LINCOLN LIFE
VARIABLE
ANNUITY
FUND A
ANNUAL REPORT
DECEMBER 31, 1997
<PAGE>
LINCOLN LIFE
VARIABLE ANNUITY FUND A
January 1998
Dear contractowner:
This booklet contains the annual report of the Lincoln Life Variable Annuity
Fund A for the period ending December 31, 1997. Fund A performance for the
year ending December 31, 1997 was 32.9% after the deduction of fund and
contract expenses.
The U.S. economy enjoyed its seventh year of expansion in 1997, propelling the
American stock market to historic highs. The U.S. stock market suffered two
brief corrections in 1997 - one as a result of the Federal Reserve Board
modestly raising short-term interest rates in the spring and the other as a
result of financial problems in Asia. However, the fundamental strength of the
U.S. economy allowed many domestic stocks to recover by year's end.
Increased productivity resulting from improvements in technology and
organizational changes have helped American companies increase earnings.
Despite vigorous U.S. economic growth, the Consumer Price Index rose 1.8% -
the smallest increase since 1986.
We remain optimistic about the long-term prospects in the various financial
markets, however we would caution that the types of returns received over the
last couple of years cannot be expected every year. 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/ Jeffrey K. Dellinger
- ------------------------
Jeffrey K. Dellinger
Vice President
<PAGE>
PORTFOLIO MANAGER'S
SUMMARY AND COMPARISON
Managed by: [VANTAGE GLOBAL ADVISORS LOGO]
Growth of $10,000 invested 1/1/88 through 12/31/97
S&P 500 INDEX FUND A
--------------------------------------------
ENDING ENDING
ACCOUNT ACCOUNT
YEAR RETURN BALANCE RETURN BALANCE
- -----------------------------------------------------
1987 5.32% $10,532 0.00% $10,000
1988 16.61% $12,281 0.00% $10,000
1989 31.68% $16,172 0.00% $10,000
1990 -3.12% $15,668 0.00% $10,000
1991 30.48% $20,443 0.00% $10,000
1992 7.62% $22,001 0.00% $10,000
1993 10.07% $24,216 0.00% $10,000
1994 1.31% $24,533 0.00% $10,000
1995 37.52% $33,738 0.00% $10,000
1996 22.92% $41,471 0.00% $10,000
1997 33.35% $55,302 0.00% $10,000
Average annualized return Ended
on investments 12/31/97
- ----------------------------------------
One Year +32.91%
- ----------------------------------------
Five Year +19.21%
- ----------------------------------------
Ten Year +15.48%
- ----------------------------------------
Fund A returned 32.9% for the year ended December 31, 1997 versus its
benchmark the S&P 500 of 33.4%. The 15 largest stocks in the S&P 500 returned
over 41% for the year.
The Fund provided investors with healthy returns for 1997. Because the Fund is
diversified across industries and securities, it minimizes individual industry
and security risk. The focus on attractively priced companies steered the
portfolio clear of some companies that fell significantly.
During 1998, the market will be particularly sensitive to earnings reports of
those higher priced large cap stocks. The Fund steers away from overvalued
companies, investing instead in companies well positioned to steadily move
through the uncertain markets ahead.
T. Scott Wittman
<PAGE>
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
INVESTMENTS:
Percent of Number Market
COMMON STOCKS: Net Assets of Shares Value
- --------------------------------------------------------------------------
AEROSPACE AND DEFENSE: 1.9%
General Dynamics 9,500 $ 821,156
United Technologies 22,800 1,660,125
------------
2,481,281
AUTOMOBILES AND AUTO PARTS: 4.4%
Cooper Industries 25,100 1,229,900
Ford Motor 42,900 2,088,694
General Motors 15,600 945,750
Johnson Controls 33,000 1,575,750
------------
5,840,094
BANKING, FINANCE, AND INSURANCE: 17.3%
AmSouth Bancorp. 26,000 1,412,125
Bank of Boston 20,500 1,925,719
Bank of New York 8,800 508,750
Bankers Trust New York 14,000 1,574,125
Bear Stearns 37,015 1,758,212
Chase Manhattan 22,800 2,496,600
Cigna 8,600 1,488,338
First Chicago NBD 18,639 1,556,357
MBIA 10,400 694,850
Marsh & McLennan 18,200 1,357,037
NationsBank 20,600 1,252,738
Paine Webber Group 30,150 1,042,059
SLM Holding 11,800 1,641,675
Torchmark 39,800 1,674,088
Travelers Group 44,799 2,413,546
------------
22,796,219
BUILDINGS AND MATERIALS: 1.2%
Armstrong World Industries 3,600 269,100
Centex 5,200 327,275
Lafarge 22,500 665,156
Masco 7,100 361,212
------------
1,622,743
