<PAGE>
LINCOLN LIFE
VARIABLE ANNUITY FUND A
January 1997
Dear Variable Annuity Fund A contractowner:
This report covers the 12 months ended December 31, 1996 for the Variable
Annuity Fund A. We are pleased to report the performance of Variable Annuity
Fund A for 1996, as measured by the change in unit value, was 18.87%. Although
this return was favorable, it lagged the 1996 Standard & Poor's 500 Index (S&P
500) return of 22.96%.
As they did one year ago, many investors are wondering if this level of
performance will continue into the new year. We recommend that you focus on
long-term investment strategy rather than worry about where the overall market
will go next. Market volatility is a certainty. The important factor in making
investment decisions is to be in the market over the long haul with a retirement
vehicle that continues to meet your investment objectives.
We remain optimistic about the long-term prospects in the equity market, but
there are always uncertainties. We believe Vantage Global Advisors' disciplined
approach will continue to prevail for those of you will willing to maintain a
long-term investment strategy for your retirement or other future needs.
The graph on the following page illustrates the performance of Fund A over the
past 10 years, 1987 through 1996. 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.
Also on the next page, we have included commentary from Vantage Global Advisors.
This will provide some insight as to how the fund was managed during 1996 and
how our portfolio manager will position the fund going forward in 1997.
In closing, we would like to thank each of you for choosing Lincoln Life as your
annuity provider. We value the confidence you have placed in Lincoln Life, and
we will work hard to earn your continued trust.
Sincerely,
/s/ Kelly D. Clevenger
Kelly D. Clevenger
Chairman, Board of Managers
The performance data quoted represents past performance. Past performance is not
indicative of future results.
<PAGE>
Portfolio manager's summary and comparison
Managed by VANTAGE GLOBAL ADVISORS
At the beginning of 1966, investors were experiencing the euphoria of an
exceptional year in 1995 as the Dow Jones Industrial Average topped 5000. The
Dow, which comprises 30 large companies, continued its climb in 1996, crossing
6000 in October and almost reaching 6600 by year-end. The fund returned 18.87%
in 1996, trailing the S&P 500 Index's return of almost 23%. The S&P 500's return
was driven by the largest 15 stocks. For the year, those stocks returned 35.8%,
while the rest of the S&P 500 provided only an 18.3% return. While this invests
in some of the top 15 stocks, the portfolio is diversified and invests in many
other stocks to control risk.
The market was fueled in part by huge contributions to mutual funds. Inspired
by the returns of 1995, investors poured more than $200 billion into stock funds
in 1996, smashing the previous record of $130 billion in 1993. The market was
also encouraged by fundamentally positive factors including low inflation and
steady growth in the Gross Domestic Product. Intermittent dips due to fears of
inflated market values or anticipated increases in interest rates occasionally
interrupted the bull rally if only for a day or two. However, in the end the
market provided exceptional returns and Variable Annuity A investors benefited
from the rise.
If investors continue to pour money into stock mutual funds at the same rate as
last year, the stock market will have a base of support for continued growth in
1997. Additionally, fundamental economic factors such as interest rates and
inflation provide reasons why 1997 could be a good year for the stock market.
