<PAGE>
Board of Managers
Kelly D. Clevenger
Chairman, Board of Managers
Vice President, Lincoln National Life
Insurance Co., Fort Wayne, Ind.
Nancy L. Frisby, CPA, Manager
Regional Vice President/Chief Financial
Officer, St. Joseph Medical Center,
Fort Wayne, Ind.
John B. Borsch, Jr., Manager
Associate Vice President, Investments,
Northwestern University, Evanston, Ill.
Stanley R. Nelson, Manager
Executive in Residence,
Program in Health Services Administration,
University of Minnesota, Minneapolis, Minn.
Barbara S. Kowalczyk, Manager
Senior Vice President, Lincoln National
Corp., Fort Wayne, Ind. and
Lincoln National (China, Inc.)
Safekeeper of securities
Bankers Trust Co.
New York, N.Y.
Independent auditors
Ernst & Young LLP
Fort Wayne, Ind.
Investment manager
Lincoln National Life Insurance Co.
Fort Wayne, Ind.
[LOGO]
Fort Wayne, Indiana 46801
SMR96-0576ALL
Feb 96 [RECYCLING LOGO]
Form 10688A-A 2/96
LINCOLN LIFE
Variable
Annuity
Fund A
Annual report
December 31, 1995
<PAGE>
Lincoln Life
Variable Annuity Fund A
February 1996
Dear Variable Fund A Contract Owner:
This booklet contains the latest annual report of the Variable Annuity Fund A.
This information applies to Variable Fund B Contract Owners as well. Fund B has
been merged into Fund A upon the majority vote of the Contract Owners. On August
1, 1995 a special meeting was held when the merger of Funds A and B and the
election of the Board of Managers was passed. The new and current board members
are listed on the back of this booklet.
1995 was a very prosperous year for most equity investors. We are pleased to
report that Fund A has performed positively this year as well. Variable Fund A
performance for 1995, as measured by the change in unit value, was 37.18%. In
comparison the Standard & Poors 500 Index (S&P 500) for 1995 was 37.5%.
The graph on the following page illustrates the performance of Fund A over the
past 10 years, 1986 to 1995. The graph compares the 10 year performance of an
initial investment of $10,000 into Fund A and the performance of a broad based
security market index, the S&P 500 Index, for the same time period. The S&P 500
Index tracks the average performance of 500 widely held common stocks and is
often used as a benchmark measure of stock-market returns.
Vantage Global Advisors, the portfolio manager of Fund A, provide commentary
regarding Fund A for 1995 on the next page. The manager's commentary and the
graph are followed by more detailed financial information regarding your
variable annuity.
Please review this information carefully. Your Lincoln Life representative will
help answer any questions that you may have.
We would like to take this opportunity to thank you for your continued
confidence in Lincoln Life. We look forward to reporting to you again in six
months.
Sincerely,
/s/Kelly D. Clevenger
Kelly D. Clevenger
Chairman, Board of Managers
<PAGE>
Portfolio manager's summary and comparison
1995 was a record-breaking year for the stock market. The Dow Jones Industrial
Average began the year below 4000 and steadily climbed upward through 4000 in
March and 5000 in November. The rise was unusually consistent. The S&P 500 Index
had a positive return for 10 months in a row ending in September. The last time
that happened was in 1959.
The market rise came in the face of economic uncertainty. The Federal Reserve
had raised interest rates throughout 1994 and the impact the increases made was
expected to be felt in 1995. Indeed, the economy did slow down in 1995. To the
surprise of many, corporate earnings were robust. These earnings drove the
market upward early in the year. The slowdown in the economy led to weak
earnings in the retail and automobile industries. The earnings of companies in
these industries lagged the rising market. In contrast consumer non-cyclicals
such as tobacco and pharmaceutical companies thrived.
Technology also played a key role in the market's surge. The technology industry
was affected by fundamentals, psychology and politics. High powered technology
is quickly becoming accessible and affordable. Those companies providing the
technology, such as chip makers and PC producers are positioned to generate
substantial earnings.
In addition, investors bought concepts rather than earnings as untested stocks
related to the Internet were big winners. Finally, technology stocks benefitted
from a proposed capital gains tax cut as their returns are largely based on
capital gains.
