AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 2009
REGISTRATION NO. 333-156125
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
x Pre-Effective Amendment No. 1
¨ Post-Effective Amendment No.
(Check appropriate box or boxes)
LINCOLN VARIABLE INSURANCE PRODUCTS TRUST
(Exact Name of Registrant as Specified in Charter)
1300 South Clinton Street
Fort Wayne, IN 46801
(Address of Principal Executive Offices)
Registrant’s Telephone Number, Including Area Code: (260) 455-2000
Dennis L. Schoff, Esq.
The Lincoln National Life Insurance Company
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, IN 46801
(Name and Address of Agent for Service)
Copies of all communications to:
Robert A. Robertson, Esq.
Dechert LLP
4675 MacArthur Court, Suite 1400
Newport Beach, CA 92660
Approximate Date of Proposed Public Offering: As soon as practicable after this Registration Statement becomes effective.
It is proposed that this registration statement shall hereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine.
No filing fee is due because an indefinite number of shares have been deemed to be registered in reliance on Section 24(f) under the Investment Company Act of 1940, as amended.
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
March 16, 2009
Dear Contract Owner or Participant:
Enclosed you will find a Notice and Proxy Statement/Prospectus for a special meeting of contract owners of Lincoln National Variable Annuity Fund A (“Fund A”) to be held on June 11, 2009. The special meeting will be held at 9:00 a.m., local time, at 1300 South Clinton Street, Fort Wayne, IN 46802. The following proposals will be considered and acted upon at the meeting:
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| Proposal 1: | | To approve an Agreement and Plan of Reorganization and related transactions to transfer the assets of Fund A to the LVIP Delaware Growth and Income Fund, a series of the Lincoln Variable Insurance Products Trust, in exchange for Standard Class shares of LVIP Delaware Growth and Income Fund, and to restructure Fund A into a unit investment trust. |
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| Proposal 2: | | To transact such other business as may properly come before the meeting or any adjournments or postponements thereof. |
After reviewing this matter carefully, the Board of Managers of Fund A unanimously recommends that you vote “FOR” the proposals. Your vote is extremely important regardless of the number of votes that you hold. Please take a few minutes to review this material, cast your vote on the enclosed proxy and return it in the enclosed postage-paid envelope. Your prompt response is needed so that the necessary quorum and vote can be obtained. It is important that your vote be received prior to the special meeting.
We appreciate your participation and prompt response in this matter, and thank you for your continued support.
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| By Order of the Fund’s Board of Managers |
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| Cynthia A. Rose |
| Secretary |
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus is being furnished to you in connection with the solicitation of proxies relating to the special meeting of contract owners of Lincoln National Variable Annuity Fund A. The special meeting will be held on June 11, 2009 at 9:00 a.m., local time, at 1300 South Clinton Street, Fort Wayne, IN 46802.
The special meeting is for the purpose of considering and acting on the following matters:
| | 1. | To approve an Agreement and Plan of Reorganization and related transactions to transfer the assets of Fund A to the LVIP Delaware Growth and Income Fund (“LVIP G&I Fund”), a series of Lincoln Variable Insurance Products Trust, a mutual fund registered under the 1940 Act, in exchange for Standard Class shares of the LVIP G&I Fund, and to restructure Fund A as a unit investment trust. |
| | 2. | To consider and act upon such other business as may properly come before the special meeting or any adjournment(s) or postponement(s) thereof. |
After careful consideration, the Board of Managers of Fund A unanimously approved the proposals and recommends that contract owners vote “FOR” the proposals. The matters referred to above are discussed in detail in this Proxy Statement/Prospectus. The Board of Managers of Fund A has fixed the close of business on February 17, 2009 as the record date for determining contract owners entitled to notice of and to vote at the special meeting, and any adjournment thereof.
Whether or not you plan to attend the special meeting, please complete, sign, and return the enclosed proxy promptly so that you will be represented at the special meeting. If you have returned a proxy and are present at the special meeting, you may change the vote specified in the proxy at that time. However, attendance at the special meeting, by itself, will not revoke a previously tendered proxy.
The date of the first mailing of the proxy cards and this Proxy Statement/Prospectus by us will be on or about March 23, 2009. If you have any questions about the meeting, please feel free to call us at (800) 4LINCOLN 9454-6265).
This Proxy Statement/Prospectus, which should be retained for future reference, sets forth concisely the information about the LVIP G&I Fund that a prospective investor should know before investing. We recommend that you read this Proxy Statement/Prospectus in its entirety as the explanations will help you to decide how to vote on the Proposals. A Statement of Additional Information dated March 16, 2009, relating to this Proxy Statement/Prospectus and the reorganization is incorporated hereby by reference. If you would like a copy of this Statement of Additional Information, call (800) 4LINCOLN (454-6265), or write the LVIP Trust at P.O. Box 2340, Fort Wayne, Indiana 46801 and you will be mailed one promptly, free of charge.
Mutual fund shares are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Proxy Statement/Prospectus. Any representation to the contrary is a criminal offense.
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QUESTIONS AND ANSWERS
Q. Why am I receiving this Proxy Statement/Prospectus?
You are receiving this Proxy Statement/prospectus because you own a contract or certificate issued by The Lincoln National Life Insurance Company (“Lincoln Life”) and such contract or certificate was issued through Lincoln National Variable Annuity Fund A (“Fund A”), a separate account of Lincoln Life. Lincoln Life is a wholly-owned subsidiary of Lincoln National Corporation (“LNC”).
Because the contracts are no longer being sold, the asset base of Fund A has been declining over the years and will not increase substantially in the foreseeable future. Accordingly, the administration costs for Fund A cannot benefit from economies of scale. Further, Lincoln Life has been operating the LVIP G&I Fund, which has investment objectives and strategies substantially similar to those of Fund A, since June 15, 1981. The officers of Fund A (“Fund A Management”) have determined that, rather than continuing to operate Fund A as an actively managed portfolio, it would be more efficient to restructure Fund A into unit investment trust (“New UIT”), which will invest in shares of the LVIP G&I Fund, a registered investment company. The contracts and certificates issued through the Lincoln Life separate account, currently Fund A, will remain in this separate account. What will change is the structure of the separate account as a New UIT.
The reorganization is intended to eliminate duplication of costs and other inefficiencies to Lincoln Life arising from having two comparable investment vehicles operated by Lincoln Life. Also, the contract owners and participants are expected to benefit from the larger asset base in the LVIP G&I Fund that will result from the Reorganization. The larger asset base of the LVIP G&I Fund should increase investment opportunities and broaden diversification of the funding medium for the contracts.
Further, the end result of the reorganization will be an organizational structure for the contract owners and participants that is more common in the variable annuity industry than the current organization structure. All of Lincoln Life’s other individual variable annuity products are structured with two tiers or levels; namely, the insurance company separate account purchases shares of mutual funds and those mutual funds hold diverse portfolios of investments. Currently, Fund A is a one-tier structure consisting of an insurance company separate account that invests directly in a diverse portfolio of investments. The Reorganization will move Fund A from a one-tier structure to the more common two-tiered structure.
This Proxy Statement/Prospectus is soliciting the contract owners and participants of Fund A to approve the Agreement and Plan of Reorganization, which contemplates the transfer of all of the asset and liabilities of Fund A (other than insurance obligations such as death benefits, surrender benefits and annuity payments) to the LVIP G&I Fund in exchange for Standard Class shares of the LVIP G&I Fund having an aggregate value equal to the net asset value of Fund A, and the restructuring of Fund A into a unit investment trust under the Investment Company Act of 1940, as amended (“1940 Act”), that will invest in Standard Class shares of the LVIP G&I Fund (the “Reorganization”). No sales charge will be imposed on the shares of the LVIP G&I Fund received by Fund A, the New UIT.
You are being asked to approve the Reorganization Agreement and the related transactions. Because contract owners and participants of Fund A are being asked to approve a Reorganization that will result in their having an interest in shares of the LVIP G&I Fund, this document also serves as a Prospectus for the LVIP G&I Fund.
Accompanying this Proxy Statement/Prospectus as Exhibit A is a copy of the Agreement and Plan of Reorganization pertaining to the transaction.
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Q. How do the Funds differ?
Fund A’s investment objective is long-term growth of capital in relation to the changing value of the dollar. A secondary investment objective of Fund A is the production of current income. The LVIP G&I Fund’s investment objective is to maximize long-term capital appreciation. The investment strategy of the LVIP G&I Fund also includes an income component. The LVIP G&I Fund typically invests in companies that have a long history of profit growth and dividend payment, which provide current income. Both Fund A and the LVIP G&I Fund are managed by the same sub-adviser, Delaware Management Company, a series of Delaware Management Business Trust, and the same portfolio management team. Fund A and the LVIP G&I Fund are managed using the same investment process, research, and proprietary technical models. As a result, the two Funds hold investments that are substantially the same. The primary difference in Fund A and the LVIP G&I Fund is that due to smaller asset flows into Fund A and Fund A’s smaller size, its investments and the amounts of those investments may differ slightly from those that are held by the LVIP G&I Fund.
Both Fund A and the LVIP G&I Fund are equity funds with a diversified portfolio. They primarily invest in stocks of large-sized U.S. companies. Both Funds benchmark their investment performance against the Russell 1000® Index, which consists of the 1,000 largest U.S. companies, based on total market capitalization, in the Russell 3000® Index. The Russell 3000® Index is a capitalization-weighted total return index, which is comprised of 3000 of the largest capitalized U.S. domiciled companies.
Please see the section entitled “Principal Investment Strategies and Risks of Each Fund” in this Proxy Statement/Prospectus for a more detailed discussion of the similarities and difference in the investment objectives, policies and principal risks of Fund A and the LVIP G&I Fund.
Q. Will there be any tax consequences as a result of the merger?
The Reorganization is being structured as a tax-free reorganization. See “Information About the Reorganization—Federal Income Tax Consequences.”
Q. Will my vote make a difference?
Your vote is important regardless of the number of shares attributable to your contract and/or qualified plan. To avoid the added cost of follow-up solicitations and possible adjournments, please take a few minutes to read the proxy statement/prospectus and provide your vote. It is important that your vote be received before the special meeting.
Q. Who will pay for the costs of the preparation, printing and mailing of this Proxy Statement/Prospectus?
The Lincoln National Life Insurance Company, the issuer of the Contracts, has agreed to pay the costs of the Reorganization, which includes preparation of the Proxy Statement/Prospectus, printing and distributing proxy materials, legal fees, accounting fees, and expenses of holding the shareholder meeting. We do not anticipate any brokerage costs associated with repositioning Fund A’s portfolio holdings as a result of the Reorganization.
Q. How does the Board recommend that I vote?
The Board of Managers of the Fund recommends that you vote to APPROVE the Reorganization on behalf of the Fund.
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Q. How do I give my voting instructions?
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| VOTING PROCEDURES |
Contract Owners /Participants are urged to designate their choice on the matter to be acted upon by using one of the following three methods: 1. BY INTERNET • Read the Proxy Statement/Prospectus. • Go to the voting link found on your proxy card. • Follow the instructions using your proxy card as a guide. • (Do not mail the proxy card if you provide voting instructions by Internet.) 2. BY MAIL • Read the Proxy Statement/Prospectus. • Date, sign, and return the enclosed proxy card in the envelope provided, which requires no postage if mailed in the United States. 3. BY TELEPHONE • Read the Proxy Statement/Prospectus. • Call the toll-free number found on your proxy card. • Follow the recorded instructions using your proxy card as a guide. (Do not mail the proxy card if you provide voting instructions by telephone.) |
Q. Who do I call if I have questions?
If you have any questions about the meeting or anything in this Proxy Statement/Prospectus, please feel free to call us toll free at (800) 4LINCOLN (454-6265).
Q. Is there any other information available to me?
Fund A. The following documents have been filed with the Securities and Exchange Commission (“SEC”) File Nos. 002-25618 and 002-26342): (i) the Prospectus of Fund A (Individual), dated April 30, 2008, which is incorporated herein by reference into this Proxy Statement/Prospectus; (ii) the Prospectus of Fund A (Group), dated April 30, 2008, which is incorporated herein by reference into this Proxy Statement/Prospectus; (iii) the Statement of Additional Information for Fund A (Individual), dated April 30, 2008, which is incorporated herein by reference into this Proxy Statement/Prospectus; (iv) the Statement of Additional Information for Fund A (Group), dated April 30, 2008, which is incorporated herein by reference into this Proxy Statement/Prospectus; (v) the Annual Report for Fund A dated December 31, 2008; and (vi) the Semi-Annual Report for Fund A dated June 30, 2008.
LVIP G&I Fund. The following documents have been filed with the SEC (SEC File Nos. 811-08090); (i) the Prospectus of the LVIP G&I Fund (Standard Class Shares), dated April 30, 2008, which is incorporated herein by reference into this Proxy Statement/Prospectus; (ii) the Statement of Additional Information for the LVIP G&I Fund, dated April 30, 2008, which is incorporated herein by reference into this Proxy Statement/Prospectus; (iii) the Annual Report for the LVIP G&I Fund, dated December 31, 2008; and (iv) the Semi-Annual Report for the LVIP G&I Fund, dated June 30, 2008.
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Copies of each of these documents, the Statement of Additional Information related to this Proxy Statement /Prospectus and any subsequently released shareholder reports are available upon request by calling (800) 4LINCOLN (454-6265) or by writing to P.O. Box 2340, Fort Wayne, Indiana 46801 and you will be mailed one free of charge. You can also access the Annual/Reports and Semi-Annual Reports and any subsequently released shareholder reports at:
http://www.annuitycontent.lnc.com/LLsup/PDFLibrary/19875A.pdf
http://www.annuitycontent.lnc.com/llsup/PDFLibrary/SAR-A-MF5.pdf
Fund A and the LVIP G&I Fund are each subject to informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 (the “1940 Act”), and in accordance therewith, file reports and other information with the SEC. Accordingly, they must file proxy material, reports, and other information with the SEC. Such proxy material, reports, and other information filed by Fund A and the LVIP G&I Fund can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.W., Washington, DC 20549. To learn more about this service, call the SEC at (202) 551-8090. Copies of such materials can also be obtained at prescribed rates by electronic request at the following email address: publicinfo@sec.gov, or by writing the Public Reference Branch, Office of Consumer Affairs and Information Services, U.S. Securities and Exchange Commission, Washington, DC 20549-0102. Contract owners and participants may also obtain such information from the SEC’s website at http://www.sec.gov.
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TABLE OF CONTENTS
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INTRODUCTION
PROPOSAL 1
To Approve an Agreement and Plan of Reorganization
SUMMARY
This summary is qualified in its entirety by reference to the additional information contained elsewhere in this Proxy Statement/Prospectus and the Agreement and Plan of Reorganization, which is attached hereto as Exhibit A.
How will the Reorganization affect me?
This Proxy Statement/Prospectus is soliciting contract owners and participants of Fund A, to approve a proposed reorganization of Fund A whereby (1) the assets and liabilities of Fund A (other than liabilities associated with insurance obligations) will be transferred to the LVIP G&I Fund, a series of Lincoln Variable Insurance Products Trust, an open-end management investment company registered under the 1940 Act, in exchange for Standard Class shares of the LVIP G&I Fund and (2) Fund A will be restructured as a unit investment trust (“New UIT”) under the Investment Company Act of 1940, as amended (“1940 Act”) (“Reorganization”). If contract owners and participants approve the Reorganization, then immediately following the consummation of the Reorganization, each contract owner and participant will have an interest in the New UIT equal in value to that contract owner’s or participant’s interest in Fund A immediately prior to the Reorganization.
The contract owners and participants are being asked to approve the Reorganization Agreement and the related transactions pursuant to which the Reorganization transaction would be accomplished. Because the contract owners and participants of Fund A are being asked to approve a Reorganization transaction that will result in them holding an interest in shares of the LVIP G&I Fund through their ownership of a Lincoln Life contract or certificate issued through Fund A, this document also serves as a Prospectus for the LVIP G&I Fund.
Fund A is a separate account under Indiana insurance law that is registered as a management investment company under the Investment Company Act of 1940. The LVIP G&I Fund is a separate diversified series of the Lincoln Variable Insurance Products Trust, a Delaware statutory trust, which is registered as an open-end management investment company under the Investment Company Act of 1940 (“1940”) Act. The investment objectives and strategies for Fund A are substantially similar to the investment objectives and strategies of the LVIP G&I Fund. Fund A and the LVIP G&I Fund have the same sub-adviser, Delaware Management Company (“DMC”), a series of Delaware Management Business Trust, the same portfolio management team, and are managed in the same manner. The investment objectives of Fund A and the LVIP G&I Fund are fundamental and may not be changed without shareholder approval.
The Reorganization is intended to eliminate duplication of costs and other inefficiencies to Lincoln Life from operating two comparable investment vehicles. Also, the contract owners and participants are expected to benefit from the larger asset base in the LVIP G&I Fund that will result from the Reorganization. The larger asset base of the LVIP G&I Fund should increase investment opportunities and broaden diversification of the investments for the contract owners and participants who select to have their contract value in the LVIP G&I Fund.
Immediately after the Reorganization, each contract owner’s interest in the New UIT will have a value identical to the value of the contract owners’ interest in Fund A immediately before the Reorganization. Immediately after the Reorganization, each participant’s interest in the New UIT will have a value identical to the value of the participant’s interest in Fund A immediately before the Reorganization. The value of your
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variable annuity contract (“contract”) or certificate will remain in the same Lincoln Life separate account, but that separate account, which has been reorganized into the New UIT, will invest in the LVIP G&I Fund following the Reorganization.
There will be no change in the contracts or in the rights of contract owners under those contracts after the Reorganization. There will be no change in the certificates or in the rights of participants under those certificates after the Reorganization. Also, there will be no change in purchase or transfer privileges or surrender or withdrawal procedures. Insurance obligations under contracts or certificates issued by Lincoln Life (e.g., death benefits, surrender benefit, and annuity payments) and currently supported by the assets of Fund A will be supported by the assets of the New UIT after the reorganization. The total value of the accumulation or annuity units a contract owner or participant has in Fund A immediately prior to the Reorganization will be the same as the total value of the accumulation or annuity units the contract owner or participant will have in the New UIT immediately after the Reorganization.
The current level of operating expenses for the LVIP G&I Fund are higher than the operating expenses of Fund A. However, if the Reorganization is approved, Lincoln Life will waive certain New UIT expenses (separate account expenses) to ensure that contract owners and participants do not incur aggregate contract or certificate expenses after the Reorganization that are higher than their pre-Reorganization aggregate contract or certificate expenses. Lincoln Life will effect this expense waiver by making adjustments, on a daily basis, in the New UIT expenses (separate account expenses) such that the sum of (a) the LVIP G&I Fund’s net fund operating expense ratio (taking into account any expense waivers or reimbursements), calculated as of the end of the most recently ended semi-annual period, and (b) the New UIT’s separate account expense ratio (i.e., asset-based fees and charges deducted on a daily basis from the New UIT assets and reflected in the calculations of the New UIT’s unit value) will not exceed, on an annualized basis, the aggregate annual expense ratio for Fund A (i.e., total separate account expenses and annual fund operating expenses as a % of average daily net assets in Fund A) for fiscal year 2008. In the event that the sum of the LVIP G&I Fund’s actual net fund operating expense ratio and the New UIT’s separate account expense ratio for any semi-annual period, including the expense waiver, exceeds, on an annual basis, the aggregate annual expense ratio for Fund A for fiscal year 2008, Lincoln Life will, in the following semi-annual period, reimburse the New UIT an additional amount that is equal to the excess of the adjusted expenses previously paid by contract owners and participants during that most recently completed semi-annual period over those expenses that would have been paid assuming the aggregate annual expense ratio for Fund A for the year ended December 31, 2008.
Lincoln Life’s waiver obligation will continue for as long as there is any contract or certificate is in effect. The fee waiver will apply to all Fund A contract owners and participants, whether they had an interest in Fund A at the time of the Reorganization. Accordingly, officers of Fund A (“Fund A Management”) is of the opinion that contract owners and participants will not be harmed by the Reorganization. See “Comparison of Fees and Expenses” and “Supplementary Financial Information” below.
Will the Reorganization result in a change in Voting Procedures?
Voting procedures will change after the Reorganization. Currently, the contract owners vote directly with respect to items affecting Fund A; in other words, contract owners are not required to instruct another party who votes on their behalf. After Fund A is restructured as a UIT, it will no longer have a Board of Managers. However, the LVIP G&I Fund has a Board of Trustees.
If the Reorganization is approved, contract owners will vote indirectly by instructing Lincoln Life as to how to vote shares of the LVIP G&I Fund held by the New UIT. Contract owners will complete voting instruction cards as opposed to proxy cards. Lincoln Life will vote the shares in accordance with the shareholder instructions pursuant to the requirements of the Investment Company Act of 1940. Lincoln Life will vote the shares of the LVIP G&I Fund held by the New UIT for which instructions are not provided in proportion to the instructions received from contract owners. If the Reorganization is approved, participants will continue to vote indirectly by providing voting instructions to the contract owner.
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Fund A shares and shares of the LVIP G&I Fund have non-cumulative voting rights, which is typical. If you have cumulative voting rights for the election of Board members, you may vote all of your shares cumulatively. This means that you would have the right to give each Board nominee an equal number of votes or divide the votes among the nominees as you wish.
See “Voting Information” and “Quorum Requirements/Votes Necessary to Approve Proposals.”
Why is the Reorganization being proposed?
The Reorganization is intended to eliminate duplication of costs and other inefficiencies to Lincoln Life arising from having two comparable investment vehicles offered by the LFG organization, as well as to assist in achieving economies of scale and increased investment opportunities for contract owners. Contract owners are also expected to benefit from the larger asset base that will result from the Reorganization. Further, the end result will be an organizational structure that is more common in the variable annuity industry than the current organization structure.
What are the key features of the Reorganization?
The Reorganization Agreement sets forth the key features of the Reorganization. For a complete description of the Reorganization, see Exhibit A. The Reorganization Agreement generally provides for the following:
| | • | | Fund A will transfer all of its assets to the LVIP G&I Fund. LVIP G&I Fund will assume Fund A’s stated liabilities other than liabilities associated with insurance obligations that will be assumed by the New UIT. |
| | • | | Fund A will be restructured as the New UIT. The New UIT will assume Fund A’s stated liabilities associated with insurance obligations. |
| | • | | The LVIP G&I Fund will issue Standard Class shares to be held by the New UIT in an amount equal to the value of the assets that the LVIP G&I Fund received from Fund A, less the liabilities LVIP G&I Fund assumes. Immediately after the Reorganization, your indirect interest in the LVIP G&I Fund will equal your previous direct interest in Fund A. |
| | • | | Contract owners will retain their same Lincoln Life contract and participants will retain their same certificate issued by Lincoln Life. The aggregate contract charges will not change for contract owners and participants. There will be no change in the value of your contract or certificate and no change in your benefits under your contract or certificate as a result of the Reorganization. The Reorganization also will not affect the features of the contracts; and |
| | • | | The Reorganization should not result in adverse tax consequences to contract owners or participants. |
Will I have to pay any sales load, commission or other transaction fee in connection with the Reorganization?
Neither Fund A nor the contract owners of Fund A will pay any fees or charges in connection with the Reorganization. Lincoln Life will pay all costs and expenses associated with effecting the Reorganization.
How does the Board of Managers recommend that I vote?
After careful consideration, the Board of Managers unanimously approved the proposed reorganization. The Board of Managers recommends that you vote “FOR” the proposed reorganization.
What happens if the contract owners do not approve the Reorganization?
In the event that Contract Owners do not approve the Reorganization, Fund A will continue to operate as it is currently, and its Board of Managers will determine what further action, if any, to take.
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How do the Funds’ investment objectives, principal investment strategies and risks compare?
Fund A’s investment objective is long-term growth of capital in relation to the changing value of the dollar. A secondary investment objective of Fund A is the production of current income. The LVIP G&I Fund’s investment objective is to maximize long-term capital appreciation. The investment strategy of the LVIP G&I Fund also includes an income component. The LVIP G&I Fund typically invests in companies that have a long history of profit growth and dividend payment, which provide current income. Accordingly, Fund A and the LVIP G&I Fund have substantially similar investment objectives.
Fund A and the LVIP G&I Fund are each equity funds with diversified portfolios. They primarily invest in stocks of large-sized U.S. companies. Both funds benchmark their investment performance against the Russell 1000® Index, which consists of the 1,000 largest U.S. companies based on total market capitalization. Fund A and the LVIP G&I Fund have the same investment sub-adviser, Delaware Management Company (“DMC”), a series of Delaware Management Business Trust, and the same portfolio management team. DMC manages Fund A and the LVIP G&I Fund using the same investment process, research and proprietary technical models. As a result, Fund A and the LVIP G&I Fund hold investments that are substantially similar.
Because Fund A and the LVIP G&I Fund have substantially similar investment objectives and strategies and are managed by the same sub-adviser and portfolio management team in the same manner, these funds have substantially similar risks. Fund A and the LVIP G&I Fund are subject to market, industry and company risks. Also, Fund A and the LVIP G&I Fund are subject to the risk associated with medium-sized companies.
How do the Funds’ fees and expenses compare?
Fund A offers only one class of shares, while the LVIP G&I Fund offers two classes of shares, Standard Class and Service Class shares. After the Reorganization, the New UIT will be invested in the Standard Class shares of the LVIP G&I Fund. While contract owners and participants will not own the shares directly, contract owners and participants will have an indirect interest through their ownership of contracts or certificates, respectively, which are held in the New UIT. Contract owners and participants will not pay any initial or deferred sales charge in connection with the Reorganization.
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The following tables allow you to compare the various fees and expenses that you may pay for buying and holding shares of each of the Funds. The column entitled “New UIT and LVIP G&I Fund Standard Class (Pro-Forma)” shows what fees and expenses are estimated to be assuming the Reorganization takes place. The fees and expenses shown for the shares of Fund A and the LVIP G&I Fund as set forth in the following tables in the in examples are based on the expenses for the Fund A and the LVIP G&I Fund for the year ended December 31, 2008. The amounts for the “New UIT and LVIP G&I Fund Standard Class (Pro Forma)” set forth in the following table and in the examples are based on what the estimated expenses of the New UIT and LVIP G&I Fund would have been for the year ended December 31, 2008, after giving effect to the proposed Reorganization.
| | | | | | | | | | | | | | | | | |
| | | Fund A (Individual and
Group) | | | LVIP G&I
Fund3 | | | New UIT and LVIP
G&I Fund
Standard Class
(Pro Forma) | |
| | | Single
Premium | | | Periodic
Premium | | | Standard
Class | | | Single
Premium | | | Periodic
Premium | |
Contract Owner Fees | |
Sales Charge (Load) Imposed on Purchases (as a % of purchase payments, as applicable) | | | 2% + $50 | 1 | | 4.25 | % | | N/A | | | | 2% + $50 | 1 | | 4.25 | % |
Administrative Expenses (as a % of purchase payments, as applicable) | | $ | 65 | 1 | | 1.00 | % | | N/A | | | $ | 65 | 1 | | 1.00 | % |
Minimum Death Benefit Rider, if elected (as a % of purchase payments) | | | .75 | %2 | | .75 | %2 | | N/A | | | | .75 | %2 | | .75 | %2 |
Separate Account Expenses (as a % of average daily net assets in the separate account) | | | | | | | | | | | | | | | | | |
Mortality and Expense Risk Charge | | | 1.002 | % | | 1.002 | % | | N/A | | | | 1.002 | % | | 1.002 | % |
Annual Fund Operating Expenses (as a % of average daily net assets in the separate account or fund, as applicable) | | | | | | | | | | | | | | |
Management Fees | | | .323 | % | | .323 | % | | .34 | % | | | .34 | % | | .34 | % |
Other Expenses | | | N/A | | | N/A | | | .07 | % | | | .07 | % | | .07 | % |
| | | | | | | | | | | | | | | | | |
Total Annual Fund Operating Expenses | | | .323 | % | | .323 | % | | .41 | % | | | .41 | % | | .41 | % |
| | | | | | | | | | | | | | | | | |
Total Separate Account Expenses and Annual Fund Operating Expenses (as a % of average daily net assets in the separate account or fund, as applicable) | | | 1.325 | % | | 1.325 | % | | .41 | % | | | 1.412 | % | | 1.412 | % |
Less Expense Waiver (as a % of average daily net assets in the separate account) | | | N/A | | | N/A | | | N/A | | | | (.087 | %)4 | | (.087 | %)4 |
| | | | | | | | | | | | | | | | | |
Net Separate Account Expenses and Annual Fund Operating Expenses | | | 1.325 | % | | 1.325 | % | | .41 | % | | | 1.325 | % | | 1.325 | % |
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1 | This charge is deducted at the time of purchase of the contract and is a one-time charge. |
2 | The minimum death benefit rider is no longer available for sale. |
3 | This column does not reflect any fees, expenses and withdrawal charges imposed by the variable annuity contracts for which the fund serves as an investment vehicle. If those fees and expenses had been included, your costs would be higher. |
4 | Lincoln Life has contractually agreed to waive certain New UIT expenses (separate account expenses) to the extent needed to ensure that the contract owners and participants do not incur aggregate contract or certificate expenses that are higher than their pre-Reorganization aggregate contract or certificate expenses. In this instance, the amount of the waiver would be (.087%). Lincoln Life may, in its discretion, waive additional amounts of the separate account expenses to account for fluctuations in the total annual fund operating expenses of the LVIP G&I Fund. |
5
Lincoln Life has contractually agreed to waive a portion of the New UIT’s expenses (separate account expenses) to ensure that the contract owners and participants do not incur aggregate contract or certificate expenses after the Reorganization that are higher than their pre-Reorganization aggregate contract or certificate expenses. Lincoln Life will effect this expense waiver by making adjustments, on a daily basis, in the New UIT expenses (separate account expenses) such that the sum of (a) the LVIP G&I Fund’s net fund operating expense ratio (taking into account any expense waivers or reimbursements), calculated as of the end of the most recently ended semi-annual period, and (b) the New UIT’s separate account expense ratio (i.e., asset-based fees and charges deducted on a daily basis from the New UIT assets and reflected in the calculations of the New UIT’s unit value) will not exceed, on an annualized basis, the aggregate annual expense ratio for Fund A (i.e., total separate account expenses and annual fund operating expenses as a % of average daily net assets in Fund A) for fiscal year 2008. In the event that the sum of the LVIP G&I Fund’s actual net fund operating expense ratio and the New UIT’s separate account expense ratio for any semi-annual period, including the expense waiver, exceeds, on an annual basis, the aggregate annual expense ratio for Fund A for fiscal year 2008, Lincoln Life will, in the following semi-annual period, reimburse the New UIT an additional amount that is equal to the excess of the adjusted expenses previously paid by contract owners and participants during that most recently completed semi-annual period over those expenses that would have been paid assuming the aggregate annual expense ratio for Fund A for the year ended December 31, 2008.
Lincoln’s Life waiver obligation will continue for as long as there is any contract or certificate in effect. The fee waiver will apply to all Fund A contract owners and participants, whether or not they had an interest in Fund A at the time of the Reorganization.
EXAMPLES
The examples are intended to show you the cost of investing in Fund A, the LVIP G&I Fund, and the New UIT and the LVIP G&I Fund (Pro Forma), assuming the Reorganization takes place. The examples assume that you redeem all of your interest or shares at the end of each time period and that you reinvest all of your dividends. The following tables also assume that total annual operating expenses remain the same. The examples are for illustration purposes only, and your actual expenses may be greater or less than those shown.
Whether or not a contract is annuitized or surrendered at the end of the applicable time period, an investor would pay the following expenses on a $10,000 investment, assuming a 5% annual return on assets:
| | | | | | | | | | | | |
| | | Lincoln National Variable Annuity Fund A* |
| | | One Year | | Three Years | | Five Years | | Ten Years |
Single Premium | | $ | 521 | | $ | 796 | | $ | 1,092 | | $ | 1,931 |
Periodic Premium | | $ | 728 | | $ | 997 | | $ | 1,287 | | $ | 2,108 |
| * | These examples assume that the minimum death benefit is in effect. Without this benefit, expenses would be lower. Premium taxes may also apply, although they do not appear in the examples. |
| | | | | | | | | | | | |
| | | LVIP G&I Fund* |
| | | One Year | | Three Years | | Five Years | | Ten Years |
Standard Class | | $ | 42 | | $ | 132 | | $ | 230 | | $ | 518 |
| * | The examples do not reflect any fees, expenses or withdrawal charges imposed by the variable annuity contracts for which the LVIP G&I Fund serves as an investment vehicle. If those fees and expenses had been included, your costs would be higher. |
6
| | | | | | | | | | | | |
| | | New UIT and LVIP G&I Fund Standard Class
(Pro Forma)* |
| | | One Year | | Three Years | | Five Years | | Ten Years |
Single Premium | | $ | 521 | | $ | 796 | | $ | 1,092 | | $ | 1,931 |
Periodic Premium | | $ | 728 | | $ | 997 | | $ | 1,287 | | $ | 2,108 |
| * | These examples reflect the separate account expenses (New UIT charges) with expense waivers for years one through ten. |
Who will be the investment adviser/sub-adviser of my Fund after the Reorganization? What will the advisory and sub-advisory fees be after the Reorganization?
Lincoln National Life Insurance Company (“Lincoln Life”), an SEC-registered investment adviser, serves as the investment adviser of Fund A. Lincoln Life is a direct subsidiary of Lincoln National Corporation and has its principal place of business at 1300 South Clinton Street, Fort Wayne, Indiana. Lincoln Life has engaged Delaware Management Company (“DMC”), a series of Delaware Management Business Trust (“DMBT”), to serve as sub-adviser and make the day-to-day investment decisions for Fund A. DMBT is registered with the SEC as an investment adviser and is located at 2005 Market Street, Philadelphia, Pennsylvania 19103. DMBT is a subsidiary of Delaware Management Holdings, Inc. (“DMHI”). DMHI is an indirect subsidiary, and subject to the ultimate control, of Lincoln National Corporation.
Lincoln Investment Advisors Corporation (“LIAC”), a direct subsidiary of Lincoln National Corporation, serves as the investment adviser for the LVIP G&I Fund. LIAC is registered with the SEC as an investment adviser and has its principal place of business at 1300 South Clinton Street, Fort Wayne, Indiana. LIAC has retained DMC to serve as LVIP G&I Fund’s sub-adviser and to make the day-to-day investment decisions for the LVIP G&I Fund.
The table shows the effective fee rate that Fund A and the LVIP G&I Fund paid to their respective advisers for calendar year 2008, and the fee that each adviser paid to DMC as the sub-adviser for calendar year 2008:
| | | | | | | | | | |
Fund | | Adviser | | Effective Fee Rate for
Adviser
(annual rate as a % of
average daily net assets) | | | Sub-Adviser | | Effective Fee Rate for
Sub-Adviser (annual
rate as a % of average
daily net assets) | |
Fund A | | Lincoln Life | | 0.323 | % | | DMC | | 0.20 | % |
LVIP G&I Fund | | LIAC | | 0.34 | %1 | | DMC | | 0.20 | % |
1 | The management fee for the LVIP G&I Fund is calculated using the following percentages of average daily net assets of the fund: .48% of the first $200 million; .40% of the next $200 million; and .30% of the excess over $400 million. |
What will be the primary federal tax consequences of the Reorganization?
The transaction is intended to qualify as a tax-free reorganization for federal income tax purposes. Assuming the Reorganization qualifies for such treatment and each contract owners’ variable annuity contract is treated as a variable annuity for federal income tax purposes, each contract owner will not recognize taxable income as a result of the Reorganization. As a condition to the closing of the Reorganization, Fund A will receive an opinion of counsel to the effect that the Reorganization will qualify as a tax-free reorganization for federal income tax purposes. You should separately consider any state, local and other tax consequences in consultation with your tax advisor. Opinions of counsel are not binding on the Internal Revenue Service or the courts.
7
Dividends and Distributions
Fund A and the LVIP G&I Fund both declare and pay dividends from net investment income and net realized capital gains each year to their shareholders. A fund may distribute net realized capital gains only once a year. As described in more detail in “More Information About the Funds—Distributions” below, all dividends and distributions are reinvested automatically in additional shares of the same class of the respective fund at net asset value.
Shareholder Voting Rights
Fund A does not generally hold annual meetings of its contract owners. Neither does the LVIP G&I Fund hold annual shareholder meetings. The 1940 Act requires that a shareholder meeting be called for the purpose of electing Managers/Trustees at such time as less than a majority of Managers/Trustees holding office have been elected by shareholders. Meetings of the shareholders may be called at any time by the Board of Managers/Trustees or by the chairperson of the Board or by the President of the Trust/Fund. To the extent required by the 1940 Act, meetings of the shareholders for the purpose of voting on the removal of any Trustees shall be called promptly by the Trustees upon the written request of shareholders holding at least 10% of the outstanding shares of the Trust entitled to vote.
Appraisal Rights
Under the laws of the State of Indiana, the contract owners of Fund A do not have appraisal rights in connection with a combination or acquisition of the assets of another fund. Under the laws of the State of Delaware, shareholders of the LVIP G&I Fund do not have appraisal rights in connection with a combination of acquisition of the assets of another fund.
DESCRIPTION OF CONTRACT FEATURES
The following presents a brief description of contract features. These features will not change as a result of the reorganization. Greater detail regarding the contracts is provided in the prospectuses for Fund A, which are incorporated by reference into this Proxy Statement/Prospectus.
General
Fund A Individual contracts are individual variable annuity contracts for use primarily with certain nonqualified plans and qualified retirement plans. Fund A Group contracts are group variable annuity contracts for use primarily with certain nonqualified plans and qualified retirement plans. The contracts are no longer being offered for sale, but additional payments may be made on certain outstanding contracts. The contracts are either single payment contracts under which no additional payments may be made or deferred contracts under which additional payments may be made.
| | • | | Fund A Individual contracts and Fund A Group contracts were available as single payment immediate annuities. |
| | • | | Fund A Individual contracts and Fund A Group contracts were also available as deferred annuities that could be purchased with either a single payment or periodic payments. Periodic purchase payments are payable to Lincoln Life at a frequency and in an amount the contract owner or participant selected in the application. Subject to these restrictions, periodic payments are completely flexible. |
| | • | | Fund A Group contracts were available as group annuities under which payments were allocated to the accounts of individual participants who each received a certificate which summarized the provisions of the group contracts. Fund A Group contracts were also available as group variable annuity deposit administration contracts, designed for use with defined benefit plans and defined benefit H.R.-10 plans. |
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Transfers between Accounts
Both Fund A Individual contracts and Fund A Group contracts provide that the contract owner can transfer all or any part of the contract value from Fund A to the fixed side of the contract, subject to certain restrictions. The contract owner may also transfer all or any part of the contract value from the fixed side of the contract to Fund A, subject to certain restrictions. When the participant is not the contract owner, the ability to transfer between accounts is subject to the restrictions established by the contract owner.
Valuing the Contracts
Lincoln Life measures the value of the contracts or certificates by valuing accumulation units before annuity payouts begin and valuing annuity units after annuity payouts begin. Currently Lincoln Life values these units each business day at the close of trading on the New York Stock Exchange. On any date other than a valuation date, the accumulation unit value and the annuity unit value will not change.
Annuity Payouts
Under both Fund A Individual contracts and Fund A Group contracts and certificates, contract owners and participants can elect annuity payouts in monthly, quarterly, semiannual or annual installments. Depending upon the terms of the contract or certificate or plan, a contract owner or participant may select from various annuity payout options, which include:
| | • | | Payouts Guaranteed for Designated Period: payouts are made for a guaranteed period of usually ten or twenty years (certain restrictions apply to contracts issued in connection with a 403(b) plan); |
| | • | | Life Annuity with Payouts Guaranteed for Designated Period: payouts are made for a guaranteed period of usually ten, fifteen or twenty years and then continued throughout the lifetime of the annuitant; |
| | • | | Unit Refund Life Annuity: payouts are made during the lifetime of the annuitant with the guarantee that a payout based on the value of annuity units will be made upon death (not available as a fixed payout); |
| | • | | Payouts Guaranteed for Designated Amount: periodic payouts of a designated amount until the proceeds are exhausted (not available to contracts issued in connection with a 403(b) plan) (not available as a fixed payout); |
| | • | | Interest Income: payouts are left on deposit with Lincoln Life, subject to withdrawal upon demand, with the interest being paid out at a frequency chosen by the contract owner (not available for Fund A Group contracts) (not available to contracts issued in connection with a 403(b) plan) (not available as a variable payout); |
| | • | | Annuity Settlement: payouts are made in the form provided by any single payment immediate annuity contract on the date the proceeds become payable; |
| | • | | Life Annuity: periodic payouts are made during the lifetime of the annuitant and end with the last payout before the death of the annuitant; |
| | • | | Joint Life Annuity: periodic payouts are made during the joint lifetime of the annuitant and a designated joint annuitant, with payouts continuing throughout the life of the survivor; |
| | • | | Joint Life and Two Thirds Survivor: periodic payouts are made during the joint lifetime of the annuitant and a designated joint annuitant, with the survivor receiving two-thirds of the periodic payout made when both were alive. |
The annuity payout may be used to provide fixed dollar or variable payments, unless otherwise noted in the contract, certificate or plan.
9
Death Benefit
Under Fund A Individual contracts and Fund A Group contracts and certificates, a death benefit will be paid if the contract owner (or joint owner), participant or annuitant dies prior to the date that annuity payments begin. The death benefit will be equal to the contract value.
Contract owners could elect a minimum death benefit. Participants who are not contract owners may elect a minimum death benefit if permitted by the contract owner. If the election has been made, the death benefit for a contract owner or participant shall be equal to the greater of the contract or account value or the minimum death benefit. The minimum death benefit is equal to the total purchase payments minus any withdrawals, partial annuitizations, premium taxes incurred and rider premiums.
Surrendering the Contract
A Fund A Individual contract owner or Fund A Group contract owner may surrender all or part of his or her contract or certificate any time before the annuity payout starting date. Contracts or certificates issued in connection with qualified plans, including H.R.-10 plans and tax-deferred annuity plans may have certain limitations on surrenders imposed by the plan. There is no surrender charge for either partial or full surrenders.
Making Withdrawals from the Contract
A Fund A Individual contract owner or Fund A Group contract owner may withdraw a portion of the contract value upon written request. The amount available for withdrawal is the contract value at the end of the valuation period during which the written request for withdrawal is received by Lincoln Life. Contracts or certificates issued in connection with qualified plans, including H.R.-10 plans and tax-deferred annuity plans may have certain early withdrawal limitations imposed by the plan.
INFORMATION ABOUT THE REORGANIZATION
Reasons for the Reorganization
The Reorganization is being proposed due to a declining asset base in Fund A and, with no new contracts being sold, the inability of contract owners to benefit from economies of scale. The Reorganization is intended to eliminate duplication of costs and other inefficiencies to Lincoln Life from operating two comparable investment vehicles—namely, Fund A and the LVIP G&I Fund.
Contract owners of Fund A are expected to benefit from the larger asset base in the LVIP G&I Fund that will result from the Reorganization. As of December 31, 2008, the net assets of Fund A were $40,221,697. By comparison, the net assets of the LVIP G&I Fund as of that date were $1,038,493,544. Management of Fund A anticipates that the larger asset base of the LVIP G&I Fund will increase investment opportunities and broaden diversification of the investments for the contract owners and participants who select to have their contract value in the LVIP G&I Fund.
Board Considerations
At the December 9, 2008 meeting of the Board of Managers of Fund A, Fund A Management presented the Reorganization to the Board of Managers, with supporting materials prepared by Fund A Management regarding the reasons for the proposal and details regarding the Reorganization. Fund A Management stated that the Reorganization was being proposed due to the declining assets of Fund A and that the Lincoln National Life Insurance Company (“Lincoln Life”) had not issued new contracts under Fund A for more than ten years. Therefore, the asset base of Fund A will not increase substantially in the foreseeable future, and Fund A cannot benefit from economies of scale. Fund A Management explained that the LVIP G&I Fund was proposed as the acquiring fund, because of its similarity to Fund A in terms of investment objective, strategy and policies, and
10
because it was currently managed by the same sub-adviser with the same portfolio management team as Fund A. Fund A Management believes that the larger asset base of the LVIP G&I Fund should increase investment opportunities and broaden diversification of the funding medium for the contracts and would provide the potential for shareholders to benefit from economies of scale in a larger fund. Lincoln Life also expects to experience savings of approximately $90,000 per year as a result of the Reorganization, due to elimination of duplicate costs to Lincoln Life for printing expenses, audit fees, fidelity bond premiums, Board of Manager fees and bank fees.
All of the Managers who are not “interested persons” (as such term is defined in the 1940 Act) (the “Independent Managers”) met separately with their independent legal counsel to review and consider the proposal, information about Fund A and the LVIP G&I Fund, and the proposed Reorganization and the supporting materials provided. Among other matters, independent legal counsel advised the Independent Managers of the findings that would need to be made by the Board under Rule 17a-8 under the 1940 Act to approve the merger of affiliated funds. The Independent Managers noted the representation by Fund A Management that the interests of the contract owners and participants of Fund A would not be diluted as a result of the Reorganization.
The Independent Managers reported their findings to the Board of Managers of Fund A, and the other Manager, who is an “interested person” (as such term is defined in the 1940 Act) adopted the considerations and conclusions of the Independent Managers. In reviewing the Reorganization, based on information provided to them by Fund A Management, the Board considered a number of factors, including:
| | • | | that the interests of the contract owners and participants following the Reorganization would not materially differ from their interests prior to the Reorganization. Immediately after the Reorganization, the value of each contract and certificate would be allocated to the same separate account and that separate account would invest in the LVIP G&I Fund; |
| | • | | Fund A Management’s representation that the larger asset base of the LVIP G&I Fund should increase investment opportunities and broaden diversification of the funding medium for the contracts and certificates; |
| | • | | the similarity of the LVIP G&I Fund’s investment objective, strategy and policies, and past performance to Fund A’s investment objective, strategy and policies, and past performance; |
| | • | | that Fund A and the LVIP G&I Fund were both sub-advised by Delaware Management Company and had the same portfolio management team; |
| | • | | that the Reorganization would result in significant cost savings to Lincoln Life, as described above, with no increase in total expenses to the contract owners or participants anticipated; |
| | • | | that Lincoln Life has agreed to pay all costs and expenses associated with effecting the Reorganization; |
| | • | | that Lincoln Life has agreed to limit the New UIT’s expenses to ensure that the contract owners and participants do not incur aggregate contract or certificate expenses that are higher than their pre-Reorganization aggregate contract or certificate expenses; and |
| | • | | that the Reorganization has been structured as a tax free transaction for federal income tax purposes. |
Based on all of the foregoing, the Board of Managers determined on December 9 that: (1) participation in the Reorganization was in the best interests of Fund A; and (2) the interests of existing contract owners and participants of the Fund A would not be diluted as a result of the Reorganization. On that date, the Board approved the Reorganization with respect to the Fund A.
Agreement and Plan of Reorganization
To effect the Reorganization, the assets and liabilities of Fund A (other than liabilities relating to insurance obligations such as death benefits, surrender benefits and annuity payments) will be used to purchase Standard
11
Class shares of the LVIP G&I Fund. The date that the assets and liabilities of Fund A will be valued for purposes of the Reorganization will be after the close of business on the closing date, which is a date to be mutually agreed upon by all of the parties to the Reorganization Agreement. If the Reorganization is approved, the closing is expected to occur in the second quarter of 2009. After the Reorganization, Fund A will no longer hold securities and other instruments directly; instead, Fund A, which will be restructured as a unit investment trust (“New UIT”), will hold similar investments indirectly through the intermediate vehicle of the LVIP G&I Fund. When Fund A is restructured as a unit investment trust, it will no longer be registered as a management investment company under the 1940 Act.
The LVIP G&I Fund will issue Standard Class shares to the New UIT in an amount equal to the value of the assets that the LVIP G&I Fund receives from Fund A, less Fund A’s liabilities (other that liabilities relating to insurance obligations that will be assumed by the New UIT) assumed by the LVIP G&I Fund in the transaction. As a result, the New UIT will become a shareholder of the LVIP G&I Fund. Accumulation or annuity units a contract owner or participant had in Fund A prior to the Reorganization, will, as part of the Reorganization, be allocated to the New UIT investing in the LVIP G&I Fund. The total value of the accumulation or annuity units a contract owner has in Fund A immediately prior to the Reorganization will be the same as the total value of the accumulation or annuity units the same contract owner will have in the New UIT immediately after the Reorganization. The total value of the accumulation or annuity units a participant has in Fund A immediately prior to the Reorganization will be the same as the total value of the accumulation or annuity units the same participant will have in the New UIT immediately after the Reorganization.
More information on the Reorganization is contained in the Reorganization Plan attached to this Proxy Statement/Prospectus as Exhibit A. Approval of the Reorganization by contract owners and participants is a prerequisite to the implementation of the Reorganization. The Reorganization may be postponed or canceled for any reason with the consent of the parties to the Reorganization Plan.
THE BOARD, INCLUDING ALL OF THE INDEPENDENT MANAGERS, HAS
UNANIMOUSLY RECOMMENDED APPROVAL OF THE REORGANIZATION PLAN.
Description of the LVIP G&I Fund’s Shares
The New UIT will receive shares of the LVIP G&I Fund in accordance with the procedures provided for in the Reorganization Agreement. Each such share will be fully paid and non-assessable when issued, which means that the consideration for the shares has been paid in full and the issuing fund may not impose levies on shareholders for more money, respectively. Full and fractional Standard Class shares of the LVIP G&I Fund will be issued to the New UIT in accordance with the procedures detailed in the Reorganization Agreement. The LVIP G&I Fund will not issue share certificates; rather, the ownership of the shares will be recorded on the books of the LVIP G&I Fund. The shares of the LVIP G&I Fund issued to the New UIT will have no pre-emptive or conversion rights.
Federal Income Tax Consequences
Lincoln Life does not believe that the Reorganization will result in the realization of taxable income or loss to Lincoln Life, Fund A, or Lincoln Variable Insurance Products Trust. Lincoln Life also does not believe that the Reorganization will result in tax consequences to contract owners or participants. The Reorganization itself will not result in a distribution from contracts currently supported by Fund A that would give rise to taxable income to contract owners or participants.
The Reorganization is intended to qualify for federal income tax purposes as a tax-free reorganization under section 368(a) of the Internal Revenue Code of 1984 (the “Code”). As a condition to the closing of the Reorganization, Lincoln Life, Fund A, and LVIP G&I Fund will receive an opinion from the law firm of Dechert LLP to the effect that, on the basis of the existing provisions of the Code., U.S. Treasury regulations issued
12
thereunder, current administrative rules, pronouncements and court decisions, and certain representations made by the Funds, for federal income tax purposes, upon consummation of the Reorganization:
| | (1) | Lincoln Life (including Fund A) will not recognize any gain or loss as a result of the restructuring of Fund A as a New UIT; |
| | (2) | Lincoln Life (including Fund A) will not recognize any gain or loss as a result of the transfer of Fund A’s assets to LVIP G&I Fund in exchange for shares of the LVIP G&I Fund and the assumption by the LVIP G&I Fund of Fund A’s liabilities (other than liabilities associated with insurance obligations that will be assumed by the New UIT); |
| | (3) | The LVIP G&I Fund’s basis in Fund A’s assets received will be the same as Lincoln Life’s basis in those assets immediately prior to the Reorganization; |
| | (4) | The LVIP G&I Fund’s holding period for the transferred assets will include Lincoln Life’s holding period therefore; |
| | (5) | No gain or loss will be recognized by the LVIP G&I Fund upon the receipt of Fund A’s assets solely in exchange for the issuance of LVIP G&I Fund’s shares and the assumption of Fund A’s liabilities (other than liabilities associated with insurance obligations that will be assumed by the New UITs); |
| | (6) | No gain or loss will be recognized by the contract owners or participants as a result of the Reorganization; |
| | (7) | Lincoln Life’s aggregate basis in the shares of the LVIP G&I Fund received in the Reorganization will be the same as the aggregate adjusted basis of the assets surrendered in exchange there for reduced by the amount of any liabilities of Fund A assumed by the LVIP G&I Fund; and |
| | (8) | Lincoln Life’s holding period in the shares of the LVIP G&I Fund received in the Reorganization will include its holding period for the assets surrendered in exchange therefore, provided that at the time of the exchange, such assets were held as capital assets. |
The LVIP G&I Fund’s utilization after the Reorganization of any pre-Reorganization losses realized by Fund A to offset gains realized by the LVIP G&I Fund could be subject to limitation in future years.
13
Pro-Forma Capitalization
The following table sets forth the capitalization of the of Fund A and the LVIP G&I Fund as of December 31, 2008 and the capitalization of the LVIP G&I Fund on a pro-forma basis as of that date, giving effect to the proposed acquisition of assets at net asset value.
Capitalization of Fund A,
LVIP G&I Fund and
LVIP G&I Fund ( Pro Forma)
(as of December 31, 2008) (Unaudited)
| | | | | | | | | | | | | | |
| | | Fund A | | | LVIP G&I
Fund | | Adjustments | | | LVIP G&I Fund
(Pro Forma) |
Net Assets | | | | | | | | | | | | | | |
Standard Class | | $ | 40,221,697 | | | $ | 993,796,589 | | $ | — | | | $ | 1,034,018,286 |
Service Class | | | — | | | | 44,696,995 | | | — | | | | 44,696,995 |
| | | | | | | | | | | | | | |
Total Net Assets | | $ | 40,221,697 | | | $ | 1,038,493,584 | | $ | — | | | $ | 1,078,715,281 |
| | | | | | | | | | | | | | |
Net Asset Value Per Unit or Share | | | | | | | | | | | | | | |
Standard Class | | $ | 14.485 | 1 | | $ | 20.972 | | | | | | $ | 20.972 |
Service Class | | | | | | $ | 20.963 | | | | | | $ | 20.963 |
| | | | |
Units/Shares Outstanding | | | | | | | | | | | | | | |
Standard Class | | | 2,776,797 | 2 | | | 47,386,242 | | | (858,945 | )3 | | | 49,304,094 |
Service Class | | | | | | | 2,132,135 | | | — | | | | 2,132,135 |
| | | | | | | | | | | | | | |
Total Shares Outstanding | | | 2,776,797 | 2 | | | 49,518,377 | | | (858,945 | ) | | | 51,436,229 |
| | | | | | | | | | | | | | |
1 | Unit Value. Fund A has only one class of shares. |
2 | Units outstanding. Fund A has only one class of shares. |
3 | Reflects change in shares outstanding due to issuance of Standard Class shares of the LVIP G&I Fund in exchange for units of Fund A based upon the net asset value of the LVIP G&I Fund’s Standard Class shares on December 31, 2008. |
The table set forth above should not be relied upon to reflect the number of shares to be received in the Reorganization; the actual number of shares to be received will depend upon the net asset value and number of shares outstanding of each Fund at the time of the Reorganization.
14
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion comparing investment objectives, policies and restrictions of the Fund A and the LVIP G&I Fund is based upon and qualified in its entirety by the respective investment objectives, policies and restrictions set forth in each of the prospectuses of the Fund A and the LVIP G&I Fund, dated April 30, 2008.
Investment Objectives of each Fund
The Fund A’s investment objective is long-term growth of capital in relation to the changing value of the dollar. A secondary investment objective of Fund A is the production of current income. The LVIP G&I Fund’s investment objective is to maximize long-term capital appreciation. The investment strategy of the LVIP G&I Fund also includes an income component. The LVIP G&I Fund typically invests in companies that have a long history of profit growth and dividend payment, which provide current income. Accordingly, Fund A and the LVIP G&I Fund have substantially similar investment objectives.
Principal Investment Strategies and Risks of each Fund
Principal Strategies
Fund A and the LVIP G&I Fund have substantially similar investment objectives and investment strategies. Fund A and the LVIP G&I Fund have the same sub-adviser, Delaware Management Company, and the same portfolio management team. DMC manages Fund A and the LVIP G&I Fund in the same manner, using the same investment process, research, and proprietary technical models. As a result, the Funds hold investments that are substantially the same. Due to smaller asset flows into Fund A and Fund A’s smaller size, Fund A’s investments and the amounts of those investments may differ slightly from those that are held by the LVIP G&I Fund.
Both Fund A and the LVIP G&I Fund pursue their objectives by investing in a diversified portfolio of stocks primarily of large-sized U.S. companies with market capitalizations, at the time of purchase, similar to the market capitalizations of the companies in the Russell 1000® Index. The Russell 1000® Index represents the largest 1000 companies in the Russell 3000® Index. The Russell 3000® Index is a capitalization-weighted total return index, which is comprised of 3000 of the largest capitalized U.S. domiciled companies.
For both Fund A and the LVIP G&I Fund, DMC places some emphasis on medium-sized companies, which are companies that have capitalizations similar to the market capitalizations of the companies in the Russell Mid-Cap® Index. As of December 31, 2008, the cap range for the companies in the Russell Mid-Cap® index is $3.06 billion to $9.96 billion.
Fund A’s and the LVIP G&I Fund’s management style focuses on seeking growth companies at a reasonable price by blending:
| | • | | A growth oriented management style, which seeks companies with earnings and/or revenues that are growing equal to or faster than the industry average; and |
| | • | | A value oriented management style, which seeks companies within an industry with current stock prices that do not reflect the stocks’ perceived true worth. |
More specifically, Fund A and the LVIP G&I Fund seek to invest in companies believed to:
| | • | | Show earnings growth equal to or greater than the average expected growth rate of the companies in the same industry; and |
| | • | | Be undervalued in the market relative to the companies’ industry peers. |
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The companies sought typically have:
| | • | | A long history of profit growth and dividend payment; and |
| | • | | A reputation for quality management, products and service. |
DMC, the sub-adviser, has access to research and proprietary technical models and will apply quantitative and qualitative analysis in determining the appropriate allocations among categories of issuers and types of securities. Fund A’s and the LVIP G&I Fund’s investments are selected using both a variety of quantitative techniques and fundamental research in seeking to maximize each Fund’s expected return while maintaining risk, style and capitalization characteristics similar to those of securities in the Russell 1000® Index.
Principal Risks
As stated above, Fund A and the LVIP G&I Fund have substantially similar investment objectives and strategies. Fund A and the LVIP G&I Fund are each managed by the same sub-adviser, DMC, and the same portfolio management team, who manages Fund A and the LVIP G&I Fund in the same manner. DMC uses the same investment process, research and proprietary technical models to manage Fund A and the LVIP G&I Fund. As a result, Fund A and the LVIP G&I Fund hold investments that are substantially the same, and accordingly, Fund A and the LVIP G&I Fund are subject to substantially similar risks.
A principal risk of investing in Fund A and the LVIP G&I Fund involves the risk that the value of the stocks purchased will fluctuate. These fluctuations could cause the value of a Fund’s stock investments and, therefore, the value of the Fund’s shares held under your contract to fluctuate, and you could lose money.
Fund A and the LVIP G&I Fund are also subject to market, industry and company risk. Market risk is the risk that all or a majority of the securities in a certain market—like the stock or bond market—will decline in value because of economic conditions, future expectations, or investor confidence. Industry risk is the risk that the value of securities in a particular industry will decline because of changing expectations for the performance of that industry. Company risk is the risk that the value of an individual stock will decline because of changing expectations for the performance of the individual company issuing the stock.
Another principal risk of investing in Fund A and the LVIP G&I Fund is the risk associated with medium-sized companies. Medium-sized companies, which are not as well-established as large-sized companies, may react more severely to market conditions and suffer more from economic, political and regulatory developments. The value of securities of medium sized, less well-know companies, can be more volatile than that of relatively larger companies.
Other Investment Strategies and Risks of Each Fund
(other than Principal Strategies and Risks)
Fund A and the LVIP G&I Fund may also use other investment strategies, to a lesser degree, to pursue their investment objectives. Each Fund’s Statement of Additional Information (“SAI”) describes these other investment strategies and the risks involved.
In response to market, economic, political or other conditions, Fund A and the LVIP G&I Fund may use temporarily different investment strategies for defensive purposes. If either Fund does so, different factors could affect the Fund’s performance and the Fund may not achieve its investment objective.
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PURCHASE AND REDEMPTION OF FUND SHARES
Net Asset Value
Each Fund determines its net asset value per share (“NAV”) as of close of regular trading (normally 4:00 p.m., Eastern time) on the New York Stock Exchange (“NYSE”) on each day the NYSE is open for trading. Each Fund determines its NAV by:
| | • | | Adding the values of all securities investments and other assets; |
| | • | | Subtracting liabilities (including dividends payable); and |
| | • | | Dividing by the number of shares outstanding. |
A Fund’s securities may be traded in other markets on days when the NYSE is closed. Therefore, the Fund’s NAV may fluctuate on days when you do not have access to the Fund to purchase or redeem shares.
Each Fund typically values its securities investments as follows:
| | • | | Equity securities, at their last sale prices on national securities exchanges or over-the-counter, or, in the absence of recorded sales, at the average of readily available closing bid and asked prices on exchanges or over-the-counter; |
| | • | | Debt securities, at the price established by an independent pricing service, which is believed to reflect the fair value of these securities; and |
| | • | | Fixed income securities with a maturity of less than sixty days are priced at amortized cost. |
In certain circumstances, a Fund may value its portfolio securities at fair value as estimated in good faith under procedures established by the Funds’ Board of Trustees. When a Fund uses fair value pricing, it may take into account any factors it deems appropriate. A Fund may determine fair value based upon developments related to a specific security, current valuations of foreign stock indices (as reflected in U.S. futures markets) and/or U.S. sector or broader stock market indices. The price of securities used by a Fund to calculate its NAV may differ from quoted or published prices for the same securities. Fair value pricing may involve subjective judgments, and it is possible that the fair value determined for a security is materially different than the value that could be realized upon the sale of that security.
The Funds anticipate using fair value pricing for securities primarily traded on U.S. exchanges only under very limited circumstances, such as the unexpected early closing of the exchange on which a security is traded or suspension of trading in the security. A Fund may use fair value pricing more frequently for securities primarily traded in non-U.S. markets because, among other things, most foreign markets close well before the Fund values its securities, normally at 4:00 p.m. Eastern time. The earlier close of these foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. To account for this, a Fund may frequently value many foreign equity securities using fair value prices based on third party vendor modeling tools to the extent available.
Share Classes
The LVIP G&I Fund offers two classes of shares: the Standard Class and the Service Class. The two classes of shares are identical, except that Service Class shares are subject to a distribution (Rule 12b-1) fee, which has been adopted pursuant to a distribution and service plan.
As part of the Reorganization, the LVIP G&I Fund will issue Standard Class shares to be held by the New UIT in an amount equal to the value of the assets that the LVIP G&I Fund received from Fund A, less the liabilities the LVIP G&I Fund assumes. Following the Reorganization, Contract Owners will have an indirect interest in LVIP G&I Fund Standard Class shares.
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MORE INFORMATION ABOUT THE FUNDS
Management of the Funds
Fund A’s and the LVIP G&I Fund’s business and affairs are managed under the direction of their Board of Managers and Board of Trustees, respectively. The Board of Managers and the Board of Trustees have the power to amend their Funds’ bylaws, to declare and pay dividends, and to exercise all the powers of the Funds, except those granted to the contractholders/shareholders.
Manager of Managers.
The LVIP G&I Fund has obtained an exemptive order from the SEC that permits the Fund to employ a “manager of managers” structure (“Multi-Manager Order”). Pursuant to the Multi-Manager Order, LIAC will be permitted to enter into and materially amend a sub-advisory agreement with a sub-adviser without shareholder approval. The Multi-Manager Order applies to, among other situations, the replacement of a sub-adviser whose sub-advisory agreement has terminated as a result of an “assignment” of the agreement. When a new sub-adviser is retained, the Multi-Manager Order requires that the shareholders be furnished with the information about the new sub-adviser that would be contained in a proxy statement. LIAC may not enter into a sub-advisory agreement with an “affiliated person” of LIAC (as that term is defined in Section 2(a)(3) of the 1940 Act) unless the sub-advisory agreement with the affiliated sub-adviser, including compensation thereunder, is approved by the affected fund’s shareholders.
The Multi-Manager Order also permits a fund of the Trust to employ two or more sub-advisers at the same time. The Trust’s Board of Trustees must continue to approve the Fund entering into or renewing any sub-advisory agreement.
Investment Adviser and Sub-Advisers.
LIAC—Lincoln Investment Advisors Corporation—is the current investment adviser to the LVIP G&I Fund. LIAC, a wholly-owned subsidiary of Lincoln National Corporation, is a Tennessee corporation registered with the SEC as an investment adviser. LIAC is responsible for overall management of the LVIP G&I Fund’s securities investments, and provides investment advisory services to other affiliated mutual funds. LIAC principal place of business is at 1300 S. Clinton Street, Fort Wayne, Indiana 46802. LIAC or its predecessors has served as an investment adviser to mutual funds for over thirty years.
LIAC has engaged Delaware Management Company (“DMC”), a series of Delaware Management Business Trust (“DMBT”), to serve as the LVIP G&I Fund’s sub-adviser and to make the day-to-day investment decisions for the LVIP G&I Fund. DMC is paid out of the fees the LVIP G&I Fund pays to LIAC. DMBT, which is located at 2005 Market Street, Philadelphia, Pennsylvania 19103, is registered with the SEC as an investment adviser and is a subsidiary of Delaware Management Holdings, Inc. (“DMHI”). DMHI is an indirect subsidiary, and subject to the ultimate control, of Lincoln National Corporation.
For further information about Fund A’s investment adviser and sub-adviser, please see “Who will be the investment adviser/sub-adviser of my Fund after the Reorganization? What will the advisory and sub-advisory fees be after the Reorganization?” above and the prospectuses for Fund A.
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The following chart lists the LVIP G&I Fund’s investment adviser (with the effective advisory fee rate for the most recently completed fiscal year), sub-adviser, and portfolio manager. The Fund’s SAI provides additional information about the portfolio managers’ compensation, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of securities in the Fund.
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LVIP G&I Fund | | Adviser: LIAC (aggregate advisory fee paid for fiscal year ended December 31, 2008 was 0.34 % of the Fund’s average net assets). Sub-Adviser: DMC and its predecessors have been managing mutual funds since 1938. As of December 31, 2008, DMC and its affiliates were managing over $115 billion in assets in various institutional or separately managed investment company and insurance accounts. DMC is a series of Delaware Management Business Trust (“DMBT”), a Delaware statutory trust that is an SEC-registered investment adviser. DMBT’s address is 2005 Market Street Philadelphia, PA 19103. DMBT is an indirect subsidiary of Lincoln National Corporation. Portfolio Managers: A team consisting of Francis X. Morris, Christopher S. Adams, Michael S. Morris and Donald G. Padilla is responsible for managing the process which determines the timing and the amount of the investments in each category. This team is also responsible for managing the stock category of the fund. Mr. Francis Morris, Senior Vice President and Chief Investment Officer, Core Equity, served as vice president and director of equity research at PNC Asset Management prior to joining Delaware Investments in 1997. He received a bachelor’s degree from Providence College and holds an MBA from Widener University. Mr. Adams, Vice President/Portfolio Manager and Senior Equity Analyst, joined Delaware Investments in 1995. Prior to joining Delaware Investments, Mr. Adams had approximately ten years of experience in the financial services industry in the U.S. and U.K., including positions with Coopers & Lybrand, The Sumitomo Bank, Bank of America, and Lloyds Bank. He is a graduate of Oxford University and received an MBA from The Wharton School of Business at the University of Pennsylvania. Mr. Michael Morris, Vice President/Portfolio Manager and Senior Equity Analyst, served as senior equity analyst at Newbold Asset Management prior to joining Delaware Investments in 1999. He earned his bachelor’s degree from Indiana University and an MBA from The Wharton School of the University of Pennsylvania. Mr. Padilla, Vice President/Portfolio Manager and Senior Equity Analyst, joined Delaware Investments in 1994 as an assistant controller. Prior to joining Delaware investments, Mr. Padilla held various positions at The Vanguard Group. He holds a bachelor’s degree from Lehigh University. Mr. Adams, Mr. Michael Morris and Mr. Padilla are CFA charterholders. |
A fund using a sub-adviser may have a name, investment objective and investment policies that are very similar to certain publicly available mutual funds that are managed by these same sub-advisers. The fund will not have the same performance as those publicly available mutual funds. Different performance will result from many factors, including, but not limited to, different cash flows into and out of the funds, different fees, and different sizes.
A discussion regarding the basis for the Board of Trustees’ approval of the investment advisory and sub-advisory contracts for the LVIP G&I Fund is available in the annual report to shareholders for the twelve month period ended December 31, 2008.
Distributions and Federal Income Tax Considerations
The LVIP G&I Fund’s policy is to distribute substantially all of its net investment income and net realized capital gains each year to its shareholders. The Fund may distribute net realized gains only once a year. Dividends and capital gain distributions will be automatically reinvested in additional Fund shares of the same class of the Fund at no charge.
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Since all of the shares of the LVIP G&I Fund will be owned directly or indirectly by insurance companies, except where specifically stated, this Proxy Statement/Prospectus does not discuss the federal income tax consequences at the Contract Owner level. For information concerning the federal income tax consequences to Contract Owners, see the prospectus for the variable account.
Certain Management Considerations
The LVIP G&I Fund may accept investments from the Lincoln Profile Funds, separate investment series of the Trust that operate as “fund of funds.” From time to time, the Lincoln Profile Funds may change the allocations of or rebalance their underlying holdings, which are mutual funds. If the Lincoln Profile Funds increase their holdings of the LVIP G&I Fund, this action may cause the LVIP G&I Fund to experience large purchases of its shares and large inflows into the Fund. Similarly, the Lincoln Profile Funds may decrease their holdings in the LVIP G&I Fund, and this action may cause the Fund to experience large redemptions. While it is impossible to predict the overall impact of these transactions over time, there could be adverse effects on the Fund’s portfolio management. For example, the Fund may be required to sell securities or invest cash at times when they would not otherwise do so. These transactions could also increase transaction costs and portfolio turnover for the Fund.
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GENERAL INFORMATION
Share Ownership
As of February 17, 2009 (the “Record Date”), the number of units of Fund A and the number of shares of each class of the LVIP G&I Fund are listed in the table at Exhibit C.
To the knowledge of Fund A, as of the Record Date, no person, except as set forth in the table at Exhibit C, owned units attributable to 5% or more of the assets of Fund A. To the knowledge of the G&I Fund, as of the Record Date, no person, except as set forth in the table at Exhibit C, owned of record 5% or more of the outstanding shares of any class of the LVIP G&I Fund. To the knowledge of Fund A, as of the Record Date, no person beneficially owned units attributable to 5% or more of the assets of Fund A. To the knowledge of the G&I Fund, as of the Record Date, neither Lincoln Life nor Lincoln New York beneficially owned 5% or more of the outstanding shares of any class of the LVIP G&I Fund. On the Record Date, the Trustees and officers of the Trust, as a group, owned separate account units attributable to less than one percent of the assets of any class of the LVIP G&I Fund.
Voting Information
The proxy solicitation will be done by mail but may also be done by telephone, telegram, facsimile or personal interview conducted by Lincoln Life personnel or outside contractors employed to assist in the solicitation. The estimated expenses for the solicitation are $2,000 to $3,000.
The management of Fund A will vote all proxies executed, dated and returned to Lincoln Life prior to the beginning of the meeting on June 11, 2009 in accordance with instructions marked thereon. If instructions are not marked thereon, management of Fund A will vote proxies “FOR” the reorganization. Abstentions will be counted to determine whether a quorum is present at the Meeting, and will have the effect of a vote “AGAINST” the reorganization.
Any contract owner or participant who provides voting instructions has the power to revoke the instructions by (1) delivering to the Secretary of Fund A (at the offices of Fund A) written notice of revocation, or (2) submitting superseding voting instructions, in each case at any time prior to the date of the meeting. Contract owners and participants may also revoke prior voting instructions by voting in person at the meeting.
The number of votes which a contract owner of an individual variable annuity contract or an individual retirement annuity contract in the accumulation period may cast is equal to the number of accumulation units under the contract. The number of votes which a contract owner of an individual contract in the annuity period may cast is equal to (1) the amount of the assets remaining in Fund A to meet the annuity obligations related to such contract divided by (2) the value of the accumulation unit.
The number of votes which a contract owner may cast for participants under a group or individual contract in the accumulation period is equal to the number of accumulation units under the contract. The number of votes which a contract owner may cast for participants receiving annuity payments under a group or individual contract is equal to (i) the amount of the assets established in Fund A to meet the annuity obligation related to such participants divided by (ii) the value of an accumulation unit.
For participants in the accumulation period under a group or individual contract, the participants will have the right to instruct the contract owner with respect to the votes attributable to his or her individual account. The number of accumulation units credited to a participant’s account will determine the number of votes attributable to his or her account. During the annuity period, a participant under a group or individual contract will have the right to instruct the contract owner with respect to the votes attributable to the amount of the assets established in Fund A to meet the annuity obligations to such participant.
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The contract owners shall cast the votes for which instructions have been received in accordance with such instructions. All votes for which instructions have not been received (other than those as to which no employee or participant is entitled to give instructions) shall be cast in the same proportions as those for which instructions were received. If a contract owner fails to cast its ballot, Lincoln Life will cast all votes for such contract owner in the same proportion as those for which Lincoln Life received voting instructions. The effective of this proportional voting is that a small number of participants may determine the outcome of a vote.
When Lincoln Life’s records no longer reflect a contract owner of record or a current address for a contract owner of record, Lincoln Life will make a reasonable effort to locate such contract owner. However, if Lincoln Life cannot identify or reach such a contract owner, and participants are still participating under the group or individual contract, Lincoln Life will solicit voting instructions from such participants and cast all votes with respect to such contract in the same proportion as those for which Lincoln received voting instructions from participants under the contract. The effect of this proportional voting is that a small number of participants may determine the outcome of a vote.
Quorum Requirements/Votes Necessary to Approve Proposals
A quorum is comprised of contract owners and participants entitled to cast 25% of the accumulation and annuity units that may be cast for Fund A at the meeting. When a quorum is present, the affirmative vote of a majority of the accumulation and annuity units represented in person or by proxy shall be required to approve the Reorganization.
Adjournment
The Meeting may be adjourned for the purpose of further proxy solicitation if a quorum is not present at the Meeting or if the vote necessary to approve the Reorganization has not been obtained. The persons designated as proxies will vote proxies in favor of any adjournment unless you provide other instructions. At any subsequent reconvening, the persons designated as proxies will vote proxies in the same manner as the proxies would have been voted at the original Meeting, unless you revoke the proxies before the Meeting is reconvened.
Other Business
The Board of Managers of Fund A knows of no other matters which are likely to be brought before the Meeting. In the event any other matters do properly come before the Meeting, however, the persons named in the enclosed proxy will vote the proxies in accordance with their best judgment.
Contract Owner Proposals
Fund A does not hold regular contract owner meetings. Contract owners wishing to submit proposals for inclusion in a proxy statement for a subsequent contract owner meeting (if any) should send their written proposals to the principal executive offices of Fund A at the address set forth on the cover of this Proxy Statement/Prospectus.
Proposals must be received a reasonable time prior to the date of a meeting of contract owners to be considered for inclusion in the proxy materials for a meeting. The submission of a proposal does not guarantee its inclusion in the proxy statement and is subject to limitations under the federal securities laws.
Communications to the Board
Contract owners who wish to communicate to the full Board or to any individual Manager may address correspondence to Fund A, c/o Cynthia Rose, Secretary, at 1300 S. Clinton Street, Fort Wayne, IN 46802. Without opening any such correspondence, Fund A Management will promptly forward all such correspondence to the intended recipient(s).
Legal Matters
Certain legal matters concerning the issuance of shares of the LVIP G&I Fund will be passed upon by Dechert, LLP, 4675 McArthur Court, Suite 1400, Newport Beach, CA 92660.
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EXHIBITS TO PROXY STATEMENT/PROSPECTUS
Exhibit A—Agreement and Plan of Reorganization
Exhibit B—Management’s Discussion of Fund Performance and Financial Highlights
Exhibit C—Ownership of Shares as of Record Date
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the “Agreement”), entered into as of the January 23, 2009 by and among The Lincoln National Life Insurance Company (“Lincoln Life”), a life insurance company organized and existing under the laws of the State of Indiana, Lincoln National Variable Annuity Fund A (“Fund A”), a managed separate account established and existing under the insurance laws of the State of Indiana, and Lincoln Variable Insurance Products Trust (“Trust”), a Delaware statutory trust, on behalf of its series, LVIP Delaware Growth and Income Fund (“LVIP G&I Fund”).
WHEREAS, Fund A is registered with the Securities and Exchange Commission (the “Commission”) as an open-end, diversified management investment company under the Investment Company Act of 1940 (the “1940 Act”); and
WHEREAS, Fund A currently supports interests under variable annuity contracts (the “Contracts”) that were registered under the Securities Act of 1933 (the “1933 Act”), and while those registration statements remain in effect and additional purchase payments are accepted under certain of those Contracts, new sales of the Contracts have been terminated; and
WHEREAS, Lincoln Life serves as investment adviser to Fund A; and
WHEREAS, the Trust is registered with the Commission as an open-end, management investment company and the LVIP G&I Fund is a diversified series thereof; and
WHEREAS, the LVIP G&I Fund has a substantially similar investment objective and substantially similar investment policies as Fund A, and the LVIP G&I Fund has the same investment sub-adviser as Fund A; and
WHEREAS, the Board of Managers of Fund A has approved the transfer of assets of Fund A to the LVIP G&I Fund in exchange for Standard Class shares of the LVIP G&I Fund and the restructuring of Fund A as a unit investment trust (the “New UIT”), and the New UIT shall be registered with the Commission under the 1940 Act as a unit investment trust (the “Reorganization”); and
WHEREAS, following the Reorganization, the New UIT shall be a passive investment vehicle with no Board of Managers, no investment adviser and no managed portfolio of investments, but shall invest exclusively in shares of the LVIP G&I Fund; and
WHEREAS, the Board of Managers of Fund A has considered and approved the actions contemplated by this Agreement; and
WHEREAS, the Board of Trustees of the Trust, on behalf of the LVIP G&I Fund, has considered and approved the actions contemplated by this Agreement; and
WHEREAS, this Agreement is conditioned upon approval of the Reorganization described herein by vote of a majority of the votes represented in person or by proxy at a meeting of the owners of the Contracts (the “Contract Owners”) called for that purpose, or any adjournments thereof.
NOW THEREFORE, in consideration of the mutual promises made herein, the parties hereto agree as follows:
ARTICLE I
Closing Date
SECTION 1.01. The Reorganization contemplated by this Agreement shall be effective on such date as may be mutually agreed upon by all parties to this Agreement (the “Closing Date”). The Effective Time of the Reorganization (“Effective Time”) shall be after the close of business on the Closing Date.
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SECTION 1.02. The parties agree to use their best efforts to obtain all necessary regulatory and Contract Owner approvals and perform all other acts necessary or desirable to complete the Reorganization as of the Closing Date.
ARTICLE II
Reorganization Transactions
SECTION 2.01. As of the Effective Time, Lincoln Life, on behalf of Fund A, shall sell, assign, and transfer all cash (except, if required, for a minimal amount needed to keep bank accounts open), all securities and other investments held or in transit, all accounts receivable for sold investments, and all dividends and interest receivable (collectively, “portfolio assets”) of Fund A to be held as the property of the LVIP G&I Fund.
SECTION 2.02. In exchange for the portfolio assets of Fund A, the LVIP G&I Fund shall issue to Lincoln Life for allocation to the New UIT, Standard Class shares of the LVIP G&I Fund, and the LVIP G&I Fund shall assume any unsatisfied liability incurred by Fund A before the Effective Time (other than liabilities associated with insurance obligations that will be assumed by the New UIT). For Fund A, the number of Standard Class shares of the LVIP G&I Fund to be issued in the exchange shall be determined by dividing the value of the net assets of Fund A to be transferred, as of the close of trading on the Closing Date, by the per share value assigned to the shares of the LVIP G&I Fund.
SECTION 2.03. Fund A shall be restructured from a managed separate account to a unit investment trust under the Investment Company Act of 1940, which shall be the New UIT.
SECTION 2.04. As of the Effective Time, Lincoln Life shall cause the shares of the LVIP G&I Fund it receives pursuant to Section 2.02 above to be duly and validly recorded and held on its records as assets of the New UIT, such that the Contract Owners’ interests in the New UIT after the Closing Date shall then be equivalent to their former interests in Fund A. The number of units and their respective values attributable to each Contract will be the same after the Effective Time as before. Lincoln Life shall take all action necessary to ensure that such interests in the New UIT, immediately following the Effective Time, are duly and validly recorded on the Contract Owners’ individual account records.
SECTION 2.05. The shares of the LVIP G&I Fund to be issued hereunder shall be issued in open account form by book entry without the issuance of certificates. Each such share that is issued pursuant to Section 2.02 above shall be issued for a consideration equal to the value of shares of the LVIP G&I Fund.
SECTION 2.06. Following the Reorganization described in this Agreement, Lincoln Life may consolidate the New UIT with other of its separate accounts. This consolidation would be subject to any necessary corporate and regulatory approvals.
ARTICLE III
Other Conditions Precedent to the Reorganization
SECTION 3.02. The obligations of the parties hereunder shall be subject to satisfaction of each of the following conditions:
(a) The Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act nor instituted any proceeding seeking to enjoin consummation of the Reorganization contemplated hereby.
(b) The appropriate parties shall have received orders from the Commission providing such exemptions and approvals as they and their counsel reasonably deem necessary, if any, and shall have made all necessary filings, if any, with, and received all necessary approvals from, state securities or insurance authorities.
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(c) The Trust shall have filed with the Commission a registration statement on Form N-14 under the 1933 Act and such amendments thereto as may be necessary or desirable to effect the purposes of the Agreement and the Reorganization contemplated hereby.
(d) Fund A shall have filed on Form N-4 a post-effective amendment to its registration statement under the 1933 Act and the 1940 Act, and such additional amendments thereto as may be necessary or desirable to effect the purposes of the Agreement and the Reorganization contemplated hereby.
(e) At a meeting of the Contract Owners called for such purpose (or any adjournments thereof), a majority of the votes represented in person or by proxy at a meeting of the Contract Owners called for that purpose, shall have voted in favor of approving this Agreement and the Reorganization contemplated hereby.
(f) Lincoln Life, Fund A and the LVIP G&I Fund shall have received an opinion of Dechert, LLP as to the federal income tax consequences of the Reorganization in form and substance reasonably satisfactory to Lincoln Life, Fund A and the LVIP G&I Fund to the effect that, as of the Closing Date:
| | (1) | Lincoln Life (including Fund A) will not recognize any gain or loss as a result of the restructuring of Fund A as a New UIT; |
| | (2) | Lincoln Life (including Fund A) will not recognize any gain or loss as a result of the transfer of Fund A’s assets to LVIP G&I Fund in exchange for shares of the LVIP G&I Fund and the assumption by the LVIP G&I Fund of Fund A’s liabilities (other than liabilities associated with insurance obligations that will be assumed by the New UIT); |
| | (3) | The LVIP G&I Fund’s basis in Fund A’s assets received will be the same as Lincoln Life’s basis in those assets immediately prior to the Reorganization; |
| | (4) | The LVIP G&I Fund’s holding period for the transferred assets will include Lincoln Life’s holding period therefore; |
| | (5) | No gain or loss will be recognized by the LVIP G&I Fund upon the receipt of Fund A’s assets solely in exchange for the issuance of LVIP G&I Fund’s shares and the assumption of Fund A’s liabilities (other than liabilities associated with insurance obligations that will be assumed by the New UITs); |
| | (6) | No gain or loss will be recognized by the Contract Owners as a result of the Reorganization; |
| | (7) | Lincoln Life’s aggregate basis in the shares of the LVIP G&I Fund received in the Reorganization will be the same as the aggregate adjusted basis of the assets surrendered in exchange there for reduced by the amount of any liabilities of Fund A assumed by the LVIP G&I Fund; and |
| | (8) | Lincoln Life’s holding period in the shares of the LVIP G&I Fund received in the Reorganization will include its holding period for the assets surrendered in exchange therefore, provided that at the time of the exchange, such assets were held as capital assets. |
(g) Each party shall have furnished, as reasonably requested by any other party, other legal opinions, officers’ certificates, incumbency certificates, certified copies of board and committee resolutions, good standing certificates, and other closing documentation as may be appropriate for a transaction of this type.
ARTICLE IV
Expenses
Lincoln Life shall bear all expenses in connection with effecting the Reorganization contemplated by this Agreement including, without limitation, preparation and filing of registration statements, applications, and amendments thereto on behalf of any and all parties hereto; and all legal, accounting, and data processing services necessary to effect the Reorganization.
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ARTICLE V
Miscellaneous
This Agreement may be terminated and the Reorganization abandoned at any time prior to the Effective Time, notwithstanding approval by the Contract Owners, by mutual consent of the parties hereto.
If, at any time after the Closing Date, the New UIT, the LVIP G&I Fund, or Lincoln Life determine that any further conveyance, assignment, documentation, or action is necessary or desirable to complete the Reorganization contemplated by this Agreement or to confirm full title to the assets transferred, the appropriate party or parties shall execute and deliver all such instruments and take all such actions.
This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Indiana, without regard to its principles of conflicts of law.
IN WITNESS WHEREOF, as of the day and year first above written, each of the parties has caused this Agreement to be executed on its behalf.
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
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| By: | | /s/ KEVIN J. ADAMSON |
| Name: | | Kevin J. Adamson |
| Title: | | Second Vice President |
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
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| By: | | /s/ WILLIAM P. FLORY, JR. |
| Name: | | William P. Flory, Jr. |
| Title: | | Second Vice President and Chief Accounting Officer |
LINCOLN VARIABLE INSURANCE PRODUCTS TRUST,
on behalf of the LVIP Delaware Growth and Income Fund
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| By: | | /s/ DANIEL R. HAYES |
| Name: | | Daniel R. Hayes |
| Title: | | President |
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EXHIBIT B
Management’s Discussion of Fund Performance and Financial Highlights
Management’s Discussion of Fund Performance
The discussion of performance for both Fund A and the LVIP G&I Fund in this Exhibit B is taken from the respective Funds’ most recent annual reports to shareholders and does not reflect developments occurring after the report was filed with the SEC and sent to shareholders.
Lincoln National Variable Annuity Fund A
2008 Annual Report Commentary
The Fund returned (36.23%) for the fiscal year ended December 31, 2008, while its benchmark, the Russell 1000® Index*, returned (37.60%).
Equity markets were extremely volatile in 2008 as weakening economic activity and a crisis of confidence in the global financial system led to a decline in the Russell 1000® Index* of 37.60%. The U.S. housing market, which has been the focal point of economic instability since 2007, saw no signs of improvement as home prices dropped almost 20% during the year. Major financial institutions across the globe were rattled by rapidly declining asset values of mortgage related securities and heightened illiquidity across all sectors of the credit markets. Bear Stearns, Lehman Brothers, American International Group (AIG), Fannie Mae and Freddie Mac were among the major victims of the credit crisis after deterioration in their capital positions left them with no other option except bankruptcy, forced merger and acquisition (M&A), or government takeover. In response to the disruptions in the financial system, the U.S. Treasury and Federal Reserve utilized a variety of conventional and unconventional techniques to restore order, lowering the Federal Funds rate from 4.25% to 0.25%, buying equity stakes in financial institutions, and the establishment of a program to purchase mortgage-backed securities as a means to support fixed income markets. While the government was successful in mitigating a widespread collapse in the financial system, their efforts were not able to prevent the U.S. economy from entering into recession. Rising unemployment, tight lending standards, and the collapse of commodity prices have dimmed growth prospects in the U.S. and abroad for the foreseeable future.
The Fund’s return exceeded that of its benchmark for the year. The Fund’s outperformance relative to the Russell 1000® Index* was attributable to stock selection in the finance, technology, and consumer services area. On the downside, adverse stock selection in the consumer staples, consumer discretionary, and basic materials sectors detracted from Fund returns versus the benchmark. On a stock specific basis, a lack of exposure to Wachovia, limited exposure to Citigroup combined with an overweight position in Merrill Lynch had a positive impact on performance. Stocks having a negative impact on the Fund relative to its benchmark included overweight positions in AIG, Textron, and Prudential. At December 31, 2008, the Fund no longer held positions in AIG, Citigroup and Textron.
Looking into 2009, hopes rest on President Barack Obama and his new administration to provide much-needed stimulus to the economy in the form of infrastructure spending and capital injections in the financial markets. We view current valuations in the market as extremely attractive, and seek to take advantage of situations where draconian market expectations have gotten out of line with underlying company fundamentals. We expect volatile equity markets over the near term but remain confident that the unconventional techniques being utilized by U.S. and foreign governments to stimulate the global economy will provide positive support to the markets over the long term.
Francis X. Morris
Christopher S. Adams, CFA
Michael S. Morris, CFA
Donald G. Padilla, CFA
Delaware Investments
B-1
Growth of $10,000 invested 12/31/98 through 12/31/08
This chart illustrates, hypothetically, that $10,000 was invested in Fund A on 12/31/98. As the chart shows, by December 31, 2008, the value of the investment at net asset value, with any dividends and distributions reinvested, would have decreased to $7,623. For comparison, look at how the Russell 1000® Index did over the same period. The same $10,000 investment would have decreased to $8,962. Earnings from a variable annuity investment compound tax-free until withdrawn, so no adjustments were made for income taxes. Past performance is not indicative of future performance. Remember, an investor cannot invest directly in an index.
| | | |
Average annual total returns on investment | | Ended
12/31/08 | |
Standard Class Shares | | | |
One Year | | -36.23 | % |
Five Years | | -2.92 | % |
Ten Years | | -2.68 | % |
* | The Russell 1000® Index measures the performance of the 1000 largest companies in the Russell 3000® Index, which represents approximately 92% of the total market capitalization of the Russell 3000® Index. |
LVIP Delaware Growth and Income Fund
2008 Annual Report Commentary
The Fund returned (35.76%) (Standard Class shares with distributions reinvested) for the fiscal year ended December 31, 2008, while its benchmark, the Russell 1000® Index*, returned (37.60%).
Equity markets were extremely volatile in 2008 as weakening economic activity and a crisis of confidence in the global financial system led to a decline in the Russell 1000® Index* of 37.60%. The U.S. housing market, which has been the focal point of economic instability since 2007, saw no signs of improvement as home prices dropped almost 20% during the year. Major financial institutions across the globe were rattled by rapidly declining asset values of mortgage-related securities and heightened illiquidity across all sectors of the credit markets. Bear Stearns, Lehman Brothers, American International Group (AIG), Fannie Mae and Freddie Mac were among the major victims of the credit crisis after deterioration in their capital positions left them with no other option except bankruptcy, forced merger and acquisition (M&A), or government takeover. In response to the disruptions in the financial system, the U.S. Treasury and Federal Reserve utilized a variety of conventional and unconventional techniques to restore order, lowering the Federal Funds rate from 4.25% to 0.25%, buying equity stakes in financial institutions, and the establishment of a program to purchase mortgage-backed securities as a means to support fixed income markets. While the government was successful in mitigating a widespread collapse in the financial system, their efforts were not able to prevent the U.S. economy from entering into recession. Rising unemployment, tight lending standards, and the collapse of commodity prices have dimmed growth prospects in the U.S. and abroad for the foreseeable future.
B-2
The Fund’s return exceeded that of its benchmark for the year. The Fund’s outperformance relative to the Russell 1000® Index* was attributable to stock selection in the finance, technology, and consumer services area. On the downside, adverse stock selection in the consumer staples, consumer discretionary, and basic materials sectors detracted from Fund returns versus the benchmark. On a stock specific basis, a lack of exposure to Wachovia and Citigroup combined with an overweight position in Merrill Lynch had a positive impact on performance. Stocks having a negative impact on the Fund relative to its benchmark included overweight positions in AIG, Textron, and Prudential. At December 31, 2008, the Fund no longer held positions in AIG and Textron.
Looking into 2009, hopes rest on President Barack Obama and his new administration to provide much-needed stimulus to the economy in the form of infrastructure spending and capital injections in the financial markets. We view current valuations in the market as extremely attractive, and seek to take advantage of situations where draconian market expectations have gotten out of line with underlying company fundamentals. We expect volatile equity markets over the near term but remain confident that the unconventional techniques being utilized by U.S. and foreign governments to stimulate the global economy will provide positive support to the markets over the long term.
Francis X. Morris
Christopher S. Adams, CFA
Michael S. Morris, CFA
Donald G. Padilla, CFA
Delaware Investments
Growth of $10,000 invested 12/31/98 through 12/31/08
This chart illustrates, hypothetically, that $10,000 was invested in the LVIP Delaware Growth and Income Fund Standard Class shares on 12/31/98. Performance of the Service Class shares would be lower than Standard Class shares as a result of higher expenses. As the chart shows, by December 31, 2008, the value of the investment at net asset value, with any dividends and distributions reinvested, would have decreased to $8,631. For comparison, look at how the Russell 1000® Index did over the same period. The same $10,000 investment would have decreased to $8,962. Earnings from a variable annuity investment compound tax-free until withdrawn, so no adjustments were made for income taxes. Past performance is not indicative of future performance. Remember, an investor cannot invest directly in an index.
| | | |
Average annual total returns on investment | | Ended
12/31/08 | |
Standard Class Shares | | | |
One Year | | -35.76 | % |
Five Years | | -1.97 | % |
Ten Years | | -1.46 | % |
| |
Service Class Shares | | | |
One Year | | -35.99 | % |
Inception (5/19/04) | | -1.99 | % |
* | The Russell 1000® Index measures the performance of the largest 1,000 U.S. companies in the Russell 3000® Index, which represents approximately 92% of the total market capitalization of the Russell 3000® Index. |
B-3
Financial Highlights
The financial highlights tables are intended to help you understand the performance of Lincoln National Variable Annuity Fund A and the Standard Class of the LVIP Delaware Growth and Income Fund for the past five years or since inception. Certain information reflects financial results for a single share. Total return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The financial highlights of both Lincoln National Variable Annuity Fund A and the LVIP Delaware Growth and Income Fund for the years ended December 31, 2004 through December 31, 2008 have been audited by Ernst & Young LLP, the Funds’ independent registered public accounting firm. Ernst & Young’s most recent reports, the financial highlights, along with the Funds’ financial statements for periods through December 31, 2008, are included in the respective Fund’s Annual Report to Shareholders. Each Fund’s Annual Report to Shareholders dated December 31, 2008 is available upon request.
Lincoln National Variable Annuity Fund A
Financial Highlights—Selected Per Unit Data and Ratios
The following is selected financial data for an accumulation unit outstanding throughout each period:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
Investment income | | $ | 0.382 | | | $ | 0.388 | | | $ | 0.354 | | | $ | 0.338 | | | $ | 0.343 | |
Expenses | | | (0.252 | ) | | | (0.297 | ) | | | (0.257 | ) | | | (0.239 | ) | | | (0.218 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net investment income | | | 0.130 | | | | 0.091 | | | | 0.097 | | | | 0.099 | | | | 0.125 | |
Net realized and unrealized gain (loss) on investments | | | (8.234 | ) | | | 1.016 | | | | 2.022 | | | | 0.732 | | | | 1.642 | |
| | | | | | | | | | | | | | | | | | | | |
Increase (decrease) in accumulation unit value | | | (8.104 | ) | | | 1.107 | | | | 2.119 | | | | 0.831 | | | | 1.767 | |
Accumulation unit value at beginning of period | | | 22.369 | | | | 21.262 | | | | 19.143 | | | | 18.312 | | | | 16.545 | |
| | | | | | | | | | | | | | | | | | | | |
Accumulation unit value at end of period | | $ | 14.265 | | | $ | 22.369 | | | $ | 21.262 | | | $ | 19.143 | | | $ | 18.312 | |
| | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000 omitted) | | $ | 40,222 | | | $ | 70,360 | | | $ | 76,710 | | | $ | 75,923 | | | $ | 80,883 | |
Ratio of expenses to average net assets | | | 1.33 | % | | | 1.32 | % | | | 1.28 | % | | | 1.28 | % | | | 1.28 | % |
Ratio of net investment income to average net assets | | | 0.65 | % | | | 0.43 | % | | | 0.48 | % | | | 0.53 | % | | | 0.73 | % |
Total investment return | | | (36.23 | %) | | | 5.21 | % | | | 11.07 | % | | | 4.54 | % | | | 10.68 | % |
Portfolio turnover rate | | | 36.35 | % | | | 29.16 | % | | | 28.83 | % | | | 20.40 | % | | | 38.72 | % |
Number of accumulation units outstanding at end of period (expressed in thousands): | | | | | | | | | | | | | | | | | | | | |
Accumulation units | | | 2,617 | | | | 2,912 | | | | 3,330 | | | | 3,689 | | | | 4,103 | |
Reserve units | | | 160 | | | | 185 | | | | 220 | | | | 214 | | | | 245 | |
B-4
LVIP Delaware Growth and Income Fund
(Standard Class only)
Financial Highlights
Selected data for each share of the Fund outstanding throughout each period were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | LVIP Delaware Growth and Income Fund Standard Class | |
| | | 12/31/08 | | | 12/31/07 | | | 12/31/06 | | | 12/31/05 | | | 12/31/04 | |
Net asset value, beginning of period | | $ | 36.857 | | | $ | 35.157 | | | $ | 31.673 | | | $ | 30.407 | | | $ | 27.502 | |
Income (loss) from investment operations: | | | | | | | | | | | | | | | | | | | | |
Net investment income1 | | | 0.470 | | | | 0.483 | | | | 0.450 | | | | 0.427 | | | | 0.458 | |
Net realized and unrealized gain (loss) on investments | | | (12.713 | ) | | | 1.660 | | | | 3.454 | | | | 1.253 | | | | 2.821 | |
| | | | | | | | | | | | | | | | | | | | |
Total from investment operations | | | (12.243 | ) | | | 2.143 | | | | 3.904 | | | | 1.680 | | | | 3.279 | |
| | | | | | | | | | | | | | | | | | | | |
Less dividends and distributions from: | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | (0.376 | ) | | | (0.443 | ) | | | (0.420 | ) | | | (0.414 | ) | | | (0.374 | ) |
Net realized gain on investments | | | (3.266 | ) | | | — | | | | — | | | | — | | | | — | |
Total dividends and distributions | | | (3.642 | ) | | | (0.443 | ) | | | (0.420 | ) | | | (0.414 | ) | | | (0.374 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net asset value, end of period | | $ | 20.972 | | | $ | 36.857 | | | $ | 35.157 | | | $ | 31.673 | | | $ | 30.407 | |
| | | | | | | | | | | | | | | | | | | | |
Total return2 | | | (35.76 | %) | | | 6.12 | % | | | 12.36 | % | | | 5.54 | % | | | 11.99 | % |
Ratios and supplemental data: | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000 omitted) | | $ | 993,797 | | | $ | 1,823,930 | | | $ | 1,989,459 | | | $ | 2,076,169 | | | $ | 2,245,431 | |
Ratio of expenses to average net assets | | | 0.41 | % | | | 0.40 | % | | | 0.38 | % | | | 0.38 | % | | | 0.37 | % |
Ratio of net investment income to average net assets | | | 1.55 | % | | | 1.29 | % | | | 1.37 | % | | | 1.39 | % | | | 1.63 | % |
Portfolio turnover | | | 37 | % | | | 31 | % | | | 29 | % | | | 20 | % | | | 38 | % |
1 | The average shares outstanding method has been applied for per share information. |
2 | Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. |
B-5
EXHIBIT C
Ownership of Shares as of February 17, 2009
Number of Outstanding Shares
| | |
| | | Shares Outstanding |
LVIP Growth and Income Fund | | |
Standard Class | | 46,304,274.69 |
Service Class | | 2,098,852.23 |
Total | | 48,403,126.92 |
| |
| | | Units Outstanding |
Lincoln National Variable Annuity Fund A | | 2,748,845.88 |
Principal Holders of Shares of LVIP G&I Fund
| | | | | | | |
Series Name/Class | | Shareholder Name and Address | | Share Amount | | Percentage | |
RECORD OWNERS Standard Class | | Lincoln National (Life) VA Acct C 1300 South Clinton Street Fort Wayne, IN 46801 | | 44,354,050.74 | | 95.81 | % |
| | | |
| Service Class | | Lincoln Life Flexible Premium Variable Life Account JF-A | | 861,477.96 | | 43.39 | % |
| | Lincoln National (Life) VA Acct N | | 878,086.85 | | 39.77 | % |
| | Lincoln National (Life) VA Acct C | | 127,733.73 | | 6.02 | % |
| | Lincoln Life Flexible Premium Variable Life Account JF-C | | 106,320.51 | | 5.07 | % |
| | 1300 South Clinton Street Fort Wayne, IN 46801 | | | | | |
| | |
Principal Holders of Units of Lincoln National Variable Annuity Fund A | | | | | |
Series Name/Class | | Shareholder Name and Address | | Unit Amount | | Percentage | |
RECORD OWNERS | | The Lincoln National Life Insurance Company 1300 South Clinton Street Fort Wayne, IN 46801 | | 2,748,845.88 | | 100.00 | % |
C-1
PART B
LINCOLN VARIABLE INSURANCE PRODUCTS TRUST
LVIP Delaware Growth and Income Fund
STATEMENT OF ADDITIONAL INFORMATION
March 16, 2009
| | |
Acquisition of the Assets and Liabilities of Lincoln National Variable Annuity Fund A 1300 South Clinton Street Fort Wayne, Indiana 46802 | | In Exchange for Shares of LVIP Delaware Growth and Income Fund (a series of Lincoln Variable Insurance Products Trust) 1300 South Clinton Street Fort Wayne, Indiana 46802 |
This Statement of Additional Information (“SAI”), which is not a prospectus, supplements and should be read in conjunction with, the Proxy Statement/Prospectus dated March 16, 2009, relating specifically to the proposed transfer of all of the assets and liabilities of Lincoln National Variable Annuity Fund A to the LVIP Delaware Growth and Income Fund in exchange for shares of the LVIP Delaware Growth and Income Fund (“Reorganization”). To obtain a copy of the Proxy Statement/Prospectus, please write to LINCOLN VARIABLE INSURANCE PRODUCTS TRUST, 1300 South Clinton Street, Fort Wayne, Indiana 46802, or call (800) 4LINCOLN (454-6265). The Reorganization will be pursuant to an Agreement and Plan of Reorganization.
This SAI incorporates by reference the following described documents, each of which was filed electronically with the Securities and Exchange Commission and is incorporated by reference herein:
(1) The SAI of Lincoln Variable Insurance Products Trust, dated April 30, 2008, as supplemented;
(2) The Financial Statements of Lincoln National Variable Annuity Fund A included in the Fund’s Annual Report to Shareholders, dated December 31, 2008.
(3) The Financial Statements of the LVIP Delaware Growth and Income Fund included in the Trust’s Annual Report to Shareholders, dated December 31, 2008.
