLOBAL DIS-
SCUDDER VARIABLE LIFE INVESTMENT FUND BOND BALANCED INCOME COVERY INTERNATIONAL
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Management: 0.48% 0.48% 0.48% 0.67% 0.83%
Other: 0.14% 0.09% 0.10% 0.83% 0.17%
Total 0.62% 0.57% 0.58% 1.50% 1.00%
</TABLE>
<TABLE>
<CAPTION>
STRONG VARIABLE INSURANCE FUNDS, INC. DISCOVERY II GROWTH II
--------------- ---------------
<S> <C> <C>
Management: 1.00% 1.00%
Other: 0.18% 0.20%
Total: 1.18% 1.20%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
STRONG OPPORTUNITY FUND II, INC. OPPORTUNITY II
---------------
<S> <C>
Management: 1.00%
Other: 0.15%
Total: 1.15%
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
T. ROWE PRICE INTERNATIONAL SERIES, INC. STOCK
---------------
<S> <C>
Management: 1.05%
Other: 0.00%
Total: 1.05%
</TABLE>
<TABLE>
<CAPTION>
NEW AMERICA
T. ROWE PRICE EQUITY SERIES, INC. GROWTH MID-CAP GROWTH EQUITY INCOME
--------------- --------------- ---------------
<S> <C> <C> <C>
Management: 0.85% 0.85% 0.85%
Other: 0.00% 0.00% 0.00%
Total: 0.85% 0.85% 0.85%
</TABLE>
<TABLE>
<CAPTION>
GROWTH WITH NEW DISCOV-
MFS VARIABLE INSURANCE TRUST(5) INCOME(6) RESEARCH EMERGING GROWTH TOTAL RETURN(6) ERY(6)
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Management (after expense
reimbursement): 0.75% 0.75% 0.75% 0.75% 0.90%
Other (after expense reimbursement): 0.25% 0.13% 0.12% 0.25% 0.25%
Total (after expense reimbursement): 1.00% 0.88% 0.87% 1.00% 1.15%
</TABLE>
- --------------------------
(1) Other expenses are based on the gross expenses of the Portfolios before
expense offset arrangements for the fiscal year ended December 31, 1997. The
information for Growth, Aggressive Growth, Worldwide Growth, and Balanced
Portfolios is net of fee reductions from Janus Capital. Without such
reductions, the Management Fee, Other Expenses and Total Operating Expenses
for the Portfolios would have been 0.74%, 0.04% and 0.78% for Growth
Portfolio; 0.74%, 0.04%, and 0.78% for Aggressive Growth Portfolio; 0.72%,
0.09%, and 0.81% for Worldwide Growth Portfolio, and 0.77%, 0.06%, and 0.83%
for Balanced Portfolio, respectively. Janus Capital may modify or terminate
the fee reductions at any time upon at least 90 days' notice to the
Trustees.
(2) The expense figures shown reflect the voluntary waiver of all or a portion
of the Management Fee. The maximum Management Fees for the indicated
Portfolios and the Total Portfolio Expenses absent the voluntary waiver are
as follows: 0.75% and 1.12%, respectively, for the Utility Fund II; 0.06%
and 1.25%, respectively, for the U.S. Government Securities II; and 0.60%
and 0.89%, respectively, for the High Income Bond Fund II. The expense
figures for U.S. Government Securities II are also net of expense
reimbursements from the investment adviser.
(3) A portion of the brokerage commissions the Portfolio paid was used to reduce
its expenses. Including this reduction, total operating expenses would have
been for Equity Income -- 0.57%, for Growth -- 0.67%, for Overseas -- 0.90%,
for Asset Manager -- 0.64%, and for Contrafund -- 0.68%.
(4) Included in the Other Expenses of this Portfolio is 0.04% of interest
expense.
(5) Each Portfolio has an expense offset arrangement which reduces the
Portfolio's custodian fee based upon the amount of cash maintained by the
Portfolio with its custodian and dividend disbursing agent, and may enter
into other such arrangements and directed brokerage arrangements (which
would also have the effect of reducing the Portfolio's expenses). Any such
fee reductions are not reflected under "Other Expenses."
(6) The Adviser has agreed to bear expenses for these Portfolio. Subject to
reimbursement by these Portfolios, such that each such Portfolio's "Other
Expenses" shall not exceed 0.25% of the average daily net assets of the
Portfolio during the current fiscal year. Otherwise, "Other Expenses" and
"Total Expenses" for each such Portfolio would be:
<TABLE>
<CAPTION>
"OTHER EXPENSES" "TOTAL EXPENSES"
WITHOUT EXPENSE WITHOUT EXPENSE
PORTFOLIO LIMITATION LIMITATION
- --------------------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
Growth With Income............................................................... 0.35% 1.10%
Total Return..................................................................... 0.27% 1.02%
New Discovery (estimate)......................................................... 0.47% 1.37%
</TABLE>
11
<PAGE>
EXAMPLES
AT THE END OF THE APPLICABLE TIME PERIOD, YOU WOULD PAY THE FOLLOWING EXPENSES
ON A $1,000 INVESTMENT, ASSUMING 5% ANNUAL RETURN ON ASSETS.
<TABLE>
<CAPTION>
FEDERATED
U.S. FEDERATED
JANUS JANUS JANUS GOV'T. HIGH FIDELITY
FLEXIBLE JANUS JANUS AGGRESSIVE WORLDWIDE FEDERATED SECURITIES INCOME MONEY
INCOME BALANCED GROWTH GROWTH GROWTH UTILITY II II BOND II MARKET
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 22 23 21 22 22 23 22 22 17
3 years 67 70 66 68 67 70 69 69 54
<CAPTION>
ALGER ALGER
FIDELITY AMERICAN AMERICAN ALGER
FIDELITY FIDELITY FIDELITY FIDELITY ASSET FIDELITY INCOME AND SMALL AMERICAN
EQUITY-INCOME GROWTH OVERSEAS CONTRAFUND MANAGER INDEX 500 GROWTH CAPITALIZATION GROWTH
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 20 21 24 21 21 17 22 23 22
3 years 62 65 72 66 64 53 67 72 69
<CAPTION>
ALGER ALGER
AMERICAN AMERICAN SCUDDER SCUDDER STRONG
MIDCAP LEVERAGED SCUDDER SCUDDER GROWTH AND GLOBAL SCUDDER DISCOVERY STRONG
GROWTH ALLCAP BOND BALANCED INCOME DISCOVERY INTERNATIONAL II GROWTH II
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 23 24 21 20 20 29 24 26 26
3 years 70 75 63 62 62 90 75 80 81
<CAPTION>
T. ROWE T. ROWE T. ROWE T. ROWE
STRONG PRICE PRICE NEW PRICE PRICE MFS GROWTH MFS
OPPORTUNITY INTERNATIONAL AMERICAN MID-CAP EQUITY WITH MFS EMERGING MFS TOTAL
II STOCK GROWTH GROWTH INCOME INCOME RESEARCH GROWTH RETURN
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 26 25 23 23 23 24 24 23 24
3 years 79 76 70 70 70 75 72 72 75
</TABLE>
<TABLE>
<CAPTION>
MFS NEW
DISCOVERY
----------
<S> <C>
1 year 26
3 year 79
</TABLE>
EXPLANATION OF FEE TABLES AND EXAMPLES
1. We have included the table and examples shown above to assist you in
understanding the costs and expenses that you will bear directly or indirectly
by investing in the Separate Account. The table reflects expenses of the
Separate Account as well as the Portfolios. For additional information, you
should read "Contract Charges," which begins on page 27 below; you should also
read the sections relating to expenses of the Portfolios in their prospectuses.
The examples do not include any taxes or tax penalties you may be required to
pay if you surrender your Contract.
2. The examples assume that you did not make any transfers. We are currently
waiving the transfer fee, but in the future, we may decide to charge $10 for the
second and each subsequent transfer within a calendar month. Premium taxes are
not reflected. Currently, we deduct premium taxes (which range from 0% to 3.5%)
either from premium received or from Contract Value upon full surrender, death
or annuitization.
3. To reflect the contract maintenance charge in the examples, we estimated an
equivalent percentage charge, which we calculated by dividing the total amount
of contract maintenance charges expected to be collected during a year by the
total estimated average net assets of the Subaccounts and the Fixed Account
attributable to the Contracts.
4. Your expenses will be the same regardless of whether you surrender,
annuitize, or continue to hold your Contract at the end of the applicable time
period, because we do not charge a withdrawal charge on surrenders or
annuitizations of this Contract.
NEITHER THE FEE TABLES NOR THE EXAMPLES SHOULD BE CONSIDERED REPRESENTATIONS OF
PAST OR FUTURE EXPENSES. YOUR ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. SIMILARLY, THE ANNUAL RATE OF RETURN OF 5% ASSUMED IN THE EXAMPLE IS NOT
AN ESTIMATE OR GUARANTEE OF FUTURE INVESTMENT PERFORMANCE.
12
<PAGE>
CONDENSED FINANCIAL INFORMATION
We have included the financial statements of the Separate Account in the
Statement of Additional Information. These financial statements do not reflect
any assets attributable to the Contracts, because we did not sell the Contracts
during the period covered by these financial statements. The Statement of
Additional Information also includes a brief explanation of how performance of
the Subaccounts is calculated.
DESCRIPTION OF THE CONTRACTS
SUMMARY. The Contract is a deferred annuity contract designed to aid you in
long-term financial planning. You may add to the Contract Value by making
additional Purchase Payments. In addition, the Contract Value will change to
reflect the performance of the Subaccounts to which you allocate your Purchase
Payments and your Contract Value, as well as to reflect interest credited to
amounts allocated to the Fixed Account. You may withdraw your Contract Value by
making a partial withdrawal or by surrendering your Contract. Upon
Annuitization, we will pay you benefits under the Contract in the form of an
annuity, either for the life of the Annuitant or for a fixed number of years.
All of these features are described in more detail below.
CONTRACT OWNER. As the Contract Owner, you are the person usually entitled to
exercise all rights of ownership under the Contract. You usually are also the
person entitled to receive benefits under the Contract or to choose someone else
to receive benefits. If your Contract was issued under a Qualified Plan,
however, the Plan may limit or modify your rights and privileges under the
Contract and may limit your right to choose someone else to receive benefits. We
will not issue a Contract to a purchaser who has attained age 90, or where the
Annuitant has attained age 90.
ANNUITANT. The Annuitant is the living person whose life span is used to
determine annuity payments. You initially designate an Annuitant in your
application. You may change the Annuitant at any time before annuity payments
begin. If your Contract was issued under a plan qualified under Section 403(b),
408 or 408A of the Tax Code, you must be the Annuitant. You may also designate a
Co-Annuitant, who is a second person on whose life annuity payments depend.
Additional restrictions may apply in the case of Qualified Plans. If you are not
the Annuitant and the Annuitant dies before annuity payments begin, then either
you become the new Annuitant or you must name another person as the new
Annuitant. You must attest that the Annuitant is alive in order to annuitize
your Contract.
MODIFICATION OF THE CONTRACT. Only a Lincoln Benefit officer may approve a
change in or waive any provision of the Contract. Any change or waiver must be
in writing. None of our agents has the authority to change or waive the
provisions of the Contract.
We are permitted to change the terms of the Contract if it is necessary to
comply with changes in the law. If a provision of the Contract is inconsistent
with state law, we will follow state law.
ASSIGNMENT. Before the Annuity Date, if the Annuitant is still alive, you may
assign a Contract issued under a Non-Qualified Plan that is not subject to Title
1 of the Employee Retirement Income Security Act of 1974 ("ERISA"). If a
Contract is issued pursuant to a Qualified Plan or a Non-Qualified Plan that is
subject to Title 1 of ERISA, the law prohibits some types of assignments,
pledges and transfers and imposes special conditions on others. An assignment
may also result in taxes or tax penalties.
We will not be bound by any assignment until we receive written notice of it.
Accordingly, until we receive written notice of an assignment, we will continue
to act as though the assignment had not occurred. We are not responsible for the
validity of any assignment.
BECAUSE OF THE POTENTIAL TAX CONSEQUENCES AND ERISA ISSUES ARISING FROM AN
ASSIGNMENT, YOU SHOULD CONSULT WITH AN ATTORNEY BEFORE TRYING TO ASSIGN YOUR
CONTRACT.
FREE LOOK PERIOD. You may cancel the Contract by returning it to us within 10
days after you receive it, or within whatever longer period may be permitted by
state law. You may return it by delivering it to your agent or mailing it to us.
If you return the Contract, the Contract terminates and, in most states, we will
pay you an amount equal to the Contract Value on the date we receive the
Contract from you. The Contract Value at that time may be more or less than your
Purchase Payments.
In some states, if you exercise your "free look" rights, we are required to
return the amount of your Purchase Payments. Currently, if you live in one of
those states, on the Issue Date we will allocate your Purchase Payment to the
Subaccounts and the Fixed Account Options as you specified in your application.
However, we reserve the right in the future to delay allocating your Purchase
Payments to the Subaccounts you have selected or to the Fixed Account until 20
days after the Issue Date or, if your state's free look period is longer than
ten days, for ten days plus the period required by state law. During that time,
we will allocate your Purchase Payment to the Fidelity Money Market Subaccount.
Your Contract will contain specific information about your free-look rights in
your state.
PURCHASES AND CONTRACT VALUE
MINIMUM PURCHASE PAYMENT. The minimum initial Purchase Payment for a Contract is
$25,000. You must pay it in a lump sum. You may not pay more than $1 million in
Purchase Payments without our prior approval. As a general rule, subsequent
Purchase Payments may be made in amounts of $500 or more. We may lower these
minimums if we choose. We may refuse any Purchase Payment at any time.
AUTOMATIC PAYMENT PLAN. You may make scheduled Purchase Payments of $100 or more
per month by automatic payment
13
<PAGE>
through your bank account. Call or write us for an enrollment form.
ALLOCATION OF PURCHASE PAYMENTS. Your Purchase Payments are allocated to the
Subaccount(s) and the Fixed Account in the proportions that you have selected.
You must specify your allocation in your Contract application, either as
percentages or specific dollar amounts. If you make your allocation in
percentages, the total must equal 100%. We will allocate your subsequent
Purchase Payments in those percentages, until you give us new allocation
instructions. You may not allocate Purchase Payments to the Fixed Account if it
is not available in your state.
You initially may allocate your Purchase Payments to up to twenty-one options,
counting each Subaccount and the Fixed Account as one option. For this purpose,
we will treat all of your allocations to the Fixed Account as one option, even
if you choose more than one Guarantee Period. You may add or delete Subaccounts
and/or the Fixed Account from your allocation instructions, but we will not
execute instructions that would cause you to have Contract Value in more than
twenty-one options. In the future, we may waive this limit.
If your application is complete, we will issue your Contract within two business
days of its receipt at our P.O. Box shown on the first page of this prospectus.
If your application for a Contract is incomplete, we will notify you and seek to
complete the application within five business days. For example, if you do not
fill in allocation percentages, we will contact you to obtain the missing
percentages. If we cannot complete your application within five business days
after we receive it, we will return your application and your Purchase Payment,
unless you expressly permit us to take a longer time.
Usually, we will allocate your initial Purchase Payment to the Subaccounts and
the Fixed Account, as you have instructed us, on the Issue Date. We will
allocate your subsequent Purchase Payments on the date that we receive them at
the next computed Accumulation Unit Value.
In some states, however, we are required to return at least your Purchase
Payment if you cancel your Contract during the "free-look" period. In those
states, we currently will allocate your Purchase Payments on the Issue Date as
you have instructed us, as described above. In the future, however, we reserve
the right, if you live in one of those states, to allocate all Purchase Payments
received during the "free-look period" to the Fidelity Money Market Subaccount.
If we exercise that right and your state's free-look period is ten days, we will
transfer your Purchase Payments to your specified Subaccounts or Fixed Account
20 days after the Issue Date; if your state's free look period is longer, we
will transfer your Purchase Payment after ten days plus the period required by
state law have passed.
We determine the number of Accumulation Units in each Subaccount to allocate to
your Contract by dividing that portion of your Purchase Payment allocated to a
Subaccount by that Subaccount's Accumulation Unit Value on the Valuation Date
when the allocation occurs.
CONTRACT VALUE. We will establish an account for you and will maintain your
account during the Accumulation Period. The total value of your Contract at any
time is equal to the sum of the value of your Accumulation Units in the
Subaccounts you have selected, plus the value of your interest in the Fixed
Account.
SEPARATE ACCOUNT ACCUMULATION UNIT VALUE. As a general matter, the Accumulation
Unit Value for each Subaccount will rise or fall to reflect changes in the share
price of the Portfolio in which the Subaccount invests. In addition, we subtract
from Accumulation Unit Value amounts reflecting the mortality and expense risk
charge, administrative expense charge, and any provision for taxes that have
accrued since we last calculated the Accumulation Unit Value. We determine
transfer fees and contract maintenance charges separately for each Contract.
They do not affect Accumulation Unit Value. Instead, we obtain payment of those
charges and fees by redeeming Accumulation Units.
We determine a separate Accumulation Unit Value for each Subaccount. If we elect
or are required to assess a charge for taxes, we may calculate a separate
Accumulation Unit Value for Contracts issued in connection with Non-Qualified
and Qualified Plans, respectively, within each Subaccount. We determine the
Accumulation Unit Value for each Subaccount Monday through Friday on each day
that the New York Stock Exchange is open for business.
You should refer to the prospectuses for the Portfolios which accompany this
prospectus for a description of how the assets of each Portfolio are valued,
since that determination has a direct bearing on the Accumulation Unit Value of
the corresponding Subaccount and, therefore, your Contract Value.
TRANSFER DURING ACCUMULATION PERIOD. During the Accumulation Period, you may
transfer Contract Value among the Fixed Account and the Subaccounts in writing
or by telephone. Currently, there is no minimum transfer amount. The Contract
permits us to set a minimum transfer amount in the future. You may not make a
transfer that would result in your allocating your Contract Value to more than
twenty-one options under the Contract at one time.
As a general rule, we only make transfers on days when we and the NYSE are open
for business. If we receive your request on one of those days, we will make the
transfer that day. Otherwise, we will make the transfer on the first subsequent
day on which we and the NYSE are open.
If you transfer an amount from the Fixed Account to a Subaccount before the end
of the applicable Guarantee Period or you allocate an amount in the Fixed
Account to a new Guarantee Period before the end of the existing Guarantee
Period, we usually will increase or decrease the amount by a Market Value
Adjustment. The calculation of the
14
<PAGE>
Market Value Adjustment is described in "Market Value Adjustment" on page 22
below. The following types of transfers are not subject to a Market Value
Adjustment:
- - transfers within 30 days after the end of the applicable Guarantee Period;
and
- - transfers that are part of a dollar cost averaging program.
The Contract permits us to defer transfers from the Fixed Account for up to six
months from the date you ask us.
You may not transfer Contract Value into the Dollar Cost Averaging Fixed Account
Option. You may not transfer Contract Value out of the Dollar Cost Averaging
Fixed Account Option except as part of a Dollar Cost Averaging program.
TRANSFERS AUTHORIZED BY TELEPHONE. You may make transfers by telephone, if you
first send us a completed authorization form. The cut off time for telephone
transfer requests is 4:00 p.m. Eastern time. Calls completed before 4:00 p.m.
will be effected on that day at that day's price. Calls completed after 4:00
p.m. will be effected on the next day on which we and the NYSE are open for
business, at that day's price.
We may charge you the transfer fee described on page 29 below, although we
currently are waiving it. In addition, we may suspend, modify or terminate the
telephone transfer privilege at any time without notice.
We use procedures that we believe provide reasonable assurance that telephone
authorized transfers are genuine. For example, we tape telephone conversations
with persons purporting to authorize transfers and request identifying
information. Accordingly, we disclaim any liability for losses resulting from
allegedly unauthorized telephone transfers. However, if we do not take
reasonable steps to help ensure that a telephone authorization is valid, we may
be liable for such losses.
AUTOMATIC DOLLAR COST AVERAGING PROGRAM. Under our Automatic Dollar Cost
Averaging program, you may authorize us to transfer a fixed dollar amount at
fixed intervals from the Dollar Cost Averaging Fixed Account Option or a
Subaccount of your choosing to up to eight options, including other Subaccounts
or the Guaranteed Maturity Fixed Account Option. The interval between transfers
may be monthly, quarterly, or annually, at your option. The transfers will be
made at the Accumulation Unit Value on the date of the transfer. The transfers
will continue until you instruct us otherwise, or until your chosen source of
transfer payments is exhausted. Currently, the minimum transfer amount is $100
per transfer. However, if you wish to Dollar Cost Average to a Guaranteed
Maturity Fixed Account Option, the minimum amount that must be transferred into
any one Option is $500. We may change this minimum or grant exceptions. If you
elect this program, the first transfer will occur one interval after your Issue
Date. You may not use the Dollar Cost Averaging program to transfer amounts from
the Guaranteed Maturity Fixed Account Option.
Your request to participate in this program will be effective when we receive
your completed application at the P.O. Box given on the first page of this
prospectus. Call or write us for a copy of the application. You may elect to
increase, decrease or change the frequency or amount of transfers under a Dollar
Cost Averaging program. We do not apply a Market Value Adjustment to transfers
made as part of a Dollar Cost Averaging program. We will not charge a transfer
fee for Dollar Cost Averaging.
The theory of dollar cost averaging is that you will purchase greater numbers of
units when the unit prices are relatively low rather than when the prices are
higher. As a result, when purchases are made at fluctuating prices, the average
cost per unit is less than the average of the unit prices on the purchase dates.
However, participation in this program does not assure you of a greater profit
from your purchases under the program; nor will it prevent or necessarily reduce
losses in a declining market. You may not use Dollar Cost Averaging and
Portfolio Rebalancing at the same time.
PORTFOLIO REBALANCING. Portfolio Rebalancing allows you to maintain the
percentage of your Contract Value allocated to each Subaccount at a pre-set
level. For example, you could specify that 30% of your Contract Value should be
in the Balanced Portfolio, 40% in the Growth Portfolio-Janus Aspen Series and
30% in Federated High Income Bond Fund II. Over time, the variations in each
Subaccount's investment results will shift the balance of your Contract Value
allocations. Under the Portfolio Rebalancing feature, each period, if the
allocations change from your desired percentages, we will automatically transfer
your Contract Value, including new Purchase Payments (unless you specify
otherwise), back to the percentages you specify. Portfolio Rebalancing is
consistent with maintaining your allocation of investments among market
segments, although it is accomplished by reducing your Contract Value allocated
to the better performing segments.
