LINCOLN LIFE
VARIABLE ANNUITY FUND A
August 1997
Dear contractowner:
This booklet contains the semiannual report of the Lincoln Life Variable
Annuity Fund A for the period ending June 30, 1997. Fund A performance for the
first six months of 1997 was 17.9% after the deduction of fund and contract
expenses.
The first half of 1997 was an exciting period for investors. The U.S. stock
market rebounded dramatically in the second quarter from its March-April
slump. However, returns of the magnitude posted during the second quarter are
rare under any circumstances. The stock market advance was led by the very
largest companies, causing market indices, which are often weighted by company
size, to show better returns than the average stock. The top 15 stocks in the
S&P 500 index returned better than 32% during this semiannual period, while
the bottom 485 stocks averaged a 15% gain. Overall, the S&P 500 was up 20.5%
as of June 30, 1997.
We remain optimistic about the long-term prospects in the various financial
markets, but there are always uncertainties. We believe Vantage Global
Advisor's disciplined approach will continue to prevail for those of you
willing to maintain a long-term investment strategy. Commentary from Vantage
Global Advisors begins on page 3 of this booklet.
Please review the following information carefully. Your Lincoln Life sales
representative will help answer any questions you may have, or you may contact
a customer service representative at 800-4LINCOLN (800-454-6265). We
appreciate your continued confidence in Lincoln Life and look forward to
helping you meet your long-term financial goals.
Sincerely,
/s/ Reed P. Miller
Reed P. Miller
Vice President
<PAGE>
PORTFOLIO MANAGER'S
SUMMARY AND COMMENTARY
VARIABLE FUND A
Fund A experienced a gain of 17.9% during the first half of 1997 compared to a
20.5% gain for its benchmark, the S&P 500. As in 1996, the 15 largest stocks
in the S&P 500 drove returns.
Fund A participated in the market's tremendous rise and has outperformed its
peer groups over the long-term. In recent months, however, the fund trailed
its benchmark since the market's return was driven by such a narrow segment.
In order to fully capture the market's return, the fund would have needed to
invest heavily in the top 15 stocks. Such concentrated positions are contrary
to the fund's objective, which is to provide diversified exposure to a broad
range of stocks and industries. This diversified approach provides the
consistency and risk control for which the fund is known.
Vantage Global Advisors has an optimistic long-term outlook for stocks.
Increased productivity, reduced government budget deficits, and accelerating
technological advances bode well for the U.S. economy. The strong economy
should translate into corporate earnings, which should result in attractive
returns from stocks.
T. Scott Wittman
<PAGE>
STATEMENT OF NET ASSETS - UNAUDITED
JUNE 30, 1997
<TABLE>
<CAPTION>
INVESTMENTS
PERCENT OF NUMBER MARKET
COMMON STOCKS: NET ASSETS OF SHARES VALUE
---------- --------- ------
<S> <C> <C> <C>
AEROSPACE AND DEFENSE: 2.1%
McDonnell Douglas 10,100 $ 691,850
United Technologies 22,800 1,892,400
------------
2,584,250
AUTOMOBILES AND AUTO PARTS: 3.2%
Cooper Industries 13,300 661,675
Ford Motor 42,900 1,619,475
General Motors 15,600 868,725
Goodrich (B.F.) 17,800 770,963
------------
3,920,838
BANKING, FINANCE, AND INSURANCE: 17.5%
AmSouth Bancorporation 8,700 328,969
Bank of Boston 20,500 1,477,281
Bank of New York 34,800 1,513,800
Bear Stearns 45,315 1,549,207
Chase Manhattan 22,800 2,213,025
CIGNA 8,600 1,526,500
Comdisco 12,000 312,000
First Chicago NBD 24,239 1,466,460
Marsh & McLennan 18,200 1,299,025
MBIA 5,200 586,625
NationsBank 20,600 1,328,700
Oxford Health Plans* 19,300 1,385,378
Paine Webber Group 19,900 696,500