Financial Statements
Unaudited pro forma financial statements reflecting consummation of the Reorganization are not included in this SAI because the assets of Fund A, the acquired fund, are less than 10% of the assets of the LVIP G&I Fund., the acquiring fund. As previously noted, the audited financial statements for the year ended December 31, 2008 for Fund A are incorporated by reference into this SAI from Fund A’s last Annual Report to Shareholders. As previously noted, the audited financial statements for the year ended December 31, 2008 for the LVIP G&I Fund are incorporated by reference into this SAI from the LVIP G&I Fund’s last Annual Report to Shareholders.
| | |
| CONTRACT OWNER’S PROXY CARD | | CONTRACT OWNER’S PROXY CARD |
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
1300 S. Clinton Street
Fort Wayne, IN 46802
THESE INSTRUCTIONS ARE SOLICITED ON BEHALF OF THE BOARD OF MANAGERS OF LINCOLN NATIONAL VARIABLE ANNUITY FUND A (THE “FUND”)
Revoking any prior instructions, I appoint Kelly D. Clevenger and Kevin J. Adamson, or either one of them individually, as my proxies and attorneys-in-fact to vote all of the shares of the Fund that are attributable to my contract at the Special Meeting of Contract Owners to be held on June 11, 2009 and at any adjournment thereof. The proxies shall have all of the powers that I would possess if present.
| | |
| | VOTE VIA THE INTERNET: www.proxy-direct.com |
| |
| | VOTE VIA THE TELEPHONE: 1-866-235-4258 |
| |
| | I acknowledge receipt of the Notice of the Special Meeting of the Contract Owners and accompanying Proxy Statement dated , 2009. |
| |
| | |
| | Signature |
| |
| | |
| | Signature (if held jointly) |
| |
| | , 2009 |
| | Date (LNL-FA) |
EVERY CONTRACT OWNER’S VOTE IS IMPORTANT!
VOTING OPTIONS – VOTE TODAY!
READ YOUR PROXY STATEMENT AND HAVE IT AT HAND WHEN VOTING.
[charts/diagrams]
If you vote on the Internet or by telephone, you need not return this proxy card.
Upon proper execution of this card, the proxies shall vote on the Proposal described in the proxy statement as specified below, and, in the proxies’ discretion, upon such other matters as may properly come before the meeting or any adjournment thereof. If this card is signed and returned but no instruction choice is given for a Proposal, the proxies will vote your proportionate shares “FOR” that Proposal.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD USING THE ENCLOSED ENVELOPE.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK. Example: ¢
| | | | | | | | |
| 1. | | To approve an Agreement and Plan of Reorganization and related transactions to transfer the assets of Fund A to the LVIP Delaware Growth and Income Fund, a series of the Lincoln Variable Insurance Products Trust, in exchange for Standard Class shares of LVIP Delaware Growth and Income Fund, and to restructure Fund A into a unit investment trust. | | FOR | | AGAINST | | ABSTAIN |
| | | ¨ | | ¨ | | ¨ |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | |
| | The proxies will vote upon such other business as may properly come before the Meeting or any adjournment or postponement thereof. | | | | | | |
(LNL-FA)
If you have any questions, please contact Lincoln Life toll free at 1-800-454-6265.
630544-10
| | |
| VOTING INSTRUCTION CARD | | VOTING INSTRUCTION CARD |
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
1300 S. Clinton Street
Fort Wayne, IN 46802
THESE INSTRUCTIONS ARE SOLICITED ON BEHALF OF THE BOARD OF MANAGERS OF LINCOLN NATIONAL VARIABLE ANNUITY FUND A (THE “FUND”)
Revoking any prior instructions, I instruct the owner of the contract [identified above] (“Contract Owner”) to vote all of the shares of the Fund that are attributable to my account at the Special Meeting of Contract Owners to be held on June 11, 2009 and at any adjournment thereof.
| | |
| | VOTE VIA THE INTERNET: www.proxy-direct.com |
| |
| | VOTE VIA THE TELEPHONE: 1-866-235-4258 |
| |
| | I acknowledge receipt of the Notice of the Special Meeting of the Contract Owners and accompanying Proxy Statement dated , 2009. |
| |
| | |
| | Signature |
| |
| | |
| | Signature (if held jointly) |
| |
| | , 2009 |
| | Date (LNL-FA) |
EVERY VOTE IS IMPORTANT!
VOTING OPTIONS – VOTE TODAY!
READ YOUR PROXY STATEMENT AND HAVE IT AT HAND WHEN VOTING.
[charts/diagrams]
If you vote on the Internet or by telephone, you need not return this proxy card.
Upon proper execution of this card, the Contract Owner shall vote on the Proposal described in the proxy statement as specified below, and, in the Contract Owner’s discretion, upon such other matters as may properly come before the meeting or any adjournment thereof. If this card is signed and returned but no instruction choice is given for a Proposal, you will be deemed to have given instructions to vote “FOR” that Proposal.
PLEASE MARK, SIGN, DATE AND RETURN THIS VOTING INSTRUCTION CARD USING THE ENCLOSED ENVELOPE.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK. Example: ¢
| | | | | | | | |
| 2. | | To approve an Agreement and Plan of Reorganization and related transactions to transfer the assets of Fund A to the LVIP Delaware Growth and Income Fund, a series of the Lincoln Variable Insurance Products Trust, in exchange for Standard Class shares of LVIP Delaware Growth and Income Fund, and to restructure Fund A into a unit investment trust. | | FOR | | AGAINST | | ABSTAIN |
| | | ¨ | | ¨ | | ¨ |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | |
| | The Contract Owner will vote upon such other business as may properly come before the Meeting or any adjournment or postponement thereof. | | | | |
(LNL-FA)
If you have any questions, please contact Lincoln Life toll free at 1-800-454-6265.
630544-10
Lincoln National Variable Annuity Fund A
Individual Variable Annuity Contracts
Home Office:
The Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801-2340
www.LFG.com
1-800-454-6265
This prospectus describes the individual variable annuity contract that is
issued by The Lincoln National Life Insurance Company (Lincoln Life). They are
primarily for use with certain nonqualified plans and qualified retirement
plans. Generally, you do not pay federal income tax on the contract's growth
until it is paid out. Qualified retirement plans already provide for tax
deferral. Therefore, there should be reasons other than tax deferral for
acquiring the contract within a qualified plan. The contract is designed to
accumulate contract value to provide retirement income that you cannot outlive
or for an agreed upon time. These benefits may be a variable or fixed amount or
a combination of both. If the contractowner or annuitant dies before the
annuity commencement date, we will pay the beneficiary a death benefit.
Additional purchase payments may be made to periodic payment contracts and must
be at least $25 per payment, and total $600 annually.
The contractowner chooses whether the contract value accumulates on a variable
or a fixed (guaranteed) basis or both. If the contractowner puts purchase
payments into the fixed account, we guarantee the principal and a minimum
interest rate. We limit withdrawals and transfers from the fixed side of the
contract.
All purchase payments for benefits on a variable basis will be placed in
Lincoln National Variable Annuity Fund A (the Fund or Variable Annuity Account
(VAA)). The Fund is a segregated investment account of Lincoln Life. The main
investment objective of the Fund is the long-term growth of capital in relation
to the changing value of the dollar. A secondary investment objective is the
production of current income. The Fund seeks to accomplish these objectives by
investing in equity securities, primarily common stocks.
The contractowner takes all the investment risk on the contract value and the
retirement income derived from purchase payments into the Fund. If the Fund
makes money, your contract value goes up; if the Fund loses money, it goes
down. How much it goes up or down depends on the performance of the Fund. We do
not guarantee how the Fund will perform. Also, neither the U.S. Government nor
any federal agency insures or guarantees your investment in the contract.
This prospectus gives you information about the contracts, Lincoln Life and the
Fund that you should know before deciding to buy a contract and make purchase
payments. This prospectus should be kept for future reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
More information about the contracts is in the current Statement of Additional
Information (SAI), dated the same date as this prospectus. The SAI is
incorporated by reference into this prospectus and is legally part of this
prospectus. For a free copy of the SAI, the Fund's annual or semi-annual
reports, other information, and to make contractowner inquiries, write The
Lincoln National Life Insurance Company, P.O. Box 2340, Fort Wayne, IN 46801 or
call 1-800-454-6265. The Fund does not maintain an internet website. The SAI,
material incorporated by reference, annual and semi-annual reports, and other
information about Lincoln Life and the Fund are also available on the SEC's
website (http://www.sec.gov). There is a table of contents for the SAI on the
last page of this prospectus.
April 30, 2008
1
Table of Contents
Item Page
Special Terms 3
Expense Tables 4
Summary of Common Questions 4
Condensed Financial Information For The Fund 5
The Lincoln National Life Insurance Company 6
Fixed Side of the Contract 6
Fund A 7
Charges and Other Deductions 8
The Contracts 9
Transfers On or Before the Annuity Commencement Date 11
Market Timing 11
Death Benefit Before the Annuity Commencement Date 12
Surrenders and Withdrawals 13
Annuity Payouts 15
More Information About The Fund 17
Federal Tax Matters 18
Additional Information 22
Voting Rights 22
Distribution of the Contracts 22
Other Information 24
Legal Proceedings 24
Statement of Additional Information
Table of Contents for Lincoln National Variable Annuity Fund A 25
2
Special Terms
In this prospectus, the following terms have the indicated meanings:
Accumulation unit - A measure used to calculate contract value for the variable
side of the contract before the annuity commencement date.
Annuitant - The person upon whose life the annuity benefit payments are based,
and upon whose life a death benefit may be paid.
Annuity commencement date - The valuation date when funds are withdrawn or
converted into annuity units or fixed dollar payout for payment of annuity
benefits under the annuity payout option you select.
Annuity unit - A measure used to calculate the amount of annuity payouts for
the variable side of the contract after the annuity commencement date. See
Annuity Payouts.
Beneficiary - The person or entity designated by the contractowner to receive
any death benefit paid if the contractowner or annuitant dies before the
annuity commencement date.
Contractowner (you, your, owner) - The annuitant or other designated person,
except in cases where a contract is issued to a trustee of a trust or a
custodian, (1) of a qualified pension or profit sharing plan or (2) of an
Individual Retirement Annuity (under Sections 401 (a) and 408 of the Internal
Revenue Code, or "tax code"), or (3) where a contract is issued in connection
with a deferred compensation plan (under Section 457 of the tax code). In these
cases, the contractowner is the trustee or custodian.
Contract value - At a given time before the annuity commencement date, the
total value of all accumulation units for a contract plus the value of the
fixed side of the contract.
Contract year - Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit-Before the annuity commencement date, the amount payable to a
designated beneficiary if the contractowner or annuitant dies.
Lincoln Life (we, us, our) - The Lincoln National Life Insurance Company.
Participant - The individual participating in the qualified pension or
profit-sharing plan, deferred compensation plan, tax deferred annuity, or tax
sheltered annuity.
Purchase payments - Amounts paid into the contract.
Valuation date - Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period - The period starting at the close of trading (currently 4:00
p.m. New York time) on each day that the NYSE is open for trading (valuation
date) and ending at the close of such trading on the next valuation date.
3
Expense Tables
Contractowner Transaction Expenses:
Single Premium Periodic Premium
o Sales load on purchase payments (as a percentage of purchase payments, as applicable) 2%+$50* 4.25%
o Administrative expenses (as a percentage of purchase payments, as applicable) $ 65* 1.00%
o Minimum death benefit rider (if elected)** (as a percentage of purchase payments) .75% .75%
We may waive or reduce these charges in certain situations. See Charges and
Other Deductions.
*This charge is deducted at the time of purchase of the contract and is a
one-time charge.
** The minimum death benefit rider is no longer available for sale.
Fund A Annual Expenses (as a percentage of average net assets):
o Management fees 0.323%
o Mortality and expense risk charge 1.002%
o Total Annual Expenses 1.325%
EXAMPLES
These examples are intended to help you compare the cost of investing in the
contract with the cost of investing in other variable annuity contracts. These
costs include contractowner transaction expenses and annual expenses and fees
of the Fund.
The examples assume that you invest $1,000 in the contract for the time period
indicated, and that your investment has a 5% annual return on assets. The
examples also assume that the minimum death benefit is in effect. Without this
benefit, expenses would be lower.
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
Single Premium $154 $179 $205 $279
Periodic Premium $ 73 $ 99 $128 $210
For more information - See Charges and Other Deductions in this prospectus.
Premium taxes may also apply, although they do not appear in the Examples.
These examples should not be considered a representation of past or future
expenses. Actual expenses may be more or less than those shown.
For information concerning compensation paid for the sale of the contacts, see
Distribution of the Contracts.
Summary of Common Questions
What kind of contract is this? It is an individual variable annuity contract
between the contractowner and Lincoln Life, and is one of two types: an
immediate annuity or a deferred annuity. Immediate annuities may only be
purchased with a single payment; deferred annuities may be purchased with a
single payment or periodic payments. It may provide for a fixed annuity and/or
a variable annuity. This prospectus describes the variable side of the
contract. See The Contracts. This prospectus provides a general description of
the contract. The contracts are no longer being sold to new contractowners.
Certain benefits, features, and charges may vary in certain states. You should
refer to your contract for any state-specific provisions.
What is the Fund? It is a separate account we established under Indiana
insurance law, and registered with the SEC as a management investment company.
Fund assets are not chargeable with liabilities arising out of any other
business which we may conduct. See Fund A.
Who invests the money? The investment adviser for the Fund is Lincoln Life. The
sub-adviser for the Fund is Delaware Management Company (DMC). See Fund A -
Investment Adviser.
How is the money invested? The principal investment objective of the Fund is
the long-term growth of capital in relation to the changing value of the
dollar. A secondary investment objective is the production of current income.
See Fund A - Investment Adviser.
4
How does the contract work? If we approve your application, we will send you a
contract. When you make purchase payments during the accumulation phase, you
buy accumulation units. If you decide to receive an annuity payout, your
accumulation units are converted to annuity units. Your annuity payouts will be
based on the number of annuity units you received and the value of each annuity
unit on payout days. See The Contracts.
What charges are there under the contract? We deduct sales load from each
purchase payment (2% +$50 from a single payment, 4.25% from each periodic
payment), along with an administrative expense ($65 from a single payment,
1.00% from each periodic premium); and if the contractowner elects the minimum
death benefit, an additional charge of 0.75% from each purchase payment. We may
reduce or waive these charges in certain situations. See Charges and Other
Deductions.
We also will deduct any applicable premium tax from purchase payments.
The Fund pays to us a management fee equal to an annual rate of 0.323%, and a
mortality and expense risk charge equal to 1.002%, of the average daily net
assets of the Fund. See Fund A - Investment Management.
For information about the compensation we pay in connection with premium
payments under the contracts, see Distribution of the Contracts.
What purchase payments must be made, and how often? Subject to the minimum
payment amounts, the payments are completely flexible. See The Contracts -
Periodic Purchase Payments.
How will my annuity payouts be calculated? If a contractowner decides to
annuitize, you may select an annuity option and start
receiving annuity payouts from your contract as a fixed option or variable
option or a combination of both. See Annuity Payouts - Annuity Options.
Remember that participants in the Fund benefit from any gain, and take a risk
of any loss, in the value of the securities in the funds' portfolios.
What happens if the contractowner or annuitant dies before annuitization? If
the contractowner elects the minimum death benefit, and the annuitant is age 64
or younger at the time of death, the beneficiary will receive the greater of
purchase payments (less Rider Premiums and withdrawals) or contract value. If
the contractowner does not elect the minimum death benefit or the annuitant is
65 or older at the time of death, the beneficiary will receive the contract
value. The beneficiary has options as to how the death benefit is paid. See
Death Benefit Before the Annuity Commencement Date.
May contract value be transfered between the variable and the fixed side of the
contract? Yes, with certain limits. See - The Contracts - Transfers On or
Before the Annuity Commencement Date and Transfers After the Annuity
Commencement Date.
May I surrender the contract or make a withdrawal? Yes, subject to contract
requirements and to the restrictions of any qualified retirement plan for which
the contract was purchased. See The Contracts - Surrenders and Withdrawals. A
portion of surrender or withdrawal proceeds may be taxable. In addition, if you
decide to take a distribution before age 591/2, a 10% Internal Revenue Service
(IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to
20% withholding. See Federal Tax Matters.
Condensed Financial Information For The Fund
(For an accumulation unit outstanding throughout the year)
Accumulation Unit Values
The following information relating to accumulation unit values and number of
accumulation units for the Fund for periods ending December 31 is derived from
the Fund's financial statements which have been audited by Ernst & Young, LLP,
independent registered public accounting firm. It should be read along with the
Fund's financial statements, notes and report of independent registered public
accounting firm which are included in the SAI.
5
2007 2006 2005 2004
----------- ------------ ------------ ------------
Investment Income ............................ $ .388 $ .354 $ .338 $ .343
Expenses ..................................... .297 .257 .239 .218
--------- -------- -------- --------
Net investment income (loss) ................. .091 .097 .099 .125
Net realized and unrealized gain (loss) on
investments ................................. 1.016 2.022 .732 1.642
--------- -------- -------- --------
Net increase (decrease) in
accumulation unit value ..................... 1.107 2.119 .831 1.767
Accumulation unit value at
beginning of period ......................... 21.262 19.143 18.312 16.545
--------- -------- -------- --------
ACCUMULATION UNIT VALUE AT
END OF PERIOD ............................... 22.369 $ 21.262 $ 19.143 $ 18.312
--------- -------- -------- --------
RATIOS
Ratio of expenses to average net assets ...... 1.32% 1.28% 1.28% 1.28%
Ratio of net investment income (loss) to
average net assets .......................... .43% .48% .53% .73%
Portfolio turnover rate ...................... 29.16% 28.83% 20.40% 38.72%
Number of accumulation units
outstanding at end of year
(expresed in thousands) ..................... 2,912 3,330 3,689 4,103
2003 2002 2001 2000 1999 1998
------------ ----------- ----------- ----------- ------------ ------------
Investment Income ............................ $ .245 $ .253 $ .249 $ .265 $ .283 $ .301
Expenses ..................................... .184 .191 .228 .275 .256 .217
-------- -------- -------- ------- -------- --------
Net investment income (loss) ................. .061 .062 .021 (.010) 0.27 .084
Net realized and unrealized gain (loss) on
investments ................................. 3.612 (4.238) (2.354) (2.454) 3.106 3.028
-------- -------- -------- ------- -------- --------
Net increase (decrease) in
accumulation unit value ..................... 3.673 (4.176) (2.333) (2.464) 3.133 3.112
Accumulation unit value at
beginning of period ......................... 12.872 17.048 19.381 21.845 18.712 15.600
-------- -------- -------- ------- -------- --------
ACCUMULATION UNIT VALUE AT
END OF PERIOD ............................... $ 16.545 $ 12.872 $ 17.048 $19.381 $ 21.845 $ 18.712
-------- -------- -------- ------- -------- --------
RATIOS
Ratio of expenses to average net assets ...... 1.27% 1.28% 1.28% 1.28% 1.28% 1.28%
Ratio of net investment income (loss) to
average net assets .......................... .42% .41% .12% (.05)% .14% .49%
Portfolio turnover rate ...................... 77.30% 60.26% 78.03% 66.67% 21.46% 31.10%
Number of accumulation units
outstanding at end of year
(expresed in thousands) ..................... 4,466 4,747 5,305 5,787 6,366 7,176
Investment Results
At times, the fund may compare its investment results to various unmanaged
indices or other variable annuities in reports to shareholders, sales
literature and advertisements. The results will be calculated on a total return
basis for various periods. Total returns include the reinvestment of all
distributions, which are reflected in the changes in unit value. Performance is
based on past performance and does not indicate or represent future
performance.
Financial Statements
The financial statements of the VAA and the consolidated financial statements
of Lincoln Life are located in the SAI. If you would like a free copy of the
SAI, complete and mail the request on the last page of this prospectus, or call
1-800-454-6265.
The Lincoln National Life Insurance Company
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana-domiciled insurance company, engaged primarily in the direct
issuance of life insurance contracts and annuities. Lincoln Life is wholly
owned by Lincoln National Corporation (LNC), a publicly held insurance and
financial services holding company incorporated in Indiana. Lincoln Life is
obligated to pay all amounts promised to policy owners under the policies.
Guarantees provided within death benefit options and living benefit riders are
backed by the claims-paying ability of Lincoln Life.
Lincoln Financial Group is the marketing name for Lincoln National Corporation
(NYSE:LNC) and its affiliates. Lincoln Financial Group sells a wide variety of
financial products and solutions through financial advisors: mutual funds,
managed accounts, retirement solutions, life insurance, 401(k) and 403(b)
plans, savings plans, institutional investments and comprehensive financial
planning and advisory services.
Fixed Side of the Contract
The value of net purchase payments (gross purchase payments minus sales and
administrative expenses) allocated to the fixed side of the contract becomes
part of our general account, and does not participate in the investment
experience of the Fund. The general account is subject to regulation and
supervision by the Indiana Insurance Department as well as the insurance laws
and regulations of the jurisdictions in which the contracts are distributed.
In reliance on certain exemptions, exclusions and rules, we have not registered
interests in the general account as a security under the Securities Act of 1933
(1933 Act) and have not registered the general account as an investment company
under the Investment Company Act of 1940 (1940 Act). Accordingly, neither the
general account nor any interests in it are regulated under the 1933 Act or the
1940 Act. We have been advised that the staff of the SEC has not made a review
of the disclosures which are included in this prospectus which relate to our
general account and to the fixed account under the contract. These disclosures,
however, may be subject to certain provisions of the federal securities laws
relating to the accuracy and completeness of statements made in prospectuses.
This prospectus is generally intended to serve as a disclosure document only
for aspects of the contract involving the Fund, and therefore contains only
selected information regarding the fixed side of the contract. Complete details
regarding the fixed side of the contract are in the contract.
6
Net Purchase Payments allocated to the fixed side of the contract are
guaranteed to be credited with a minimum interest rate, specified in the
contract, of at least 3.5%. A net purchase payment allocated to the fixed side
of the contract is credited with interest beginning on the next calendar day
following the date of receipt if all data is complete. Lincoln Life may vary
the way in which it credits interest to the fixed side of the contract from
time to time.
ANY INTEREST IN EXCESS OF 3.5% WILL BE DECLARED IN ADVANCE AT LINCOLN LIFE'S
SOLE DISCRETION. CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF
3.5% WILL BE DECLARED.
Fund A
On September 16, 1966, we established the Fund as a segregated investment
account under Indiana Law. It is registered with the SEC as an open-end,
diversified management investment company under the provisions of the
Investment Company Act of 1940 (1940 Act). Diversified means not owning too
great a percentage of the securities of any one company. The Fund is a
segregated investment account, meaning that its assets may not be charged with
liabilities resulting from any other business that we may conduct. Income,
gains and losses, whether realized or not, from assets allocated to the Fund
are, in accordance with the applicable contracts, credited to or charged
against the Fund. They are credited or charged without regard to any other
income, gains or losses of Lincoln Life. The obligations arising under the
contract are obligations of Lincoln Life. The Fund satisfies the definition of
separate account under the federal securities laws. We do not guarantee the
investment performance of the Fund. Any investment gain or loss depends on the
investment performance of the Fund. The contractowner assumes the full
investment risk for all amounts placed in the Fund.
We reserve the right, within the law, to make certain changes to the structure
and operation of the Fund at our discretion and without your consent. We may
transfer the assets supporting the contracts from the Fund to another separate
account, combine the Fund with other separate accounts and/or create new
separate accounts, deregister the Fund under the 1940 Act, or operate the Fund
as a management investment company under the 1940 Act or as any other form
permitted by law. We may modify the provisions of the contracts to reflect
charges to the Fund and to comply with applicable law.
The Fund is used to support annuity contracts offered by Lincoln Life other
than the contracts described in this prospectus. The other annuity contracts
may have different charges that could affect performance, and they offer
different benefits.
A description of the Fund's policies and procedures with respect to the
disclosure of its portfolio holdings is available in the Statement of
Additional Information.
Investment Adviser and Sub-Adviser
We are the investment adviser for the Fund. We have been registered under the
Investment Advisers Act of 1940 since 1967. For more information about us, see
The Lincoln National Life Insurance Company, above; and Management, in the SAI.
The current board of managers for the Fund was elected by the contractowners
(See Voting rights). A majority of these managers are not otherwise interested
persons of Lincoln Life as the term "interested persons" is defined in the 1940
Act. The Board is responsible for authorizing investment programs for the Fund,
for recommending any appropriate changes to those objectives and policies, and
for contracting for certain services necessary to the operation of the Fund.
In performing investment management services, we provide the board of managers
with an investment program for its approval. Once the investment program is
approved, we hire an investment sub-adviser to place orders for the purchase
and sale of the assets of the Fund, and we monitor the investment sub-adviser.
We also provide overall management of the Fund's business affairs, subject to
the authority of the board of managers.
A sub-advisory agreement is in effect between Lincoln Life and Delaware
Management Company (DMC), a series of Delaware Management Business Trust
(DMBT), 2005 Market Street, Philadelphia, PA 19103, a Delaware statutory trust
that is registered with the SEC as an investment adviser. DMBT is a wholly
owned indirect subsidiary of Lincoln National Investments, Inc. and ultimately
of Lincoln National Corporation. Under the sub-advisory agreement, DMC may
perform substantially all of the investment advisory services required by the
Fund. However, we remain primarily responsible for investment decisions
affecting the Fund, and no additional compensation from the assets of the Fund
is assessed as a result of this agreement.
A discussion regarding the basis for the Board of Managers approving the
investment advisory contract and sub-advisory contract is available in the
annual report to shareholders for the twelve month period ended December 31,
2007.
Portfolio Manager
A team consisting of Francis X. Morris, Christopher S. Adams, Michael S. Morris
and Donald G. Padilla is responsible for the day-to-day management of the
Fund's investments. Mr. Francis Morris serves as the team leader. Each team
member performs research, and all team members meet and make investment
decisions as a group. Mr. Francis Morris, Director of Research/Senior Vice
President and Senior Portfolio Manager, served as Director of Equity Research
at PNC Asset Management prior to joining Delaware Investments in 1997. Mr.
Adams, Vice President/Portfolio Manager and Senior Equity Analyst, joined
Delaware Investments in 1995. He is a graduate of Oxford University and
received an MBA from the Wharton School of Business at the University of
Pennsylvania. Mr. Michael
7
Morris, Vice President/Portfolio Manager, served as Senior Equity Analyst at
Pilgrim Baxter prior to joining Delaware Investments in 1999. Mr. Padilla, Vice
President/Portfolio Manager, joined Delaware Investments in 1994 as an
Assistant Controller. Prior to joining Delaware Investments, Mr. Padilla worked
for ten years at The Vanguard Group. All team members are CFA Charterholders.
The SAI provides additional information about the portfolio managers'
compensation, other accounts managed by the portfolio managers, and the
portfolio managers' ownership of securities in the Fund.
Investment Objective and Policies
The primary investment objective of the Fund is long-term growth of capital in
relation to the changing value of the dollar. We will make investments with the
objective of providing annuity payments which reflect changes in the value of
the dollar over the long term. A secondary invesment objective is the
production of current income. Generally, we will reinvest income and realized
capital gains.
We usually will invest the Fund's assets in a portfolio of equity securities,
mainly common stocks, diversified over industries and companies.
Diversification means that we will keep the investments spread out over
different industries, and different companies within each industry. We will not
concentrate any more than 25% of the Fund's assets in any one industry.
Diversification, however, does not eliminate the risks inherent in the making
of equity investments. These investment objectives and policies are
"fundamental". That is, they may not be changed without approval by a majority
of contractowners.
Risks
Historically, the value of a diversified portfolio of common stocks held for an
extended period of time has tended to rise during periods of inflation. There
has, however, been no exact correlation, and for some periods the prices of
securities have declined while the cost of living was rising.
The value of the investments held in the Fund fluctuates daily and is subject
to the risks of changing economic conditions as well as the risks inherent in
the ability of management to anticipate changes in such investments necessary
to meet changes in economic conditions.
We will not invest more than 10% of the Fund's assets in securities which are
privately placed with financial institutions (and cannot be sold to the public
without registering with the SEC) ("restricted securities"). We limit
investment in restricted securities because the Fund may not be able to sell
them quickly at a reasonable price.
Other Information
For providing investment services to the Fund, we make deductions aggregating
..323% annually of the average daily value of the Fund. The Fund paid investment
advisory fees of $245,405 in 2007, $242,119 in 2006, and $250,246 in 2005.
Charges and Other Deductions
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contracts. We incur certain costs
and expenses for the distribution and administration of the contracts and for
paying the benefits under the contracts.
Our administrative costs include:
o salaries;
o rent;
o postage;
o stationery;
o travel;
o legal;
o actuarial and accounting fees;
o office equipment and
o telephone.
The benefits we provide include:
o death benefits;
o annuity payout benefits and
o cash surrender value benefits.
The risks we assume include:
o the risk that annuitants receiving annuity payouts under contracts live
longer than we assumed when we calculated our guaranteed rates (these rates
are incorporated in the contract and cannot be changed);
8
o the risk that death benefits paid under the minimum death benefit option
(see below) will exceed the actual contract value;
o the risk that more owners than expected will qualify for reduced sales or
administrative charges; and
o the risk that our costs in providing the services will exceed our revenues
from contract charges (which we cannot change).
The amount of a charge may not necessarily correspond to the costs associated
with providing the services or benefits indicated by the description of the
charge. For example, the sales expense charge may not fully cover all of the
sales and distribution expenses actually incurred by us. Any remaining expenses
will be paid from our general account which may consist, among other things, of
proceeds derived from mortality and expense risk charges deducted from the
Fund. We may profit from one or more of the fees and charges deducted under the
contract. We may use these profits for any corporate purpose, including
financing the distribution of the contracts.
Deductions from Purchase Payments
Under periodic payment contracts, we deduct 4.25% for sales expenses and 1% for
administrative expenses from each purchase payment when it is received. Under
single payment contracts, we deduct 2% plus $50 from the single purchase
payment for sales expense and $65 for administrative expenses. Deductions for
sales and administrative expenses made from purchase payments applied to the
fixed side of the contract are the same as those made from purchase payments
applied to the Fund.
If the contractowner elected the minimum death benefit, we make an additional
deduction of .75% from each purchase payment. We expect to make a profit from
the sale of this death benefit. This death benefit is no longer available for
purchase.
We will deduct from purchase payments any premium tax or other tax levied by
any governmental entity with regard to the contracts of the Fund. The
applicable premium tax rates that states and other governmental entities impose
on the purchase of an annuity are subject to change by legislation, by
administrative interpretation or by judicial action. These premium taxes
generally depend upon the law of the contractowner's state of residence. The
tax ranges from 0% to 3.5%.
Deductions from Average Daily Value of the Fund
We assume the risk that annuitants as a class may live longer than expected
(mortality risk) and that expenses may be higher than the deductions for such
expenses (expense risk). In either case, the loss will fall on us. Conversely,
if such deductions are higher than expenses, the excess will be a profit to us.
In return for the assumption of these risks, daily deductions aggregating
1.002% annually of the average daily value of the Fund are made consisting of
0.9% for mortality risk and 0.102% for expense risk.
We also deduct a management fee for investment advisory services equal to
0.323% annually of the average daily value of the Fund. See Fund A - Other
Information.
Additional Information
The sales and administrative charges described previously may be reduced or
eliminated for any particular contract. However, these charges will be reduced
only to the extent that we anticipate lower distribution and/or administrative
expenses, or that we perform fewer sales or administrative services than those
originally contemplated in establishing the level of those charges. Lower
distribution and administrative expenses may be the result of economies
associated with:
o the use of mass enrollment procedures;
o the performance of administrative or sales functions by the employer;
o the use by an employer of automated techniques in submitting deposits or
information related to deposits on behalf of its employees; or
o any other circumstances which reduce distribution or administrative
expenses.
The exact amount of sales and administrative charges applicable to a particular
contract will be stated in that contract.
In accordance with the terms of the periodic payment contract, on each
anniversary after the second anniversary, the terms of the contract, including
the charges, may be modified. The contractowner will receive at least 90 days
written notice of a modification to the contract, and no modification will
affect any contract which has been annuitized prior to the effective date of
the modification.
The Contracts
Purchase of Contracts
We no longer offer contracts for sale. However, existing contractowners can
make purchase payments of at least $25 under the periodic contracts. The total
of periodic purchase payments made in a single year must be at least $600.
9
Periodic Purchase Payments
Periodic purchase payments are payable to us at a frequency and in an amount
the contractowner selected in the application. If the contractowner stops
making purchase payments, the contract will remain in force as a paid-up
contract. However, we may terminate the contract as allowed by the
contractowner's state's non-forfeiture law for individual deferred annuities.
Payments may be made or, if stopped, resumed at any time until the annuity
commencement date, the surrender of the contract, maturity date or the death of
the contractowner (or joint owner, if applicable), whichever comes first. If
you submit a purchase payment to your agent, we will not begin processing the
purchase payment until we receive it from our agent's broker-dealer.
Valuation Date
Accumulation and annuity units will be valued once daily at the close of
trading (normally, 4:00 p.m., New York time) on each day the New York Stock
Exchange is open (valuation date). On any date other than a valuation date, the
accumulation unit value and the annuity unit value will not change.
Allocation of Purchase Payments
Purchase payments are placed into the Fund or into the fixed account, according
to the contractowner's instructions. Purchase payments allocated to the Fund
are converted into accumulation units and are credited to the account of each
contractowner. The number of accumulation units credited is determined by
dividing the net purchase payment by the value of an accumulation unit on the
valuation date on which the purchase payment is received at our home office if
received before 4:00 p.m., New York time. If the purchase payment is received
at or after 4:00 p.m., New York time, we will process the request using the
accumulation unit value computed on the next valuation date. The number of
accumulation units determined in this way is not changed by any subsequent
change in the value of an accumulation unit. However, the dollar value of an
accumulation unit will vary depending not only upon how well the Fund's
investments perform, but also upon the expenses of the Fund.
Valuation of Accumulation Units
Purchase payments allocated to the Fund are converted into accumulation units.
This is done by dividing the amount allocated by the value of an accumulation
unit for the valuation period during which the purchase payments are allocated
to the Fund. The accumulation unit value for the Fund was established on March
1, 1967, at $1. It may increase or decrease from valuation period to valuation
period. Accumulation unit values are affected by investment performance of the
Fund, fund expenses, and the deduction of certain contract charges. We
determine the value of an accumulation unit on the last day of any following
valuation period as follows:
1. The total value of the Fund (determined by adding the values of all
securities investments and other assets) at end of the valuation period;
minus
2. The liabilities of the Fund at the end of the valuation period; these
liabilities include daily charges imposed on the Fund, and may include a
charge or credit with respect to any taxes paid or reserved for by us that
we determine result from the operations of the Fund; and
3. The result is divided by the number of Fund units outstanding at the
beginning of the valuation period.
The daily charges imposed on the Fund for any valuation period are equal to the
daily mortality and expense risk charge and the daily management fee multiplied
by the number of calendar days in the valuation period.
The Fund's securities may be traded in other markets on days when the NYSE is
closed. Therefore, the accumulation unit value may fluctuate on days that are
not valuation dates.
The Fund typically values its securities investments as follows:
o equity securities, at their last sale prices on national securities
exchanges or over-the-counter, or, in the absence of recorded sales, at the
average of readily available closing bid and asked prices on exchanges or
over-the-counter; and
o debt securities, at the price established by an independent pricing service,
which is believed to reflect the fair value of these securities; and
o fixed income securities with a maturity of less than sixty days are priced
at amortized cost.
In certain circumstances, the Fund may value its portfolio securities at fair
value as estimated in good faith under procedures established by the Fund's
board of managers. When the Fund uses fair value pricing, it may take into
account any factors it deems appropriate. The Fund may determine fair value
based upon developments related to a specific security, current valuations of
foreign stock indices (as reflected in U.S. futures markets) and/or U.S. sector
or broader stock market indices. The price of securities used by the Fund to
calculate the accumulation unit value may differ from quoted or published
prices for the same securities. Fair value pricing may involve subjective
judgments, and it is possible that the fair value determined for a security is
materially different than the value that could be realized upon the sale of
that security.
The Fund anticipates using fair value pricing for securities primarily traded
on U.S. exchanges only under very limited circumstances, such as the unexpected
early closing of the exchange on which a security is traded or suspension of
trading in the security. The Fund
10
may use fair value pricing more frequently for securities primarily traded in
non-U.S. markets because, among other things, most foreign markets close well
before the Fund values its securities, normally at 4:00 p.m. Eastern time. The
earlier close of these foreign markets gives rise to the possibility that
significant events, including broad market moves, may have occurred in the
interim. To account for this, the Fund may frequently value many foreign equity
securities using fair value prices based on third party vendor modeling tools
to the extent available.
Valuation of Annuity Units. The value of an annuity unit for the period ending
March 1, 1967 was established at $1. We determine the value of the annuity unit
for any following valuation period by multiplying:
(a) the annuity unit value from the previous valuation period by;
(b) the net investment factor for the valuation period containing the 14th day
prior to the last day of the current valuation period by;
(c) a factor to neutralize the assumed investment rate (AIR) built into the
annuity table contained in the contract which is not applicable as actual net
investment income is credited instead.
The value of an annuity unit on any date on which the NYSE is closed is its
value on the next day on which the NYSE is open. We use the net investment
factor for the 14th day prior to the current valuation date in calculating the
value of an annuity unit in order to calculate amounts of annuity payments and
to mail checks in advance of their due dates. We normally issue and mail such
checks at least three days before the due date.
Transfers On or Before the Annuity Commencement Date
The contractowner may transfer all or any part of the contract value from the
Fund to the fixed side of the contract.
The contractowner may also transfer all or any part of the contract value from
the fixed side of the contract to the Fund subject to the following
restrictions:
(1) the sum of the percentages of fixed value transferred is limited to 25% of
the value of the fixed side in any 12-month period; and
(2) the minimum amount which can be transferred is $300 or the amount in the
fixed account.
Market Timing
Frequent, large, or short-term transfers between the Fund and the fixed side of
the contract, such as those associated with "market timing" transactions, can
affect the Fund and its investment returns. Such transfers may dilute the value
of the Fund units, interfere with the efficient management of the Fund's
portfolio, and increase brokerage and administrative costs of the Fund, and as
a result, we discourage and strive not to accommodate such trading activity. As
an effort to protect our contractowners and the Fund from potentially harmful
trading activity, we utilize certain market timing policies and procedures
which have been approved by the Lincoln Life Separate Account Compliance
Committee (the "Market Timing Procedures"). Our Market Timing Procedures are
designed to detect and prevent such transfer activity between the Fund and the
fixed side of the contract that may affect other contractowners or Fund
shareholders.
In addition, the Fund adopted its own policies and procedures with respect to
frequent purchases and redemptions of its respective shares. The Fund's
policies and procedures may be more or less restrictive than the Market Timing
Procedures we have adopted to discourage frequent transfers among the Fund and
the fixed side of the contract. While we reserve the right to enforce the
Fund's policies and procedures, contractowners and other persons with interests
under the contracts should be aware that we may not have the contractual
authority or the operational capacity to apply the frequent trading policies
and procedures of the Fund. However, under SEC rules, we are required to: (1)
enter into a written agreement with each fund or its principal underwriter that
obligates us to provide to the fund promptly upon request certain information
about the trading activity of individual contractowners, and (2) execute
instructions from the Fund to restrict or prohibit further purchases or
transfers by specific contractowners who violate the excessive trading policies
established by the Fund.
You should be aware that the purchase and redemption orders received by the
Fund generally are "omnibus" orders from intermediaries such as retirement
plans or separate accounts funding variable insurance contracts. The omnibus
orders reflect the aggregation and netting of multiple orders from individual
retirement plan participants and/or individual owners of variable insurance
contracts. The omnibus nature of these orders may limit the Fund's ability to
apply its restrictive disruptive trading policies and procedures. We cannot
guarantee that the Fund (and thus our contractowners) will not be harmed by
transfer activity relating to the retirement plans and/or other insurance
companies that may invest in the Fund. In addition, if the Fund believes that
an omnibus order we submit may reflect one or more transfer requests from
policy owners engaged in disruptive trading activity, the Fund may reject the
entire omnibus order.
Our Market Timing Procedures detect potential "market timers" by examining the
number of transfers made by contractowners within given periods of time. In
addition, the Fund will notify us if it believes or suspects that there is
market timing. Pursuant to the Fund's procedures, the Fund reviews periodic
trade reports for unusual activity that may be suggestive of market timing. The
Fund maintains guidelines for assessing unusual trading activity based upon a
variety of factors.
11
We may increase our monitoring of contractowners who we have previously
identified as market timers. When applying the parameters used to detect market
timers, we will consider multiple contracts owned by the same contractowner if
that contractowner has been identified as a market timer. For each
contractowner, we will investigate the transfer patterns that meet the
parameters being used to detect potential market timers. We will investigate
any patterns of trading behavior identified by the Fund that may not have been
captured by our Market Timing Procedures.
Once a contractowner has been identified as a "market timer" under our Market
Timing Procedures, we will notify the contractowner in writing that future
transfers (between the Fund and the fixed side of the contract) will be
temporarily permitted to be made only by original signature sent to us by U.S.
mail, standard delivery, for the remainder of the year. Overnight delivery
submitted during this period will not be accepted. If overnight delivery is
inadvertently accepted from a contractowner that has been identified as a
market timer, we will reverse the transaction within 1 to 2 business days. We
will impose this "original signature" restriction on that contractowner even if
we cannot identify, in the particular circumstances, any harmful effect from
that contractowner's particular transfers.
Contractowners seeking to engage in frequent, large, or short-term transfer
activity may deploy a variety of strategies to avoid detection. Our ability to
detect such transfer activity may be limited by operational systems and
technological limitations. The identification of contractowners determined to
be engaged in such transfer activity that may adversely affect other
contractowners or Fund shareholders involves judgments that are inherently
subjective. We cannot guarantee that our Market Timing Procedures will detect
every potential market timer. If we are unable to detect market timers, you may
experience dilution in the value of your Fund units and increased brokerage and
administrative costs in the Fund. This may result in lower long-term returns
for your investments.
Our Market Timing Procedures are applied consistently and uniformly to all
contractowners. An exception for any contractowner will be made only in the
event we are required to do so by a court of law. We may vary our Market Timing
Procedures among our other variable insurance products to account for
differences in various factors, such as operational systems and contract
provisions.
In our sole discretion, we may revise our Market Timing Procedures at any time
without prior notice as necessary to better detect and deter frequent, large,
or short-term transfer activity to comply with state or federal regulatory
requirements, and/or to impose additional or alternate restrictions on market
timers (such as dollar or percentage limits on transfers). We also reserve the
right to implement and administer redemption fees imposed by the Fund in the
future. If we modify our policy, it will be applied uniformly to all
contractowners or as applicable to all contractowners investing in the Fund.
The Fund has reserved the right to temporarily or permanently refuse payments
or transfer requests from us if, in the judgment of the Fund's investment
adviser, the Fund would be unable to invest effectively in accordance with its
investment objective or policies, or would otherwise potentially be adversely
affected. To the extent permitted by applicable law, we reserve the right to
defer or reject a transfer request at any time that we are unable to purchase
or redeem shares of the Fund available through the VAA, including any refusal
or restriction on purchases or redemptions of the Fund shares as a result of
the Fund's own policies and procedures on market timing. If the Fund refuses to
accept a transfer request we have already processed, we will reverse the
transaction within 1 or 2 business days. We will notify you in writing if we
have reversed, restricted or refused any of your transfer requests. The Fund
also may impose redemption fees on short-term trading (i.e., redemptions of
mutual fund shares within a certain number of business days after purchase). We
reserve the right to administer and collect any such redemption fees on behalf
of the Fund.
To the extent permitted by applicable law, we reserve the right to defer or
reject a transfer request at any time that we are unable to purchase or redeem
units of the Fund, including any refusal or restriction on purchases or
redemptions of Fund units as a result of the Fund's own policies and procedures
on market timing activities. If the Fund refuses to accept a transfer request
we have already processed, we will reverse the transaction within 1 to 2
business days. We will notify you in writing if we have reversed, restricted or
refused any of your transfer requests.
Transfers After the Annuity Commencement Date
The contractowner may transfer all or a portion of the investment in the Fund
to the fixed side of the contract. Those transfers will be limited to three
times per contract year. Currently, there is no charge for these transfers, but
we reserve the right to impose a charge. However, after the annuity
commencement date, no transfers are allowed from the fixed side of the contract
to the Fund.
Death Benefit Before the Annuity Commencement Date
If the contractowner (or a joint owner) or annuitant dies prior to the annuity
commencement date, a death benefit is payable.
You should consider the following provisions carefully when designating the
beneficiary, annuitant, and any joint owner, as well as before changing any of
these parties. The identity of these parties under the contract may
significantly affect the amount and timing of the death benefit paid upon a
contractowner's or annuitant's death.
The contractowner may designate a beneficiary during the life of the annuitant
and change the beneficiary by filing a written request with our home office.
Each change of the beneficiary revokes any previous designation. We reserve the
right to request that the contract for endorsement of a change of beneficiary
be sent to us.
12
Qualified Contracts. If the annuitant dies before the annuity commencement
date, we will pay the beneficiary a death benefit equal to the contract value,
or, if greater and you have elected it, the minimum death benefit. The minimum
death benefit is equal to the total purchase payments applied minus any
withdrawals, partial annuitizations, premium taxes incurred and rider premiums.
Nonqualified Contracts. Prior to the annuity commencement date, a death benefit
equal to the contract value will be paid upon the death of the contractowner or
annuitant.
If the contractowner or annuitant of a nonqualified contract dies before the
annuity commencement date, then, in compliance with the tax code, the death
benefit will be paid as follows:
1. Upon the death of a nonannuitant contractowner, the death benefit shall be
paid to any surviving joint or contingent owner(s). If no joint or
contingent owner has been named, then the death benefit shall be paid to
the annuitant named in the contract; and
2. Upon the death of a contractowner, who is also the annuitant, the death will
be treated as death of the annuitant and the provisions of the contract
regarding death of annuitant will control, and the death benefit will be
paid to the beneficiary. If the beneficiary is the surviving spouse of the
contractowner, the surviving spouse may elect to continue the contract in
his or her name as the new contractowner, and the contract will continue as
though no death benefit had been payable.
General Information
The value of the death benefit will be determined as of the date on which the
death claim is approved for payment. This payment will occur upon receipt of:
(1) proof, satisfactory to us, of the death;
(2) written authorization for payment; and
(3) our receipt of all required claim forms, fully completed.
If the death benefit becomes payable upon the death of the annuitant, the
beneficiary may elect to receive payment either in the form of a lump sum
settlement or an annuity payout. Federal tax law requires that an annuity
election be made no later than 60 days after we receive satisfactory notice of
death as discussed previously. If an election has not been made by the end of
the 60 day period, a lump sum settlement will be made to the beneficiary at
that time.
If a lump sum settlement is requested, the proceeds will be mailed within seven
days of receipt of satisfactory claim documentation as discussed previously,
subject to the laws and regulations governing payment of death benefits. This
payment may be postponed as permitted by the 1940 Act.
Payment will be made in accordance with applicable laws and regulations
governing payment of death benefits. Notwithstanding any provision to the
contrary, the payment of death benefits provided under the contract must be
made in compliance with Code Section 72(s) or 401(a)(9) as applicable, as
amended from time to time.
The tax code requires that any distribution be paid within five years of the
death of the contractowner unless the beneficiary begins receiving, within one
year of the contractowner's death, the distribution in the form of a life
annuity or an annuity for a designated period not exceeding the beneficiary's
life expectancy.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of the beneficiary:
1. If any beneficiary dies before the annuitant, that beneficiary's interest
will go to any other beneficiaries named, according to their respective
interests (There are no restrictions on the beneficiary's use of the
proceeds.); and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
contractowner, or to the contractowner's estate, as applicable.
Joint Ownership
If a contract has joint owners, the joint owners shall be treated as having
equal undivided interests in the contract. Either owner, independently of the
other, may exercise any ownership rights in this contract. A contingent owner
may not exercise ownership rights in this contract while the contractowner is
living.
Surrenders and Withdrawals
Before the annuity commencement date, we will allow the surrender of the
contract or a withdrawal of a portion of the contract value upon your written
request, subject to the rules discussed below. Surrender or withdrawal rights
after the annuity commencement date depend on the annuity payout option
selected.
The amount available upon surrender/withdrawal is the contract value at the end
of the valuation period during which the written request for
surrender/withdrawal is received at the home office. If we receive a surrender
or withdrawal request at or after 4:00 p.m., New York time, we will process the
request using the accumulation unit value computed on the next valuation date.
Unless prohibited,
13
surrender/withdrawal payments will be mailed within seven days after we receive
a valid written request at the home office. The payment may be postponed as
permitted by the 1940 Act.
The tax consequences of a surrender/withdrawal are discussed later in this
prospectus. See Federal Tax Matters.
Participants in the Texas Optional Retirement Program should refer to the
Restrictions Under the Texas Optional Retirement Program, later in this
prospectus.
We may terminate the contract if the frequency of purchase payments or the
contract value falls below the contractowner's state's minimum standards.
Delay of Payments
Contract proceeds from the Fund will be paid within seven days, except:
o when the NYSE is closed (other than weekends and holidays);
o times when market trading is restricted or the SEC declares an emergency,
and we cannot value units or the Fund cannot redeem shares; or
o when the SEC so orders to protect contractowners.
Payment of proceeds from the fixed account may be delayed for up to six months.
Due to federal laws designed to counter terrorism and prevent money laundering
by criminals, we may be required to reject a purchase payment and/or deny
payment of a request for transfers, withdrawals, surrenders, or death benefits,
until instructions are received from the appropriate regulator. We also may be
required to provide additional information about a contractowner's account to
government regulators.
Reinvestment Privilege
You may elect to make a reinvestment purchase with any part of the proceeds of
a surrender/withdrawal, and we will recredit that portion of the
surrender/withdrawal charges attributable to the amount returned.
This election must be made by your written authorization to us on an approved
Lincoln reinvestment form and received in our home office within 30 days of the
date of the surrender/withdrawal, and the repurchase must be of a contract
covered by this prospectus. In the case of a qualified retirement plan, a
representation must be made that the proceeds being used to make the purchase
have retained their tax-favored status under an arrangement for which the
contracts offered by this prospectus are designed. The number of accumulation
units which will be credited when the proceeds are reinvested will be based on
the value of the accumulation unit(s) on the next valuation date. (see More
information about the Fund-Valuing the Fund's assets). This computation will
occur following receipt of the proceeds and request for reinvestment at the
home office. You may utilize the reinvestment privilege only once. For tax
reporting purposes, we will treat a surrender/withdrawal and a subsequent
reinvestment purchase as separate transactions (and a Form 1099 may be issued,
if applicable). You should consult a tax adviser before you request a
surrender/withdrawal or subsequent reinvestment purchase.
Amendment of Contract
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be
notified in writing of any changes, modifications or waivers. Any changes are
subject to prior approval of your state's insurance department (if required).
Ownership
The owner on the date of issue will be the person or entity designated in the
contract specifications. If no owner is designated, the annuitant(s) will be
the owner. The owner may name a joint owner.
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the Fund are held for the exclusive benefit of all
contractowners and their designated beneficiaries; and the assets of the Fund
are not chargeable with liabilities arising from any other business that we may
conduct. Qualified contracts may not be assigned or transferred except as
permitted by applicable law and upon written notification to us. Non-qualified
contracts may not be collaterally assigned. We assume no responsibility for the
validity or effect of any assignment. Consult your tax adviser about the tax
consequences of an assignment.
Contractowner Questions
The obligations to purchasers under the contracts are those of Lincoln Life.
Contracts, endorsements and riders may vary as required by state law. This
prospectus provides a general description of the contract. Questions about your
contract should be directed to us at 1-800-454-6265.
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Annuity Payouts
When you applied for a contract, you could select any annuity commencement date
permitted by law. (Please note the following exception: Contracts issued under
qualified employee pension and profit-sharing trusts [described in Section
401(a) and tax exempt under Section 501(a) of the tax code] and qualified
annuity plans [described in Section 403(a) of the tax code], including H.R. 10
trusts and plans covering self-employed individuals and their employees,
provide for annuity payouts to start at the date and under the option specified
in the plan.)
The contract provides optional forms of payouts of annuities (annuity options),
each of which is payable on a variable basis, a fixed basis or a combination of
both as you specify. The contract provides that all or part of the contract
value may be used to purchase an annuity payout option.
You may elect annuity payouts in monthly, quarterly, semiannual or annual
installments. If the payouts would be or become less than $50, we have the
right to reduce their frequency until the payouts are at least $50 each. The
amount of each annuity payout will depend upon the frequency of payout you
select. For example, if you select frequent payments (e.g., monthly), the
amount of each payout will be lower than if you choose a less frequent payout
(e.g., annual installments). Also, the amount of each annuity payout will
depend upon the duration of payout you select. For example, if you choose the
Life Annuity option, the amount of each payout likely will be higher than if
you choose the Joint Life Annuity since the Life Annuity assumes a shorter
period of time than the Joint Life Annuity. Following are explanations of the
annuity options available.
Annuity Options
Payouts Guaranteed for Designated Period. This option guarantees periodic
payouts during a guaranteed period, usually 10 or 20 years. However, under
contracts issued in connection with Section 403(b) plans, this option is not
available if the sum of the number of years over which monthly payouts would be
made and the age of the annuitant on the first scheduled payment date is
greater than 95.
Life Annuity with Payouts Guaranteed for Designated Period. This option
guarantees periodic payouts during a designated period, usually 10, 15 or 20
years, and then continues throughout the lifetime of the annuitant. The
designated period is selected by the contractowner.
Unit Refund Life Annuity. This option offers a periodic payout during the
lifetime of the annuitant with the guarantee that upon death a payout will be
made of the value of the number of annuity units (see Variable Annuity Payouts)
equal to the excess, if any, of:
o the total amount applied under this option divided by the annuity unit value
for the date payouts begin, divided by
o the annuity units represented by each payout to the annuitant multiplied by
the number of payouts paid before death.
The value of the number of annuity units is computed on the date the death
claim is approved for payment by the home office. (Not available as a fixed
payout.)
Payouts Guaranteed for Designated Amount. This option offers equal annual,
semi-annual, quarterly or monthly payouts of a designated amount (not less than
$50 per year per $1,000 of original proceeds left with us) until the proceeds
are exhausted. The minimum amount withdrawable under this option is not
necessarily the recommended amount. This option is not available under
contracts issues in connection with Section 403(b) plans. (Not available as a
fixed payout.)
Interest income. Under this option, the proceeds may be left on deposit with
us, subject to withdrawal upon demand, and interest will be paid annually,
semi-annually, quarterly or monthly as the contractowner elects. We guarantee
an interest rate of 3% per year. This option is not available under contracts
issued in connection with Section 403(b) plans. (Not available as a variable
payout.)
Annuity Settlement. This option offers payouts in the form provided by any
single payment immediate annuity contract issued by us on the date the proceeds
become payable. However, the amount of the first payment shall be 103% of the
first payment which such proceeds would otherwise provide under such annuity
contract on the basis of the Company's rates in effect on such date. In
calculating the first payment under the single payment immediate annuity
contract selected under this option, we assume that a deduction for sales and
administrative expenses has been made from the amount applied.
Life Annuity. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a death benefit for beneficiaries.
However, there is the risk under this option that the recipient would receive
no payouts if the annuitant dies before the date set for the first payout; only
one payout if death occurs before the second scheduled payout, and so on.
Joint Life Annuity. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts
continue during the lifetime of the survivor.
Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic
payout during the joint lifetime of the annuitant and a designated joint
annuitant. When one of the joint annuitants dies, the survivor receives two
thirds of the periodic payout made when both were alive.
15
If any payee dies after an annuity payout becomes operative, then we will pay
the following to the payee's estate (unless otherwise specified in the election
option):
o the present value of unpaid payments under the payouts guaranteed for
designated period or life annuity with payouts guaranteed for designated
period;
o the amount payable at the death of the payee under the unit refund life
annuity; or
o the proceeds remaining with Lincoln Life under the payouts guaranteed for
designated amount or interest income, if available.
If the annuity settlement has been selected and becomes operative, when the
last payee dies, we will pay the remainder of the contract in a single sum to
the last payee's estate (unless otherwise specified in the election option).
Present values will be based on the Assumed Investment Rate [See Assumed
Investment Rate (AIR)] used in determining annuity payments. The mortality and
expense risk charge and the charge for administrative services will be assessed
on all annuity options, including those that do not have a life contingency and
thus no mortality risks.
General Information
None of the options listed above currently provides withdrawal features,
permitting the contractowner to withdraw commuted values as a lump sum payment.
Other options, with or without withdrawal features, may be made available by
us. Options are only available to the extent they are consistent with the
requirements of the contract as well as Sections 72(s) and 401 (a)(9) of the
tax code, if applicable.
The annuity commencement date must be at least one year from the effective date
of the contract but before the annuitant's 85th birthday. You may change the
annuity commencement date up to 30 days before the scheduled annuity
commencement date, upon written notice to the home office. You must give us at
least 30 days notice before the date on which you want payouts to begin. If
proceeds become available to a beneficiary in a lump sum, the beneficiary may
choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable
or combination fixed and variable basis, in proportion to the account
allocations at the time of annuitization) except when a joint life payout is
required by law. Under any option providing for guaranteed period payouts, the
number of payouts which remain unpaid at the date of the annuitant's death (or
surviving annuitant's death in case of joint life annuity) will be paid to the
beneficiary as payouts become due after we are in receipt of:
o proof, satisfactory to us, of the death;
o written authorization for payment; and
o all claim forms, fully completed.
Once you begin to receive annuity payouts, you cannot change the payout option,
payout amount, or payout period. You may transfer from the Fund to the fixed
side of the contract three times per contract year, but you may not transfer
from the fixed side of the contract to the Fund after the annuity commencement
date.
Assumed Investment Rate (AIR)
The contractowner may elect an AIR of 3.5%, 4.5% or 5%, as state law or
regulations permit. These AIRs are used to determine the required level of
employer contributions in connection with certain pension plans. They do not
reflect how the value of the Fund's investments has grown or will grow.
The contractowner's choice of AIR affects the pattern of annuity payments. A
higher AIR will produce a higher initial payment but a more slowly rising
series of subsequent payments (or a more rapidly falling series of subsequent
payments) than a lower AIR.
The following table shows the annuity unit values at each year end for the
different AIRs:
Assumed Investment Rate
Annuity Unit Values December 31
--------------------- ----------------------
3.5% 4.5% 5%
------- ------- ------
1998 .............. 6.353 4.699 4.045
1999 .............. 7.167 5.250 4.500
2000 .............. 6.144 4.458 3.801
2001 .............. 5.221 3.751 3.184
2002 .............. 3.808 2.710 2.289
2003 .............. 4.730 3.334 2.803
2004 .............. 5.057 3.531 2.954
2005 .............. 5.108 3.532 2.941
2006 .............. 5.483 3.755 3.111
2007 .............. 5.572 3.779 3.117
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Variable Annuity Payouts
Variable annuity payouts will be determined using:
o The contract value on the annuity commencement date, less applicable premium
taxes;
o The annuity tables contained in the contract;
o The annuity option selected; and
o The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
We may use sex distinct tables in contracts that are not associated with
employer sponsored plans.
When calculating the first payment under a single payment immediate annuity
contract, assume that a deduction for sales and administrative expenses (which
currently amounts to 2% plus $115 for single payment variable annuity
contracts) has been made from the amount applied under this provision.
Immediate Annuity Contracts. For immediate annuities, the number of annuity
units purchased is specified in the contract. We determine the number of
annuity units by:
(a) multiplying the net single payment (after deductions) by the applicable
annuity factor from the annuity table that we are then using for immediate
variable annuity contracts, and then
(b) dividing by the value of the annuity unit based on the net investment
factor calculated on the valuation date of the day or the day after the
contract was issued.
This number of annuity units does not change during the annuity period, and we
determine the dollar amount of the annuity payment by multiplying the number of
annuity units by the then value of an annuity unit.
More Information About The Fund
Restrictions
The investments of the Fund are subject to the provisions of the Indiana
Insurance Law concerning earnings records, preferred stock overage,
self-dealing, real estate holdings and concentration.
Loans will not be made, but the purchase of a portion of an issue of bonds,
debentures or other securities publicly distributed or privately placed with
financial institutions shall not be considered the making of a loan.
The Fund will not:
1. Invest more than 5% of the value of the Fund's assets in securities of any
one issuer, except obligations of the United States Government and
instrumentalities thereof.
2. Acquire more than 10% of the voting securities of any one issuer.
3. Borrow money except for temporary or emergency purposes in an amount up to
5% of the value of the assets.
4. Underwrite securities of other issuers.
5. Purchase or sell real estate as a principal activity. However, the right is
reserved to invest up to 10% of the value of the assets of the Fund in real
properties.
6. Purchase commodities or commodity contracts.
7. Make short sales of securities.
8. Make purchases on margin, except for such short-term credits as are
necessary for the clearance of transactions.
9. Invest in the securities of a company for the purpose of exercising
management or control.
10. Place emphasis upon obtaining short-term trading profits, but it may engage
in short-term transactions in the event that a change in economic
conditions or a rapid appreciation or depreciation of stock prices occurs.
(See the Fund's portfolio turnover rates set forth in Condensed Financial
Information for the Fund.) The securities markets in general have
experienced volatility due to rapidly shifting economic trends. This
volatility can affect turnover.
17
11. Plan to make investments in securities of other investment companies.
However, the right is reserved to make such investments up to a maximum of
10% of the value of the assets of the Fund, provided that not more than 3%
of the total outstanding voting stock of any one investment company may be
held.
Custodian
All securities, cash and other similar assets of the Fund are currently held in
custody by Mellon Bank, N.A., One Mellon Center, Pittsburgh, Pennsylvania
15258.
The custodian shall:
o receive and disburse money;
o receive and hold securities;
o transfer, exchange, or deliver securities;
o present for payment coupons and other income items, collect interest and
cash dividends received, hold stock dividends, etc.;
o cause escrow and deposit receipts to be executed;
o register securities; and
o deliver to the Fund proxies, proxy statements, etc.
Lincoln Life performs the dividend and transfer agent functions for the Fund.
Federal Tax Matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes
uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income tax
rules that may affect you and your contract. This discussion also does not
address other Federal tax consequences (including consequences of sales to
foreign individuals or entities), or state or local tax consequences,
associated with the contract. As a result, you should always consult a tax
adviser about the application of tax rules to your individual situation.
Nonqualified Annuities
This part of the discussion describes some of the Federal income tax rules
applicable to nonqualified annuities. A nonqualified annuity is a contract not
issued in connection with a qualified retirement plan, such as an IRA or a
section 403(b) plan, receiving special tax treatment under the tax code. We may
not offer nonqualified annuities for all of our annuity products.
Tax Deferral On Earnings
The Federal income tax law generally does not tax any increase in your contract
value until you receive a contract distribution. However, for this general rule
to apply, certain requirements must be satisfied:
o An individual must own the contract (or the tax law must treat the contract
as owned by an individual).
o The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
o Your right to choose particular investments for a contract must be limited.
o The annuity commencement date must not occur near the end of the annuitant's
life expectancy.
Contracts Not Owned By An Individual
If a contract is owned by an entity (rather than an individual) the tax code
generally does not treat it as an annuity contract for Federal income tax
purposes. This means that the entity owning the contract pays tax currently on
the excess of the contract value over the purchase payments for the contract.
Examples of contracts where the owner pays current tax on the contract's
earnings, bonus credits and persistency credits, if applicable, are contracts
issued to a corporation or a trust. Some exceptions to the rule are:
o Contracts in which the named owner is a trust or other entity that holds the
contract as an agent for an individual; however, this exception does not
apply in the case of any employer that owns a contract to provide deferred
compensation for its employees;
o Immediate annuity contracts, purchased with a single premium, when the
annuity starting date is no later than a year from purchase and
substantially equal periodic payments are made, not less frequently than
annually, during the annuity payout period;
o Contracts acquired by an estate of a decendent;
o Certain qualified contracts;
o Contracts purchased by employers upon the termination of certain qualified
plans; and
o Certain contracts used in connection with structured settlement agreements.
Investments In The VAA Must Be Diversified
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For a contract to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." IRS regulations define
standards for determining whether the investments of the VAA are adequately
diversified. If the VAA fails to comply with these diversification standards,
you could be required to pay tax currently on the excess of the contract value
over the contract purchase payments. Although we do not control the investments
of the underlying investment options, we expect that the underlying investment
options will comply with the IRS regulations so that the VAA will be considered
"adequately diversified."
Restrictions
Federal income tax law limits your right to choose particular investments for
the contract. Because the IRS has not issued guidance specifying those limits,
the limits are uncertain and your right to allocate contract values among the
subaccounts may exceed those limits. If so, you would be treated as the owner
of the assets of the VAA and thus subject to current taxation on the income,
bonus credits, persistency credits and gains, if applicable, from those assets.
We do not know what limits may be set by the IRS in any guidance that it may
issue and whether any such limits will apply to existing contracts. We reserve
the right to modify the contract without your consent to try to prevent the tax
law from considering you as the owner of the assets of the VAA.
Loss Of Interest Deduction
After June 8, 1997, if a contract is issued to a taxpayer that is not an
individual, or if a contract is held for the benefit of an entity, the entity
will lose a portion of its deduction for otherwise deductible interest
expenses.
Age At Which Annuity Payouts Begin
Federal income tax rules do not expressly identify a particular age by which
annuity payouts must begin. However, those rules do require that an annuity
contract provide for amortization, through annuity payouts, of the contract's
purchase payments, bonus credits, persistency credits and earnings. If annuity
payouts under the contract begin or are scheduled to begin on a date past the
annuitant's 85th birthday, it is possible that the tax law will not treat the
contract as an annuity for Federal income tax purposes. In that event, you
would be currently taxed on the excess of the contract value over the purchase
payments of the contract.
Tax Treatment Of Payments
We make no guarantees regarding the tax treatment of any contract or of any
transaction involving a contract. However, the rest of this discussion assumes
that your contract will be treated as an annuity for Federal income tax
purposes and that the tax law will not tax any increase in your contract value
until there is a distribution from your contract.
Taxation Of Withdrawals And Surrenders
You will pay tax on withdrawals to the extent your contract value exceeds your
purchase payments in the contract. This income (and all other income from your
contract) is considered ordinary income (and does not receive capital gains
treatment and is not qualified dividend income). A higher rate of tax is paid
on ordinary income than on capital gains. You will pay tax on a surrender to
the extent the amount you receive exceeds your purchase payments. In certain
circumstances, your purchase payments are reduced by amounts received from your
contract that were not included in income. Surrender and reinstatement of your
contract will generally be taxed as a withdrawal.
Taxation Of Regular Income Payments
The tax code imposes tax on a portion of each annuity payout (at ordinary
income tax rates) and treats a portion as a nontaxable return of your purchase
payments in the contract. We will notify you annually of the taxable amount of
your annuity payout. Once you have recovered the total amount of the purchase
payment in the contract, you will pay tax on the full amount of your annuity
payouts. If annuity payouts end because of the annuitant's death and before the
total amount in the contract has been distributed, the amount not received will
generally be deductible.
Taxation Of Death Benefits
We may distribute amounts from your contract because of the death of a
contractowner or an annuitant. The tax treatment of these amounts depends on
whether you or the annuitant dies before or after the annuity commencement
date.
Death prior to the annuity commencement date:
o If the beneficiary receives death benefits under an annuity payout option,
they are taxed in the same manner as annuity payouts.
o If the beneficiary does not receive death benefits under an annuity payout
option, they are taxed in the same manner as a withdrawal.
Death after the annuity commencement date:
o If death benefits are received in accordance with the existing annuity
payout option, they are excludible from income if they do not exceed the
purchase payments not yet distributed from the contract. All annuity
payouts in excess of the purchase payments not previously received are
includible in income.
o If death benefits are received in a lump sum, the tax law imposes tax on the
amount of death benefits which exceeds the amount of purchase payments not
previously received.
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Penalty Taxes Payable On Withdrawals, Surrenders, Or Annuity Payouts
The tax code may impose a 10% penalty tax on any distribution from your
contract which you must include in your gross income. The 10% penalty tax does
not apply if one of several exceptions exists. These exceptions include
withdrawals, surrenders, or annuity payouts that:
o you receive on or after you reach 591/2,
o you receive because you became disabled (as defined in the tax law),
o you receive from an immediate annuity,
o a beneficiary receives on or after your death, or
o you receive as a series of substantially equal periodic payments based on
your life or life expectancy (non-natural owners holding as agent for an
individual do not qualify).
Special Rules If You Own More Than One Annuity Contract
In certain circumstances, you must combine some or all of the nonqualified
annuity contracts you own in order to determine the amount of an annuity
payout, a surrender, or a withdrawal that you must include in income. For
example, if you purchase two or more deferred annuity contracts from the same
life insurance company (or its affiliates) during any calendar year, the tax
code treats all such contracts as one contract. Treating two or more contracts
as one contract could affect the amount of a surrender, a withdrawal or an
annuity payout that you must include in income and the amount that might be
subject to the penalty tax described previously.
Loans and Assignments
Except for certain qualified contracts, the tax code treats any amount received
as a loan under your contract, and any assignment or pledge (or agreement to
assign or pledge) of any portion of your contract value, as a withdrawal of
such amount or portion.
Gifting A Contract
If you transfer ownership of your contract, other than to your spouse (or to
your former spouse incident to divorce), and receive a payment less than your
contract's value, you will pay tax on your contract value to the extent it
exceeds your purchase payments not previously received. The new owner's
purchase payments in the contract would then be increased to reflect the amount
included in income.
Charges for Additional Benefits
Your contract automatically includes a basic death benefit and may include
other optional riders. Certain enhancements to the basic death benefit may also
be available to you. The cost of the basic death benefit and any additional
benefit are deducted from your contract. It is possible that the tax law may
treat all or a portion of the death benefit charge and charges for other
optional riders, if any, as a contract withdrawal.
Qualified Retirement Plans
We also designed the contracts for use in connection with certain types of
retirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called
"qualified contracts." We issue contracts for use with various types of
qualified plans. The Federal income tax rules applicable to those plans are
complex and varied. As a result, this prospectus does not attempt to provide
more than general information about the use of the contract with the various
types of qualified plans. Persons planning to use the contract in connection
with a qualified plan should obtain advice from a competent tax adviser.
Types of Qualified Contracts and Terms of Contracts
Qualified plans include the following:
o Individual Retirement Accounts and Annuities ("Traditional IRAs")
o Roth IRAs
o Traditional IRA that is part of a Simplified Employee Pension Plan ("SEP")
o SIMPLE 401(k) plans (Savings Incentive Matched Plan for Employees)
o 401(a) plans (qualified corporate employee pension and profit-sharing plans)
o 403(a) plans (qualified annuity plans)
o 403(b) plans (public school system and tax-exempt organization annuity
plans)
o H.R. 10 or Keogh Plans (self-employed individual plans)
o 457(b) plans (deferred compensation plans for state and local governments
and tax-exempt organizations)
o Roth 403(b) plans
We do not offer certain types of qualified plans for all of our annuity
products. Check with your representative concerning qualified plan availability
for this product.
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We will amend contracts to be used with a qualified plan as generally necessary
to conform to the tax law requirements for the type of plan. However, the
rights of a person to any qualified plan benefits may be subject to the plan's
terms and conditions, regardless of the contract's terms and conditions. In
addition, we are not bound by the terms and conditions of qualified plans to
the extent such terms and conditions contradict the contract, unless we
consent.
Tax Treatment of Qualified Contracts
The Federal income tax rules applicable to qualified plans and qualified
contracts vary with the type of plan and contract. For example:
o Federal tax rules limit the amount of purchase payments that can be made,
and the tax deduction or exclusion that may be allowed for the purchase
payments. These limits vary depending on the type of qualified plan and the
plan participant's specific circumstances, e.g., the participant's
compensation.
o Loans are allowed under certain types of qualified plans, but Federal income
tax rules prohibit loans under other types of qualified plans. For example,
Federal income tax rules permit loans under some section 403(b) plans, but
prohibit loans under Traditional and Roth IRAs. If allowed, loans are
subject to a variety of limitations, including restrictions as to the loan
amount, the loan's duration, the rate of interest, and the manner of
repayment. Your contract or plan may not permit loans.
Tax Treatment of Payments
The Federal income tax rules generally include distributions from a qualified
contract in the participant's income as ordinary income. These taxable
distributions will include purchase payments that were deductible or excludible
from income. Thus, under many qualified contracts, the total amount received is
included in income since a deduction or exclusion from income was taken for
purchase payments. There are exceptions. For example, you do not include
amounts received from a Roth IRA in income if certain conditions are satisfied.
Required Minimum Distributions
Under most qualified plans, you must begin receiving payments from the contract
in certain minimum amounts by the later of age 701/2 or retirement. You are
required to take distributions from your traditional IRAs beginning in the year
you reach age 701/2. If you own a Roth IRA, you are not required to receive
minimum distributions from your Roth IRA during your life.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax equals 50% of the amount by which a minimum
required distribution exceeds the actual distribution from the qualified plan.
The IRS has issued new regulations concerning required minimum distributions.
The regulations may impact the distribution method you have chosen and the
amount of your distributions. Under new regulations, the presence of an
enhanced death benefit, or other benefit which could provide additional value
to your contract, may require you to take additional distributions. An enhanced
death benefit is any death benefit that has the potential to pay more than the
contract value or a return of purchase payments. Annuity contracts inside
Custodial or Trusteed IRAs will also be subject to these regulations. Please
contact your tax adviser regarding any tax ramifications.
Federal Penalty Taxes Payable on Distributions
The tax code may impose a 10% penalty tax on a distribution from a qualified
contract that must be included in income. The tax code does not impose the
penalty tax if one of several exceptions applies. The exceptions vary depending
on the type of qualified contract you purchase. For example, in the case of an
IRA, exceptions provide that the penalty tax does not apply to a withdrawal,
surrender, or annuity payout:
o received on or after the annuitant reaches 591/2,
o received on or after the annuitant's death or because of the annuitant's
disability (as defined in the tax law),
o received as a series of substantially equal periodic payments based on the
annuitant's life (or life expectancy), or
o received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally apply
to taxable distributions from other qualified plans. However, the specific
requirements of the exception may vary.
Transfers and Direct Rollovers
As a result of Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA), you may be able to move funds between different types of qualified
plans, such as 403(b) and 457(b) governmental plans, by means of a rollover or
transfer. You may be able to rollover or transfer amounts between qualified
plans and traditional IRAs. These rules do not apply to Roth IRAs and 457(b)
non-governmental tax-exempt plans. The Pension Plan Act permits direct
conversions from certain qualified, 403(b) or 457(b) plans to Roth IRAs
(effective for distributions after 2007). There are special rules that apply to
rollovers, direct rollovers and transfers (including rollovers or transfers of
after-tax amounts). If the applicable rules are not followed, you may incur
adverse Federal income tax consequences, including paying taxes which you might
not otherwise have had to pay. Before we send a rollover distribution, we will
21
provide a notice explaining tax withholding requirements (see Federal Income
Tax Withholding). We are not required to send you such notice for your IRA. You
should always consult your tax adviser before you move or attempt to move any
funds.
Pursuant to IRS regulations, IRAs may not invest in life insurance contracts.
We do not believe that these regulations prohibit the death benefit from being
provided under the contract when we issue the contract as a Traditional or Roth
IRA. However, the law is unclear and it is possible that the presence of the
death benefit under a contract issued as a Traditional or Roth IRA could result
in increased taxes to you. Certain death benefit options may not be available
for all of our products.
Federal Income Tax Withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless you notify us prior to the
distribution that tax is not to be withheld. In certain circumstances, Federal
income tax rules may require us to withhold tax. At the time a withdrawal,
surrender, or annuity payout is requested, we will give you an explanation of
the withholding requirements.
Certain payments from your contract may be considered eligible rollover
distributions (even if such payments are not being rolled over). Such
distributions may be subject to special tax withholding requirements. The
Federal income tax withholding rules require that we withhold 20% of the
eligible rollover distribution from the payment amount, unless you elect to
have the amount directly transferred to certain qualified plans or contracts.
The IRS requires that tax be withheld, even if you have requested otherwise.
Such tax withholding requirements are generally applicable to 401(a), 403(a) or
(b), HR 10, and 457(b) governmental plans and contracts used in connection with
these types of plans.
Our Tax Status
Under existing Federal income tax laws, we do not pay tax on investment income
and realized capital gains of the VAA. We do not expect that we will incur any
Federal income tax liability on the income and gains earned by the VAA.
However, the Company does expect, to the extent permitted under Federal tax
law, to claim the benefit of the foreign tax credit as the owner of the assets
of the VAA. Therefore, we do not impose a charge for Federal income taxes. If
Federal income tax law changes and we must pay tax on some or all of the income
and gains earned by the VAA, we may impose a charge against the VAA to pay the
taxes.
Changes in the Law
The above discussion is based on the tax code, IRS regulations, and
interpretations existing on the date of this prospectus. However, Congress, the
IRS, and the courts may modify these authorities, sometimes retroactively.
Additional Information
Voting Rights
Contractowners who have interests in the Fund may cast votes. The number of
votes the contractowners have the right to cast will be determined as follows:
o in the accumulation period, the number of votes equals the number of
accumulation units;
o in the annuity payout period, the number of votes equals:
(a) the amount of assets in the Fund established to meet the annuity
obligations related to the annuitant divided by
(b) the value of an accumulation unit.
Fractional shares will be recognized in determining the number of votes.
During the annuity period, every contractowner has the right to give
instructions regarding all votes attributable to the assets established in the
Fund to meet the annuity obligations related to that contractowner.
Whenever a meeting of the Fund is called, each contractowner having a voting
interest in the Fund will receive proxy material, reports, and other materials.
Distribution of the Contracts
Lincoln Financial Distributors ("LFD") serves as Principal Underwriter of this
contract. LFD is affiliated with Lincoln Life and is registered as a
broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a
member of FINRA. The Principal Underwriter has entered into selling agreements
with Lincoln Financial Advisors ("LFA"), also an affiliate of ours. The
Principal Underwriter has also entered into selling agreements with
broker-dealers that are unaffiliated with us. While the Principal Underwriter
has the legal authority to make payments to broker-dealers which have entered
into selling agreements, we will make such payments on behalf of the Principal
Underwriter in compliance with appropriate regulations. We also pay on behalf
of LFD certain of its operating expenses
22
related to the distribution of this and other of our contracts. The following
paragraphs describe how payments are made by us and The Principal Underwriter
to various parties,
Compensation Paid to LFA. The maximum commission the Principal Underwriter pays
to LFA is 5.10% of purchase payments, plus up to 0.25% quarterly based on
contract value. LFA may elect to receive a lower commission when a purchase
payment is made along with an earlier quarterly payment based on contract value
for so long as the contract remains in effect. Upon annuitization, the maximum
commission the Principal Underwriter pays to LFA is 5.10% of annuitized
value/or ongoing annual compensation of up to 1.00 of annuity value or
statutory reserves.
Lincoln Life also pays for the operating and other expenses of LFA, including
the following sales expenses: sales representative training allowances;
compensation and bonuses for LFA's management team; advertising expenses; and
all other expenses of distributing the contracts. LFA pays its sales
representatives a portion of the commissions received for their sales of
contracts. LFA sales representatives and their managers are also eligible for
various cash benefits, such as bonuses, insurance benefits and financing
arrangements, and non-cash compensation items that we may provide jointly with
LFA. Non-cash compensation items may include conferences, seminars, trips,
entertainment, merchandise and other similar items. In addition, LFA sales
representatives who meet certain productivity, persistency and length of
service standards and/or their managers may be eligible for additional
compensation. Sales of the contracts may help LFA sales representatives and/or
their managers qualify for such benefits. LFA sales representatives and their
managers may receive other payments from us for services that do not directly
involve the sale of the contracts, including payments made for the recruitment
and training of personnel, production of promotional literature and similar
services.
Compensation Paid to Unaffiliated Selling Firms. The Principal Underwriter pays
commissions to all Selling Firms. The maximum commission the Principal
Underwriters pays to Selling Firms, other than LFA, is 2.50% of purchase
payments, plus up to 0.30% quarterly based on contract value. Some Selling
Firms may elect to receive a lower commission when a purchase payment is made
along with an earlier quarterly payment based on contract value for so long as
the contract remains in effect. Upon annuitization, the maximum commission the
Principal Underwriter pays to Selling Firms is 4.00% of annuitized value and/or
ongoing annual compensation of up to 1.15% of annuity value or statutory
reserves. LFD also acts as wholesaler of the contracts and performs certain
marketing and other functions in support of the distribution and servicing of
the contracts.
LFD may pay certain Selling Firms or their affiliates additional amounts for:
(1) "preferred product" treatment of the contracts in their marketing programs,
which may include marketing services and increased access to sales
representatives; (2) sales promotions relating to the contracts; (3) costs
associated with sales conferences and educational seminars for their sales
representatives; (4) other sales expenses incurred by them; and (5) inclusion
in the financial products the Selling Firm offers.
Lincoln Life may provide loans to broker-dealers or their affiliates to help
finance marketing and distribution of the contracts, and those loans may be
forgiven if aggregate sales goals are met. In addition, we may provide staffing
or other administrative support and services to broker-dealers who distribute
the contracts. LFD, as wholesaler, may make bonus payments to certain Selling
Firms based on aggregate sales of our variable insurance contracts (including
the contracts) or persistency standards. These additional payments are not
offered to all Selling Firms, and the terms of any particular agreement
governing the payments may vary among Selling Firms.
These additional types of compensation are not offered to all Selling Firms.
The terms of any particular agreement governing compensation may vary among
Selling Firms and the amounts may be significant. The prospect of receiving, or
the receipt of, additional compensation may provide Selling Firms and/or their
registered representatives with an incentive to favor sales of the contracts
over other variable annuity contracts (or other investments) with respect to
which a Selling Firm does not receive additional compensation, or lower levels
of additional compensation. You may wish to take such payment arrangements into
account when considering and evaluating any recommendation relating to the
contracts. Additional information relating to compensation paid in 2007 is
contained in the Statement of Additional Information (SAI).
Compensation Paid to Other Parties. Depending on the particular selling
arrangements, there may be others whom LFD compensates for the distribution
activities. For example, LFD may compensate certain "wholesalers", who control
access to certain selling offices, for access to those offices or for
referrals, and that compensation may be separate from the compensation paid for
sales of the contracts. LFD may compensate marketing organizations,
associations, brokers or consultants which provide marketing assistance and
other services to broker-dealers who distribute the contracts, and which may be
affiliated with those broker-dealers. Commissions and other incentives or
payments described above are not charged directly to contract owners or the
Fund. All compensation is paid from our resources, which include fees and
charges imposed on your contract.
State Regulation
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance. Our books and accounts are subject to review and
examination by the Indiana Department of Insurance at all times. A full
examination of our operations is conducted by that Department at least every
five years.
23
Restrictions Under the Texas Optional Retirement Program
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a variable annuity contract issued under the ORP only upon:
o Termination of employment in all institutions of higher education as defined
in Texas law;
o Retirement; or
o Death.
Accordingly, a participant in the ORP will be required to obtain a certificate
of termination from their employer before accounts can be redeemed.
Records and Reports
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the Fund.
Certain records and accounts of the Fund may also be maintained by the Fund's
subadviser and custodian. Also, accounts, books, and other documents are
maintained by Mellon Bank, N.A. (the Fund's accounting services provider), 135
Santilli Highway, Everett, Massachusetts 02149-1950; and Delaware Services
Company, Inc. (The Fund's fund accounting and financial administration
oversight provider), One commerce Square, 2005 Market Street, Philadelphia,
Pennsylvania 19103.
Other Information
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further
information about the Fund, Lincoln Life and the contracts offered. Statements
in this prospectus about the content of contracts and other legal instruments
are summaries. For the complete text of those contracts and instruments, please
refer to those documents as filed with the SEC.
For an SAI, annual or semi-annual report, either write The Lincoln National
Life Insurance Company, P.O. Box 2340, Fort Wayne, Indiana 46801, or call
1-800-4LINCOLN (454-6265). Also call this number to request other information
about the Fund, or to make inquiries. The Fund does not maintain an internet
website.
Legal Proceedings
In the ordinary course of its business, Lincoln Life, the VAA, and the
principal underwriter may become or are involved in various pending or
threatened legal proceedings, including purported class actions, arising from
the conduct of business. In some instances, these proceedings include claims
for unspecified or substantial punitive damages and similar types of relief in
addition to amounts for alleged contractual liability or requests for equitable
relief. After consultation with legal counsel and a review of available facts,
it is management's opinion that these proceedings, after consideration of any
reserves and rights to indemnification, ultimately will be resolved without
materially affecting the consolidated financial position of Lincoln Life, the
VAA, or the principal underwriter. However, given the large and indeterminate
amounts sought in certain of these proceedings and the inherent difficulty in
predicting the outcome of such legal proceedings, it is possible that an
adverse outcome in certain matters could be material to our operating results
for any particular reporting period.
24
Statement of Additional Information
Table of Contents for Lincoln National Variable Annuity Fund A
Item Page
Special terms B-2
Investment Objectives and Policies of the Fund B-2
Managers and Officers B-2
Proxy Voting Policies and Procedures B-6
Investment Advisory and Related Services B-6
Portfolio Managers B-6
Portfolio Transactions and Brokerage B-6
Purchase and Pricing of Securities Being
Offered B-7
Other Services B-8
Principal Underwriter B-9
Determination of Accumulation Unit Value B-9
Financial Statements B-9
Appendix A B-10
Appendix B B-11
For a free copy of the SAI complete the form below.
Statement of Additional Information Request Card
Lincoln National Variable Annuity Fund A (Individual or Group)
Please send me a free copy of the current Statement of Additional Information
for Lincoln National Variable Annuity Fund A (Individual or Group).
(Please Print)
Name: -------------------------------------------------------------------------
Address: ----------------------------------------------------------------------
City --------------------------------------------------- State ---------
Zip ---------
Mail to: The Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne,
Indiana 46801
25
Lincoln National Variable Annuity Fund A
Group Variable Annuity Contracts
Home Office:
The Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801-2340
www.LFG.com
1-800-454-6265
This prospectus describes the group variable annuity contract that is issued by
The Lincoln National Life Insurance Company (Lincoln Life). They are primarily
for use with certain nonqualified plans and qualified retirement plans.
Generally, you do not pay federal income tax on the contract's growth until it
is paid out. Qualified retirement plans already provide for tax deferral.
Therefore, there should be reasons other than tax deferral for acquiring the
contract within a qualified plan. The contract is designed to accumulate
contract value to provide retirement income that you cannot outlive or for an
agreed upon time. These benefits may be a variable or fixed amount or a
combination of both. If the contractowner or annuitant dies before the annuity
commencement date, we will pay the beneficiary a death benefit.
Additional purchase payments may be made to periodic payment contracts and must
be at least $25 per payment, and total $600 annually.
The contractowner chooses whether the contract value accumulates on a variable
or a fixed (guaranteed) basis or both. If the contractowner puts purchase
payments into the fixed account, we guarantee the principal and a minimum
interest rate. We limit withdrawals and transfers from the fixed side of the
contract.
All purchase payments for benefits on a variable basis will be placed in
Lincoln National Variable Annuity Fund A (the Fund or Variable Annuity Account
(VAA)). The Fund is a segregated investment account of Lincoln Life. The main
investment objective of the Fund is the long-term growth of capital in relation
to the changing value of the dollar. A secondary investment objective is the
production of current income. The Fund seeks to accomplish these objectives by
investing in equity securities, primarily common stocks.
The contractowner takes all the investment risk on the contract value and the
retirement income derived from purchase payments into the Fund. If the Fund
makes money, your contract value goes up; if the Fund loses money, it goes
down. How much it goes up or down depends on the performance of the Fund. We do
not guarantee how the Fund will perform. Also, neither the U.S. Government nor
any federal agency insures or guarantees your investment in the contract.
This prospectus gives you information about the contracts, Lincoln Life and the
Fund that you should know before deciding to buy a contract and make purchase
payments. This prospectus should be kept for future reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
More information about the contracts is in the current Statement of Additional
Information (SAI), dated the same date as this prospectus. The SAI is
incorporated by reference into this prospectus and is legally part of this
prospectus. For a free copy of the SAI, the Fund's annual or semi-annual
reports, other information, and to make contractowner inquiries, write The
Lincoln National Life Insurance Company, P.O. Box 2340, Fort Wayne, IN 46801 or
call 1-800-454-6265. The Fund does not maintain an internet website. The SAI,
material incorporated by reference, annual and semi-annual reports, and other
information about Lincoln Life and the Fund are also available on the SEC's
website (http://www.sec.gov). There is a table of contents for the SAI on the
last page of this prospectus.
April 30, 2008
1
Table of Contents
Item Page
Special Terms 3
Expense Tables 4
Summary of Common Questions 4
Condensed Financial Information For The Fund 5
The Lincoln National Life Insurance Company 6
Fixed Side of the Contract 6
Fund A 7
Charges and Other Deductions 8
The Contracts 10
Transfers On or Before the Annuity Commencement Date 11
Market Timing 11
Death Benefit Before the Annuity Commencement Date 13
Surrenders and Withdrawals 14
Annuity Payouts 15
More Information About The Fund 18
Federal Tax Matters 19
Voting Rights 21
Distribution of the Contracts 21
Other Information 23
Legal Proceedings 23
Statement of Additional Information
Table of Contents for Lincoln National Variable Annuity Fund A 24
2
Special Terms
In this prospectus, the following terms have the indicated meanings:
Accumulation unit - A measure used to calculate contract value for the variable
side of the contract before the annuity commencement date.
Annuitant - The person upon whose life the annuity benefit payments are based,
and upon whose life a death benefit may be paid.
Annuity commencement date - The valuation date when funds are withdrawn or
converted into annuity units or fixed dollar payout for payment of annuity
benefits under the annuity payout option you select.
Annuity unit - A measure used to calculate the amount of annuity payouts for
the variable side of the contract after the annuity commencement date. See
Annuity Payouts.
Beneficiary - The person or entity designated by the contractowner to receive
any death benefit paid if the contractowner or annuitant dies before the
annuity commencement date.
Contractowner (you, your, owner) - An employer, or a trustee of a trust or a
custodian, (1) of a qualified pension or profit sharing plan or (2) of an
Individual Retirement Annuity (under Sections 401 (a) and 408 of the Internal
Revenue Code, or "tax code"), or (3) where a contract is issued in connection
with a deferred compensation plan (under Section 457 of the tax code).
Contract value - At a given time before the annuity commencement date, the
total value of all accumulation units for a contract plus the value of the
fixed side of the contract.
Contract year - Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit-Before the annuity commencement date, the amount payable to a
designated beneficiary if the contractowner or annuitant dies.
Lincoln Life (we, us, our) - The Lincoln National Life Insurance Company.
Participant - The individual participating in the qualified pension or
profit-sharing plan, deferred compensation plan, tax deferred annuity, or tax
sheltered annuity.
Purchase payments - Amounts paid into the contract.
Valuation date - Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period - The period starting at the close of trading (currently 4:00
p.m. New York time) on each day that the NYSE is open for trading (valuation
date) and ending at the close of such trading on the next valuation date.
3
Expense Tables
Contractowner Transaction Expenses:
Single Premium Periodic Premium
o Sales load on purchase payments (as a percentage of purchase payments, as applicable) 2%+$50* 4.25%
o Administrative expenses (as a percentage of purchase payments, as applicable) $ 65* 1.00%
o Minimum death benefit rider (if elected)** (as a percentage of purchase payments) .75% .75%
We may waive or reduce these charges in certain situations. See Charges and
Other Deductions.
*This charge is deducted at the time of purchase of the contract and is a
one-time charge.
** The minimum death benefit rider is no longer available for sale.
Fund A Annual Expenses (as a percentage of average net assets):
o Management fees 0.323%
o Mortality and expense risk charge 1.002%
o Total Annual Expenses 1.325%
EXAMPLES
These examples are intended to help you compare the cost of investing in the
contract with the cost of investing in other variable annuity contracts. These
costs include contractowner transaction expenses and annual expenses and fees
of the Fund.
The examples assume that you invest $1,000 in the contract for the time period
indicated, and that your investment has a 5% annual return on assets. The
examples also assume that the minimum death benefit is in effect. Without this
benefit, expenses would be lower.
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
Single Premium $154 $179 $205 $279
Periodic Premium $ 73 $ 99 $128 $210
For more information - See Charges and Other Deductions in this prospectus.
Premium taxes may also apply, although they do not appear in the Examples.
These examples should not be considered a representation of past or future
expenses. Actual expenses may be more or less than those shown.
For information concerning compensation paid for the sale of the contacts, see
Distribution of the Contracts.
Summary of Common Questions
What kind of contract is this? It is a group variable annuity contract between
the contractowner and Lincoln Life, and is one of two types: an immediate
annuity or a deferred annuity. Immediate annuities may only be purchased with a
single payment; deferred annuities may be purchased with a single payment or
periodic payments. It may provide for a fixed annuity and/or a variable
annuity. This prospectus describes the variable side of the contract. See The
Contracts. This prospectus provides a general description of the contract. The
contracts are no longer being sold to new contractowners. Certain benefits,
features, and charges may vary in certain states. You should refer to your
contract for any state-specific provisions.
What is the Fund? It is a separate account we established under Indiana
insurance law, and registered with the SEC as a management investment company.
Fund assets are not chargeable with liabilities arising out of any other
business which we may conduct. See Fund A.
Who invests the money? The investment adviser for the Fund is Lincoln Life. The
sub-adviser for the Fund is Delaware Management Company (DMC). See Fund A -
Investment Adviser.
How is the money invested? The principal investment objective of the Fund is
the long-term growth of capital in relation to the changing value of the
dollar. A secondary investment objective is the production of current income.
See Fund A - Investment Adviser.
4
How does the contract work? If we approve your application, we will send you a
contract. When you make purchase payments during the accumulation phase, you
buy accumulation units. If you decide to receive an annuity payout, your
accumulation units are converted to annuity units. Your annuity payouts will be
based on the number of annuity units you received and the value of each annuity
unit on payout days. See The Contracts.
What charges are there under the contract? We deduct sales load from each
purchase payment (2% +$50 from a single payment, 4.25% from each periodic
payment), along with an administrative expense ($65 from a single payment,
1.00% from each periodic premium); and if the contractowner elects the minimum
death benefit, an additional charge of 0.75% from each purchase payment. We may
reduce or waive these charges in certain situations. See Charges and Other
Deductions.
We also will deduct any applicable premium tax from purchase payments.
The Fund pays to us a management fee equal to an annual rate of 0.323%, and a
mortality and expense risk charge equal to 1.002%, of the average daily net
assets of the Fund. See Fund A - Investment Management.
For information about the compensation we pay in connection with premium
payments under the contracts, see Distribution of the Contracts.
What purchase payments must be made, and how often? Subject to the minimum
payment amounts, the payments are completely flexible. See The Contracts -
Periodic Purchase Payments.
How will my annuity payouts be calculated? If a contractowner decides to
annuitize, you may select an annuity option and start
receiving annuity payouts from your contract as a fixed option or variable
option or a combination of both. See Annuity Payouts - Annuity Options.
Remember that participants in the Fund benefit from any gain, and take a risk
of any loss, in the value of the securities in the funds' portfolios.
What happens if the contractowner or annuitant dies before annuitization? If
the contractowner elects the minimum death benefit, and the annuitant is age 64
or younger at the time of death, the beneficiary will receive the greater of
purchase payments (less Rider Premiums and withdrawals) or contract value. If
the contractowner does not elect the minimum death benefit or the annuitant is
65 or older at the time of death, the beneficiary will receive the contract
value. The beneficiary has options as to how the death benefit is paid. See
Death Benefit Before the Annuity Commencement Date.
May contract value be transfered between the variable and the fixed side of the
contract? Yes, with certain limits. See - The Contracts - Transfers On or
Before the Annuity Commencement Date and Transfers After the Annuity
Commencement Date.
May I surrender the contract or make a withdrawal? Yes, subject to contract
requirements and to the restrictions of any qualified retirement plan for which
the contract was purchased. See The Contracts - Surrenders and Withdrawals. A
portion of surrender or withdrawal proceeds may be taxable. In addition, if you
decide to take a distribution before age 591/2, a 10% Internal Revenue Service
(IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to
20% withholding. See Federal Tax Matters.
Condensed Financial Information For The Fund
(For an accumulation unit outstanding throughout the year)
Accumulation Unit Values
The following information relating to accumulation unit values and number of
accumulation units for the Fund for periods ending December 31 is derived from
the Fund's financial statements which have been audited by Ernst & Young, LLP,
independent registered public accounting firm. It should be read along with the
Fund's financial statements, notes and report of independent registered public
accounting firm which are included in the SAI.
5
2007 2006 2005 2004
----------- ------------ ------------ ------------
Investment Income ............................ $ .388 $ .354 $ .338 $ .343
Expenses ..................................... .297 .257 .239 .218
--------- -------- -------- --------
Net investment income (loss) ................. .091 .097 .099 .125
Net realized and unrealized gain (loss) on
investments ................................. 1.016 2.022 .732 1.642
--------- -------- -------- --------
Net increase (decrease) in
accumulation unit value ..................... 1.107 2.119 .831 1.767
Accumulation unit value at
beginning of period ......................... 21.262 19.143 18.312 16.545
--------- -------- -------- --------
ACCUMULATION UNIT VALUE AT
END OF PERIOD ............................... 22.369 $ 21.262 $ 19.143 $ 18.312
--------- -------- -------- --------
RATIOS
Ratio of expenses to average net assets ...... 1.32% 1.28% 1.28% 1.28%
Ratio of net investment income (loss) to
average net assets .......................... .43% .48% .53% .73%
Portfolio turnover rate ...................... 29.16% 28.83% 20.40% 38.72%
Number of accumulation units
outstanding at end of year
(expresed in thousands) ..................... 2,912 3,330 3,689 4,103
2003 2002 2001 2000 1999 1998
------------ ----------- ----------- ----------- ------------ ------------
Investment Income ............................ $ .245 $ .253 $ .249 $ .265 $ .283 $ .301
Expenses ..................................... .184 .191 .228 .275 .256 .217
-------- -------- -------- ------- -------- --------
Net investment income (loss) ................. .061 .062 .021 (.010) 0.27 .084
Net realized and unrealized gain (loss) on
investments ................................. 3.612 (4.238) (2.354) (2.454) 3.106 3.028
-------- -------- -------- ------- -------- --------
Net increase (decrease) in
accumulation unit value ..................... 3.673 (4.176) (2.333) (2.464) 3.133 3.112
Accumulation unit value at
beginning of period ......................... 12.872 17.048 19.381 21.845 18.712 15.600
-------- -------- -------- ------- -------- --------
ACCUMULATION UNIT VALUE AT
END OF PERIOD ............................... $ 16.545 $ 12.872 $ 17.048 $19.381 $ 21.845 $ 18.712
-------- -------- -------- ------- -------- --------
RATIOS
Ratio of expenses to average net assets ...... 1.27% 1.28% 1.28% 1.28% 1.28% 1.28%
Ratio of net investment income (loss) to
average net assets .......................... .42% .41% .12% (.05)% .14% .49%
Portfolio turnover rate ...................... 77.30% 60.26% 78.03% 66.67% 21.46% 31.10%
Number of accumulation units
outstanding at end of year
(expresed in thousands) ..................... 4,466 4,747 5,305 5,787 6,366 7,176
Investment Results
At times, the fund may compare its investment results to various unmanaged
indices or other variable annuities in reports to shareholders, sales
literature and advertisements. The results will be calculated on a total return
basis for various periods. Total returns include the reinvestment of all
distributions, which are reflected in the changes in unit value. Performance is
based on past performance and does not indicate or represent future
performance.
Financial Statements
The financial statements of the VAA and the consolidated financial statements
of Lincoln Life are located in the SAI. If you would like a free copy of the
SAI, complete and mail the request on the last page of this prospectus, or call
1-800-454-6265.
The Lincoln National Life Insurance Company
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana-domiciled insurance company, engaged primarily in the direct
issuance of life insurance contracts and annuities. Lincoln Life is wholly
owned by Lincoln National Corporation (LNC), a publicly held insurance and
financial services holding company incorporated in Indiana. Lincoln Life is
obligated to pay all amounts promised to policy owners under the policies.
Guarantees provided within death benefit options and living benefit riders are
backed by the claims-paying ability of Lincoln Life.
Lincoln Financial Group is the marketing name for Lincoln National Corporation
(NYSE:LNC) and its affiliates. Lincoln Financial Group sells a wide variety of
financial products and solutions through financial advisors: mutual funds,
managed accounts, retirement solutions, life insurance, 401(k) and 403(b)
plans, savings plans, institutional investments and comprehensive financial
planning and advisory services.
Fixed Side of the Contract
The value of net purchase payments (gross purchase payments minus sales and
administrative expenses) allocated to the fixed side of the contract becomes
part of our general account, and does not participate in the investment
experience of the Fund. The general account is subject to regulation and
supervision by the Indiana Insurance Department as well as the insurance laws
and regulations of the jurisdictions in which the contracts are distributed.
In reliance on certain exemptions, exclusions and rules, we have not registered
interests in the general account as a security under the Securities Act of 1933
(1933 Act) and have not registered the general account as an investment company
under the Investment Company Act of 1940 (1940 Act). Accordingly, neither the
general account nor any interests in it are regulated under the 1933 Act or the
1940 Act. We have been advised that the staff of the SEC has not made a review
of the disclosures which are included in this prospectus which relate to our
general account and to the fixed account under the contract. These disclosures,
however, may be subject to certain provisions of the federal securities laws
relating to the accuracy and completeness of statements made in prospectuses.
This prospectus is generally intended to serve as a disclosure document only
for aspects of the contract involving the Fund, and therefore contains only
selected information regarding the fixed side of the contract. Complete details
regarding the fixed side of the contract are in the contract.
6
Net Purchase Payments allocated to the fixed side of the contract are
guaranteed to be credited with a minimum interest rate, specified in the
contract, of at least 3.5%. A net purchase payment allocated to the fixed side
of the contract is credited with interest beginning on the next calendar day
following the date of receipt if all data is complete. Lincoln Life may vary
the way in which it credits interest to the fixed side of the contract from
time to time.
ANY INTEREST IN EXCESS OF 3.5% WILL BE DECLARED IN ADVANCE AT LINCOLN LIFE'S
SOLE DISCRETION. CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF
3.5% WILL BE DECLARED.
Fund A
On September 16, 1966, we established the Fund as a segregated investment
account under Indiana Law. It is registered with the SEC as an open-end,
diversified management investment company under the provisions of the
Investment Company Act of 1940 (1940 Act). Diversified means not owning too
great a percentage of the securities of any one company. The Fund is a
segregated investment account, meaning that its assets may not be charged with
liabilities resulting from any other business that we may conduct. Income,
gains and losses, whether realized or not, from assets allocated to the Fund
are, in accordance with the applicable contracts, credited to or charged
against the Fund. They are credited or charged without regard to any other
income, gains or losses of Lincoln Life. The obligations arising under the
contract are obligations of Lincoln Life. The Fund satisfies the definition of
separate account under the federal securities laws. We do not guarantee the
investment performance of the Fund. Any investment gain or loss depends on the
investment performance of the Fund. The contractowner assumes the full
investment risk for all amounts placed in the Fund.
We reserve the right, within the law, to make certain changes to the structure
and operation of the Fund at our discretion and without your consent. We may
transfer the assets supporting the contracts from the Fund to another separate
account, combine the Fund with other separate accounts and/or create new
separate accounts, deregister the Fund under the 1940 Act, or operate the Fund
as a management investment company under the 1940 Act or as any other form
permitted by law. We may modify the provisions of the contracts to reflect
charges to the Fund and to comply with applicable law.
The Fund is used to support annuity contracts offered by Lincoln Life other
than the contracts described in this prospectus. The other annuity contracts
may have different charges that could affect performance, and they offer
different benefits.
A description of the Fund's policies and procedures with respect to the
disclosure of its portfolio holdings is available in the Statement of
Additional Information.
Investment Adviser and Sub-Adviser
We are the investment adviser for the Fund. We have been registered under the
Investment Advisers Act of 1940 since 1967. For more information about us, see
The Lincoln National Life Insurance Company, above; and Management, in the SAI.
The current board of managers for the Fund was elected by the contractowners
(See Voting rights). A majority of these managers are not otherwise interested
persons of Lincoln Life as the term "interested persons" is defined in the 1940
Act. The Board is responsible for authorizing investment programs for the Fund,
for recommending any appropriate changes to those objectives and policies, and
for contracting for certain services necessary to the operation of the Fund.
