[LOGO OF LINCOLN FINANCIAL GROUP]
Variable
Annuity
Fund A
Annual Report 1998
<PAGE>
[LOGO OF LINCOLN FINANCIAL GROUP]
Lincoln National Life Insurance Co.
January 1999 1300 S. Clinton St.
P.O. Box 1110
Fort Wayne, IN 46801-1110
Dear Participant:
I am pleased to send you the 1998 Annual Report for Lincoln Life Variable
Annuity Fund A. 1998 was a volatile yet rewarding year as the unit value for
Fund A increased 19.95% after fund management and contract expenses. This marks
the eighth consecutive year of positive performance.
I would call your attention to the letter from Scott Wittman, president of
Vantage Global Advisors, the sub-advisor for Variable Annuity Fund A. Vantage
continues to seek conservative growth, since Fund A is a vehicle for
accumulating retirement savings. In the up and down stock market of 1998, these
goals were clearly achieved, once again.
Although past performance is no guarantee of future results, we look for
continued solid performance in the year ahead. While there are uncertainties
with respect to certain foreign markets and Year 2000 computer problems, Fund A
is managed in a style that is intended to reduce risk. This is yet another good
reason for using your Lincoln Life Variable Annuity to help build and protect
retirement savings. Please review the enclosed information carefully. Your sales
representative will help answer any questions you may have. Or you may call
Lincoln Life Customer Service at 1-800-4LINCOLN (454-6265).
Thank you for your continued confidence in allowing Lincoln Life to help you
meet your retirement savings needs. We will continue our efforts to see that we
do.
Sincerely yours,
/s/ Kelly D. Clevenger
Kelly D. Clevenger
Vice President
www.LincolnLife.com
Lincoln Financial Group is the marketing name for Lincoln National Corporation
and its affiliates.
<PAGE>
Portfolio manager's
summary and comparison
Managed by [LOGO OF VANTAGE INVESTMENT ADVISORS]
Growth of $10,000 invested 1/1/89 through 12/31/98
1/1/89 12/31/98
Fund A $10,000 $57,904
S&P 500 Index $10,000 $46,065
Average annual return Ended
on investments 12/31/98
- --------------------------------------------
One Year +19.95%
- --------------------------------------------
Five Years +21.35%
- --------------------------------------------
Ten Years +16.50%
- --------------------------------------------
For the year ended December 31, 1998, the Fund returned 19.95% versus its
benchmark, the S&P 500 Index, which returned 28.76%. Often the best stocks are
those everyone else seems to overlook. In a time when many economists consider
earnings estimates for stocks to be inflated, it is a challenge to identify
companies that are selling at low prices but have the potential to increase in
value over time. In an effort to uncover hidden gems, we use a quantitative
selection strategy that we have developed and fine-tuned through years of
investment management. During erratic markets, quantitative analysis helps us
to select stocks based on pre-set parameters without being swayed by current
market conditions.
In 1998, the largest 20 stocks in the S&P 500 Index were responsible for much of
the past year's stock market growth. Companies like Wal-Mart and Pfizer
dramatically outperformed other stocks in the index, making it difficult for
diversified portfolios, such as Fund A, to keep pace with the index. The
companies in the narrow group driving the market tend to have high
price-to-earnings (P/E) ratios, prompting many investors to expect higher
earnings growth. However, these stocks also tend to be more expensive and, in
our minds, have a lower expected return. Fund A seeks companies with low P/E
ratios - companies that appear undervalued and whose price we expect to
appreciate over time.
Although the recent market has favored companies with high P/E ratios, our
disciplined, computer-driven process has prevented us from veering from our
investment focus. With the Fund, we tend to keep our sector allocation roughly
similar to that of the S&P 500 Index, so we didn't completely avoid these
"supercap" companies, because a few such as General Electric and Merck & Co. met
our selection criteria. We strive to create a portfolio that has the ability to
flourish during prosperous markets and hold its own in market declines.
Our technology stocks performed well for the Fund this past year. Technology
companies tend to be more sensitive to the "upgrade cycle," the rate at which
companies update their software for consumers, than they are to the business
cycle. Technology companies are under intense pressure to improve their products
within relatively short periods of time. Some heavy hitters this past year
included Apple Computer and Intel Corporation. Apple Computer continues to meet
our selection criteria including our growth and value parameters. With the
introduction of new Apple products, including the competitively priced iMAC, we
believe that this company could continue to grow, adding value to the Fund.