Variable Annuity A provided full participation in this rising market. In order
to capture the long term returns of the stock market there is no substitute for
being in it. Those who were in the market during 1995 reaped the rewards.
Growth of $10,000 invested 1/1/86 through 12/31/95
Fund A S&P 500 Index
------- -------------
1/1/86............. $10,000 $10,000
12/31/95........... $33,598 $40,043
<PAGE>
<TABLE>
<CAPTION>
Statement of Net Assets
December 31, 1995
INVESTMENTS
Percent of Number of Market
COMMON STOCKS: Net Assets Shares Value
-------- -------- ------------
<S> <C> <C> <C>
Aerospace: 1.3%
McDonnell Douglas Corp. 14,500 $1,334,000
Air Transportation: 0.4%
AMR Corp.* 5,200 386,100
Banking and Insurance: 10.5%
AllState Corp. 22,080 908,040
American General Corp. 38,200 1,332,225
Bank of Boston Corp. 28,300 1,308,875
Bank of New York Inc. 29,400 1,433,250
Chemical Banking Corp. 25,800 1,515,750
Cigna Corp. 13,200 1,362,900
First Chicago NBD Corp. 39,639 1,565,741
NationsBank Corp. 10,300 717,137
Transamerica Corp. 5,500 400,812
Travelers Inc. 5,700 358,388
------------
10,903,118
Broadcasting: 1.1%
Capital Cities ABC Inc. 3,000 370,125
King World Productions Inc.* 19,200 746,400
------------
1,116,525
Building Materials: 1.3%
Armstrong World Industries Inc. 14,100 874,200
Dover Corp. 6,500 239,688
Parker Hannifin Corp. 7,500 256,875
------------
1,370,763
Chemicals: 3.0%
Dow Chemical Co. 8,600 605,225
Du Pont E I De Nemours & Co. 10,100 705,738
Eastman Chemical Co. 7,700 482,212
Olin Corp. 10,300 764,775
Union Carbide Corp. 13,800 517,500
------------
3,075,450
Consumer Products and Services: 6.5%
American Brands Inc. 16,500 736,312
Black & Decker Corp. 8,000 282,000
Omnicom Group Inc. 28,400 1,057,900
Philip Morris Co. Inc. 32,200 2,914,100
Procter & Gamble Co. 21,600 1,792,800
------------
6,783,112
Drug and Hospital Supplies: 8.0%
Baxter International Inc. 35,600 1,490,750
Bristol Myers Squibb Co. 25,800 2,215,575
Lilly (Eli) & Co. 22,400 1,260,000
Merck & Co. Inc. 4,300 282,725
Pharmacia & Upjohn Inc.* 37,190 1,441,113
Schering-Plough Corp. 30,000 1,642,500
------------
8,332,663
Electrical and Electronics: 8.6%
Alliance Semiconductor Corp.* 32,400 376,650
Applied Materials Inc.* 34,700 1,366,313
Arrow Electronics Inc.* 3,500 150,938
Avnet Inc. 4,200 187,950
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Number of Market
Net Assets Shares Value
-------- -------- -----------
<S> <C> <C> <C>
General Electric Co. 39,400 $2,836,800
Harris Corp. 13,800 753,825
Micron Technology Inc. 10,700 423,987
Read Rite Corp.* 34,500 802,125
Teradyne Inc.* 38,800 970,000
Texas Instruments Inc. 5,500 284,625
TRW Inc. 10,100 782,750
-----------
8,935,963
Entertainment: 1.5%
Mattel Inc. 12,787 393,200
Mirage Resorts Inc.* 35,100 1,210,950
-----------
1,604,150
Finance: 1.1%
Household International Inc. 18,600 1,099,725
Food and Beverage: 6.8%
Campbell Soup Co. 12,200 732,000
Coca Cola Co. 24,400 1,811,700
ConAgra Inc. 14,000 577,500
CPC International Inc. 7,400 507,825
Heinz H.J. Co. 9,450 313,031
IBP Inc. 21,200 1,070,600
RJR Nabisco Holdings Corp. 16,600 512,525
Safeway Inc.* 28,300 1,457,450
Universal Foods Corp. 1,600 64,200
