[Federal Register Volume 67, Number 117 (Tuesday, June 18, 2002)]
[Notices]
[Pages 41533-41545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15250]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25610; File No. 812-11894]


The Lincoln National Life Insurance Company, et al.

June 12, 2002.
AGENCY: Securities and Exchange Commission (the ``Commission'' or 
``SEC'').
Summary of Application: Applicants seek an order pursuant to Section 
26(c) of the Investment Company Act of 1940 to permit substitution of 
shares of certain portfolios of variable insurance product funds for 
shares of portfolios of certain other variable insurance products 
funds.

Applicants: The Lincoln National Life Insurance Company (``Lincoln 
Life''), Lincoln Life Variable Annuity Account N (``Lincoln Life 
Account N''), Lincoln Life & Annuity Company of New York (``LLNY''), 
Lincoln New York Separate Account N for Variable Annuities (``Lincoln 
New York Separate Account N'') and Touchstone Advisors, Inc. 
(``Touchstone'') (collectively, the ``Applicants'').

Filing Date: The application (``Application'') was filed on December 
17, 1999 and amended and restated on January 22, 2001, December 5, 2001 
and June 10, 2002.

Hearing or Notification of Hearing: An order granting the Application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the Secretary of the SEC and serving 
the Applicants with a copy of the request, personally or by mail. 
Hearing requests must be received by the SEC by 5:30 p.m. on July 3, 
2002, and should be accompanied by proof of service on the Applicants 
in the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the Secretary of the SEC.

ADDRESSES: For the SEC: Secretary, U.S. Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. For 
Applicants: Brian Burke, Esquire, The Lincoln National Life Insurance 
Company, 1300 South Clinton Street, Fort Wayne, IN 46802. Copies to 
Susan S. Krawczyk, Esquire, Sutherland Asbill & Brennan LLP, 1275 
Pennsylvania Avenue, NW, Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT: Alison Toledo, Senior Counsel, or 
Lorna MacLeod, Branch Chief, Division of Investment Management, Office 
of Insurance Products, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
Application. The complete Application is available for a fee from the 
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC 
20549-0102.

Applicants' Representations

    1. Lincoln Life is a stock life insurance company incorporated 
under the laws of the State of Indiana on June 12, 1905. LLNY is a life 
insurance company founded under the laws of New York on June 6, 1996. 
For purposes of the Act, Lincoln Life is the depositor and sponsor of 
the Lincoln Life Account N and LLNY is the depositor and sponsor of 
Lincoln New York Separate Account N, as those terms have been 
interpreted by the Commission with respect to variable annuity separate 
accounts. The Board of Directors of Lincoln Life established Lincoln 
Life Account N on November 3, 1997. Lincoln Life Account N is 
registered under the Act as a unit investment trust (File No. 811-
8517). The assets of Lincoln Life Account N support certain individual 
variable annuity contracts (including Choice Plus), and interests in 
Lincoln Life Account N offered through such contracts have been 
registered under the Securities Act of 1933 (``1933 Act'') on Form N-4 
(Reg. File Nos. 333-40937, 333-36304, and 333-36316).
    2. The Board of Directors of LLNY established Lincoln New York 
Separate Account N on March 11, 1999. Lincoln New York Separate Account 
N is also registered under the Act as a unit investment trust (File No. 
811-9763). The assets of Lincoln New York Separate Account N support 
certain Contracts and interests in Lincoln New

[[Page 41534]]

York Separate Account N offered through such Contracts have been 
registered under the 1933 Act on Form N-4 (File Nos. 333-93875 and 333-
37982).
    3. Touchstone, a subsidiary of Western and Southern Life Insurance 
Company, is an investment advisor registered under the Investment 
Advisors Act of 1940. As of December 31, 2001, Touchstone had $1.6 
billion in assets under management.
    4. The Contracts are flexible premium deferred variable annuity 
contracts issued by Lincoln Life (for Lincoln Life Account N) or LLNY 
(for Lincoln New York Separate Account N). Currently, transfers of cash 
value can be made in unlimited amounts each contract year among and 
between the sub-accounts available as investment options under the 
Contracts without the imposition of a transfer charge. Under the 
Contracts, Lincoln Life or LLNY, as applicable, reserves the right to 
restrict transfer privileges.
    5. The Applicants propose that Lincoln Life and LLNY replace shares 
of the Funds in Column I (``Replaced Shares'' or ``Old Funds'') with 
shares in Column II (``Substitute Shares'' or ``New Funds'') outlined 
below:

----------------------------------------------------------------------------------------------------------------
         Column I (replaced funds)                              Column II (substitute funds)
----------------------------------------------------------------------------------------------------------------
AIM Variable Insurance Funds (``AIM VI'').  American Funds Insurance Series (``AFIS'')
    Capital Appreciation Fund.............  Growth Fund--Class 2.
Alliance Variable Products Series Fund
 (``Alliance VPS''):
    Growth Portfolio--Class B.............  AFIS Growth Fund--Class 2.
Delaware Group VIP Trust (``Delaware
 VIP''):
    Emerging Markets Series*
        Standard Class....................  AFIS International Fund--Class 2.
        Service Class.....................  AFIS International Fund--Class 2.
Delaware VIP:
    Select Growth Series*
        Standard Class....................  AFIS Growth Fund--Class 2.
        Service Class.....................  AFIS Growth Fund--Class 2.
Delaware VIP:
    Social Awareness Series*
        Standard Class....................  Lincoln National Social Awareness Fund.
        Service Class.....................  Lincoln National Social Awareness Fund.
Fidelity Variable Insurance Products Fund   Scudder VIT Funds (``Scudder VIT'')
 (``Fidelity VIP''):.
    Growth Opportunities Portfolio*
        Initial Class.....................  Scudder VIT Equity 500 Index Fund.
        Service Class 2...................  Scudder VIT Equity 500 Index Fund.
Franklin Templeton Variable Insurance
 Products Trust (``Franklin VIT''):
    Mutual Shares Securities Fund--Class 2  AFIS Growth-Income Fund--Class 2.
MFS Variable Insurance Trust (``MFS''):
    Research Series*
        Initial Class.....................  AFIS Growth Fund--Class 2.
        Service Class.....................  AFIS Growth Fund--Class 2.
Liberty Variable Investment Trust:
    Newport Tiger Fund....................  AFIS International Fund--Class 2.
Franklin VIT:
    Templeton Foreign Securities Fund--     AFIS International Fund--Class 2.
     Class 2.
----------------------------------------------------------------------------------------------------------------
*Contracts issued before July 24, 2000 have standard or initial class shares. Contracts issued on or after July
  24, 2000 have service class shares.

    In addition, Lincoln Life also proposes to replace shares of 
certain other funds that were only available as investment options to 
certain ``ChoicePlus'' contracts issued before February 22, 2000 (the 
``Closed Funds'') as follows:

----------------------------------------------------------------------------------------------------------------
           Column I (replaced funds)                              Column II (substitute funds)
----------------------------------------------------------------------------------------------------------------
Liberty Variable Investment Trust:
    Colonial U.S. Growth & Income Fund........  AFIS Growth-Income Fund--Class 2.
    Delaware VIP Devon Series.................  AFIS Growth-Income Fund--Class 2.
Dreyfus Variable Investment Fund
 (``Dreyfus''):
    Small Cap Portfolio.......................  Scudder VIT Small Cap Index Fund.
OCC Accumulation Trust (``OCC''):
    Global Equity Portfolio...................  AFIS International Fund--Class 2.
    OCC Managed Portfolio.....................  AFIS Growth-Income Fund--Class 2.
Scudder Variable Series (``Scudder SVS''):
    Government Securities Portfolio...........  Lincoln National Bond Fund.
    Scudder SVS Small Cap Growth Portfolio....  Scudder VIT Small Cap Index Fund.
----------------------------------------------------------------------------------------------------------------

    6. The investment objective of the AIM VI Capital Appreciation Fund 
is growth-of-capital. The Fund seeks to meet its objective by investing 
principally in common stocks of companies that have experienced above-
average, long-term growth in earnings and have excellent prospects for 
future growth. Under normal circumstances, the Fund invests primarily 
in large- and medium-capitalization stocks. The Fund may hold a 
substantial part of its assets in cash or cash equivalents as a 
temporary defensive measure.
    7. The investment objective of the AFIS Growth Fund is growth-of-
capital. To pursue this goal, the Fund invests primarily in common 
stocks of larger companies that are growth oriented and appear to offer 
superior opportunities for growth of capital. The Fund may

