<PAGE>
LINCOLN LIFE VUL III
Semiannual
Report 1996
[LOGO]
<PAGE>
[LOGO OF LINCOLN LIFE]
August 1996
Dear VUL III Life policyowner:
This booklet contains the latest semiannual report on the VUL III Account G,
covering the six-month period ending June 30, 1996.
Last month we sent you the semiannual 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 table below shows the change in unit values of these two subaccounts over
several time periods. These figures are slightly different from those appearing
later in this report, as they reflect the deduction of asset charges associated
with your policy. However, these results do not reflect the cost of insurance
protection, which varies for each insured. Therefore, performance will be lower
than the results shown below. For examples of how the cost of insurance
protection affects performance, refer to the appendix to the prospectus labeled
"Illustrations." For a personalized illustration of how your policy values will
vary under representative investment returns, please contact your agent.
Percent change in unit values/1/
Periods ending 6/30/96
---------------------------------------------------
5-year average 10-year average
annual compound annual compound
VUL III subaccounts 6 months 1 year rate of return rate of return
- --------------------------------------------------------------------------------
Growth-Income Fund 8.97% 24.27% 14.61% 12.61%
- --------------------------------------------------------------------------------
Special Opportunities Fund 6.59 17.40 15.59 11.70
- --------------------------------------------------------------------------------
The following page contains performance and investment commentary regarding the
Growth and Income Fund and the Special Opportunities Fund. The portfolio
managers continue to use their expertise to obtain favorable relative returns in
any given market condition. More detailed information about the two underlying
funds follows the commentary.
We invite you to read the accompanying reports, and we look forward to helping
you meet your long-term financial goals. If we can be of further assistance,
please call one of our customer service representatives on our toll free number
- -- 1-800-348-0851.
Sincerely,
/s/ Reed P. Miller
Reed P. Miller
Vice President
1 All results shown represent the net investment results of the funds (gross
investment results minus asset management charges and miscellaneous expenses)
minus the mortality and expense risk charges made by the Separate Account. Where
results shown include periods prior to the date the Separate Account actually
began investing in any fund, such results have been derived by reducing the
historic net investment results of the fund by the mortality and expense risk
charges that would have been applicable had the Separate Account been investing
in the fund during that period.
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
National Life Flexible Variable Life Account G. Read the prospectus carefully
before you invest or send money.
SMR96-2318ALL
Aug 96
<PAGE>
Growth and Income
Managed by: VANTAGE
GLOBAL ADVISORS
This has proven to be a successful year for stock market investors so far.
After a 37.6% return for the S&P 500 in 1995, few could have reasonably expected
the same in 1996. Nevertheless year-to-date returns for the S&P 500 are again
above historical averages, although not at 1995 levels.
Economic news influenced the markets as good news was bad for the bond market
and bad news was good. Signs of strength in the economy led investors to
anticipate that inflation might follow and the Federal Reserve might raise
short-term interest rates to combat rising prices. As a result, the bond market
dropped and interest rates rose. The yield on long-term government bonds rose
from 5.9% to over 7%.
The stock market charged forward despite higher interest rates as smaller stocks
outperformed larger stocks in the first half of 1996. The market was also
fueled by record-breaking flows into mutual funds. For the first six months of
1996, almost as much flowed into equity mutual funds as did in all of 1995.
The market outlook for the rest of 1996 depends largely on corporate earnings.
If the economy continues to show signs of strength and corporate earnings
continue to grow, the market could continue its bull run. However, should the
Federal Reserve interpret economic growth as inflationary and, in turn, raise
interest rates, the market could respond negatively, ending the impressive bull
period we have enjoyed.
With the uncertainty of the equity market, investors have been rewarded for
remaining fully invested and maintaining a long-term perspective. The Growth &
Income Fund is designed to provide consistent equity exposure, remaining fully
invested to maximize longer-term returns.
T. Scott Wittman
Special Opportunities Fund
Managed by: VANTAGE
GLOBAL ADVISORS
The stock market continued its remarkable bull rally into the first half of
1996. While stocks in general had a strong first half, all investors in the
market were not treated equally. For the first time in a number of years,
investors in aggressive equities have been treated to better performance than
more conservative investors. Small company growth funds outperformed large
company growth & income funds by over three percentage points.
The ride was wild for the small company investors! The Russell 2000, an Index
that is representative of small company equities, had a 20% range from trough
(Jan. 16) to peak (May 22). By midyear, it had settled back near the midpoint of
the range. Technology stocks led smaller stocks up and down, with a 25% range
from trough (Jan. 15) to peak (May 20). Thus, as technology went, so went small
companies.
While some analysts were forecasting a recession for 1996, economic news has
proven otherwise with low unemployment and higher wages. The economy may
continue to grow steadily unless the higher wages begin to drive prices upward.
In such a case, the Federal Reserve may raise interest rates to keep the economy
under control, which may slow earnings in the long term and tame the market over
the short term. Given the long bull market in stocks, a near-term correction
would not be a surprise. However, longer term, equities should continue to
provide attractive returns for investors.
The Special Opportunities Fund participates in some of the upside of smaller
companies, but controls the downside by holding a diversified portfolio of
medium-sized companies. The resulting portfolio has some of the stability of
larger companies, while avoiding some of the troughs of small companies.