T. Scott Wittman
Growth of $10,000 invested
[Plot Points for Funds A
invested 1/1/87 through 12/31/96
S&P 500 Index]
S & P
500
Fund A Index
1987 $10,697 $10,532
1988 $11,747 $12,281
1989 $14,370 $16,172
1990 $14,312 $15,668
1991 $18,670 $20,444
1992 $18,739 $22,002
1993 $20,578 $24,218
1994 $20,816 $24,534
1995 $28,554 $33,740
1996 $33,942 $41,474
<PAGE>
Statement of Net Assets
December 31, 1996
<TABLE>
<CAPTION>
INVESTMENTS
Percent of Number Market
COMMON STOCKS: Net Assets of Share Value
---------- --------- ----------
<S> <C> <C> <C>
Aerospace: 2.0%
McDonnell Douglas Corp. 16,700 $1,068,800
United Technologies Corp. 17,600 1,161,600
----------
2,230,400
Air Transportation: 1.4%
AMR Corp.* 8,000 705,000
Northwest Airlines Corp.* 20,400 798,150
----------
1,503,150
Banking and Insurance: 12.3%
AmSouth Bancorporation 5,800 280,575
Bank of Boston Corp. 24,100 1,548,425
Bank of New York Inc. 48,800 1,647,000
Chase Manhattan Corp. 25,800 2,302,650
Cigna Corp. 13,200 1,803,450
Equitable Co. 10,300 253,638
First Chicago NBD Corp. 33,339 1,791,971
Marsh & McLennan Cos. Inc. 2,000 208,000
Nations Bank Corp. 10,300 1,006,825
Transamerica Corp. 6,700 529,300
Travelers Inc. 45,466 2,063,020
----------
13,434,854
Broadcasting: 0.6%
King World Productions Inc.* 19,200 708,000
Building Materials: 0.8%
Dover Corp. 17,900 899,475
Building and Construction: 0.1%
Kaufman & Broad Home Corp. 7,100 91,413
Chemicals: 2.0%
Dow Chemical Co. 17,900 1,402,813
Olin Corp. 20,600 775,075
----------
2,177,888
Consumer Products and Services: 8.1%
American Brand Inc. 16,500 818,813
Johnson & Johnson 30,000 1,492,500
Omnicom Group Inc. 23,400 1,070,550
Philip Morris Co. Inc. 27,400 3,085,925
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Number Market
Net Assets of Shares Value
---------- --------- ------
<S> <C> <C> <C>
Procter & Gamble Co. 18,900 $2,031,750
Stanley Works Inc. 14,200 383,400
----------
8,882,938
Container: 0.3%
Stone Container Corp. 23,400 348,075
Drug and Hospital Supplies: 7.3%
Abbott Laboratories 15,500 786,625
Amgen Inc.* 29,300 1,595,019
Bristol Myers Squibb Co. 24,300 2,642,625
Lincare Holdings Inc.* 6,200 255,750
Merck & Co. Inc. 11,500 811,375
Schering-Plough Corp. 27,800 1,800,050
----------
7,991,444
Electrical and Electronics: 7.3%
Ascend Communications Inc.* 15,600 969,150
Cooper Industries Inc. 13,300 560,263
General Electric Co. 36,100 3,569,388
Harris Corp. 13,800 947,025
Litton Industries Inc.* 5,400 257,175
Raychem Corp. 4,700 376,588
Tektronix Inc. 6,100 312,625
Tellabs Inc.* 17,700 667,069
UCAR International Inc.* 6,900 259,613
----------
7,918,896
Entertainment: 1.7%
Callaway Golf Co. 43,500 1,250,625
Mirage Resorts Inc.* 29,100 629,288
----------
1,879,913
Financial Services: 1.2%
Student Loan Marketing Assn. 14,100 1,313,063
Food and Beverage: 6.4%
Boston Chicken Inc.* 4,200 150,675
Campbell Soup Co. 8,400 674,100
Coca Cola Co. 41,600 2,189,200
ConAgra Inc. 8,200 407,950
CPC International Inc. 7,400 573,500
Heinz H.J. Co. 10,950 391,463
Hershey Foods Corp. 17,000 743,750
RJR Nabisco Holdings Corp. 24,800 843,200
Safeway Inc.* 23,200 991,800
Universal Food Corp. 1,600 56,400
----------
7,022,038
</TABLE>
<PAGE>
Percent of Number Market
Net Assets of Shares Value
---------- --------- ----------
Hospital and Healthcare: 1.3%
Oxford Health Plans Inc.* 24,300 $1,423,069
Household Appliances: 0.3%
Maytag Corp. 14,300 282,425
Industrial: 1.3%
Johnson Controls Inc. 16,500 1,367,438
Machinery and Engineering: 1.4%
Caterpillar Inc. 15,800 1,188,950
Ingersoll-Rand Co. 6,800 302,600
----------
1,491,550
Metals and Mining: 1.6%
ASARCO Inc. 16,600 412,925
Cleveland-Cliffs Inc. 900 40,838
Phelps Dodge Corp. 18,900 1,275,750
----------
1,729,513
Motor Vehicles and Equipment: 3.0%
Chrysler Corp. 50,100 1,653,300
General Motors Corp. 15,600 869,700
Goodrich BF Co.* 17,800 720,900
----------
3,243,900
Office and Business Equipment and Services: 7.7%
Cadence Design Systems Inc.* 31,275 1,243,181