[[Page 41535]]

also invest up to 15% of its assets in equity securities of issuers 
domiciled outside the U.S. and Canada and not included in the Standard 
& Poors 500 Composite Index.
    8. The investment objectives of the AIM VI Capital Appreciation 
Fund and the AFIS Growth Fund are identical. While their specific 
investment policies and strategies differ, somewhat, both Funds are 
stock funds seeking investments with good long-term growth prospects. 
Each Fund invests primarily in large-sized growth companies, with the 
AIM VI Capital Appreciation Fund also investing in some mid-sized 
growth companies. While each of these Funds seeks to achieve its 
objective through somewhat different investment policies and 
strategies, an investor in the AIM VI Capital Appreciation Fund is 
attempting to achieve the same long-term goal as that sought by AFIS 
Growth Fund investors.
    9. The investment objective of the Alliance VPS Growth Portfolio is 
long-term-growth-of-capital. The Fund seeks to meet its objective by 
investing primarily in equity securities of companies with favorable 
earnings outlooks and long-term growth rates expected to exceed that of 
the U.S. economy over time. The Portfolio emphasizes investments in 
large- and mid-cap companies. The Portfolio may invest up to 25% of its 
total assets in lower-rated fixed-income securities and convertible 
bonds and generally up to 20% of its total assets in foreign 
securities.
    10. The investment objective of the AFIS Growth Fund is growth-of-
capital. To pursue this goal, the Fund invests primarily in common 
stocks of larger companies that are growth oriented and appear to offer 
superior opportunities for growth of capital. The Fund may also invest 
up to 15% of its assets in equity securities of issuers domiciled 
outside the U.S. and Canada and not included in the Standard & Poors 
500 Composite Index.
    11. The investment objectives of the Alliance VPS Growth Portfolio 
and the AFIS Growth Fund are substantially similar. While their 
specific investment strategies differ, somewhat, both Funds are stock 
funds seeking investments with good long-term growth prospects. Each 
Fund invests primarily in large-sized growth companies, with the 
Alliance VPS Growth Portfolio also investing in some mid-sized growth 
companies. While each of these Funds seeks to achieve its objective 
through somewhat different investment strategies, an investor in the 
Alliance VPS Growth Portfolio is generally attempting to achieve the 
same long-term goal as that sought by the AFIS Growth Fund investors.
    12. The investment objective of the Delaware VIP Emerging Markets 
Series is long-term capital appreciation. The Series invests primarily 
in equity securities from emerging foreign countries. The Series uses a 
dividend discount analysis to evaluate specific investment 
opportunities in various countries. The Series also uses a purchasing 
power parity approach to determine what currencies and what markets are 
overvalued or undervalued relative to the U.S. dollar. Together, the 
Series uses these analyses to determine good value oriented 
investments. The Series is an international fund. Under normal 
circumstances, at least 80% of the Series' total assets will be 
invested in the securities of issuers from at least three different 
countries (whose economics are considered to be emerging or developing) 
outside of the United States. The Series may invest in a broad range of 
equity securities including common stocks. The Series may invest up to 
35% of its net assets in high yield, high risk foreign fixed income 
securities.
    13. The investment objective of the AFIS International Fund is 
growth of capital (capital appreciation). The Fund invests primarily in 
common stocks of companies located outside the United States. The basic 
strategy of the Fund is to seek undervalued securities that represent 
good long-term investment opportunities. The Fund will invest at least 
65% of its assets in equity securities (including depositary receipts 
of issuers domiciled outside the U.S.; however, under normal market 
conditions, the fund will invest substantially all of its assets in 
issuers domiciled outside the U.S. The Fund may invest up to 5% of its 
assets in debt securities rated BBB or Baa or below by S&P or Moody's.
    14. The investment objectives of the Delaware VIP Emerging Markets 
Series and the AFIS International Fund are substantially similar. Both 
Funds invest in common stocks with potential for capital appreciation 
using value investment styles. Both Funds invest at least 65% of their 
assets in equity securities of issuers domiciled outside the United 
States, using value investment styles, with the Delaware VIP Emerging 
Markets Series emphasizing emerging foreign country investment. 
Delaware VIP Emerging Markets Series may also hold a higher percentage 
of high yield, high risk debt securities. While each of these Funds 
seeks to achieve its objective through somewhat different investment 
strategies, an investor in the Delaware VIP Emerging Markets Series is 
generally attempting to achieve the same long-term goal as that sought 
by the AFIS International Fund investors.
    15. The investment objective of the Delaware VIP Select Growth 
Series is long-term capital appreciation. The Fund seeks to meet its 
objective by investing primarily in equity securities of companies that 
the investment manager believes have the potential for high earnings 
growth over time. The Series emphasizes investments in large- and mid-
cap companies and may also invest in small-cap companies. The Series 
will invest at least 65% of its assets in equity securities and 
generally will invest 90% to 100% of its assets in equity securities. 
The Series may invest up to 15% of its assets in illiquid securities. 
The Series may invest all its assets in high quality fixed-income 
securities, cash or cash equivalents for defensive purposes.
    16. The investment objective of the AFIS Growth Fund is growth of 
capital. To pursue this goal, the Fund invests primarily in common 
stocks of larger companies that are growth oriented and appear to offer 
superior opportunities for growth of capital. The Fund may also invest 
up to 15% of its assets in equity securities of issuers domiciled 
outside the U.S. and Canada and not included in the Standard & Poors 
500 Composite Index.
    17. The investment objectives of the Delaware VIP Select Growth 
Series and the AFIS Growth Fund are substantially similar. While their 
specific investment strategies differ, somewhat, both Funds are stock 
funds seeking investments with good long-term growth prospects, with 
Delaware VIP Select Growth Series seeking capital appreciation. Each 
Fund invests primarily in large-sized growth companies; the Delaware 
VIP Select Growth Series also invests in some mid- and small-sized 
growth companies. While each of these Funds seeks to achieve its 
objective through somewhat different investment strategies, an investor 
in the Delaware VIP Select Growth Series is generally attempting to 
achieve the same long-term goal as that sought by the AFIS Growth Fund 
investors.
    18. The investment objective of the Delaware VIP Social Awareness 
Series is long-term growth of capital (capital appreciation). The 
Series invests primarily in common stocks of medium to large-sized 
domestic companies that meet certain socially responsible criteria and 
which are expected to grow over time. The Series' socially responsible 
criteria exclude companies that engage in activities relating to 
nuclear power; military weapons; liquor, tobacco or

[[Page 41536]]