Popular 16,100 647,019
Student Loan Marketing Association 11,800 1,498,600
Torchmark 19,900 1,417,875
Travelers Group 35,866 2,261,800
------------
21,508,764
BUILDING AND MATERIALS: 0.7%
Armstrong World Industries 3,600 264,150
Oakwood Homes 23,700 568,800
------------
832,950
CABLE, MEDIA, AND PUBLISHING: 2.2%
Dun & Bradstreet 16,200 425,250
New York Times 15,200 767,600
Omnicom Group 23,400 1,442,025
------------
2,634,875
CHEMICALS: 1.9%
Dow Chemical 17,900 1,559,538
Olin 20,600 804,688
------------
2,364,226
<PAGE>
PERCENT OF NUMBER MARKET
NET ASSETS OF SHARES VALUE
---------- --------- ------
COMPUTERS AND TECHNOLOGY: 7.1%
American Power Conversion* 49,700 $ 939,641
Cadence Design Systems* 31,275 1,047,713
Compaq Computer* 18,700 1,855,975
Gartner Group Class A* 2,500 89,766
Honeywell 18,500 1,403,688
Micron Electronics* 10,900 194,838
Sun Microsystems* 47,400 1,764,169
Western Digital* 46,200 1,461,075
------------
8,756,865
CONSUMER PRODUCTS: 6.9%
Clorox 7,300 963,600
General Electric 72,200 4,720,075
Maytag 14,300 373,588
Procter & Gamble 16,800 2,373,000
------------
8,430,263
ELECTRICAL AND ELECTRONICS: 0.7%
Harris Corp Delaware 10,500 882,000
ENERGY: 10.0%
Atlantic Richfield 17,200 1,212,600
Exxon 42,400 2,607,600
Halliburton 16,200 1,283,850
Occidental Petroleum 47,000 1,177,938
Royal Dutch Petroleum - NY 46,800 2,544,750
Texaco 15,800 1,718,250
Unocal 29,400 1,141,087
USX-Marathon Group 22,600 652,575
------------
12,338,650
FOOD, BEVERAGE, AND TOBACCO: 9.1%
Boston Chicken 25,400 354,806
Campbell Soup 16,800 840,000
Coca Cola 32,800 2,287,800
ConAgra 8,200 525,825
Fortune Brands 16,500 615,656
Gallagher Group Plc* 16,500 304,218
Heinz (H.J.) 19,250 887,906
Hershey Foods 17,000 940,313
Philip Morris 82,200 3,647,625
RJR Nabisco Holdings 24,800 818,400
------------
11,222,549
HEALTHCARE AND PHARMACEUTICALS: 9.7%
Amgen* 29,300 1,702,141
Bristol-Myers Squibb 35,900 2,907,900
Johnson & Johnson 30,000 1,931,250
Lincare Holdings* 12,400 533,588
Merck & Company 24,600 2,546,100
Schering-Plough 48,800 2,336,300
------------
11,957,279
<PAGE>
PERCENT OF NUMBER MARKET
NET ASSETS OF SHARES VALUE
---------- --------- ------
INDUSTRIAL MACHINERY: 3.3%
Caterpillar 15,800 $ 1,696,525
Ingersoll-Rand 15,500 957,125
Johnson Controls 33,000 1,355,062
------------
4,008,712
LEISURE, LODGING, AND ENTERTAINMENT: 2.4%
Callaway Golf 35,500 1,260,250
HBO 5,200 358,150
HFS* 11,962 693,796
King World Productions* 19,200 672,000
------------
2,984,196
METALS AND MINING: 1.5%
ASARCO 16,600 508,375
Phelps Dodge 15,400 1,311,888
------------
1,820,263
PAPER: 1.2%
Avery Dennison 37,300 1,496,663
RETAIL: 5.3%
Gap 25,800 1,002,975
Jostens 33,000 870,375
Ross Stores 19,600 640,063
Safeway* 29,400 1,356,075
Sears,Roebuck 18,100 972,875
TJX 63,600 1,677,450
------------
6,519,813
TELECOMMUNICATIONS: 9.0%
ADC Telecommunications* 16,400 548,375
Ameritech 29,000 1,970,188
Ascend Communications* 15,600 612,787
BellSouth 44,600 2,068,325
NYNEX 33,800 1,947,725
PairGain Technologies* 23,900 371,196
SBC Communications 23,599 1,460,188
Tellabs* 26,000 1,451,125
U.S. West Communications Group 17,700 667,069
------------
11,096,978
TEXTILES, APPAREL, & FURNITURE: 0.7%
Fruit of the Loom* 6,800 210,800
Miller (Herman) 1,000 35,875
Nike 11,500 671,313
------------
917,988
TRANSPORTATION AND SHIPPING: 1.4%
AMR* 8,000 740,000
Tidewater 9,000 396,000
UAL 5,800 415,063
------------
1,551,063
<PAGE>
PERCENT OF NUMBER MARKET
NET ASSETS OF SHARES VALUE
---------- --------- ------
UTILITIES: 3.0%
Edison International 19,100 $ 475,112
General Public Utilities 33,600 1,205,400
Ohio Edison 32,100 700,181
Texas Utilities 38,500 1,325,844
------------
3,706,537
TOTAL COMMON STOCKS:
( Cost $75,311,226 ) 98.9% 121,535,722
------------
PAR AMOUNT
MONEY MARKET INSTRUMENTS:
UBS Finance (De) Inc.