In performing investment management services, we provide the board of managers
with an investment program for its approval. Once the investment program is
approved, we hire an investment sub-adviser to place orders for the purchase
and sale of the assets of the Fund, and we monitor the investment sub-adviser.
We also provide overall management of the Fund's business affairs, subject to
the authority of the board of managers.
A sub-advisory agreement is in effect between Lincoln Life and Delaware
Management Company (DMC), a series of Delaware Management Business Trust
(DMBT), 2005 Market Street, Philadelphia, PA 19103, a Delaware statutory trust
that is registered with the SEC as an investment adviser. DMBT is a wholly
owned indirect subsidiary of Lincoln National Investments, Inc. and ultimately
of Lincoln National Corporation. Under the sub-advisory agreement, DMC may
perform substantially all of the investment advisory services required by the
Fund. However, we remain primarily responsible for investment decisions
affecting the Fund, and no additional compensation from the assets of the Fund
is assessed as a result of this agreement.
A discussion regarding the basis for the Board of Managers approving the
investment advisory contract and sub-advisory contract is available in the
annual report to shareholders for the twelve month period ended December 31,
2007.
Portfolio Manager
A team consisting of Francis X. Morris, Christopher S. Adams, Michael S. Morris
and Donald G. Padilla is responsible for the day-to-day management of the
Fund's investments. Mr. Francis Morris serves as the team leader. Each team
member performs research, and all team members meet and make investment
decisions as a group. Mr. Francis Morris, Director of Research/Senior Vice
President and Senior Portfolio Manager, served as Director of Equity Research
at PNC Asset Management prior to joining Delaware Investments in 1997. Mr.
Adams, Vice President/Portfolio Manager and Senior Equity Analyst, joined
Delaware Investments in 1995. He is a graduate of Oxford University and
received an MBA from the Wharton School of Business at the University of
Pennsylvania. Mr. Michael
7
Morris, Vice President/Portfolio Manager, served as Senior Equity Analyst at
Pilgrim Baxter prior to joining Delaware Investments in 1999. Mr. Padilla, Vice
President/Portfolio Manager, joined Delaware Investments in 1994 as an
Assistant Controller. Prior to joining Delaware Investments, Mr. Padilla worked
for ten years at The Vanguard Group. All team members are CFA Charterholders.
The SAI provides additional information about the portfolio managers'
compensation, other accounts managed by the portfolio managers, and the
portfolio managers' ownership of securities in the Fund.
Investment Objective and Policies
The primary investment objective of the Fund is long-term growth of capital in
relation to the changing value of the dollar. We will make investments with the
objective of providing annuity payments which reflect changes in the value of
the dollar over the long term. A secondary invesment objective is the
production of current income. Generally, we will reinvest income and realized
capital gains.
We usually will invest the Fund's assets in a portfolio of equity securities,
mainly common stocks, diversified over industries and companies.
Diversification means that we will keep the investments spread out over
different industries, and different companies within each industry. We will not
concentrate any more than 25% of the Fund's assets in any one industry.
Diversification, however, does not eliminate the risks inherent in the making
of equity investments. These investment objectives and policies are
"fundamental". That is, they may not be changed without approval by a majority
of contractowners.
Risks
Historically, the value of a diversified portfolio of common stocks held for an
extended period of time has tended to rise during periods of inflation. There
has, however, been no exact correlation, and for some periods the prices of
securities have declined while the cost of living was rising.
The value of the investments held in the Fund fluctuates daily and is subject
to the risks of changing economic conditions as well as the risks inherent in
the ability of management to anticipate changes in such investments necessary
to meet changes in economic conditions.
We will not invest more than 10% of the Fund's assets in securities which are
privately placed with financial institutions (and cannot be sold to the public
without registering with the SEC) ("restricted securities"). We limit
investment in restricted securities because the Fund may not be able to sell
them quickly at a reasonable price.
Other Information
For providing investment services to the Fund, we make deductions aggregating
..323% annually of the average daily value of the Fund. The Fund paid investment
advisory fees of $245,405 in 2007, $242,119 in 2006, and $250,246 in 2005.
Charges and Other Deductions
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contracts. We incur certain costs
and expenses for the distribution and administration of the contracts and for
paying the benefits under the contracts.
Our administrative costs include:
o salaries;
o rent;
o postage;
o stationery;
o travel;
o legal;
o actuarial and accounting fees;
o office equipment and
o telephone.
The benefits we provide include:
o death benefits;
o annuity payout benefits and
o cash surrender value benefits.
The risks we assume include:
o the risk that annuitants receiving annuity payouts under contracts live
longer than we assumed when we calculated our guaranteed rates (these rates
are incorporated in the contract and cannot be changed);
8
o the risk that death benefits paid under the minimum death benefit option
(see below) will exceed the actual contract value;
o the risk that more owners than expected will qualify for reduced sales or
administrative charges; and
o the risk that our costs in providing the services will exceed our revenues
from contract charges (which we cannot change).
The amount of a charge may not necessarily correspond to the costs associated
with providing the services or benefits indicated by the description of the
charge. For example, the sales expense charge may not fully cover all of the
sales and distribution expenses actually incurred by us. Any remaining expenses
will be paid from our general account which may consist, among other things, of
proceeds derived from mortality and expense risk charges deducted from the
Fund. We may profit from one or more of the fees and charges deducted under the
contract. We may use these profits for any corporate purpose, including
financing the distribution of the contracts.
Deductions from Purchase Payments
Under periodic payment contracts, we deduct 4.25% for sales expenses and 1% for
administrative expenses from each purchase payment when it is received. Under
single payment contracts, we deduct 2% plus $50 from the single purchase
payment for sales expense and $65 for administrative expenses. Deductions for
sales and administrative expenses made from purchase payments applied to the
fixed side of the contract are the same as those made from purchase payments
applied to the Fund.
If the contractowner elected the minimum death benefit, we make an additional
deduction of .75% from each purchase payment. We expect to make a profit from
the sale of this death benefit. This death benefit is no longer available for
purchase.
We will deduct from purchase payments any premium tax or other tax levied by
any governmental entity with regard to the contracts of the Fund. The
applicable premium tax rates that states and other governmental entities impose
on the purchase of an annuity are subject to change by legislation, by
administrative interpretation or by judicial action. These premium taxes
generally depend upon the law of the contractowner's state of residence. The
tax ranges from 0% to 3.5%.
Deductions from Average Daily Value of the Fund
We assume the risk that annuitants as a class may live longer than expected
(mortality risk) and that expenses may be higher than the deductions for such
expenses (expense risk). In either case, the loss will fall on us. Conversely,
if such deductions are higher than expenses, the excess will be a profit to us.
In return for the assumption of these risks, daily deductions aggregating
1.002% annually of the average daily value of the Fund are made consisting of
0.9% for mortality risk and 0.102% for expense risk.
We also deduct a management fee for investment advisory services equal to
0.323% annually of the average daily value of the Fund. See Fund A - Other
Information.
We may modify the amount of deductions and annuity rates. See The contracts.
However, we may increase deductions for investment advisory services only after
approval by a vote of the majority of contractowners, as defined in the 1940
Act.
Additional Information
The sales and administrative charges described previously may be reduced or
eliminated for any particular contract. However, these charges will be reduced
only to the extent that we anticipate lower distribution and/or administrative
expenses, or that we perform fewer sales or administrative services than those
originally contemplated in establishing the level of those charges. Lower
distribution and administrative expenses may be the result of economies
associated with:
o the use of mass enrollment procedures;
o the performance of administrative or sales functions by the employer;
o the use by an employer of automated techniques in submitting deposits or
information related to deposits on behalf of its employees; or
o any other circumstances which reduce distribution or administrative
expenses.
The exact amount of sales and administrative charges applicable to a particular
contract will be stated in that contract.
In accordance with the terms of the periodic payment contract, on each
anniversary after the second anniversary, the terms of the contract, including
the charges, may be modified. The contractowner will receive at least 90 days
written notice of a modification to the contract, and no modification will
affect any account which has been annuitized prior to the effective date of the
modification.
9
The Contracts
Purchase of Contracts
We no longer offer contracts for sale. However, existing contractowners can
make periodic purchase payments under the periodic contracts.
Two types of group variable annuity contracts are described in this Prospectus:
1. Regular group variable annuity contracts, under which we allocate payments
to the accounts of individual participants. Each participant under the
regular group variable annuity contract receives a certificate which
summarizes the provisions of the group contract and is proof of
participation.
2. Group variable annuity deposit administration contracts, designed for use
with defined benefit pension plans and defined benefit H.R.-10 plans.
Periodic Purchase Payments
Periodic purchase payments are payable to us at a frequency and in an amount
the contractowner selected in the application. Additional purchase payments
must be for at least $25 per payment, and total at least $600 annually. If the
contractowner stops making purchase payments, the contract will remain in force
as a paid-up contract. However, we may terminate the contract as allowed by the
contractowner's state's non-forfeiture law for deferred annuities. If you
submit a purchase payment to your agent, we will not begin processing the
purchase payment until we receive it from our agent's broker-dealer.
Valuation Date
Accumulation and annuity units will be valued once daily at the close of
trading (normally, 4:00 p.m., New York time) on each day the New York Stock
Exchange is open (valuation date). On any date other than a valuation date, the
accumulation unit value and the annuity unit value will not change.
Allocation of Purchase Payments
Purchase payments are placed into the Fund or into the fixed account, according
to the contractowner's instructions. Under the regular group variable annuity
contract, purchase payments allocated to the Fund are converted into
accumulation units and are credited to the account of each participant. Under
the group variable annuity deposit administration contract, net purchase
payments are converted into accumulation units and credited to the account of
the contractowner. The number of accumulation units credited is determined by
dividing the net purchase payment by the value of an accumulation unit on the
valuation date on which the purchase payment is received at our home office if
received before 4:00 p.m., New York time. If the purchase payment is received
at or after 4:00 p.m., New York time, we will process the request using the
accumulation unit value computed on the next valuation date. The number of
accumulation units determined in this way is not changed by any subsequent
change in the value of an accumulation unit. However, the dollar value of an
accumulation unit will vary depending not only upon how well the Fund's
investments perform, but also upon the expenses of the Fund.
Valuation of Accumulation Units
Under the regular group variable annuity contract, purchase payments allocated
to the Fund are converted into accumulation units. This is done by dividing the
amount allocated by the value of an accumulation unit for the valuation period
during which the purchase payments are allocated to the Fund. The accumulation
unit value for the Fund was established on March 1, 1967, at $1. It may
increase or decrease from valuation period to valuation period. Accumulation
unit values are affected by investment performance of the Fund, fund expenses,
and the deduction of certain contract charges. We determine the value of an
accumulation unit on the last day of any following valuation period as follows:
1. The total value of the Fund (determined by adding the values of all
securities investments and other assets) at end of the valuation period;
minus
2. The liabilities of the Fund at the end of the valuation period; these
liabilities include daily charges imposed on the Fund, and may include a
charge or credit with respect to any taxes paid or reserved for by us that
we determine result from the operations of the Fund; and
3. The result is divided by the number of Fund units outstanding at the
beginning of the valuation period.
The daily charges imposed on the Fund for any valuation period are equal to the
daily mortality and expense risk charge and the daily management fee multiplied
by the number of calendar days in the valuation period.
The Fund's securities may be traded in other markets on days when the NYSE is
closed. Therefore, the accumulation unit value may fluctuate on days that are
not valuation dates.
10
The Fund typically values its securities investments as follows:
o equity securities, at their last sale prices on national securities
exchanges or over-the-counter, or, in the absence of recorded sales, at the
average of readily available closing bid and asked prices on exchanges or
over-the-counter; and
o debt securities, at the price established by an independent pricing service,
which is believed to reflect the fair value of these securities; and
o fixed income securities with a maturity of less than sixty days are priced
at amortized cost.
In certain circumstances, the Fund may value its portfolio securities at fair
value as estimated in good faith under procedures established by the Fund's
board of managers. When the Fund uses fair value pricing, it may take into
account any factors it deems appropriate. The Fund may determine fair value
based upon developments related to a specific security, current valuations of
foreign stock indices (as reflected in U.S. futures markets) and/or U.S. sector
or broader stock market indices. The price of securities used by the Fund to
calculate the accumulation unit value may differ from quoted or published
prices for the same securities. Fair value pricing may involve subjective
judgments, and it is possible that the fair value determined for a security is
materially different than the value that could be realized upon the sale of
that security.
The Fund anticipates using fair value pricing for securities primarily traded
on U.S. exchanges only under very limited circumstances, such as the unexpected
early closing of the exchange on which a security is traded or suspension of
trading in the security. The Fund may use fair value pricing more frequently
for securities primarily traded in non-U.S. markets because, among other
things, most foreign markets close well before the Fund values its securities,
normally at 4:00 p.m. Eastern time. The earlier close of these foreign markets
gives rise to the possibility that significant events, including broad market
moves, may have occurred in the interim. To account for this, the Fund may
frequently value many foreign equity securities using fair value prices based
on third party vendor modeling tools to the extent available.
Valuation of Annuity Units. The value of an annuity unit for the period ending
March 1, 1967 was established at $1. We determine the value of the annuity unit
for any following valuation period by multiplying:
(a) the annuity unit value from the previous valuation period by;
(b) the net investment factor for the valuation period containing the 14th day
prior to the last day of the current valuation period by;
(c) a factor to neutralize the assumed investment rate (AIR) built into the
annuity table contained in the contract which is not applicable as actual net
investment income is credited instead.
The value of an annuity unit on any date on which the NYSE is closed is its
value on the next day on which the NYSE is open. We use the net investment
factor for the 14th day prior to the current valuation date in calculating the
value of an annuity unit in order to calculate amounts of annuity payments and
to mail checks in advance of their due dates. We normally issue and mail such
checks at least three days before the due date.
Transfers On or Before the Annuity Commencement Date
The contractowner may transfer all or any part of the contract value from the
Fund to the fixed side of the contract.
The contractowner may also transfer all or any part of the contract value from
the fixed side of the contract to the Fund subject to the following
restrictions:
(1) the sum of the percentages of fixed value transferred is limited to 25% of
the value of the fixed side in any 12-month period; and
(2) the minimum amount which can be transferred is $300 or the amount in the
fixed account.
Market Timing
Frequent, large, or short-term transfers between the Fund and the fixed side of
the contract, such as those associated with "market timing" transactions, can
affect the Fund and its investment returns. Such transfers may dilute the value
of the Fund units, interfere with the efficient management of the Fund's
portfolio, and increase brokerage and administrative costs of the Fund, and as
a result, we discourage and strive not to accommodate such trading activity. As
an effort to protect our contractowners and the Fund from potentially harmful
trading activity, we utilize certain market timing policies and procedures
which have been approved by the Lincoln Life Separate Account Compliance
Committee (the "Market Timing Procedures"). Our Market Timing Procedures are
designed to detect and prevent such transfer activity between the Fund and the
fixed side of the contract that may affect other contractowners or Fund
shareholders.
In addition, the Fund adopted its own policies and procedures with respect to
frequent purchases and redemptions of its respective shares. The Fund's
policies and procedures may be more or less restrictive than the Market Timing
Procedures we have adopted to discourage frequent transfers among the Fund and
the fixed side of the contract. While we reserve the right to enforce the
Fund's policies and procedures, contractowners and other persons with interests
under the contracts should be aware that we may not have the contractual
authority or the operational capacity to apply the frequent trading policies
and procedures of the Fund. However, under
11
SEC rules, we are required to: (1) enter into a written agreement with each
fund or its principal underwriter that obligates us to provide to the fund
promptly upon request certain information about the trading activity of
individual contractowners, and (2) execute instructions from the Fund to
restrict or prohibit further purchases or transfers by specific contractowners
who violate the excessive trading policies established by the Fund.
You should be aware that the purchase and redemption orders received by the
Fund generally are "omnibus" orders from intermediaries such as retirement
plans or separate accounts funding variable insurance contracts. The omnibus
orders reflect the aggregation and netting of multiple orders from individual
retirement plan participants and/or individual owners of variable insurance
contracts. The omnibus nature of these orders may limit the Fund's ability to
apply its restrictive disruptive trading policies and procedures. We cannot
guarantee that the Fund (and thus our contractowners) will not be harmed by
transfer activity relating to the retirement plans and/or other insurance
companies that may invest in the Fund. In addition, if the Fund believes that
an omnibus order we submit may reflect one or more transfer requests from
policy owners engaged in disruptive trading activity, the Fund may reject the
entire omnibus order.
Our Market Timing Procedures detect potential "market timers" by examining the
number of transfers made by contractowners within given periods of time. In
addition, the Fund will notify us if it believes or suspects that there is
market timing. Pursuant to the Fund's procedures, the Fund reviews periodic
trade reports for unusual activity that may be suggestive of market timing. The
Fund maintains guidelines for assessing unusual trading activity based upon a
variety of factors.
We may increase our monitoring of contractowners who we have previously
identified as market timers. When applying the parameters used to detect market
timers, we will consider multiple contracts owned by the same contractowner if
that contractowner has been identified as a market timer. For each
contractowner, we will investigate the transfer patterns that meet the
parameters being used to detect potential market timers. We will investigate
any patterns of trading behavior identified by the Fund that may not have been
captured by our Market Timing Procedures.
Once a contractowner has been identified as a "market timer" under our Market
Timing Procedures, we will notify the contractowner in writing that future
transfers (between the Fund and the fixed side of the contract) will be
temporarily permitted to be made only by original signature sent to us by U.S.
mail, standard delivery, for the remainder of the year. Overnight delivery
submitted during this period will not be accepted. If overnight delivery is
inadvertently accepted from a contractowner that has been identified as a
market timer, we will reverse the transaction within 1 to 2 business days. We
will impose this "original signature" restriction on that contractowner even if
we cannot identify, in the particular circumstances, any harmful effect from
that contractowner's particular transfers.
Contractowners seeking to engage in frequent, large, or short-term transfer
activity may deploy a variety of strategies to avoid detection. Our ability to
detect such transfer activity may be limited by operational systems and
technological limitations. The identification of contractowners determined to
be engaged in such transfer activity that may adversely affect other
contractowners or Fund shareholders involves judgments that are inherently
subjective. We cannot guarantee that our Market Timing Procedures will detect
every potential market timer. If we are unable to detect market timers, you may
experience dilution in the value of your Fund units and increased brokerage and
administrative costs in the Fund. This may result in lower long-term returns
for your investments.
Our Market Timing Procedures are applied consistently and uniformly to all
contractowners. An exception for any contractowner will be made only in the
event we are required to do so by a court of law. We may vary our Market Timing
Procedures among our other variable insurance products to account for
differences in various factors, such as operational systems and contract
provisions.
In our sole discretion, we may revise our Market Timing Procedures at any time
without prior notice as necessary to better detect and deter frequent, large,
or short-term transfer activity to comply with state or federal regulatory
requirements, and/or to impose additional or alternate restrictions on market
timers (such as dollar or percentage limits on transfers). We also reserve the
right to implement and administer redemption fees imposed by the Fund in the
future. If we modify our policy, it will be applied uniformly to all
contractowners or as applicable to all contractowners investing in the Fund.
The Fund has reserved the right to temporarily or permanently refuse payments
or transfer requests from us if, in the judgment of the Fund's investment
adviser, the Fund would be unable to invest effectively in accordance with its
investment objective or policies, or would otherwise potentially be adversely
affected. To the extent permitted by applicable law, we reserve the right to
defer or reject a transfer request at any time that we are unable to purchase
or redeem shares of the Fund available through the VAA, including any refusal
or restriction on purchases or redemptions of the Fund shares as a result of
the Fund's own policies and procedures on market timing. If the Fund refuses to
accept a transfer request we have already processed, we will reverse the
transaction within 1 or 2 business days. We will notify you in writing if we
have reversed, restricted or refused any of your transfer requests. The Fund
also may impose redemption fees on short-term trading (i.e., redemptions of
mutual fund shares within a certain number of business days after purchase). We
reserve the right to administer and collect any such redemption fees on behalf
of the Fund.
To the extent permitted by applicable law, we reserve the right to defer or
reject a transfer request at any time that we are unable to purchase or redeem
units of the Fund, including any refusal or restriction on purchases or
redemptions of Fund units as a result of the
12
Fund's own policies and procedures on market timing activities. If the Fund
refuses to accept a transfer request we have already processed, we will reverse
the transaction within 1 to 2 business days. We will notify you in writing if
we have reversed, restricted or refused any of your transfer requests.
Transfers After the Annuity Commencement Date
The contractowner may transfer all or a portion of the investment in the Fund
to the fixed side of the contract. Those transfers will be limited to three
times per contract year. Currently, there is no charge for these transers, but
we reserve the right to impose a charge. However, after the annuity
commencement date, no transfers are allowed from the fixed side of the contract
to the Fund.
Death Benefit Before the Annuity Commencement Date
If the contractowner (or a joint owner) or annuitant dies prior to the annuity
commencement date, a death benefit is payable.
You should consider the following provisions carefully when designating the
beneficiary, annuitant, and any joint owner, as well as before changing any of
these parties. The identity of these parties under the contract may
significantly affect the amount and timing of the death benefit paid upon a
contractowner's or annuitant's death.
The contractowner may designate a beneficiary during the life of the annuitant
and change the beneficiary by filing a written request with our home office.
Each change of the beneficiary revokes any previous designation. We reserve the
right to request that the contract for endorsement of a change of beneficiary
be sent to us.
Qualified Contracts. If the annuitant dies before the annuity commencement
date, we will pay the beneficiary a death benefit equal to the contract value,
or, if greater and you have elected it and the annuitant dies before age 65,
the minimum death benefit. The minimum death benefit is equal to the greater of
contract value or the sum of all purchase payments made on behalf of the
participant (minus any withdrawals, partial annuitizations, premium taxes
incurred, and rider premiums).
Nonqualified Contracts. Prior to the annuity commencement date, a death benefit
equal to the contract value will be paid upon the death of the contractowner or
annuitant.
If the participant or annuitant under a nonqualified contract dies before the
annuity commencement date, then, in compliance with the tax code, the
participant's death benefit will be paid as follows:
1. Upon the death of a nonannuitant participant, the death benefit shall be
paid to any surviving joint or contingent owner(s). If no joint or
contingent owner has been named, then the death benefit shall be paid to
the annuitant named in the contract; and
2. Upon the death of a participant, who is also the annuitant, the death will
be treated as death of the annuitant and the provisions of the contract
regarding death of annuitant will control, and the death benefit will be
paid to the beneficiary. If the beneficiary is the surviving spouse of the
participant, the surviving spouse may elect to continue the contract in his
or her name as the new participant, and the contract will continue as
though no death benefit had been payable.
General Information
The value of the death benefit will be determined as of the date on which the
death claim is approved for payment. This payment will occur upon receipt of:
(1) proof, satisfactory to us, of the death;
(2) written authorization for payment; and
(3) our receipt of all required claim forms, fully completed.
If the death benefit becomes payable upon the death of the annuitant, the
beneficiary may elect to receive payment either in the form of a lump sum
settlement or an annuity payout. Federal tax law requires that an annuity
election be made no later than 60 days after we receive satisfactory notice of
death as discussed previously. If an election has not been made by the end of
the 60 day period, a lump sum settlement will be made to the beneficiary at
that time.
If a lump sum settlement is requested, the proceeds will be mailed within seven
days of receipt of satisfactory claim documentation as discussed previously,
subject to the laws and regulations governing payment of death benefits. This
payment may be postponed as permitted by the 1940 Act.
Payment will be made in accordance with applicable laws and regulations
governing payment of death benefits. Notwithstanding any provision to the
contrary, the payment of death benefits provided under the contract must be
made in compliance with Code Section 72(s) or 401(a)(9) as applicable, as
amended from time to time.
The tax code requires that any distribution be paid within five years of the
death of the participant unless the beneficiary begins receiving, within one
year of the participant's death, the distribution in the form of a life annuity
or an annuity for a designated period not exceeding the beneficiary's life
expectancy.
13
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of the beneficiary:
1. If any beneficiary dies before the annuitant, that beneficiary's interest
will go to any other beneficiaries named, according to their respective
interests (There are no restrictions on the beneficiary's use of the
proceeds.); and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
participant's estate.
Joint Ownership
If a contract has joint owners, the joint owners shall be treated as having
equal undivided interests in the contract. Either owner, independently of the
other, may exercise any ownership rights in this contract. A contingent owner
may not exercise ownership rights in this contract while the contractowner is
living.
Surrenders and Withdrawals
Before the annuity commencement date, we will allow the surrender of the
contract or a withdrawal of a portion of the contract value upon your written
request, subject to the rules discussed below. Surrender or withdrawal rights
after the annuity commencement date depend on the annuity payout option
selected.
The amount available upon surrender/withdrawal is the contract value at the end
of the valuation period during which the written request for
surrender/withdrawal is received at the home office. If we receive a surrender
or withdrawal request at or after 4:00 p.m., New York time, we will process the
request using the accumulation unit value computed on the next valuation date.
Unless prohibited, surrender/withdrawal payments will be mailed within seven
days after we receive a valid written request at the home office. The payment
may be postponed as permitted by the 1940 Act.
The tax consequences of a surrender/withdrawal are discussed later in this
prospectus. See Federal Tax Matters.
Participants in the Texas Optional Retirement Program should refer to the
Restrictions Under the Texas Optional Retirement Program, later in this
prospectus.
We may terminate the contract if the frequency of purchase payments or the
contract value falls below the contractowner's state's minimum standards.
For contracts issued in connection with qualified plans, including H.R.-10
plans and tax-deferred annuity plans, participants should consult the terms of
the plan for limitations on early surrender or payment. See Federal Tax Matters
and the SAI.
For other contracts, if the contractowner stops making purchase payments for a
participant before the annuity commencement date, a participant has the
following options:
1. We may apply the participant's account value to provide annuity payments
under the selected annuity option. See Annuity Payouts - Annuity Options.
2. A participant may surrender all or any portion of the participant's account
value by submitting a written request for surrender and the certificate to
our home office. The participant will receive account value determined as
of the day of the surrender.
3. The participant may continue to participate in the Fund. When the annuity
commencement date arrives, the participant can annuitize. See Annuity
Payouts - Annuity Options. Before then, the participant can surrender
account value.
If the participant becomes an employee of another employer or a member of an
association which has a similar variable annuity contract in force with us, the
participant may transfer account value to the other contract.
A participant may also purchase an individual variable annuity contract we are
issuing at that time after making any required payments.
Delay of Payments
Contract proceeds from the Fund will be paid within seven days, except:
o when the NYSE is closed (other than weekends and holidays);
o times when market trading is restricted or the SEC declares an emergency,
and we cannot value units or the Fund cannot redeem shares; or
o when the SEC so orders to protect contractowners.
Payment of proceeds from the fixed account may be delayed for up to six months.
Due to federal laws designed to counter terrorism and prevent money laundering
by criminals, we may be required to reject a purchase payment and/or deny
payment of a request for transfers, withdrawals, surrenders, or death benefits,
until instructions are received from the appropriate regulator. We also may be
required to provide additional information about a contractowner's account to
government regulators.
14
Reinvestment Privilege
You may elect to make a reinvestment purchase with any part of the proceeds of
a surrender/withdrawal, and we will recredit that portion of the
surrender/withdrawal charges attributable to the amount returned.
This election must be made by your written authorization to us on an approved
Lincoln reinvestment form and received in our home office within 30 days of the
date of the surrender/withdrawal, and the repurchase must be of a contract
covered by this prospectus. In the case of a qualified retirement plan, a
representation must be made that the proceeds being used to make the purchase
have retained their tax-favored status under an arrangement for which the
contracts offered by this prospectus are designed. The number of accumulation
units which will be credited when the proceeds are reinvested will be based on
the value of the accumulation unit(s) on the next valuation date. (see More
information about the Fund-Valuing the Fund's assets). This computation will
occur following receipt of the proceeds and request for reinvestment at the
home office. You may utilize the reinvestment privilege only once. For tax
reporting purposes, we will treat a surrender/withdrawal and a subsequent
reinvestment purchase as separate transactions (and a Form 1099 may be issued,
if applicable). You should consult a tax adviser before you request a
surrender/withdrawal or subsequent reinvestment purchase.
Amendment of Contract
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be
notified in writing of any changes, modifications or waivers. Any changes are
subject to prior approval of your state's insurance department (if required).
Otherwise, we cannot modify the contract without contractowner approval until
the contract has been in force for at least three years. We also cannot modify
the contract as it applies to retired participants unless we get their written
consent.
Ownership
The owner on the date of issue will be the person or entity designated in the
contract specifications. If no owner is designated, the annuitant(s) will be
the owner. The owner may name a joint owner.
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the Fund are held for the exclusive benefit of all
contractowners, participants and their designated beneficiaries; and the assets
of the Fund are not chargeable with liabilities arising from any other business
that we may conduct. Qualified contracts may not be assigned or transferred
except as permitted by applicable law and upon written notification to us.
Non-qualified contracts may not be collaterally assigned. We assume no
responsibility for the validity or effect of any assignment. Consult your tax
adviser about the tax consequences of an assignment.
Contractowner Questions
The obligations to purchasers under the contracts are those of Lincoln Life.
Contracts, endorsements and riders may vary as required by state law. This
prospectus provides a general description of the contract. Questions about your
contract should be directed to us at 1-800-454-6265.
Annuity Payouts
When you applied for a contract, you could select any annuity commencement date
permitted by law. (Please note the following exception: Contracts issued under
qualified employee pension and profit-sharing trusts [described in Section
401(a) and tax exempt under Section 501(a) of the tax code] and qualified
annuity plans [described in Section 403(a) of the tax code], including H.R. 10
trusts and plans covering self-employed individuals and their employees,
provide for annuity payouts to start at the date and under the option specified
in the plan.)
The contract provides optional forms of payouts of annuities (annuity options),
each of which is payable on a variable basis, a fixed basis or a combination of
both as you specify. The contract provides that all or part of the contract
value may be used to purchase an annuity payout option.
You may elect annuity payouts in monthly, quarterly, semiannual or annual
installments. If the payouts would be or become less than $50, we have the
right to reduce their frequency until the payouts are at least $50 each. The
amount of each annuity payout will depend upon the frequency of payout you
select. For example, if you select frequent payments (e.g., monthly), the
amount of each payout will be lower than if you choose a less frequent payout
(e.g., annual installments). Also, the amount of each annuity payout will
depend upon the duration of payout you select. For example, if you choose the
Life Annuity option, the amount of each payout likely will be higher than if
you choose the Joint Life Annuity since the Life Annuity assumes a shorter
period of time than the Joint Life Annuity. Following are explanations of the
annuity options available.
15
Annuity Options
Payouts Guaranteed for Designated Period. This option guarantees periodic
payouts during a guaranteed period, usually 10 or 20 years. However, under
contracts issued in connection with Section 403(b) plans, this option is not
available if the sum of the number of years over which monthly payouts would be
made and the age of the annuitant on the first scheduled payment date is
greater than 95.
Life Annuity with Payouts Guaranteed for Designated Period. This option
guarantees periodic payouts during a designated period, usually 10, 15 or 20
years, and then continues throughout the lifetime of the annuitant. The
designated period is selected by the participant.
Unit Refund Life Annuity. This option offers a periodic payout during the
lifetime of the annuitant with the guarantee that upon death a payout will be
made of the value of the number of annuity units (see Variable Annuity Payouts)
equal to the excess, if any, of:
o the total amount applied under this option divided by the annuity unit value
for the date payouts begin, divided by
o the annuity units represented by each payout to the annuitant multiplied by
the number of payouts paid before death.
The value of the number of annuity units is computed on the date the death
claim is approved for payment by the home office. (Not available as a fixed
payout.)
Payouts Guaranteed for Designated Amount. This option offers equal annual,
semi-annual, quarterly or monthly payouts of a designated amount (not less than
$50 per year per $1,000 of original proceeds left with us) until the proceeds
are exhausted. The minimum amount withdrawable under this option is not
necessarily the recommended amount. This option is not available under
contracts issues in connection with Section 403(b) plans. (Not available as a
fixed payout.)
Annuity Settlement. This option offers payouts in the form provided by any
single payment immediate annuity contract issued by us on the date the proceeds
become payable. However, the amount of the first payment shall be 103% of the
first payment which such proceeds would otherwise provide under such annuity
contract on the basis of the Company's rates in effect on such date. In
calculating the first payment under the single payment immediate annuity
contract selected under this option, we assume that a deduction for sales and
administrative expenses has been made from the amount applied.
Life Annuity. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a death benefit for beneficiaries.
However, there is the risk under this option that the recipient would receive
no payouts if the annuitant dies before the date set for the first payout; only
one payout if death occurs before the second scheduled payout, and so on.
Joint Life Annuity. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts
continue during the lifetime of the survivor.
Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic
payout during the joint lifetime of the annuitant and a designated joint
annuitant. When one of the joint annuitants dies, the survivor receives two
thirds of the periodic payout made when both were alive.
If any payee dies after an annuity payout becomes operative, then we will pay
the following to the payee's estate (unless otherwise specified in the election
option):
o the present value of unpaid payments under the payouts guaranteed for
designated period or life annuity with payouts guaranteed for designated
period;
o the amount payable at the death of the payee under the unit refund life
annuity; or
o the proceeds remaining with Lincoln Life under the payouts guaranteed for
designated amount or interest income, if available.
If the annuity settlement has been selected and becomes operative, when the
last payee dies, we will pay the remainder of the contract in a single sum to
the last payee's estate (unless otherwise specified in the election option).
Present values will be based on the Assumed Investment Rate [See Assumed
Investment Rate (AIR)] used in determining annuity payments. The mortality and
expense risk charge and the charge for administrative services will be assessed
on all annuity options, including those that do not have a life contingency and
thus no mortality risks.
General Information
None of the options listed above currently provides withdrawal features,
permitting the contractowner to withdraw commuted values as a lump sum payment.
Other options, with or without withdrawal features, may be made available by
us. Options are only available to the extent they are consistent with the
requirements of the contract as well as Sections 72(s) and 401 (a)(9) of the
tax code, if applicable.
The annuity commencement date must be at least one year from the effective date
of the contract but before the annuitant's 85th birthday. You may change the
annuity commencement date up to 30 days before the scheduled annuity
commencement date, upon
16
written notice to the home office. You must give us at least 30 days notice
before the date on which you want payouts to begin. If proceeds become
available to a beneficiary in a lump sum, the beneficiary may choose any
annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable
or combination fixed and variable basis, in proportion to the account
allocations at the time of annuitization) except when a joint life payout is
required by law. Under any option providing for guaranteed period payouts, the
number of payouts which remain unpaid at the date of the annuitant's death (or
surviving annuitant's death in case of joint life annuity) will be paid to the
beneficiary as payouts become due after we are in receipt of:
o proof, satisfactory to us, of the death;
o written authorization for payment; and
o all claim forms, fully completed.
Once you begin to receive annuity payouts, you cannot change the payout option,
payout amount, or payout period. You may transfer from the Fund to the fixed
side of the contract three times per contract year, but you may not transfer
from the fixed side of the contract to the Fund after the annuity commencement
date.
Assumed Investment Rate (AIR)
The contractowner may elect an AIR of 3.5%, 4.5%, 5% or 6%, as state law or
regulations permit. These AIRs are used to determine the required level of
employer contributions in connection with certain pension plans. They do not
reflect how the value of the Fund's investments has grown or will grow.
The contractowner's choice of AIR affects the pattern of annuity payments. A
higher AIR will produce a higher initial payment but a more slowly rising
series of subsequent payments (or a more rapidly falling series of subsequent
payments) than a lower AIR.
The following table shows the annuity unit values at each year end for the
different AIRs:
Assumed Investment Rate
December
Annuity UnitValues 31
-------------------- ------------------------------
3.5% 4.5% 5% 6%
------- ------- ------- ------
1998 ............. 6.353 4.699 4.045 3.004
1999 ............. 7.167 5.250 4.500 3.309
2000 ............. 6.144 4.458 3.801 2.770
2001 ............. 5.221 3.751 3.184 2.298
2002 ............. 3.808 2.710 2.289 1.637
2003 ............. 4.730 3.334 2.803 1.985
2004 ............. 5.057 3.531 2.954 2.072
2005 ............. 5.108 3.532 2.941 2.044
2006 ............. 5.483 3.755 3.111 2.142
2007 ............. 5.572 3.779 3.117 2.125
Variable Annuity Payouts
Variable annuity payouts will be determined using:
o The contract value on the annuity commencement date, less applicable premium
taxes;
o The annuity tables contained in the contract;
o The annuity option selected; and
o The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
We may use sex distinct tables in contracts that are not associated with
employer sponsored plans.
When calculating the first payment under a single payment immediate annuity
contract, assume that a deduction for sales and administrative expenses (which
currently amounts to 2% plus $115 for single payment variable annuity
contracts) has been made from the amount applied under this provision.
Immediate Annuity Contracts. For immediate annuities, the number of annuity
units purchased is specified in the contract. We determine the number of
annuity units by:
17
(a) multiplying the net single payment (after deductions) by the applicable
annuity factor from the annuity table that we are then using for immediate
variable annuity contracts, and then
(b) dividing by the value of the annuity unit based on the net investment
factor calculated on the valuation date of the day or the day after the
contract was issued.
This number of annuity units does not change during the annuity period, and we
determine the dollar amount of the annuity payment by multiplying the number of
annuity units by the then value of an annuity unit.
More Information About The Fund
Restrictions
The investments of the Fund are subject to the provisions of the Indiana
Insurance Law concerning earnings records, preferred stock overage,
self-dealing, real estate holdings and concentration.
Loans will not be made, but the purchase of a portion of an issue of bonds,
debentures or other securities publicly distributed or privately placed with
financial institutions shall not be considered the making of a loan.
The Fund will not:
1. Invest more than 5% of the value of the Fund's assets in securities of any
one issuer, except obligations of the United States Government and
instrumentalities thereof.
2. Acquire more than 10% of the voting securities of any one issuer.
3. Borrow money except for temporary or emergency purposes in an amount up to
5% of the value of the assets.
4. Underwrite securities of other issuers.
5. Purchase or sell real estate as a principal activity. However, the right is
reserved to invest up to 10% of the value of the assets of the Fund in real
properties.
6. Purchase commodities or commodity contracts.
7. Make short sales of securities.
8. Make purchases on margin, except for such short-term credits as are
necessary for the clearance of transactions.
9. Invest in the securities of a company for the purpose of exercising
management or control.
10. Place emphasis upon obtaining short-term trading profits, but it may engage
in short-term transactions in the event that a change in economic
conditions or a rapid appreciation or depreciation of stock prices occurs.
(See the Fund's portfolio turnover rates set forth in Condensed Financial
Information for the Fund.) The securities markets in general have
experienced volatility due to rapidly shifting economic trends. This
volatility can affect turnover.
11. Plan to make investments in securities of other investment companies.
However, the right is reserved to make such investments up to a maximum of
10% of the value of the assets of the Fund, provided that not more than 3%
of the total outstanding voting stock of any one investment company may be
held.
Custodian
All securities, cash and other similar assets of the Fund are currently held in
custody by Mellon Bank, N.A., One Mellon Center, Pittsburgh, Pennsylvania
15258.
The custodian shall:
o receive and disburse money;
o receive and hold securities;
o transfer, exchange, or deliver securities;
o present for payment coupons and other income items, collect interest and
cash dividends received, hold stock dividends, etc.;
o cause escrow and deposit receipts to be executed;
o register securities; and
o deliver to the Fund proxies, proxy statements, etc.
Lincoln Life performs the dividend and transfer agent functions for the Fund.
18
Federal Tax Matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes
uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income tax
rules that may affect you and your contract. This discussion also does not
address other Federal tax consequences (including consequences of sales to
foreign individuals or entities), or state or local tax consequences,
associated with the contract. As a result, you should always consult a tax
adviser about the application of tax rules to your individual situation.
Qualified Retirement Plans
We designed the contracts for use in connection with certain types of
retirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called
"qualified contracts." We issue contracts for use with various types of
qualified plans. The Federal income tax rules applicable to those plans are
complex and varied. As a result, this prospectus does not attempt to provide
more than general information about the use of the contract with the various
types of qualified plans. Persons planning to use the contract in connection
with a qualified plan should obtain advice from a competent tax adviser.
Types of Qualified Contracts and Terms of Contracts
Qualified plans include the following:
o Individual Retirement Accounts and Annuities ("Traditional IRAs")
o Roth IRAs
o Traditional IRA that is part of a Simplified Employee Pension Plan ("SEP")
o SIMPLE 401(k) plans (Savings Incentive Matched Plan for Employees)
o 401(a) plans (qualified corporate employee pension and profit-sharing plans)
o 403(a) plans (qualified annuity plans)
o 403(b) plans (public school system and tax-exempt organization annuity
plans)
o H.R. 10 or Keogh Plans (self-employed individual plans)
o 457(b) plans (deferred compensation plans for state and local governments
and tax-exempt organizations)
o Roth 403(b) plans
We may issue a contract for use with other types of qualified plans in the
future. We do not offer certain types of qualified plans for all of our annuity
products. Check with your representative concerning qualified plan availability
for this product.
We will amend contracts to be used with a qualified plan as generally necessary
to conform to the tax law requirements for the type of plan. However, the
rights of a person to any qualified plan benefits may be subject to the plan's
terms and conditions. In addition, we are not bound by the terms and conditions
of qualified plans to the extent such terms and conditions contradict the
contract, unless we consent.
Tax Deferral on Earnings
The Federal income tax law generally does not tax any increase in your contract
value until you receive a contract distribution. However, for this general rule
to apply, certain requirements must be satisfied:
o An individual must own the contract (or the tax law must treat the contract
as owned by an individual).
o The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
o Your right to choose particular investments for a contract must be limited.
o The annuity commencement date must not occur near the end of the annuitant's
life expectancy.
Investments in the VAA Must Be Diversified
For a contract to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." IRS regulations define
standards for determining whether the investments of the VAA are adequately
diversified. If the VAA fails to comply with these diversification standards,
you could be required to pay tax currently on the excess of the contract value
over the contract purchase payments. Although we do not control the investments
of the underlying investment options, we expect that the underlying investment
options will comply with the IRS regulations so that the VAA will be considered
"adequately diversified."
Restrictions
Federal income tax law limits your right to choose particular investments for
the contract. Because the IRS has not issued guidance specifying those limits,
the limits are uncertain and your right to allocate contract values among the
subaccounts may exceed those limits. If so, you would be treated as the owner
of the assets of the VAA and thus subject to current taxation on the income,
bonus
19
credits, persistency credits and gains, if applicable, from those assets. We do
not know what limits may be set by the IRS in any guidance that it may issue
and whether any such limits will apply to existing contracts. We reserve the
right to modify the contract without your consent to try to prevent the tax law
from considering you as the owner of the assets of the VAA.
Tax Treatment of Qualified Contracts
The Federal income tax rules applicable to qualified plans and qualified
contracts vary with the type of plan and contract. For example,
o Federal tax rules limit the amount of purchase payments that can be made,
and the tax deduction or exclusion that may be allowed for the purchase
payments. These limits vary depending on the type of qualified plan and the
plan participant's specific circumstances, e.g., the participant's
compensation.
o Under most qualified plans, such as a traditional IRA, the owner must begin
receiving payments from the contract in certain minimum amounts by a
certain age, typically age 701/2. Other qualified plans may allow the
participant to take required distributions upon the later of reaching age
701/2 or retirement.
Tax Treatment of Payments
The Federal income tax rules generally include distributions from a qualified
contract in the participant's income as ordinary income. These taxable
distributions will include purchase payments that were deductible or excludible
from income. Thus, under many qualified contracts, the total amount received is
included in income since a deduction or exclusion from income was taken for
purchase payments. There are exceptions. For example, you do not include
amounts received from a Roth IRA in income if certain conditions are satisfied.
Required Minimum Distributions
Under most qualified plans, you must begin receiving payments from the contract
in certain minimum amounts by the later of age 701/2 or retirement. You are
required to take distributions from your traditional IRAs beginning in the year
you reach age 701/2. If you own a Roth IRA, you are not required to receive
minimum distributions from your Roth IRA during your life.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax equals 50% of the amount by which a minimum
required distribution exceeds the actual distribution from the qualified plan.
The IRS has issued new regulations concerning required minimum distributions.
The regulations may impact the distribution method you have chosen and the
amount of your distributions. Under new regulations, the presence of an
enhanced death benefit, Lincoln SmartSecurity (Reg. TM) Advantage, or other
benefit, if any, may require you to take additional distributions. An enhanced
death benefit is any death benefit that has the potential to pay more than the
contract value or a return of purchase payments. Please contact your tax
adviser regarding any tax ramifications.
Federal Penalty Taxes Payable on Distributions
The tax code may impose a 10% penalty tax on a distribution from a qualified
contract that must be included in income. The tax code does not impose the
penalty tax if one of several exceptions applies. The exceptions vary depending
on the type of qualified contract you purchase. For example, in the case of an
IRA, exceptions provide that the penalty tax does not apply to a withdrawal,
surrender, or annuity payout:
o received on or after the annuitant reaches 591/2,
o received on or after the annuitant's death or because of the annuitant's
disability (as defined in the tax law),
o received as a series of substantially equal periodic payments based on the
annuitant's life (or life expectancy), or
o received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally apply
to taxable distributions from other qualified plans. However, the specific
requirements of the exception may vary.
Taxation of Death Benefits
We may distribute amounts from your contract because of your death. Federal tax
rules may limit the payment options available to your beneficiaries. If your
spouse is your beneficiary, your surviving spouse will generally receive
special treatment and will have more available payment options. Non-spouse
beneficiaries do not receive the same special treatment. Payment options may be
further limited depending upon whether you reached the date upon which you were
required to begin minimum distributions. The Pension Protection Act of 2006
("PPA") permits non-spouse beneficiary rollovers to an "inherited IRA"
(effective January 1, 2007).
Transfers and Direct Rollovers
As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA"), you may be able to move funds between different types of qualified
plans, such as 403(b) and 457(b) governmental plans, by means of a rollover or
transfer. You may be able
20
to rollover or transfer amounts between qualified plans and traditional IRAs.
These rules do not apply to Roth IRAs and 457(b) non-governmental tax-exempt
plans. There are special rules that apply to rollovers, direct rollovers and
transfers (including rollovers or transfers or after-tax amounts). If the
applicable rules are not followed, you may incur adverse Federal income tax
consequences, including paying taxes which you might not otherwise have had to
pay. Before we send a rollover distribution, we will provide a notice
explaining tax withholding requirements (see Federal Income Tax Withholding).
We are not required to send you such notice for your IRA. You should always
consult your tax adviser before you move or attempt to move any funds. The PPA
permits direct conversions from certain qualified, 403(b) or 457(b) plans to
Roth IRAs (effective for distribution after 2007).
Federal Income Tax Withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless you notify us prior to the
distribution that tax is not to be withheld. In certain circumstances, Federal
income tax rules may require us to withhold tax. At the time a withdrawal,
surrender, or annuity payout is requested, we will give you an explanation of
the withholding requirements.
Certain payments from your contract may be considered eligible rollover
distributions (even if such payments are not being rolled over). Such
distributions may be subject to special tax withholding requirements. The
Federal income tax withholding rules require that we withhold 20% of the
eligible rollover distribution from the payment amount, unless you elect to
have the amount directly transferred to certain qualified plans or contracts.
The IRS requires that tax be withheld, even if you have requested otherwise.
Such tax withholding requirements are generally applicable to 401(a), 403(a) or
(b), HR 10, and 457(b) governmental plans and contracts used in connection with
these types of plans.
Nonqualified Annuity Contracts
A nonqualified annuity is a contract not issued in connection with a qualified
retirement plan receiving special tax treatment under the tax code, such as an
IRA or 403(b) plan. These contracts are not intended for use with nonqualified
annuity contracts. Different federal tax rules apply to nonqualified annuity
contracts. Persons planning to use the contract in connection with a
nonqualified annuity should obtain advice from a tax advisor.
Our Tax Status
Under existing Federal income tax laws, we do not pay tax on investment income
and realized capital gains of the VAA. We do not expect that we will incur any
Federal income tax liability on the income and gains earned by the VAA.
However, the Company does expect, to the extent permitted under Federal tax
law, to claim the benefit of the foreign tax credit as the owner of the assets
of the VAA. Therefore, we do not impose a charge for Federal income taxes. If
Federal income tax law changes and we must pay tax on some or all of the income
and gains earned by the VAA, we may impose a charge against the VAA to pay the
taxes.
Changes in the Law
The above discussion is based on the tax code, IRS regulations, and
interpretations existing on the date of this prospectus. However, Congress, the
IRS, and the courts may modify these authorities, sometimes retroactively.
Voting Rights
Contractowners cast votes on behalf of participants. The voting will be done
according to the instructions of the participants who have interests in the
Fund. The number of votes the contractowners have the right to cast will be
determined as follows:
o for participants in the accumulation period, the number of votes equals the
number of accumulation units;
o for annuitants receiving annuity payments, the number of votes equals:
(a) the amount of assets in the Fund established to meet the annuity
obligations related to such annuitants divided by
(b) the value of an accumulation unit.
Fractional shares will be recognized in determining the number of votes.
During the annuity period, every participant has the right to give instructions
regarding all votes attributable to the assets established in the Fund to meet
the annuity obligations related to that participant. If a contractowner
receives no instructions from the relevant participant, or if there is no
participant entitled to give voting instructions, the contractowner may cast
the votes in his or her sole discretion.
Whenever a meeting of the Fund is called, each contractowner and each
participant having a voting interest in the Fund will receive proxy material,
reports, and other materials.
Distribution of the Contracts
Lincoln Financial Distributors ("LFD") serves as Principal Underwriter of this
contract. LFD is affiliated with Lincoln Life and is registered as a
broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a
member of FINRA. The Principal Underwriter
21
has entered into selling agreements with Lincoln Financial Advisors ("LFA"),
also an affiliate of ours. The Principal Underwriter has also entered into
selling agreements with broker-dealers that are unaffiliated with us. While the
Principal Underwriter has the legal authority to make payments to
broker-dealers which have entered into selling agreements, we will make such
payments on behalf of the Principal Underwriter in compliance with appropriate
regulations. We also pay on behalf of LFD certain of its operating expenses
related to the distribution of this and other of our contracts. The following
paragraphs describe how payments are made by us and The Principal Underwriter
to various parties,
Compensation Paid to LFA. The maximum commission the Principal Underwriter pays
to LFA is 5.10% of purchase payments, plus up to 0.25% quarterly based on
contract value. LFA may elect to receive a lower commission when a purchase
payment is made along with an earlier quarterly payment based on contract value
for so long as the contract remains in effect. Upon annuitization, the maximum
commission the Principal Underwriter pays to LFA is 5.10% of annuitized
value/or ongoing annual compensation of up to 1.00 of annuity value or
statutory reserves.
Lincoln Life also pays for the operating and other expenses of LFA, including
the following sales expenses: sales representative training allowances;
compensation and bonuses for LFA's management team; advertising expenses; and
all other expenses of distributing the contracts. LFA pays its sales
representatives a portion of the commissions received for their sales of
contracts. LFA sales representatives and their managers are also eligible for
various cash benefits, such as bonuses, insurance benefits and financing
arrangements, and non-cash compensation items that we may provide jointly with
LFA. Non-cash compensation items may include conferences, seminars, trips,
entertainment, merchandise and other similar items. In addition, LFA sales
representatives who meet certain productivity, persistency and length of
service standards and/or their managers may be eligible for additional
compensation. Sales of the contracts may help LFA sales representatives and/or
their managers qualify for such benefits. LFA sales representatives and their
managers may receive other payments from us for services that do not directly
involve the sale of the contracts, including payments made for the recruitment
and training of personnel, production of promotional literature and similar
services.
Compensation Paid to Unaffiliated Selling Firms. The Principal Underwriter pays
commissions to all Selling Firms. The maximum commission the Principal
Underwriters pays to Selling Firms, other than LFA, is 2.50% of purchase
payments, plus up to 0.30% quarterly based on contract value. Some Selling
Firms may elect to receive a lower commission when a purchase payment is made
along with an earlier quarterly payment based on contract value for so long as
the contract remains in effect. Upon annuitization, the maximum commission the
Principal Underwriter pays to Selling Firms is 4.00% of annuitized value and/or
ongoing annual compensation of up to 1.15% of annuity value or statutory
reserves. LFD also acts as wholesaler of the contracts and performs certain
marketing and other functions in support of the distribution and servicing of
the contracts.
LFD may pay certain Selling Firms or their affiliates additional amounts for:
(1) "preferred product" treatment of the contracts in their marketing programs,
which may include marketing services and increased access to sales
representatives; (2) sales promotions relating to the contracts; (3) costs
associated with sales conferences and educational seminars for their sales
representatives; (4) other sales expenses incurred by them; and (5) inclusion
in the financial products the Selling Firm offers.
Lincoln Life may provide loans to broker-dealers or their affiliates to help
finance marketing and distribution of the contracts, and those loans may be
forgiven if aggregate sales goals are met. In addition, we may provide staffing
or other administrative support and services to broker-dealers who distribute
the contracts. LFD, as wholesaler, may make bonus payments to certain Selling
Firms based on aggregate sales of our variable insurance contracts (including
the contracts) or persistency standards. These additional payments are not
offered to all Selling Firms, and the terms of any particular agreement
governing the payments may vary among Selling Firms.
These additional types of compensation are not offered to all Selling Firms.
The terms of any particular agreement governing compensation may vary among
Selling Firms and the amounts may be significant. The prospect of receiving, or
the receipt of, additional compensation may provide Selling Firms and/or their
registered representatives with an incentive to favor sales of the contracts
over other variable annuity contracts (or other investments) with respect to
which a Selling Firm does not receive additional compensation, or lower levels
of additional compensation. You may wish to take such payment arrangements into
account when considering and evaluating any recommendation relating to the
contracts. Additional information relating to compensation paid in 2007 is
contained in the Statement of Additional Information (SAI).
Compensation Paid to Other Parties. Depending on the particular selling
arrangements, there may be others whom LFD compensates for the distribution
activities. For example, LFD may compensate certain "wholesalers", who control
access to certain selling offices, for access to those offices or for
referrals, and that compensation may be separate from the compensation paid for
sales of the contracts. LFD may compensate marketing organizations,
associations, brokers or consultants which provide marketing assistance and
other services to broker-dealers who distribute the contracts, and which may be
affiliated with those broker-dealers. Commissions and other incentives or
payments described above are not charged directly to contract owners or the
Fund. All compensation is paid from our resources, which include fees and
charges imposed on your contract.
State Regulation
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance. Our books and accounts are subject to review and
examination by the Indiana Department of Insurance at all times. A full
examination of our operations is conducted by that Department at least every
five years.
22
Restrictions Under the Texas Optional Retirement Program
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a variable annuity contract issued under the ORP only upon:
o Termination of employment in all institutions of higher education as defined
in Texas law;
o Retirement; or
o Death.
Accordingly, a participant in the ORP will be required to obtain a certificate
of termination from their employer before accounts can be redeemed.
Records and Reports
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the Fund.
Certain records and accounts of the Fund may also be maintained by the Fund's
subadviser and custodian. Also, accounts, books, and other documents are
maintained by Mellon Bank, N.A. (the Fund's accounting services provider), 135
Santilli Highway, Everett, Massachusetts 02149-1950; and Delaware Services
Company, Inc. (The Fund's fund accounting and financial administration
oversight provider), One commerce Square, 2005 Market Street, Philadelphia,
Pennsylvania 19103.
Other Information
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further
information about the Fund, Lincoln Life and the contracts offered. Statements
in this prospectus about the content of contracts and other legal instruments
are summaries. For the complete text of those contracts and instruments, please
refer to those documents as filed with the SEC.
For an SAI, annual or semi-annual report, either write The Lincoln National
Life Insurance Company, P.O. Box 2340, Fort Wayne, Indiana 46801, or call
1-800-4LINCOLN (454-6265). Also call this number to request other information
about the Fund, or to make inquiries. The Fund does not maintain an internet
website.
Legal Proceedings
In the ordinary course of its business, Lincoln Life, the VAA, and the
principal underwriter may become or are involved in various pending or
threatened legal proceedings, including purported class actions, arising from
the conduct of business. In some instances, these proceedings include claims
for unspecified or substantial punitive damages and similar types of relief in
addition to amounts for alleged contractual liability or requests for equitable
relief. After consultation with legal counsel and a review of available facts,
it is management's opinion that these proceedings, after consideration of any
reserves and rights to indemnification, ultimately will be resolved without
materially affecting the consolidated financial position of Lincoln Life, the
VAA, or the principal underwriter. However, given the large and indeterminate
amounts sought in certain of these proceedings and the inherent difficulty in
predicting the outcome of such legal proceedings, it is possible that an
adverse outcome in certain matters could be material to our operating results
for any particular reporting period.
23
Statement of Additional Information
Table of Contents for Lincoln National Variable Annuity Fund A
Item Page
Special terms B-2
Investment Objectives and Policies of the Fund B-2
Managers and Officers B-2
Proxy Voting Policies and Procedures B-6
Investment Advisory and Related Services B-6
Portfolio Managers B-6
Portfolio Transactions and Brokerage B-6
Purchase and Pricing of Securities Being
Offered B-7
Other Services B-8
Principal Underwriter B-9
Determination of Accumulation Unit Value B-9
Financial Statements B-9
Appendix A B-10
Appendix B B-11
For a free copy of the SAI complete the form below.
Statement of Additional Information Request Card
Lincoln National Variable Annuity Fund A (Individual or Group)
Please send me a free copy of the current Statement of Additional Information
for Lincoln National Variable Annuity Fund A (Individual or Group).
(Please Print)
Name: -------------------------------------------------------------------------
Address: ----------------------------------------------------------------------
City --------------------------------------------------- State ---------
Zip ---------
Mail to: The Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne,
Indiana 46801
24
(This page intentionally left blank)
25
Lincoln National Variable Annuity Fund A (Individual)
(Registrant)
The Lincoln National Life Insurance Company
(Insurance Company)
Statement of Additional Information (SAI)
This SAI should be read in conjunction with the prospectus of Lincoln National
Variable Annuity Fund A (Individual) dated April 30, 2008. You may obtain a
copy of the Fund A (Individual) prospectus on request and without charge.
Please write Annuities Customer Service, The Lincoln National Life Insurance
Company, PO Box 2340, Fort Wayne, IN 46801-2340, or call 1-800-454-6265.
Table of Contents
Item Page
Special Terms B-2
Investment Objectives and Policies of the Fund B-2
Managers and Officers B-2
Proxy Voting Policies and Procedures B-6
Investment Advisory and Related Services B-6
Portfolio Managers B-6
Portfolio Transactions and Brokerage B-6
Purchase and Pricing of Securities Being
Offered B-7
Item Page
Other Services B-8
Principal Underwriter B-9
Determination of Accumulation Unit Value B-9
Financial Statements B-9
Appendix A B-10
Appendix B B-11
This SAI is not a prospectus.
The date of this SAI is April 30, 2008.
Special Terms
The special terms used in this SAI are the ones defined in the Prospectus.
Investment Objectives and Policies of the Fund
Portfolio Holdings Disclosure
The fund's board of managers has adopted policies and procedures designed to
ensure that disclosure of information regarding the fund's portfolio securities
is in the best interests of fund shareholders. In accordance with these
policies and procedures, a Fund vice president or the vice president's
designees will make shareholder reports containing the fund's portfolio
holdings available free of charge to individual investors, institutional
investors, intermediaries that distribute the fund's shares, and affiliated
persons of the fund that make requests for such holdings information.
Shareholder reports are available 60 days after the end of each semi-annual
reporting period.
A fund vice president or the vice president's designees may provide the fund's
top-ten holdings immediately after each quarter-end to Lincoln Life and other
insurance companies who include the fund in their products ("Insurance
Companies"). All Insurance Companies must sign a confidentiality agreement
acknowledging that any nonpublic portfolio information will be kept strictly
confidential and that the nonpublic portfolio information is proprietary
information of the fund. The Insurance Company may include this information in
marketing and other public materials (including via website posting) 15 days
after the end of the quarter.
A vice president of the fund or the vice president's designees may provide
other portfolio information 30 days following the end of each quarter to the
Insurance Companies. All Insurance Companies must sign confidentiality
agreements acknowledging that any non-public portfolio information will be kept
strictly confidential and that the non-public information is proprietary
information to the fund. The Insurance Companies will distribute shareholder
reports (annual and semi-annual) containing the portfolio holdings of the fund
to contract owners in accordance with applicable laws and regulations. The
Insurance Companies may make the portfolio information publicly available
(including via website posting) 45 days after the end of the quarter.
A fund vice president or the vice president's designees may also provide
portfolio holdings information 30 days following the end of the quarterly
reporting period under a confidentiality agreement to third-party service
providers, including but are not limited to independent rating and ranking
organizations, which conduct market analyses of the fund's portfolio holdings
against benchmarks or securities market indices. All such third parties must
sign a confidentiality agreement acknowledging that the nonpublic information
will be kept strictly confidential and that the nonpublic portfolio information
is proprietary information of the fund. These parties may disseminate the
portfolio holdings information 60 days following the end of the quarter, which
is after SEC filings are made. Currently, the fund has no such arrangements
with any third party.
A fund vice president or the vice president's designees may provide, at any
time, portfolio holdings information to: (a) fund service providers and
affiliates, such as the fund's investment adviser, sub-advisers, custodian and
auditor, to the extent necessary to perform services for the fund; and (b)
state and federal regulators and government agencies as required by law or
judicial process. These entities are subject to duties of confidentiality
imposed by law, contract, or fiduciary obligations.
The fund will disclose its portfolio holdings in public SEC filings. The fund's
board of managers also may, on a case-by-case basis, authorize disclosure of
the fund's portfolio holdings, provided that, in its judgment, such disclosure
is not inconsistent with the best interests of shareholders, or may impose
additional restrictions on the dissemination of portfolio information.
Neither the funds, its investment adviser nor any affiliate receive any
compensation or consideration in connection with the disclosure of the fund's
portfolio holdings information.
Fund management is responsible for ensuring appropriate disclosure is made
regarding these procedures in the fund's prospectus and/or SAI.
The fund's board of managers exercises oversight of these policies and
procedures. In this regard, fund management will inform the managers if any
substantial changes to the procedures become necessary to ensure that the
procedures are in the best interest of fund shareholders. The officers will
consider any possible conflicts between the interest of fund shareholders, on
the one hand, and those of the fund's investment adviser and other fund
affiliates, on the other. Moreover, the fund's Chief Compliance Officer will
address the operation of the fund's procedures in the annual compliance report
to the board and will recommend any remedial changes to the procedures.
Managers and Officers
The board of managers oversees the management of the Fund and elects its
officers. The members of the board of managers (the "managers") have the power
to amend the bylaws of the Fund, and to exercise all the powers of the Fund
except those granted to the contractowners. The managers hold their position
until their successors are elected and qualify. The Fund's officers are
re-elected
B-2
annually and are responsible for the day-to-day operations of the Fund.
Information pertaining to the managers and executive officers of the Fund is
set forth below. Managers that are deemed "interested persons," as defined in
the Investment Company Act of 1940, are included in the table titled,
"Interested Managers." Managers who are not interested persons are referred to
as Independent Managers.
As used herein, the terms "Fund Complex" and "Family of Investment Companies"
include thirty-one Lincoln VIP Funds and Lincoln National Variable Annuity Fund
A.
Interested Managers
Position(s) Term of Office
Name, Address and Held With and Length of
Date of Birth the Fund Time Served
------------------------ --------------- -----------------------
Kelly D. Clevenger* Chairman, and Chairman since August
1300 S. Clinton Street Manager 1995; Manager since
Fort Wayne, IN 46802 November 1994
YOB: 1952
Number of
Funds in
Principal Fund
Occupation(s) Complex Other Board
Name, Address and During Past Overseen by Memberships
Date of Birth Five Years Manager Held by Manager
------------------------ ----------------------------- ------------- ----------------------------
Kelly D. Clevenger* Vice President, The Lincoln 32 Lincoln Retirement Services
1300 S. Clinton Street National Life Insurance Company, LLC
Fort Wayne, IN 46802 Company; Executive Vice
YOB: 1952 President, Lincoln
Retirement Services
Company, LLC
* Kelly D. Clevenger, currently Chairman of the Fund, is an interested person
of the Fund by reason of his being an officer of Lincoln Life.
Independent Managers
Position(s) Term of Office
Name, Address and Held With and Length of
Date of Birth the Fund Time Served
------------------------ ------------- ----------------------
Michael D. Coughlin Advisory Advisory Manager
1300 S. Clinton Street Manager* since November 2007
Fort Wayne, IN 46802
YOB: 1942
Nancy L. Frisby Manager Manager since April
1300 S. Clinton Street 1992
Fort Wayne, IN 46802
YOB: 1941
Elizabeth S. Hager Advisory Advisory Manager
1300 S. Clinton Street Manager* since November 2007
Fort Wayne, IN 46802
YOB: 1944
Gary D. Lemon Advisory Advisory Manager
1300 S. Clinton Street Manager* since November 2004
Fort Wayne, IN 46802
YOB: 1948
Thomas D. Rath Advisory Advisory Manager
1300 S. Clinton Street Manager* since November 2007
Fort Wayne, IN 46802
YOB: 1945
Kenneth G. Stella Manager Manager since
1300 S. Clinton Street February 1998
Fort Wayne, IN 46802
YOB: 1943
David H. Windley Manager Manager since August
1300 S. Clinton Street 2004
Fort Wayne, IN 46802
YOB: 1943
Number of
Funds in
Principal Fund
Occupation(s) Complex Other Board
Name, Address and During Past Overseen by Memberships
Date of Birth Five Years Manager Held by Manager
------------------------ ------------------------------ ------------- ---------------------------
Michael D. Coughlin Management Consultant, 32 Merrimack County Savings
1300 S. Clinton Street Owner of Coughlin Bank; Trustee of Merrimack
Fort Wayne, IN 46802 Associates Bankcorp, MHC.
YOB: 1942
Nancy L. Frisby Retired. Formerly: Senior 32 N/A
1300 S. Clinton Street Vice President and Chief
Fort Wayne, IN 46802 Financial Officer, Desoto
YOB: 1941 Memorial Hospital
Elizabeth S. Hager State Represnetative, State 32 N/A
1300 S. Clinton Street of New Hampshire;
Fort Wayne, IN 46802 Executive Director, United
YOB: 1944 Way of Merrimack County
Gary D. Lemon Professor of Economics 32 N/A
1300 S. Clinton Street and Management, DePauw
Fort Wayne, IN 46802 University
YOB: 1948
Thomas D. Rath Managing Partner, Rath, 32 Associated Grocers of New
1300 S. Clinton Street Young and Pignatelli England
Fort Wayne, IN 46802
YOB: 1945
Kenneth G. Stella President Emeritus, Indiana 32 Advisory Board of Harris
1300 S. Clinton Street Health Association, Bank
Fort Wayne, IN 46802 Formerly, President,
YOB: 1943 Indiana Hospital & Health
Association
David H. Windley Retired. Formerly: Director, 32 Meridian Investment
1300 S. Clinton Street Blue & Co., LLC Advisors, Inc.
Fort Wayne, IN 46802
YOB: 1943
*An Advisory Manager provides the Fund with information and advice about
securities markets, political developments, economic and business factors and
trends and provides other such advice as the Managers may request from time to
time but shall not provide advice or make recommendations regarding the
purchase or sale of securities. Each Advisory Manager will serve for such term
as determined by the Board of Managers or until his or her earlier resignation
or removal. An Advisory
B-3
Manager: (a) does not have the powers of a Manager; (b) may not vote at
meetings of the Managers; and (c) may not take part in the operation or
governance of the Fund. An Advisory Manager who is not an "interested" person
of the Fund shall receive the same compensation as an Independent Manager of
the Fund.
Officers Who Are Not Managers
Number of
Funds in
Principal Fund
Position(s) Term of Office Occupation(s) Complex Other Board
Name, Address and Held With and Length of During Past Overseen by Memberships
Date of Birth the Fund Time Served Five Years Manager Held by Manager
------------------------ ------------------ ------------------------- ---------------------------- ------------- ----------------
Kevin J. Adamson Second Vice Second Vice President Second Vice President, N/A N/A
1300 S. Clinton Street President since May 2006 Director of Funds
Fort Wayne, IN 46802 Management, The Lincoln
YOB: 1966 National Life Insurance
Company; Formerly:
Director of Financial
Operations, Swiss Re/
Lincoln Re
William P. Flory, Jr. Second Vice Second Vice President Second Vice President and N/A N/A
1300 S. Clinton Street President and since August 2007 and Director of Separate
Fort Wayne, IN 46802 Chief Accounting Chief Accounting Account Operations and
YOB: 1961 Officer Officer since May 2006 Mutual Fund
Administration, The Lincoln
National Life Insurance
Company; Formerly:
Second Vice President and
Director of Corporate
Procurement and Assistant
Vice President of Separate
Account Operations and
Mutual Fund
Administration, The Lincoln
National Life Insurance
Company
Cynthia A. Rose Secretary Secretary since Secretary, Lincoln VIP N/A N/A
1300 S. Clinton Street February 1995 Trust; Formerly: Secretary
Fort Wayne, IN 46802 and Assistant Vice
YOB: 1954 President, The Lincoln
National Life Insurance
Company
Rise` C. M. Taylor Vice President Vice President since Vice President and N/A N/A
1300 S. Clinton Street and Treasurer August 2003 and Treasurer, The Lincoln
Fort Wayne, IN 46802 Treasurer since May National Life Insurance
YOB: 1967 2006; Formerly Company; Vice President
Assistant Treasurer and Treasurer Lincoln Life
since August 2003 & Annuity Company of
New York
John (Jack) A. Chief Chief Compliance Vice President for Fund N/A N/A
Weston Compliance Officer since May 2007. and Advisor Compliance,
One Granite Place Officer The Lincoln National Life
Concord, NH 46802 Insurance Company;
YOB: 1959 Formerly: Treasurer,
Jefferson Pilot Variable
Fund, Inc. and Jefferson
Pilot Investment Advisory
Corporation
Board Committees
The Board of managers has established an Audit Committee, which is responsible
for overseeing the Fund's financial reporting process on behalf of the board of
managers and for reporting the result of their activities to the board. The
Audit Committee will assist and act as a liaison with the board of managers in
fulfilling the board's responsibility to contractowners of the Fund and others
relating to oversight of fund accounting, the Fund's system of control, the
Fund's process for monitoring compliance with laws and regulations, and the
quality and integrity of the financial statements, financial reports, and audit
of the Fund. The members of the Audit Committee include independent managers:
Nancy L. Frisby, Elizabeth S. Hagar, and David H. Windley. The Audit Committee
met five times during the last fiscal year.
B-4
Effective January 1, 2008, the board of managers established an Investment
Committee, which is responsible for overseeing underperforming or troubled
funds and for performing certain contract renewal tasks as requested by the
board. The members of the Investment Committee are: Michael D. Coughlin, Gary
D. Lemon and Thomas D. Rath.
On February 23, 2004, the board of managers established a Nominating and
Governance Committee. The current members of the committee are: Nancy L.
Frisby, Elizabeth S. Hager, Kenneth G. Stella and David H. Windley. The
Nominating and Governance Committee is responsible for, among other things, the
identification, evaluation and nomination of potential candidates to serve on
the board of managers. The Nominating and Governance Committee met two times
during the last fiscal year. The Nominating and Governance Committee will
accept shareholder manager nominations. Any such nominations should be sent to
the Fund's Nominating and Governance Committee, c/o The Lincoln National Life
Insurance Company.
Ownership of Securities
As of December 31, 2007, the managers and officers as a group owned variable
contracts that entitled them to give voting instructions with respect to less
than 1% of the outstanding shares of the Fund. As of December 31, 2007, the
dollar range of equity securities owned beneficially by each manager in the
Fund and in any registered investment companies overseen by the managers within
the same family of investment companies as the Fund is as follows:
Interested Managers
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Manager in
Name of Manager Dollar Range of Equity Securities in the Fund Family of Investment Companies
-------------------- ----------------------------------------------- ----------------------------------------
Kelly D. Clevenger None $10,001-$50,000
Independent Managers
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Manager in
Name of Manager Dollar Range of Equity Securities in the Fund Family of Investment Companies
-------------------- ----------------------------------------------- ----------------------------------------
Nancy L. Frisby None Over $100,000
Elizabeth S. Hager None $ 10,001-$50,000
Gary D. Lemon None $ 10,001-$50,000
Kenneth G. Stella None Over $100,000
David H. Windley None $50,001-$100,000
No Independent Manager, nor any of his or her immediate family members, owned
securities beneficially or of record in the Company, or in any person (other
than a registered investment company) directly or indirectly controlling,
controlled by, or under common control with the Company. Further, during the
two most recently completed calendar years, no Independent Manager, nor any of
his or her immediate family members, held any direct or indirect interest or
relationship, the value of which exceeds $60,000, in or with the Company, or in
or with any person (other than a registered investment company) directly or
indirectly controlling, controlled by, or under common control with the
Company.
Remuneration of Certain Affiliated Persons
No manager or officer of the Fund received from the Fund compensation in excess
of $60,000 for the most recently completed fiscal year. Lincoln Life pays all
expenses relative to the operation of the Fund, for which it deducts certain
amounts (see the Prospectus).
Code of Ethics
The Fund has adopted a Code of Ethics that has been approved by the Fund's
board of managers, which regulates the personal securities tranactions of the
Fund's "Access Persons" as defined by Rule 17j-1 under the 1940 Act. Access
Persons are required to follow the guidelines established by the Fund's Code of
Ethics in connection with their personal securities transactions and are
subject to certain prohibitions on personal trading. The Fund's adviser,
sub-adviser and principal underwriter, pursuant to Rule 17j-1 and other
applicable laws and pursuant to the terms of the Fund's Code of Ethics, must
adopt and enforce their own Codes of Ethics appropriate to their operations.
The Fund's board of managers is required to review and approve the Codes of
Ethics for its adviser, sub-adviser and principal underwriter.
The Codes of Ethics for the Fund, adviser, sub-adviser and principal
underwriter can be reviewed and copied at the Commission's Public Reference
Room in Washington, D.C. The hours of operation of the Public Reference Room
are available by calling 1-202-942-8090. The Codes of Ethics are also available
on the EDGAR Database on the Commission's Internet site at http://www.sec.gov.
Copies
B-5
are also available for a fee by electronic request at the following e-mail
address: publicinfo@sec.gov or by writing the Securities and Exchange
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549-0102.
Control of the Fund
The Insurance Company held of record more than 25% of the Fund's outstanding
units.
Proxy Voting Policies and Procedures
The board of managers has delegated to the Fund's sub-adviser the
responsibility for voting any proxies relating to portfolio securities held by
the Fund in accordance with the sub-adviser's proxy voting policies and
procedures. A summary of the proxy voting policies and procedures to be
followed by the Fund and the sub-adviser on behalf of the Fund, including
procedures to be used when a vote represents a conflict of interest, are
attached hereto as Appendix A.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available
(1) without charge, upon request, by calling 1-800-4LINCOLN (454-6265); and (2)
on the SEC's website at http://
www.sec.gov.
Investment Advisory and Related Services
This information is disclosed in the Prospectus.
Portfolio Managers
Information regarding each portfolio manager's other accounts managed, material
conflicts of interests, compensation, and any ownership of securities of the
Fund is attached hereto as Appendix B.
Portfolio Transactions and Brokerage
The sub-adviser places orders for the purchase and sale of securities for the
Fund's portfolio. It is the Fund's policy to have orders placed with brokers or
dealers who will give the best execution of such orders at prices and under
conditions most favorable to the Fund. The sub-adviser will customarily deal
with principal market makers in purchasing over-the-counter securities. In the
allocation of brokerage business, preference may be given to those brokers and
dealers who provide statistical, research, or other services - so long as there
is no sacrifice in getting the best price and execution.
Consistent with the policy of seeking best price and execution for the
transaction size and the risk involved, in selecting brokers or dealers or
negotiating the commissions to be paid, the sub-adviser considers each firm's
financial responsibility and reputation, range and quality of the service made
available to the fund and the broker's or dealer's professional services,
including execution, clearance procedures, wire service quotations and ability
to provide performance, statistical and other research information for
consideration, analysis and evaluation by the sub-adviser. In accordance with
this policy, the sub-adviser does not execute brokerage transactions solely on
the basis of the lowest commission rates available for a particular
transaction.
Securities of the same issuer may be purchased, held or sold at the same time
by the Fund or other accounts or companies for which the sub-adviser provides
investment advice (including affiliates of the sub-adviser). On occasions when
the sub-adviser deems the purchase or sale of a security to be in the best
interest of the Fund, as well as the other clients of the sub-adviser, the
sub-adviser, to the extent permitted by applicable laws and regulations, may
aggregate such securities to be sold or purchased for the Fund with those to be
sold or purchased for other clients in order to obtain best execution and lower
brokerage commissions, if any. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the sub-adviser in the manner it considers to be equitable and
consistent with its fiduciary obligations to all such clients, including the
Fund. In some instances, the procedures may impact the price and size of the
position obtainable for the Fund.
The sub-adviser may from time to time direct trades to brokers which have
provided specific brokerage or research services for the benefit of the
sub-adviser's clients; in addition, the sub-adviser may allocate trades among
brokers that generally provide superior brokerage and research services. During
2007, the sub-adviser directed transactions totaling approximately $37,417,938
to these brokers and paid commissions of approximately $39,256 in connection
with these transactions. Research services furnished by brokers are used for
the benefit of all the sub-adviser's clients and not solely or necessarily for
the benefit of the Fund. The sub-adviser believes that the value of research
services received is not determinable and does not significantly reduce its
expenses. The Fund does not reduce its fee payable to the adviser or the
sub-adviser by an amount that might be attributable to the value of such
services.
The Fund paid brokerage fees of $45,781 in 2007; $48,948 in 2006; and $37,918
in 2005.
B-6
No Commission to Finance Distribution
The 1940 Act permits a fund to use its selling brokers to execute transactions
in portfolio securities only if the fund or its adviser has implemented
policies and procedures designed to ensure that the selection of brokers for
portfolio securities transactions is not influenced by considerations relating
to the sale of Fund units. Accordingly, the Fund maintains, among other
policies, a policy that prohibits it from directing to a broker-dealer in
consideration for the promotion or sale of Fund units: (a) Fund portfolio
securities transactions; or (b) any commission or other remuneration received
or to be received from the Fund's portfolio transactions effected through any
other broker-dealer. The Fund has also established other policies and
procedures designed to ensure that its brokerage commissions are not used to
finance the distribution of Fund units.
Commission Recapture Program
The Fund has entered into a commission recapture program with Russell, pursuant
to which the commission rebates will be included in realized gain (loss) on
securities in the appropriate financial statements of the Fund. If DMC, the
sub-adviser, does not believe it can obtain best execution from such
broker-dealers, there is no obligation to execute portfolio transactions
through such broker-dealers. The board of managers, with the assistance of
Russell, intends to continue to review whether recapture opportunities are
available and, if so, to determine in the exercise of its business judgment
whether it would be advisable for the Fund to participate, or continue to
participate, in the commission recapture program.
Purchase and Pricing of Securities Being Offered
Offering to Public; Sales Load
This information is disclosed in the Prospectus.
General Formulas for Determining Value of the Accumulation Unit
The following formulas set out in general terms the computation of the
Accumulation Unit value at the close of trading on any day upon which the New
York Stock Exchange is open.
Investment Income + Capital Gains - Capital Losses -
Taxes
Gross Investment Rate =
Value of Fund at Beginningof Valuation Period
Net Investment Rate = Gross Investment Rate - .0000363 (for a one day Valuation
Period)
Net Investment Factor = Net Investment Rate + 1.00000000
Accumulation Unit Value
Accumulation Unit Value = x Net Investment Factor
on Preceding Valuation Date
Calculation of Accumulation Unit Value Using Hypothetical Example
The above computations may be illustrated by the following hypothetical
example. Assume that the value of the assets of the Fund at the beginning of a
one day valuation period was $5,000,000; that the value of an Accumulation Unit
on that date was $1.135; and that during the valuation period the investment
income was $4,000, the net unrealized capital gains were $6,000 and the net
realized capital losses were $3,000. Assuming these figures are net after
provision for applicable taxes, the value of the assets of the fund at the end
of the valuation period, before adding payments received during the period,
would thus be $5,007,000 ($5,000,000 plus $4,000 plus $6,000 minus $3,000).
The gross investment rate for the valuation period would be equal to (a) $7,000
($4,000 plus $6,000 less $3,000) divided by (b) $5,000,000 which produces .14%
(.0014). The net investment rate for the valuation period is determined by
deducting .00363% (.0000363) from the gross investment rate, which results in a
net investment rate of .13637% (.0013637). The net investment factor for the
valuation period would be determined as the net investment rate plus 1.0, or
1.0013637.
The value of the Accumulation Unit at the end of the valuation period would be
equal to the value at the beginning of the period ($1.135) multiplied by the
net investment factor for the period (1.0013637), which produces $1.1365478.
B-7
General Formulas for Determining Dollar Amount of Annuity Payments
Dollar Amount of First Monthly Payment
Number of Annuity Units =
Annuity Unit Value on Date of First Payment
Value of Annuity Unit Factor to Net Investment Factor
Annuity Unit Value = on Preceding x Neutralize x for 14th Day Preceding
Valuation Date AIR Current Valuation Date
Dollar Amount of Annuity Unit Value
Second and Subsequent = Number of Annuity Units x for Period in which
Annuity Payment Payment is Due
Calculation of Annuity Payments Using Hypothetical Example
The determination of the Annuity Unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume a contractowner or
participant at the date of retirement has credited to his individual account
30,000 Accumulation Units, and that the value of an Accumulation Unit on the
14th day preceding the last day of the valuation period in which annuity
payments commence was $1.15 producing a total value of his individual account
of $34,500. Assume also that the contractowner or participant elects an option
for which the table in the variable annuity contract indicates the first
monthly payment is $6.57 per $1.000 of value applies; the contractowner's or
participant's first monthly payment would thus be 34.5 multiplied by $6.57 or
$226.67.
Assume that the Annuity Unit value for the valuation period in which the first
payment was due was $1.10. When this is divided into the first monthly payment,
the number of Annuity Units represented by that payment is determined to be
206.064. The value of this same number of Annuity Units will be paid in each
subsequent month.
Assume further that the net investment factor for the Fund for the 14th day
preceding the last day of the valuation period in which the next annuity
payment is due is 1.0019. Multiplying this factor by .99990575 (for a one day
valuation period) to neutralize the assumed investment rate (AIR) of 3.5% per
year built into the number of Annuity Units determined as per above, produces a
result of 1.00180557. This is then multiplied by the Annuity Unit value for the
valuation period preceding the period in which the next annuity payment is due
(assume $1.105) to produce an Annuity Unit value for the current valuation
period of $1.10699515.
The current monthly payment is then determined by multiplying the fixed number
of Annuity Units by the current Annuity Unit value of 206.064 times
$1.10699515, which produces a current monthly payment of $228.11.
Other Services
Custodian
This information is disclosed in the Prospectus.
Independent Registered Public Accounting Firm
The financial statements of the Fund, and the consolidated financial statements
of Lincoln Life appearing in this SAI and Registration Statement have been
audited by Ernst & Young LLP, independent registered public accounting firm,
2300 National City Center, 110 West Berry Street, Fort Wayne, Indiana 46802, as
set forth in their reports, also appearing in this SAI and in the Registration
Statement. The financial statements audited by Ernst & Young LLP have been
included herein in reliance on their reports given on their authority as
experts in accounting and auditing.
Keeper of Records
All accounts, books, records and other documents which are required to be
maintained for the Fund are maintained by the Company or by third parties
responsible to the Fund or the Company. For example, some books, records and
other documents are maintained by DMC, the sub-adviser, and the Fund's
custodian, Mellon Bank, N.A., One Mellon Bank Center, 500 Grant Street,
Pittsburgh, Pennsylvania, 15258. Some books, records, and other documents are
maintained by Mellon Bank, N.A. (the Fund's accounting services provider), 2005
Market Street, 6th Floor, Philadelphia, Pennsylvania 19103 and Delaware
Services Company, Inc. ( the Funds' fund accounting and financial
administration oversight provider), One Commerce Square, 2005 Market Street,
Philadelphia, PA 19103. No separate charge against the assets of the Fund is
made by the Company for these services.
B-8
Principal Underwriter
Lincoln Financial Distributors ("LFD") serves as Principal Underwriter (the
"Principal Underwriter") for the variable annuity contracts as described in the
prospectus. LFD is affiliated with Lincoln Life and is registered as a
broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a
member of FINRA. The Principal Underwriter has entered into selling agreements
with Lincoln Financial Advisors ("LFA") also an affiliate of ours.
The Principal Underwriter anticipates continuing to accept payments under the
contracts, but reserves the right to discontinue accepting such payments. The
contracts are no longer being sold. The Prinicipal Underwriter paid
approximately $53,436 in 2007; 462,251 in 2006; and $35,892 in 2005 as sales
compensation with respect to the contracts. The Principal Underwriter did not
retain any underwriting commissions from the sale of the variable annuity
contracts during the past three fiscal years.
Determination of Accumulation Unit Value
A description of the days on which the Fund's accumulation unit values will be
determined is given in the Prospectus. The New York Stock Exchange is generally
closed on New Year's Day, Martin Luther King's birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. It may also be closed on other days.
Financial Statements
Financial statements of the VAA, and consolidated financial statements of
Lincoln Life appear on the following pages.
B-9
Appendix A
Delaware Management Company
The Fund has formally delegated to the manager the ability to make all proxy
voting decisions in relation to portfolio securities held by the Fund. If and
when proxies need to be voted on behalf of the Fund, the manager will vote such
proxies pursuant to its Proxy Voting Procedures (the "Procedures"). The Manager
has established a Proxy Voting Committee (the "Committee") which is responsible
for overseeing the Manager's proxy voting process for the Fund. One of the main
responsibilities of the committee is to review and approve the Procedures to
ensure that the Procedures are designed to allow the Manager to vote proxies in
a manner consistent with the goal of voting in the best interest of the Fund.
In order to facilitate the actual process of voting proxies, the Manager has
contracted with Institutional Shareholder Services ("ISS") to analyze proxy
statements on behalf of the Fund and other clients of the Manager and vote
proxies generally in accordance with the procedures. The Committee is
responsible for overseeing ISS's proxy voting activities. If a proxy has been
voted for the Fund, ISS will create a record of the vote. Beginning no later
than August 31 of each year, information (if any) regarding how the Fund voted
proxies relating to the Fund's portfolio securities during the most recent
12-month period ended June 30 is available without charge: (i) through the
Fund's website at delawareinvestment.com: and (ii) on the SEC's website at
http:www.sec.gov.
The Procedures contain a general guideline that recommendations of company
management on an issue (particularly routine issues) should be given a fair
amount of weight in determining how proxy issues should be voted. However, the
Manager will normally vote against management's position when it runs counter
to its specific Proxy Voting Guidelines (the "Guidelines"), and the Manager
will also vote against management's recommendation when it believes that such
position is not in the best interests of the Fund.
As stated above, the Procedures also list specific Guidelines on how to vote
proxies on behalf of the Fund. Some examples of the Guidelines are as follows:
(i) generally vote for shareholder proposals asking that a majority or more of
directors be independent; (ii) generally vote against proposals to require a
supermajority shareholder vote; (iii) votes on mergers and acquisitions should
be considered on a case-by-case basis, determining whether the transaction
enhances shareholder value; (iv) generally vote against proposals to create a
new class of common stock with superior voting rights; (v) generally vote
reincorporation proposals on a case-by-case basis; (vi) votes with respect to
equity-based compensation plans are generally determined on a case-by-case
basis; and (vii) generally vote for proposals requesting reports on the level
of greenhouse gas emissions from a company's operations and products.
Because the Fund has delegated proxy voting to the Manager, the Fund is not
expected to encounter any conflict of interest issues regarding proxy voting
and therefore does not have procedures regarding this matter. However, the
Manager does have a section in its Procedures that addresses the possibility of
conflicts of interest. Most proxies which the Manager receives on behalf of the
Fund are voted by ISS in accordance with the Procedures. Because almost all
Fund proxies are voted by ISS pursuant to the pre-determined Procedures, it
normally will not be necessary for the Manager to make an actual determination
of how to vote a particular proxy, thereby largely eliminating conflicts of
interest for the Manager during the proxy voting process. In the very limited
instances where the Manager is considering voting a proxy contrary to ISS's
recommendation, the Committee will first assess the issue to see if there is
any possible conflict of interest involving the Manager or affiliated persons
of the Manager. If a member of the Committee has actual knowledge of a conflict
of interest, the Committee will normally use another independent third party to
do additional research on the particular proxy issue in order to make a
recommendation to the Committee on how to vote the proxy in the best interests
of the Fund. The Committee will then review the proxy voting materials and
recommendation provided by ISS and the independent third party to determine how
to vote the issue in a manner which the Committee believes is consistent with
the Procedures and in the best interests of the Fund.
B-10
Appendix B
Portfolio Managers
The following provides information regarding each portfolio managers' other
accounts managed, material conflicts of interests, compensation, and any
ownership of securities in the Fund. Each portfolio manager or team member is
referred to in this section as a "portfolio manager." The portfolio managers
are shown together in this section only for ease in presenting the information
and should not be viewed for purposes of comparing the portfolio managers
against one another. Each portfolio manager may be affected by different
conflicts of interest.
Other Accounts Managed
The following table provides information about other accounts for which each
portfolio manager was primarily responsible as of December 31, 2007:
Registered Other Pooled
Investment Companies Investment Vehicles
------------------------------ ------------------------------
Number of Total Assets* in Number of Total Assets* in
Adviser/Sub-Adviser and Portfolio Manager Accounts the Accounts Accounts the Accounts
------------------------------------------- ----------- ------------------ ----------- ------------------
Delaware Management
Christopher Adams ......................... 8 3,500 0 0
Francis Morris ............................ 8 3,500 0 0
Michael Morris ............................ 8 3,500 0 0
Donald Padilla ............................ 8 3,500 0 0
Other Accounts
------------------------------
Number of Total Assets* in
Adviser/Sub-Adviser and Portfolio Manager Accounts** the Accounts
------------------------------------------- ------------ -----------------
Delaware Management
Christopher Adams ......................... 20 1,100
Francis Morris ............................ 20 1,100
Michael Morris ............................ 17 1,100
Donald Padilla ............................ 23 1,100
* in millions of dollars
** Any accounts managed in a personal capacity appear under "Other Accounts"
along with other accounts managed on a professional basis. The personal
account information is current as of the most recent calendar quarter-end
for which account statements are available.
Other Accounts Managed with Performance-Based Advisory Fees
The following table provides information for other accounts managed by each
portfolio manager, with respect to which the advisory fee is based on account
performance. Information is shown as of December 31, 2007:
Number of Accounts
Adviser/Sub-Adviser and Portfolio Managers With Incentive Fees Total Assets
-------------------------------------------- --------------------- -------------
Delaware Management Company (Francis X. 0 0
Morris, Christopher S. Adams, Michael S.
Morris, Donald G. Padilla)
Material Conflicts of Interest
Individual portfolio managers may perform investment management services for
other accounts similar to those provided to the fund and the investment action
for each account and fund may differ. For example, one account or fund may be
selling a security, while another account or fund may be purchasing or holding
the same security. As a result, transactions executed for one account and fund
may adversely affect the value of securities held by another account.
Additionally, the management of multiple accounts and funds may give rise to
potential conflicts of interest, as a portfolio manager must allocate time and
effort to multiple accounts and funds. A portfolio manager may discover an
investment opportunity may be limited, however, so that all accounts and funds
for which the investment would be suitable may not be able to participate.
Delaware has adopted procedures designed to allocate investments fairly across
multiple accounts.
A portfolio manager's management of personal accounts also may present certain
conflicts of interest. While Delaware's code of ethics is designed to address
these potential conflicts, there is no guarantee that it will do so.
Compensation Structures and Methods
Each portfolio manager's compensation consists of the following:
Base Salary
Each named portfolio manager receives a fixed base salary. Salaries are
determined by a comparison to industry benchmarking data prepared by third
parties to ensure that portfolio manager salaries are in line with salaries
paid at peer investment advisory firms.
Bonus - Mr. Francis Morris, Mr. Adams, Mr. Michael Morris and Mr. Padilla:
The bonus pool is determined by the revenues associated with the products a
portfolio manager manages. Delaware keeps a percentage of the revenues and the
remaining percentage of revenues (minus appropriate direct expenses associated
with this product and
B-11
the investment management team) create the "bonus pool" for a product. Various
members of the team have the ability to earn a percentage of the bonus pool
with the most senior contributors having the largest share.
Due to transitioning of responsibilities of this team during the year, 100% of
their bonuses for the prior year were subjective, determined in part based on
performance of the funds managed as compared to the appropriate Lipper peer
groups for a one-year period. It is anticipated that going forward an objective
component will be added in a manner similar to that described above (see
description under Beck, Madden and Hughes).
DEFERRED COMPENSATION - Each named portfolio manager is eligible to participate
in the Lincoln National Corporation Executive Deferred Compensation Plan, which
is available to all employees whose income exceeds a designated threshold. The
Plan is a non-qualified unfunded deferred compensation plan that permits
participating employees to defer the receipt of a portion of their cash
compensation.
STOCK OPTION INCENTIVE PLAN/EQUITY COMPENSATION PLAN - Portfolio managers may
be awarded options, stock appreciation rights, restricted stock awards and
restricted stock units relating to the underlying shares of common stock of
Delaware Investments U.S., Inc. pursuant to the terms of the Amended and
Restated Delaware Investments U.S., Inc. Incentive Compensation Plan. In
addition, certain managers may be awarded restricted stock units, or
"performance shares", in Lincoln National Corporation. Delaware Investments
U.S., Inc., is an indirect subsidiary of Delaware Management Holdings, Inc.
Delaware Management Holdings, Inc., is in turn an indirect, wholly-owned
subsidiary of Lincoln National Corporation.
The Amended and Restated Delaware Investments U.S., Inc. Incentive Compensation
Plan was established in 2001 in order to provide certain employees of the
Manager with a more direct means of participating in the growth of the
Manager. Under the terms of the plan, stock options typically vest in 25%
increments on a four-year schedule and expire ten years after issuance. Subject
to the terms of the plan, restricted stock units typically vest in 25%
increments on a four-year schedule, and shares of common stock underlying the
restricted stock awards will be issued after vesting. Awards are granted under
the plan from time to time by the investment manager in its full discretion.
Awards may be based in part on seniority. The fair market value of the shares
of Delaware Investments U.S., Inc., is normally determined as of each March 31,
June 30, September 30 and December 31. Shares issued upon the exercise of such
options or vesting of restricted stock units must be held for six months and
one day, after which time the shareholder may put them back to the issuer or
the shares may be called back from the shareholder from time to time, as the
case may be.
Portfolio managers who do not participate in the Delaware Investments U.S.,
Inc. Stock Option Plan are eligible to participate in Lincoln's Long-Term
Incentive Plan, which is designed to provide a long-term incentive to officers
of Lincoln. Under the plan, a specified number of performance shares are
allocated to each unit and are awarded to participants in the discretion of
their managers in accordance with recommended targets related to the number of
employees in a unit that may receive an award and the number of shares to be
awarded. The performance shares have a three year vesting schedule and, at the
end of the three years, the actual number of shares distributed to those who
received awards may be equal to, greater than or less than the amount of the
award based on Lincoln's achievement of certain performance goals relative to a
pre-determined peer group.
Other Compensation - Portfolio managers may also participate in benefit plans
and programs available generally to all employees.
Beneficial Interest of Portfolio Managers
Information regarding securities of the Fund beneficially owned, if any, by
portfolio managers is disclosed below. In order to own securities of the Fund,
a portfolio manager would need to own a Lincoln Life variable annuity contract.
Portfolio Managers are not required to own securities of the Fund. In addition,
although the level of a portfolio manager's securities ownership may be an
indicator of his or her confidence in the portfolio's investment strategy, it
does not necessarily follow that a portfolio manager who owns few or no
securities has any less confidence or is any less concerned about the
applicable portfolio's performance.
As of the Fund's fiscal year ended December 31, 2007, no portfolio manager of
the Fund beneficially owned securities of the Fund.
B-12
Lincoln National Variable Annuity Fund A (Group)
(Registrant)
The Lincoln National Life Insurance Company
(Insurance Company)
Statement of Additional Information (SAI)
This SAI should be read in conjunction with the prospectus of Lincoln National
Variable Annuity Fund A (Group) dated April 30, 2008. You may obtain a copy of
the Fund A (Group) prospectus on request and without charge. Please write
Annuities Customer Service, The Lincoln National Life Insurance Company, PO Box
2340, Fort Wayne, IN 46801-2340, or call 1-800-454-6265.
Table of Contents
Item Page
Special Terms B-2
Investment Objectives and Policies of the Fund B-2
Managers and Officers B-2
Proxy Voting Policies and Procedures B-6
Investment Advisory and Related Services B-6
Portfolio Managers B-6
Portfolio Transactions and Brokerage B-6
Purchase and Pricing of Securities Being
Offered B-7
Item Page
Other Services B-8
Principal Underwriter B-9
Determination of Accumulation Unit Value B-9
Financial Statements B-9
Appendix A B-10
Appendix B B-11
This SAI is not a prospectus.
The date of this SAI is April 30, 2008.
Special Terms
The special terms used in this SAI are the ones defined in the Prospectus.
Investment Objectives and Policies of the Fund
Portfolio Holdings Disclosure
The fund's board of managers has adopted policies and procedures designed to
ensure that disclosure of information regarding the fund's portfolio securities
is in the best interests of fund shareholders. In accordance with these
policies and procedures, a Fund vice president or the vice president's
designees will make shareholder reports containing the fund's portfolio
holdings available free of charge to individual investors, institutional
investors, intermediaries that distribute the fund's shares, and affiliated
persons of the fund that make requests for such holdings information.
Shareholder reports are available 60 days after the end of each semi-annual
reporting period.
A fund vice president or the vice president's designees may provide the fund's
top-ten holdings immediately after each quarter-end to Lincoln Life and other
insurance companies who include the fund in their products ("Insurance
Companies"). All Insurance Companies must sign a confidentiality agreement
acknowledging that any nonpublic portfolio information will be kept strictly
confidential and that the nonpublic portfolio information is proprietary
information of the fund. The Insurance Company may include this information in
marketing and other public materials (including via website posting) 15 days
after the end of the quarter.
A vice president of the fund or the vice president's designees may provide
other portfolio information 30 days following the end of each quarter to the
Insurance Companies. All Insurance Companies must sign confidentiality
agreements acknowledging that any non-public portfolio information will be kept
strictly confidential and that the non-public information is proprietary
information to the fund. The Insurance Companies will distribute shareholder
reports (annual and semi-annual) containing the portfolio holdings of the fund
to contract owners in accordance with applicable laws and regulations. The
Insurance Companies may make the portfolio information publicly available
(including via website posting) 45 days after the end of the quarter.
A fund vice president or the vice president's designees may also provide
portfolio holdings information 30 days following the end of the quarterly
reporting period under a confidentiality agreement to third-party service
providers, including but are not limited to independent rating and ranking
organizations, which conduct market analyses of the fund's portfolio holdings
against benchmarks or securities market indices. All such third parties must
sign a confidentiality agreement acknowledging that the nonpublic information
will be kept strictly confidential and that the nonpublic portfolio information
is proprietary information of the fund. These parties may disseminate the
portfolio holdings information 60 days following the end of the quarter, which
is after SEC filings are made. Currently, the fund has no such arrangements
with any third party.
A fund vice president or the vice president's designees may provide, at any
time, portfolio holdings information to: (a) fund service providers and
affiliates, such as the fund's investment adviser, sub-advisers, custodian and
auditor, to the extent necessary to perform services for the fund; and (b)
state and federal regulators and government agencies as required by law or
judicial process. These entities are subject to duties of confidentiality
imposed by law, contract, or fiduciary obligations.
The fund will disclose its portfolio holdings in public SEC filings. The fund's
board of managers also may, on a case-by-case basis, authorize disclosure of
the fund's portfolio holdings, provided that, in its judgment, such disclosure
is not inconsistent with the best interests of shareholders, or may impose
additional restrictions on the dissemination of portfolio information.
Neither the funds, its investment adviser nor any affiliate receive any
compensation or consideration in connection with the disclosure of the fund's
portfolio holdings information.
Fund management is responsible for ensuring appropriate disclosure is made
regarding these procedures in the fund's prospectus and/or SAI.
The fund's board of managers exercises oversight of these policies and
procedures. In this regard, fund management will inform the managers if any
substantial changes to the procedures become necessary to ensure that the
procedures are in the best interest of fund shareholders. The officers will
consider any possible conflicts between the interest of fund shareholders, on
the one hand, and those of the fund's investment adviser and other fund
affiliates, on the other. Moreover, the fund's Chief Compliance Officer will
address the operation of the fund's procedures in the annual compliance report
to the board and will recommend any remedial changes to the procedures.
Managers and Officers
The board of managers oversees the management of the Fund and elects its
officers. The members of the board of managers (the "managers") have the power
to amend the bylaws of the Fund, and to exercise all the powers of the Fund
except those granted to the contractowners. The managers hold their position
until their successors are elected and qualify. The Fund's officers are
re-elected
B-2
annually and are responsible for the day-to-day operations of the Fund.
Information pertaining to the managers and executive officers of the Fund is
set forth below. Managers that are deemed "interested persons," as defined in
the Investment Company Act of 1940, are included in the table titled,
"Interested Managers." Managers who are not interested persons are referred to
as Independent Managers.
As used herein, the terms "Fund Complex" and "Family of Investment Companies"
include thirty-one Lincoln VIP Funds and Lincoln National Variable Annuity Fund
A.
Interested Managers
Position(s) Term of Office
Name, Address and Held With and Length of
Date of Birth the Fund Time Served
------------------------ --------------- -----------------------
Kelly D. Clevenger* Chairman, and Chairman since August
1300 S. Clinton Street Manager 1995; Manager since
Fort Wayne, IN 46802 November 1994
YOB: 1952
Number of
Funds in
Principal Fund
Occupation(s) Complex Other Board
Name, Address and During Past Overseen by Memberships
Date of Birth Five Years Manager Held by Manager
------------------------ ----------------------------- ------------- ----------------------------
Kelly D. Clevenger* Vice President, The Lincoln 32 Lincoln Retirement Services
1300 S. Clinton Street National Life Insurance Company, LLC
Fort Wayne, IN 46802 Company; Executive Vice
YOB: 1952 President, Lincoln
Retirement Services
Company, LLC
* Kelly D. Clevenger, currently Chairman of the Fund, is an interested person
of the Fund by reason of his being an officer of Lincoln Life.
Independent Managers
Position(s) Term of Office
Name, Address and Held With and Length of
Date of Birth the Fund Time Served
------------------------ ------------- ----------------------
Michael D. Coughlin Advisory Advisory Manager
1300 S. Clinton Street Manager* since November 2007
Fort Wayne, IN 46802
YOB: 1942
Nancy L. Frisby Manager Manager since April
1300 S. Clinton Street 1992
Fort Wayne, IN 46802
YOB: 1941
Elizabeth S. Hager Advisory Advisory Manager
1300 S. Clinton Street Manager* since November 2007
Fort Wayne, IN 46802
YOB: 1944
Gary D. Lemon Advisory Advisory Manager
1300 S. Clinton Street Manager* since November 2004
Fort Wayne, IN 46802
YOB: 1948
Thomas D. Rath Advisory Advisory Manager
1300 S. Clinton Street Manager* since November 2007
Fort Wayne, IN 46802
YOB: 1945
Kenneth G. Stella Manager Manager since
1300 S. Clinton Street February 1998
Fort Wayne, IN 46802
YOB: 1943
David H. Windley Manager Manager since August
1300 S. Clinton Street 2004
Fort Wayne, IN 46802
YOB: 1943
Number of
Funds in
Principal Fund
Occupation(s) Complex Other Board
Name, Address and During Past Overseen by Memberships
Date of Birth Five Years Manager Held by Manager
------------------------ ------------------------------ ------------- ---------------------------
Michael D. Coughlin Management Consultant, 32 Merrimack County Savings
1300 S. Clinton Street Owner of Coughlin Bank; Trustee of Merrimack
Fort Wayne, IN 46802 Associates Bankcorp, MHC.