gambling industries; and animal testing for personal care products and 
those companies that engage in activities likely to result in damage to 
the natural environment. The Series invests primarily in companies 
whose stock prices appear low relative to their underlying value or 
future potential. The Series uses a computer-driven selection process 
designed to identify stocks, and, aided by this technology, the 
investment manager evaluates and ranks hundreds of stocks daily using a 
variety of factors such as dividend yield, earnings growth and price to 
earnings ratios. The Series blends growth and value investment styles. 
Generally, 90% to 100% of the Series' assets will be invested in common 
stocks. The Series may hold a substantial part of its assets in cash or 
cash equivalents as a temporary defensive measure.
    19. The investment objective of the Lincoln National Social 
Awareness Fund is long-term growth of capital (capital appreciation). 
The Fund invests primarily in common stocks of medium to large-sized 
domestic companies that meet certain socially responsible criteria and 
which are expected to grow over time. The Fund's socially responsible 
criteria exclude companies that engage in activities relating to 
nuclear power; military weapons; liquor, tobacco or gambling 
industries; and animal testing for personal care products and those 
companies that engage in activities likely to result in damage to the 
natural environment. The Fund invests primarily in companies whose 
stock prices appear low relative to their underlying value or future 
potential. The Fund uses a computer-driven selection process designed 
to identify stocks and, aided by this technology, the investment 
manager evaluates and ranks hundreds of stocks daily using a variety of 
factors such as dividend yield, earnings growth and price-to-earnings 
ratios. The Fund blends growth and value investment styles. Generally, 
90% to 100% of the Series' assets will be invested in common stocks. 
The Fund may hold a substantial part of its assets in cash or cash 
equivalents as a temporary defensive measure.
    20. The investment objectives of the Delaware VIP Social Awareness 
Series and the Lincoln National Social Awareness Fund are identical. 
Both Funds seek long-term growth of capital. Additionally, both Funds 
invest in common stocks of medium to large-sized domestic companies 
using growth and value investment styles with socially responsible 
investment criteria. An investor in the Delaware VIP Social Awareness 
Series is attempting to achieve the same long-term goal as that sought 
by the Lincoln National Social Awareness Fund investors.
    21. The investment objective of the Fidelity VIP Growth 
Opportunities Portfolio is growth of capital. The Portfolio invests 
primarily in common stocks and securities convertible into common 
stocks of medium to large-sized domestic companies. The Portfolio may 
also invest in other types of securities, including bonds, which may be 
lower-quality debt securities. The Portfolio may invest in domestic and 
foreign issuers. The Portfolio invests in either ``growth'' stocks or 
``value'' stocks or both. The Portfolio uses fundamental analysis of 
each issuer's financial condition and industry position and market and 
economic conditions to select investments.
    22. The investment objective of the Scudder VIT 500 Index Fund is 
capital appreciation. The Fund seeks to replicate the performance of 
the S&P 500 Index, which emphasizes stocks of large U.S. companies. The 
Fund uses quantitative analysis techniques to structure the Fund to 
obtain a high correlation to the S&P 500 Index while remaining as fully 
invested as possible in all market environments. Under normal 
circumstances, the Fund will invest at least 80% of its assets in 
stocks of companies included in the S&P 500 Index and in derivative 
instruments, such as futures contracts and options, that provide 
exposure to the stocks of companies in the S&P 500 Index.
    23. The investment objectives of the Fidelity VIP Growth 
Opportunities Portfolio and the Scudder VIT Equity 500 Index Fund are 
substantially similar. Both funds seek growth of capital. Additionally, 
both Funds invest in common stocks of large growth and value companies, 
with Fidelity VIP Growth Opportunities Portfolio also investing in some 
medium-sized growth and value companies. In short, while each of these 
Funds seeks to achieve its objective through somewhat different 
investment strategies, an investor in the Fidelity VIP Growth 
Opportunities Portfolio is generally attempting to achieve the same 
long-term goal as that sought by the Scudder VIT Equity 500 Index Fund 
investors.
    24. The investment objective of the Franklin Mutual Shares 
Securities Fund is capital appreciation and secondarily income. The 
Fund invests primarily in medium and large capitalization companies. 
The Fund may also invest a significant portion of its assets in small 
capitalization companies. The Fund primarily invests in equity 
securities of companies that the manager believes are available at 
market prices less than their value based on certain recognized or 
objective criteria (intrinsic value). The Fund primarily invests in 
undervalued stocks (those trading at a discount to intrinsic value) and 
to a smaller extent, the Fund also invests in restructuring companies 
and distressed companies. Under normal market conditions, the Fund will 
invest at least 65% of its total assets in equity securities of 
undervalued companies. The Fund intends to invest up to approximately 
20% of its assets in foreign equity and debt securities. The Fund may 
hold a substantial part of its assets in cash or cash equivalents as a 
temporary defensive measure.
    25. The investment objective of the AFIS Growth-Income Fund is both 
capital appreciation and income. To pursue this goal, the Fund invests 
primarily in common stocks or other securities that demonstrate the 
potential for appreciation and/or dividends. The Fund may also invest 
up to 10% of its assets in securities of issuers domiciled outside the 
U.S. and not included in the Standard & Poors 500 Composite Index. The 
Fund may also invest up to 5% of its assets in debt securities rated BA 
and BB or below by S&P or Moody's. The Fund cannot invest more than 25% 
of the Fund's assets in the securities of issuers in the same industry. 
The basic strategy of the Fund is to seek undervalued securities that 
represent good long-term investment opportunities. For defensive 
purposes, the Portfolio may invest up to 10% of its assets in defensive 
instruments such as U.S. Government securities and money market 
instruments.
    26. The investment objectives of the Franklin Mutual Shares 
Securities Fund and the AFIS Growth-Income Fund are substantially 
similar. While their specific investment strategies differ, somewhat, 
both Funds are stock funds seeking undervalued investments with good 
long-term growth prospects. Each Fund invests primarily in domestic 
large-sized value companies, with the Franklin Mutual Shares Securities 
Fund also investing in medium- and small sized companies and 
potentially more in foreign securities. While each of these Funds seeks 
to achieve its objective through somewhat different investment 
strategies, an investor in the Franklin Mutual Shares Securities Fund 
is generally attempting to achieve the same long-term goal as that 
sought by the AFIS Growth Income Fund investors.
    27. The investment objective of the MFS Research Series is long-
term growth of capital and future income. The Series seeks to meet its 
objective by investing primarily in equity securities of companies with 
favorable prospects

[[Page 41537]]

for long-term growth, attractive valuations based on current and 
expected earnings or cash flow, dominant or growing market share, and 
superior management. Under normal market conditions, the Series invests 
at least 80% of its total assets in common stocks and related 
securities. The Series emphasizes investments in large-cap companies 
but may also invest significant amounts of the Series' assets in 
companies of any size. Future income is a secondary investment 
objective, with growth of capital being the primary objective.
    28. The investment objective of the AFIS Growth Fund is growth of 
capital. To pursue this goal, the Fund invests primarily in common 
stocks of larger companies that are growth oriented and appear to offer 
superior opportunities for growth of capital. The Fund may also invest 
up to 15% of its assets in equity securities of issuers domiciled 
outside the U.S. and Canada and not included in the Standard & Poors 
500 Composite Index.
    29. The investment objectives of MFS Research Series and AFIS 
Growth Fund are substantially similar. While their specific investment 
strategies differ, somewhat, both Funds are stock funds seeking 
investments with good long-term growth prospects. Each Fund invests 
primarily in large-sized growth companies, with the MFS Research Series 
also investing in mid- and small-sized companies. While each of these 
Funds seeks to achieve its objective through somewhat different 
investment strategies, an investor in the MFS Research Series is 
generally attempting to achieve the same long-term goal as that sought 
by the AFIS Growth Fund investors.
    30. The investment objective of the Newport Tiger Fund is long-term 
capital appreciation. Under normal market conditions, the Fund invests 
primarily in stocks of companies located in the ten ``Tiger'' countries 
of Asia. The ``Tigers'' of Asia are Hong Kong, Singapore, South Korea, 
Taiwan, Malaysia, Thailand, India, Indonesia, The People's Republic of 
China and the Philippines. Stocks of quality growth companies are 
typically selected as investments for the Fund. For defensive purposes, 
the Fund may, but is not required to, invest up to 100% of its assets 
in cash or high quality, short-term debt securities.
    31. The investment objective of the AFIS International Fund is 
growth of capital (capital appreciation). The Fund invests primarily in 
common stocks of companies located outside the United States. The basic 
strategy of the Fund is to seek undervalued securities that represent 
good long-term investment opportunities. The Fund will invest at least 
65% of its assets in equity securities (including depositary receipts) 
of issuers domiciled outside the U.S.; however, under normal market 
conditions, the Fund will invest substantially all of its assets in 
issuers domiciled outside the U.S. The Fund may invest up to 5% of its 
assets in straight debt securities rated BBB or Baa or below by S&P or 
Moody's.
    32. The investment objectives of the Newport Tiger Fund and the 
AFIS International Fund are substantially similar. The Newport Tiger 
Fund seeks long-term capital appreciation and the AFIS International 
Fund seeks growth of capital (capital appreciation). The Newport Tiger 
Fund invests principally in equity securities located in Asia, using 
growth-investing strategies. AFIS International Fund invests 
principally in equity securities located outside the United States 
using value and growth investing strategies. By investing in non-Asian 
companies (European) as well as Asian companies, the AFIS International 
Fund also provides additional diversification versus the Newport Tiger 
Fund.
    While each of these Funds seeks to achieve its objective through 
somewhat different investment strategies, an investor in the Newport 
Tiger Fund is generally attempting to achieve the same long-term goal 
(i.e., long-term growth) as that sought by the AFIS International Fund 
investors.
    33. The investment objective of the Templeton Foreign Securities 
Fund is long-term capital growth. The Fund invests its assets using 
``bottom up,'' value-oriented, and long-term approaches. The Fund is an 
international fund. Under normal circumstances, at least 65% of the 
Fund's total assets will be invested in the equity securities of 
companies located outside the U.S., including those in emerging 
markets. The Fund generally invests in large to medium capitalization 
companies with market capitalizations greater than $2 billion. The Fund 
may hold a substantial part of its assets in U.S. or non-U.S. currency 
short-term investments, including cash or cash equivalents as a 
temporary defensive measure.
    34. The investment objective of the AFIS International Fund is 
growth of capital (capital appreciation). The Fund invests primarily in 
common stocks of companies located outside the United States. The basic 
strategy of the Fund is to seek undervalued securities that represent 
good long-term investment opportunities. The Fund will invest at least 
65% of its assets in equity securities (including depositary receipts) 
of issuers domiciled outside the U.S.; however, under normal market 
conditions, the Fund will invest substantially all of its assets in 
issuers domiciled outside the U.S. The Fund may invest up to 5% of its 
assets in debt securities rated BBB or Baa or below by S&P or Moody's.
    35. The investment objectives of the Templeton Foreign Securities 
Fund and the AFIS International Fund are substantially similar in that 
the Funds seek long-term growth and capital appreciation, respectively. 
Both Funds invest in common stocks with potential for capital 
appreciation using value investment styles. Both Funds are 
international funds and invest at least 65% of their assets in equity 
securities of issuers domiciled outside the United States. While each 
of these funds seeks to achieve its objective through somewhat 
different investment strategies, an investor in the Templeton 
International Securities is generally attempting to achieve the same 
long-term goal as that sought by the AFIS International Fund investors.
    36. The investment objective of the Colonial U.S. Growth & Income 
Fund is long-term capital growth and income. Under normal market 
conditions, the Fund invests primarily in large capitalization stocks. 
These are stocks with market capitalization of greater than $3 billion 
at the time of purchase. Up to 10% of the Fund's assets may be invested 
in debt securities. The Fund uses a value investing strategy that 
focuses on buying stocks cheaply when they are under valued or ``out of 
favor.'' The Fund buys stocks that have attractive current prices, 
consistent operating performance and/or favorable future growth 
prospects. The Fund cannot concentrate more than 25% of its total 
assets in any one industry.
    37. The investment objective of the AFIS Growth-Income Fund is both 
capital appreciation and income. To pursue this goal, the Fund invests 
primarily in common stocks or other securities which demonstrate the 
potential for appreciation and/or dividends. The basic strategy of the 
Fund is to seek undervalued securities that represent good long-term 
investment opportunities. The Fund may invest up to 10% of its assets 
in securities of issuers domiciled outside the U.S. and not included in 
the Standard & Poors 500 Composite Index. The Fund may also invest up 
to 5% of its assets in straight debt securities rated BA and BB or 
below by S&P or Moody's. The Fund cannot invest more than 25% of the 
Fund's assets in the securities of issuers in the same industry. For

