-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NYjK7Z7E9FAXIOliqSUsHWMyGd8r8NonT9yFNYbKjyX4V8Y6VAyohM28xYQUNOba 6AEJ3vuH+SRKq1IRhCaifA== 0000059558-98-000043.txt : 19980319 0000059558-98-000043.hdr.sgml : 19980319 ACCESSION NUMBER: 0000059558-98-000043 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN NATIONAL CORP CENTRAL INDEX KEY: 0000059558 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 351140070 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06028 FILM NUMBER: 98568007 BUSINESS ADDRESS: STREET 1: 200 E BERRY ST STREET 2: PO BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46802 BUSINESS PHONE: 2194552000 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File Number 1-6028 LINCOLN NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1140070 State of incorporation) (I.R.S. Employer Identification No.) 200 East Berry Street, Fort Wayne, Indiana 46802-2706 (Address of principal executive offices) Registrant's telephone number (219) 455-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchanges on which registered Common Stock (Without Par Value) New York, Chicago, Pacific and London Common Share Purchase Rights New York, Chicago and Pacific $3.00 Cumulative Convertible Preferred New York and Chicago Stock, Series A (Without Par Value) 8.75% Cumulative Quarterly Income New York Preferred Securities, Series A* 8.35% Trust Originated Preferred New York Securities, Series B* *Issued by Lincoln National Capital I and Lincoln National Capital II, respectively. Payments of distributions and payments on liquidation or redemption are guaranteed by Lincoln National Corporation. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] As of February 27, 1998, 100,316,069 shares of common stock were outstanding. The aggregate market value of such shares (based upon the closing price of these shares on the New York Stock Exchange) held by nonaffiliates was approximately $8,426,500,000. Select materials from the Proxy statement for the Annual meeting of Shareholders, scheduled for May 14, 1998, have been incorporated by reference into Part III of this Form 10-K. The exhibit index to this report is located on page 79. Page 1 of 222 -2- Lincoln National Corporation Table of Contents Item Page PART I 1. Business A. General Description . . . . . . . . . . . . . . . . . . . . . . .3 B. Description of Business Segments: Life Insurance and Annuities . . . . . . . . . . . . . . . . . . .3 Lincoln UK. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Investment Management . . . . . . . . . . . . . . . . . . . . . . 4 C. Other Matters: Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 6 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters .6 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . .7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . .8 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 33 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures . . . . . . . . . . . . . . . . . . . . 66 PART III 10. Directors and Executive Officers of the Registrant . . . . . . . . . 67 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 68 12. Security Ownership of Certain Beneficial Owners and Management. . . . 68 13. Certain Relationships and Related Transactions . . . . . . . . . . . 68 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . 68 Index to Exhibits. . . . . . . . . . . . . . . . .. . . . . . . . . .79 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .80 -3- PART I Item 1. Business Lincoln National Corporation ("LNC") is a holding company. Through subsidiary companies, LNC operates multiple insurance and investment management businesses. During 1998, the collective group of companies will be adopting "Lincoln Financial Group" as its marketing identity. LNC is the 40th largest (based on assets) U.S. corporation (1996 Fortune 500, Largest U.S. Corporations, April 1997). Operations are divided into four business segments, 1) Life Insurance and Annuities, 2) Lincoln UK 3) Reinsurance and 4) Investment Management. Over the past five years, segments have been redefined as noted below. Prior to 1997, LNC had a Property-Casualty segment. This operation was sold in 1997 and the related data has been reclassified to discontinued operations (see note 11 to the consolidated financial statements on page 65). The Lincoln UK segment is new in 1997. Prior to the adoption of Financial Accounting Standard No. 131 (see note 2 to the consolidated financial statements on page 43), this unit was included in the Life Insurance and Annuities segment. The Investment Management segment was added in April of 1995 following the acquisition of Delaware Management Holdings, Inc. (see note 11 to the consolidated financial statements on page 64). Prior to the sale of 71% of its direct writer of employee life-health coverages in the first quarter of 1994, LNC operated in a business segment entitled Employee Life-Health Benefits. After the sale, the earnings from the 29% minority interest retained were included in "Other Operations" as described below. Although one of the subsidiaries held by LNC was formed as early as 1905, LNC itself was formed in 1968. LNC is an Indiana corporation with its principal office at 200 East Berry Street, Fort Wayne, Indiana 46802-2706. As of December 31, 1997, there were 245 persons on the staff of LNC. Total employment of Lincoln National Corporation at December 31, 1997 on a consolidated basis was 8,120. Revenues, pre-tax income, and assets for LNC's major business segments and other operations are shown in this 10-K report as part of the consolidated financial statements (see note 9 to the consolidated financial statements on page 61). The LNC "Other Operations" category includes the financial data for an unconsolidated affiliate (subsequent to the first quarter of 1994 and prior to the sale of this holding in October of 1995) engaged in the employee life-health benefits business, an investment management company that services LNC's business segments, certain other operations that are not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on short-term and long-term borrowings and unallocated corporate overhead expenses). Following is a brief description of the four business segments: 1. Life Insurance and Annuities The primary companies within this business segment are The Lincoln National Life Insurance Company ("Lincoln Life"); First Penn-Pacific Life Insurance Company ("First Penn"); and Lincoln Life & Annuity Company of New York ("LLANY"). Lincoln Life, an Indiana corporation headquartered in Fort Wayne, Indiana, is the 7th largest U.S. stockholder-owned life insurance company, based on revenues, (1996 Fortune Rankings of Largest Life Insurance Companies by Revenues, April 1997) and the 12th largest, based on assets, (Best's Review Life-Health Edition, October 1997). A network of 68 life insurance agencies, independent life insurance brokers, insurance agencies located within financial institutions and specifically trained employees sells fixed annuities, variable annuities, pension products, universal life insurance, variable universal life insurance and other individual insurance coverages in most states of the United States. The distribution network includes approximately 2,200 career agents, 15,600 brokers and access to 51,800 stockbrokers and financial planners. The network of agencies and career agents shown above includes 30 and 600, respectively, that were added January 2, 1998 as the result of the acquisition of a block of individual life insurance and annuity business (see note 11 to the consolidated financial statements on page 64). First Penn is an Indiana Corporation headquartered in Oakbrook Terrace, Illinois. Its universal life, term life and deferred annuity products are distributed through stockbrokers, financial planners, banks and personal producing general agents. It also manufactures universal life, term life and deferred annuity products for Lincoln Life for distribution through its career agents and banks. These products are marketed in most states of the United States. LLANY is a New York company, headquartered in Syracuse, New York. This company was formed and licensed prior to the completion of the purchase of the tax-qualified annuity business from UNUM Corporation's affiliates (see note 11 to the consolidated financial statements on page 64). LLANY also offers other types of annuities, pension and insurance products within the state of New York. -4- A portion of the block of individual life insurance and annuities acquired January 2, 1998 (see Lincoln Life paragraph above) was reinsured into this corporate structure. Other companies within this segment include various general business corporations that support the segment's sales, service and administrative efforts. Approximately 4,575 employees are involved in this business segment. This count includes employees associated with the block of individual life and annuity businesses acquired January 2, 1998 (see note 11 to the consolidated financial statements on page 64). 2. Lincoln UK Business in this segment is conducted through a series of operating companies owned by Lincoln National (UK). Lincoln National (UK) is headquartered in Gloucester, England, and is licensed to do business throughout the United Kingdom. The principal products produced by this operation, unit-linked life and pension products, are similar to U.S. produced variable life and annuity products. The distribution network includes approximately 1,800 sales representatives. Lincoln National (UK) was the 12th largest writer of unit-linked new business premiums in the UK for 1996 (Money Management Magazine-New Business Trends, June 1997). Approximately 1,340 employees are involved in this business segment. 3. Reinsurance The primary companies within this business segment are Lincoln National Reassurance Company ("LNRAC"), Lincoln National Health & Casualty Insurance Company ("LNH&C"), Lincoln Life, Lincoln National Reinsurance Company Ltd (Bermuda), Old Fort Insurance Company Ltd (Bermuda) and Lincoln National Reinsurance Company Ltd (Barbados). LNRAC and Lincoln Life offer reinsurance programs for individual life, group life, group medical, disability income, personal accident and annuity products to U.S. and international clients. LNH&C offers group medical products and services on both a direct and reinsurance basis as well as personal accident reinsurance. The insurance companies in Bermuda and Barbados offer specialized reinsurance programs for life, health and annuity business. They also offer funded cover programs to property-casualty carriers in the U.S. and select international markets. This segment offers a broad range of risk management products and services to insurance companies, HMOs, self-funded employers and other primary market risk accepting organizations throughout the United States and economically attractive international markets. Marketing efforts are conducted primarily through the efforts of a reinsurance sales staff. Some business is presented by reinsurance intermediaries and brokers. The reinsurance organization is one of the leading life-health reinsurers worldwide measured on gross premiums, net of ceded (Standard & Poor's Global Reinsurance Highlights, August 1997). Other companies in this business segment include various general business corporations that support the segment's sales, service and administration efforts. Approximately 775 employees are involved in this business segment. 4. Investment Management The primary companies within this business segment include Lincoln National Investments, Inc. ("LNI"), Lincoln National Investment Companies, Inc. ("LNIC"), Delaware Management Holdings, Inc. ("Delaware"), Lynch & Mayer, Inc. ("L&M") and Vantage Global Advisors, Inc. ("Vantage"). LNI and LNIC are intermediate level holding companies that own the operating companies within this segment. The operating companies provide a variety of asset management services to institutional and retail customers including pension plans, college endowment funds, individuals and trusts. These companies serve as investment advisor to approximately 610 pension funds and other institutional accounts; act as investment manager/national distributor and/or shareholder services agent for 99 open-end funds; and serve as investment manager for 10 closed-end funds. Approximately 920 employees are involved in this business segment. -5- LNC's insurance subsidiaries protect themselves against losses greater than the amount they are willing to retain on any one risk or event by purchasing reinsurance from unaffiliated insurance companies (see note 7 to the consolidated financial statements on page 54). All businesses LNC is involved in are highly competitive due to the market structure and the large number of competitors. At the end of 1996, the latest year for which data is available, there were more than 1,700 life insurance companies in the United States. Lincoln Life is among the 15 largest stock and mutual life insurance companies in the United States based on premiums (Best's Review Life-Health Edition, October 1997). LNC's investment management companies were the 33rd largest U.S. investment management group at the end of 1996 (1996 Institutional Investor 300 Money Managers, July 1997). LNC's Life Insurance & Annuities, Lincoln UK and Reinsurance business segments, in common with those of other insurance companies, are subject to regulation and supervision by the states, territories and countries in which they are licensed to do business. The laws of these jurisdictions generally establish supervisory agencies with broad administrative powers relative to granting and revoking licenses to transact business, regulating trade practices, licensing agents, prescribing and approving policy forms, regulating premium rates for some lines of business, establishing reserve requirements, regulating competitive matters, prescribing the form and content of financial statements and reports, regulating the type and amount of investments permitted and prescribing minimum levels of capital. The ability to continue an insurance business is dependent upon the maintenance of the licenses in the various jurisdictions. LNC's Investment Management segment, in common with other investment management groups, is subject to regulation and supervision by the Securities and Exchange Commission, National Association of Securities Dealers, the Investment Management Regulator Organization ("IMRO"), the Pennsylvania Department of Banking and jurisdictions of the states, territories and foreign countries in which they are licensed to do business. Because of the nature of the insurance and investment management businesses, there is no single customer or group of customers upon whom the business is dependent. Factors such as backlog, raw materials, seasonality, patents (including trademarks, licenses, franchises and any other concessions held) or environmental impact do not have a material effect upon such businesses. However, within LNC's Reinsurance segment, Lincoln National Risk Management, Inc., does hold a patent for "The Method and Apparatus for Evaluating a Potentially Insurable Risk" and markets multiple knowledge-based underwriting products that rely on this product. LNC does not have a separate unit that conducts market research. Research activities related to new products or services, or the improvement of existing products or services, are conducted within the business segments. Expenses related to such activities are not material. Also, sales are not dependent upon select geographic areas. LNC has foreign operations that are significant in relationship to the consolidated group (see note 9 to the consolidated financial statements on page 62). Item 2. Properties LNC and the various Fort Wayne operating businesses own or lease approximately 1.5 million square feet of office space in the Fort Wayne area. The businesses operating in suburban Chicago, Illinois; Philadelphia, Pennsylvania; Hartford, Connecticut and areas near London, England own or lease another 700,000 square feet of office space. An additional 1.0 million square feet of office space is owned or leased in other U.S. cities and foreign countries for branch offices and other smaller operations. As shown in the notes to the consolidated financial statements (see note 7 to the consolidated financial statements on page 54), the rental expense on operating leases for office space and equipment for continuing operations totaled $62.5 million for 1997. Office space rent expense accounts for $47.2 million of this total. This discussion regarding properties does not include information on investment properties. -6- Item 3. Legal Proceedings LNC and its subsidiaries are involved in various pending or threatened legal proceedings arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings ultimately will be resolved without materially affecting the consolidated financial position of LNC. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1997, no matters were submitted to securityholders for a vote. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Stock Market and Dividend Information The dividend on LNC's common stock is approved each quarter by the Corporation's Board of Directors. In determining dividends, the Board takes into consideration items such as LNC's financial condition, including current and expected earnings, projected cash flows and anticipated financing needs. The market prices and cash dividends declared by calendar quarter for the past two years are as follows: Common Stock Data: (per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1997 High. . . . . . . . . . . . . . . $61.625 $68.625 $73.000 $78.125 Low . . . . . . . . . . . . . . . 51.375 49.000 63.813 64.625 Dividend declared . . . . . . . . $.49 $.49 $.49 $.52 1996 High . . . . . . . . . . . . . . $57.000 $52.875 $47.000 $54.625 Low. . . . . . . . . . . . . . . 48.000 45.875 40.750 44.000 Dividend declared . . . . . . . $.46 $.46 $.46 $.49 Notes: (1) At December 31, 1997, the number of shareholders of record of LNC's common stock was 12,575. (2) The payment of dividends to shareholders is subject to the restrictions described in notes 5, Supplemental Financial Data, and 7, Restrictions, Commitments and Contingencies to the consolidated financial statements (see pages 50 and 53, respectively) and is discussed in the Management's Discussion and Analysis of Financial Condition (see page 33). Exchanges: New York, Chicago, Pacific, and London. Stock Exchange Symbol: LNC -7- Item 6. Selected Financial Data
(Millions of dollars, except per share data) Year Ended December 31 1997 1996 1995 1994 1993 Total revenue ............................... 4,898.5 4,733.6 4,586.5 3,932.7 4,937.2 Net income from continuing operations before cumulative effect of accounting change (1) ...................... 22.2 356.4 301.4 165.5 172.8 Net income from discontinued operations ..... 134.9 157.2 180.8 184.4 242.5 Gain on sale of discontinued operations ..... 776.9 -- -- -- -- Cumulative effect of accounting change ...... -- -- -- -- (96.4) Net Income (1) .......................... 934.0 513.6 482.2 349.9 318.9 Per Share Data: (2) Net income from continuing operations before cumulative effect of accounting change .......................... $ .21 $ 3.31 $ 2.81 $ 1.59 $ 1.68 Net income from discontinued operations ..... 1.30 1.49 1.72 1.76 2.35 Gain on sale of discontinued operations ..... 7.47 -- -- -- -- Cumulative effect of accounting change ...... -- -- -- -- (.94) Net Income-Diluted .......................... 8.98 4.87 4.60 3.35 3.09 Net Income-Basic ......................... 9.11 4.95 4.78 3.52 3.24 Common stock dividend ....................... $ 1.99 $ 1.87 $ 1.75 $ 1.66 $ 1.55 December 31 ................................. 1997 1996 1995 1994 1993 Assets ...................................... 77,174.7 71,713.4 63,257.7 48,864.8 47,825.1 Long-term debt .............................. 511.0 626.3 659.3 474.2 417.1 Minority interest-preferred securities of subsidiary companies ....................... 315.0 315.0 -- -- -- Shareholders' equity ........................ 4,982.9 4,470.0 4,378.1 3,042.1 4,072.3 Per Share Data: (2) Shareholders' equity (Securities at market).. $ 49.27 43.00 41.89 29.35 39.39 Shareholders' equity (Securities at cost) ... 44.96 39.03 35.21 32.35 30.54 Market value of common stock ................ 78.13 52.50 53.75 35.00 43.50