T. Scott Wittman
3
<PAGE>
GROWTH AND INCOME FUND
STATEMENT OF NET ASSETS - UNAUDITED
June 30, 1996
INVESTMENTS:
<TABLE>
<CAPTION>
Number Market
COMMON STOCKS: of shares value
--------- ------------
<S> <C> <C>
AEROSPACE: 2.1%
McDonnell Douglas Corp. 557,600 $ 27,043,600
- ------------------------------------------------
United Technologies Corp. 157,300 18,089,500
- ------------------------------------------------ ------------
45,133,100
AIR TRANSPORTATION: 1.5%
AMR Corp. * 215,100 19,574,100
- ------------------------------------------------
Northwest Airlines Corp. * 309,900 12,241,050
- ------------------------------------------------ ------------
31,815,150
BANKING AND INSURANCE: 11.0%
AllState Corp. 87,849 4,008,111
- ------------------------------------------------
Bank of Boston Corp. 586,300 29,021,850
- ------------------------------------------------
Bank of New York Inc. 502,500 25,753,125
- ------------------------------------------------
Chase Manhattan Corp. New 528,200 37,304,125
- ------------------------------------------------
Cigna Corp. 273,700 32,262,388
- ------------------------------------------------
First Chicago NBD Corp. 615,943 24,098,770
- ------------------------------------------------
Marsh & McLennan Companies Inc. 165,600 15,980,400
- ------------------------------------------------
Nations Bank Corp. 227,500 18,797,188
- ------------------------------------------------
Transamerica Corp. 189,700 15,365,700
- ------------------------------------------------
Travelers Inc. 846,450 38,619,281
- ------------------------------------------------ ------------
241,210,937
BROADCASTING: 0.5%
King World Productions Inc. * 328,900 11,963,738
- ------------------------------------------------
BUILDING MATERIALS: 1.0%
Dover Corp. 465,400 21,466,575
- ------------------------------------------------
BUILDING AND CONSTRUCTION: 0.1%
Kaufman & Broad Home Corp. 138,500 2,008,250
- ------------------------------------------------
CHEMICALS: 6.9%
Dow Chemical Co. 251,000 19,076,000
- ------------------------------------------------
Eastman Chemical Co. 118,300 7,201,513
- ------------------------------------------------
Olin Corp. 179,400 16,011,450
- ------------------------------------------------ ------------
42,288,963
CONSUMER PRODUCTS AND SERVICES: 6.9%
American Brands Inc. 153,500 6,965,063
- ------------------------------------------------
Black & Decker Corp. 323,000 12,475,875
- ------------------------------------------------
Johnson & Johnson 533,800 26,423,100
- ------------------------------------------------
Omnicom Group Inc. 232,800 10,825,200
- ------------------------------------------------
Philip Morris Co. Inc. 622,100 64,698,400
- ------------------------------------------------
Procter & Gamble Co. 320,700 29,063,438
- ------------------------------------------------ ------------
150,451,075
DRUG AND HOSPITAL SUPPLIES: 8.7%
Abbott Laboratories 504,100 21,928,350
- ------------------------------------------------
Advanced Technology Laboratories Inc. * 169,800 6,197,700
- ------------------------------------------------
Baxter International Inc. 637,500 30,121,875
- ------------------------------------------------
Bristol Myers Squibb Co. 510,000 45,900,000
- ------------------------------------------------
Lilly (Eli) & Co. 260,000 16,900,000
- ------------------------------------------------
Merck & Co. Inc. 359,100 23,206,838
- ------------------------------------------------
Pharmacia & Upjohn Inc. 180,190 7,995,931
- ------------------------------------------------
Schering-Plough Corp. 614,100 38,534,775
- ------------------------------------------------ ------------
190,785,469
ELECTRICAL AND ELECTRONICS: 7.6%
Analog Devices Inc. * 475,600 12,127,800
- ------------------------------------------------
Applied Materials Inc. * 711,200 21,691,600
- ------------------------------------------------
General Electric Co. 676,300 58,499,950
- ------------------------------------------------
Harris Corp. 306,300 18,684,300
- ------------------------------------------------
International Rectifier Corp. * 845,700 13,636,913
- ------------------------------------------------
KLA Instruments Corp. * 265,100 6,163,575
- ------------------------------------------------
Komag Inc. * 1,063,000 28,036,625
- ------------------------------------------------
Silicon Valley Group Inc. * 446,600 8,373,750
- ------------------------------------------------ ------------
167,214,513
ENTERTAINMENT: 2.2%
Brunswick Corp. 299,700 5,994,000
- ------------------------------------------------
Callaway Golf Co. 496,200 16,498,650
- ------------------------------------------------
Mirage Resorts Inc. * 473,100 25,547,400
- ------------------------------------------------ ------------
48,040,050
FINANCIAL SERVICES: 1.0%
Student Loan Marketing Association 297,300 22,000,200
- ------------------------------------------------
FOOD AND BEVERAGE: 7.1%
Campbell Soup Co. 70,300 4,956,150
- ------------------------------------------------
Coca Cola Co. 659,400 32,228,175
- ------------------------------------------------
ConAgra Inc. 331,900 15,059,963
- ------------------------------------------------
CPC International Inc. 146,100 10,519,200
- ------------------------------------------------
Heinz H.J. Co. 407,150 12,367,181
- ------------------------------------------------
IBP Inc. 710,600 19,630,325
- ------------------------------------------------
RJR Nabisco Holding Corp. 862,920 26,750,520
- ------------------------------------------------
Safeway Inc. * 862,000 28,446,000
- ------------------------------------------------
Universal Foods Corp. 142,600 5,258,375
- ------------------------------------------------ ------------
155,215,889
MACHINERY AND ENGINEERING: 0.8%
Novellus Systems Inc. * 464,000 16,704,000
- ------------------------------------------------
METALS AND MINING: 1.5%
Cyprus Amax Minerals Co. 413,200 9,348,650
- ------------------------------------------------
Phelps Dodge Corp. 378,600 23,615,175
- ------------------------------------------------ ------------