[[Page 41538]]

defensive purposes, the portfolio may invest up to 100% of its assets 
in defensive instruments such as U.S. Government securities and money 
market instruments.
    38. The investment objectives of the Colonial U.S. Growth & Income 
Fund and the AFIS Growth-Income Fund are substantially similar. Both 
Funds are stock funds seeking undervalued investments with good long-
term growth prospects. Each Fund invests primarily in large-sized value 
companies. While each of these Funds seeks to achieve its objective 
through somewhat different investment strategies, an investor in the 
Colonial U.S. Growth & Income Fund is generally attempting to achieve 
the same long-term goal as that sought by the AFIS Growth-Income Fund 
investors.
    39. The investment objective of the Delaware VIP Devon Series is 
total return (current income and capital appreciation). The Series 
invests primarily in common stocks that the investment manager believes 
have the potential for above-average earnings per share growth over 
time combined with a high degree of earnings consistency. The Series 
blends traditional growth and value investment styles. Generally, 90% 
to 100% of the Series' assets will be invested in common stocks under 
normal market conditions. The Series may also invest up to 5% of net 
assets in convertible securities. The Series may hold a substantial 
part of its assets in cash or cash equivalents as a temporary defensive 
measure.
    40. The investment objective of the AFIS Growth-Income Fund is both 
capital appreciation and income. To pursue this goal, the Fund invests 
primarily in common stocks or other securities which demonstrate the 
potential for appreciation and/or dividends. The Fund may also invest 
up to 10% of its assets in securities of issuers domiciled outside the 
U.S. and not included in the Standard & Poors 500 Composite Index. The 
Fund may also invest up to 5% of its assets in straight debt securities 
rated BA and BB or below by S&P or Moody's. The Fund cannot invest more 
than 25% of the Fund's assets in the securities of issuers in the same 
industry. The basic strategy of the Fund is to seek undervalued 
securities that represent good long-term investment opportunities. For 
defensive purposes, the Portfolio may invest up to 100% of its assets 
in defensive instruments such as U.S. Government securities and money 
market instruments.
    41. The investment objectives of the Delaware VIP Devon Series and 
the AFIS Growth-Income Fund are substantially similar. While their 
specific investment strategies differ somewhat, both Funds are stock 
funds seeking undervalued investments with good long-term growth 
prospects. Each Fund invests primarily in domestic large-sized 
companies, using both growth and/or value investment styles. While each 
of these Funds seeks to achieve its objective through somewhat 
different investment strategies, an investor in the Delaware VIP Devon 
Series is generally attempting to achieve the same long-term goal as 
that sought by the AFIS Growth-Income Fund investors.
    42. The investment objective of the Dreyfus Small Cap Portfolio is 
capital appreciation. The Portfolio focuses on small-cap companies with 
total market values of less than $2 billion. The Portfolio uses a 
blended strategy, investing in growth stocks, value stocks or stocks 
that exhibit characteristics of both.
    43. The investment objective of the Scudder VIT Small Cap Index 
Fund is capital appreciation. The Fund seeks to replicate the 
performance of the Russell 2000 Index, which emphasizes stocks of small 
U.S. companies. The Fund uses quantitative analysis techniques to 
structure the Fund to obtain a high correlation to the Russell 2000 
Index while remaining as fully invested as possible in all market 
environments. Under normal circumstances, the Fund will invest at least 
80% of its assets in stocks of companies included in the Russell 2000 
Index and in derivative instruments, such as futures contracts and 
options, that provide exposure to the stocks of companies in the 
Russell 2000 Index.
    44. The investment objectives of the Dreyfus Small Cap Portfolio 
and the Scudder VIT Small Cap Index Fund are identical. Both Funds seek 
capital appreciation. Additionally, both Funds invest in small, growth-
oriented companies and small, value-oriented companies. While each of 
these Funds seeks to achieve its objective through somewhat different 
investment strategies, an investor in the Dreyfus Small Cap Portfolio 
is generally attempting to achieve the same long-term goal as that 
sought by the Scudder VIT Small Cap Index Fund investors.
    45. The investment objective of the OCC Global Equity Portfolio is 
long-term capital appreciation. The Portfolio invests primarily in 
equity securities on a worldwide basis and may invest up to a lesser 
extent in U.S. or foreign fixed-income securities. The Portfolio may 
invest up to 35% of its total assets in fixed-income securities that 
may be lower than investment grade. The Portfolio applies the 
principles of value investing to select securities. The Portfolio uses 
fundamental company analysis to select stocks that it believes are 
undervalued by the marketplace and have favorable cash flow, 
management, franchises or intrinsic value. For defensive purposes, the 
Portfolio may invest up to 100% of its assets in defensive investments 
such as U.S. Government securities and money market instruments.
    46. The investment objective of the AFIS International Fund is 
growth of capital (capital appreciation). The Fund invests primarily in 
common stocks of companies located outside the United States. The basic 
strategy of the Fund is to seek undervalued securities that represent 
good long-term investment opportunities. The Fund will invest at least 
65% of its assets in equity securities (including depositary receipts) 
of issuers domiciled outside the U.S.; however, under normal market 
conditions, the Fund will invest substantially all of its assets in 
issuers domiciled outside the U.S. The Fund may invest up to 5% of its 
assets in straight debt securities rated BBB or Baa or below by S&P or 
Moody's.
    47. The investment objectives of the OCC Global Equity Portfolio 
and the AFIS International Fund are substantially identical. The OCC 
Global Equity Portfolio seeks long-term capital appreciation and the 
AFIS International Fund seeks growth of capital (capital appreciation). 
The OCC Global Equity Portfolio invests principally in equity 
securities located anywhere in the world using traditional value 
investing strategies. AFIS International Fund invests principally in 
equity securities located outside the United States using value and 
growth investing strategies. While each of these Funds seeks to achieve 
its objective through somewhat different investment strategies, an 
investor in the OCC Global Equity Portfolio is generally attempting to 
achieve the same long-term goal (i.e., long-term growth) as that sought 
by the AFIS International Fund investors.
    48. The investment objective of the OCC Managed Portfolio is growth 
of capital over time (current income and capital appreciation). The 
Portfolio invests in common stocks, bonds and cash equivalents, the 
percentages of which will vary based on the Fund's assessment of the 
relative outlook for such investments. However, the Portfolio normally 
invests mainly in equity securities. The Portfolio may purchase 
securities listed on U.S. or foreign securities exchanges or traded in 
the U.S. or foreign over-the-counter markets. The Portfolio can invest 
up to

[[Page 41539]]