(1) Factors affecting the comparability of net income from continuing operations before cumulative effect of accounting change and net income from continuing operations for the 1993-1997 period are shown on page 8 (see "Supplemental Data"). Other factors affecting comparability are shown within the review of operations for each segment (see pages 9-17). (2) Per share amounts were also affected by the issuance of 9,200,000 and 1,398,112 shares of common stock in 1993 and 1997, respectively, and the retirement of 500,000; 694,582 and 4,948,900 shares of common stock in 1994, 1996 and 1997, respectively. The per share amounts for prior years have been restated to conform to the provisions of Financial Accounting Standard No. 128 (see note 2 to the consolidated financial statement on page 43). -8- Supplemental Data The following table presents a reconciliation of "Income (Loss) from Continuing Operations" to "Net Income (Loss) from Continuing Operations" determined in accordance with generally accepted accounting principles. Income (Loss) from Continuing Operations is LNC's alternative measure of operating performance which excludes the after-tax realized gain (loss) on investments and associated items, gain (loss) on sale of subsidiaries, restructuring charges and non-recurring accounting changes. Year Ended December 31 (in millions) 1997 1996 1995 1994 1993 Income (loss) from continuing operations (1) . . . . . . . . . $(50.7) $298.8 $140.9 $218.6 $197.5 Realized gain (loss) on investments, net of associated amortization of deferred policy acquisition costs, investment expenses and income taxes 72.9 57.6 102.2 (101.9) 73.8 Gain (loss) on sale of subsidiary, net of taxes . . . . . . . . . . . -- -- 58.3 48.8 (98.5) Cumulative effect of accounting change (postretirement benefits). . -- -- -- -- (96.4) Net Income (Loss) from Continuing Operations . . . . . . . . . . . . $ 22.2 $356.4 $301.4 $165.5 $ 76.4 (1) Income from continuing operations for 1997, 1995 and 1993 includes the impact of the changes in estimate of the reserve level needed for LNC's disability income business ($130.0 million, $121.6 million and $32.8 million, after-tax, respectively). Also 1997 includes a change in estimate for reserves for 1) Lincoln UK's pension business of $174.9 million after-tax and 2) Reinsurance's personal accident programs of $113.7 million after-tax. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The pages to follow review LNC's results of operations and financial condition. Historical financial information is presented and analyzed. Where appropriate, factors that may affect future financial performance are identified and discussed. Actual results could differ materially from those indicated in forward-looking statements due to, among other specific changes currently not known, subsequent significant changes in: the company (e.g., acquisitions and divestitures), financial markets (e.g., interest rates and securities markets), legislation (e.g., taxes and product taxation), regulations (e.g., insurance and securities regulations), acts of God (e.g., hurricanes, earthquakes and storms), other insurance risks (e.g., policyholder mortality and morbidity) and competition. On pages 9 through 17, the financial results of LNC's four business segments and other operations are presented and discussed. Within these business segment discussions, reference is made to "Income from Operations". This alternative measure of earnings is defined as "Net income less realized gain (loss) on sale of investments, gain (loss) on sale of subsidiaries, restructuring charges and cumulative effect of accounting change, all net of taxes." Page 18 discusses factors affecting LNC's consolidated investment performance. Pages 19 through 33 discuss factors that have affected specific elements of the consolidated financial statements as well as information pertaining to LNC as a whole. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the audited consolidated financial statements and accompanying notes presented on pages 34 through 66. -9-
Review of Operations: Life Insurance and Annuities Year Ended December 31 (in millions) 1997 1996 1995 1994 1993 Financial Results by Source Annuities ........................................... $ 203.0 $ 165.0 $ 149.3 $ 120.0 $ 96.5 Insurance ........................................... 36.1 36.4 31.1 34.2 37.8 Pensions ............................................ 6.3 2.9 22.1 22.4 30.6 Disability Income (1) ............................... -- -- (18.3) (14.9) 3.5 Other ............................................... 10.4 8.2 8.5 (5.5) (17.0) Income from Operations (2) ....................... 255.8 212.5 192.7 156.2 151.4 Realized Gain (Loss) on Investments (3) ............. 47.5 38.5 81.3 (93.4) 53.8 Net Income (2) ................................... $ 303.3 $ 251.0 $ 274.0 $ 62.8 $ 205.2 December 31 ....................... (in billions) 1997 1996 1995 1994 1993 Account Values Annuities ........................................... $ 44.6 $ 38.0 $ 30.3 $ 24.6 $ 20.9 Reinsurance Ceded - Annuities ....................... (1.8) (1.8) (1.7) (1.5) (.7) Universal and Variable Life Insurance ............... 3.0 2.9 2.6 2.4 2.2 401k Retirement Plans ............................... 3.4 2.9 2.4 1.9 1.5 Other Pensions ...................................... 4.5. 4.9. 5.6 5.5 5.5 Total Account Values .............................. $ 53.7 $ 46.9 $ 39.2 $ 32.9 $ 29.4
(1) Lincoln stopped writing disability income coverages on a direct basis at the end of March 1996. The administration of this business was moved to the Reinsurance segment at the end of September 1995. (2) Income from operations and net income of the annuities and pension sub- segments for 1993 include an increase in the estimate of net investment income ($26.0 million after-tax) related to a refinement in the method used to calculate the estimated effective yields on mortgage-backed securities. (3) Realized gain (loss) on investments for 1993 includes an increase in the allowance for losses for mortgage loans ($42.3 million after-tax) related to a change in accounting for the impairment of mortgage loans as prescribed by Financial Accounting Standard No. 114. LNC's Life Insurance and Annuities segment reported record income from operations of $255.8 million in 1997, a 20% increase over the $212.5 million reported in 1996. The continuing double-digit growth in the annuity business was the primary factor in this segment's earnings performance. Profile: The Life Insurance and Annuities segment is composed of Lincoln National Life Insurance Company ("Lincoln Life"), First Penn-Pacific Life Insurance Company ("First Penn") and Lincoln Life & Annuity Company of New York ("LLANY"). As shown above, account values for this segment's annuities, 401(k) retirement plans, life insurance and pensions total $53.7 billion as of December 31, 1997. Life insurance in-force for these companies as of December 31, 1997, totaled $63.5 billion, an increase of 29% in comparison with $49.1 billion as of December 31, 1996. Lincoln Life, which is based in Fort Wayne, Ind., is the 12th largest life insurer in the United States when measured by assets (Best's Review, Life/Health Edition, October 1997). First Penn, which has its headquarters in Oakbrook Terrace, Ill., is recognized for its product innovations. One recent introduction is MoneyGuard, a life insurance policy that incorporates long-term care benefits. LLANY, which is based in Syracuse, N.Y., provides group tax-sheltered annuities and other insurance products in New York State. LNC completed the acquisition of a block of individual life insurance and annuities business on January 2, 1998, from CIGNA Corporation, adding a career agency system of 600 producers; a life brokerage operation; an annuity distribution system; and $41 billion of individual life insurance in-force. Varied Distribution: Products from the companies in this segment are sold through multiple distribution channels, reflecting a marketplace where consumers increasingly want to do business on their own terms. These channels are career agents, independent agencies, insurance brokers, banks, stockbrokers and financial planners. -10- Lincoln Life's and LLANY's wealth accumulation and wealth protection products include: fixed and variable annuities; tax-deferred annuities; term, universal and variable universal life insurance; and 401(k) retirement plans. These products are sold in 50 states through the 68 regional offices of Lincoln Financial Advisors ("LFA"), a broker/dealer that serves approximately 2,200 career agents and 15,600 insurance brokers, as well as through 51,800 stockbrokers and financial planners. The network of agencies and career agents includes 30 and 600, respectively, that were added January 2, 1998 as the result of the acquisition of a block of individual life insurance and annuity business (see note 11 to the consolidated financial statements on page 64). LFA is a new corporation that includes a network of regional financial planning offices that serve as the preferred distributor of Lincoln Life products. LFA offers a full range of financial planning services and investments, and is a securities broker/dealer and registered investment advisor. First Penn offers annuities through banks, universal life insurance through independent marketers and life insurance through brokers and LFA agents. Lincoln Life Technology: Lincoln Life has invested $70 million over the past three years to provide the infrastructure that improves customer service, adds products and lowers expense levels. The objective, realized through voice response technology and other developments, is to serve the customer from a single platform, rather than from multiple product platforms. In addition to better service, a single platform offers greater opportunities to cross-sell products to existing customers. Also during 1997 came the decision to enter into a relationship with IBM for providing information technology services for the Fort Wayne operation. This decision stemmed from the rapid acceleration of the technology industry and the realization that top technology people, whether experienced or recently graduated, are going to work for technology companies. The relationship with IBM will enable Lincoln Life to leverage that technological expertise. A seven-year contract was signed with IBM in February 1998 (see note 7 to the consolidated financial statements on page 54). Annuities: Annuity earnings in this segment increased 23% in 1997, reaching a record $203.0 million. As of December 31, 1997, annuity account values were $44.6 billion, up from $38.0 billion the year before. Variable annuity account values at year-end were $27.3 billion, while fixed annuities represented $17.2 billion. Annuity deposits in 1997 were $4.0 billion. Annuity deposits sold through producers were $2.2 billion, while annuity deposits sold through stockbrokers were $1.7 billion. The latter compares with $2.0 billion in deposits from stockbrokers in 1996. American Funds Distributors ("AFD"), which markets the American Legacy variable annuity product sold through stockbrokers, plans to expand its annuity distribution staff and to be more aggressive in product innovations. Lincoln Life is a leading writer of annuities in the United States (National Underwriter, July 1997). Life Insurance: Operating income from life insurance was $36.1 million, about even with 1996. Combined universal life and variable universal life insurance account values increased 6 percent in 1997 to $3.0 billion. Individual life insurance sales increased 15% for the year to $18.7 billion. Pensions: This segment's pension business is focused on 401(k) retirement plans for businesses with fewer than 100 employees. Account values for these plans were $3.4 billion as of December 31, 1997, a 17% increase over 1996. Deposits totaled $742 million. The remainder of this segment's pension business consists primarily of guaranteed interest contracts ("GICs") and group pension annuities ("GPAs"), both of which Lincoln Life stopped writing in 1995 as it focused its operations on the small business retirement market. Account values in this portion of the pension business declined to $4.4 billion at year-end. Alliances: As Lincoln Life has exited small lines of business that were outside its primary operating focus, it has entered into alliances in order to provide its distribution force with access to products. Among these lines have been long-term care, disability income insurance, pension plan termination annuities and GICs. In 1997, Lincoln Life exited the employer-sponsored life insurance market and entered into an alliance with Colonial Life & Accident for the servicing and re-enrollment of Lincoln Life's block of business. -11- Outlook: The acquisition and integration of the individual life and annuity business from CIGNA Corporation will add breadth to Lincoln Life's distribution structure and product portfolio. The transaction brings approximately 600 financial planners along with products to serve higher net-worth individuals seeking wealth accumulation and protection. It also will add a new, more competitive, multiple manager variable annuity to market through the various distribution channels. In addition, changes in the American Legacy annuity and distribution should improve deposits from this source. In connection with the completion of the acquisition mentioned above, LNC expects to record a charge to its Life Insurance & Annuities segment during the first quarter of 1998 of approximately $20 million, after-tax. This charge will cover certain costs of integrating the existing operations with the new block of business.
Review of Operations: Lincoln UK (1) Year Ended December 31 (in millions) 1997 1996 1995 1994 1993 Financial Results Income (Loss) from Operations (2) ................... $ (108.3) $ 66.1 $ 45.9 $ 17.2 $ 11.9 Realized Gain (Loss) on Investments ................. 1.5 (.1) (.2) 1.3 .7 Net Income (Loss)(2)............................. $ (106.8) $ 66.0 $ 45.7 $ 18.5 $ 12.6 Net Initial Commission Value (3) .................... $ 55.4 $ 47.2 $ 39.4 $ 32.1 $ 26.0 December 31 (in billions) 1997 1996 1995 1994 1993 Unit-Linked Assets .................................. $ 5.643 $ 5.074 $ 4.307 $ 1.320 $ 1.235 Individual Life Insurance In-Force .................. $ 25.026 $23.835 $ 23.509 $ 9.412 $ 8.044 Exchange Rate Ratio - U.S. Dollars to Pounds Sterling Average for the Year ................................ 1.644 1.567 1.582 1.536 1.500 End of Year ......................................... 1.651 1.713 1.553 1.565 1.480
(1) This segment was added in 1997 (with restatement of prior year amounts) as required by the adoption of Financial Accounting Standard No. 131 (see note 2 to the consolidated financial statements on page 43). Lincoln UK was previously reported with the Life Insurance and Annuities segment. (2) Income (loss) from operations and net income (loss) for 1997 include a charge of $174.9 million ($199.4 million pre-tax) for a change in estimate of the cost of settling pension mis-selling liabilities (see note 2 to the consolidated financial statements on page 43). (3) Net Initial Commissions is a measure used by Lincoln UK to measure sales progress and future profitability. LNC's Lincoln UK segment, conducted through Lincoln National (UK) and its operating subsidiaries reported income from operations of $66.6 million in 1997, excluding a charge of $174.9 million, after-tax, to strengthen reserves for future liabilities concerning past sales of pension products to individuals. Including the special charge, Lincoln UK had a loss from operations of $108.3 million. Income from operations in 1996 was $66.1 million. Profile: Lincoln UK offers life, investment and income protection and retirement planning products primarily through 1,800 direct sales representatives and tied agents. Lincoln UK sells predominantly unit-linked products where the investment risk is borne by the policyholder. These products are similar to variable life products sold in the U.S. After rapid growth prompted by the acquisition of three life insurance companies between 1993 and 1995, its home office operations are divided between Uxbridge, Middlesex, and Barnwood, Gloucester, England. -12- Markets: Account values in the unit-linked asset business were $5.6 billion as of December 31, 1997, an increase of 11% over the year before (15% calculated using pounds sterling). Net initial commission values increased $8.2 million or 17% in 1997(12% using pounds sterling). Individual life insurance in-force as of December 31, 1997, was $25.0 billion. Exchange Rates: LNC's subsidiary in the United Kingdom, as with subsidiaries in other foreign countries, has its balance sheet accounts and income statements translated at the current exchange and average exchange rates for the year, respectively. The average exchange rate for 1997 was $1.644 per British pound sterling. This was 5% higher than the 1996 average exchange rate of $1.567 per British pound. Acquisition: In December 1997, City Financial Partners Ltd. ("CFPL"), Lincoln UK's largest tied agent, was acquired and is now a wholly-owned subsidiary. Founded in 1992 as a tied agent of Citibank Life, which was acquired by LNC in 1993, CFPL had a contract with Lincoln UK. It offers the full range of Lincoln UK pensions, life assurance and unit trust products. Pension Product Mis-selling: A charge of $174.9 million after-tax was taken in the fourth quarter of 1997 to increase reserves for liabilities in the so-called "pension mis-selling" situation in the United Kingdom. In December 1993, regulatory agencies raised questions as to whether individuals who bought pensions in the UK and exited employer plans between 1988 and 1993 were given appropriate advice by insurance agents and brokers. The regulatory agencies asked the insurance companies to review their cases and to provide redress to those individuals harmed by the activities of agents or brokers. As a result of what the government viewed as a slow response by the insurance industry, regulators have set targets, publicly named companies that it sees as tardy in their resolution of cases and taken disciplinary actions. A subsidiary of Lincoln UK incurred a small fine in 1997 in one of these actions. Lincoln UK has expressed its commitment to complete its review as quickly as possible so that appropriate action can be taken. The timetable has proved challenging, however, especially since 75% of the priority cases to be reviewed relate to companies Lincoln UK recently acquired. Considerable staff has been added to undertake the review and outside consultants have been retained to expedite the process. Lincoln UK achieved its target of completing 90% of the top-priority cases by December 1997 and is making a strong effort to meet the regulatory target of having all remaining priority cases reviewed by the end of 1998. As of December 31, 1997, and December 31, 1996, liabilities of $291.0 million and $86.7 million had been established for this issue. These liabilities, which are net of expected recoveries, were established for the estimated cost of this issue following regulatory guidance as to activities to be undertaken. These liabilities were booked net of expected recoveries of $113.0 million and $31.4 million, respectively, from previous owners of companies acquired over the last few years as specified in the indemnification clauses of the purchase agreements. Outlook: With resolution to the "pension mis-selling" situation expected in 1998, Lincoln UK expects a stable earnings picture going forward. Lincoln UK anticipates growing faster than the rest of the U.K. life insurance industry through increased distribution, a superior trained sales force, improved products and investment performance and suitable acquisitions. -13-
Review of Operations: Reinsurance Year Ended December 31 (in millions) 1997 1996 1995 1994 1993 Financial Results by Source Individual Markets .................................... $ 71.9 $ 49.9 $ 43.4 $ 41.4 $ 34.6 Group Markets ......................................... 103.3) 19.0 25.2 21.6 19.5 Financial Reinsurance ................................. 14.4 16.4 10.2 15.5 20.5 Other ................................................. (.3) (.2) .7 (1.9) (1.7) Income (Loss) from Operations, excluding Disability Income ...................... (17.3) 85.1 79.5 76.6 72.9 Disability Income (1) ................................. (134.3) (11.1 (132.2) (10.0) (54.0) Income (Loss) from Operations (1) ................. (151.6) 74.0 (52.7) 66.6 18.9 Realized Gain (Loss) on Investments ................... 15.2 11.7 10.7 .5 (1.6) Net Income (Loss) (1) ............................. (136.4) $ 85.7 $ (42.0) $ 67.1 $ 17.3 Individual Life Sales (in billions) ................... $ 39.5 $ 26.6 $ 22.7 $ 19.9 $ 17.3 December 31 (in billions) 1997 1996 1995 1994 1993 Individual and Group Life Insurance In-Force ................................... $ 183.5 $ 160.9 $ 142.8 $ 125.6 $ 118.0