You may choose to have rebalances made monthly, quarterly, semi-annually, or
annually until your Annuity Date. Portfolio Rebalancing is not available after
you annuitize. We will not charge a transfer fee for Portfolio Rebalancing. No
more than eight Subaccounts can be included in a Portfolio Rebalancing program
at one time. You may not include the Fixed Account in a Portfolio Rebalancing
program.
You may request Portfolio Rebalancing at any time before your Annuity Date by
submitting a completed written request to us at the P.O. Box given on the first
page of this prospectus. Please call or write us for a copy of the request form.
If you stop Portfolio Rebalancing, you must wait 30 days to begin again. In your
request, you may specify a date for your first rebalancing. If you specify a
date fewer than 30 days after your Issue Date, your first rebalance will be
delayed one month. If you request Portfolio Rebalancing in your Contract
application and do not specify a date for your first rebalancing, your first
rebalance will occur one period after the Issue Date. For example, if you
specify quarterly
15
<PAGE>
rebalancing, your first rebalance will occur three months after your Issue Date.
Otherwise, your first rebalancing will occur one period after we receive your
completed request form. All subsequent rebalancing will occur at the intervals
you have specified on the day of the month that coincides with the same day of
the month as your Contract Anniversary Date.
Generally, you may change the allocation percentages, frequency, or choice of
Subaccounts at any time. If your total Contract Value subject to rebalancing
falls below any minimum value that we may establish, we may prohibit or limit
your use of Portfolio Rebalancing. You may not use Dollar Cost Averaging and
Portfolio Rebalancing at the same time. We may change, terminate, limit, or
suspend Portfolio Rebalancing at any time.
THE INVESTMENT AND FIXED ACCOUNT OPTIONS
SEPARATE ACCOUNT INVESTMENTS
THE PORTFOLIOS. Each of the Subaccounts of the Separate Account invests in the
shares of one of the Portfolios. Each Portfolio is either an open-end management
investment company registered under the Investment Company Act of 1940 or a
separate investment series of an open-end management investment company. We have
briefly described the Portfolios below. You should consult the current
prospectuses for the Portfolios for more detailed and complete information
concerning the Portfolios. If you do not have a prospectus for a Portfolio,
contact us and we will send you a copy. Appendix A contains a description of how
advertised performance data for the Subaccounts are computed.
We do not promise that the Portfolios will meet their investment objectives.
Amounts you have allocated to Subaccounts may grow in value, decline in value,
or grow less than you expect, depending on the investment performance of the
Portfolios in which those Subaccounts invest. You bear the investment risk that
those Portfolios possibly will not meet their investment objectives. You should
carefully review their prospectuses before allocating amounts to the Subaccounts
of the Separate Account.
JANUS ASPEN SERIES (investment adviser: Janus Capital Corporation)
FLEXIBLE INCOME PORTFOLIO seeks to maximize total return from a combination of
current income and capital appreciation, with an emphasis on current income.
This Portfolio invests in all types of income-producing securities. This
Portfolio may have substantial holdings of debt securities rated below
investment grade. Investments in such securities present special risks; you are
urged to carefully read the risk disclosure in the accompanying Prospectus for
the Portfolio before allocating amounts to the Janus Flexible Income Subaccount.
BALANCED PORTFOLIO seeks long-term growth of capital balanced by current income.
This 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.
GROWTH PORTFOLIO seeks long-term growth of capital by investing primarily in a
diversified portfolio of common stocks of a large number of issuers of any size.
Generally, this Portfolio emphasizes issuers with larger market capitalizations.
AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital. It is a
non-diversified fund. It normally invests at least 50% of its equity assets in
securities issued by medium-sized companies, which are companies whose market
capitalizations at the time of purchase by the Portfolio fall within the same
range as companies in the S&P MidCap 400 Index. This range is expected to change
on a regular basis. This Portfolio may invest its remaining assets in smaller or
larger issuers.
WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital by investing in a
diversified portfolio of common stocks of foreign and domestic issuers of any
size. This Portfolio normally invests in issuers from at least five different
countries including the United States.
FEDERATED INSURANCE MANAGEMENT SERIES (investment adviser: Federated Advisers)
FEDERATED UTILITY FUND II'S investment objective is to achieve high current
income and moderate capital appreciation. The Portfolio invests primarily in
equity and debt securities of utility companies that produce, transmit, or
distribute gas and electric energy, as well as those companies that provide
communications facilities, such as telephone and telegraph companies.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II'S investment objective is to
provide current income. The Portfolio invests in direct obligations of the U.S.
Government or its agencies or instrumentalities, and securities guaranteed by
the U.S. Government, its agencies, or instrumentalities. This Portfolio may also
invest in certain collateralized mortgage obligations and repurchase agreements.
FEDERATED HIGH INCOME BOND FUND II'S investment objective is to seek high
current income. This Portfolio invests at least 65% of its assets in lower rated
corporate debt obligations, such as preferred stocks, bonds, debentures, notes,
equipment lease certificates and equipment trust certificates. Some of these
fixed income securities may involve equity features. Under normal circumstances,
this Portfolio will not invest more than 10% of the value of its total assets in
equity securities.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND (investment adviser: Fidelity
Management & Research Company)
MONEY MARKET PORTFOLIO seeks to obtain as high a level of current income as is
consistent with preserving capital and providing liquidity. This Portfolio will
invest in high quality
16
<PAGE>
U.S. dollar-denominated money market securities of domestic and foreign
insurers, including U.S. government securities and repurchase agreements.
EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily in
income-producing equity securities. The goal is to achieve a higher yield than
the composite yield of the S&P 500 Composite Stock Price Index. At least 65% of
this Portfolio's assets will be invested in income-producing common or preferred
stock. The Portfolio, however, has the flexibility to invest the balance in all
types of domestic and foreign securities, including bonds.
GROWTH PORTFOLIO seeks to achieve capital appreciation. This Portfolio usually
purchases common stocks, although its investments are not restricted to any one
type of security.
OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. At least 65% of this Portfolio's assets will
be invested in securities of issuers outside of the United States. The Portfolio
normally diversifies its investments across countries and regions.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II (investment adviser: Fidelity
Management & Research Company)
ASSET MANAGER PORTFOLIO seeks to obtain high total return with reduced risk over
the long term by allocating its assets among domestic and foreign stocks, bonds,
and short-term money market securities. Usually, this Portfolio's assets will be
allocated within the following guidelines: 30-70% in stocks (equities); 20-60%
in bonds (intermediate to long-term); and 0-50% in short-term instruments.
CONTRAFUND PORTFOLIO seeks capital appreciation by investing mainly in equity
securities of companies whose value the Portfolio's adviser believes is not
fully recognized by the public. This Portfolio usually invests primarily in
common stock and securities convertible into common stock, but it may invest in
other types of securities.
INDEX 500 PORTFOLIO seeks long-term capital growth through the purchase of a
portfolio of securities that broadly represents the U.S. stock market, as
measured by the S&P 500. By investing to match the return of the S&P 500, the
Portfolio seeks to keep expenses low.
THE ALGER AMERICAN FUND (investment adviser: Fred Alger Management, Inc.)
INCOME AND GROWTH PORTFOLIO seeks primarily to provide a high level of dividend
income. Capital appreciation is a secondary objective of the Portfolio. Except
during temporary defensive periods, the Portfolio attempts to invest 100%, and
it is a fundamental policy of the Portfolio to invest at least 65%, of its total
assets in dividend paying equity securities.
SMALL CAPITALIZATION PORTFOLIO seeks long-term capital appreciation. Except
during temporary defensive periods, the Portfolio invests at least 65% of its
total assets in equity securities of companies that at the time of purchase have
total market capitalization within the range of companies included in the
Russell 2000 Growth Index or the S&P SmallCap 600 Index. The Portfolio may
invest its remaining assets in larger or smaller issuers.
GROWTH PORTFOLIO seeks long-term capital appreciation. Under normal
circumstances, the Portfolio invests at least 65% of its total assets in equity
securities of companies that have total market capitalization of $1 billion or
greater. The Portfolio may invest up to 35% of its total assets in equity
securities of companies that have total market capitalization of less than $1
billion.
MIDCAP GROWTH PORTFOLIO seeks long-term capital appreciation. Under normal
circumstances, the Portfolio invests at least 65% of its total assets in equity
securities of companies that have total market capitalization within the range
of companies included in the S&P MidCap 400 Index.
LEVERAGED ALLCAP PORTFOLIO seeks long-term capital appreciation. Except during
temporary defensive periods, the Portfolio invests at least 85% of its net
assets in equity securities of companies of any size. The Portfolio may purchase
put and call options and sell (write) covered call and put options on securities
and securities indexes to increase gain and to hedge against the risk of
unfavorable price movements, and may enter into futures contracts on securities
indexes and purchase and sell call and put options on these futures contracts.
The Portfolio may also borrow money for the purchase of additional securities.
SCUDDER VARIABLE LIFE INVESTMENT FUND (investment adviser: Scudder, Kemper
Investments, Inc.) The Scudder Variable Life Investment Fund has two classes of
shares. The Subaccounts invest in Class A shares, which do not impose
distribution fees.
BOND PORTFOLIO seeks high income from a high quality portfolio of debt
securities. Under normal circumstances, this Portfolio invests at least 65% of
its assets in bonds including those of the U.S. Government and its agencies and
those of corporations and other notes and bonds paying high current income. This
Portfolio can invest in a broad range of short, intermediate and long-term
securities.
BALANCED PORTFOLIO seeks a balance of growth and income from a diversified
portfolio of equity and fixed income securities. The Portfolio also seeks
long-term preservation of capital through a quality-oriented investment approach
that is designed to reduce risk. The Portfolio will invest its assets in equity
securities, debt securities with maturities generally exceeding one year, and
money market instruments and other debt securities with maturities generally not
exceeding thirteen months. Not more than 75% of this Portfolio's net assets may
be invested in stocks or other equity investments. Generally, 25%-50% of the
Portfolio's net assets are invested in bonds.
GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital, current income
and growth of income. In pursuing these
17
<PAGE>
three objectives, the Portfolio invests primarily in common stocks, preferred
stocks, and securities convertible into common stocks of companies which offer
the prospect for growth of earnings while paying higher than average current
dividends. The Portfolio allocates its investments among different industries
and companies, and changes its portfolio securities for investments
considerations and not for trading purposes.
GLOBAL DISCOVERY PORTFOLIO seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
located throughout the world. The Portfolio is designed for investors looking
for above-average appreciation potential (when compared with the overall
domestic stock market as reflected by the S&P 500 Stock Composite Price Index)
and the benefits of investing globally, but who are willing to accept
above-average stock market risk, the impact of currency fluctuation, and little
or no current income. The Portfolio generally invests in small, rapidly growing
companies that offer the potential for above-average returns relative to larger
companies, yet are frequently overlooked and thus undervalued by the market.
INTERNATIONAL PORTFOLIO seeks long-term growth of capital primarily through
diversified holdings of marketable foreign equity investments. The Portfolio
invests in companies, wherever organized, which do business primarily outside
the United States. The Portfolio intends to diversify investments among several
countries and to have represented in its holdings business activities in not
less than three different countries, excluding the United States. The Portfolio
invests primarily in equity securities of established companies, listed on
foreign exchanges, which the adviser believes have favorable characteristics. It
may also invest in fixed income securities of foreign governments and companies.
STRONG VARIABLE INSURANCE FUNDS, INC. (investment adviser: Strong Capital
Management, Inc.)
DISCOVERY FUND II seeks capital growth. The Portfolio usually emphasizes equity
investments, although it has the flexibility to invest in any security the
adviser believes has the potential for capital appreciation. The Portfolio's
strategy is to invest in a blend of small, mid- and large-cap companies that are
in good businesses, are headed by capable and driven management, and trade at
attractive valuations.
GROWTH FUND II seeks capital growth. The Portfolio invests primarily in equity
securities that the adviser believes have above-average growth prospects and are
selling at reasonable valuations. The Portfolio generally has over half of its
assets in small- and mid-cap issues as these companies tend to have the highest
growth rates.
STRONG OPPORTUNITY FUND II, INC. (investment adviser: Strong Capital Management,
Inc.)
OPPORTUNITY FUND II seeks capital growth. The Portfolio currently emphasizes
medium-sized companies that the adviser believes are under-researched and
attractively valued. To achieve its investment goals, the Portfolio seeks to
find well-managed companies that have sustainable growth prospects but that are
selling at prices below their private market values.
T. ROWE PRICE INTERNATIONAL SERIES, INC. (investment adviser: Rowe Price-Fleming
International, Inc., a joint venture between T. Rowe Price & Associates, Inc.
and Robert Fleming Holdings, Ltd.)
INTERNATIONAL STOCK PORTFOLIO seeks long-term growth of capital through
investments primarily in common stocks of established, non-U.S. companies. The
Portfolio invests substantially all of its assets outside the United States and
broadly diversifies its investments among countries throughout the world --
developed, newly industrialized and emerging.
T. ROWE PRICE EQUITY SERIES, INC. (investment adviser: T. Rowe Price Associates,
Inc.)
NEW AMERICA GROWTH PORTFOLIO seeks long-term growth of capital through
investment primarily in the common stocks of U.S. growth companies which operate
in service industries. The Portfolio will invest most of its assets in service
companies, regardless of size, that the adviser believes to be above average
performers in their fields. The Portfolio may invest up to 25% of its assets
outside the service sector.
MID-CAP GROWTH PORTFOLIO seeks long-term growth of capital by investing
primarily in the common stocks of companies with medium-sized market
capitalizations and the potential for above-average earnings growth. Most of the
assets will be invested in U.S. common stocks, but the Portfolio also may invest
in other types of securities, such as foreign securities, when consistent with
the Portfolio's investment objective.
EQUITY INCOME PORTFOLIO seeks to provide high current dividend income as well as
long-term capital appreciation by investing primarily in common stocks of
established companies. Under normal circumstances, the Portfolio usually will
invest at least 65% of its assets in common stocks of established companies
paying above-average dividends which are expected to have favorable prospects
for dividend growth and capital appreciation. The Portfolio may also invest in
other securities such as fixed income and convertible securities.
MFS VARIABLE INSURANCE TRUST (investment adviser: Massachusetts Financial
Services)
GROWTH WITH INCOME SERIES seeks reasonable current income, as well as long-term
growth of capital and income. The Portfolio invests in stocks of companies that
the adviser considers to be of high or improving investment quality. The
Portfolio has the flexibility to invest in derivative securities when its
managers believe such securities can provide better value relative to direct
investments in stocks and bonds.
RESEARCH SERIES seeks to provide long-term growth of capital and future income.
The Portfolio invests in the common stocks of companies the adviser believes
possess better-than-
18
<PAGE>
average prospects for long-term growth. The Portfolio may invest up to 20% of
its net assets in foreign and emerging market securities. Investing in foreign
and emerging market securities involves special risks and may increase share
price volatility. The Portfolio has the flexibility to invest in derivative
securities when its adviser believes such securities can provide better value
relative to direct investments in stocks and bonds.
EMERGING GROWTH SERIES seeks to provide long-term growth of capital. The
Portfolio invests primarily in common stocks of companies that are early in
their life cycles but which have the potential to become major enterprises. The
Portfolio may also invest in more established companies whose earnings growth
the adviser expects to accelerate because of special factors. Investing in
emerging growth companies involves greater risk than is customarily associated
with more established companies. The Portfolio also may invest up to 25% of its
net assets in foreign and emerging market securities. The Portfolio has the
flexibility to invest in derivative securities when its adviser believes such
securities can provide better value relative to direct investments in stocks or
bonds.
TOTAL RETURN SERIES seeks to provide above-average current income (compared to a
portfolio invested entirely in equity securities) consistent with the prudent
employment of capital. The Portfolio also seeks to provide reasonable
opportunity for growth of capital and income. The Portfolio invests in both
equities and fixed income securities. The equity segment is actively managed
with a value-oriented style of investing. The fixed income segment is actively
managed through shifts in maturity, duration, and sector components. The
Portfolio may invest up to 20% of its assets in foreign and emerging market
securities. The Portfolio has the flexibility to invest in derivative securities
when its adviser believes such securities can provide better value relative to
direct investments in stocks or bonds.
NEW DISCOVERY SERIES seeks capital appreciation. This Portfolio seeks to achieve
its objective by investing under normal market conditions at least 65% of its
total assets in companies that its adviser believes offer superior prospects for
growth. Those securities may either be listed on securities exchanges or traded
in the over-the-counter markets and may be U.S. or foreign companies.
Each Portfolio is subject to certain investment restrictions and policies which
may not be changed without the approval of a majority of the shareholders of the
Portfolio. See the accompanying Prospectuses of the Portfolios for further
information.
We automatically reinvest all dividends and capital gains distributions from the
Portfolios in shares of the distributing Portfolio at their net asset value. The
income and realized and unrealized gains or losses on the assets of each
Subaccount are separate and are credited to or charged against the particular
Subaccount without regard to income, gains or losses from any other Subaccount
or from any other part of our business. We will use the net Purchase Payments
you allocate to a Subaccount to purchase shares in the corresponding Portfolio
and will redeem shares in the Portfolios to meet Contract obligations or make
adjustments in reserves. The Portfolios are required to redeem their shares at
net asset value and to make payment within seven days.
Certain of the Portfolios sell their shares to separate accounts underlying both
variable life insurance and variable annuity contracts. It is conceivable that
in the future it may be unfavorable for variable life insurance separate
accounts and variable annuity separate accounts to invest in the same Portfolio.
Although neither we nor any of the Portfolios currently foresees any such
disadvantages either to variable life insurance or variable annuity contract
owners, each Portfolio's Board of Directors intends to monitor events in order
to identify any material conflicts between variable life and variable annuity
contract owners and to determine what action, if any, should be taken in
response thereto. If a Board of Directors were to conclude that separate
investment funds should be established for variable life and variable annuity
separate accounts, Lincoln Benefit will bear the attendant expenses.
VOTING RIGHTS. As a general matter, you do not have a direct right to vote the
shares of the Portfolios held by the Subaccounts to which you have allocated
your Contract Value. Under current law, however, you are entitled to give us
instructions on how to vote those shares on certain matters. We will notify you
when your instructions are needed. We will also provide proxy materials or other
information to assist you in understanding the matter at issue. We will
determine the number of shares for which you may give voting instructions as of
the record date set by the relevant Portfolio for the shareholder meeting at
which the vote will occur.
As a general rule, before the Annuity Date, you are the person entitled to give
voting instructions. After the Annuity Date, the payee is that person.
Retirement plans, however, may have different rules for voting by plan
participants.
If you send us written voting instructions, we will follow your instructions in
voting the Portfolio shares attributable to your Contract. If you do not send us
written instructions, we will vote the shares attributable to your Contract in
the same proportions as we vote the shares for which we have received
instructions from other Contract Owners. We will vote shares that we hold in the
same proportions as we vote the shares for which we have received instructions
from other Contract Owners.
We may, when required by state insurance regulatory authorities, disregard
Contract Owner voting instructions if the instructions require that the shares
be voted so as to cause a change in the sub-classification or investment
objective of one or more of the Portfolios or to approve or disapprove an
investment advisory contract for one or more of the Portfolios.
19
<PAGE>
In addition, we may disregard voting instructions in favor of changes initiated
by Contract Owners in the investment objectives or the investment adviser of the
Portfolios if we reasonably disapprove of the proposed change. We would
disapprove a proposed change only if the proposed change is contrary to state
law or prohibited by state regulatory authorities or we reasonably conclude that
the proposed change would not be consistent with the investment objectives of
the Portfolio or would result in the purchase of securities for the Portfolio
which vary from the general quality and nature of investments and investment
techniques utilized by the Portfolio. If we disregard voting instructions, we
will include a summary of that action and our reasons for that action in the
next semi-annual financial report to you.
This description reflects our view of currently applicable law. If the law
changes or our interpretation of the law changes, we may decide that we are
permitted to vote the Portfolio shares without obtaining instructions from our
Contract Owners, and we may choose to do so.
ADDITIONS, DELETIONS, AND SUBSTITUTIONS OF SECURITIES. If the shares of any of
the Portfolios are no longer available for investment by the Separate Account or
if, in the judgment of our Board of Directors, further investment in the shares
of a Portfolio is no longer appropriate in view of the purposes of the Contract,
we may add or substitute shares of another Portfolio or mutual fund for
Portfolio shares already purchased or to be purchased in the future by Purchase
Payments under the Contract. Any substitution will comply with the requirements
of the 1940 Act.
We also reserve the right to make the following changes in the operation of the
Separate Account and the Subaccounts:
(a) to operate the Separate Account in any form permitted by law;
(b) to take any action necessary to comply with applicable law or obtain and
continue any exemption from applicable laws;
(c) to transfer assets from one Subaccount to another, or from any subaccount to
our general account;
(d) to add, combine, or remove Subaccounts in the Separate Account; and
(e) to change the way in which we assess charges, as long as the total charges
do not exceed the amount currently charged the Separate Account and the
Portfolios in connection with the Contracts.
If we take any of these actions, we will comply with the then applicable legal
requirements.
THE FIXED ACCOUNT
GENERAL. You may allocate part or all of your Purchase Payments to the Fixed
Account in states where it is available. Amounts allocated to the Fixed Account
become part of the general assets of Lincoln Benefit. Allstate Life invests the
assets of the general account in accordance with applicable laws governing the
investments of insurance company general accounts. The Fixed Account may not be
available in all states. Please contact us at 1-800-865-5237 for current
information.
GUARANTEED MATURITY FIXED ACCOUNT OPTION. We will credit interest to each amount
allocated to the Guaranteed Maturity Fixed Account Option at a specified rate
for a specified Guarantee Period. You select the Guarantee Period for each
amount that you allocate to this option. We will declare the interest rate that
we will guarantee to credit to that amount for that Guarantee Period. Each
amount allocated to a Guarantee Period under this option must be at least $500.
We reserve the right to limit the number of additional Purchase Payments that
may be allocated to this option.
