<PAGE>
[LOGO OF LINCOLN LIFE] VUL III
Annual
Report
1995
<PAGE>
[LOGO OF LINCOLN LIFE]
January 1996
Dear VUL III Policyholder:
1995 was a very prosperous year for most investors. The year saw a dramatic
continuation of the rally in the financial marketplace that began in late 1994.
The performance of the funds underlying the VUL III subaccounts reflects 1995's
strong investment markets.
Last month we sent you the annual report of the American Variable Insurance
Series funds and mentioned that you would shortly receive a similar report for
two additional fund options managed by Lincoln Investment Management, Inc. You
will find this report on the following pages.
The following table shows the change in unit values of these two subaccounts
over several time periods. These figures are slightly different from those
appearing in the accompanying report as they reflect the deduction of asset
charges associated with your policy.
<TABLE>
<CAPTION>
Percent change in unit values
Periods ended 12/31/95
---------------------------------------------------------------
VUL III subaccounts 5-year average 10-year average
(Fund inception date) 1 year annual compound annual compound
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and Income Fund (1/1/82) 37.31% 15.45% 13.51%
Special Opportunities Fund (1/1/82) 30.87 18.23 11.67
</TABLE>
VUL III began operations on 1/23/89; results prior to 1/23/89 are hypothetical.
The rates of return shown in the above table reflect the percentage change in
unit values of the Separate Account, and represent the gross investment results
of the subaccounts minus the asset management charges and any miscellaneous
expenses incurred by the funds, and minus the mortality and expense risk charges
made by the Separate Account.
The positive performance of the subaccounts in 1995, in comparison to the
relatively poor performance of 1994, illustrates the importance of keeping a
long-term perspective and maintaining a well-diversified portfolio. As we've
mentioned in previous reports, it is important that your allocations among the
available investment options are consistent with your individual risk tolerance
and your long term investment horizon.
The following pages contain performance and investment commentary regarding the
Growth and Income Fund and the Special Opportunities Fund. More detailed
information about these two underlying funds follows the commentary.
<PAGE>
Your decision to select one of our variable insurance products was well rewarded
in 1995 and we appreciate the opportunity to help you achieve your financial
security goals. Thank you again for placing your confidence in Lincoln Life. If
we can be of further service, please call one of our customer service
representatives on our toll free number- 1-800-348-0851.
Sincerely,
/s/Kelly D. Clevenger /s/Edward B. Martin
Kelly D. Clevenger Edward B. Martin, CLU
Vice President Vice President
Note: The investment return and principal value of an investment may fluctuate
so that an investor's shares, when redeemed, may be worth more or less than the
original cost.
This material must be preceded or accompanied by a prospectus for the Lincoln
Life Flexible Premium Variable Life Account G. Read the prospectus carefully
before you invest.
<PAGE>
How a $10,000 investment has grown
The following charts show the growth of $10,000 invested in each of the
investment portfolios. However, the variable annuity and life insurance
contracts that use these funds have certain fees and expenses not reflected
here.
Growth and Income Fund
Growth of $10,000 invested 1/1/86 through 12/31/95
[CHART APPEARS HERE]
Stocks provided extraordinary gains this year as the S&P 500 Index returned
37.6%. At the beginning of the year, the economic soil did not seem rich enough
to yield such a bountiful crop of returns. The Federal Reserve had aggressively
raised interest rates to cut off a perceived threat of inflation. This
tightening action was intended to slow down the economy and, in turn, may have
tamed corporate profits. Quite to the contrary, while growth in Gross Domestic
Product decreased early in the year, corporate profits were robust, surpassing
the average expectations. These strong earnings fueled the stock market returns
early in the year. Later in the year, while earnings continued to grow, the
Federal Reserve lowered interest rates. This action boosted both the stock and
bond markets.
Separate from the impact of raw earnings and economic forces on the market,
speculation and politics also played a role in the market's dramatic rise.
Technology stocks were hot. In part, the phenomenon of the Internet and the
convenience and affordability of high powered computers drove technology stocks
higher. However, politics played a role in that technology stocks generally do
not pay dividends and they would benefit from the anticipated capital gains tax
cut proposed by Congress.
The Growth and Income Fund had a strong year, outpacing the vast majority of
similar funds. While the economic environment at the beginning of the year did
not seem positive for stocks, investors with a long term perspective were
rewarded for investing in the Growth & Income Fund and participating fully in
the rally of 1995.
T. Scott Wittman
Vantage Global Advisors
Special Opportunities Fund
Growth of $10,000 invested 1/1/86 through 12/31/95
[CHART APPEARS HERE]
The stock market had a remarkable year in 1995 with larger stocks leading the
way. The Dow Jones Industrial Average broke through the 4000 mark early in the
year and surged straight through the 5000 mark by November. Larger stocks, as
represented by the S&P 500 returned 37.6% while the Russell 2000 which is
comprised of mostly smaller stocks returned 28.4%. In both cases, the returns
were well above historical averages. The Special Opportunities Fund which
invests in mid-sized companies performed in line with these benchmarks with a
return for the year in between the S&P 500 and the Russell 2000.
<PAGE>
Throughout 1994 and into 1995, the Federal Reserve had been raising interest
rates, attempting to accomplish a "soft landing," (i.e. slow the economy without
causing a recession.) Some say Alan Greenspan and his associates have achieved
this objective as growth in GDP had decreased but remains positive. Greenspan's
intention was to slow the economy to fight off the threat of inflation. At this
point inflation appears to be in check.
Given this action by the Fed and the economic consequences, investors steered
toward issues that were less likely to be affected by an economic downturn.
Large consumer non-cyclicals such as tobacco and pharmaceutical companies
performed exceptionally well. Large companies were further bolstered by a flurry
of mergers and acquisitions in the banking industry with financial companies in
general outpacing the averages substantially. In contrast, economically
sensitive companies such as small retailers were weak.
Historically, smaller companies have provided a higher long term return. The
underperformance of smaller companies last year was due largely to the economic
uncertainty early in the year. The Special Opportunities Fund is designed to
capture the additional long term return opportunities of smaller companies and
has provided competitive returns relative to its peers and relevant mid-cap
indices.