(1) Income (loss) from operations and net income (loss) for 1997, 1995 and 1993 include the impact of a change in estimate of the reserve level needed for LNC's disability income business ($130.0 million, $121.6 million and $32.8 million after-tax, respectively). Also, income (loss) from operations and net income (loss) for 1997 include a charge of $113.7 million after-tax for the impact of a change in estimate of the reserve level needed for personal accident programs. LNC's Reinsurance segment, conducted through the Lincoln National Reinsurance companies ("Lincoln Re"), reported income from operations, excluding special charges, of $92.1 million in 1997. The two charges were $130 million for disability income reserve strengthening and $113.7 million for certain personal accident reinsurance business. As of December 31, 1997, Lincoln Re's individual and group life business in-force was $183.5 billion, an increase of 14% for the year. Profile: One of the leading life-health reinsurers in the world, Lincoln Re reported consolidated, worldwide net premium income of $1.7 billion in 1997. This compares with $2.1 billion net premium income reported in 1996. Lincoln Re opened an office in Buenos Aires in 1997 to better serve clients in Argentina and Chile and has offices in Toronto, Brussels, London, Mexico City, Manila and Singapore. Lincoln Re does business in more than 50 countries. Lincoln Re is also charged with managing LNC's activities in several emerging markets. In 1997, LNC entered into a joint venture through the purchase of 49% of Seguros Serfin Lincoln which sells insurance products through Banca Serfin, Mexico's oldest and third largest bank. This joint venture enables LNC to leverage the insurance expertise of this segment in an under-insured market with long-term potential. In addition, LNC maintains representative offices in China (Beijing, Shanghai, Guangzhou) and is working to gain a license to conduct insurance business in the People's Republic of China. Mass Customization: Lincoln Re's approach is that the traditional risk-transfer commodity business is in decline and that today's reinsurer must provide innovative, tailored programs. As a result, Lincoln Re uses a mass customization approach. This involves packaging and distributing modular pricing, underwriting, systems, alliance resources, marketing consultation, product development and claims management components to meet the needs of client companies. More than 600 such customized transactions were completed by Lincoln Re in 1997. It has a current client base of more than 1,700 U.S. and 350 international companies, and a client retention rate of more than 95%. -14- Knowledge Management: Lincoln Re's intellectual capital is critical to its success. It demonstrated this more than a decade ago by introducing an underwriting manual that quickly became the industry standard for life and health risk selection. The formation of Lincoln National Risk Management ("LNRM") to develop proprietary knowledge-based systems was the next step. Today, its systems are used throughout the insurance industry. Foremost among these systems is LNRM's patented Life Underwriting System, a state-of-the-art risk management technology now licensed to more than 50 insurers. Other proprietary systems assist health insurers, claims processors and agents. Datalliance [registered trademark] is an electronic data interchange that can link agents, insurers, information sources, medical labs and reinsurers. The most recent addition to the Lincoln Re portfolio is the Lincoln Mortality System which aids insurers developing preferred term life insurance products. Alliance Management: Lincoln Re's approach also involves the capabilities of more than 40 alliance partners. These include direct marketers, medical equipment suppliers, electronic information providers, specialized legal firms, accountants, variable life and annuity administrators, all ready to form a "virtual organization" to help a Lincoln Re client do business. Individual Markets: Strong sales in recent years contributed to record income from operations for individual markets in 1997. Income from operations was $71.9 million, a 44% increase over 1996. Very favorable life mortality throughout the year was an integral factor in the strong performance. Sales volume, measured by face amount of new business, was a record $39.5 billion in 1997. Group Markets: Income from operations in 1997 in group markets was $10.4 million, excluding the special charge for personal accident programs. This compares with $19.0 million in 1996. Total annualized premium of $202.2 million represents an increase of 5% over the $193.3 million in 1996. Financial Reinsurance: Income from operations declined slightly in the financial reinsurance area in 1997. Income from operations was $14.4 million, compared with $16.4 million in 1996. Disability Income: The disability income business has proved to be one of the most difficult for the industry in this decade. Lincoln Life, the largest company in LNC's Life Insurance and Annuities segment, withdrew from the disability income market in 1996 and its block of business was transferred to Lincoln Re where it has been managed along with a block of reinsurance disability income business. In the fourth quarter of 1995, LNC took a $121.6 million after-tax charge against earnings to strengthen reserves for the direct and reinsurance disability income business. These reserves were established assuming that the current experience would continue. In the second quarter of 1997, LNC took an additional charge of $130 million against earnings when it obtained new information indicating that experience had deteriorated further. Personal Accident Programs: Certain excess-of-loss personal accident reinsurance programs created in the London market in which Lincoln Re participated from 1993 to 1996 have produced unexpectedly heavy losses. Investigations and audits of ceding companies conducted in late 1997 led LNC to conclude that many more claims will be reported than previously estimated. As a result, LNC took a charge of $113.7 million against earnings. LNC is investigating the manner in which the programs were designed and intends to pursue negotiated settlements or other remedies. Outlook: Lincoln Re continues to enhance its reputation as a leading life-health reinsurer in the world with the development of new knowledge-based tools and marketing methods. It continues to build partnerships inside and outside the traditional insurance marketplace as it seeks to exceed $100 million in annual operating earnings. -15- Review of Operations: Investment Management (1) Year Ended December 31 (in millions) 1997 1996 1995 Financial Results Fees: Investment Advisory Fees . . . . . . . $219.6 $190.4 130.1 Other Revenue and Fees . . . . . . . . 38.1 24.6 18.7 Income: Income from Operations . . . . . . . . . $ 4.5 $ 10.2 $ 13.3 Realized Gain on Investments . . . . . . 3.3 5.2 4.3 Net Income . . . . . . . . . . . . . $ 7.8 $ 15.4 $ 17.6 Income from Operations-Excluding Amortization of Intangibles. . . . . . $ 31.6 $ 34.1 $ 28.1 December 31 (in billions) 1997 1996 1995 Assets Under Management Retail-Fixed . . . . . . . . . . . . . $ 6.9 $ 4.6 $ 4.8 Retail-Equity . . . . . . . . . . . . 15.6 11.5 8.8 Total Retail . . . . . . . . . . . 22.5 16.1 13.6 Institutional-Fixed . . . . . . . . . 5.7 3.6 3.0 Institutional-Equity . . . . . . . . 25.8 3.5 22.1 Total Institutional . . . . . . . . 31.5 27.1 25.1 Total Assets Under Management . . . $ 54.0 $ 43.2 $ 38.7 (1) Data is not shown for this segment for 1993 and 1994 as this segment was added in April 1995 following the acquisition of Delaware Management Holdings, Inc. (see note 11 to the consolidated financial statements on page 64). (2) Certain amounts previously shown in the 1996 and 1995 columns have been reallocated to "Other Operations" in order to conform to the 1997 presentation. LNC's Investment Management segment reported income from operations of $4.5 million in 1997, compared with $10.2 million in 1996. The segment's 1997 operating income, excluding amortization of goodwill and other intangible assets, was $31.6 million. The decrease in income from operations was attributable to increased expenses related to efforts to expand retail operations at Delaware Management Holdings, Inc. ("Delaware"). These efforts included increasing marketing personnel, broadening product offerings and upgrading customer service. Profile: Although investment management has long been an area of expertise within LNC, the addition of Delaware in 1995 signaled LNC's intention to expand its role as a money manager and meet its objective of becoming a top-tier company in the financial services industry. Particular emphasis is being given to accelerating the growth of Delaware's retail mutual funds operation. The operating companies that comprise this segment are: Delaware; Lynch & Mayer, Inc. ("Lynch & Mayer"); and Vantage Global Advisors, Inc ("Vantage"). Delaware has its headquarters in Philadelphia, with offices also in London and Minneapolis. Lynch & Mayer and Vantage each maintain headquarters in New York. Complementary Approaches: Delaware, Lynch & Mayer and Vantage operate autonomously and are encouraged to preserve their distinctive investment styles. Their breadth of complementary styles and strengths is a prudent way to diversify risks, especially in the sometimes uncertain and volatile investment markets. Delaware, founded in 1929 and acquired by LNC in 1995, is best known for a conservative, "value" investment style that focuses on stocks with above average dividend yields. It is also recognized for its small-cap and mid-cap growth investment styles and its expertise in municipal and high-yield bonds. It is active in both retail and institutional business. Its subsidiary Delaware International Advisors, Ltd., was formed in 1990 and provides international investment expertise from its base in London. -16- Lynch & Mayer, founded in 1976 and acquired by LNC in 1985, is primarily an institutional investment firm with an equity growth focus. It manages equities and convertible securities as separate accounts, commingled funds and mutual funds and is now sub-advising a growth equity fund in Delaware's retail mutual fund family. Vantage founded in 1979 and also acquired in 1985, invests in undervalued companies that have strong potential for above-average growth. Employing a disciplined, systematic, risk-controlled investment approach, Vantage primarily manages part of Lincoln Life's variable U.S. life and annuity products. It also sub-advises on two of Delaware's retail mutual funds. Assets Under Management: As shown above, the Investment Management segment has assets of $54.0 billion under management as of December 31, 1997. Domestic institutional assets represent $24.4 billion of the Investment Management's total assets under management. Domestic retail assets represent $21.8 billion of the total. International equity and global bond assets managed by Delaware International Advisors account for $7.8 billion. Distribution: Multiple distribution channels enable the businesses in the Investment Management segment to deliver their broad range of products to an expanding community of retail and institutional investors. Retail mutual funds are marketed through regional and national broker/dealers; financial planners; insurance agents, including those associated with the regional marketing offices of Lincoln Life and banks. Institutional products are marketed primarily by an employed sales force in conjunction with pension consultants. They also are offered to defined benefit and defined contribution plan sponsors, endowments, foundations and insurance companies. Retail Mutual Funds: The Investment Management segment's retail mutual fund and wrap fee assets totaled $22.5 billion at December 31, 1997, which is a 40% increase from the $16.1 billion at December 31, 1996. Delaware, which operates the retail mutual funds, offers 63 open-end retail mutual funds and eight closed-end funds. These funds had assets under management of $12.3 billion. The remaining $10.2 billion was from wrap-fee business and retail mutual funds managed by Lynch & Mayer and Vantage. The retail mutual fund operations experienced both internal and external growth during the year. The external growth occurred with the acquisition and integration of the tax-free bond specialist, Voyageur Fund Managers. This added a family of 32 open end bond funds and six closed end funds and a total of $2.6 billion in assets. On the internal side, the number of wholesalers was increased to 37 as of December 31, 1997 from 31 as of December 31, 1996. Delaware strengthened its service quality foundation in order to consistently achieve exceptional customer service. As a result of enhancing service quality measurement techniques, improving training and automating business processes, Delaware's Dalbar National Rankings improved in substantially all of the Main Office - Operations categories. An impressive climb in the Overall Operations Service category from a ranking of 16th in 1996 to a ranking of 8th in 1997; illustrated Delaware's commitment to exceed customer expectations. The tracking and measuring was done by two independent outside vendors, National Quality Review, and Technical Assistance Research Programs. Delaware undertook several strategic initiatives in its retail operation during the year, increasing the number of wholesalers and products. These efforts, combined with improved performance and service, contributed to Delaware increasing its retail non-money market sales to $2.0 billion in 1997, up 63% in comparison with $1.2 billion for 1996. Institutional Investments: The institutional investment management business had assets under management of $31.5 billion as of December 31, 1997, compared with $27.1 billion at December 31, 1996. The 1995 acquisition of Delaware Management Holdings complemented the position already held by Lynch & Mayer and Vantage in this mature, but still growing, business. Delaware International Advisors, Ltd's institutional investment management business is experiencing exceptional growth as evidenced by assets increasing to $7.1 billion as of December 31, 1997 from $4.4 billion on December 31, 1996. Investment Performance: In terms of performance, the number of Delaware funds ranked as four- and five-star funds by Morningstar, Inc., (a service that assigns rankings to mutual funds according to their investment styles with one star as the lowest to five stars as the highest) was 21 as of December 31, 1997, compared with seven as of December 31, 1996. High ratings are significant: Across the mutual fund industry, nearly 75% of net new fund flows in 1996 were into funds with four- or five-star ratings from Morningstar. The 21 funds represented 69% of the company's mutual fund assets under management. The largest five of these funds were: Decatur Income, Delchester, Decatur Total Return, Tax Free PA and Tax Free USA. -17- The return for the Social Awareness Fund managed by Vantage was 36.1% in 1997, well ahead of the 29.9% return for the top decile variable annuity in the Morningstar Growth Universe. This performance earned an 8th place ranking among 885 variable annuity funds in that Morningstar category. Also, over the long term, the fund was the top ranked fund in Growth Universe for three and five years versus the 637 and 414 of such funds. Among institutional investment managers, Delaware produced strong results in the value equity category, with a return of 32.2% that qualified as a top quintile performance as measured by Callan's Value Universe. In the international equity category, Delaware's return of 7.9% exceeded the 1.8% return for its comparative Morgan Stanley Capital International Europe, Australia, Far East (EAFE) index. Outlook: The Investment Management segment's objective is to reach $50 billion in retail fund assets and $80 billion in total assets under management by the end of 2000. Steady progress was made toward this objective in 1997 and further progress is expected through internal growth and niche acquisitions. Review of Other Operations:
Year Ended December 31 (in millions) 1997 1996 1995 1994 1993 Financial Results by Source Lincoln Investment Management (1) ............. $ 1.4 $ 1.5 $ 1.7 $ 7.1 $ 6.1 LNC Financing .................................. (31.9) (49.7) (52.7) (31.7) (26.7) LNC Operations ................................. (18.4) (14.8) (19.5) (21.8) (22.3) Other Corporate ................................ (2.2) (.9) (1.5) (3.9) 4.0 Earnings from Unconsolidated Affiliate ......... -- -- 13.7 14.8 -- Income (Loss) from Operations .............. (51.1) (63.9) (58.3) (35.5) (38.9) Realized Gain (Loss) on Investments ............ 5.4 2.2 6.1 (10.6) 19.8 Gain (Loss) on Sale of Subsidiaries ............ -- -- 58.3 48.8 (98.5) Cumulative Effect of Accounting Change (Postretirement Benefits) .............. -- -- -- -- (96.4) Net Income (Loss) .......................... $ (45.7) $ (61.7) $ 6.1 $ 2.7 $ (214.0)
(1) The data shown in the 1996 and 1995 columns includes amounts previously shown within the Investment Management segment. These reallocations were initiated in order to conform to the 1997 presentation. The income (loss) from operations shown above includes the earnings from Lincoln Investment Management, certain other operations that are not directly related to the business segments and unallocated corporate revenues and expenses, such as corporate investment income, interest expense on short-term and long-term borrowings, and corporate overhead expenses. Other operations also included LNC's investment in an unconsolidated affiliate engaged in the employee life- health benefits business prior to the sale of this holding in October 1995. Lincoln Investment Management provides investment advisory services and asset management services for LNC's Corporate portfolios and entities not owned by LNC. Corporate interest expense included within the LNC financing line above was greater for 1995 - 1996 than years prior to 1995 as the result of additions to long-term debt and minority interest-preferred securities of subsidiary companies. The 1997 amount was less than the 1995 - 1996 due to reduced interest expense and investment earnings in the fourth quarter of 1997 that resulted from the use of proceeds from the sale of discontinued operations (see liquidity and cash flow discussion on page 31). This benefit will not continue into 1998 as most of these funds were used to purchase a block of individual life and annuity business on January 2, 1998 (see note 12 to the consolidated financial statements on page 65). Net income (loss) shown above for "Other Operations" includes the items described above under loss from operations plus the realized gain (loss) on sale of certain investments, the gain (loss) on sale of subsidiaries (see note 11 to the consolidated financial statements on page 64) and the cumulative effect of the 1993 accounting change for the consolidated group of companies related to postretirement benefits. -18- Discussion and Analysis of Consolidated Investments
December 31 (in billions) 1997 1996 1995 1994 1993 Assets Managed (by advisor) Investment Management Segment (1) .. $ 54.0 $ 43.2 $ 38.7 $ -- $ -- Lincoln Investment Management: Regular Fees ....................... 2.9 8.2 4.2 11.8 8.3 At Cost For Business Units ......... 33.9 30.6 33.3 36.3 37.7 Lincoln UK ......................... 6.8 6.1 5.3 1.0 .9 Within Business Units (Policy Loans) .8 .8 .6 .6 .6 Non-LNC Affiliates ................. 20.7 16.2 12.7 9.4 9.9 Total Assets Managed ........... $119.1 $105.1 $ 94.8 $ 59.1 $ 57.4
(1) See Investment Management segment data on page 15 for additional detail. The following discussion covers select general investment matters. The review of consolidated operations, which begins on page 19, includes the fact that LNC's net investment income for the year ended December 31, 1997 was $2.3 billion, an increase of 8% over 1996. Also, this discussion indicates that during 1997 net gains on investments totaling $122.6 million were realized. The review of consolidation financial condition begins on page 22 and discusses the composition and quality of the LNC portfolio. Total Return Strategy: LNC follows a total return strategy that focuses on the economic value of its assets in addition to current income. This approach permits LNC to be more effective in its asset-liability management efforts, since decisions can be made based upon the true economic value of assets and true economic value of liabilities. The total return approach requires the evaluation of risk and expected return of each asset class utilized. Asset Diversification: Fundamental to LNC's investment policy is diversification across asset classes. LNC's investment portfolio, excluding cash and invested cash, is composed of fixed maturity securities; equities; mortgage loans on real estate; real estate either wholly owned or in joint ventures and other long-term investments. LNC purchases investments that have yield, duration and other characteristics which take into account the liabilities of the products being supported. The dominant investment held is fixed maturity securities, which represent 81% of the investment portfolio. Fixed Maturity Performance: In 1997, the LNC fixed maturity portfolio produced a return of 10.56%, compared to the Lehman Brothers Government/Corporate index which produced 9.76%. Use Of Derivatives: The primary use of derivatives at LNC is to hedge interest rate risk that is embedded in either life and annuity product liabilities or investment portfolios. To a lesser extent, derivatives are also used to hedge exposures to foreign currency and equity market risks. -19-
REVIEW OF CONSOLIDATED OPERATIONS AND FINANCIAL CONDITION Summary Information Increase (Decrease) Year Ended December 31 (in millions) 1997 1996 1995 1997 1996 Continuing Operations: Life insurance and annuity premiums .......... $ 756.2 $ 728.7 $ 707.0 4% 3% Health premiums .............................. 572.5 790.5 807.0 (28%) (2%) Insurance fees ............................... 832.2 713.5 600.3 17% 19% Investment advisory fees ..................... 204.9 180.8 125.6 13% Net investment income ........................ 2,250.8 2,087.9 1,979.7 8% 5% Equity in earnings of unconsolidated affiliates ................... -- 1.4 13.9 Realized gain (loss) on investments .......... 122.6 92.5 157.6 Gain (loss) on sale of subsidiaries ......... -- -- 82.5 Other revenue and fees ....................... 159.3 138.3 112.9 16% 22% Life insurance and annuity benefits .......... 2,358.7 2,036.3 2,031.2 16% Health benefits .............................. 833.1 673.6 820.1 24% (18%) Underwriting, acquisition, insurance and other expenses .......................... 1 ,579.3 1,434.9 1,248.3 10% 15% Interest and debt expenses ................... 92.5 84.7 72.5 9% 17% Federal income taxes ......................... 12.7 147.7 113.0 31% Net Income from Continuing Operations ... 22.2 356.4 301.4 18% Discontinued Operations: Income prior to disposal ..................... 134.9 157.2 180.8 Gain on disposal ............................. 776.9 -- -- Net Income .............................. $ 934.0 $ 513.6 $ 482.2 7%