We will tell you what interest rates and Guarantee Periods we are offering at a
particular time. We may offer Guarantee Periods ranging from one to ten years in
length. We will decide in our discretion which Guarantee Periods to offer.
Currently, we offer Guarantee Periods of one, three, five, seven and ten years.
In the future we may offer Guarantee Periods of different lengths or stop
offering some Guarantee Periods.
We will credit interest daily to each amount allocated to a Guarantee Period
under this option at a rate which compounds to the effective annual interest
rate that we declared at the beginning of the applicable Guarantee Period. We
will not change the interest rate credited to a particular allocation until the
end of the relevant Guarantee Period. We may declare different interest rates
for Guarantee Periods of the same length that begin at different times.
20
<PAGE>
The following example illustrates how a Purchase Payment allocated to this
option would grow, given an assumed Guarantee Period and effective annual
interest rate:
EXAMPLE
Purchase Payment $50,000
Guarantee Period 5 years
Effective Annual Rate 4.50%
END OF CONTRACT YEAR
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$50,000.00
X 1.045
Beginning Contract Value ---------
X (1 + Effective Annual Rate) $52,250.00
$52,250.00
X 1.045
Contract Value at end of Contract Year ---------
X (1 + Effective Annual Rate) $54,601.25
$54,601.25
X 1.045
Contract Value at end of Contract Year ---------
X (1 + Effective Annual Rate) $57,058.31
$57,058.31
X 1.045
Contract Value at end of Contract Year ---------
X (1 + Effective Annual Rate) $59,625.93
$59,625.93
X 1.045
Contract Value at end of Contract Year ---------
X (1 + Effective Annual Rate) $62,309.10
</TABLE>
Total Interest Credited During Guarantee Period = $12,309.10 ($62,309.10 -
$50,000)
NOTE: This example assumes no withdrawals during the entire five year Guarantee
Period. If you were to make a partial withdrawal, the amount withdrawn might be
increased or decreased by a Market Value Adjustment. The hypothetical interest
rate is for illustrative purposes only and is not intended to predict future
interest rates to be declared under the Contract.
We have no specific formula for determining the rate of interest that we will
declare initially or in the future. We will set those interest rates based on
relevant factors such as then current interest rates, regulatory and tax
requirements, our sales commission and administrative expenses, general economic
trends, and competitive factors. For current interest rate information, please
contact us at 1-800-865-5237.
WE WILL DETERMINE THE INTEREST RATES TO BE DECLARED IN OUR SOLE DISCRETION. WE
CAN NEITHER PREDICT NOR GUARANTEE WHAT THOSE RATES WILL BE IN THE FUTURE.
At the end of each Guarantee Period, we will mail you a notice asking you what
to do with the relevant amount, including the accrued interest. During the
30-day period after the end of the Guarantee Period, you may:
(1) take no action. If so, we will automatically keep the relevant amount in the
Guaranteed Maturity Fixed Account Option. The new Guarantee Period will be the
same length as the expiring Guarantee Period and will begin on the day the
previous Guarantee Period ends. The new interest rate will be our then current
declared rate for Guarantee Periods of that length; or
(2) allocate the relevant Contract Value to one or more new Guarantee Periods of
your choice in the Guaranteed Maturity Fixed Account Option. The new Guarantee
Period(s) will begin on the day the previous Guarantee Period ends. The new
interest rate will be our then current declared rate for those Guarantee
Periods; or
(3) instruct us to transfer all or a portion of the relevant amount to one or
more Subaccounts. We will effect the transfer on the day we receive your
instructions. We will not adjust the amount transferred to include a Market
Value Adjustment; or
(4) withdraw all or a portion of the relevant amount through a partial
withdrawal. We will not adjust the amount withdrawn to include a Market Value
Adjustment. The amount withdrawn will be deemed to have been withdrawn on the
day the Guarantee Period ends.
Under our Automatic Laddering Program, you may choose, in advance, to use
Guarantee Periods of the same length for all renewals in the Guaranteed Maturity
Fixed Account Option. You can select this program at any time during the
Accumulation Period, including on the Issue Date. We will apply renewals to
Guarantee Periods of the selected length until you direct us in writing to stop.
We may stop offering
21
<PAGE>
this program at any time. For additional information, please call us at
1-800-865-5237.
MARKET VALUE ADJUSTMENT. We may increase or decrease the amount of some
transactions involving your interest in the Fixed Account to include a Market
Value Adjustment. The formula for determining Market Value Adjustments reflects
changes in interest rates since the beginning of the relevant Guarantee Period.
As a result, you will bear some of the investment risk on amounts allocated to
the Guaranteed Maturity Fixed Account Option.
As a general rule, we will apply a Market Value Adjustment to the following
transactions involving your Fixed Account balance:
(1) when you withdraw funds from the Guaranteed Maturity Fixed Account Option;
(2) when you transfer funds from the Guaranteed Maturity Fixed Account Option to
the Subaccounts;
(3) when you allocate part of your balance in the Guaranteed Maturity Fixed
Account Option to a new Guarantee Period before the end of the existing
Guarantee Period;
(4) when you annuitize your Contract; and
(5) when we pay a death benefit.
We will not apply a Market Value Adjustment to a transaction, to the extent
that: (1) it occurs within 30 days after the end of a Guarantee Period
applicable to the funds involved in the transaction; (2) it is part of a Dollar
Cost Averaging program; or (3) you make a withdrawal to satisfy the IRS'
required minimum distribution rules for this Contract.
The formula for calculating Market Value Adjustments is set forth in Appendix B
to this prospectus, which also contains additional examples of the application
of the Market Value Adjustment. This formula primarily compares: (1) the
Treasury Rate at the time of the relevant transaction for a maturity equal in
length to the relevant Guarantee Period; and (2) the Treasury Rate at the
beginning of the Guarantee Period for a maturity equal in length to the
Guarantee Period. Generally, if the Treasury Rate at the beginning of the
Guarantee Period is higher than the corresponding current Treasury Rate, then
the Market Value Adjustment will increase the amount payable to you or
transferred. Similarly, if the Treasury Rate at the beginning of the Guarantee
Period is lower than the corresponding current Treasury Rate, then the Market
Value Adjustment will reduce the amount payable to you or transferred.
For example, assume that you purchased a Contract and selected an initial
Guarantee Period of five years and the five-year Treasury Rate for that duration
is 4.50%. Assume that at the end of three years, you make a partial withdrawal.
If, at that later time, the current five-year Treasury Rate is 4.20%, then the
Market Value Adjustment will be positive, which will result in an increase in
the amount payable to you. Similarly, if the current five-year Treasury Rate is
4.80%, then the Market Value Adjustment will be negative, which will result in a
decrease in the amount payable to you.
DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. You may also allocate Purchase
Payments to the Dollar Cost Averaging Fixed Account Option. We will credit
interest to Purchase Payments allocated to this option for up to one year at the
current rate that we declare when you make the allocation. The effective annual
rate will never be less than 3%. You may not transfer funds to this option from
the Subaccounts or the Guaranteed Maturity Fixed Account Option. We will follow
your instructions in transferring amounts from this option to the Subaccounts or
the Guaranteed Maturity Fixed Account Option, as described in "Automatic Dollar
Cost Averaging Program" on page 15 of this prospectus. We will not adjust the
amounts transferred by a Market Value Adjustment.
ANNUITY BENEFITS
ANNUITY DATE. You may select the Annuity Date, which is the date on which
annuity payments are to begin, in your application. The Annuity Date must always
be the business day immediately following the tenth day of a calendar month.
The Annuity Date may be no later than the Latest Annuity Date. As a general
rule, the Latest Annuity Date is the later of the 10th Contract Anniversary or
the Annuitant's 90th birthday. If your Contract was issued pursuant to a
Qualified Plan, however, the Tax Code generally requires you to begin to take at
least a minimum distribution by the later of:
- - the year of your separation from service; or
- - April 1 of the calendar year following the calendar year in which you attain
age 70 1/2.
If your Contract is issued pursuant to Section 408 of the Tax Code (traditional
IRAs), you must begin taking minimum distributions by April 1 of the calendar
year following the calendar year in which you reach age 70 1/2. No minimum
distributions are required by the Tax Code for Contracts issued pursuant to
Section 408A (Roth IRAs).
If you are in a Qualified Plan, we may require you to annuitize by the date
required by the Tax Code, unless you show us that you are meeting the minimum
distribution requirements in some other way.
If you do not select an Annuity Date, the Latest Annuity Date will automatically
become the Annuity Date. You may change the Annuity Date by writing to us at the
address given on the first page of the prospectus.
ANNUITY OPTIONS. You may elect an Annuity Option at any time before the Annuity
Date. As part of your election, you may choose the length of the applicable
guaranteed payment period within the limits available for your chosen Option. If
you do not select an Annuity Option, we will pay monthly
22
<PAGE>
annuity payments in accordance with the applicable default Option. The default
Options are:
- - Option A with 10 years (120 months) guaranteed, if you have designated only
one Annuitant; and
- - Option B with 10 years (120 months) guaranteed, if you have designated joint
Annuitants.
You may freely change your choice of Annuity Option, as long as you request the
change at least thirty days before the Annuity Date.
Three Annuity Options are generally available under the Contract. Each is
available in the form of:
- - a Fixed Annuity;
- - a Variable Annuity; or
- - a combination of both Fixed and Variable Annuity.
The three Annuity Options are:
OPTION A, LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 5 TO 20 YEARS. We make
periodic payments at least as long as the Annuitant lives. If the Annuitant dies
before all of the guaranteed payments have been made, we will pay the remaining
guaranteed payments to the Beneficiary.
OPTION B, JOINT AND SURVIVOR ANNUITY, WITH PAYMENTS GUARANTEED FOR 5 TO 20
YEARS. We make periodic payments at least as long as either the Annuitant or the
joint Annuitant is alive. If both the Annuitant and the Joint Annuitant die
before all of the guaranteed payments have been made, we will pay the remaining
guaranteed payments to the Beneficiary.
OPTION C, PAYMENTS FOR A SPECIFIED PERIOD CERTAIN OF 5 YEARS TO 30 YEARS. We
make periodic payments for the period you have chosen. If the Annuitant dies
before all of the guaranteed payments have been made, we will pay the remaining
guaranteed payments to the Beneficiary.
If you purchased your Contract under a retirement plan, you may have a more
limited selection of Annuity Options to choose from. You should consult your
Plan documents to see what is available.
You may not "annuitize" your Contract for a lump sum payment. Instead, before
the Annuity Date you may surrender your Contract for a lump sum. As described on
page 21 above, however, we will increase or decrease your surrender proceeds by
any applicable Market Value Adjustment.
OTHER OPTIONS. We may have other Annuity Options available. You may obtain
information about them by writing or calling us.
If your Contract is issued under Sections 401, 403(b), 408 or 408A of the Tax
Code, we will only make payments to you and/or your spouse.
ANNUITY PAYMENTS: GENERAL. On the Annuity Date, we will apply the Annuitized
Value of your Contract to the Annuity Option you have chosen. Your annuity
payments may consist of Variable Annuity payments or Fixed Annuity payments or a
combination of the two. We will determine the amount of your annuity payments as
described in "Variable Annuity Payments" and "Fixed Annuity Payments" on pages
23-24 below.
You must notify us in writing at least 30 days before the Annuity Date how you
wish to allocate your Annuitized Value between Variable Annuity and Fixed
Annuity payments. You must apply at least the Contract Value in the Fixed
Account on the Annuity Date to Fixed Annuity payments. If you wish to apply any
portion of your Fixed Account balance to your Variable Annuity payments, you
should plan ahead and transfer that amount to the Subaccounts prior to the
Annuity Date. If you do not tell us how to allocate your Contract Value among
Fixed and Variable Annuity payments, we will apply your Contract Value in the
Separate Account to Variable Annuity payments and your Contract Value in the
Fixed Account to Fixed Annuity payments.
Annuity payments begin on the Annuity Date. We make subsequent annuity payments
on the tenth of the month or, if the NYSE is closed on that day, the next day on
which the NYSE is open for business.
Annuity payments will be made in monthly, quarterly, semi-annual or annual
installments as you select. If the amount available to apply under an Annuity
Option is less than $5,000, however, and state law permits, we may pay you a
lump sum instead of the periodic payments you have chosen. In addition, if the
first annuity payment would be less than $50, and state law permits us, we may
reduce the frequency of payments so that the initial payment will be at least
$50.
We may defer for up to 15 days the payment of any amount attributable to a
Purchase Payment made by check to allow the check reasonable time to clear.
YOU MAY NOT WITHDRAW CONTRACT VALUE DURING THE ANNUITY PERIOD, IF WE ARE MAKING
PAYMENTS TO YOU UNDER ANY ANNUITY OPTION INVOLVING LIFE CONTINGENCIES.
VARIABLE ANNUITY PAYMENTS. One basic objective of the Contract is to provide
Variable Annuity Payments which will to some degree respond to changes in the
economic environment. The amount of your Variable Annuity Payments will depend
upon the investment results of the Subaccounts you have selected, any premium
taxes, the age and sex of the Annuitant, and the Annuity Option chosen. We
guarantee that the Payments will not be affected by (1) actual mortality
experience and (2) the amount of our administration expenses.
We cannot predict the total amount of your Variable Annuity payments. The
Variable Annuity payments may be more or less than your total Purchase Payments
because (a) Variable Annuity payments vary with the investment results of the
underlying Portfolios; and (b) Annuitants may die before their actuarial life
expectancy is achieved.
23
<PAGE>
The length of any guaranteed payment period under your selected Annuity Option
will affect the dollar amounts of each Variable Annuity payment. As a general
rule, longer guarantee periods result in lower periodic payments, all other
things being equal. For example, if a life Annuity Option with no minimum
guaranteed payment period is chosen, the Variable Annuity payments will be
greater than Variable Annuity payments under an Annuity Option for a minimum
specified period and guaranteed thereafter for life.
The investment results of the Subaccounts to which you have allocated your
Contract Value will also affect the amount of your periodic payment. In
calculating the amount of the periodic payments in the annuity tables in the
Contract, we assumed an annual investment rate of 3 1/2%. If the actual net
investment return is less than the assumed investment rate, then the dollar
amount of the Variable Annuity payments will decrease. The dollar amount of the
Variable Annuity payments will stay level if the net investment return equals
the assumed investment rate and the dollar amount of the Variable Annuity
payments will increase if the net investment return exceeds the assumed
investment rate. You should consult the Statement of Additional Information for
more detailed information as to how we determine Variable Annuity Payments.
FIXED ANNUITY PAYMENTS. You may choose to apply a portion of your Annuitized
Value to provide Fixed Annuity payments. We determine the Fixed Annuity payment
amount by applying the applicable Annuitized Value to the Annuity Option you
have selected.
As a general rule, subsequent Fixed Annuity payments will be equal in amount to
the initial payment. However, as described in "Transfers During the Annuity
Period" below, after the Annuity Date, you will have a limited ability to
increase the amount of your Fixed Annuity payments by making transfers from the
Subaccounts.
We may defer making Fixed Annuity payments for a period of up to six months or
whatever shorter time state law may require. During the deferral period, we
credit interest at a rate at least as high as state law requires.
TRANSFERS DURING THE ANNUITY PERIOD. During the Annuity Period, you will have a
limited ability to make transfers among the Subaccounts so as to change the
relative weighting of the Subaccounts on which your Variable Annuity payments
will be based. In addition, you will have a limited ability to make transfers
from the Subaccounts to increase the proportion of your annuity payments
consisting of Fixed Annuity payments. You may not, however, convert any portion
of your right to receive Fixed Annuity payments into Variable Annuity payments.
You may not make any transfers for the first six months after the Annuity Date.
Thereafter, you may make transfers among the Subaccounts or make transfers from
the Subaccounts to increase your Fixed Annuity payments. Your transfers must be
at least six months apart.
DEATH BENEFIT DURING ANNUITY PERIOD. After annuity payments begin, upon the
death of the Annuitant and any Joint Annuitant, we will make any remaining
annuity payments to the Beneficiary. The amount and number of these annuity
payments will depend on the Annuity Option in effect at the time of the
Annuitant's death. After the Annuitant's death, any remaining interest will be
distributed at least as rapidly as under the method of distribution in effect at
the Annuitant's death.
CERTAIN EMPLOYEE BENEFIT PLANS. In some states, the Contracts offered by this
prospectus contain life annuity tables that provide for different benefit
payments to men and women of the same age. In certain employment-related
situations, however, the U.S. Supreme Court's decision in ARIZONA GOVERNING
COMMITTEE V. NORRIS requires employers to use the same annuity tables for men
and women. Accordingly, if the Contract is to be used in connection with an
employment-related retirement or benefit plan and we do not offer unisex annuity
tables in your state, you should consult with legal counsel as to whether the
purchase of a Contract is appropriate under Norris.
OTHER CONTRACT BENEFITS
DEATH BENEFIT. We will pay a distribution on death, if:
(1) the Contract is in force;
(2) annuity payments have not begun; and
(3) either:
(a) you die; or
(b) if the Contract is owned by a company or other legal entity, the
Annuitant dies.
Currently, we will pay a distribution on death equal in amount to the Death
Benefit. Under the Contract, however, we have the right to pay a distribution
equal in amount to the Surrender Value unless:
(1) the Beneficiary chooses to receive the Death Benefit in a lump sum within
180 days of the date of death; and
(2) the Beneficiary requests that the Death Benefit be paid as of the date we
receive the completed claim for a distribution on death.
We currently are waiving this 180 day limitation, but we may enforce it in the
future. If we do, we will calculate the distribution as of the earlier of the
requested distribution date or the fifth anniversary of the date of death.
We determine the Death Benefit as of the date we receive all of the information
we need to process the Death Benefit claim. The Death Benefit under the Contract
is the greatest of the following:
(1) the total Purchase Payments, less a withdrawal adjustment for any prior
partial withdrawals;
24
<PAGE>
(2) the Contract Value on the date as of which we calculate the Death Benefit;
(3) the Surrender Value; or
(4) the highest Contract Value on any Contract Anniversary, increased by the
total Purchase Payments since the most recent Contract Anniversary and reduced
by a withdrawal adjustment for any partial withdrawals since the most recent
Contract Anniversary.
The withdrawal adjustment for the Death Benefit will equal (a) divided by (b),
with the result multiplied by (c), where:
(a) = the withdrawal amount;
(b) = the Contract Value immediately before the withdrawal; and
(c) = the value of the applicable Death Benefit immediately before the
withdrawal.
A claim for a distribution on death must be submitted before the Annuity Date.
As part of the claim, the Beneficiary must provide "Due Proof of Death". We will
accept the following documentation as Due Proof of Death:
- - a certified original copy of the Death Certificate;
- - a certified copy of a court decree as to the finding of death; or
- - a written statement of a medical doctor who attended the deceased at the time
of death.
In addition, in our discretion we may accept other types of proof.
We will pay the Death Benefit in a lump sum within seven days of receiving a
completed claim for distribution on death, unless the Beneficiary selects one of
the other alternatives described below.
If the Beneficiary is a natural person, the Beneficiary may choose from the
following alternative ways of receiving the distribution:
- - the Beneficiary may receive the distribution as a lump sum payment;
- - the Beneficiary may apply the distribution to receive a series of equal
periodic payments over the life of the Beneficiary, over a fixed period no
longer than the Beneficiary's life expectancy, or over the life of the
Beneficiary with payments guaranteed for a period not to exceed the life
expectancy of the Beneficiary (the payments must begin within one year of the
date of death); or
- - if there is only one Beneficiary, he or she may defer payment for up to five
years from the date of death. Any remaining funds must be distributed at the
end of the five-year period. An Annuitant is necessary for this option. If
prior to your death you were the Annuitant, the Beneficiary will become the
new Annuitant.
If your spouse is the Beneficiary, he or she may choose to continue the Contract
as the new Contract Owner. If your spouse chooses to continue the Contract, the
following conditions apply:
(1) On the day the Contract is continued, we will set the Contract Value equal
to the Death Benefit, calculated as of the date on which we receive all of the
information we need to process your spouse's request to continue the Contract
after your death. Because the Death Benefit can never be less than the then
current Contract Value, our resetting the Contract will not cause the Contract
Value to decrease. During the continuation period, however, the Contract Value
will continue to increase or decrease to reflect the investment performance of
the Subaccounts, interest credited to the Fixed Account, and charges and
expenses under the Contract, as described in this prospectus.
(2) During the continuation period, currently we will pay a distribution on
death equal to the Death Benefit, determined as of the date on which we receive
due proof of your spouse's death. As described above, we also reserve the right
to pay a distribution equal in amount to the Surrender Value as of the date on
which we receive due proof of death. The standard Death Benefit payable upon
your spouse's death will be calculated using the formula described above. Thus,
the amount of the distribution on death may increase or decrease during the
continuation period, depending on changes in the Contract Value and other
Contract transactions during the continuation period.
(3) If before your death you were the Annuitant, your surviving spouse becomes
the Annuitant.
Your surviving spouse may also select one of the options listed above.
If the Beneficiary is a company or other legal entity, then the Beneficiary must
receive the Death Benefit in a lump sum, and the options listed above are not
available.
Different rules may apply to Contracts issued in connection with Qualified
Plans.
BENEFICIARY. You name the Beneficiary. You may name a Beneficiary in the
application. You may change the Beneficiary or add additional Beneficiaries at
any time before the Annuity Date. We will provide a form to be signed and filed
with us.
Your changes in Beneficiary take effect when we receive them, effective as of
the date you signed the form. Until we receive your change instructions, we are
entitled to rely on your most recent instructions in our files. We are not
liable for making a payment to a Beneficiary shown in our files or treating that
person in any other respect as the Beneficiary. Accordingly, if you wish to
change your beneficiary, you should deliver your instructions to us promptly.
25
<PAGE>
If you did not name a Beneficiary or if the named Beneficiary is no longer
living, the Beneficiary will be:
- - your spouse if he or she is still alive; or, if he or she is no longer alive,
- - your surviving children equally; or if you have no surviving children,
- - your estate.
If you name more than one Beneficiary, we will divide the Death Benefit among
your Beneficiaries according to your most recent written instructions. If you
have not given us written instructions, we will pay the Death Benefit in equal
shares to the Beneficiaries. If one of the Beneficiaries dies before you, we
will divide the Death Benefit among the surviving Beneficiaries.
Different rules may apply to Contracts issued in connection with Qualified
Plans.