YOB: 1942
Nancy L. Frisby Retired. Formerly: Senior 32 N/A
1300 S. Clinton Street Vice President and Chief
Fort Wayne, IN 46802 Financial Officer, Desoto
YOB: 1941 Memorial Hospital
Elizabeth S. Hager State Represnetative, State 32 N/A
1300 S. Clinton Street of New Hampshire;
Fort Wayne, IN 46802 Executive Director, United
YOB: 1944 Way of Merrimack County
Gary D. Lemon Professor of Economics 32 N/A
1300 S. Clinton Street and Management, DePauw
Fort Wayne, IN 46802 University
YOB: 1948
Thomas D. Rath Managing Partner, Rath, 32 Associated Grocers of New
1300 S. Clinton Street Young and Pignatelli England
Fort Wayne, IN 46802
YOB: 1945
Kenneth G. Stella President Emeritus, Indiana 32 Advisory Board of Harris
1300 S. Clinton Street Health Association, Bank
Fort Wayne, IN 46802 Formerly, President,
YOB: 1943 Indiana Hospital & Health
Association
David H. Windley Retired. Formerly: Director, 32 Meridian Investment
1300 S. Clinton Street Blue & Co., LLC Advisors, Inc.
Fort Wayne, IN 46802
YOB: 1943
*An Advisory Manager provides the Fund with information and advice about
securities markets, political developments, economic and business factors and
trends and provides other such advice as the Managers may request from time to
time but shall not provide advice or make recommendations regarding the
purchase or sale of securities. Each Advisory Manager will serve for such term
as determined by the Board of Managers or until his or her earlier resignation
or removal. An Advisory
B-3
Manager: (a) does not have the powers of a Manager; (b) may not vote at
meetings of the Managers; and (c) may not take part in the operation or
governance of the Fund. An Advisory Manager who is not an "interested" person
of the Fund shall receive the same compensation as an Independent Manager of
the Fund.
Officers Who Are Not Managers
Number of
Funds in
Principal Fund
Position(s) Term of Office Occupation(s) Complex Other Board
Name, Address and Held With and Length of During Past Overseen by Memberships
Date of Birth the Fund Time Served Five Years Manager Held by Manager
------------------------ ------------------ ------------------------- ---------------------------- ------------- ----------------
Kevin J. Adamson Second Vice Second Vice President Second Vice President, N/A N/A
1300 S. Clinton Street President since May 2006 Director of Funds
Fort Wayne, IN 46802 Management, The Lincoln
YOB: 1966 National Life Insurance
Company; Formerly:
Director of Financial
Operations, Swiss Re/
Lincoln Re
William P. Flory, Jr. Second Vice Second Vice President Second Vice President and N/A N/A
1300 S. Clinton Street President and since August 2007 and Director of Separate
Fort Wayne, IN 46802 Chief Accounting Chief Accounting Account Operations and
YOB: 1961 Officer Officer since May 2006 Mutual Fund
Administration, The Lincoln
National Life Insurance
Company; Formerly:
Second Vice President and
Director of Corporate
Procurement and Assistant
Vice President of Separate
Account Operations and
Mutual Fund
Administration, The Lincoln
National Life Insurance
Company
Cynthia A. Rose Secretary Secretary since Secretary, Lincoln VIP N/A N/A
1300 S. Clinton Street February 1995 Trust; Formerly: Secretary
Fort Wayne, IN 46802 and Assistant Vice
YOB: 1954 President, The Lincoln
National Life Insurance
Company
Rise` C. M. Taylor Vice President Vice President since Vice President and N/A N/A
1300 S. Clinton Street and Treasurer August 2003 and Treasurer, The Lincoln
Fort Wayne, IN 46802 Treasurer since May National Life Insurance
YOB: 1967 2006; Formerly Company; Vice President
Assistant Treasurer and Treasurer Lincoln Life
since August 2003 & Annuity Company of
New York
John (Jack) A. Chief Chief Compliance Vice President for Fund N/A N/A
Weston Compliance Officer since May 2007. and Advisor Compliance,
One Granite Place Officer The Lincoln National Life
Concord, NH 46802 Insurance Company;
YOB: 1959 Formerly: Treasurer,
Jefferson Pilot Variable
Fund, Inc. and Jefferson
Pilot Investment Advisory
Corporation
Board Committees
The Board of managers has established an Audit Committee, which is responsible
for overseeing the Fund's financial reporting process on behalf of the board of
managers and for reporting the result of their activities to the board. The
Audit Committee will assist and act as a liaison with the board of managers in
fulfilling the board's responsibility to contractowners of the Fund and others
relating to oversight of fund accounting, the Fund's system of control, the
Fund's process for monitoring compliance with laws and regulations, and the
quality and integrity of the financial statements, financial reports, and audit
of the Fund. The members of the Audit Committee include independent managers:
Nancy L. Frisby, Elizabeth S. Hagar, and David H. Windley. The Audit Committee
met five times during the last fiscal year.
B-4
Effective January 1, 2008, the board of managers established an Investment
Committee, which is responsible for overseeing underperforming or troubled
funds and for performing certain contract renewal tasks as requested by the
board. The members of the Investment Committee are: Michael D. Coughlin, Gary
D. Lemon and Thomas D. Rath.
On February 23, 2004, the board of managers established a Nominating and
Governance Committee. The current members of the committee are: Nancy L.
Frisby, Elizabeth S. Hager, Kenneth G. Stella and David H. Windley. The
Nominating and Governance Committee is responsible for, among other things, the
identification, evaluation and nomination of potential candidates to serve on
the board of managers. The Nominating and Governance Committee met two times
during the last fiscal year. The Nominating and Governance Committee will
accept shareholder manager nominations. Any such nominations should be sent to
the Fund's Nominating and Governance Committee, c/o The Lincoln National Life
Insurance Company.
Ownership of Securities
As of December 31, 2007, the managers and officers as a group owned variable
contracts that entitled them to give voting instructions with respect to less
than 1% of the outstanding shares of the Fund. As of December 31, 2007, the
dollar range of equity securities owned beneficially by each manager in the
Fund and in any registered investment companies overseen by the managers within
the same family of investment companies as the Fund is as follows:
Interested Managers
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Manager in
Name of Manager Dollar Range of Equity Securities in the Fund Family of Investment Companies
-------------------- ----------------------------------------------- ----------------------------------------
Kelly D. Clevenger None $10,001-$50,000
Independent Managers
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Manager in
Name of Manager Dollar Range of Equity Securities in the Fund Family of Investment Companies
-------------------- ----------------------------------------------- ----------------------------------------
Nancy L. Frisby None Over $100,000
Elizabeth S. Hager None $ 10,001-$50,000
Gary D. Lemon None $ 10,001-$50,000
Kenneth G. Stella None Over $100,000
David H. Windley None $50,001-$100,000
No Independent Manager, nor any of his or her immediate family members, owned
securities beneficially or of record in the Company, or in any person (other
than a registered investment company) directly or indirectly controlling,
controlled by, or under common control with the Company. Further, during the
two most recently completed calendar years, no Independent Manager, nor any of
his or her immediate family members, held any direct or indirect interest or
relationship, the value of which exceeds $60,000, in or with the Company, or in
or with any person (other than a registered investment company) directly or
indirectly controlling, controlled by, or under common control with the
Company.
Remuneration of Certain Affiliated Persons
No manager or officer of the Fund received from the Fund compensation in excess
of $60,000 for the most recently completed fiscal year. Lincoln Life pays all
expenses relative to the operation of the Fund, for which it deducts certain
amounts (see the Prospectus).
Code of Ethics
The Fund has adopted a Code of Ethics that has been approved by the Fund's
board of managers, which regulates the personal securities tranactions of the
Fund's "Access Persons" as defined by Rule 17j-1 under the 1940 Act. Access
Persons are required to follow the guidelines established by the Fund's Code of
Ethics in connection with their personal securities transactions and are
subject to certain prohibitions on personal trading. The Fund's adviser,
sub-adviser and principal underwriter, pursuant to Rule 17j-1 and other
applicable laws and pursuant to the terms of the Fund's Code of Ethics, must
adopt and enforce their own Codes of Ethics appropriate to their operations.
The Fund's board of managers is required to review and approve the Codes of
Ethics for its adviser, sub-adviser and principal underwriter.
The Codes of Ethics for the Fund, adviser, sub-adviser and principal
underwriter can be reviewed and copied at the Commission's Public Reference
Room in Washington, D.C. The hours of operation of the Public Reference Room
are available by calling 1-202-942-8090. The Codes of Ethics are also available
on the EDGAR Database on the Commission's Internet site at http://www.sec.gov.
Copies
B-5
are also available for a fee by electronic request at the following e-mail
address: publicinfo@sec.gov or by writing the Securities and Exchange
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549-0102.
Control of the Fund
The Insurance Company held of record more than 25% of the Fund's outstanding
units.
Proxy Voting Policies and Procedures
The board of managers has delegated to the Fund's sub-adviser the
responsibility for voting any proxies relating to portfolio securities held by
the Fund in accordance with the sub-adviser's proxy voting policies and
procedures. A summary of the proxy voting policies and procedures to be
followed by the Fund and the sub-adviser on behalf of the Fund, including
procedures to be used when a vote represents a conflict of interest, are
attached hereto as Appendix A.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available
(1) without charge, upon request, by calling 1-800-4LINCOLN (454-6265); and (2)
on the SEC's website at http://
www.sec.gov.
Investment Advisory and Related Services
This information is disclosed in the Prospectus.
Portfolio Managers
Information regarding each portfolio manager's other accounts managed, material
conflicts of interests, compensation, and any ownership of securities of the
Fund is attached hereto as Appendix B.
Portfolio Transactions and Brokerage
The sub-adviser places orders for the purchase and sale of securities for the
Fund's portfolio. It is the Fund's policy to have orders placed with brokers or
dealers who will give the best execution of such orders at prices and under
conditions most favorable to the Fund. The sub-adviser will customarily deal
with principal market makers in purchasing over-the-counter securities. In the
allocation of brokerage business, preference may be given to those brokers and
dealers who provide statistical, research, or other services - so long as there
is no sacrifice in getting the best price and execution.
Consistent with the policy of seeking best price and execution for the
transaction size and the risk involved, in selecting brokers or dealers or
negotiating the commissions to be paid, the sub-adviser considers each firm's
financial responsibility and reputation, range and quality of the service made
available to the fund and the broker's or dealer's professional services,
including execution, clearance procedures, wire service quotations and ability
to provide performance, statistical and other research information for
consideration, analysis and evaluation by the sub-adviser. In accordance with
this policy, the sub-adviser does not execute brokerage transactions solely on
the basis of the lowest commission rates available for a particular
transaction.
Securities of the same issuer may be purchased, held or sold at the same time
by the Fund or other accounts or companies for which the sub-adviser provides
investment advice (including affiliates of the sub-adviser). On occasions when
the sub-adviser deems the purchase or sale of a security to be in the best
interest of the Fund, as well as the other clients of the sub-adviser, the
sub-adviser, to the extent permitted by applicable laws and regulations, may
aggregate such securities to be sold or purchased for the Fund with those to be
sold or purchased for other clients in order to obtain best execution and lower
brokerage commissions, if any. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the sub-adviser in the manner it considers to be equitable and
consistent with its fiduciary obligations to all such clients, including the
Fund. In some instances, the procedures may impact the price and size of the
position obtainable for the Fund.
The sub-adviser may from time to time direct trades to brokers which have
provided specific brokerage or research services for the benefit of the
sub-adviser's clients; in addition, the sub-adviser may allocate trades among
brokers that generally provide superior brokerage and research services. During
2007, the sub-adviser directed transactions totaling approximately $37,417,938
to these brokers and paid commissions of approximately $39,256 in connection
with these transactions. Research services furnished by brokers are used for
the benefit of all the sub-adviser's clients and not solely or necessarily for
the benefit of the Fund. The sub-adviser believes that the value of research
services received is not determinable and does not significantly reduce its
expenses. The Fund does not reduce its fee payable to the adviser or the
sub-adviser by an amount that might be attributable to the value of such
services.
The Fund paid brokerage fees of $45,781 in 2007; $48,948 in 2006; and $37,918
in 2005.
B-6
No Commission to Finance Distribution
The 1940 Act permits a fund to use its selling brokers to execute transactions
in portfolio securities only if the fund or its adviser has implemented
policies and procedures designed to ensure that the selection of brokers for
portfolio securities transactions is not influenced by considerations relating
to the sale of Fund units. Accordingly, the Fund maintains, among other
policies, a policy that prohibits it from directing to a broker-dealer in
consideration for the promotion or sale of Fund units: (a) Fund portfolio
securities transactions; or (b) any commission or other remuneration received
or to be received from the Fund's portfolio transactions effected through any
other broker-dealer. The Fund has also established other policies and
procedures designed to ensure that its brokerage commissions are not used to
finance the distribution of Fund units.
Commission Recapture Program
The Fund has entered into a commission recapture program with Russell, pursuant
to which the commission rebates will be included in realized gain (loss) on
securities in the appropriate financial statements of the Fund. If DMC, the
sub-adviser, does not believe it can obtain best execution from such
broker-dealers, there is no obligation to execute portfolio transactions
through such broker-dealers. The board of managers, with the assistance of
Russell, intends to continue to review whether recapture opportunities are
available and, if so, to determine in the exercise of its business judgment
whether it would be advisable for the Fund to participate, or continue to
participate, in the commission recapture program.
Purchase and Pricing of Securities Being Offered
Offering to Public; Sales Load
This information is disclosed in the Prospectus.
General Formulas for Determining Value of the Accumulation Unit
The following formulas set out in general terms the computation of the
Accumulation Unit value at the close of trading on any day upon which the New
York Stock Exchange is open.
Investment Income + Capital Gains - Capital Losses -
Taxes
Gross Investment Rate =
Value of Fund at Beginningof Valuation Period
Net Investment Rate = Gross Investment Rate - .0000363 (for a one day Valuation
Period)
Net Investment Factor = Net Investment Rate + 1.00000000
Accumulation Unit Value
Accumulation Unit Value = x Net Investment Factor
on Preceding Valuation Date
Calculation of Accumulation Unit Value Using Hypothetical Example
The above computations may be illustrated by the following hypothetical
example. Assume that the value of the assets of the Fund at the beginning of a
one day valuation period was $5,000,000; that the value of an Accumulation Unit
on that date was $1.135; and that during the valuation period the investment
income was $4,000, the net unrealized capital gains were $6,000 and the net
realized capital losses were $3,000. Assuming these figures are net after
provision for applicable taxes, the value of the assets of the fund at the end
of the valuation period, before adding payments received during the period,
would thus be $5,007,000 ($5,000,000 plus $4,000 plus $6,000 minus $3,000).
The gross investment rate for the valuation period would be equal to (a) $7,000
($4,000 plus $6,000 less $3,000) divided by (b) $5,000,000 which produces .14%
(.0014). The net investment rate for the valuation period is determined by
deducting .00363% (.0000363) from the gross investment rate, which results in a
net investment rate of .13637% (.0013637). The net investment factor for the
valuation period would be determined as the net investment rate plus 1.0, or
1.0013637.
The value of the Accumulation Unit at the end of the valuation period would be
equal to the value at the beginning of the period ($1.135) multiplied by the
net investment factor for the period (1.0013637), which produces $1.1365478.
B-7
General Formulas for Determining Dollar Amount of Annuity Payments
Dollar Amount of First Monthly Payment
Number of Annuity Units =
Annuity Unit Value on Date of First Payment
Value of Annuity Unit Factor to Net Investment Factor
Annuity Unit Value = on Preceding x Neutralize x for 14th Day Preceding
Valuation Date AIR Current Valuation Date
Dollar Amount of Annuity Unit Value
Second and Subsequent = Number of Annuity Units x for Period in which
Annuity Payment Payment is Due
Calculation of Annuity Payments Using Hypothetical Example
The determination of the Annuity Unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume a contractowner or
participant at the date of retirement has credited to his individual account
30,000 Accumulation Units, and that the value of an Accumulation Unit on the
14th day preceding the last day of the valuation period in which annuity
payments commence was $1.15 producing a total value of his individual account
of $34,500. Assume also that the contractowner or participant elects an option
for which the table in the variable annuity contract indicates the first
monthly payment is $6.57 per $1.000 of value applies; the contractowner's or
participant's first monthly payment would thus be 34.5 multiplied by $6.57 or
$226.67.
Assume that the Annuity Unit value for the valuation period in which the first
payment was due was $1.10. When this is divided into the first monthly payment,
the number of Annuity Units represented by that payment is determined to be
206.064. The value of this same number of Annuity Units will be paid in each
subsequent month.
Assume further that the net investment factor for the Fund for the 14th day
preceding the last day of the valuation period in which the next annuity
payment is due is 1.0019. Multiplying this factor by .99990575 (for a one day
valuation period) to neutralize the assumed investment rate (AIR) of 3.5% per
year built into the number of Annuity Units determined as per above, produces a
result of 1.00180557. This is then multiplied by the Annuity Unit value for the
valuation period preceding the period in which the next annuity payment is due
(assume $1.105) to produce an Annuity Unit value for the current valuation
period of $1.10699515.
The current monthly payment is then determined by multiplying the fixed number
of Annuity Units by the current Annuity Unit value of 206.064 times
$1.10699515, which produces a current monthly payment of $228.11.
Other Services
Custodian
This information is disclosed in the Prospectus.
Independent Registered Public Accounting Firm
The financial statements of the Fund, and the consolidated financial statements
of Lincoln Life appearing in this SAI and Registration Statement have been
audited by Ernst & Young LLP, independent registered public accounting firm,
2300 National City Center, 110 West Berry Street, Fort Wayne, Indiana 46802, as
set forth in their reports, also appearing in this SAI and in the Registration
Statement. The financial statements audited by Ernst & Young LLP have been
included herein in reliance on their reports given on their authority as
experts in accounting and auditing.
Keeper of Records
All accounts, books, records and other documents which are required to be
maintained for the Fund are maintained by the Company or by third parties
responsible to the Fund or the Company. For example, some books, records and
other documents are maintained by DMC, the sub-adviser, and the Fund's
custodian, Mellon Bank, N.A., One Mellon Bank Center, 500 Grant Street,
Pittsburgh, Pennsylvania, 15258. Some books, records, and other documents are
maintained by Mellon Bank, N.A. (the Fund's accounting services provider), 2005
Market Street, 6th Floor, Philadelphia, Pennsylvania 19103 and Delaware
Services Company, Inc. ( the Funds' fund accounting and financial
administration oversight provider), One Commerce Square, 2005 Market Street,
Philadelphia, PA 19103. No separate charge against the assets of the Fund is
made by the Company for these services.
B-8
Principal Underwriter
Lincoln Financial Distributors ("LFD") serves as Principal Underwriter (the
"Principal Underwriter") for the variable annuity contracts as described in the
prospectus. LFD is affiliated with Lincoln Life and is registered as a
broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a
member of FINRA. The Principal Underwriter has entered into selling agreements
with Lincoln Financial Advisors ("LFA") also an affiliate of ours.
The Principal Underwriter anticipates continuing to accept payments under the
contracts, but reserves the right to discontinue accepting such payments. The
contracts are no longer being sold. The Prinicipal Underwriter paid
approximately $53,436 in 2007; 462,251 in 2006; and $35,892 in 2005 as sales
compensation with respect to the contracts. The Principal Underwriter did not
retain any underwriting commissions from the sale of the variable annuity
contracts during the past three fiscal years.
Determination of Accumulation Unit Value
A description of the days on which the Fund's accumulation unit values will be
determined is given in the Prospectus. The New York Stock Exchange is generally
closed on New Year's Day, Martin Luther King's birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. It may also be closed on other days.
Financial Statements
Financial statements of the VAA, and consolidated financial statements of
Lincoln Life appear on the following pages.
B-9
Appendix A
Delaware Management Company
The Fund has formally delegated to the manager the ability to make all proxy
voting decisions in relation to portfolio securities held by the Fund. If and
when proxies need to be voted on behalf of the Fund, the manager will vote such
proxies pursuant to its Proxy Voting Procedures (the "Procedures"). The Manager
has established a Proxy Voting Committee (the "Committee") which is responsible
for overseeing the Manager's proxy voting process for the Fund. One of the main
responsibilities of the committee is to review and approve the Procedures to
ensure that the Procedures are designed to allow the Manager to vote proxies in
a manner consistent with the goal of voting in the best interest of the Fund.
In order to facilitate the actual process of voting proxies, the Manager has
contracted with Institutional Shareholder Services ("ISS") to analyze proxy
statements on behalf of the Fund and other clients of the Manager and vote
proxies generally in accordance with the procedures. The Committee is
responsible for overseeing ISS's proxy voting activities. If a proxy has been
voted for the Fund, ISS will create a record of the vote. Beginning no later
than August 31 of each year, information (if any) regarding how the Fund voted
proxies relating to the Fund's portfolio securities during the most recent
12-month period ended June 30 is available without charge: (i) through the
Fund's website at delawareinvestment.com: and (ii) on the SEC's website at
http:www.sec.gov.
The Procedures contain a general guideline that recommendations of company
management on an issue (particularly routine issues) should be given a fair
amount of weight in determining how proxy issues should be voted. However, the
Manager will normally vote against management's position when it runs counter
to its specific Proxy Voting Guidelines (the "Guidelines"), and the Manager
will also vote against management's recommendation when it believes that such
position is not in the best interests of the Fund.
As stated above, the Procedures also list specific Guidelines on how to vote
proxies on behalf of the Fund. Some examples of the Guidelines are as follows:
(i) generally vote for shareholder proposals asking that a majority or more of
directors be independent; (ii) generally vote against proposals to require a
supermajority shareholder vote; (iii) votes on mergers and acquisitions should
be considered on a case-by-case basis, determining whether the transaction
enhances shareholder value; (iv) generally vote against proposals to create a
new class of common stock with superior voting rights; (v) generally vote
reincorporation proposals on a case-by-case basis; (vi) votes with respect to
equity-based compensation plans are generally determined on a case-by-case
basis; and (vii) generally vote for proposals requesting reports on the level
of greenhouse gas emissions from a company's operations and products.
Because the Fund has delegated proxy voting to the Manager, the Fund is not
expected to encounter any conflict of interest issues regarding proxy voting
and therefore does not have procedures regarding this matter. However, the
Manager does have a section in its Procedures that addresses the possibility of
conflicts of interest. Most proxies which the Manager receives on behalf of the
Fund are voted by ISS in accordance with the Procedures. Because almost all
Fund proxies are voted by ISS pursuant to the pre-determined Procedures, it
normally will not be necessary for the Manager to make an actual determination
of how to vote a particular proxy, thereby largely eliminating conflicts of
interest for the Manager during the proxy voting process. In the very limited
instances where the Manager is considering voting a proxy contrary to ISS's
recommendation, the Committee will first assess the issue to see if there is
any possible conflict of interest involving the Manager or affiliated persons
of the Manager. If a member of the Committee has actual knowledge of a conflict
of interest, the Committee will normally use another independent third party to
do additional research on the particular proxy issue in order to make a
recommendation to the Committee on how to vote the proxy in the best interests
of the Fund. The Committee will then review the proxy voting materials and
recommendation provided by ISS and the independent third party to determine how
to vote the issue in a manner which the Committee believes is consistent with
the Procedures and in the best interests of the Fund.
B-10
Appendix B
Portfolio Managers
The following provides information regarding each portfolio managers' other
accounts managed, material conflicts of interests, compensation, and any
ownership of securities in the Fund. Each portfolio manager or team member is
referred to in this section as a "portfolio manager." The portfolio managers
are shown together in this section only for ease in presenting the information
and should not be viewed for purposes of comparing the portfolio managers
against one another. Each portfolio manager may be affected by different
conflicts of interest.
Other Accounts Managed
The following table provides information about other accounts for which each
portfolio manager was primarily responsible as of December 31, 2007:
Registered Other Pooled
Investment Companies Investment Vehicles
------------------------------ ------------------------------
Number of Total Assets* in Number of Total Assets* in
Adviser/Sub-Adviser and Portfolio Manager Accounts the Accounts Accounts the Accounts
------------------------------------------- ----------- ------------------ ----------- ------------------
Delaware Management
Christopher Adams ......................... 8 3,500 0 0
Francis Morris ............................ 8 3,500 0 0
Michael Morris ............................ 8 3,500 0 0
Donald Padilla ............................ 8 3,500 0 0
Other Accounts
------------------------------
Number of Total Assets* in
Adviser/Sub-Adviser and Portfolio Manager Accounts** the Accounts
------------------------------------------- ------------ -----------------
Delaware Management
Christopher Adams ......................... 20 1,100
Francis Morris ............................ 20 1,100
Michael Morris ............................ 17 1,100
Donald Padilla ............................ 23 1,100
* in millions of dollars
** Any accounts managed in a personal capacity appear under "Other Accounts"
along with other accounts managed on a professional basis. The personal
account information is current as of the most recent calendar quarter-end
for which account statements are available.
Other Accounts Managed with Performance-Based Advisory Fees
The following table provides information for other accounts managed by each
portfolio manager, with respect to which the advisory fee is based on account
performance. Information is shown as of December 31, 2007:
Number of Accounts
Adviser/Sub-Adviser and Portfolio Managers With Incentive Fees Total Assets
-------------------------------------------- --------------------- -------------
Delaware Management Company (Francis X. 0 0
Morris, Christopher S. Adams, Michael S.
Morris, Donald G. Padilla)
Material Conflicts of Interest
Individual portfolio managers may perform investment management services for
other accounts similar to those provided to the fund and the investment action
for each account and fund may differ. For example, one account or fund may be
selling a security, while another account or fund may be purchasing or holding
the same security. As a result, transactions executed for one account and fund
may adversely affect the value of securities held by another account.
Additionally, the management of multiple accounts and funds may give rise to
potential conflicts of interest, as a portfolio manager must allocate time and
effort to multiple accounts and funds. A portfolio manager may discover an
investment opportunity may be limited, however, so that all accounts and funds
for which the investment would be suitable may not be able to participate.
Delaware has adopted procedures designed to allocate investments fairly across
multiple accounts.
A portfolio manager's management of personal accounts also may present certain
conflicts of interest. While Delaware's code of ethics is designed to address
these potential conflicts, there is no guarantee that it will do so.
Compensation Structures and Methods
Each portfolio manager's compensation consists of the following:
Base Salary
Each named portfolio manager receives a fixed base salary. Salaries are
determined by a comparison to industry benchmarking data prepared by third
parties to ensure that portfolio manager salaries are in line with salaries
paid at peer investment advisory firms.
Bonus - Mr. Francis Morris, Mr. Adams, Mr. Michael Morris and Mr. Padilla:
The bonus pool is determined by the revenues associated with the products a
portfolio manager manages. Delaware keeps a percentage of the revenues and the
remaining percentage of revenues (minus appropriate direct expenses associated
with this product and
B-11
the investment management team) create the "bonus pool" for a product. Various
members of the team have the ability to earn a percentage of the bonus pool
with the most senior contributors having the largest share.
Due to transitioning of responsibilities of this team during the year, 100% of
their bonuses for the prior year were subjective, determined in part based on
performance of the funds managed as compared to the appropriate Lipper peer
groups for a one-year period. It is anticipated that going forward an objective
component will be added in a manner similar to that described above (see
description under Beck, Madden and Hughes).
DEFERRED COMPENSATION - Each named portfolio manager is eligible to participate
in the Lincoln National Corporation Executive Deferred Compensation Plan, which
is available to all employees whose income exceeds a designated threshold. The
Plan is a non-qualified unfunded deferred compensation plan that permits
participating employees to defer the receipt of a portion of their cash
compensation.
STOCK OPTION INCENTIVE PLAN/EQUITY COMPENSATION PLAN - Portfolio managers may
be awarded options, stock appreciation rights, restricted stock awards and
restricted stock units relating to the underlying shares of common stock of
Delaware Investments U.S., Inc. pursuant to the terms of the Amended and
Restated Delaware Investments U.S., Inc. Incentive Compensation Plan. In
addition, certain managers may be awarded restricted stock units, or
"performance shares", in Lincoln National Corporation. Delaware Investments
U.S., Inc., is an indirect subsidiary of Delaware Management Holdings, Inc.
Delaware Management Holdings, Inc., is in turn an indirect, wholly-owned
subsidiary of Lincoln National Corporation.
The Amended and Restated Delaware Investments U.S., Inc. Incentive Compensation
Plan was established in 2001 in order to provide certain employees of the
Manager with a more direct means of participating in the growth of the
Manager. Under the terms of the plan, stock options typically vest in 25%
increments on a four-year schedule and expire ten years after issuance. Subject
to the terms of the plan, restricted stock units typically vest in 25%
increments on a four-year schedule, and shares of common stock underlying the
restricted stock awards will be issued after vesting. Awards are granted under
the plan from time to time by the investment manager in its full discretion.
Awards may be based in part on seniority. The fair market value of the shares
of Delaware Investments U.S., Inc., is normally determined as of each March 31,
June 30, September 30 and December 31. Shares issued upon the exercise of such
options or vesting of restricted stock units must be held for six months and
one day, after which time the shareholder may put them back to the issuer or
the shares may be called back from the shareholder from time to time, as the
case may be.
Portfolio managers who do not participate in the Delaware Investments U.S.,
Inc. Stock Option Plan are eligible to participate in Lincoln's Long-Term
Incentive Plan, which is designed to provide a long-term incentive to officers
of Lincoln. Under the plan, a specified number of performance shares are
allocated to each unit and are awarded to participants in the discretion of
their managers in accordance with recommended targets related to the number of
employees in a unit that may receive an award and the number of shares to be
awarded. The performance shares have a three year vesting schedule and, at the
end of the three years, the actual number of shares distributed to those who
received awards may be equal to, greater than or less than the amount of the
award based on Lincoln's achievement of certain performance goals relative to a
pre-determined peer group.
Other Compensation - Portfolio managers may also participate in benefit plans
and programs available generally to all employees.
Beneficial Interest of Portfolio Managers
Information regarding securities of the Fund beneficially owned, if any, by
portfolio managers is disclosed below. In order to own securities of the Fund,
a portfolio manager would need to own a Lincoln Life variable annuity contract.
Portfolio Managers are not required to own securities of the Fund. In addition,
although the level of a portfolio manager's securities ownership may be an
indicator of his or her confidence in the portfolio's investment strategy, it
does not necessarily follow that a portfolio manager who owns few or no
securities has any less confidence or is any less concerned about the
applicable portfolio's performance.
As of the Fund's fiscal year ended December 31, 2007, no portfolio manager of
the Fund beneficially owned securities of the Fund.
B-12
Lincoln Variable Insurance Products Trust
LVIP Delaware Growth and Income Fund
Standard Class
1300 South Clinton Street
Fort Wayne, Indiana 46802
Prospectus April 30, 2008
Each fund is a series of the Lincoln Variable Insurance Products Trust
(referred to as "fund") that sells its shares directly or indirectly to The
Lincoln National Life Insurance Company and its affiliates (Lincoln Life).
Lincoln Life holds the shares in its separate accounts to support variable
annuity contracts and variable life contracts (contracts). We refer to a
separate account as a variable account. Each variable account has its own
prospectus that describes the account and the contracts it supports. You choose
the fund or funds in which a variable account invests your contract assets. In
effect, you invest indirectly in the fund(s) that you choose under the
contract. This prospectus discusses the information about the fund that you
should know before choosing to invest your contract assets in the fund.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved or disapproved these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
-------------------------------------------------------------------------------
We have not authorized any dealer, salesperson, or any other person to give any
information, or to make any representation, other than what this prospectus
states.
[THIS PAGE INTENTIONALLY LEFT BLANK]
Fund Overview-LVIP Delaware Growth and Income Fund
What are the fund's goals and main investment strategies?
The investment objective of the LVIP Delaware Growth and Income Fund (fund) is
to maximize long-term capital appreciation.
The fund pursues its objective by investing in a diversified portfolio of
stocks primarily of large-sized U.S. companies with market capitalizations, at
the time of purchase, similar to the market capitalizations of the companies in
the Russell 1000 (Reg. TM) Index. The fund will also place some emphasis on
medium-sized companies.
The fund's management style focuses on seeking growth companies at a reasonable
price by blending:
o a growth oriented management style, which seeks companies with
earnings and/or revenues that are growing equal to or faster than the
industry average; and
o a value oriented management style, which seeks companies within an
industry with current stock prices that do not reflect the stocks'
perceived true worth.
More specifically, the fund seeks to invest in companies believed to:
o show earnings growth equal to or greater than the average expected
growth rate of the companies in the same industry; and
o be undervalued in the market relative to the companies' industry
peers.
The companies sought typically have:
o a long history of profit growth and dividend payment; and
o a reputation for quality management, products and service.
The sub-adviser has access to research and proprietary technical models and
will apply quantitative and qualitative analysis in determining the appropriate
allocations among categories of issuers and types of securities. The fund's
investments are selected using both a variety of quantitative techniques and
fundamental research in seeking to maximize the fund's expected return while
maintaining risk, style and capitalization characteristics similar to the
Russell 1000 Index.
In response to market, economic, political or other conditions, the fund may
temporarily use a different investment strategy for defensive purposes. If the
fund does so, different factors could affect fund performance and the fund may
not achieve its investment objective.
Lincoln Investment Advisors Corporation (LIA) serves as the investment adviser
to the fund. Day-to-day management of the fund's securities investments has
been sub-advised to Delaware Management Company (DMC), a series of Delaware
Management Business Trust. For more information regarding the investment
adviser and sub-adviser, please refer to the General Prospectus Disclosure.
What are the main risks of investing in the fund?
Investing in stocks involves the risk that the value of the stocks purchased
will fluctuate. These fluctuations could occur for a single company, an
industry, a sector of the economy, or the stock market as a whole. These
fluctuations could cause the value of the fund's stock investments and,
therefore, the value of the fund's shares held under your contract to
fluctuate, and you could lose money.
Moreover, the fund invests in medium-sized as well as large-sized companies,
and the fund's performance may be affected if stocks in one of these two groups
of companies do not perform as well as stocks in the other group. Further,
medium-sized companies, which are not as well-established as large-sized
companies, may (i) react more severely to market conditions and (ii) suffer
more from economic, political and regulatory developments.
DGI-1
How has the fund performed?
The following bar chart and table provide some indication of the risks of
choosing to invest your contract assets in the fund. The information shows: (a)
changes in the performance of the fund's Standard Class from year to year; and
(b) how the average annual returns of the fund's Standard Class for one year,
five year and ten year periods compare with those of a broad measure of market
performance. Please note that the past performance of the fund is not
necessarily an indication of how the fund will perform in the future. Further,
the returns shown do not reflect variable contract expenses. If reflected, the
returns shown would be lower.
[GRAPHIC OMITTED]
[CHART]
Annual Total Returns
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
20.34% 17.54% (9.63%) (11.21%) (22.07%) 29.71% 11.99% 5.54% 12.36% 6.12%
During the periods shown in the above chart, the fund's highest return for a
quarter occurred in the fourth quarter of 1998 at: 22.88%.
The fund's lowest return for a quarter occurred in the third quarter of 2002
at: (15.63%).
Average Annual Total Return
For periods ended 12/31/07
----------------------------
1 year 5 years 10 years
-------- --------- ---------
LVIP Delaware Growth and Income Fund 6.12% 12.82% 4.92%
Russell 1000 (Reg. TM) Index* 5.77% 13.43% 6.20%
* The Russell 1000 Index measures the performance of the 1,000 largest U.S.
companies based on total market capitalization.
Fees and Expenses
The following table describes the fees and expenses that are incurred if you
buy, hold, or sell shares of the fund. This table does not reflect any variable
contract expenses. If reflected, the expenses shown would be higher.
Shareholder Fees (fees paid by the investor directly)
Sales Charge (Load) Imposed on Purchases N/A
Deferred Sales Charge (Load) N/A
Maximum Sales Charge (Load) Imposed on Reinvested Dividends N/A
Redemption Fee N/A
Exchange Fee N/A
Account Maintenance Fee N/A
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
Management Fee 0.33%
Distribution and/or Service (12b-1) fees None
Other Expenses 0.07%
Annual Fund Operating Expenses 0.40%
DGI-2
The following example helps you compare the cost of investing in the fund with
the cost of investing in other mutual funds. The example illustrates the
hypothetical expenses that you would incur over the time periods indicated if
you invest $10,000 in the fund's shares. The example also assumes that the fund
provides a return of 5% a year and that operating expenses remain the same.
Your actual costs may be higher or lower than this example. This example does
not reflect any variable contract expenses. If reflected, the expenses shown
would be higher. The results apply whether or not you redeem your investment at
the end of the given period.
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
$41 $128 $224 $505
DGI-3
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Management of the Funds
The funds' business and affairs are managed under the direction of their board
of trustees. The board of trustees has the power to amend the funds' bylaws, to
declare and pay dividends, and to exercise all the powers of the funds except
those granted to the shareholders.
Manager of Managers. The funds employ a "manager of managers" structure. In
this regard, the funds have received an exemptive order from the SEC to permit
the funds' investment adviser, without further shareholder approval, to enter
into and materially amend sub-advisory agreements with sub-advisers upon
approval of the Trust's Board of Trustees. The SEC order is subject to certain
conditions. For example, within ninety days of the hiring of any new
sub-adviser, shareholders will be furnished with information that would be
included in a proxy statement regarding the new sub-adviser. Moreover, the
funds' adviser will not enter into a sub-advisory agreement with any affiliated
sub-adviser without shareholder approval. The adviser has ultimate
responsibility (subject to Board oversight) to oversee sub-advisers and to
recommend their hiring, termination, and replacement.
Investment Adviser and Sub-Advisers: Lincoln Investment Advisors Corporation
(LIA), formerly Jefferson Pilot Investment Advisory Corporation, is the
investment adviser to the funds. LIA is a registered investment adviser and
wholly-owned subsidiary of Lincoln National Corporation (LNC). Its address is
1300 South Clinton Street, Fort Wayne, IN 46802. LIA (or its predecessors) has
served as an investment adviser to mutual funds for over 20 years.
Prior to May 1, 2007, Delaware Management Company (DMC), another indirect
subsidiary of LNC, acted as the fund's investment adviser and was compensated
according to the same advisory fee rate. As a result of the merger between LNC
and Jefferson-Pilot Corporation in 2006, the organization had two separate
registered investment advisers - DMC and LIA. As part of an effort to
streamline the investment management operations, LIA became the investment
adviser to the funds. Where DMC managed the assets of a fund without a
sub-adviser, DMC entered into a sub-advisory agreement with LIA so that it
could continue to provide day-to-day portfolio management services to those
funds. Fund shareholders approved these new advisory and sub-advisory
arrangements on April 5, 2007.
LNC is a publicly-held insurance holding company organized under Indiana law.
Through its subsidiaries, LNC provides, on a national basis, insurance and
financial services.
Certain of the funds use sub-advisers who are responsible for the day-to-day
management of the fund's securities investments. Any sub-adviser to a fund,
where applicable, is paid out of the fees paid to the adviser.
The eight LVIP Wilshire Profile funds operate as "fund of funds." In this
structure, the fund invests in other mutual funds, which, in turn, invest
directly in portfolio securities. The expenses associated with investing in a
fund of funds are generally higher than those for funds that do not invest
primarily in other mutual funds because shareholders indirectly pay for a
portion of the fees and expenses charged at the underlying fund level.
The following chart lists each fund's investment adviser (with the effective
advisory fee rate for the most recently completed fiscal year), sub-adviser, if
any, and portfolio manager. The chart also indicates whether a fund operates as
a "fund of funds." The funds' SAI provides additional information about the
portfolio managers' compensation, other accounts managed by the portfolio
managers, and the portfolio managers' ownership of securities in the funds.
GPD-1
Fund Investment Adviser, Sub-Adviser, if any, and Portfolio Manager(s)
================================= ================================================================================================
LVIP Delaware Growth and Income Adviser: LIA (aggregate advisory fee paid to LIA and the fund's former adviser, for fiscal year
Fund ended December 31, 2007 was 0.33% of the fund's average net assets).
Sub-Adviser: DMC.
Portfolio Manager(s): A team consisting of Francis X. Morris, Christopher S. Adams, Michael
S. Morris and Donald G. Padilla is responsible for managing the process which determines the
timing and the amount of the investments in each category. This team is also responsible for
managing the stock category of the fund. Mr. Francis Morris, Senior Vice President and Chief
Investment Officer, Core Equity, served as vice president and director of equity research at
PNC Asset management prior to joining Delaware Investments in 1997. Mr. Adams, Vice
President/Portfolio Manager and Senior Equity Analyst, joined Delaware Investments in 1995.
Prior to joining Delaware Investments, Mr Adams had approximately ten years of experience
in the financial services industry in the U.S. and U.K., including positions with Coopers &
Lybrand, The Sumitomo Bank, Bank of America, and Lloyds Bank. He is a graduate of Oxford
University and received an MBA from the Wharton School of Business at the University of
Pennsylvania. Mr. Michael Morris, Vice President/Portfolio Manager and Senior Equity Analyst,
served as senior equity analyst at Newbold Asset Management prior to joining Delaware
Investments in 1999. Mr. Padilla, Vice President/Portfolio Manager and Senior Equity Analyst,
joined Delaware Investments in 1994 as an assistant controller. Prior to joining Delaware
Investments, Mr. Padilla held various positions at The Vanguard Group. Mr. Adams, Mr.
Michael Morris and Mr. Padilla are CFA charterholders.
Some of the funds using sub-advisers have names, investment objectives and
investment policies that are very similar to certain publicly available mutual
funds that are managed by these same sub-advisers. These funds will not have
the same performance as those publicly available mutual funds. Different
performance will result from many factors, including, but not limited to,
different cash flows into and out of the funds, different fees, and different
asset levels.
A discussion regarding the basis for the Trust's Board of Trustees approving
the investment advisory contract for the funds and the sub-advisory contracts
for certain of the funds is available in the annual report to shareholders for
the twelve month period ended December 31, 2007 or the semi-annual report to
shareholders for the six month period ended June 30, 2007.
Net Asset Value
The fund determines its net asset value per share (NAV) as of close of regular
trading (normally 4:00 p.m., New York time) on the New York Stock Exchange
(NYSE) on each day the NYSE is open for trading. The fund determines its NAV
by:
o adding the values of all securities investments and other assets;
o subtracting liabilities (including dividends payable); and
o dividing by the number of shares outstanding.
The fund's securities may be traded in other markets on days when the NYSE is
closed. Therefore, the fund's NAV may fluctuate on days when you do not have
access to the fund to purchase or redeem shares.
The fund typically values its securities investments as follows:
o equity securities, at their last sale prices on national securities
exchanges or over-the-counter, or, in the absence of recorded sales,
at the average of readily available closing bid and asked prices on
exchanges or over-the-counter; and
o debt securities, at the price established by an independent pricing
service, which is believed to reflect the fair value of these
securities; and
o fixed income securities with a maturity of less than sixty days are
priced at amortized cost.
In certain circumstances, the fund may value its portfolio securities at fair
value as estimated in good faith under procedures established by the fund's
board of trustees. When the fund uses fair value pricing, it may take into
account any factors it deems appropriate. The fund may determine fair value
based upon developments related to a specific security, current valuations of
foreign stock indices (as reflected in U.S. futures markets) and/or U.S. sector
or broader stock market indices. The price of securities used by the fund to
calculate its NAV may differ from quoted or published prices for the same
securities. Fair value pricing may involve subjective judgments, and it is
possible that the fair value determined for a security is materially different
than the value that could be realized upon the sale of that security.
GPD-2
The fund anticipates using fair value pricing for securities primarily traded
on U.S. exchanges only under very limited circumstances, such as the unexpected
early closing of the exchange on which a security is traded or suspension of
trading in the security. The fund may use fair value pricing more frequently
for securities primarily traded in non-U.S. markets because, among other
things, most foreign markets close well before the fund values its securities,
normally at 4:00 p.m. Eastern time. The earlier close of these foreign markets
gives rise to the possibility that significant events, including broad market
moves, may have occurred in the interim. To account for this, the fund may
frequently value many foreign equity securities using fair value prices based
on third party vendor modeling tools to the extent available.
Share Classes
The fund offers two classes of shares: the Standard Class and the Service
Class. The two classes of shares are identical, except that Service Class
shares are subject to a distribution (Rule 12b-1) fee, which is described in
the prospectus offering Service Class shares. This prospectus only offers
Standard Class shares.
Purchase and Redemption of Fund Shares
The fund sells its shares directly or indirectly to The Lincoln National Life
Insurance Company (Lincoln Life), Lincoln Life & Annuity Company of New York
(LNY), and other insurance companies. The insurance companies hold the fund
shares in separate accounts (variable accounts) that support various variable
annuity contracts and variable life insurance contracts.
The fund sells and redeems its shares, without charge, at their NAV next
determined after the fund or its agent receives a purchase or redemption
request. The value of shares redeemed may be more or less than original cost.
The fund normally pays for shares redeemed within seven days after the fund
receives the redemption request. However, a fund may suspend redemption or
postpone payment for any period when (a) the NYSE closes for other than
weekends and holidays; (b) the SEC restricts trading on the NYSE; (c) the SEC
determines that an emergency exists, so that a fund's disposal of investment
securities, or determination of net asset value is not reasonably practicable;
or (d) the SEC permits, by order, for the protection of fund shareholders.
LIA and its affiliates, including Lincoln Financial Distributors, Inc. ("LFD")
and/or the fund's sub-adviser, may pay additional compensation (at their own
expense and not as an expense of the fund) to certain affiliated or
unaffiliated brokers, dealers, or other financial intermediaries (collectively,
"financial intermediaries") in connection with the sale or retention of fund
shares or insurance products that contain the fund and/or shareholder servicing
("distribution assistance"). The level of payments made to a qualifying
financial intermediary in any given year will vary. To the extent permitted by
SEC and NASD rules and other applicable laws and regulations, LFD may pay or
allow its affiliates to pay other promotional incentives or payments to
financial intermediaries.
If a mutual fund sponsor, distributor or other party makes greater payments to
your financial intermediary for distribution assistance than sponsors or
distributors of other mutual funds make to your financial intermediary, your
financial intermediary and its salespersons may have a financial incentive to
favor sales of shares of the mutual fund complex making the higher payments
over another mutual fund complex or over other investment options. You should
consult with your financial intermediary and review carefully any disclosure
provided by such intermediary as to compensation it receives in connection with
investment products it recommends or sells to you. In certain instances, the
payments could be significant and may cause a conflict of interest for your
financial intermediary. Any such payments will not change the net asset value
or the price of the fund's shares, as such payments are not made from fund
assets.
For more information, please see the Statement of Additional Information.
Securities Lending
The fund may, subject to approval by the Board of Trustees, seek to increase
its income by lending its portfolio securities. Such loans will usually be made
to member banks of the Federal Reserve System and member firms (and
subsidiaries thereof) of the New York Stock Exchange and would be required to
be secured continuously by collateral in cash, U.S. Government securities or an
irrevocable letter of credit maintained on a current basis at an amount at
least equal to the market value of the securities loaned. A fund would continue
to collect the equivalent of the interest or dividends on the securities loaned
and would receive either interest (through investment of cash collateral) or a
fee (if the collateral is U. S. Government securities or a letter of credit).
The principal risk of portfolio lending is potential default or insolvency of
the borrower. In either of these cases a fund could experience delays in
recovering securities or collateral or could lose all or part of the value of
the loaned securities.
GPD-3
Market Timing
Frequent, large, or short-term transfers among the funds, such as those
associated with "market timing" transactions, may adversely affect the funds
and their investment returns. Such transfers may dilute the value of fund
shares, interfere with the efficient management of the fund's portfolio, and
increase brokerage and administrative costs of the funds. The risks of frequent
trading are more pronounced for funds investing a substantial percentage of
assets in overseas markets. This is due to the time differential in pricing
between U.S. and overseas markets, which market timers attempt to use to their
advantage. As a result, the funds discourage such trading activity. As an
effort to protect our fund investors and the funds from potentially harmful
trading activity, we utilize certain market timing policies and procedures that
have been approved by the fund's board of trustees (the "Market Timing
Procedures"). Our Market Timing Procedures are designed to detect and prevent
such transfer activity among the funds and other mutual funds supporting the
insurance contracts, that may adversely affect fund investors.
The fund reserves the right to reject or restrict any purchase order (including
exchanges) from any investor. The fund will exercise this right if, among other
things, the fund identifies an investor as a "market timer" under the Market
Timing Procedures.
While the fund has Market Timing Procedures, the fund, in seeking to identify
market timing, also relies on the insurance companies that hold shares of the
fund in separate accounts to support the insurance contracts. The fund receives
purchase, exchange and redemption orders through omnibus accounts maintained
for the fund. Omnibus account arrangements are common forms of holding shares
of the fund, particularly among insurance companies offering variable insurance
products and retirement plans. These arrangements permit intermediaries such as
insurance companies to aggregate their clients' transactions and ownership
positions. The fund has entered into an agreement with each insurance company
that holds fund shares to help detect and prevent market timing in the fund's
shares. The agreement generally requires such insurance company to (i) provide,
upon request by the fund, certain identifying and account information regarding
contract owners who investin fund shares through the omnibus account; and (ii)
execute instructions from the fund to restrict further purchases or exchanges
of fund shares by a contract owner who the fund has identified as a market
timer.
As part of the Market Timing Procedures, the fund reviews periodic trade
reports for unusual activity that may be suggestive of market timing. The fund
maintains guidelines for assessing unusual activity based upon a variety of
factors. Upon the identification of potential market timing, the fund contacts
the applicable insurance company. If the fund identifies the contract holder as
a "market timer," the insurance company will follow its procedures for
restricting the contract holder's trading activity.
Fund investors seeking to engage in frequent, large, or short-term transfer
activity may deploy a variety of strategies to avoid detection. Our ability to
detect and deter such transfer activity may be limited by operational systems
and technological limitations. The identification of fund investors determined
to be engaged in such transfer activity that may adversely affect other fund
investors involves judgments that are inherently subjective.
As a result of these noted limitations, there is no guarantee that the fund
will be able to identify possible market timing activity or that market timing
will not occur in the fund. If we are unable to detect market timers, you may
experience dilution in the value of your fund shares and increased brokerage
and administrative costs in the fund. This may result in lower long-term
returns for your investments.
In our sole discretion, we may revise our Market Timing Procedures at any time
without prior notice as necessary to better detect and deter frequent, large,
or short-term transfer activity to comply with state or federal regulatory
requirements, and/or to impose additional or alternate restrictions on market
timers (such as dollar or percentage limits on transfers). We also reserve the
right to implement and administer redemption fees imposed by the fund in the
future.
Insurance company sponsors of your contract may impose transfer limitations and
other limitations designed to curtail market timing. Please refer to the
prospectus and SAI for your variable annuity or variable life contract for
details.
Portfolio Holdings Disclosure
A description of the fund's policies and procedures with respect to the
disclosure of the fund's portfolio securities is available in the Statement of
Additional Information.
Distributions and Federal Income Tax Considerations
The fund's policy is to distribute substantially all of its net investment
income and net realized capital gains each year to its shareholders. The fund
may distribute net realized capital gains only once a year. Dividends and
capital gain distributions will be automatically reinvested in additional fund
shares of the same class of the fund at no charge.
GPD-4
Since all the shares of the fund are owned directly or indirectly by Lincoln
Life and LNY, this prospectus does not discuss the federal income tax
consequence at the shareholder level. For information concerning the federal
income tax consequences to owners of variable annuity contracts or variable
life insurance contracts (contract owners), see the prospectus for the variable
account.
Funds as Profile Fund Investments
The fund may accept investments from the Profile Funds and Target Maturity
Profile Funds, other investment series of the Trust, each of which operates as
a fund of funds. The "fund of funds" structure operates in reliance on the
federal securities laws and rules adopted thereunder which generally permit a
fund to sell its shares to other affiliated funds and non-affiliated funds
within strict percentage limitations. From time to time, the fund may
experience large investments or redemptions due to allocations or rebalancings
by the Profile Funds and Target Maturity Profile Funds. While it is impossible
to predict the overall impact of these transactions over time, there could be
adverse effects on the fund's portfolio management. For example, the fund may
be required to sell securities or invest cash at times when it would not
otherwise do so. These transactions could also increase transaction costs or
portfolio turnover.
GPD-5
Financial Highlights
The financial highlights table is intended to help you understand the financial
performance of each fund's Standard Class shares for the past 5 years or for
such shorter period of time as the fund has been in operation. Certain
information reflects financial results for a single fund share. Total
investment return is based on the change in net asset value of a share during
the period and assumes reinvestment of dividends and distributions at net asset
value. Total investment return reflects any waivers and payment of fees by the
manager, as applicable. If this is the case, performance would have been lower
had the expense limitation not been in effect. The table does not reflect any
variable contract expenses. If reflected, the expenses shown would be higher.
This information has been audited by Ernst & Young LLP, Independent Registered
Public Accounting Firm, whose report, along with each fund's financial
statements, is included in the annual report, which is available upon request.
Income from Investment Operations Less Dividends and Distributions From:
------------------------------------------- -------------------------------------------------------
Net Realized
and
Unrealized
Gain (Loss)
Net Asset Net on Total
Value Investment Investments and Total From Net Net Realized Dividends Net Asset
Beginning Income Foreign Investment Investment Gain on and Value End
Period Ended of Period (Loss) Currencies Operations Income Investments Distributions of Period
-------------- ----------- ------------ ----------------- ------------ ------------ -------------- --------------- -----------
LVIP Baron Growth 1,4,18
12/31/2007 $31.455 0.009 (1.478) (1.469) - - - $29.986
LVIP Capital Growth Fund 2,4,27,31
12/31/2007 $23.586 0.045 3.906 3.951 (0.026) - (0.026) $27.511
12/31/2006 $22.507 0.029 1.051 1.080 (0.001) - (0.001) $23.586
12/31/2005 $21.513 - 1.021 1.021 (0.027) - (0.027) $22.507
12/31/2004 $19.652 0.030 1.831 1.861 - - - $21.513
12/31/2003 $15.477 - 4.175 4.175 - - - $19.652
LVIP Cohen & Steers Global Real Estate Fund 1,4,17
12/31/2007 $10.000 0.111 (2.013) (1.902) (0.047) - (0.047) $ 8.051
LVIP Delaware Bond Fund 1,3,6
12/31/2007 $12.640 0.648 0.032 0.680 (0.642) - (0.642) $12.678
12/31/2006 $12.620 0.619 (0.028) 0.591 (0.571) - (0.571) $12.640
12/31/2005 $12.966 0.520 (0.188) 0.332 (0.546) (0.132) (0.678) $12.620
12/31/2004 $13.223 0.566 0.103 0.669 (0.534) (0.392) (0.926) $12.966
12/31/2003 $12.989 0.549 0.382 0.931 (0.578) (0.119) (0.697) $13.223
LVIP Delaware Growth and Income Fund 1,3,10
12/31/2007 $35.157 0.483 1.660 2.143 (0.443) - (0.443) $36.857
12/31/2006 $31.673 0.450 3.454 3.904 (0.420) - (0.420) $35.157
12/31/2005 $30.407 0.427 1.253 1.680 (0.414) - (0.414) $31,673
12/31/2004 $27.502 0.458 2.821 3.279 (0.374) - (0.374) $30.407
12/31/2003 $21.438 0.304 6.047 6.351 (0.287) - (0.287) $27.502
LVIP Delaware Managed Fund 1,3,12
12/31/2007 $16.957 0.416 0.353 0.769 (0.421) (0.395) (0.816) $16.910
12/31/2006 $15.708 0.366 1.285 1.651 (0.402) - (0.402) $16.957
12/31/2005 $15.391 0.305 0.384 0.689 (0.372) - (0.372) $15.708
12/31/2004 $14.299 0.306 1.108 1.414 (0.322) - (0.322) $15.391
12/31/2003 $11.881 0.245 2.458 2.703 (0.285) - (0.285) $14.299
LVIP Social Awareness Fund 1,3,14
12/31/2007 $35.920 0.401 0.661 1.062 (0.328) - (0.328) $36.654
12/31/2006 $32.259 0.326 3.637 3.963 (0.302) - (0.302) $35.920
12/31/2005 $29.034 0.297 3.189 3.486 (0.261) - (0.261) $32.259
12/31/2004 $26.001 0.368 2.921 3.289 (0.256) - (0.256) $29.034
12/31/2003 $19.875 0.222 6.099 6.321 (0.195) - (0.195) $26.001
LVIP Delaware Special Opportunities Fund 1,3,15
12/31/2007 $44.049 0.544 1.166 1.710 (0.424) (3.284) (3.708) $42.051
12/31/2006 $39.849 0.583 5.688 6.271 (0.537) (1.534) (2.071) $44.049
12/31/2005 $36.112 0.581 4.839 5.420 (0.436) (1.247) (1.683) $39.849
12/31/2004 $29,753 0.452 6.292 6.744 (0.385) - (0.385) $36.112
12/31/2003 $22.471 0.390 7.227 7.617 (0.335) - (0.335) $29.753
LVIP FI Equity-Income Fund 1,4,8,29
12/31/2007 $18.231 0.241 0.496 0.737 (0.211) (1.787) (1.998) $16.970
12/31/2006 $17.994 0.221 1.720 1.941 (0.205) (1.499) (1.704) $18.231
12/31/2005 $18.020 0.217 0.540 0.757 (0.204) (0.579) (0.783) $17.994
12/31/2004 $16.595 0.247 1.366 1.613 (0.188) - (0.188) $18.020
12/31/2003 $12.653 0.163 3.921 4.084 (0.142) - (0.142) $16.595
Ratio of Net Net
Ratio of Investment Assets At
Expenses to Income End of
Average (Loss) to Portfolio Period
Total Net Average Net Turnover (000's
Period Ended Return Assets Assets Rate omitted)
-------------- ------------ ------------- -------------- ----------- -------------
LVIP Baron Growth 1,4,18
12/31/2007 (4.67%) 1.04%45 0.05% 23%42 $ 16,095
LVIP Capital Growth Fund 2,4,27,31
12/31/2007 16.76% 0.78%46 0.18% 104% $ 262,609
12/31/2006 4.80% 0.80% 0.13% 89% $ 165,411
12/31/2005 4.77% 0.80% 0.00%43 77% $ 174,988
12/31/2004 9.47% 0.83% 0.13% 163% $ 189,265
12/31/2003 26.97% 0.90% 0.00%43 48% $ 190,185
LVIP Cohen & Steers Global Real Estate Fund 1,4,17
12/31/2007 (19.04%) 0.85%47 1.89% 84% $ 151,254
LVIP Delaware Bond Fund 1,3,6
12/31/2007 5.45% 0.40% 5.06% 462% $ 992,363
12/31/2006 4.71% 0.40% 4.89% 397% $ 943,819
12/31/2005 2.64% 0.41% 4.02% 270% $ 921,661
12/31/2004 5.30% 0.42% 4.31% 329% $ 898,105
12/31/2003 7.28% 0.44% 4.13% 652% $ 855,329
LVIP Delaware Growth and Income Fund 1,3,10
12/31/2007 6.12% 0.40% 1.29% 31% $1,823,930
12/31/2006 12.36% 0.38% 1.37% 29% $1,989,459
12/31/2005 5.54% 0.38% 1.39% 20% $2,076,169
12/31/2004 11.99% 0.37% 1.63% 38% $2,245,431
12/31/2003 29.71% 0.38% 1.28% 72% $2,242,161
LVIP Delaware Managed Fund 1,3,12
12/31/2007 4.58% 0.48% 2.38% 174% $ 477,666
12/31/2006 10.57% 0.50% 2.25% 143% $ 525,479
12/31/2005 4.49% 0.51% 1.96% 92% $ 545,772
12/31/2004 10.00% 0.49% 2.10% 145% $ 581,333
12/31/2003 22.90% 0.50% 1.90% 237% $ 587,274
LVIP Social Awareness Fund 1,3,14
12/31/2007 2.97% 0.41% 1.09% 15% $1,000,287
12/31/2006 12.31% 0.41% 0.97% 28% $1,131,469
12/31/2005 12.03% 0.42% 0.99% 28% $1,149,865
12/31/2004 12.70% 0.41% 1.38% 38% $1,111,254
12/31/2003 31.86% 0.43% 0.99% 60% $1,062,079
LVIP Delaware Special Opportunities Fund 1,3,15
12/31/2007 3.81% 0.44% 1.19% 7% $ 726,114
12/31/2006 16.05% 0.44% 1.40% 11% $ 807,158
12/31/2005 15.65% 0.45% 1.55% 13% $ 764,088
12/31/2004 22.76% 0.47% 1.43% 36% $ 652,224
12/31/2003 33.99% 0.52% 1.56% 80% $ 541,170
LVIP FI Equity-Income Fund 1,4,8,29
12/31/2007 4.36% 0.74%48 1.31% 141% $ 639,956
12/31/2006 11.27% 0.69%48 1.24% 199% $ 738,199
12/31/2005 4.49% 0.78%48 1.23% 151% $ 765,796
12/31/2004 9.77% 0.80% 1.47% 120% $ 830,276
12/31/2003 32.35% 0.82% 1.15% 134% $ 810,728
GPD-6
Income from Investment Operations Less Dividends and Distributions From:
------------------------------------------- -------------------------------------------------------
Net Realized
and
Unrealized
Gain (Loss)
Net Asset Net on Total
Value Investment Investments and Total From Net Net Realized Dividends Net Asset
Beginning Income Foreign Investment Investment Gain on and Value End
Period Ended of Period (Loss) Currencies Operations Income Investments Distributions of Period
-------------- ----------- ------------ ----------------- ------------ ------------ -------------- --------------- -----------
LVIP Janus Capital Appreciation Fund 1,4,7
12/31/2007 $20.116 0.095 4.019 4.114 (0.061) - (0.061) $24.169
12/31/2006 $18.376 0.051 1.725 1.776 (0.036) - (0.036) $20.116
12/31/2005 $17.680 0.038 0.704 0.742 (0.046) - (0.046) $18.376
12/31/2004 $16.793 (0.009) 0.896 0.887 - - - $17.680
12/31/2003 $12.678 (0.014) 4.129 4.115 - - - $16.793
LVIP Marsico International Growth Fund 2,4,19,33
12/31/2007 $15.102 0.224 2.875 3.099 (0.130) - (0.130) $18.071
12/31/2006 $12.190 0.059 2.862 2.921 (0.009) - (0.009) $15.102
12/31/2005 $10.263 0.040 1.943 1.983 (0.056) - (0.056) $12.190
12/31/2004 $ 8.794 0.060 1.434 1.494 (0.025) - (0.025) $10.263
12/31/2003 $ 6.792 0.040 2.050 2.090 (0.088) - (0.088) $ 8.794
LVIP MFS Value Fund 2,4,30,34
12/31/2007 $24.786 0.404 1.496 1.900 (0.264) - (0.264) $26.422
12/31/2006 $22.837 0.361 3.794 4.155 (0.286) (1.920) (2.206) $24.786
12/31/2005 $21.417 0.280 1.406 1.686 (0.266) - (0.266) $22.837
12.31/2004 $19.332 0.270 2.000 2.270 (0.185) - (0.185) $21.417
12/31/2003 $15.223 0.180 4.068 4.248 (0.139) - (0.139) $19.332
LVIP Mid-Cap Growth Fund (now LVIP Turner Mid-Cap Growth Fund) 2,4,39
12/31/2007 $11.330 (0.042) 2.838 2.796 - - - $14.126
12/31/2006 $11.025 (0.018) 0.778 0.760 - (0.455) (0.455) $11.330
12/31/2005 $ 9.820 (0.050) 1.255 1.205 - - - $11.025
12/31/2004 $ 8.780 (0.070) 1.110 1.040 - - - $ 9.820
12/31/2003 $ 5.870 (0.050) 2.960 2.910 - - - $ 8.780
LVIP Mid-Cap Value Fund 2,3,35
12/31/2007 $14.473 0.066 0.170 0.236 (0.051) - (0.051) $14.658
12/31/2006 $13.797 0.071 2.223 2.294 - (1.618) (1.618) $14.473
12/31/2005 $14.133 (0.010) 1.224 1.214 - (1.550) (1.550) $13.797
12/31/2004 $12.264 (0.010) 1.940 1.930 - (0.061) (0.061) $14.133
12/31/2003 $ 8.568 (0.010) 3.706 3.696 - - - $12.264
LVIP Mondrian International Value Fund 1,3,11,21
12/31/2007 $22.703 0.631 1.934 2.565 (0.482) (0.623) (1.105) $24.163
12/31/2006 $17.966 0.569 4.778 5.347 (0.610) - (0.610) $22.703
12/31/2005 $16.304 0.436 1.587 2.023 (0.361) - (0.361) $17.966
12/31/2004 $13.620 0.332 2.509 2.841 (0.157) - (0.157) $16.304
12/31/2003 $ 9.797 0.311 3.745 4.056 (0.233) - (0.233) $13.620
LVIP Money Market Fund 3,13
12/31/2007 $10.000 0.484 - 0.484 (0.484) - (0.484) $10.000
12/31/2006 $10.000 0.457 - 0.457 (0.457) - (0.457) $10.000
12/31/2005 $10.000 0.278 - 0.278 (0.278) - (0.278) $10.000
12/31/2004 $10.000 0.087 - 0.087 (0.087) - (0.087) $10.000
12/31/2003 $10.000 0.068 - 0.068 (0.068) - (0.068) $10.000
LVIP S&P 500 Index Fund (now LVIP SSgA S&P 500 Index Fund) 2,4,23,36
12/31/2007 $ 9.916 0.183 0.333 0.516 (0.114) - (0.114) $10.318
12/31/2006 $ 8.718 0.154 1.185 1.339 (0.141) - (0.141) $ 9.916
12/31/2005 $ 8.470 0.140 0.246 0.386 (0.138) - (0.138) $ 8.718
12/31/2004 $ 7.756 0.140 0.670 0.810 (0.096) - (0.096) $ 8.470
12/31/2003 $ 6.130 0.100 1.610 1.710 (0.084) - (0.084) $ 7.756
LVIP Small-Cap Index Fund (now LVIP SSgA Small-Cap Index Fund) 2,4,24,40
12/31/2007 $18.450 0.181 0.590 0.771 (0.125) - (0.125) $19.096
12/31/2006 $16.316 (0.044) 2.178 2.134 - - - $18.450
12/31/2005 $14.573 (0.090) 1.833 1.743 - - - $16.316
12/31/2004 $13.721 (0.100) 0.952 0.852 - - - $14,573
12/31/2003 $ 9.778 (0.080) 4.023 3.943 - - - $13.721
Ratio of Net Net
Ratio of Investment Assets At
Expenses to Income End of
Average (Loss) to Portfolio Period
Total Net Average Net Turnover (000's
Period Ended Return Assets Assets Rate omitted)
-------------- -------------- ------------- -------------- ----------- ----------
LVIP Janus Capital Appreciation Fund 1,4,7
12/31/2007 20.42% 0.69%49 0.43% 123% $506,900
12/31/2006 9.67% 0.70%49 0.27% 99% $488,232
12/31/2005 4.20% 0.73%49 0.22% 85% $544,301
12/31/2004 5.28% 0.80%49 (0.06%) 33% $659,385
12/31/2003 32.45% 0.82% (0.10%) 21% $789,544
LVIP Marsico International Growth Fund 2,4,19,33
12/31/2007 20.55% 1.03%50 1.35% 108% $209,614
12/31/2006 23.97% 1.12% 0.44% 106% $137,535
12/31/2005 19.46% 1.22% 0.27% 159% $ 50,762
12/31/2004 17.02% 1.28% 0.68% 145% $ 40,496
12/31/2003 31.38%20 1.29% 0.52% 234% $ 33,189
LVIP MFS Value Fund 2,4,30,34
12/31/2007 7.69% 0.78% 1.53% 22% $301,096
12/31/2006 19.66% 0.78%28 1.58% 164% $109,129
12/31/2005 7.98% 0.82% 1.20% 69% $ 83,737
12.31/2004 11.85% 0.82% 1.30% 39% $ 83,802
12/31/2003 28.18% 0.83% 1.08% 71% $ 82,914
LVIP Mid-Cap Growth Fund (now LVIP Turner Mid-Cap Growth Fund) 2,4,39
12/31/2007 24.68% 0.99%51 (0.33%) 199% $ 21,354
12/31/2006 6.72% 1.07% (0.16%) 156% $ 26,072
12/31/2005 12.27% 1.08% (0.56%) 158% $ 27,171
12/31/2004 11.84% 1.09% (0.77%) 175% $ 24,086
12/31/2003 49.59% 1.14% (0.89%) 167% $ 24,844
LVIP Mid-Cap Value Fund 2,3,35
12/31/2007 1.63% 1.03% 0.41% 71% $ 92,072
12/31/2006 17.69% 1.10% 0.52% 52% $ 62,172
12/31/2005 10.01% 1.13% (0.04%) 47% $ 45,854
12/31/2004 15.81% 1.19% (0.09%) 61% $ 45,088
12/31/2003 43.14% 1.21% (0.16%) 60% $ 40.020
LVIP Mondrian International Value Fund 1,3,11,21
12/31/2007 11.49% 0.80% 2.62% 15% $880,906
12/31/2006 30.01% 0.84% 2.80% 14% $796,037
12/31/2005 12.54% 0.92% 2.58% 7% $550,669
12/31/2004 20.94% 0.98% 2.33% 9% $435,012
12/31/2003 41.62% 1.04% 2.81% 14% $352,183
LVIP Money Market Fund 3,13
12/31/2007 4.97% 0.44% 4.84% N/A $620,605
12/31/2006 4.68% 0.49% 4.62% N/A $444,510
12/31/2005 2.79% 0.54% 2.78% N/A $331,371
12/31/2004 0.88% 0.53% 0.87% N/A $297,914
12/31/2003 0.68% 0.52% 0.69% N/A $350.584
LVIP S&P 500 Index Fund (now LVIP SSgA S&P 500 Index Fund) 2,4,23,36
12/31/2007 5.23% 0.28%52 1.75% 25% $504,728
12/31/2006 15.52% 0.28%52 1.69% 4% $236,510
12/31/2005 4.69% 0.28%52 1.60% 5% $233,215
12/31/2004 10.56% 0.28%52 1.74% 2% $237,290
12/31/2003 28.30% 0.28%52 1.48% 2% $214,568
LVIP Small-Cap Index Fund (now LVIP SSgA Small-Cap Index Fund) 2,4,24,40
12/31/2007 4.18% 0.52%53 1.13% 119% $166,199
12/31/2006 13.08% 0.86% (0.25%) 222% $ 71,306
12/31/2005 11.96% 0.85% (0.57%) 133% $ 70,150
12/31/2004 6.21% 0.87% (0.69%) 125% $ 67,705
12/31/2003 40.32% 0.92% (0.74%) 112% $ 72,514
GPD-7
Income from Investment Operations Less Dividends and Distributions From:
------------------------------------------- -------------------------------------------------------
Net Realized
and
Unrealized
Gain (Loss)
Net Asset Net on Total
Value Investment Investments and Total From Net Net Realized Dividends Net Asset
Beginning Income Foreign Investment Investment Gain on and Value End
Period Ended of Period (Loss) Currencies Operations Income Investments Distributions of Period
-------------- ----------- ------------ ----------------- ------------ ------------ -------------- --------------- -----------
LVIP T. Rowe Price Growth Stock Fund 2,3,22,37
12/31/2007 $16.859 0.090 1.415 1.505 (0.049) - (0.049) $18.315
12/31/2006 $14.910 0.078 1.906 1.984 (0.035) - (0.035) $16.859
12/31/2005 $14.097 0.050 0.829 0.879 (0.066) - (0.066) $14.910
12/31/2004 $12.855 0.070 1.172 1.242 - - - $14.097
12/31/2003 $ 9.739 - 3.116 3.116 - - - $12.855
LVIP T. Rowe Price Structured Mid-Cap Growth Fund 1,3,5,25
12/31/2007 $11.828 (0.004) 1.611 1.607 - - - $13.435
12/31/2006 $10.824 - 1.004 1.004 - - - $11.828
12/31/2005 $ 9.857 (0.026) 0.993 0.967 - - - $10.824
12/31/2004 $ 8.672 (0.039) 1.224 1.185 - - - $ 9.857
12/31/2003 $ 6.539 (0.029) 2.162 2.133 - - - $ 8.672
LVIP Templeton Growth Fund 2,4,38
12/31/2007 $31.307 0.724 1.782 2.506 (0.580) - (0.580) $33.233
12/31/2006 $27.119 0.566 6.074 6.640 (0.414) (2.038) (2.452) $31.307
12/31/2005 $25.886 0.440 1.762 2.202 (0.375) (0.594) (0.969) $27.119
12/31/2004 $22.084 0.390 3.668 4.058 (0.256) - (0.256) $25.886
12/31/2003 $16.832 0.290 5.301 5.591 (0.339) - (0.339) $22.084
LVIP UBS Global Asset Allocation Fund 1,3,9,26
12/31/2007 $15.646 0.301 0.668 0.969 (0.272) (0.754) (1.026) $15.589
12/31/2006 $14.535 0.273 1.767 2.040 (0.197) (0.732) (0.929) $15.646
12/31/2005 $14.186 0.187 0.729 0.916 (0.177) (0.390) (0.567) $14.535
12/31/2004 $12.704 0.190 1.515 1.705 (0.223) - (0.223) $14.186
12/31/2003 $10.890 0.134 2.045 2.179 (0.365) - (0.365) $12.704
LVIP Value Opportunities Fund (now LVIP Columbia Value Opportunities Fund) 2,3,32,41
12/31/2007 $14.491 0.076 0.184 0.260 (0.091) - (0.091) $14.660
12/31/2006 $14.637 0.013 1.501 1.514 - (1.660) (1.660) $14.491
12/31/2005 $15.344 0.040 0.613 0.653 - (1.360) (1.360) $14.637
12/31/2004 $13.083 (0.030) 2.574 2.544 - (0.283) (0.283) $15.344
12/31/2003 $ 9.635 (0.030) 3.478 3.448 - - - $13.083
LVIP Wilshire Conservative Profile Fund 1,4,16,44
12/31/2007 $11.392 0.276 0.605 0.881 (0.219) (0.048) (0.267) $12.006
12/31/2006 $10.591 0.187 0.797 0.984 (0.178) (0.005) (0.183) $11.392
12/31/2005 $10.000 0.131 0.460 0.591 - - - $10.591
LVIP Wilshire Moderate Profile Fund 1,4,16,44
12/31/2007 $12.047 0.226 0.885 1.111 (0.173) (0.059) (0.232) $12.926
12/31/2006 $10.866 0.132 1.171 1.303 (0.121) (0.001) (0.122) $12.047
12/31/2005 $10.000 0.082 0.784 0.866 - - - $10.866
LVIP Wilshire Moderately Aggressive Profile Fund 1,4,16,44
12/31/2007 $12.528 0.190 1.026 1.216 (0.212) (0.146) (0.358) $13.386
12/31/2006 $11.100 0.137 1.427 1.564 (0.135) (0.001) (0.136) $12.528
12/31/2005 $10.000 0.136 0.964 1.100 - - - $11.100
LVIP Wilshire Aggressive Profile Fund 1,4,16,44
12/31/2007 $13.153 0.106 1.329 1.435 (0.124) (0.183) (0.307) $14.281
12/31/2006 $11.392 0.069 1.809 1.878 (0.116) (0.001) (0.117) $13.153
12/31/2005 $10.000 0.055 1.337 1.392 - - - $11.392
LVIP Wilshire 2010 Profile Fund 1,4,17,44
12/31/2007 $10.000 0.150 0.511 0.661 (0.048) - (0.048) $10.613
LVIP Wilshire 2020 Profile Fund 1,4,17,44
12/31/2007 $10.000 0.130 0.407 0.537 (0.043) - (0.043) $10.494
LVIP Wilshire 2030 Profile Fund 1,4,17,44
12/31/2007 $10.000 0.115 0.588 0.703 (0.042) - (0.042) $10.661
LVIP Wilshire 2040 Profile Fund 1,4,17,44
12/31/2007 $10.000 0.127 0.453 0.580 (0.082) - (0.082) $10.498
Ratio of Net Net
Ratio of Investment Assets At
Expenses to Income End of
Average (Loss) to Portfolio Period
Total Net Average Net Turnover (000's
Period Ended Return Assets Assets Rate omitted)
-------------- ---------- ------------- -------------- ----------- ----------
LVIP T. Rowe Price Growth Stock Fund 2,3,22,37
12/31/2007 8.93% 0.83% 0.50% 54% $223,805
12/31/2006 13.33% 0.88% 0.50% 45% $ 87,555
12/31/2005 6.29% 0.88% 0.24% 38% $ 86,413
12/31/2004 9.66% 0.91% 0.49% 37% $ 91,576
12/31/2003 32.00% 0.92% 0.02% 105% $ 89,651
LVIP T. Rowe Price Structured Mid-Cap Growth Fund 1,3,5,25
12/31/2007 13.59% 0.82% (0.03%) 35% $247,671
12/31/2006 9.28% 0.85% 0.00% 41% $282,397
12/31/2005 9.81% 0.87% (0.26%) 38% $272,838
12/31/2004 13.66% 0.91% (0.44%) 106% $269,192
12/31/2003 32.62% 0.90% (0.39%) 94% $267,451
LVIP Templeton Growth Fund 2,4,38
12/31/2007 8.01% 0.81%54 2.18% 15% $163,596
12/31/2006 26.13% 0.85% 2.00% 19% $167,966
12/31/2005 8.88% 0.86% 1.66% 22% $133,060
12/31/2004 18.56% 0.88% 1.62% 24% $127,487
12/31/2003 34.09% 0.89% 1.57% 25% $115,062
LVIP UBS Global Asset Allocation Fund 1,3,9,26
12/31/2007 6.37% 0.87% 1.88% 99% $280,964
12/31/2006 14.51% 0.91% 1.83% 78% $291,846
12/31/2005 6.80% 0.93% 1.33% 91% $273,272
12/31/2004 13.54% 1.03% 1.46% 139% $268,263
12/31/2003 20.40% 1.06% 1.16% 191% $257,804
LVIP Value Opportunities Fund (now LVIP Columbia Value Opportunities Fund)
2,3,32,41
12/31/2007 1.80% 1.26% 0.50% 152% $ 24,565
12/31/2006 10.28% 1.34% 0.09% 54% $ 46,721
12/31/2005 5.10% 1.36% 0.25% 43% $ 51,276
12/31/2004 19.77% 1.40% (0.24%) 45% $ 54,455
12/31/2003 35.79% 1.42% (0.31%) 54% $ 44,982
LVIP Wilshire Conservative Profile Fund 1,4,16,44
12/31/2007 7.77% 0.25%55 2.32% 44% $ 36,768
12/31/2006 9.34% 0.30%55 1.72% 28% $ 10,474
12/31/2005 5.91% 0.30%55 1.87% 20% $ 2,440
LVIP Wilshire Moderate Profile Fund 1,4,16,44
12/31/2007 9.27% 0.25%56 1.78% 48% $106,381
12/31/2006 12.04% 0.30%56 1.16% 19% $ 39,500
12/31/2005 8.66% 0.30%56 1.16% 10% $ 12,391
LVIP Wilshire Moderately Aggressive Profile Fund 1,4,16,44
12/31/2007 9.81% 0.25%57 1.44% 48% $ 97,486
12/31/2006 14.14% 0.30%57 1.16% 27% $ 36,657
12/31/2005 11.00% 0.30%57 1.88% 10% $ 11,426
LVIP Wilshire Aggressive Profile Fund 1,4,16,44
12/31/2007 11.02% 0.25%58 0.75% 56% $ 41,110
12/31/2006 16.54% 0.30%58 0.57% 40% $ 15,102
12/31/2005 13.92% 0.30%58 0.75% 15% $ 4,280
LVIP Wilshire 2010 Profile Fund 1,4,17,44
12/31/2007 6.62% 0.25%59 2.12% 72% $ 4,395
LVIP Wilshire 2020 Profile Fund 1,4,17,44
12/31/2007 5.38% 0.25%60 1.86% 61% $ 9,355
LVIP Wilshire 2030 Profile Fund 1,4,17,44
12/31/2007 7.04% 0.25%61 1.61% 47% $ 6,438
LVIP Wilshire 2040 Profile Fund 1,4,17,44
12/31/2007 5.81% 0.25%62 1.80% 41% $ 3,285
1 The average shares outstanding method has been applied for per share
information.
2 The average shares outstanding method has been applied for per share
information for the years ended December 31, 2007 and 2006.
3 Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value.
GPD-8
4 Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of dividends and
distributions at net asset value. Total investment return reflects waivers
of fees by the manager. Performance would have been lower had the expense
limitation not been in effect.
5 Effective April 30, 2003, the Lincoln National Aggressive Growth Fund, Inc.
was merged into the Aggressive Growth Fund. The financial highlights for
periods prior to April 30, 2003 reflect the performance history of the
Lincoln National Aggressive Growth Fund, Inc.
6 Effective April 30, 2003, the Lincoln National Bond Fund, Inc. was merged
into the Bond Fund. The financial highlights for periods prior to April 30,
2003 reflect the performance history of the Lincoln National Bond Fund,
Inc.
7 Effective April 30, 2003, the Lincoln National Capital Appreciation Fund,
Inc. was merged into the Capital Appreciation Fund. The financial
highlights for periods prior to April 30, 2003 reflect the performance
history of the Lincoln National Capital Appreciation Fund, Inc.
8 Effective April 30, 2003, the Lincoln National Equity-Income Fund, Inc. was
merged into the Fund. The financial highlights for periods prior to April
30, 2003 reflect the performance history of the Lincoln National
Equity-Income Fund, Inc.
9 Effective April 30, 2003, the Lincoln National Global Asset Allocation
Fund, Inc. was merged into the Fund. The financial highlights for periods
prior to April 30, 2003 reflect the performance history of the Lincoln
National Global Asset Allocation Fund, Inc.
10 Effective April 30, 2003, the Lincoln National Growth and Income Fund, Inc.
was merged into the Fund. The financial highlights for periods prior to
April 30, 2003 reflect the performance history of the Lincoln National
Growth and Income Fund, Inc.
11 Effective April 30, 2003, the Lincoln National International Fund, Inc. was
merged into the Fund. The financial highlights for periods prior to April
30, 2003 reflect the performance history of the Lincoln National
International Fund, Inc.
12 Effective April 30, 2003, the Lincoln National Managed Fund, Inc. was
merged into the Fund. The financial highlights for periods prior to April
30, 2003 reflect the performance history of the Lincoln National Managed
Fund, Inc.
13 Effective April 30, 2003, the Lincoln National Money Market Fund, Inc. was
merged into the Fund. The financial highlights for periods prior to April
30, 2003 reflect the performance history of the Lincoln National Money
Market Fund, Inc.
14 Effective April 30, 2003, the Lincoln National Social Awareness Fund, Inc.
was merged into the Fund. The financial highlights for periods prior to
April 30, 2003 reflect the performance history of the Lincoln National
Social Awareness Fund, Inc.
15 Effective April 30, 2003, the Lincoln National Special Opportunities Fund,
Inc. was merged into the Fund. The financial highlights for periods prior
to April 30, 2003 reflect the performance history of the Lincoln National
Special Opportunities Fund.
16 Operations related to the Standard Class of the fund commenced May 3, 2005.
2005 ratios have been annualized and total return has not been annualized.
17 Operations related to the Standard Class of the fund commenced April 30,
2007. 2007 ratios have been annualized and total return has not been
annualized.
18 Operations related to the Standard Class of the fund commenced June 5,
2007. 2007 ratios have been annualized and total return has not been
annualized.
19 Commencing May 1, 2003 Marsico Capital Management LLC, replaced Lombard
Odier International Portfolio Management Ltd as the fund's sub-adviser.
20 In 2003, the fund received a non-recurring reimbursement which was recorded
as capital contribution. Excluding the effect of this payment from the
fund's ending net asset value per share, the total return for the year
ended December 31, 2003 would have been 30.91%
21 Commencing September 24, 2004, Mondrian Investment Partners Limited
replaced Delaware International Advisers Limited as the fund's sub-adviser.
22 Commencing May 1, 2003, T. Rowe Price Associates, Inc. replaced
Massachusetts Financial Services Company as the fund's sub-adviser.
23 Commencing December 12, 2003, Mellon Capital Management Corporation
replaced Barclays Global Fund Advisors as the fund's sub-adviser.
24 Commencing April 30, 2007, Mellon Capital Management Corporation replaced
Lord, Abbett & Co. LLC as the fund's sub-adviser.
25 Commencing January 1, 2004, T. Rowe Price replaced Putnam Investments as
the fund's sub-adviser.
26 Commencing January 1, 2004, UBS Global Asset Management (Americas), Inc.
replaced Putnam Investments as the fund's sub-adviser.
27 Commencing May 1, 2004, Wellington Management Company LLP replaced Janus
Capital Management as the fund's sub-adviser.
28 Net of expenses absorbed or waived. If no expenses had been absorbed, the
ratio of expenses to the average net assets for the LVIP MFS Value Fund
would have been 0.82% for 2006.
29 Commencing September 1, 2006, Pyramis Global Advisors, LLC, a subsidiary of
Fidelity Management and Research Company (FMR), replaced FMR as the fund's
sub-adviser.
30 Commencing November 15, 2006 Massachusetts Financial Services Company
replaced Credit Suisse Asset Management, LLC as the fund's sub-adviser.
31 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. Capital Growth
Portfolio (the "JPVF Fund"). The financial highlights for the periods prior
to April 30, 2007 reflect the performance of the JPVF Fund.
32 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. Small Cap Value
Portfolio (the "JPVF Fund"). The financial highlights for the periods prior
to April 30, 2007 reflect the performance of the JPVF Fund.
33 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. International Equity
Portfolio (the "JPVF Fund"). The financial highlights for the periods prior
to April 30, 2007 reflect the performance of the JPVF Fund.
34 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. Value Portfolio (the
"JPVF Fund"). The financial highlights for the periods prior to April 30,
2007 reflect the performance of the JPVF Fund.
35 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. Mid-Cap Value
Portfolio (the "JPVF Fund"). The financial highlights for the periods prior
to April 30, 2007 reflect the performance of the JPVF Fund.
36 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. S&P 500 Index
Portfolio (the "JPVF Fund"). The financial highlights for the periods prior
to April 30, 2007 reflect the performance of the JPVF Fund.
37 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. Strategic Growth
Portfolio (the "JPVF Fund"). The financial highlights for the periods prior
to April 30, 2007 reflect the performance of the JPVF Fund.
38 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. World Growth Stock
Portfolio (the "JPVF Fund"). The financial highlights for the periods prior
to April 30, 2007 reflect the performance of the JPVF Fund.
GPD-9
39 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. Mid-Cap Growth
Portfolio (the "JPVF Fund"). The financial highlights for the periods prior
to April 30, 2007 reflect the performance of the JPVF Fund.
40 Effective April 30 2007, the fund received all of the assets and
liabilities of the Jefferson Pilot Variable Fund, Inc. Small Company
Portfolio (the "JPVF Fund"). The financial highlights for the periods prior
to April 30, 2007 reflect the performance of the JPVF Fund.
41 Commencing October 15, 2007, Columbia Management Advisors, LLC replaced
Dalton, Greiner, Hartman, Maher & Co. as the fund's sub-adviser.
42 The Portfolio turnover is representative of the fund for the entire year.
43 The ratio calculates to less than 0.005%.
44 Ratio of expenses to average net assets does not include expenses of the
investment companies in which the fund invests.
45 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP Baron
Growth Opportunities Fund would have been 1.08% for 2007.
46 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Capital Growth Fund would have been 0.80% for 2007.
47 Net of advisory fee waiver and expenses absorbed or waived. If no fees had
been waived by the adviser, the ratio of expenses to the average net assets
for the LVIP Cohen & Steers Global Real Estate Fund would have been 1.10%
for 2007.
48 Net of expenses absorbed or waived.. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP FI
Equity-Income Fund would have been 0.81% for 2007, 0.80% for 2006, and
0.80% for 2005.
49 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP Janus
Capital Appreciation Fund would have been 0.82% for 2007, 0.83% for 2006,
0.83% for 2005 and 0.81% for 2004.
50 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Marsico International Growth Fund would have been 1.04% for 2007.
51 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Mid-Cap Growth Fund would have been 1.06% for 2007.
52 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP S&P
500 Index Fund would have been 0.32% for 2007, 0.34% for 2006, 0.34% for
2005, 0.34% for 2004, and 0.39% for 2003.
53 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Small-Cap Index Fund would have been 0.56% for 2007.
54 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Templeton Growth Fund would have been 0.84% for 2007.
55 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Wilshire Conservative Profile Fund would have been 0.33% for 2007, 0.54%
for 2006 and 1.53% for 2005.
56 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Wilshire Moderate Profile Fund would have been 0.29% for 2007, 0.32% for
2006, and 0.60% for 2005.
57 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Wilshire Moderately Aggressive Profile Fund would have been 0.29% for 2007,
0.36% for 2006 and 0.79% for 2005.
58 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Wilshire Aggressive Profile Fund would have been 0.34% for 2007, 0.61% for
2006 and 1.91% for 2005.
59 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Wilshire 2010 Profile Fund would have been 3.43% for 2007.
60 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Wilshire 2020 Profile Fund would have been 1.70% for 2007.
61 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Wilshire 2030 Profile Fund would have been 2.86% for 2007.
62 Net of expenses absorbed or waived. If no fees had been waived by the
adviser, the ratio of expenses to the average net assets for the LVIP
Wilshire 2040 Profile Fund would have been 5.14% for 2007.
General Information
This prospectus does not contain all the information included in the
registration statements that the funds have filed with the SEC. You may examine
the registration statements at the SEC in Washington, D.C. Statements made in
the prospectus about any variable annuity contract, variable life insurance
contract, or other document referred to in a contract, are not necessarily
complete. In each instance, we refer you to the copy of that contract or other
document filed as an exhibit to the related registration statement. We qualify
each statement in all respects by that reference.
The funds have received an exemptive order from the SEC, which allows the use
of fund shares by separate accounts funding variable annuity and variable life
insurance contracts, qualified plans, the investment manager, and insurance
company general accounts. Due to differences in redemption rates, tax
treatment, or other considerations, the interests of various contract owners
participating in the funds and the interests of qualified plans, the investment
manager, or general accounts investing in the funds might at some time be in
conflict. Violation of the federal tax laws by one separate account investing
in a fund could cause the contracts funded through
GPD-10
another separate account to lose its tax-deferred status, unless remedial
action was taken. The Trust's Board of Trustees will monitor for the existence
of any material irreconcilable conflicts and determine what action, if any,
will be taken in response to such conflicts.
A conflict could arise that requires a variable account to redeem a substantial
amount of assets from any of the funds. The redemption could disrupt orderly
portfolio management to the detriment of those contract owners still investing
in that fund. Also, that fund could determine that it has become so large that
its size materially impairs investment performance. The fund would then examine
its options.
You can find additional information in the Trust's statement of additional
information (SAI), which is on file with the SEC. The Trust incorporates its
SAI, dated April 30, 2008, into its prospectus. The Trust will provide a free
copy of its SAI upon request.
You can find further information about each fund's investments in the fund's
annual and semi-annual reports to shareholders, when available. The annual
report discusses the market conditions and investment strategies that
significantly affected the fund's performance during its last fiscal year. The
fund will provide a free copy of its annual and semi-annual report upon
request, when available.
The Trust will issue unaudited semi-annual reports showing current investments
and other information; and annual financial statements audited by the Trust's
independent auditors. For an SAI, annual or semi-annual report, either write
The Lincoln National Life Insurance Company, P.O. Box 2340, Fort Wayne, Indiana
46801, or call 1-800-4LINCOLN (454-6265). Also call this number to request
other information about a fund, or to make inquiries. The Trust does not
maintain an internet website.
You can review and copy information about the funds (including the SAIs) at the
SEC's public reference room in Washington, D.C. You can get information on the
operation of the public reference room by calling the SEC at 1-202-551-8090.
You can also get reports and other information about the funds on the EDGAR
Database on the SEC's Internet site at http://www.sec.gov. You can get copies
of this information, after paying a duplicating fee, by writing the SEC Public
Reference Section, 100 F. Street N.E., D.C. 20549, or by electronic request at
the following e-mail address: publicinfo@sec.gov.
SEC File No: 811-08090
GPD-11
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Lincoln Variable Insurance Products Trust
LVIP Baron Growth Opportunities Fund
LVIP Capital Growth Fund
LVIP Cohen & Steers Global Real Estate Fund
LVIP Columbia Value Opportunities Fund
LVIP Delaware Bond Fund
LVIP Delaware Growth and Income Fund
LVIP Delaware Managed Fund
LVIP Delaware Social Awareness Fund
LVIP Delaware Special Opportunities Fund
LVIP FI Equity-Income Fund
LVIP Janus Capital Appreciation Fund
LVIP Marsico International Growth Fund
LVIP MFS Value Fund
LVIP Mid-Cap Value Fund
LVIP Mondrian International Value Fund
LVIP Money Market Fund
LVIP SSgA S&P 500 Index Fund
LVIP SSgA Small-Cap Index Fund
LVIP T. Rowe Price Growth Stock Fund
LVIP T. Rowe Price Structured Mid-Cap Growth Fund
LVIP Templeton Growth Fund
LVIP Turner Mid-Cap Growth Fund
LVIP UBS Global Asset Allocation Fund
LVIP Wilshire Conservative Profile Fund
LVIP Wilshire Moderate Profile Fund
LVIP Wilshire Moderately Aggressive Profile Fund
LVIP Wilshire Aggressive Profile Fund
LVIP Wilshire 2010 Profile Fund
LVIP Wilshire 2020 Profile Fund
LVIP Wilshire 2030 Profile Fund
LVIP Wilshire 2040 Profile Fund
1300 South Clinton Street
Fort Wayne, Indiana 46802
Statement of Additional Information April 30, 2008
This Statement of Additional Information (SAI), which is not a prospectus,
provides more information about the thirty-one series - referred to as "funds"
- of Lincoln Variable Insurance Products Trust. The funds indicate the funds
named in the above caption. Each fund offers two classes of shares: the
Standard Class and the Service Class.
Each fund's audited financial statements and the report of Ernst &Young, LLP,
independent registered public accounting firm, are incorporated by reference to
the fund's 2007 annual report. This SAI should be read in conjunction with the
funds' prospectus dated April 30, 2008. You may obtain a copy of the funds'
prospectus or a fund's annual report on request and without charge. Please
write The Lincoln National Life Insurance Company, P.O. Box 2340, Fort Wayne,
Indiana 46801 or call 1-800-4LINCOLN (454-6265).
April 30, 2008
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Table of Contents
Item Page
Description of the Trust and the Funds 4
Fundamental Investment Restrictions 4
Additional Investment Strategies and Risks 5
Investment Strategies Available to All Funds 5
Investment Strategies Available to All Funds Except LVIP Money Market Fund 6
Investment Strategies and Limitations Applicable to Certain Funds 13
Portfolio Transactions and Brokerage 18
Portfolio Turnover 23
Trustees and Officers 24
Investment Adviser and Sub-Advisers 28
Portfolio Managers 37
Principal Underwriter 46
Administration Agreement 46
Accounting Agreement 46
Code of Ethics 48
Description of Shares 48
Control Persons and Principal Holders of Securities 49
Rule 12b-1 Plan 55
Revenue Sharing 55
Valuation of Portfolio Securities 56
Portfolio Holdings Disclosure 56
Purchase and Redemption Information 57
Custodian and Transfer Agent 58
Independent Registered Public Accounting Firm 58
Financial Statements 58
Taxes 58
APPENDIX A 60
APPENDIX B 62
APPENDIX C 109
Description of the Trust and the Funds
Lincoln Variable Insurance Product Trust (the Trust), a Delaware statutory
trust formed on February 1, 2003, is an open-end management investment company.
Prior to April 30, 2003, each fund in existence at the time was organized as a
separate Maryland corporation (each, a predecessor fund). Eleven series of the
Trust are successors to a predecessor fund, the assets and liabilities of which
were acquired and assumed, respectively, on April 30, 2003. Each fund's
investment objective and certain investment restrictions are fundamental and
cannot be changed without the affirmative vote of a majority of the outstanding
voting securities of the fund. There can be no assurance that the objective of
a fund will be achieved. Each of the funds except the LVIP Marsico
International Growth Fund, LVIP Cohen & Steers Global Real Estate Fund and the
funds of funds is diversified within the meaning of the Investment Company Act
of 1940 (1940 Act). References to adviser in this SAI include both Lincoln
Investment Advisors Corporation (LIA) and a fund's sub-adviser unless the
context otherwise indicates.
Fundamental Investment Restrictions
The funds have adopted certain fundamental policies and investment restrictions
which may not be changed without a majority vote of a fund's outstanding
shares. Such majority is defined in the 1940 Act as the vote of the lesser of
(1) 67% or more of the outstanding voting securities present at a meeting, if
the holders of more than 50% of the outstanding voting securities are present
in person or by proxy, or (2) more than 50% of the outstanding voting
securities. For purposes of the following restrictions: (a) all percentage
limitations apply immediately after the making of an investment; and (b) any
subsequent change in any applicable percentage resulting from market
fluctuations does not require elimination of any security from the portfolio.
Each fund may not:
1. Change its investment objective, except for the LVIP Capital Growth Fund,
LVIP Cohen & Steers Global Real Estate Fund, LVIP Columbia Value
Opportunities Fund, LVIP Marsico International Growth Fund, LVIP MFS Value
Fund, LVIP Mid-Cap Value Fund, LVIP SSgA S&P 500 Index Fund, LVIP SSgA
Small-Cap Index Fund, LVIP T. Rowe Price Growth Stock Fund, LVIP Templeton
Growth Fund, LVIP Turner Mid-Cap Growth Fund and the Target Maturity
Profile Funds.
2. Make investments that will result in the concentration (as that term may be
defined in the 1940 Act, any rule or order thereunder, or official
interpretation thereof) of its investments in the securities of issuers
primarily engaged in the same industry, provided that this restriction does
not limit the fund from investing in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, or in tax-exempt
securities or certificates of deposit, except for the LVIP Cohen & Steers
Global Real Estate Fund.
3. Borrow money or issue senior securities, except as the 1940 Act, any rule or
order thereunder, or official interpretation thereof, may permit.
4. Underwrite the securities of other issuers, except that the fund may engage
in transactions involving the acquisition, disposition or resale of its
portfolio securities, under circumstances where it may be considered to be
an underwriter under the Securities Act of 1933.
5. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments and provided that this restriction does not
prevent the fund from investing in issuers which invest, deal, or otherwise
engage in transactions in real estate or interests therein, or investing in
securities that are secured by real estate or interests therein.
6. Purchase or sell physical commodities, unless acquired as a result of
ownership of securities or other instruments and provided that this
restriction does not prevent the fund from investing in securities that are
secured by physical commodities or engaging in transactions involving
financial commodities, such as financial options, financial futures
contracts, options on financial futures contracts, and financial forward
contracts.
7. Make loans of any security or make any other loan if, as a result, more than
33 1|M/3% of its total assets would be lent to other parties, provided that
this limitation does not apply to purchases of debt obligations, to
repurchase agreements, and to investments in loans, including assignments
and participation interests.
8. (Except for the Risk-based Profile Funds, Target Maturity Profile Funds,
LVIP Cohen & Steers Global Real Estate Fund and LVIP Marsico International
Growth Fund) with respect to 75% of its total assets, invest in a security
if, as a result of such investment: (a) more than 5% of its total assets
would be invested in the securities of any one issuer or (b) the fund would
hold more than 10% of the outstanding voting securities of any one issuer;
except that these restrictions do not apply to (i) securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities or
(ii) securities of other investment companies.
Additional Investment Strategies and Risks
The prospectus discusses each fund's principal investment strategies used to
pursue the fund's investment objective and the risks of those strategies.
Unless otherwise stated in the prospectus, many investment strategies and
techniques are discretionary. That means the fund's adviser may elect to engage
or not engage in the various strategies and techniques at its sole discretion.
Investors should not assume that any particular discretionary investment
technique or strategy will be employed at all times, or ever employed.
Investment Strategies Available to All Funds
Money Market Instruments. Money market instruments include bank time deposits,
certificates of deposit, commercial paper, loan participations and bankers'
acceptances. Bank time deposits are funds kept on deposit with a bank for a
stated period of time in an interest-bearing account. Certificates of deposit
are certificates issued against funds deposited in a bank or financial
institution, are for a definite period of time, earn a specified rate of
return, and are normally negotiable. Commercial paper is a short-term note with
a maturity of up to nine months issued by banks, corporations or government
bodies. Loan participations are short-term, high-quality participations in
selected commercial bank loans issued by creditworthy banks.
Bankers' acceptances are short-term credit instruments used to finance
commercial transactions. Generally, a bankers' acceptance is a time draft or
bill of exchange drawn on a bank by an exporter or an importer to obtain a
stated amount of funds to pay for specific merchandise. The draft is then
accepted by a bank that, in effect, unconditionally guarantees to pay the face
value of the instrument on its maturity date. Bankers' acceptances may be
purchased in the secondary market at the going rate of discount for a specific
maturity. Although maturities for bankers' acceptances can be as long as 270
days, most bankers' acceptances have maturities of six months or less.
Repurchase Agreements. In a repurchase agreement, the fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount that is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value (at least equal to the amount of the agreed upon
resale price and marked-to-market daily) of the underlying security.
A fund may engage in a repurchase agreement with respect to any security in
which it is authorized to invest. While it does not presently appear possible
to eliminate all risks from these transactions (particularly the possibility of
a decline in the market value of the underlying securities, as well as delays
and costs to the fund in the event of bankruptcy of the seller), it is the
policy of the fund to limit repurchase agreements to those parties whose
creditworthiness has been reviewed and found satisfactory by the board of
trustees or its delegates. In addition, the collateral will be segregated and
will be marked-to-market daily to determine that the full value of the
collateral, as specified in the agreement, does not decrease below 102% of the
purchase price plus accrued interest. If such decrease occurs, additional
collateral will be requested and, when received, added to maintain full
collateralization. In the event of a default or bankruptcy by a selling
financial institution, the fund will seek to liquidate such collateral.
However, the fund may incur delay and costs in selling the underlying security
or may suffer a loss of principal and interest if the fund is treated as an
unsecured creditor and required to return the underlying collateral to the
seller's estate.
U.S. Government Securities. A fund may invest in securities issued or
guaranteed by the U.S. Government. Securities guaranteed by the U.S. Government
include: (1) direct obligations of the U.S. Treasury (such as Treasury bills,
notes and bonds) and (2) federal agency obligations guaranteed as to principal
and interest by the U.S. Treasury (such as Government National Mortgage
Association (GNMA) certificates and Federal Housing Administration (FHA)
debentures). These securities are of the highest possible credit quality,
because the payment of principal and interest is unconditionally guaranteed by
the U.S. Government. They are subject to variations in market value due to
fluctuations in interest rates, but, if held to maturity are deemed to be free
of credit risk for the life of the investment.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of, nor are they guaranteed by, the
U.S. Treasury. However, they do generally involve federal sponsorship in one
way or another. Some are backed by specific types of collateral. Some are
supported by the issuer's right to borrow from the U.S. Treasury. Some are
supported by the discretionary authority of the U.S. Treasury to purchase
certain obligations of the issuer. Others are supported only by the credit of
the issuing government agency or instrumentality. These agencies and
instrumentalities include, but are not limited to, Federal Land Banks, Farmers
Home Administration, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and Federal Home Loan Banks. There is no guarantee that the government
will support these types of securities and, therefore, they may involve more
risk than other government obligations.