T. Scott Wittman
Vantage Global Advisors
First time use with the public February 1996.
<PAGE>
<TABLE>
<CAPTION>
Lincoln National Growth and Income Fund, Inc.
Statement of Net Assets
December 31, 1995
Investments
Number Market
Common Stocks: of Shares Value
---------- -----------
<S> <C> <C>
Aerospace: 1.4%
- --------------------------------------------------------------------
McDonnell Douglas Corp. 270,900 $24,922,800
- --------------------------------------------------------------------
Air Transportation: 0.6%
- --------------------------------------------------------------------
AMR Corp.* 154,900 11,501,325
- --------------------------------------------------------------------
Banking and Insurance: 10.6%
- --------------------------------------------------------------------
AllState Corp. 480,049 19,742,015
American General Corp. 584,000 20,367,000
Bank of Boston Corp. 521,500 24,119,375
Bank of New York Inc. 502,500 24,496,875
Chemical Banking Corp. 458,800 26,954,500
Cigna Corp. 248,800 25,688,600
First Chicago NBD Corp. 615,943 24,329,749
NationsBank Corp. 227,500 15,839,687
Transamerica Corp. 104,300 7,600,863
Transport Holdings Inc.* 77 3,138
Travelers Inc. 83,500 5,250,062
- --------------------------------------------------------------------
194,391,864
Broadcasting: 1.3%
- --------------------------------------------------------------------
Capital Cities ABC Inc. 82,400 10,166,100
King World Productions Inc.* 328,900 12,785,988
- --------------------------------------------------------------------
22,952,088
Building Materials: 0.7%
- --------------------------------------------------------------------
Dover Corp. 334,200 12,323,625
- --------------------------------------------------------------------
Building and Construction: 0.4%
- --------------------------------------------------------------------
Armstrong World Industries Inc. 114,900 7,123,800
- --------------------------------------------------------------------
Chemicals: 3.1%
- --------------------------------------------------------------------
Dow Chemical Co. 147,600 10,387,350
Du Pont E I De Nemours & Co. 248,300 17,349,962
Eastman Chemical Co. 82,900 5,191,613
Olin Corp. 171,400 12,726,450
Union Carbide Corp. 274,700 10,301,250
- --------------------------------------------------------------------
55,956,625
Consumer Products and Services: 5.7%
- --------------------------------------------------------------------
American Brands Inc. 133,500 5,957,437
Black & Decker Corp. 323,000 11,385,750
Omnicom Group Inc. 232,800 8,671,800
Philip Morris Co. Inc. 583,000 52,761,500
Procter & Gamble Co. 320,700 26,618,100
- --------------------------------------------------------------------
105,394,587
Drug and Hospital Supplies: 8.3%
- --------------------------------------------------------------------
Baxter International Inc. 637,500 26,695,313
Bristol Myers Squibb Co. 488,300 41,932,762
Lilly (Eli) & Co. 260,000 14,625,000
Merck & Co. Inc. 150,800 9,915,100
Pharmacia & Upjohn Inc.* 719,490 27,880,237
Schering-Plough Corp. 578,900 31,694,775
- --------------------------------------------------------------------
152,743,187
Electrical and Electronics: 7.7%
- --------------------------------------------------------------------
Alliance Semiconductor Corp.* 296,100 3,442,163
Applied Materials Inc.* 565,400 22,262,625
Arrow Electrics Inc.* 115,200 4,968,000
Avnet Inc. 239,400 10,713,150
General Electric Co. 563,500 40,572,000
Harris Corp. 306,300 16,731,637
Mentor Graphics Corp.* 411,200 7,504,400
Read Rite Corp.* 638,700 14,849,775
Teradyne Inc.* 568,000 14,200,000
Texas Instruments Inc. 100,100 5,180,175
- --------------------------------------------------------------------
140,423,925
Entertainment: 2.1%
- --------------------------------------------------------------------
Bally Entertainment Corp.* 555,500 7,777,000
Mattel Inc. 252,031 7,749,953
Mirage Resorts Inc.* 678,400 23,404,800
- --------------------------------------------------------------------
38,931,753
Finance: 0.9%
- --------------------------------------------------------------------
Household International Inc. 270,700 16,005,137
- --------------------------------------------------------------------
Food and Beverage: 6.9%
- --------------------------------------------------------------------
Campbell Soup Co. 70,300 4,218,000
Coca Cola Co. 329,700 24,480,225
ConAgra Inc. 331,900 13,690,875
CPC International Inc. 146,100 10,026,112
Heinz H.J. Co. 407,150 13,486,844
IBP Inc. 355,300 17,942,650
RJR Nabisco Holding Corp. 318,920 9,846,655
Safeway Inc.* 515,900 26,568,850
Universal Foods Corp. 142,600 5,721,825
- --------------------------------------------------------------------
125,982,036
Industrial: 0.5%
- --------------------------------------------------------------------
TRW Inc. 126,100 9,772,750
- --------------------------------------------------------------------
Machinery and Engineering: 1.2%
- --------------------------------------------------------------------
Novellus Systems Inc.* 394,300 21,292,200
- --------------------------------------------------------------------
Metals and Mining: 2.2%
- --------------------------------------------------------------------
Cyprus Amax Minerals Co. 413,200 10,794,850
Parker Hannifin Corp. 261,950 8,971,787
Phelps Dodge Corp. 336,800 20,965,800
- --------------------------------------------------------------------
40,732,437
Motor Vehicles and Equipment: 2.6%
- --------------------------------------------------------------------
Eaton Corp. 373,100 20,007,488
Ford Motor Co. 405,400 11,756,600
Goodrich BF Co. 139,400 9,496,625
Navistar International Corp.* 679,900 7,138,950
- --------------------------------------------------------------------
48,399,663
Office and Business Equipment and Services: 7.0%
- --------------------------------------------------------------------
Adaptec Inc.* 200,400 8,216,400