32,963,825
MOTOR VEHICLES AND EQUIPMENT: 2.9%
Chrysler Corp. 602,800 37,373,600
- ------------------------------------------------
Dana Corp. 280,800 8,704,800
- ------------------------------------------------
Ford Motor Co. 204,900 6,633,638
- ------------------------------------------------
Goodrich BF Co. 308,600 11,533,925
- ------------------------------------------------ ------------
64,245,963
OFFICE AND BUSINESS EQUIPMENT AND SERVICES: 7.3%
Adaptec Inc. * 122,200 5,789,225
- ------------------------------------------------
Cabletron Systems Inc. 315,900 21,678,638
- ------------------------------------------------
Cadence Design Systems Inc. * 616,575 20,809,406
- ------------------------------------------------
Cisco Systems Inc. * 300,600 17,021,475
- ------------------------------------------------
Computer Associates International Inc. 95,300 6,790,125
- ------------------------------------------------
Digital Equipment Corp. * 126,500 5,692,500
- ------------------------------------------------
Honeywell Inc. 227,200 12,382,400
- ------------------------------------------------
Parametric Technology Corp. * 40,800 1,769,700
- ------------------------------------------------
Pitney Bowes Inc. 481,700 23,001,175
- ------------------------------------------------
Reynolds & Reynolds Co. 209,200 11,139,900
- ------------------------------------------------
Structural Dynamics Research Corp. * 182,100 4,006,200
- ------------------------------------------------
Sun Microsystems Inc. * 488,000 28,731,000
- ------------------------------------------------ ------------
158,811,744
PAPER: 2.1%
Avery Dennison Corp. 204,100 11,199,988
- ------------------------------------------------
Bowater Inc. 546,800 20,573,350
- ------------------------------------------------
Stone Container Corp. 465,500 6,400,625
- ------------------------------------------------
Union Camp Corp. 151,600 7,390,500
- ------------------------------------------------ ------------
45,564,463
PETROLEUM AND PETROLEUM RELATED: 9.9%
Amoco Corp. 328,000 23,739,000
- ------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Market
of shares value
----------- ---------------
<S> <C> <C>
Atlantic Richfield Co. 92,900 $ 11,008,650
- --------------------------------------------
Exxon Corp. 574,400 49,901,000
- --------------------------------------------
Halliburton Co. 277,800 15,417,900
- --------------------------------------------
Mobil Corp. 292,300 32,774,138
- --------------------------------------------
Occidental Petroleum Corp. 940,300 23,272,425
- --------------------------------------------
Royal Dutch Petroleum Co. 147,600 22,693,500
- --------------------------------------------
Seagull Energy Corp. * 209,500 5,237,500
- --------------------------------------------
Texaco Inc. 67,000 5,619,625
- --------------------------------------------
Williams Companies Inc. 554,300 27,437,850
--------------
217,101,588
PRINTING AND PUBLISHING: 1.0%
Deluxe Corp. 145,900 5,179,450
- --------------------------------------------
Harcourt General Inc. 128,000 6,400,000
- --------------------------------------------
New York Times Co. 321,800 10,498,725
- -------------------------------------------- --------------
22,078,175
PUBLIC UTILITIES: 3.7%
Baltimore Gas & Electric Co. 150,900 4,281,788
- --------------------------------------------
Consolidated Edison Co. 806,600 23,593,050
- --------------------------------------------
Edison International 203,700 3,590,213
- --------------------------------------------
General Public Utilities Corp. 272,450 9,603,863
- --------------------------------------------
New York State Electric & Gas Corp. 331,300 8,075,438
- --------------------------------------------
Texas Utilities Co. 239,600 10,242,900
- --------------------------------------------
Unicom Corp. 740,300 20,635,863
- -------------------------------------------- --------------
80,023,113
RETAIL: 3.7%
Eckerd Corp. * 230,600 5,217,325
- --------------------------------------------
Jostens Inc. 56,100 1,107,975
- --------------------------------------------
Pier 1 Imports Inc. 466,700 6,942,163
- --------------------------------------------
Ross Stores Inc. 166,300 5,778,925
- --------------------------------------------
Sears, Roebuck & Co. 228,200 11,096,225
- --------------------------------------------
Staples Inc. * 875,700 17,076,150
- --------------------------------------------
The Gap Inc. 854,200 27,441,175
- --------------------------------------------
Waban Inc. * 252,500 6,028,438
- -------------------------------------------- --------------
80,688,375
SECURITIES DEALERS: 1.6%
Bear, Stearns & Co. Inc. 847,455 20,021,124
- --------------------------------------------
Morgan Stanley Group Inc. 122,900 6,037,463
- --------------------------------------------
Paine Webber Group Inc. 367,900 8,737,625
- -------------------------------------------- --------------
34,796,212
SHOES: 0.9%
Nike Inc. 187,500 19,265,625
SOAPS, CLEANER AND COSMETICS: 1.2%
Clorox Co. 303,400 26,888,825
TELECOMMUNICATIONS: 8.1%
American Telephone & Telegraph Co. 345,200 21,402,400
- --------------------------------------------
Ameritech Corp. 607,500 36,070,313
- --------------------------------------------
Bell Atlantic Corp. 112,500 7,171,875
- --------------------------------------------
Bellsouth Corp. 573,600 24,306,300
- --------------------------------------------
GTE Corp. 788,700 35,294,325
- --------------------------------------------
Nynex Corp. 276,100 13,114,750
- --------------------------------------------
Pacific Telesis Group 995,800 33,608,250
- --------------------------------------------
SBC Communications Inc. 135,800 6,688,150
- -------------------------------------------- --------------
177,656,363
TRANSPORTATION: 0.2%
PHH Corp. 92,700 5,283,900
- -------------------------------------------- --------------
TOTAL COMMON STOCKS: 96.5%
(Cost $1,636,486,675) 2,111,666,075
- --------------------------------------------
Par Market
MONEY MARKET INSTRUMENTS: amount value
----------- --------------
A.I. Credit Corp.