REVIEW OF CONSOLIDATED OPERATIONS As the result of the purchase of a block of individual life insurance and annuity business in January of 1998, select income statement accounts listed above are expected to increase in future periods (see note 12 to the consolidated financial statements on page 65). Life Insurance and Annuity Premiums Life insurance and annuity premiums increased $27.5 million or 4% in 1997 and $21.7 million or 3% in 1996 as the result of increases in volumes of business in the Lincoln UK and Reinsurance segments being partially offset by decreases in premium in the Life Insurance and Annuities segment. Barring the passage of unfavorable tax legislation that would eliminate the tax-advantages for some of LNC's life and annuity products, LNC expects growth in life insurance and annuity premium in 1998. Health Premiums Health premiums decreased $218.0 million or 28% in 1997 as a result of decreased volume in the Reinsurance segment. Health premiums decreased $16.5 million or 2% in 1996 as a result of increased volumes of business in the Reinsurance segment being more than offset by decreases in the Life Insurance and Annuities segment due to the withdrawal from the disability income business. Insurance Fees Insurance fees from universal life, other interest-sensitive life insurance contracts and variable life insurance contracts increased $118.7 million or 17% in 1997 and $113.2 million or 19% in 1996. These increases are the result of an increase in the volume of transactions and a market-driven increase in the value of existing customer accounts upon which some of the fees are based in the Life Insurance & Annuities and Lincoln UK segments. The growth in fees from this business is expected to continue in 1998. -20- Investment Advisory Fees This line was added to the consolidated statements of income in the second quarter of 1995 following LNC's purchase of Delaware Management Holdings, Inc. (see note 11 to the consolidated financial statements on page 64). Investment advisory fees increased $24.1 million or 13% in 1997 and on an annualized basis increased 8% in 1996. These increases were the result of increased volumes of business and an increase in the market value of customer accounts. Net Investment Income Net investment income increased $162.9 million or 8% in 1997 as the net result of a 9% increase in mean invested assets, a decrease in the yield on investments from 7.52% to 7.46% and a benefit of a reduction in the recurring adjustments of discount on mortgaged-backed securities. In 1997, this adjustment was a charge of $.4 million versus a charge of $7.6 million in 1996. Net investment income increased $108.2 million or 5% in 1996. The impact of a 7% increase in mean invested assets was partially offset by: 1) a decrease in the yield on investments from 7.67% to 7.52% (all calculations on a cost basis) and; 2) a charge of $7.6 million in 1996 versus a benefit of $27.5 million in 1995 from the recurring adjustment of discount on mortgage-backed securities. The increase in mean invested assets for both years was the result of increased volumes of business in the Life Insurance and Annuities segment. Equity in Earnings of Unconsolidated Affiliates This line was added to the consolidated statements of income in 1994 to report the earnings from the remaining 29% ownership following LNC's sale of 71% of the ownership of its primary direct writer of employee life-health benefit coverages. LNC sold its 29% interest in this company in October 1995. This accounts for the minimal amounts since that date. In 1998, equity in earnings of unconsolidated affiliates is expected to increase due to the investment in a 49% joint venture in Mexico in December 1997, known as Seguros Serfin Lincoln. Realized Gain on Investments The pre-tax realized gain on investments, net of related amortization and expenses was $122.6 million, $92.5 million and $157.6 million in 1997, 1996 and 1995, respectively. The after-tax gain in 1997, 1996 and 1995 was $72.9 million, $57.6 million and $102.2 million, respectively. These gains were primarily the result of the sale of investments. Some modest write-downs and provisions for losses offset a portion of the realized gains. During 1996, LNC completed a bulk sale of performing and non-performing mortgage loans and real estate holdings through a sealed bid process. The selling price for these holdings was $6.1 million in excess of the carrying value, resulting in a gain on sale. Securities available-for-sale, mortgage loans on real estate and real estate that were deemed to have declines in fair value that were other than temporary were written down. The fixed maturity securities to which these write-downs apply were generally of investment grade quality at the time of purchase but were classified as "below-investment-grade" at the time of the write-downs. Also, write-downs and allowances for losses on select mortgage loans on real estate, real estate and other investments were established when the underlying value of the property was deemed to be less than the carrying value. These write-downs and provisions for losses are disclosed within the notes to the accompanying financial state ments (see note 3 to the consolidated financial statements on page 44). Gain on Sale of Subsidiaries In 1995, LNC recorded the gain on sale of the remaining 29% of the employee life-health benefits company. Other Revenue and Fees Other revenue and fees increased $21.0 million or 16% in 1997 and $25.4 million or 22% in 1996 as the result of increases in the volume of transactions in the Reinsurance and Investment Management segments. Life Insurance and Annuity Benefits Life insurance and annuity benefits in 1997 increased $322.4 million or 16% as compared to 1996. This increase was the result of increases of $89.4 million or 6% from the Life Insurance and Annuities segment, $25.6 million or 7% from the Reinsurance segment and $207.1 million from the Lincoln UK segment. The Lincoln UK increase includes a change in estimate for its pension mis-selling liability (see note 2 to the consolidated financial statements on page 43). Life insurance and annuity benefits increased $5.1 million in 1996 as compared to 1995. This increase was the result of decreased volumes of business and improved mortality in the Life Insurance and Annuities segment being essentially offset by -21- increased volumes of business in the Reinsurance and Lincoln UK segments. In 1998, the increase in life insurance and annuity benefits are expected to parallel the growth in life insurance and annuity premiums. Health Benefits Health benefits increased $159.5 million in 1997 as the net result of decreased volumes of business being more than offset by additions to the reserves for disability income business and personal accident programs within the Reinsurance segment. Health benefits increased $40.5 million or 6% in 1996 compared to 1995 health benefits after excluding the special addition to the disability income reserve in 1995. See note 2 to the consolidated financial statements on page 43. Underwriting, Acquisition, Insurance and Other Expenses These expenses increased $144.4 million or 10% in 1997. The primary drivers behind this increase beyond the general inflation rate was increased business volumes in the various segments due to general growth and the acquisition of blocks of business/subsidiary companies (see note 11 to the consolidated financial statements on page 64) and the write-off of deferred acquisition costs associated with the disability income business (see note 2 to the consolidated financial statements on page 43). These expenses increased $186.7 million or 15% in 1996 as the result of increased business volumes in all business segments and the addition of the operating costs of companies acquired in 1995 and 1996. In 1998, all business segments will continue to adjust staff levels as appropriate to match business volumes. Interest and Debt Expense Interest and debt expense increased $7.8 million or 9% in 1997 and $12.2 million or 17% in 1996. These increases were the result of increases in the average debt outstanding and the impact of changes in the composition of debt outstanding (see page 31). During 1997, Standard and Poor's, Moody's, and Duff & Phelps re-affirmed LNC's debt ratings as A ("Excellent"), A2 ("Very Good, Strong or High") and AA- ("Excellent"), respectively. Federal Income Taxes Federal income taxes decreased from $147.7 million in 1996 to $12.7 million in 1997 as the result of a decrease in pre-tax earnings. Federal income taxes increased $34.7 million or 31% in 1996 as the result of an increase in the pre-tax earnings. Discontinued Operations In 1997, lines were added to the income statement to accommodate the operating activity and gain on sale associated with LNC's decision to sell its 83.3% ownership in American States Financial Corporation (see note 11 to the consolidated financial statements on page 64). Summary Net income for 1997 was $934.0 million compared with $513.6 million in 1996. Excluding realized gain (loss) on investments, gain (loss) on sale of subsidiaries, discontinued operations and the special 1997 additions to the disability income, personal accident programs and UK pension product reserves, all net of taxes, LNC earned $368.0 million for 1997 compared to $298.8 million in 1996. This increase is the result of increased earnings in the Life Insurance & Annuities, Lincoln UK and Reinsurance segments. In the fourth quarter of 1997 the Corporate and Other unit benefited from earnings on proceeds from discontinued operations. This benefit will not continue into 1998 as most of these funds were used to purchase a block of individual life and annuity business on January 2, 1998 (see note 12 to the consolidated financial statements on page 65). Net income for 1996 was $513.6 million compared with $482.2 million in 1995. Excluding realized gain (loss) on investments, gain on sale of subsidiaries, discontinued operations and the special 1995 addition to the disability income reserve, LNC earned $298.8 million for 1996 compared to $262.2 million in 1995. This increase is the result of increased earnings in the Life Insurance & Annuities, Lincoln UK and Reinsurance segments. Century Compliance The year 2000 issue is pervasive and complex and affects virtually every aspect of LNC's businesses. LNC's computer systems and interfaces with the computer systems of vendors, suppliers, customers and business partners are particularly vulnerable. The inability to properly recognize date sensitive electronic information and transfer data between systems could cause errors or even a complete systems failure which would result in a temporary inability to process transactions correctly and engage in normal business activities for one or more of LNC's businesses. LNC is redirecting a large portion of its internal information technology efforts and contracting with outside consultants to update its systems to accommodate the year 2000. Also, LNC has initiated formal -22- communications with critical parties that interface with LNC's systems to gain an understanding of their progress in addressing year 2000 issues. While LNC is making every effort to address its own systems and the systems with which it interfaces, it is not possible to provide assurance that operational problems will not occur. LNC presently believes that, with the modification of existing computer systems, updates by vendors and conversion to new software and hardware, the year 2000 issue will not pose significant operational problems for its computer systems. In addition, LNC is developing contingency plans in the event that, despite its best efforts, there are unresolved year 2000 problems. If the remediation efforts noted above are not completed timely or properly, the year 2000 issue could have a material adverse impact on the operation of LNC's businesses. During 1996 and 1997, LNC identified expenditures of approximately $11 million ($7 million after-tax) that it had spent to address this issue. LNC's financial plans for 1998-2000 include expected expenditures of an additional $39 million ($25 million after-tax) on this issue. The cost of addressing year 2000 issues and the timeliness of completion will be closely monitored by management and are based on management's current best estimates which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. Nevertheless, there can be no guarantee that these estimated costs will be achieved and actual results could differ significantly from those anticipated. Specific factors that might cause such differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer problems, and other uncertainties. REVIEW OF CONSOLIDATED FINANCIAL CONDITION As a result of the purchase of a block of individual life insurance and annuity business in January of 1998, select balance sheet accounts described below will increase (see note 12 to the consolidated financial statements on page 65). Investments The investment portfolio, excluding cash and invested cash, is comprised of fixed maturity securities; equities; mortgage loans on real estate; real estate, either wholly owned or joint ventures; and other long-term investments. LNC purchases investments for its segmented portfolios with yield, duration and other characteristics that take into account the liabilities of the products being supported. The total investment portfolio increased $88.9 million in 1997. This minimal increase was the net result of increases from 1) the fair value of securities available-for-sale and 2) the new purchases of investments from cash flow generated by the business units being mostly offset by 1) the sale of select investments to raise cash for the January 2, 1998 purchase of a block of individual life insurance and annuity business and 2) the continuation of fixed annuity contractholders opting to transfer funds to variable annuity contracts. LNC maintains a high-quality fixed maturity securities portfolio. As of December 31, 1997, $8.4 billion or 35.1% of its fixed maturity securities portfolio had ratings of AA or better. Fixed maturity securities with below-investment-grade ratings (BB or less) were $1.7 billion or 7.3% of the total fixed maturity securities portfolio (see note 3 to the consolidated financial statements on page 46). The below-investment-grade fixed maturity securities represent 5.9% of LNC's total investment portfolio. The interest rates available on these below-investment-grade securities are significantly higher than are available on other corporate debt securities. Also, the risk of loss due to default by the borrower is significantly greater with respect to such below investment grade securities because these securities are generally unsecured, often subordinated to other creditors of the issuer and issued by companies that usually have high levels of indebtedness. LNC attempts to minimize the risks associated with these below investment grade securities by limiting the exposure to any one issuer and by closely monitoring the credit worthiness of such issuers. For the year ended December 31, 1997, the aggregate cost of below investment grade securities purchased was $1.8 billion. Aggregate proceeds from such investments sold were $1.6 billion, resulting in a realized pre-tax gain at the time of sale of $81.9 million. LNC's entire fixed maturity and equity securities portfolio is classified as "available-for-sale" and is carried at fair value. Changes in fair values, net of related deferred acquisition costs, amounts required to satisfy policyholder commitments and taxes are charged or credited directly to shareholders' equity. Note 3 to the consolidated financial statements on page 45 shows the gross unrealized gains and losses as of December 31, 1997. -23- LNC's fixed maturity securities available-for-sale include mortgage-backed securities. The mortgage-backed securities included in LNC's investment portfolio are subject to risks associated with variable prepayments or delayed repayments. This may result in these securities having a different actual cash flow and maturity than planned at the time of purchase. Securities that have an amortized cost greater than par and backed by mortgages that prepay faster than expected will incur a reduction in yield or a loss. Those securities with an amortized cost lower than par that prepay faster than expected will generate an increase in yield or a gain. Repayments occurring slower than expected have the opposite impact. The degree to which a security is susceptible to either gains or losses is influenced by the difference between its amortized cost and par, the relative sensitivity of the underlying mortgages backing the assets to prepayment or delayed repayments in a changing interest rate environment and the repayment priority of the securities in the overall securitization structure. LNC limits the extent of its risk on mortgage-backed securities by generally avoiding the purchase of securities with a cost that significantly exceeds par, by purchasing securities backed by stable collateral, and by concentrating on securities with enhanced priority in their trust structure. Such securities with reduced risk typically have a lower yield (but higher liquidity) than higher- risk mortgage-backed securities. At selected times, higher-risk securities may be purchased if they do not compromise the safety of the general portfolio. At December 31, 1997, LNC did not have a significant amount of higher-risk mortgage-backed securities. There are negligible default risks in the mortgage- backed securities portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government-sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status. Note 3 to the consolidated financial statements on page 45 shows additional detail about the underlying collateral. As of December 31, 1997, mortgage loans on real estate and investments in real estate represented 11% and 1.9% of the total investment portfolio. As of December 31, 1997, the underlying properties supporting the mortgage loans on real estate consisted of 20.7% in commercial office buildings, 30.4% in retail stores, 21.5% in apartments, 14.6% in industrial buildings, 4.2% in hotels/motels and 8.6% in other. In addition to the dispersion by type of property, the mortgage loan portfolio is geographically diversified throughout the United States. Cash and Invested Cash Cash and invested cash increased by $2.6 billion in 1997. This increase is the result of accumulating funds at the end of 1997 in anticipation of the purchase of a block of individual life and annuity business on January 2, 1998 (see note 12 to the consolidated financial statements on page 65). Deferred Acquisition Costs Deferred acquisition costs decreased $65.9 million in 1997. This decrease was the net result of an increase related to the growth in business being more than offset by decreases related to the write-off of such costs in conjunction with the strengthening of disability income reserves (see note 2 to the consolidated financial statements on page 43) and reductions related to the increase in unrealized gain on securities available-for-sale. Premiums and Fees Receivable Premiums and fees receivable decreased $39.8 million in 1997 as the result of decreased volumes of business in the Reinsurance segment more than offsetting the increase in volumes of business in the Investment Management segment. Assets Held in Separate Accounts This asset account, as well as the corresponding liability account, increased by $8.3 billion in 1997 as a result of increases in annuity and pension funds under management. This increase resulted from new deposits, market appreciation and the continuation of fixed annuity contractholders opting to transfer funds to variable annuity contracts. Amounts Recoverable from Reinsurers The increase of $22.3 million in amounts recoverable from reinsurers was the result of an increased volume of business ceded in the Life Insurance and Annuities segment. Goodwill The increase of $106.0 million is the net result of additions related to business acquired (see note 11 to the consolidated financial statements on page 64) being more than the on-going amortization. -24- Other Intangible Assets The decrease of $94.5 million is the net result of additions related to the purchase of subsidiary (see note 11 to the consolidated financial statements on page 64) being more than offset by the on-going amortization and an adjustment to the Lincoln UK amount to more closely conform this segments classifications to LNC's U.S. operations. Other Assets The decrease in other assets of $51.6 million is the result of having a lower receivable related to investment securities sold in the last few days of 1997 versus the end of 1996. Total Liabilities Total liabilities from continuing operations increased by $9.1 billion in 1997. The primary item underlying this increase is the increase of $8.3 billion related to separate accounts (see explanation under "Assets Held in Separate Accounts" above). The increase of $808.4 million in insurance policy and claim reserves is the result of increased volumes of business and reserve strengthening as described in note 2 to the consolidated financial statements on page 43. The reduction in contractholder funds is the net result of new deposits being more than offset by the withdrawal of guaranteed interest contract funds because of the decision to exit this business. The increases in the other liability categories essentially offset the reduction in contractholder funds. The increase in other liabilities relates to an increase in the expected payouts for securities purchased in the last few days of 1996 versus a lower volume of such transactions late in 1995. While it is management's judgement that, based on available information, the appropriate level of liabilities have been recorded, LNC has areas where changes in estimates of related liabilities required could occur in the near term. These areas include claims for disability income coverages, liabilities and recoveries related to inappropriate selling of pension products in the United Kingdom, liabilities for marketing and compliance issues, the reserve for the run-off of group pension annuities and liabilities for personal accident programs (see note 7 to the consolidated financial statements on page 53). Shareholders' Equity Total shareholders' equity increased $513.0 million during the year ended December 31, 1997. Excluding the increase of $20.4 million related to an increase in the unrealized gain (loss) on