6.20%, 7/1/97 $1,100,000 1,100,000
------------
TOTAL MONEY MARKET INSTRUMENTS:
( Cost $1,100,000 ) 0.9% 1,100,000
------------
TOTAL INVESTMENTS
( Cost $76,411,226 ) 99.8% 122,635,722
------------
Excess of other assets over liabilities 0.2% 278,908
------------
NET ASSETS 100.0% $122,914,630
============
Net assets are represented by:
Value of accumulation units:
8,116,774 units at $13.838 unit value $112,321,582
Annuity reserves:
415,850 units at $17.537 unit value 7,292,618
238,499 units at $13.838 unit value 3,300,430
------------
$122,914,630
============
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF OPERATIONS - UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $1,175,720
Interest 24,964
------------
1,200,684
EXPENSES:
Investment management services $184,203
Mortality and expense guarantees 543,099 727,302
----------- ----------
NET INVESTMENT INCOME 473,382
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 6,140,015
Increase in net unrealized appreciation of investments 12,414,922
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 18,554,937
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $19,028,319
============
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS - UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED
1997 1996 DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1996
----------- ----------- ------------
<S> <C> <C> <C>
CHANGES FROM OPERATIONS:
Net investment income $473,382 $582,396 $1,248,519
Net realized gain on investments 6,140,015 4,717,240 9,896,271
Increase in net unrealized appreciation
of investments 12,414,922 3,792,148 7,531,873
------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 19,028,319 9,091,784 18,676,663
Net decrease from equity transactions (5,018,539) (5,269,722) (13,726,463)
------------ ------------ ------------
TOTAL INCREASE IN NET ASSETS 14,009,780 3,822,062 4,950,200
Net assets at beginning of period 108,904,850 103,954,650 103,954,650
------------ ------------ ------------
NET ASSETS AT END OF PERIOD $122,914,630 $107,776,712 $108,904,850
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund:
- ---------
The Lincoln National Variable Annuity Fund A (Fund) is a segregated
investment account of The Lincoln 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 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%.
Use of Estimates:
- -----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those
estimates.
2. INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) during the period ended
June, 30 1997 amounted to $18,798,617 and $23,851,847 respectively.
3. EXPENSES AND SALES CHARGES
Amounts are paid to The Lincoln 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 Life Insurance Company retained
$5,507 from the proceeds of the sale of annuity contracts during the six
months ended June 30, 1997 for sales and administrative charges. Accordingly,
the Lincoln 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 period ended June 30, 1997, the custodial fee offset
arrangement was not material to either expenses or to the calculation of
average net assets and the ratio of expenses to average net assets.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
4. NET ASSETS
Net assets at June 30, 1997 consisted of the following:
Equity transactions ($146,465,346)
Accumulated net investment income 72,810,134
Accumulated net realized gain on investments 150,345,346
Net unrealized appreciation of investments 46,224,496
-------------
$122,914,630
=============
5. SUMMARY OF CHANGES IN EQUITY TRANSACTIONS
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997 Year Ended December 31, 1996
------------------------------ ----------------------------
Units Amount Units Amount
------------ --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of period 8,462,449 ($135,295,732) 9,568,929 ($123,869,196)
Contract purchases 78,446 988,344 13 153,035 1,603,060
Terminated contracts (424,121) (5,337,346) 13 (1,259,515) (13,029,596)
--------- ------------- ---------- -------------
BALANCE AT END OF PERIOD 8,116,774 ($139,644,734) 8,462,449 ($135,295,732)
========= ============= ========== =============
Annuity Reserves:
Balance at beginning of period 699,953 ($6,151,075) (9) 831,033 ($3,851,148)
Annuity payments (45,604) (669,537) 15 (66,369) (1,207,775)
Receipt of guarantee mortality
adjustments 0 0 (64,711) (1,092,152)
--------- ------------- ---------- -------------
BALANCE AT END OF PERIOD 654,349 ($6,820,612) 699,953 ($6,151,075)
========= ============= ========== =============
</TABLE>
6. SUPPLEMENTAL INFORMATION - SELECTED PER UNIT DATA AND RATIOS
The following is selected financial data for an accumulation unit outstanding
throughout each period:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
(Unaudited) 1996 1995 1994 1993 1992
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Investment income $0.135 $0.267 $0.251 $0.217 $0.204 $0.206
Expenses 0.085 0.139 0.114 0.095 0.090 0.083
------- ------- ------- ------ ------ ------
Net investment income 0.050 0.128 0.137 0.122 0.114 0.123
Net realized and unrealized
gain(loss) on investment 2.051 1.735 2.539 (0.040) 0.522 (0.099)
------- ------- ------- ------ ------ ------
Increase in accumulation
unit value 2.101 1.863 2.676 0.082 0.636 0.024
Accumulation unit value at
beginning of year 11.737 9.874 7.198 7.116 6.480 6.456
------- ------- ------- ------ ------ ------
ACCUMULATION UNIT VALUE
AT END OF PERIOD $13.838 $11.737 $9.874 $7.198 $7.116 $6.480
======= ======= ======= ====== ====== ======
Ratio of expenses to average
net assets 1.27% 1.28% 1.28% 1.27% 1.27% 1.27%
Ratio of net investment income
to average net assets 0.83% 1.17% 1.65% 1.75% 1.72% 2.01%
Portfolio turnover rate 16.60% 49.94% 48.95% 64.09% 49.90% 70.97%
Number of accumulation units
outstanding at end of
period (expressed in thousands) 8,117 8,462 9,569 9,908 11,538 12,742
</TABLE>