Cadence Design Systems Inc.* 494,250 20,758,500
Cisco Systems Inc.* 150,300 11,216,138
Computer Associates International Inc. 95,300 5,420,187
Dell Computer Corp.* 626,200 21,682,175
Digital Equipment Corp.* 73,600 4,719,600
Manpower Inc. 213,100 5,993,437
Micron Technology Inc. 118,100 4,679,713
Reynolds & Reynolds Co. 209,200 8,132,650
Seagate Technology* 230,300 10,939,250
Sun Microsystems Inc.* 568,200 25,924,125
- --------------------------------------------------------------------
127,682,175
Paper: 1.8%
- --------------------------------------------------------------------
Bowater Inc. 546,800 19,411,400
Stone Container Corp. 465,500 6,691,562
Union Camp Corp. 151,600 7,219,950
- --------------------------------------------------------------------
33,322,912
Petroleum and Petroleum Related: 9.1%
- --------------------------------------------------------------------
Amoco Corp. 288,900 20,764,687
Atlantic Richfield Co. 92,900 10,288,675
Exxon Corp. 574,400 46,023,800
Halliburton Co. 277,800 14,063,625
Lyondell Petrochemical Co. 588,300 13,457,363
Mobil Corp. 123,200 13,798,400
Occidental Petroleum Corp. 195,000 4,168,125
Royal Dutch Petroleum Co. 147,600 20,830,050
Williams Companies Inc. 537,500 23,582,812
- --------------------------------------------------------------------
166,977,537
Printing and Publishing: 0.5%
- --------------------------------------------------------------------
New York Times Co. 321,800 9,533,325
- --------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Market
of Shares Value
---------- -----------
<S> <C> <C>
Public Utilities: 4.4%
- ------------------------------------------------------------------------
Baltimore Gas & Electric Co. 150,900 $4,300,650
Consolidated Edison Co. 679,900 21,756,800
General Public Utilities Corp. 272,450 9,263,300
New York State Electric & Gas Corp.* 331,300 8,572,388
Northeast Utilities 388,000 9,457,500
SCE Corp. 203,700 3,615,675
Unicom Corp. 730,900 23,936,975
- ------------------------------------------------------------------------
80,903,288
Railroads: 0.2%
- ------------------------------------------------------------------------
Conrail Inc. 44,200 3,094,000
- ------------------------------------------------------------------------
Retail: 3.6%
- ------------------------------------------------------------------------
Eckerd Corp.* 115,300 5,145,263
Jostens Inc. 56,100 1,360,425
Kroger Co.* 611,600 22,935,000
Pier 1 Imports Inc. 416,700 4,739,962
Sears, Roebuck & Co. 228,200 8,899,800
Staples Inc.* 773,800 18,861,375
Waban Inc.* 252,500 4,734,375
- ------------------------------------------------------------------------
66,676,200
Securities Dealers: 1.5%
- ------------------------------------------------------------------------
Bear, Stearns & Co. Inc. 807,100 16,041,113
Dean Witter Discover & Co. 261,800 12,304,600
- ------------------------------------------------------------------------
28,345,713
Shoes: 0.7%
- ------------------------------------------------------------------------
Nike Inc. 178,600 12,435,025
- ------------------------------------------------------------------------
Soaps, Cleaner and Cosmetics: 1.9%
- ------------------------------------------------------------------------
Clorox Co. 220,000 15,757,500
Colgate-Palmolive Co. 264,900 18,609,225
- ------------------------------------------------------------------------
34,366,725
Telecommunications: 9.2%
- ------------------------------------------------------------------------
American Telephone & Telegraph Co. 345,200 22,351,700
Ameritech Corp. 607,500 35,842,500
Bellsouth Corp. 573,600 24,951,600
Comsat Corp. 281,600 5,244,800
GTE Corp. 738,000 32,472,000
Pacific Telesis Group 821,000 27,606,125
SBC Communications Inc. 135,800 7,808,500
Sprint Corp. 333,500 13,298,313
- ------------------------------------------------------------------------
169,575,538
Transportation: 0.9%
- ------------------------------------------------------------------------
Illinois Central Corp. 311,300 11,946,138
PHH Corp. 92,700 4,333,725
- ------------------------------------------------------------------------
16,279,863
Total Common Stocks: 97.0%
(Cost $1,404,390,388) 1,778,042,103
- ------------------------------------------------------------------------
Par
Money Market Instruments: Amount
----------
AT&T Corp.
5.65%, 1/17/96 $5,000,000 4,984,306
U.S. Treasury Bill
0.0%, 5/2/96 4,500,000 4,229,957
Avco Financial Services
5.66%, 2/13/96 2,500,000 2,464,232
Bell Atlantic Financial Services
5.77%, 1/17/96 7,600,000 7,556,148
Commercial Credit Co.
5.81%, 1/8/96 3,300,000 3,289,348
ITT-Hartford Group, Inc.
5.8%, 1/18/96 6,300,000 6,276,655
5.65%,1/19/96 5,900,000 5,880,555
Par Market
Amount Value
---------- -----------
PHH Corp.
5.85%, 1/10/96 $3,725,000 $3,717,131
5.75%, 1/19/96 6,300,000 6,250,694
Smith Barney
5.8%, 1/3/96 4,200,000 4,185,790
5.9%, 1/3/96 5,600,000 5,593,521
Sony Capital Corp.
6.05%, 1/5/96 1,400,000 1,398,118
Sumitomo Corp. Of America
5.75%, 1/4/96 12,700,000 12,664,736
5.75%, 1/5/96 5,800,000 5,785,178
5.8%, 1/22/96 5,275,000 5,253,753
Temple-Inland Inc.
5.9%, 1/17/96 5,000,000 4,983,611
UBS Finance Inc.
5.75%, 1/2/96 6,800,000 6,786,967
- ------------------------------------------------------------------------
Total Money Market Instruments: 5.0%
(Cost $91,300,700) 91,300,700
- ------------------------------------------------------------------------
Total Investments: 102.0%
(Cost $1,495,691,088) 1,869,342,803
- ------------------------------------------------------------------------
Other Assets Under Liabilities (2.0%) (35,892,346)
- ------------------------------------------------------------------------
Net Assets: 100.0%
(equivalent to $29.756 per share
based on 61,615,296 shares
issued and outstanding) $1,833,450,457
========================================================================
Lincoln National Special Opportunities Fund, Inc.