-----------
7,046,831
Machinery and Engineering: 1.5%
Novellus Systems Inc.* 21,800 1,177,200
Outboard Marine Corp. 17,300 352,487
-----------
1,529,687
Metals and Mining: 1.7%
ASARCO Inc. 16,600 531,200
Cleveland-Cliffs Inc. 900 36,900
Phelps Dodge Corp. 18,900 1,176,525
-----------
1,744,625
Motor Vehicles and Equipment: 2.7%
Eaton Corp. 18,300 981,338
Ford Motor Co. 31,800 922,200
Goodrich BF Co. 8,900 606,312
Navistar International Corp.* 30,900 324,450
-----------
2,834,300
Office and Business Equipment and
Services 6.1%
Adaptec Inc.* 9,700 397,700
Cadence Design Systems Inc.* 26,250 1,102,500
Cisco Systems Inc.* 9,700 723,863
Computer Associates International Inc. 5,800 329,875
Dell Computer Corp.* 27,700 959,112
Digital Equipment Corp.* 3,200 205,200
Mentor Graphics Corp. * 11,900 217,175
Reynolds & Reynolds Co. 4,200 163,275
Seagate Technology* 18,100 859,750
Sun Microsystems Inc.* 31,000 1,414,375
-----------
6,372,825
Paper: 1.5%
Avery Dennison Corp. 11,100 556,388
Bowater Inc. 14,300 507,650
Stone Container Corp. 23,400 336,375
Union Camp Corp. 4,700 223,837
-----------
1,624,250
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Number of Market
Net Assets Shares Value
---------- -------- -------------
<S> <C> <C> <C>
Petroleum and Petroleum Related: 9.7%
Amoco Corp. 10,100 $725,938
Atlantic Richfield Co. 8,600 952,450
Exxon Corp. 34,900 2,796,362
Halliburton Co. 21,100 1,068,187
Lyondell Petrochemical Co. 36,600 837,225
Mobil Corp. 10,600 1,187,200
Occidental Petroleum Corp. 17,200 367,650
Royal Dutch Petroleum Co. 13,600 1,919,300
Williams Companies Inc. 5,100 223,763
------------
10,078,075
Printing and Publishing: 0.4%
New York Times Co. 15,200 450,300
Public Utilities: 4.3%
Consolidated Edison Co. 42,700 1,366,400
General Public Utilities Corp. 14,700 499,800
Northeast Utilities 47,400 1,155,375
Ohio Edison Co. 32,100 754,350
SCE Corp. 19,100 339,025
Unicom Corp. 10,600 347,150
------------
4,462,100
Railroads: 1.3%
Conrail Inc. 3,500 245,000
Illinois Central Corp. 29,600 1,135,900
------------
1,380,900
Retail: 4.4%
Eckerd Corp.* 3,600 160,650
Jostens Inc. 43,000 1,042,750
Kroger Co.* 37,100 1,391,250
Sears, Roebuck & Co. 12,600 491,400
Staples Inc.* 33,050 805,594
Waban Inc.* 33,700 631,875
------------
4,523,519
Securities Dealers: 1.3%
Bear, Stearns & Co. Inc. 42,100 836,737
Dean Witter Discover & Co. 11,300 531,100
------------
1,367,837
Shoes: 0.8%
Nike Inc. 11,600 807,650
Soaps, Cleaner and Cosmetics: 1.7%
Clorox Co. 7,300 522,863
Colgate-Palmolive Co. 17,750 1,246,937
------------
1,769,800
Telecommunications: 8.8%
American Telephone & Telegraph Co. 28,700 1,858,325
Ameritech Corp. 33,500 1,976,500
Bellsouth Corp. 50,600 2,201,100
Comsat Corp. 2,000 37,250
Pacific Telesis Group 46,600 1,566,925
Sprint Corp. 38,600 1,539,175
------------
9,179,275
Transportation: 0.7%
PHH Corp. 14,800 691,900
-------- ------------
TOTAL COMMON STOCKS
(Cost $74,527,710) 97.0% 100,805,443
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Par Market
Net Assets Amount Value
---------- ---------- -------------
<S> <C> <C> <C>
COMMERCIAL PAPER:
(Cost $2,300,000)
Morgan Stanley Group, Inc.