. 5.35%, 7/1/96 $ 7,400,000 $ 7,395,601
- --------------------------------------------
G.E. Capital Corp.
. 5.37%, 7/16/96 1,000,000 997,017
- --------------------------------------------
Merrill Lynch
. 5.554%, 7/8/96 12,600,000 12,551,315
. 5.37%, 7/9/96 6,800,000 6,773,676
. 5.551%, 7/11/96 4,100,000 4,089,545
- --------------------------------------------
Nalco Chemical Co.
. 5.34%, 7/15/96 15,000,000 14,924,350
- --------------------------------------------
Pepsico
. 5.36%, 7/16/96 2,700,000 2,692,764
- --------------------------------------------
PHH Corp.
. 5.33%, 7/15/96 10,700,000 10,644,553
- --------------------------------------------
Prudential Funding Inc.
. 5.37%, 7/18/96 14,000,000 13,951,968
- --------------------------------------------
Smith Barney
. 5.37%, 7/16/96 2,600,000 2,589,529
- --------------------------------------------
Sony Capital Corp.
. 5.32%, 7/2/96 11,300,000 11,254,913
- --------------------------------------------
Temple-Inland Inc
. 5.498%, 7/16/96 1,680,000 1,671,278
. 5.531%, 7/24/96 5,800,000 5,770,584
- --------------------------------------------
Toyota Motor Credit
. 5.32%, 7/11/96 3,600,000 3,587,232
- -------------------------------------------- --------------
TOTAL MONEY MARKET INSTRUMENTS: 4.5%
(Cost $98,894,326) 98,894,326
- --------------------------------------------
TOTAL INVESTMENTS: 101.0% 2,210,560,401
(Cost $1,735,381,001)
- --------------------------------------------
Other assets under liabilities: (1.0)% (22,704,488)
- -------------------------------------------- --------------
NET ASSETS: 100.0%
(equivalent to $30.582 per share based on
71,540,210 shares issued and outstanding) $2,187,855,913
- -------------------------------------------- ==============
SPECIAL OPPORTUNITIES FUND
STATEMENT OF NET ASSETS - UNAUDITED
June 30, 1996
INVESTMENTS:
Number Market
COMMON STOCKS: of shares value
----------- --------------
AEROSPACE: 2.0%
McDonnell Douglas Corp. 120,800 $ 5,858,800
- --------------------------------------------
United Technologies Corp. 50,800 5,842,000
- -------------------------------------------- --------------
11,700,800
AIR TRANSPORTATION: 1.9%
AMR Corp. * 61,600 5,605,600
- --------------------------------------------
Northwest Airlines Corp. * 136,000 5,372,000
- -------------------------------------------- --------------
10,977,600
BANKING AND INSURANCE: 12.2%
Bank of Boston Corp. 119,800 5,930,100
- --------------------------------------------
Chase Manhattan Corp. New 84,900 5,996,063
- --------------------------------------------
Cigna Corp. 53,100 6,259,163
- --------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Market
of shares value
--------- -----------
<S> <C> <C>
First Chicago NBD Corp. 141,494 $ 5,535,953
- ----------------------------------
Healthcare Compare Corp. 124,000 6,045,000
- ----------------------------------
Marsh & McLennan Companies Inc. 59,000 5,693,500
- ----------------------------------
Mercury General Corp. 126,300 5,525,625
- ----------------------------------
Mid Ocean Ltd. 139,200 5,707,200
- ----------------------------------
Nations Bank Corp. 71,100 5,874,638
- ----------------------------------
Star Banc Corp. 80,000 5,390,000
- ----------------------------------
Transamerica Corp. 70,400 5,702,400
- ----------------------------------
Travelers Inc. 139,350 6,357,844
- ---------------------------------- ----------
70,017,484
BUILDING MATERIALS: 1.0%
Dover Corp. 127,500 5,880,938
- ----------------------------------
CHEMICALS: 1.9%
Eastman Chemical Co. 88,700 5,399,613
- ----------------------------------
Union Carbide Corp. 133,000 5,286,750
- ---------------------------------- ----------
10,686,363
CONSUMER PRODUCTS AND SERVICES: 4.0%
American Brands Inc. 127,200 5,771,700
- ----------------------------------
Leggett & Platt Inc. 214,900 5,963,475
- ----------------------------------
The Stanley Works 200,800 5,973,800
- ----------------------------------
Universal Corp. 202,500 5,366,250
- ---------------------------------- ----------
23,075,225
DRUG AND HOSPITAL SUPPLIES: 4.0%
Baxter International Inc. 118,700 5,608,575
- ----------------------------------
Becton, Dickinson & Co. 72,400 5,810,100
- ----------------------------------
Medtronic Inc. 101,400 5,678,400
- ----------------------------------
Pharmacia & Upjohn Inc. 137,090 6,083,369
- ---------------------------------- ----------
23,180,444
ELECTRICAL AND ELECTRONICS: 6.0%
Applied Materials Inc. * 135,900 4,144,950
- ----------------------------------
Atmel Corp. * 190,000 5,723,750
- ----------------------------------
EG&G Inc. 276,400 5,908,050
- ----------------------------------
KLA Instruments Corp. 183,200 4,259,400
- ----------------------------------
Komag Inc. * 224,600 5,923,825
- ----------------------------------
Lam Research Corp. * 130,600 3,395,600
- ----------------------------------
Silicon Valley Group Inc. * 268,500 5,034,375
- ---------------------------------- ----------
34,389,950
ENTERTAINMENT: 2.9%
Callaway Golf Co. 168,600 5,605,950
- ----------------------------------
MGM Grand Inc. * 133,700 5,331,288
- ----------------------------------
Mirage Resorts Inc. * 107,200 5,788,800
- ---------------------------------- ----------
16,726,038
Financial services: 1.0%
Student Loan Marketing Association 78,700 5,823,800
- ----------------------------------
FOOD AND BEVERAGE: 4.5%
Great Atlantic & Pacific Tea Inc. 162,500 5,342,188
- ----------------------------------
Heinz H.J. Co. 170,900 5,191,088