CABLE, MEDIA, AND PUBLISHING: 3.4%
Dun & Bradstreet 19,200 594,000
McGraw-Hill 15,900 1,176,600
New York Times 15,200 1,005,100
Omnicom Group 38,400 1,627,200
------------
4,402,900
<PAGE>
Percent of Number Market
Net Assets of Shares Value
- --------------------------------------------------------------------------
CHEMICALS: 2.9%
Avery Dennison 21,795 $ 975,326
Dow Chemical 18,200 1,847,300
Lyondell Petrochemicals 36,700 972,550
------------
3,795,176
COMPUTERS AND TECHNOLOGY: 7.5%
American Power Conversion* 27,100 641,931
Bay Networks* 18,300 467,794
Cadence Design Systems* 35,750 875,875
Compaq Computer 33,950 1,916,053
HBO 10,400 498,875
Network Associates Inc.* 5,100 269,184
PeopleSoft* 33,200 1,290,650
Storage Technology* 27,100 1,678,506
Sun Microsystems* 42,400 1,693,350
Western Digital* 32,700 525,244
------------
9,857,462
CONSUMER PRODUCTS: 6.6%
Clorox 14,600 1,154,313
General Electric 59,600 4,373,150
Maytag 12,000 447,750
Procter & Gamble 33,600 2,681,700
------------
8,656,913
ELECTRONICS AND ELECTRICAL: 1.1%
Honeywell 11,400 780,900
Raytheon-Class A 995 49,057
Xerox 9,100 671,694
------------
1,501,651
ENERGY: 9.2%
Atlantic Richfield 17,200 1,378,150
Exxon 47,500 2,906,406
Halliburton 26,500 1,376,344
Occidental Petroleum 36,000 1,055,250
Royal Dutch Petroleum 46,800 2,535,975
Texaco 31,600 1,718,250
USX-Marathon Group 33,200 1,120,500
------------
12,090,875
<PAGE>
Percent of Number Market
Net Assets of Shares Value
- --------------------------------------------------------------------------
FOOD, BEVERAGE, AND TOBACCO: 8.2%
Campbell Soup 16,800 $ 976,500
Coca Cola 24,800 1,652,300
ConAgra 16,400 538,125
Fortune Brands 16,500 611,531
Heinz (H.J.) 19,250 978,141
Hershey Foods 17,000 1,052,937
Philip Morris 82,200 3,724,688
RJR Nabisco Holdings 32,500 1,218,750
------------
10,752,972
HEALTHCARE AND PHARMACEUTICALS: 10.7%
Amgen* 29,300 1,585,863
Bristol-Myers Squibb 35,900 3,397,038
Dura Pharmaceuticals* 7,600 350,550
Johnson & Johnson 23,900 1,574,412
Lincare Holdings* 12,400 709,900
Merck & Company 27,800 2,953,750
Oxford Health Plans* 19,300 299,753
Phycor* 27,500 743,359
Schering-Plough 39,000 2,422,875
------------
14,037,500
INDUSTRIAL MACHINERY: 2.8%
Caterpillar 35,800 1,738,538
Deere & Co. 17,200 1,002,975
Ingersoll-Rand 23,250 941,625
------------
3,683,138
LEISURE, LODGING, AND ENTERTAINMENT: 1.7%
Boston Chicken* 25,400 163,116
Callaway Golf 35,500 1,013,969
King World Productions* 19,200 1,108,800
------------
2,285,885
METALS AND MINING: 1.0%
ASARCO 16,600 372,463
Phelps Dodge 15,400 958,650
------------
1,331,113
MISCELLANEOUS: .4%
Cendant* 15,288 525,525
RETAIL: 5.6%
CompUSA* 45,600 1,413,600
Gap 18,600 659,136
Jostens 33,000 761,062
Liz Claiborne 13,000 543,562
Ross Stores 19,600 714,175
Safeway* 24,600 1,555,950
TJX 51,500 1,770,313
------------
7,417,798
<PAGE>
Percent of Number Market
Net Assets of Shares Value
- --------------------------------------------------------------------------
TELECOMMUNICATIONS: 8.7%
AT & T 14,600 $ 894,250
Ameritech 29,000 2,334,500
Bell Atlantic 25,958 2,362,178
BellSouth 44,600 2,511,538
PairGain Technologies* 5,000 97,031
SBC Communications 13,599 996,127
Tellabs* 26,000 1,372,312
U.S. West Communications Group 17,700 798,713
------------
11,366,649
TRANSPORTATION AND SHIPPING: 1.2%
AMR* 8,000 1,028,000
UAL* 5,800 536,500
------------
1,564,500
UTILITIES: 3.3%
FirstEnergy* 32,100 930,900
General Public Utilities 33,600 1,415,400
Minnesota Power and Light 8,200 357,212
Texas Utilities 38,500 1,600,156
------ ------------
4,303,668
TOTAL COMMON STOCKS
(Cost $78,612,415) 99.1% 130,314,062
------ ------------
TOTAL INVESTMENTS
(Cost $78,612,415) 99.1% 130,314,062
Other Assets Over Liabilities: .9% 1,144,001
------ ------------
NET ASSETS 100.0% $131,458,063
====== ============
Net assets are represented by:
Value of accumulation units:
7,722,501 units at $15.600 unit value $120,467,202
Annuity reserves:
217,841 units at $15.600 unit value 3,398,212
382,478 units at $19.851 unit value 7,592,649
------- ------------
600,319
$131,458,063
------------
*Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 2,455,559
Interest 48,577
------------
2,504,136
EXPENSES:
Investment management services $ 394,625
Mortality and expense guarantees 1,163,876 1,558,501
----------- ------------
NET INVESTMENT INCOME 945,635