CONTRACT LOANS FOR 401(a), 401(k), AND 403(b) CONTRACTS. Subject to the
restrictions described below, we will make loans to the Owner of a Contract used
in connection with a Tax Sheltered Annuity Plan ("TSA Plan") under Section
403(b) of the Tax Code, or an Owner of a Contract purchased by a pension,
profit-sharing, or other similar plan qualified under Section 401(a) of the Tax
Code (a "401 Plan"), including a Section 401(k) plan, where a plan trustee is
the Owner. Loans are not available under Non-Qualified Contracts. We will only
make loans after the free look period and before annuitization. All loans are
subject to the terms of the Contract, the relevant Plan, and the Tax Code, which
impose restrictions on loans.
We will not make a loan to you if the total of the requested loan and your
unpaid outstanding loans will be greater than the Surrender Value of your
Contract on the date of the loan. In addition, we will not make a loan to you if
the total of the requested loan and all of the plan participant's Contract loans
under TSA plans and 401 plans is more than the lesser of (a) or (b) where:
(a) equals $50,000 minus the excess of the highest outstanding loan balance
during the prior 12 months over the current outstanding loan balance; and
(b) equals the greater of $10,000 or 1/2 of the Surrender Value.
The minimum loan amount is $1,000.
To request a Contract loan, write to us at the address given on the first page
of the prospectus. You alone are responsible for ensuring that your loan and
repayments comply with tax requirements. Loans made before the Annuity Date are
generally treated as distributions under the Contract, and may be subject to
withholding and tax penalties for early distributions. Some of these
requirements are stated in Section 72 of the Tax Code and Title 1 of ERISA.
Please seek advice from your plan administrator or tax advisor.
When we make a loan, we will transfer an amount equal to the loan amount from
the Separate Account and/or the Fixed Account to the Loan Account as collateral
for the loan. You may select from which account(s) to transfer the loan value.
However, we will not transfer amounts from the Fixed Account in an amount
greater than the total amount of the loan multiplied by the ratio of the value
of the Fixed Account to the Contract Value immediately before the loan. If you
do not give us instructions, we will first transfer to the Loan Account amounts
from the Separate Account in proportion to the assets in each Subaccount. If
your loan amount is greater than your Contract Value in the Subaccounts, we will
transfer the remaining required collateral from the Fixed Account.
We may apply a Market Value Adjustment to a transfer from the Fixed Account to
the Loan Account. If we do, we will increase or decrease the amount remaining in
the Fixed Account by the amount of the Market Value Adjustment, so that the net
amount transferred to the Loan Account will equal the desired loan amount.
We will credit interest to the amounts in the Loan Account. The annual interest
rate credited to the Loan Account will be the greater of: (a) 3%; or (b) the
loan interest rate minus 2.25%. The value of the amounts in the Loan Account are
not affected by the changes in the value of the Subaccounts.
When you take out a loan, we will set the loan interest rate. That rate will
apply to your loan until it is repaid. From time to time, we may change the loan
interest rate applicable to new loans. We also reserve the right to change the
terms of new loans
We will subtract the outstanding Contract loan balance, including accrued but
unpaid interest, from:
(1) the Death Benefit;
(2) surrender proceeds;
(3) the amount available for partial withdrawal; and
(4) the amount applied on the Annuity Date to provide annuity payments.
Usually you must repay a Contract loan within five years of the date the loan is
made. Scheduled payments must be level, amortized over the repayment period, and
made at least quarterly. We may permit a repayment period of 15 or 30 years if
the loan proceeds are used to acquire your principal residence. We may also
permit other repayment periods.
You must mark your loan repayments as such. We will assume that any payment
received from you is a Purchase Payment, unless you tell us otherwise.
If you do not make a loan payment when due, we will continue to charge interest
on your loan. We also will declare the entire loan in default. We will subtract
the defaulted loan balance plus accrued interest from any future distribution
under the Contract and keep it in payment of your loan. Any
26
<PAGE>
defaulted amount plus interest will be treated as a distribution for tax
purposes (as permitted by law). As a result, you may be required to pay taxes on
the defaulted amount, incur the early withdrawal tax penalty, and be subject to
mandatory 20% federal withholding.
If the total loan balance exceeds the Surrender Value, we will mail written
notice to your last known address. The notice will state the amount needed to
maintain the Contract in force. If we do not receive payment of this amount
within 31 days after we mail this notice, we will terminate your Contract.
We may defer making any loan for 6 months after you ask us for a loan, unless
the loan is to pay a premium to us.
WITHDRAWALS (REDEMPTIONS). Except as explained below, you may redeem a Contract
for all or a portion of its Contract Value before the Annuity Date. Withdrawals
from the Fixed Account may be increased or decreased by a Market Value
Adjustment, as described in "Market Value Adjustment" on page 22 above.
In general, you must withdraw at least $50 at a time. You may also withdraw a
lesser amount if you are withdrawing your entire interest in a Subaccount. If
your request for a partial withdrawal would reduce the Contract Value to less
than $5,000, we may treat it as a request for a withdrawal of your entire
Contract Value, as described in "Minimum Contract Value" on page 28. Your
Contract will terminate if you withdraw all of your Contract Value.
We may be required to withhold 20% of withdrawals and distributions from
Contracts issued in connection with certain Qualified Plans, as described on
page 30 below. Withdrawals also may be subject to a 10% penalty tax, as
described in page 31 below.
To make a withdrawal, you must send us a written withdrawal request or
systematic withdrawal program enrollment form. You may obtain the required forms
from us at the address and phone number given on the first page of this
prospectus. We will not honor your request unless the required form includes
your Tax I.D. Number (e.g., Social Security Number) and provides instructions
regarding withholding of income taxes.
For partial withdrawals, you may allocate the amount among the Subaccounts and
the Fixed Account. If we do not receive allocation instructions from you, we
usually will allocate the partial withdrawal proportionately among the
Subaccounts and the Fixed Account in the same proportions as you have instructed
us to allocate your Purchase Payments. If you have Contract Value in the
Guaranteed Maturity Fixed Account Option that is allocated entirely to Guarantee
Periods of the same length, we will subtract the partial withdrawal first from
the most recently created Guarantee Period. If your Contract Value in the
Guaranteed Maturity Fixed Account Option is allocated to Guarantee Periods of
different lengths, you must provide us with allocation instructions, and we will
not process your withdrawal request until we receive your instructions. You may
not make a partial withdrawal from the Fixed Account in an amount greater than
the total amount of the partial withdrawal multiplied by the ratio of the value
of the Fixed Account to the Contract Value immediately before the partial
withdrawal.
If you request a total withdrawal, you must send us your Contract. The Surrender
Value will equal the Contract Value adjusted by any applicable Market Value
Adjustment. We also will deduct a contract maintenance charge of $35, unless we
have waived the contract maintenance charge on your Contract as described on
page 29 below. We determine the Surrender Value based on the Contract Value next
computed after we receive a properly completed surrender request. We will
usually pay the Surrender Value within seven days after the day we receive a
completed request form. However, we may suspend the right of withdrawal from the
Separate Account or delay payment for withdrawals for more than seven days in
the following circumstances:
(1) whenever the New York Stock Exchange ("NYSE") is closed (other than
customary weekend and holiday closings);
(2) when trading on the NYSE is restricted or an emergency exists, as determined
by the SEC, so that disposal of the Separate Account's investments or
determination of Accumulation Unit Values is not reasonably practicable; or
(3) at any other time permitted by the SEC for your protection.
In addition, we may delay payment of the Surrender Value in the Fixed Account
for up to 6 months or a shorter period if required by law. If we delay payment
from the Fixed Account for more than 30 days, we will pay interest as required
by applicable law.
You may withdraw amounts attributable to contributions made pursuant to a salary
reduction agreement (in accordance with Section 403(b)(11) of the Tax Code) only
in the following circumstances:
(1) when you attain age 59 1/2;
(2) when you terminate your employment with the plan sponsor;
(3) upon your death;
(4) upon your disability as defined in Section 72(m)(7) of the Tax Code; or
(5) in the case of hardship.
If you seek a hardship withdrawal, you may only withdraw amounts attributable to
your Purchase Payments; you may not withdraw any earnings. These limitations on
withdrawals apply to:
(1) salary reduction contributions made after December 31, 1988;
(2) income attributable to such contributions; and
(3) income attributable to amounts held as of December 31, 1988.
27
<PAGE>
The limitations on withdrawals do not affect transfers between certain Qualified
Plans. Additional restrictions and limitations may apply to distributions from
any Qualified Plan. Tax penalties may also apply. You should seek tax advice
regarding any withdrawals or distributions from Qualified Plans.
SUBSTANTIALLY EQUAL PERIODIC PAYMENTS. In general, earnings on annuities are
taxable as ordinary income upon withdrawal. As described in page 31 below, a 10%
tax penalty is imposed on certain "premature" payments under annuity contracts.
The tax penalty applies to any payment received before age 59 1/2, to the extent
it is includable in income and is not subject to an exception. The Tax Reform
Act of 1986 clarified an exception to this tax penalty. This exception is known
as "substantially equal periodic payments."
Generally, under this exception you may take "substantially equal periodic
payments" before age 59 1/2 without incurring the tax penalty. These "payments"
are withdrawals, as opposed to an annuitization of the Contract. A Market Value
Adjustment may apply.
To qualify for this exception, the payments must meet the following
requirements:
(1) The payments must continue to the later of age 59 1/2 or for five years.
(2) Payments must be established under one of the approved methods detailed by
the IRS in IRS Notice 89-25.
(3) You must have separated from service, if you purchased your Contract under a
qualified retirement plan or tax sheltered annuity.
If you modify the payment stream in any way, except for reason of death or
disability, you will loose the exception. Modification includes changing the
amount or timing of the payments, or making additional Purchase Payments. Any
subsequent periodic payment will be subject to the penalty tax, unless it
qualifies for a different exception. In addition, in the year of the
modification, you will be required to pay the penalty tax (plus interest) that
you would have been required to pay on the earlier payments if this exception
had not applied.
SYSTEMATIC WITHDRAWAL PROGRAM. If your Contract was issued in connection with a
Non-Qualified Plan or IRA, you may participate in our Systematic Withdrawal
Program. You must complete an enrollment form and send it to us. You must
complete the withholding election section of the enrollment form before the
systematic withdrawals will begin. You may choose withdrawal payments of a flat
dollar amount, earnings, or a percentage of Purchase Payments. Systematic
withdrawals are treated the same as partial withdrawals for purposes of
determining if a Market Value Adjustment applies. You may choose to receive
systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual
basis.
Depending on fluctuations in the net asset value of the Subaccounts and the
value of the Fixed Account, systematic withdrawals may reduce or even exhaust
the Contract Value. The minimum amount of each systematic withdrawal is $50.
We will make systematic withdrawal payments to you or your designated payee. We
may modify or suspend the Systematic Withdrawal Program and charge a processing
fee for the service. If we modify or suspend the Systematic Withdrawal Program,
existing systematic withdrawal payments will not be affected.
ERISA PLANS. A married participant may need spousal consent to receive a
distribution from a Contract issued in connection with a Qualified Plan or a
Non-Qualified Plan covered by to Title 1 of ERISA. You should consult an
adviser.
MINIMUM CONTRACT VALUE. If as a result of withdrawals your Contract Value would
be less than $5,000 and you have not made any Purchase Payments during the
previous three full calendar years, we may terminate your Contract and
distribute its Surrender Value to you. Before we do this, we will give you 60
days notice. We will not terminate your Contract on this ground if the Contract
Value has fallen below $5,000 due to either a decline in Accumulation Unit Value
or the imposition of fees and charges. In addition, in some states we are not
permitted to terminate Contracts on this ground. Different rules may apply to
Contracts issued in connection with Qualified Plans.
CONTRACT CHARGES
We assess charges under the Contract in two ways:
(1) as deductions from Contract Value for contract maintenance charges and, if
applicable, for premium taxes; and
(2) as charges against the assets of the Separate Account for administrative
expenses or for the assumption of mortality and expense risks.
In addition, certain deductions are made from the assets of the Portfolios for
investment management fees and expenses. Those fees and expenses are summarized
in the Fee Tables on page 10-13, and described more fully in the Prospectuses
and Statements of Additional Information for the Portfolios.
MORTALITY AND EXPENSE RISK CHARGE. We deduct a mortality and expense risk charge
from each Subaccount during each Valuation Period. The mortality and expense
risk charge is equal, on an annual basis, to 1.30% of the average net asset
value of each Subaccount. The mortality risks arise from our contractual
obligations:
(1) to make annuity payments after the Annuity Date for the life of the
Annuitant(s); and
(2) to provide the Death Benefit prior to the Annuity Date. A detailed
explanation of the Death Benefit may be found beginning on page 24 above.
28
<PAGE>
The expense risk is that it may cost us more to administer the Contracts and the
Separate Account than we receive from the contract maintenance charge and the
administrative expense charge. We guarantee the mortality and expense risk
charge and we cannot increase it. We assess the mortality and expense risk
charge during both the Accumulation Period and the Annuity Period.
ADMINISTRATIVE CHARGES.
CONTRACT MAINTENANCE CHARGE. We charge an annual contract maintenance charge of
$35 on your Contract. The amount of this charge is guaranteed not to increase.
This charge reimburses us for our expenses incurred in maintaining your
Contract.
Before the Annuity Date, we assess the contract maintenance charge on each
Contract Anniversary. To obtain payment of this charge, on a pro rata basis we
will allocate this charge among the Subaccounts and the Fixed Account to which
you have allocated your Contract Value, and redeem Accumulation Units and reduce
your interest in the Fixed Account accordingly. We will waive this charge if you
pay more than $50,000 in Purchase Payments or if you allocate all of your
Contract Value to the Fixed Account. If you surrender your Contract, we will
deduct the full $35 charge as of the date of surrender, unless your Contract
qualifies for a waiver.
After the Annuity Date, we will subtract this charge in equal parts from each of
your annuity payments. We will waive this charge if on the Annuity Date your
Contract Value is $50,000 or more or if all of your annuity payments are Fixed
Annuity payments.
ADMINISTRATIVE EXPENSE CHARGE. We deduct an administrative expense charge from
each Subaccount during each Valuation Period. This charge is equal, on an annual
basis, to 0.10% of the average net asset value of the Subaccounts. This charge
is designed to compensate us for the cost of administering the Contracts and the
Separate Account. The administrative expense charge is assessed during both the
Accumulation Period and the Annuity Period.
TRANSFER FEE. We currently are waiving the transfer fee. The Contract, however,
permits us to charge a transfer fee of $10 on the second and each subsequent
transaction in each calendar month in which transfer(s) are effected between
Subaccount(s) and/or the Fixed Account. We will notify you if we begin to charge
this fee. We will not charge a transfer fee on transfers that are part of a
Dollar Cost Averaging or Portfolio Rebalancing program.
The transfer fee will be deducted from Contract Value that remains in the
Subaccount(s) or Fixed Account from which the transfer was made. If that amount
is insufficient to pay the transfer fee, we will deduct the fee from the
transferred amount.
PREMIUM TAXES. We will charge premium taxes or other state or local taxes
against the Contract Value, including Contract Value that results from amounts
transferred from existing policies (Section 1035 exchange) issued by us or other
insurance companies. Some states assess premium taxes when Purchase Payments are
made; others assess premium taxes when annuity payments begin. We will deduct
any applicable premium taxes upon full surrender, death, or annuitization.
Premium taxes generally range from 0% to 3.5%.
DEDUCTION FOR SEPARATE ACCOUNT INCOME TAXES. We are not currently maintaining a
provision for taxes. In the future, however, we may establish a provision for
taxes if we determine, in our sole discretion, that we will incur a tax as a
result of the operation of the Separate Account. We will deduct for any taxes we
incur as a result of the operation of the Separate Account, whether or not we
previously made a provision for taxes and whether or not it was sufficient. Our
status under the Tax Code is briefly described on page 30 below.
OTHER EXPENSES. You indirectly bear the charges and expenses of the Portfolios
whose shares are held by the Subaccounts to which you allocate your Contract
Value. For a summary of current estimates of those charges and expenses, see
pages 10-13 above. For more detailed information about those charges and
expenses, please refer to the prospectuses for the appropriate Portfolios. We
may receive compensation from the investment advisers or administrators of the
Portfolios in connection with administrative service and cost savings
experienced by the investment advisers or administrators.
TAXES
NOTE: We based the following description upon our understanding of current
federal income tax law applicable to annuities in general. We cannot predict the
probability that any changes in those laws will be made. Also, we do not
guarantee the tax status of the Contracts. You bear the complete risk that the
Contracts may not be treated as "annuity contracts" under federal income tax
laws. You should seek tax advice concerning the effect on your personal tax
liability of the transactions permitted under the Contract, as well as any other
questions you may have concerning the tax status of the Contract or the
possibility of changes in the tax law.
GENERAL. Section 72 of the Tax Code governs taxation of annuities in general. As
a general rule, if you are a natural person, you will not be taxed on increases
in the value of a Contract until a distribution occurs, either in the form of a
non-annuity distribution or as annuity payments under an Annuity Option. For a
lump sum payment received as a total surrender of the Contract (total
redemption), you will be taxed on the portion of the payment that exceeds the
cost basis of the Contract. For a partial withdrawal (partial redemption), your
federal tax liability will be determined on a last-in, first-out basis, meaning
that taxable earnings are treated as being withdrawn before the cost basis of
the Contract is withdrawn. For Contracts issued in connection
29
<PAGE>
with Non-Qualified Plans, the cost basis generally equals the Purchase Payments.
A Contract issued in connection with a Qualified Plan, however, may have no cost
basis, because the Purchase Payments were excluded from income in the year they
were made. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates. Tax penalties may also apply to surrenders and withdrawals
before the payee reaches age 59 1/2, except in certain circumstances described
below.
For annuity payments, the taxable portion is determined by a formula which
establishes the ratio that the cost basis of the Contract bears to the total
value of annuity payments for the term of the annuity payments. The taxable
portion is taxed at ordinary income tax rates. Before making a distribution,
Contract Owners, Annuitants and Beneficiaries under the Contracts should consult
a tax adviser about the tax consequences.
All Non-Qualified annuity contracts that are issued by us (or our affiliates) to
the same Contract Owner during any calendar year will be aggregated and treated
as one annuity contract for purposes of determining the taxable amount.
Accordingly, you should consult a tax adviser before purchasing more than one
Non-Qualified annuity contract.
If you or the Annuitant dies, the Beneficiary will be taxed on the portion of
any lump sum payment that exceeds your cost basis in the Contract. If the
Beneficiary chooses to receive annuity payments, however, the Death Benefit will
be taxed like other annuity payments. In order to be treated as an annuity
contract, the terms of the Contract must provide the following two distribution
rules: (1) if any Contract Owner dies on or after the date annuity payments
commence, and before the entire interest in the Contract has been distributed,
the remainder of his interest will not be distributed under a slower
distribution schedule than that provided for in the method in effect on the
Contract Owner's death; and (2) if any Contract Owner dies before the date
annuity payments commence, his entire interest must generally be distributed
within five years after the date of death provided that if such interest is
payable to a designated Beneficiary, then such interest may be made over the
life of that designated Beneficiary or over a period not extending beyond the
life expectancy of that Beneficiary, so long as payments commence within one
year after the Contract Owner's death. If the sole designated Beneficiary is the
spouse of the Contract Owner, the Contract may be continued in the name of the
spouse as Contract Owner. The designated Beneficiary is the natural person
designated by the terms of the Contract or by the Contract Owner as the
individual to whom ownership of the Contract passes by reason of the Contract
Owner's death. If the Contract Owner is not an individual, then for purposes of
the distribution at death rules, the Annuitant is considered the Contract Owner.
In addition, when the Contract Owner is not an individual, a change in the
Annuitant is treated as the death of the Contract Owner. Distributions made to a
Beneficiary upon the Contract Owner's death from a Qualified Plan must be made
pursuant to the rules in Section 401(a)(9) of the Tax Code.
The tax treatment of Death Benefits described above is less favorable than the
income tax-free treatment applicable to a person who inherits and sells
appreciated mutual fund shares outside of a Qualified Plan. Accordingly, if you
are considering purchasing a Contract in a Non-Qualified Plan, you should also
take these factors into consideration in weighing the tax advantages and
disadvantages of the Contract.
If you transfer ownership of a Contract, designate an Annuitant or Beneficiary
other than yourself or a joint owner, assign a Contract or exchange a Contract,
you may incur tax liabilities or tax penalties. We do not discuss these
consequences here. If you are contemplating a transfer, assignment, or exchange
of a Contract, you should consult a tax adviser concerning the potential tax
effects of the transaction.
For a Contract to be treated as an annuity for federal income tax purposes, the
investments in the Separate Account must be "adequately diversified" in
accordance with the standards provided in Treasury Department regulations. If
the investments in the Separate Account are not adequately diversified, then the
Contract will not be treated as an annuity contract for federal income tax
purposes and you may be taxed on the earnings on the Contract in the year in
which they are earned. Although we do not have control over the Portfolios or
their investments, we expect the Portfolios to meet the diversification
requirements.
If the Annuitant will have reached an advanced age, E.G., age 85, at the
Contract's scheduled maturity date, it is possible that the Contract would not
be treated as an annuity for tax purposes. In that event, you might be taxed on
the income and gains under the Contract.
Lincoln Benefit is taxed as a life insurance company under the Tax Code. For
federal income tax purposes, the Separate Account is not treated as a separate
entity and its operations form a part of Lincoln Benefit.
WITHHOLDING TAX ON DISTRIBUTIONS. The Tax Code generally requires us or, in some
cases, plan administrators to withhold tax on the taxable portion of any
distribution or withdrawal from a Contract.
For "eligible rollover distributions" from Contracts issued under certain types
of Qualified Plans, we must withhold 20% of the distribution, unless you elect
to have the distribution "rolled over" to another eligible plan. An "eligible
rollover distribution" is the estimated taxable portion of any amount received
by a covered employee from a plan qualified under Section 401(a) or 403(a) of
the Tax Code, or from a tax-sheltered annuity qualified under Section 403(b) of
the Tax Code, other than:
(1) annuity payments for the life (or life expectancy) of the employee, or joint
lives (or joint life expectancies) of the
30
<PAGE>
employee and his or her designated beneficiary, or for a specified period of
ten years or more; and
(2) distributions required to be made under the Tax Code.