Intel Corporation, manufacturer of a widely used semi-conductor - the Pentium
chip - continues to sell at a reasonable valuation and we foresee even further
earnings growth potential as demand for technology increases. We expect an
upswing in the "upgrade cycle" and we anticipate a rebound in the chip industry.
Not all stocks performed as favorably as we had anticipated. Caterpillar
Tractor, an industrial machinery manufacturer, for instance, did not meet
earnings expectations. In a market that was especially sensitive to earnings,
the stock suffered at the signs of weakness.
We still see choppy waters ahead; however, this past summer's stock market
decline gave us many opportunities to purchase relatively low-priced
investments for the Fund's portfolio. We are optimistic that they will offer
long-term capital appreciation potential.
Our long-range outlook for the U.S. economy during the next five to ten years is
very favorable. Based on many standards, the U.S. economy is more efficient,
productive and innovative than most other world economies. In coming years, we
should be able to reap the benefits of our ability to create superior products.
As technology becomes even more prevalent in our society, the emergence of
Internet shopping and a consumer's ability to find the lowest prices at the
click of a mouse should help keep prices in check. Our economy's potential to
create non-inflationary growth is the best we have seen in the past ten years.
We believe that the Fund's quantitative strategy will enable us to weather any
waves of short-term market volatility and leave us prepared to capture potential
market growth.
T. Scott Wittman
<PAGE>
Statement of Net Assets
December 31, 1998
Investments:
Percent of Number Market
Common Stock: Net Assets of Shares Value
- ----------------------------------------------------------------------------
Aerospace & Defense: 2.3%
Gulfstream Aerospace * 16,700 $ 889,275
United Technologies 22,800 2,479,500
-----------
3,368,775
Automobiles & Auto Parts: 2.0%
Ford Motor 25,200 1,478,925
Hertz Class A 2,800 127,750
Navistar International * 25,000 712,500
Republic Industries * 39,400 581,150
-----------
2,900,325
Banking, Finance & Insurance: 14.8%
Allstate 8,600 332,175
AmSouth Bancorporation 39,000 1,779,375
American International Group 16,200 1,565,325
Bank One 22,095 1,128,235
Bank of Boston 35,700 1,390,069
BankAmerica 20,600 1,238,575
Bankers Trust New York 14,000 1,196,125
Chase Manhattan 39,600 2,695,275
Citigroup 44,799 2,217,550
Conseco 44,600 1,363,087
Dime Bancorp 32,000 846,000
Marsh & McLennan 21,600 1,262,250
MBIA 10,400 681,850
Metris 13,594 682,228
Paine Webber Group 34,050 1,315,181
SLM Holding 41,300 1,982,400
-----------
21,675,700
Buildings & Materials: 1.6%
Centex 31,200 1,405,950
Lafarge 22,500 911,250
-----------
2,317,200
Cable, Media & Publishing: 4.1%
Donnelley & Sons 16,200 709,762
McGraw-Hill 19,700 2,006,937
New York Times 40,800 1,415,250
Omnicom Group 30,400 1,763,200
R.H.Donnelley 3,840 55,920
-----------
5,951,069
Chemicals: 1.6%
Dow Chemical 18,200 1,655,063
Lyondell Petrochemicals 36,700 660,600
-----------
2,315,663
<PAGE>
Percent of Number Market
Net Assets of Shares Value
- ----------------------------------------------------------------------------
Computers & Technology: 11.2%
American Power Conversion * 16,000 $774,500
Apple Computer * 40,000 1,638,750
Cisco Systems * 2,000 185,687
Dell Computer * 24,800 1,815,825
Electronics Arts * 7,300 409,256
HBO & Co. * 20,800 597,350
International Business Machines 8,200 1,514,950
Keane * 7,900 315,506
Lexmark International Group A * 16,200 1,628,100