Cisco Systems Inc.* 23,500 1,496,656
Compaq Computer Corp.* 4,200 311,850
Computer Associates International Inc. 8,700 432,825
Diebold Inc. 9,200 578,450
Honeywell Inc. 24,000 1,578,000
NCR Corp. 1,100 36,988
Pairgain Technologies Inc.* 22,200 675,713
Pitney Bowes Inc. 11,500 626,750
Sun Microsystems Inc.* 53,000 1,361,438
----------
8,341,851
Paper: 1.5%
Avery Dennison Corp. 44,800 1,584,800
Petroleum and Petroleum Products: 10.7%
Atlantic Richfield Co. 8,600 1,139,500
Exxon Corp. 21,200 2,077,600
Halliburton Co. 16,200 976,050
<PAGE>
Percent of Number Market
Net Assets of Shares Value
---------- --------- -----------
Occidental Petroleum Corp. 47,000 $ 1,098,625
Royal Dutch Petroleum Co. 11,700 1,997,775
Seagull Energy Corp.* 23,900 525,800
Texaco Inc. 15,800 1,550,375
Unocal Corp. 42,200 1,714,375
USX-Marathon Group Inc. 22,600 539,575
-----------
11,619,675
Printing and Publishing: 0.5%
New York Times Co. 15,200 577,600
Public Utilities: 3.2%
Edison International 19,100 379,613
General Public Utilities Corp. 14,700 494,288
Ohio Edison Co. 32,100 730,275
Texas Utilities Co. 38,500 1,568,875
Unicom Corp. 10,600 287,525
-----------
3,460,576
Real Estate: 0.5%
Oakwood Homes Inc.* 23,700 542,138
Retail: 3.8%
Eckerd Corp.* 2,828 90,496
Gap Inc. 34,600 1,042,325
Jostens Inc. 33,000 697,125
Ross Stores Inc. 5,300 264,338
Sears, Roebuck & Co. 12,600 581,175
TJX Cos. Inc. 30,800 1,459,150
-----------
4,134,609
Securities Dealers: 1.7%
Bear, Stearns & Co. Inc. 34,205 953,464
Morgan Stanley Group 6,300 359,888
Paine Webber Group 19,900 559,688
-----------
1,873,040
Shoes: 0.9%
Nike Inc. 16,400 979,900
Soaps, Cleaner and Cosmetics: 0.7%
Clorox Co. 7,300 732,738
Telecommunications: 7.0%
American Telephone & Telegraph Co. 17,600 726,021
Ameritech Corp. 29,000 1,758,125
<PAGE>
Percent of Number Market
Net Assets of Shares Value
---------- --------- ------------
BellSouth Corp. 44,600 $ 1,800,725
Nynex Inc. 33,800 1,626,625
Pacific Telesis Group 46,600 1,712,550
------------
7,624,046
Transportation: 0.6%
PHH Corp. 14,500 623,500
---------- ------------
TOTAL INVESTMENTS
(Cost $74,224,441) 99.2% 108,034,015
Excess of other assets over liabilities 0.8% 870,835
---------- ------------
NET ASSETS 100.0% $108,904,850
========== ============
Net assets are represented by:
Value of accumulation units:
8,462,449 units at $11.737 unit value $ 99,332,458
Annuity reserves:
258,966 units at $11.737 unit value 3,039,454
440,987 units at $14.813 unit value 6,532,938
--------- ------------
699,953 9,572,392
------------
$108,904,850
============
* Non-income producing
See accompanying notes to financial statements.
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
Year Ended December 31, 1996
<S> <C> <C>
Investment Income:
Dividends $2,551,263
Interest 61,478
----------
2,612,741
Expenses:
Investment management services 345,624
Mortality and expense guarantees 1,018,598 1,364,222
--------- ----------
NET INVESTMENT INCOME 1,248,519
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 9,896,271
Increase in net unrealized appreciation
of investments 7,531,873
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 17,428,144
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $18,676,663
===========
</TABLE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
Changes from operations: ----------- -----------
<S> <C> <C>
Net investment income $1,248,519 $1,473,052
Net realized gain on investments 9,896,271 9,013,278
Increase in net unrealized appreciation
of investments 7,531,873 17,280,315
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 18,676,663 27,766,645
Net decrease from equity transactions (13,726,463) (2,346,263)
----------- -----------
TOTAL INCREASE IN NET ASSETS 4,950,200 25,420,382
Net assets at beginning of year 103,954,650 78,534,268
----------- -----------
NET ASSETS AT END OF YEAR $108,904,850 $103,954,650
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund: 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%.