U.S. Government securities may be acquired by the fund in the form of
separately-traded principal and interest segments of selected securities issued
or guaranteed by the U.S. Treasury. These segments are traded independently
under the Separate Trading of Registered Interest and Principal Securities
(STRIPS) program. Under the STRIPS program, the principal and interest parts are
individually numbered and separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the parts independently.
Obligations of the Resolution Funding Corp. are similarly divided into principal
and interest parts and maintained on the book entry records of the Federal
Reserve Banks.
The fund may also invest in custodial receipts that evidence ownership of
future interest payments, principal payments, or both, on certain U.S. Treasury
notes or bonds in connection with programs sponsored by banks and brokerage
firms. Such notes and bonds are held in custody by a bank on behalf of the
owners of the receipts. These custodial receipts are known by various names,
including Treasury Receipts (TRs), Treasury Interest Guarantee Receipts
(TIGRs), and Certificates of Accrual on Treasury Securities (CATS) and may not
be deemed U.S. Government securities.
The fund may invest occasionally in collective investment vehicles, the assets
of which consist principally of U.S. Government securities or other assets
substantially collateralized or supported by such securities, such as
government trust certificates.
In general, the U.S. Government securities in which the fund invests do not
have as high a yield as do more speculative securities not supported by the
U.S. Government or its agencies or instrumentalities.
Investment in Securities of Other Investment Companies. Subject to certain
restrictions, as described below, the funds are permitted to invest in other
investment companies, including open-end, closed-end or unregistered investment
companies, either within the percentage limits of the Investment Company Act of
1940 Act (1940 Act), any rule or order thereunder, or any SEC staff
interpretation thereof, or without regard to percentage limits in connection
with a merger, reorganization, consolidation, or other similar transaction. In
addition, certain sub-advisers may invest fund assets in money market funds
that they advise or in other investment companies. Each of the funds (except
the Risk-based Profile Funds and Target Maturity Funds) has a policy that
prohibits it from acquiring any securities of open-end investment companies or
registered unit investment trusts in reliance on Section 12(d)(1)(G) or Section
12(d)(1)(F) of the 1940 Act.
Exchange-Traded Funds ("ETFs"). These are a type of index fund bought and sold
on a securities exchange. An ETF trades like common stock and represents a
fixed portfolio of securities designed to track a particular market index. The
fund could purchase an ETF to temporarily gain exposure to a portion of the
U.S. or a foreign market while awaiting purchase of underlying securities. The
risks of owning an ETF generally reflect the risks of owning the underlying
securities they are designed to track, although lack of liquidity in an ETF
could result in it being more volatile and ETFs have management fees that
increase their costs.
Investment Strategies Available to All Funds Except LVIP Money Market Fund
Options on Securities. The funds may purchase and sell (write) put and call
options on securities that are traded on United States and foreign securities
exchanges and over-the-counter and on indices of securities. By purchasing a
put option, the purchaser obtains the right (but not the obligation) to sell
the option's underlying instrument at a fixed strike price. In return for this
right, the purchaser pays the current market price for the option (known as the
option premium). Options have various types of underlying instruments,
including specific securities, indices of securities prices, and futures
contracts. The purchaser may terminate its position in a put option by allowing
it to expire or by exercising the option. If the option is allowed to expire,
the purchaser will lose the entire premium. If the option is exercised, the
purchaser completes the sale of the underlying instrument at the strike price.
A purchaser may also terminate a put option position by closing it out in the
secondary market at its current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium, plus related
transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase,
rather than sell, the underlying instrument at the option's strike price. A
call buyer typically attempts to participate in potential price increases of
the underlying instrument with risk limited to the cost of the option if
security prices fall. At the same time, the buyer can expect to suffer a loss
if security prices do not rise sufficiently to offset the cost of the option.
The writer of a put or call option takes the opposite side of the transaction
from the option's purchaser. In return for receipt of the premium, the writer
of a put option assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The writer may seek to terminate a position in a put option before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option, however, the writer must
continue to be prepared to pay the strike price while the option is
outstanding, regardless of price changes. When writing an option on a futures
contract, a fund will be required to make margin payments to a futures
commission merchant (FCM) as described below for futures contracts.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit, because it should be able to close out the option at a lower
price. If security prices fall, the put writer would expect to suffer a loss.
This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
Writing a call option obligates the writer to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security price
increases.
The successful use of a fund's options strategies depends on the ability of the
adviser to forecast correctly market movements. For example, if the fund were
to write a call option based on the adviser's expectation that the price of the
underlying security would fall, but the price were to rise instead, the fund
could be required to sell the security upon exercise at a price below the
current market price. Similarly, if the fund were to write a put option based
on the adviser's expectation that the price of the underlying security would
rise, but the price were to fall instead, the fund could be required to
purchase the security upon exercise at a price higher than the current market
price.
When the fund purchases an option, it runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless
the fund exercises the option or enters into a closing sale transaction before
the option's expiration. If the price of the underlying security does not rise
(in the case of a call) or fall (in the case of a put) to an extent sufficient
to cover the option premium and transaction costs, the fund will lose part or
all of its investment in the option. This contrasts with an investment by the
fund in the underlying security, since the fund will not lose any of its
investment in such security if the price does not change.
A fund's written options positions will be covered at all times. A call option
written by a fund will be deemed to be covered if the fund holds the underlying
instrument or an option on the underlying instrument with an exercise price
equal to or less than the exercise price of the call written. A put option
written by a fund will be deemed to be covered if the fund holds a put option
on the same instrument with an exercise price equal to or greater than the
exercise price of the put option written by the fund. A fund may also cover a
written options position by segregating cash or liquid securities equal to the
fund's net uncovered obligation.
The effective use of options also depends on the fund's ability to terminate
option positions at times when the adviser deems it desirable to do so.
Although the fund will take an option position only if the adviser believes
there is a liquid secondary market for the option, there is no assurance that
the fund will be able to effect closing transactions at any particular time or
at an acceptable price.
If a secondary market in options were to become unavailable, the fund could no
longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series
of options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if
unusual events, such as volume in excess of trading or clearing capability,
were to interrupt its normal operations.
A market may at times find it necessary to impose restrictions on particular
types of options transactions, such as opening transactions. For example, if an
underlying security ceases to meet qualifications imposed by the market or the
Options Clearing Corp. (OCC), new series of options on that security will no
longer be opened to replace expiring series, and opening transactions in
existing series may be prohibited. If an options market were to become
unavailable, the fund as a holder of an option would be able to realize profits
or limit losses only by exercising the option, and the fund, as option writer,
would remain obligated under the option until expiration or exercise.
Disruption in the markets for the securities underlying options purchased or
sold by the fund could result in losses on the option. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the OCC or other options
markets may impose exercise restrictions. If a prohibition on exercise is
imposed at the time when trading in the option has also been halted, the fund
as purchaser or writer of an option will be locked into its position until one
of the two restrictions has been lifted. If the OCC were to determine that the
available supply of an underlying security appears insufficient to permit
delivery by the writers of all outstanding calls in the event of exercise, it
may prohibit indefinitely the exercise of put options. The fund, as holder of
such a put option could lose its entire investment if the prohibition remained
in effect until the put option's expiration and the fund was unable either to
acquire the underlying security or to sell the put option in the market.
Spreads and Straddles. In addition to the options strategies described
previously, a fund may engage in spread transactions in which it purchases and
writes a put or call option on the same underlying instrument, with the options
having different exercise prices and/or expiration dates. The fund may also
engage in so-called straddles, in which it purchases or sells combinations of
put and call options on the same instrument. Spread and straddle transactions
require the fund to purchase and/or write more than one option simultaneously.
Accordingly, the fund's ability to enter into such transactions and to
liquidate its positions when necessary or deemed advisable may be more limited
than if the fund were to purchase or sell a single option. Similarly, costs
incurred by the fund in connection with these transactions will in many cases
be greater than if the fund were to purchase or sell a single option.
A call option included in a spread or straddle will be deemed to be covered if
the fund holds an option on the same instrument with an exercise price equal to
or less than the exercise price of the call written (or, where the exercise
price is greater than that of the option written by the fund, if the fund
segregates cash or liquid securities equal to the difference). Similarly, a put
option included in a spread or straddle will be deemed to be covered if the fund
holds a put option on the same instrument with an exercise price equal to or
greater than the exercise price of the put option written by the fund (or, where
the exercise price is less than that of the option written by the fund, if the
fund segregates cash or liquid securities equal to the difference).
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter (OTC) options (options not traded
on exchanges) generally are established through negotiation with the other
party to the option contract. While this type of arrangement allows the
purchaser or writer greater flexibility to tailor an option to its needs, OTC
options generally involve greater credit risk than exchange-traded options,
which are guaranteed by the clearing organization of the exchanges where they
are traded.
Futures Contracts. The funds may enter into contracts for the purchase or sale
for future delivery of fixed income securities, foreign currencies or contracts
based on financial indices including interest rates or an index of U.S.
Government securities, foreign government securities, equity securities or
fixed income securities. The buyer or seller of a futures contract is not
required to deliver or pay for the underlying instrument unless the contract is
held until the delivery date. However, both the buyer and seller are required
to deposit initial margin for the benefit of an FCM when the contract is
entered into and maintain variation margin requirements. In the event of the
bankruptcy of an FCM that holds margin on behalf of the fund, the fund may be
entitled to return of margin owed to it only in proportion to the amount
received by FCM's other customers. The adviser will attempt to minimize this
risk by careful monitoring of the creditworthiness of the FCMs with which the
fund does business.
Pursuant to rules adopted by the Commodity Futures Trading Commission (CFTC),
each fund is permitted to engage in unlimited futures trading activity without
registration with the CFTC. Although the fund would deposit with the FCM margin
consisting of cash and liquid assets, these assets would be available to the
fund immediately upon closing out the futures position, while settlement of
securities transactions could take several days. However, because the fund's
cash that may otherwise be invested would be held uninvested or invested in
liquid assets so long as the futures position remains open, the fund's return
could be diminished due to the opportunity losses of foregoing other potential
investments.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal price relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced and prices in the futures market
distorted. Third, from the point of view of speculators, the margin deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
the foregoing distortions, a correct forecast of general price trends by the
adviser still may not result in a successful use of futures.
Because futures contracts are generally settled within a day from the date they
are closed out, compared with a settlement period of three days for some types
of securities, the futures markets may provide superior liquidity to the
securities markets. Nevertheless, there is no assurance that a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit on a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for the fund to enter
into new positions or close out existing positions. If the secondary market for
a futures contract is not liquid because of price fluctuation limits or
otherwise, the fund may not be able to promptly liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until the delivery date, regardless of changes in its value. As a
result, the fund's access to other assets held to cover its futures positions
also could be impaired.
Successful use of futures contracts is subject to the ability of the adviser to
correctly predict movements in the direction of interest rates or changes in
market conditions. These predictions involve skills and techniques that may be
different from those involved in the management of the portfolio being hedged.
In addition, there can be no assurance that there will be a correlation between
movements in the price of the underlying index or securities and movements in
the price of the securities which are the subject of the hedge. A decision of
whether, when and how to hedge involves the exercise of skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected trends in interest rates or markets.
Options on Futures Contracts. A fund may purchase and sell (write) call and put
options on futures contracts and enter into closing transactions with respect
to such options to terminate existing positions. The fund may use options on
futures contracts in lieu of writing or buying options directly on the
underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of
its portfolio securities, the fund may purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
the fund may purchase call options or write put options on futures contracts as
a substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the fund expects to purchase. Such
options generally operate in the same manner as options purchased or written
directly on the underlying investments.
As with options on securities, the holder or writer of an option may terminate
the position by selling or purchasing an offsetting option. There is no
guarantee that such closing transactions can be effected.
The fund will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements similar to those described above. The fund does not
intend to leverage the futures contracts.
Illiquid Investments. The funds may invest in securities or other investments
that are considered illiquid. A security or investment is considered illiquid
if it cannot be sold or disposed of in the ordinary course of business at
approximately the price at which it is valued. A security or investment might
be illiquid due to the absence of a readily available market or due to legal or
contractual restrictions on resale. LIA will determine the liquidity of
securities purchased by the funds, subject to oversight by the board of
trustees.
The fund may have to bear the expense of registering restricted securities for
resale and risk the substantive delays in effecting such registration. However,
the fund may avail itself of Rule 144A under the Securities Act of 1933 which
permits the fund to purchase securities which have been privately placed and
resell such securities to certain qualified institutional buyers without
restriction. Certain restricted securities that are not registered for sale to
the general public but can be resold to institutional investors may not be
considered illiquid, provided that a dealer or institutional trading market
exists. The institutional trading market is relatively new and liquidity of the
fund's investments could be impaired if trading fails to further develop, or if
it declines.
Borrowing. Each fund may borrow money to the extent permitted under the 1940
Act. Borrowing may exaggerate the effect on net asset value of any increase or
decrease in the market value of a fund. Money borrowed will be subject to
interest costs and other fees, which could reduce a fund's return and may or
may not be recovered by appreciation of the securities purchased. A fund also
may be required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate. In addition, purchasing securities when the fund has
borrowed money may involve an element of leverage.
Pledging Assets. A fund may not pledge, hypothecate, mortgage or otherwise
encumber its assets in excess of 15% of its total assets (taken at current
value) and then only to secure borrowings permitted by the "Borrowing"
restriction. The deposit of underlying securities and other assets in escrow
and other collateral arrangements with respect to margin for options on
financial futures contracts are not deemed to be pledges or other encumbrances.
Foreign Currency Transactions. A fund may hold foreign currency deposits from
time to time and may convert dollars and foreign currencies in the foreign
exchange markets. Although foreign exchange dealers generally do not charge a
fee for such conversions, they do realize a profit based on the difference
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency at one rate, while offering
a lesser rate of exchange should the counterparty desire to resell that
currency to the dealer. A fund also may enter into forward foreign currency
exchange contracts (forward contracts). Forward contracts are customized
transactions that require a specific amount of a currency to be delivered at a
specific exchange rate on a specific date or range of dates in the future.
Forward contracts are generally traded in an interbank market directly between
currency traders (usually large commercial banks) and their customers. The
parties to a forward contract may agree to offset or terminate the contract
before its maturity, or may hold the contract to maturity and complete the
contemplated currency exchange.
A fund will exchange foreign currencies for U.S. dollars and for other foreign
currencies in the normal course of business and may buy and sell currencies
through forward contracts in order to fix a price for securities it has agreed
to buy or sell (transaction hedge). The fund also may hedge some or all of its
investments denominated in or exposed to foreign currency against a decline in
the value of that currency relative to the U.S. dollar by entering into forward
contracts to sell an amount of that currency (or a proxy currency whose
performance is expected to replicate the performance of that currency)
approximating the value of some or all of its portfolio securities denominated
in or exposed to that currency (position hedge) or by participating in options
or futures contracts with respect to the currency. The fund also may enter into
a forward contract with respect to a currency where the fund is considering the
purchase of investments denominated in or exposed to that currency but has not
yet done so (anticipatory hedge).
A fund may enter into forward contracts to shift its investment exposure from
one currency into another. This may include shifting exposure from U.S. dollars
to a foreign currency, or from one foreign currency to another foreign
currency. This type of strategy, sometimes known as a "cross-hedge," will tend
to reduce or eliminate exposure to the currency that is sold, and increase
exposure to the currency that is purchased, much as if a fund had sold a
security denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause a fund to assume the risk of
fluctuations in the value of the currency it purchases.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the
fund may not always be able to enter into forward contracts at attractive
prices and may be limited in its ability to use these contracts to hedge fund
assets. Also, with regard to the fund's use of cross-hedges, there can be no
assurance that historical correlations between the movement of certain foreign
currencies relative to the U.S. dollar will continue. Poor correlation may
exist between movements in the exchange rates of the foreign currencies
underlying the fund's cross-hedges and the movements in the exchange rates of
the foreign currencies in which its assets that are the subject of such
cross-hedges are denominated.
Successful use of currency management strategies will depend on the adviser's
skill in analyzing currency values. Currency management strategies may
substantially change a fund's investment exposure to changes in currency
exchange rates and could result in losses to a fund if currencies do not perform
as the adviser anticipates. For example, if a currency's value rose at a time
when the adviser had hedged a fund by selling that currency in exchange for
dollars, a fund would not participate in the currency's appreciation. If the
adviser hedges currency exposure through proxy hedges, a fund could realize
currency losses from both the hedge and the security position if the two
currencies do not move in tandem. Similarly, if the adviser increases a fund's
exposure to a foreign currency and that currency's value declines, a fund will
realize a loss. There is no assurance that the adviser's use of currency
management strategies will be advantageous to a fund or that it will hedge at
appropriate times.
Options and Futures Relating to Foreign Currencies. Currency futures contracts
are similar to forward contracts, except that they are traded on exchanges (and
have margin requirements) and are standardized as to contract size and delivery
date. Most currency futures contracts call for payment or delivery in U.S.
dollars. The underlying instrument of a currency option may be a foreign
currency, which generally is purchased or delivered in exchange for U.S.
dollars, or may be a futures contract. The purchaser of a currency call obtains
the right to purchase the underlying currency, and the purchaser of a currency
put obtains the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to those of
options and futures relating to securities or indices, as discussed above. A
fund may purchase and sell currency futures and may purchase and write currency
options to increase or decrease its exposure to different foreign currencies.
Currency options may also be purchased or written in conjunction with each
other or with currency futures or forward contracts. Currency futures and
options values can be expected to correlate with exchange rates, but may not
reflect other factors that affect the value of a fund's investments. A currency
hedge, for example, should protect a Yen-denominated security from a decline in
the Yen, but will not protect a fund against a price decline resulting from
deterioration in the issuer's creditworthiness. Because the value of a fund's
foreign-denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the fund's investments exactly over time.
Unlike transactions entered into by a fund in futures contracts, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) by the Securities and Exchange Commission (SEC). To the contrary, such
instruments are traded through financial institutions acting as market-makers,
although foreign currency options are also traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board Options Exchange, subject to SEC regulation. Similarly, options on
currencies may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the buyer of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, an option writer and a buyer or seller of futures or forward
contracts could lose amounts substantially in excess of any premium received or
initial margin or collateral posted due to the potential additional margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in
the over-the-counter market, potentially permitting the fund to liquidate open
positions at a profit before exercise or expiration, or to limit losses in the
event of adverse market movements.
Foreign Options and Futures Markets. Options on U.S. Government securities,
futures contracts, options on futures contracts, forward contracts and options
on foreign currencies may be traded on foreign exchanges and over-the-counter
in foreign countries. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or securities.
The value of such positions also could be adversely affected by (1) other
complex foreign political and economic factors, (2) lesser availability than in
the United States of data on which to make trading decisions, (3) delays in the
fund's ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in
the United States, and (5) low trading volume.
Special risks are presented by internationally-traded options. Because of time
differences between the United States and the various foreign countries, and
because different holidays are observed in different countries, foreign options
markets may be open for trading during hours or on days when U.S. markets are
closed. As a result, option premiums may not reflect the current prices of the
underlying interest in the United States.
Debt and Other Fixed-Income Securities. Fixed-income securities include, but are
not limited to, preferred stocks, warrants, stock rights, corporate bonds and
debentures and longer-term government securities. Fixed-income securities also
include mortgage-backed securities, which are debt obligations issued by
government agencies and other non-government agency issuers. Mortgage-backed
securities include obligations backed by a mortgage or pool of mortgages and
direct interests in an underlying pool of mortgages. Mortgage-backed securities
also include collateralized mortgage obligations (CMOs). The mortgages involved
could be those on commercial or residential real estate properties. Fixed income
securities may be issued by U.S. companies, the U.S. Government and its agencies
and instrumentalities, foreign companies, foreign governments and their agencies
and instrumentalities, and supranational organizations such as (but not limited
to) the European Economic Community and the World Bank, or other issuers.
As a general matter, the value of debt securities will fluctuate with changes
in interest rates, and these fluctuations can be greater for debt securities
with longer maturities. The market value of debt securities typically varies
inversely to changes in prevailing interest rates. In periods of declining
interest rates, the value of debt securities typically increase. In periods of
rising interest rates, the value of those securities typically decrease. These
fluctuations in the value of debt securities may cause the value of the fund's
shares to fluctuate in value.
A fund's share price and yield also depend, in part, on the quality of its
investments. U.S. Government securities generally are of high quality. Debt
securities that are not backed by the full faith and credit of the United
States (including those of foreign governments) may be affected by changes in
the creditworthiness of the issuer of the security. The prices of investment
grade bonds generally fluctuate less than the prices of bonds that are below
investment grade. Investment grade bonds are those rated at the time of
purchase in the top four credit rating categories of Moody's Investors Service
(Moody's) or Standard & Poor's Corp. (S&P), or their equivalents from other
nationally recognized rating agencies, or are unrated securities judged by the
adviser to be of comparable value.
High Yield Fixed Income Securities. Debt securities rated below investment
grade by the primary rating agencies (bonds rated Ba or lower by Moody's or BB
or lower by S&P, or their equivalents from other nationally recognized rating
agencies) constitute lower-rated fixed income securities (commonly referred to
as high yield bonds). See Appendix A to the SAI for a description of these
ratings. Unrated bonds or bonds with split ratings are included in this limit
if the adviser determines that these securities have the same characteristics
as non-investment-grade bonds. Each fund (except the Money Market Fund) may
invest up to 15% of its total assets in high yield bonds.
High yield bonds involve a higher degree of credit risk, that is, the risk that
the issuer will not make interest or principal payments when due. In the event
of an unanticipated default, the fund would experience a reduction in its
income, and could expect a decline in the market value of the securities
affected. More careful analysis of the financial condition of each issuer of
high yield bonds is necessary. During an economic downturn or substantial
period of rising interest rates, issuers of high yield bonds may experience
financial stress which would adversely affect their ability to honor their
principal and interest payment obligations, to meet projected business goals,
and to obtain additional financing.
The market prices of high yield bonds are generally less sensitive to interest
rate changes than higher-rated investments, but more sensitive to adverse
economic or political changes, or in the case of corporate issuers, to
individual corporate developments. Periods of economic or political uncertainty
and change can be expected to result in volatility of prices of high yield
bonds. High yield bonds also may have less liquid markets than higher-rated
securities, and their liquidity as well as their value may be negatively
affected by adverse economic conditions. Adverse publicity and investor
perceptions as well as new or proposed laws may also have a negative impact on
the market for high yield bonds.
The market for high yield bonds may be less active than that for higher-rated
debt securities, which may make it difficult to value these securities. If
market quotations are not available, high yield bonds will be valued in
accordance with procedures established by the board of trustees, including the
use of outside pricing services. Judgment plays a greater role in valuing high
yield bonds than is the case for securities for which more external sources for
quotations and last-sale information are available.
Convertible Securities. Convertible securities are bonds, debentures, notes,
preferred stocks or other securities that may be converted or exchanged (by the
holder or by the issuer) into shares of the underlying common stock (or cash or
securities of equivalent value) at a stated exchange ratio. A convertible
security may also be called for redemption or conversion by the issuer after a
particular date and under certain circumstances (including a specified price)
established upon issue. If a convertible security held by a fund is called for
redemption or conversion, the fund could be required to tender it for
redemption, convert it into the underlying common stock, or sell it to a third
party.
Convertible securities generally have less potential for gain or loss than
common stocks. Convertible securities generally provide yields higher than the
underlying common stocks, but generally lower than comparable non-convertible
securities. Because of this higher yield, convertible securities generally sell
at prices above their "conversion value," which is the current market value of
the stock to be received upon conversion. The difference between this
conversion value and the price of convertible securities will vary over time
depending on changes in the value of the underlying common stocks and interest
rates. When the underlying common stocks decline in value, convertible
securities will tend not to decline to the same extent because of the interest
or dividend payments and the repayment of principal at maturity for certain
types of convertible securities. However, securities that are convertible other
than at the option of the holder generally do not limit the potential for loss
to the same extent as securities convertible at the option of the holder. When
the underlying common stocks rise in value, the value of convertible securities
may also be expected to increase. At the same time, however, the difference
between the market value of convertible securities and their conversion value
will narrow, which means that the value of convertible securities will
generally not increase to the same extent as the value of the underlying common
stocks. Because convertible securities may also be interest-rate sensitive,
their value may increase as interest rates fall and decrease as interest rates
rise. Convertible securities are also subject to credit risk, and are often
lower-quality securities.
Short Sales. Stocks underlying a fund's convertible security holdings can be
sold short. For example, if the adviser anticipates a decline in the price of
the stock underlying a convertible security held by the fund, it may sell the
stock short. If the stock price subsequently declines, the proceeds of the
short sale could be expected to offset all or a portion of the effect of the
stock's decline on the value of the convertible security. The fund currently
intends to hedge no more than 15% of its total assets with short sales on
equity securities underlying its convertible security holdings under normal
circumstances.
A fund will be required to segregate securities equivalent in kind and amount
to those sold short (or securities convertible or exchangeable into such
securities) and will be required to hold them aside while the short sale is
outstanding. The fund will incur transaction costs, including interest
expenses, in connection with opening, maintaining, and closing short sales.
Real Estate Investment Trusts. Equity real estate investment trusts own real
estate properties, while mortgage real estate investment trusts make
construction, development, and long-term mortgage loans. Their value may be
affected by changes in the value of the underlying property of the trusts, the
creditworthiness of the issuer, property taxes, interest rates, and tax and
regulatory requirements, such as those relating to the environment. Both types
of trusts are dependent upon management skill, are not diversified, and are
subject to heavy cash flow dependency, defaults by borrowers, self-liquidation,
and the possibility of failing to qualify for tax-free status of income under
the Internal Revenue Code and failing to maintain exemption from the 1940 Act.
Foreign Investments. Foreign investments can involve significant risks in
addition to the risks inherent in U.S. investments. The value of securities
denominated in or indexed to foreign currencies, and of dividends and interest
from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets, and
prices on some foreign markets can be highly volatile. Many foreign countries
lack uniform accounting and disclosure standards comparable to those applicable
to U.S. companies, and it may be more difficult to obtain reliable information
regarding an issuer's financial condition and operations. In addition, the
costs of foreign investing, including withholding taxes, brokerage commissions
and custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal
rights in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic or social instability, military action or unrest or adverse diplomatic
developments. There is no assurance that the adviser will be able to anticipate
these potential events or counter their effects.
Investing in securities of issuers located in countries considered to be
emerging markets involves additional risks. While emerging market countries may
change over time depending on market and economic conditions, at present the
fund believes that emerging market countries include every country in the world
except Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany,
Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United
States. The considerations noted previously generally are intensified for
investments in emerging market countries. Emerging market countries may have
relatively unstable governments, economies based on only a few industries and
securities markets that trade a small number of securities. Securities of
issuers located in these countries tend to have volatile prices and may offer
significant potential for loss as well as gain.
In addition to investing directly in equity securities, the funds may invest in
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and
Global Depositary Receipts (GDRs). Generally, ADRs in registered form are U.S.
dollar denominated securities designed for use in the U.S. securities markets,
which represent and may be converted into the underlying foreign security. EDRs
are typically issued in bearer form and are designed for use in the European
securities markets. GDRs are designed for use in the global securities markets.
Depositary receipts involve many of the same risks of investing directly in
foreign securities, including currency risks and risks of foreign investing.
Depositary receipts may be sponsored or unsponsored. Issuers of the stock of
unsponsored ADRs, EDRs and GDRs are not obligated to disclose material
information in the United States and, therefore, there may not be an accurate
correlation between such information and the market value of such depositary
receipts.
Temporary Defensive Strategies
In response to market, economic, political or other conditions, the funds may
temporarily use a different investment strategy for defensive purposes. If the
funds do so, different factors could affect fund performance and the funds may
not achieve their investment objectives.
Investment Strategies and Limitations Applicable to Certain Funds
Stock Index Futures (LVIP Columbia Value Opportunities Fund, LVIP Mid-Cap Value
Fund, LVIP SSgA Small-Cap Index Fund, LVIP T. Rowe Price Growth Stock Fund and
LVIP MFS Value Fund only). A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date, a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes
in the specified index of equity securities on which the future is based. Stock
index futures may be used to hedge the equity portion of a Portfolio's
securities portfolio with regard to market risk (involving the market's
assessment of over-all economic prospects), as distinguished from
stock-specific risk (involving the market's evaluation of the merits of the
issuer of a particular security). By establishing an appropriate "short"
position in stock index futures, a Portfolio may seek to protect the value of
its portfolio against an overall decline in the market for equity securities.
Alternatively, in anticipation of a generally rising market, a Portfolio can
seek to avoid losing the benefit of apparently low current prices by
establishing a "long" position in stock index futures and later liquidating
that position as particular equity securities are in fact acquired. To the
extent that these hedging strategies are successful, a Portfolio will be
affected to a lesser degree by adverse overall market price movements,
unrelated to the merits of specific portfolio equity securities, than would
otherwise be the case.
Mortgage-Related Securities (All funds except LVIP Capital Growth Fund, LVIP
Mid-Cap Value Fund, LVIP Money Market Fund, LVIP SSgA S&P 500 Index Fund, LVIP
SSgA Small-Cap Index Fund, LVIP Templeton Growth Fund and LVIP Turner Mid-Cap
Growth Fund). Mortgage-related securities are issued by government and
non-government entities such as banks, mortgage lenders, or other institutions.
A mortgage-related security is an obligation of the issuer backed by a mortgage
or pool of mortgages or a direct interest in an underlying pool of mortgages.
Some mortgage-related securities, such as collateralized mortgage obligations
(or CMOs), make payments of both principal and interest at a range of specified
intervals; others make semiannual interest payments at a predetermined rate and
repay principal at maturity (like a typical bond). Mortgage-related securities
are based on different types of mortgages, including those on commercial real
estate or residential properties. Stripped mortgage-related securities are
created when the interest and principal components of a mortgage-related
security are separated and sold as individual securities. In the case of a
stripped mortgage-related security, the holder of the "principal-only" security
(PO) receives the principal payments made by the underlying mortgage, while the
holder of the "interest-only" security (IO) receives interest payments from the
same underlying mortgage.
Fannie Maes and Freddie Macs are pass-through securities issued by Fannie Mae
and Freddie Mac, respectively. Fannie Mae and Freddie Mac, which guarantee
payment of interest and repayment of principal on Fannie Maes and Freddie Macs,
respectively, are federally chartered corporations supervised by the U.S.
Government that act as governmental instrumentalities under authority granted
by Congress. Fannie Mae is authorized to borrow from the U.S. Treasury to meet
its obligations. Fannie Maes and Freddie Macs are not backed by the full faith
and credit of the U.S. Government.
The value of mortgage-related securities may change due to shifts in the
market's perception of issuers and changes in interest rates. In addition,
regulatory or tax changes may adversely affect the mortgage-related securities
market as a whole. Non-government mortgage-related securities may offer higher
yields than those issued by government entities, but also may be subject to
greater price changes than government issues. Mortgage-related securities are
subject to prepayment risk, which is the risk that early principal payments
made on the underlying mortgages, usually in response to a reduction in
interest rates, will result in the return of principal to the investor, causing
it to be invested subsequently at a lower current interest rate. Alternatively,
in a rising interest rate environment, mortgage-related security values may be
adversely affected when prepayments on underlying mortgages do not occur as
anticipated, resulting in the extension of the security's effective maturity
and the related increase in interest rate sensitivity of a longer-term
instrument (extension risk). The prices of stripped mortgage-related securities
tend to be more volatile in response to changes in interest rates than those of
non-stripped mortgage-related securities.
Asset-Backed Securities (All funds except LVIP Capital Growth, LVIP MFS Value
Fund, LVIP Mid-Cap Value Fund, LVIP Money Market Fund, LVIP SSgA S&P 500 Index
Fund, LVIP SSgA Small-Cap Index Fund, LVIP Templeton Growth Fund and LVIP
Turner Mid-Cap Growth Fund). Asset-backed securities represent interests in
pools of mortgages, loans, receivables or other assets. Payment of interest and
repayment of principal may be largely dependent upon the cash flows generated
by the assets backing the securities and, in certain cases, supported by
letters of credit, surety bonds, or other credit enhancements. Asset-backed
security values may also be affected by other factors including changes in
interest rates, the availability of information concerning the pool and its
structure, the creditworthiness of the servicing agent for the pool, the
originator of the loans or receivables, or the entities providing the credit
enhancement. If the credit enhancement is exhausted, certificate holders may
experience losses or delays in payment if the required payments of principal
and interest are not made to the trust with respect to the underlying loans.
In addition, these securities may be subject to prepayment risk. Prepayment,
which occurs when unscheduled or early payments are made on the underlying
obligations, may shorten the effective maturities of these securities and may
lower their total returns. Additionally, asset-backed securities are also
subject to maturity extension risk. This is the risk that in a period of rising
interest rates, prepayments may occur at a slower than expected rate, which may
cause these securities to fluctuate more widely in response to changes in
interest rates.
Delayed Delivery and When-Issued Securities and Forward Commitments (LVIP
Capital Growth Fund, LVIP Columbia Value Opportunities Fund, LVIP Delaware Bond
Fund, LVIP Delaware Managed Fund, LVIP Janus Capital Appreciation Fund, LVIP
Marsico International Growth Fund, LVIP MFS Value Fund, LVIP Mid-Cap Value
Fund, LVIP SSgA S&P 500 Index Fund, LVIP SSgA Small-Cap Index Fund, LVIP T.
Rowe Price Growth Stock Fund, LVIP T. Rowe Price Structured Mid-Cap Growth
Fund, LVIP Templeton Growth Fund and LVIP Turner Mid-Cap Growth Fund only).
Each fund may purchase securities on a delayed delivery or when-issued basis
and may purchase or sell securities on a forward commitment basis. When such
transactions are negotiated, the price is fixed at the time of the commitment,
but delivery and payment can take place a month or more after the date of the
commitment. The securities so purchased are subject to market fluctuation and
no interest accrues to the purchaser during this period. While a fund will only
purchase securities on a when-issued, delayed delivery or forward commitment
basis with the intention of acquiring the securities, the fund may sell the
securities before the settlement date, if it is deemed advisable. At the time
the fund makes the commitment to purchase securities on a when-issued or
delayed delivery basis, the fund will record the transaction and thereafter
reflect the value, each day, of such security in determining the net asset
value of the fund. At the time of delivery of the securities, the value may be
more or less than the purchase price. The fund will also segregate cash or
liquid assets equal in value to commitments for such when-issued or delayed
delivery securities; subject to this requirement, the fund may purchase
securities on such basis without limit. An increase in the percentage of the
fund's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the fund's net asset
value. The board of trustees does not believe that the fund's net asset value
or income will be adversely affected by its purchases of securities on such
basis.
Special Situations (LVIP Janus Capital Appreciation Fund and LVIP T. Rowe Price
Structured Mid-Cap Growth Fund only). A fund may invest in certain securities
under special situations. A special situation arises when, in the adviser's
opinion, the securities of a particular company will be recognized and will
appreciate in value due to a specific development at that company. Developments
creating a special situation might include a new product or process, a
management change, a technological breakthrough or another event considered
significant. Investment in special situations may carry an additional risk of
loss in the event that the anticipated development does not occur or does not
attract the expected attention.
A fund may invest in the securities of companies which have been in continuous
operation for less than three years, or have capitalizations of less than $250
million at the time of purchase. Securities of these companies may have limited
liquidity which can result in their being priced lower than they may be
otherwise. Investments in unseasoned or smaller companies are more speculative
and involve greater risk than do investments in companies with established
operating records or that are larger.
Reverse Repurchase Agreements (LVIP Janus Capital Appreciation Fund and LVIP FI
Equity-Income Fund only). In a reverse repurchase agreement, a fund sells a
security to another party, such as a bank or broker-dealer, in return for cash
and agrees to repurchase that security at an agreed-upon price and time.
Reverse repurchase agreements may be used to provide cash to satisfy unusually
heavy redemption requests or for other temporary or emergency purposes without
the necessity of selling portfolio securities, or to earn additional income on
portfolio securities.
While a reverse repurchase agreement is outstanding, the fund will segregate
appropriate liquid assets to cover its obligation under the agreement. The fund
will enter into reverse repurchase agreements only with parties that the board
of trustees, or its delegate, deems creditworthy. Such transactions may
increase fluctuations in the market value of the fund's assets and may be
viewed as a form of leverage.
Swaps and Swaps-Related Products (LVIP Capital Growth Fund, LVIP Columbia Value
Opportunities Fund, LVIP Delaware Bond Fund, LVIP Delaware Managed Fund, LVIP
Janus Capital Appreciation Fund, LVIP FI Equity-Income Fund and LVIP UBS Global
Asset Allocation Fund only). A fund may enter into interest rate swaps, caps
and floors on either an asset-based or liability-based basis, depending upon
whether it is hedging its assets or its liabilities. An interest rate swap is a
contract in which two parties exchange different types of interest payment
streams, pegged to an underlying notional principal amount. The three main
types of interest rate swaps are coupon swaps (fixed rate to floating rate in
the same currency); basis swaps (one floating rate index to another floating
rate index in the same currency); and cross-currency interest rate swaps (fixed
rate in one currency to floating rate in another). A cap is a contract for
which the buyer pays a fee, or premium, to obtain protection against a rise in
a particular interest rate above a certain level. For example, an interest rate
cap may cover a specified principal amount of a loan over a designated time
period, such as a calendar quarter. If the covered interest rate rises above
the rate ceiling, the seller of the rate cap pays the purchaser an amount of
money equal to the average rate differential times the principal amount times
one-quarter. A floor is a contract in which the seller agrees to pay to the
purchaser, in return for the payment of a premium, the difference between
current interest rates and an agreed (strike) rate times the notional amount,
should interest rates fall below the agreed level (the floor). A floor contract
has the effect of a string of interest rate guarantees.
The fund will usually enter into interest rate swaps on a net basis (i.e., the
two payment streams are netted out, with the fund receiving or paying, as the
case may be, only the net amount of the two payments). The net amount of the
excess, if any, of the fund's obligations over its entitlement with respect to
each interest rate swap will be calculated on a daily basis and an amount of
cash or liquid assets having an aggregate net asset value at least equal to the
accrued excess will be segregated by the fund's custodian. If the fund enters
into an interest rate swap on other than a net basis, it will segregate the full
amount of its obligations, accrued on a daily basis, with respect to the swap.
The fund will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in one of the three highest credit rating categories of at
least one nationally recognized statistical rating organization at the time of
entering into such transaction. The adviser will monitor the creditworthiness of
all counterparties on an ongoing basis. If there is a default by the other party
to such a transaction, the fund will have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The adviser has determined that, as
a result, the swap market has become relatively liquid. Caps and floors are
more recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. To the extent the
fund sells (i.e., writes) caps and floors, it will maintain cash or liquid
assets having an aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of its obligations with respect to any caps or floors
in a segregated account.
There is no limit on the amount of interest rate swap transactions that may be
entered into by the fund. These transactions may in some instances involve the
delivery of securities or other underlying assets by the fund or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the fund
is contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the fund would risk the loss of the net
amount of the payments that it contractually is entitled to receive. The fund
may buy and sell (i.e., write) caps and floors without limitation, subject to
the segregation requirement described previously.
Rights and Warrants (All funds except LVIP Delaware Bond Fund and LVIP Money
Market Fund). Each fund may invest in rights and warrants which entitle the
holder to buy equity securities at a specified price for a specific period of
time. Rights and warrants do not entitle a holder to dividends or voting rights
with respect to the securities which may be purchased, nor do they represent
any rights to the assets of the issuing company. The value of a right or
warrant may be more volatile than the value of the underlying securities. Also,
their value does not necessarily change with the value of the underlying
securities. Warrants can be a speculative instrument. The value of a warrant
may decline because of a decrease in the value of the underlying stock, the
passage of time or a change in perception as to the potential of the underlying
stock or any other combination. If the market price of the underlying stock is
below the exercise price set forth in the warrant on the expiration date, the
warrant will expire worthless. Warrants generally are freely transferable and
are traded on the major stock exchanges. Rights and warrants purchased by the
fund which expire without being exercised will result in a loss to the fund.
Loans and Other Direct Debt Instruments (LVIP Capital Growth Fund, LVIP
Columbia Value Opportunities Fund, LVIP FI Equity-Income Fund, LVIP Marsico
International Growth Fund, LVIP MFS Value Fund, LVIP Mid-Cap Value Fund, LVIP
SSgA S&P 500 Index Fund, LVIP SSgA Small-Cap Index Fund, LVIP T. Rowe Price
Growth Stock Fund, LVIP Templeton Growth Fund and LVIP Turner Mid-Cap Growth
Fund only). Direct debt instruments are interests in amounts owed by a
corporate, governmental, or other borrowers to lenders or lending syndicates
(loans and loan participations), to suppliers of goods or services (trade
claims or other receivables), or to other parties. Direct debt instruments
involve a risk of loss in case of default or insolvency of the borrower and may
offer less legal protection to the purchaser in the event of fraud or
misrepresentation.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of interest and repayment
of principal. If scheduled interest or principal payments are not made, the
value of the instrument may be adversely affected. Loans that are fully secured
provide more protections than an unsecured loan in the event of the borrower's
failure to make scheduled interest or principal payments. However, there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the borrower's obligation, or that the collateral could be liquidated.
Indebtedness of borrowers whose creditworthiness is poor involves substantially
greater risks and may be highly speculative. Borrowers that are in bankruptcy
or restructuring may never pay off their indebtedness, or may pay only a small
fraction of the amount owed. Direct indebtedness of developing countries also
involves a risk that the governmental entities responsible for the repayment of
the debt may be unable, or unwilling, to pay interest and repay principal when
due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks. For example, if
a loan is foreclosed, the purchaser could become part owner of any collateral,
and would bear the costs and liabilities associated with owning and disposing
of the collateral. In addition, it is conceivable that under emerging legal
theories of lender liability, a purchaser could be held liable as a co-lender.
Direct debt instruments may also involve a risk of insolvency of the lending
bank or other intermediary.
A loan is often administered by a bank or other financial institution that acts
as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, the purchaser has direct recourse against the borrower, the
purchaser may have to rely on the agent to apply appropriate credit remedies
against a borrower. If assets held by the agent for the benefit of a purchaser
were determined to be subject to the claims of the agent's general creditors,
the purchaser might incur certain costs and delays in realizing payment on the
loan or loan participation and could suffer a loss of principal or interest.
Direct indebtedness may include letters of credit, revolving credit facilities,
or other standby financing commitments that obligate purchasers to make
additional cash payments on demand. These commitments may have the effect of
requiring the fund to increase its investment in a borrower at a time when it
would not otherwise have done so, even if the borrower's condition makes it
unlikely that the amount will ever be repaid.
Limitations on Futures and Options Transactions (LVIP FI Equity-Income Fund
only). The LVIP FI Equity-Income Fund will not: (a) sell futures contracts,
purchase put options, or write call options if, as a result, more than 25% of
the fund's total assets would be hedged with futures and options under normal
conditions; (b) purchase futures contracts or write put option if, as a result,
the fund's total obligations upon settlement or exercise of purchased future
contracts and written put options would exceed 25% of its total assets under
normal conditions; or (c) purchase call options if, as a result, the current
value of option premiums for call options purchased by the fund would exceed 5%
of the fund's total assets. These limitations do not apply to securities that
incorporate features similar to options.
Indexed Securities (LVIP FI Equity-Income Fund only). Indexed securities are
instruments whose prices are indexed to the prices of other securities,
securities indices, currencies, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic.
Mortgage-indexed securities, for example, could be structured to replicate the
performance of mortgage securities and the characteristics of direct ownership.
Currency-indexed securities typically are short-term to intermediate-term debt
securities whose maturity values or interest rates are determined by reference
to the values of one or more specified foreign currencies and may offer higher
yields than U.S. dollar-denominated securities. Currency-indexed securities may
be positively or negatively indexed; that is, their maturity value may increase
when the specified currency value increases, resulting in a security that
performs similarly to a foreign-denominated instrument, or their maturity value
may decline when foreign currency values increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. Indexed securities may be more volatile than the underlying
instruments. Indexed securities are also subject to the credit risks associated
with the issuer of the security, and their values may decline substantially if
the issuer's creditworthiness deteriorates. Recent issuers of indexed
securities have included banks, corporations, and certain U.S. Government
agencies.
Foreign Currency Denominated Cash (LVIP Mondrian International Value Fund
only). To facilitate overseas securities transactions, the fund may hold a
portion of its assets in foreign-currency-denominated cash or cash equivalents
and foreign government securities. The amount held in cash may range between 2%
and 15% of fund assets, although the fund anticipates that under normal
circumstances, less than 10% of fund assets would be held in cash. The amount
held in cash equivalents, combined with all other non-U.S. debt securities and
money market instruments, would not exceed 35% of the fund's assets.
SEC Name Rule Requirement (LVIP Cohen & Steers Global Real Estate Fund, LVIP
Columbia Value Opportunities Fund, LVIP Delaware Bond Fund, LVIP FI
Equity-Income Fund, LVIP Mid-Cap Value Fund, LVIP SSgA S&P 500 Index Fund, LVIP
SSgA Small-Cap Index Fund, LVIP T. Rowe Price Growth Stock Fund and LVIP Turner
Mid-Cap Growth Fund only).
LVIP Cohen & Steers Global Real Estate Fund. The fund's policy of normally
investing at least 80% of its assets in companies in the real estate industry
is a non-fundamental policy changeable only upon 60 days' prior notice to
shareholders.
LVIP Delaware Bond Fund. The fund's policy of normally investing at least 80%
of its assets in debt securities is a non-fundamental policy changeable only
upon 60 days' prior notice to shareholders.
LVIP FI Equity-Income Fund. The fund's policy of normally investing at least
80% of its assets in equity securities is a non-fundamental policy changeable
only upon 60 days' prior notice to shareholders.
LVIP Mid-Cap Value Fund. The fund's policy of normally investing at least 80%
of its assets in stocks of mid-cap companies is a non-fundamental policy
changeable only upon 60 days' prior notice to shareholders.
LVIP SSgA S&P 500 Index Fund. The fund's policy of normally investing at least
80% of its assets in securities of stocks of companies included in the Russell
2000 Index and in derivative instruments, such as stock index futures contracts
and options that provide exposure to the stocks of companies in the Russell
2000 is a non-fundamental policy changeable only upon 60 days' prior notice to
shareholders.
LVIP SSgA Small-Cap Index Fund. The fund's policy of normally investing at
least 80% of its assets in securities of issuers included in the S&P 500 Index
is a non-fundamental policy changeable only upon 60 days' prior notice to
shareholders.
LVIP T. Rowe Price Growth Stock Fund. The fund's policy of normally investing
at least 80% of its assets in the common stocks of a diversified group of
growth companies is a non-fundamental policy changeable only upon 60 days'
prior notice to shareholders.
LVIP Turner Mid-Cap Growth Fund. The fund's policy of normally investing at
least 80% of its assets in stocks of mid-cap companies is a non-fundamental
policy changeable only upon 60 days' prior notice to shareholders.
Strategy Ranges (LVIP UBS Global Asset Allocation Fund only).
As set forth in the Prospectus, under normal market conditions, the LVIP UBS
Global Asset Allocation Fund expects to allocate assets between fixed income
securities and equity securities. The "Strategy Ranges" indicated below are the
ranges within which the LVIP UBS Global Asset Allocation Fund generally expects
to allocate its assets among the various asset classes. The LVIP UBS Global
Asset Allocation Fund may exceed these Strategy Ranges and may modify them in
the future.
Asset Class Strategy Ranges
------------------------------------------------ ----------------
U.S. Equities ......................... 10 to 70%
Global (Ex-U.S.) Equities ............. 0 to 52%
Emerging Market Equities .............. 0 to 13%
U.S. Fixed Income ..................... 0 to 51%
Global (Ex-U.S.) Fixed Income.......... 0 to 39%
High Yield Fixed Income ............... 0 to 15%
Emerging Market Debt .................. 0 to 12%
Cash Equivalents ...................... 0 to 50%
More About the LVIP SSgA S&P 500 Index Fund. Investors look to indexes as a
standard of market performance. Indexes are model portfolios, that is, groups
of stocks or bonds selected to represent an entire market. The S&P 500 Index is
a widely used measure of large U.S. company stock performance. It consists of
the common stocks of 500 major corporations selected according to size,
frequency and ease by which their stocks trade and range and diversity of the
American economy.
The fund seeks to approximate as closely as possible, before fees and expenses,
the total return of the S&P 500 Index. To accomplish this objective the fund's
sub-adviser, State Street Global Advisors (SSgA), attempts to buy and sell all
of the index's securities in the same proportion as they are reflected in the
S&P 500 Index, although the fund reserves the right not to invest in every
security in the S&P 500 Index if it is not practical to do so under the
circumstances. SSgA does not seek to beat the S&P 500 Index and does not seek
temporary defensive positions when markets appear to be overvalued. SSgA makes
no attempt to apply economic, financial or market analysis when managing the
fund. Including a security among the fund's holdings implies no opinion as to
its attractiveness as an investment.
The fund may invest in stock index futures and options on stock index futures
as a substitute for a comparable market position in the underlying securities.
A stock index future obligates one party to deliver (and the other party to
take), effectively, an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. Instead,
the buyer and seller settle the difference in cash between the contract price
and the market price on the agreed upon date. The buyer pays the difference if
the actual price is lower than the contract price and the seller pays the
difference if the actual price is higher. There can be no assurance that a
liquid market will exist at the time when the fund seeks to close out a futures
contract or a futures option position. Lack of a liquid market may prevent
liquidation of any unfavorable position.
The fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to the owners of the fund or
any member of the public regarding the advisability of investing in securities
generally or in the fund particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the fund is
the licensing of certain trademarks and trade names of S&P and of the S&P 500
Index which is determined, composed and calculated by S&P without regard to the
fund. S&P has no obligation to take the needs of the fund or its shareholders
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the fund or the timing of the issuance or sale of the fund
or in the determination or calculation of the equation by which the fund is to
be converted into cash. S&P has no obligation or liability in connection with
the administration, marketing or trading of the fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND OR ITS SHAREHOLDERS, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Portfolio Transactions and Brokerage
The adviser and the sub-adviser of each fund are responsible for decisions to
buy and sell securities and other investments for each fund, and for the
selection of brokers and dealers to effect the transactions and the negotiation
of brokerage commissions, if any. Purchases and sales of securities on an
exchange are effected through brokers who charge a commission for their
services. A particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction. Transactions in
foreign securities generally involve the payment of fixed brokerage
commissions, which are generally higher than those in the United States. There
is generally no stated commission in the case of securities traded in the
over-the-counter markets, but the price paid by the fund usually includes an
undisclosed dealer commission or mark-up. In the U.S. Government securities
market, securities are generally traded on a net basis with dealers acting as
principal for their own accounts without a stated commission, although the
price of the securities usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which
includes an amount of compensation to the underwriter, generally referred to as
the underwriter's concession or discount. On occasion, certain money market
instruments may be purchased directly from an issuer, in which case no
commission or discounts are paid.
The sub-adviser of each fund currently provides investment advice to a number
of other clients. It will be the practice of each sub-adviser to allocate
purchase and sale transactions among the fund and other clients whose assets
are managed in such manner as is deemed equitable. In making such allocations
among the major factors the sub-adviser considers are the investment objectives
of the relevant fund, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the fund and other client accounts.
Securities of the same issuer may be purchased, held, or sold at the same time
by the fund or other accounts or companies for which the sub-adviser provides
investment advice (including affiliates of the sub-adviser, as the case may
be).
On occasions when the sub-adviser to a fund deems the purchase or sale of a
security to be in the best interest of the fund, as well as its' other clients,
the sub-adviser, to the extent permitted by applicable laws and regulations,
may aggregate such securities to be sold or purchased for the fund with those
to be sold or purchased for its' other clients in order to obtain best
execution and lower brokerage commissions, if any. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the sub-adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to all such
clients, including the fund. In some instances, the procedures may impact the
price and size of the position obtainable for the fund.
In connection with effecting portfolio transactions, primary consideration will
be given to securing the most favorable price and efficient execution. Within
the framework of this policy, the reasonableness of commission or other
transaction costs is a major factor in the selection of brokers and is
considered together with other relevant factors, including financial
responsibility, confidentiality (including trade anonymity), research and
investment information and other services provided by such brokers. It is
expected that,as a result of such factors, transaction costs charged by some
brokers may be greater than the amounts other brokers might charge. The
sub-adviser to a fund may determine in good faith that the amount of such
higher transaction costs is reasonable in relation to the value of the
brokerage and research services provided.
The Board of Trustees will review regularly the reasonableness of commissions
and other transaction costs incurred from time to time, and, will receive
reports regarding brokerage practices. The nature of the research services
provided to each sub-adviser by brokerage firms varies from time to time but
generally includes current and historical financial data concerning particular
companies and their securities; information and analysis concerning securities
markets and economic and industry matters; and technical and statistical
studies and data dealing with various investment opportunities; and risks and
trends, all of which the sub-adviser regards as a useful supplement of its own
internal research capabilities.
Each sub-adviser may from time to time direct trades to brokers which have
provided specific brokerage or research services for the benefit of the clients
of the sub-adviser; in addition, each sub-adviser may allocate trades among
brokers that generally provide superior brokerage and research services. During
2007, the total amount of brokerage transactions directed to these brokers and
the total commissions paid with respect to such transactions are set forth in
the second table below. Research services furnished by brokers are for the
benefit of all the clients of the sub-adviser and not solely or necessarily for
the benefit of the fund. Each sub-adviser believes that the value of research
services received is not determinable and does not significantly reduce its
expenses. The fund does not reduce its fee to any sub-adviser by any amount
that might be attributable to the value of such services.
During the fiscal years ended December 31, 2007, December 31, 2006 and December
31, 2005, the funds incurred brokerage commissions as follows:
Brokerage and Research Services
2007 2006 2005
---------------------- ------------ -----------
LVIP Baron Growth Opportunties Fund .................. 150,833 N/A N/A
LVIP Capital Growth Fund ............................. 243,967 211,175 185,964
LVIP Cohen & Steers Global Real Estate Fund .......... 536,842 N/A N/A
LVIP Columbia Value Opportunities Fund ............... 165,007* 92,873 74,033
LVIP Delaware Bond Fund .............................. 94,251* 28,936 16,386
LVIP Delaware Growth and Income Fund ................. 1,348,786 1,375,770 1,045,069
LVIP Delaware Managed Fund ........................... 425,387* 295,399 276,534
LVIP Delaware Social Awareness Fund .................. 528,076** 775,400 660,658
LVIP Delaware Special Opportunities Fund ............. 236,509 233,717 205,598
LVIP FI Equity-Income Fund (a) ....................... 971,770** 1,749,264 2,983,083
LVIP Janus Capital Appreciation Fund ................. 1,126,830***** 636,934 944,069
LVIP Marsico International Growth Fund ............... 464,935*** 332,993 206,571
LVIP MFS Value Fund .................................. 136,844** 217,452 146,991
LVIP Mid-Cap Value Fund .............................. 139,489*,*** 52,740 47,670
LVIP Mondrian International Value Fund ............... 173,191**** 245,183 277,515
LVIP Money Market Fund ............................... N/A N/A N/A
LVIP SSgA S&P 500 Index Fund ......................... 43,124*** 12,016 8,810
LVIP SSgA Small-Cap Index Fund ....................... 264,523 281,626 159,957
LVIP T. Rowe Price Growth Stock Fund ................. 160,088* 69,615 80,375
LVIP T. Rowe Price Structured Mid-Cap Growth Fund .... 111,033 93,652 101,705
LVIP Templeton Growth Fund ........................... 101,405*** 66,891 65,077
LVIP Turner Mid-Cap Growth Fund ...................... 67,608 73,601 67,905
LVIP UBS Global Asset Allocation Fund (b) ............ 236,058 209,160 212,093
LVIP Wilshire Conservative Profile Fund .............. N/A N/A N/A
LVIP Wilshire Moderate Profile Fund .................. N/A N/A N/A
LVIP Wilshire Moderately Aggressive Profile Fund ..... N/A N/A N/A
LVIP Wilshire Aggressive Profile Fund ................ N/A N/A N/A
LVIP Wilshire 2010 Profile Fund ...................... N/A N/A N/A
LVIP Wilshire 2020 Profile Fund ...................... N/A N/A N/A
LVIP Wilshire 2030 Profile Fund ...................... N/A N/A N/A
LVIP Wilshire 2040 Profile Fund ...................... N/A N/A N/A
(a) of which $7,402 (0.76%), $7,169 (0.41%), and $24,925 (0.84%) was paid to
Fidelity Capital Markets ("FCM"), an affiliate of Fidelity Management &
Research Company, in 2007, 2006 and 2005 respectively.
(b) of which $651 (0.28%), $2,601 (1.24%) and $2,577 (1.22%) was paid to UBS
Securities LLC, an affiliate of UBS AG, in 2007, 2006 and 2005
respectively.
* In 2007, portfolio brokerage increased due to the fund's higher annual
portfolio turnover.
** In 2007, portfolio brokerage decreased due to the fund's lower annual
portfolio turnover.
*** In 2007, portfolio brokerage increased due to the fund's increased cash
flow activity.
**** In 2007, portfolio brokerage decreased due to the sub-adviser's ability to
negotiate significantly lower commission rates.
***** In 2007, portfolio brokerage increased due to the fund's higher annual
portfolio turnover. Howerver, Janus (the fund's sub-adviser) reimburesed
the fund for a portion of the brokerage commission in connection with
noted portfolio manager changes.
During the fiscal year ended December 31, 2007, the adviser or sub-adviser, as
appropriate, for each of the following funds allocated the following amount of
transactions to broker-dealers that provided them with certain research,
statistics and other information:
Related Brokerage
Transactions Commissions
---------------- ------------------
LVIP Baron Growth Opportunities Fund ........ 65,870,708 117,674
LVIP Capital Growth Fund .................... 22,430,553 12,041
LVIP Cohen & Steers Global Real Estate Fund . 1,733,202 23,946
LVIP Columbia Value Opportunities Fund ...... N/A N/A
LVIP Delaware Growth and Income Fund ........ 1,113,621,603 1,175,137
LVIP Delaware Managed Fund .................. 240,522,128 282,497
LVIP Delaware Social Awareness Fund ......... 371,275,894 453,808
LVIP Delaware Special Opportunities Fund .... 142,777,491 209,927
LVIP FI Equity-Income Fund .................. N/A N/A
LVIP Janus Capital Appreciation Fund ........ N/A N/A
LVIP Marsico International Growth Fund ...... 321,323,971 60,174
LVIP MFS Value Fund ......................... 46,114,199 40,253
LVIP Mid-Cap Value Fund ..................... 9,632,519 6,342
LVIP Mondrian International Value Fund ...... N/A N/A
LVIP Money Market Fund ...................... N/A N/A
LVIP SSgA S&P 500 Index Fund ................ N/A N/A
LVIP SSgA Small-Cap Index Fund .............. N/A N/A
LVIP T. Rowe Price Growth Stock Fund ........ N/A N/A
LVIP T. Rowe Price Structured Mid-Cap Growth Fund N/A N/A
LVIP Templeton Growth Fund .................. 27,562,101 24,761
LVIP Turner Mid-Cap Growth Fund ............. 6,417,063 4,764
LVIP UBS Global Asset Allocation Fund ....... 38,080,863 39,100
LVIP Wilshire Conservative Profile Fund ..... N/A N/A
LVIP Wilshire Moderate Profile Fund ......... N/A N/A
LVIP Wilshire Moderately Aggressive Profile Fund N/A N/A
LVIP Wilshire Aggressive Profile Fund ....... N/A N/A
LVIP Wilshire 2010 Profile Fund ............. N/A N/A
LVIP Wilshire 2020 Profile Fund ............. N/A N/A
LVIP Wilshire 2030 Profile Fund ............. N/A N/A
LVIP Wilshire 2040 Profile Fund ............. N/A N/A
Purchases of Securities of "Regular" Brokers or Dealers
As of December 31, 2007, the following funds held securities issued by their
"regular" broker-dealers or the parent companies of their "regular"
broker-dealers:
Value of Securities
of "Regular"
Broker-Dealers
--------------------
LVIP Baron Growth Opportunities Fund N/A
LVIP Capital Growth Fund
Goldman Sachs Group ....................... $ 3,929,000
LVIP Cohen & Steers Global Real Estate Fund N/A
LVIP Columbia Value Opportunties Fund N/A
LVIP Delaware Bond Fund N/A
Value of Securities
of "Regular"
Broker-Dealers
--------------------
Morgan Stanley ......................... $ 8,585,000
CS First Boston ........................ $ 2,204,000
Lehman Brothers ........................ $ 3,989,000
Goldman Sachs .......................... $44,033,000
Bank of America ........................ $38,500,000
Merrill Lynch .......................... $ 1,407,000
JP Morgan Securities Inc. .............. $31,371,000
LVIP Delaware Growth and Income Fund
Bank of America ........................ $31,634,000
Citigroup .............................. $16,154,000
JP Morgan Chase ........................ $28,551,000
Morgan Stanley ......................... $18,259,000
LVIP Delaware Managed Fund
Bank of America ........................ $ 8,524,000
Citigroup .............................. $ 2,529,000
JP Morgan Chase ........................ $ 4,605,000
Morgan Stanley ......................... $ 990,000
Goldman Sachs .......................... $ 3,412,000
Credit Suisse First Boston Corp ........ $ 220,000
Lehman Brothers ........................ $ 1,302,000
JP Morgan Securities Inc. .............. $ 3,216,000
LVIP Delaware Social Awareness Fund
Bank of America ........................ $30,499,000
LVIP Delaware Special Opportunities Fund N/A
LVIP FI Equity Income Fund
Citigroup, Inc. ........................ $16,374,000
JP Morgan Chase & Co. .................. $ 4,077,000
BNY Brokerage, Inc.. ................... $10,800,000
LVIP Janus Capital Appreciation Fund
JP Morgan. ............................. $ 9,799,000
LVIP Marsico International Growth Fund
Credit Suisse Group .................... $ 3,876,000
LVIP MFS Value Fund
BNY Brokerage, Inc. .................... $ 6,323,000
Citigroup .............................. $ 4,546,000
Goldman Sachs .......................... $ 5,288,000
Lehman Brothers ........................ $ 1,906,000
Merrill Lynch .......................... $ 2,299,000
UBS .................................... $ 4,965,000
Value of Securities
of "Regular"
Broker-Dealers
--------------------
LVIP Mid-Cap Value Fund
Citigroup ....................................... $ 877,000
LVIP Mondrian International Value Fund N/A
LVIP Money Market Fund
Bank of America ................................. $ 9,944,000
Morgan Stanley .................................. $27,082,000
LVIP SSgA S&P 500 Index Fund
BNY Brokerage, Inc. ............................. $ 2,208,000
Citigroup ....................................... $ 6,023,000
Goldman Sachs ................................... $ 3,487,000
JP Morgan ....................................... $ 5,900,000
Lehman Brothers ................................. $ 1,392,000
Merrill Lynch ................................... $ 1,852,000
Morgan Stanley .................................. $ 2,237,000
LVIP SSgA Small-Cap Index Fund N/A
LVIP T. Rowe Price Growth Stock Fund
Goldman Sachs. .................................. $ 1,430,000
Morgan Stanley .................................. $ 802,000
LVIP T. Rowe Price Structured Mid-Cap Growth Fund N/A
LVIP Templeton Growth Fund
Morgan Stanley .................................. $ 701,000
UBS ............................................. $ 1,902,000
LVIP Turner Mid-Cap Growth Fund N/A
LVIP UBS Global Asset Allocation Fund
BNY Brokerage, Inc. ............................. $ 2,887,000
Citigroup, Inc. ................................. $ 4,592,000
Credit Suisse ................................... $ 1,006,000
Goldman Sachs Group ............................. $ 615,000
JP Morgan Chase ................................. $ 5,587,000
Lehman Brothers ................................. $ 269,000
Merrill Lynch ................................... $ 107,000
Morgan Stanley .................................. $ 4,536,000
LVIP Wilshire Conservative Profile Fund N/A
LVIP Wilshire Moderate Profile Fund N/A
Value of Securities
of "Regular"
Broker-Dealers
--------------------
LVIP Wilshire Moderately Aggressive Profile Fund N/A
LVIP Wilshire Aggressive Profile Fund N/A
LVIP Wilshire 2010 Profile Fund N/A
LVIP Wilshire 2020 Profile Fund N/A
LVIP Wilshire 2030 Profile Fund N/A
LVIP Wilshire 2040 Profile Fund N/A
*Denotes inclusion of fixed-income securities.
No Commissions to Finance Distribution
The Investment Company Act of 1940 permits a fund to use its selling brokers to
execute transactions in portfolio securities only if the fund or its adviser
has implemented policies and procedures designed to ensure that the selection
of brokers for portfolio securities transactions is not influenced by
considerations relating to the sale of fund shares. Accordingly, the funds
maintain, among other policies, a policy that prohibits them from directing to
a broker-dealer in consideration for the promotion or sale of fund shares: (a)
fund portfolio securities transactions; or (b) any commission or other
remuneration received or to be received from the funds' portfolio transactions
effected through any other broker-dealer. The funds have also established other
policies and procedures designed to ensure that a fund's brokerage commissions
are not used to finance the distribution of fund shares.
Commission Recapture Program
All funds, except LVIP Delaware Bond Fund, LVIP Money Market Fund and the LVIP
Wilshire Risk-based and Target Maturity Profile Funds, have entered into a
commission recapture program with Russell, pursuant to which the commission
rebates will be included in realized gain (loss) on securities in the
appropriate financial statements of the funds. The LVIP FI Equity-Income Fund,
sub-advised by Pyramis Global Advisors, LLC, a subsidiary of FMR, has entered
into a similar brokerage commission recapture program with FMR. If the adviser
or sub-adviser does not believe it can obtain best execution from such
broker-dealer, there is no obligation to execute portfolio transactions through
such broker-dealers. The Board of Trustees, with the assistance of Russell and
FMR, intends to continue to review whether recapture opportunities are
available and, if so, to determine in the exercise of its business judgment
whether it would be advisable for a fund to participate, or continue to
participate, in the commission recapture program.
Portfolio Turnover
A portfolio turnover rate is the percentage computed by dividing the lesser of
a fund's purchases or sales of securities (excluding short-term securities) by
the average market value of the fund's portfolio securities. The adviser
intends to manage each fund's assets (except for the LVIP Money Market Fund) by
buying and selling securities to help attain its investment objective. This may
result in increases or decreases in a fund's current income available for
distribution to its shareholders. While the funds are not managed with the
intent of generating short-term capital gains, each fund may dispose of
investments (including money market instruments) regardless of the holding
period if, in the opinion of the adviser, an issuer's creditworthiness or
perceived changes in a company's growth prospects or asset value make selling
them advisable. Such an investment decision may result in a high portfolio
turnover rate during a given period, resulting in increased transaction costs.
In 2007, the portfolio turnover of the LVIP Columbia Value Opportunities Fund
increased from 54% to 152%. The increase was due to a change in sub-adviser,
which became effective October 15, 2007. The fund does not anticipate that the
high turnover experienced in 2007 will continue under normal market conditions.
In 2007, the portfolio turnover of the LVIP FI Equity-Income Fund declined from
199% to 141%. The high turnover in 2006 was due to a change in portfolio
manager, which became effective July 1, 2006. The turnover rate that the fund
experienced in 2007 is representative of the sub-adviser's investment style.
In 2007, the portfolio turnover of the LVIP Janus Capital Appreciation Fund
increased from 99% to 123%. The increase was due to changes in portfolio
managers, which became effective May 29, 2007 and November 1, 2007. The fund
does not anticipate that the high turnover rate will continue under normal
market conditions.
In 2007, the portfolio turnover of the LVIP MFS Value Fund declined from 164%
to 22%. The high turnover in 2006 was due to a change in sub-adviser, which
became effective in November 15, 2006. The turnover rate that the fund
experienced in 2007 is representative of the sub-adviser's investment style.
In 2007, the portfolio turnover of the LVIP Turner Mid-Cap Growth Fund
increased from 156% to 199%. In 2007, the portfolio turnover of the LVIP
Mid-Cap Value Fund increased from 52% to 71%. In 2007, the portfolio turnover
of the LVIP S&P 500 Index Fund increased from 4% to 25%. These increases were
due to significant cash inflows during 2007.
In 2007, the portfolio turnover of the LVIP Small-Cap Index Fund decreased from
222% to 119%. The low turnover in 2007 was due to a change in investment
objective from active management to passive management, which became effective
April 30, 2007.
Trustees and Officers
The Board of Trustees oversees the management of each fund and elects the
Trust's officers. The trustees have the power to amend the Trust's bylaws of
each fund, to declare and pay dividends, and to exercise all the powers of the
fund except those granted to the shareholders. The trustees hold their position
until their successors are elected and qualify. The funds' officers are
re-elected annually and are responsible for the day-to-day operations of the
funds. Information pertaining to the trustees and executive officers of the
funds is set forth below. Trustees that are deemed "interested persons," as
defined in the 1940 Act, are included in the table titled, "Interested
Trustees." Trustees who are not interested persons are referred to as
independent trustees. The trustees were re-elected at the Special Meeting of
Stockholders of the funds on April 5, 2007 to serve until the next annual
meeting, if any, or until their successors shall have been duly elected and
qualified.
The term "Fund Complex" includes the thirty-one funds of the Trust and Lincoln
National Variable Annuity Fund A.
Interested Trustees
Position(s) Term of Office
Name, Address and Held With and Length of
Year of Birth the Fund Time Served
------------------------ --------------- -----------------------
Kelly D. Clevenger* Chairman, Chairman since August
1300 S. Clinton Street President and 1995; President and
Fort Wayne, IN 46802 Trustee Trustee since
YOB: 1952 November 1994.
Number of
Funds in
Principal Fund
Occupation(s) Complex Other Board
Name, Address and During Past Overseen by Memberships
Year of Birth Five Years Trustee Held by Trustee
------------------------ ----------------------------- ------------- ----------------------------
Kelly D. Clevenger* Vice President, The Lincoln 32 Lincoln Retirement Services
1300 S. Clinton Street National Life Insurance Company, LLC
Fort Wayne, IN 46802 Company; Executive Vice
YOB: 1952 President, Lincoln
Retirement Services
Company, LLC
* Kelly D. Clevenger, currently Chairman and President of the Trust, is an
interested person of the Trust by reason of his being an officer of Lincoln
Life.
Independent Trustees
Number of
Funds in
Principal Fund
Position(s) Term of Office Occupation(s) Complex Other Board
Name, Address and Held With and Length of During Past Overseen by Memberships
Year of Birth the Fund Time Served Five Years Trustee Held by Trustee
------------------------ ------------- --------------------- -------------------------- ------------- ---------------------------
Michael D. Coughlin Trustee Trustee since April Management Consultant, 32 Merrimack County Savings
1300 S. Clinton Street 2007 Owner of Coughlin Bank; Trustee of Merrimack
Fort Wayne, IN 46802 Associates Bankcorp, MHC.
YOB: 1942
Nancy L. Frisby Trustee Trustee since April Retired,Formerly: Senior 32 N/A
1300 S. Clinton Street 1992. Vice President and Chief
Fort Wayne, IN 46802 Financial Officer, Desoto
YOB: 1941 Memorial Hospital
Position(s) Term of Office
Name, Address and Held With and Length of
Year of Birth the Fund Time Served
------------------------ ------------- ------------------------
Elizabeth S. Hager Trustee Trustee since April
1300 S. Clinton Street 2007
Fort Wayne, IN 46802
YOB: 1944
Gary D. Lemon Trustee Trustee since February
1300 S. Clinton Street 2006; formerly:
Fort Wayne, IN 46802 Advisory Trustee since
YOB: 1948 November 2004
Thomas D. Rath Trustee Trustee since April
1300 S. Clinton Street 2007
Fort Wayne, IN 46802
YOB: 1945
Kenneth G. Stella Trustee Trustee since February
1300 S. Clinton Street 1998.
Fort Wayne, IN 46802
YOB: 1943
David H. Windley Trustee Trustee since August
1300 S. Clinton Street 2004.
Fort Wayne, IN 46802
YOB: 1943
Number of
Funds in
Principal Fund
Occupation(s) Complex Other Board
Name, Address and During Past Overseen by Memberships
Year of Birth Five Years Trustee Held by Trustee
------------------------ ----------------------------- ------------- --------------------------
Elizabeth S. Hager State Representative, State 32 N/A
1300 S. Clinton Street of New Hampshire;
Fort Wayne, IN 46802 Executive Director, United
YOB: 1944 Way of Merrimack County
Gary D. Lemon Professor of Economics 32 N/A
1300 S. Clinton Street and Management, DePauw
Fort Wayne, IN 46802 University
YOB: 1948
Thomas D. Rath Managing Partner, Rath, 32 Associated Grocers of New
1300 S. Clinton Street Young, and Pignatelli England
Fort Wayne, IN 46802
YOB: 1945
Kenneth G. Stella President Emeritus, Indiana 32 Advisory Board of Harris
1300 S. Clinton Street Health Association, Bank
Fort Wayne, IN 46802 Formerly: President,
YOB: 1943 Indiana Hospital & Health
Association
David H. Windley Retired, Formerly: Director 32 Meridian Investment
1300 S. Clinton Street of Blue & Co., LLC Advisors, Inc.
Fort Wayne, IN 46802
YOB: 1943
Officers Who Are Not Trustees
Number of
Funds in
Principal Fund
Position(s) Term of Office Occupation(s) Complex Other Board
Name, Address and Held With and Length of During Past Overseen by Memberships
Year of Birth the Fund Time Served Five Years Trustee Held by Trustee
------------------------ ------------------ ------------------------ ---------------------------- ------------- ----------------
Kevin J. Adamson Second Vice Second Vice President Second Vice President, N/A N/A
1300 S. Clinton Street President since May 2006 Director of Funds
Fort Wayne, IN 46802 Management, The Lincoln
YOB: 1966 National Life Insurance
Company; Formerly:
Director of Financial
Operations, Swiss Re/
Lincoln Re
William P. Flory, Jr. Second Vice Second Vice President Second Vice President and N/A N/A
1300 S. Clinton Street President and since August 2007 and; Director of Separate
Fort Wayne, IN 46802 Chief Accounting Chief Accounting Account Operations and
YOB: 1961 Officer Officer since May 2006 Mutual Fund
Administration, The Lincoln
National Life Insurance
Company; Formerly:
Second Vice President and
Director of Corporate
Procurement and Assistant
Vice President of Separate
Account Operations and
Mutual Fund
Administration, The Lincoln
National Life Insurance
Company
Cynthia A. Rose Secretary Secretary since Secretary; Formerly: N/A N/A
1300 S. Clinton Street February 1995 Secretary and Assistant
Fort Wayne, IN 46802 Vice President, The Lincoln
YOB: 1954 National Life Insurance
Company.
Number of
Funds in
Principal Fund
Position(s) Term of Office Occupation(s) Complex Other Board
Name, Address and Held With and Length of During Past Overseen by Memberships
Year of Birth the Fund Time Served Five Years Trustee Held by Trustee
------------------------ ---------------- ------------------------ ---------------------------- ------------- ----------------
Michael O. Schulitz Second Vice Second Vice President Second Vice President, N/A N/A
Metro Center President since August 2007 Product Marketing, The
350 Church Street Lincoln National Life
Hartford, CT 06103 Insurance Company
YOB: 1968
Rise` C. M. Taylor Vice President Vice President since Vice President and N/A N/A
1300 S. Clinton Street and Treasurer August 2003 and Treasurer, The Lincoln
Fort Wayne, IN 46802 Treasurer since May National Life Insurance
YOB: 1967 2006 Company; Vice President
and Treasurer, Lincoln Life
& Annuity Company of
New York
David A. Weiss Assistant Vice Assistant Vice Assistant Vice President, N/A N/A
One Granite Place President President since August Funds Management
Concord, NH 03301 2007 Research, The Lincoln
YOB: 1976 National Life Insurance
Company; Formerly:
Director, Funds
Management Research;
Mutual Fund/Securities
Analyst; Senior Mutual
Fund Analyst, Jefferson
Pilot Corp.
John (Jack) A. Chief Chief Compliance Vice President for Fund N/A N/A
Weston Compliance Officer since May 2007 and Advisor Compliance,
One Granite Place Officer The Lincoln National Life
Concord, NH 03301 Insurance Company;
YOB: 1959 Treasurer, Jefferson Pilot
Variable Fund, Inc.
Board Committees
The Board of Trustees has established an Audit Committee, which is responsible
for overseeing the funds' financial reporting process on behalf of the Board of
Trustees and for reporting the result of their activities to the board. The
Audit Committee will assist and act as a liaison with the Board of Trustees in
fulfilling the board's responsibility to shareholders of the funds and others
relating to oversight of fund accounting, the funds' systems of control, the
funds' process for monitoring compliance with laws and regulations, and the
quality and integrity of the financial statements, financial reports, and audit
of the funds. The members of the Audit Committee include independent trustees:
Nancy L. Frisby, Elizabeth S. Hagar, and David H. Windley. The Audit Committee
met five times during the last fiscal year.
Effective January 1, 2008, the board of trustees established an Investment
Committee, which is responsible for overseeing underperforming or troubled
funds and for performing certain contract renewal tasks as requested by the
board. The members of the Investment Committee are: Michael D. Coughlin, Gary
D. Lemon and Thomas D. Rath.
On February 23, 2004, the Board of Trustees established a Nominating and
Governance Committee. The current members of the committee are: Nancy L.
Frisby, Elizabeth S. Hager, Kenneth G. Stella and David H. Windley. The
Nominating and Governance Committee is responsible for, among other things, the
identification, evaluation and nomination of potential candidates to serve on
the Board of Trustees. The Nominating and Governance Committee met two times
during the last fiscal year. The Nominating and Governance Committee will
accept shareholder trustee nominations. Any such nominations should be sent to
the Trust's Nominating and Governance Committee, c/o The Lincoln National Life
Insurance Company.
Ownership of Securities
As of December 31, 2007 the trustees and officers as a group owned variable
contracts that entitled them to give voting instructions with respect to less
than 1% of the outstanding shares of each of the funds. As of December 31,
2007, the dollar range of equity securities owned beneficially by each trustee
in the funds and in any registered investment companies overseen by the
trustees within the same family of investment companies as the funds is as
follows:
Interested Trustees
Name of Trustee Dollar Range of Equity Securities in the Funds
-------------------- ---------------------------------------------------------------------
Kelly D. Clevenger LVIP T. Rowe Price Structured Mid-Cap Growth Fund - $10,001-$50,000
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Trustee in
Name of Trustee Family of Investment Companies
-------------------- ----------------------------------------
Kelly D. Clevenger $10,001-$50,000
Independent Trustees
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Trustee in
Name of Trustee Dollar Range of Equity Securities in the Funds Family of Investment Companies
-------------------- ------------------------------------------------------------ ----------------------------------------
Nancy L. Frisby LVIP Delaware Growth & Income Fund - $50,001-$100,000 Over $100,000
LVIP Delaware Managed Fund - $50,001-$100,000
LVIP Delaware Social Awareness Fund - $50,001-$100,000
LVIP Delaware Special Opportunities Fund - $50,001-$100,000
LVIP SSgA Small Cap Index Fund - $10,001-$50,000
Elizabeth S. Hager LVIP Delaware Growth & Income Fund - $10,001-$50,000 $ 10,001-$50,000
LVIP Delaware Social Awareness Fund - $10,001-$50,000
LVIP Janus Capital Appreciation Fund - $1-$10,000
LVIP Mondrian International Value Fund - $10,001-$50,000
Gary D. Lemon LVIP Delaware Growth & Income Fund - $10,001-$50,000 $ 10,001-$50,000
Kenneth G. Stella LVIP Delaware Social Awareness Fund - $50,001-$100,000 Over $100,000
LVIP Delaware Special Opportunities Fund - $50,001-$100,000
David H. Windley LVIP Delaware Social Awareness Fund - $10,001-$50,000 $50,001-$100,000
LVIP Delaware Special Opportunities Fund - $10,001-$50,000
The following table sets forth the compensation paid to the independent
trustees by the Trust as well as the compensation paid to the independent
trustees by the Fund Complex for the fiscal year ended December 31, 2007:
Compensation Table
Aggregate Compensation Total Compensation From the
Name of Person, Position From the Trust Trust And Fund Complex
-------------------------------- ------------------------ ----------------------------
Michael D. Coughlin, Trustee $33,698 $33,767
Nancy L. Frisby, Trustee 40,716 44,500
Elizabeth S. Hager, Trustee 31,898 31,967
Gary D. Lemon, Trustee 34,760 38,500
Thomas D. Rath, Trustee 31,898 31,967
Kenneth G. Stella, Trustee 41,208 45,000
David H. Windley, Trustee 34,760 38,500
Investment Adviser and Sub-Advisers
Investment Adviser: Lincoln Investment Advisors Corporation (LIA) is the
investment adviser to the funds. LIA is a registered investment adviser and
wholly-owned subsidiary of Lincoln National Corporation (LNC). LIA's address is
1300 South Clinton Street, Fort Wayne, Indiana 46802. LIA (or its predecessors)
has served as an investment adviser to mutual funds for over 20 years.
Prior to April 30, 2007, Delaware Management Company (DMC), another indirect
subsidiary of LNC, acted as the fund's investment adviser and was compensated
according to the same advisory fee rate. As a result of the merger between LNC
and Jefferson-Pilot Corporation in 2006, the organization had two separate
registered investment advisers - DMC and JPIA. As part of an effort to
streamline the investment management operations, JPIA (now LIA) became the
investment adviser to the funds. Where DMC managed the assets of a fund without
a sub-adviser, DMC entered into a sub-advisory agreement with LIA so that it
could continue to provide day-to-day portfolio management services to those
funds. Fund shareholders approved these new advisory and sub-advisory
arrangements on April 5, 2007.
LNC is a publicly-held insurance holding company organized under Indiana law.
Through its subsidiaries, LNC provides, on a national basis, insurance and
financial services.
The advisory fee rates paid by both the Standard Class and the Service Class of
each fund to LIA are set forth in the following table:
Annual Fee Rate Based on
Fund Average Daily Net Asset Value
------------------------------------------------------------------------ ------------------------------------------------
LVIP Baron Growth Opportunities Fund .......................... 1.00% of the average daily net assets.
LVIP Capital Growth Fund ...................................... .75 of 1% of the first $100 million;
.70 of 1% of the next $150 million;
.65 of 1% of the next $750 million;
and 0.60 of 1 %of the excess over $1 billion.
LVIP Cohen & Steers Global Real Estate Fund ................... .95 of 1% of average daily net assets.
LVIP Columbia Value Opportunities Fund ........................ 1.05 of 1% of the first $60 million;
.75 of 1% of the next $90 million;
and .65 of 1 % of the excess over $150 million.
LVIP FI Equity-Income Fund .................................... .75 of 1% of the first $500 million; and
.70 of 1% of the excess over $500 million.
LVIP Janus Capital Appreciation Fund .......................... .75 of 1% of the first $500 million; and
.70 of 1% of the excess over $500 million.
LVIP Marsico International Growth Fund ........................ 1.00 of 1% of the first $50 million;
.95 of 1% of the next $50 million;
.90 of 1% of the next $50 million;
.85 of 1% of the next $100 million;
and .80 of 1 % of the excess over $250 million.
LVIP MFS Value Fund ........................................... .75 of 1% of the first $75 million;
.70 of 1% of the next $75 million;
.65 of 1% of the next $50 million;
and .60 of 1 % of the excess over $200 million.
LVIP Mid-Cap Value Fund ....................................... 1.05 of 1% of the first $25 million;
.95 of 1% of the next $25 million;
.85 of 1% of the next $50 million;
.75 of 1% of the next $150 million;
and .70 of 1 % of the excess over $250 million.
LVIP Mondrian International Value Fund ........................ .90 of 1% of the first $200 million;
.75 of 1% of the next $200 million; and
.60 of 1% in excess over $400 million.
LVIP SSgA S&P 500 Index Fund .................................. .24 of 1% of the first $500 million;
.20 of 1% of the next $500 million and
.16 of 1% of the excess over $1 billion.
LVIP SSgA Small-Cap Index Fund ................................ .32 of 1% of the average daily net asset value.
LVIP T. Rowe Price Growth Stock Fund .......................... .80 of 1% of the first $50 million;
.75 of 1% of the next $50 million;
.70 of 1% of the next $150 million;
.65 of 1% of the next $250 million;
and .60 of 1 % of the excess over $500 million.
LVIP T. Rowe Price Structured Mid-Cap Growth Fund ............. .75 of 1% of the first $200 million;
.70 of 1% of the next $200 million; and
.65 of 1% of the excess over $400 million.
LVIP Templeton Growth Fund .................................... .75 of 1% of the first $200 million;
.65 of 1% of the next $300 million;
and .60 of 1 % of the excess over $500 million.
LVIP Turner Mid-Cap Growth Fund ............................... .90 of 1% of the first $25 million;
.85 of 1% of the next $50 million;
.80 of 1% of the next $75 million;
.70 of 1% of the next $100 million;
and .65 of 1 % of the excess over $250 million.
LVIP UBS Global Asset Allocation Fund ......................... .75 of 1% of the first $200 million;
.70 of 1% of the next $200 million; and
.68 of 1% of the excess over $400 million.
LVIP Wilshire Risk-based and Target Maturity Profile Funds .... .25 of 1% of the average daily net assets.
All other funds ............................................... .48 of 1% of the first $200 million;
.40 of 1% of the next $200 million; and
.30 of 1% in excess over $400 million.
During the last three years, the adviser received the amounts, as illustrated
in the table below, for investment advisory services with respect to each fund
and its predecessor fund:
Advisory Fees Paid by Each Fund and Its Predecessor Fund
2007 2006 2005
---------------------- ------------------- -------------------
LVIP Baron Growth Opportunities Fund ................. $ 3,503,958* N/A N/A
LVIP Capital Growth Fund ............................. 1,285,793 $ 1,218,873 $ 1,272,637
LVIP Cohen & Steers Global Real Estate Fund .......... 982,793** N/A N/A
LVIP Columbia Value Opportunities Fund ............... 411,103 627,551 644,636
LVIP Delaware Bond Fund .............................. 5,048,486+ 4,524,648 4,117,866
LVIP Delaware Growth and Income Fund ................. 6,548,807+ 6,566,459 6,951,395
LVIP Delaware Managed Fund ........................... 2,259,427+ 2,151,642 2,239,334
LVIP Delaware Social Awareness Fund .................. 4,127,862+ 4,150,171 4,049,125
LVIP Delaware Special Opportunities Fund ............. 3,018,843+ 2,939,146 2,677,521
LVIP FI Equity-Income Fund ........................... 5,337,877***+ 5,575,570*** 5,741,232***
LVIP Janus Capital Appreciation Fund ................. 4,161,942****+ 3,885,527**** 4,351,441****
LVIP Marsico International Growth Fund ............... 1,609,500 867,262 412,791
LVIP MFS Value Fund .................................. 1,314,354 695,445 631,413
LVIP Mid-Cap Value Fund .............................. 840,185 532,800 450,440
LVIP Mondrian International Value Fund ............... 7,304,877+ 5,708,416 4,356,095
LVIP Money Market Fund ............................... 2,921,509+ 2,002,420 1,684,389
LVIP SSgA S&P 500 Index Fund ......................... 920,214 564,670 599,025
LVIP SSgA Small-Cap Index Fund ....................... 519,177 539,017 488,974
LVIP T. Rowe Price Growth Stock Fund ................. 1,169,089 665,652 678,312
LVIP T. Rowe Price Structured Mid-Cap growth Fund .... 2,099,163+ 2,117,324 1,920,473
LVIP Templeton Growth Fund ........................... 1,549,522 1,091,453 950,411
LVIP Turner Mid-Cap Growth Fund ...................... 233,211***** 242,883 214,508
LVIP UBS Global Asset Allocation Fund ................ 2,466,251+ 2,209,631 2,003,874
LVIP Wilshire Conservative Profile Fund .............. 345,678+ 173,118 20,621
LVIP Wilshire Moderate Profile Fund .................. 1,503,942+ 676,048 76,708
LVIP Wilshire Moderately Aggressive Profile Fund ..... 1,111,408+ 445,889 48,854
LVIP Wilshire Aggressive Profile Fund ................ 301,665+ 130,585 15,693
LVIP Wilshire 2010 Profile Fund ...................... 3,801 N/A N/A
LVIP Wilshire 2020 Profile Fund ...................... 8,420 N/A N/A
LVIP Wilshire 2030 Profile Fund ...................... 4,710 N/A N/A
LVIP Wilshire 2040 Profile Fund ...................... 2,486 N/A N/A
* On June 5, 2007, the Baron Capital Asset Fund was acquired by the LVIP
Baron Growth Opportunities Fund. This total includes management fees of
$1,405,244 paid by the predecessor fund under a different advisory
agreement.
** During the fiscal year ended December 31, 2007, the adviser waived fees
for the LVIP Cohen & Steers Global Real Estate Fund totaling $227,478.
*** During the fiscal years ended December 31, 2007, 2006 and 2005, the
adviser waived fees for the LVIP FI Equity-Income Fund totaling $458,817,
$898,139 and $186,536 respectively.
**** During the fiscal years ended December 31, 2007, 2006 and 2005, the
adviser waived fees for the LVIP Janus Capital Appreciation Fund totaling
$ 733,530, $693,021, and $609,345 respectively.
***** During the fiscal year ended December 31, 2007, the adviser waived fees
for the LVIP Turner Mid-Cap Growth Fund totaling $16,170.
+ Commencing on April 30, 2007, Lincoln Investment Advisors Corporation, a
subsidiary of Lincoln National Corporation, replaced DMC as the funds'
investment adviser. The portion of the 2007 payment attributed to DMC was
$14,951,681. During this period, DMC waived fees totaling $371,655.
Pursuant to an Investment Management Agreement dated April 30, 2007 (the
Management Agreement), the adviser manages each fund's portfolio investments
and reports to the board of trustees. With limited exception, each fund
conducts its other business and affairs and bears the expenses and salaries
necessary and incidental thereto. These expenses include, without limitation,
expenses related to: the maintenance of the fund's books, records and
procedures, including corporate secretary services; general accounting
oversight; preparation of tax returns and reports; and, legal services provided
by the adviser or an affiliate of the adviser.
With respect to the LVIP Cohen & Steers Global Real Estate Fund, the adviser
has contractually agreed to waive the following portion of its advisory fee:
0.22% on the first $250,000,000 of average daily net assets of the Fund; 0.32%
of the excess over $250,000,000 of average daily net assets of the Fund. The
waiver agreement will continue at least through April 30, 2009 and will renew
automatically for one-year terms unless the adviser provides written notice of
termination to the Fund.
To help limit expenses, the adviser has contractually agreed to waive the
following portion of its advisory fee for the LVIP T. Rowe Price Structured
Mid-Cap Growth Fund: 0.05% of the excess over $750,000,000 of average daily net
assets of the Fund. The waiver agreement will continue at least through April
30, 2009 and will renew automatically for one-year terms unless the adviser
provides written notice of termination to the Fund.
With respect to the LVIP Janus Capital Appreciation Fund, the adviser has
contractually agreed to waive the following portion of its advisory fee: 0.15%
of the first $100,000,000 of average daily net assets of the Fund; 0.10% of the
next $150,000,000 of average daily net assets of the Fund; 0.15% of the next
$250,000,000 of average daily net assets of the Fund; 0.10% of the next
$250,000,000 of average daily net assets of the Fund; 0.15% of the next
$750,000,000 of average daily net assets of the Fund; and 0.20% of the excess
over $1,500,000,000 of average daily net assets of the Fund. The fee waiver
agreement will continue at least through April 30, 2009 and will renew
automatically for one-year terms unless the adviser provides written notice of
termination to the Fund.
With respect to the LVIP FI Equity-Income Fund, the adviser has contractually
agreed to waive the following portion of its advisory fee: 0.03% on the first
$250,000,000 of average daily net assets of the Fund; 0.08% on the next
$500,000,000 of average daily net assets of the Fund; 0.13% on the excess over
$750,000,000 of average daily net assets of the Fund. This waiver will continue
through at least April 30, 2009 and will renew automatically for one-year terms
unless the adviser provides written notice of termination to the Fund.
With respect to the LVIP Turner Mid-Cap Growth Fund, the adviser has
contractually agreed to waive the following portion of its advisory fee: 0.10%
on the first $25,000,000 of average daily net assets of the Fund; 0.05% of the
next $50,000,000 of average daily net assets of the Fund. The waiver agreement
will continue at least through April 30, 2009 and will renew automatically for
one-year terms unless the adviser provides written notice of termination to the
Fund.
There can be no assurance that the above fee waivers will continue beyond the
dates indicated.
Sub-Advisers. As adviser, LIA is primarily responsible for investment decisions
affecting each of the funds under its management. However, LIA has entered into
sub-advisory agreements with several professional investment management firms.
These firms provide some or substantially all of the investment advisory
services required by a number of the funds, including day-to-day investment
management of those funds' portfolios. Each sub-adviser makes investment
decisions for its respective fund in accordance with that fund's investment
objectives and places orders on behalf of that fund to effect those decisions.
See the following table for more information about the sub-advisers and their
fees:
Fund Sub-Adviser
---------------------------- --------------------------
LVIP Baron Growth BAMCO, Inc.
Opportunities Fund 767 Fifth Avenue
New York, NY 10153
LVIP Capital Growth Fund Wellington Management
Company, LLP (Wellington
Management)
75 State Street
Boston Massachusetts
02109
LVIP Cohen & Steers Global Cohen & Steers Capital
Real Estate Fund Management, Inc.
280 Park Avenue)
New York, NY 10017
LVIP Columbia Value Columbia Management
Opportunities Fund Advisors, LLC.
One Financial Center
Boston, MA 02111
LVIP Delaware Bond Fund Delaware Management
Company (DMC)
2005 Market Street
Philadelphia, PA 19103
LVIP Delaware Growth and Delaware Management
Income Fund Company (DMC)
2005 Market Street
Philadelphia, PA 19103
LVIP Delaware Managed Delaware Management
Fund Company (DMC)
2005 Market Street
Philadelphia, PA 19103
Annual Fee Rate Based On
Fund Average Daily Net Asset Value
---------------------------- ------------------------------------------------------------------------------
LVIP Baron Growth 0.50% of the fund's average daily net assets.
Opportunities Fund
LVIP Capital Growth Fund 0.45% of the first $100 million of the fund's average daily net assets; 0.40%
of the fund's average daily net assets over $100 million.
LVIP Cohen & Steers Global 0.55% on the first $150 million of the fund's average daily net assets; 0.45%
Real Estate Fund on the next $100 million of the fund's average daily net assets; 0.35% on the
excess of $250 million of the fund's average daily net assets.
LVIP Columbia Value 0.75% on the first $60 million of the fund's average daily net assets; 0.50%
Opportunities Fund on the next $90 million of the fund's average daily net assets; 0.40% on the
excess of $150 million of the fund's average daily net assets.
LVIP Delaware Bond Fund 0.18% of the fund's average daily net assets.
LVIP Delaware Growth and 0.20% of the fund's average daily net assets.
Income Fund
LVIP Delaware Managed 0.19% of the fund's average daily net assets.
Fund
Fund Sub-Adviser
----------------------------- -------------------------------
LVIP Delaware Social Delaware Management
Awareness Fund Company (DMC)
2005 Market Street
Philadelphia, PA 19103
LVIP Delaware Special Delaware Management
Opportunities Fund Company (DMC)
2005 Market Street
Philadelphia, PA 19103
LVIP FI Equity-Income Fund Pyramis Global Advisors,
LLC, a subsidiary of Fidelity
Management and Research
Company (FMR)
82 Devonshire Street
Boston, MA 02109
LVIP Janus Capital Janus Capital Management
Appreciation Fund LLC (Janus)
151 Detroit Street
Denver, CO 80206
LVIP Marsico International Marsico Capital
Growth Fund Management, LLC (Marsico)
1200 17th Street, Suite 1600
Denver, Colorado 80202
LVIP MFS Value Fund Massachusetts Financial
Services Company (MFS)
500 Boylston Street
Boston, Massachusetts
02116
LVIP Mid-Cap Value Fund Wellington Management
75 State Street
Boston, Massachusetts
02109
LVIP Mondrian International Mondrian Investment
Value Fund Partners Limited.
10 Gresham Street,
London, United Kingdom
EC2V 7JD
LVIP Money Market Fund Delaware Management
Company (DMC)
2005 Market Street
Philadelphia, PA 19103
LVIP SSgA S&P 500 Index SSgA Funds Management,
Fund Inc.
One Lincoln Street
Boston, MA 02111
LVIP SSgA Small-Cap Index SSgA Funds Management,
Fund Inc.
One Lincoln Street
Boston, MA 02111
LVIP T. Rowe Price Growth T. Rowe Price Associates,
Stock Fund Inc. (T. Rowe Price)
100 East Pratt Street
Baltimore, MD 21202
LVIP T. Rowe Price T. Rowe Price Associates,
Structured Mid-Cap Growth Inc. (T. Rowe Price)
Fund 100 East Pratt Street
Baltimore, MD 21202
Annual Fee Rate Based On
Fund Average Daily Net Asset Value
----------------------------- -------------------------------------------------------------------------------
LVIP Delaware Social 0.20% of the fund's average daily net assets.
Awareness Fund
LVIP Delaware Special 0.20% of the fund's average daily net assets.
Opportunities Fund
LVIP FI Equity-Income Fund 0.45% on the first $250 million of the fund's average daily net assets; 0.40%
on the next $500 million of the fund's average daily net assets; and 0.35%
on any excess of the fund's average daily net assets over $750 million.*
LVIP Janus Capital 0.40% on the first $250 million of the fund's average daily net assets; 0.35%
Appreciation Fund on the next $500 million of the fund's average daily net assets; 0.30% on the
next $750 million of the fund's average daily net assets; and 0.25% on any
excess of the fund's average daily net assets over $1.5 billion.
LVIP Marsico International 0.50% on the first $300 million of the fund's average daily net assets; 0.45%
Growth Fund on the next $100 million of the fund's average daily net assets; 0.40% on the
next $600 million of the fund's average daily net assets; and 0.35% on any
excess of the fund's average daily net assets over $1 billion.**
LVIP MFS Value Fund 0.40% on the first $250 million of the fund's average daily net assets; 0.35%
on the next $250 million of the fund's average daily net assets; and 0.325%
on any excess of the fund's average daily net assets over $500 million.
LVIP Mid-Cap Value Fund 0.75% on the first $25 million of the fund's average daily net assets; 0.65%
on the next $25 million of the fund's average daily net assets; 0.55% on the
next $50 million of the fund's average daily net assets; and 0.45% on any
excess of the fund's average daily net assets over $100 million.
LVIP Mondrian International 0.40% on the first $800 million of the fund's average daily net assets; 0.35%
Value Fund on the next $500 million of the fund's average daily net assets; and 0.30%
on any excess of the fund's average daily net assets over $1.3 billion.***
LVIP Money Market Fund 0.18% of the fund's average daily net assets.
LVIP SSgA S&P 500 Index 0.015% on the first $1 billion of the fund's average daily net assets; and
Fund 0.01% on any excess of the fund's average daily net assets over $1 billion.
LVIP SSgA Small-Cap Index 0.03% on the first $500 million of the fund's average daily net assets; and
Fund 0.02% on any excess of the fund's average daily net assets over $500
million.
LVIP T. Rowe Price Growth 0.40% on the first $250 million of the fund's average daily net assets;
Stock Fund 0.375% on the next $250 million of the fund's average daily net assets; and
0.35% on any excess of the fund's average daily net assets over $500
million.
LVIP T. Rowe Price 0.50% for the first $250 million of the fund's average daily net assets; 0.45%
Structured Mid-Cap Growth of the next $500 million of the fund's average daily net assets; and 0.40% of
Fund the excess of the fund's average daily net assets over $750 million.
Fund Sub-Adviser
---------------------------- -----------------------------
LVIP Templeton Growth Templeton Investment
Fund Counsel, LLC (Templeton)
500 East Broward
Boulevard, Suite 2100
Fort Lauderdale, Florida
33394
LVIP Turner Mid-Cap Growth Turner Investment Partners,
Fund Inc.
1205 Westlakes Drive, Suite
100
Berwyn, Pennsylvania
19312
LVIP UBS Global Asset UBS Global Asset
Allocation Fund Management (Americas)
Inc.
(UBS Global AM)
One North Wacker Drive
Chicago, IL 60606
LVIP Wilshire Profile Wilshire Associates
Funds: Incorporated (Wilshire)
Conservative Profile Fund 1299 Ocean Avenue
Moderate Profile Fund Suite 700
Moderately Aggressive Santa Monica, CA 90401
Profile Fund
Aggressive Profile Fund
2010 Profile Fund
2010 Profile Fund
2020 Profile Fund
2030 Profile Fund
2040 Profile Fund
Annual Fee Rate Based On
Fund Average Daily Net Asset Value
---------------------------- -------------------------------------------------------------------------------
LVIP Templeton Growth 0.50% for the first $200 million of the fund's average daily net assets;
Fund 0.425% of the next $300 million of the fund's average daily net assets; and
0.40% of the excess of the fund's average daily net assets over $500 million.
LVIP Turner Mid-Cap Growth 0.50% on the first $150 million of the fund's average daily net assets; and
Fund 0.45% on any excess of the fund's average daily net assets over $150
million.
LVIP UBS Global Asset 0.47% of the first $200 million of the fund's average daily net assets; 0.42%
Allocation Fund of the next $200 million of the fund's daily net assets; and 0.40% of any
excess of the fund's average daily net assets over $400 million.
LVIP Wilshire Profile Each fund's pro-rata portion of the Profile Funds' combined net assets fee of:
Funds: 0.08% of the first $500 million of the fund's average daily net assets; 0.06%
Conservative Profile Fund of the fund's daily average net assets over $500 million but less than $1
Moderate Profile Fund billion; 0.05% of the fund's daily net assets over $1 billion but less than $3
Moderately Aggressive billion; and 0.04% of any excess of the fund's average daily net assets over
Profile Fund $3 billion.****
Aggressive Profile Fund
2010 Profile Fund
2010 Profile Fund
2020 Profile Fund
2030 Profile Fund
2040 Profile Fund
* Prior to September 1, 2006, the sub-advisory fee was the following: 0.48%
on the first $250,000,000 of the average daily net assets of the fund; 0.43% on
the next $500,000,000 of average daily net assets of the fund; and 0.38% on any
excess of the fund's average daily net assets over $750,000,000.
** Prior to December 15, 2007, the sub-advisory fee was the following: 0.50%
of the average daily net assets of the fund.
*** Prior to May 1, 2008, the sub-advisory fee was the following: 0.20% of
the average daily net assets of the fund.
**** Prior to April 30, 2007, the sub-advisory fee was the following: Each
fund's pro-rata portion of the Profile Funds' combined net assets fee of:
0.10% of the first $250 million; 0.06% over $250 million but less than $1
billion; 0.05% over $1 billion but less than $3 billion; 0.04% of the
amount over $3 billion.
BAMCO, Inc., a New York corporation, is a wholly-owned subsidiary of Baron
Capital Group, Inc. ("BCG"). Mr. Ronald Baron, with his family, is the
controlling stockholder of BCG and is BAMCO's chief investment officer.