Statement of Net Assets
December 31, 1995
Investments
Number Market
Common Stocks: of Shares Value
---------- -----------
Aerospace: 1.0%
- ------------------------------------------------------------------------
McDonnell Douglas Corp. 53,400 $4,912,800
- ------------------------------------------------------------------------
Banking and Insurance: 10.9%
- ------------------------------------------------------------------------
Bank of Boston Corp. 110,000 5,087,500
Bank of New York Inc. 109,500 5,338,125
Chemical Banking Corp. 84,500 4,964,375
Cigna Corp. 47,100 4,863,075
First Chicago NBD Corp. 121,994 4,818,763
Mid Ocean LTD Shares 138,600 5,145,525
NationsBank Corp. 71,100 4,950,338
Star Banc Corp. 80,000 4,760,000
Transamerica Corp. 70,400 5,130,400
Travelers Inc. 80,800 5,080,300
US Life Corp. 166,950 4,987,631
- ------------------------------------------------------------------------
55,126,032
Building Materials: 1.0%
- ------------------------------------------------------------------------
Dover Corp. 135,700 5,003,938
- ------------------------------------------------------------------------
Chemicals: 2.9%
- ------------------------------------------------------------------------
Eastman Chemical Co. 74,800 4,684,350
Olin Corp. 69,700 5,175,225
Union Carbide Corp. 129,500 4,856,250
- ------------------------------------------------------------------------
14,715,825
Consumer Products and Services: 3.9%
- ------------------------------------------------------------------------
American Brands Inc. 111,900 4,993,538
Leggett & Platt Inc. 210,900 5,114,325
The Stanley Works 89,900 4,629,850
Universal Corp. 207,700 5,062,687
- ------------------------------------------------------------------------
19,800,400
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Market
of Shares Value
---------- -----------
<S> <C> <C>
Drug and Hospital Supplies: 4.0%
- --------------------------------------------------------------------------
Baxter International Inc. 118,000 $4,941,250
Medtronic Inc. 87,800 4,905,825
Nellcor Inc.* 87,800 5,092,400
Pharmacia & Upjohn Inc.* 136,590 5,292,863
- --------------------------------------------------------------------------
20,232,338
Electrical and Electronics: 7.5%
- --------------------------------------------------------------------------
Alliance Semiconductor Corp.* 256,600 2,982,975
Applied Materials Inc.* 116,800 4,599,000
Cirrus Logic Inc.* 111,500 2,202,125
Cypress Semiconductor Corp.* 362,100 4,616,775
Harris Corp. 92,900 5,074,663
Lam Research Corp.* 108,000 4,941,000
Teradyne Inc.* 206,100 5,152,500
Texas Instruments Inc. 77,200 3,995,100
TRW Inc. 57,700 4,471,750
- --------------------------------------------------------------------------
38,035,888
Entertainment: 2.1%
- --------------------------------------------------------------------------
Mattel Inc. 176,843 5,437,922
Mirage Resorts Inc.* 151,300 5,219,850
- --------------------------------------------------------------------------
10,657,772
Finance: 0.9%
- --------------------------------------------------------------------------
Household International Inc. 78,500 4,641,312
- --------------------------------------------------------------------------
Food and Beverage: 3.7%
- --------------------------------------------------------------------------
Heinz H.J. Co. 156,300 5,177,438
IBP Inc. 79,400 4,009,700
International Multifoods Corp. 220,700 4,441,587
Von Companies Inc.* 183,700 5,189,525
- --------------------------------------------------------------------------
18,818,250
Industrial: 0.7%
- --------------------------------------------------------------------------
Measurex Corp. 111,100 3,138,575
Trinova Corp. 8,500 243,313
- --------------------------------------------------------------------------
3,381,888
Machinery and Engineering: 2.0%
- --------------------------------------------------------------------------
Carpenter Technology Corp. 123,000 5,058,375
Novellus Systems Inc.* 90,300 4,876,200
- --------------------------------------------------------------------------
9,934,575
Metals and Mining: 4.5%
- --------------------------------------------------------------------------
ASARCO Inc. 157,100 5,027,200
Ball Corp. 130,500 3,588,750
Cleveland-Cliffs Inc. 118,700 4,866,700
Parker Hannifin Corp. 140,150 4,800,138
Phelps Dodge Corp. 75,400 4,693,650
- --------------------------------------------------------------------------
22,976,438
Miscellaneous: 1.0%
- --------------------------------------------------------------------------
Flight Transportation Corp.* 4,725 1
Snap On Inc. 110,900 5,018,225
- --------------------------------------------------------------------------
5,018,226
Motor Vehicles and Equipment: 1.9%
- --------------------------------------------------------------------------
Dana Corp. 168,000 4,914,000
Eaton Corp. 86,500 4,638,563
- --------------------------------------------------------------------------
9,552,563
Office and Business Equipment and Services: 8.8%
- --------------------------------------------------------------------------
Borland International Inc.* 271,300 4,476,450
Cadence Design Systems Inc.* 128,850 5,411,700
Mentor Graphics Corp.* 270,600 4,938,450
Moore Corp. LTD 255,200 4,753,100
New England Business Services Inc. 223,600 4,863,300
Reynolds & Reynolds Co. 133,100 5,174,263
Seagate Technology* 105,700 5,020,750
Sun Microsystems Inc.* 112,100 5,114,562
Symantec Corp.* 193,700 4,503,525
- --------------------------------------------------------------------------
44,256,100
Paper: 4.1%
- --------------------------------------------------------------------------
Avery Dennison Corp. 104,900 5,258,112
Boise Cascade Corp. 129,500 4,483,937
Chesapeake Corp. 127,900 3,789,038
Stone Container Corp. 216,500 3,112,187
Westvaco Corp. 152,850 4,241,587
- --------------------------------------------------------------------------
20,884,861
Petroleum and Petroleum Related: 6.7%
- --------------------------------------------------------------------------
GATX 95,700 4,653,412
Lyondell Petrochemical Co. 215,000 4,918,125
Occidental Petroleum Corp. 239,000 5,108,625
Phillips Petroleum Co. 139,900 4,774,087
Smith International Inc.* 212,100 4,984,350
Union Texas Petroleum 236,900 4,589,938
Williams Companies Inc. 115,000 5,045,625
- --------------------------------------------------------------------------
34,074,162
Printing and Publishing: 1.9%
- --------------------------------------------------------------------------
Banta Corp. 112,500 4,950,000
New York Times Co. 165,300 4,897,013
- --------------------------------------------------------------------------
9,847,013
Public Utilities: 7.6%