- ----------------------------------
IBP Inc. 205,800 5,685,225
- ----------------------------------
International Multifoods Corp. 224,000 4,088,000
- ----------------------------------
Von Companies Inc. * 151,900 5,677,263
- ---------------------------------- ----------
25,983,763
INDUSTRIAL: 1.0%
Measurex Corp. 200,400 5,861,700
- ----------------------------------
MACHINERY AND ENGINEERING: 1.4%
Carpenter Technology Corp. 154,900 4,956,800
- ----------------------------------
Novellus Systems Inc. * 92,100 3,315,600
- ---------------------------------- ----------
8,272,400
METALS AND MINING: 5.7%
ASARCO Inc. 205,500 5,676,938
- ----------------------------------
Ball Corp. 195,500 5,620,625
- ----------------------------------
Cleveland-Cliffs Inc. 139,700 5,465,763
- ----------------------------------
Hecla Mining Co. * 727,100 5,089,700
- ----------------------------------
Phelps Dodge Corp. 76,400 4,765,450
- ----------------------------------
Snap On Inc. 123,800 5,865,025
- ---------------------------------- ----------
32,483,500
MOTOR VEHICLES AND EQUIPMENT: 2.9%
Dana Corp. 168,000 5,208,000
- ----------------------------------
Fleetwood Enterprises Inc. 192,000 5,952,000
- ----------------------------------
Goodrich BF Co. 145,000 5,419,375
- ---------------------------------- ----------
16,579,375
OFFICE AND BUSINESS EQUIPMENT AND SERVICES: 9.0%
Cabletron Systems Inc. * 82,900 5,689,013
- ----------------------------------
Cadence Design Systems Inc. * 168,475 5,686,031
- ----------------------------------
Honeywell Inc. 104,200 5,678,900
- ----------------------------------
Moore Corp. Ltd. 285,200 5,383,150
- ----------------------------------
New England Business Services Inc. 324,400 6,325,800
- ----------------------------------
Reynolds & Reynolds Co. 109,000 5,804,250
- ----------------------------------
Sun Microsystems Inc. * 93,200 5,487,150
- ----------------------------------
U.S. Robotics Corp. * 68,000 5,814,000
- ----------------------------------
Western Digital Corp. * 228,200 5,961,725
- ---------------------------------- ----------
51,830,019
PAPER: 3.5%
Avery Dennison Corp. 105,800 5,805,775
- ----------------------------------
Boise Cascade Corp. 129,500 4,742,938
- ----------------------------------
Chesapeake Corp. 127,900 3,357,375
- ----------------------------------
Stone Container Corp. 216,500 2,976,875
- ----------------------------------
Westvaco Corp. 102,850 3,072,644
- ---------------------------------- ----------
19,955,606
PETROLEUM AND PETROLEUM RELATED: 5.9%
Occidental Petroleum Corp. 214,300 5,303,925
- ----------------------------------
Phillips Petroleum Co. 141,400 5,921,125
- ----------------------------------
Smith International Inc. * 186,900 5,630,363
- ----------------------------------
Union Texas Petroleum 304,900 5,945,550
- ----------------------------------
USX Marathon Group Inc. 274,500 5,524,313
- ----------------------------------
Williams Companies Inc. 115,000 5,692,500
- ---------------------------------- ----------
34,017,775
PRINTING AND PUBLISHING: 1.8%
Banta Corp. 188,250 4,753,313
- ----------------------------------
New York Times Co. 167,800 5,474,475
- ---------------------------------- ----------
10,227,788
PUBLIC UTILITIES: 9.0%
Baltimore Gas & Electric Co. 201,700 5,723,238
- ----------------------------------
Edison International 260,400 4,589,550
- ----------------------------------
General Public Utilities Corp. 171,300 6,038,325
- ----------------------------------
Portland General 193,900 5,986,663
- ----------------------------------
Rochester Gas & Electric Corp. 283,100 6,086,650
- ----------------------------------
Sierra Pacific Resources 233,300 5,919,988
- ----------------------------------
Southwestern Public Service Co. 178,500 5,823,563
- ----------------------------------
Texas Utilities Co. 135,700 5,801,175
- ----------------------------------
Unicom Corp. 207,900 5,795,213
- ---------------------------------- ----------
51,764,363
RAILROADS: 0.9%
Norfolk Southern Corp. 64,100 5,432,475
- ----------------------------------
RETAIL: 4.9%
Eckerd Corp. * 255,400 5,778,425
- ----------------------------------
Mercantile Stores Co. Inc. 91,700 5,375,913
- ----------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Market
of shares value
--------- ------------
<S> <C> <C>
Staples Inc. * 307,775 $ 6,001,613
- ------------------------------------------
Tiffany & Co. 78,200 5,708,600
- ------------------------------------------
Waban Inc. * 217,300 5,188,038
- ------------------------------------------ ------------
28,052,588
SECURITIES DEALERS: 2.1%
Bear, Stearns & Co. Inc. 251,895 5,951,019
- ------------------------------------------
Edwards (A G) Inc. 225,800 6,124,825
- ------------------------------------------ ------------
12,075,844
SHOES: 1.0%
Nike Inc. 58,500 6,010,875
- ------------------------------------------
SOAPS, CLEANER AND COSMETICS: 1.8%
Clorox Co. 68,300 6,053,088
- ------------------------------------------
International Flavors & Fragrances Inc. 94,000 4,476,750
- ------------------------------------------ ------------
10,529,838
TELECOMMUNICATIONS: 2.0%
Cincinnati Bell Inc. 108,300 5,645,138
- ------------------------------------------
Pacific Telesis Group 165,100 5,572,125
- ------------------------------------------ ------------
11,217,263
TEXTILES-APPAREL MANUFACTURING: 1.0%
Liz Claiborne Inc. 170,200 5,893,175
- ------------------------------------------ ------------