An "Eligible Rollover Distribution" may be rolled over into any plan qualified
under Sections 401(a) or 403(a) of the Tax Code, an individual retirement
account described in Section 408(a) of the Tax Code, or an individual retirement
annuity under Section 408(b) of the Tax Code, other than an endowment contract.
In most instances, you may avoid withholding by making the transfer directly
from "trustee to trustee". If you ask us to pay the eligible rollover
distribution directly to you, we are required to withhold 20% of the
distribution. You could be subject to taxes and tax penalties on the amount paid
to you unless you pay an amount equal to the entire eligible rollover
distribution to another eligible plan within 60 days. To avoid taxation, and tax
penalties, the amount paid into the new plan must equal the ENTIRE eligible
rollover distribution. The amount withheld by us is not treated as being "rolled
over" into the new plan, although you may apply it against your other tax
liabilities.
We will impose withholding on the estimated taxable portion of withdrawals or
distributions other than eligible rollover distributions, unless you waive the
withholding requirement. We use the following rates to determine the amounts
withheld:
(1) for periodic payments, we use the rates applicable to wages; and
(2) for other distributions, we withhold 10% of the distribution.
We will ask you for a withholding exemption certificate (W-4 form). If you do
not provide us with a W-4 form, we will use the withholding rate applicable to
married individuals claiming 3 withholding exemptions.
In addition, some states may require that state income tax be withheld.
TAX TREATMENT OF ASSIGNMENTS. An assignment of a Contract may result in tax
liability. In addition, some assignments are prohibited by ERISA. You should
therefore consult your legal advisers before assigning your Contract.
TAX TREATMENT OF WITHDRAWALS
QUALIFIED PLANS. The Tax Code provides that withdrawals from Qualified Plans are
taxable as ordinary income. In addition, Section 72(t) of the Tax Code imposes a
10% penalty tax on the taxable portion of any early distribution from qualified
retirement plans, including Contracts issued and qualified under Sections 401
(H.R. 10 and Corporate Pension and Profit Sharing Plans), 403(b) (Tax-Sheltered
Annuities), 408(b) (traditional IRAs) and 408A (Roth IRAs) of the Tax Code.
The penalty tax will not apply to the following distributions from plans
qualified under Sections 401 and 403(b) of the Tax Code:
(1) distributions made on or after the date on which you reach age 59 1/2;
(2) distributions following the death or disability of you or the Annuitant (as
applicable). For this purpose, "disability" is defined in Section 72(m)(7)
of the Tax Code;
(3) distributions that are part of substantially equal periodic payments made
not less frequently than annually for the life (or life expectancy) of you
or the Annuitant (as applicable) or the joint lives (or joint life
expectancies) of you or the Annuitant (as applicable) and his or her
designated beneficiary;
(4) distributions to you or the Annuitant (as applicable) who has separated from
service after he or she has attained age 55;
(5) distributions made to you or the Annuitant (as applicable) to pay for
medical expenses that are deductible under Tax Code Section 213; and
(6) distributions made to an alternate payee pursuant to a qualified domestic
relations order.
The tax penalty does not apply to distributions from plans qualified under
Section 408(b) (traditional IRAs) that meet any of the first three exceptions
stated above, or are: (1) distributions made for higher educational expenses; or
(2) distributions for a qualified first-time home purchase.
The tax penalty does not apply to distributions from plans qualified under
Section 408A (Roth IRAs), if a five year holding period is satisfied and the
distribution is:
(1) made on or after the date on which you reach age 59 1/2;
(2) made to a Beneficiary (or your estate) on or after your death;
(3) upon your total disability, as "disability" is defined in Section 72(m)(7)
of the Tax Code; or
(4) made to pay for a qualified first-time home purchase.
The Tax Code's limitations on withdrawals from tax-sheltered annuities are
described on page 30 above.
Under some circumstances, you may "roll over" the taxable portion of a
withdrawal or distribution from Contracts issued under certain types of plans
into another eligible plan so as to continue to defer income tax. Such treatment
is available for any "eligible rollover distribution" as described on page 30
above. Amounts received from IRAs may also be rolled over into other IRAs,
individual retirement accounts, Roth IRAs, or certain other plans, subject to
limitations set forth in the Tax Code.
31
<PAGE>
NON-QUALIFIED PLANS. Section 72 of the Tax Code provides that if the Contract
Value exceeds the total Purchase Payments made, any amount withdrawn from a
Non-Qualified Contract will be treated as coming first from the earnings and
then, only after the earnings portion is exhausted, as coming from the
principal. Withdrawn earnings are includable in a taxpayer's gross income as
ordinary income. Section 72 further provides that a 10% tax penalty will apply
to the income portion of all distributions from a Non-Qualified Contract, except
for amounts received:
(1) after the taxpayer reaches age 59 1/2;
(2) upon the death of the Contract Owner or Annuitant (as applicable);
(3) upon total disability of the taxpayer. For this purpose, "disability" is
defined in Section 72(m)(7) of the Tax Code;
(4) in a series of substantially equal periodic payments made for the life of
the taxpayer or for the joint lives of the taxpayer and his Beneficiary;
(5) under an immediate annuity; or
(6) which are allocable to Purchase Payments made prior to August 14, 1982.
DESCRIPTION OF LINCOLN BENEFIT LIFE
COMPANY AND THE SEPARATE ACCOUNT
LINCOLN BENEFIT LIFE COMPANY. Lincoln Benefit Life Company is a stock life
insurance company organized under the laws of the state of Nebraska in 1938. Our
legal domicile and principal business address is 206 South 13th Street, Lincoln,
Nebraska. Lincoln Benefit is a wholly owned subsidiary of Allstate Life
Insurance Company ("Allstate Life or ALIC"), a stock life insurance company
incorporated under the laws of the State of Illinois. Allstate Life is a wholly
owned subsidiary of Allstate Insurance Company ("AIC"), a stock
property-liability insurance company incorporated under the laws of Illinois.
All outstanding capital stock of Allstate is owned by The Allstate Corporation
("Allstate").
We are authorized to conduct life insurance and annuity business in the District
of Columbia, Guam and all states except New York. We intend to market the
Contract everywhere we conduct variable annuity business. The Contracts offered
by this prospectus are issued by us and will be funded in the Separate Account
and/or the Fixed Account.
Under our reinsurance agreement with Allstate Life, all contract related
transactions are transferred to Allstate Life. Through our reinsurance agreement
with Allstate Life, all of the assets backing our reinsured liabilities are
owned by Allstate Life. These assets represent our general account and are
invested and managed by Allstate Life. Accordingly, the results of operations
with respect to applications received and contracts issued by Lincoln Benefit
are not reflected in our financial statements. The amounts reflected in our
financial statements relate only to the investment of those assets of Lincoln
Benefit that are not transferred to Allstate Life under the reinsurance
agreement. While the reinsurance agreement provides us with financial backing
from Allstate Life, it does not create a direct contractual relationship between
Allstate Life and you.
Lincoln Benefit is highly rated by independent agencies, including A.M. Best,
Moody's, and Standard & Poor's. These ratings are based on our reinsurance
agreement with Allstate Life, and reflect financial soundness and strong
operating performance. The ratings are not intended to reflect the financial
strength or investment experience of the Separate Account. We may from time to
time advertise these ratings in our sales literature.
FINANCIAL STATEMENTS OF LINCOLN BENEFIT. The Company's consolidated financial
statements and notes thereto are included in this Prospectus beginning on page
F-1. You should consider those financial statements only as bearing on Lincoln
Benefit's ability to meet its obligations under the Policy. They do not relate
to the investment performance of the assets held in the Separate Account. The
financial statements for the Separate Account are set forth in the Statement of
Additional Information.
SELECTED FINANCIAL DATA. The following selected financial data for the Company
should be read in conjunction with the consolidated financial statements and
notes thereto included in the prospectus beginning on page F-1.
LINCOLN BENEFIT LIFE COMPANY
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR-END FINANCIAL DATA 1997 1996 1995 1994
- ------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FOR THE YEARS ENDED
DECEMBER 31:
Income Before Income
Tax Expense $10,587 $8,603 $7,838 $4,641
Net Income 6,852 5,583 5,093 3,036
AS OF DECEMBER 31:
Total Assets $7,507,203 $7,108,502 $6,347,097 $5,319,707
</TABLE>
Financial information prepared in accordance with generally accepted accounting
principles ("GAAP") is not available for fiscal years prior to 1994. Prior to
1994, the Company's
32
<PAGE>
financial statements were prepared in accordance with statutory accounting
practices, a comprehensive basis of accounting other than GAAP.
INVESTMENTS BY LINCOLN BENEFIT. Our general account assets, like the general
account assets of other insurance companies, including Allstate Life, must be
invested in accordance with applicable state laws. These laws govern the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit us, within specified limits and
subject to certain qualifications, to invest in federal, state, and municipal
obligations, corporate bonds, preferred stocks, real estate mortgages, real
estate and certain other investments. All of our general account assets are
available to meet our obligations.
We will primarily invest our general account assets in investment-grade fixed
income securities including the following:
Securities issued by the United States Government or its agencies or
instrumentalities, which may or may not be guaranteed by the United States
Government;
Debt instruments, including issues of or guaranteed by banks or bank holding
companies, and of corporations, which our management deems to have qualities
appropriate for inclusion in our general account;
Commercial mortgages, mortgage-backed securities collateralized by real estate
mortgage loans, or securities collateralized by other assets, that are insured
or guaranteed by the Federal Home Loan Mortgage Association, the Federal
National Mortgage Association or the Government National Mortgage Association,
or that have an investment grade at time of purchase within the four highest
grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa),
Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally
recognized rating service;
Commercial paper, cash or cash equivalents, and other short-term investments
having a maturity of less than one year that our management considers to have
investment quality comparable to securities having the ratings stated above.
In addition, interest rate swaps, futures, options, rate caps, and other hedging
instruments may be used solely for non-speculative hedging purposes. Anticipated
use of these financial instruments shall be limited to protecting the value of
portfolio sales or purchases, or to enhance yield through the creation of a
synthetic security.
In addition, Lincoln Benefit maintains certain unitized separate accounts which
invest in shares of open-end investment companies registered under the
Investment Company Act of 1940, as amended. The Subaccounts under this Contract
are subdivisions of one of those Separate Accounts. These separate account
assets do not support our obligations under the Fixed Account provisions of the
Contracts.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights significant factors influencing consolidated
results of operations and changes in financial position of Lincoln Benefit Life
Company (the "Company") and its wholly owned subsidiary. Lincoln Benefit
Financial Services, Inc. It should be read in conjunction with the consolidated
financial statements and related notes.
The Company, a wholly owned subsidiary of Allstate Life ("ALIC"), which is
wholly owned by Allstate Insurance Company ("AIC"), a wholly owned subsidiary of
The Allstate Corporation, markets life insurance and annuity products through
independent agents.
The Company issues flexible premium deferred variable annuity contracts and
variable life policies, the assets and liabilities of which are legally
segregated and reflected as Separate Account assets and liabilities. Separate
Account assets and liabilities are carried at fair value in the statements of
financial position. Investment income and realized gains and losses of the
Separate Accounts accrue directly to the contractholders (net of fees) and,
therefore, are not included in Lincoln Benefit's statements of operations.
RESULTS OF OPERATIONS ($ IN THOUSANDS).
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net investment income $ 10,789 $ 9,951 $ 8,796
--------- --------- ---------
--------- --------- ---------
Realized capital gains and losses, after-tax $ 17 $ 6 $ 258
--------- --------- ---------
--------- --------- ---------
Operating costs and expenses $ 219 $ 889 $ 754
--------- --------- ---------
--------- --------- ---------
Net Income $ 6,852 $ 5,583 $ 5,093
--------- --------- ---------
--------- --------- ---------
Investments $ 151,505 $ 142,296 $ 143,116
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company and ALIC have reinsurance agreements under which all contract and
policy related transactions are transferred to ALIC. The Company's consolidated
results of operations include only investment income and realized capital gains
and losses earned on the assets of the Company that are not transferred to ALIC
under the reinsurance agreements, and underwriting expense allowance for
services provided by the Company's broker dealer, Lincoln Benefit Financial
Services, Inc. Prior to December 31, 1996, the Company retained a small block of
paid up life insurance, which was ceded to ALIC on that date.
33
<PAGE>
Net income for 1997 and 1996 increased $1,269,000 and $490,000, respectively. In
1997, the increase was attributable to the underwriting expense allowance and
increased net investment income. In 1996, increased investment income was
partially offset by lower realized capital gains.
Pretax net investment income increased by $838,000, or 8.4% in 1997 and
$1,155,000, or 13.1% in 1996. The additional investment income was earned on a
higher base of investments arising from positive cash flows from operating
activities, partially offset by increased investment expenses. In 1997,
operating costs and expenses decreased as a result of the cession of the small
block of paid up life insurance and the expenses on that block of business that
we incurred in 1996.
Realized capital gains were $17,000 and $6,000 after tax in 1997 and 1996,
respectively, and arose principally from prepayments on fixed income securities.
No securities were sold in 1997 or 1996. Realized capital gains in 1995 of
$258,000 after tax were primarily the result of a sale of a fixed income
security, the remainder was due to prepayments on fixed income securities.
FINANCIAL POSITION ($ IN THOUSANDS).
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Fixed income securities(1) $ 147,911 $ 137,638
Real Estate 2,574 2,797
Short-term investments 1,020 1,861
----------- -----------
Total investments $ 151,505 $ 142,296
----------- -----------
----------- -----------
Reinsurance recoverable from Allstate Life $ 6,732,755 $ 6,544,750
----------- -----------
----------- -----------
Separate Account assets and liabilities $ 447,658 $ 255,881
----------- -----------
----------- -----------
Contractholder funds $ 6,607,130 $ 6,422,126
----------- -----------
----------- -----------
</TABLE>
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $141,553 and $134,866 at December 31, 1997 and 1996,
respectively.
The Company's fixed income securities portfolio consists of mortgage-backed
securities, publicly traded corporate bonds, and U.S. government bonds. The
Company generally holds its fixed income securities until maturity, but has
classified all of these securities as available for sale to allow maximum
flexibility in portfolio management.
Investments grew $9.2 million, or 6.5%, during 1997 primarily due to the
investment of positive operating cash flows and an increase in the unrealized
capital gain position on fixed income securities. At December 31, 1997, net
unrealized capital gains on fixed income securities were $4.1 million compared
to $1.8 million as of December 31, 1996. The increase in the unrealized net
capital gain position is primarily attributable to lower interest rates.
At the end of 1997, all of the Company's fixed income securities portfolio is
rated investment grade. 99.7% of the portfolio has a National Association of
Insurance Commissioners ("NAIC") rating of 1 or a Moody's rating of Aaa, Aa or
A. The remaining .3% has an NAIC rating of 2.
At December 31, 1997 and 1996, $55.1 million and $61.0 million, respectively, of
the fixed income portfolio were invested in mortgage-backed securities ("MBS").
At December 31, 1997, all of the MBS had underlying collateral that is
guaranteed by U.S. government entities, thus credit risk was minimal.
MBS, however, are subject to interest rate risk as the duration and ultimate
realized yield are affected by the rate of repayment of the underlying
mortgages. The Company attempts to limit interest rate risk by purchasing MBS
whose cost does not significantly exceed par value, and with repayment
protection to provide a more certain cash flow to the Company. At December 31,
1997, the amortized cost of the MBS portfolio was below par value by $2.8
million and 15% of the MBS portfolio was invested in planned amortization class
bonds. This type of MBS is purchased to provide additional protection against
rising interest rates.
The Company closely monitors its fixed income portfolio for declines in value
that are other than temporary. Securities are placed on non-accrual status when
they are in default or when the receipt of interest payments is in doubt.
The Company's short-term investment portfolio was $1.0 million and $1.9 million
at December 31, 1997 and 1996, respectively. The Company invests available cash
balances, primarily in taxable short-term securities having a final maturity
date or redemption date of one year or less.
During 1997, contractholder funds increased by $185 million and reinsurance
recoverable from ALIC under reinsurance agreements increased by $188 million.
Interest credited to contractholders and sales of fixed annuity contracts
exceeded the fixed annuity surrenders, withdrawals, policyholder transfers from
fixed annuity contracts to flexible premium deferred variable annuity contracts,
and benefits paid. Reinsurance recoverable from Allstate Life relates to
contract benefit obligations ceded to Allstate Life.
34
<PAGE>
Separate Account assets and liabilities increased by $191.8 million, primarily
attributable to sales of flexible premium deferred variable annuity contracts,
the favorable investment performance of the Separate Account investment
portfolios and transfers from fixed annuity contracts, partially offset by
variable annuity surrenders and withdrawals.
MARKET RISK. Market risk is the risk that the Company will incur losses due to
adverse changes in market rates and prices. The Company's primary market risk
exposure is to changes in interest rates. Interest rate risk is the risk that
the Company will incur economic losses due to adverse changes in interest rates,
as the Company invests substantial funds in interest-sensitive assets.
One way to quantify this exposure is duration. Duration measures the sensitivity
of the fair value of assets to changes in interest rates. For example, if
interest rates increase 1%, the fair value of an asset with a duration of 5
years is expected to decrease in value by approximately 5%. At December 31,
1997, the Company's asset duration was approximately 4.6 years.
To calculate duration, the Company projects asset cash flows and discounts them
to a net present value basis using a risk-free market rate adjusted for credit
quality, sector attributes, liquidity and other specific risks. The projections
include assumptions (based upon historical market and Company specific
experience) reflecting the impact of changing interest rates on the prepayment
and/or option features of instruments, where applicable. Such assumptions relate
primarily to mortgage-backed securities, collateralized mortgage obligations,
and municipal and corporate obligations.
Based upon the information and assumptions the Company uses in its duration
calculation and in effect at December 31, 1997, management estimates that a 100
basis point immediate, parallel increase in interest rates ("rate shock") would
decrease the net fair value of its assets identified above by approximately $6.9
million. The selection of a 100 basis point immediate rate shock should not be
construed as a prediction by the Company's management of future market events;
but rather, to illustrate the potential impact of such an event.
To the extent that actual results differ from the assumptions utilized, the
Company's duration and rate shock measures could be significantly impacted.
Additionally, Lincoln Benefit's calculation assumes that the current
relationship between short-term and long-term interest rates (the term structure
of interest rates) will remain constant over time. As a result, these
calculations may not fully capture the impact of non-parallel changes in the
term structure of interest rates and/or large changes in interest rates.
In formulating and implementing policies for investing new and existing funds,
AIC, as parent company of ALIC, administers and oversees investment risk
management processes primarily through three oversight bodies: the Boards of
Directors and Investment Committees of its operating subsidiaries, and the
Credit and Risk Management Committee ("CRMC"). The Boards of Directors and
Investment Committees provide executive oversight of investment activities. The
CRMC is a senior management committee consisting of the Chief Investment
Officer, the Investment Risk Manager, and other investment officers who are
responsible for the day-to-day management of market risk. The CRMC meets at
least monthly to provide detailed oversight of investment risk, including market
risk.
AIC has investment guidelines that define the overall framework for managing
market and other investment risks, including the accountabilities and controls
over these activities. In addition, AIC has specific investment policies for
each of its affiliates, including the Company, that delineate the investment
limits and strategies that are appropriate for the Company's liquidity, surplus
and regulatory requirements.
LIQUIDITY AND CAPITAL RESOURCES. Under the terms of reinsurance agreements,
premiums and deposits, excluding those relating to Separate Accounts, are
transferred to ALIC, which maintains the investment portfolios supporting
Lincoln Benefit's products. Payments of policyholder claims, benefits, contract
maturities, contract surrenders and withdrawals and operating costs are
reimbursed by ALIC, also under the terms of the reinsurance agreements. The
primary sources for the remainder of the Company's funds are collection of
principal and interest from the investment portfolio and capital contributions
from ALIC. The primary uses for the remainder of the Company's funds are to
purchase investments and pay costs associated with the maintenance of the
Company's investment portfolio. The Company continues to have primary liability
as a direct insurer for risks reinsured.
The NAIC has a standard for assessing the solvency of insurance companies, which
is referred to as risk-based capital ("RBC"). The requirement consists of a
formula for determining each insurer's RBC and a model law specifying regulatory
actions if an insurer's RBC falls below specified levels. The RBC formula for
life insurance companies establishes capital requirements relating to insurance,
business, asset, and interest rate risks. At December 31, 1997, RBC for the
Company was significantly above levels that would require regulatory action.
YEAR 2000. The Company is heavily dependent upon complex computer systems for
all phases of its operations, including customer service, and policy and
contract administration.
35
<PAGE>
Since many of the Company's older computer software programs recognize only the
last two digits of the year in any date, some software may fail to operate
properly in or after the year 1999, if the software is not reprogrammed or
replaced ("Year 2000 Issue"). The Company believes that many of its suppliers
and counterparties also have Year 2000 Issues which could affect the Company. In
1995, AIC commenced a plan intended to mitigate and/or prevent the adverse
affects of Year 2000 Issues. These strategies include normal development and
enhancement of new and existing systems, upgrades to operating systems already
covered by maintenance agreements and modifications to existing systems to make
them Year 2000 compliant. The plan also includes the Company actively working
with its external counterparties and suppliers to assess their compliance
efforts and the Company's exposure to them. The Company presently believes that
it will resolve the Year 2000 Issue in a timely manner, and the financial impact
will not materially affect its results of operations, liquidity, or financial
position. Year 2000 costs are and will be expenses as incurred.
PENDING ACCOUNTING STANDARDS. In December 1996, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." SFAS No. 127 delayed the implementation of certain
provisions of SFAS No. 125. "Accounting for Transfers of Financial Assets and
Extinguishments of Liabilities" until January 1, 1998. The deferred provisions
of SFAS No. 125 will be adopted effective January 1, 1998 and are not expected
to have a material impact on the financial position of the Company.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" and
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information".
SFAS No. 130 requires the presentation of comprehensive income in the financial
statements. Comprehensive income is a measurement of all changes in equity that
result from transactions and other economic events other than transactions with
shareholders. The requirements of this statement will be adopted effective
January 1, 1998.