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 1996 amounted to
$52,601,994 and $62,081,604, 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
$12,259 from the proceeds of the sale of annuity contracts during 1996 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 3, 1996, 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, 1996 consisted of the following:
Equity transactions ($141,446,807)
Accumulated net investment income 72,336,752
Accumulated net realized gain on investments 146,123,703
Net unrealized appreciation of investments 31,891,202
------------
$108,904,850
============
<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 the Securities and Exchange Commission 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. 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>
1996 1995
---------------------------- ----------------------------
Units Amount Units Amount
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of year 9,568,929 ($123,869,196) 9,907,664 ($121,421,039)
Contract purchases 153,035 1,603,060 84,705 701,434
Issued in connection with
merger of Fund B - - 763,488 7,157,877
Terminated contracts (1,259,515) (13,029,596) (1,186,928) (10,307,468)
----------- ------------- ----------- -------------
BALANCE AT END OF YEAR 8,462,449 ($135,295,732) 9,568,929 ($123,869,196)
=========== ============= =========== =============
Annuity Reserves:
Balance at beginning of year 831,033 ($3,851,148) 862,789 ($3,953,042)
Annuity payments (66,369) (1,207,775) (144,037) (1,077,169)
Issued in connection with
merger of Fund B - - 82,501 773,467
Receipt of guarantee
mortality adjustments (64,711) (1,092,152) 29,780 405,596
----------- ------------- ----------- -------------
BALANCE AT END OF YEAR 699,953 ($6,151,075) 831,033 ($3,851,148)
=========== ============= =========== =============
</TABLE>
7. SUPPLEMENTAL INFORMATION - SELECTED PER UNIT DATA AND RATIOS
The following is selected financial data for an accumulation unit outstanding
throughout each year:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Investment income $ 0.267 $ 0.251 $ 0.217 $ 0.204 $ 0.206
Expenses 0.139 0.114 0.095 0.090 0.083
------- ------- ------- ------- -------
Net investment income 0.128 0.137 0.122 0.114 0.123
Net realized and unrealized gain (loss)
on investments 1.735 2.539 (0.040) 0.522 (0.099)
------- ------- ------- ------- -------
Increase in accumulation unit value 1.863 2.676 0.082 0.636 0.024
Accumulation unit value at beginning of year 9.874 7.198 7.116 6.480 6.456
------- ------- ------- ------- -------
ACCUMULATION UNIT VALUE AT END OF YEAR $11.737 $ 9.874 $ 7.198 $ 7.116 $ 6.480
======= ======= ======= ======= =======
Ratio of expenses to average net assets 1.28% 1.28% 1.27% 1.27% 1.27%
Ratio of net investment income to average
net assets 1.17% 1.65% 1.75% 1.72% 2.01%
Portfolio turnover rate 49.94% 48.95% 64.09% 49.90% 70.97%
Number of accumulation units outstanding
at end of year (expressed in thousands) 8,462 9,569 9,908 11,538 12,742
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Lincoln National Variable Annuity Fund A
We have audited the accompanying statement of net assets of Lincoln National
Variable Annuity Fund A as of December 31, 1996, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the selected per unit data
and ratios (Note 7 to financial statements) for each of the five years in the
period then ended. These financial statements and per unit data and ratios are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and per unit data and ratios based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per unit data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per unit data and ratios
referred to above present fairly, in all material respects, the financial
position of the Lincoln National Variable Annuity Fund A at December 31, 1996,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the selected per
unit data and ratios for each of the five years in the period then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
February 12, 1997
<PAGE>
LINCOLN LIFE
Variable
Annuity
Fund A
Annual report
December 31, 1996
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 (China, Inc.)
Safekeeper of securities
Bankers Trust Company
New York, N.Y.
Independent auditors
Ernst & Young LLP
Fort Wayne, Ind.
Investment manager
Lincoln National Life Insurance Co.
Fort Wayne, Ind.
[LOGO OF LINCOLN NATIONAL LIFE INSURANCE COMPANY]
Fort Wayne, Indiana 46801
SMR96-0369ALL
Form 10688A-A 2/97 Feb 97 [RECYCLED LOGO]