- --------------------------------------------------------------------------
Baltimore Gas & Electric Co. 170,700 4,864,950
General Public Utilities Corp. 153,200 5,208,800
Northeast Utilities 195,900 4,775,062
Rochester Gas & Electric Corp. 198,000 4,479,750
SCE Corp. 260,400 4,622,100
Sierra Pacific Resources* 209,600 4,899,400
Southwestern Public Service Co.* 145,800 4,774,950
Unicom Corp. 149,300 4,889,575
- --------------------------------------------------------------------------
38,514,587
Railroads: 2.0%
- --------------------------------------------------------------------------
Burlington Northern Inc. 58,100 4,531,800
Burlington Northern Santa Fe 7,000 546,000
Conrail Inc. 68,700 4,809,000
- --------------------------------------------------------------------------
9,886,800
Restaurant: 0.9%
- --------------------------------------------------------------------------
Buffets Inc.* 330,100 4,538,875
- --------------------------------------------------------------------------
Retail: 7.1%
- --------------------------------------------------------------------------
Eckerd Corp.* 114,200 5,096,175
Kroger Co.* 138,500 5,193,750
Rite Aid Corp. 158,100 5,414,925
Smith's Food & Drug Centers Inc. 193,400 4,883,350
Staples Inc.* 224,450 5,470,969
Tiffany & Co. 95,600 4,815,850
Waban Inc.* 267,900 5,023,125
- --------------------------------------------------------------------------
35,898,144
Securities Dealers: 1.9%
- --------------------------------------------------------------------------
Bear, Stearns & Co. Inc. 238,400 4,738,200
Edwards (A G) Inc.* 200,000 4,775,000
- --------------------------------------------------------------------------
9,513,200
Shoes: 1.1%
- --------------------------------------------------------------------------
Nike Inc. 78,700 5,479,487
- --------------------------------------------------------------------------
Soaps, Cleaner and Cosmetics: 1.8%
- --------------------------------------------------------------------------
Clorox Co. 66,300 4,748,738
International Flavors & Fragrances Inc. 94,000 4,512,000
- --------------------------------------------------------------------------
9,260,738
Steel: 0.6%
- --------------------------------------------------------------------------
USX Steel Group Inc. 105,300 3,237,975
- --------------------------------------------------------------------------
Telecommunications: 1.0%
- --------------------------------------------------------------------------
Pacific Telesis Group 143,100 4,811,737
- --------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Market
of Shares Value
---------- -----------
<S> <C> <C>
Textiles-Apparel Manufacturing: 0.9%
- --------------------------------------------------------------------------
Springs Industries Inc. 108,700 $4,497,462
- --------------------------------------------------------------------------
Total Common Stocks: 94.4%
(Cost $410,931,424) 477,509,386
- --------------------------------------------------------------------------
Par
Money Market Instruments: Amount
----------
ITT-Hartford Group Inc.
5.8%, 1/8/96 $9,600,000 9,584,534
Sumitomo Corp. Of America
6.0%, 1/5/96 18,100,000 18,072,850
UBS Finance Inc.
5.75%, 2/1/96 6,200,000 6,188,117
6.0%, 2/1/96 1,400,000 1,398,366
United States Treasury Bill
0.0%, 5/1/96+ 750,000 704,993
- --------------------------------------------------------------------------
Total Money Market Instruments: 7.1%
(Cost $35,948,860) 35,948,860
- --------------------------------------------------------------------------
Total Investments: 101.5%
(Cost $446,880,284) 513,458,246
- --------------------------------------------------------------------------
Other Assets Under Liabilities: (1.5%) (7,703,566)
- --------------------------------------------------------------------------
Net Assets: 100.0%
(equivalent to $27.383 per share
based on 18,469,661 shares
issued and outstanding) $505,754,680
===========================================================================
</TABLE>
* Non-income producing.
+ Pledged as collateral for financial futures contracts.
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Lincoln Lincoln
National National
Growth Special
and Income Opportunities
Fund, Inc. Fund, Inc.
-------------------------------------------
<S> <C> <C>
Investment income:
Interest $ 5,126,223 $ 1,659,405
- ----------------------------------------------------------------------------------------------------------
Dividends 39,790,594 10,372,607
- ----------------------------------------------------------------------------------------------------------
Total investment income 44,916,817 12,032,012
- ----------------------------------------------------------------------------------------------------------
Expenses:
Management fees 5,077,981 1,809,514
- ----------------------------------------------------------------------------------------------------------
Directors fees 3,000 3,000
- ----------------------------------------------------------------------------------------------------------
Printing and Postage 14,924 29,849
- ----------------------------------------------------------------------------------------------------------
Other 189,603 59,359
- ----------------------------------------------------------------------------------------------------------
Total expenses 5,285,508 1,901,722
- ----------------------------------------------------------------------------------------------------------
Net investment income 39,631,309 10,130,290
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on:
Investment transactions 112,217,388 40,236,411
- ----------------------------------------------------------------------------------------------------------
Options written - (2,078,011)
- ----------------------------------------------------------------------------------------------------------
Net realized gain on investments 112,217,388 38,158,400
- ----------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on:
Investments 328,786,475 62,954,572
- ----------------------------------------------------------------------------------------------------------
Options written - 20,675
- ----------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation or depreciation
on investments 328,786,475 62,975,247
- ----------------------------------------------------------------------------------------------------------
Net gain on investments 441,003,863 101,133,647
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $480,635,172 $111,263,937
==========================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Years Ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
Lincoln Lincoln
National National
Growth Special
and Income Opportunities
Fund, Inc. Fund, Inc.