TOTAL COMMON STOCKS: 95.5%
(Cost $469,029,131) 548,646,985
- ------------------------------------------ ------------
Par
MONEY MARKET INSTRUMENTS: amount
-------
Cargill Inc.
. 5.32%, 7/2/96 $ 1,200,000 1,198,049
- ------------------------------------------
Merrill Lynch
. 5.499%, 7/1/96 12,500,000 12,486,105
. 5.524%, 7/8/96 8,700,000 8,684,340
- ------------------------------------------
U S West Communications Group
. 5.43%, 7/9/96 6,100,000 6,089,879
- ------------------------------------------ ------------
TOTAL MONEY MARKET INSTRUMENTS: 5.0%
(Cost $28,458,373) 28,458,373
- ------------------------------------------ ------------
TOTAL INVESTMENTS: 100.5%
(Cost $497,487,504) 577,105,358
- ------------------------------------------
Other assets under liabilities: (0.5)% (2,642,283)
- ------------------------------------------ ------------
NET ASSETS: 100.0%
(equivalent to $27.167 per share based on
21,145,772 shares issued and outstanding) $574,463,075
- ------------------------------------------ ============
</TABLE>
* Non-income producing.
See accompanying notes to financial statements.
<PAGE>
Statement of operations--unaudited
Six Months ended June 30, 1996
<TABLE>
<CAPTION>
Growth
and Special
Income Opportunities
Fund Fund
----------------------------
<S> <C> <C>
Investment income:
Interest $ 2,679,681 $ 909,447
- -----------------------------------------------------------------------------
Dividends 22,809,838 5,728,223
- -----------------------------------------------------------------------------
Total investment income 25,489,519 6,637,670
- -----------------------------------------------------------------------------
Expenses:
Management fees 3,329,575 1,095,915
- -----------------------------------------------------------------------------
Directors fees 1,500 1,500
- -----------------------------------------------------------------------------
Reporting and distribution 137,059 37,237
- -----------------------------------------------------------------------------
Other 14,303 9,240
- -----------------------------------------------------------------------------
Total expenses 3,482,437 1,143,892
- -----------------------------------------------------------------------------
Net investment income 22,007,082 5,493,778
- -----------------------------------------------------------------------------
Net realized and unrealized
gain on investments:
Net realized gain on:
Investment transactions 58,456,941 17,933,789
- -----------------------------------------------------------------------------
Options written - 201,831
- -----------------------------------------------------------------------------
Net realized gain on investments 58,456,941 18,135,620
- -----------------------------------------------------------------------------
Net change in unrealized
appreciation or depreciation on:
Investments 101,527,684 13,278,657
- -----------------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on investments 101,527,684 13,278,657
- -----------------------------------------------------------------------------
Net gains on investments 159,984,625 31,414,277
- -----------------------------------------------------------------------------
Net increase in net assets
resulting from operations $181,991,707 $36,908,055
=============================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS--UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Growth Special
and Income Opportunities
Fund Fund
-------------------------------
<S> <C> <C>
NET ASSETS AT JANUARY 1, 1995 $1,161,324,307 $318,417,174
- -------------------------------------------------------------------------------
Changes from operations:
Net investment income 18,110,910 4,649,832
- -------------------------------------------------------------------------------
Net realized gain on investments 34,664,505 13,545,428
- -------------------------------------------------------------------------------
Net change in unrealized appreciation or
depreciation on investments 201,891,132 47,327,562
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 254,666,547 65,522,822
- -------------------------------------------------------------------------------
Dividends to shareholder from:
Net investment income (18,110,910) (4,649,832)
- -------------------------------------------------------------------------------
Net realized gain on investments (69,061,295) (15,004,876)
- -------------------------------------------------------------------------------
TOTAL DIVIDENDS TO SHAREHOLDER (87,172,205) (19,654,708)
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM CAPITAL SHARE TRANSACTIONS 165,804,088 52,719,151
- -------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 333,298,430 98,587,265
- -------------------------------------------------------------------------------
NET ASSETS AT JUNE 30, 1995 $1,494,622,737 $417,004,439
===============================================================================
NET ASSETS AT JANUARY 1, 1996 $1,833,450,457 $505,754,680
Changes from operations:
Net investment income 22,007,082 5,493,778
- -------------------------------------------------------------------------------
Net realized gain on investments 58,456,941 18,135,620
- -------------------------------------------------------------------------------
Net change in unrealized appreciation or
depreciation on investments 101,527,684 13,278,657
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 181,991,707 36,908,055