SFAS No. 131 redefines how segments are determined and requires additional
segment disclosures for both annual and quarterly reporting. Under this
statement, segments are determined using the "management approach" for financial
statement reporting. The management approach is based on the way an enterprise
makes operating decisions and assesses performance of its businesses. The
Company is currently reviewing the requirements of this SFAS and has yet to
determine its impact on its current reporting requirements. The requirements of
this statement will be adopted effective December 31, 1998.
In December 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
97-3, "Accounting by Insurance and Other Enterprises for Insurance-related
Assessments". The SOP provides guidance concerning when to recognize a liability
for insurance-related assessments and how those liabilities should be measured.
Specifically, insurance-related assessments should be recognized as liabilities
when all of the following criteria have been met: a) an assessment has been
imposed or it is probable that an assessment will be imposed, b) the event
obligating an entity to pay an assessment has occurred and c) the amount of the
assessment can be reasonably estimated. The requirements of this standard will
be adopted in 1999 and are not expected to have a material impact on the results
of operations, cash flows or financial position of the Company.
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." The SOP provides guidance on accounting for the costs of
computer software developed or obtained for internal use. Specifically, certain
external, payroll and payroll related costs should be capitalized during the
application development state of a project and depreciated over the computer
software's useful life. The Company currently expenses these costs as incurred
and is evaluating the effects of this SOP on its accounting for internally
developed software. The SOP is expected to be adopted in 1998.
FORWARD-LOOKING STATEMENTS. The statements contained in this Management's
Discussion and Analysis that are not historical information are forward-looking
statements that are based on management's estimates, assumptions and
projections. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor under the Securities Act of 1933 and the Securities Exchange Act of
1934 for forward-looking statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- FOR THE QUARTER ENDED MARCH 31, 1998
The following discussion highlights significant factors influencing results of
operations and changes in financial position of Lincoln Benefit Life Company
(the "Company") and its wholly owned subsidiary, Lincoln Benefit Financial
Services, Inc. ("LBFS"), a registered broker-dealer. It should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended December 31, 1997.
The Company, a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a wholly
owned subsidiary of The Allstate Corporation, markets life insurance and annuity
products through independent agents and brokers.
36
<PAGE>
The Company issues flexible premium deferred variable annuity contracts and
flexible premium variable life policies, the assets and liabilities of which are
legally segregated and reflected as Separate Account assets and liabilities.
Separate Account assets and liabilities are carried at fair value in the
consolidated statements of financial position. Investment income and realized
gains and losses of the Separate Accounts accrue directly to the contractholders
(net of fees) and, therefore, are not included in the Company's consolidated
statements of operations.
RESULTS OF OPERATIONS ($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Net investment income $ 2,566 $ 2,462
--------- ---------
--------- ---------
Realized capital gains and losses,
after-tax $ -- $ 1
--------- ---------
--------- ---------
Net income $ 1,667 $ 1,548
--------- ---------
--------- ---------
Investments $ 156,268 $ 139,261
--------- ---------
--------- ---------
</TABLE>
The Company and ALIC amended their reinsurance agreement effective December 31,
1996. All business issued subsequent to that date is primarily ceded to ALIC.
The Company's results of operations include only investment income and realized
capital gains and losses earned on the assets of the Company that are not
transferred to ALIC under the reinsurance agreement.
Net income for the first quarter of 1998 was $1.7 million compared to $1.5
million for the first quarter of 1997. The increase was due to increased
investment income.
Pretax net investment income for the three-month period ended March 31, 1998 was
$2.6 million compared to $2.5 million for the same period last year. Additional
investment income was earned on higher investment balances arising from positive
cash flows from operating activities.
FINANCIAL POSITION ($ IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -------------
<S> <C> <C>
Fixed income securities(1) $ 149,287 $ 147,911
Investment in home office real estate 2,488 2,574
Short-term investments 4,493 1,020
----------- -------------
Total investments $ 156,268 $ 151,505
----------- -------------
----------- -------------
Reinsurance recoverable from ALIC $ 6,746,392 $ 6,732,755
----------- -------------
----------- -------------
Separate Account assets and liabilities $ 543,452 $ 447,658
----------- -------------
----------- -------------
Contractholder funds $ 6,617,167 $ 6,607,130
----------- -------------
----------- -------------
</TABLE>
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $142,906 and $141,553 at March 31, 1998 and December 31,
1997, respectively.
The Company's fixed income securities portfolio consists of mortgage-backed
securities, U.S. government bonds, publicly traded corporate bonds and foreign
government bonds. The Company generally holds its fixed income securities for
the long term, but has classified all of these securities as available for sale
to allow maximum flexibility in portfolio management.
Total investments increased to $156.3 million at March 31, 1998 from $151.5
million at December 31, 1997. The increase in investments is primarily due to
amounts invested from positive cash flows generated from operations and a slight
increase in unrealized net capital gains on the fixed income securities
portfolio. At March 31, 1998, unrealized net capital gains on the fixed income
securities were $6.4 million compared to $6.3 million at December 31, 1997.
At March 31, 1998, all of the Company's fixed income securities portfolio is
rated investment grade, with a National Association of Insurance Commissioners
("NAIC") rating of 1 or 2 or a Moody's rating of Aaa, Aa or A.
The Company's short-term investment portfolio was $4.5 million and $1.0 million
at March 31, 1998 and December 31, 1997, respectively. The Company invests
available cash balances primarily in taxable short-term securities having a
final maturity date or redemption date of one year or less.
During 1998, contractholder funds increased by $10.0 million and amounts
recoverable from ALIC under the reinsurance agreement increased by $13.6
million. The increases resulted from sales of the Company's single and flexible
premium deferred annuities, and interest credited to contractholders, partially
offset by surrenders, withdrawals and benefits paid. Reinsurance recoverable
from ALIC relates to contract benefit obligations ceded to ALIC.
Separate Account assets and liabilities increased by $95.8 million as compared
with December 31, 1997. The increases were primarily attributable to increased
sales of flexible premium deferred variable annuity contracts and the favorable
investment performance of the Separate Account investment portfolios, partially
offset by variable annuity surrenders and withdrawals.
37
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES. Under the terms of reinsurance agreements,
premiums and deposits on life policies and investment contracts, excluding those
relating to Separate Accounts, are transferred to ALIC, which maintains the
investment portfolios supporting the Company's products. The Company continues
to have primary liability as a direct insurer for risks reinsured.
YEAR 2000. The Company is heavily dependent upon complex computer systems for
all phases of its operations, including customer service, and policy and
contract administration. Since many of the Company's older computer software
programs recognize only the last two digits of the year in any date, some
software may fail to operate properly in or after the year 1999, if the software
is not reprogrammed,
remediated or replaced, ("Year 2000 Issue"). The Company believes that many of
its counterparties and suppliers also have Year 2000 Issues which could affect
the Company. In 1995, AIC commenced a plan intended to mitigate and/or prevent
the adverse effects of Year 2000 Issues. These strategies include normal
development and enhancement of new and existing systems, upgrades to operating
systems already covered by maintenance agreements and modifications to existing
systems to make them Year 2000 compliant. The plan also includes the Company
actively working with its major external counterparties and suppliers to assess
their compliance efforts and the Company's exposure to them. The Company
presently believes that it will resolve the Year 2000 Issue in a timely manner,
and the financial impact will not materially affect its results of operations,
liquidity or financial position. Year 2000 costs are and will continue to be
expensed as incurred.
PENDING ACCOUNTING STANDARDS. Statement of Financial Accounting Standards
("SFAS") No. 131 redefines how segments are determined and requires additional
segment disclosures for both annual and quarterly reporting. Under this
statement, segments are determined using the "management approach" for financial
statement reporting. The management approach is based on the way an enterprise
makes operating decisions and assesses performance of its businesses. The
Company is currently reviewing the requirements of the SFAS and has yet to
determine its impact on its current reporting segments. The requirements of this
statement will be adopted effective December 31, 1998.
In December 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-related Assessments." The SOP provides guidance concerning when to
recognize a liability for insurance-related assessments and how those
liabilities should be measured. Specifically, insurance-related assessments
should be recognized as liabilities when all of the following criteria have been
met: 1) an assessment has been imposed or it is probable that an assessment will
be imposed, 2) the event obligating an entity to pay an assessment has occurred
and 3) the amount of the assessment can be reasonably estimated. The
requirements of this statement are expected to be adopted in 1999 and are not
expected to have a material impact on the results of operations, cash flows or
financial position of the Company.
FORWARD-LOOKING STATEMENTS. The statements contained in this Management's
Discussion and Analysis that are not historical information are forward-looking
statements that are based on management's estimates, assumptions and
projections. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor under The Securities Act of 1933 and The Securities Exchange Act of
1934 for forward-looking statements.
------------------------
COMPETITION. Lincoln Benefit is engaged in a business that is highly
competitive. Many other life insurance companies and other entities sell
insurance and annuities. There are approximately 1,700 insurers in business in
the United States. As of April 1, 1998, A.M. Best Company assigns a rating of A+
(Superior) to Allstate Life, which automatically reinsures all net general
account business of Lincoln Benefit. A.M. Best Company also assigns Lincoln
Benefit a rating of A+(r), because Lincoln Benefit automatically reinsures all
general account business with Allstate Life. Standard & Poor's Insurance Rating
Services assigns an AA+ (Very Strong.) to Lincoln Benefit's financial strength
rating. Moody's assigns an Aa2 (Excellent) financial stability rating to Lincoln
Benefit. Lincoln Benefit shares the same ratings as its parent, Allstate Life.
EMPLOYEES. As of December 31, 1997, Lincoln Benefit had approximately 585
employees at its home office in Lincoln, Nebraska.
PROPERTIES. Lincoln Benefit owns and leases office space in Lincoln, Nebraska.
The combined owned and leased spaces are used for home office administrative
operations.
EXECUTIVE OFFICERS AND DIRECTORS OF LINCOLN BENEFIT. Our directors and executive
officers are listed below, together with information as to their ages, dates of
election and principal business occupations during the last five years (if other
than their present occupation).
JANET P. ANDERBERY, 39, VICE PRESIDENT AND CONTROLLER, 1994; Associate Vice
President and Controller, 5/84-4/94, Lincoln Benefit Life Company; Vice
President and Controller, 1/94-present, Surety Life Insurance Company; Vice
President and Controller, 5/93-present, Lincoln Benefit Financial Services, Inc.
THOMAS R. ASHLEY, 44, SENIOR VICE PRESIDENT/MEDICAL DIRECTOR 1998; Vice
President/Medical Director, 10/96-5/98, Lincoln Benefit Life Company; Senior
Vice President/Medical
38
<PAGE>
Director, 5/98-present, Medical Director, 1/97-5/98, Surety Life Insurance
Company; 1989-1997, Partner, Antelope Creek Physicians.
DAVID A. BEHRENS, 35, SENIOR VICE PRESIDENT, DIRECTOR, 1998; Vice President
3/95-5/98, Director of Sales, 9/93-3/95, Lincoln Benefit Life Company; Marketing
Director, 9/90-9/93, Ameritas; Regional Director, 7/81-9/90, John Hancock.
JOHN H. COLEMAN, III, 51, SENIOR VICE PRESIDENT, DIRECTOR, 1998; Vice President,
5/96-5/98, Manager, 4/94-5/96, Lincoln Benefit Life Company; Senior Vice
President, Director, 5/98-present; Vice President, 9/96-5/98, Surety Life
Insurance Company; President, Acordia, 2/93-4/94.
DOUGLAS F. GAER, 51, EXECUTIVE VICE PRESIDENT, 1997, DIRECTOR, 1981; Senior Vice
President, 4/95-2/97, Senior Vice President and Treasurer, 4/94-3/95, Vice
President, 3/81-4/94, Director, 1981-present, Lincoln Benefit Life Company;
Senior Vice President and Treasurer, 1/94-present, Director, 6/95-present,
Surety Life Insurance Company; Director, 5/93-present, Lincoln Benefit Financial
Services, Inc.
PETER H. HECKMAN, 52, VICE CHAIRMAN OF THE BOARD, 1996, DIRECTOR, 1990; Vice
President, Director, 4/92-present, Glenbrook Life & Annuity Company; Vice
President, 11/90-12/97, Director, 9/90-12/97, Glenbrook Life Insurance Company;
Vice President, 6/89-present, Director, 7/90-present, Allstate Life Insurance
Company of New York; Vice President, 4/89-present, Director, 12/88-present,
Allstate Life Insurance Company; Vice President, 12/88-present, Director,
12/88-present, Northbrook Life Insurance Company; Director, 5/90-present, Surety
Life Insurance Company; Director, 5/90-present, Lincoln Benefit Life Company;
Director 5/91-9/93, Allstate Life Financial Services.
LOUIS G. LOWER, II, 52, CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER, 1989,
DIRECTOR, 1989; Chairman of the Board and President, 4/92-6/95, Chairman of the
Board and Chief Executive Officer, 6/95-present, Glenbrook Life and Annuity
Company; Chairman of the Board and President, 1/91-12/95, Chairman of the Board
and Chief Executive Officer, 12/95-12/97, Director, 9/90-12/97, Glenbrook Life
Insurance Company; President, 1/90-present, Executive Vice President, 1/89-1/90,
Senior Vice President and Treasurer, 10/86-12/88, Director, Allstate Life
Insurance Company; Chairman of the Board and Chief Executive Officer,
6/95-present, Chairman of the Board and President, 4/90-6/95, Chairman of the
Board, 4/90-7/90, Executive Vice President, 1/89-4/90, Senior Vice President and
Treasurer, 10/86-4/89, Director, Northbrook Life Insurance Company; Chairman of
the Board and President, 6/90-present, Vice President and Treasurer 12/86-6/90,
Director, Allstate Life Insurance Company of New York; Chairman of the Board and
Chief Executive Officer, Director, 5/90-present, Lincoln Benefit Life Company;
Chairman of the Board and Chief Executive Officer, 3/90-present, Director,
5/89-present, Surety Life Insurance Company; Group Vice President, 1976-1989,
Director, Allstate Insurance Company; Director, 4/90-present, Allstate
Settlement Company; Director, 5/91-present, Allstate Life Financial Services.
JOHN J. MORRIS, 61, SENIOR VICE PRESIDENT/SECRETARY, 1994, DIRECTOR, 1987;
Senior Vice President and Secretary, 4/94-present, Vice President and Secretary,
8/85-4/94, Director, 1987-present, Lincoln Benefit Life Company; Senior Vice
President, 9/96-present, Director, 6/95-present, Surety Life Insurance Company;
Vice President and Secretary, Director, 5/93-present, Lincoln Benefit Financial
Services Inc.
ROBERT E. RICH, 43, EXECUTIVE VICE PRESIDENT, 1996, DIRECTOR, 1987; Senior Vice
President/Chief Actuary and Treasurer, 4/95-5/96, Senior Vice President,
Assistant Secretary, 4/94-3/95, Vice President/Assistant Secretary, 1/84-4/94,
Director, 1987-present, Lincoln Benefit Life Company; Executive Vice President,
7/96-present, Senior Vice President and Chief Actuary, 1/94-6/96, Director,
9/93-present, Surety Life Insurance Company; Director, 5/93-present, Lincoln
Benefit Financial Services, Inc.
KEVIN R. SLAWIN, 40, DIRECTOR, 1996; Director and Vice President-Finance and
Planning, 1996-present, Allstate Life Insurance Company; Director, 1996-present,
Allstate Life Insurance Company of New York; Director, 1996-present, Laughlin
Group Holdings, Inc.; Director, 1996-present, Northbrook Life Insurance Company;
Director, 1996-12/97, Surety Life Insurance Company; Director, 1996-present,
Glenbrook Life Insurance Company; Assistant Vice President, Assistant Treasurer,
1995-1996, Allstate Insurance Company.
MICHAEL J. VELOTTA, 51, DIRECTOR, 1992; Vice President, Secretary and General
Counsel, 1/93-present, Director, 12/92-present, Allstate Life Insurance Company;
Vice President, Secretary and General Counsel, 1/93-12/97, Director,
12/92-12/97, Glenbrook Life Insurance Company; Vice President, Secretary and
General Counsel, 1/93-present, Director, 12/92-present, Glenbrook Life and
Annuity Company; Vice President, Secretary and General Counsel, 1/93-present,
Director, 12/92-present, Allstate Life Insurance Company of New York; Vice
President, Secretary and General Counsel, 1/93-present, Director, 12/92-present,
Northbrook Life Insurance Company; Vice President, Secretary and General
Counsel, 1/93-present, Director, 12/92-present, Surety Life Insurance Company;
Assistant Vice President and Assistant General Counsel, 1989, Allstate Insurance
Company; Director, 12/92-present, Lincoln Benefit Life Company.
RANDY J. VON FUMETTI, 41, SENIOR VICE PRESIDENT, 1996, DIRECTOR, 1996; Senior
Vice President, 9/96-present, Director, 9/96-present, Surety Life Insurance
Company; Senior Actuary and Director, 8/87-9/96, Allstate Life Insurance
Company.
CAROL S. WATSON, 45, SENIOR VICE PRESIDENT/GENERAL COUNSEL, 1994, DIRECTOR,
1992; Senior Vice President and General Counsel, 4/94-present, Vice President
and General Counsel, 7/91-4/94, Director, 5/92-present, Lincoln Benefit Life
Company; Senior Vice President, Corporate Secretary and General Counsel,
1/98-present, Senior Vice President, Assistant Secretary and General Counsel,
Director, 6/95-present,
39
<PAGE>
Surety Life Insurance Company; President, 12/96-present, Vice President and
General Counsel, 5/93-11/96, Director, 5/93-present, Lincoln Benefit Financial
Services, Inc.
DEAN M. WAY, 43, SENIOR VICE PRESIDENT/ACTUARY, DIRECTOR, 1998; Vice
President/Actuary, 5/92-5/98, Associate Vice President/Actuary, 8/91-5/92,
Actuary/Manager, 12/87-7/91, Lincoln Benefit Life Company; Senior Vice
President/Actuary, Director 5/98-present, Vice President/Actuary 9/96-5/98,
Surety Life Insurance Company.
PATRICIA W. WILSON, 45, DIRECTOR, 1997; Assistant Vice President/Assistant
Secretary/Assistant Treasurer, 7/97-present, Assistant Vice President,
1/93-7/97, Allstate Life Insurance Company; Assistant Vice President,
6/91-present, Director, 6/97-present, Allstate Life Insurance Company of New
York; Assistant Treasurer, 7/97-12/97, Glenbrook Life Insurance Company;
Assistant Treasurer, 7/97-present, Glenbrook Life Annuity Company; Assistant
Vice President/Assistant Secretary/Assistant Treasurer, 7/97-present, Northbrook
Life Insurance Company; Director, 7/97-present, Surety Life Insurance Company.
B. EUGENE WRAITH, 52, PRESIDENT, CHIEF OPERATING OFFICER, 1996, DIRECTOR, 1984;
President and Chief Operating Officer, 3/96-present, Senior Vice President,
4/94-3/96, Vice President, 12/81-4/94, Director, 1984-present, Lincoln Benefit
Life Company; President and Chief Operating Officer, 3/96-present, Executive
Vice President, 1/94-3/96, Director, 9/93-present, Surety Life Insurance
Company; Chairman of the Board, 1/97-present, Director, 5/93-present, President,
5/93-11/96, Lincoln Benefit Financial Services, Inc.
EXECUTIVE COMPENSATION
Certain executive officers of Lincoln Benefit also serve as officers of Allstate
Life and receive no compensation directly from Lincoln Benefit. Some officers
also serve as executive officers of other companies affiliated with Lincoln
Benefit. Allocations have been made as to each individual's time devoted to his
or her duties as an executive officer of Lincoln Benefit. Those allocations are
reflected in the Summary Compensation Table set forth below, except that the
figures for Mr. Lower reflect his total compensation from Lincoln Benefit, its
affiliates, and parent company Allstate Life Insurance Company. Lincoln
Benefit's directors receive no compensation for serving as directors, in
addition to their compensation as employees at Lincoln Benefit, Allstate Life,
or their affiliates.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ------------- -----------
(a) (b) (c) (d) (e) (f) (g)
- ---------------------------------------- ------ ----------- ----------- ------------- ----------- -----------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS (#)
- ---------------------------------------- ------ ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Louis G. Lower II 1997 $ 453,225 $ 500,000 $ 27,768 $ 280,589 25,914
Chief Executive Officer 1996 $ 436,800 $ 246,781 $ 10,246 0 18,258
Chairman of the Board 1995 $ 416,000 $ 286,650 $ 17,044 0 89,359
------ ----------- ----------- ------------- ----------- -----------
Bernard Eugene Wraith 1997 99,500 24,733 4,887 0 1,002
President 1996 90,750 26,500 10,435 0 14,275
1995 75,468 10,000 9,861 0 769
------ ----------- ----------- ------------- ----------- -----------
Robert Edwin Rich 1997 77,772 20,206 18,461 0 456
Executive Vice President and Chief 1996 71,824 23,500 19,611 0 132
Actuary 1995 67,624 9,000 9,846 0 679
------ ----------- ----------- ------------- ----------- -----------
Douglas Ford Gaer 1997 73,750 17,888 15,978 0 434
Executive Vice President 1996 57,875 18,550 12,996 0 100
1995 51,902 6,850 15,231 0 523
------ ----------- ----------- ------------- ----------- -----------
John H. Coleman, III 1997 109,776 28,620 12,709 0 0
Vice President 1996 101,088 25,500 3,047 0 0
1995 94,000 25,010 3,835 0 0
<CAPTION>
(a) (h) (i)
- ---------------------------------------- ----------- -----------
LTIP ALL OTHER
NAME AND PRINCIPAL POSITION PAYOUTS ($) COMPENSATION
- ---------------------------------------- ----------- -----------
<S> <C> <C>
Louis G. Lower II $ 570,068 $ 8,000(1)
Chief Executive Officer 0 $ 5,250(1)
Chairman of the Board $ 411,122 $ 5,250(1)
----------- -----------
Bernard Eugene Wraith 0 0
President 0 0
0 0
----------- -----------
Robert Edwin Rich 0 0
Executive Vice President and Chief 0 0
Actuary 0 0
----------- -----------
Douglas Ford Gaer 0 0
Executive Vice President 0 0
0 0
----------- -----------
John H. Coleman, III 0 0
Vice President 0 0
0 0
</TABLE>
(1) Amount received by Mr. Lower which represents the value allocated to his
account from employer contributions under The Savings and Profit Sharing Fund of
Allstate Employees and prior to 1996 to The Profit Sharing Fund and to its
predecessor, The Savings and Profit Sharing Fund of Sears employees.