100% of its assets in debt securities, but will do so only if equity 
securities are not an attractive investment. The Portfolio applies the 
principles of value investing to select securities. The Portfolio uses 
fundamental company analysis to select stocks that it believes are 
undervalued by the marketplace and have favorable cash flow, 
management, franchises or intrinsic value. For defensive purposes, the 
portfolio may invest up to 100% of its assets in defensive investments 
such as U.S. Government securities and money market instruments.
    49. The investment objective of the AFIS Growth-Income Fund is both 
capital appreciation and income. The portfolio invests primarily in 
common stocks or other securities, which demonstrate the potential for 
appreciation and/or dividends. The Fund may invest up to 10% of its 
assets in securities of issuers domiciled outside the U.S. and not 
included in the Standard & Poors 500 Composite Index. The Fund may also 
invest up to 5% of its assets in debt securities rated BA and BB or 
below by S&P or Moody's. The Fund cannot invest more than 25% of the 
Fund's assets in the securities of issuers in the same industry. The 
basic strategy of the Fund is to seek undervalued securities that 
represent good long-term investment opportunities. For defensive 
purposes, the portfolio may invest up to 100% of its assets in 
defensive investments such as U.S. Government securities and money 
market instruments.
    50. The investment objectives of the OCC Managed Portfolio and the 
AFIS Growth-Income Fund are substantially similar. Both Funds seek 
growth of capital over time and income. While their specific investment 
strategies differ, somewhat, both Funds are stock funds seeking 
primarily domestic undervalued investments with good long-term growth 
prospects. Each Fund invests primarily in large-sized value companies. 
While each of these Funds seeks to achieve its objective through 
somewhat different investment strategies, an investor in the OCC 
Managed Portfolio is generally attempting to achieve the same long-term 
goals as those sought by the AFIS Growth Income Fund. For defensive 
purposes, the Portfolio may invest up to 100% of its assets in 
defensive investments such as U.S. Government securities and money 
market instruments.
    51. The investment objective of the Scudder SVS Government 
Securities Portfolio is high current return consistent with 
preservation of capital. The Portfolio invests at least 65% of its 
total assets in U.S. Government securities and repurchase agreements of 
U.S. Government securities. U.S. Government-related debt instruments in 
which the Portfolio may invest include: direct obligations of the U.S. 
Treasury and securities issued or guaranteed by U.S. Government 
agencies or government-sponsored entities. The Portfolio may invest up 
to 35% of its assets in other types of fixed-income securities, 
including corporate debt securities with investment-grade credit 
ratings. The Portfolio may invest up to 10% of its assets in fixed 
income securities not subject to these limitations, including 
securities that are rated below investment grade and non-rated 
securities. The Portfolio generally manages its exposure to interest 
rate risk by adjusting its duration. For temporary defensive purposes, 
the Portfolio may invest up to 100% of its assets in short-term high 
quality debt securities, cash and cash equivalents.
    52. The investment objective of the Lincoln National Bond Fund is 
maximum current income consistent with a prudent investment strategy. 
The Fund's investment strategy is to determine appropriate levels of 
interest rate risk and credit risk for the Fund and then hold a diverse 
group of debt obligations that offer the most attractive yields given 
the anticipated interest rate environment. The Fund will invest 
primarily in a combination of: high quality investment-grade corporate 
bonds; obligations issued or guaranteed by the U.S. Government, its 
agencies or instrumentalities; and mortgage-backed securities. The Fund 
also invests a small percentage of assets in corporate bonds rated 
lower than medium-grade (junk bonds) and high-quality U.S. dollar 
denominated foreign debt obligations. The Fund invests in significant 
amounts of debt obligations with medium term maturities (5-15 years) 
and some debt obligations with short-term maturities (0-5 years) and 
long-term maturities (over 15 years). The Fund may invest in money 
market instruments as a temporary defensive strategy.
    53. The investment objectives of the Scudder SVS Government 
Securities Portfolio and the Lincoln National Bond Fund are 
substantially similar. Both Funds seek high current income and reduced 
risk (preservation of capital or prudent investment risk). 
Additionally, both Funds invest in similar fixed income securities: 
U.S. Government obligations, investment-grade corporate debt, and 
limited investment in lower grade corporate debt. While each of these 
Funds seeks to achieve its objective through somewhat different 
investment strategies, an investor in the Scudder SVS Government 
Securities Portfolio is generally attempting to achieve the same long-
term goals as those sought by the Lincoln National Bond Fund.
    54. The investment objective of the Scudder SVS Small Cap Growth 
Portfolio is maximum capital appreciation. The Portfolio generally 
invests at least 65% of its assets in small capitalization stocks 
similar in size to those companies comprising the Russell 2000 Index. 
Many of these companies would be in the early stages of their life 
cycle. Equity securities in which the Portfolio invests consist 
primarily of common stocks, but may include convertible securities, 
including warrants and rights. The Portfolio emphasizes growth stocks 
in selecting equity securities. In selecting growth stocks, the 
Portfolio emphasizes stock selection and fundamental research in 
seeking to enhance long-term performance potential. The Portfolio may 
also invest up to 25% of its assets in common stocks of foreign 
companies. For temporary defensive purposes, the Portfolio may invest 
up to 100% of its assets in high-quality debt securities, cash and cash 
equivalents.
    55. The investment objective of the Scudder VIT Small Cap Index 
Fund is capital appreciation. The Fund seeks to replicate the 
performance of the Russell 2000 Index, which emphasizes stocks of small 
U.S. companies. The Fund uses quantitative analysis techniques to 
structure the Fund to obtain a high correlation to the Russell 2000 
Index while remaining as fully invested as possible in all market 
environments. Under normal circumstances, the Fund will invest at least 
80% of its assets in stocks of companies included in the Russell 2000 
Index and in derivative instruments, such as futures contracts and 
options, that provide exposure to the stocks of companies in the 
Russell 2000.
    56. The investment objectives of the Scudder SVS Small Cap Growth 
Portfolio and the Scudder VIT Small Cap Index Fund are almost identical 
in that both Funds seek capital appreciation. Additionally, both Funds 
invest in small, growth-oriented companies, with the Scudder VIT Small 
Cap Index Fund also investing in small, value-oriented companies. While 
each of these Funds seeks to achieve its objective through somewhat 
different investment strategies, an investor in the Scudder SVS Small 
Cap Growth Portfolio is generally attempting to achieve the same long-
term goal as that sought by the Scudder VIT Small Cap Index Fund 
investors.

[[Page 41540]]

    57. The following chart shows the average annual total returns for 
the Replaced Funds for the past six calendar year periods.

----------------------------------------------------------------------------------------------------------------
                                      Total return of replaced funds for the periods indicated below  (percent)
                                   -----------------------------------------------------------------------------
          Replaced funds              Calendar     Calendar     Calendar     Calendar     Calendar     Calendar
                                     year 2001    year 2000    year 1999    year 1998    year 1997    year 1996
----------------------------------------------------------------------------------------------------------------
AIM VI Capital Appreciation Fund         -23.28       -10.91        44.61        19.30        13.51        17.58
 (Inception date: 5/5/93).........
Alliance VPS Growth Portfolio--          -23.47       -17.75        34.22        28.48        29.77        28.22
 Class B Shares (Inception date: 9/
 15/94) 1.........................
Colonial U.S. Growth & Income Fund        -0.60         3.60        12.00        20.15        32.23        21.84
 (Inception date: 7/5/94).........
Delaware VIP Devon Series                 -9.19       -11.76       -10.13        24.05          N/A          N/A
 (Inception date: 5/1/97).........
Delaware VIP Emerging Markets              5.28       -23.60        48.28       -38.28          N/A          N/A
 Series--Standard Class (Inception
 date: 5/1/97)3...................
Delaware VIP Select Growth Series--      -23.78       -22.46          N/A          N/A          N/A          N/A
 Standard Class (Inception date: 5/
 3/99) 3..........................
Delaware VIP Social Awareness             -9.54        -9.37        12.91        15.45          N/A          N/A
 Series--Standard Class (Inception
 date: 5/1/97) 3..................
Dreyfus Small Cap Portfolio               -6.12        13.31        23.15        -3.44        16.75         16.6
 (Inception date: 8/31/90)........
Fidelity VIP Growth Opportunities        -14.42       -17.07         4.27        24.61        29.95        18.27
 Portfolio--Initial Class
 (Inception date: 1/3/95) 3.......
Franklin Mutual Shares Securities          7.31        13.25        13.15        -0.16        17.48          N/A
 Fund--Class 2 Shares (Inception
 date: 11/8/96) 2.................
MFS Research Series Initial Class        -21.25        -4.85        24.05        23.39        20.26        22.33
 (Inception date: 7/26/95) 3......
Newport Tiger Fund (Inception            -18.48       -15.63        68.01        -6.43       -31.14        11.73
 date: 5/1/95)....................
OCC Global Equity Portfolio              -13.80         4.70        26.50        13.29        14.02        15.02
 (Inception date: 3/1/95).........
OCC Managed Portfolio (Inception          -4.90         9.70         0.83         7.12        22.29        22.77
 date: 8/1/88)....................
Scudder SVS Government Securities          7.48        10.93         0.68         7.03         8.96         2.56
 Portfolio (Inception date: 9/3/
 87)..............................
Scudder SVS Small Cap Growth             -28.91        10.71        34.56        18.37        34.20        28.04
 Portfolio (Inception date: 5/2/
 94)..............................
Templeton Foreign Securities Fund--      -15.75        -2.38        23.23         9.08         9.46       23.79
 Class 2 Shares (Inception date: 5/
 1/92) 2..........................
----------------------------------------------------------------------------------------------------------------
\1\ Total return shown reflects the historical performance of Class A shares since the inception of the Fund,
  adjusted to reflect the 12b-1 fees imposed on Class B shares of the Fund.
\2\ Total return shown reflects the historical performance of Class 1 shares since the inception of the Fund,
  adjusted to reflect the 12b-1 fees imposed on Class 2 shares of the Fund.
\3\ This Replaced Fund offers different share classes under various Contracts; the performance shown for the
  Replaced Fund is for the class with the lowest expenses.

    58. The following chart shows the average annual total returns for 
the Substitute Funds for the past six calendar year periods.