Cohen & Steers Capital Management, Inc. ("Cohen & Steers"), was founded in 1986
as the first U.S. investment adviser to focus on investing in real estate
securities and is registered with the SEC. Cohen & Steers is a wholly-owned
subsidiary of Cohen & Steers, Inc. a public company listed on the New York
Stock Exchange (NYSE: CNS).
Columbia Management Advisors, LLC. (Columbia Management) has more than $643
billion in assets under management and a history that dates back to the 1900s.
Columbia Management and its affiliates make up one of the largest and most
experienced asset management companies. As the investment management division
of Bank of America, Columbia Management seeks to leverage their scale and
expertise to benefit their institutional clients.
DMC and its predecessors have been managing mutual funds since 1938. As of
December 31, 2007, DMC and its affiliates were managing in excess of $150
billion in assets in various institutional or separately managed investment
company and insurance accounts. DMC is a series of DMBT, a Delaware Statutory
trust registered with the SEC as an investment adviser. DMBT's address is 2005
Market Street, Philadelphia, Pennsylvania 19103. DMBT is an indirect subsidiary
of DMH. DMH is an indirect subsidiary, and subject to the ultimate control, of
LNC.
Janus (together with its predecessors) has served as an investment adviser
since 1969 and currently serves as investment adviser, or sub-adviser, to
separately managed accounts, mutual funds, as well as commingled pools or
private funds, and wrap fee accounts. Janus Capital Management LLC is a direct
subsidiary of Janus Capital Group, Inc. ("JCGI"), a publicly traded company
with principal operations in financial asset management businesses. JCGI owns
approximately 95% of Janus Capital Management LLC, with the remaining 5% held
by Janus Management Holdings Corporation.
FMR Corp., organized in 1972, is the ultimate parent company of FMR and FMR
Co., Inc. (FMRC). The voting common stock of FMR Corp. is divided into two
classes. Class B is held predominantly by members of the Edward C. Johnson 3d
family and is entitled to 49% of the vote on any matter acted upon by the
voting common stock. Class A is held predominately by non-Johnson family member
employees of FMR Corp. and its affiliates and is entitled to 51% of the vote on
any such matter. The Johnson family group and all other Class B shareholders
have entered into a shareholders' voting agreement under which all Class B
shares will be voted in accordance with the majority vote of Class B shares.
Under the 1940 Act, control of a company is presumed where one individual or
group of individuals owns more than 25% of the voting stock of that company.
Therefore, through their ownership of voting common stock and the execution of
the shareholders' voting agreement, members of the Johnson family may be
deemed, under the 1940 Act, to form a controlling group with respect to FMR
Corp.
Marsico is a registered investment adviser and a Delaware Limited Liability
Company. Marsico was formed in 1997, and provides investment management
services to other mutual funds and private accounts. As of December 31, 2007,
Marsico had approximately $105.9 billion under management. Marsico is an
indirect subsidiary of Marsico Management Equity, LLC, a Delaware limited
liability company, which purchased Marsico from a subsidiary of Bank of America
Corporation effective December 14, 2007. Marsico Management Equity, LLC,
through its subsidiaries, now own at least 88% of all common equity interests
in Marsico on a fully diluted bases (including 100% of all voting interests).
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $197.7 billion as of December 31, 2007. MFS is a subsidiary of
Sun Life Financial Inc.
Mondrian Investment Partners Limited is owned by its current management and
others, including various private investment firms affiliated with Hellman &
Friedman LLC, a private equity firm. Mondrian is registered as an investment
adviser with the SEC and is regulated in the United Kingdom by the Financial
Services Authority. As of December 31, 2007, Mondrian managed approximately $64
billion in mutual fund institutional and separately managed accounts.
T. Rowe Price is one of the nation's largest investment management firms for
individual and institutional investors, retirement plans and financial
intermediaries. T. Rowe Price is a wholly-owned subsidiary of T. Rowe Price
Group, Inc., a publicly-traded financial services holding company. As of
December 1, 2007, T. Rowe Price had assets under management of approximately
$400 billion.
Templeton is a registered investment adviser and a Delaware Limited Liability
Company. Templeton is an indirect wholly-owned subsidiary of Franklin
Resources, Inc. ("Franklin"), a Delaware corporation. Net assets under the
management of the Franklin organization was approximately $643.7 billion as of
December 31,2007.
Turner is a registered investment adviser. As of December 31, 2007, it had
assets under management totaling approximately $29.1 billion. Turner is 100%
owned by its employees, including Robert E. Turner, who is the Chairman and
controlling shareholder of Turner.
UBS Global AM, a Delaware corporation, is an investment adviser registered with
the U.S. Securities and Exchange Commission. UBS Global AM is an indirect,
wholly owned subsidiary of UBS Global Asset Management Division (UBS AG). UBS
AG is an internationally diversified organization headquartered in Zurich,
Switzerland, with operations in many areas of the financial services industry.
Wellington Management Company, LLP ("Wellington Management") is a Massachusetts
limited liability partnership with principal offices at 75 State Street,
Boston, Massachusetts 02109. Wellington Management is a professional investment
counseling firm which provides investment services to investment companies,
employee benefit plans, endowments, foundations and other institutions.
Wellington Management and its predecessor organization have provided investment
advisory services for over 70 years. As of December 31, 2007, Wellington
Management had investment management authority with respect to approximately
$588 billion in assets.
Wilshire is 100% owned by key employees including Dennis A. Tito who
beneficially owns a majority of the outstanding shares of the company. It is a
global investment management, consulting and technology firm that offers
customized, institutionally based solutions to meet the investment needs of its
clients. Wilshire was formed in 1972 and as of December 31, 2007, the Wilshire
Funds Management business unit managed approximately $45.5 billion in assets.
During the last three years, sub-advisers received the following amounts for
investment sub-advisory services with respect to the management of each fund
and its predecessor fund. LIA, not the fund, pays all sub-advisory fees owed.
Sub-Advisory Fees Paid by the Adviser
2007 2006 2005
--------------- ------------------- -----------
LVIP Baron Growth Opportunities Fund ................... 1,049,357+ N/A N/A
LVIP Capital Growth Fund ............................... 756,528 721,795 748,650
LVIP Cohen & Steers Global Real Estate Fund* ........... 543,564 N/A N/A
LVIP Columbia Value Opportunities Fund ................. 303,678++ 480,048 482,116
LVIP Delaware Bond Fund ................................ 1,866,062 N/A N/A
LVIP Delaware Growth and Income Fund ................... 2,723,342 N/A N/A
LVIP Delaware Managed Fund ............................. 757,939 N/A N/A
LVIP Delaware Social Awareness Fund .................... 1,604,838 N/A N/A
LVIP Delaware Special Opportunities Fund ............... 1,110,458 N/A N/A
LVIP FI Equity-Income Fund ............................. 3,298,469 2,780,547+++ 3,619,430
LVIP Janus Capital Appreciation Fund ................... 2,081,157 1,960,366 2,396,678
LVIP Marsico International Growth Fund ................. 859,262 409,778 206,400
LVIP MFS Value Fund .................................... 746,312 447,355++++ 419,837
LVIP Mid-Cap Value Fund ................................ 568,940 363,245 311,931
LVIP Mondrian International Value Fund ................. 2,134,959 1,552,452 1,121,124
LVIP Money Market Fund ................................. 1,045,133 N/A N/A
LVIP SSgA S&P 500 Index Fund** ......................... 100,000 117,639 116,464
LVIP SSgA Small-Cap Index Fund** ....................... 186,684 358,724 325,983
LVIP T. Rowe Price Growth Stock Fund ................... 626,692 341,712 345,211
LVIP T. Rowe Price Structured Mid-Cap Growth Fund ...... 1,409,399 1,414,319 1,289,427
LVIP Templeton Growth Fund ............................. 1,031,471 687,321 633,607
LVIP Turner Mid-Cap Growth ............................. 139,061 161,380 142,974
LVIP UBS Global Asset Allocation Fund .................. 1,519,751 1,455,198 1,131,682
LVIP Wilshire Conservative Profile Fund*** ............. 88,342 65,640 34,553
LVIP Wilshire Moderate Profile Fund*** ................. 384,791 207,666 49,813
LVIP Wilshire Moderately Aggressive Profile Fund*** .... 284,241 140,895 42,518
LVIP Wilshire Aggressive Profile Fund*** ............... 77,115 52,248 33,592
LVIP Wilshire 2010 Profile Fund* ....................... 952 N/A N/A
LVIP Wilshire 2020 Profile Fund* ....................... 2,114 N/A N/A
LVIP Wilshire 2030 Profile Fund* ....................... 1,181 N/A N/A
LVIP Wilshire 2040 Profile Fund* ....................... 623 N/A N/A
* The Fund commenced operations on April 30, 2007.
** Commencing April 30, 2008, SSgA Funds Management, Inc. replaces Mellon
Capital Management Corporation.
*** The Fund commenced operations on May 3, 2005.
+ Following the close of business on June 4, 2007, the LVIP Baron Growth
Opportunities Fund received all of the assets and liabilities of the Baron
Capital Asset Fund, a series of the Baron Capital Funds Trust.
++ Commencing October 15, 2007, Columbia Management Advisors Inc. replaced
Dalton, Greiner, Hartman, Maher & Co. as the fund's sub-adviser. The
portion of the 2007 payment attributed to Columbia was $41,924.
+++ Commencing September 1, 2006, Pyramis Global Advisors, LLC, a subsidiary
of Fidelity Management and Research Company (FMR) replaced FMR as the
fund's sub-adviser. The portion of the 2006 payment attributed to Pyramis
was $774,072.
++++ Commencing November 15, 2006, Massachusetts Financial Services Company
(MFS) replaced Credit Suisse Asset Management as the fund's sub-adviser.
The portion of the 2006 payment attributed to MFS was $18,529.
Service marks.The service mark for the funds and the name Lincoln have been
adopted by the funds with the permission of LNC, and their continued use is
subject to the right of LNC to withdraw this permission in the event the
adviser should not be the investment adviser of the funds.
In the prospectus and sales literature, the name Baron will be used with the
LVIP Baron Growth Opportunities Fund; Cohen & Steers will be used with the LVIP
Cohen & Steers Global Real Estate Fund; Columbia will be used with the LVIP
Columbia Value Opportunities Fund; Delaware will be used with the LVIP Delaware
Bond Fund, LVIP Delaware Growth and Income Fund, LVIP Delaware Managed Fund,
LVIP Delaware Social Awareness Fund and LVIP Delaware Special Opportunities
Fund; Fidelity Investments will be used with the LVIP FI Equity-Income Fund;
Janus will be used with the LVIP Janus Capital Appreciation Fund; Marsico will
be used with the LVIP Marsico International Growth Fund; MFS will be used with
the LVIP MFS Value Fund; Mondrian Investment Partners Limited will be used with
the LVIP Mondrian International Fund; State Street Global Advisors (SSgA) will
be used for LVIP SSgA S&P 500 Index Fund and LVIP SSgA Small-Cap Index Fund; T.
Rowe Price will be used with the LVIP T. Rowe Price Growth Stock Fund and LVIP
T. Rowe Price Structured Mid-Cap Growth Fund; Templeton will be used with the
LVIP Templeton Growth Stock Fund; Turner will be used with the LVIP Turner
Mid-Cap Growth Fund; UBS Global AM will be used with the LVIP UBS Global Asset
Allocation Fund; Wilshire will be used with the LVIP Wilshire Risk-based and
LVIP Wilshire Target Maturity Funds. The continued use of these names is subject
to the right of the respective sub-adviser to withdraw its permission in the
event it ceases to be the sub-adviser to the particular fund it advises. In
addition, the Trust has licensed certain trademarks and the trade names of S&P
and of the S&P 500 Index, which is determined, composed and calculated by S&P
without regard to the LVIP SSgA S&P 500 Index Fund.
Fund Expenses. Expenses specifically assumed by each fund under its advisory
agreement include, among others, compensation and expenses of the members of
the fund's board of trustees who are not interested persons of the fund;
custodian fees; independent auditor fees; brokerage commissions; legal and
accounting fees; registration and other fees in connection with maintaining
required fund and share registration with the SEC and state securities
authorities; and the expenses of printing and mailing updated prospectuses,
proxy statements and shareholder reports to current contract owners.
Proxy Voting Policies and Procedures. With the exception of the LVIP Wilshire
Risk-based and LVIP Wilshire Target Maturity Funds, the board of trustees has
delegated to each fund's sub-adviser responsibility for voting any proxies
relating to portfolio securities held by the fund in accordance with the
sub-adviser's proxy voting policies and procedures. Summaries of the proxy
voting policies and procedures to be followed by sub-advisers on behalf of the
funds, including procedures to be used when a vote represents a conflict of
interest, are attached hereto as Appendix B.
With respect to the LVIP Wilshire Risk-based and LVIP Wilshire Target Maturity
Funds (which are each a fund of funds), these funds will vote the shares in the
same proportion as the vote of all other holders of shares of the underlying
fund, as described in Section 12(d)(1)(E)(iii)(aa) of the 1940 Act. This type
of proxy voting structure is commonly referred to as "echo voting". The proxy
voting policies and procedures to be followed by these funds are attached herto
in Appendix B.
Information regarding how each fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available
(1) without charge, upon request, by call 1-800-4LINCOLN (454-6265); and (2) on
the SEC's website at http://
www.sec.gov.
Portfolio Managers
The following provides information regarding each portfolio managers' other
accounts managed, material conflicts of interests, compensation, and any
ownership of securities in a fund. Each portfolio manager or team member is
referred to in this section as a "portfolio manager." The portfolio managers
are shown together in this section only for ease in presenting the information
and should not be viewed for purposes of comparing the portfolio managers or
the sub-advisory firms against one another. Each sub-advisory firm is a
separate entity that may employ different compensation structures, may have
different management requirements, and each portfolio manager may be affected
by different conflicts of interest.
Other Accounts Managed
The following table provides information about other accounts for which each
portfolio manager was primarily responsible as of December 31, 2007:
Registered Other Pooled
Investment Companies Investment Vehicles
------------------------------ ------------------------------
Number of Total Assets* in Number of Total Assets* in
Adviser/Sub-Adviser and Portfolio Manager Accounts the Accounts Accounts the Accounts
------------------------------------------- ----------- ------------------ ----------- ------------------
BAMCO, Inc.
Ron Baron ................................. 8 $15,584 5 $ 254
Cohen & Steers
Scott Crowe ............................... 3 920 13 4,872
Joseph Harvey ............................. 20 16,852 23 5,602
Chip McKinley ............................. 1 427 12 4,582
Columbia Management
Christian Stadlinger ...................... 2 1,200 0 0
Jarl Ginsberg ............................. 2 1,200 0 0
Delaware Management
Christopher Adams ......................... 8 3,500 0 0
Christopher Beck .......................... 5 2,500 0 0
Thomas H. Chow ............................ 17 8,100 0 0
Roger A Early ............................. 16 5,200 1 7
Michael Hughes ............................ 5 2,500 0 0
Kent Madden ............................... 5 2,500 0 0
Francis Morris ............................ 8 3,500 0 0
Michael Morris ............................ 8 3,500 0 0
Donald Padilla ............................ 8 3,500 0 0
Janus Capital Management
Jonathan D. Coleman ....................... 5 16,642 0 0
Daniel Riff ............................... 6 17,235 0 0
Marsico Capital Management, LLC
James G. Gendelman ........................ 17 13,468 0 0
MFS Investment Management
Nevin Chitkara ............................ 22 36,602 3 1,955
Steven Gorham ............................. 22 36,602 3 1,955
Mondrian Investment Partners
Elizabeth Desmond ......................... 8 4,900 1 2,900
Clive Gillmore ............................ 6 5,600 1 2,100
Emma Lewis ................................ 6 5,100 0 0
Other Accounts
-----------------------------
Number of Total Assets* in
Adviser/Sub-Adviser and Portfolio Manager Accounts the Accounts
------------------------------------------- ----------- -----------------
BAMCO, Inc.
Ron Baron ................................. 55 $ 615
Cohen & Steers
Scott Crowe ............................... 18 920
Joseph Harvey ............................. 52 4,152
Chip McKinley ............................. 9 538
Columbia Management
Christian Stadlinger ...................... 30 30
Jarl Ginsberg ............................. 29 30
Delaware Management
Christopher Adams ......................... 20** 1,100
Christopher Beck .......................... 12** 158
Thomas H. Chow ............................ 4** 1,600
Roger A Early ............................. 0** 0
Michael Hughes ............................ 5** 161
Kent Madden ............................... 7** 159
Francis Morris ............................ 20** 1,100
Michael Morris ............................ 17** 1,100
Donald Padilla ............................ 23** 1,100
Janus Capital Management
Jonathan D. Coleman ....................... 2 33
Daniel Riff ............................... 3 35
Marsico Capital Management, LLC
James G. Gendelman ........................ 17 2,679
MFS Investment Management
Nevin Chitkara ............................ 22 10,482
Steven Gorham ............................. 22 10,482
Mondrian Investment Partners
Elizabeth Desmond ......................... 24 9,600
Clive Gillmore ............................ 21 2,700
Emma Lewis ................................ 4 1,000
Registered Other Pooled
Investment Companies Investment Vehicles
------------------------------ ------------------------------
Number of Total Assets* in Number of Total Assets* in
Adviser/Sub-Adviser and Portfolio Manager Accounts the Accounts Accounts the Accounts
------------------------------------------- ----------- ------------------ ----------- ------------------
Pyramis Global Advisors, LLC
Ciaran O'Neill ............................ 3 1,601 4 693
SSgA
Global Structured Products Group .......... 65 38,000 282 369,300
T. Rowe Price Associates
P. Robert Bartolo ......................... 12 32,099 1 232
Donald J. Peters .......................... 12 2,740 0 0
Templeton Investment Counsel, LLC
Peter Nori ................................ 9 10,213.9 3 1,450.9
Cindy Sweeting ............................ 13 81,097.2 1 165.6
Tina Sadler ............................... 9 7,293.1 3 176
Turner Investment Partners, Inc.
Tara R. Hedlund ........................... 10 3,700 20 505
Christopher McHugh ........................ 14 5,000 27 636
Jason D. Schrotberger ..................... 15 4,200 26 551
UBS Global Asset Management
Edwin Denson .............................. 11 12,969 21*** 26,286
Thomas Clarke ............................. 7 12,005 21*** 26,395
Wellington Management Company
James N. Mordy ............................ 9 4,223 3 112
Andrew J. Shilling ........................ 4 2,466 9 2,373
Wilshire Associates
Victor Zhang .............................. 2 1,730 0 0
Other Accounts
-----------------------------
Number of Total Assets* in
Adviser/Sub-Adviser and Portfolio Manager Accounts the Accounts
------------------------------------------- ----------- -----------------
Pyramis Global Advisors, LLC
Ciaran O'Neill ............................ 8 2,149
SSgA
Global Structured Products Group .......... 229 236,100
T. Rowe Price Associates
P. Robert Bartolo ......................... 7 436
Donald J. Peters .......................... 34 1,849
Templeton Investment Counsel, LLC
Peter Nori ................................ 32 6,237.8
Cindy Sweeting ............................ 14 4,912
Tina Sadler ............................... 32 8,285.3
Turner Investment Partners, Inc.
Tara R. Hedlund ........................... 15 916
Christopher McHugh ........................ 23 2,800
Jason D. Schrotberger ..................... 55 3,300
UBS Global Asset Management
Edwin Denson .............................. 25 4,960
Thomas Clarke ............................. 10 3,008
Wellington Management Company
James N. Mordy ............................ 11 1,826
Andrew J. Shilling ........................ 44 10,033
Wilshire Associates
Victor Zhang .............................. 1 381
* in millions of dollars
** Any accounts managed in a personal capacity appear under "Other Accounts"
along with other accounts managed on a professional basis. The personal
account information is current as of the most recent calendar quarter-end
for which account statements are available.
*** one account with approximately $188.7 million has an advisory fee based
upon the performance of the account. Table reflects all accounts that the
portfolio manager's managed.
Other Accounts Managed with Performance-Based Advisory Fees
The following table provides information for other accounts managed by each
portfolio manager, with respect to which the advisory fee is based on account
performance. Information is shown as of December 31, 2007:
Number of Accounts
Adviser/Sub-Adviser and Portfolio Managers With Incentive Fees Total Assets
-------------------------------------------- --------------------- --------------
BAMCO, Inc. (Ron Baron) 2 $131,300,000
Columbia (Christian Stadlinger, Jarl 0 0
Ginsberg)
Cohen & Steers Capital Management, Inc. 0 0
(Scott Crowe, Joseph Harvey, Chip
McKinley)
Delaware Management Company (Francis X. 0 0
Morris, Christopher S. Adams, Michael S.
Morris, Donald G. Padilla)
Number of Accounts
Adviser/Sub-Adviser and Portfolio Managers With Incentive Fees Total Assets
---------------------------------------------- --------------------- ---------------
Delaware Management Company (Thomas 0 0
H. Chow, Roger A. Early)
Delaware Management Company 0 0
(Christopher Beck, Michael Hughes, Kent
Madden)
Janus Capital Management LLC (Jonathan 0 0
D. Coleman, Daniel Riff)
Marsico Capital Management, LLC (James 0 0
G. Gendelman)
MFS Investment Management (Nevin 0 0
Chitkara, Steven Gorham)
Mondrian Investment Partners Ltd. (Clive A. 0 0
Gillmore, Elizabeth A. Desmond, Emma R.
E. Lewis)
Pyramis Global Advisors, LLC (Ciaran 0 0
O'Neill)
SSgA (Global Structured Products Group) 0 0
SSgA (Global Structured Products Group) 0 0
T. Rowe Price Associates (P. Robert Bartolo) 0 0
T. Rowe Price Associates (Donald J. Peters) 0 0
Templeton Investment Counsel, LLC (Peter 0 0
Nori, Cindy Sweeting, Tina Sadler)
Turner Investment Partners, Inc.
Tara R. Hedlund 4 234,000,000
Christopher McHugh 7 1,466,000,000
Jason D. Schrotberger 7 371,000,000
UBS Global Asset Management (Americas) 1 183,000,000
Inc. (Brian D. Singer)
Wellington Management Company
James N. Mordy 2 79,527,381
Andrew J. Shilling 3 875,851,152
Wilshire Associates Inc. (Victor Zhang) 0 0
Material Conflicts of Interest
Actual or apparent conflicts of interest may arise when a portfolio manager has
day-to-day management responsibilities with respect to more than one investment
account. Portfolio managers who manage other investment accounts in addition to
a Lincoln VIP fund may be presented with the following potential conflicts:
BAMCO, Inc ("Baron") (LVIP Baron Growth Opportunities Fund)
Conflicts of interest could arise in connection with managing multiple funds
and other clients of BAMCO and its affiliated investment adviser. Because of
market conditions, client investment guidelines and the consideration of such
factors as current holidays, cash availability, and diversification
considerations, not all investment opportunities will be available to all
clients at all times. BAMCO has allocation policies designed to ensure that no
BAMCO client is systematically given preferential treatment over time. BAMCO's
Chief Compliance Officer monitors allocations for consistency with this policy.
Because an investment opportunity may be suitable for multiple accounts, a
BAMCO client may not be able to take full advantage of that opportunity because
the opportunity may be allocated among many or all of the clients managed by
BAMCO and its affiliate.
To the extent that a portfolio manager has responsibilities for managing other
BAMCO client accounts, the portfolio manager may have conflicts of interest
with respect to his time and attention among relevant accounts. In addition,
differences in the investment restrictions or strategies among the Fund and
other BAMCO clients may cause a portfolio manager to take action with respect
to one client that differs from the action taken with respect to the Fund. In
some cases, another account managed by a portfolio manager may provide more
revenue to BAMCO. While this may create additional conflicts of interest for
the portfolio manager in the allocation of management time, resources and
investment opportunities, BAMCO takes all necessary steps to ensure that
portfolio managers endeavor to exercise their discretion in a manner that is
equitable to all interested persons.
Columbia (LVIP Columbia Value Opportunities Fund)
Like other investment professionals with multiple clients, the fund's portfolio
manager(s) may face certain potential conflicts of interest in connection with
managing both the fund and other accounts at the same time. Columbia Management
and the fund have adopted compliance policies and procedures that attempt to
address certain of the potential conflicts that portfolio managers face in this
regard. Certain of these conflicts of interest are summarized below.
The management of accounts with different advisory fee rates and/or fee
structures, including accounts that pay advisory fees based on account
performance (performance fee accounts), may raise potential conflicts of
interest for a portfolio manager by creating an incentive to favor higher fee
accounts.
Potential conflicts of interest also may arise when a portfolio manager has
personal investments in other accounts that may create an incentive to favor
those accounts. As a general matter and subject to Columbia Management's Code
of Ethics and certain limited exceptions, Columbia Management's investment
professionals do not have the opportunity to invest in client accounts, other
than the fund.
A portfolio manager who is responsible for managing multiple funds and/or
accounts may devote unequal time and attention to the management of those funds
and/or accounts. The effects of this potential conflict may be more pronounced
where funds and/or accounts managed by a particular portfolio manager have
different investment strategies.
A portfolio manager may be able to select or influence the selection of the
broker/dealers that are used to execute securities transactions for the fund. A
portfolio manager's decision as to the selection of broker/dealers could
produce disproportionate costs and benefits among the fund and the other
accounts the portfolio manager manages.
A potential conflict of interest may arise when a portfolio manager buys or
sells the same securities for the fund and other accounts. On occasions when a
portfolio manager considers the purchase or sale of a security to be in the
best interests of the fund as well as other accounts, Columbia Management's
trading desk may, to the extent consistent with applicable laws and
regulations, aggregate the securities to be sold or bought in order to obtain
the best execution and lower brokerage commissions, if any. Aggregation of
trades may create the potential for unfairness to the fund or another account
if a portfolio manager favors one account over another in allocating the
securities bought or sold.
"Cross trades," in which a portfolio manager sells a particular security held
by the fund to another account (potentially saving transaction costs for both
accounts), could involve a potential conflict of interest if, for example, a
portfolio manager is permitted to sell a security from one account to another
account at a higher price than an independent third party would pay. Columbia
Management and the fund have adopted compliance procedures that provide that
any transactions between the fund and another account managed by Columbia
Management are to be made at an independent current market price, consistent
with applicable laws and regulation.
Another potential conflict of interest may arise based on the different
investment objectives and strategies of the fund and other accounts managed by
its portfolio manager(s). Depending on another account's objectives and other
factors, a portfolio manager may give advice to and make decisions for the fund
that may differ from advice given, or the timing or nature of decisions made,
with respect to another account. A portfolio manager's investment decisions are
the product of many factors in addition to basic suitability for the particular
account involved. Thus, a portfolio manager may buy or sell a particular
security for certain accounts, and not for the fund, even though it could have
been bought or sold for the fund at the same time. A portfolio manager also may
buy a particular security for one or more accounts when one or more other
accounts are selling the security (including short sales). There may be
circumstances when a portfolio manager's purchases or sales of portfolio
securities for one or more accounts may have an adverse effect on other
accounts, including the fund.
Columbia Management or an affiliate may provide more services (such as
distribution or recordkeeping) for some types of funds or accounts than for
others. In such cases, a Portfolio Manager may benefit, either directly or
indirectly, by devoting disproportionate attention to the management of fund
and/or accounts that provide greater overall returns to Columbia Management and
its affiliates.
Additional actual or potential conflicts of interest and certain investment
activity limitations that could affect the fund may arise from the financial
services activities of Bank of America and its affiliates, including the
investment advisory/management services it provides for clients and customers
other than the fund. In this regard, Bank of America is a major financial
services company, engaged in a wide range of financial activities beyond the
mutual fund-related activities of Columbia Management, including, among others,
commercial banking, investment banking, broker/dealer (sales and trading),
asset management, insurance and other financial activities. The broad range of
financial services activities of Bank of America and its affiliates may involve
multiple advisory, transactional, lending, financial and other interests in
securities and other instruments, and in companies, that may be bought, sold or
held by the fund.
Portfolio Managers may also face other potential conflicts of interest in
managing the Portfolio and the description above is not a complete description
of every conflict that could be deemed to exist in managing both the fund and
other accounts. In addition, Portfolio Managers may also manage other accounts
(including their personal assets or the assets of family members) in their
personal capacity. The management of these accounts may also involve certain of
the potential conflicts described above.
Cohen & Steers Capital Management, Inc. (LVIP Cohen & Steers Global Real Estate
Fund)
We do not believe there are any conflicts of interest that would arise in
regard to Cohen & Steers managing this portfolio for LVIP.
Cohen & Steers is affiliated with Cohen & Steers Capital Advisors, LLC, a New
York-based entity that engages in corporate and real estate investment banking
advisory services. Cohen & Steers Capital Advisors, LLC is a distinct,
separately staffed entity from Cohen & Steers. Its professionals have no
interaction with Cohen & Steers' investment team. Nonetheless, we maintain
strict procedures and personal trading policies to avoid potential conflicts of
interest.
In addition, Cohen & Steers is affiliated with Cohen & Steers Securities, LLC,
a New York-based entity that serves as the distributor of Cohen and Steers'
mutual funds but provides no other broker/dealer services.
We carefully manage these affiliations to avoid potential conflicts and do no
believe these affiliations would lead to any conflicts of interest with the
management of this account.
Delaware Management Company ("DMC") (LVIP Delaware Bond Fund, LVIP Delaware
Growth and Income Fund, LVIP Delaware Managed Fund, LVIP Money Market Fund,
LVIP Delaware Social Awareness Fund, LVIP Delaware Special Opportunities Fund)
Individual portfolio managers may perform investment management services for
other accounts similar to those provided to the funds and the investment action
for each account and fund may differ. For example, one account or fund may be
selling a security, while another account or fund may be purchasing or holding
the same security. As a result, transactions executed for one account and fund
may adversely affect the value of securities held by another account.
Additionally, the management of multiple accounts and funds may give rise to
potential conflicts of interest, as a portfolio manager must allocate time and
effort to multiple accounts and funds. A portfolio manager may discover an
investment opportunity may be limited, however, so that all accounts and funds
for which the investment would be suitable may not be able to participate.
Delaware has adopted procedures designed to allocate investments fairly across
multiple accounts.
A portfolio manager's management of personal accounts also may present certain
conflicts of interest. While Delaware's code of ethics is designed to address
these potential conflicts, there is no guarantee that it will do so.
Janus Capital Management LLC ("Janus") (LVIP Janus Capital Appreciation Fund)
The portfolio manager may manage other accounts with investment strategies
similar to the fund. Those other accounts
may include other Janus funds, private-label mutual funds for which Janus
serves as sub-adviser, and separately managed accounts. Fees earned by Janus
may vary amount these accounts, a portfolio manager may personally invest in
some but not all of these accounts, and certain of these accounts may have a
greater impact on their compensation than others. In addition, certain
portfolio managers may also have roles as research analysts for one or more
Janus funds and receive compensation with respect to the analyst role.
These factors could create conflicts of interest because a portfolio manager
may have incentives to favor certain accounts over others, resulting in the
potential for other accounts outperforming the fund.
A conflict may also exist if a portfolio manager identifies a limited
investment opportunity that may be appropriate for more than one account, but
the fund is not able to take full advantage of that opportunity due to the need
to allocate that opportunity among multiple accounts. In addition, the
portfolio manager may execute transactions for another account that may
adversely impact the value of securities held by a Portfolio.
However, Janus believes that these conflicts may be mitigated to a certain
extent by the fact that accounts with like investment strategies managed by a
particular portfolio manager are generally managed in a similar fashion,
subject to a variety of exceptions, for example, particular investment
restrictions or policies applicable only to certain accounts, certain portfolio
holdings that may be transferred in-kind when an account is opened, differences
in cash flows and account sizes, and similar factors. In addition, Janus has
adopted trade allocation procedures that govern allocation of securities among
various Janus accounts.
Marsico Capital Management, LLC ("MCM) (LVIP Marsico International Growth Fund)
As a general matter, MCM faces the same need to balance the interests of
different clients that any investment adviser with multiple clients might
experience. Portfolio managers make investment decisions for each portfolio
based on the investment objectives, policies, practices and other relevant
investment considerations that the managers believe are applicable to the
portfolio. Consequently, portfolio managers may purchase (or sell) securities
for one portfolio and not another portfolio, or may take similar actions for
different portfolios at different times. As a result, the mix of securities
purchased in one portfolio may perform better than the mix of securities
purchased for another portfolio. Similarly, the sale of securities from one
portfolio may cause that portfolio to perform better than others if the value
of those securities subsequently decline.
The need to balance the interests of multiple clients may also arise when
allocating and/or aggregating trades. MCM often aggregates into a single trade
order several individual contemporaneous client trade orders in a single
security. Under MCM's Portfolio Management and Trade Management Policy and
Procedures, when trades are aggregated on behalf of more than one account, MCM
seeks to allocate such trades to all participating client accounts in a fair and
equitable manner. With respect to IPOs and other syndicated or limited
offerings, it is MCM's policy to seek to ensure that over the long term,
accounts with the same or similar investment objectives will receive an
equitable opportunity to participate meaningfully and will not be unfairly
disadvantaged. To deal with these situations, MCM has adopted policies and
procedures for allocating transactions across multiple accounts. MCM's policies
also seek to ensure that portfolio managers do not systematically allocate other
types of trades in a manner that would be more beneficial to one account than
another. MCM's compliance department monitors transactions made on behalf of
multiple clients to seek to ensure adherence to its policies.
MCM has adopted and implemented policies and procedures that seek to minimize
potential conflicts of interest that may arise as a result of a portfolio
manager advising multiple accounts. In addition, MCM monitors a variety of
areas, including compliance with primary fund guidelines, the allocation of
securities, and compliance with MCM's Code of Ethics.
Massachusetts Financial Services Company ("MFS") (LVIP MFS Value Fund)
MFS seeks to identify potential conflicts of interest resulting from a
portfolio manager's management of both the Fund and other accounts, and has
adopted policies and procedures designed to address such potential conflicts.
The management of multiple funds and accounts (including proprietary accounts)
may give rise to potential conflicts of interest if the funds and accounts have
different objectives and strategies, benchmarks, time horizons and fees as a
portfolio manager must allocate his or her time and investment ideas across
multiple funds and accounts. In certain instances, there may be securities
which are suitable for the fund's portfolio as well as for accounts of MFS or
its subsidiaries with similar investment objectives. A fund's trade allocation
policies may give rise to conflicts of interest if the fund's orders do not get
fully executed or are delayed in getting executed due to being aggregated with
those of other accounts of MFS or its subsidiaries. A portfolio manager may
execute transactions for another found or account that may adversely impact the
value of the fund's investments. Investments selected for funds or accounts
other than the fund may outperform investments selected for the fund.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by MFS to be fair and equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as the fund is concerned. In most cases, however, MFS believes
that the fund's ability to participate in volume transactions will product
better executions for the fund.
MFS does not receive a performance fee for its management of the Fund. As a
result, MFS and/or a portfolio manager may have a financial incentive to
allocate favorable or limited opportunity investments or structure the timing
of investments to favor accounts other than the fund - for instance, those that
pay a higher advisory fee and/or have a performance fee.
Mondrian Investment Partners Limited ("Mondrian") (LVIP Mondrian International
Value Fund)
Mondrian does not foresee any material conflicts of interest that may arise in
the management of the funds and any other accounts managed with similar
investment guidelines. Mondrian acts solely as an investment manager and does
not engage in any other business activities. The following is a list of some
potential conflicts of interest that can arise in the course of normal
investment management business activities. Mondrian maintains and operates
various policies and procedures which are designed to prevent or manage any of
the conflicts identified below so that the interests of its clients are always
put ahead of Mondrian's own interests or those of its employees and directors:
1. Access to non-public information.
2. Investment in shares of companies which are clients of Mondrian.
3. Dealing in investments as principal in connection with the provision of seed
capital for Mondrian investment vehicles.
4. Side-by-side management of Mondrian hedge funds.
5. Dealing in investments as agent for more than one party.
6. Dual agency/cross trades.
7. Allocation of aggregated trades.
8. Allocation of investment opportunities.
9. Allocation of IPO opportunities.
10 "Cherry picking" (inappropriate attempts to improve the appearance of a
portfolio).
11. Soft dollar arrangements - Other than the receipt of proprietary broker
research, Mondrian does not have any soft dollar arrangements in place with
brokers.
12. Pricing and valuation.
13. Employee external directorships and appointments.
14. Employee personal account dealing.
15. Gifts and entertainment received and given.
Pyramis Global Advisors, LLC (a subsidiary of Fidelity Management & Research
Company "FMR") (LVIP FI Equity-Income Fund)
A portfolio manager's compensation plan may give rise to potential conflicts of
interest. Although investors in a fund may invest through either tax-deferred
accounts or taxable accounts, a portfolio manager's compensation is linked to
the pre-tax performance of the fund, rather than its after-tax performance. A
portfolio manager's base pay tends to increase with additional and more complex
responsibilities that include increased assets under management and a portion
of the bonus relates to marketing efforts, which together indirectly link
compensation to sales. When a portfolio manager takes over a fund or an
account, the time period over which performance is measured may be adjusted to
provide a transition period in which to assess the portfolio. The management of
multiple funds and accounts (including proprietary accounts) may give rise to
potential conflicts of interest if the funds and accounts have different
objectives, benchmarks, time horizons, and fees as a portfolio manager much
allocate his time and investment ideas across multiple funds and accounts. In
addition, a fund's trade allocation policies and procedures may give rise to
conflicts of interest if the fund's orders do not get fully executed due to
being aggregated with those of other accounts managed by FMR or an affiliate. A
portfolio manager may execute transactions for another fund or account that may
adversely impact the value of securities held by a fund. Securities selected
for other funds or accounts may outperform the securities selected for the
fund. Portfolio managers may be permitted to invest in the funds they manage,
even if a fund is closed to new investors. Trading in personal accounts, which
may give rise to potential conflicts of interest, is restricted by a fund's
Code of Ethics.
State Street Global Advisors Funds Management, Inc. ("SSgA FM") (LVIP SSgA
Equity 500 Index Fund and SSgA Small-Cap Index Fund)
A Portfolio Manager may be subject to potential conflicts of interest because
he or she is responsible for other accounts in addition to the Fund. Potential
conflicts may arise out of (a) the Portfolio Manager's execution of different
investment strategies for various accounts or (b) the allocation of investment
opportunities among the Portfolio Manager's accounts with the same strategy.
A potential conflict of interest may arise as a result of the Portfolio
Manager's responsibility for multiple accounts with similar investment
guidelines. Under these circumstances, a potential investment may be suitable
for more than one of the Portfolio Manager's accounts, but the quantity of the
investment available for purchase is less than the aggregate amount the
accounts would ideally devote to the opportunity. Similar conflicts may arise
when multiple accounts seek to dispose of the same investment. The Portfolio
Manager may also manage accounts whose objectives and policies differ from that
of the Fund. These differences may be such that under certain circumstances,
trading activity appropriate for one account managed by the Portfolio Manager
may have adverse consequences for another account managed by the Portfolio
Manager. For example, an account may sell a significant position in a security,
which could cause the market price of that security to decrease, while the Fund
maintained its position in that security.
A potential conflict may arise when the Portfolio Manager is responsible for
accounts that have different advisory fees - the difference in fees could
create an incentive for the Portfolio Manager to favor one account over
another, for example, in terms of access to investment opportunities. This
conflict may be heightened if an account is subject to a performance-based fee.
Another potential conflict may arise when the Portfolio Manager has an
investment in one or more accounts that participates in transactions with other
accounts. His or her investment(s) may create an incentive for the portfolio
manager to favor one account over another. SSgA FM has adopted policies and
procedures reasonably designed to address these potential material conflicts.
For instance, portfolio managers within SSgA FM are normally responsible for
all accounts within a certain investment discipline, and do not, absent special
circumstances, differentiate among the various accounts when allocating
resources. Special circumstances refers to specific guidelines and prohibitions
applicable to one account, but not others. Additionally, SSgA FM and its
advisory affiliates utilize a system for allocating investment opportunities
among portfolios that is designed to provide a fair and equitable allocation.
The potential conflicts described are applicable to SSgA/SSgA FM as our
Portfolio Managers manage several accounts with similar guidelines and
differing fee schedules.
T. Rowe Price ("T. Rowe Price") (LVIP T. Rowe Price Growth Stock Fund and T.
Rowe Price Structured Mid-Cap Growth Fund)
Portfolio managers at T. Rowe Price typically manage multiple accounts. These
accounts may include, among others, mutual funds, separate accounts (assets
managed on behalf of institutions such as pension funds, colleges and
universities, foundations), and commingled trust accounts. Portfolio managers
make investment decisions for each portfolio based on the investment
objectives, policies, practices and other relevant investment considerations
that the managers believe are applicable to that portfolio. Consequently,
portfolio managers may purchase (or sell) securities for one portfolio and not
another portfolio. T. Rowe Price has adopted brokerage and trade allocation
policies and procedures which it believes are reasonably designed to address
any potential conflicts associated with managing multiple accounts for multiple
clients.
T. Rowe Price does not anticipate experiencing any conflicts in managing the
funds in relation to its discretionary authority over any other accounts.
Sub-advised fund procedures are incorporated into or covered by general
compliance manuals and internal control policies and procedures kept by each
separate business unit that services the funds. T. Rowe Price believes that
these polices and procedures are adequate to address any potential conflicts of
interest between and among its clients in its investment advisory business.
Procedures for the identification and management of conflicts of interest are
incorporated into certain elements of our compliance program where such
conflicts may be present (e.g., Trade Allocation Guidelines, Proxy Voting
Polices and Procedures, Code of Ethics, etc.). In addition, conflicts of
interest are addressed through internal controls, and where appropriate, the
separation of functions and duties within the business units.
Please be advised that T. Rowe Price does not sponsor or act as investment
adviser to any hedge funds or similar private accounts with investment
objectives and strategies that would conflict with the interests of our other
investment advisory clients. Also, as described below, T. Rowe Price portfolio
managers' compensation is determined in the same manner with respect to all
portfolios managed by the portfolio manager.
Templeton Investment Counsel, LLC (LVIP Templeton Growth Fund)
The management of multiple funds, including the Fund, and accounts may also
give rise to potential conflicts of interest if the funds and other accounts
have different objectives, benchmarks, time horizons, and fees as the portfolio
manager must allocate his or her time and investment ideas across multiple
funds and accounts. The manager seeks to manage such competing interests for
the time and attention of portfolio managers by having portfolio managers focus
on a particular investment discipline. Most other accounts managed by a
portfolio manager are managed using the same investment strategies that are
used in connection with the management of the Fund. Accordingly, portfolio
holdings, position sizes, and industry and sector exposures tend to be similar
across similar portfolios, which may minimize the potential for conflicts of
interest. The separate management of the trade execution and valuation
functions from the portfolio management process also helps to reduce potential
conflicts of interest. However, securities selected for funds or accounts other
than the Fund may outperform the securities selected for the Fund. Moreover, if
a portfolio manager identifies a limited investment opportunity that may be
suitable for more than one fund or other account, the Fund may not be able to
take full advantage of that opportunity due to an allocation of that
opportunity across all eligible funds and other accounts. The manager seeks to
manage such potential conflicts by using procedures intended to provide a fair
allocation of buy and sell opportunities among funds and other accounts.
The structure of a portfolio manager's compensation may give rise to potential
conflicts of interest. A portfolio manager's base pay and bonus tend to
increase with additional and more complex responsibilities that include
increased assets under management. As such, there may be an indirect
relationship between a portfolio manager's marketing or sales efforts and his
or her bonus.
Finally, the management of personal accounts by a portfolio manager may give
rise to potential conflicts of interest. While the funds and the manager have
adopted a code of ethics which they believe contains provisions reasonably
necessary to prevent a wide range of prohibited activities by portfolio
managers and others with respect to their personal trading activities, there
can be no assurance that the code of ethics addresses all individual conduct
that could result in conflicts of interest.
Templeton has adopted certain compliance procedures that are designed to
address these, and other, types of conflicts. However, there is no guarantee
that such procedures will detect each and every situation where a conflict
arises.
Turner Investment Partners, Inc. ("Turner") (LVIP Turner Mid-Cap Growth Fund)
As is typical for many money managers, potential conflicts of interest may
arise related to Turner's management of accounts including the fund, where not
all accounts are able to participate in a desired IPO, or other limited
opportunity, relating to use of soft dollars and other brokerage practices,
related to the voting of proxies, employee personal securities trading, and
relating to a variety of other circumstances. In all cases, however, Turner
believes it has written policies and procedures in place reasonably designed to
prevent violations of the federal securities laws and to prevent material
conflicts of interest from arising. Please see Turner's Form ADV, Part II for a
description of some of its policies and procedures in this regard.
UBS Global Asset Management (Americas) Inc. ("UBS") (LVIP UBS Global Asset
Allocation Fund)
The management of a portfolio and other accounts by a portfolio manager could
result in potential conflicts of interest if the portfolio and other accounts
have different objectives, benchmarks and fees because the portfolio manager
and his team must allocate time and investment expertise across multiple
accounts, including the portfolio. The portfolio manager and his team manage
the portfolio and other accounts utilizing a model portfolio approach that
groups similar accounts within a model portfolio. UBS manages accounts
according to the appropriate model portfolio, including where possible, those
accounts that have specific investment restrictions. Accordingly, portfolio
holdings, position sizes, and industry and sector exposures tend to be similar
across accounts, which may minimize the potential for conflict of interest.
If a portfolio manager identifies a limited investment opportunity that may be
suitable for more than one account or model portfolio, the portfolio may not be
able to take full advantage of that opportunity due to an allocation or filled
purchase or sale orders across all eligible model portfolios and accounts. To
deal with these situations, UBS has adopted procedures for allocating portfolio
trades among multiple accounts to provide fair treatment to all accounts.
The management of personal accounts by a portfolio manager may also give rise
to potential conflicts of interest. UBS has adopted a Code of Ethics that
govern such trading, but there is no assurance that the Codes will adequately
address all such conflicts.
Wellington Management Company, LLP (LVIP Capital Growth Fund and LVIP Mid-Cap
Value Fund)
Individual investment professionals at Wellington Management mange multiple
accounts for multiple clients. These accounts may include mutual funds, separate
accounts (assets managed on behalf of institutions, such as pension funds,
insurance companies, foundations, or separately managed account programs
sponsored by financial intermediaries), bank common trust accounts, and hedge
funds. Each Fund's managers listed in the prospectus who are primarily
responsible for the day-to-day management of the Funds ("Investment
Professionals") generally manage accounts in several different investment
styles. These accounts may have investment objectives, strategies, time
horizons, tax considerations and risk profiles that differ from those of the
relevant Fund. The Investment Professionals make investment decisions for each
account, including the relevant Fund, based on the investment objectives,
policies, practices, benchmarks, cash flows, tax and other relevant investment
consideration applicable to that account. Consequently, the Investment
Professionals may purchase or sell securities, including IPO's, for one account
and not another account, and the performance of securities purchased for one
account may vary from the performance of securities purchased for other
accounts. Alternatively, these accounts may be managed in a similar fashion to
the relevant Fund and thus the accounts may have similar, and in some cases
nearly identical, objectives, strategies and/or holdings to that of the relevant
Fund.
An Investment Professional or other investment professionals at Wellington
Management may place transactions on behalf of other accounts that are directly
or indirectly contrary to investment decisions made on behalf of the relevant
Fund, or make investment decisions that are similar to those made for the
relevant Fund, both of which have the potential to adversely impact the
relevant Fund depending on market conditions. For example, an Investment
Professional may purchase a security in one account while appropriately selling
that same security in another account. Similarly, an Investment Professional
may purchase the same security for the relevant Fund and one or more other
accounts at or about the same time, and in those instances the other accounts
will have access to their respective holdings prior to the public disclosure of
the relevant Fund's holdings. In addition, some of these accounts have fee
structures, including performance fees, which are or have the potential to be
higher, in some cases significantly higher, than the fees paid by the relevant
Fund to Wellington Management. Because incentive payments paid by Wellington
management to the Investment Professionals are tied to revenues earned by
Wellington Management, and, where noted, to the performance achieved by the
manager in each account, the incentives associated with any given account may
be significantly higher or lower than those associated with other accounts
managed by a given Investment Professional. Finally, the Investment
Professionals may hold shares or investments in the other pooled investment
vehicles and/or other accounts identified above.
Wellington Management's goal is to meet its fiduciary obligation to treat all
clients fairly and provide high quality investment services to all of its
clients. Wellington Management has adopted and implemented policies and
procedures, including brokerage and trade allocation policies and procedures,
which it believes address the conflicts associated with managing multiple
accounts for multiple clients. In addition, Wellington Management monitors a
variety of areas, including compliance with primary account guidelines, the
allocation of IPO's, and compliance with the firm's Code of Ethics, and places
additional investment restrictions on investment professionals who manage hedge
funds and certain other accounts. Furthermore, senior investment and business
personnel at Wellington Management periodically review the performance of
Wellington Management's investment professionals. Although Wellington
Management does not track the time an investment professional spends on a
single account, Wellington Management does periodically assess whether an
investment professional has adequate time and resources to effectively manage
the investment professional's various client mandates.
Wilshire Associates Incorporated ("Wilshire") (LVIP Wilshire Conservative
Profile Fund, LVIP Wilshire Moderate Profile Fund, LVIP Wilshire Moderately
Aggressive Profile Fund, LVIP Wilshire Aggressive Profile Fund, LVIP Wilshire
2010 Profile Fund, LVIP Wilshire 2020 Profile Fund, LVIP Wilshire 2030 Profile
Fund, LVIP Wilshire 2040 Profile Fund)
Each of the Profile Funds invests substantially all of its assets in other
mutual funds (underlying funds) through a structure known as "fund of funds."
It is the policy of Wilshire that all decisions concerning the selection of
funds be based solely on the best interests of each Profile Fund and its
investors, and without regard to any revenue that Wilshire receives, might
receive, or has received in the past, directly or indirectly, from portfolio
managers or funds for services provided by any Wilshire business unit.
Accordingly, Wilshire operates Wilshire Funds Management, Wilshire Analytics,
Wilshire Consulting and Wilshire Private Markets as separate business units.
Each business unit has its own leadership team and professional and support
staff. Moreover, Wilshire has adopted policies and procedures that are designed
to provide full disclosure of all potential, actual or perceived conflicts and
to prevent staff from having internal access to information that otherwise
might appear to compromise their objectivity.
In addition, personal accounts may give rise to potential conflicts of interest
and must be maintained and conducted pursuant to Wilshire's Code of Ethics.
Additional information regarding conflicts of interest can be found in our Form
ADV Part II.
Compensation Structures and Methods
Information regarding each portfolio manager's compensation is attached hereto
as Appendix C.
Beneficial Interest of Portfolio Managers
Information regarding securities of each Lincoln VIP fund beneficially owned,
if any, by portfolio managers is disclosed below. In order to own securities of
a fund, a portfolio manager would need to own a Lincoln Life variable life
insurance policy or variable annuity contract. Portfolio managers are not
required to own securities of a fund. In addition, although the level of a
portfolio manager's securities ownership may be an indicator of his or her
confidence in the portfolio's investment strategy, it does not necessarily
follow that a portfolio manager who owns few or no securities has any less
confidence or is any less concerned about the applicable portfolio's
performance.
As of the funds' fiscal year ended, December 31, 2007, no portfolio manager of
any fund beneficially owned securities of any fund.
Principal Underwriter
Lincoln Financial Distributors, Inc. ("LFD"), 130 North Radnor-Chester Road,
Radnor, Pennsylvania 19087, serves as the principal underwriter for the Trust
pursuant to a Principal Underwriting Agreement with the Trust dated June 1,
2007. Under the agreement, the Trust has appointed LFD as the principal
underwriter and distributor of the Trust to sell shares of each class of each
fund series of the Trust at net asset value in a continuous offering to
insurance company separate accounts or employer-sponsored products. LFD will
not retain underwriting commissions from the sale of fund shares. From June 1,
2007 through December 31, 2007, LFD received $4,592,085 in compensation from
the Trust.
Administration Agreement
The funds have entered into an Administration Agreement (the Administration
Agreement) with Lincoln National Life Insurance Company (Lincoln Life),
pursuant to which Lincoln Life provides various administrative services
necessary for the operation of the funds. These services include, among others:
coordination of all service providers; providing personnel and office space;
maintenance of each fund's books and records; general accounting monitoring and
oversight; preparation of tax returns and reports; preparing and arranging for
the distribution of all shareholder materials; preparing and coordinating the
filing of all materials with the SEC and other federal and state regulatory
authorities. As reimbursement for the cost of providing these administrative
services for the year ended December 31, 2007, the funds paid Lincoln Life
$553,000, which was allocated to the funds based on average net assets. In
addition, pursuant to the Administration Agreement, the funds reimburse the
cost of legal and corporate secretary services provided to the funds. For the
year ended December 31, 2007, the funds reimbursed Lincoln Life $266,557 for
legal and corporate secretary services.
Accounting Agreement
The funds have entered into a fund accounting and financial administration
services agreement (the Accounting Agreement) with Mellon Bank, N.A. (Mellon),
effective October 1, 2007, pursuant to which Mellon provides certain accounting
services for the funds. Services provided under the Accounting Agreement
include, among others, functions related to calculating the daily net asset
values of each fund's shares, providing financial reporting information,
regulatory compliance testing and other related accounting services. For these
services, the funds pay Mellon an asset-based fee, subject to certain fee
minimums, plus certain out-of-pocket expenses as set forth in the following
table. The fees are payable on a monthly basis.
Fund Annual Rate as a Percent of Average Daily Net Assets *
----------------------------------------------------------- -------------------------------------------------------
LVIP Baron Growth Opportunities Fund 0.035% of first $15 billion
LVIP Capital Growth Fund 0.0325% of next $5 billion
LVIP Cohen & Steers Global Real Estate Fund 0.030% of next $5 billion
LVIP Columbia Value Opportunities Fund 0.025% of next $5 billion
LVIP Delaware Bond Fund 0.020% over $30 billion
LVIP Delaware Growth and Income Fund
LVIP Delaware Managed Fund
LVIP Delaware Social Awareness Fund
LVIP Delaware Special Opportunities Fund
LVIP FI Equity-Income Fund
LVIP Janus Capital Appreciation Fund
LVIP Marsico International Growth Fund
LVIP MFS Value Fund
LVIP Mid-Cap Value Fund
LVIP Mondrian International Value Fund
LVIP Money Market Fund
LVIP SSgA S&P 500 Index Fund
LVIP SSgA Small-Cap Index Fund
LVIP T. Rowe Price Growth Stock Fund
LVIP T. Rowe Price Structured Mid-Cap Growth Fund
LVIP Templeton Growth Fund
LVIP Turner Mid-Cap Growth Fund
LVIP UBS Global Asset Allocation Fund
LVIP Wilshire Conservative Profile Fund $47,000 flat
LVIP Wilshire Moderate Profile Fund
LVIP Wilshire Moderately Aggressive Profile Fund
LVIP Wilshire Aggressive Profile Fund
LVIP Wilshire 2010 Profile Fund
LVIP Wilshire 2020 Profile Fund
LVIP Wilshire 2030 Profile Fund
LVIP Wilshire 2040 Profile Fund
* Pursuant to the Accounting Agreement, Mellon receives the following minimum
annual fees: Year 1 - $3,000,000; Year 2 - $2,700,000; Year 3 - $2,300,000;
Year 4 - $2,300,000; Year 5 - $2,300,000.
In addition, the Trust has entered into a Fund Accounting and Financial
Administration Oversight Agreement (Oversight Agreement), effective October 1,
2007, with, among others, Delaware Service Company, Inc. (DSC). Under the
Oversight Agreement, DSC has agreed to perform fund accounting, financial
administration and related services for the Trust to supplement the services
provided by Mellon under the Accounting Agreement. DSC has also agreed to
establish and monitor certain service level requirements with respect to
Mellon's performance of its duties pursuant to the Accounting Agreement. For
these services, the funds pay DSC an asset-based fee, plus certain
out-of-pocket expenses at the annual rates set forth in the following table.
The fees are payable on a monthly basis.
Fund Annual Rate as a Percent of Average Daily Net Assets
----------------------------------------------------------- -----------------------------------------------------
LVIP Baron Growth Opportunities Fund 0.0025% of first $15 billion
LVIP Capital Growth Fund 0.0023% of next $5 billion
LVIP Cohen & Steers Global Real Estate Fund 0.0020% of next $5 billion
LVIP Columbia Value Opportunities Fund 0.0015% of next $5 billion
LVIP Delaware Bond Fund 0.0013% over $30 billion
LVIP Delaware Growth and Income Fund
LVIP Delaware Managed Fund
LVIP Delaware Social Awareness Fund
LVIP Delaware Special Opportunities Fund
LVIP FI Equity-Income Fund
LVIP Janus Capital Appreciation Fund
LVIP Marsico International Growth Fund
LVIP MFS Value Fund
LVIP Mid-Cap Value Fund
LVIP Mondrian International Value Fund
LVIP Money Market Fund
LVIP SSgA S&P 500 Index Fund
LVIP SSgA Small-Cap Index Fund
LVIP T. Rowe Price Growth Stock Fund
LVIP T. Rowe Price Structured Mid-Cap Growth Fund
LVIP Templeton Growth Fund
LVIP Turner Mid-Cap Growth Fund
LVIP UBS Global Asset Allocation Fund
LVIP Wilshire Conservative Profile Fund $1,000 flat
LVIP Wilshire Moderate Profile Fund
LVIP Wilshire Moderately Aggressive Profile Fund
LVIP Wilshire Aggressive Profile Fund
LVIP Wilshire 2010 Profile Fund
LVIP Wilshire 2020 Profile Fund
LVIP Wilshire 2030 Profile Fund
LVIP Wilshire 2040 Profile Fund
Code of Ethics
The Trust, LIA and the sub-advisers have each adopted a Code of Ethics pursuant
to Rule 17j-1 under the 1940 Act. The board of trustees has reviewed and
approved these Codes of Ethics. Subject to certain limitations and procedures,
these codes permit personnel that they cover, including employees of LIA and
the sub-advisers who regularly have access to information about securities
purchase for the funds, to invest in securities for their own accounts. This
could include securities that may be purchased by funds. The codes are intended
to prevent these personnel from taking inappropriate advantage of their
positions and to prevent fraud upon the fund. The Trust's Code of Ethics
requires reporting to the board of trustees on compliance violations.
Description of Shares
The Trust was organized as a Delaware statutory trust on February 1, 2003 and
is registered with the SEC as an open-end, management investment company. The
Trust's Certificate of Trust is on file with the Secretary of State of
Delaware. The Trust's Declaration of Trust authorizes the board of trustees to
issue an unlimited number of shares, which are shares of beneficial interest,
without par value. The Trust consists of thirty-one funds organized as separate
series of shares. The Declaration of Trust authorizes the board of trustees to
divide or redivide any unissued shares of the Trust into one or more additional
series by setting or changing in any one or more respects their respective
preferences, conversion or other rights, voting power, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption, and to establish separate classes of shares.
Each fund currently offers two classes of shares: the Standard Class and the
Service Class. The two classes of shares are identical, except that Service
Class shares are subject to a distribution (Rule 12b-1) fee. The Trust's 12b-1
plan allows each fund to pay distribution fees of up to 0.35% per year to those
organizations that sell and distribute Service Class shares and provide
services to Service Class shareholders and contract owners. The 12b-1 plan for
the Service Class is discussed in the "Rule 12b-1 Plan" section of this SAI.
Each fund's shares (all classes) have no subscriptive or preemptive rights and
only such conversion or exchange rights as the board of trustees may grant in
its discretion. When issued for payment as described in the prospectus and this
SAI, the shares will be fully paid and non-assessable. In the event of a
liquidation or dissolution of the Trust, shareholders of each fund are entitled
to receive the assets available for distribution belonging to that fund, and a
proportionate distribution, based upon the relative asset values of the
respective funds, of any general assets not belonging to any particular fund
which are available for distribution, subject to any differential class
expenses.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of outstanding voting securities of an investment company such
as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding shares of a fund will be required in connection
with a matter, a fund will be deemed to be affected by a matter unless it is
clear that the interests of each fund in the matter are identical, or that the
matter does not affect any interest of the fund. Under Rule 18f-2, the approval
of an investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of that fund. However, Rule 18f-2 also provides that the
ratification of independent public accountants (for funds having the same
independent accountants), the approval of principal underwriting contracts, and
the election of trustees may be effectively acted upon by shareholders of the
Trust voting without regard to individual funds.
Unless otherwise required by the 1940 Act, ordinarily it will not be necessary
for the Trust to hold annual meetings of shareholders. As a result,
shareholders may not consider each year the election of trustees or the
appointment of auditors. However, the holders of at least 10% of the shares
outstanding and entitled to vote may require the Trust to hold a special
meeting of shareholders for purposes of removing a trustee from office.
Shareholders may remove a trustee by the affirmative vote of two-thirds of the
Trust's outstanding voting shares. In addition, the board of trustees will call
a meeting of shareholders for the purpose of electing trustees if, at any time,
less than a majority of the trustees then holding office have been elected by
shareholders.
Control Persons and Principal Holders of Securities
Each fund sells its shares of beneficial interest directly or indirectly to
certain life insurance companies (Insurance Companies) for allocation to
certain of their separate accounts established for the purpose of funding
variable annuity contracts and variable life insurance policies (collectively,
Variable Contract). These Insurance Companies include, without limitation, (1)
The Lincoln National Life Insurance Company (Lincoln Life), an Indiana
insurance company, at 1300 South Clinton Street, Fort Wayne, IN 46802; (2)
except for the LVIP Delaware Special Opportunities Fund, Lincoln Life & Annuity
Company of New York (Lincoln New York), a New York insurance company, at 100
Madison Street, Suite 1860, Syracuse, NY 13202-2802; and (3) with respect to
the LVIP Baron Growth Opportunities Fund, nine unaffiliated insurance
companies.
The Insurance Companies as record owners are entitled to be present and vote
fund shares at any shareholder meeting. However, the Insurance Companies are
required to vote the fund shares at shareholder meetings according to the
instructions received from the contract owners of the Variable Contracts. Fund
shares held in an Insurance Company separate account for which no timely
instructions are received will be voted by the Insurance Company in the same
proportion as the voting instructions which are received from all other
contract owners participating in that separate account. The effect of this
proportional voting is that a smaller number of contract owners may determine
the outcome of any vote.
The funds may sell their shares directly to the Lincoln Profile Funds (each, a
fund of funds), the shares of which are owned by Lincoln Life and Lincoln New
York. The Lincoln Profile Funds, at 1300 South Clinton Street, Fort Wayne, IN
46802, are each series of Lincoln Variable Insurance Products Trust, a Delaware
statutory trust. The Lincoln Profile Funds will vote shares of funds that they
hold in the same proportion as the vote of all other holders of shares of such
fund, as is described by Section 12(d)(1)(E)(iii)(aa) of the 1940 Act.
25% Plus Record Holders
As of March 10, 2008, the following entities held of record more than 25% of
each fund's outstanding shares as noted below:
Total Share Ownership
Fund and Shareholder ----------------------
LVIP Baron Growth Opportunities Fund
Lincoln Life .................................... 74.85%
LVIP Capital Growth Fund
Lincoln Life .................................... 63.39%
LVIP Cohen & Steers Global Real Estate Fund
Lincoln Life .................................... 80.47%
LVIP Columbia Value Opportunities Fund
Lincoln Life .................................... 98.08%
LVIP Delaware Bond Fund
Lincoln Life .................................... 89.55%
LVIP Delaware Growth and Income Fund
Lincoln Life .................................... 99.69%
LVIP Delaware Managed Fund
Lincoln Life .................................... 99.70%
LVIP Delaware Social Awareness Fund
Lincoln Life .................................... 99.14%
LVIP Delaware Special Opportunities Fund
Lincoln Life .................................... 99.78%
LVIP FI Equity-Income Fund
Lincoln Life .................................... 99.77%
LVIP Janus Capital Appreciation Fund
Lincoln Life .................................... 99.45%
LVIP Marsico International Growth Fund
Lincoln Life .................................... 39.89%
LVIP MFS Value Fund
Lincoln Life .................................... 31.22%
LVIP Wilshire Moderately Aggressive Profile Fund 26.16%
LVIP Wilshire Moderate Profile Fund ............. 25.69%
LVIP Mid-Cap Value Fund
Lincoln Life .................................... 44.83%
LVIP Wilshire Moderate Profile Fund ............. 30.76%
LVIP Mondrian International Value Fund
Lincoln Life .................................... 84.34%
LVIP Money Market Fund
Total Share Ownership
Fund and Shareholder ----------------------
Lincoln Life .................................... 95.44%
LVIP SSgA S&P 500 Index Fund
Lincoln Life .................................... 97.96%
LVIP SSgA Small-Cap Index Fund
Lincoln Life .................................... 97.45%
LVIP T. Rowe Price Growth Stock Fund
Lincoln Life .................................... 37.89%
LVIP T. Rowe Price Structured Mid-Cap Growth Fund
Lincoln Life .................................... 95.30%
LVIP Templeton Growth Fund
Lincoln Life .................................... 98.39%
LVIP Turner Mid-Cap Growth Fund
Lincoln Life .................................... 96.09%
LVIP UBS Global Asset Allocation Fund
Lincoln Life .................................... 98.83%
LVIP Wilshire Conservative Profile Fund
Lincoln Life .................................... 97.87%
LVIP Wilshire Moderate Profile Fund
Lincoln Life .................................... 95.53%
LVIP Wilshire Moderately Aggressive Profile Fund
Lincoln Life .................................... 96.64%
LVIP Wilshire Aggressive Profile Fund
Lincoln Life .................................... 97.04%
LVIP Wilshire 2010 Profile Fund
Lincoln Life .................................... 94.52%
LVIP Wilshire 2020 Profile Fund
Lincoln Life .................................... 98.72%
LVIP Wilshire 2030 Profile Fund
Lincoln Life .................................... 98.10%
LVIP Wilshire 2040 Profile Fund
Lincoln Life .................................... 95.82%
5% Plus Record Holders
As of March 10, 2008, the shareholders listed below held of record 5% or more
of a class of a fund's outstanding shares
Share Ownership
Fund / Shareholder - Share Class ----------------
LVIP Baron Growth Opportunities Fund
Share Ownership
Fund / Shareholder - Share Class ----------------
Lincoln Life - Service Class ........................ 78.52%
LVIP Wilshire Moderately Aggressive Profile Fund - 71.82%
Standard Class ......................................
LVIP Wilshire Aggressive Profile Fund - Standard 18.69%
Class ...............................................
Lincoln New York - Service Class .................... 5.00%
Great West Life & Annuity Insurance Co. - Service 7.15%
Class ...............................................
Nationwide Life Insurance Co. - Service Class ....... 6.76%
LVIP Capital Growth Fund
Lincoln Life - Service Class ........................ 69.39%
Lincoln Life - Standard Class ....................... 63.64%
Lincoln New York - Service Class .................... 30.61%
LVIP Wilshire Moderate Profile Fund - Standard Class 17.09%
LVIP Wilshire Moderately Aggressive Profile Fund - 14.91%
Standard Class ......................................
LVIP Cohen & Steers Global Real Estate Fund .........
Lincoln Life - Service Class ........................ 95.16%
Lincoln Life - Standard Class ....................... 76.20%
LVIP Wilshire Moderate Profile Fund - Standard Class 11.53%
LVIP Wilshire Moderately Aggressive Profile Fund - 8.40%
Standard Class ......................................
LVIP Columbia Value Opportunities Fund
Lincoln Life - Standard Class ....................... 98.58%
Lincoln Life - Service Class ........................ 89.25%
Lincoln New York - Service Class .................... 10.75%
LVIP Delaware Bond Fund
Lincoln Life - Service Class ........................ 94.71%
Lincoln Life - Standard Class ....................... 86.45%
Lincoln New York - Service Class .................... 5.29%
LVIP Delaware Growth and Income Fund
Lincoln Life - Standard Class ....................... 99.77%
Lincoln Life - Service Class ........................ 97.63%
LVIP Delaware Managed Fund
Lincoln Life - Standard Class ....................... 99.91%
Lincoln Life - Service Class ........................ 98.36%
LVIP Delaware Social Awareness Fund
Lincoln Life - Standard Class ....................... 99.42%
Lincoln Life - Service Class ........................ 95.99%
LVIP Delaware Special Opportunities Fund
Lincoln Life - Standard Class ....................... 99.83%
Lincoln Life - Service Class ........................ 98.21%
LVIP FI Equity Income Fund
Lincoln Life - Standard Class ....................... 99.96%
Lincoln Life - Service Class ........................ 96.03%
LVIP Janus Capital Appreciation Fund
Lincoln Life - Standard Class ....................... 99.62%
Share Ownership
Fund / Shareholder - Share Class ----------------
Lincoln Life - Service Class ........................ 97.20%
LVIP Marsico International Growth Fund
Lincoln Life - Service Class ........................ 94.98%
Lincoln Life - Standard Class ....................... 32.03%
LVIP Wilshire Moderately Aggressive Profile Fund - 28.48%
Standard Class ......................................
LVIP Wilshire Moderate Profile Fund - Standard Class 23.45%
LVIP Wilshire Aggressive Profile Fund - Standard 8.13%
Class ...............................................
LVIP Wilshire Conservative Profile Fund - Standard 5.48%
Class ...............................................
Lincoln New York - Service Class .................... 5.02%
LVIP MFS Value Fund
Lincoln Life - Service Class ........................ 93.33%
LVIP Wilshire Moderately Aggressive Profile Fund - 27.86%
Standard Class ......................................
LVIP Wilshire Moderate Profile Fund ................. 27.35%
Lincoln Life - Standard Class ....................... 27.20%
LVIP Wilshire Aggressive Profile Fund - Standard 8.82%
Class ...............................................
LVIP Wilshire Conservative Profile Fund - Standard 6.83%
Class ...............................................
Lincoln New York - Service Class .................... 6.67%
LVIP Mid-Cap Value Fund
Lincoln Life - Service Class ........................ 93.79%
Lincoln Life - Standard Class ....................... 36.40%
LVIP Wilshire Moderate Profile Fund - Standard Class 36.07%
LVIP Wilshire Moderately Aggressive Profile Fund - 19.72%
Standard Class ......................................
LVIP Wilshire Aggressive Profile Fund - Standard 6.85%
Class ...............................................
Lincoln New York - Service Class .................... 6.21%
LVIP Mondrian International Value Fund
Lincoln Life - Service Class ........................ 94.25%
Lincoln Life - Standard Class ....................... 81.96%
LVIP Wilshire Moderately Aggressive Profile Fund - 6.53%
Standard Class ......................................
LVIP Wilshire Moderate Profile Fund - Standard Class 5.99%
Lincoln New York - Service Class .................... 5.75%
LVIP Money Market Fund
Lincoln Life - Service Class ........................ 95.66%
Lincoln Life - Standard Class ....................... 95.32%
LVIP SSgA S&P 500 Index Fund
Lincoln Life - Standard Class ....................... 98.30%
Lincoln Life - Service Class ........................ 92.31%
Lincoln New York - Service Class .................... 7.69%
LVIP SSgA Small-Cap Index Fund
Lincoln Life - Standard Class ....................... 97.76%
Lincoln Life - Service Class ........................ 92.46%
Lincoln New York - Service Class .................... 7.54%
Share Ownership
Fund / Shareholder - Share Class ----------------
LVIP T. Rowe Price Growth Stock Fund
Lincoln Life - Service Class ........................ 94.11%
Lincoln Life - Standard Class ....................... 35.79%
LVIP Wilshire Moderate Profile Fund - Standard Class 25.88%
LVIP Wilshire Moderately Aggressive Profile Fund - 21.54%
Standard Class ......................................
LVIP Wilshire Aggressive Profile Fund - Standard 7.70%
Class ...............................................
LVIP Wilshire Conservative Profile Fund - Standard 7.23%
Class ...............................................
Lincoln New York - Service Class .................... 5.89%
LVIP T. Rowe Price Structured Mid-Cap Growth Fund
Lincoln Life - Standard Class ....................... 95.41%
Lincoln Life - Service Class ........................ 94.09%
Lincoln New York - Service Class .................... 5.91%
LVIP Templeton Growth Fund
Lincoln Life - Standard Class ....................... 99.16%
Lincoln Life - Service Class ........................ 97.23%
LVIP Turner Mid-Cap Growth Fund
Lincoln Life - Standard Class ....................... 97.87%
Lincoln Life - Service Class ........................ 93.82%
Lincoln New York - Service Class .................... 6.18%
LVIP UBS Global Asset Allocation Fund
Lincoln Life - Standard Class ....................... 99.63%
Lincoln Life - Service Class ........................ 95.43%
LVIP Wilshire Conservative Profile Fund
Lincoln Life - Standard Class ....................... 98.50%
Lincoln Life - Service Class ........................ 97.71%
LVIP Wilshire Moderate Profile Fund
Lincoln Life - Standard Class ....................... 97.27%
Lincoln Life - Service Class ........................ 95.26%
LVIP Wilshire Moderately Aggressive Profile Fund
Lincoln Life - Service Class ........................ 97.12%
Lincoln Life - Standard Class ....................... 94.42%
Lincoln New York - Standard Class ................... 5.58%
LVIP Wilshire Aggressive Profile Fund
Lincoln Life - Service Class ........................ 97.30%
Lincoln Life - Standard Class ....................... 96.41%
LVIP Wilshire 2010 Profile Fund .....................
Lincoln Life - Standard Class ....................... 98.23%
Lincoln Life - Service Class ........................ 85.67%
Lincoln New York - Service Class .................... 14.33%
LVIP Wilshire 2020 Profile Fund .....................
Lincoln Life - Service Class ........................ 99.29%
Lincoln Life - Standard Class ....................... 98.59%
Share Ownership
Fund / Shareholder - Share Class ----------------
LVIP Wilshire 2030 Profile Fund ........
Lincoln Life - Service Class ........... 98.58%
Lincoln Life - Standard Class .......... 98.01%
LVIP Wilshire 2040 Profile Fund ........
Lincoln Life - Standard Class .......... 98.37%
Lincoln Life - Service Class ........... 89.43%
Lincoln New York - Service Class ....... 10.57%
Rule 12b-1 Plan
Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a distribution
and service plan (the Plan) for the Service Class of shares of each fund. As
previously noted, the Trust offers shares of beneficial interest to Insurance
Companies for allocation to certain of their Variable Contracts. The Trust may
pay the Insurance Companies or others, out of the assets of a Service Class,
for activities primarily intended to sell Service Class shares or Variable
Contracts offering Service Class shares. The Trust would pay each third-party
for these services pursuant to a written agreement with that third-party.
Payments made under the Plan may be used for, among other things: the printing
of prospectuses and reports used for sales purposes; preparing and distributing
sales literature and related expenses; advertisements; education of contract
owners or dealers and their representatives; and other distribution-related
expenses. Payments made under the Plan may also be used to pay Insurance
Companies, dealers or others for, among other things: service fees as defined
under NASD rules; furnishing personal services or such other enhanced services
as the Trust or a Variable Contract may require; or maintaining customer
accounts and records.
For the noted services, the Plan authorizes each fund to pay to Insurance
Companies or others, out of the assets of the Service Class, a monthly fee (the
Plan Fee) not to exceed 0.35% per annum of the average daily net asset value of
the Service Class shares of such fund, as compensation or reimbursement for
services rendered and/or expenses borne. The Plan Fee is currently 0.35% for
the Service Class shares of the following funds: LVIP Delaware Bond Fund, LVIP
Delaware Growth and Income Fund, LVIP Delaware Managed Fund, LVIP Delaware
Social Awareness Fund, and LVIP Delaware Special Opportunities Fund. The Plan
Fee for Service Class shares of all other funds is 0.25%. The Plan Fee may be
adjusted by the Trust's board of trustees from time to time. The Plan may not
limit Plan Fees to amounts actually expended by third-parties for services
rendered and/or expenses borne. A third-party, therefore, may realize a profit
from Plan Fees in any particular year.
No "interested person" or independent trustee of a fund had or has a direct or
indirect financial interest in the operation of the Plan or any related
agreement.
The trustees of the Trust, including a majority of the independent trustees,
have determined that, in the exercise of reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit each fund and contract owners of the Service Class of each fund.
Each year, the Trustees must make this determination for the Plan to be
continued.
For the fiscal year ended December 31, 2007, the total amount of distribution
related expenses paid by the Service Class shares of the funds was
approximately $7,052,534. For the fiscal year ended December 31, 2007, the
distribution related expenses paid by the Service Class under the Plan were
used for compensation to broker-dealers and sales personnel and for printing
and mailing of prospectuses to other than current shareholders.
Revenue Sharing
LIA and its affiliates, including Lincoln Financial Distributors, Inc. ("LFD"),
and/or the funds' sub-advisers may pay compensation at their own expense,
including the profits from the advisory fees LIA receives from the funds or the
sub-advisory fees the sub-advisers receive from LIA, to affiliated or
unaffiliated brokers, dealers or other financial intermediaries ("financial
intermediaries") in connection with the sale or retention of fund shares or the
sales of insurance products that contain the funds and/or shareholder servicing
("distribution assistance"). For example, LFD may pay additional compensation
to financial intermediaries for various purposes, including, but not limited
to, promoting the sale of fund shares and the products that include the fund
shares; access to their registered representatives; sub-accounting,
administrative or shareholder processing services; and marketing and education
support. Such payments are in addition to any distribution fees, service fees
and/or transfer agency fees that may be payable by the funds. The additional
payments may be based on factors, including level of sales, the funds' advisory
fees, some other agreed upon amount, or other measures as determined from time
to time.
A significant purpose of these payments is to increase sales of the funds'
shares and the products that contain the funds. LIA and/or its affiliates may
benefit from these payments of compensation to financial intermediaries through
increased fees resulting from additional assets acquired through the sale of
insurance products through such intermediaries.
Valuation of Portfolio Securities
A fund determines its net asset value per share by subtracting its liabilities
(including accrued expenses and dividends payable) from its total assets (the
value of the securities the fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by the total
number of shares outstanding. In addition to the disclosure in the funds'
prospectus under the "Net Asset Value"section, the value of a fund's
investments is determined as follows.
Short-term Investments. For funds (other than the LVIP Money Market Fund) that
own short-term investments which mature in less than 60 days, these instruments
are valued at amortized cost. Such securities acquired with a remaining
maturity of 61 days or more are valued at their fair value until the
sixty-first day prior to maturity; thereafter, their cost for valuation
purposes is deemed to be their fair value on such sixty-first day.
Options Trading. For those funds engaging in options trading, fund investments
underlying call options will be valued as described previously. Options are
valued at the last sale price or, if there has been no sale that day, at the
mean of the last bid and asked price on the principal exchange where the option
is traded, as of the close of trading on the NYSE. The fund's net asset value
will be increased or decreased by the difference between the premiums received
on writing options and the cost of liquidating those positions measured by the
closing price of those options on the exchange where traded.
Futures Contracts and Options. For those funds buying and selling futures
contracts and related options thereon, the futures contracts and options are
valued at their daily settlement price.
Foreign Securities. For funds investing in foreign securities, the value of a
foreign portfolio security held by a fund is determined based upon its closing
price or upon the mean of the closing bid and asked prices on the foreign
exchange or market on which it is traded and in the currency of that market, as
of the close of the appropriate exchange. As of the close of business on the
NYSE, that fund's portfolio securities which are quoted in foreign currencies
are converted into their U.S. dollar equivalents at the prevailing market
rates, as computed by the custodian of the fund's assets.
However, trading on foreign exchanges may take place on dates or at times of
day when the NYSE is not open; conversely, overseas trading may not take place
on dates or at times of day when the NYSE is open. Any of these circumstances
could affect the net asset value of fund shares on days when the investor has
no access to the fund.
Portfolio Holdings Disclosure
The Trust's board of trustees has adopted policies and procedures designed to
ensure that disclosure of information regarding a fund's portfolio securities
is in the best interests of fund shareholders. In accordance with these
policies and procedures, a Trust vice president or the vice president's
designees will make shareholders reports or other regulatory filings containing
a fund's portfolio holdings available free of charge to individual investors,
institutional investors, intermediaries that distribute the fund's shares, and
affiliated persons of the fund that make requests for such holdings
information. Shareholder reports are available 60 days after the end of each
semi-annual reporting period.
A Trust vice president or the vice president's designees may provide a fund's
top-ten holdings immediately after each quarter-end to Lincoln Life and other
insurance companies who include the funds in their products ("Insurance
Companies"). All Insurance Companies must sign a confidentiality agreement
acknowledging that any nonpublic portfolio information will be kept strictly
confidential and that the nonpublic portfolio information is proprietary
information of the funds. The Insurance Companies may include this information
in marketing and other public materials (including via website posting) 15 days
after the end of the quarter.
A vice president of the Trust or the vice president's designees may provide
other portfolio holdings information 30 days following the end of each quarter
to the Insurance Companies. All Insurance Companies must sign a confidentiality
agreement acknowledging that any non-public portfolio information will be kept
strictly confidential and that the non-public information is proprietary
information of the funds. The Insurance Companies will distribute shareholder
reports (annual and semi-annual) containing the portfolio holdings of the funds
to contract owners in accordance with applicable laws and regulations. The
Insurance Companies may make the portfolio information publicly available
(including via website posting) 45 days after the end of the quarter.
A vice president of the Trust or vice president's designees may post all of the
holdings (e.g., underlying funds) of each Lincoln Profile Fund to a website 25
days after each calendar quarter end and 25 says after any material changes
(including rebalancing) are made to the holdings of a Lincoln Profile Fund.
Holdings data will also be made available via a publicly disclosed telephone
number.
A Trust vice president or the vice president's designees may also provide
holdings information 30 days following the end of the quarterly reporting
period under a confidentiality agreement to third-party service providers,
including but not limited to independent rating and ranking organizations,
which conduct market analyses of the fund's portfolio holdings against
benchmarks or securities market indices. All such third parties must sign a
confidentiality agreement acknowledging that the non-public information will be
kept strictly confidential and that the non-public portfolio information is
proprietary information of the funds. These parties may disseminate the
portfolio holdings information 60 days following the end of the quarter, which
is after the SEC filings are made. These third parties presently are Anerich
Massina & Associates and Ibbotson Associates.
The Trust's sub-advisers have ongoing arrangement with the following third
parties to make available information about a fund's portfolio holdings: (1)
rating organizations, such as Moodys, S&P, Morningstar and Lipper, provided
generally on a monthly basis for the purpose of reviewing the particular fund;
(2) portfolio analysis companies, such as Factset Research Systems, Line Datta,
GlassLewis, Investment Technology Group, Inc., BondEdge, Investools, Plexus,
Saloman Analytics, Inc., Wilshire Analytics Axiom, ITG Alpha Capture, MSCI
BARRA, Inc., Bloomberg, L.P., Investor Tools Perform, J.P. Morgan Securities,
Inc. and Plexus, BARRA TotalRisk Systems provided generally on a daily or
monthly basis for the purpose of compiling reports, preparing comparative
analysis data and trade execution evaluation; (3) proxy voting or class action
services, such as ADP, Broadridge Financial Solutions, Inc., Risk Metrics or
Brown Brothers Harriman & Co., provided generally on a daily or bi-monthly
basis for the purpose of voting proxies relating to portfolio holdings or
providing corporate actions services and trade confirmation; (4) computer
systems, products, services, and software vendors, such as Advent Software,
Inc., Eagle Investment Systems Corp., The MacGregor Group, OMGEO LLC,
CDS/Computer, Checkfree, Cogent Consulting, GFP Acquisition Company, Inc.
D.B.A. GCom2 Solutions, Siemens Business Services, Inc. and GainsKeeper, Inc.
provided generally on a daily basis for the purpose of providing computer
products, services, software and accounting systems to the sub-advisers; and
(5) operational services, such as State Street Bank and Trust Company, State
Street Investment Manager Solutions, Mark-it Group and Standard & Poor's
Securities Evaluations Services provided generally on a daily basis for the
purpose of providing operational functions including fund pricing and OTC
derivative swap products to the sub-advisers. Each of the above unaffiliated
third parties must agree to keep the fund's holdings information confidential
and not engage in securities transactions on the basis of the information. The
sub-advisers do not receive compensation in connection with these arrangements.
A Trust vice president or the vice president's designees may provide, at any
time, portfolio holdings information to: (a) fund service providers and
affiliates, such as the funds' investment adviser, sub-advisers, custodian and
auditor, to the extent necessary to perform services for the funds; and (b)
state and federal regulators and government agencies as required by law or
judicial process. These entities are subject to duties of confidentiality
imposed by law, contract. or fiduciary obligations.
The funds will disclose their portfolio holdings in public SEC filings. The
Trust's board of trustees also may, on a case-by-case basis, authorize
disclosure of the funds' portfolio holdings, provided that, in its judgment,
such disclosure is not inconsistent with the best interests of shareholders, or
may impose additional restrictions on the dissemination of portfolio
information.
Neither the funds, their investment adviser nor any affiliate receive any
compensation or consideration in connection with the disclosure of the funds'
portfolio holdings information.
Fund management is responsible for ensuring appropriate disclosure is made
regarding these procedures in the funds' prospectus and/or SAI.
The Trust's board of trustees exercises oversight of these policies and
procedures. In this regard, fund management will inform the trustees if any
substantial changes to the procedures become necessary to ensure that the
procedures are in the best interest of fund shareholders. The officers will
consider any possible conflicts between the interest of fund shareholders, on
the one hand, and those of the funds' investment adviser and other fund
affiliates, on the other. Moreover, the funds' chief compliance officer will
address the operation of the funds' procedures in the annual compliance report
to the board and will recommend any remedial changes to the procedures.
Purchase and Redemption Information
Shares of a fund may not be purchased or redeemed by individual investors
directly but may be purchased or redeemed by such investors only through
variable annuity contracts or variable life contracts offered by Lincoln Life,
LNY and other insurance companies. Shares of the funds may also be purchased by
the LVIP Wilshire Risk-based Profile Funds and Target Maturity Funds, which
invest their assets in other mutual funds. The offering price of each fund's
shares is equal to its net asset value per share.
If conditions exist which make payment of redemption proceeds wholly in cash
unwise or undesirable, a fund may make payment wholly or partly in securities
or other investment instruments which may not constitute securities as such
term is defined in the applicable securities laws. If a redemption is paid
wholly or partly in securities or other property, a shareholder would incur
transaction costs in disposing of the redemption proceeds.
Custodian and Transfer Agent
All securities, cash and other similar assets of the funds are currently held
in custody by Mellon Bank, N.A., One Mellon Center, Pittsburgh, Pennsylvania
15258.
The custodian shall: receive and disburse money; receive and hold securities;
transfer, exchange, or deliver securities; present for payment coupons and
other income items, collect interest and cash dividends received, hold stock
dividends, etc.; cause escrow and deposit receipts to be executed; register
securities; and deliver to the funds proxies, proxy statements, etc.
Lincoln Life performs the dividend and transfer agent functions for each fund.
Independent Registered Public Accounting Firm
The board of trustees has engaged Ernst & Young LLP, Two Commerce Square, Suite
4000, 2001 Market Street, Philadelphia, PA 19103, to serve as the Independent
Registered Public Accounting Firm for the fund. In addition to the audits of
the financial statements of the funds, other services provided include review
of annual reports and registration statements filed with the SEC; consultation
on financial accounting and reporting matters; and meetings with the Audit
Committee.
Financial Statements
The audited financial statements and the reports of Ernst & Young LLP are
incorporated by reference to each fund's 2007 annual report. We will provide a
copy of each fund's annual report on request and without charge. Either write
The Lincoln National Life Insurance Company, P.O. Box 2340, Fort Wayne, Indiana
46801 or call: 1-800-4LINCOLN (454-6265).
Taxes
Each fund intends to qualify and has elected to be taxed as a regulated
investment company under certain provisions of the Internal Revenue Code of
1986 (the Code). If a fund qualifies as a regulated investment company and
complies with the provisions of the Code relieving regulated investment
companies which distribute substantially all of their net income (both net
ordinary income and net capital gain) from federal income tax, it will be
relieved from such tax on the part of its net ordinary income and net realized
capital gain which it distributes to its shareholders. To qualify for treatment
as a regulated investment company, each fund must, among other things, derive
in each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (subject to the
authority of the Secretary of the Treasury to exclude foreign currency gains
which are not directly related to the fund's principal business of investing in
stock or securities or options and futures with respect to such stock or
securities), or other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its investing in such
stocks, securities, or currencies.
Each fund also intends to comply with diversification regulations under Section
817(h) of the Code, that apply to mutual funds underlying variable contracts.
Generally, a fund will be required to diversify its investments so that on the
last day of each quarter of a calendar year, no more than 55% of the value of
its total assets is represented by any one investment, no more than 70% is
represented by any two investments, no more than 80% is represented by any
three investments, and no more than 90% is represented by any four investments.
For this purpose, securities of a given issuer are treated as one investment,
but each U.S. government agency or instrumentality is treated as a separate
issuer. Any security issued, guaranteed, or insured (to the extent so
guaranteed or insured) by the U.S. government or an agency or instrumentality
of the U.S. government is treated as a security issued by the U.S. government
or its agency or instrumentality, whichever is applicable.
Failure by a fund to both qualify as a regulated investment company and satisfy
the Section 817(h) diversification requirements would generally cause Variable
Contracts that include the fund as an underlying investment to lose their
favorable tax status and require contract holders to include in ordinary income
any income under the contracts for the current and all prior taxable years.
Under certain circumstances described in the applicable Treasury regulations,
inadvertent failure to satisfy the applicable diversification requirements may
be corrected, but such a correction would require a payment to the Internal
Revenue Service (IRS) based on the tax contract holders would have incurred if
they were treated as receiving the income on the contract for the period during
which the diversification requirements were not satisfied. Any such failure may
also result in adverse tax consequences for the insurance company issuing the
contracts. Failure by a fund to qualify as a regulated investment company would
also subject a fund to federal and state income taxation on all of its taxable
income and gain, whether or not distributed to shareholders.
Since individual contract owners are generally not treated as shareholders of
the funds, no discussion is included regarding the federal income tax
consequences at the shareholder level.
The discussion of federal income tax considerations in the prospectus, in
conjunction with the foregoing, is a general and abbreviated summary of the
applicable provisions of the Code and Treasury Regulations currently in effect
as interpreted by the Courts and the Internal Revenue Service (IRS). These
interpretations can be changed at any time. The above discussion covers only
federal tax considerations with respect to the fund. State and local taxes vary.
APPENDIX A
Bond and Commercial Paper Ratings
Certain of the funds' investment policies and restrictions include references
to bond and commercial paper ratings. The following is a discussion of the
rating categories of Moody's Investors Service, Inc. and Standard & Poor's
Corp.
Moody's Investors Service, Inc.
Aaa-Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A-Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa-Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
Standard & Poor's Corp.
AAA-This is the highest rating assigned by Standard & Poor's Corp. to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas these bonds normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay principal and interest
than for bonds in the A category and higher.
BB-B-CCC-CC-Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Moody's Investors Service, Inc.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Prime 1-Highest Quality;
Prime 2-Higher Quality;
Prime 3-High Quality.
(The funds will not invest in commercial paper rated Prime 3).
Standard & Poor's Corp.
A Standard & Poor's Corp. commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. The fund will invest in commercial paper rated in the A
Categories, as follows:
A-Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2, and 3 to indicate the relative degree of safety. (The
funds will not invest in commercial paper rated A-3).
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not overwhelming as for issues
designated A-1.
APPENDIX B
BAMCO, Inc.
Introduction - Baron Capital Management, Inc. and BAMCO, Inc. (the "Adviser" or
"Advisers") are adopting these proxy voting policies and procedures (the
"Policies and Procedures") in order to comply with Rule 206(4)-6 under the
Investment Advisers Act of 1940, as amended and its associated record-keeping
requirements.
The Policies and Procedures apply to those client accounts (i) that contain
voting securities; and (ii) for which an Adviser has authority to vote client
proxies. The Policies and Procedures will be reviewed and, as necessary,
updated periodically to address new or revised proxy voting issues. Other,
similar rights such as consent rights shall be evaluated on a case by case
basis.
Pursuant to the Policies and Procedures and its fiduciary duties, each Adviser
will vote client proxies as part of its authority to manage, acquire and
dispose of account assets. When voting proxies for client accounts, the
Adviser's primary objective is to make voting decisions solely in the best
interests of clients and beneficiaries and participants of benefits plans for
which we manage assets. In fulfilling its obligations to clients, the Adviser
will act in a manner deemed to be prudent and diligent and which is intended to
enhance the economic value of the underlying securities held in client
accounts. In certain situations, a client or its fiduciary may provide the
Adviser with a statement of proxy voting policy. In these situations, the
Adviser seeks to comply with such policy to the extent it would not be
inconsistent with applicable regulation or the fiduciary responsibility of the
Adviser.
Duty to Vote Proxies - The Adviser acknowledges that it is part of its
fiduciary duty to its clients to vote client proxies, except in cases in which
the cost of doing so, in the opinion of the Adviser, would exceed the expected
benefits to the client. This may be particularly true in the case of non-U.S.
securities. While the proxy voting process is well established in the United
States and other developed markets with a number of tools and services
available to assist an investment manager, voting proxies of non-US companies
located in certain jurisdictions, particularly emerging markets, may involve a
number of logistical problems that may have a detrimental effect on the
Adviser's ability to vote such proxies. The logistical problems include, but
are not limited to: (i) proxy statements and ballots being written in a
language other than English, (ii) untimely and/or inadequate notice of
shareholder meetings, (iii) restrictions on the ability of holders outside the
issuer's jurisdiction of organization to exercise votes, (iv) requirements to
vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting, and
(vi) requirements to provide local agents with power of attorney to facilitate
the Adviser's voting instructions. Accordingly, the Adviser may conduct a
cost-benefit analysis in determining whether to attempt to vote its clients'
shares at a non-US company's meeting, whereby if it is determined that the cost
associated with the attempt to exercise its vote outweighs the benefit the
Adviser believes its clients will derive by voting on the company's proposal,
the Adviser may decide not to attempt to vote at the meeting.
Material Conflicts - The Adviser will vote its clients' proxies in the best
interests of its clients and not its own. In voting client proxies, the Adviser
will avoid material conflicts of interests between the interests of the Adviser
and its affiliates on the one hand and the interests of its clients on the
other. The Adviser recognizes that it may have a material conflict of interest
in voting a client proxy where (i) it manages assets, administers employee
benefit plans, or provides brokerage, underwriting or insurance to companies
whose management is soliciting proxies; (ii) it manages money for an employee
group that is the proponent of a proxy proposal; (iii) has a personal
relationship with participants in a proxy solicitation or a director or
candidate for director; or (iv) it otherwise has a personal interest in the
outcome in a particular matter before shareholders. Notwithstanding the above
categories, the Adviser understands that the determination of whether a
"material conflict"exists depends on all of the facts and circumstances of the
particular situation. The Adviser acknowledges the existence of a relationship
of the type discussed above, even in the absence of any active efforts to
solicit the investment adviser with respect to a proxy vote, is sufficient for
a material conflict to exist.
Assumptions Related to Director Independence - In 2003, the New York Stock
Exchange (or "NYSE") and NASDAQ implemented increased standards for board
independence, including a stronger definition of "independent" director and a
requirement that a majority of the board be independent. In general, according
to the NYSE and NASDAQ independence standards, a director will be deemed
independent if the board affirmatively attests that he or she has no
relationship with the company that would interfere with the director's exercise
of independent judgment or in carrying out the responsibilities of a director.
Certain types of relationships will preclude a finding of independence by the
board. Such relationships include: directors (or those with family members) who
are former employees of the company or its auditor; have commercial, advisory
or, in the case of NASDAQ, charitable ties with the company; or have
interlocking compensation committees. Such relationships carry a three-year
cooling-off, or look-back, period beginning on the date the relationship ends.
The Adviser has adopted a policy which assumes director independence after a
five-year cooling-off period.
GENERAL PROXY VOTING GUIDELINES
It is the policy of the Adviser in voting proxies to consider and vote each
proposal with the objective of maximizing long-term investment returns for its
clients. To ensure consistency in voting proxies on behalf of its clients, the
Adviser utilizes the proxy voting guidelines (the "Proxy Voting Guidelines")
set forth below. These guidelines address a broad range of issues, including
board size and composition, executive compensation, anti-takeover proposals,
capital structure proposals and social responsibility issues.
I. Management Proposals:
A. The following management sponsored proposals are usually voted in support of
management.
1. Approval of auditors and financial statements
2. Election of Directors
3. Requirement that at least 51% of its Board's members be comprised of
independent and unaffiliated Directors
4. Requirement that the majority of members of the company's compensation
committee, and 100% of members of the company's nominating and audit
committees, be comprised of independent or unaffiliated Directors
5. Recommendations to set retirement ages or require specific levels of
stock ownership by Directors
6. General updating/corrective amendments to the charter
7. Elimination of cumulative voting
8. Elimination of preemptive rights
9. Provisions for confidential voting and independent tabulation of voting
results
10. Proposals related to the conduct of the annual meeting except those
proposals which relate to the "transaction of such other business which
may come before the meeting"
11. Capitalization changes which eliminate other classes of stock and
voting rights
12. Proposals to increase the authorization of existing classes of stock
if: (i) a clear and legitimate business purpose is stated and (ii) the
number of shares requested is reasonable in relation to the purpose for
which authorization is requested
13. Proposals for share repurchase plans, unless it appears that a
repurchase plan lacks a bona fide business purpose
14. Proposals to effect stock splits unless such a split would be contrary
to shareholders' best interests
15. Proposals to effect reverse stock splits if management proportionately
reduces the authorized share amount set forth in the corporate charter.
Reverse stock splits that do not adjust proportionately to the
authorized share amount will generally be approved if the resulting
increase in authorized shares coincides with the proxy guidelines set
forth above for common stock increases
16. Director fees unless the amounts are excessive relative to other
companies in the country or industry
17. Employee stock purchase plans that permit discounts up to 15%, but
only for grants that are part of a broad based employee plan, including
all non-executive employees, are fair reasonable, and in the best
interest of shareholders.
18. Establishment of Employee Stock Option Plans and other employee
ownership plans
19. Proposals to expense stock options
20. Executive/Director stock option plans. Generally, the stock option
plans should meet the following criteria: (i) the stock option plan
should be incentive based; (ii) should be no more than 2% per annum of
the issued capital at the time of approval; (iii) should be broad based;
(iv) priced at fair market value; (v) have no repricing provisions; (vi)
the number of non-employee directors should be considered; and (vii) any
other relevant factors.
21. Non-employee Director stock option plans. Generally, the stock options
plans should meet the following criteria: (i) the stockoption plan
should be incentive based; (ii) should be no more than 2% per annum of
the issued capital at the time of approval; (iii) should be broad based;
(iv) priced at fair market value; (v) have no repricing provisions; (vi)
the number of non-employee directors should be considered; and (vii) any
other relevant factors.
22. Modify or rescind existing supermajority vote requirements to amend
the charters or bylaws
23. Adoption of anti-greenmail provisions provided that the proposal (a)
defines greenmail, (b) prohibits buyback offers to large block holders
not made to all shareholders or not approved by disinterested
shareholders, and (c) contains no anti-takeover measures or other
provisions restricting the rights of shareholders
24. Proposals requiring shareholder ratification of poison pills
B. The following proposals are usually voted against, notwithstanding
management support:
1. Capitalization changes which add classes of stock which may
significantly dilute the voting interests of existing shareholders
2. Proposals to increase the authorized number of shares of existing
classes of stock which carry preemptive rights or super voting rights
3. Creation of blank check preferred stock
4. Changes in capitalization by 2% or more where management does not offer
an appropriate rationale or where it is contrary to the best interests of
existing shareholders
5. Compensation proposals that allow for discounted stock options which
have not been offered to employees in general
6. Executive compensation plans that are excessive relative to other
companies in the industry
7. Anti-takeover and related provision that serve to prevent the majority
of shareholders from exercising their rights or effectively deter the
appropriate tender offers and other offers
8. Shareholders rights plans which allow appropriate offers to
shareholders to be blocked by the board or trigger provisions which
prevent legitimate offers from proceeding
9. Amendments to bylaws that would require a supermajority shareholder
vote to pass or repeal certain provisions
10. Proposals to indemnify auditors
11. Proposals to adopt poison pills
12. Classified boards
C. The following types of proposals are usually voted on a case-by-case basis:
1. Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit management
and would be costly to shareholders if triggered are not supported by the
Advisers, however the Adviser does not want to vote against a good
management team, and so will usually abstain
2. Mergers, acquisitions and other special corporate transactions (i.e.,
takeovers, spin-offs, sales of assets, reorganizations, restructurings
and recapitalizations)
3. Proposals to create a new class of preferred stock or for issuances of
preferred stock up to 5% of issued capital unless the terms of the
preferred stock would adversely affect the rights of existing
shareholders, in which case we are opposed
4. Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock, provided
such proposals have a legitimate business purpose
5. Proposals to change covenants or other terms in connection with
financings or debt issuances
6. Proposals to amend terms of shareholder rights agreements or similar
documents which will affect the rights of a client
7. Limiting Directors' liability and broadening indemnification of
Directors
II. Shareholder Proposals:
A. The following shareholder proposals are usually voted in support:
1. Requirement that a majority of members of the company's compensation,
nominating and audit committees be comprised of independent or
unaffiliated Directors
2. Prohibit payment of greenmail
3. Proposals which request or require disclosure of executive compensation
in addition to the disclosure required by the Securities and Exchange
Commission ("SEC") regulations
4. Elimination of certain anti-takeover related provisions
5. Reduction or elimination of supermajority vote requirements
6. Proposals to expense stock options
7. Confidential voting
8. Majority vote for the election of Directors
9. Declassified boards
B. The following shareholder proposals are usually voted against:
1. Requirements that the issuer prepare reports which are costly to
provide or which would require duplicative efforts or expenditures which
are of a non-business nature or would provide no pertinent information
from the perspective of institutional shareholders
2. Restrictions related to social, political or special interest issues
that impact the ability of the company to do business or be competitive
and which have a significant financial or best interest impact to the
shareholders
3. Proposals that require inappropriate endorsements or corporate actions
4. Proposals requiring Directors to own large amounts of stock to be
eligible for election
5. Proposals which limit tenure of Directors
6. Requiring shareholder approval of golden parachutes
7. Requiring separate chairman and CEO positions
8. Limiting benefits under supplemental executive retirement plans
9. Limiting executive compensation with regards to "pay-for-superior
performance" stock option plans, employee stock purchase plans, and
non-employee director stock option plans
C. The following shareholder proposals are usually determined on a case-by-case
basis:
1. Proposals to limit golden parachutes
2. Restoring cumulative voting in the election of Directors
3. Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors
4. Proposals which limit retirement benefits or executive compensation
5. Requiring shareholder approval for Bylaw or charter amendments
6. Requiring shareholder approval for shareholder rights plan or poison
pill
ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
I. Proxy Review Committee
---------------------------------------------------------------
A. The Adviser's Proxy Review Committee (the "Committee") is responsible for
creating and implementing the Policies and Procedures and, in that regard,
has adopted the general principles and guidelines set forth above in
Sections I and II. Among other things, the Committee is responsible for the
following:
1. The Committee shall establish and review these Policies and Procedures
and determine how the Adviser will vote proxies on an ongoing basis.
2. The Committee shall have the authority to amend and change the Policies
and Procedures and designate voting positions consistent with the
objective of maximizing long-term investment returns for the Adviser's
clients.
3. The Committee shall meet as needed to oversee and address all questions
relating to the Adviser's Policies and Procedures, which may include: (1)
general review of proposals being put forth at shareholder meetings of
portfolio companies; (2) adopting changes in the Policies and Procedures;
(3) determining whether voting on matters in the manner favored by the
Adviser are "material" conflicts of interests within the meaning of Rule
206(4)-6 under the Investment Advisers Act of 1940, as amended; (4)
determining how to vote matters for which specific direction has not been
provided the Proxy Voting Guidelines (i.e. "case by case" matters) or are
otherwise not covered by the Proxy Voting Guidelines (collectively,
"Discretionary Proposals"); and (5) override review.