6.05%, 1/2/96 2.2% $2,300,000 $2,300,000
----- ------------
TOTAL INVESTMENTS
(Cost $76,827,710) 99.2% 103,105,443
Excess of other assets over liabilities 0.8% 849,207
----- ------------
NET ASSETS 100.0% $103,954,650
===== ============
Net assets are represented by:
Value of accumulation units:
9,568,929 units at $9.874 unit value $94,487,611
Annuity reserves:
323,677 units at $9.874 unit value 3,196,126
507,356 units at $12.360 unit value 6,270,913
------- ------------
831,033 9,467,039
======= ------------
$103,954,650
============
</TABLE>
* Non-income producing
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Statement of Operations
Year Ended December 31, 1995
Investment Income:
Dividends $2,451,414
Interest 158,447
-----------
2,609,861
Expenses:
Investment management services $288,545
Mortality and expense guarantees 848,264 1,136,809
------------ -----------
NET INVESTMENT INCOME 1,473,052
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 9,013,278
Increase in net unrealized appreciation of investments 17,280,315
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 26,293,593
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $27,766,645
===========
Statements of Changes in Net Assets
Year Ended December 31
1995 1994
------------- ------------
Changes from operations:
Net investment income $1,473,052 $1,480,481
Net realized gain on investments 9,013,278 7,201,941
Increase (decrease) in net unrealized appreciation
of investments 17,280,315 (7,661,756)
------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 27,766,645 1,020,666
Net decrease from equity transactions (2,346,263) (12,355,642)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 25,420,382 (11,334,976)
Net assets at beginning of year 78,534,268 89,869,244
------------ ------------
NET ASSETS AT END OF YEAR $103,954,650 $78,534,268
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund: The Lincoln National Variable Annuity Fund A (Fund) is a segregated
investment account of The Lincoln National Life Insurance Company. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. The Fund's investment objective is to
maximize long-term growth of capital. The Fund invests primarily in equity
securities diversified over industries and companies.
Investments: Security transactions are accounted for on the date the securities
are purchased or sold. Stocks are valued at the closing sales prices for those
traded on a national stock exchange and the mean between the quoted bid and
asked prices for those traded over-the-counter. Short-term investments are
stated at cost which approximates market. The cost of investments sold is
determined using the specific identification method.
Federal Income Taxes: Operations of the Fund form a part of, and are taxed
with, operations of The Lincoln National Life Insurance Company, which is taxed
as a "life insurance company" under the Internal Revenue Code. Under current
law, no federal income taxes are payable with respect to the investment income
and gains on investments of the Fund. Accordingly, no provision for any such
liability has been made.
Income: Dividends are recorded as earned on the ex-dividend date and interest
is accrued as earned.
Annuity Reserves: Reserves on contracts not involving life contingencies are
calculated using assumed investment rates of 3.5%, 4.5%, 5%, or 6%. Reserves on
contracts involving life contingencies are calculated using the Progressive
Annuity Table with the age adjusted for persons born before 1900 or after 1919
and assumed investment rates of 3.5%, 4.5%, 5%, or 6%.
2. INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) during 1995 amounted to
$42,219,230 and $52,568,232, respectively.
3. EXPENSES AND SALES CHARGES
Amounts are paid to The Lincoln National Life Insurance Company for investment
management services at the rate of .000885% of the current value of the Fund per
day (.323% on an annual basis) and for mortality and expense guarantees at the
rate of .002745% of the current value of the Fund per day (1.002% on an annual
basis). In addition, The Lincoln National Life Insurance Company retained from
the proceeds of the sale of annuity contracts $12,796 during 1995 for sales and
administrative charges. Accordingly, The Lincoln National Life Insurance Company
is responsible for all sales, general, and administrative expenses applicable to
the Fund.