----------------------------------------------------------------------------------------------------------------
                                     Total return of substitute funds for the periods indicated below  (percent)
                                   -----------------------------------------------------------------------------
         Substitute funds             Calendar     Calendar     Calendar     Calendar     Calendar     Calendar
                                     year 2001    year 2000    year 1999    year 1998    year 1997    year 1996
----------------------------------------------------------------------------------------------------------------
AFIS Growth Fund--Class 2 Shares         -18.15         4.47        57.27        35.24        29.80        13.07
 (Inception date: 2/8/94) \1\.....
AFIS Growth-Income Fund--Class 2           2.56         7.95        11.20        18.09        25.54        18.41
 Shares (Inception date: 2/8/84)
 \1\..............................
AFIS International Fund--Class 2         -19.89       -22.06        75.97        20.92         8.82        17.23
 Shares (Inception date: 5/1/90)
 \1\..............................
Scudder VIT Equity 500 Index             -12.18        -9.24        20.39        28.71          N/A          N/A
 (Inception date: 10/1/97)........
Scudder VIT Small Cap Index                2.07        -3.87        20.16        -2.18          N/A          N/A
 (Inception date: 8/22/97)........
Lincoln National Bond Fund                 9.18        10.88        -3.30         9.56         9.30         2.31
 (Inception date: 12/28/81).......
Lincoln National Social Awareness         -9.50        -8.32        15.44        19.89        37.53       28.94
 Fund (Inception date: 5/2/88)....
----------------------------------------------------------------------------------------------------------------
\1\ Total return shown reflects the historical performance of Class 1 shares since the inception of the Fund,
  adjusted to reflect the 12b-1 fees imposed on Class 2 shares of the Fund.

    59. The following chart shows the approximate size for each of the 
Replaced Funds as of December 31, 2001 as well as the expense ratios, 
management fees, and 12b-1 fee for each of the Replaced Funds for 
Calendar Year 2001.

[[Page 41541]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Gross calendar
                                                           Net assets at     year 2001     Net calendar   Gross calendar   Net calendar    Calendar year
                     Replaced funds                        December 31,    expense ratio     year 2001       year 2001       year 2001    2001 12b-1 fee
                                                             2001  (in    \3\  (percent)   expense ratio  management fee  management fee     (percent)
                                                          thousands) \2\                     (percent)       (percent)       (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
AIM VI Capital Appreciation Fund (Inception date: 5/5/         1,163,764            0.85            0.85            0.61            0.61             N/A
 93)....................................................
Alliance VPS Growth Portfolio--Class B Shares (Inception         320,452            1.11            1.11            0.75            0.75            0.25
 date: 9/15/94).........................................
Colonial U.S. Growth & Income Fund (Inception date: 7/5/         207,684            0.96            0.96            0.80            0.80             N/A
 94)....................................................
Delaware VIP Devon Series (Inception date: 5/1/97)......          33,080            0.72            0.72            0.65            0.65             N/A
Delaware VIP Emerging Markets Series--Standard Class              12,641            1.45            1.45            1.25            1.07             N/A
 (Inception date: 5/1/97) \1\...........................
Delaware VIP Select Growth Series--Standard Class                 69,602            0.88            0.88            0.75            0.75             N/A
 (Inception date: 5/3/99) \1\...........................
Delaware VIP Social Awareness Series--Standard Class              23,887            0.85            0.85            0.75            0.69             N/A
 (Inception date: 5/1/97) \1\...........................
Dreyfus Small Cap Portfolio (Inception date: 8/31/90)...         693,079            0.79            0.79            0.75            0.75             N/A
Fidelity VIP Growth Opportunities Portfolio--Initial             975,582            0.69            0.69            0.58            0.58             N/A
 Class (Inception date: 1/3/95)1,4......................
Franklin Mutual Shares Securities Fund--Class 2 Shares           661,957            1.04            1.04            0.60            0.60            0.25
 (Inception date: 11/8/96)..............................
MFS Research Series--Initial Class (Inception date: 7/26/        808,889            0.90            0.90            0.75            0.75             N/A
 95) \1\................................................
Newport Tiger Fund (Inception date: 5/1/95).............          35,920            1.31            1.31            0.90            0.90             N/A
OCC Global Equity Portfolio (Inception date: 3/1/95)....          31,289            1.20            1.20            0.80            0.80             N/A
OCC Managed Portfolio (Inception date: 8/1/88)..........         572,321            0.88            0.88            0.78            0.78             N/A
Scudder SVS Government Securities Portfolio (Inception           305,223            0.60            0.60            0.55            0.55             N/A
 date: 9/3/87)..........................................
Scudder SVS Small Cap Growth Portfolio (Inception date:          231,850            0.68            0.68            0.65            0.65             N/A
 5/2/94)................................................
Templeton Foreign Securities Fund--Class 2 Shares                790,725            1.16            1.16            0.69            0.69           0.25
 (Inception date: 5/1/92)...............................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ This Replaced Fund offers different share classes under different Contracts; expenses and fees shown are for the Replaced Fund Class with the lowest
  fees and expenses.
\2\ Reflects total assets of all classes of shares, where applicable, of the fund.
\3\ Total annual expenses.
\4\ Actual annual class operating expenses were lower because a portion of the brokerage commissions that the fund paid was used to reduce the fund's
  expenses, and/or because through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances were used to reduce
  a portion of the fund's custodian expenses. See thmpanying prospectus for details.

    60. The next chart provides the approximate size for each of the 
Substitute Funds as of December 31, 2001, as well as the expense ratio, 
management fee and 12b-1 fee for each of the Substitute Funds for 
Calendar Year 2001.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Gross calendar   Net calendar
                                                         Net assets \1\      year 2001       year 2001    Gross calendar   Net calendar    Calendar year
                   Substitute funds                      at December 31,   expense ratio   expense ratio     year 2001       year 2001      2001  12b-1
                                                            2001  (in     \2\  (percent)  \2\  (percent)  management fee  management fee  fee  (percent)
                                                           thousands)                                        (percent)       (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
AFIS Growth Fund--Class 2 Shares (Inception date: 2/8/         8,144,406            0.63            0.63            0.37            0.37            0.25
 94)..................................................
AFIS Growth--Income Fund (Inception date: 2/8/84).....         8,614,715            0.60            0.60            0.33            0.33            0.25
AFIS International Fund--Class 2 Shares (Inception             2,400,096            0.86            0.86            0.55            0.55            0.25
 date: 5/1/90)........................................
Scudder VIT Equity 500 Index (Inception date: 10/1/97)           465,836            0.31            0.30            0.20            0.20             N/A
Scudder VIT Small Cap Index (Inception date: 8/22/97).           151,742            0.63            0.45            0.35            0.35             N/A
Lincoln National Bond Fund (Inception date: 12/28/81).           556,894            0.53            0.53            0.45            0.45             N/A

[[Page 41542]]

 
Lincoln National Social Awareness Fund (Inception              1,274,803            0.40            0.40            0.34            0.34            N/A
 date: 5/2/88)........................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Reflects total assets of all classes of shares, where applicable, of the Fund.
\2\ Total annual expenses.