----------------------------------------
<S> <C> <C>
Net Assets at January 1, 1994 $1,034,105,477 $273,997,784
- --------------------------------------------------------------------------------
Changes from operations:
Net investment income 31,708,118 7,440,312
- --------------------------------------------------------------------------------
Net realized gain on investments 69,061,295 15,004,876
- --------------------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on investments (86,360,222) (25,542,877)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 14,409,191 (3,097,689)
- --------------------------------------------------------------------------------
Dividends to shareholder from:
Net investment income (31,708,118) (7,440,312)
- --------------------------------------------------------------------------------
Net realized gain on investments (45,931,842) (18,072,011)
- --------------------------------------------------------------------------------
Total dividends to shareholder (77,639,960) (25,512,323)
- --------------------------------------------------------------------------------
Net increase in net assets
resulting from capital share transactions 190,449,599 73,029,402
- --------------------------------------------------------------------------------
Total increase in net assets 127,218,830 44,419,390
- --------------------------------------------------------------------------------
Net Assets at December 31, 1994 $1,161,324,307 $318,417,174
Changes from operations:
Net investment income 39,631,309 10,130,290
- --------------------------------------------------------------------------------
Net realized gain on investments 112,217,388 38,158,400
- --------------------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on investments 328,786,475 62,975,247
- --------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 480,635,172 111,263,937
- --------------------------------------------------------------------------------
Dividends to shareholder from:
Net investment income (39,631,309) (10,130,290)
- --------------------------------------------------------------------------------
Net realized gain on investments (69,061,295) (15,004,876)
- --------------------------------------------------------------------------------
Total dividends to shareholder (108,692,604) (25,135,166)
- --------------------------------------------------------------------------------
Net increase in net assets
resulting from capital share transactions 300,183,582 101,208,735
- --------------------------------------------------------------------------------
Total increase in net assets 672,126,150 187,337,506
- --------------------------------------------------------------------------------
Net Assets at December 31, 1995 $1,833,450,457 $505,754,680
================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
THE FUNDS: Lincoln National Growth and Income Fund, Inc., is registered as an
open-end, diversified management investment company and Lincoln National Special
Opportunities Fund, Inc. is registered as an open-end, non-diversified
management investment company under the Investment Company Act of 1940, as
amended. The Funds' shares are sold only to The Lincoln National Life Insurance
Company (the Company) for allocation to its Variable Annuity Account C, which
was established for the purpose of funding variable annuity contracts, and to
its Flexible Premium Variable Life Accounts D, G, and K, which were established
for the purpose of funding variable universal life contracts.
The Funds' investment objectives are as follows:
FUND INVESTMENT OBJECTIVE
---- --------------------
Lincoln National Growth The investment objective is to maximize long-term
and Income Fund, Inc. capital appreciation. The Fund buys stocks of
established companies.
Lincoln National Special The investment objective is to maximize capital
Opportunities Fund, Inc. appreciation. The Fund primarily invests in mid-
size companies whose stocks have significant
growth potential. Current income is a secondary
consideration.
INVESTMENT VALUATION: Investments are stated at value. Portfolio securities
which are traded on stock exchanges are valued at the last reported sale price
on the exchange or market where primarily traded or listed or, in the absence of
recent sales, at the mean between the last reported bid and asked prices. Long-
term debt investments are valued at their bid quotations. The Funds hedge
certain portions of their exposure to fluctuations in interest and market risks
by entering into derivative transactions. These hedges include options and
financial futures. Options traded on exchanges are valued at the last bid price
for options purchased and the last sale price for options written. Options
traded in the over-the-counter market are valued at the last bid price for
options purchased and the last asked price for options written. Financial
futures are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. Other securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Funds' Board of
Directors. Money market instruments in securities are stated at amortized cost,
which approximates market value.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
accounted for on the trade date. Dividend income is recorded on the ex-dividend
date and interest income is recorded on the accrual basis. Interest income
includes premium and discount amortization on money market instruments and
mortgage-backed securities; it also includes original issue and market discount
amortization on long-term debt investments. Realized gains or losses from
investment transactions are reported on an identified cost basis. Gains and
losses on premiums from expired options are recognized on the date of
expiration.
EXPENSES: The custodian bank of the Lincoln National Growth and Income Fund,
Inc. and Lincoln National Special Opportunities Fund, Inc. has agreed to waive
its custodial fees when the Funds maintain a prescribed amount of cash on
deposit in certain non-interest bearing accounts. For the year ended December
31, 1995, the custodial fees offset arrangements were not material to either
total expenses or the calculation of average net assets and the ratio of
expenses to average net assets.
TAXES: Each Fund has complied with the special provisions of the Internal
Revenue Code for regulated investment companies. As such, each Fund is not
subject to U.S. federal income taxes to the extent that it distributes all of
its taxable income for its fiscal year.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
2. OTHER ASSETS UNDER LIABILITIES
The statement of net assets accounts "Other Assets Under Liabilities" at
December 31, 1995 consisted of the following assets (liabilities):
<TABLE>
<CAPTION>
LINCOLN LINCOLN
NATIONAL NATIONAL
GROWTH SPECIAL
AND INCOME OPPORTUNITIES
FUND, INC. FUND, INC
------------- --------------
<S> <C> <C>
Cash $ 830,757 $ 1,203,486
- ---------------------------------------------------------------
Receivable for dividends earned 4,440,444 1,190,953
- ---------------------------------------------------------------
Receivable for interest earned 358,793 61,939
- ---------------------------------------------------------------
Receivable for securities sold - 3,791,213
- ---------------------------------------------------------------
Dividends declared and unpaid (39,631,309) (10,130,290)
- ---------------------------------------------------------------
Payable for securities
purchased (1,368,346) (3,338,623)
- ---------------------------------------------------------------
Management fees payable (511,243) (175,592)
- ---------------------------------------------------------------
Other, net (11,442) (306,652)
- ---------------------------------------------------------------
$(35,892,346) $ (7,703,566)
============================
</TABLE>
3. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Lincoln Investment Management, Inc. (the Advisor) manages the Funds' investment
portfolios, maintains their accounts and records, and furnishes the services of
individuals to perform executive and administrative functions of the Funds. In
return for these services, the Advisor receives a management fee at an annual
rate of .48% of the first $200,000,000 of the average daily net asset value of
the Funds, .40% of the next $200,000,000, and .30% of the average daily net
asset value of the Funds in excess of $400,000,000. If the aggregate annual
expenses of the Funds, including the management fee, but excluding taxes,
interest, brokerage commissions relating to the purchase or sale of portfolio
securities and extraordinary non-recurring expenses, exceeds 1 1/2% of the
average daily net asset value of the Fund, the Advisor will reimburse the Funds
in the amount of such excess. No reimbursement was due for the year ended
December 31, 1995.