securities available-for-sale, shareholders' equity increased $492.6 million. This increase in shareholders' equity was the net result of increases due to $934.0 million of net income, $74.3 million from the issuance of stock related to the purchase of subsidiary companies and $33.2 million from the issuance of common stock related to benefit plans and decreases of $203.3 million related to the declaration of dividends to shareholders, $20.3 million related to a decrease in the accumulated foreign exchange gain and $325.3 million for the retirement of common stock. Capital adequacy is a primary measure used by insurance regulators to determine the financial stability of an insurance company. In the U.S., risk-based capital guidelines are used by the National Association of Insurance Commissioners to determine the amount of capital that represents minimum acceptable operating amounts related to insurance and investment risks. Regulatory action is triggered when an insurer's statutory-basis capital falls below the formula-produced capital level. At December 31, 1997, statutory-basis capital for each of LNC's U.S. insurance subsidiaries was substantially in excess of regulatory action levels of risk-based capital required by the jurisdiction of domicile. As noted above, shareholders' equity includes net unrealized gain (loss) on securities available-for-sale. At December 31, 1997, the book value of $49.27 per share included $4.31 of unrealized gains on securities and at December 31, 1996, the book value of $43.00 per share included $3.97 of unrealized gains on securities. A significant portion of both realized and unrealized gains or losses on investments that support long-term life insurance, pension and annuity contracts are expected to be applied to contract benefits. These realized and unrealized gains or losses are included in net income and shareholders' equity, respectively. Current accounting standards do not require or permit adjustment of policyholder reserves to recognize the full effect of these realized and unrealized gains or losses on future benefit payments in the absence of a contractual obligation requiring their attribution to policyholders. -25- Market Risk Exposures of Financial Instruments LNC analyzes and manages the risks arising from market exposures of financial instruments, as well as other risks, in an integrated asset-liability management process that takes diversification into account. By aggregating the potential effect of market and other risks of the entire enterprise, LNC estimates, reviews and in some cases manages the risk to its earnings and shareholder value. LNC has material exposures to several market risks including interest rate, default risk, foreign currency exchange and equity price risks. The exposures of financial instruments to market risks, and the related risk management processes, are most important in the Life Insurance and Annuities segment. This segment is where most of the invested assets support accumulation and investment oriented insurance products. As an important element of its integrated asset-liability management process, LNC uses derivatives to minimize the effects of changes in interest rate levels and the shape of the yield curve. In this context, derivatives are designated as a hedge and serve to reduce interest rate risk by mitigating the effect of large rises in interest rates on LNC's stream of earnings. Additional market exposures exist in LNC's other general account insurance products and in its debt structure and derivatives positions. The primary sources of market risk are: 1) substantial, relatively rapid and sustained increases or decreases in interest rates, 2) fluctuations in currency exchange rates 3) a sharp drop in equity market values. Each of these market risks are discussed in detail in the following pages. 1) Interest Rate Risk Accumulation and Investment Oriented Insurance Products. General account assets supporting accumulation and investment oriented insurance products total $22.4 billion or 75% of total invested assets. Fixed maturity and equity securities are held at fair value on the balance sheet, mortgage loans on real estate are held at amortized cost and real estate is held at cost less depreciation while liabilities are generally held at account values less surrender charges (see note 1 to the consolidated financial statements on page 40). The fair values for mortgage loans on real estate and guaranteed interest rate contracts are calculated on a discounted cash flow basis while fixed annuities and other deposit liabilities are at policy cash surrender value (see note 8 to the consolidated financial statements on page 58). With respect to these products, LNC seeks to earn a stable and profitable spread between investment income and interest credited to account values. If LNC has adverse experience on investments that cannot be passed through to customers, its spreads are reduced. Alternatively, LNC may seek to maintain spreads and this may result in crediting rates that are not competitive in the market place. This strategy could result in adverse surrender experience on policies and could force LNC to liquidate a portion of its portfolio to fund excess cash surrender value benefits. LNC does not view the near term risk to spreads over the next twelve months to be material. The combination of a probable range of interest rate changes over the next twelve months, asset-liability management strategies, flexibility in adjusting crediting rate levels and protection afforded by policy surrender charges and other switching costs all work together to minimize this risk. The interest rate scenarios of concern are those in which there is a substantial, relatively rapid increase or decrease in interest rates that is then sustained over a long period. Fixed Deferred Annuities. Assets of $15.6 billion supports the biggest category of accumulation and investment oriented insurance products, fixed deferred annuities. For these products, LNC may adjust renewal crediting rates monthly or annually, subject to guaranteed minimums ranging from 3.0% to 4.5%. The higher minimums apply to in-force blocks of older products that no longer are sold. Annuity insurance customers have the right to surrender their policies at account value less a surrender charge that grades to zero over periods ranging from 5 to 10 years from policy issue date or, in some cases, the date of each premium received. Due to LNC's ability to change crediting rates to reflect investment experience, the underlying assets are assumed to be a good proxy for the interest rate risk inherent in these liabilities. This assumption is appropriate for probable movements in interest rates over the next 12 months. This assumption may not be appropriate for a substantial, relatively rapid increase or decrease in interest rates that is then sustained over a long period. Universal Life. LNC has $3.4 billion in assets supporting universal life insurance on which it has the right to adjust renewal crediting rates subject to guaranteed minimums ranging from 4% to 5% at December 31, 1997. Similar to annuities, universal life insurance customers have the right to surrender their policies at account value less a surrender charge that grades to zero over periods ranging from 5 to 10 years from policy issue date or, in some cases, the date of each premium received. -26- Guaranteed Interest Contracts and Group Pension Annuities. LNC has assets totaling $3.4 billion that support guaranteed interest contracts, group pension annuities and immediate annuities. Generally, the cash flows expected on these liabilities do not vary with fluctuations in market interest rates and are not adjustable by LNC. Accordingly, if experience on the assets supporting these products is more adverse than the assumptions used in pricing the products, spreads will tend to be below expectations. LNC limits exposure to interest rate risk by managing the duration and maturity structure of each investment portfolio in relation to the liabilities it supports. Other General Account Insurance products. LNC has $7.4 billion of assets supporting general account products, including disability income and term life insurance. For these products, the liability cash flows may have actuarial uncertainty. However, their amounts and timing do not vary significantly with interest rates. LNC limits interest rate risk by analyzing the duration of the projected cash flows and structuring investment portfolios with similar durations. Interest Rate Risk--Falling Rates. After rising in 1994, interest rates fell in 1995, rose again in 1996 and declined in 1997. For example, the five-year Treasury yield rose from 5.2% to 7.8% during 1994 and fell back to 5.4% at the end of 1995, increased to 6.2% by the end of 1996 and decreased to 5.7 % by the end of 1997. Under scenarios in which interest rates fall and remain at levels significantly lower than those prevailing at December 31, 1997, minimum guarantees on annuity and universal life insurance policies (generally 3.0% to 4.5% or an average of approximately 4%) could cause the spread between the yield on the portfolio and the interest rate credited to policyholders to deteriorate. Select contracts that specify these minimum guarantees can be amended periodically to reflect current interest rate conditions. The earned rate on the annuity and universal life insurance portfolios averaged 7.8% and 7.9%, respectively, for the year ended December 31, 1997, providing a cushion for further decline before the earned rates would be insufficient to cover minimum guaranteed rates plus the target spread. The maturity structure and call provisions of the related portfolios are structured to afford protection against erosion of this cushion for a period of time. However, spreads would be at risk if interest rates continued to fall and remained lower for a long period. LNC manages these exposures by maintaining a suitable maturity structure and by limiting its exposure to call risk in each respective investment portfolio. LNC believes that the portfolios supporting its accumulation and investment oriented insurance products have a prudent degree of call protection individually and on a consolidated basis. The mortgage-backed securities ("MBS") and asset- backed securities ("ABS") portion of the portfolio represents a total of $4.5 billion or 20% of the $22.4 billion of general account assets supporting such products. Of this portfolio, 13% of general account assets or $3.0 billion is subject to residential prepayment risk from investments made in Collateralized Mortgage Obligations ("CMOs"), mortgage pass-throughs, manufactured housing and home equity loans. LNC's MBS portfolio has equal to or slightly less prepayment risk than the MBS pass-through market in general primarily due to holding more seasoned securities in the portfolio. Due to the combination of recent lower interest rates and increased efficiency by mortgage-holders in exercising their prepayment options, the riskiness of these securities has increased over the last few years without a compensating adjustment to risk premiums. This trend has also reduced the degree of protection provided by the purchase of protected amortization class CMOs. As a result, LNC has reduced its exposure to the MBS asset class in recent years. Interest Rate Risk--Rising Rates. For both annuities and universal life insurance, a rapid and sustained rise in interest rates poses risks of deteriorating spreads and high surrenders. The portfolios supporting these products have fixed-rate assets laddered over maturities generally ranging from one to ten years or more. Accordingly, the earned rate on each portfolio lags behind changes in market yields. As rates rise, the lag may be increased by slowing MBS prepayments. The greater and faster the rise in interest rates, the more the earned rate will tend to lag behind market rates. If LNC sets renewal crediting rates to earn the desired spread, the gap between its renewal crediting rates and competitors' new money rates may be wide enough to cause increased surrenders. If LNC credits more competitive renewal rates to limit surrenders, its spreads will narrow. LNC devotes extensive effort to evaluating these risks by simulating asset and liability cash flows for a wide range of interest rate scenarios. Such analysis has led to adjustments in the target maturity structure and to hedging the risk of rising rates by buying out-of-the-money interest rate cap agreements and swaptions (see discussion below). With this hedge, the potential adverse impact of a rapid and sustained rise in rates is kept within corporate risk tolerances. LNC believes that the risks of rising interest rates are also mitigated by its emphasis on periodic premium products. -27- Debt. LNC has short-term debt, long-term debt, and minority interest-preferred securities of subsidiary companies totaling $1.1 billion ($835.6 million of this debt is at fixed rates and $287.6 million is at floating rates). LNC manages the timing of maturities and the mixture of fixed-rate and floating-rate debt as part of the process of integrated management of interest rate risk for the entire enterprise. Derivatives. As indicated in note 7 to the consolidated financial statements on page 56, LNC has entered into derivative transactions to reduce its exposure to rapid rises in interest rates. The four programs discussed below are used to help LNC achieve more stable margins while providing competitive crediting rates to policyholders during periods when interest rates are rising. Failure to maintain competitive crediting rates could cause policyholders to withdraw their funds and place them in more competitive products. LNC uses interest rate cap agreements to hedge against the negative impact of a significant and sustained rise in interest rates. Interest rate caps are contracts that require counterparties to pay LNC at specified future dates the amount, if any, by which a specified market interest rate exceeds the cap rate stated in the agreements, applied to a notional amount. As of December 31, 1997, LNC had agreements with notional amounts of $4.9 billion with cap rates ranging from 245 to 504 basis points above prevailing interest rates. The cap rates in some contracts increase over time. These agreements expire in 1998 through 2003. LNC also uses swaptions to hedge against the negative impact of a significant and sustained rise in interest rates. Swaptions are options to enter into a swap at a specified future date. If the option is exercised at expiration, the option is either settled in cash or exercised into a swap agreement. LNC purchases swaptions to be settled in cash. At expiration, the counterparty is required to pay LNC the amount, if any, of the present value of the difference between the fixed rate on a market rate swap and the strike rate stated in the agreement, applied to a notional amount. As of December 31, 1997, LNC had agreements with notional amounts of $1.752 billion with strike rates ranging from 224 to 350 basis points above prevailing interest rates. These agreements expire in 2002 and 2003. For future periods, the fair value of LNC's interest rate caps and swaptions depends on the levels of interest rates on U.S. Treasury securities with maturities of two, five, seven and 10 years and U.S. dollar swap rates with five, seven and 10 year maturities. The table below analyzes fair value levels at December 31, 1997 and for the next five years if the rates were 2%, 4%, 6%, 8%,10% or 12% higher than they were at December 31, 1997. In relation to the level of these rates at December 31, 1997, the cap and swaption rates were from 2.24% to 5.04% out-of-the-money, i.e., higher. The table below shows the fair value levels of interest rate caps and swaptions under these scenarios.
Year Ended December 31 (in millions) 1997 1998 1999 2000 2001 2002 No change................................... $ 7.8 $ 4.0 $ 1.4 $ .0 $ .0 $ .0 Up 2% .................................... 54.6 32.3 14.6 0.1 .0 .0 Up 4% .................................... 188.3 123.0 70.8 27.7 6.0 0.4 Up 6% .................................... 422.2 304.1 198.6 111.9 54.4 23.2 Up 8% .................................... 681.4 522.2 367.3 233.7 136.0 79.5 Up 10% ..................................... 936.3 746.6 550.4 376.2 242.5 158.7 Up 12% ..................................... 1181.0 970.4 741.8 533.4 367.7 259.5
LNC uses exchange-traded financial futures contracts and options on financial futures to hedge against interest rate risks and to manage duration of a portion of its fixed maturity securities. Financial futures contracts obligate LNC to buy or sell a financial instrument at a specified future date for a specified price. They may be settled in cash or through delivery of the financial instrument. Cash settlements on the change in market values of financial futures contracts are made daily. Put options on a financial futures contract give LNC the right, but not the obligation, to assume a long or short position in the underlying futures contract at a specified price during a specified time period. As of December 31, 1997, LNC did not have any open futures or options on futures. LNC uses interest rate swap agreements to hedge its exposure to floating rate bond coupon payments, replicating a fixed rate bond. An interest rate swap is a contractual agreement to exchange payments at one or more times based on the actual or expected price, level, performance or value of one or more underlying interests. LNC is required to pay the counterparty the stream of variable coupon payments generated from the bonds, and in turn, receives a fixed payment from the counterparty, at a predetermined interest rate. As of December 31, 1997, LNC had a swap agreement with a notional amount of $10.0 million that expires in 2000. -28- In addition to continuing existing programs, LNC may use derivative products in other strategies to limit risk and enhance returns, particularly in the management of investment spread businesses. LNC has established policies, guidelines and internal control procedures for the use of derivatives as tools to enhance management of the overall portfolio of risks assumed in LNC's operations. The table below provides a general measure of LNC's significant interest rate risk (principal amounts are shown by year of maturity and include amortization of premiums and discounts) as of December 31, 1997.
There- Fair (in millions of dollars) 1998 1999 2000 2001 2002 after Total Value Rate Sensitive Assets: Fixed maturity securities . . . 665 855 904 1,086 1,197 20,665 25,373 24,066 Average interest rate . . . . 8.01% 7.73% 7.38% 7.67% 7.43% 7.96% 7.88% Mortgage loans . . . . . . . . . 188.3 119.2 266.0 138.0 233.4 2,349.8 3,294.8 3,473.5 Average interest rate . . . . . 9.37% 9.36% 9.13% 8.71% 8.60% 8.54% 8.68% Rate Sensitive Liabilities: Guaranteed interest contracts: Interest paid out annually. . . . 148.4 179.9 106.1 434.4 446.2 Average interest rate . . . . . . 6.55% 7.20% 6.97% 6.92% Interest paid at maturity . . . . 327.9 130.7 159.9 34.9 1.4 49.8 704.6 723.7 Average interest rate . . . . . 6.45% 6.87% 7.16% 8.15% 6.18% 10.70% 7.07% Investment type insurance contracts, excluding guaranteed insurance contracts (1) . . . . . . . . . 583.6 705.3 800.5 952.2 1,154.9 13,436.2 17,632.7 18,329.2 Average interest rate . . . . . 8.12% 7.74% 7.77% 7.80% 7.62% 8.00% 7.99% Debt(2) . . . . . . . . . . . . 297.2 100.1 .1 .5 100.0 628.3 1,126.2 1,161.8 Average interest rate . . . . 5.83% 7.13% 7.63% 8.30% 7.48% Rate Sensitive Derivative Financial Instruments: Interest rate caps and swaptions (3) Outstanding cap notional . . 3,100.0 2,041.0 2,619.0 3.107.0 2,459.0 517.0 7.8 Average strike rate (4) . . 9.6% 9.9% 9.2% 8.9% 8.8% 9.1% Forward CMT curve (5) . . . 5.7% 5.8% 5.8% 5.8% 5.8% 5.9%
(1) The information shown is for the fixed maturity securities and mortgage loans that support these insurance contracts. (2) Includes minority interest-preferred securities of subsidiary companies. (3) Swaptions notional is shown converted to cap equivalent. (4) The indexes are a mixture of five-year and ten-year Constant Maturity Treasury ("CMT") and Constant Maturity Swap ("CMS"). (5) The CMT curve is the five-year constant maturity treasury forward curve. 2) Foreign Currency Risk Foreign Currency Denominated Investments. LNC invests in foreign currency securities for incremental return and risk diversification relative to United States Dollar-Denominated ("USD") securities. The fair value of foreign securities which are denominated in 16 different foreign currencies, as of December 31, 1997 was $519.8 million. LNC periodically uses a combination of foreign exchange forward contracts, foreign currency options, and foreign currency swaps to hedge some of the foreign exchange risk related to its investments in securities denominated in foreign currencies. The currency risk is hedged using foreign currency derivatives of the same currency as the bonds. Unhedged, a 10% adverse move in the currency would create a $52.0 million -29- pre-tax loss. The aggregate USD equivalent of forward currency positions hedging the portfolio was $172.8 million; the unhedged amount of the portfolio was $347.0 million. A 10% adverse currency move has thus been reduced to $34.7 million pre-tax through hedging. This number is approximate because not all foreign currency derivatives are "at- the-money spot." The table below shows LNC's exposure to foreign currency securities. Also included is the relevant information relating the foreign currency derivatives that are hedging the currency risk of these securities. The table below presents the principal (notional) amount in U.S. dollar equivalents by expected maturity for LNC's foreign currency denominated investments.