    61. By supplements to the prospectuses for the Contracts, as well 
as the most current prospectuses for the Contracts, all owners and 
prospective owners of the Contracts were notified of Lincoln Life's and 
LLNY's intention to take the necessary actions, including seeking the 
order requested by the amended and restated Application, to substitute 
portfolios.
    62. The supplements and prospectuses stated that on the date of the 
proposed substitutions (after the relief requested has been obtained 
and all necessary systems support changes have been made), the 
Substitute Funds will replace the Replaced Funds as the underlying 
investments for such sub-accounts. In addition, the supplements 
informed owners and prospective owners that Lincoln Life and LLNY would 
not exercise any rights reserved by them under the Contracts to impose 
restrictions or fees on transfers from the Replaced Funds until at 
least thirty (30) days after the proposed substitutions. Certain 
supplements and prospectuses also advised existing and prospective 
``ChoicePlus'' Contract owners that as of a to-be-specified date (for 
existing ChoicePlus Contract owners) and as of February 22, 2000 (for 
prospective ChoicePlus Contract owners) they would be unable to 
allocate net purchase payments to, or transfer cash values to, the sub-
accounts of Lincoln Life Account N corresponding to each of the Closed 
Funds.
    63. By means of an additional prospectus supplement or updated 
prospectus, Contract owners will be advised, at least thirty (30) days 
in advance of the substitutions, of the actual date of the 
substitutions. At least sixty (60) days before the date of the proposed 
substitutions, affected owners will also be provided with a prospectus 
for each Substitute Fund that includes complete current information 
concerning the Substitute Funds. Thus, any owner affected by the 
substitutions will have received current prospectus disclosure for each 
Substitute Fund at least sixty (60) days or more in advance of the 
proposed substitutions.
    64. Lincoln Life and LLNY will redeem shares of each Replaced Fund 
in cash and purchase with the proceeds shares of the corresponding 
Substitute Fund. Redemption requests and purchase orders will be placed 
simultaneously so that the contract values will remain fully invested 
at all times. The proposed substitutions will take place at relative 
net asset value with no change in the amount of any Contract owner's 
cash value or death benefit or in the dollar value of his or her 
investment in any of the Accounts. Contract owners will not incur any 
additional fees or charges as a result of the proposed substitutions 
nor will their rights or Lincoln Life's or LLNY's obligations under the 
Contracts be altered in any way. All expenses incurred in connection 
with the proposed substitutions, including legal, accounting, brokerage 
and other fees and expenses, will be paid by Lincoln Life or LLNY. In 
addition, the proposed substitutions will not impose any tax liability 
on Contract owners. The proposed substitutions will not cause the 
contract fees and charges currently imposed by Lincoln Life and LLNY 
and paid by existing Contract owners to be greater after the proposed 
substitutions than before the proposed substitutions. Lincoln Life and 
LLNY do not currently impose any restrictions or fees on transfers 
under the Contracts, and will not exercise any right they may have 
under the Contracts to impose restrictions on transfers from the 
Replaced Funds under the Contracts for a period of at least thirty (30) 
days following the proposed substitutions.
    65. Lincoln Life and LLNY will not increase contract charges or 
total separate account charges (net of any waiver or reimbursements) of 
the sub-accounts that invest in the Substitute Funds for those Contract 
owners who were Contract owners on the date of the substitution for a 
period of two years from the date of the substitution. If the total 
operating expenses for any Substitute Fund (taking into account any 
expense waiver or reimbursement) for any fiscal quarter for the two-
year period following the date of substitution exceed on an annualized 
basis the net expense ratio for its corresponding Replaced Fund for the 
fiscal year ended December 31, 2001, Lincoln Life and LLNY will reduce 
(through waiver or reimbursement) the separate account expenses paid 
during that quarter of the sub-account that invests in such Substitute 
Fund for Contract owners who were Contract owners on the date of the 
substitution to the extent necessary to offset the amount by which the 
Substitute Fund's expense ratio for such period exceeds, on an 
annualized basis, the year 2001 expense ratio level of the Replaced 
Fund.
    66. In addition, with regard to the substitution involving the AIM 
VI Capital Appreciation Fund and the AFIS Growth Fund, Lincoln and LLNY 
will not receive, for three years from the date of the substitution, 
any direct or indirect benefits from the AFIS Growth Fund, its advisers 
or underwriters, or from affiliates of the AFIS Growth Fund, their 
advisers or underwriters, in connection with assets attributable to the 
Contracts affected by the substitution involving the AIM VI Capital 
Appreciation Fund and the AFIS Growth Fund, at a higher rate than 
Lincoln Life and LLNY received from the AIM VI Capital Appreciation 
Fund, its advisers or underwriters, or from affiliates of the AIM VI 
Capital Appreciation Fund, their advisers or underwriters, including 
without limitation Rule 12b-1 fees, shareholder service or 
administrative or other service fees, revenue-sharing or other 
arrangements. Lincoln Life and LLNY each represent that the 
substitution involving the AIM VI Capital Appreciation Fund and the 
AFIS Growth Fund and its selection of the AFIS Growth Fund was not 
motivated by any financial consideration paid or to be paid to it or to 
any of its affiliates by the AFIS Growth Fund, its advisers or 
underwriters, or by the affiliates of the AFIS Growth Fund, their 
advisers or underwriters.
    Applicants' Legal Analysis
    1. Section 26(c) of the Act requires the depositor of a registered 
unit investment trust holding the securities of a single issuer to 
obtain Commission approval before substituting the securities held by 
the trust. Specifically, Section 26(c) states:


[[Page 41543]]


    It shall be unlawful for any depositor or trustee of a 
registered unit investment trust holding the security of a single 
issuer to substitute another security for such security unless the 
Commission shall have approved such substitution. The Commission 
shall issue an order approving such substitution if the evidence 
establishes that it is consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of 
this title.

    2. Applicants state that the proposed substitution of shares of the 
Substitute Portfolios for those of the Replaced Portfolios appears to 
involve a substitution of securities within the meaning of Section 
26(c) of the Act. Applicants therefore request an order from the 
Commission pursuant to Section 26(c) approving the proposed 
substitutions.
    3. The Contracts give Lincoln Life and LLNY the right, subject to 
Commission approval, to substitute shares of another open-end 
management investment company for shares of an open-end management 
investment company held by a sub-account of the relevant account. The 
prospectuses for the Contracts and the Accounts contain appropriate 
disclosure of this right. The Contracts state as follows:

    Substituted Securities. Shares corresponding to a particular 
Fund may not always be available for purchase or [Lincoln Life] may 
decide that further investment in such Fund is no longer appropriate 
in view of the purposes of the Variable Account, or in view of 
legal, regulatory or federal income tax restrictions. In such event, 
shares of another registered open-end investment company or unit 
investment trust may be substituted both for Fund shares already 
purchased and/or as the securities to be purchased in the future, 
provided that these substitutions meet applicable Internal Revenue 
Service diversification guidelines and have been approved by the 
Securities and Exchange Commission and such other regulatory 
authorities as may be necessary. In the event of any substitution 
pursuant to this provision, the company may make appropriate 
endorsement(s) to this contract to reflect the substitution.

    4. The prospectuses for the Contracts state under the caption 
``Investments of the Variable Annuity Account'' the following: [Lincoln 
Life] [LLNY] reserve[s] the right to add, delete or substitute funds.
    5. Lincoln Life and LLNY reserve this right of substitution both to 
protect themselves and Contract owners in situations where either might 
be harmed or disadvantaged by circumstances surrounding the issuer of 
the shares held by one or more of their separate accounts and to afford 
these companies the opportunity to replace such shares where to do so 
could benefit themselves and Contract owners. For example, the 
Commission staff has approved substitutions made by insurance companies 
in response to pending mergers or liquidations of the issuer of shares 
held by the companies' separate accounts and has approved numerous 
substitutions by life insurance companies of shares of an issuer for 
shares of a similar issuer held by the companies' separate accounts in 
a variety of circumstances.
    6. As mentioned above, the investment objective of the AFIS Growth-
Income Fund and the Colonial U.S. Growth & Income Fund are 
substantially similar. Both Funds are stock funds seeking undervalued 
investments with good long-term growth prospects.
    7. The AFIS Growth-Income Fund's and the Delaware VIP Devon Series' 
investment objectives are substantially similar; both seek capital 
appreciation with AFIS Growth-Income Fund also seeking income. 
Additionally, both Funds invest in common stocks using both growth and/
or value investment styles.
    8. The Lincoln National Bond Fund's and the Scudder SVS Government 
Securities Portfolio's investment objectives are substantially similar; 
both Funds seek high current income consistent with the preservation of 
capital. Additionally, both Funds invest in similar fixed-income 
securities: U.S. Government obligations and investment-grade corporate 
debt, with some limited investment in below investment-grade corporate 
debt.
    9. The AFIS International Fund's and the OCC Global Equity 
Portfolio's investment objectives are substantially similar; the OCC 
Global Equity Portfolio seeks long-term capital appreciation and the 
AFIS International Fund seeks growth of capital (capital appreciation). 
The OCC Global Equity Portfolio invests principally in equity 
securities located anywhere in the world using traditional value 
investing strategies, while AFIS International Fund invests principally 
in equity securities located outside the United States using value and 
growth investing strategies.
    10. The AFIS Growth-Income Fund's and the OCC Managed Portfolio's 
investment objectives are substantially similar; both Funds seek growth 
of capital over time (income and capital appreciation). AFIS Growth-
Income Fund seeks undervalued investments with good long-term growth 
prospects, while the OCC Managed Portfolio uses traditional value 
investing in both equity and fixed-income securities.
    11. The investment objectives of AIM VI Capital Appreciation and 
the AFIS Growth Fund are identical; both seek growth of capital. 
Additionally, both Funds invest in common stocks using growth 
investment styles.
    12. The investment objectives of the Alliance VPS Growth Portfolio 
and the AFIS Growth Fund are substantially similar; both seek growth of 
capital. Additionally, both Funds invest in common stocks using growth 
investment styles.
    13. The investment objectives of the Delaware VIP Emerging Markets 
Series and the AFIS International Fund are substantially similar; both 
Funds seek capital appreciation by investing in common stocks with 
potential for capital appreciation, using value investment styles. 
Additionally, both Funds invest principally in equity securities 
located outside the United States, with the Delaware VIP Emerging 
Markets Series emphasizing emerging foreign country investment and may 
also hold a higher percentage of high-yield, high-risk debt securities.
    14. The investment objectives of the Delaware VIP Select Growth 
Series and the AFIS Growth Fund are substantially similar; both seek 
growth of capital, with Delaware VIP Select Growth Series' emphasis on 
long-term capital appreciation. Additionally, both Funds invest in 
common stocks using growth investment styles. Both Funds invest in 
large-sized companies, with Delaware VIP Select Growth Series also 
investing in medium- and small-sized companies.
    15. The investment objectives of the Delaware VIP Social Awareness 
Series and the Lincoln National Social Awareness Fund are identical; 
both seek long-term growth of capital.
    Additionally, both Funds invest in common stocks of medium to 
large-sized domestic companies using growth and/or value investment 
styles with socially responsible investment criteria.
    16. The investment objectives of the Scudder VIT Small Cap Index 
Fund and the Dreyfus Small Cap Portfolio are identical; both seek 
capital appreciation. Additionally, both invest in common stocks of 
small-sized growth and value companies.
    17. The investment objectives of the Fidelity VIP Growth 
Opportunities Portfolio and the Scudder VIT Equity 500 Index Fund are 
substantially similar; both seek growth of capital. Additionally, both 
Funds invest in common stocks of large-sized growth and value 
companies, with Fidelity VIP Growth Opportunities Portfolio also 
investing in some medium-sized growth and value companies.
    18. The investment objectives of the Franklin Mutual Shares 
Securities Fund and the AFIS Growth-Income Fund are substantially 
similar; both seek capital