Certain officers and directors of the Funds are also officers or directors of
the Company. The compensation of unaffiliated directors of the Funds is borne by
the Funds.
4. ANALYSIS OF NET ASSETS
The analysis of net assets at December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
LINCOLN LINCOLN
NATIONAL NATIONAL
GROWTH SPECIAL
AND INCOME OPPORTUNITIES
FUND, INC. FUND, INC.
-------------- -------------
<S> <C> <C>
Common Stock, par value
$.01 per share ** $ 616,153 $ 184,697
- ----------------------------------------------------------------------------
Paid-in capital in excess of par
value of shares issued 1,346,965,201 401,072,386
- ----------------------------------------------------------------------------
Undistributed net realized gain
on investments 112,217,388 38,158,400
- ----------------------------------------------------------------------------
Net unrealized appreciation or depreciation
on investments 373,651,715 66,339,197
- ----------------------------------------------------------------------------
$1,833,450,457 $505,754,680
=============================
</TABLE>
** The Lincoln National Growth and Income Fund, Inc. and the Lincoln National
Special Opportunities Fund, Inc. have 100,000 and 50,000 shares authorized,
respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
5. INVESTMENTS
The cost of investments for federal income tax purposes is the same as for book
purposes. The aggregate cost of investments purchased, the aggregate proceeds
from investments sold, the aggregate gross unrealized appreciation, the
aggregate gross unrealized depreciation and the net unrealized appreciation of
investments and other financial instruments at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE GROSS GROSS NET
COST OF PROCEEDS UNREALIZED UNREALIZED UNREALIZED
PURCHASES FROM SALES APPRECIATION DEPRECIATION APPRECIATION
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Lincoln National Growth
and Income Fund, Inc. $956,735,084 $746,186,273 $419,990,161 $(46,338,446) $373,651,715
Lincoln National Special
Opportunities Fund, Inc. 430,824,124 358,721,194 84,294,639 (17,955,442) 66,339,197
</TABLE>
6. SUPPLEMENTAL FINANCIAL INSTRUMENT INFORMATION
OPTIONS: The Funds purchase or write options which are exchange traded to hedge
fluctuation risks in the price of certain securities. When the Funds write a
call or put option, an amount equal to the premium received is reflected as a
liability. The amount of the liability is subsequently "marked-to-market" to
reflect the current market value of the option written. The premium paid by the
Funds for the purchase of a call or put option is recorded as an investment and
subsequently "marked-to-market" to reflect the current market value of the
option purchased. The Funds are subject to the risk of an imperfect correlation
between movement in the price of the instrument and the price of the underlying
security or transaction. Risks may also arise due to illiquid secondary markets
for the instruments. Written call option activity for 1995 is summarized as
follows:
<TABLE>
<CAPTION>
LINCOLN NATIONAL SPECIAL
OPPORTUNITIES FUND, INC.
--------------------------
NUMBER OF PREMIUMS
SHARES RECEIVED
--------------------------
<S> <C> <C>
Options outstanding at January 1, 1995 125,400 $ 204,656
Options written 2,455,200 11,009,524
Options exercised (399,500) (2,744,150)
Options expired (134,800) (241,498)
Options closed (2,046,300) (8,228,532)
------------------------
Options outstanding at December 31, 1995 0 $ 0
========================
</TABLE>
FINANCIAL FUTURES CONTRACTS: The Funds may purchase or sell financial futures
contracts, which are exchange traded, to hedge fluctuation risks of adverse
changes in exchange markets or interest rates. Financial futures contracts
obligate the Funds to take delivery or deliver a financial instrument at a
future date at a specified price. The Funds deposit with its custodian a
specified amount of cash or eligible securities called "initial margin" or
"variation margin". The market value of investments pledged to cover margin
requirements for open positions at December 31, 1995 was $704,993 for the
Lincoln National Special Opportunities Fund, Inc. The unrealized gain or loss on
the contracts are reflected in the accompanying financial statements. The Funds
are subject to the market risks of unexpected changes in the underlying markets
and interest rates; however, such changes in the value generally are offset by
changes in the value of the items being hedged by such contracts. Purchased
financial futures contracts open at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
UNDERLYING EXPIRATION UNREALIZED
FUND CONTRACTS FACE AMOUNT DATE LOSS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lincoln National Special 85 S&P 400 midcap stock index $9,505,890 March 1996 $(238,765)
Opportunities Fund, Inc.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
7. SUMMARY OF CHANGES FROM CAPITAL SHARE TRANSACTIONS
<TABLE>
<CAPTION>
SHARES ISSUED UPON NET INCREASE
CAPITAL REINVESTMENT OF CAPITAL SHARES RESULTING FROM CAPITAL
SHARES SOLD DIVIDENDS REDEEMED SHARE TRANSACTIONS
------------------------ ----------------------- -------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ --------- ------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994:
Lincoln National Growth
and Income Fund, Inc. 6,010,672 $141,925,232 2,859,641 $ 69,491,281 (899,760) $(20,966,914) 7,970,553 $190,449,599
Lincoln National Special
Opportunities Fund, Inc. 4,246,768 96,029,031 983,331 23,219,317 (2,057,740) (46,218,946) 3,172,359 73,029,402
Year Ended
December 31, 1995:
Lincoln National Growth
and Income Fund, Inc. 8,053,315 216,522,961 4,377,795 100,769,413 (665,107) (17,108,792) 11,766,003 300,183,582
Lincoln National Special
Opportunities Fund, Inc. 3,684,568 92,454,762 1,003,269 22,445,188 (584,289) (13,691,215) 4,103,548 101,208,735
</TABLE>
8. DISTRIBUTION TO SHAREHOLDER
The Funds declare dividends daily on net investment income and annually on net
realized gains, if any. Dividends are distributed annually.