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 15,561,276
Increase in net unrealized appreciation of investments 17,892,073
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 33,453,349
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 34,398,984
------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CHANGES FROM OPERATIONS:
Net investment income $ 945,635 $ 1,248,519
Net realized gain on investments 15,561,276 9,896,271
Increase in net unrealized appreciation of investments 17,892,073 7,531,873
------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 34,398,984 18,676,663
Net decrease from equity transactions (11,845,771) (13,726,463)
------------- -------------
TOTAL INCREASE IN NET ASSETS 22,553,213 4,950,200
Net assets at beginning of year 108,904,850 103,954,650
------------- -------------
NET ASSETS AT END OF YEAR $131,458,063 $108,904,850
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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%.
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 year ended
December 31, 1997 amounted to $39,042,799 and $50,216,101, 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 $9,784 from the proceeds of the sale of annuity contracts during 1997
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-interesting
bearing accounts, For the period ended December 31, 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.
4. NET ASSETS
Net assets at December 31, 1997 consisted of the following:
Equity transactions ($153,292,578)
Accumulated net investment income 73,282,387
Accumulated net realized gain on investments 161,684,979
Net unrealized appreciation of investments 49,783,275
--------------
$131,458,063
==============
5. SUMMARY OF CHANGES IN EQUITY TRANSACTIONS
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------
Units Amount Units Amount
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of year 8,462,449 ($135,982,849) 9,568,929 ($123,869,196)
Contract purchases 152,590 2,092,826 153,035 1,603,060
Terminated contracts (892,538) (12,324,266) (1,259,515) (13,716,713)
---------- -------------- ----------- --------------
Balance at end of year 7,722,501 ($146,214,289) 8,462,449 ($135,982,849)
========== ============== =========== ==============
Annuity Reserves:
Balance at beginning of year 699,953 ($5,463,958) 831,033 ($3,851,148)
Annuity payments (88,185) (1,400,844) (99,335) (1,207,775)
Receipt of guarantee
mortality adjustments (11,449) (213,487) (31,745) (405,035)
---------- -------------- ----------- --------------
Balance at end of year 600,319 ($7,078,289) 699,953 ($5,463,958)
========== ============== =========== ==============
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL INFORMATION - SELECTED PER UNIT DATA AND RATIOS
<TABLE>
<CAPTION>
The following is selected financial data for a unit outstanding throughout each year:
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $ .286 $ .267 $ .251 $ .217 $ .204
Expenses .178 .139 .114 .095 .090
------- ------- ------- ------- -------
Net investment income .108 .128 .137 .122 .114
Net realized and unrealized gain(loss) on investments 3.755 1.735 2.539 (.040) .522
------- ------- ------- ------- -------
Increase in accumulation unit value 3.863 1.863 2.676 .082 .636
Accumulation unit value at beginning of year 11.737 9.874 7.198 7.116 6.480
------- ------- ------- ------- -------
Accumulation unit value at end of year $15.600 $11.737 $ 9.874 $ 7.198 $ 7.116
======= ======= ======= ======= =======
Ratio of expenses to average net assets 1.27% 1.28% 1.28% 1.27% 1.27%
Ratio of net investment income to average net assets .77% 1.17% 1.65% 1.75% 1.72%
Portfolio turnover rate 32.56% 49.94% 48.95% 64.09% 49.90%
Number of units outstanding at end of year
(in thousands)
Accumulation units: 7,723 8,462 9,569 9,908 11,538
Reserve units: 600 700 831 863 945
</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, 1997, 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 6 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, 1997, 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, 1997,
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.
Ernst & Young LLP
Fort Wayne, Indiana
February 13, 1998
<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.
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.
(TM) [LINCOLN NATIONAL
LIFE INSURANCE CO. LOGO]
Fort Wayne, Indiana 46801