4. The Committee will periodically review the Proxy Voting Guidelines to
determine if they are current and consistent with the Adviser's policy
and will make appropriate changes as needed.
Operating Procedures
B. The following operating procedures are intended to ensure that the Adviser
satisfies its proxy voting obligations:
1. The legal department will review all new client accounts to determine
whether (i) the account contains voting securities and (ii) the client
has delegated proxy voting authorization to the Adviser in the investment
Advisory agreement or (iii) the client has otherwise provided specific
voting instructions. Any questions regarding whether or not a security is
a "voting" security or whether voting authority has been delegated by a
client will be directed to the legal department.
2. The designated proxy reviewer, as supervised by the legal department,
will receive proxy materials and ballots and reconcile these materials
with holdings in client accounts as they occur.
3. The designated proxy reviewer will compile and review the matters to be
voted on, and determine: (i) which matters are to be voted in accordance
with the Proxy Voting Guidelines (a "Pre-Determined Matter"); and (ii)
which matters are Discretionary Matters and (iii) which matters are to be
voted pursuant to the instructions of clients (a "Directed Matter"). Any
questions regarding whether a matter is a Pre-Determined Matter, a
Discretionary Matter or a Directed Matter will be directed to the legal
department.
4. For all Discretionary Matters, the designated proxy reviewer, as
supervised by the legal department, shall screen the matter and make a
preliminary determination regarding whether the matter presents a
potential material conflict of interest between the interests of the
Adviser and its affiliates on the one hand and the Adviser's client on
the other. In order to determine whether a Discretionary Matter poses a
potential material conflict of interest, the designated proxy reviewer
shall compile and maintain a list of the following as applicable.
a. all issuers for which the Adviser or its affiliates manage assets;
b. all issuers for which the Adviser or its affiliates manages
employee benefit plans;
c. any issuer for which the Adviser or its affiliates is soliciting
the provision of services enumerated in (a) and (b);
d. any other issuer with which the Adviser or its affiliates or its
senior officers has a material business relationship; and
e. any employee group for which the Adviser manages money.
This list, which shall be reviewed quarterly by the Director of
Mutual Fund Marketing and the Director of Institutional Marketing,
shall be known as the "Master Conflicts List".
5. The designated proxy reviewer, as supervised by the legal department,
shall screen the issuer, employee group or any other material related
party ("Material Parties") involved in the Discretionary Matter against
the Master Conflicts List and develop a list of potential conflicts
("Potential Conflicts List").
6. For each Discretionary Matter, the designated proxy reviewer, as
supervised by the legal department, may solicit relevant information from
portfolio managers, investment personnel, analysts and other employees of
the Adviser who may have an investment or other professional interest in
the Discretionary Matter.
7. The Committee shall meet at least quarterly and shall review whether
any person listed on the Master Conflicts List would, under the facts and
circumstances, create a material conflict of interest between the
interests of the Adviser and its affiliates on the one hand and the
Adviser's clients on the other. In making the finding required in (ii)
above, the Committee shall consider the Potential Conflicts List and any
other material relationship known to the Committee between the Adviser
and its affiliates and the Material Parties. The Committee may act by
consent.
8. If the Proxy Review Committee in consultation with the legal department
determines that with respect to any Discretionary Matter a material
conflict of interest exists in voting the Discretionary Matter, the
Committee shall direct the legal department to obtain the informed
written consent of the affected client (or clients) to the Committee's
favored vote. If obtaining such consent from any client is impracticable
or undesirable, the Adviser shall vote the client's proxy in accordance
with the published recommendation of Institutional Shareholder Services
("ISS") or shall appoint an independent third party to vote.
9. If any portfolio manager, investment person, or any other employee of
the Adviser wishes to vote a proxy with respect to a Pre-Determined
Matter in a manner other than that set forth in the Proxy Voting
Guidelines (an "Override Matter"), such person shall contact the legal
department. The legal department shall review the Override Matter against
the Master List and make a determination whether a material conflict
exists. If a material conflict is found to exist, it shall be duly
recorded. If the legal department determines that a material conflict of
interest exists with respect to voting the Override Matter in the manner
it favors, the legal department shall either: (i) vote the Override
Matter in the manner originally prescribed by the Proxy Voting
Guidelines; or (ii) obtain the informed written consent of the affected
client (or clients). A list of Override Matters shall be presented at the
next meeting of the Committee.
10. Directed Matters will be voted in accordance with the instructions of
the client.
11. The designated proxy reviewer, as supervised by the legal department,
will ensure that all proxies are voted in accordance with these
Procedures and Policies.
12. The functions described hereunder may be delegated to a third party
proxy voting or other service provider.
13. All decisions of the Committee, including all determinations regarding
the existence of a material conflict of interest with respect to a
Discretionary or Override Matter and the basis for such determination,
shall be documented in writing and maintained for a period of at least 6
years.
III. CLIENT DISCLOSURE POLICIES
BCM will give a copy of the Policies and Procedures to its clients. The legal
department will provide any client, upon written request, with a tabulation of
how such client's proxies were voted by BCM. BAMCO will follow the same
procedures with respect to its sub-advised fund clients.
For BAMCO managed Funds, a quarterly proxy voting report shall be provided to
the Board of each Fund. Form N-PX will be filed with the SEC no later than
August 31 for each year ended June 30 by the legal department. The Funds will
also include in their SAIs, pursuant to Item 13(F) of Form N-1A, a description
of the policies and procedures that BAMCO uses when a vote presents a conflict
of interest between the Funds' shareholders and BAMCO. The Funds' SAIs will
also state the location of each of the Funds' Form N-PX disclosing how each of
the Funds' proxies relating to portfolio securities were voted during the most
recent 12-month period ended June 30. The Funds will include in their
semi-annual report and annual reports to shareholders a statement that the
Funds' proxy voting policies and procedures are available without charge on the
Fund's website, www.BaronFunds.com, or by calling 1-800-99-BARON, and on the
SEC's website at www.sec.gov for the most recent twelve-month period ending
June 30 is available on or through the Funds' website and on the SEC's website.
Such information will be posted to the website as soon as reasonably
practicable after the filing with the SEC. The Funds will also include in their
semi-annual report and annual reports to shareholders a statement that the
Funds' proxy voting record for the most recent twelve-month period ending June
30 is available on or through the Funds' website and on the SEC's website. Such
information will be posted to the website as soon as reasonably practicable
after filing with the SEC.
RECORDKEEPING
Rule 204-2 under the Advisers Act, as amended, requires that the Adviser retain
(i) its proxy voting policies and procedures; (ii) proxy statements received
regarding client securities; (iii) records of votes it cast on behalf of
clients; (iv) records of client requests for proxy voting information and (v)
any documents prepared by the investment adviser that were material to making a
decision how to vote or that memorialized the basis for the decision. The
Adviser will keep all written requests from clients and any written response
from the Adviser (to either a written or an oral request). The Adviser may rely
on proxy statements filed on the SEC's EDGAR system instead of keeping its own
copies, and may rely on proxy statements and records of proxy votes cast by the
Adviser that are maintained with a third party such as a proxy voting service,
provided that the Adviser has obtained an undertaking from the third party to
provide a copy of the documents promptly upon request.
Cohen & Steers Capital Management, Inc.
This statement sets forth the policies and procedures that Cohen & Steers
Capital Management, Inc. ("C&S") follows in exercising voting rights with
respect to securities held in our client portfolios. All proxy-voting rights
that are exercised by C&S shall be subject to this Statement of Policy and
Procedures.
I. Objectives
Voting rights are an important component of corporate governance. C&S has three
overall objectives in exercising voting rights:
A. Responsibility. C&S shall seek to ensure that there is an effective means in
place to hold companies accountable for their actions. While management must be
accountable to its board, the board must be accountable to a company's
shareholders. Although accountability can be promoted in a variety of ways,
protecting shareholder voting rights may be among our most important tools.
B. Rationalizing Management and Shareholder Concerns. C&S seeks to ensure that
the interests of a company's management and board are aligned with those of the
company's shareholders. In this respect, compensation must be structured to
reward the creation of shareholder value.
C. Shareholder Communication. Since companies are owned by their shareholders,
C&S seeks to ensure that management effectively communicates with its owners
about the company's business operations and financial performance. It is only
with effective communication that shareholders will be able to assess the
performance of management and to make informed decisions on when to buy, sell
or hold a company's securities.
II. General Principles
In exercising voting rights, C&S shall conduct itself in accordance with the
general principles set forth below.
1. The ability to exercise a voting right with respect to a security is a
valuable right and, therefore, must be viewed as part of the asset itself.
2. In exercising voting rights, C&S shall engage in a careful evaluation of
issues that may materially affect the rights of shareholders and the value
of the security.
3. Consistent with general fiduciary principles, the exercise of voting rights
shall always be conducted with reasonable care, prudence and diligence.
4. In exercising voting rights on behalf of clients, C&S shall conduct itself
in the same manner as if C&S were the constructive owner of the securities.
5. To the extent reasonably possible, C&S shall participate in each shareholder
voting opportunity.
6. Voting rights shall not automatically be exercised in favor of
management-supported proposals.
7. C&S, and its officers and employees, shall never accept any item of value in
consideration of a favorable proxy voting decision.
III. General Guidelines
Set forth below are general guidelines that C&S shall follow in exercising
proxy voting rights:
Prudence
In making a proxy voting decision, C&S shall give appropriate consideration to
all relevant facts and circumstances, including the value of the securities to
be voted and the likely effect any vote may have on that value. Since voting
rights must be exercised on the basis of an informed judgment, investigation
shall be a critical initial step.
Third Party Views
While C&S may consider the views of third parties, C&S shall never base a proxy
voting decision solely on the opinion of a third party. Rather, decisions shall
be based on a reasonable and good faith determination as to how best to
maximize shareholder value.
Shareholder Value
Just as the decision whether to purchase or sell a security is a matter of
judgment, determining whether a specific proxy resolution will increase the
market value of a security is a matter of judgment as to which informed parties
may differ. In determining how a proxy vote may affect the economic value of a
security, C&S shall consider both short-term and long-term views about a
company's business and prospects, especially in light of our projected holding
period on the stock (e.g., C&S may discount long-term views on a short-term
holding).
IV. Specific Issues
Set forth below are guidelines as to how specific proxy voting issues shall be
analyzed and assessed. While these guidelines will provide a framework for our
decision making process, the mechanical application of these guidelines can
never address all proxy voting decisions. When new issues arise or old issues
present nuances not encountered before, C&S must be guided by its reasonable
judgment to vote in a manner that C&S deems to be in the best interests of its
clients.
A. Stock-Based Compensation
Approval of Plans or Plan Amendments. By their nature, compensation plans must
be evaluated on a case-by-case basis. As a general matter, C&S always favors
compensation plans that align the interests of management and shareholders. C&S
generally approves compensation plans under the following conditions:
10% Rule. The dilution effect of the newly authorized shares, plus the shares
reserved for issuance in connection with all other stock related plans,
generally should not exceed 10%.
Exercise Price. The minimum exercise price of stock options should be at least
equal to the market price of the stock on the date of grant.
Plan Amendments. Compensation plans should not be materially amended without
shareholder approval.
Non-Employee Directors. Awards to non-employee directors should not be subject
to management discretion, but rather should be made under non-discretionary
grants specified by the terms of the plan.
Repricing/Replacement of Underwater Options. Stock options generally should not
be re-priced, and never should be re-priced without shareholder approval. In
addition, companies should not issue new options, with a lower strike price, to
make up for previously issued options that are substantially underwater. C&S
will vote against the election of any slate of directors that, to its
knowledge, has authorized a company to re-price or replace underwater options
during the most recent year without shareholder approval.
Reload/Evergreen Features. We will generally vote against plans that enable the
issuance of reload options and that provide an automatic share replenishment
("evergreen") feature.
Measures to Increase Executive Long-Term Stock Ownership. We support measures
to increase the long-term stock ownership by a company's executives. These
include requiring senior executives to hold a minimum amount of stock in a
company (often expressed as a percentage of annual compensation), requiring
stock acquired through option exercise to be held for a certain minimum amount
of time, and issuing restricted stock awards instead of options. In this
respect, we support the expensing of option grants because it removes the
incentive of a company to issue options in lieu of restricted stock. We also
support employee stock purchase plans, although we generally believe the
discounted purchase price should be at least 85% of the current market price.
Vesting. Restricted stock awards normally should vest over at least a two-year
period.
Other stock awards. Stock awards other than stock options and restricted stock
awards should be granted in lieu of salary or a cash bonus, and the number of
shares awarded should be reasonable.
B. Change of Control Issues
While we recognize that a takeover attempt can be a significant distraction for
the board and management to deal with, the simple fact is that the possibility
of a corporate takeover keeps management focused on maximizing shareholder
value. As a result, C&S opposes measures that are designed to prevent or
obstruct corporate takeovers because they can entrench current management. The
following are C&S's guidelines on change of control issues:
Shareholder Rights Plans. C&S acknowledges that there are arguments for and
against shareholder rights plans, also known as "poison pills." Companies
should put their case for rights plans to shareholders. We generally vote
against any directors who, without shareholder approval, to our knowledge have
instituted a new poison pill plan, extended an existing plan, or adopted a new
plan upon the expiration of an existing plan during the past year.
Golden Parachutes. C&S opposes the use of accelerated employment contracts that
result in cash grants of greater than three times annual compensation (salary
and bonus) in the event of termination of employment following a change in
control of a company. In general, the guidelines call for voting against
"golden parachute" plans because they impede potential takeovers that
shareholders should be free to consider. We generally withhold our votes at the
next shareholder meeting for directors who to our knowledge approved golden
parachutes.
Approval of Mergers - C&S votes against proposals that require a super-majority
of shareholders to approve a merger or other significant business combination.
We support proposals that seek to lower super-majority voting requirements.
C. Routine Issues
Director Nominees in a Non-Contested Election - C&S generally votes in favor of
management proposals on director nominees.
Director Nominees in a Contested Election - By definition, this type of board
candidate or slate runs for the purpose of seeking a significant change in
corporate policy or control. Therefore, the economic impact of the vote in
favor of or in opposition to that director or slate must be analyzed using a
higher standard normally applied to changes in control. Criteria for evaluating
director nominees as a group or individually should include: performance;
compensation, corporate governance provisions and takeover activity; criminal
activity; attendance at meetings; investment in the company; interlocking
directorships; inside, outside and independent directors; whether the chairman
and CEO titles are held by the same person; number of other board seats; and
other experience. It is impossible to have a general policy regarding director
nominees in a contested election.
Board Composition - C&S supports the election of a board that consists of at
least a majority of independent directors. We generally withhold our support
for non-independent directors who serve on a company's audit, compensation
and/or nominating committees. We also generally withhold support for director
candidates who have not attended a sufficient number of board or committee
meetings to effectively discharge their duties as directors.
Classified Boards - Because a classified board structure prevents shareholders
from electing a full slate of directors at annual meetings, C&S generally votes
against classified boards. We vote in favor of shareholder proposals to
declassify a board of directors unless a company's charter or governing
corporate law allows shareholders, by written consent, to remove a majority of
directors at any time, with or without cause.
Barriers to Shareholder Action - We vote to support proposals that lower the
barriers to shareholder action. This includes the right of shareholders to call
a meeting and the right of shareholders to act by written consent.
Cumulative Voting - Having the ability to cumulate our votes for the election
of directors - that is, cast more than one vote for a director about whom they
feel strongly - generally increases shareholders' rights to effect change in
the management of a corporation. We generally support, therefore, proposals to
adopt cumulative voting.
Ratification of Auditors - Votes generally are cast in favor of proposals to
ratify an independent auditor, unless there is a reason to believe the auditing
firm is no longer performing its required duties or there are exigent
circumstances requiring us to vote against the approval of the recommended
auditor. For example, our general policy is to vote against an independent
auditor that receives more than 50% of its total fees from a company for
non-audit services.
D. Stock Related Items
Increase Additional Common Stock - C&S's guidelines generally call for approval
of increases in authorized shares, provided that the increase is not greater
than three times the number of shares outstanding and reserved for issuance
(including shares reserved for stock-related plans and securities convertible
into common stock, but not shares reserved for any poison pill plan).
Votes generally are cast in favor of proposals to authorize additional shares
of stock except where the proposal:
1. creates a blank check preferred stock; or
2. establishes classes of stock with superior voting rights.
Blank Check Preferred Stock - Votes generally are cast in opposition to
management proposals authorizing the creation of new classes of preferred stock
with unspecific voting, conversion, distribution and other rights, and
management proposals to increase the number of authorized blank check preferred
shares. C&S may vote in favor of this type of proposal when it receives
assurances to its reasonable satisfaction that (i) the preferred stock was
authorized by the board for the use of legitimate capital formation purposes and
not for anti-takeover purposes, and (ii) no preferred stock will be issued with
voting power that is disproportionate to the economic interests of the preferred
stock. These representations should be made either in the proxy statement or in
a separate letter from the company to C&S.
Preemptive Rights - Votes are cast in favor of shareholder proposals restoring
limited preemptive rights.
Dual Class Capitalizations - Because classes of common stock with unequal
voting rights limit the rights of certain shareholders, C&S votes against
adoption of a dual or multiple class capitalization structure.
E. Social Issues
C&S believes that it is the responsibility of the board and management to run a
company on a daily basis. With this in mind, in the absence of unusual
circumstances, we do not believe that shareholders should be involved in
determining how a company should address broad social and policy issues. As a
result, we generally vote against these types of proposals, which are generally
initiated by shareholders, unless we believe the proposal has significant
economic implications.
F. Other Situations
No set of guidelines can anticipate all situations that may arise. Our
portfolio managers and analysts will be expected to analyze proxy proposals in
an effort to gauge the impact of a proposal on the financial prospects of a
company, and vote accordingly. These policies are intended to provide
guidelines for voting. They are not, however, hard and fast rules because
corporate governance issues are so varied.
G. Section 12(d)(1)(F) Investment Companies
Proxy proposals of registered investment companies that are portfolio holdings
of any fund relying on Section 12(d)(1)(F) of the Investment Company Act of
1940 ("Section 12(d)(1)(F) Fund") for which C&S is the adviser shall be voted
in accordance with the requirements of that Section. That is, C&S either will
have the Section 12(d)(1)(F) Fund seek instructions from its shareholders with
regard to the voting of a proxy of such registered investment company and vote
such proxy only in accordance with such instructions, or will vote the shares
held by the Section 12(d)(1)(F) Fund in the same proportion as the vote of all
other holders of such registered investment company securities.
V. Proxy Voting Procedures
C&S shall maintain a record of all voting decisions for the period required by
applicable laws. In each case in which C&S votes contrary to the stated
policies set forth in these guidelines, the record shall indicate the reason
for such a vote.
The Investment Committee of C&S shall have responsibility for voting proxies.
The Investment Committee shall appoint a designee (the "Designee") who shall be
responsible for ensuring that the Investment Committee is aware of all upcoming
proxy voting opportunities. The Designee shall ensure that proxy votes are
properly recorded and that the requisite information regarding each proxy
voting opportunity is maintained. The General Counsel of C&S shall have overall
responsibility for ensuring that C&S complies with all proxy voting
requirements and procedures.
VI. Recordkeeping
The Designee shall be responsible for recording and maintaining the following
information with respect to each proxy voted by C&S:
o Name of the company
o Ticker symbol
o CUSIP number
o Shareholder meeting date
o Brief identification of each matter voted upon
o Whether the matter was proposed by management or a shareholder
o Whether C&S voted on the matter
o If C&S voted, then how C&S voted
o Whether C&S voted with or against management
The General Counsel of C&S shall be responsible for maintaining and updating
these Policies and Procedures, and for maintaining any records of written
client requests for proxy voting information. The General Counsel shall ensure
that the Investment Committee maintains documents that were prepared by C&S and
were deemed material to making a voting decision or that memorialized the basis
for the decision.
C&S shall rely on the SEC's EDGAR filing system with respect to the requirement
to maintain proxy materials regarding client securities.
II. Conflicts of Interest
There may be situations in which C&S may face a conflict between its interests
and those of its clients or fund shareholders. Potential conflicts are most
likely to fall into three general categories:
o Business Relationships - This type of conflict would occur if C&S or an
affiliate has a substantial business relationship with the company or a
proponent of a proxy proposal relating to the company (such as an employee
group) such that failure to vote in favor of management (or the proponent)
could harm the relationship of C&S or its affiliate with the company or
proponent. In the context of C&S, this could occur if Cohen & Steers Capital
Advisors, a wholly owned subsidiary of C&S ("Capital Advisors"), has a
material business relationship with a company that C&S has invested in on
behalf of its clients, and C&S is encouraged to vote in favor of management
as an inducement to acquire or maintain the Capital Advisors relationship.
o Personal Relationships - C&S or an affiliate could have a personal
relationship with other proponents of proxy proposals, participants in proxy
contests, corporate directors or director nominees.
o Familial Relationships - C&S or an affiliate could have a familial
relationship relating to a company (e.g., spouse or other relative who
serves as a director or nominee of a public company).
The next step is to identify if a conflict is material. A material matter is
one that is reasonably likely to be viewed as important by the average
shareholder. Materiality will be judged under a two-step approach:
o Financial Based Materiality - C&S presumes a conflict to be non-material
unless it involves at least $500,000.
o Non-Financial Based Materiality - Non-financial based materiality would
impact the members of the C&S Investment Committee, who are responsible for
making proxy voting decisions.
Finally, if a material conflict exists, C&S shall vote in accordance with the
advice of a proxy voting service. C&S currently uses ISS to provide advice on
proxy voting decisions.
The General Counsel of C&S shall have responsibility for supervising and
monitoring conflicts of interest in the proxy voting process according to the
following process:
1. Identifying Conflicts - The General Counsel of C&S is responsible for
monitoring the relationships of Capital Advisors for purposes of C&S's Inside
Information Policies and Procedures. The General Counsel of C&S(or his
designee) maintains a watch list and a restricted list. The Investment
Committee is unaware of the content of the watch list and therefore it is only
those companies on the restricted list, which is made known to everyone at C&S,
for which potential concerns might arise. When a company is placed on the
restricted list, the General Counsel of C&S(or his designee) shall promptly
inquire of the Designee as to whether there is a pending proxy voting
opportunity with respect to that company, and continue to inquire on a weekly
basis until such time as the company is no longer included on the restricted
list. When there is a proxy voting opportunity with respect to a company that
has been placed on the restricted list, the General Counsel of C&S shall inform
the Investment Committee that no proxy vote is to be submitted for that company
until the General Counsel completes the conflicts analysis.
For purposes of monitoring personal or familial relationships, the General
Counsel of C&S (or his designee) shall notify on at least an annual basis the
members of the Investment Committee of their obligation to disclose any
personal or familial relationships with a portfolio company that could raise
potential conflict of interest concerns. Investment Committee members shall
also advise the General Counsel of C&S (or his designee) if (i) there are
material changes to any previously furnished information, (ii) a person with
whom a personal or familial relationship exists is subsequently nominated as a
director or (iii) a personal or familial relationship exists with any proponent
of a proxy proposal or a participant in a proxy contest.
2. Identifying Materiality - The General Counsel of C&S (or his designee) shall
be responsible for determining whether a conflict is material. He shall
evaluate financial based materiality in terms of both actual and potential fees
to be received. Non-financial based items impacting a member of the Investment
Committee shall be presumed to be material.
3. Communication with Investment Committee; Voting of Proxy - If the General
Counsel of C&S determines that the relationship between Capital Advisors and a
company is financially material, he shall communicate that information to the
members of the Investment Committee and instruct them, and the Designee, that
C&S will vote its proxy based on the advice of ISS or other consulting firm
then engaged by C&S. Any personal or familial relationship, or any other
business relationship, that exists between a company and any member of the
Investment Committee shall be presumed to be material, in which case C&S again
will vote its proxy based on the advice of ISS or other consulting firm then
engaged by C&S. The fact that a member of the Investment Committee personally
owns securities issued by a company will not disqualify C&S from voting common
stock issued by that company, since the member's personal and professional
interests will be aligned.
In cases in which C&S will vote its proxy based on the advice of ISS or other
consulting firm then engaged by C&S, the General Counsel of C&S(or his
designee) shall be responsible for ensuring that the Designee votes proxies in
this manner. The General Counsel of C&S will maintain a written record of each
instance when a conflict arises and how the conflict is resolved (e.g., whether
the conflict is judged to be material, the basis on which the materiality is
decision is made and how the proxy is voted).
VIII. Cohen & Steers Funds
Proxies relating to portfolio securities held by any Cohen & Steers Fund shall
be voted in accordance with this Statement of Policies and Procedures. For this
purpose, the Board of Directors of the Cohen & Steers Funds has delegated to
C&S the responsibility for voting proxies on behalf of the Funds. The General
Counsel of C&S shall make an annual presentation to the Board regarding this
Statement of Policy and Procedures, including whether any revisions are
recommended, and shall report to the Board at each regular, quarterly meeting
with respect to any conflict of interest situation that arose regarding the
proxy voting process.
IV. Annual Review; Reporting
The chief compliance officer (CCO) of C&S (or his designee) shall conduct an
annual review to assess compliance with these policies and procedures. This
review will include sampling a limited number of proxy votes during the prior
year to determine if they were consistent with these policies and procedures.
The results of this review will be reported to the General Counsel of C&S and
the CCO of the Funds.
Any violations of these policies and procedures shall be reported to the
General Counsel or CCO of C&S. If the violation relates to any Cohen & Steers
Fund, the General Counsel or CCO of C&S shall report such violation to the CCO
of the Funds.
Columbia Management Advisors, LLC
Proxy Voting Policy
Applicable Regulations
Rule 206(4)-6 under the Investment Advisers Act of 1940
Form N-PX
ERISA Department of Labor Bulletin 94-2
Institutional Shareholder Services, Inc. (SEC No Action Letter dated September
15, 2004)
Explanation/Summary of Regulatory Requirements
An investment adviser that exercises voting authority over clients' proxies
must adopt written policies and procedures that are reasonably designed to
ensure that those proxies are voted in the best economic interests of clients.
An adviser's policies and procedures must address how the adviser resolves
material conflicts of interest between its interests and those of its clients.
An investment adviser must comply with certain record keeping and disclosure
requirements with respect to its proxy voting responsibilities. In addition, an
investment adviser to Employee Retirement Income Security Act ("ERISA")
accounts has an affirmative obligation to vote proxies for an ERISA account,
unless the client expressly retains proxy voting authority.
Policy Summary
Columbia Management Advisors, LLC ("CMA") has adopted and implemented the
following policy, which it believes is reasonably designed to: (1) ensure that
proxies are voted in the best economic interest of clients; and (2) address
material conflicts of interest that may arise. This policy applies primarily to
the Global Wealth and Investment Management ("GWIM") Investment Operations
Group, as well as to Compliance Risk Management ("CRM") and Legal. CRM and
Business groups to whom this policy applies must adopt written procedures to
implement this Policy.
Policy
All proxies regarding client securities for which CMA has authority to vote
will, unless CMA determines in accordance with policies stated below to refrain
from voting, be voted in a manner considered by CMA to be in the best interest
of CMA's clients without regard to any resulting benefit or detriment to CMA or
its affiliates. The best interest of clients is defined for this purpose as the
interest of enhancing or protecting the economic value of client accounts,
considered as a group rather than individually, as CMA determines in its sole
and absolute discretion. In the event a client believes that its other
interests require a different vote, CMA will vote as the client clearly
instructs, provided CMA receives such instructions in time to act accordingly.
Information regarding CMA's proxy voting decisions is confidential. Therefore,
the information may be shared on a need to know basis only, including within
CMA and with CMA affiliates. Advisory clients, including mutual funds' and
other funds' boards, may obtain information on how their proxies were voted by
CMA. However, CMA will not selectively disclose its investment company clients'
proxy voting records to third parties. Rather, the investment company clients'
proxy records will be disclosed to shareholders by publicly-available annual
filings for 12-month periods ending each year on June 30th on Form N-PX.
CMA endeavors to vote, in accordance with this Policy, all proxies of which it
becomes aware prior to the vote deadline date, subject to certain general
exceptions described below.
CMA seeks to avoid the occurrence of actual or apparent material conflicts of
interest in the proxy voting process by voting in accordance with predetermined
voting guidelines and observing other procedures that are intended to prevent
where practicable and manage conflicts of interest (refer to Section III,
Conflicts of Interest). CMA's proxy voting policy and practices are summarized
in its Form ADV. Additionally, CMA will provide clients with a copy of its
policies, as they may be updated from time to time, upon request.
Means of Achieving Compliance
I. PROXY COMMITTEE
CMA has established a Proxy Committee whose standing members include senior
investment management personnel, who participate as voting authorities on the
Committee. Additionally, the Proxy Committee regularly involves other
associates (i.e., Legal representative, CRM representatives, GWIM Investment
Operations representatives, etc.) who participate as needed to enable effective
execution of the Committee's responsibilities.
The Proxy Committee has established a charter, which sets forth the Committee's
purpose, membership and operation. The Proxy Committee's functions include, in
part,
(a) direction of the vote on proposals where there has been a recommendation to
the Committee not to vote according to the predetermined Voting Guidelines
(stated in Appendix A) or on proposals which require special, individual
consideration in accordance with Section IV.C;
(b) review at least annually of this Proxy Voting Policy and Voting Guidelines
to ensure consistency with internal policies, client disclosures and
regulatory requirements;
(c) review at least annually of existing Voting Guidelines and the need for
development of additional Voting Guidelines to assist in the review of
proxy proposals;
(d) ensure that appropriate disclosure of CMA's Proxy Voting Policy is made to
its clients, is disclosed in CMA's Form ADV and is made to the Funds'
shareholders; and
(e) oversight of any circumstances where, as described in Section III, CMA may
determine it is necessary to delegate proxy voting to an independent third
party.
II. CMA'S INVESTMENT ASSOCIATES
Under CMA's Voting Guidelines, certain matters must be determined on a
case-by-case basis. In general, the Proxy Group within GWIM Investment
Operations will refer these matters first to the relevant CMA research analyst
after first confirming with CRM that the proxy matter does not present a
conflict to CMA. If there is not a research analyst assigned to the particular
security, the matter will be referred to the appropriate portfolio manager.
In considering a particular proxy matter, the research analyst or portfolio
manager must vote in the clients' best interest as defined above. Information
regarding CMA's proxy voting decisions is confidential information. Therefore,
research analysts and portfolio managers generally must not discuss proxy votes
with any person outside of CMA and within CMA except on a need to know basis
only.
Research analysts and portfolio managers must discharge their responsibilities
consistent with the obligations set forth below (refer to Management of
Conflicts of Interest - Additional Procedures). A research analyst or portfolio
manager must disclose in writing any inappropriate attempt to influence their
recommendation or any other personal interest that they have with the issuer
(see Appendix B - Conflicts of Interest Disclosure and Certification Form). For
each Proxy Referral (defined below), the research analyst or portfolio manager
is responsible for memorializing their recommendation on the Proxy Voting
Recommendation Form (see Appendix C) and communicating their recommendation to
the Proxy Group.
Research analysts and portfolio managers should seek advice from CRM or Legal
with respect to any questions that they have regarding personal conflicts of
interests, communications regarding proxies, or other related matters.
III. CONFLICTS OF INTEREST
For purposes of this policy, a material conflict of interest is a relationship
or activity engaged in by CMA, a CMA affiliate1 , or a CMA associate that
creates an incentive (or appearance thereof) to favor the interests of CMA, the
affiliate, or associate, rather than the clients' interests. However, a
material conflict of interest is not automatically created when there is a
relationship or activity engaged in by a CMA affiliate, but there is a
possibility that a CMA affiliate could cause a conflict. CMA may have a
conflict of interest if either CMA has a significant business relationship with
a company that is soliciting a proxy, or if a CMA associate involved in the
proxy voting decision-making process has a significant personal or family
relationship with the particular company. A conflict of interest is considered
to be "material" to the extent that a reasonable person could expect the
conflict to influence CMA's decision on the particular vote at issue. In all
cases where there is deemed to be a material conflict of interest, CMA will
seek to resolve said conflict in the clients' best interests.
1 Bank of America Corporation ("BAC"), the ultimate corporate parent of CMA,
Bank of America, N.A. and all of their numerous affiliates owns, operates
and has interests in many lines of business that may create or give rise to
the appearance of a conflict of interest between BAC or its affiliates and
those of CMA-advised clients. For example, the commercial and investment
banking business lines may have interests with respect to issuers of voting
securities that could appear to or even actually conflict with CMA's duty,
in the proxy voting process, to act in the best economic interest of its
clients.
For those proxy proposals that: (1) are not addressed by CMA's proxy voting
guidelines; (2) the guidelines specify the issue must be evaluated and
determined on a case-by-case basis; or (3) a CMA investment associate believes
that an exception to the guidelines may be in the best economic interest of
CMA's clients (collectively, "Proxy Referrals"), CMA may vote the proxy,
subject to the conflicts of interest procedures set forth below.
In the case of Proxy Referrals, CRM will collect and review any information
deemed reasonably appropriate to evaluate if CMA or any person participating in
the proxy voting decision-making process has, or has the appearance of, a
material conflict of interest. CMA investment personnel involved in the
particular Proxy Referral must report any personal conflict of interest
circumstances to Columbia Management's Conflicts of Interest Officer in writing
(see Appendix B). CRM will consider information about CMA's significant
business relationships, as well as other relevant information. The information
considered by CRM may include information regarding: (1) CMA client and other
business relationships; (2) any relevant personal conflicts; and (3)
communications between investment professionals and parties outside the CMA
investment division regarding the proxy matter. CRM will consult with relevant
experts, including legal counsel, as necessary.
If CRM determines that it reasonably believes (1) CMA has a material conflict
of interest, or (2) certain individuals should be recused from participating in
the proxy vote at issue, CRM will inform the Chair of the Proxy Committee.
Where a material conflict of interest is determined to have arisen in the proxy
voting process, CMA's policy is to invoke one or more of the following conflict
management procedures:
o Causing the proxies to be voted in accordance with the recommendations of an
independent third party (which generally will be CMA's proxy voting agent);
o Causing the proxies to be delegated to a qualified, independent third party,
which may include CMA's proxy voting agent; or
o In unusual cases, with the Client's consent and upon ample notice,
forwarding the proxies to CMA's clients so that they may vote the proxies
directly.
Affiliate Investment Companies and Public Companies
CMA considers (1) proxies solicited by open-end and closed-end investment
companies for which CMA or an affiliate serves as an investment adviser or
principal underwriter; and (2) proxies solicited by Bank of America Corporation
("BAC") or other public companies within the BAC organization to present a
material conflict of interest for CMA. Consequently, the proxies of such
affiliates will be voted following one of the conflict management practices
discussed above.
Management of Conflicts of Interest - Additional Procedures
Additionally, by assuming his or her responsibilities pursuant to this Policy,
each member of the Proxy Committee (including the chairperson) and any CMA or
BAC associate advising or acting under the supervision or oversight of the
Proxy Committee undertakes to disclose in writing to the Columbia Management
Conflicts of Interest Officer (within CRM) any actual or apparent personal
material conflicts of interest which he or she may have (e.g., relationships
with nominees for directorship, members of an issuer's or dissident's
management or otherwise) in determining whether or how CMA will vote proxies.
In the event any member of the Proxy Committee has a conflict of interest
regarding a given matter, he or she will abstain from participating in the
Committee's determination of whether and/or how to vote in the matter. CMA's
investment associates also follow the same disclosure requirements for any
actual or apparent personal material conflicts of interest as stated in this
section.
In certain circumstances, CMA follows the proxy guidelines and uses other
research services provided by the proxy vendor or another independent third
party. CMA has undertaken a review of the proxy vendor's conflicts of interest
procedures, and will continue to monitor them on an ongoing basis.
CMA and other BAC affiliates have adopted various other policies and procedures
that help reinforce this Policy. Please see any associated documents.
Ownership Limits - Delegation of Proxy Voting to an Independent Third Party
From time to time, CMA may face regulatory or compliance limits on the types or
amounts of voting securities that it may purchase or hold for client accounts.
Among other limits, federal, state, foreign regulatory restrictions, or
company-specific ownership limits may restrict the total percentage of an
issuer's voting securities that CMA can hold for clients (collectively,
"Ownership Limits").
The regulations or company-specific documents governing a number of these
Ownership Limits often focus upon holdings in voting securities. As a result,
in limited circumstances in order to comply with such Ownership Limits and/or
internal policies designed to comply with such limits, CMA may delegate proxy
voting in certain issuers to a qualified, independent third party, who may be
CMA's proxy voting agent.
IV. PROXY VOTING GUIDELINES
A. CMA's Proxy Voting Guidelines - General Practices.
The Proxy Committee has adopted the guidelines for voting proxies specified in
Appendix A of this policy. CMA uses an independent, third-party proxy vendor to
implement its proxy voting process as CMA's proxy voting agent. In general,
whenever a vote is solicited, the proxy vendor will execute the vote according
to CMA's Voting Guidelines.
B. Ability to Vote Proxies Other than as Provided by Voting Guidelines. A
Portfolio Manager or other party involved with a client's account may conclude
that the best interest of the firm's client, as defined above, requires that a
proxy be voted in a manner that differs from the predetermined proxy Voting
Guidelines. In this situation, he or she will request that the Proxy Committee
consider voting the proxy other than according to such Guidelines. If any
person, group, or entity requests the Proxy Committee (or any of its members)
vote a proxy other than according to the predetermined Voting Guidelines, that
person will furnish to the Proxy Committee a written explanation of the reasons
for the request and a description of the person's, group's, or entity's
relationship, if any, with the parties proposing and/or opposing the matter's
adoption using the Proxy Vote Recommendation / Proxy Committee Request Form (see
Appendix C of this policy). The Proxy Committee may consider the matter, subject
to the conflicts of interest procedures discussed above.
C. Other Proxy Matters
For the following categories, proxies will be voted as stated below:
1. New Proposals. For certain new proposals that are expected to be proposed to
shareholders of multiple companies, the Proxy Committee may develop a
Voting Guideline which will be incorporated into this Policy.
2. Accounts Adhering to Taft Hartley Principles. All proposals for accounts
adhering to Taft Hartley principles will be voted according to the Taft
Hartley Guidelines developed by the proxy vendor.
3. Accounts Adhering to Socially Responsible Principles. All proposals for
accounts adhering to socially responsible principles will be voted
according to the Socially Responsible Guidelines developed by the proxy
vendor or as specified by the client.
4. Proxies of International Issuers. In general, CMA will refrain from voting
securities in cases where international issuers impose share blocking
restrictions. However, in the exceptional circumstances that CMA determines
that it would be appropriate to vote such securities, all proposals for
these securities will be voted only on the specific instruction of the
Proxy Committee and to the extent practicable in accordance with the Voting
Guidelines set forth in this Policy. Additionally, proxies will typically
not be voted in markets where powers of attorney are required to be
executed in order to vote shares.
5. Proxies of Investment Company Shares. Proposals on issues other than those
specified in Section V.A will be voted on the specific instruction of the
Proxy Committee.
6. Proxy Referrals for Passive Index Accounts. Proxy Referrals for a security
that is held only within a passive index account managed by CMA's
Quantitative Strategies Group and not in any other account within CMA,
shall be voted according to the guidelines developed by the proxy vendor or
as specified by the client. However, if a security is held within a passive
index account managed by CMA's Quantitative Strategies Group and within
another CMA-managed account (including without limitation an account
actively managed by CMA's Quantitative Strategies Group), all proposals,
including Proxy Referrals, will be voted in accordance with the Voting
Guidelines, subject to the other provisions of this Policy.
7. Proxy Voting for Securities on Loan. CMA generally votes in cases where
shares have been loaned from actively managed Columbia Funds as long as the
shares have been recalled in a timely manner. However, CMA generally does
not vote shares that have been loaned from passively managed Columbia Index
Funds. Other CMA clients may have their own stock loan programs and may or
may not recall their shares for proxy voting.
V. VOTING PROCEDURES
The Proxy Group within GWIM Investment Operations is primarily responsible for
overseeing the day-to-day operations of the proxy voting process. The Proxy
Group's monitoring will take into account the following elements: (1) periodic
review of the proxy vendor's votes to ensure that the proxy vendor is
accurately voting consistent with CMA's Voting Guidelines; and (2) review of
the fund website to ensure that annual proxy voting reports are posted in a
timely and accurate manner. For additional information regarding the proxy
voting process, please refer to the GWIM Investment Operations Desktop
Procedures.
Supervision
Managers and supervisory personnel are responsible for ensuring that their
associates understand and follow this policy and any applicable procedures
adopted by the business group to implement the policy. The Proxy Committee has
ultimate responsibility for the implementation of this Policy.
Escalation
With the exception of conflicts of interest-related matters, issues arising
under this policy should be escalated to the Proxy Committee. Issues involving
potential or actual conflicts of interest should be promptly communicated to
the Columbia Management Conflicts of Interest Officer.
Monitoring/Oversight
The Compliance Assessment Team within CRM and/or the Corporate Internal Audit
Group perform periodic reviews and assessments of various lines of businesses,
including a review of Columbia Management's compliance with the Proxy Voting
Policy.
Recordkeeping
CMA will create and maintain records of each investment company's proxy record
for 12-month periods ended June 30th. CMA will compile the following
information for each matter relating to a portfolio security considered at any
shareholder meeting during the period covered by the annual report and for
which CMA was entitled to vote:
o The name of the issuer of the security;
o The exchange ticker symbol of the portfolio security (if symbol is available
through reasonably practicable means);
o The Council on Uniform Securities Identification Procedures number for the
portfolio security (if number is available through reasonably practicable
means);
o The shareholder meeting date;
o A brief identification of the matter voted on;
o Whether the matter was proposed by the issuer or by a security holder;
o Whether the company cast its vote on the matter;
o How the company cast its vote (e.g., for or against proposal, or abstain;
for or withhold regarding the election of directors); and
o Whether the company cast its vote for or against management
Business groups and support partners are responsible for maintaining all
records necessary to evidence compliance with this policy. The records must be
properly maintained and readily accessible in order to evidence compliance with
this policy.
These records include:
Document Responsible Party
Proxy Committee Meeting Minutes and Related Materials Proxy Group in GWIM Investment Operations
Proxy Vote Recommendation Form and Supporting Materials of Proxy Group in GWIM Investment Operations
Investment Management Personnel Concerning Proxy Decisions
and Recommendations (or any other document created by CMA
taht was material to making a voting decision or that memorializes
the basis for the voting decision)
Conflicts of Interest Review Documentation, including Conflicts of Compliance Risk Management
Interest Forms
Client Communications Regarding Proxy Matters Client Service Group
Copy of Each Applicable Proxy Statement Unless it has been Filed Proxy Group in GWIM Investment Operations
with the SEC and may be Obtained from the SEC's EDGAR System
Records should be retained for a period of not less than six years plus the
current year. Records must be retained in an appropriate office of CM for the
first three years.
APPENDIX A - CMA's Proxy Voting Policy
CMA'S VOTING GUIDELINES
A. The Proxy Committee has adopted the following guidelines for voting proxies:
1. Matters Relating to the Board of Directors/Corporate Governance
CMA generally will vote FOR:
o Proposals for the election of directors or for an increase or decrease in
the number of directors, provided that no more than one-third of the Board
of Directors would, presently or at any time during the previous three-year
period, be from management.
However, CMA generally will WITHHOLD votes from pertinent director
nominees if:
(i) the board as proposed to be constituted would have more than one-third
of its members from management;
(ii) the board does not have audit, nominating, and compensation
committees composed solely of directors who qualify as being regarded as
"independent," i.e. having no material relationship, directly or
indirectly, with the Company, as CMA's proxy voting agent may determine
(subject to the Proxy Committee's contrary determination of independence
or non-independence);
(iii) the nominee, as a member of the audit committee, permitted the
company to incur excessive non-audit fees (as defined below regarding
other business matters - ratification of the appointment of auditors);
(iv) a director serves on more than six public company boards;
(v) the CEO serves on more than two public company boards other than the
company's board.
On a CASE-BY-CASE basis, CMA may WITHHOLD votes for a director nominee who
has failed to observe good corporate governance practices or, through
specific corporate action or inaction (e.g. failing to implement policies
for which a majority of shareholders has previously cast votes in favor),
has demonstrated a disregard for the interests of shareholders.
o Proposals requesting that the board audit, compensation and/or nominating
committee be composed solely of independent directors. The Audit Committee
must satisfy the independence and experience requirements established by
the Securities and Exchange Commission ("SEC") and the New York Stock
Exchange, or appropriate local requirements for foreign securities. At
least one member of the Audit Committee must qualify as a "financial
expert" in accordance with SEC rules.
o Proposals to declassify a board, absent special circumstances that would
indicate that shareholder interests are better served by a classified board
structure.
CMA generally will vote FOR:
o Proposals to create or eliminate positions or titles for senior management.
CMA generally prefers that the role of Chairman of the Board and CEO be
held by different persons unless there are compelling reasons to vote
AGAINST a proposal to separate these positions, such as the existence of a
counter-balancing governance structure that includes at least the following
elements in addition to applicable listing standards:
o Established governance standards and guidelines.
o Full board composed of not less than two-thirds "independent" directors, as
defined by applicable regulatory and listing standards.
o Compensation, as well as audit and nominating (or corporate governance)
committees composed entirely of independent directors.
o A designated or rotating presiding independent director appointed by and
from the independent directors with the authority and responsibility to
call and preside at regularly and, as necessary, specially scheduled
meetings of the independent directors to be conducted, unless the
participating independent directors otherwise wish, in executive session
with no members of management present.
o Disclosed processes for communicating with any individual director, the
presiding independent director (or, alternatively, all of the independent
directors, as a group) and the entire board of directors, as a group.
o The pertinent class of the Company's voting securities has out-performed,
on a three-year basis, both an appropriate peer group and benchmark index,
as indicated in the performance summary table of the Company's proxy
materials. This requirement shall not apply if there has been a change in
the Chairman/CEO position within the three-year period.
o Proposals that grant or restore shareholder ability to remove directors with
or without cause.
o Proposals to permit shareholders to elect directors to fill board vacancies.
o Proposals that encourage directors to own a minimum amount of company stock.
o Proposals to provide or to restore shareholder appraisal rights.
o Proposals to adopt cumulative voting.
o Proposals for the company to adopt confidential voting.
CMA will generally vote FOR shareholder proposals calling for majority voting
thresholds for director elections unless the company has adopted formal
corporate governance principles that present a meaningful alternative to the
majority voting standard and/or provides an adequate response to both new
nominees as well as incumbent nominees who fail to receive a majority of votes
cast.
CMA generally will vote AGAINST:
o Proposals to classify boards, absent special circumstances indicating that
shareholder interests would be better served by a classified board
structure.
o Proposals that give management the ability to alter the size of the board
without shareholder approval.
o Proposals that provide directors may be removed only by supermajority vote.
o Proposals to eliminate cumulative voting.
o Proposals which allow more than one vote per share in the election of
directors.
o Proposals that provide that only continuing directors may elect replacements
to fill board vacancies.
o Proposals that mandate a minimum amount of company stock that directors must
own.
o Proposals to limit the tenure of non-management directors.
CMA will vote on a CASE-BY-CASE basis in contested elections of directors.
CMA generally will vote on a CASE-BY-CASE basis on board approved proposals
relating to corporate governance. Such proposals include, but are not limited
to:
o Reimbursement of proxy solicitation expenses taking into consideration
whether or not CMA was in favor of the dissidents.
o Proxy contest advance notice. CMA generally will vote FOR proposals that
allow shareholders to submit proposals as close to the meeting date as
possible while allowing for sufficient time for Company response, SEC
review, and analysis by other shareholders.
o CMA will vote on a CASE-BY-CASE basis to indemnify directors and officers,
and AGAINST proposals to indemnify external auditors.
o CMA will vote FOR the indemnification of internal auditors, unless the costs
associated with the approval are not disclosed.
2. Compensation
CMA generally will vote FOR management sponsored compensation plans (such as
bonus plans, incentive plans, stock option plans, pension and retirement
benefits, stock purchase plans or thrift plans) if they are consistent with
industry and country standards. However, CMA generally is opposed to
compensation plans that substantially dilute ownership interest in a company,
provide participants with excessive awards, or have objectionable structural
features. Specifically, for equity-based plans, if the proposed number of
shares authorized for option programs (excluding authorized shares for expired
options) exceeds an average of 5% of the currently outstanding shares over the
previous three years or an average of 3% over the previous three years for
directors only, the proposal should be referred to the Proxy Committee. The
Committee will then consider the circumstances surrounding the issue and vote
in the best interest of CMA's clients. CMA requires that management provide
substantial justification for the repricing of options.
CMA generally will vote FOR:
o Proposals requiring that executive severance arrangements be submitted for
shareholder ratification.
o Proposals asking a company to expense stock options.
o Proposals to put option repricings to a shareholder vote.
o Employee stock purchase plans that have the following features: (i) the
shares purchased under the plan are acquired for no less than 85% of their
market value, (ii) the offering period under the plan is 27 months or less,
and (iii) dilution is 10% or less.
o Proposals for the remuneration of auditors if no more than 33% of the
compensation costs comes from non audit activity.
CMA generally will vote AGAINST:
o Stock option plans that permit issuance of options with an exercise price
below the stock's current market price, or that permit replacing or
repricing of out-of-the money options.
o Proposals to authorize the replacement or repricing of out-of-the money
options.
o Proposals requesting that plan administrators have advance authority to
amend the terms of a plan without detailed disclosure of the specific
amendments. When sufficient details are provided on the amendments
permitted by the advance authority, CMA will recommend on such proposals on
a CASE-BY-CASE basis
CMA will vote on a CASE-BY-CASE basis proposals regarding approval of specific
executive severance arrangements.
3. Capitalization
CMA generally will vote FOR:
o Proposals to increase the authorized shares for stock dividends, stock
splits (and reverse stock splits) or general issuance, unless proposed as
an anti-takeover measure or a general issuance proposal increases the
authorization by more than 30% without a clear need presented by the
company. Proposals for reverse stock splits should include an overall
reduction in authorization.
For companies recognizing preemptive rights for existing shareholders, CMA
generally will vote FOR general issuance proposals that increase the
authorized shares by more than 30%. CMA will vote on a CASE-BY-CASE basis
all such proposals by companies that do not recognize preemptive rights for
existing shareholders.
o Proposals for the elimination of authorized but unissued shares or
retirement of those shares purchased for sinking fund or treasury stock.
o Proposals to institute/renew open market share repurchase plans in which all
shareholders may participate on equal terms.
o Proposals to reduce or change the par value of common stock, provided the
number of shares is also changed in order to keep the capital unchanged.
CMA will evaluate on a CASE-BY-CASE basis proposals regarding:
o Management proposals that allow listed companies to de-list and terminate
the registration of their common stock. CMA will determine whether the
transaction enhances shareholder value by giving consideration to:
o Whether the company has attained benefits from being publicly traded.
o Cash-out value
o Balanced interests of continuing vs. cashed-out shareholders
o Market reaction to public announcement of transaction
4. Mergers, Restructurings and Other Transactions
CMA will review, on a CASE-BY-CASE basis, business transactions such as
mergers, acquisitions, reorganizations, liquidations, spinoffs, buyouts and
sale of all or substantially all of a company's assets.
5. Anti-Takeover Measures
CMA generally will vote AGAINST proposals intended largely to avoid acquisition
prior to the occurrence of an actual event or to discourage acquisition by
creating a cost constraint. With respect to the following measures, CMA
generally will vote as follows:
Poison Pills
o CMA votes FOR shareholder proposals that ask a company to submit its poison
pill for shareholder ratification.
o CMA generally votes FOR shareholder proposals to eliminate a poison pill.
o CMA generally votes AGAINST management proposals to ratify a poison pill.
Greenmail
o CMA will vote FOR proposals to adopt anti-greenmail charter or bylaw
amendments or to otherwise restrict a company's ability to make greenmail
payments.
Supermajority vote
o CMA will vote AGAINST board-approved proposals to adopt anti-takeover
measures such as supermajority voting provisions, issuance of blank check
preferred stock, the creation of a separate class of stock with disparate
voting rights and charter amendments adopting control share acquisition
provisions.
Control Share Acquisition Provisions
o CMA will vote FOR proposals to opt out of control share acquisition
statutes.
6. Other Business Matters
CMA generally will vote FOR:
o Bylaw amendments giving holders of at least 25% of outstanding common stock
the ability to call a special meeting of stockholders.
o Board governance document amendments or other proposals which give the lead
independent director the authority to call special meetings of the
independent directors at any time.
CMA generally will vote FOR:
o Proposals to approve routine business matters such as changing the company's
name and procedural matters relating to the shareholder meeting such as
approving the minutes of a prior meeting.
o Proposals to ratify the appointment of auditors, unless any of the following
apply in which case CMA will generally vote AGAINST the proposal:
o Credible reason exists to question:
o The auditor's independence, as determined by applicable regulatory
requirements.
o The accuracy or reliability of the auditor's opinion as to the company's
financial position.
o Fees paid to the auditor or its affiliates for "non-audit" services were
excessive, i.e., in excess of the total fees paid for "audit,"
"audit-related" and "tax compliance" and/or "tax return preparation"
services, as disclosed in the company's proxy materials.
o Bylaw or charter changes that are of a housekeeping nature (e.g., updates or
corrections).
o Proposals to approve the annual reports and accounts provided the
certifications required by the Sarbanes Oxley Act of 2002 have been
provided.
CMA generally will vote AGAINST:
o Proposals to eliminate the right of shareholders to act by written consent
or call special meetings.
o Proposals providing management with authority to adjourn an annual or
special shareholder meeting absent compelling reasons, or to adopt, amend
or repeal bylaws without shareholder approval, or to vote unmarked proxies
in favor of management.
o Shareholder proposals to change the date, time or location of the company's
annual meeting of shareholders.
CMA will vote AGAINST:
o Authorization to transact other unidentified substantive (as opposed to
procedural) business at a meeting.
CMA will vote on a CASE-BY-CASE basis:
o Proposals to change the location of the company's state of incorporation.
CMA considers whether financial benefits (e.g., reduced fees or taxes)
likely to accrue to the company as a result of a reincorporation or other
change of domicile outweigh any accompanying material diminution of
shareholder rights.
o Proposals on whether and how to vote on "bundled" or otherwise conditioned
proposals, depending on the overall economic effects upon shareholders.
CMA generally will ABSTAIN from voting on shareholder proposals predominantly
involving social, socio-economic, environmental, political or other similar
matters on the basis that their impact on share value can rarely be anticipated
with any high degree of confidence. CMA may, on a CASE-BY-CASE basis, vote:
o FOR proposals seeking inquiry and reporting with respect to, rather than
cessation or affirmative implementation of, specific policies where the
pertinent issue warrants separate communication to shareholders; and
o FOR or AGAINST the latter sort of proposal in light of the relative benefits
and detriments (e.g. distraction, costs, other burdens) to share value
which may be expected to flow from passage of the proposal.
7. Other Matters Relating to Foreign Issues
CMA generally will vote FOR:
o Most stock (scrip) dividend proposals. CMA votes AGAINST proposals that do
not allow for a cash option unless management demonstrates that the cash
option is harmful to shareholder value.
o Proposals to capitalize the company's reserves for bonus issues of shares or
to increase the par value of shares.
o Proposals to approve control and profit transfer agreements between a parent
and its subsidiaries.
o Management proposals seeking the discharge of management and supervisory
board members, unless there is concern about the past actions of the
company's auditors/directors and/or legal action is being taken against the
board by other shareholders.
o Management proposals concerning allocation of income and the distribution of
dividends, unless the proxy vendor would vote against such proposal in
accordance with its guidelines, in which case CMA will evaluate the
proposal on a CASE-BY-CASE basis.
o Proposals for the adoption of financing plans if they are in the best
economic interests of shareholders.
CMA will generally vote FOR proposals to approve Directors' Fees, unless the
proxy vendor would vote against such proposal in accordance with its
guidelines, in which case CMA will evaluate the proposal on a CASE-BY-CASE
basis.
CMA will evaluate management proposals to approve protective preference shares
for Netherlands located company-friendly foundations proposals on a
CASE-BY-CASE basis and will only support resolutions if:
o The supervisory board needs to approve an issuance of shares while the
supervisory board is independent within the meaning of CMA' categorization
rules and the Dutch Corporate Governance Code.
o No call/put option agreement exists between the company and the foundation.
o There is a qualifying offer clause or there are annual management and
supervisory board elections.
o The issuance authority is for a maximum of 18 months.
o The board of the company-friendly foundation is independent.
o The company has disclosed under what circumstances it expects to make use of
the possibility to issue preference shares.
o There are no priority shares or other egregious protective or entrenchment
tools.
o The company releases its proxy circular, with details of the poison pill
proposal, at least three weeks prior to the meeting.
o Art 2:359c Civil Code of the legislative proposal has been implemented.
8. Investment Company Matters
Election of Directors:
CMA will vote on a CASE-BY-CASE basis proposals for the election of directors,
considering the following factors:
o Board structure
o Attendance at board and committee meetings.
CMA will WITHHOLD votes from directors who:
o Attend less than 75 percent of the board and committee meetings without a
valid excuse for the absences. Valid reasons include illness or absence due
to company business. Participation via telephone is acceptable. In
addition, if the director missed only one meeting or one day's meetings,
votes should not be withheld even if such absence dropped the director's
attendance below 75 percent.
o Ignore a shareholder proposal that is approved by a majority of shares
outstanding;
o Ignore a shareholder proposal this is approved by a majority of the votes
cast for two consecutive years;
o Are interested directors and sit on the audit or nominating committee; or
o Are interested directors and the full board serves as the audit or
nominating committee or the company does not have one of these committees.
Proxy Contests:
CMA will vote on a CASE-BY-CASE basis proposals for proxy contests, considering
the following factors:
o Past performance relative to its peers
o Market in which fund invests
o Measures taken by the board to address the pertinent issues (e.g.,
closed-end fund share market value discount to NAV)
o Past shareholder activism, board activity and votes on related proposals
o Strategy of the incumbents versus the dissidents
o Independence of incumbent directors; director nominees
o Experience and skills of director nominees
o Governance profile of the company
o Evidence of management entrenchment
Converting Closed-end Fund to Open-end Fund:
CMA will vote conversion proposals on a CASE-BY-CASE basis, considering the
following factors:
o Past performance as a closed-end fund
o Market in which the fund invests
o Measures taken by the board to address the discount
o Past shareholder activism, board activity, and votes on related proposals.
Investment Advisory Agreements:
CMA will vote investment advisory agreements on a CASE-BY-CASE basis,
considering the following factors:
o Proposed and current fee schedules
o Fund category/investment objective
o Performance benchmarks
o Share price performance as compared with peers
o Resulting fees relative to peers
o Assignments (where the adviser undergoes a change of control)
Approving New Classes or Series of Shares:
CMA will vote FOR the establishment of new classes or series of shares.
Preferred Stock Proposals:
CMA will vote on a CASE-BY-CASE basis proposals for the authorization for or
increase in the preferred shares, considering the following factors:
o Stated specific financing purpose
o Possible dilution for common shares
o Whether the shares can be used for antitakover purposes
Policies Addressed by the Investment Company Act of 1940 ("1940 Act"):
CMA will vote proposals regarding adoption or changes of policies addressed by
the 1940 Act on a CASE-BY-CASE basis, considering the following factors:
o Potential competitiveness
o Regulatory developments
o Current and potential returns
o Current and potential risk
CMA generally will vote FOR these amendments as long as the proposed changes do
not fundamentally alter the investment focus of the fund and do comply with
current SEC interpretations.
Changing a Fundamental Restriction to a Non-fundamental Restriction:
CMA will vote on a CASE-BY-CASE basis proposals to change a fundamental
restriction to a non-fundamental restriction, considering the following
factors:
o Fund's target investments
o Reasons given by the fund for the change
o Projected impact of the change on the portfolio
Change Fundamental Investment Objective to Non-fundamental:
CMA will vote AGAINST proposals to change a fund's investment objective from
fundamental to non-fundamental unless management acknowledges meaningful
limitations upon its future requested ability to change the objective
Name Change Proposals:
CMA will vote on a CASE-BY-CASE basis proposals to change a fund's name,
considering the following factors:
o Political/economic changes in the target market
o Consolidation in the target market
o Current asset composition
Change in Fund's Subclassification:
CMA will vote on a CASE-BY-CASE basis proposals to change a fund's
subclassification, considering the following factors:
o Potential competitiveness
o Current and potential returns
o Risk of concentration
o Consolidation in target industry
Disposition of Assets/Termination/Liquidation:
CMA will vote on a CASE-BY-CASE basis these proposals, considering the
following factors:
o Strategies employed to salvage the company
o Past performance of the fund
o Terms of the liquidation
Changes to the Charter Document:
CMA will vote on a CASE-BY-CASE basis proposals to change the charter document,
considering the following factors:
o The degree of change implied by the proposal
o The efficiencies that could result
o The state of incorporation; net effect on shareholder rights
o Regulatory standards and implications
CMA will vote FOR:
o Proposals allowing the Board to impose, without shareholder approval, fees
payable upon redemption of fund shares, provided imposition of such fees is
likely to benefit long-term fund investors (e.g., by deterring market
timing activity by other fund investors)
o Proposals enabling the Board to amend, without shareholder approval, the
fund's management agreement(s) with its investment adviser(s) or
sub-advisers, provided the amendment is not required by applicable law
(including the Investment Company Act of 1940) or interpretations
thereunder to require such approval
CMA will vote AGAINST:
o Proposals enabling the Board to:
o Change, without shareholder approval the domicile of the fund
o Adopt, without shareholder approval, material amendments of the fund's
declaration of trust or other organizational document
Changing the Domicile of a Fund:
CMA will vote on a CASE-BY-CASE basis proposals to reincorporate, considering
the following factors:
o Regulations of both states
o Required fundamental policies of both states
o The increased flexibility available
Authorizing the Board to Hire and Terminate Subadvisors Without Shareholder
Approval:
CMA will vote FOR proposals to enable the Board or Investment Adviser to hire
and terminate sub-advisers, without shareholder approval, in accordance with
applicable rules or exemptive orders under the Investment Company Act of 1940
Distribution Agreements:
CMA will vote these proposals on a CASE-BY-CASE basis, considering the
following factors:
o Fees charged to comparably sized funds with similar objectives
o The proposed distributor's reputation and past performance
o The competitiveness of the fund in the industry
o Terms of the agreement
Master-Feeder Structure:
CMA will vote FOR the establishment of a master-feeder structure.
Mergers:
CMA will vote merger proposals on a CASE-BY-CASE basis, considering the
following factors:
o Resulting fee structure
o Performance of both funds
o Continuity of management personnel
o Changes in corporate governance and their impact on shareholder rights
Shareholder Proposals to Establish Director Ownership Requirement:
CMA will generally vote AGAINST shareholder proposals that mandate a specific
minimum amount of stock that directors must own in order to qualify as a
director or to remain on the board. While CMA favors stockownership on the part
of directors, the company should determine the appropriate ownership
requirement.
Shareholder Proposals to Reimburse Shareholder for Expenses Incurred:
CMA will vote on a CASE-BY-CASE basis proposals to reimburse proxy solicitation
expenses.
Shareholder Proposals to Terminate the Investment Adviser:
CMA will vote on a CASE-BY-CASE basis proposals to terminate the investment
adviser, considering the following factors:
o Performance of the fund's NAV
o The fund's history of shareholder relations
o The performance of other funds under the adviser's management
APPENDIX B
Conflicts of Interest Disclosure and Certification Form
Conflict Review Questionnaire for Proxy Voting Working Group Members and Other
Individuals Participating in the Proxy Voting Decision-Making Process.
Instructions: Please complete each of the questions. Please provide an
explanation for any affirmative responses. Return the completed questionnaire
to Columbia Management Conflicts of Interest Officer.
--------------------------------------------------------------------------------
Issuer and Proxy Matter:
--------------------------------------------------------------------------------
1. Do you or any member of your immediate family have an existing (or
potential) business, financial, personal or other relationship with any
management personnel of the issuer1?
2. Do you or any member of your immediate family have an existing (or
potential) business, financial, personal or other relationship with any
person participating, supporting, opposing or otherwise connected with the
particular proxy proposal (e.g., principals of the issuer; director
nominees of issuer company; shareholder activists)?
3. Have you discussed this particular proxy proposal with anyone outside of
Columbia Management's investment group2?
4. Are you aware of any other potential personal conflicts of interest not
described above? Please detail below.
Name:
Signed:
Date:
--------------
1 Personal investing in the issuer by you or a member of your immediate family
does not require an affirmative response to this item.
2 Communications with issuer or solicitors in the regular course of business
would not have to be disclosed on this form.
APPENDIX C
CMA Proxy Vote Recommendation/Proxy Committee Request Form
Name of Investment Associate:
--------------------------------------------------------------------------------
Company Name:
--------------------------------------------------------------------------------
Overview of Proxy Vote and Meeting
Date:
-------------------------------------------------------------
Proxy Agenda Item(s)
--------------------------------------------------------------------------------
Description of Item:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(The above information will be pre-populated by the Proxy Department.)
Recommendation (FOR, AGAINST, ABSTAIN) including brief
rationale:
----------------------------------------------------------
Please attach any supporting information other than analysis or reports
provided by the Proxy Department.
------------------------------------
Signed
By signing, I am certifying that I either have no conflicts of interest-related
information to report or have sent a completed "Conflicts of Interest
Disclosure and Certification Form" to Compliance Risk Management (Conflicts
Officer).
--------------------------------------------------------------------------------
Send Completed Forms to:
GWIM Investment Operations - Proxy Department
or
In the case of Proxy Votes to be referred to the Proxy Committee, submit this
form and materials to the Chair of the Proxy Committee
Delaware Management Company
The Funds have formally delegated to the manager the ability to make all proxy
voting decisions in relation to portfolio securities held by the Funds. If and
when proxies need to be voted on behalf of the Funds, the Manager will vote
such proxies pursuant to its Proxy Voting Policies and Procedures (the
"Procedures"). The Manager has established a Proxy Voting Committee (the
"Committee") which is responsible for overseeing the Manager's proxy voting
process for the Funds. One of the main responsibilities of the Committee is to
review and approve the Procedures to ensure that the Procedures are designed to
allow the Manager to vote proxies in a manner consistent with the goal of
voting in the best interests of the Funds.
In order to facilitate the actual process of voting proxies, the Manager has
contracted with Institutional Shareholder Services ("ISS") to analyze proxy
statements on behalf of the Funds and other clients of the Manager and vote
proxies generally in accordance with the Procedures. The Committee is
responsible for overseeing ISS's proxy voting activities. If a proxy has been
voted for the Funds, ISS will create a record of the vote. Beginning no later
than August 31 of each year, information (if any) regarding how the Fund voted
proxies relating to each Fund's portfolio securities during the most recent
12-month period ended June 30 is available without charge: (i) through the
Funds' website at delawareinvestments.com; and (ii) on the SEC's website at
http://www.sec.gov.
The Procedures contain a general guideline that recommendations of company
management on an issue (particularly routine issues) should be given a fair
amount of weight in determining how proxy issues should be voted. However, the
Manager will normally vote against management's position when it runs counter
to its specific Proxy Voting Guidelines (the "Guidelines"), and the Manager
will also vote against management's recommendation when it believes that such
position is not in the best interests of the Funds.
As stated above, the Procedures also list specific Guidelines on how to vote
proxies on behalf of the Fund. Some examples of the Guidelines are as follows:
(i) generally vote for shareholder proposals asking that a majority or more of
directors be independent; (ii) generally vote against proposals to require a
supermajority shareholder vote; (iii) votes on mergers and acquisitions should
be considered on a case-by-case basis, determining whether the transaction
enhances shareholder value; (iv) generally vote against proposals to create a
new class of common stock with superior voting rights; (v) generally vote
re-incorporation proposals on a case-by-case bases; (vi) votes with respect to
equity-based compensation plans are generally determined on a case-by-case
basis; and (vii) generally vote for proposales requesting reports on the level
of greenhouse gas emissions from a company's operations and products.
Because the Funds have delegated proxy voting to the Manager, the Funds are not
expected to encounter any conflict of interest issues regarding proxy voting
and therefore does not have procedures regarding this matter. However, the
Manager does have a section in its Procedures that addresses the possibility of
conflicts of interest. Most proxies which the Manager receives on behalf of the
Funds are voted by ISS in accordance with the Procedures. Because almost all
Fund proxies are voted by ISS pursuant to the pre-determined Procedures, it
normally will not be necessary for the Manager to make an actual determination
of how to vote a particular proxy, thereby largely eliminating conflicts of
interest for the Manager during the proxy voting process. In the very limited
instances where the Manager is considering voting a proxy contrary to ISS's
recommendation, the Committee will first assess the issue to see if there is
any possible conflict of interest involving the Manager or affiliated persons
of the Manager. If a member of the Committee has actual knowledge of a conflict
of interest, the Committee will normally use another independent third party to
do additional research on the particular proxy issue in order to make a
recommendation to the Committee on how to vote the proxy in the best interests
of the Funds. The Committee will then review the proxy voting materials and
recommendation provided by ISS and the independent third party to determine how
to vote the issue in a manner which the Committee believes is consistent with
the Procedures and in the best interests of the Funds.
Pyramis Global Advisors, LLC Proxy Voting Guidelines
I. General Principals
A. Voting of shares will be conducted in a manner consistent with the best
interests of clients as follows: (i) securities of a portfolio company
will generally be voted in a manner consistent with the guidelines; and
(ii) voting will be done without regard to any other Pyramis or Fidelity
companies' relationship, business or otherwise, with that portfolio
company.
B. FMR Investment Compliance votes proxies on behalf of the clients of
Pyramis. In the event an Investment Compliance employee has a personal
conflict with a portfolio company or an employee or director of a
portfolio company, that employee will withdraw from making any proxy
voting decisions with respect to that portfolio company. A conflict of
interest arises when there are factors that may prompt one to question
whether a Fidelity and/or Pyramis employee is acting solely on the best
interests of Pyramis, Fidelity and their customers. Employees are expected
to avoid situations that could present even the appearance of a conflict
between their interests and the interests of Pyramis, Fidelity and their
customers.
C. Except as set forth herein, Pyramis will generally vote in favor of routine
management proposals.
D. Non-routine proposals will generally be voted in accordance with the
guidelines.
E. Non-routine proposals not covered by the guidelines or involving other
special circumstances will be evaluated on a case-by-case basis with input
from the appropriate Pyramis analyst or portfolio manager, as applicable,
subject to review by an attorney within the General Counsel's office and a
member of senior management within FMR Investment Compliance. A
significant pattern of such proposals or other special circumstances will
be referred to the Fund Board Proxy Voting Committee or its designee.
F. Pyramis will vote on shareholder proposals not specifically addressed by
the guidelines based on an evaluation of a proposal's likelihood to
enhance the economic returns or profitability of the portfolio company or
to maximize shareholder value. Where information is not readily available
to analyze the economic impact of the proposal, Pyramis will generally
abstain.
G. Many clients invest in voting securities issued by companies that are
domiciled outside the United States and are not listed on a U.S.
securities exchange. Corporate governance standards, legal or regulatory
requirements and disclosure practices in foreign countries can differ from
those in the United States. When voting proxies relating to non-U.S.
securities, Pyramis will generally evaluate proposals in the context of
these guidelines, but Pyramis may, where applicable and feasible, take
into consideration differing laws and regulations in the relevant foreign
market in determining how to vote shares.
H. In certain non-U.S. jurisdictions, shareholders voting shares of a
portfolio company may be restricted from trading the shares for a period
of time around the shareholder meeting date. Because such trading
restrictions can hinder portfolio management and could result in a loss of
liquidity for a client, Pyramis will generally not vote proxies in
circumstances where such restrictions apply. In addition, certain non-U.S.
jurisdictions require voting shareholders to disclose current share
ownership on a fund-by-fund basis. When such disclosure requirements
apply, Pyramis will generally not vote proxies in order to safeguard fund
holdings information.
I. Where a management-sponsored proposal is inconsistent with the guidelines,
Pyramis may receive a company's commitment to modify the proposal or its
practice to conform to the guidelines, and Pyramis will generally support
management based on this commitment. If a company subsequently does not
abide by its commitment, Pyramis will generally withhold authority for the
election of directors at the next election.
II. Definitions (as used in this document)
A. Anti-Takeover Provision - includes fair price amendments; classified
boards; "blank check" preferred stock; golden parachutes; supermajority
provisions; Poison Pills; restricting the right to call special meetings;
and any other provision that eliminates or limits shareholder rights.
B. Golden parachute - Employment contracts, agreements, or policies that
include an excise tax gross-up provision; single trigger for cash
incentives; or may result in a lump sum payment of cash and acceleration
of equity that may total more than three times annual compensation (salary
and bonus) in the event of a termination.
C. Greenmail - payment of a premium to repurchase shares from a shareholder
seeking to take over a company through a proxy contest or other means.
D. Sunset Provision - a condition in a charter or plan that specifies an
expiration date.
E. Permitted Bid Feature - a provision suspending the application of a Poison
Pill, by shareholder referendum, in the event a potential acquirer
announces a bona fide offer for all outstanding shares.
F. Poison Pill - a strategy employed by a potential take-over / target company
to make its stock less attractive to an acquirer. Poison Pills are
generally designed to dilute the acquirer's ownership and value in the
event of a take-over.
G. Large Capitalization Company - a company included in the Russell 1000 stock
index.
H. Small Capitalization Company - a company not included in the Russell 1000
stock index that is not a Micro-Capitalization Company.
I. Micro-Capitalization Company - a company with market capitalization under
US $300 million.
II. Directors
A. Incumbent Directors
Pyramis will generally vote in favor of incumbent and nominee directors
except where one or more such directors clearly appear to have failed to
exercise reasonable judgment.
Pyramis will also generally withhold authority for the election of all
directors or directors on responsible committees if:
1. An Anti-Takeover Provision was introduced, an Anti-Takeover Provision
was extended, or a new Anti-Takeover Provision was adopted upon the
expiration of an existing Anti-Takeover Provision, without shareholder
approval except as set forth below.
With respect to Poison Pills, however, Pyramis will consider not
withholding authority on the election of directors if all of the
following conditions are met when a Poison Pill is introduced,
extended, or adopted:
a. The Poison Pill includes a Sunset Provision of less than 5 years;
b. The Poison Pill includes a Permitted Bid Feature;
c. The Poison Pill is linked to a business strategy that will result in
greater value for the shareholders, and
d. Shareholder approval is required to reinstate the Poison Pill upon
expiration.
Pyramis will also consider not withholding authority on the election of
directors when one or more of the conditions above are not met if a
board is willing to strongly consider seeking shareholder
ratification of, or adding above conditions noted a. and b. to an
existing Poison Pill. In such a case, if the company does not take
appropriate action prior to the next annual shareholder meeting,
Pyramis will withhold authority on the election of directors.
2. The company refuses, upon request by Pyramis, to amend the Poison Pill
to allow Fidelity to hold an aggregate position of up to 20% of a
company's total voting securities and of any class of voting securities.
3. Within the last year and without shareholder approval, a company's
board of directors or compensation committee has repriced outstanding
options.
4. The company failed to act in the best interests of shareholders when
approving executive compensation, taking into accounts such factors as:
(i) whether the company used an independent compensation committee; (ii)
whether the compensation committee engaged independent compensation
consultants; and (iii) whether the company has admitted to or settled a
regulatory proceeding relating to options backdating.
5. To gain Pyramis' support on a proposal, the company made a commitment
to modify a proposal or practice to conform to these guidelines and the
company has failed to act on that commitment.
6. The director attended fewer than 75% of the aggregate number of
meetings of the board or its committees on which the director served
during the company's prior fiscal year, absent extenuating
circumstances.
7. The Board is not comprised of a majority of independent directors.
B. Indemnification
Pyramis will generally vote in favor of charter and by-law amendments
expanding the indemnification of directors and/or limiting their
liability for breaches of care unless Pyramis is otherwise dissatisfied
with the performance of management or the proposal is accompanied by
Anti-Takeover Provisions.
C. Independent Chairperson
Pyramis will generally vote against shareholder proposals calling for or
recommending the appointment of a non-executive or independent
chairperson. However, Pyramis will consider voting for such proposals in
limited cases if, based upon particular facts and circumstances,
appointment of a non-executive or independent chairperson appears likely
to further the interests of shareholders and to promote effective
oversight of management by the board of directors.
D. Majority Director Elections
Pyramis will generally vote in favor of proposals calling for directors to
be elected by an affirmative majority of votes cast in a board election,
provided that the proposal allows for plurality voting standard in the
case of contested elections (i.e., where there are more nominees than
board seats). Pyramis may consider voting against such shareholder
proposals where a company's board has adopted an alternative measure,
such as a director resignation policy, that provides a meaningful
alternative to the majority voting standard and appropriately addresses
situations where an incumbent director fails to receive the support of a
majority of the votes cast in an uncontested election.
IV. Compensation
A. Equity Award Plans (including stock options, restricted stock awards, and
other stock awards).
Pyramis will generally vote against Equity Award Plans or amendments to
authorize additional shares under such plans if:
1. (a) The dilution effect of the shares outstanding and available for
issuance pursuant to all plans, plus any new share requests is greater
than 10% for a Large Capitalization Company, 15% for a Small
Capitalization Company or 20% for a Micro-Capitalization Company; and
(b) there were no circumstances specific to the company or the plans
that lead Pyramis to conclude that the level of dilution in the plan or
the amendments is acceptable.
2. In the case of stock option plans, (a) the offering price of options is
less than 100% of fair market value on the date of grant, except that
the offering price may be as low as 85% of fair market value if the
discount is expressly granted in lieu of salary or cash bonus; (b) the
plan's terms allow repricing of underwater options; or (c) the
board/committee has repriced options outstanding under the plan in the
past two years.
3. The plan may be materially altered without shareholder approval,
including increasing the benefits accrued to participants under the
plan; increasing the number of securities which may be issued under the
plan; modifying the requirements for participation in the plan; or
including a provision allowing the Board to lapse or waive restrictions
at its discretion, except in limited cases relating to death,
disability, retirement, or change in control.
4. Awards to non-employee directors are subject to management discretion.
5. In the case of stock awards, the restriction period is less than 3
years for non-performance-based awards, and less than 1 year for
performance-based awards.
Pyramis will consider approving an Equity Award Plan or an amendment to
authorize additional shares under such plan if, without complying with
the guidelines immediately above, the following two conditions are met:
1. The shares are granted by a compensation committee composed entirely of
independent directors; and
2. The shares are limited to 5% (large capitalization company) and 10%
(small capitalization company) of the shares authorized for grant under
the plan.
B. Equity Exchanges and Repricing
Pyramis will generally vote in favor of a management proposal to exchange
shares or reprice outstanding options if the proposed exchange or
repricing is consistent with the interests of shareholders, taking into
account such factors as:
1. Whether the proposal excludes senior management and directors;
2. Whether the equity proposed to be exchanged or repriced exceeded
Pyramis' dilution thresholds when initially granted;
3. Whether the exchange or repricing proposal is value neutral to
shareholders based upon an acceptable pricing model;
4. The company's relative performance compared to other companies within
the relevant industry or industries;
5. Economic and other conditions affecting the relevant industry or
industries in which the company competes; and
6. Any other facts or circumstances relevant to determining whether an
exchange or repricing proposal is consistent with the interests of
shareholders.
C. Employee Stock Purchase Plans
Pyramis will generally vote against employee stock purchase plans if the
plan violates any of the criteria in section IV(A) above, except that
the minimum stock purchase price may be equal to or greater than 85% of
the stock's fair market value if the plan constitutes a reasonable
effort to encourage broad based participation in the company's equity.
In the case of non-U.S. company stock purchase plans, Pyramis may permit
a lower minimum stock purchase price equal to the prevailing "best
practices" in the relevant non-U.S. market, provided that the minimum
stock purchase price must be at least 75% of the stock's fair market
value.
D. Employee Stock Ownership Plans (ESOPs)
Pyramis will generally vote in favor of non-leveraged ESOPs. For leveraged
ESOPs, Pyramis may examine the company's state of incorporation,
existence of supermajority vote rules in the charter, number of shares
authorized for the ESOP, and number of shares held by insiders. Pyramis
may also examine where the ESOP shares are purchased and the dilution
effect of the purchase. Pyramis will generally vote against leveraged
ESOPs if all outstanding loans are due immediately upon change in
control.
E. Executive Compensation
Pyramis will generally vote against management proposals on stock-based
compensation plans or other compensation plans if such proposals are
inconsistent with the interests of shareholders, taking into account
such factors as: (i) whether the company has an independent compensation
committee; and (ii) whether the compensation committee has authority to
engage independent compensation consultants.
F. Bonus Plans and Tax Deductibility Proposals
Pyramis will generally vote in favor of cash and stock incentive plans
that are submitted for shareholder approval in order to qualify for
favorable tax treatment under Section 162(m) of the Internal Revenue
Code, provided that the plan includes well defined and appropriate
performance criteria, and with respect to any cash component, that the
maximum award per participant is clearly stated and is not unreasonable
or excessive.
V. Anti-Takeover Provisions
Pyramis will generally vote against a proposal to adopt or approve the
adoption of an Anti-Takeover Provision unless:
A. The Poison Pill includes the following features:
1. A sunset provision of no greater than 5 years;
2. Linked to a business strategy that is expected to result in greater
value for the shareholders;
3. Requires shareholder approval to be reinstated upon expiration or if
amended;
4. Contains a Permitted Bid Feature; and
5. Allows Fidelity to hold an aggregate position of up to 20% of a
company's total voting securities and of any class of voting
securities.
B. An Anti-Greenmail proposal that does not include other Anti-Takeover
Provisions; or
C. It is a fair price amendment that considers a two-year price history or
less.
Pyramis will generally vote in favor of proposals to eliminate
Anti-Takeover Provisions. In the case of proposals to declassify a board
of directors, Pyramis will generally vote against such a proposal if the
issuer's Articles of Incorporation or applicable statutes include a
provision whereby a majority of directors may be removed at any time,
with or without cause, by written consent, or other reasonable
procedures, by a majority of shareholders entitled to vote for the
election of directors.
VI. Capital Structure / Incorporation
A. Increases in Common Stock
Pyramis will generally vote against a provision to increase a Company's
common stock if such increase will result in a total number of
authorized shares greater than 3 times the current number of outstanding
and scheduled to be issued shares, including stock options, except in
the case of real estate investment trusts, where an increase that will
result in a total number of authorized shares up to 5 times the current
number of outstanding and scheduled to be issued shares is generally
acceptable.
B. New Classes of Shares
Pyramis will generally vote against the introduction of new classes of
stock with differential voting rights.
C. Cumulative Voting Rights
Pyramis will generally vote against the introduction and in favor of the
elimination of cumulative voting rights.
D. Acquisition or Business Combination Statutes
Pyramis will generally vote in favor of proposed amendments to a company's
certificate of incorporation or by-laws that enable the company to opt
out of the control shares acquisition or business combination statutes.
E. Incorporation or Reincorporation in Another State or Country
Pyramis will generally vote against shareholder proposals calling for, or
recommending that, a portfolio company reincorporate in the United
States and vote in favor of management proposals to reincorporate in a
jurisdiction outside the United States if (i) it is lawful under United
States, state and other applicable law for the company to be
incorporated under the laws of the relevant foreign jurisdiction and to
conduct its business and (ii) reincorporating or maintaining a domicile
in the United States would likely give rise to adverse tax or other
economic consequences detrimental to the interests of the company and
its shareholders. However, Pyramis will consider supporting such
shareholder proposals and opposing such management proposals in limited
cases if, based upon particular facts and circumstances, reincorporating
in or maintaining a domicile in the relevant foreign jurisdiction gives
rise to significant risks or other potential adverse consequences that
appear reasonably likely to be detrimental to the interests of the
company or its shareholders.
VII. Shares of Investment Companies
A. If applicable, when a Fidelity Fund invests in an underlying Fidelity fund
with public shareholders, an Exchange Traded Fund (ETF), or non-affiliated
fund, shares will be voted in the same proportion as all other
shareholders of such underlying fund or class ("echo voting").
B. Certain clients may invest in shares of underlying Fidelity funds, which
are held exclusively by Fidelity funds or accounts managed by Pyramis, FMR
or an FMR affiliate. Such shares will generally be voted in favor of
proposals recommended by the underlying fund's Board of Trustees.
VIII. Other
A. Voting Process
Pyramis will generally vote in favor of proposals to adopt confidential
voting and independent vote tabulation practices.
B. Regulated Industries
Voting of shares in securities of any regulated industry (e.g., U.S.
banking) organization shall be conducted in a manner consistent with
conditions that may be specified by the industry's regulator (e.g., the
Federal Reserve Board) for a determination under applicable law (e.g.,
federal banking law) that no client or group of clients has acquired
control of such organization.
Janus Capital Management LLC
Proxy Voting Procedures - February 2008
The following represents the procedures for Janus Capital Management LLC
("Janus") with respect to the voting of proxies on behalf of all clients,
including mutual funds advised by Janus, for which Janus has voting
responsibility and the keeping of records relating to proxy voting.
General Policy. Janus votes proxies in the best interest of its clients. Janus
will not accept direction as to how to vote individual proxies for which it has
voting responsibility from any other person or organization (other than the
research and information provided by the Proxy Voting Service (as hereinafter
defined)). Janus will only accept direction from a client to vote proxies for
that client's account pursuant to: 1) the Janus Capital Management LLC Proxy
Voting Guidelines ("Guidelines"); 2) the recommendations of The Risk Metrics
Group, formerly known as Institutional Shareholder Services (the "Proxy Voting
Service"); or 3) the recommendations of the Proxy Voting Service under their
Proxy Voter Services program.
ERISA Plan Policy. On behalf of client accounts subject to ERISA, Janus seeks
to discharge its fiduciary duty by voting proxies solely in the best interest
of the participants and beneficiaries of such plans. Janus recognizes that the
exercise of voting rights on securities held by ERISA plans for which Janus has
voting responsibility is a fiduciary duty that must be exercised with care,
skill, prudence and diligence. In voting proxies for ERISA accounts, Janus will
exercise its fiduciary responsibility to vote all proxies for shares for which
it has investment discretion as investment manager unless the power to vote
such shares has been retained by the appointing fiduciary as set forth in the
documents in which the named fiduciary has appointed Janus as investment
manager.
Proxy Voting Committee. The Janus Proxy Voting Committee (the "Committee")
develops Janus' positions on all major corporate issues, creates guidelines and
oversees the voting process. The Committee is comprised of the Vice President
of Investment Accounting, the Assistant Vice President of Compliance, and a
Portfolio Management representative (or their designees). Internal legal
counsel serves as a consultant to the Committee and is a non-voting member. A
quorum is required for all Committee meetings. In creating proxy voting
recommendations, the Committee analyzes proxy proposals, from the Proxy Voting
Service, from the prior year and evaluates whether those proposals would
adversely or beneficially affect shareholders' interests. Once the Committee
establishes its recommendations, they are distributed to Janus' portfolio
managers for review and comment. Following portfolio manager input on the
recommendations, they are implemented as the Guidelines. While the Committee
sets the Guidelines and serves as a resource for Janus portfolio management, it
does not have proxy voting authority for any proprietary or non-proprietary
mutual fund or any investment advisory client. The portfolio managers are
responsible for proxy votes on securities they own in the portfolios they
manage. Most portfolio managers vote consistently with the Guidelines. However,
a portfolio manager may choose to vote contrary to the Guidelines. When
portfolio managers cast votes which are contrary to the Guidelines, the manager
is required to document the reasons in writing for the Committee. In many
cases, a security may be held by multiple portfolio managers. Portfolio
managers are not required to cast consistent votes. Annually the Janus Funds
Board of Trustees, or a committee thereof, will review Janus' proxy voting
process, policies and voting records.
Investment Accounting Group. The Investment Accounting Group is responsible for
administering the proxy voting process as set forth in these procedures and the
Guidelines. The Proxy Administrator in the Investment Accounting Group works
with the Proxy Voting Service and is responsible for ensuring that all meeting
notices are reviewed against the Guidelines and proxy matters are communicated
to the portfolio managers and analysts for consideration pursuant to the
Guidelines.
Voting and Use of Proxy Voting Service. Janus has engaged an independent proxy
voting service, the Proxy Voting Service, to assist in the voting of proxies.
The Proxy Voting Service is responsible for coordinating with the clients'
custodians to ensure that all proxy materials received by the custodians
relating to the clients' portfolio securities are processed in a timely
fashion. In addition, the Proxy Voting Service is responsible for maintaining
copies of all proxy statements received by issuers and to promptly provide such
materials to Janus upon request.
To the extent applicable, the Proxy Voting Service will process all proxy votes
in accordance with the Guidelines. Portfolio managers may decide to vote their
proxies consistent with the Guidelines and instruct the Proxy Administrator to
vote all proxies accordingly. In such cases, he or she may request to review
the vote recommendations and sign-off on all the proxies before the votes are
cast, or may choose to only sign-off on those votes cast against management.
The portfolio managers are also given the option of reviewing and determining
the votes on all proxies without utilizing the Guidelines. In all cases, the
portfolio mangers may elect to receive a weekly report summarizing all proxy
votes in his or her client accounts. The Proxy Administrator is responsible for
maintaining this documentation. If the Proxy Administrator does not receive a
voting instruction from a Portfolio Manager, and the Guidelines require
Portfolio Manager input on the issue, the vote will be cast by the Chief
Investment Officer(s) or the Director of Research.
The Proxy Voting Service will refer proxy questions to the Proxy Administrator
for instructions under circumstances where: (1) the application of the
Guidelines is unclear; (2) the proxy question relates to a company and/or issue
in which the Proxy Voting Services does not have research, analysis and/or a
recommendation available, or (3) the Guidelines call for Janus portfolio
manager input. The Proxy Administrator solicits feedback from the Portfolio
Manager or the Committee as required. Janus also utilizes research services
relating to proxy questions provided by the Proxy Voting Service.
Procedures for Proxy Issues Outside the Guidelines. In situations where the
Proxy Voting Service refers a proxy question to the Proxy Administrator, the
Proxy Administrator will consult with the portfolio manager regarding how the
shares will be voted. The Proxy Administrator will refer such questions,
through a written request, to the portfolio manager(s) who hold(s) the security
for a voting recommendation. The Proxy Administrator may also refer such
questions, through a written request to any member of the Committee, but the
Committee cannot direct the Proxy Administrator how to vote. If the proxy issue
raises a conflict of interest (see Conflict of Interest discussion below), the
portfolio manager will document how the proxy should be voted and the rationale
for such recommendation. If the portfolio manager has had any contact with
persons outside of Janus (excluding routine communications with proxy
solicitors) regarding the proxy issue, the portfolio manager will disclose that
contact to the Committee. The Committee will review the portfolio manager's
voting recommendation. If the Committee believes a conflict exists and that the
portfolio manager's voting recommendation is not in the best interests of the
shareholders, the Committee will refer the issue to the Janus Chief Investment
Officer(s) (or the Director of Research in his/her absence) to determine how to
vote.
Procedures for Voting Janus "Fund of Funds". Janus advises certain portfolios
or "fund of funds" that invest in other Janus funds. From time to time, a fund
of funds may be required to vote proxies for the underlying Janus funds in
which it is invested. Accordingly, if an underlying Janus fund submits a matter
to a vote of its shareholders, votes for and against such matters on behalf of
the owner fund of funds will be cast in the same proportion as the votes of the
other shareholders in the underlying fund (also know as "echo-voting").
Conflicts of Interest. The Committee is responsible for monitoring and resolving
possible material conflicts with respect to proxy voting. Because the Guidelines
are pre-determined and designed to be in the best interests of shareholders,
application of the Guidelines to vote client proxies should, in most cases,
adequately address any possible conflicts of interest. In instances where a
portfolio manager proposes to vote a proxy inconsistent with the Guidelines, the
Committee will review the proxy votes to determine whether the portfolio
manager's voting rationale appears reasonable and no material conflict exists.
A conflict of interest may exist, for example, if Janus has a business
relationship with (or is actively soliciting business from) either the company
soliciting the proxy or a third party that has a material interest in the
outcome of a proxy vote or that is actively lobbying for a particular outcome
of a proxy vote. In addition, any portfolio manager with knowledge of a
personal conflict of interest (i.e., a family member in a company's management)
relating to a particular referral item shall disclose that conflict to the
Committee and may be required to recuse himself or herself from the proxy
voting process. Issues raising possible conflicts of interest are referred by
the Proxy Administrator to the Committee for resolution. If the Committee does
not agree that the portfolio manager's rationale is reasonable, the Committee
will refer the matter to the Chief Investment Officer(s) (or the Director of
Research) to vote the proxy.
If a matter is referred to the Chief Investment Officer(s) (or the Director of
Research) the decision made and basis for the decision will be documented by
the Committee.
Reporting and Record Retention. Upon request, on an annual basis, Janus will
provide its non-mutual fund clients with the proxy voting record for that
client's account. On an annual basis, Janus will provide its proxy voting
record for each proprietary mutual fund for the one-year period ending on June
30th on Janus' website.
Janus retains proxy statements received regarding client securities, records of
votes cast on behalf of clients, records of client requests for proxy voting
information and all documents prepared by Janus regarding votes cast in
contradiction to the Janus Guidelines. In addition, any document prepared by
Janus that is material to a proxy voting decision such as the Guidelines, Proxy
Voting Committee materials and other internal research relating to voting
decisions will be kept. Proxy statements received from issuers are either
available on the SEC's EDGAR database or are kept by a third party voting
service and are available on request. All proxy voting materials and supporting
documentation are retained for a minimum of 6 years.
Marsico Capital Management, LLC Proxy Voting Policy and Procedures
It is the policy of MCM to seek to vote or otherwise process, such as by a
decision to abstain from voting or to take no action on, proxies over which it
has voting authority in the best interests of MCM's clients, as summarized
here.
o MCM's security analysts generally review proxy proposals as part of their
monitoring of portfolio companies. Under MCM's investment discipline, one
of the qualities that MCM generally seeks in companies selected for client
portfolios is good management teams that generally seek to serve
shareholder interests. Because MCM believes that the management teams of
most companies it invests in generally seek to serve shareholder interests,
MCM believes that voting proxy proposals in clients' best economic
interests usually means voting with the recommendations of these management
teams (including their boards of directors).
o In certain circumstances, MCM's vote-by-vote analysis of proxy proposals
could lead it to conclude that particular management recommendations may
not appear as closely aligned with shareholder interests as MCM may deem
desirable, or could be disregarded in the best interests of shareholders.
In those and other circumstances, MCM may, in its sole discretion, vote
against a management recommendation based on its analysis if such a vote
appears consistent with the best interests of clients.
MCM may process certain proxies without voting them, such as by making a
decision to abstain from voting or take no action on such proxies (or on
certain proposals within such proxies). Examples include, without
limitation, proxies issued by companies that MCM has decided to sell,
proxies issued for securities that MCM did not select for a client portfolio
(such as, without limitation, securities that were selected by the client or
by a previous adviser, unsupervised securities held in a client's account,
money market securities, or other securities selected by clients or their
representatives other than MCM), or proxies issued by foreign companies that
impose burdensome or unreasonable voting, power of attorney, or holding
requirements. MCM also may abstain from voting, or take no action on,
proxies in other circumstances, such as when voting may not be in the best
interests of clients, as an alternative to voting with (or against)
management, or when voting may be unduly burdensome or expensive.
o In circumstances when there may be an apparent material conflict of interest
between MCM's interests and clients' interests in how proxies are voted
(such as when MCM knows that a proxy issuer is also an MCM client), MCM
generally will resolve any appearance concerns by causing those proxies to
be "echo voted" or "mirror voted" in the same proportion as other votes, or
by voting the proxies as recommended by an independent service provider. In
other cases, MCM might use other procedures to resolve an apparent material
conflict.
o MCM may use an independent service provider to help vote proxies, keep
voting records, and disclose voting information to clients. MCM's Proxy
Voting Policy and reports describing the voting of a client's proxies are
available to the client on request.
o MCM seeks to ensure that, to the extent reasonably feasible, proxies for
which MCM receives ballots in good order and receives timely notice will be
voted or otherwise processed (such as through a decision to abstain or take
no action) as intended under MCM's Proxy Voting Policy and Procedures. MCM
may be unable to vote or otherwise process proxy ballots that are not
received or processed in a timely manner due to functional limitations of the
proxy voting system, custodial limitations, or other factors beyond MCM's
control. Such ballots may include, without limitation, ballots for securities
out on loan under securities lending programs initiated by the client or its
custodian, ballots not timely forwarded by a custodian, or ballots for which
MCM does not receive timely notice from a proxy voting service provider of
factors such as the proxy proposal itself or modifications to the required
vote cast date.
Massachusetts Financial Services Company
Massachusetts Financial Services Company, MFS Institutional Advisors, Inc., MFS
International (UK) Limited, MFS Heritage Trust Company, and MFS' other
investment adviser subsidiaries (except Four Pillars Capital, Inc.)
(collectively, "MFS") have adopted proxy voting policies and procedures, as set
forth below ("MFS Proxy Voting Policies and Procedures"), with respect to
securities owned by the clients for which MFS serves as investment adviser and
has the power to vote proxies, including the registered investment companies
sponsored by MFS.
A. VOTING GUIDELINES
1. General Policy; Potential Conflicts of Interest
MFS' policy is that proxy voting decisions are made in what MFS believes to be
the best long-term economic interests of MFS' clients, and not in the interests
of any other party or in MFS' corporate interests, including interests such as
the distribution of MFS Fund shares, administration of 401(k) plans, and
institutional relationships.
In developing these proxy voting guidelines, MFS periodically reviews corporate
governance issues and proxy voting matters that are presented for shareholder
vote by either management or shareholders of public companies. Based on the
overall principle that all votes cast by MFS on behalf of its clients must be
in what MFS believes to be the best long-term economic interests of such
clients, MFS has adopted proxy voting guidelines, set forth below, that govern
how MFS generally will vote on specific matters presented for shareholder vote.
In all cases, MFS will exercise its discretion in voting on these matters in
accordance with this overall principle. In other words, the underlying
guidelines are simply that - guidelines. Proxy items of significance are often
considered on a case-by-case basis, in light of all relevant facts and
circumstances, and in certain cases MFS may vote proxies in a manner different
from what otherwise be dictated by these guidelines.
As a general matter, MFS maintains a consistent voting position on similar
proxy proposals with respect to various issuers. In addition, MFS generally
votes consistently on the same matter when securities of an issuer are held by
multiple client accounts. However, MFS recognizes that there are gradations in
certain types of proposals that might result in different voting positions
being taken with respect to different proxy statements. There also may be
situations involving matters presented for shareholder vote that are not
governed by the guidelines or situations where MFS has received explicit voting
instructions from a client for its own account. Some items that otherwise would
be acceptable will be voted against the proponent when it is seeking extremely
broad flexibility without offering a valid explanation. MFS reserves the right
to override the guidelines with respect to a particular shareholder vote when
such an override is, in MFS' best judgment, consistent with the overall
principle of voting proxies in the best long-term economic interests of MFS'
clients.
From time to time, MFS receives comments on these guidelines as well as
regarding particular voting issues from its clients. These comments are
carefully considered by MFS when it reviews these guidelines each year and
revises them as appropriate.
These policies and procedures are intended to address any potential material
conflicts of interest on the part of MFS or its subsidiaries that are likely to
arise in connection with the voting of proxies on behalf of MFS' clients. If
such potential material conflicts of interest do arise, MFS will analyze,
document and report on such potential material conflicts of interest (see
Sections B.2 and E below), and shall ultimately vote the relevant proxies in
what MFS believes to be the best long-term economic interests of its clients.
The MFS Proxy Voting Committee is responsible for monitoring and reporting with
respect to such potential material conflicts of interest.
B. ADMINISTRATIVE PROCEDURES
1. MFS Proxy Voting Committee
The administration of these MFS Proxy Voting Policies and Procedures is
overseen by the MFS Proxy Voting Committee, which includes senior personnel
from the MFS Legal and Global Investment Support Departments. The Proxy Voting
Committee does not include individuals whose primary duties relate to client
relationship management, marketing, or sales. The MFS Proxy Voting Committee:
a. Reviews these MFS Proxy Voting Policies and Procedures at least annually
and recommends any amendments considered to be necessary or advisable;
b. Determines whether any potential material conflict of interest exist
with respect to instances in which MFS (i) seeks to override these MFS
Proxy Voting Policies and Procedures; (ii) votes on ballot items not
governed by these MFS Proxy Voting Policies and Procedures; (iii) evaluates
an excessive executive compensation issue in relation to the election of
directors; or (iv) requests a vote recommendation from an MFS portfolio
manager or investment analyst (e.g. mergers and acquisitions); and
c. Considers special proxy issues as they may arise from time to time.
2. Potential Conflicts of Interest
The MFS Proxy Voting Committee is responsible for monitoring potential material
conflicts of interest on the part of MFS or its subsidiaries that could arise
in connection with the voting of proxies on behalf of MFS' clients. Due to the
client focus of our investment management business, we believe that the
potential for actual material conflict of interest issues is small.
Nonetheless, we have developed precautions to ensure that all proxy votes are
cast in the best long-term economic interest of shareholders. Other MFS
internal policies require all MFS employees to avoid actual and potential
conflicts of interests between personal activities and MFS' client activities.
If an employee identifies an actual or potential conflict of interest with
respect to any voting decision that employee must recuse himself/herself from
participating in the voting process. Additionally, with respect to decisions
concerning all Non Standard Votes, as defined below, MFS will review the
securities holdings reported by the individuals that participate in such
decision to determine whether such person has a direct economic interest in the
decision, in which case such person shall not further participate in making the
decision. Any significant attempt by an employee of MFS or its subsidiaries to
influence MFS' voting on a particular proxy matter should also be reported to
the MFS Proxy Voting Committee.
In cases where proxies are voted in accordance with these MFS Proxy Voting
Policies and Procedures, no material conflict of interest will be deemed to
exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting
Policies and Procedures, (ii) matters presented for vote are not clearly
governed by these MFS Proxy Voting Policies and Procedures, (iii) MFS evaluates
an excessive executive compensation issue in relation to the election of
directors, or (iv) a vote recommendation is requested from an MFS portfolio
manager or investment analyst (e.g. mergers and acquisitions) (collectively,
"Non Standard Votes"); the MFS Proxy Voting Committee will follow these
procedures:
a. Compare the name of the issuer of such proxy against a list of
significant current (i) distributors of MFS Fund shares, (ii) MFS
institutional clients (the "MFS Significant Client List");
b. If the name of the issuer does not appear on the MFS Significant Client
List, then no material conflict of interest will be deemed to exist, and
the proxy will be voted as otherwise determined by the MFS Proxy Voting
Committee;
c. If the name of the issuer appears on the MFS Significant Client List,
then the MFS Proxy Voting Committee will be apprised of that fact and each
member of the MFS Proxy Voting Committee will carefully evaluate the
proposed vote in order to ensure that the proxy ultimately is voted in what
MFS believes to be the best long-term economic interests of MFS' clients,
and not in MFS' corporate interests; and
d. For all potential material conflicts of interest identified under clause
(c) above, the MFS Proxy Voting Committee will document: the name of the
issuer, the issuer's relationship to MFS, the analysis of the matters
submitted for proxy vote, the votes as to be cast and the reasons why the
MFS Proxy Voting Committee determined that the votes were cast in the best
long-term economic interests of MFS' clients, and not in MFS' corporate
interests. A copy of the foregoing documentation will be provided to MFS'
Conflicts Officer.