December 31, 1997 There- Fair (in millions of dollars) 1998 1999 2000 2001 2002 after Total Value Currencies Canadian Dollar. . . . . 2.9 15.4 .6 7.0 3.6 54.0 83.5 91.2 Interest Rate . . . . . . 8.76% 8.78% 5.57% 7.73% 8.16% 6.97% British Pound . . . . . . 78.3 78.3 90.0 Interest Rate . . . . . 7.25% Japanese Yen . . . 28.5 36.6 65.1 73.6 Interest Rate . . . . 1.08% 1.77% German Mark . . . . . 18.0 44.1 62.1 67.3 Interest Rate . . . . . 4.90% 5.34% Italian Lira . . . . . . . 44.9 44.9 54.8 Interest Rate . . . . . 7.16% All Other Currencies . 16.3 2.0 25.2 11.6 7.5 72.3 134.9 142.9 Interest Rate . . . . . 17.44% 13.12% 8.18% 7.90% 6.61% 6.21% Derivatives Forwards . . . . . . . . . 163.1 163.1 5.4 Swaps . . . . . . . . . 15.0 15.0 (2.1)
Foreign Currency Forward Contracts. LNC uses foreign currency forward contracts to actively hedge some of the foreign exchange risk related to its investments in fixed maturity securities denominated in foreign currencies. LNC typically engages in short-term currency forward contracts of less than six months and actively monitors currency markets in determining those currencies to hedge, the duration of the hedge and the nominal amount to hedge. A foreign currency forward contract obligates LNC to deliver a specified amount of currency at a future date at a specified exchange rate. The value of the foreign exchange forward contracts at any given point fluctuates according to the underlying level of exchange rate and interest rate differentials. As of December 31, 1997, LNC had agreements with notional amounts of $163.1 million in foreign exchange forward contracts for an average overall hedge ratio of 38%. These contracts include hedges against British Pounds (60% hedged), Japanese Yen (73% hedged) and Italian Lira (25% hedged) with average forward foreign exchange rates of 1.610, 120.750 and 1826.100, respectively. LNC periodically uses foreign exchange forward contracts to hedge against foreign exchange risk related to LNC's investment in its British subsidiary, Lincoln National (UK). As of December 31, 1997, LNC did not have any open foreign exchange forward contracts related to its investment in Lincoln National (UK). Foreign Currency Options. A foreign currency option gives LNC the right, but not the obligation, to buy or sell a foreign currency at a specific exchange rate during a specified time period. LNC has historically used options that were slightly "out-of-the-money" resulting in a "corridor" of currency risk assumed, but limited the risk above the strike price. At December 31, 1997, LNC did not have any open positions in foreign currency options. Foreign Currency Swaps. A foreign currency swap is a contractual agreement to exchange the currencies of two different countries pursuant to an agreement to re-exchange the two currencies at the same rate of exchange at a specified future date. As of December 31, 1997, LNC had a foreign currency swap with a notional amount of $15.0 million. -30- 3) Equity Market Exposures LNC's revenues, assets, liabilities and derivatives are exposed to equity market risk. Fee Revenues. The fee revenues of LNC's Investment Management segment and fees earned from variable annuities are exposed to the risk of a decline in equity market values. These fees are generally a fixed percentage of the market value of assets under management. In a severe equity market decline, fee income could be reduced by not only reduced market valuations but also by customer withdrawals. Such withdrawals from equity funds and accounts might be partially offset by transfers to LNC's fixed-income accounts and the transfer of funds to LNC by its competitors' customers. Assets. While LNC invests in equity assets with the expectation of achieving higher returns than would be available in its core fixed-income investments, the returns on, and values of, these equity investments are subject to somewhat greater market risk than its fixed income investments. These investments, however, add diversification benefits to LNC's fixed income investments. The table below shows the sensitivity of price changes to LNC's equity assets owned as of December 31, 1997. 10% Fair 10% Fair Carrying Fair Value Value December 31, 1997(in millions) Value Value Increase Decrease U.S. Equities . . . . . . $ 498.1 $ 498.1 $ 547.9 $ 448.3 Foreign Equities . . . . . 157.7 157.7 173.5 141.9 Emerging Market Equities . 4.6 4.6 5.1 4.1 Sub-Total . . . . . . . 660.4 660.4 726.5 594.3 Real Estate . . . . . . . . 576.0 621.3 683.4 559.2 Other Equity Interests . . . 202.1 245.5 270.1 220.9 Total . . . . . . . . $1,438.5 $1,527.2 $1,680.0 $1,374.4 Liabilities. LNC has an exposure to foreign currency equity risk with respect to unit-linked annuity policies issued in the UK. As of December 31, 1997, the aggregate U.S dollar equivalent amount of account value is $59.4 million. LNC also has a small exposure to U.S. equity markets through reinsurance contracts that reinsure equity-indexed annuities. The aggregate amount of account value of these annuities is $6.6 million. These risks are being hedged with equity derivatives as discussed below. Derivatives Hedging Equity Risks. LNC has two programs hedging equity market risk in annuities issued in the U.K. and U.S. that contain equity features. LNC uses Over-the-Counter ("OTC") foreign currency equity call options to hedge against the foreign equity market risk component contained in its U.K. unit-linked annuities which are a function of the Financial Times Stock Exchange ("FTSE") index. These call options require the counterparties to pay LNC at specified future expiration dates the amount, if any, of the percentage increase in the FTSE index over the strike price defined in the contract, applied to a notional amount. As of December 31, 1997, LNC had agreements with notional amounts of $14.1 million. The call options expirations are matched to the liabilities and expire in 1998 through 2001. LNC uses OTC equity call options on the S&P 500 index to hedge against the increase in its liabilities resulting from certain reinsurance agreements which guarantee payment of the appreciation of the S&P 500 index on certain underlying annuity products. These call options require the counterparty to pay LNC at specified future expiration dates the amount, if any, of the percentage increase in the S&P 500 index over the strike price defined in the contract, applied to the notional amount. The reinsurance agreement then requires LNC to pay any appreciation on the S&P 500 index to the reinsurance client. As of December 31, 1997, LNC had agreements with notional amounts of $5.3 million. The call options expirations are matched to the liabilities and expire in 2005. -31- Default Risk. In assessing the risk that the rate of default losses for each category of asset may be higher than the rates assumed in pricing its products, LNC considers the entire $29.8 billion portfolio of invested assets, taking diversification into account. Of this total, $16.6 billion consists of corporate bonds and $3.3 billion consists of commercial mortgages. LNC manages the risk of adverse default experience on these investments by applying disciplined credit evaluation and underwriting standards, prudently limiting allocations to lower-quality, higher-yielding investments, and diversifying exposures by issuer, industry, region and property type. For each counterparty or borrowing entity and its affiliates, LNC's exposures from all transactions are aggregated and managed in relation to formal limits set by rating quality and industry group. LNC remains exposed to occasional adverse cyclical economic downturns during which default rates may be significantly higher than the long-term historical average used in pricing. LNC is depending on the ability of derivative product dealers and their guarantors to honor their obligations to pay the contract amounts under interest rate cap agreements, swaptions, spread-lock agreements, interest rate swaps, call options, foreign currency exchange contracts, foreign currency options and foreign currency swaps. In order to minimize the risk of default losses, LNC diversifies its exposures among several dealers and limits the amount of exposure in accordance with the credit rating of each dealer or its guarantor. LNC generally limits its selection of counterparties that are obligated under these derivative contracts to those with an A credit rating or above. Credit-Related Derivatives. LNC periodically uses spread-lock agreements to hedge a portion of the value of its fixed maturity securities against the risk of widening in the spreads between their yields and the yields of comparable maturity U.S. or other Government obligations. The actual risk being hedged by these agreements is the potential widening of bond spreads that would be caused by widening swap spreads. Under these agreements, LNC assumed the right and the obligation to enter into an interest rate swap at a future date in which LNC would pay a fixed rate equal to a contractually specified spread over the yield of a specified Government security and receive a floating rate. As of December 31, 1997, LNC did not have any open spread-lock agreements. LIQUIDITY AND CASH FLOW Liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations to meet cash requirements with a prudent margin of safety. Because of the interval of time from receipt of a deposit or premium until payment of benefits or claims, LNC and other insurers employ investment portfolios as an integral element of operations. By segmenting its investment portfolios along product lines, LNC enhances the focus and discipline it can apply to managing the liquidity as well as the interest rate and credit risk of each portfolio commensurate with the profile of the liabilities. For example, portfolios backing products with less certain cash flows and/or withdrawal provisions are kept more liquid than portfolios backing products with more predictable cash flows. The consolidated statements of cash flows on page 37 indicate that operating activities provided cash of $1.1 billion, $1.4 billion and $2.2 billion in 1997, 1996 and 1995, respectively. This statement also classifies the other sources and uses of cash by investing activities and financing activities and discloses the amount of cash available at the end of the year to meet LNC's obligations. Although LNC generates adequate cash flow to meet the needs of its normal operations, periodically LNC may issue debt or equity securities to fund internal expansion, acquisitions, investment opportunities and the retirement of LNC's debt and equity. As of December 31, 1997, LNC had a shelf registration with an unused balance of $600 million that would allow LNC to issue debt or equity securities. In 1996, LNC filed another shelf registration for $500 million which included the right to offer various forms of hybrid securities. These securities, which have a combination of both debt and equity characteristics, are offered through a series of three newly formed trusts (Lincoln National Capital I, II and III). All of these trusts' common securities are owned by LNC. As of December 31, 1997, LNC had an unused balance of $185 million related to this hybrid security registration. Cash funds also are available from LNC's revolving credit agreement, which provides for borrowing up to $750 million (see note 5 to the consolidated financial statements on page 50). Recent transactions also include LNC's purchase and retirement of 4,948,900 and 694,582 shares of common stock at a cost of $325.3 million and $35.0 million in 1997 and 1996, respectively. The 4,948,900 shares purchased in 1997 includes 4,370,000 shares at a cost of $294.9 million that have been purchased since the June 1997 board authorization to repurchase up to $500 million of common stock. -32- This leaves a Board authorization to repurchase an additional $205.1 million of LNC's common stock. From January 1, 1998 through February 27, 1998 LNC purchased an additional 623,281 shares at a cost of $46.9 million. Also LNC issued 1,323,144 shares of LNC common stock in 1997 to purchase a subsidiary company (see note 12 to the consolidated financial statements on page 65). Another transaction that occurred in 1997 that had a major impact on LNC's cash flow was the sale of a subsidiary for $2.65 billion (see note 11 to the consolidated financial statements on page 65). LNC used these proceeds to 1) repurchase $294.9 million of its own common stock, 2) retire $86.7 million in long-term debt and 3) $85.0 million to purchase 49% of Sequrous Serfin Lincoln. Also $447.6 million was set aside to pay the taxes related to the gain on sale of discontinued operations and $1.4 billion was set aside for use in purchasing a block of individual life insurance and annuity business in January 1998 (see note 12 to the consolidated financial statements on page 65). The remaining balance was applied to pay off a portion of LNC's short-term debt and invested for general corporate purposes which could include the purchase of additional subsidiary companies or blocks of business. In order to maximize the use of available cash, the holding company (Lincoln National Corporation) maintains a facility where subsidiaries can borrow from the holding company to meet their short-term needs and can invest their short-term funds with the holding company. Depending on the overall cash availability or need, the holding company invests excess cash in short-term investments or borrows funds in the financial markets. In addition to facilitating the management of cash, the holding company receives dividends from its subsidiaries, invests in operating companies, maintains an investment portfolio and pays shareholder dividends and certain corporate expenses.