40
<PAGE>
Shares of the Company and Allstate Life are not directly owned by any of our
directors or executive officers. The percentage of shares of The Allstate
Corporation beneficially owned by any director, and by all of our directors and
executive officers as a group does not exceed one percent of the class
outstanding.
STATE REGULATION OF LINCOLN BENEFIT. We are subject to the laws of Nebraska and
regulated by the Nebraska Department of Insurance. Every year we file an annual
statement with the Department of Insurance covering our operations for the
previous year and our financial condition as of the end of the year. We are
inspected periodically by the Department of Insurance to verify our contract
liabilities and reserves. We also are examined periodically by the NAIC. Our
books and records are subject to review by the Department of Insurance at all
times. We are also subject to regulation under the insurance laws of every
jurisdiction in which we operate.
SEPARATE ACCOUNT. Lincoln Benefit Life Variable Annuity Account was originally
established in 1992, as a segregated asset account of Lincoln Benefit. The
Separate Account meets the definition of a "separate account" under the federal
securities laws and is registered with the SEC as a unit investment trust under
the Investment Company Act of 1940. The SEC does not supervise the management of
the Separate Account or Lincoln Benefit.
We own the assets of the Separate Account, but we hold them separate from our
other assets. To the extent that these assets are attributable to the Contract
Value of the Contracts offered by this prospectus, these assets are not
chargeable with liabilities arising out of any other business we may conduct.
Income, gains, and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains, or losses. Our obligations arising under the
Contracts are general corporate obligations of Lincoln Benefit.
The Separate Account is divided into Subaccounts. The assets of each Subaccount
are invested in the shares of one of the Portfolios. We do not guarantee the
investment performance of the Separate Account, its Subaccounts or the
Portfolios. Values allocated to the Separate Account and the amount of Variable
Annuity payments will rise and fall with the values of shares of the Portfolios
and are also reduced by Contract charges. We may also use the Separate Account
to fund our other annuity contracts. We will account separately for each type of
annuity contract funded by the Separate Account.
We have included additional information about the Separate Account in the
Statement of Additional Information. You may obtain a copy of the Statement of
Additional Information by writing to us or calling us at 1-800-865-5237. We have
reproduced the Table of Contents of the Statement of Additional Information on
page 43 below.
ADMINISTRATION
We have primary responsibility for all administration of the Contracts and the
Separate Account. Our mailing address is P.O. Box 82532, Lincoln, Nebraska
68501-2532.
We provide the following administrative services, among others: issuance of the
Contracts; maintenance of Contract Owner records; Contract Owner services;
calculation of unit values; maintenance of the Separate Account; and preparation
of Contract Owner reports.
We will send you Contract statements and transaction confirmations at least
quarterly. You should notify us promptly in writing of any address change. You
should read your statements and confirmations carefully and verify their
accuracy. You should contact us promptly if you have a question about a periodic
statement. We will investigate all complaints and make any necessary adjustments
retroactively, but you must notify us of a potential error within a reasonable
time after the date of the questioned statement. If you wait too long, we will
make the adjustment as of the date that we receive notice of the potential
error.
We will also provide you with additional periodic and other reports, information
and prospectuses as may be required by federal securities laws.
MARKET TIMING AND ASSET ALLOCATION SERVICES
Certain third parties offer market timing and asset allocation services in
connection with the Contracts. In certain situations, we will honor transfer
instructions from third party market timing and asset allocation services if
they comply with our administrative systems, rules and procedures, which we may
modify at any time. PLEASE NOTE that fees and charges assessed for third party
market timing and asset allocation services are separate and distinct from the
Contract fees and charges set forth herein. We neither recommend nor discourage
the use of market timing and asset allocation services.
DISTRIBUTION OF CONTRACTS
The Contracts described in this prospectus are sold by registered
representatives of broker-dealers who are our licensed insurance agents, either
individually or through an incorporated insurance agency. Commissions paid to
broker-dealers may vary, but we estimate that the total commissions paid on all
Contract sales will not exceed one percent of initial Purchase Payments and one
percent of account value annually beginning in the second Contract year. From
time to time, we may offer additional sales incentives of up to 1% of Purchase
Payments to broker-dealers who maintain certain sales volume levels. We may use
any of our corporate assets, including potential profit which may arise from the
mortality and expense risk charge or from any other charge or fee under the
Contracts, to cover sales commissions and other promotional or distribution
expenses relating to the sale of
41
<PAGE>
the Contracts. We do not pay commission on Contract sales to our employees, our
affiliate's employees or their spouses or minor children.
Lincoln Benefit Financial Services, Inc. ("LBFS") serves as distributor of the
Contracts. LBFS is located at 206 South 13th Street, Lincoln, Nebraska
68508-1993. LBFS is our wholly owned subsidiary. It is registered as a
broker-dealer under the Securities Exchange Act of 1934, and is a member of the
National Association of Securities Dealers, Inc.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Separate Account. Lincoln
Benefit and its subsidiaries are engaged in routine law suits which, in our
management's judgment, are not of material importance to their respective total
assets or material with respect to the Separate Account.
LEGAL MATTERS
All matters of Nebraska law pertaining to the Contract, including the validity
of the Contract and our right to issue the Contract under Nebraska law, have
been passed upon by Carol S. Watson, Senior Vice President and General Counsel
of Lincoln Benefit. Legal matters relating to the federal securities laws in
connection with the Contracts described in this prospectus are being passed upon
by the law firm of Jorden Burt Boros Cicchetti Berenson & Johnson, 1025 Thomas
Jefferson St., East Lobby-Suite 400, Washington, D.C. 20007-0805.
EXPERTS
The consolidated financial statements of Lincoln Benefit Life Company and
subsidiary as of December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
42
<PAGE>
REGISTRATION STATEMENT
We have filed a registration statement with the SEC, under the Securities Act of
1933 as amended, with respect to the Contracts offered by this prospectus. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits filed as part of the registration statement. You
should refer to the registration statement and the exhibits for further
information concerning the Separate Account, Lincoln Benefit, and the Contracts.
The descriptions in this prospectus of the Contracts and other legal instruments
are summaries. You should refer to those instruments as filed for the precise
terms of those instruments. You may inspect and obtain copies of the
registration statements as described on the cover page of this prospectus.
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL
INFORMATION
<TABLE>
<S> <C>
The Contract.................................. S-2
Annuity Payments............................ S-2
Annuity Unit Value.......................... S-3
Illustrative Example of Variable Annuity
Payments.................................. S-4
Additional Federal Income Tax Information..... S-4
Diversification -- Separate Account
Investments............................... S-4
Owner Control............................... S-5
Multiple Contracts.......................... S-5
Qualified Plans............................. S-5
Separate Account Performance.................. S-7
Experts....................................... S-15
Financial Statements.......................... S-15
</TABLE>
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
LINCOLN BENEFIT LIFE COMPANY:
We have audited the accompanying consolidated statements of financial position
of Lincoln Benefit Life Company and subsidiary (wholly owned by Allstate Life
Insurance Company) as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholder's equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Lincoln Benefit Life Company and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying
supplemental schedule is presented for the purpose of additional analysis and is
not a required part of the basic consolidated financial statements. This
schedule is the responsibility of the Company's management. Such schedule has
been subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects when considered in relation to the basic consolidated
financial statements taken as a whole.
/s/ Deloitte & Touche LLP
Lincoln, Nebraska
March 20, 1998
F-1
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
($ in thousands) 1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value (amortized
cost $141,553 and $134,866) $ 147,911 $ 137,638
Investment in home office real estate 2,574 2,797
Short-term 1,020 1,861
------------- -------------
Total investments 151,505 142,296
Reinsurance recoverable from Allstate Life
Insurance Company 6,732,755 6,544,750
Reinsurance recoverable from third parties 127,182 115,965
Receivable from Allstate Life Insurance Company
and affiliates, net 14,481 19,923
Cash 4,220 7,412
Other assets 29,402 22,275
Separate Accounts 447,658 255,881
------------- -------------
Total assets $ 7,507,203 $ 7,108,502
------------- -------------
------------- -------------
LIABILITIES
Reserve for life-contingent contract benefits $ 252,195 $ 239,449
Contractholder funds 6,607,130 6,422,126
Income taxes payable 1,128 923
Deferred income taxes 4,149 3,480
Other liabilities and accrued expenses 43,609 44,482
Separate Accounts 447,658 255,881
------------- -------------
Total liabilities 7,355,869 6,966,341
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 8)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 30,000 shares
authorized, 25,000 issued and outstanding 2,500 2,500
Additional capital paid-in 116,750 116,750
Unrealized net capital gains 4,132 1,801
Retained income 27,952 21,110
------------- -------------
Total shareholder's equity 151,334 142,161
------------- -------------
Total liabilities and shareholder's equity $ 7,507,203 $ 7,108,502
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
($ in thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Net investment income $ 10,789 $ 9,951 $ 8,796
Realized capital gains and losses 17 6 258
--------- --------- ---------
10,806 9,957 9,054
COSTS AND EXPENSES
Provision for policy benefits (net of reinsurance
recoveries of $464,154, $419,936 and $375,662) - 465 462
Operating costs and expenses 219 889 754
--------- --------- ---------
219 1,354 1,216
--------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE 10,587 8,603 7,838
INCOME TAX EXPENSE 3,735 3,020 2,745
--------- --------- ---------
NET INCOME $ 6,852 $ 5,583 $ 5,093
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
($ in thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK $ 2,500 $ 2,500 $ 2,500
ADDITIONAL CAPITAL PAID-IN
Balance, beginning of year 116,750 116,750 96,750
Capital contribution - - 20,000
--------- --------- ---------
Balance, end of year 116,750 116,750 116,750
--------- --------- ---------
UNREALIZED NET CAPITAL GAINS
Balance, beginning of year 1,801 4,998 (2,630)
Net change 2,331 (3,197) 7,628
--------- --------- ---------
Balance, end of year 4,132 1,801 4,998
--------- --------- ---------
RETAINED INCOME
Balance, beginning of year 21,110 18,060 12,967
Dividend-in-kind (10) (2,533) -
Net income 6,852 5,583 5,093
--------- --------- ---------
Balance, end of year 27,952 21,110 18,060
--------- --------- ---------
Total shareholder's equity $ 151,334 $ 142,161 $ 142,308
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
($ in thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,852 $ 5,583 $ 5,093
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation, amortization and other non-cash items 20 50 96
Realized capital gains and losses (17) (6) (258)
Increase (decrease) in life-contingent contract
benefits and contractholder funds 427 (4,918) (130)
Change in deferred income taxes (586) (62) (156)
Changes in other operating assets and liabilities (4,261) 11,083 (5,940)
--------- --------- ---------
Net cash provided by (used in) operating
activities 2,435 11,730 (1,295)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales
Fixed income securities - - 5,633
Equity securities - - 108,255
Investment collections
Fixed income securities 11,980 8,759 13,769
Investment purchases
Fixed income securities (18,307) (17,570) (34,372)
Equity securities - - (108,255)
Real estate (140) (405) (644)
Change in short-term investments, net 840 4,489 (2,920)
Change in policy loans, net - - 24
--------- --------- ---------
Net cash used in investing activities (5,627) (4,727) (18,510)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution - - 20,000
--------- --------- ---------
Net cash provided by financing activities - - 20,000
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (3,192) 7,003 195
CASH AT BEGINNING OF YEAR 7,412 409 214
--------- --------- ---------
CASH AT END OF YEAR $ 4,220 $ 7,412 $ 409
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash financing activity:
Dividend-in-kind to Allstate Life Insurance Company $ (10) $ (2,533) $ -
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. GENERAL
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Lincoln Benefit Life Company (the "Company") and its wholly owned subsidiary,
Lincoln Benefit Financial Services, Inc. ("LBFS"), a registered broker-dealer.
The Company is a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a wholly
owned subsidiary of The Allstate Corporation (the "Corporation"). On June 30,
1995, Sears, Roebuck and Co. ("Sears") distributed its 80.3% ownership in the
Corporation to Sears common shareholders through a tax-free dividend (the
"Distribution"). These consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. All significant
intercompany accounts and transactions have been eliminated.
To conform with the 1997 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
NATURE OF OPERATIONS
The Company markets a broad line of life insurance and annuity products
countrywide. Life insurance policies include traditional products such as whole
life and term life insurance, as well as variable life universal life and other
interest-sensitive life products. Annuities include deferred annuities, such as
variable annuities and fixed rate single and flexible premium annuities, and
immediate annuities. The Company distributes its products primarily through
independent agents and brokers specializing in life insurance and annuities.
Annuity contracts and life insurance policies issued by the Company are subject
to discretionary withdrawal or surrender by the customers, subject to applicable
surrender charges. These policies and contracts are reinsured primarily with
ALIC (see Note 3), which invests premiums and deposits to provide cash flows
that will be used to fund future benefits and expenses. In order to support
competitive crediting rates and limit interest rate risk, ALIC as the Company's
primary reinsurer adheres to a basic philosophy of matching assets with related
liabilities, while maintaining adequate liquidity and a prudent and diversified
level of credit risk.
The Company monitors economic and regulatory developments which have the
potential to impact its business. There continues to be new and proposed federal
and state regulation and legislation which would allow banks greater
participation in the securities and insurance businesses, which will present an
increased level of competition for sales of the Company's life and annuity
products. Furthermore, the market for deferred annuities and interest-sensitive
life insurance is enhanced by the tax incentives available under current law.
Any legislative changes which lessen these incentives are likely to negatively
impact the demand for these products.
Enacted and pending state legislation to permit mutual insurance companies to
covert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; (2) increasing competition in capital
markets; and (3) reopening stock/mutual company disagreements related to such
issues as taxation disparity between mutual and stock insurance companies.
The Company is authorized to sell life and annuity products in all states except
New York, as well as in the District of Columbia, Guam and the U.S. Virgin
Islands. The top geographic locations for statutory premiums earned by the
Company are California, Florida, Illinois, Virginia and Wisconsin for the year
ended December 31, 1997. No other jurisdiction accounted for more than 5% of
statutory premiums and deposits. Substantially all premiums and contract charges
are ceded to ALIC under reinsurance agreements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed income securities include bonds and mortgage-backed securities. All fixed
income securities are carried at fair value and may be sold prior to their
contractual maturity ("available for sale"). The difference between amortized
cost and fair value, net
F-6
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
of deferred income taxes, is reflected as a component of shareholder's equity.
Provisions are recognized for declines in the value of fixed income securities
that are other than temporary. Such writedowns are included in realized capital
gains and losses.
Short-term investments are carried at cost which approximates fair value. Real
estate represents property owned and occupied by the Company, and is carried at
depreciated cost.
Investment income consists primarily of interest, which is recognized on an
accrual basis. Interest income on mortgaged-backed securities is determined on
the effective yield method, based on the estimated principal repayments. Accrual
of income is suspended for fixed income securities that are in default or when
the receipt of interest payments is in doubt. Realized capital gains and losses
are determined on a specific identification basis.
REINSURANCE
The Company has reinsurance agreements whereby all premiums, contract charges,
credited interest, policy benefits and certain expenses are primarily ceded to
ALIC and reflected net of such cessions in the statements of operations. The
amounts shown in the Company's statements of operations relate to the
consolidated investment of those assets of the Company that are not transferred
to ALIC under reinsurance agreements. Reinsurance recoverable and the related
reserve for life-contingent contract benefits and contractholder funds are
reported separately in the statements of financial position. The Company
continues to have primary liability as the direct insurer for risks reinsured.
RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES
Premiums for traditional life insurance are recognized as revenue when due.
Accident and disability premiums are earned on a pro rata basis over the policy
period. Revenues on interest-sensitive life insurance policies are comprised of
contract charges and fees, and are recognized when assessed against the
policyholder account balance. Revenues on most annuities, which are considered
investment contracts, include contract charges and fees for contract
administration and surrenders. These revenues are recognized when levied against
the contract balances. Gross premium in excess of the net premium of limited
payment contracts are deferred and recognized over the contract period.
INCOME TAXES
The income tax provision is calculated under the liability method. Deferred tax
assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates. Deferred income taxes also arise from unrealized capital gains or losses
on fixed income securities carried at fair value.
SEPARATE ACCOUNTS
The Company issues flexible premium deferred variable annuity contracts and
flexible premium variable life policies, the assets and liabilities of which are
legally segregated and reflected in the accompanying consolidated statements of
financial position as assets and liabilities of the Separate Accounts. (Lincoln
Benefit Life Variable Annuity Account and Lincoln Benefit Life Variable Life
Account, unit investment trusts registered with the Securities and Exchange
Commission.) Assets of the Separate Accounts are carried at fair value.
Investment income and realized capital gains and losses of the Separate Accounts
accrue directly to the policy and contractholders and, therefore, are not
included in the Company's consolidated statements of operations. Revenues to the
Company from the Separate Accounts consist of contract maintenance fees,
administration fees and mortality and expense risk charges, all of which are
ceded to ALIC.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits, which relates to traditional
life, annuities with life contingencies, and disability insurance and accident
insurance, is computed on the basis of assumptions as to future investment
yields, mortality, morbidity, terminations and expenses. These assumptions,
which for traditional life are applied using the net level premium method,
include provisions for adverse deviation and generally vary by such
characteristics as type of coverage, year of issue and policy duration. Reserve
interest rates ranged from 4.0% to 8.75% during 1997.
F-7
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of individual or group policies and
contracts that include an investment component, including most annuities and
universal life policies. Payments received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received and interest
credited to the benefit of the contractholder less withdrawals, mortality
charges and administrative expenses. During 1997, credited interest rates on
contractholder funds ranged from 5.0% to 8.75% for those contracts with fixed
interest rates and from 4.0% to 14.0% for those contracts with flexible rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company previously reinsured all of its annuities and approximately one
third of its life insurance with ALIC. Effective December 31, 1996, the
reinsurance treaty with ALIC was amended to also include a paid up block of life
business which was previously retained by the Company. The reinsurance premium
related to the transfer was $8,255 on a statutory accounting basis and $5,712
based upon generally accepted accounting principles, creating a dividend-in-kind
of $2,543. The premium is equal to the sum of the aggregate policy reserves and
policyholder dividend accumulations on this block of business as of December 31,
1996. The policy loans and accrued interest relating to this block of business
totaled $554 and were also ceded to ALIC as of December 31, 1996, creating a
non-cash financing transaction.
Premiums and contract charges ceded to ALIC were $34,834 and $87,061 in 1997,
$48,111 and $73,659 in 1996, and $56,008 and $44,655 in 1995. Credited interest,
policy benefits and expenses ceded to ALIC amounted to $533,369, $496,735 and
$466,508 in 1997, 1996, and 1995. Investment income earned on the assets which
support contractholder funds is not included in the Company's consolidated
financial statements as those assets are owned and managed by ALIC under the
terms of the reinsurance agreements.
BUSINESS OPERATIONS
The Company utilizes services and business facilities owned or leased, and
operated by AIC in conducting its business activities. The Company reimburses
AIC for the operating expenses incurred by AIC on behalf of the Company. The
cost to the Company is determined by various allocation methods and is primarily
related to the level of services provided. Operating expenses, including
compensation and retirement and other benefit programs, allocated to the Company
were $34,947, $25,094 and $16,083 in 1997, 1996 and 1995, respectively. All of
these costs are ceded to ALIC under reinsurance agreements.
F-8
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
4. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------------- FAIR
AT DECEMBER 31, 1997 COST GAINS (LOSSES) VALUE
- ----------------------------------------------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. government and agencies $ 14,598 $ 1,760 $ - $ 16,358
Corporate 71,602 1,839 (297) 73,144
Foreign government 3,040 229 - 3,269
Mortgage-backed securities 52,313 2,845 (18) 55,140
----------- --------- ----------- ---------
Total fixed income securities $ 141,553 $ 6,673 $ (315) $ 147,911
----------- --------- ----------- ---------
----------- --------- ----------- ---------
<CAPTION>
AT DECEMBER 31, 1996
- -----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agencies $ 16,960 $ 780 $ (25) $ 17,715
Corporate 55,778 1,178 (1,274) 55,682
Foreign government 3,048 225 - 3,273
Mortgage-backed securities 59,080 2,493 (605) 60,968
----------- --------- ----------- ---------
Total fixed income securities $ 134,866 $ 4,676 $ (1,904) $ 137,638
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- ---------
<S> <C> <C>
Due in one year or less $ 375 $ 375
Due after one year through five years 17,195 17,599
Due after five years through ten years 58,369 59,867
Due after ten years 13,301 14,930
----------- ---------
89,240 92,771
Mortgage-backed securities 52,313 55,140
----------- ---------
Total $ 141,553 $ 147,911
----------- ---------
----------- ---------
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Fixed income securities $ 10,723 $ 9,825 $ 8,710
Short-term investments 160 215 177
Other investments 66 31 31
--------- --------- ---------
Investment income, before expense 10,949 10,071 8,918
Investment expense 160 120 122
--------- --------- ---------
Net investment income $ 10,789 $ 9,951 $ 8,796
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-9
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
REALIZED CAPITAL GAINS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Fixed income securities $ 17 $ 6 $ 258
Income tax expense 6 2 90
--------- --------- ---------
Realized capital gains and losses, after tax $ 11 $ 4 $ 168
--------- --------- ---------
--------- --------- ---------
</TABLE>
Gains of $251 were realized on sales of fixed income securities during 1995,
excluding calls and prepayments.
UNREALIZED NET CAPITAL GAINS
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
COST/ UNREALIZED
AMORTIZED FAIR NET
COST VALUE GAINS
----------- --------- -----------
<S> <C> <C> <C>
Fixed income securities $ 141,553 $ 147,911 $ 6,357
----------- ---------
----------- ---------
Deferred income taxes 2,225
-----------
Unrealized net capital gains $ 4,132
-----------
-----------
</TABLE>
CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Fixed income securities $ 3,585 $ (4,918) $ 11,735
Deferred income taxes 1,254 1,721 (4,107)
--------- --------- ---------
Change in unrealized net capital gains and losses $ 2,331 $ (3,197) $ 7,628
--------- --------- ---------
--------- --------- ---------
</TABLE>
SECURITIES ON DEPOSIT
At December 31, 1997, fixed income securities with a carrying value of $8,581
were on deposit with regulatory authorities as required by law.
5. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since a number of the Company's significant assets
(including reinsurance recoverable) and liabilities (including deferred income
taxes and reserve for life-contingent contract benefits) are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments, such as accrued investment income
and cash, are generally of a short-term nature. It is assumed that their
carrying value approximates fair value.
F-10
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
FINANCIAL ASSETS
The carrying value and fair value of financial assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Fixed income securities $ 147,911 $ 147,911 $ 137,638 $ 137,638
Short-term investments 1,020 1,020 1,861 1,861
Separate Accounts 447,658 447,658 255,881 255,881
</TABLE>
Fair values for fixed income securities are based on quoted market prices.
Non-quoted securities are valued based on discounted cash flows using current
interest rates for similar securities. Short-term investments are highly liquid
investments with maturities of less than one year whose carrying value
approximates fair value. Separate Accounts assets are carried in the
consolidated statements of financial position at fair value.
FINANCIAL LIABILITIES
The carrying value and fair value of financial liabilities at December 31, are
as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Contractholder funds on investment contracts $ 5,188,474 $ 4,941,732 $ 5,180,396 $ 4,921,842
Separate Accounts 447,658 447,658 255,881 255,881
</TABLE>
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
6. INCOME TAXES
The Company joins the Corporation and its other eligible domestic subsidiaries
in the filing of a consolidated federal income tax return (the "Allstate Group")
and is party to a federal income tax allocation agreement (the "Tax Sharing
Agreement"). Under the Tax Sharing Agreement, the Company paid to or received
from the Corporation the amount, if any, by which the Allstate Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this results in the
Company's annual income tax provision being computed, with adjustments, as if
the Company filed a separate return.
Prior to the Distribution, the Corporation and all of its eligible domestic
subsidiaries, including the Company, joined with Sears and its domestic business
units (the "Sears Group") in the filing of a consolidated federal income tax
return (the "Sears Tax Group") and were parties to a federal income tax
allocation agreement (the "Sears Tax Sharing Agreement"). Under the Sears Tax
Sharing Agreement, the Company, through the Corporation, paid to or received
from the Sears Group the amount, if any, by which the Sears Tax Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this resulted in the
Company's annual income tax provision being computed as if the Allstate Group
filed a separate consolidated return, except that items such as net operating
losses, capital losses or similar items, which might not be recognized in a
separate return, were allocated according to the Sears Tax Sharing Agreement.
The Allstate Group and Sears Group have entered into an agreement which governs
their respective rights and obligations with respect to federal income taxes for
all periods prior to the Distribution ("Consolidated Tax Years"). The agreement
F-11
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
provides that all Consolidated Tax Years will continue to be governed by the Tax
Sharing Agreement with respect to the Allstate Group's federal income tax
liability.
The components of the deferred income tax assets and liabilities at December 31,
are as follow:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
DEFERRED ASSETS
Separate accounts $ 393 $ -
DEFERRED LIABILITIES
Difference in tax bases of investments (2,265) (2,510)
Unrealized net capital gains (2,225) (970)
Other (52) -
--------- ---------
Total deferred tax liabilities (4,542) (3,480)
--------- ---------
Net deferred tax liability $ (4,149) $ (3,480)
--------- ---------
--------- ---------
</TABLE>
The components of the income tax expense for the year ended at December 31, are
as follow:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current $ 4,321 $ 3,082 $ 2,901
Deferred (586) (62) (156)
--------- --------- ---------
Total income tax expense $ 3,735 $ 3,020 $ 2,745
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company paid income taxes of $4,116, $2,864 and $3,125 in 1997, 1996 and
1995, respectively, to ALIC.
Prior to January 1, 1984, the Company was entitled to exclude certain amounts
from taxable income and accumulate such amounts in a "policyholder surplus"
account. The balance in this account at December 31, 1997, approximately $340
will result in federal income taxes payable of $119 if distributed by the
Company to ALIC. No provision for taxes has been made as the Company has no plan
to distribute amounts from this account. No further additions to the account
have been permitted since the Tax Reform Act of 1984.
F-12
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
7. STATUTORY FINANCIAL INFORMATION
The following tables reconcile net income for the year ended December 31, and
shareholder's equity at December 31, as reported herein in conformity with
generally accepted accounting principles with statutory net income and capital
and surplus, determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities.
<TABLE>
<CAPTION>
NET INCOME
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance per generally accepted accounting principles $ 6,852 $ 5,583 $ 5,093
Deferred income taxes (586) (62) (156)
Statutory investment reserves 36 38 446
Other 363 2 638
--------- --------- ---------
Balance per statutory accounting practices $ 6,665 $ 5,561 $ 6,021
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER'S EQUITY
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Balance per generally accepted accounting principles $ 151,334 $ 142,161
Deferred income taxes 4,149 3,480
Unrealized gain/loss on fixed income securities (4,132) (1,801)
Non-admitted assets and statutory investment reserves (15,994) (14,838)
Other 3,304 4,034
--------- ---------
Balance per statutory accounting practices $ 138,661 $ 133,036
--------- ---------
--------- ---------
</TABLE>
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the Nebraska
Department of Insurance. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners,
("NAIC"), as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. The Company does not follow any permitted statutory accounting
practices that have a material effect on statutory surplus or risk-based
capital.
The NAIC has approved revised statutory accounting principles, as a result of
the codification project to be effective January 1, 1999. Dates for adoption and
implementation, however, will be determined on an individual state basis. The
requirements are not expected to have a material impact on the statutory surplus
of the Company.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. The payment
of shareholder dividends by insurance companies without the prior approval of
the state insurance regulator is limited to formula amounts based on net income
and capital and surplus, determined in accordance with statutory accounting
practices, as well as the timing and amount of dividends paid in the preceding
twelve months. The maximum amount of dividends that the Company can distribute
during 1998 without prior approval of the Nebraska Department of Insurance is
$6,665.
F-13
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
8. LEASE COMMITMENTS
The Company leases certain office facilities. Total rent expense for all leases
was $1,274, $1,039 and $741 in 1997, 1996, and 1995, respectively. Minimum
rental commitments under non-cancelable operating leases with a remaining term
of more than one year as of December 31, are as follows:
<TABLE>
<S> <C>
1998 $ 1,370
1999 1,170
2000 1,095
2001 1,080
2002 542
Thereafter -
---------
$ 5,257
---------
---------
</TABLE>
Included in the table above is $982 for commitments beyond 1998 which relate to
a certain lease for office space. The Company has the option to cancel the
agreement for office space subject to a cancellation charge of an amount equal
to one year's rent.
F-14
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
SUPPLEMENTAL SCHEDULE - REINSURANCE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS
YEAR ENDED DECEMBER 31, 1997 AMOUNT CEDED NET AMOUNT
- -------------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Life insurance in force $72,754,000 $72,754,000 $ -
----------- ----------- ----------
----------- ----------- ----------
Premiums and contract charges:
Life and annuities $ 299,838 $ 299,838 $ -
----------- ----------- ----------
----------- ----------- ----------
<CAPTION>
GROSS
YEAR ENDED DECEMBER 31, 1996 AMOUNT CEDED NET AMOUNT
- -------------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Life insurance in force $51,514,000 $51,514,000 $ -
----------- ----------- ----------
----------- ----------- ----------
Premiums and contract charges:
Life and annuities $ 200,853 $ 200,853 $ -
----------- ----------- ----------
----------- ----------- ----------
<CAPTION>
GROSS
YEAR ENDED DECEMBER 31, 1995 AMOUNT CEDED NET AMOUNT
- -------------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Life insurance in force $28,215,000 $28,200,000 $ 15,000
----------- ----------- ----------
----------- ----------- ----------
Premiums and contract charges:
Life and annuities $ 128,975 $ 128,975 $ -
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
F-15
<PAGE>
FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
(UNAUDITED)
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
($ in thousands) 1998 1997
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Investments
Fixed income securities, at fair value (amortized
cost $142,906 and $141,553) $ 149,287 $ 147,911
Investment in home office real estate 2,488 2,574
Short-term 4,493 1,020
------------- -------------
Total investments 156,268 151,505
Reinsurance recoverable from Allstate Life Insurance
Company 6,746,392 6,732,755
Reinsurance recoverable from third parties 147,204 127,182
Receivable from Allstate Life Insurance Company
and affiliates, net 15,228 14,481
Cash 1,492 4,220
Other assets 35,685 29,402
Separate Accounts 543,452 447,658
------------- -------------
Total assets $ 7,645,721 $ 7,507,203
------------- -------------
------------- -------------
LIABILITIES
Reserve for life-contingent contract benefits $ 276,030 $ 252,195
Contractholder funds 6,617,167 6,607,130
Income taxes payable 2,188 1,128
Deferred income taxes 4,010 4,149
Other liabilities and accrued expenses 49,858 43,609
Separate Accounts 543,452 447,658
------------- -------------
Total liabilities 7,492,705 7,355,869
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 30,000 shares
authorized, 25,000 issued and outstanding 2,500 2,500
Additional capital paid-in 116,750 116,750
Retained income 29,619 27,952
Accumulated other comprehensive income:
Unrealized net capital gains 4,147 4,132
------------- -------------
Total accumulated other comprehensive income 4,147 4,132
------------- -------------
Total shareholder's equity 153,016 151,334
------------- -------------
Total liabilities and shareholder's equity $ 7,645,721 $ 7,507,203
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------------
($ in thousands) 1998 1997
------------------------- -------------------------
<S> <C> <C>
(UNAUDITED)
REVENUES
Net investment income $ 2,566 $ 2,462
Miscellaneous income 13 -
Realized capital gains and losses - 1
------ ------
2,579 2,463
------ ------
COSTS AND EXPENSES
Operating costs and expenses - 84
------ ------
- 84
INCOME BEFORE INCOME TAX EXPENSE 2,579 2,379
INCOME TAX EXPENSE 912 831
------ ------
NET INCOME $ 1,667 $ 1,548
------ ------
------ ------
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------------------
($ in thousands) 1998 1997
----------------------- -----------------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,667 $ 1,548
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Amortization and other non-cash items 11 17
Realized capital gains and losses - (1)
Increase (decrease) in life-contingent contract
benefits and contractholder funds 213 (160)
Change in deferred income taxes (147) (109)
Changes in other operating assets and liabilities 279 (7,804)
------- -------
Net cash provided by (used in) operating
activities 2,023 (6,509)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment collections
Fixed income securities 1,792 1,648
Investment purchases
Fixed income securities (3,070) (2,524)
Real estate - (3)
Change in short-term investments, net (3,473) 10
------- -------
Net cash used in investing activities (4,751) (869)
------- -------
NET (DECREASE) IN CASH (2,728) (7,378)
CASH AT BEGINNING OF YEAR 4,220 7,852
------- -------
CASH AT END OF YEAR $ 1,492 $ 474
------- -------
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash financing activity:
Dividend-in-kind to Allstate Life Insurance Company $ - $ (10)
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Lincoln Benefit Life Company (the "Company")
and its wholly owned subsidiary, Lincoln Benefit Financial Services, Inc.
("LBFS"), a registered broker-dealer. The Company is a wholly owned subsidiary
of Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate
Insurance Company, a wholly owned subsidiary of The Allstate Corporation.
The consolidated financials statements and notes as of March 31, 1998 and for
the three-month periods ended March 31, 1998 and 1997 are unaudited. The interim
consolidated financial statements reflect all adjustments (consisting only of
normal recurring accruals) which are, in the opinion of management, necessary
for the fair presentation of the financial position, results of operations and
cash flows for the interim periods. These consolidated financial statements and
notes should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the year ended December 31, 1997. The
results of operations for the interim period should not be considered indicative
of results to be expected for the full year.
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. Specifically, certain external, payroll and payroll related costs should be
capitalized during the application development state of a project and
depreciated over the computer software's useful life. The Company has adopted
the SOP effective January 1, 1998.
2. REINSURANCE
Premiums, contract charges, credited interest, policy benefits and certain
expenses are primarily ceded to ALIC. The consolidated statements of operations
is presented net of reinsurance transactions. Therefore, the amounts shown in
the Company's consolidated statements of operations relate to the investment of
those assets of the Company that are not transferred to ALIC under the
reinsurance agreement. Reinsurance recoverable and contractholder funds are
reported separately in the consolidated statements of financial position. The
Company continues to have primary liability as the direct insurer for risks
reinsured.
Investment income earned on the assets which support contractholder funds is not
included in the Company's consolidated financial statements as those assets are
owned and managed by ALIC under the terms of reinsurance agreements. The
following amounts were ceded to ALIC under the reinsurance agreements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Contract charges $ 24,569 $ 21,587
Credited interest, policy benefits and expenses 123,098 132,348
</TABLE>
3. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Comprehensive Income is a
measurement of all changes in shareholder's equity that result from transactions
and other economic events other than transactions with shareholders. For the
Company, these changes consist of changes in unrealized gains and losses of the
investment portfolio. These amounts, presented as other comprehensive income,
net of related taxes, are added to net income which results in comprehensive
income. The cumulative amount of these changes is reported in the consolidated
statements of financial position as accumulated other comprehensive income.
F-19
<PAGE>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the three-month periods ended March 31,
<TABLE>
<CAPTION>
1998 1997
------------------------------ -----------------------------
INCOME INCOME
TAX AFTER- TAX AFTER-
($ in thousands) PRETAX EFFECT TAX PRETAX EFFECT TAX
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Unrealized capital gains and losses:
Unrealized holding gains (losses) arising
during the period 23 (8) 15 (3,450) 1,208 (2,242)
Less: reclassification adjustment for
realized net capital gains included in net
income - - - 1 - 1
-------- -------- -------- -------- -------- --------
Other comprehensive income $ 23 $ (8) $ 15 $ (3,451) $ 1,208 $ (2,243)
-------- -------- -------- -------- -------- --------
-------- -------- -------- --------
Net income 1,667 1,548
-------- --------
Comprehensive income $ 1,682 $ (695)
-------- --------
-------- --------
</TABLE>
4. REGULATION AND LEGAL PROCEEDINGS
The Company's insurance businesses are subject to the effects of a changing
social, economic and regulatory environment. Public and regulatory initiatives
have varied and have included efforts to adversely influence and restrict
premium rates, restrict the Company's ability to cancel policies, impose
underwriting standards and expand overall regulation. The ultimate changes and
eventual effects, if any, of these initiatives are uncertain.
Various other legal and regulatory actions are currently pending that involve
the Company and specific aspects of its conduct of business. In the opinion of
managment, the ultimate liability, if any, in one or more of these actions in
excess of amounts currently reserved is not expected to have a material effect
on the results of operations, liquidity or financial position of the Company.
F-20
<PAGE>
APPENDIX A
PORTFOLIOS AND PERFORMANCE DATA
PERFORMANCE DATA
From time to time the Separate Account may advertise the Fidelity Money Market
Subaccount's "yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Fidelity Money Market Subaccount refers to the net income earned
by the Subaccount over the seven-day period stated in the advertisement. This
income is then "annualized." That is, the amount of income earned during that
week is assumed to be generated each week over a 52-week period and is shown as
a percentage of the investment. The "effective yield" is calculated similarly
but, when annualized, the income earned by the investment is assumed to be
reinvested at the end of each seven-day period. The "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment. Neither the yield nor the effective yield takes into
consideration the effect of any capital gains or losses that might have occurred
during the seven day period, nor do they reflect the impact of any premium tax
charge. The impact of other, recurring charges on both yield figures is,
however, reflected in them to the same extent it would affect the yield (or
effective yield) for a Contract of average size.
In addition, the Separate Account may advertise an annualized 30-day (or one
month) yield figure for Subaccounts other than the Fidelity Money Market
Subaccount. These yield figures are based upon the actual performance of the
Subaccount over a 30-day (or one month) period ending on a date specified in the
advertisement. Like the money market yield data described above, the 30-day (or
one month) yield data will reflect the effect of all recurring Contract charges,
but will not reflect any premium tax charge. The yield figure is derived from
net investment gain (or loss) over the period expressed as a fraction of the
investment's value at the end of the period.
The Separate Account may also advertise standardized and non-standardized "total
return" data for its Subaccounts. Like the yield figures described above, total
return figures are based on historical data and are not intended to indicate
future performance. The standardized "total return" compares the value of a
hypothetical investment made at the beginning of the period to the value of the
same hypothetical investment at the end of the period. Recurring Contract
charges are reflected in the standardized total return figures in the same
manner as they are reflected in the yield data for Contracts funded through the
Money Market Subaccount.
In addition to the standardized "total return," the Separate Account may
advertise non-standardized "total return." Non-standardized total return is
calculated in a similar manner and for the same time periods as the standardized
total return. We assumed, however, an initial hypothetical investment of
$75,000, because $75,000 is closer to the average Purchase Payment of a Contract
which we expect to write. Standardized total return, on the other hand, assumes
an initial hypothetical investment of $1,000. In addition, non-standardized
total return does not reflect the effect of the contract maintenance charge,
because we waive that charge on Contracts on which the Purchase Payments exceed
$50,000. As a result, the return on a Contract that is subject to the contract
maintenance charge will be less than the non-standardized total return
calculated as described above.
The Separate Account may also disclose yield and non-standardized total return
for time periods before the date the Separate Account commenced operations. In
this case, performance data for the Subaccounts is calculated based on the
performance of the Portfolios and assumes that the Subaccounts existed during
the same time period as those of the Portfolios, with recurring Contract charges
equal to those currently assessed against the Subaccounts.
Our advertisements may also compare the performance of our Subaccounts with: (a)
certain unmanaged market indices, including but the Dow Jones Industrial
Average, the Standard & Poor's 500, and the Shearson Lehman Bond Index; and/or
(b) other management investment companies with investment objectives similar to
the underlying funds being compared. Our advertisements also may include the
performance ranking assigned by various publications, including the Wall Street
Journal, Forbes, Fortune, Money, Barron's, Business Week, USA Today, and
statistical services, including Lipper Analytical Services Mutual Fund Survey,
Lipper Annuity and Closed End Survey, the Variable Annuity Research Data Survey,
and SEI.
The Contract charges are described in more detail on pages 27-31. We have
described the computation of advertised performance data for the Separate
Account in more detail on page S-15 of the Statement of Additional Information.
A-1
<PAGE>
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Purchase Payment: $40,000.00
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
5-year Treasury Rate at
Time of Purchase Payment: 6.0%
</TABLE>
The following examples illustrate how the Market Value Adjustment may affect the
values of a Contract upon a withdrawal. The 5% assumed Guaranteed Interest Rate
is the rate required to be used in the "Summary of Expenses." In these examples,
the withdrawal occurs one year after the Issue Date. The Market Value Adjustment
operates in a similar manner for transfers.
Assuming that the entire $40,000.00 Purchase Payment is allocated to the
Guaranteed Maturity Fixed Account for the Guarantee Period specified above, at
the end of the five-year Guarantee Period the Contract Value would be
$51,051.26. After one year, when the withdrawals occur in these examples, the
Contract Value would be $42,000.00. We have assumed that no prior partial
withdrawals or transfers have occurred.
The formula that we use to determine the amount of the Market Value Adjustment
is:
.9 X (I-J) X N,
<TABLE>
<S> <C> <C> <C>
where: I = the Treasury Rate for a maturity equal to the relevant Guarantee Period for the week
preceding the beginning of the Guarantee Period;
J = the Treasury Rate for a maturity equal to the relevant Guarantee Period for the week
preceding our receipt of your withdrawal request, death benefit request, transfer request,
or annuity option request; and
N = the number of whole and partial years from the date we receive your request until the end of
the relevant Guarantee Period.
</TABLE>
We will base the Market Value Adjustment on the then current Treasury Rate for a
maturity corresponding in length to the relevant Guarantee Period.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment, such that the five-year Treasury
Rate is now 6.5%. Upon a withdrawal, the market value adjustment factor would
be:
.9 X (.06 - .065) X 4 = -.0180
The Market Value Adjustment is a reduction of $756.00 from the amount withdrawn:
$756.00 = -.0180 X $42,000.00
As a result, the net amount payable to you would be:
$41,244.00 = $42,000.00 - $756.00
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
after the Purchase Payment, such that the five-year Treasury Rate is now 5.5%.
Upon a withdrawal, the market value adjustment factor would be:
.9 X (.06 - .055) X 4 = .0180(1)
The Market Value Adjustment would increase the amount withdrawn by $756.00, as
follows:
$756.00 = .0180 X $42,000.00
As a result, the net amount payable to you would be:
$42,756.00 = $42,000.00 + $756.00
- ------------------------
(1)Actual calculation utilizes ten decimal places.
B-1
<PAGE>
EXAMPLE OF A PARTIAL WITHDRAWAL
If you request a partial withdrawal from a Guarantee Period, we can either (1)
withdraw the specified amount of Contract Value and pay you that amount as
adjusted by any applicable Market Value Adjustment or (2) pay you the amount
requested, and subtract an amount from your Contract Value that equals the
requested amount after application of the Market Value Adjustment. Unless you
instruct us otherwise, when you request a partial withdrawal we will assume that
you wish to receive the amount requested. We will make the necessary
calculations and on your request provide you with a statement showing our
calculations.
For example, if in the first example above you wished to receive $20,000 as a
partial withdrawal, we would perform the following calculations:
<TABLE>
<S> <C> <C> <C>
Let A = the amount to be withdrawn from your Contract Value; and
B = the amount of the applicable Market Value Adjustment
Then A + B = $20,000,
-.0180 X A = B, and
A = $20,000 / (1 -.0180) = $20,366.60
</TABLE>
Accordingly, we would pay you $20,000 and subtract $20,366.60 from your Contract
Value. The Market Value Adjustment would be a subtraction of $366.60.
If, however, in the same example, you wished to withdraw $20,000 from your
Contract Value and receive the adjusted amount, we would perform the following
calculations:
<TABLE>
<S> <C> <C> <C>
Let A = the amount to be paid to you; and
B = the amount of the applicable Market Value Adjustment
Then $20,000 + B = A,
-.0180 X $20,000 = -$360.00 = B, and
A = $20,000 - $360.00 = $19,640.00
</TABLE>
Accordingly, we would pay you $19,640.00 and subtract $20,000.00 from your
Contract Value. The Market Value Adjustment would be a subtraction of $360.00
B-2