The members of the MFS Proxy Voting Committee are responsible for creating and
maintaining the MFS Significant Client List, in consultation with MFS'
distribution and institutional business units. The MFS Significant Client List
will be reviewed and updated periodically, as appropriate.
From time to time, certain MFS Funds may own shares of other MFS Funds (the
"underlying fund"). If an underlying fund submits a matter to a shareholder
vote, the MFS Fund that owns shares of the underlying fund will vote its shares
in the same proportion as the other shareholders of the underlying fund.
3. Gathering Proxies
Most proxies received by MFS and its clients originate at Automatic Data
Processing Corp. ("ADP") although a few proxies are transmitted to investors by
corporate issuers through their custodians or depositories. ADP and issuers
send proxies and related material directly to the record holders of the shares
beneficially owned by MFS' clients, usually to the client's custodian or, less
commonly, to the client itself. This material will include proxy cards,
reflecting the shareholdings of Funds and of clients on the record dates for
such shareholder meetings, as well as proxy statements with the issuer's
explanation of the items to be voted upon.
MFS, on behalf of itself and the Funds, has entered into an agreement with an
independent proxy administration firm, Institutional Shareholder Services, Inc.
(the "Proxy Administrator"), pursuant to which the Proxy Administrator performs
various proxy vote related administrative services, such as vote processing and
recordkeeping functions for MFS' Funds and institutional client accounts. The
Proxy Administrator receives proxy statements and proxy cards directly or
indirectly from various custodians, logs these materials into its database and
matches upcoming meetings with MFS Fund and client portfolio holdings, which
are input into the Proxy Administrator's system by an MFS holdings datafeed.
Through the use of the Proxy Administrator system, ballots and proxy material
summaries for all upcoming shareholders' meetings are available on-line to
certain MFS employees and the MFS Proxy Voting Committee.
4. Analyzing Proxies
Proxies are voted in accordance with these MFS Proxy Voting Policies and
Procedures. The Proxy Administrator at the prior direction of MFS automatically
votes all proxy matters that do not require the particular exercise of
discretion or judgment with respect to these MFS Proxy Voting Policies and
Procedures as determined by the MFS Proxy Voting Committee. With respect to
proxy matters that require the particular exercise of discretion or judgment,
MFS considers and votes on those proxy matters. MFS receives research from ISS
which it may take into account in deciding how to vote. In addition, MFS expects
to rely on ISS to identify circumstances in which a board may have approved
excessive executive compensation. Representatives of the MFS Proxy Voting
Committee review, as appropriate, votes cast to ensure conformity with these MFS
Proxy Voting Policies and Procedures.
As a general matter, portfolio managers and investment analysts have little or
no involvement in specific votes taken by MFS. This is designed to promote
consistency in the application of MFS' voting guidelines, to promote
consistency in voting on the same or similar issues (for the same or for
multiple issuers) across all client accounts, and to minimize the potential
that proxy solicitors, issuers, or third parties might attempt to exert
inappropriate influence on the vote. In limited types of votes (e.g., corporate
actions, such as mergers and acquisitions), a representative of MFS Proxy
Voting Committee may consult with or seek recommendations from MFS portfolio
managers or investment analysts.1 However, the MFS Proxy Voting Committee would
ultimately determine the manner in which all proxies are voted.
As noted above, MFS reserves the right to override the guidelines when such an
override is, in MFS' best judgment, consistent with the overall principle of
voting proxies in the best long-term economic interests of MFS' clients. Any
such override of the guidelines shall be analyzed, documented and reported in
accordance with the procedures set forth in these policies.
5. Voting Proxies
In accordance with its contract with MFS, the Proxy Administrator also
generates a variety of reports for the MFS Proxy Voting Committee, and makes
available on-line various other types of information so that the MFS Proxy
Voting Committee may review and monitor the votes cast by the Proxy
Administrator on behalf of MFS' clients.
C. MONITORING SYSTEM
It is the responsibility of the Proxy Administrator and MFS' Proxy Voting
Committee to monitor the proxy voting process. When proxy materials for clients
are received, they are forwarded to the Proxy Administrator and are input into
the Proxy Administrator's system. Through an interface with the portfolio
holdings database of MFS, the Proxy Administrator matches a list of all MFS
Funds and clients who hold shares of a company's stock and the number of shares
held on the record date with the Proxy Administrator's listing of any upcoming
shareholder's meeting of that company.
When the Proxy Administrator's system "tickler" shows that the voting cut-off
date of a shareholders' meeting is approaching, a Proxy Administrator
representative checks that the vote for MFS Funds and clients holding that
security has been recorded in the computer system. If a proxy card has not been
received from the client's custodian, the Proxy Administrator calls the
custodian requesting that the materials be forwarded immediately. If it is not
possible to receive the proxy card from the custodian in time to be voted at
the meeting, MFS may instruct the custodian to cast the vote in the manner
specified and to mail the proxy directly to the issuer.
D. RECORDS RETENTION
MFS will retain copies of these MFS Proxy Voting Policies and Procedures in
effect from time to time and will retain all proxy voting reports submitted to
the Board of Trustees, Board of Directors and Board of Managers of the MFS
Funds for the period required by applicable law. Proxy solicitation materials,
including electronic versions of the proxy cards completed by representatives
of the MFS Proxy Voting Committee, together with their respective notes and
comments, are maintained in an electronic format by the Proxy Administrator and
are accessible on-line by the MFS Proxy Voting Committee. All proxy voting
materials and supporting documentation, including records generated by the
Proxy Administrator's system as to proxies processed, including the dates when
proxy ballots were received and submitted, and the votes on each company's
proxy issues, are retained as required by applicable law.
E. REPORTS
At any time, a report can be printed by MFS for each client who has requested
that MFS furnish a record of votes cast. The report specifies the proxy issues
which have been voted for the client during the year and the position taken
with respect to each issue.
Except as described above, MFS generally will not divulge actual voting
practices to any party other than the client or its representatives (unless
required by applicable law) because we consider that information to be
confidential and proprietary to the client.
1 From time to time, due to travel schedules and other commitments, an
appropriate portfolio manager or research analyst is not available to
provide a recommendation on a merger or acquisition proposal. If such a
recommendation cannot be obtained prior to the cut-off-date of the
shareholder meeting, certain members of the MFS Proxy Voting Committee may
determine to abstain from voting.
Mondrian Investment Partners Limited
The Fund has formally delegated to its investment adviser, Mondrian Investment
Partners Ltd. (the "Adviser"), the ability to make all proxy voting decisions
in relation to portfolio securities held by the Fund. The Adviser will vote
proxies on behalf of the Fund pursuant to its Proxy Voting Policies and
Procedures (the "Procedures"). The Adviser has established a Proxy Voting
Committee (the "Committee") which is responsible for overseeing the Adviser's
proxy voting process for the Fund. One of the main responsibilities of the
Committee is to review and approve the Procedures to ensure that the Procedures
are designed to allow the Adviser to vote proxies in a manner consistent with
the goal of voting in the best interests of the Fund.
In order to facilitate the actual process of voting proxies, the Adviser has
contracted with Institutional Shareholder Services ("ISS") to analyze proxy
statements on behalf of the Fund and other Adviser clients and vote proxies
generally in accordance with the Procedures. After a proxy has been voted for
the Fund, ISS will create a record of the vote that will be available to
stockholders and filed with the SEC on a yearly basis beginning no later than
August 31, 2004. The Committee is responsible for overseeing ISS's proxy voting
activities.
The Procedures contain a general guideline that recommendations of company
management on an issue (particularly routine issues) should be given a fair
amount of weight in determining how proxy issues should be voted. However, the
Adviser will normally vote against management's position when it runs counter
to its specific Proxy Voting Guidelines (the "Guidelines"), and the Adviser
will also vote against management's recommendation when it believes that such
position is not in the best interests of the Fund.
As stated above, the Procedures also list specific Guidelines on how to vote
proxies on behalf of the Fund. Some examples of the Guidelines are as follows:
(i) generally vote for shareholder proposals asking that a majority or more of
directors be independent; (ii) generally vote against proposals to require a
supermajority shareholder vote; (iii) generally vote for debt restructuring if
it is expected that the company will file for bankruptcy if the transaction is
not approved; (iv) votes on mergers and acquisitions should be considered on a
case-by-case basis, determining whether the transaction enhances shareholder
value; (v) generally vote against proposals to create a new class of common
stock with superior voting rights; (vi) generally vote for proposals to
authorize preferred stock in cases where the company specifies the voting,
dividend, conversion, and other rights of such stock and the terms of the
preferred stock appear reasonable; (vii) generally vote for management
proposals to institute open-market share repurchase plans in which all
shareholders may participate on equal terms; (viii) votes with respect to
management compensation plans are determined on a case-by-case basis; (ix)
generally vote for reports on the level of greenhouse gas emissions from the
company's operations and products; and (x) generally vote for proposals asking
for a report on the feasibility of labeling products containing genetically
modified ingredients.
Because the Fund has delegated proxy voting to the Adviser, the Fund obviously
does not encounter any conflict of interest issues regarding proxy voting and
therefore does not have procedures regarding this matter. The Adviser does have
a section in its Procedures that addresses the possibility of conflicts of
interest. Most proxies which the Adviser receives on behalf of the Fund are
voted by ISS in accordance with the Procedures. Because almost all Fund proxies
are voted by ISS pursuant to the pre-determined Procedures, it normally will
not be necessary for the Adviser to make an actual determination of how to vote
a particular proxy, thereby largely eliminating conflicts of interest for the
Adviser during the proxy voting process. In the very limited instances where
the Adviser is considering voting a proxy contrary to ISS's recommendation, the
Committee will first assess the issue to see if there is any possible conflict
of interest involving the Adviser or affiliated persons of the Adviser. If a
member of the Committee has actual knowledge of a conflict of interest, the
Committee will normally use another independent third party to do additional
research on the particular proxy issue in order to make a recommendation to the
Committee on how to vote the proxy in the best interests of the Fund. The
Committee will then review the proxy voting materials and recommendation
provided by ISS and the independent third party to determine how to vote the
issue in a manner which the Committee believes is consistent with the
Procedures and in the best interests of the Fund. In these instances, the
Committee must come to a unanimous decision regarding how to vote the proxy, or
they must vote the proxy in accordance with ISS's original recommendation.
State Street Global Advisors ("SSgA) Funds Management, Inc.
SSgA Funds Management, Inc. ("FM") seeks to vote proxies for which it has
discretionary authority in the best interests of its clients. This entails
voting proxies in a way which FM believes will maximize the monetary value of
each portfolio's holdings with respect to proposals that are reasonably
anticipated to have an impact on the current or potential value of a security.
FM takes the view that voting in a manner consistent with maximizing the value
of our clients' holdings will benefit our direct clients (e.g. investment
funds) and, indirectly, the ultimate owners and beneficiaries of those clients
(e.g. fund shareholders).
Oversight of the proxy voting process is the responsibility of the State Street
Global Advisors ("SSgA") Investment Committee. The SSgA Investment Committee
reviews and approves amendments to the FM Proxy Voting Policy and delegates
authority to vote in accordance with this policy to the FM Proxy Review
Committee, a subcommittee of the SSgA Investment Committee. FM retains the
final authority and responsibility for voting.
In order to facilitate our proxy voting process, FM retains Institutional
Shareholder Services ("ISS"), a firm with expertise in the proxy voting and
corporate governance fields. ISS assists in the proxy voting process, including
acting as our voting agent (i.e. actually processing the proxies), advising us
as to current and emerging governance issues that we may wish to address,
interpreting this policy and applying it to individual proxy items, and
providing analytical information concerning specific issuers and proxy items as
well as governance trends and developments. The Manager of Corporate Governance
works with ISS to establish and update detailed procedures to implement this
policy.
From time to time, proxy votes will be solicited which fall into one of the
following categories:
(i) proxies which involve special circumstances and require additional
research and discussion (e.g. a material merger or acquisition, or a
material governance issue with the potential to become a significant
precedent in corporate governance); or
(ii) proxies which are not directly addressed by our policies and which are
reasonably anticipated to have an impact on the current or potential value
of a security or which we do not consider to be routine.
These proxies are identified through a number of methods, including but not
limited to notification from ISS, concerns of clients, review by internal proxy
specialists, and questions from consultants. The role of third parties in
identifying special circumstances does not mean that we will depart from our
guidelines; these third parties are all treated as information sources. If they
raise issues that we determine to be prudent before voting a particular proxy
or departing from our prior guidance to ISS, we will weigh the issue along with
other relevant factors before making an informed decision. In all cases, we
vote proxies as to which we have voting discretion in a manner that we
determine to be in the best interest of our clients. As stated above, if the
proposal has a quantifiable effect on shareholder value, we seek to maximize
the value of a portfolio's holdings. With respect to matters that are not so
quantifiable, we exercise greater judgment but still seek to maximize long-term
value by promoting sound governance policies. The goal of the Proxy Voting
Committee is to make the most informed decision possible.
In instances of special circumstances or issues not directly addressed by our
policies or guidance to ISS, the FM Manager of Corporate Governance will refer
the item to the Chairman of the Investment Committee for a determination of the
proxy vote. The first determination is whether there is a material conflict of
interest between the interests of our client and those of FM or its affiliates
(as explained in greater detail below under "Potential Conflicts"). If the
Manager of Corporate Governance and the Chairman of the Investment Committee
determine that there is a material conflict, the process detailed below under
"Potential Conflicts" is followed. If there is no material conflict, we examine
the proposals that involve special circumstances or are not addressed by our
policy or guidance in detail in seeking to determine what vote would be in the
best interests of our clients. At this point, the Chairman of the Investment
Committee makes a voting decision in our clients' best interest. However, the
Chairman of the Investment Committee may determine that a proxy involves the
consideration of particularly significant issues and present the proxy item to
the Proxy Review Committee and/or to the entire Investment Committee for a
final decision on voting the proxy. The Investment Committee will use the same
rationale for determining the appropriate vote.
Potential Conflicts
As discussed above under Process, from time to time, FM will review a proxy
which may present a potential conflict of interest. As a fiduciary to its
clients, FM takes these potential conflicts very seriously While FM's only goal
in addressing any such potential conflict is to ensure that proxy votes are
cast in the clients' best interests and are not affected by FM's potential
conflict, there are a number of courses FM may take. Although various
relationships could be deemed to give rise to a conflict of interest, we have
determined that two categories of relationships present a sufficiently serious
concern to warrant an alternative process: customers of FM or its affiliates
which are among the top 100 clients of FM and its affiliates based upon
revenue; and the 10 largest broker-dealers used by SSgA, based upon revenue (a
"Material Relationship").
When the matter falls clearly within the polices set forth above or the
guidance previously provided by FM to ISS and the proxy is to be voted in
accordance with that guidance, we do not believe that such decision represents
a conflict of interest and no special procedures are warranted.
In circumstances where either (i) the matter does not fall clearly within the
policies set forth above or the guidance previously provided to ISS, or (ii) FM
determines that voting in accordance with such policies or guidance is not in
the best interests of its clients, the Manager of Corporate Governance will
compare the name of the issuer against a list of the top 100 revenue generating
clients of State Street Corporation and its affiliates and a list of the top 10
broker-dealer relationships to determine if a Material Relationship exists.
(These lists are updated quarterly.) If the issuer's name appears on either
list and the pre-determined policy is not being followed, FM will employ the
services of a third party, wholly independent of FM, its affiliates and those
parties involved in the proxy issue, to determine the appropriate vote.
However, in certain circumstances the Proxy Review Committee may determine that
the use of a third party fiduciary is not necessary or appropriate, either
because the matter involved does not involve a material issue or because the
issue in question affects the underlying value of the portfolio position and it
is appropriate for FM, notwithstanding the potential conflict of interest, to
vote the security in a manner that it determines will maximize the value to its
client. In such situations, the Proxy Committee, or if a broader discussion is
warranted, the SSgA Investment Committee, shall make a decision as to the
voting of the proxy. The basis for the voting decision, including the basis for
the determination that the decision is in the best interests of FM's clients,
shall be formalized in writing as a part of the minutes to the Investment
Committee.
State of Incorporation
Generally, SSgA FM votes against management on reincorporation in a state which
has more stringent anti-takeover and related provisions; general updating of or
corrective amendments to charter; and change in corporation name.
Mergers and Restructurings
SSgA FM generally votes:
o Against offers with potentially damaging consequences for minority
shareholders because of illiquid stock, especially in some non-US markets
o Against offers when we believe that reasonable prospects exist for an
enhanced bid or other bidders
o Against offers where, at the time of voting, the current market price of the
security exceeds the bid price
o For proposals to restructure or liquidate closed end investment funds in
which the secondary market price is substantially lower than the net asset
value
o For offers made at a premium where no other higher bidder exists
Anti-takeover Provisions
Generally, SSgA FM votes in support of management on elimination of "poison
pill" rights; reductions in supermajority vote requirements; and adoption of
anti-"greenmail" provisions.
Generally, SSgA FM votes against management on anti-takeover and related
provisions that serve to prevent the majority of shareholders from exercising
their rights or effectively deter appropriate tender offers and other offers;
amendments to bylaws which would require super-majority shareholder votes to
pass or repeal certain provisions and shareholder rights plans that allow the
board of directors to block appropriate offers to shareholders or which trigger
provisions preventing legitimate offers from proceeding.
Election of Directors
Generally, SSgA FM votes in support management on election of directors who (i)
we determine to be adequately independent of management and (ii) do not
simultaneously serve on an unreasonable (as determined by FM) number of other
boards (other than those affiliated with the issuer). Factors that we consider
in evaluating independence include whether the nominee is an employee of or
related to an employee of the issuer or its auditor, whether the nominee
provides professional services to the issuer, or whether the nominee receives
non-board related compensation from the issuer.
Generally, SSgA FM votes against management on proposals requesting re-election
of insiders or affiliated directors who serve on audit, compensation, and
nominating committees.
Generally, SSgA FM votes against management on the election of directors who
have failed to act on a shareholder proposal that has been approved by a
majority of outstanding shares.
Generally, SSgA FM votes against management on the election of directors at
companies where prior non-cash compensation was improperly "backdated" or
"springloaded" where one of the following scenarios exists:
o (i) it is unknown whether the Compensation Committee had knowledge of such
backdating at the time, (ii) the Compensation Committee was not
independent at the time, and (iii) the director seeking reelection served
on the Compensation Committee at the time; or
o (i) it is unknown whether the Compensation Committee had knowledge of such
backdating at the time, (ii) the Compensation Committee was independent at
the time, and (iii) sufficient controls have not been implemented to avoid
similar improper payments going forward; or
o (i) the Compensation Committee had knowledge of such backdating at the
time, and (ii) the director seeking reelection served on the Compensation
Committee at the time; or
o (i) the Compensation Committee did not have knowledge of such backdating at
the time, and (ii) sufficient controls have not been implemented to avoid
similar improper payments going forward.
Appointment of Auditors
Generally, SSgA FM votes in support of management on the approval of directors.
SSgA FM votes in support of shareholder-initiated mandates giving the Audit
Committee the sole responsibility for the selection and dismissal of the
auditing firm and any subsequent results of audits are reported to the audit
committee.
Shareholder Voting Right
Generally, SSgA FM votes in support of shareholders on the establishment of
confidential voting.
Changes to Capital Structure
Generally, SSgA FM votes in support of management on capitalization changes
which eliminate other classes of stock and voting rights; and changes in
capitalization authorization for stock splits, stock dividends, and other
specified needs which are no more than 50% of the existing authorization for US
companies and no more than 100% of existing authorization for non-US companies.
Generally, SSgA FM votes against management on capitalization changes that add
"blank check" classes of stock or classes that dilute the voting interests of
existing shareholders; changes in capitalization authorization where management
does not offer an appropriate rationale or which are contrary to the best
interest of existing shareholders.
Compensation
Generally, SSgA FM votes in support of management on directors' and auditors'
compensation; stock purchase plans with an exercise price of not less than 85%
if fair market value; and stock option plans which are incentive based and not
excessive. Stock option plans which are incentive based and not excessively
dilutive. In order to assess the dilutive effect, we divide the number of shares
required to fully fund the proposed plan, the number of authorized but unissued
shares, and the issued but unexercised shares by fully diluted share count. We
review that number in light of certain factors, including the industry of the
issuer, in order to make our determination as to whether the dilution is
excessive.
Generally, SSgA FM votes against management on Excessive compensation (i.e.
compensation plans which are deemed by FM to be overly dilutive); and
change-in-control provisions in non-salary compensation plans, employment
contracts, and severance agreements which benefit management and would be
costly to shareholders if triggered.
Generally, SSgA FM votes against shareholders on proposals requiring the
disclosure of executive retirement benefits if the issuer has an independent
compensation committee.
Corporate Responsibility
SSgA FM votes against shareholder-initiated restrictions related to social,
political or special interest issues which affect the ability of the company to
do business or be competitive and which have significant financial or
best-interest impact; and shareholder-initiated proposals which require
inappropriate endorsements or corporate actions.
T. Rowe Price Associates, Inc.
T. Rowe Price Associates, Inc. and T. Rowe Price International, Inc. recognize
and adhere to the principle that one of the privileges of owning stock in a
company is the right to vote on issues submitted to shareholder vote - such as
election of directors and important matters affecting a company's structure and
operations. As an investment adviser with a fiduciary responsibility to its
clients, T. Rowe Price analyzes the proxy statements of issuers whose stock is
owned by the investment companies that it sponsors and serves as investment
adviser. T. Rowe Price also is involved in the proxy process on behalf of its
institutional and private counsel clients who have requested such service. For
those private counsel clients who have not delegated their voting
responsibility but who request advice, T. Rowe Price makes recommendations
regarding proxy voting.
Proxy Administration
The T. Rowe Price Proxy Committee develops our firm's positions on all major
corporate issues, creates guidelines, and oversees the voting process. The
Proxy Committee is composed of portfolio managers, investment operations
managers, and internal legal counsel, analyzes proxy policies based on whether
they would adversely affect shareholders' interests and make a company less
attractive to own. In evaluating proxy policies each year, the Proxy Committee
relies upon our own fundamental research, independent proxy research provided
by third parties, such as Institutional Shareholder Services (ISS) and Glass
Lewis, and information presented by company managements and shareholder groups.
Once the Proxy Committee establishes its recommendations, they are distributed
to the firm's portfolio managers as voting guidelines. Ultimately, the
portfolio managers decide how to vote on the proxy proposals of companies in
his or her portfolio. Because portfolio managers may have differences of
opinion on portfolio companies and their proxies, or or their portfolios may
have different investment objectives, these factors among others, may lead to
different votes between portfolios on the same proxies. When portfolio managers
cast votes that are counter to the Proxy Committee's guidelines, they are
required to document their reasons in writing to the Proxy Committee. Annually,
the Proxy Committee reviews T. Rowe Price's proxy voting process, policies, and
voting records.
T. Rowe Price has retained Institutional Shareholder Services, an expert in the
proxy voting and corporate governance area, to provide proxy advisory and
voting services. These services include in-depth research, analysis, and voting
recommendations as well as vote execution, reporting, auditing, and consulting
assistance for the handling of proxy voting responsibility and corporate
governance-related efforts. While the Proxy Committee relies upon ISS research
in establishing T. Rowe Price's voting guidelines-many of which are consistent
with ISS positions-T. Rowe Price ocassionally may deviate from ISS
recommendations on general policy issues or specific proxy proposals.
Fiduciary Considerations
T. Rowe Price's decisions with respect to proxy issues are made in light of the
anticipated impact of the issue on the desirability of investing in the
portfolio company. Proxies are voted solely in the interests of the client,
Price Fund shareholders or, where employee benefit plan assets are involved, in
the interests of plan participants and beneficiaries. Practicalities and costs
involved with international investing may make it impossible at times, and at
other times disadvantageous, to vote proxies in every instance. For example, we
might refrain from voting if we or our agents are required to appear in person
at a shareholder meeting or if the exercise of voting rights results in the
imposition of trading or other ownership restrictions.
Consideration Given Management Recommendations
When determining whether to invest in a particular company, one of the key
factors T. Rowe Price considers is the quality and depth of its management. As
a result, T. Rowe Price believes that recommendations of management on most
issues should be given weight in determining how proxy issues should be voted.
T. Rowe Price Voting Policies
Specific voting guidelines have been established by the Proxy Committee for
recurring issues that appear on proxies, which are available to clients upon
request. The following is a summary of the more significant T. Rowe Price
policies:
Election of Directors
T. Rowe Price generally supports slates with a majority of independent
directors. We withhold votes for outside directors that do not meet certain
criteria relating to their independence or their inability to dedicate
sufficient time to their board duties due to their commitment to other boards.
We also withhold votes for inside directors serving on compensation, nominating
and audit committees and for directors who miss more than one-fourth of the
scheduled board meetings. We may also withhold votes from inside directors for
the failure to establish a formal nominating committee. T. Rowe Price supports
shareholder proposals calling for a majority vote threshold for the election of
directors.
Executive Compensation
Our goal is to assure that a company's equity-based compensation plan is
aligned with shareholders' long-term interests. While we evaluate most plans on
a case-by-case basis, T. Rowe Price generally opposes compensation packages
that provide what we view as excessive awards to a few senior executives or
that contain excessively dilutive stock option plans. We base our review on
criteria such as the costs associated with the plan, plan features, burn rates
which are excessive in relation to the company's peers, dilution to
shareholders and comparability to plans in the company's peer group. We
generally oppose plans that give a company the ability to reprice options or to
grant options at or below market prices. For companies with particularly
egregious pay practices we may withhold votes from compensation committee
members, the CEO, or even the entire board.
Mergers and Acquisitions
T. Rowe Price considers takeover offers, mergers, and other extraordinary
corporate transactions on a case-by-case basis to determine if they are
beneficial to shareholders' current and future earnings stream and to ensure
that our Price Funds and clients are receiving fair compensation in exchange
for their investment.
Anti-takeover and Corporate Governance Issues
T. Rowe Price generally opposes anti-takeover measures and other proposals
designed to limit the ability of shareholders to act on possible transactions.
Such anti-takeover mechanisms include classified boards, supermajority voting
requirements, dual share classes, and poison pills. We also oppose proposals
that give management a "blank check" to create new classes of stock with
disparate rights and privileges. We generally support proposals to permit
cumulative voting and those that seek to prevent potential acquirers from
receiving a takeover premium for their shares. When voting on corporate
governance proposals, we will consider the dilutive impact to shareholders and
the effect on shareholder rights. We generally support shareholder proposals
that call for the separation of the Chairmans and CEO positions unless there
are sufficient governance safeguards already in place. With respect to
proposals for the approval of the company's auditor, we typically oppose
auditors who have a significant non-audit relationship with the company.
Social and Corporate Responsibility Issues
T. Rowe Price generally votes with a company's management on social,
environmental and corporate responsibility issues unless they have substantial
economic implications for the company's business and operations that have not
been adequately addressed by management.
Monitoring and Resolving Conflicts of Interest
The Proxy Committee is also responsible for monitoring and resolving possible
material conflicts between the interests of T. Rowe Price and those of its
clients with respect to proxy voting. We believe that due to client-focused
nature of our investment management business that the potential for conflicts of
interest is relatively infrequent. Nevertheless, we have adopted safeguards to
ensure that our proxy voting is not influenced by interests other than those of
our clients. While membership on the Proxy Committee is diverse, it does not
include individuals whose primary duties relate to client relationship
management, marketing, or sales. Since our voting guidelines are predetermined
by the Proxy Committee using recommendations from ISS, an independent third
party, application of the T. Rowe Price guidelines to vote clients' proxies
should in most instances adequately address any possible conflicts of interest.
However, for proxy votes inconsistent with T. Rowe Price guidelines, the Proxy
Committee reviews all such proxy votes in order to determine whether the
portfolio manager's voting rationale appears reasonable. The Proxy Committee
also assesses whether any business or other relationships between T. Rowe Price
and a portfolio company could have influenced an inconsistent vote on that
company's proxy. Issues raising possible conflicts of interest are referred to
designated members of the Proxy Committee for immediate resolution prior to the
time T. Rowe Price casts its vote. With respect to personal conflicts of
interest, T. Rowe Price's Code of Ethics requires all employees to avoid placing
themselves in a "compromising position" in which their interests may conflict
with those of our clients and restricts their ability to engage in certain
outside business activities. Portfolio managers or Proxy Committee members with
a personal conflict of interest regarding a particular proxy vote must recuse
themselves and not participate in the voting decisions with respect to that
proxy.
Templeton Investment Counsel, LLC
Proxy Voting Policies & Procedures
RESPONSIBILITY OF INVESTMENT MANAGER TO VOTE PROXIES
Templeton Investment Counsel, LLC (hereinafter "Investment Manager") has
delegated its administrative duties with respect to voting proxies to the Proxy
Group within Franklin Templeton Companies, LLC (the "Proxy Group"), a
wholly-owned subsidiary of Franklin Resources, Inc. Franklin Templeton
Companies, LLC provides a variety of general corporate services to its
affiliates, including but not limited to legal and compliance activities. Proxy
duties consist of analyzing proxy statements of issuers whose stock is owned by
any client (including both investment companies and any separate accounts
managed by Investment Manager) that has either delegated proxy voting
administrative responsibility to Investment Manager or has asked for
information and/or recommendations on the issues to be voted. The Proxy Group
will process proxy votes on behalf of, and Investment Manager votes proxies
solely in the interests of, separate account clients, Investment
Manager-managed mutual fund shareholders, or, where employee benefit plan
assets are involved, in the interests of the plan participants and
beneficiaries (collectively, "Advisory Clients") that have properly delegated
such responsibility or will inform Advisory Clients that have not delegated the
voting responsibility but that have requested voting advice about Investment
Manager's views on such proxy votes. The Proxy Group also provides these
services to other advisory affiliates of Investment Manager.
HOW INVESTMENT MANAGER VOTES PROXIES
Fiduciary Considerations
All proxies received by the Proxy Group will be voted based upon Investment
Manager's instructions and/or policies. To assist it in analyzing proxies,
Investment Manager subscribes to RiskMetrics Group ("RiskMetrics"), an
unaffiliated third party corporate governance research service that provides
in-depth analysis of shareholder meeting agendas, vote recommendations, record
keeping and vote disclosure services. In addition, Investment Manager
subscribes to Glass Lewis & Co., LLC ("Glass Lewis"), an unaffiliated third
party analytical research firm, to receive analysis and vote recommendations on
the shareholder meetings of publicly held U.S. companies. Although RiskMetrics'
and/or Glass Lewis' analysis are thoroughly reviewed and considered in making a
final voting decision, Investment Manager does not consider recommendations
from RiskMetrics, Glass Lewis, or any other third party to be determinative of
Investment Manager's ultimate decision. As a matter of policy, the officers,
directors and employees of Investment Manager and the Proxy Group will not be
influenced by outside sources whose interests conflict with the interests of
Advisory Clients.
Conflicts of Interest
All conflicts of interest will be resolved in the interests of the Advisory
Clients. Investment Manager is an affiliate of a large, diverse financial
services firm with many affiliates and makes its best efforts to avoid
conflicts of interest. However, conflicts of interest can arise in situations
where:
1. The issuer is a client1 of Investment Manager or its affiliates;
2. The issuer is a vendor whose products or services are material or
significant to the business of Investment Manager or its affiliates;
3. The issuer is an entity participating to a material extent in the
distribution of investment products advised, administered or sponsored by
Investment Manager or its affiliates (e.g., a broker, dealer or bank)2
4. An Access Person3 of Investment Manager or its affiliates, or an
immediate family member of such employee, also serves as a director or
officer of the issuer;
5. A director or trustee of Franklin Resources, Inc. or of a Franklin
Templeton investment product, or an immediate family member4 of such
director or trustee, also serves as an officer or director of the issuer;
or
6. The issuer is Franklin Resources, Inc. or any of its proprietary
investment products.
1 For purposes of this section, a "client" does not include underlying
investors in a commingled trust, Canadian pooled fund, or other pooled
investment vehicle managed by the Investment Manager or its affiliates.
Sponsors of funds sub-advised by Investment Manager or its affiliates will
be considered a "client."
2 The top 40 executing broker-dealers (based on gross brokerage commissions and
client commissions), and distributors (based on aggregate 12b-1 distribution
fees), as determined on a quarterly basis, will be considered to present a
potential conflict of interest. In addition, any insurance company that has
entered into a participation agreement with a Franklin Templeton entity to
distribute the Franklin Templeton Variable Insurance Products Trust or other
variable products will be considered to present a potential conflict of
interest.
3 "Access Person" shall have the meaning provided under the current Code of
Ethics of Franklin Resources, Inc.
4 The term "immediate family member" means a person's spouse; child residing in
the person's household (including step and adoptive children); and any
dependent of the person, as defined in Section 152 of the Internal Revenue
Code (26 U.S.C. 152).
Nonetheless, even though a potential conflict of interest exists, the
Investment Manager may vote in opposition to the recommendations of an issuer's
management.
Material conflicts of interest are identified by the Proxy Group based upon
analysis of client, broker and vendor lists, information periodically gathered
from directors and officers, and information derived from other sources,
including public filings. The Proxy Group gathers and analyzes this information
on a best efforts basis, as much of this information is provided directly by
individuals and groups other than the Proxy Group, and the Proxy Group relies
on the accuracy of the information it receives from such parties.
In situations where a material conflict of interest is identified, the Proxy
Group, may defer to the voting recommendation of RiskMetrics, Glass Lewis, or
those of another independent third party provider of proxy services or send the
proxy directly to the relevant Advisory Clients with the Investment Manager's
recommendation regarding the vote for approval. If the conflict is not resolved
by the Advisory Client, the Proxy Group may refer the matter, along with the
recommended course of action by the Investment Manager, if any, to a Proxy
Review Committee comprised of representatives from the Portfolio Management
(which may include portfolio managers and/or research analysts employed by
Investment Manager), Fund Administration, Legal and Compliance Departments
within Franklin Templeton for evaluation and voting instructions. The Proxy
Review Committee may defer to the voting recommendation of RiskMetrics, Glass
Lewis, or those of another independent third party provider of proxy services
or send the proxy directly to the relevant Advisory Clients.
Where the Proxy Group or the Proxy Review Committee refers a matter to an
Advisory Client, it may rely upon the instructions of a representative of the
Advisory Client, such as the board of directors or trustees or a committee of
the board in the case of a U.S. registered mutual fund, the conducting officer
in the case of an open-ended collective investment scheme formed as a Soci-t-
d'investissement - capital variable (SICAV), the Independent Review Committee
for Canadian investment funds, or a plan administrator in the case of an
employee benefit plan. The Proxy Review Committee may determine to vote all
shares held by Advisory Clients in accordance with the instructions of one or
more of the Advisory Clients.
The Proxy Review Committee may independently review proxies that are identified
as presenting material conflicts of interest; determine the appropriate action
to be taken in such situations (including whether to defer to an independent
third party or refer a matter to an Advisory Client); report the results of
such votes to Investment Manager's clients as may be requested; and recommend
changes to the Proxy Voting Policies and Procedures as appropriate.
The Proxy Review Committee will also decide whether to vote proxies for
securities deemed to present conflicts of interest that are sold following a
record date, but before a shareholder meeting date. The Proxy Review Committee
may consider various factors in deciding whether to vote such proxies,
including Investment Manager's long-term view of the issuer's securities for
investment, or it may defer the decision to vote to the applicable Advisory
Client.
Where a material conflict of interest has been identified, but the items on
which the Investment Manager's vote recommendations differ from Glass Lewis,
RiskMetrics, or another independent third party provider of proxy services
relate specifically to (1) shareholder proposals regarding social or
environmental issues or political contributions, (2) "Other Business" without
describing the matters that might be considered, or (3) items the Investment
Manager wishes to vote in opposition to the recommendations of an issuer's
management, the Proxy Group may defer to the vote recommendations of the
Investment Manager rather than sending the proxy directly to the relevant
Advisory Clients for approval.
To avoid certain potential conflicts of interest, the Investment Manager will
employ echo voting, if possible, in the following instances: (1) when a
Franklin Templeton investment company invests in an underlying fund in reliance
on any one of Sections 12(d)(I)(E), (F), or (G) of the Investment Company Act
of 1940, as amended, or pursuant to an SEC exemptive order; (2) when a Franklin
Templeton investment company invests uninvested cash in affiliated money market
funds pursuant to an SEC exemptive order ("cash sweep arrangement"); or (3)
when required pursuant to an account's governing documents or applicable laws.
Echo voting means that the Investment Manager will vote the shares in the same
proportion as the vote of all of the other holders of the fund's shares.
Weight Given Management Recommendations
One of the primary factors Investment Manager considers when determining the
desirability of investing in a particular company is the quality and depth of
that company's management. Accordingly, the recommendation of management on any
issue is a factor that Investment Manager considers in determining how proxies
should be voted. However, Investment Manager does not consider recommendations
from management to be determinative of Investment Manager's ultimate decision.
As a matter of practice, the votes with respect to most issues are cast in
accordance with the position of the company's management. Each issue, however,
is considered on its own merits, and Investment Manager will not support the
position of a company's management in any situation where it determines that
the ratification of management's position would adversely affect the investment
merits of owning that company's shares.
THE PROXY GROUP
The Proxy Group is part of the Franklin Templeton Companies, LLC Legal
Department and is overseen by legal counsel. Full-time staff members are devoted
to proxy voting administration and providing support and assistance where
needed. On a daily basis, the Proxy Group will review each proxy upon receipt as
well as any agendas, materials and recommendations that they receive from
RiskMetrics, Glass Lewis, or other sources. The Proxy Group maintains a log of
all shareholder meetings that are scheduled for companies whose securities are
held by Investment Manager's managed funds and accounts. For each shareholder
meeting, a member of the Proxy Group will consult with the research analyst that
follows the security and provide the analyst with the meeting notice, agenda,
RiskMetrics and/or Glass Lewis analysis, recommendations and any other available
information. Except in situations identified as presenting material conflicts of
interest, Investment Manager's research analyst and relevant portfolio
manager(s) are responsible for making the final voting decision based on their
review of the agenda, RiskMetrics and/or Glass Lewis analysis, their knowledge
of the company and any other information readily available. In situations where
the Investment Manager has not responded with vote recommendations to the Proxy
Group by the deadline date, the Proxy Group may defer to the vote
recommendations of an independent third party provider of proxy services. Except
in cases where the Proxy Group is deferring to the voting recommendation of an
independent third party service provider, the Proxy Group must obtain voting
instructions from Investment Manager's research analyst, relevant portfolio
manager(s), legal counsel and/or the Advisory Client or Proxy Review Committee
prior to submitting the vote.
GENERAL PROXY VOTING GUIDELINES
Investment Manager has adopted general guidelines for voting proxies as
summarized below. In keeping with its fiduciary obligations to its Advisory
Clients, Investment Manager reviews all proposals, even those that may be
considered to be routine matters. Although these guidelines are to be followed
as a general policy, in all cases each proxy and proposal will be considered
based on the relevant facts and circumstances. Investment Manager may deviate
from the general policies and procedures when it determines that the particular
facts and circumstances warrant such deviation to protect the interests of the
Advisory Clients. These guidelines cannot provide an exhaustive list of all the
issues that may arise nor can Investment Manager anticipate all future
situations. Corporate governance issues are diverse and continually evolving
and Investment Manager devotes significant time and resources to monitor these
changes.
INVESTMENT MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES
Investment Manager's proxy voting positions have been developed based on years
of experience with proxy voting and corporate governance issues. These
principles have been reviewed by various members of Investment Manager's
organization, including portfolio management, legal counsel, and Investment
Manager's officers. The Board of Directors of Franklin Templeton's
U.S.-registered mutual funds will approve the proxy voting policies and
procedures annually.
The following guidelines reflect what Investment Manager believes to be good
corporate governance and behavior:
Board of Directors: The election of directors and an independent board are key
to good corporate governance. Directors are expected to be competent
individuals and they should be accountable and responsive to shareholders.
Investment Manager supports an independent board of directors, and prefers that
key committees such as audit, nominating, and compensation committees be
comprised of independent directors. Investment Manager will generally vote
against management efforts to classify a board and will generally support
proposals to declassify the board of directors. Investment Manager will
consider withholding votes from directors who have attended less than 75% of
meetings without a valid reason. While generally in favor of separating
Chairman and CEO positions, Investment Manager will review this issue on a
case-by-case basis taking into consideration other factors including the
company's corporate governance guidelines and performance. Investment Manager
evaluates proposals to restore or provide for cumulative voting on a
case-by-case basis and considers such factors as corporate governance
provisions as well as relative performance. The Investment Manager generally
will support non-binding shareholder proposals to require a majority vote
standard for the election of directors; however, if these proposals are
binding, the Investment Manager will give careful review on a case-by-case
basis of the potential ramifications of such implementation.
Ratification of Auditors: In light of several high profile accounting scandals,
Investment Manager will closely scrutinize the role and performance of
auditors. On a case-by-case basis, Investment Manager will examine proposals
relating to non-audit relationships and non-audit fees. Investment Manager will
also consider, on a case-by-case basis, proposals to rotate auditors, and will
vote against the ratification of auditors when there is clear and compelling
evidence of accounting irregularities or negligence attributable to the
auditors.
Management & Director Compensation: A company's equity-based compensation plan
should be in alignment with the shareholders' long-term interests. Investment
Manager believes that executive compensation should be directly linked to the
performance of the company. Investment Manager evaluates plans on a
case-by-case basis by considering several factors to determine whether the plan
is fair and reasonable. Investment Manager reviews the RiskMetrics quantitative
model utilized to assess such plans and/or the Glass Lewis evaluation of the
plan. Investment Manager will generally oppose plans that have the potential to
be excessively dilutive, and will almost always oppose plans that are
structured to allow the repricing of underwater options, or plans that have an
automatic share replenishment "evergreen" feature. Investment Manager will
generally support employee stock option plans in which the purchase price is at
least 85% of fair market value, and when potential dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis,
although Investment Manager will generally oppose "golden parachutes" that are
considered excessive. Investment Manager will normally support proposals that
require that a percentage of directors' compensation be in the form of common
stock, as it aligns their interests with those of the shareholders.
Anti-Takeover Mechanisms and Related Issues: Investment Manager generally
opposes anti-takeover measures since they tend to reduce shareholder rights.
However, as with all proxy issues, Investment Manager conducts an independent
review of each anti-takeover proposal. On occasion, Investment Manager may vote
with management when the research analyst has concluded that the
proposal is not onerous and would not harm Advisory Clients' interests as
stockholders. Investment Manager generally supports proposals that require
shareholder rights plans ("poison pills") to be subject to a shareholder vote.
Investment Manager will closely evaluate shareholder rights' plans on a
case-by-case basis to determine whether or not they warrant support. Investment
Manager will generally vote against any proposal to issue stock that has
unequal or subordinate voting rights. In addition, Investment Manager generally
opposes any supermajority voting requirements as well as the payment of
"greenmail." Investment Manager usually supports "fair price" provisions and
confidential voting.
Changes to Capital Structure: Investment Manager realizes that a company's
financing decisions have a significant impact on its shareholders, particularly
when they involve the issuance of additional shares of common or preferred
stock or the assumption of additional debt. Investment Manager will carefully
review, on a case-by-case basis, proposals by companies to increase authorized
shares and the purpose for the increase. Investment Manager will generally not
vote in favor of dual-class capital structures to increase the number of
authorized shares where that class of stock would have superior voting rights.
Investment Manager will generally vote in favor of the issuance of preferred
stock in cases where the company specifies the voting, dividend, conversion and
other rights of such stock and the terms of the preferred stock issuance are
deemed reasonable. Investment Manager will review proposals seeking preemptive
rights on a case-by-case basis.
Mergers and Corporate Restructuring: Mergers and acquisitions will be subject
to careful review by the research analyst to determine whether they would be
beneficial to shareholders. Investment Manager will analyze various economic
and strategic factors in making the final decision on a merger or acquisition.
Corporate restructuring proposals are also subject to a thorough examination on
a case-by-case basis.
Social and Corporate Policy Issues: As a fiduciary, Investment Manager is
primarily concerned about the financial interests of its Advisory Clients.
Investment Manager will generally give management discretion with regard to
social, environmental and ethical issues although Investment Manager may vote
in favor of those issues that are believed to have significant economic
benefits or implications.
Global Corporate Governance: Investment Manager manages investments in
countries worldwide. Many of the tenets discussed above are applied to
Investment Manager's proxy voting decisions for international investments.
However, Investment Manager must be flexible in these worldwide markets and
must be mindful of the varied market practices of each region. As experienced
money managers, Investment Manager's analysts are skilled in understanding the
complexities of the regions in which they specialize and are trained to analyze
proxy issues germane to their regions.
PROXY PROCEDURES
The Proxy Group is fully cognizant of its responsibility to process proxies and
maintain proxy records pursuant to applicable rules and regulations, including
those of the U.S. Securities and Exchange Commission ("SEC") and the Canadian
Securities Administrators ("CSA"). In addition, Investment Manager understands
its fiduciary duty to vote proxies and that proxy voting decisions may affect
the value of shareholdings. Therefore, Investment Manager will attempt to
process every proxy it receives for all domestic and foreign securities.
However, there may be situations in which Investment Manager cannot vote
proxies. For example, if the cost of voting a foreign proxy outweighs the
benefit of voting, the Proxy Group may refrain from processing that vote.
Additionally, the Proxy Group may not be given enough time to process the vote.
For example, the Proxy Group, through no fault of their own, may receive a
meeting notice from the company too late, or may be unable to obtain a timely
translation of the agenda. In addition, if Investment Manager has outstanding
sell orders, or anticipates placing sell orders prior to the date of the
shareholder meeting, in certain markets that have blocking restrictions, the
proxies for those meetings may not be voted in order to facilitate the sale of
those securities. If a security is on loan, Investment Manager may determine
that it is not in the best interests of its clients to recall the security for
voting purposes. Although Investment Manager may hold shares on a company's
record date, should it sell them prior to the company's meeting date,
Investment Manager ultimately may decide not to vote those shares. Lastly, the
Investment Manager will not vote proxies when prohibited from voting by
applicable law.
Investment Manager may vote against an agenda item where no further information
is provided, particularly in non-U.S. markets. For example, if "Other Business"
is listed on the agenda with no further information included in the proxy
materials, Investment Manager may vote against the item to send a message to
the company that if it had provided additional information, Investment Manager
may have voted in favor of that item. Investment Manager may also enter an
"withhold" vote on the election of certain directors from time to time based on
individual situations, particularly where Investment Manager is not in favor of
electing a director and there is no provision for voting against such director.
The following describes the standard procedures that are to be followed with
respect to carrying out Investment Manager's proxy policy:
1. The Proxy Group will identify all Advisory Clients, maintain a list of
those clients, and indicate those Advisory Clients who have delegated proxy
voting authority to the Investment Manager. The Proxy Group will
periodically review and update this list.
2. All relevant information in the proxy materials received (e.g., the
record date of the meeting) will be recorded immediately by the Proxy Group
in a database to maintain control over such materials. The Proxy Group will
confirm each relevant Advisory Client's holdings of the securities and that
the client is eligible to vote.
3. The Proxy Group will review and compile information on each proxy upon
receipt of any agendas, materials, reports, recommendations from
RiskMetrics and/or Glass Lewis, or other information. The Proxy Group will
then forward this information to the appropriate research analyst and/or
legal counsel for review and voting instructions.
4. In determining how to vote, Investment Manager's analysts and relevant
portfolio manager(s) will consider the General Proxy Voting Guidelines set
forth above, their in-depth knowledge of the company, any readily available
information and research about the company and its agenda items, and the
recommendations put forth by RiskMetrics, Glass Lewis, or other independent
third party providers of proxy services.
5. The Proxy Group is responsible for maintaining the documentation that
supports Investment Manager's voting position. Such documentation may
include, but is not limited to, any information provided by RiskMetrics,
Glass Lewis, or other proxy service providers, and, especially as to
non-routine, materially significant or controversial matters, memoranda
describing the position it has taken, why that position is in the best
interest of its Advisory Clients (including separate accounts such as ERISA
accounts as well as mutual funds), an indication of whether it supported or
did not support management and any other relevant information.
Additionally, the Proxy Group may include documentation obtained from the
research analyst, portfolio manager, legal counsel and/or the Proxy Review
Committee.
6. After the proxy is completed but before it is returned to the issuer
and/or its agent, the Proxy Group may review those situations including
special or unique documentation to determine that the appropriate
documentation has been created, including conflict of interest screening.
7. The Proxy Group will attempt to submit Investment Manager's vote on all
proxies to RiskMetrics for processing at least three days prior to the
meeting for U.S. securities and 10 days prior to the meeting for foreign
securities. However, in certain foreign jurisdictions it may be impossible
to return the proxy 10 days in advance of the meeting. In these situations,
the Proxy Group will use its best efforts to send the proxy vote to ISS in
sufficient time for the vote to be lodged.
8. The Proxy Group prepares reports for each client that has requested a
record of votes cast. The report specifies the proxy issues that have been
voted for the client during the requested period and the position taken
with respect to each issue. The Proxy Group sends one copy to the client,
retains a copy in the Proxy Group's file and forwards a copy to either the
appropriate portfolio manager or the client service representative. While
many Advisory Clients prefer quarterly or annual reports, the Proxy Group
will provide reports for any timeframe requested by a client.
9. If the Franklin Templeton Services, LLC Fund Treasury Department learns
of a vote on a material event that will affect a security on loan, the Fund
Treasury Department will notify Investment Manager and obtain instructions
regarding whether Investment Manager desires the Fund Treasury Department
to contact the custodian bank in an effort to retrieve the securities. If
so requested by Investment Manager, the Fund Treasury Department shall use
its best efforts to recall any security on loan and will use other
practicable and legally enforceable means to ensure that Investment Manager
is able to fulfill its fiduciary duty to vote proxies for Advisory Clients
with respect to such loaned securities. The Fund Treasury Department will
advise the Proxy Group of all recalled securities.
10. The Proxy Group, in conjunction with Legal Staff responsible for
coordinating Fund disclosure, on a timely basis, will file all required
Form N-PXs, with respect to investment company clients, disclose that its
proxy voting record is available on the web site, and will make available
the information disclosed in its Form N-PX as soon as is reasonable
practicable after filing Form N-PX with the SEC.
11. The Proxy Group, in conjunction with Legal Staff responsible for
coordinating Fund disclosure, will ensure that all required disclosure
about proxy voting of the investment company clients is made in such
clients' financial statements and disclosure documents.
12. The Proxy Group will review the guidelines of RiskMetrics and Glass
Lewis, with special emphasis on the factors they use with respect to proxy
voting recommendations.
13. The Proxy Group will familiarize itself with the procedures of
RiskMetrics that govern the transmission of proxy voting information from
the Proxy Group to RiskMetrics and periodically review how well this
process is functioning.
14. The Proxy Group will investigate, or cause others to investigate, any
and all instances where these Procedures have been violated or there is
evidence that they are not being followed. Based upon the findings of these
investigations, the Proxy Group, if practicable will recommend amendments
to these Procedures to minimize the likelihood of the reoccurrence of
non-compliance.
15. At least annually, the Proxy Group will verify that:
o All annual proxies for the securities held by Advisory Clients have been
received;
o Each proxy or a sample of proxies received has been voted in a manner
consistent with these Procedures and the Proxy Voting Guidelines;
o Each proxy or sample of proxies received has been voted in accordance with
the instructions of the Investment Manager;
o Adequate disclosure has been made to clients and fund shareholders about
the procedures and how proxies were voted; and
o Timely filings were made with applicable regulators related to proxy
voting.
The Proxy Group is responsible for maintaining appropriate proxy voting
records. Such records will include, but are not limited to, a copy of all
materials returned to the issuer and/or its agent, the documentation described
above, listings of proxies voted by issuer and by client, and any other
relevant information. The Proxy Group may use an outside service such as
RiskMetrics to support this function. All records will be retained for at least
five years, the first two of which will be on-site. Advisory Clients may
request copies of their proxy voting records by calling the Proxy Group collect
at 1-954-527-7678, or by sending a written request to: Franklin Templeton
Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL
33394, Attention: Proxy Group. Advisory Clients may review Investment Manager's
proxy voting policies and procedures on-line at www.franklintempleton.com and
may request additional copies by calling the number above. For U.S. mutual fund
products, an annual proxy voting record for the period edning June 30 of each
year will be posted to www.franklintempleton.com no later than August 31 of
each year. For Canadian mutual fund products, an annual proxy voting record for
the period ending June 30 of each year will be posted to
www.franklintempleton.ca. no later than August 31 of each year. The Proxy Group
will periodically review web site posting and update the posting when
necessary. In addition, the Proxy Group is responsible for ensuring that the
proxy voting policies, procedures and records of the Investment Manager are
available as required by law and is responsible for overseeing the filing of
such policies, procedures and mutual fund voting records with the SEC, the CSA
and other applicable regulators.
As of January 2, 2008
Turner Investment Partners, Inc.
PROXY VOTING POLICY AND PROCEDURES
Turner Investment Partners, Inc., as well as its investment advisory affiliate,
Turner Investment Management, LLC (collectively, Turner), act as fiduciaries in
relation to their clients and the assets entrusted by them to their management.
Where the assets placed in Turner's care include shares of corporate stock, and
except where the client has expressly reserved to itself or another party the
duty to vote proxies, it is Turner's duty as a fiduciary to vote all proxies
relating to such shares.
Duties with Respect to Proxies:
Turner has an obligation to vote all proxies appurtenant to shares of corporate
stock owned by its client accounts in the best interests of those clients. In
voting these proxies, Turner may not be motivated by, or subordinate the
client's interests to, its own objectives or those of persons or parties
unrelated to the client. Turner will exercise all appropriate and lawful care,
skill, prudence and diligence in voting proxies, and shall vote all proxies
relating to shares owned by its client accounts and received by Turner. Turner
shall not be responsible, however, for voting proxies that it does not receive
in sufficient time to respond.
Delegation:
In order to carry out its responsibilities in regard to voting proxies, Turner
must track all shareholder meetings convened by companies whose shares are held
in Turner client accounts, identify all issues presented to shareholders at
such meetings, formulate a principled position on each such issue and ensure
that proxies pertaining to all shares owned in client accounts are voted in
accordance with such determinations.
Consistent with these duties, Turner has delegated certain aspects of the proxy
voting process to Institutional Shareholder Services, and its Proxy Voting
Service (PVS) subsidiary. PVS is a separate investment adviser registered under
the Investment Advisers Act of 1940, as amended. Under an agreement entered
into with Turner, PVS has agreed to vote proxies in accordance with
recommendations developed by PVS and overseen by Turner, except in those
instances where Turner has provided it with different direction.
Review and Oversight:
Turner has reviewed the methods used by PVS to identify and track shareholder
meetings called by publicly traded issuers throughout the United States and
around the globe. Turner has satisfied itself that PVS operates a system
reasonably designed to identify all such meetings and to provide Turner with
timely notice of the date, time and place of such meetings. Turner has further
reviewed the principles and procedures employed by PVS in making
recommendations on voting proxies on each issue presented, and has satisfied
itself that PVS's recommendations are: (i) based upon an appropriate level of
diligence and research, and (ii) designed to further the interests of
shareholders and not serve other unrelated or improper interests. Turner,
either directly or through its duly-constituted Proxy Committee, shall review
its determinations as to PVS at least annually.
Notwithstanding its belief that PVS's recommendations are consistent with the
best interests of shareholders and appropriate to be implemented for Turner's
client accounts, Turner has the right and the ability to depart from a
recommendation made by PVS as to a particular vote, slate of candidates or
otherwise, and can direct PVS to vote all or a portion of the shares owned for
client accounts in accordance with Turner's preferences. PVS is bound to vote
any such shares subject to that direction in strict accordance with all such
instructions. Turner, through its Proxy Committee, reviews on a regular basis
the overall shareholder meeting agenda, and seeks to identify shareholder votes
that warrant further review based upon either (i) the total number of shares of
a particular company stock that Turner holds for its clients accounts, or (ii)
the particular subject matter of a shareholder vote, such as board independence
or shareholders' rights issues. In determining whether to depart from a PVS
recommendation, the Turner Proxy Committee looks to its view of the best
interests of shareholders, and provides direction to PVS only where in Turner's
view departing from the PVS recommendation appears to be in the best interests
of Turner's clients as shareholders. The Proxy Committee keeps minutes of its
determinations in this regard.
Conflicts of Interest:
Turner stock is not publicly traded, and Turner is not otherwise affiliated
with any issuer whose shares are available for purchase by client accounts.
Further, no Turner affiliate currently provides brokerage, underwriting,
insurance, banking or other financial services to issuers whose shares are
available for purchase by client accounts.
Where a client of Turner is a publicly traded company in its own right, Turner
may be restricted from acquiring that company's securities for the client's
benefit. Further, while Turner believes that any particular proxy issues
involving companies that engage Turner, either directly or through their
pension committee or otherwise, to manage assets on their behalf, generally
will not present conflict of interest dangers for the firm or its clients, in
order to avoid even the appearance of a conflict of interest, the Proxy
Committee will determine, by surveying the Firm's employees or otherwise,
whether Turner, an affiliate or any of their officers has a business, familial
or personal relationship with a participant in a proxy contest, the issuer
itself or the issuer's pension plan, corporate directors or candidates for
directorships. In the event that any such relationship is found to exist, the
Proxy Committee will take appropriate steps to ensure that any such
relationship (or other potential conflict of interest), does not influence
Turner's or the Committee's decision to provide direction to PVS on a given
vote or issue. Further to that end, Turner will adhere to all recommendations
made by PVS in connection with all shares issued by such companies and held in
Turner client accounts, and, absent extraordinary circumstances that will be
documented in writing, will not subject any such proxy to special review by the
Proxy Committee. Turner will seek to resolve any conflicts of interests that
may arise prior to voting proxies in a manner that reflects the best interests
of its clients.
Securities Lending:
Turner will generally not vote nor seek to recall in order to vote shares on
loan in connection with client administered securities lending programs, unless
it determines that a vote is particularly significant. Seeking to recall
securities in order to vote them even in these limited circumstances may
nevertheless not result in Turner voting the shares because the securities are
unable to be recalled in time from the party with custody of the securities, or
for other reasons beyond Turner's control.
Obtaining Proxy Voting Information:
To obtain information on how Turner voted proxies, please contact:
Andrew Mark, Director of Operations and Technology Administration
C/o Turner Investment Partners, Inc.
1205 Westlakes Drive, Suite 100
Berwyn, PA 19312
Recordkeeping:
Turner shall retain its (i) proxy voting policies and procedures; (ii) proxy
statements received regarding client statements; (iii) records or votes it
casts on behalf of clients; (iv) records of client requests for proxy voting
information, and (v) any documents prepared by Turner that are material in
making a proxy voting decision. Such records may be maintained with a third
party, such as PVS, that will provide a copy of the documents promptly upon
request.
Adopted: July 1, 2003
Last revised: April 1, 2007
UBS Global Asset Management (Americas) Inc.
The proxy voting policy of UBS Global Asset Management ("UBS Global AM") is
based on its belief that voting rights have economic value and must be treated
accordingly. Generally, UBS Global AM expects the boards of directors of
companies issuing securities held by its clients to act as stewards of the
financial assets of the company, to exercise good judgment and practice
diligent oversight with the management of the company. While there is no
absolute set of rules that determine appropriate corporate governance under all
circumstances and no set of rules will guarantee ethical behavior, there are
certain benchmarks, which, if substantial progress is made toward, give
evidence of good corporate governance. UBS Global AM may delegate to an
independent proxy voting and research service the authority to exercise the
voting rights associated with certain client holdings. Any such delegation
shall be made with the direction that the votes be exercised in accordance with
UBS Global AM's proxy voting policy.
When UBS Global AM's view of a company's management is favorable, UBS Global AM
generally supports current management initiatives. When UBS Global AM's view is
that changes to the management structure would probably increase shareholder
value, UBS Global AM may not support existing management proposals. In general,
UBS Global AM: (1) opposes proposals which act to entrench management; (2)
believes that boards should be independent of company management and composed
of persons with requisite skills, knowledge and experience; (3) opposes
structures which impose financial constraints on changes in control; (4)
believes remuneration should be commensurate with responsibilities and
performance; and (5) believes that appropriate steps should be taken to ensure
the independence of auditors.
UBS Global AM has implemented procedures designed to identify whether it has a
conflict of interest in voting a particular proxy proposal, which may arise as
a result of its or its affiliates' client relationships, marketing efforts or
banking, investment banking and broker/dealer activities. To address such
conflicts, UBS Global AM has imposed information barriers between it and its
affiliates who conduct banking, investment banking and broker/dealer activities
and has implemented procedures to prevent business, sales and marketing issues
from influencing our proxy votes. Whenever UBS Global AM is aware of a conflict
with respect to a particular proxy, its appropriate local corporate governance
committee is required to review and agree to the manner in which such proxy is
voted.
Wellington Management Company, LLP
The Funds for which Wellington Management Company, LLP (`Wellington
Management") serves as sub-adviser have granted to Wellington Management the
authority to vote proxies on their behalf with respect to the assets managed by
Wellington Management. Wellington Management votes proxies in what it believes
are the best economic interests of its clients and in accordance with its
Global Proxy Policies and Procedures. Wellington Management's Corporate
Governance Committee is responsible for the review and oversight of the firm's
Global Proxy Policies and Procedures. The Corporate Governance Group within
Wellington Management's Corporate Operations Department is responsible for the
day-to-day administration of the proxy voting process. Although Wellington
Management may utilize the services of various external resources in analyzing
proxy issues and has established its own Global Proxy Voting Guidelines setting
forth general guidelines for voting proxies, Wellington Management personnel
analyze all proxies and vote proxies based on their assessment of the merits of
each proposal. Each Fund's portfolio manager has the authority to determine the
final vote for securities held in the Fund, unless the portfolio manager is
determined to have a material conflict of interest related to that proxy vote.
Wellington Management maintains procedures designed to identify and address
material conflicts of interest in voting proxies. Its Corporate Governance
Committee sets standards for identifying materials conflicts based on client,
vendor and lender relationships. Proxy votes for which Wellington Management
identifies a material conflict are reviewed by designated members of its
Corporate Governance Committee or by the entire committee in some cases to
resolve the conflict and direct the vote.
Wellington Management may be unable to vote or may determine not to vote a
proxy on behalf of a Fund due to securities lending, share blocking and
re-registration requirements, lack of adequate information, untimely receipt of
proxy materials, immaterial impact of the vote, and/or excessive costs.
LVIP Wilshire Risk-based Funds and LVIP Wilshire Target Maturity Funds
Background
The Lincoln Variable Insurance Products Trust offers certain series
fund-of-funds, which are referred to as the "Profile Funds." Each Profile Fund
intends to invest substantially all of its assets in shares of the Trust series
referred to as "Underlying Funds." The Underlying Funds are other investment
companies or series that offer their shares as investment options for variable
annuity and/or variable life insurance contracts issued by The Lincoln National
Life Insurance Company ("Lincoln Life") and Lincoln Life & Annuity Company of
New York (collectively, the "Insurance Companies").
The Insurance Companies and the Underlying Funds currently rely on Paragraph
(b)(15) of Rule 6e-3(T) under the Investment Company Act of 1940 (the "1940
Act") for an exemption from the certain provisions of the 1940 Act to the
extent necessary to permit shares of an Underlying Fund to be sold to and held
by variable annuity and variable life insurance separate accounts of the
Insurance Companies (such exemption referred to as "Mixed Funding Relief").
The Trust, on behalf of the Profile Funds, will comply with all the conditions
that apply to it as specified in Paragraph (b)(15) of Rule 6e-3(T) in
connection with the Mixed Funding Relief, and in this respect, the Profile
Funds will monitor for the existence of any material irreconcilable conflict
between the interests of variable annuity contractholders and variable life
insurance contractholders investing in such Fund. The Profile Funds shall have
the rights and responsibilities of registered investment companies in which
insurance companies invest as specified in such Paragraph.
The SEC staff has informally taken the position that Mixed Funding Relief may
be relied upon by the insurance companies and underlying funds of a
fund-of-funds, subject to the certain "echo voting" procedures, notwithstanding
the investment in the underlying funds by an intervening fund-of-funds. The
Trust wishes to adhere to the informal position of the SEC staff, and,
accordingly has established the following procedures.
Procedures
To the extent that an Underlying Fund whose shares are held by a Profile Fund
solicits a shareholder vote on any matter, the Profile Fund shall vote such
shares of the Underlying Fund in the same proportion as the vote of all other
holders of shares of such Underlying Fund, as described by Section
12(d)(1)(E)(iii)(aa) of the 1940 Act. This type of voting structure is commonly
referred to as "echo voting."
APPENDIX C
Compensation Structures and Methodologies of Portfolio Managers
The following describes the structure of, and the method(s) used to determine
the different types of compensation (e.g., salary, bonus, deferred
compensation, retirement plans and arrangements) for each portfolio manager as
of the funds' fiscal year ended December 31, 2007:
BAMCO, Inc. (LVIP Baron Growth Opportunities Fund)
Mr. Baron has an employment agreement that includes a fixed salary, a fixed
bonus that is roughly equivalent to 42% of his base salary and a performance
bonus based on a percentage of the management fees earned on the funds he
manages. The contract is for five years, with automatic one year extensions
thereafter. Mr. Baron also has a line of credit from the Firm and the Firm has
agreed to post collateral up to a fixed amount for his personal bank loans. The
terms of his contract are based on Mr. Baron's role as the Firm's founder,
chief executive officer, chief investment officer, and his position as
portfolio manager for the majority of the Firm's assets under management.
Consideration is given to Mr. Baron's reputation, the long-term performance
records of the funds under his management and the profitability of the Firm. In
addition to his cash compensation, Mr. Baron benefits from a line of credit
that is guaranteed by Baron Capital.
Cohen & Steers (LVIP Cohen & Steers Global Real Estate Fund)
Portfolio managers and research analysts receive a base salary plus a
performance-based incentive bonus (consisting of cash and equity in the form of
restricted stock units), which is designed to be a meaningful portion of
compensation. Portfolio managers are evaluated on performance relative to their
benchmark on a one-and three-year basis and performance relative to peer
groups. Research analysts' incentive compenstation is based on the quality of
their research inputs to our valuation model and their investment cases, as
well as their contribution to the investment process. Traders' incentive
compensation is based on the efficiency of their trading execution measured, in
part, by Abel/Noser. Other factors that contribute to total compensation
include the firm's overall success and each individual's performance with
regard to teamwork, attitude, leadership and values. The firm uses McLagan to
benchmark compensation relative to market comparables, and our goal is to be in
the top quartile relative to that survey.
All employees earning a threshold amount receive a significant portion of their
total compensation in restricted stock units ("RSUs"), at least 15%-35%, which
vest and convert to common stock ratably over four years. In addition, all
employees may voluntarily defer up to 25% of their bonus to the optional Stock
Purchase Program under the Stock Incentive Plan. Any such bonus amounts
mandated or voluntarily deferred into RSUs are matched 25% by the firm in
additional RSUs. All employees are eligible to participate in a stock purchase
plan as well, whereby emplyees may purchase the firm's common stock at a 15%
discount. A significant amount of the firm's equity is held by employees.
Columbia Management Advisors, LLC (Columbia Value Opportunites Fund)
Columbia Management's portfolio managers received their compensation from
Columbia Management and its parent company, Columbia Management Group, LLC, in
the form of salary, bonus, stock options, restricted stock, and notional
investments through an incentive plan, the value of which is measured by
reference to the performance of the Columbia Funds in which the account is
invested. A portfolio manager's bonus is variable and generally is based on (1)
an evaluation of the portfolio manager's investment performance and (2) the
results of a peer and/or management review of the portfolio manager, which
takes into account skills and attributes such as team participation, investment
process, communication and professionalism. In evaluating investment
performance, Columbia Management generally considers the one, three and five
year performance of mutual funds and other accounts managed by the portfolio
manager relative to the benchmarks and peer groups noted below, emphasizing the
portfolio manager's three and five year performance. Columbia Management also
may consider a portfolio manager's performance in managing client assets in
sectors and industries assigned to the portfolio manager as part of his/her
investment team responsibilities, where applicable. For portfolio managers who
also have group management responsibilities, another factor in their evaluation
is an assessment of the group's overall investment performance.
Performance Benchmarks
Secondary Morningstar Category
Portfolio Manager Primary Benchmark Benchmark (Peer Group)
Jarl Ginsberg Russell 2000 Value TR N/A Small Value
Christian K. Stadlinger Russell 2000 Value TR N/A Small Value
The size of the overall bonus pool each year is determined by Columbia
Management Group, LLC and depends on, among other factors, the levels of
compensation generally in the investment management industry (based on market
compensation data) and Columbia Management's profitability for the year, which
is largely determined by assets under management.
Delaware Management Company ("DMC") (Bond Fund, Growth and Income Fund, Managed
Fund, Money Market Fund, Social Awareness Fund, Special Opportunties Fund)
COMPENSATION STRUCTURE
Each portfolio manager's compensation consists of the following:
BASE SALARY - Each named portfolio manager receives a fixed base salary.
Salaries are determined by a comparison to industry data prepared by third
parties to ensure that portfolio manager salaries are in line with salaries
paid at peer investment advisory firms.
Bonus - Mr. Chow and Mr. Early: Mr. Early is eligible to receive an annual cash
bonus which is based on quantitative and qualitative factors.
The amount of the pool for bonus payments is first determined by mathematical
equation based on assets, management fees and expenses, including fund waiver
expenses, for registered investment companies, pooled vehicles, and managed
separate accounts. Generally, approximately 80% of the bonus is quantitatively
determined. For investment companies, each manager is compensated according to
the fund's Lipper peer group percentile ranking on a one-year and three-year
basis. For managed separate accounts the portfolio managers are compensated
according to the composite percentile ranking in consultant databases. There is
no objective award for a fund that falls below the 50th percentile for a given
time period. There is a sliding scale for investment companies that are ranked
above the 50th percentile. The managed separate accounts are compared to Callan
and other databases. The remaining 20% portion of the bonus is discretionary as
determined by Delaware and takes into account subjective factors.
Due to the transitioning of his responsibilities, Mr. Early's bonus for the
past year was guaranteed. It is anticipated that going forward an objective
component will be added that is reflective of account performance relative to
an appropriate peer group or database.
Mr. Chow is eligible to receive an annual cash bonus, which is based on
quantitative and qualitative factors. There is one pool for bonus payments for
the fixed income department. The amount of the pool for bonus payments is first
determined by
mathematical equation based on all assets managed (including investment
companies, insurance product-related accounts and other separate accounts),
management fees and related expenses (including fund waiver expenses) for
registered investment companies, pooled vehicles, and managed separate
accounts. Generally 50% - 70% of the bonus is quantitatively determined. For
more senior portfolio managers, a higher percentage of the bonus is
quantitatively determined. For investment companies, each manager is
compensated according to the fund's Lipper peer group percentile ranking on a
one-year and three-year basis, equally weighted.
For managed separate accounts the portfolio managers are compensated according
to the composite percentile ranking against the Frank Russell and Callan
Associates databases on a one-year and three-year basis, with three-year
performance more heavily weighted.
There is no objective award for a fund that falls below the 50th percentile
over the three-year period. There is a sliding scale for investment companies
that are ranked above the 50th percentile. The remaining 30%-50% portion of the
bonus is discretionary as determined by the Manager and takes into account
subjective factors.
Bonus - Mr. Beck, Mr. Madden and Mr. Hughes: The bonus pool is determined by
the revenues associated with the products a portfolio manager manages. Delaware
keeps a percentage of the revenues and the remaining percentage of revenues
(minus appropriate direct expenses associated with this product and the
investment management team) create the "bonus pool" for a product. Various
members of the team have the ability to earn a percentage of the bonus pool
with the most senior contributors having the largest share. The pool is
allotted based on subjective factors (50%) and objective factors (50%). The
primary objective factor is the performance of the funds managed relative to
the performance of the appropriate Lipper peer groups.Performance is measured
as a result of one's standing in the Lipper peer groups on a one-year and
three-year basis. Three year performance is weighted more heavily and there is
no objective award for a fund that falls below the 50th percentile for a given
time period. There is a sliding scale for performance achievements above the
50th percentile.
For the analysts identified as having responsibility for day-to-day management
of [fund], 50% of their objective bonus is determined as described immediately
above. The remaining 50% is determined for each analyst based on that analyst's
stock selection process within the sectors for which he is responsible as
compared to the relevant Russell index over a one-year period.
Bonus - Mr. Francis Morris, Mr. Adams, Mr. Michael Morris and Mr. Padilla:
The bonus pool is determined by the revenues associated with the products a
portfolio manager manages. Delaware keeps a percentage of the revenues and the
remaining percentage of revenues (minus appropriate direct expenses associated
with this product and the investment management team) create the "bonus pool"
for a product. Various members of the team have the ability to earn a
percentage of the bonus pool with the most senior contributors having the
largest share.
Due to transitioning of responsibilities of this team during the year, 100% of
their bonuses for the prior year were subjective, determined in part based on
performance of the funds managed as compared to the appropriate Lipper peer
groups for a one-year period. It is anticipated that going forward an objective
component will be added in a manner similar to that described above (see
description under Beck, Madden and Hughes).
DEFERRED COMPENSATION - Each named portfolio manager is eligible to participate
in the Lincoln National Corporation Executive Deferred Compensation Plan, which
is available to all employees whose income exceeds a designated threshold. The
Plan is a non-qualified unfunded deferred compensation plan that permits
participating employees to defer the receipt of a portion of their cash
compensation.
STOCK OPTION INCENTIVE PLAN/EQUITY COMPENSATION PLAN - Portfolio managers may
be awarded options, stock appreciation rights, restricted stock awards and
restricted stock units relating to the underlying shares of common stock of
Delaware Investments U.S., Inc. pursuant to the terms of the Amended and
Restated Delaware Investments U.S., Inc. Incentive Compensation Plan. In
addition, certain managers may be awarded restricted stock units, or
"performance shares", in Lincoln National Corporation. Delaware Investments
U.S., Inc., is an indirect subsidiary of Delaware Management Holdings, Inc.
Delaware Management Holdings, Inc., is in turn an indirect, wholly-owned
subsidiary of Lincoln National Corporation.
The Amended and Restated Delaware Investments U.S., Inc. Incentive Compensation
Plan was established in 2001 in order to provide certain employees of the
Manager with a more direct means of participating in the growth of the
Manager. Under the terms of the plan, stock options typically vest in 25%
increments on a four-year schedule and expire ten years after issuance. Subject
to the terms of the plan, restricted stock units typically vest in 25%
increments on a four-year schedule, and shares of common stock underlying the
restricted stock awards will be issued after vesting. Awards are granted under
the plan from time to time by the investment manager in its full discretion.
Awards may be based in part on seniority. The fair market value of the shares
of Delaware Investments U.S., Inc., is normally determined as of each March 31,
June 30, September 30 and December 31. Shares issued upon the exercise of such
options or vesting of restricted stock units must be held for six months and
one day, after which time the shareholder may put them back to the issuer or
the shares may be called back from the shareholder from time to time, as the
case may be.
Portfolio managers who do not participate in the Delaware Investments U.S.,
Inc. Stock Option Plan are eligible to participate in Lincoln's Long-Term
Incentive Plan, which is designed to provide a long-term incentive to officers
of Lincoln. Under the plan, a specified number of performance shares are
allocated to each unit and are awarded to participants in the discretion of
their managers in accordance with recommended targets related to the number of
employees in a unit that may receive an award and the number of shares to be
awarded. The performance shares have a three year vesting schedule and, at the
end of the three years, the actual number of shares distributed to those who
received awards may be equal to, greater than or less than the amount of the
award based on Lincoln's achievement of certain performance goals relative to a
pre-determined peer group.
OTHER COMPENSATION - Portfolio managers may also participate in benefit plans
and programs available generally to all employees.
Fidelity Management & Research Company ("Fidelity") (LVIP FI Equity-Income
Fund)
Ciaran O'Neill is the portfolio manager of LVIP FI Equity Income Fund and
receives compensation for his services. As of December 31, 2007, portfolio
manager compensation generally consisted of a fixed base salary determined
periodically (typically annually), a bonus and, in certain cases, participation
in several types of equity-based compensation plans, and, if applicable,
relocation plan benfits. A portion of the portfolio manager's compensation may
be deferred based on criteria established by FMR or at the election of the
portfolio manager.
The portfolio manager's base salary is determined by level of responsibility
and tenure at FMR or its affiliates. The portfolio manager's bonus is based on
several components. The primary components of the portfolio manager's bonus are
based on (i) the pre-tax investment performance of the portfolio manager's
fund(s) and account(s) measured against a benchmark index assigned to each fund
or account and within a defined peer group assigned to each fund or account.
The pre-tax investment performance of the portfolio manager's fund(s) and
account(s) is weighted according to his tenure on those fund(s) and account(s)
and the average asset size of those fund(s) and accounts(s) over his tenure.
Each component is calculated separately over the portfolio manager's tenure on
those fund(s) and account(s) over a measurement period that initially is
contemporaneous with his tenure, but that eventually encompasses rolling
periods of up to five years for the comparison to a benchmark index, and
rolling periods of up to three years for the comparison to a peer group. A
smaller subjective component of the portfolio manager's bonus is based on the
portfolio manager's overall contribution to management of FMR. The portion of
the portfolio manager's bonus that is linked to the investment performance of
LVIP FI Equity Income Fund is based on the fund's pre-tax investment
performance measured against the Russell 1000 Value Index and the fund's
pre-tax investment performance within the US Equity Large Cap Value universe.
The portfolio manager also is compensated under equity-based compensation plans
linked to increases or decreases in the net asset value of the stock of FMR
LLC, FMR's parent company. FMR LLC is a diverse financial services company
engaged in various activities that include fund management, brokerage,
retirement, and employer administrative services. If requested to relocate
their primary residence, portfolio managers also may be eligible to receive
benefits, such as home sale assistance and payment of certain moving expenses,
under relocation plans for most full-time employees of FMR LLC and its
affiliates.
Janus Capital Management LLC ("Janus") (LVIP Janus Capital Appreciation Fund)
The following describes the structure and method of calculating a portfolio
manager's compensation as of December 31, 2007.
Portfolio managers and, if applicable, co-portfolio managers ("portfolio
manager" or "portfolio managers") are compensated for managing the fund and any
other funds, portfolios or accounts for which they have exclusive shared
responsibilities (collectively, the "Managed Funds") through two components:
fixed compensation and variable compensation. Certain portfolio managers are
eligible to receive additional discretionary compensation in recognition of
their continued analyst responsibilities, and the Chief Investment Officers
("CIO") of Janus are eligible for additional variable compensation in
recognition of their CIO roles, each as noted below.
Fixed Compensation: Fixed compensation is paid in cash and is comprised of an
annual base salary based on factors such as the complexity of managing funds
and other accounts and scope of responsibility (including assets under
management).
Variable Compensation: Variable compensation is paid in the form of cash and
long-term incentive awards (consisting of a mixture of Janus Capital Group Inc.
("JCGI") restricted stock, stock options, and a cash deferred award that is
credited with income, gains and losses based on the performance of Janus mutual
fund investments selected by the portfolio managers. Variable compensation is
based on pre-tax performance of the Managed Funds.
Variable compensation is structured to pay the portfolio managers primarily on
the Managed Funds' performance, with additional discretionary compensation
available from one or more bonus pools as discussed below:
Aggregate compensation derived from the Managed Funds' performance is
calculated based upon a percentage of the total revenue received on the Managed
Funds adjusted to reflect the actual performance of such Managed Funds. Actual
performance is calculated based on the Managed Funds' aggregate asset-weighted
Lipper peer group performance ranking on a one-, three-, and five-year rolling
period basis with a predominant weighting on the Managed Funds' performance in
the three- and five-year periods. The compensation determined from the Managed
Funds' performance is then allocated to the respective portfolio manager(s).
A portfolio manages is also eligible to participate in a portfolio manager
discretionary bonus pool. The size of the portfolio manager bonus pool
fluctuates depending on both the revenue derived from firm-wide managed assets
(excluding assets managed by subadvisers) and the investment performance of
such firm-wide managed assets. Compensation from the portfolio manager bonus
pool is then allocated among the eligible respective participants at the
discretion of Janus based upon, among other things: (i) teamwork and support of
team culture; (ii) mentoring of analysts; (iii) contributions to the sales
process; and (iv) client relationships.
Analyst Variable Compensation: If a portfolio manager also has analyst
responsibilities, then such portfolio manager is eligible to participate in a
discretionary analyst team pool. The aggregate compensation available under the
analyst team pool is derived from a formula tied to a combination of the
aggregate fund-weighted and asset-weighted Lipper peer group performance
ranking of certain Janus mutual funds for one- and three-year rolling periods,
subject to a reduction in the event of absolute negative performance. The
analyst team pool is then allocated among the eligible analysts at the
discretion of Janus based on factors which may include performance of
investment recommendations, individual and team contributions, scope of
coverage, and other subjective criteria.
CIO Variable Compensation: The CIOs are entitled to additional compensation in
consideration of their role as CIO of Janus that is generally based on
firm-wide investment performance (excluding assets managed by subadvisers),
Janus-managed net long-term flows (excluding assets managed by subadvisers and
money market funds), investment team leadership factors, and overall corporate
leadership factors. Variable compensation from firm-wide investment performance
is calculated based upon the firm-wide aggregate asset-weighted Lipper peer
group performance ranking on a one- and three-year rolling period basis.
Portfolio managers may elect to defer payment of a designated percentage of
their fixed compensation and/or up to all variable compensation in accordance
with JCGI's Executive Income Deferral Program.
The Fund's Lipper peer group for compensation purposes is the Large-Cap Growth
Funds.
Marsico Capital Management (Marsico International Growth Fund)
Compensation for Marsico Capital Management's (MCM) portfolio managers and
research analysts consists of a base salary (reevaluated at least annually),
and periodic cash bonuses. Bonuses are typically based on two primary factors;
(1) MCM's overall profitability for the period, and (2) individual achievement
and contribution. In addition, MCM's portfolio managers and research analysts
typically own equity interests in a company that indirectly owns MCM. In
addition to salary and bonus, portfolio managers and research analysts may
participate in other MCM benefits such as health insurance and retirement plans
on the same basis as other MCM employees.
Portfolio manager compensation takes into account, among other factors, the
overall performance of all accounts for which the manager provides investment
advisory services. Portfolio managers do not receive special consideration
based on the performance of particular accounts and do not receive compensation
from accounts charging performance-based fees. Exceptional individual efforts
are typically rewarded through salary readjustments and through greater
participation in the bonus pool. Portfolio manager compensation comes solely
from MCM.
MCM does not tie portfolio manager compensation to specific levels of
performance relative to fixed benchmarks. Although performance may be a relevant
consideration, to encourage a long-term horizon for managing portfolios, MCM
evaluates a portfolio manager's performance over periods longer than the
immediate compensation period, and may consider a variety of measures such as
the performance of unaffiliated portfolios with similar strategies and other
measurements. Other factors that may be significant in determining portfolio
manager compensation include, without limitation, effectiveness of the manger's
leadership within MCM's Investment Management Team, contributions to MCM's
overall performance, discrete securities analysis, idea generation, ability to
support and train other analysts, and other consideration.
Massachusetts Financial Services Company (MFS Value Fund)
Portfolio manager total cash compensation is a combination of base salary and
performance bonus:
Base Salary - Base salary represents a smaller percentage of portfolio manager
total cash compensation (generally below 33%) than incentive compensation.
Performance Bonus - Generally, incentive compensation represents a majority of
portfolio manager total cash compensation.
The performance bonus is based on a combination of quantitative and qualitative
factors, with more weight given to the former (generally over 60%) and less
weight given to the latter.
The quantitative portion is based on pre-tax performance of all of the accounts
managed by the portfolio manager (which includes the Fund and any other
accounts managed by the portfolio manager) over a one-, three-, and five-year
period relative to the appropriate Lipper peer group universe and/or benchmark
index with respect to each account. (Generally the benchmark index used is a
benchmark index set forth in the Fund's prospectus to which the Fund's
performance is compared. With respect to Funds with multiple portfolio
managers, the index used may differ for each portfolio manager, and may not be
a benchmark index set forth in the Fund's prospectus, but will be an
appropriate benchmark index based on the respective portfolio manager's role in
managing the Fund.) Additional or different appropriate peer group or benchmark
indices may also be used. Primary weight is given to portfolio performance over
three-year and five-year time periods with lesser consideration given to
portfolio performance over a one-year period (adjusted as appropriate if the
portfolio manager has served for less than five years).
The qualitative portion is based on the results of an annual internal peer
review process (conducted by other portfolio managers, analysts, and traders)
and management's assessment of overall portfolio manager contributions to
investor relations and the investment process (distinct from fund and other
account performance).
Portfolio managers also typically benefit from the opportunity to participate
in the MFS Equity Plan. Equity interests and/or options to acquire equity
interests in MFS or its parent company are awarded by management, on a
discretionary basis, taking into account tenure at MFS, contribution to the
investment process, and other factors.
Finally, portfolio managers are provided with a benefits package including a
defined contribution plan, health coverage and other insurance, which are
available to other employees of MFS on substantially similar terms. The
percentage such benefits represent of any portfolio manager's compensation
depends upon the length of the individual's tenure at MFS and salary level, as
well as other factors.
Mondrian Investment Partners Limited ("Mondrian") (International Fund)
Mondrian has the following programs in place to retain key investment staff:
1) Competitive Salary - All investment professionals are remunerated with a
competitive base salary.
2) Profit Sharing Bonus Pool - All Mondrian staff, including portfolio managers
and senior officers, qualify for participation in an annual profit sharing
pool determined by the company's profitability (approximately 30% of
profits).
3) Equity Ownership - Mondrian is majority management owned. A high proportion
of senior Mondrian staff (investment professionals and other support
functions) are shareholders in the business.
There is no direct link between portfolio manager compensation and individual
portfolio performance. Incentives (Bonus and Equity Programs) focus on the key
areas of research quality, long-term and short-term stock performance,
teamwork, client service and marketing.
At Mondrian, the investment management of particular portfolios is not "star
manager" based but uses a team system. This means that Mondrian's investment
professionals are primarily assessed on their contribution to the team's effort
and results, though with an important element of their assessment being focused
on the quality of their individual research contribution.
Compensation Committee
In determining the amount of bonuses and equity awarded, Mondrian's Board of
Directors consults with the company's Compensation Committee, who will make
recommendations based on a number of factors including investment research,
organization management, team work, client servicing and marketing.
Defined Contribution Pension Plan
All portfolio managers are members of the Mondrian defined contribution pension
plan where Mondrian pays a regular monthly contribution and the member may pay
additional voluntary contributions if they wish. The Plan is governed by
Trustees who have responsibility for the trust fund and payments of benefits to
members. In addition, the Plan provides death benefits for death in service and
a spouse's or dependant's pension may also be payable.
State Street Global Advisors Funds Management, Inc. ("SSgA")(SSgA S&P 500 Index
Fund and SSgA Small-Cap Index Fund)
The compensation of SSgA FM's investment professionals is based on a number of
factors. The first factor considered is external market. Through an extensive
compensation survey process, SSgA FM seeks to understand what its competitors
are paying people to perform similar roles. This data is then used to determine
a competitive baseline in the areas of base pay, bonus and long term incentive
(i.e. equity). The second factor taken into consideration is the size of the
pool available for this compensation. SSgA FM is a part of State Street
Corporation, and therefore works within its corporate environment on
determining the overall level of its incentive compensation pool. Once
determined, this pool is then allocated to the various locations and
departments of State Street Global Advisors and SSgA FM. The discretionary
determination of the allocation amounts to these locations and departments is
influenced by the competitive market data, as well as the overall performance
of the group. The pool is then allocated on a discretionary basis to individual
employees based on their individual performance. There is no fixed formula for
determining these amounts, nor is anyone's compensation directly tied to the
investment performance or asset value of a product or strategy. The same
process is followed in determining incentive equity allocations.
T. Rowe Price Associates ("T. Rowe Price") (LVIP T. Rowe Price Structured
Mid-Cap Growth Fund)
Portfolio manager compensation consists primarily of a base salary, a cash
bonus, and an equity incentive that usually comes in the form of a stock option
grant. Occasionally, portfolio managers will also have the opportunity to
participate in venture capital partnerships. Compensation is variable and is
determined based on the following factors.
Investment performance over one-, three-, five-, and 10-year periods is the
most important input. We evaluate performance in absolute, relative, and
risk-adjusted terms. Relative performance and risk-adjusted performance are
determined with reference to a broad based index (e.g., S&P 500) and the Lipper
index (e.g., Large-Cap Growth) set forth in the total return table of the
fund's prospectus, although other benchmarks may be used as well. Investment
results are also measured against comparably managed funds of competitive
investment management firms. The selection of comparable funds is approved by
our Investment Steering Committee and those funds are the same ones presented
to our mutual fund directors in their regular review of fund performance.
Performance is primarily measured on a pre-tax basis though tax-efficiency is
considered and is especially important for the Tax Efficient Funds.
Compensation is viewed with a long term time horizon. The more consistent a
manager's performance over time, the higher the compensation opportunity. The
increase or decrease in a fund's assets due to the purchase or sale of fund
shares is not considered a material factor. In reviewing relative performance
for fixed-income funds, a fund's expense ratio is usually taken into account.
Contribution to our overall investment process is an important consideration as
well. Sharing ideas with other portfolio managers, working effectively with and
mentoring our younger analysts, and being good corporate citizens are important
components of our long term success and are highly valued.
All employees of T. Rowe Price, including portfolio managers, participate in a
401(k) plan sponsored by T. Rowe Price Group. In addition, all employees are
eligible to purchase T. Rowe Price common stock through an employee stock
purchase plan that features a limited corporate matching contribution.
Eligibility for and participation in these plans is on the same basis as for
all employees. Finally, all vice presidents of T. Rowe Price Group, including
all portfolio managers, receive supplemental medical/hospital reimbursement
benefits.
This compensation structure is used for all portfolios managed by the portfolio
manager.
Templeton Investment Counsel, LLC (Templeton Growth Fund)
The manager seeks to maintain a compensation program that is competitively
positioned to attract, retain and motivate top-quality investment
professionals. Portfolio managers receive a base salary, a cash incentive bonus
opportunity, an equity compensation opportunity, and a benefits package.
Portfolio manager compensation is reviewed annually and the level of
compensation is based on individual performance, the salary range for a
portfolio manager's level of responsibility and Franklin Templeton guidelines.
Portfolio managers are provided no financial incentive to favor one fund or
account over another. Each portfolio manager's compensation consists of the
following three elements:
Base Salary Each portfolio manager is paid a base salary.
Annual Bonus Annual bonuses are structured to align the interests of the
portfolio manager with those of the Fund's shareholders. Each portfolio manager
is eligible to receive an annual bonus. Bonuses generally are split between cash
(50% to 65%) and restricted shares of Franklin Resources stock (17.5% to 25%)
and mutual fund shares (17.5% to 25%). The deferred equity-based compensation is
intended to build a vested interest of the portfolio manager in the financial
performance of both Franklin Resources and mutual funds advised by the manager.
The bonus plan is intended to provide a competitive level of annual bonus
compensation that is tied to the portfolio manager achieving consistently strong
investment performance, which aligns the financial incentives of the portfolio
manager and Fund shareholders. The Chief Investment Officer of the manager
and/or other officers of the manager, with responsibility for the Fund, have
discretion in the granting of annual bonuses to portfolio managers in accordance
with Franklin Templeton guidelines. The following factors are generally used in
determining bonuses under the plan:
Investment Performance. Primary consideration is given to the historic
investment performance over the 1, 3 and 5 preceding years of all accounts
managed by the portfolio manager. The pre-tax performance of each fund managed
is measured relative to a relevant peer group and/or applicable benchmark as
appropriate.
Research. Where the portfolio management team also has research
responsibilities, each portfolio manager is evaluated on the number and
performance of recommendations over time, productivity and quality of
recommendations, and peer evaluation.
Non-Investment Performance. For senior portfolio managers, there is a
qualitative evaluation based on leadership and the mentoring of staff.
Responsibilities. The characteristics and complexity of funds managed by the
portfolio manager are factored in the manager's appraisal.
Additional Long-Term Equity-Based Compensation Portfolio managers may also be
awarded restricted shares or units of Franklin Resources stock or restricted
shares or units of one or more mutual funds, and options to purchase common
shares of Franklin Resources stock. Awards of such deferred equity-based
compensation typically vest over time, so as to create incentives to retain key
talent.
Portfolio managers also participate in benefit plans and programs available
generally to all employees of the manager.
Turner Investment Partners, Inc. (Turner Mid-Cap Growth Fund)
Turner's investment professionals receive a base salary commensurate with his
or her level of experience. Turner's goal is to maintain competitive base
salaries through review of industry standards, market conditions, and salary
surveys. Bonus compensation, which is a multiple of base salary, is based on
the performance of each individual's sector and portfolio assignments relative
to appropriate market benchmarks. In addition, each employee is eligible for
equity awards. Turner believes that its compensation and ownership structure
provides incentive to attract and retain highly qualified people, as each
member of the firm has the opportunity to share directly in the accomplishments
of the business.
The objective performance criteria noted above accounts for 90% of the bonus
calculation. The remaining 10% is based upon subjective, "good will" factors
including teamwork, interpersonal relations, the individual's contribution to
overall success of the firm, media and client relations, presentation skills,
and professional development. Portfolio managers/analysts are reviewed on an
annual basis. Turner's Chief Investment Officer, Robert E. Turner is
responsible for setting base salaries, bonus targets, and making all subjective
judgments related to an investment professionals' compensation. The Chief
Investment Officer is also responsible for identifying investment professionals
that should be considered for equity ownership on an annual basis.
UBS Global Asset Management (Americas) ("UBS") (LVIP UBS Global Asset
Allocation Fund)
The compensation received by portfolio managers includes a base salary and
incentive compensation based on their personal performance.
Our compensation and benefits programs are designed to provide our investment
professionals with incentives to excel, and to promote an entrepreneurial,
performance-oriented culture. They also align the interests of our investment
professionals with the interests of our clients. Overall compensation can be
grouped into four categories:
o Competitive salary, benchmarked to maintain competitive compensation
opportunities.
o Annual bonus, tied to individual contributions and investment performance.
o Analyst incentives, tied to performance of model portfolios.
o UBS equity awards, promoting company-wide success and employee retention.
Base salary is used to recognize the experience, skills and knowledge that the
investment professionals bring to their roles. Salary levels are monitored and
adjusted periodically in order to remain competitive within the investment
management industry.
Annual bonuses are strictly and rigorously correlated with performance. As
such, annual incentives can be highly variable, and are based on three
components: 1) the firm's overall business success; 2) the performance of the
respective asset class and/or investment mandate; and 3) an individual's
specific contribution to the firm's results. We strongly believe that tying
bonuses to both long-term (3-year) and shorter-term (1-year) portfolio
performance closely aligns our investment professionals' interests with those
of our clients.
Analyst Incentives. Because we value our proprietary research, we have designed
a compensation system that has made investment analysis a highly regarded career
within our firm. Grouped int 12 global sector teams, our analysts manage model
portfolios in global and local sectors. Our portfolio managers use the model
sector portfolios to build actual client portfolios. Analyst incentives are tied
t the performance of the model portfolios, which we evaluate over rolling
three-year periods. One-third of each analyst's rating is based on the
performance of the model global sector portfolio; one-third o the model local
sector portfolio; and one-third is a qualitative assessment of their
contribution. We believe that a system closely aligns our analysts' incentives
with our clients.
UBS AG equity. Many of our senior investment professionals are required to
defer a portion of their annual performance-based incentive in the form of
deferred or restricted UBS AG shares or employee stock options. Not only does
this reinforce the critical importance of creating long-term business value, it
also serves as an effective retention tool as the equity shares typically vest
over a number of years.
Broader equity share ownership is encouraged for all employees through "Equity
Plus". This long-term incentive program gives employees the opportunity to
purchase UBS stock with after-tax funds from their bonus or salary. Two UBS
stock options are given for each share acquired and held for two years. We feel
this engages our employees as partners in the firm's success, and helps to
maximize our integrated business strategy.
Wellington Management Company, LLP (Capital Growth Fund and Mid-Cap Value)
The Funds pay Wellington Management a fee based on the assets under management
of the each Fund as set forth in the Investment Subadvisory Agreements between
Wellington Management and Lincoln National Corporation (formerly, Jefferson
Pilot Investment Advisory Corporation) on behalf of each Fund. Wellington
Management pays its investment professionals out of its total revenues and
other resources, including the advisory fees earned with respect to each Fund.
The following information relates to the fiscal year ended December 31, 2007.
Wellington Management's compensation structure is designed to attract and
retain high-caliber investment professionals necessary to deliver high quality
investment management services to its clients. Wellington Management's
compensation of the Investment Professionals includes a base salary and
incentive components. The base salaries for each Investment Professional, as
partners of Wellington Management, are determined by the Managing Partners of
the firm. A partner's base salary is generally a fixed amount that may change
as a result of an annual review. Each equity Investment Professional is
eligible to receive an incentive payment based on the revenues earned by
Wellington Management from the Fund managed by the Investment Professional and
generally each other account managed by such Investment Professional. Each
Investment Professional's incentive payment relating to the relevant Fund is
linked to the gross pre-tax performance of the portion of the Fund managed by
the Investment Professional compared to the benchmark index and/or peer group
identified below over one and three year periods, with an emphasis on three
year results. Wellington Management applies similar incentive compensation
structures (although the benchmarks or peer groups, time periods and rates may
differ) to other accounts managed by the Investment Professionals, including
accounts with performance fees.
Portfolio-based incentives across all accounts managed by an investment
professional can, and typically do, represent a significant portion of an
investment professional's overall compensation; incentive compensation varies
significantly by individual and can vary significantly from year to year. The
Investment Professionals may also be eligible for bonus payments based on their
overall contribution to Wellington Management's business operations. Senior
management at Wellington Management may reward individuals as it deems
appropriate based on factors other than account performance. Each partner of
Wellington Management is eligible to participate in a partner-funded tax
qualified retirement plan, the contributions to which are made pursuant to an
actuarial formula, as a partner of the firm. Messrs. Boselli, Mordy and
Shilling are all partners of the firm.
Fund Benchmark Index and/or Peer Group for Incentive Period
LVIP Capital Growth Fund ....... Russell 1000 Growth
LVIP Mid-Cap Value Fund ........ Russell 2500 Value
Wilshire Associates ("Wilshire") (LVIP Wilshire Conservative Profile Fund, LVIP
Wilshire Moderate Profile Fund, LVIP Wilshire Moderately Aggressive Profile
Fund, LVIP Wilshire Aggressive Profile Fund, LVIP Wilshire 2010 Profile Fund,
LVIP Wilshire 2020 Profile Fund, LVIP Wilshire 2030 Profile Fund, LVIP Wilshire
2040 Profile Fund)
The portfolio manager's compensation is based on two major components, base
slaary and performnace bonus. The salary is set each year and is commensurate
with the contribution that the portfolio manager makes to his team, the
investment process and to the overall success of the firm. The bonus portion of
his salary is based on the performnace of each portfolio manager's accounts and
contributions that individual made to the overall performance of the division
and the company as a whole. The compensation package for the portfolio manager
takes into consideration the performance of the funds.
LINCOLN VARIABLE INSURANCE PRODUCTS TRUST
PART C
OTHER INFORMATION
The response to this item is incorporated by reference from Item 25 of Part C of Post-Effective Amendment No. 53 to the Registrant’s Registration Statement on Form N-1A filed with the Commission on January 27, 2009.
| (1) | Agreement and Declaration of Trust of Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 13 (File No. 33-70742) the Registrant’s Registration Statement on Form N-1A filed with the Commission on April 4, 2003. |
| (2) | By-Laws of Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 19 (File No. 33-70742) to the Registrant’s Registration Statement on Form N-1A filed with the Commission on April 5, 2006. |
| (4) | Agreement and Plan of Reorganization filed herewith as Exhibit A to the Proxy Statement/Prospectus. |
| (6) | (a) Investment Management Agreement dated April 30, 2007 between the Lincoln Variable Insurance Products Trust and Lincoln Investment Advisors Corporation incorporated herein by reference to Post-Effective Amendment No. 41 (File No. 33-70742) filed on April 15, 2008. |
(b) Sub-Advisory Agreement between Lincoln Investment Advisors Corporation and Delaware Management Company incorporated herein by reference to Post-Effective Amendment No. 41 (File No. 33-70742) filed on April 15, 2008.
| (7) | Principal Underwriting Agreement dated June 1, 2007 incorporated herein by reference to Post-Effective Amendment No. 41 (File No. 33-70742) filed on April 15, 2008. |
| (9) | (a) Custody Agreement, as amended, by and between Lincoln Variable Insurance Products Trust and Mellon Bank, N.A. incorporated herein by reference to Post-Effective Amendment No. 41 (File No. 33-70742) filed on April 15, 2008. |
| (10) | (a) Service Class Distribution and Service Plan incorporated herein by reference to Post-Effective Amendment No. 41 (File No. 33-70742) filed on April 15, 2008. |
(b) Distribution Services Agreement between Lincoln Variable Insurance Products Trust and Lincoln Financial Distributors, Inc. filed herein as Exhibit 16(10)(b).
(c) Distribution Services Agreement between Lincoln Financial Distributors, Inc. and The Lincoln National Life Insurance Company filed herein as Exhibit 16(10)(c).
(d) Distribution Services Agreement between Lincoln Financial Distributors, Inc. and Lincoln Life & Annuity Company of New York filed herein as Exhibit 16(10)(d).
| (11) | Opinion of Dechert LLP regarding legality of issuance of shares filed herein as Exhibit 16(11). |
| (12) | Form of opinion of Dechert LLP regarding tax matters filed herein as Exhibit 16(12). |
| (14) | Consent of Independent Registered Public Accounting Firm filed herein as Exhibit 16(14). |
| (16) | Power of Attorney filed herein as Exhibit 16(16). |
(1) The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act [17 CFR 230.145c], the reoffering prospectus will contain the information called for by the applicable registration form for the reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.
SIGNATURE PAGE
As required by the Securities Act of 1933, this Registration Statement has been signed on behalf of the Registrant, in the City of Fort Wayne, and State of Indiana on this 16th day of March, 2009.
| | |
| Lincoln Variable Insurance Products Trust |
| (LVIP Delaware Growth and Income Fund) |
| |
| By: | | /s/ Daniel R. Hayes |
| Daniel R. Hayes, President |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in their capacities indicated on March 16, 2009.
| | | | |
Signature | | Title |
| |
/s/ Daniel R. Hayes Daniel R. Hayes | | President and Trustee (Principal Executive Officer) |
| |
* Kelly D. Clevenger | | Chairman of the Board and Trustee |
| |
* William P. Flory, Jr. | | Chief Accounting Officer (Principal Accounting Officer and Principal Financial Officer) |
| |
* Michael D. Coughlin | | Trustee |
| |
* Nancy L. Frisby | | Trustee |
| |
* Elizabeth S. Hager | | Trustee |
| |
* Gary D. Lemon | | Trustee |
| |
* Thomas D. Rath | | Trustee |
| |
* Kenneth G. Stella | | Trustee |
| |
* David H. Windley | | Trustee |
| | |
*By | | /s/ Cynthia A. Rose Cynthia A. Rose | | Attorney-in-Fact |
Exhibit Index
| | |
| |
| 16(10)(b) | | Distribution Services Agreement (LVIP & LFD) |
| |
| 16(10)(c) | | Distribution Services Agreement (LFD & LNL) |
| |
| 16(10)(d) | | Distribution Services Agreement (LFD & LNY) |
| |
| 16(11) | | Opinion of Counsel – Issuance of Shares |
| |
| 16(12) | | Form of Opinion of Counsel – Tax Matters |
| |
| 16(14) | | Consent of Independent Registered Public Accountant |
| |
| 16(16) | | Power of Attorney |