Holding Company Cash Flow Year Ended December 31 (in millions) 1997 1996 1995 Dividends from subsidiaries: Lincoln Life . . . . . . . . . . . . . . . . . . . $ 150.0 $ 135.0 $ 310.0 American States (subsidiary subsequently transferred to discontinued operations ) . . . . 24.7 74.7 199.0 Other . . . . . . . . . . . . . . . . . . . . . . . 63.2 96.4 29.5 Net investment income . . . . . . . . . . . . . . . . 10.7 4.3 2.9 Operating expenses . . . . . . . . . . . . . . . . . (36.9) (44.6) (41.7) Interest . . . . . . . . . . . . . . . . . . . . . . . (84.1) (67.8) (57.3) Net sales (purchases) of investments . . . . . . . . . 4.2 91.2 16.6 Increase (decrease) in cash collateral on loaned securities . . . . . . . . . . . . . . . . . (21.9) (53.4) (4.5) Decrease (increase) in investment in subsidiaries . . (116.8) 217.8 (697.1) Sale of subsidiary (discontinued operations) . . . . 822.5 -- -- (Investment in) sale of unconsolidated affiliates . . (69.0) (16.0) 194.0 Net increase (decrease) in debt . . . . . . . . . . . (72.7) (178.5) 217.1 Increase in receivables from subsidiaries . . . . . . (23.0) (36.0) (.3) Increase (decrease) in loans from subsidiaries . . . . 454.3 28.2 (42.4) Decrease (increase) in loans to subsidiaries . . . . . 414.7 (303.5) (107.0) Federal income taxes paid . . . . . . . . . . . . . . (158.0) (143.8) (38.3) Net tax receipts from subsidiaries . . . . . . . . . . 206.8 122.3 61.5 Dividends paid to shareholders . . . . . . . . . . (201.9) (191.2) (178.8) Common stock issued for benefit plans . . . . . . . . . 33.2 (0.2) 24.1 Retirement of common stock . . . . . . . . . . . . . (327.6) (32.7) -- Other . . . . . . . . . . . . . . . . . . . . . . . 24.0 (35.2) 56.4 Cash and invested cash - December 31 . . . . . . . . . $1,230.2 $ 133.8 $ 466.8 Other investments - December 31 . . . . . . . . . . . 232.0 227.2 20.3 Debt - December 31 . . . . . . . . . . . . . . . . . . 1,633.5 1,251.9 1,402.1
The table above shows the cash flow activity for the holding company from 1995 through 1997. The line, "net tax receipts from (payments to) subsidiaries", recognizes that the holding company receives tax payments from subsidiaries, pays the consolidated tax liability and reimburses subsidiaries for the tax effect of any taxable operating and capital losses. -33- LNC's insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payments of dividends to the holding company (see note 7 to the consolidated financial statements on page 53). However, these restrictions pose no short-term liquidity concerns for the holding company. The financial strength and stability of the subsidiaries permit ready access to short-term or long-term credit sources for the holding company. Effect of Inflation LNC's insurance affiliates, as well as other companies in the insurance industry, attempt to minimize the effect of inflation on their revenues and expenses by anticipating inflationary trends in the pricing of their products. Inflation, except for changes in interest rates, does not have a significant effect on LNC's balance sheet due to the minimal amount of dollars invested in property, plant and equipment and the absence of inventories. Item 8. Financial Statements and Supplementary Data
(in millions, except per share) Operating Results by Quarter 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1997 Data Premiums and other considerations .......................... $ 626.6 $ 567.8 $ 661.5 $ 669.2 Net investment income ...................................... 559.4 557.8 548.5 585.1 Realized gain on investments ............................... 12.1 2.5 57.0 51.0 Net income (loss) from continuing operations (1) ........... $ 83.0 $ (48.0) $ 124.9 $ (137.7) Discontinued operations (1) ................................ 48.3 40.2 46.4 776.9 Net Income (Loss) ....................................... $ 131.3 $ (7.8) $ 171.3 $ 639.2 Net income (loss) from continuing operations per share (2) .................................. $ .79 $ (.46) $ 1.20 $ (1.34) Discontinued operations per share (2) ...................... .47 .39 .45 7.55 Net Income (Loss) Per Share (2) ......................... $ 1.26 $ (.07) $ 1.65 $ 6.21 1996 Data Premiums and other considerations .......................... $ 584.7 $ 617.1 $ 688.1 $ 663.3 Net investment income ...................................... 491.2 505.8 520.0 570.9 Realized gain (loss) on investments ........................ 50.1 22.2 (.7) 20.9 Net income from continuing operations ...................... $ 93.4 $ 85.3 $ 83.0 $ 94.7 Discontinued operations .................................... 46.6 26.1 36.3 48.2 Net Income .............................................. 140.0 $ 111.4 $ 119.3 $ 142.9 Net income from continuing operations per share (2) .................................. $ .88 $ .81 $ .78 $ .90 Discontinued operations per share (2) ...................... .45 .25 .35 .46 Net Income Per Share (2) .................................. $ 1.33 $ 1.06 $ 1.13 $ 1.36
(1) Net income (loss) from continuing operations for the second and fourth quarters of 1997 include special charges for changes in estimates on reserves. The discontinued operations amount for the fourth quarter of 1997 includes the gain on sale of the discontinued operations (see notes 2 and 11 to the consolidated financial statements on pages 43 and 64, respectively). (2) Per share amounts for all periods shown are shown on a diluted basis in conformance with the provisions of Financial Accounting Standard No. 128 (see note 2 to the consolidated financial statements on page 43). Consolidated Financial Statements The consolidated financial statements of Lincoln National Corporation and Subsidiaries follow on pages 34 through 66. -34- LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31 (000s omitted) 1997 1996 ASSETS Investments: Securities available-for-sale, at fair value: Fixed maturity (cost: 1997-$22,626,036; 1996-$23,205,273) .... $24,066,376 $24,096,669 Equity (cost: 1997-$517,156; 1996-$434,502) ......... 660,428 557,565 Mortgage loans on real estate ................... 3,288,112 3,240,686 Real estate ..................................... 575,956 655,024 Policy loans .................................... 763,148 734,773 Other investments ............................... 464,826 445,279 Total Investments ............................ 29,818,846 29,729,996 Investment in unconsolidated affiliates ........... 20,975 21,004 Cash and invested cash ............................ 3,794,706 1,144,766 Property and equipment ............................ 189,811 196,044 Deferred acquisition costs ........................ 1,623,845 1,689,716 Premiums and fees receivable ...................... 197,509 237,345 Accrued investment income ......................... 423,008 417,582 Assets held in separate accounts .................. 37,138,845 28,809,137 Amounts recoverable from reinsurers ............... 2,350,766 2,328,514 Goodwill .......................................... 457,729 351,707 Other intangible assets ........................... 613,909 708,446 Other assets ...................................... 544,759 596,420 Discontinued operations - investment assets ....... -- 4,314,968 Discontinued operations - other assets ............ -- 1,167,760 Total Assets .................................. $77,174,708 $71,713,405 -35-
December 31 (000s omitted) 1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Insurance and Investment Contract Liabilities: Insurance policy and claim reserves ......................... $11,266,272 $10,457,896 Contractholder funds ........................................ 20,063,393 21,165,410 Liabilities related to separate accounts .................... 37,138,845 28,809,137 Total Insurance and Investment Contract Liabilities ...... 68,468,510 60,432,443 Federal income taxes ........................................ 487,805 161,501 Short-term debt ............................................. 297,208 188,960 Long-term debt .............................................. 511,037 626,311 Minority interest - preferred securities of subsidiary companies ....................................... 315,000 315,000 Other liabilities ........................................... 2,112,233 1,417,377 Discontinued operations-insurance liabilities ............... -- 3,650,805 Discontinued operations-other liabilities ................... -- 451,052 Total Liabilities....................................... 72,191,793 67,243,449 Shareholders' Equity: Series A preferred stock - 10,000,000 shares authorized (1997 liquidation value - $2,807) .......................... 1,153 1,212 Common stock - 800,000,000 shares authorized ............... 966,461 904,331 Retained earnings............................................ 3,533,105 3,082,368 Accumulated Other Comprehensive Income: Foreign currency translation adjustment ..................... 46,204 66,454 Net unrealized gain (loss) on securities available-for-sale . 435,992 415,591 Total Accumulated Other Comprehensive Income ............ 482,196 482,045 Total Shareholders' Equity .............................. 4,982,915 4,469,956 Total Liabilities and Shareholders' Equity .............. $77,174,708 $71,713,405
See notes to the consolidated financial statements on pages 40 - 65. -36-
LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (000s omitted) 1997 1996 1995 Revenue: Insurance premiums .................................$1,328,735 $1,519,169 $1,514,001 Insurance fees .................................... 832,153 713,519 600,279 Investment advisory fees ........................... 204,926 180,792 125,593 Net investment income .............................. 2,250,764 2,087,946 1,979,663 Equity in earnings of unconsolidated affiliates ... -- 1,416 13,887 Realized gain (loss) on investments ................ 122,570 92,520 157,606 Gain on sale of subsidiaries ....................... -- -- 82,545 Other revenue and fees ............................. 159,331 138,246 112,913 Total Revenue .................................... 4,898,479 4,733,608 4,586,487 Benefits and Expenses: Benefits ........................................... 3,191,733 2,709,881 2,851,321 Underwriting, acquisition, insurance and other expenses ..................... 1,579,341 1,434,948 1,248,233 Interest and debt expense .......................... 92,524 84,721 72,516 Total Benefits and Expenses ...................... 4,863,598 4,229,550 4,172,070 Net Income from Continuing Operations Before Federal Income Taxes ..................... 34,881 504,058 414,417 Federal income tax expense ........................... 12,651 147,669 113,007 Net Income from Continuing Operations ............ 22,230 356,389 301,410 Discontinued Operations (Net of income taxes): Income prior to disposal ........................... 134,886 157,169 180,776 Gain on disposal ................................... 776,872 -- -- Net Income .......................................$ 933,988 $ 513,558 $ 482,186 Earnings Per Common Share-Basic: ..................... Restated Restated Net Income (Loss) from Continuing Operations .......$ .22 $ 3.43 $ 2.99 Discontinued Operations ............................ 8.89 1.52 1.79 Net Income ......................................$ 9.11 $ 4.95 $ 4.78 Earnings Per Common Share-Diluted: Net Income (Loss) from Continuing Operations .......$ .21 $ 3.38 $ 2.88 Discontinued Operations ............................ 8.77 1.49 1.72 Net Income.......................................$ 8.98 $ 4.87 $ 4.60
See notes to the consolidated financial statements on pages 40-65. -37-
LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (000s omitted) 1997 1996 1995 Cash Flows from Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . . . . .$ 933,988 $ 513,558 $ 482,186 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred acquisition costs . . . . . . . . . . . . . (23,519) 34,471 (44,710) Premiums and fees receivable . . . . . . . . . . . . 39,836 (77,379) (22,633) Accrued investment income . . . . . . . . . . . . . (5,426) (22,079) (49,059) Policy liabilities and accruals . . . . . . . . . . 540,676 71,471 273,247 Contractholder funds . . . . . . . . . . . . . . . . 636,600 1,280,205 1,630,708 Amounts recoverable from reinsurers . . . . . . . . (22,252) (128,538) (462,032) Federal income taxes . . . . . . . . . . . . . . . . 255,105 30,418 264,856 Equity in undistributed earnings of unconsolidated affiliates . . . . . . . . . . . . . -- (1,428) (11,493) Provisions for depreciation . . . . . . . . . . . . . 58,136 51,328 49,292 Amortization of goodwill and other intangible assets . . . . . . . . . . . . . . . . 82,396 70,748 51,632 Realized (gain) loss on investments . . . . . . . . . (122,570) (92,520) (157,606) Gain on sale of subsidiaries/ discontinued operations . . . . . . . . . . . . . . . (1,192,226) -- (82,545) Other . . . . . . . . . . . . . . . . . . . . . . . . (69,056) (358,901) 264,447 Net Adjustments . . . . . . . . . . . . . . . . . 177,700 857,796 1,704,104 Net Cash Provided by Operating Activities . . . . 1,111,688 1,371,354 2,186,290 Cash Flows from Investing Activities: Securities available-for-sale: Purchases . . . . . . . . . . . . . . . . . . . . . (10,740,292) (13,127,740) (14,291,590) Sales . . . . . . . . . . . . . . . . . . . . . . . 10,098,697 12,135,338 13,149,321 Maturities . . . . . . . . . . . . . . . . . . . . 1,461,390 981,264 965,460 Purchase of other investments . . . . . . . . . . . . (2,128,852) (2,333,222) (1,759,349) Sale or maturity of other investments . . . . . . . . 1,961,551 2,187,615 990,125 Sale of subsidiary/discontinued operations . . . . . . 2,650,000 -- 186,900 Purchase of affiliates/business . . . . . . . . . . . (11,847) (71,593) (736,966) Increase (decrease) in cash collateral on loaned securities . . . . . . . . . . . . . . . . . . 353,550 (97,257) (39,223) Other . . . . . . . . . . . . . . . . . . . . . . . . . 121,065 (146,768) (212,898) Net Cash Provided by (Used in) Investing Activities . . . . . . . . . . . . . . . . 3,765,262 (472,363) (1,748,220) Cash Flows from Financing Activities: Principal payments on long-term debt . . . . . . . . . . . (116,942) (35,074) (14,182) Issuance of long-term debt . . . . . . . . . . . . . . 1,118 2,082 197,785 Net increase (decrease) in short-term debt . . . . . . 108,248 (237,888) 25,785 Minority interest-preferred securities of subsidiary companies . . . . . . . . . . . . . . . . -- 315,000 -- Universal life and investment contract deposits . . . . 986,541 1,125,532 2,094,239 Universal life and investment contract withdrawals . . (2,709,662) (2,366,725) (2,149,326) Common stock issued for benefit plans . . . . . . . . . 33,199 (565) 24,097 Retirement of common stock . . . . . . . . . . . . . . . (327,585) (32,716) -- Proceeds from sale of minority interest in subsidiary -- 215,182 -- Dividends paid to shareholders . . . . . . . . . . . . . (201,927) (191,223) (178,805) Net Cash Provided by (Used in) Financing Activities (2,227,010) (1,206,395) (407) Net Increase (Decrease) in Cash . . . . . . . . . . . 2,649,940 (307,404) 437,663 Cash at Beginning-of-Year . . . . . . . . . . . . . . . . 1,144,766 1,452,170 1,014,507 Cash at End-of-Year . . . . . . . . . . . . . . . . . $ 3,794,706 $ 1,144,766 $ 1,452,170 See notes to the consolidated financial statements on pages 40-65
-38-
LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Year Ended December 31 (000s omitted) 1997 1996 1995 Preferred Stock: Series A Preferred Stock: Balance at beginning-of-year .........................$ 1,212 $ 1,335 $ 1,420 Conversion into common stock ......................... (59) (123) (85) Balance at End-of-Year ............................. 1,153 1,212 1,335 Series E and F Preferred Stock: Balance at beginning-of-year ......................... -- -- 309,913 Conversion into common stock ......................... -- -- (309,913) Balance at End-of-Year ............................. -- -- -- Common Stock: Balance at beginning-of-year .......................... 904,331 907,432 573,338 Conversion of series A preferred stock ................ 59 123 85 Conversion of series E and F preferred stock .......... -- -- 309,913 Issued for benefit plans ............................. 34,592 7,597 26,888 Shares forfeited under benefit plans ................. (1,393) (4,771) (2,792) Issued for purchase of subsidiaries ................... 74,390 -- -- Retirement of common stock ............................ (45,518) (6,050) -- Balance at End-of-Year ............................ 966,461 904,331 907,432 Retained Earnings: Balance at beginning-of-year ......................... 3,082,368 2,757,762 2,461,576 Comprehensive income ................................. 934,139 284,010 1,497,966 Less other comprehensive income (loss): Foreign currency translation ....................... (20,250) 53,041 6,523 Net unrealized gain (loss) on securities available-for-sale ................................ 20,401 (282,589) 1,009,257 Net Income ................................... 933,988 513,558 482,186 Realized gain (loss) on sale of minority interest in subsidiary ............................. -- 34,121 -- Retirement of common stock ........................... (279,808) (28,925) -- Dividends declared: Series A Preferred ($3.00 per share)................ (106) (112) (123) Series E Preferred ($1.89 per share) ............... -- -- (4,168) Series F Preferred ($1.97 per share) ............... -- -- (4,364) Common stock (1997 - $1.99; 1996 - $1.87; 1995 - $1.75) ...................... (203,337) (194,036) (177,345) Balance at End-of-Year ........................... 3,533,105 3,082,368 2,757,762
- 39-
Year Ended December 31 (000s omitted) 1997 1996 1995 Foreign Currency Translation Adjustment: Accumulated adjustment at beginning-of-year .... 66,454 13,413 6,890 Change during the year.......................... (20,250) 53,041 6,523 Balance at End-of-Year ...................... 46,204 66,454 13,413 Net Unrealized Gain (Loss) on Securities Available-for-sale: Balance at beginning-of-year ................... 415,591 698,180 (311,077) Realized gain (loss) on sale of minority interest in subsidiary ............... -- (19,101) -- Removal of discontinued operations ............. (176,603) -- -- Other change during the year ................... 197,004 (263,488) 1,009,257 Balance at End-of-Year ....................... 435,992 415,591 698,180 Total Shareholders' Equity at End-of-Year ... $4,982,915 $ 4,469,956 $ 4,378,122
Year Ended December 31 (Number of Shares) 1997 1996 1995 Preferred Stock: Series A Preferred Stock: Balance at beginning-of-year ......................... 36,885 40,646 43,218 Conversion into common stock ......................... (1,794) (3,761) (2,572) Balance Issued and Outstanding at End-of-Year ...... 35,091 36,885 40,646 Series E and F Preferred Stock: Balance at beginning-of-year ......................... -- -- 4,417,897 Conversion into common stock ......................... -- -- (4,417,897) Balance Issued and Outstanding at End-of-Year ...... -- -- -- Common Stock: Balance at beginning-of-year ........................... 103,658,575 104,185,117 94,477,942 Conversion of series A preferred stock ................. 14,352 30,088 20,576 Conversion of series E and F preferred stock ........... -- -- 8,835,794 Issued for benefit plans ............................... 759,330 250,072 905,361 Shares forfeited under benefit plans ................... (21,991) (112,120) (54,556) Issued for purchase of subsidiaries ................... 1,398,112 -- -- Retirement of common stock ............................. 4,948,900 (694,582) -- Balance Issued and Outstanding at End-of-Year ......... 100,859,478 103,658,575 104,185,117 Average Common Stock Outstanding for the Year ............ 102,704,221 104,253,043 99,425,639 Common Stock at End-of-Year (assuming conversion of Preferred Stock) ................ 101,140,206 103,953,655 104,510,285