9. FUND NAME CHANGE
Effective April 28, 1995, the name of the Lincoln National Growth Fund, Inc. was
changed to the Lincoln National Growth and Income Fund, Inc.
<PAGE>
FINANCIAL HIGHLIGHTS
(Selected data for each capital share outstanding throughout the year)
<TABLE>
<CAPTION>
Income from Investment Operation Less Dividends From:
---------------------------------------------------- -------------------------------------
Net Net
Asset Realized and Total
Year Value Net Unrealized From Net Net Realized
Ended Beginning Investment Gain(Loss) on Investment Investment Gain on Total
12/31 of Period Income(Loss) Investments Operations Income Investments Dividends
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Lincoln National Growth and Income Fund, Inc.
1986 $16.138 $0.544 $2.147 $2.691 ($0.544) ($0.254) ($0.798)
1987 18.031 0.587 2.148 2.735 (0.587) (0.539) (1.126)
1988 19.640 0.540 0.729 1.269 (0.540) (2.997) (3.537)
1989 17.372 0.793 2.859 3.652 (0.793) - (0.793)
1990 20.231 0.512 (0.539) (0.027) (0.512) (1.068) (1.580)
1991 18.624 0.617 5.142 5.759 (0.617) - (0.617)
1992 23.766 0.663 (0.336) 0.327 (0.663) (0.503) (1.166)
1993 22.927 0.610 2.285 2.895 (0.610) (0.519) (1.129)
1994 24.693 0.668 (0.428) 0.240 (0.668) (0.968) (1.636)
1995 23.297 0.701 7.680 8.380 (0.701) (1.221) (1.921)
Net Ratio of Net
Asset Ratio of Investment Net Assets
Year Value Expenses Income Portfolio At End
Ended End Total To Average To Average Turnover of Period
12/31 of Period Return* Net Assets Net Asset Rate (000's)
=======================================================================================
1986 $18.031 16.77% 0.50% 3.06% 55.22% $ 105,781
1987 19.640 14.75% 0.52% 2.78% 142.01% 177,354
1988 17.372 8.06% 0.54% 3.08% 179.88% 209,513
1989 20.231 19.86% 0.50% 4.06% 208.98% 295,399
1990 18.624 1.68% 0.48% 2.79% 59.47% 356,329
1991 23.766 30.83% 0.44% 2.86% 33.59% 581,297
1992 22.927 1.24% 0.41% 2.97% 74.50% 765,457
1993 24.693 13.31% 0.38% 2.58% 60.76% 1,034,105
1994 23.297 0.65% 0.37% 2.85% 76.34% 1,161,324
1995 29.756 39.06% 0.35% 2.64% 51.76% 1,833,450
</TABLE>
<TABLE>
<CAPTION>
Income from Investment Operation Less Dividends From:
---------------------------------------------------- -------------------------------------
Net Net
Asset Realized and Total
Year Value Net Unrealized From Net Net Realized
Ended Beginning Investment Gain(Loss) on Investment Investment Gain on Total
12/31 of Period Income(Loss) Investments Operations Income Investments Dividends
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Lincoln National Special Opportunities Fund, Inc.
1986 $17.233 $0.178 ($0.616) ($0.438) ($0.178) $ - ($0.178)
1987 16.617 0.064 1.316 1.380 (0.064) - (0.064)
1988 17.933 0.060 0.327 0.387 (0.060) (2.659) (2.719)
1989 15.601 0.276 4.904 5.180 (0.276) - (0.276)
1990 20.505 0.236 (1.931) (1.695) (0.236) (1.208) (1.444)
1991 17.366 0.323 7.195 7.518 (0.323) - (0.323)
1992 24.561 0.546 1.106 1.652 (0.546) (0.955) (1.501)
1993 24.712 0.530 2.703 3.233 (0.530) (2.937) (3.467)
1994 24.478 0.565 (0.942) (0.377) (0.565) (1.372) (1.937)
1995 22.164 0.616 6.131 6.747 (0.616) (0.912) (1.528)
Net Ratio of Net
Asset Ratio of Investment Net Assets
Year Value Expenses Income Portfolio At End
Ended End Total To Average To Average Turnover of Period
12/31 of Period Return* Net Assets Net Asset Rate (000's)
========================================================================================
1986 $16,617 (2.50%) 0.54% 1.00% 102.32% $ 43,369
1987 17.933 8.77% 0.56% 0.31% 110.80% 58,866
1988 15.601 3.73% 0.59% 0.39% 73.91% 63,982
1989 20.505 31.92% 0.55% 1.50% 92.56% 75,245
1990 17.366 (7.28%) 0.55% 1.33% 37.50% 83,762
1991 24.561 43.14% 0.53% 1.49% 111.60% 132,753
1992 24.712 6.24% 0.53% 2.35% 128.49% 189,867
1993 24.478 18.31% 0.49% 2.29% 74.11% 273,998
1994 22.164 (1.55%) 0.48% 2.49% 74.63% 318,417
1995 27.383 32.05% 0.45% 2.39% 90.12% 505,755
</TABLE>
* Total return percentages in this table are calculated on the basis
prescribed by the Securities and Exchange Commission. These percentages are
based on the underlying mutual fund shares in which Separate Account C, D,
G, and K may invest. The total return percentages in the table are NOT
calculated on the same basis as the performance percentages noted in the
letter at the front of this booklet (those percentages are based on the
change in unit values).
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDER OF LINCOLN NATIONAL GROWTH AND INCOME FUND,
INC. AND LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
We have audited the accompanying statements of net assets of Lincoln National
Growth and Income Fund, Inc. and Lincoln National Special Opportunities Fund,
Inc. (Funds) as of December 31, 1995, and the related statements of operations,
the statements of changes in net assets, and the financial highlights presented
herein for each of the respective years or periods in the period ended December
31, 1995. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights 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 financial
highlights 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, 1995, by correspondence with the custodian and brokers. 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 financial highlights referred to
above present fairly, in all material respects, the financial positions of the
Funds at December 31, 1995, the results of their operations, the changes in
their net assets, and the financial highlights presented herein for each of the
respective years or periods in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Fort Wayne, Indiana
January 24, 1996