- -------------------------------------------------------------------------------
Dividends to shareholder from:
Net investment income (22,007,082) (5,493,778)
- -------------------------------------------------------------------------------
Net realized gain on investments (112,217,388) (38,158,400)
- -------------------------------------------------------------------------------
TOTAL DIVIDENDS TO SHAREHOLDER (134,224,470) (43,652,178)
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM CAPITAL SHARE TRANSACTIONS 306,638,219 75,452,518
- -------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 354,405,456 68,708,395
- -------------------------------------------------------------------------------
NET ASSETS AT JUNE 30, 1996 $2,187,855,913 $574,463,075
===============================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--UNAUDITED
JUNE 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
THE FUNDS: Growth and Income Fund is registered as an open-end, diversified
management investment company and Special Opportunities Fund, 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 (Lincoln Life) 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:
<TABLE>
<CAPTION>
FUND INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
<S> <C>
Growth and Income Fund The investment objective is to maximize long-term
capital appreciation. The Fund buys stocks of
established companies.
Special Opportunities Fund The investment objective is to maximize capital
appreciation. The Fund primarily invests in
mid-size companies whose stocks have significant
growth potential. Current income is a secondary
consideration.
</TABLE>
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 Growth and Income Fund, and Special
Opportunities Fund 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 six months ended June 30, 1996, 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--unaudited (continued)
2. Other assets under liabilities
The statement of net assets accounts "Other assets under liabilities" at June
30, 1996 consisted of the following assets (liabilities):
<TABLE>
<CAPTION>
Growth
and Special
Income Opportunities
Fund Fund
-------------------------------
<S> <C> <C>
Cash (overdraft) $ (155,258) $ 421,044
Receivable for dividends earned 4,658,349 1,173,794
Receivable for interest earned 223,569 22,194
Receivable for securities sold 669,405 2,316,065
Dividends declared and unpaid (22,007,082) (5,493,778)
Payable for securities purchased (5,453,202) (873,075)
Management fees payable (586,146) (187,259)
Other, net (54,123) (21,268)
-------------------------------
$(22,704,488) $(2,642,283)
===============================
</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 six months ended
June 30, 1996.
Certain officers and directors of the Funds are also officers or directors of
Lincoln Life. The compensation of unaffiliated directors of the Funds is borne
by the Funds.
4. Analysis of net assets
Net assets at June 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
Growth
and Special
Income Opportunities
Fund Fund
-------------------------------
<S> <C> <C>
Common stock, par value
$.01 per share ** $ 716,001 $ 211,458
Paid-in capital in excess of par
value of shares issued 1,653,503,571 476,498,143
Undistributed net realized
gain on investments 58,456,941 18,135,620
Net unrealized appreciation
on investments 475,179,400 79,617,854
-------------------------------
$2,187,855,913 $574,463,075
===============================
</TABLE>
**The Growth and Income Fund and the Special Opportunities Fund have 100,000,000
and 50,000,000 shares authorized, respectively.
<PAGE>
Notes to financial statements--unaudited (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 June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Aggregate Aggregate Gross Gross Net
cost of proceeds unrealized unrealized unrealized
purchases from sale appreciation depreciation appreciation
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth and Income Fund $713,422,091 $539,782,745 $518,417,339 $43,237,939 $475,179,400
Special Opportunities Fund 272,273,604 231,693,372 93,586,219 13,968,365 79,617,854
</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 1996 is summarized as follows:
<TABLE>
<CAPTION>
Special Opportunities
Fund
-----------------------------
Number of Premiums
shares received
-----------------------------
<S> <C> <C>
Options outstanding at January 1, 1996 -- $ --
Options written 355,000 794,917
Options exercised (88,500) (177,182)
Options closed (266,500) (617,735)
-----------------------------
Options outstanding at June 30, 1996 -- $ --
=============================
</TABLE>
<PAGE>
Notes to financial statements--unaudited (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
----------------------------------------------------------------------------------------------------------
Six months ended
June 30, 1995:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth and Income Fund 3,080,048 $ 75,306,254 4,377,795 $100,769,414 (425,159) ($10,271,580) 7,032,684 $165,804,088
Special Opportunities
Fund 1,782,194 41,428,814 1,003,269 22,445,189 (489,693) (11,154,852) 2,295,770 52,719,151
Six months ended
June 30, 1996:
Growth and Income Fund 5,337,342 161,469,995 4,811,213 151,848,696 (223,641) (6,680,472) 9,930,914 306,638,219
Special Opportunities
Fund 1,632,634 44,436,431 1,695,199 48,288,651 (651,722) (17,272,564) 2,676,111 75,452,518
</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.