Microsoft * 17,400 2,410,444
Network Associates * 7,650 507,530
Storage Technology * 19,000 675,688
Sun Microsystems * 30,700 2,626,769
Symantec * 8,800 190,850
Xerox 9,100 1,073,800
-----------
16,365,005
Consumer Products: 7.2%
Clorox 14,600 1,705,462
General Electric 48,600 4,960,237
Maytag 12,000 747,000
Procter & Gamble 33,600 3,068,100
-----------
10,480,799
Electronics & Electrical Equipment: 2.8%
FirstEnergy 32,100 1,045,256
Honeywell 20,300 1,528,844
Intel 12,600 1,493,494
-----------
4,067,594
Energy: 7.2%
Atlantic Richfield 17,200 1,122,300
ENSCO International 44,600 476,663
Exxon 47,500 3,473,437
Occidental Petroleum 36,000 607,500
Royal Dutch Petroleum 46,800 2,240,550
Texaco 31,600 1,670,850
USX-Marathon Group 33,200 1,000,150
-----------
10,591,450
Food, Beverage & Tobacco: 7.7%
CKE Restaurants 20,790 612,006
Coca-Cola 19,800 1,324,125
ConAgra 3,300 103,950
General Mills 16,200 1,259,550
Heinz (H.J.) 31,650 1,792,181
Philip Morris 76,600 4,098,100
Quaker Oats 11,200 666,400
Suiza Foods * 27,800 1,416,063
-----------
11,272,375
<PAGE>
Percent of Number Market
Net Assets of Shares Value
- ----------------------------------------------------------------------------
Healthcare & Pharmaceuticals: 12.8%
Amgen * 22,000 $2,299,000
Arterial Vascular Engineering * 42,400 2,222,025
Bristol-Myers Squibb 15,900 2,127,619
Health Management Associates Class A * 5,650 122,181
Lilly (Eli) 12,200 1,084,275
Lincare Holdings * 24,800 1,005,175
Merck & Company 19,800 2,924,213
Pfizer 9,500 1,191,656
Rexall Sundown * 6,500 90,594
Schering-Plough 62,000 3,425,500
Tyco International 29,300 2,210,319
-----------
18,702,557
Industrial Machinery: 0.6%
Ingersoll-Rand 18,750 880,078
Leisure, Lodging & Entertainment: 0.2%
Eastman Kodak 3,700 266,400
Metals & Mining: 0.6%
Bethlehem Steel * 17,600 147,400
USX-U.S. Steel Group 30,900 710,700
-----------
858,100
Retail: 6.2%
Best Buy * 2,900 177,987
Fingerhut 6,900 106,519
Gap 27,900 1,569,375
Jostens 33,000 864,188
Kroger * 5,800 350,900
Lowe's Companies 8,500 435,094
Ross Stores 27,800 1,093,756
Safeway * 21,000 1,279,688
TJX 53,500 1,551,500
Wal-Mart Stores 20,000 1,628,750
-----------
9,057,757
Telecommunications: 11.2%
ADC Telecommunications 21,800 754,825
Ameritech 44,000 2,788,500
AT & T 23,800 1,790,950
Bell Atlantic 51,916 2,949,478
BellSouth 89,200 4,448,850
Lucent Technologies 3,400 374,000
SBC Communications 13,599 729,246
Tellabs * 20,000 1,371,250
U.S.West 17,700 1,143,863
-----------
16,350,962
<PAGE>
Percent of Number Market
Net Assets of Shares Value
- ----------------------------------------------------------------------------
Textiles, Apparel & Furniture: 1.5%
Johnson Controls 26,500 $ 1,563,500
Tommy Hilfiger * 11,400 684,000
------------
2,247,500
Transportation & Shipping: 1.0%
Alaska Air Group 9,900 438,075
AMR 16,000 950,000
------------
1,388,075
Utilities: 2.5%
General Public Utilities 33,600 1,484,700
Minnesota Power and Light 8,200 360,800
Texas Utilities 38,500 1,797,469
------- ------------
3,642,969
Total Common Stock
(Cost $83,630,615) 99.1% 144,700,353
------- ------------
Total Investments
(Cost $83,630,615) 99.1% 144,700,353
Other Assets Over Liabilities: .9% 1,366,830
------- ------------
Net Assets 100.0% $146,067,183
======= ============
Net assets are represented by:
Value of accumulation units:
7,176,135 units at $18.712 unit value $134,281,654
Annuity reserves:
178,649 units at $18.712 unit value 3,342,925
351,631 units at $24.010 unit value 8,442,604
-------- ------------
530,280
========
$146,067,183
============
*Non-income producing security
See accompanying notes to financial statements.