The custodian bank of the Fund has agreed to waive its custodial fees when the
Fund maintains a prescribed amount of cash on deposit in certain non-interest
bearing accounts. For the year ended December 31, 1995, the custodial fee offset
arrangement was not material to either total expenses or to the calculation of
average net assets and the ratio of expenses to average net assets.
4. NET ASSETS
Net assets at December 31, 1995 consisted of the following:
Equity transactions ($127,720,344)
Accumulated net investment income 71,088,233
Accumulated net realized gain on investments 136,227,432
Net unrealized appreciation of investments 24,359,329
-------------
$103,954,650
=============
<PAGE>
Notes to Financial Statements (Continued)
5. MERGER
Effective October 4, 1995, an Agreement and Plan of Reorganization was executed
to merge the Lincoln National Variable Annuity Fund B (Fund B), a segregated
investment account of The Lincoln National Life Insurance Company, into the
Fund. The merger received approval of regulators and contract owners of the Fund
and Fund B at a special meeting on August 1, 1995. The merger was accomplished
by a tax-free exchange of 763,488 accumulation units and 82,501 annuity reserve
units of the Fund for all of the 897,517 accumulation units and 96,984 annuity
reserve units of Fund B outstanding on the date of exchange. Fund B's net assets
at the merger date of $7,931,344, including unrealized appreciation on
investments of $1,918,404, were combined with those of the Fund, whose net
assets prior to the merger were $92,566,438. The statements of operations and
changes in net assets have not been restated for Fund B's operations prior to
the merger date. For the period January 1, 1995 to October 4, 1995, Fund B had
net investment income of $88,334 and net realized and unrealized gains of
$1,864,313.
6. SUMMARY OF CHANGES IN EQUITY TRANSACTIONS
<TABLE>
<CAPTION>
1995 1994
------------------------------ --------------------------------
Units Amount Units Amount
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of year 9,907,664 ($121,421,039) 11,538,380 ($109,744,849)
Contract purchases 84,705 701,434 118,031 997,597
Issued in connection with
merger of Fund B 763,488 7,157,877 - -
Terminated contracts (1,186,928) (10,307,468) (1,748,747) (12,673,787)
---------- ------------- ----------- -------------
BALANCE AT END OF YEAR 9,568,929 ($123,869,196) 9,907,664 ($121,421,039)
========== ============= =========== =============
Annuity Reserves:
Balance at beginning of year 862,789 ($3,953,042) 945,353 ($3,273,590)
Annuity payments (144,037) (1,077,169) (103,958) (853,903)
Issued in connection with
merger of Fund B 82,501 773,467 - -
Receipt of guarantee mortality
adjustments 29,780 405,596 21,394 174,451
---------- ------------- ----------- -------------
BALANCE AT END OF YEAR 831,033 ($3,851,148) 862,789 ($3,953,042)
========== ============= =========== =============
</TABLE>
7. SUPPLEMENTAL INFORMATION - SELECTED PER UNIT DATA AND RATIOS
<TABLE>
<CAPTION>
The following is selected financial data for an accumulation unit outstanding throughout each year:
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Investment income $0.251 $0.217 $0.204 $0.206 $0.181
Expenses 0.114 0.095 0.090 0.083 0.076
------ ------ ------ ------ ------
Net investment income 0.137 0.122 0.114 0.123 0.105
Net realized and unrealized
gain (loss) on investments 2.539 (0.040) 0.522 (0.099) 1.402
------ ------ ------ ------ ------
Increase in accumulation
unit value 2.676 0.082 0.636 0.024 1.507
Accumulation unit value at
beginning of year 7.198 7.116 6.480 6.456 4.949
------ ------ ------ ------ ------
ACCUMULATION UNIT VALUE AT
END OF YEAR $9.874 $7.198 $7.116 $6.480 $6.456
====== ====== ====== ====== ======
Ratio of expenses to average
net assets 1.28% 1.27% 1.27% 1.27% 1.27%
Ratio of net investment income
to average net assets 1.65% 1.75% 1.72% 2.01% 1.85%
Portfolio turnover rate 48.95% 64.09% 49.90% 70.97% 36.99%
Number of accumulation units
outstanding at end of
year (expressed in thousands) 9,569 9,908 11,538 12,742 14,185
</TABLE>