<PAGE>
FINANCIAL HIGHLIGHTS - UNAUDITED
(SELECTED DATA FOR EACH CAPITAL SHARE OUTSTANDING THROUGHOUT THE YEAR)
<TABLE>
<CAPTION>
Income from investment operation Less dividends from:
------------------------------------------- -------------------------------------
Net Net Net
asset realized and Total asset
Year value Net unrealized from Net Net realized value
ended beginning investment gain(loss) on investment investment gain on Total end Total
12/31 of period income investment operations income investments dividends of period return**
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $18.031 $0.587 $2.148 $2.735 ($0.587) ($0.539) ($1.126) $19.640 14.75%
1988 19.640 0.540 0.729 1.269 (0.540) (2.997) (3.537) 17.372 8.06%
1989 17.372 0.793 2.859 3.652 (0.793) - (0.793) 20.231 19.86%
1990 20.231 0.512 (0.539) (0.027) (0.512) (1.068) (1.580) 18.624 1.68%
1991 18.624 0.617 5.142 5.759 (0.617) - (0.617) 23.766 30.83%
1992 23.766 0.663 (0.336) 0.327 (0.663) (0.503) (1.166) 22.927 1.24%
1993 22.927 0.610 2.285 2.895 (0.610) (0.519) (1.129) 24.693 13.31%
1994 24.693 0.668 (0.428) 0.240 (0.668) (0.968) (1.636) 23.297 0.65%
1995 23.297 0.701 7.680 8.380 (0.701) (1.221) (1.921) 29.756 39.06%
1996+ 29.756 0.324 2.476 2.800 (0.324) (1.650) (1.974) 30.582 10.75%
Ratio of net
Ratio of investment Net assets
Year expenses income Portfolio at end Average
ended to average to average turnover of period commission
12/31 net assets net assets rate (000's) rate***
- ------------------------------------------------------------------------------------------------------------------------------------
1987 0.52% 2.78% 142.01% $ 177,354 -
1988 0.54% 3.08% 179.88% 209,513 -
1989 0.50% 4.06% 208.98% 295,399 -
1990 0.48% 2.79% 59.47% 356,329 -
1991 0.44% 2.86% 33.59% 581,297 -
1992 0.41% 2.97% 74.50% 765,457 -
1993 0.38% 2.58% 60.76% 1,034,105 -
1994 0.37% 2.85% 76.34% 1,161,324 -
1995 0.35% 2.64% 51.76% 1,833,450 -
1996+ 0.17% 1.08% 27.39% 2,187,856 $0.047
Income from investment operation Less dividends from:
------------------------------------------- -------------------------------------
Net Net Net
asset realized and Total asset
Year value Net unrealized from Net Net realized value
ended beginning investment gain(loss) on investment investment gain on Total end Total
12/31 of period income investment operations income investments dividends of period return**
- ------------------------------------------------------------------------------------------------------------------------------------
SPECIAL OPPORTUNITIES FUND
1987 $16.617 $0.064 $1.316 $1.380 ($0.064) - ($0.064) $17.933 8.77%
1988 17.933 0.060 0.327 0.387 (0.060) (2.659) (2.719) 15.601 3.73%
1989 15.601 0.276 4.904 5.180 (0.276) - (0.276) 20.505 31.92%
1990 20.505 0.236 (1.931) (1.695) (0.236) (1.208) (1.444) 17.366 (7.28%)
1991 17.366 0.323 7.195 7.518 (0.323) - (0.323) 24.561 43.14%
1992 24.651 0.546 1.106 1.652 (0.546) (0.955) (1.501) 24.712 6.24%
1993 24.712 0.530 2.703 3.233 (0.530) (2.937) (3.467) 24.478 18.31%
1994 24.478 0.565 (0.942) (0.377) (0.565) (1.372) (1.937) 22.164 (1.55%)
1995 22.164 0.616 6.131 6.747 (0.616) (0.912) (1.528) 27.383 32.05%
1996+ 27.383 0.271 1.666 1.937 (0.271) (1.882) (2.153) 27.167 8.28%
Ratio of net
Ratio of investment Net assets
Year expenses income Portfolio at end Average
ended to average to average turnover of period commission
12/31 net assets net assets rate (000's) rate***
- ------------------------------------------------------------------------------------------------------------------------------------
1987 0.56% 0.31% 110.80% $ 58,866 -
1988 0.59% 0.39% 73.91% 63,982 -
1989 0.55% 1.50% 92.56% 75,245 -
1990 0.55% 1.33% 37.50% 83,762 -
1991 0.53% 1.49% 111.60% 132,753 -
1992 0.53% 2.35% 128.49% 189,867 -
1993 0.49% 2.29% 74.11% 273,998 -
1994 0.48% 2.49% 74.63% 318,417 -
1995 0.45% 2.39% 90.12% 505,755 -
1996+ 0.21% 1.00% 44.53% 574,463 $0.044
====================================================================================================================================
</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 upon the
change in unit value).
*** The average commission rate is required to be disclosed for fiscal years
beginning on or after September 1, 1995. The rate is the average commission
paid per share for security trades on which a commission is charged. This
amount may vary from period to period and from fund to fund depending on
the mix trades executed in various markets where trading practices and
commission rate structures may differ.
+ Six months ended June 30, 1996. Returns, ratios, and portfolio turnovers
have NOT been calculated on an annualized basis.
<PAGE>
Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, IN 46802
[LOGO OF LINCOLN NATIONAL LIFE INSURANCE CO.]