<PAGE>
Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Dividends $ 2,358,504
Interest 61,960
-----------
2,420,464
Expenses:
Investment management services $ 441,232
Mortality and expense guarantees 1,304,517 1,745,749
----------- -----------
Net Investment Income 674,715
Net Realized and Unrealized Gain on Investments
Net realized gain on investments 15,158,708
Increase in net unrealized appreciation of investments 9,368,090
-----------
Net Realized and Unrealized Gain on Investments 24,526,798
-----------
Net Increase in Net Assets Resulting from Operations $25,201,513
===========
</TABLE>
Statements of Changes in Net Assets
Year Ended December 31,
1998 1997
------------------------
Changes from operations:
Net investment income $ 674,715 $ 945,635
Net realized gain on investments 15,158,708 15,561,276
Increase in net unrealized
appreciation of investments 9,368,090 17,892,073
------------------------
Net increase in net assets
resulting from operations 25,201,513 34,398,984
Net decrease from equity transactions (10,592,393) (11,845,771)
------------------------
Total increase in net assets 14,609,120 22,553,213
Net assets at beginning of period 131,458,063 108,904,850
------------------------
Net assets at end of period $146,067,183 $131,458,063
========================
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
December 31, 1998
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: Investment transactions are accounted for on the date the
securities are purchased or sold. Common 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
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, 1998 amounted to $41,571,993 and $51,892,501,
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 $10,852 from the proceeds of the sale of annuity
contracts during the period 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-interesting
bearing accounts, For the year ended December 31, 1998, 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 (Continued)
4. Net assets
Net assets at December 31, 1998 consisted of the following:
Equity transactions ($165,803,344)
Accumulated net investment income 73,957,102
Accumulated net realized gain on investments 176,843,687
Net unrealized appreciation of investments 61,069,738
------------
$146,067,183
============
5. Summary of changes in equity transactions
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
Units Amount Units Amount
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of period 7,722,501 ($146,214,289) 8,462,449 ($135,982,849)
Contract purchases 95,911 1,611,124 152,590 2,092,826
Terminated contracts (642,277) (12,586,365) (892,538) (12,324,266)
----------- ------------- --------- -------------
Balance at end of period 7,176,135 ($157,189,530) 7,722,501 ($146,214,289)
=========== ============= ========= =============
Annuity Reserves:
Balance at beginning of period 600,319 ($7,078,289) 699,953 ($5,463,958)
Annuity payments (84,509) (1,535,525) (88,185) (1,400,844)
Receipt of guarantee
mortality adjustments 14,470 - (11,449) (213,487)
----------- ------------- --------- -------------
Balance at end of period 530,280 ($8,613,814) 600,319 ($7,078,289)
=========== ============= ========= =============
</TABLE>
<PAGE>
Notes to Financial Statements (Continued)
6. Supplemental information - selected per unit data and ratios
The following is selected financial data for an accumulation unit outstanding
throughout each period:
1998 1997 1996 1995 1994
-----------------------------------------------
Investment income $ 0.301 $ 0.286 $ 0.267 $0.251 $0.217
Expenses 0.217 0.178 0.139 0.114 0.095
------- ------- ------- ------ ------
Net investment income 0.084 0.108 0.128 0.137 0.122
Net realized and unrealized
gain (loss) on investments 3.028 3.755 1.735 2.539 (0.040)
------- ------- ------- ------ ------
Increase in accumulation
unit value 3.112 3.863 1.863 2.676 0.082
Accumulation unit value
at beginning of year 15.600 11.737 9.874 7.198 7.116
------- ------- ------- ------ ------
Accumulation unit value
at end of period $18.712 $15.600 $11.737 $9.874 $7.198
======= ======= ======= ====== ======
Ratio of expenses to average
net assets 1.28% 1.27% 1.28% 1.28% 1.27%
Ratio of net investment income
to average net assets 0.54% 0.77% 1.17% 1.65% 1.75%
Portfolio turnover rate 31.10% 32.56% 49.94% 48.95% 64.09%
Number of accumulation units
outstanding at end of period
(expressed in thousands)
Accumulation units: 7,176 7,723 8,462 9,569 9,908
Reserve units: 530 600 700 831 863
<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, 1998, 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, 1998 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, 1998,
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 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Fort Wayne, Indiana
February 9, 1999
<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
Chief Financial Officer, University of Miami
School of Medicine, Bascom Palmer Eye Institute,
Miami, Fla.
John B. Borsch, Jr., Manager
Associate Vice President, Investments,
Northwestern University, Evanston, Ill.
Kenneth G. Stella, Manager
President, Indiana Hospital and Health
Association, Indianapolis, Ind.
Barbara S. Kowalczyk, Manager
Senior Vice President, Lincoln National Corp.,
Fort Wayne, Ind.
Safekeeper of Securities
Chase Manhattan Bank, NA for Chase MetroTech
Center, Brooklyn, NY
Independent Auditors
Ernst & Young LLP
Fort Wayne, Ind.
Investment manager
Lincoln National Life Insurance Co.
Fort Wayne, Ind.
[LOGO OF LINCOLN FINANCIAL GROUP]
Lincoln National Life Insurance Co.
Fort Wayne, Indiana 46801
800-4LINCOLN (800-454-6265)
www.LincolnLife.com