[[Page 41544]]

appreciation, with AFIS Growth-Income Fund also seeking income and 
Franklin Mutual Share Securities Fund secondarily seeking income. 
Additionally, both Funds invest in common stocks using value investment 
styles. Both Funds invest in large-sized domestic companies, with 
Franklin Mutual Shares Securities Fund also investing in medium- and 
small-sized companies and foreign companies and debt securities.
    19. The investment objectives of the AFIS Growth Fund and MFS 
Research Series are substantially similar; both seek growth of capital, 
with MFS Research Series also seeking income. Additionally, both Funds 
invest in common stocks using growth investment styles. Both Funds 
invest in large-sized companies, with MFS Research Series also 
investing in medium- and small-sized companies.
    20. The investment objectives of the Newport Tiger Fund and the 
AFIS International Fund are substantially similar; both invest in 
common stocks with potential for capital appreciation, with AFIS 
International Fund primarily using a value investment style and Newport 
Tiger Fund primarily using a growth investment style. Additionally, 
both Funds invest principally in equity securities located outside the 
United States, with the Newport Tiger Fund investing principally in 
Asian companies, while the AFIS International Fund provides additional 
diversification in non-Asian (European) companies.
    21. The investment objectives of the Templeton Foreign Securities 
Fund and the AFIS International Fund are substantially similar; both 
invest in common stocks with potential for capital appreciation using 
value investment styles. Additionally, both Funds invest principally in 
equity securities located outside the United States.
    22. The investment objectives of the Scudder SVS Small Cap Growth 
Portfolio and the Scudder VIT Small Cap Index Fund are substantially 
similar; both seek capital appreciation, with Scudder VIT Small Cap 
Index Fund utilizing a quantitative investment style and Scudder SVS 
Small Cap Growth Portfolio utilizing a growth investment style. 
Additionally, both Funds invest principally in common stocks of small-
sized growth companies, with the Scudder VIT Small Cap Index Fund also 
investing in small-sized value companies.
    23. The Applicants have concluded that, although there are 
differences in the objectives and policies of the Funds, their 
objectives and policies are sufficiently consistent to assure that 
following the substitutions, the achievement of the core investment 
goals of the affected owners in the Replaced Funds will not be 
frustrated.
    24. The Applicants' proposed substitutions would effectively 
consolidate the Lincoln Life and LLNY assets of each Substitute Fund 
held by the accounts with those of the corresponding Replaced Fund, 
with a goal of each Substitute Fund having lower future expense ratios 
than the past expense ratios. Larger funds can have lower expenses due 
to two reasons. First, with a larger asset size, fixed fund expenses 
are spread over a larger base, lowering the expense ratio. Second, 
larger funds may have lower trading expenses, potentially resulting in 
higher total returns. In the following comparisons, ``expense ratio'' 
refers to both gross and net expense ratios, and ``management fee'' 
includes both gross and net management fees, as well as any applicable 
12b-1 fees.
    25. The AFIS Growth Fund has a lower expense ratio and slightly 
higher management fee (though total expenses are lower) and is much 
larger than the AIM VI Capital Appreciation Fund. The AFIS Growth Fund 
also has performed better for five time periods and lower for one time 
period compared to the AIM VI Capital Appreciation Fund.
    26. The AFIS Growth Fund has a lower expense ratio and management 
fee and is much larger than the Alliance VPS Growth Portfolio. The AFIS 
Growth Fund has performed better for four time periods, the same for 
one time period, and lower for one time period than the Alliance VPS 
Growth Portfolio.
    27. The AFIS International Fund has a lower expense ratio and 
management fee and is much larger than the Delaware VIP Emerging 
Markets Series. The AFIS International Fund also has performed better 
for three time periods and lower for one time period compared to the 
Delaware VIP Emerging Markets Series.
    28. The AFIS Growth Fund has a lower expense ratio and management 
fee and is much larger than the Delaware VIP Select Growth Series. The 
AFIS Growth Fund also has performed better for two time periods 
compared to the Delaware VIP Select Growth Series.
    29. The Lincoln National Social Awareness Fund has a lower expense 
ratio and management fee and is much larger compared to the Delaware 
VIP Social Awareness Series. The Lincoln National Social Awareness Fund 
also has performed the same for one time period and better for four 
time periods compared to the Delaware VIP Social Awareness Series.
    30. The Scudder VIT Small Cap Index Fund has a lower expense ratio 
and management fee and is much smaller than the Dreyfus Small Cap Index 
Portfolio. The Scudder VIT Small Cap Index Fund also has better 
performance for two time periods and lower performance for two time 
periods compared to the Dreyfus Small Cap Index Fund.
    31. The Scudder VIT Equity 500 Index Fund has a lower expense ratio 
and management fee and is smaller than the Fidelity Growth 
Opportunities Portfolio. The Scudder VIT Equity 500 Index Fund also has 
better performance for four time periods compared to the Fidelity 
Growth Opportunities Fund.
    32. The AFIS Growth-Income Fund has a lower expense ratio and 
management fee and is much larger than the Franklin Mutual Shares 
Securities Fund. The AFIS Growth-Income Fund also has performed better 
for two time periods and lower for three time periods compared to the 
Franklin Mutual Shares Securities Fund.
    33. The AFIS Growth-Income Fund has a lower expense ratio and 
management fee and is larger than the Colonial U.S. Growth & Income 
Fund. The AFIS Growth-Income Fund also has performed better for two 
time periods, slightly lower for two time periods and lower for two 
time periods compared to the Colonial U.S. Growth & Income Fund.
    34. The AFIS Growth-Income Fund has a lower expense ratio and 
management fee and is much larger than the Delaware VIP Devon Series. 
In addition, as indicated previously, the AFIS Growth-Income Fund has 
performed better for three time periods and lower for one period 
compared to the Delaware VIP Devon Series.
    35. The AFIS International Fund has a lower expense ratio and the 
same management fee and is much larger than the OCC Global Equity 
Portfolio. The AFIS International Fund has performed better for three 
time periods and lower for three time periods compared to the OCC 
Global Equity Portfolio.
    36. The AFIS Growth-Income Fund has a lower expense ratio and 
management fee and is much larger than the OCC Managed Portfolio. The 
AFIS Growth-Income Fund has performed better for four time periods and 
lower for two time periods compared to the OCC Managed Portfolio.
    37. The Lincoln National Bond Fund has a lower expense ratio and 
management fee and is larger than the Scudder SVS Government Securities 
Portfolio. The Lincoln National Bond Fund has performed better for 
three time periods and lower for three time

[[Page 41545]]

periods compared to the Scudder SVS Government Securities Portfolio.
    38. The AFIS International Fund has a lower expense ratio and 
management fee and is much larger than the Templeton Foreign Securities 
Fund. The AFIS International Fund also has performed better for two 
time periods and lower for four time periods compared to the Templeton 
Foreign Securities Fund.
    39. The AFIS Growth Fund has a lower expense ratio and management 
fee and is much larger than the MFS Research Series. The AFIS Growth 
Fund also has performed better for five time periods and lower for one 
time period compared to the MFS Research Series.
    40. The AIFS International Fund has a lower expense ratio and 
management fee and is much larger than the Newport Tiger Fund. The AFIS 
International Fund also has performed better for four time periods and 
lower for two time periods compared to the Newport Tiger Fund.
    41. The Scudder VIT Small Cap Index Fund has a lower expense ratio 
and management fee and is smaller than the Scudder SVS Small Cap Growth 
Portfolio. The Scudder VIT Small Cap Index Fund also has performed 
better for one time period and has lower performance for three time 
periods compared to the Scudder SVS Small Cap Growth Portfolio.

Conclusion

    Applicants submit that, for all the reasons stated above, the 
proposed substitutions are consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-15250 Filed 6-17-02; 8:45 am]
BILLING CODE 8010-01-P