See notes to the consolidated financial statements on pages 40-65. -40- LINCOLN NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation. The accompanying consolidated financial statements include Lincoln National Corporation ("LNC") and its majority-owned subsidiaries. Through subsidiary companies, LNC operates multiple insurance and investment management businesses. Operations are divided into four business segments (see note 9 on page 60). Less than majority-owned entities in which LNC has at least a 20% interest are reported on the equity basis. These consolidated financial statements have been prepared in conformity with generally accepted accounting principles. Certain prior year amounts have been reclassified to conform to the current year presentation, including reclassification of amounts related to discontinued operations (see note 11 on page 64). Use of Estimates. The nature of the insurance and investment management businesses requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Investments. LNC classifies its fixed maturity and equity securities as available-for-sale and, accordingly, such securities are carried at fair value. The cost of fixed maturity securities is adjusted for amortization of premiums and discounts. The cost of fixed maturity and equity securities is adjusted for declines in value that are other than temporary. For the mortgage-backed securities portion of the fixed maturity securities portfolio, LNC recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied at the time of acquisition. This adjustment is reflected in net investment income. Mortgage loans on real estate are carried at the outstanding principal balances less unaccrued discounts. Investment real estate is carried at cost less allowances for depreciation. The cost for both mortgage loans and real estate and investment real estate is adjusted for declines in value that are other than temporary. Also, allowances for losses are established, as appropriate, for real estate holdings that are in the process of being sold. Real estate acquired through foreclosure proceedings is recorded at fair value on the settlement date which establishes a new cost basis. If a subsequent periodic review of a foreclosed property indicates the fair value, less estimated costs to sell, is lower than the carrying value at the settlement date, the carrying value is adjusted to the lower amount. Any changes to the reserves for mortgage loans on real estate and real estate are reported as realized gain (loss) on investments. Policy loans are carried at aggregate unpaid balances. Cash and invested cash are carried at cost and include all highly liquid debt instruments purchased with a maturity of three months or less. Realized gain (loss) on investments is recognized in net income, net of associated amortization of deferred acquisition costs and capital gains expenses, using the specific identification method. Changes in the fair values of securities carried at fair value are reflected directly in shareholders' equity, after deductions for related adjustments for deferred acquisition costs and amounts required to satisfy policyholder commitments that would have been recorded had these securities been sold at their fair value, and after deferred taxes or credits to the extent deemed recoverable. Realized gain (loss) on sale of subsidiaries, net of taxes, is recognized in net income. Realized gain (loss) on sale of minority interests in subsidiaries is reflected directly in shareholders' equity net of deferred taxes, if any. -41- Derivatives. LNC hedges certain portions of its exposure to interest rate fluctuations, the widening of bond yield spreads over comparable maturity U.S. Government obligations, fluctuations in the Financial Times Stock Exchange ("FTSE") index, increased liabilities associated with certain reinsurance agreements and foreign exchange risk by entering into derivative transactions. A description of LNC's accounting for its hedging of such risks is discussed in the following two paragraphs. The premiums paid for interest rate caps, swaptions and S&P call options are deferred and amortized to net investment income on a straight-line basis over the term of the respective derivative. Any settlement received in accordance with the terms of the interest rate caps is also recorded as net investment income. Realized gain (loss) from the termination of the interest rates caps is included in net income. Settlements received on swaptions are deferred and amortized over the life of the hedged assets as an adjustment to yield. Swaptions, spread-lock agreements, interest rate swaps and financial futures that hedge fixed maturity securities available-for-sale are carried at fair value. The change in fair value is reflected directly in shareholders' equity. Realized gain (loss) from the settlement of such derivatives is deferred and amortized over the life of the hedged assets as an adjustment to the yield. Over-the-counter call options are carried at fair value. The change in fair value is reflected directly in shareholders' equity. Any gain (loss) realized upon termination of these call options is included in net income. Foreign exchange forward contracts, which hedge LNC's investment in its British subsidiary, Lincoln National (UK), are carried at fair value. The change in fair value and realized gain (loss) on such contracts is reflected directly in the foreign currency translation adjustment component of shareholders' equity. Foreign exchange forward contracts, foreign currency options and foreign currency swaps, which hedge some of the foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies, are carried at fair value. The change in fair value is included in shareholders' equity. Realized gain (loss) from the settlement of such derivatives is included in net income. Hedge accounting is applied as indicated above after LNC determines that the items to be hedged expose LNC to interest rate fluctuations, the widening of bond yield spreads over comparable maturity U.S. Government obligations, fluctuations in the FTSE index, increased liabilities associated with certain reinsurance agreements and foreign exchange risk. Moreover, the derivatives used are designated as a hedge and reduce the indicated risk by having a high correlation between changes in the value of the derivatives and the items being hedged at both the inception of the hedge and throughout the hedge period. Should such criteria not be met or if the hedged items have been sold, terminated or matured, the change in value of the derivatives is included in net income. Loaned Securities. Securities loaned are treated as collateralized financing transactions and a liability is recorded equal to the repurchase price. It is LNC's policy to take possession of securities with a market value at least equal to the securities loaned. Securities loaned are recorded at fair value as long as the value of the related collateral is sufficient. LNC's agreements with third parties generally contain contractual provisions to allow for additional collateral to be obtained when necessary. LNC values collateral daily and obtains additional collateral when deemed appropriate. Property and Equipment. Property and equipment owned for company use is carried at cost less allowances for depreciation. Premiums and Fees. Revenue for universal life and other interest-sensitive insurance policies consists of policy charges for the cost of insurance, policy initiation and administration, and surrender charges that have been assessed. Traditional individual life-health and annuity premiums are recognized as revenue over the premium-paying period of the policies. Group health premiums are prorated over the contract term of the policies. Investment Advisory Fees. As specified in the investment advisory agreements with the mutual funds, fees are determined and recognized as revenues monthly, based on the average daily net assets of the mutual funds managed. Investment advisory contracts generally provide for the determination and payment of advisory fees based on market values of managed portfolios at the end of a calendar month or quarter. Investment management and advisory contracts are renewable annually with cancellation clauses ranging from 30 to 90 days. Assets Held in Separate Accounts/Liabilities Related to Separate Accounts. These assets and liabilities represent segregated funds administered and invested by LNC's insurance subsidiaries for the exclusive benefit of pension and variable life and annuity contractholders. The fees earned by LNC's insurance subsidiaries for administrative and contractholder maintenance services performed for these separate accounts are included in insurance fee revenue. - 42- Deferred Acquisition Costs. Commissions and other costs of acquiring universal life insurance, variable universal life insurance, traditional life insurance, unit-linked products, annuities and group health insurance which vary with and are primarily related to the production of new business, have been deferred to the extent recoverable. Acquisition costs for universal and variable universal life insurance policies and unit-linked products are being amortized over the lives of the policies in relation to the incidence of estimated gross profits from surrender charges and investment, mortality, and expense margins, and actual realized gain (loss) on investments. That amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Traditional life-health and annuity acquisition costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy reserves. Benefits and Expenses. Benefits for universal and variable universal life insurance policies include interest credited to policy account balances and benefit claims incurred during the period in excess of policy account balances. Interest crediting rates associated with funds invested in the insurance company's general account during 1995 through 1997 ranged from 5.9% to 8.0%. Interest and debt expense includes interest on Minority Interest-Preferred Securities of Subsidiary Companies. Goodwill and Other Intangible Assets. The cost of acquired subsidiaries or blocks of business in excess of the fair value of net assets (goodwill) is amortized using the straight-line method over periods of 20 to 40 years which corresponds with the benefits expected to be derived from the acquisitions. Other intangible assets for the non-insurance subsidiaries (i.e., institutional customer relationships, covenants not to compete and mutual fund customer relationships) have been recorded in connection with the acquisition of asset management services companies. These assets are amortized on a straight-line basis over 6 to 15 years. The carrying value of goodwill and other intangible assets is reviewed periodically for indicators of impairment in value. Insurance and Investment Contract Liabilities. The liabilities for future policy and claim reserves for universal and variable universal life insurance policies consist of policy account balances that accrue to the benefit of the policyholders, excluding surrender charges. The liabilities for future insurance policy and claim reserves for traditional life policies and immediate and deferred paid-up annuities are computed using a net level premium method and assumptions for investment yields, mortality and withdrawals based principally on company experience projected at the time of policy issue, with provision for possible adverse deviations. Interest assumptions for traditional direct individual life reserves for all policies range from 2.6% to 8.4% graded to 5.7% after 30 years depending on time of policy issue. Interest rate assumptions for reinsurance reserves range from 5.0% to 11.0% graded to 8.0% after 20 years. The interest assumptions for immediate and deferred paid-up annuities range from 4.75% to 11.0%. With respect to its insurance and investment contract liabilities, LNC continually reviews its: 1) overall reserve position; 2) reserving techniques and; 3) reinsurance arrangements. As experience develops and new information becomes known, liabilities are adjusted as deemed necessary. The effects of changes in estimates are included in the operating results for the period in which such changes occur. Reinsurance. LNC's insurance companies enter into reinsurance agreements with other companies in the normal course of their business. LNC's insurance subsidiaries may assume reinsurance from unaffiliated companies and/or cede reinsurance to such companies. Assets/liabilities and premiums/benefits from certain reinsurance contracts that grant statutory surplus to other insurance companies have been netted on the balance sheets and income statements, respectively, since there is a right of offset. All other reinsurance agreements are reported on a gross basis. Depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets. Postretirement Medical and Life Insurance Benefits. LNC accounts for its postretirement medical and life insurance benefits using the full accrual method. -43- Stock Options. LNC recognizes compensation expense for its stock option incentive plans using the intrinsic value method of accounting. Under the terms of the intrinsic value method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date, or other measurement date, over the amount an employee must pay to acquire the stock. Foreign Exchange. LNC's foreign subsidiaries' balance sheet accounts and income statement items are translated at the current exchange and average exchange rates for the year, respectively. Resulting translation adjustments are reported as a component of shareholders' equity. Other translation adjustments for foreign currency transactions that affect cash flows are reported in earnings. 2. Changes in Accounting Principles and Change in Estimates. Change in Estimate for Disability Income Reserve. During the fourth quarter of 1995, LNC completed an in-depth review of the experience of its disability income business. As a result of this study, and based on the assumption that recent experience would continue in the future, net income was decreased by $121,600,000 or $1.15 per share ($187,000,000 pre-tax) as a result of strengthening the disability income reserve by $103,700,000 and writing-off deferred acquisition costs of $83,300,000 in the Reinsurance segment. Because of continuing adverse experience and worsening projections of future experience, LNC conducted an additional in-depth review of loss experience on its disability income business during the second quarter of 1997. As a result of this study, the reserve level was deemed to be inadequate to meet future obligations if current incident levels were to continue in the future. In order to address this situation, LNC's Reinsurance segment strengthened its disability income reserve by $92,800,000, wrote-off deferred acquisition costs of $71,100,000 and reduced related assets by $36,100,000. Combined these actions reduced net income by $130,000,000 or $1.23 per share ($200,000,000 pre-tax). Change in Estimate for United Kingdom Pension Mis-selling. During the fourth quarter of 1997, an in-depth review was completed of the United Kingdom regulatory environment, settlements to date and the remaining liability established to settle claims associated with this business. As a result of this study, the Lincoln UK segment strengthened its liability by $199,400,000 reducing net income by $174,900,000 after-tax or $1.70 per share. Change in Estimate for Personal Accident Programs. During the fourth quarter of 1997, an in-depth review was completed of certain excess-of-loss personal accident reinsurance programs written by LNC's Reinsurance segment. Based on a concern that these programs were generating claims substantially in excess of expectations, an investigation and audit was conducted covering all such programs. While LNC continues to investigate the manner in which these programs were designed and all legal remedies available, it has been determined that the incurred but not reported reserve liability related to this business should be strengthened. Accordingly, a charge of $175,000,000 ($113,700,000 after-tax or $1.11 per share) was taken in the fourth quarter of 1997. Disclosures about Segments of an Enterprise and Related Information. Financial Accounting Standard No. 131 entitled "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131") issued in June 1997, was adopted by LNC in the second quarter of 1997 on a retroactive basis as permitted by the standard. Under FAS 131 business segments are defined on the same basis that the company is managed versus the product or market approach previously used. For LNC this redefinition involved moving LNC's major United Kingdom operation from within the Life Insurance and Annuities segment into a separate segment entitled "Lincoln UK." Data shown for all periods has been restated to conform to the current period presentation (see note 9 on page 60). Earnings per Share. Financial Accounting Standard No. 128 entitled "Earnings per Share" ("FAS 128") issued in February 1997, was adopted by LNC during the fourth quarter of 1997. All prior period earnings per share amounts have been restated to conform to the provisions of this standard. See note 10 on page 63 for further earnings per share disclosures. Reporting Comprehensive Income. Financial Accounting Standard No. 130 entitled "Reporting Comprehensive Income" ("FAS 130") issued in June 1997 was adopted by LNC during the fourth quarter of 1997 on a retroactive basis as permitted by the standard. FAS 130 requires that select changes in shareholders' equity be added to net income and reported as Comprehensive Income. LNC reported this information within the consolidated statements of shareholders' equity (see page 38). This standard also requires disclosures related to the tax effects of each component of comprehensive income (see note 10 on page 64). -44- 3. Investments The major categories of net investment income are as follows: Year Ended December 31 (in millions) 1997 1996 1995 Fixed maturity securities . . . . . . . $1,832.1 $1,690.1 $1,610.1 Equity securities . . . . . . . . . . . 19.2 14.4 11.9 Mortgage loans on real estate . . . . . 279.2 292.7 268.5 Real estate. . . . . . . . . . . . . . . 99.4 125.4 117.9 Policy loans . . . . . . . . . . . . . . 44.5 40.7 36.6 Invested cash . . . . . . . . . . . . . 102.4 69.2 31.6 Other investments . . . . . . . . . . . 20.6 14.7 52.0 Investment revenue. . . . . . . . . . 2,397.4 2,247.2 2,128.6 Investment expense . . . . . . . . . . . 146.6 159.3 148.9 Net investment income . . . . . . . . $2,250.8 $2,087.9 $1,979.7 The realized gain (loss) on investments is as follows: Year Ended December 31 (in millions) 1997 1996 1995 Fixed maturity securities available-for-sale: Gross gain . . . . . . . . . . . . . . $240.0 $ 209.5 $ 245.9 Gross loss . . . . . . . . . . . . . (91.5) (202.6) (90.6) Equity securities available-for-sale: Gross gain . . . . . . . . . . . . . . 136.8 152.7 97.5 Gross loss . . . . . . . . . . . . . (41.8) (37.8) (46.9) Other investments . . . . . . . . . . (32.3) 40.4 36.9 Amortization of deferred acquisition costs, provision for policyholder commitments and capital gains expenses . . . . . . . . (88.6) (69.7) (85.2) Total . . . . . . . . . . . . . . $122.6 $ 92.5 $ 157.6 Provisions (credits) for write-downs and net changes in allowances for loss, which are included in the realized gain (loss) on investments shown above, are as follows: Year Ended December 31 (in millions) 1997 1996 1995 Fixed maturity securities . . .. . . . . $ 13.1 $ 12.3 $ 13.6 Equity securities . . . . . . . . . . . .3 3.2 .3 Mortgage loans on real estate . . . . . . (8.9) 3.1 14.1 Real estate . . . . . . . . . . . . . . . (13.6) 4.6 (9.2) Other long-term investments . . . . . . . (6.5) (.8) (4.7) Guarantees . . . . . . . . . . . . . . . -- .2 (2.6) Total . . . . . . . . . . . . . . . $(15.6) $ 22.6 $ 11.5 The change in unrealized appreciation (depreciation) on investments in fixed maturity and equity securities is as follows: Year Ended December 31 (in millions) 1997 1996 1995 Fixed maturity securities available-for-sale .$549.0 $(735.5) $2,138.2 Equity securities available-for-sale . . . . 20.2 (42.1) 93.3 Total . . . . . . . . . . . . . . . . . $569.2 $(777.6) $2,231.5 - 45- The cost, gross unrealized gain and loss, and fair value of securities available-for-sale are as follows:
Amortized Fair December 31 (in millions) Cost Gain Loss Value 1997: Corporate bonds ................................ $ 15,622.9 $1,077.2 $ 66.8 $ 16,633.3 U.S. Government bonds .......................... 591.9 70.7 .2 662.4 Foreign governments bonds ...................... 1,683.4 129.0 7.9 1,804.5 Mortgage-backed securities: Mortgage pass-through securities ............. 952.5 34.8 2.6 984.7 Collateralized mortgage obligations .......... 3,340.0 197.8 4.3 3,533.5 Other mortgage-backed securities ............. 11.1 -- -- 11.1 State and municipal bonds ...................... 236.1 5.3 -- 241.4 Redeemable preferred stocks .................... 188.1 8.0 .6 195.5 Total fixed maturity securities ............ 22,626.0 1,522.8 82.4 24,066.4 Equity securities .............................. 517.2 163.9 20.7 660.4 Total ..................................... $ 23,143.2 $1,686.7 $ 103.1 $ 24,726.8 1996: Corporate bonds ................................ $ 14,887.0 $ 651.2 $ 87.2 $ 15,451.0 U.S. Government bonds .......................... 1,279.2 44.8 18.9 1,305.1 Foreign governments bonds ...................... 1,664.7 148.5 31.7 1,781.5 Mortgage-backed securities: Mortgage pass-through securities ............. 1,244.5 27.0 6.7 1,264.8 Collateralized mortgage obligations .......... 3,719.4 168.2 9.1 3,878.5 Other mortgage-backed securities ............. .8 .4 -- 1.2 State and municipal bonds ...................... 234.7 6.7 4.2 237.2 Redeemable preferred stocks .................... 175.0 4.0 1.6 177.4 Total fixed maturity securities ............ 23,205.3 1,050.8 159.4 24,096.7 Equity securities .............................. 434.5 163.7 40.7 557.5 Total ..................................... $ 23,639.8 $1,214.5 $ 200.1 $ 24,654.2
Future maturities of fixed maturity securities available-for-sale are as follows: 1997 Amortized Fair December 31 (in millions) Cost Value Due in one year or less . . . . . . . . . $ 650.5 $ 653.5 Due after one year through five years . . 4,001.0 4,109.0 Due after five years through ten years . 5,876.6 6,124.4 Due after ten years . . . . . . . . . . 7,794.3 8,650.2 Subtotal . . . . . . . . . . . . 18,322.4 19,537.1 Mortgage-backed securities . . . . . . . . 4,303.6 4,529.3 Total . . . . . . . . . . . . . . . . $ 22,626.0 $ 24,066.4 The foregoing data is based on stated maturities. Actual maturities will differ in some cases because borrowers may have the right to call or pre-pay obligations. At December 31, 1997, the par value, amortized cost and estimated fair value of investments in mortgage-backed securities summarized by interest rates of the underlying collateral are as follows: Par Amortized Fair December 31 (in millions) Value Cost Value Below 7%. . . . . . . . . . . . . . . $ 62.5 $ 59.6 $ 61.3 7% - 8% . . . . . . . . . . . . . . 1,675.7 1,645.3 1,691.5 8% - 9% . . . . . . . . . . . . . 1,372.7 1,322.8 1,396.5 Above 9% . . . . . . . . . . . . . . 1,316.4 1,275.9 1,380.0 Total . . . . . . . . . . . . . . $ 4,427.3 $ 4,303.6 $ 4,529.3 -46- The quality ratings of fixed maturity securities available-for-sale are as follows: December 31 1997 Treasuries and AAA . . . . . . . . . . . . . . . . . . . . . . . . . . 27.6% AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.1 BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.5 BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Less than BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 100.0% Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that LNC will be unable to collect all amounts due according to the contractual terms of the loan agreement. When LNC determines that a loan is impaired, the cost is adjusted or a provision for loss is established equal to the difference between the initial cost of the mortgage loan and the estimated value. Estimated value is based on: 1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the loan's observable market price or; 3) the fair value of the collateral. The provision for losses is reported as realized gain (loss) on investments. Mortgage loans deemed to be uncollectible are charged against the allowance for losses and subsequent recoveries, if any, are credited to the allowance for losses. The allowance for losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation of the adequacy of the allowance for losses is based on LNC's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Impaired loans along with the related allowance for losses are as follows: December 31 (in millions) 1997 1996 Impaired loans with allowance for losses . . . . . . $41.2 $71.9 Allowance for losses. . . . . . . . . . . . . . . . . (5.0) (12.4) Impaired loans with no allowance for losses . . . . . -- 2.3 Net impaired loans . . . . . . . . . . . . . . . $36.2 $61.8 Impaired loans with no allowance for losses are a result of: 1) direct write- downs or; 2) collateral dependent loans where the fair value of the collateral is greater than the recorded investment in the loan. A reconciliation of the mortgage loan allowance for losses for these impaired mortgage loans is as follows: Year Ended December 31 (in millions) 1997 1996 1995 Balance at beginning-of-year . . . . . . . . . $12.4 $ 29.6 $ 62.7 Provisions for losses . . . . . . . . . . . . .8 3.1 14.2 Releases due to write-downs . . . . . . . . . -- -- (11.9) Releases due to sales . . . . . . . . . . . . . (4.8) (19.9) (20.2) Releases due to foreclosures. . . . . . . . . . (3.4) (.4) (15.2) Balance at end-of-year . . . . . . . . . . $ 5.0 $ 12.4 $ 29.6 The average recorded investment in impaired loans and the interest income recognized on impaired loans were as follows: Year Ended December 31 (in millions) 1997 1996 1995 Average recorded investment in impaired loans . $74.9 $139.6 $189.6 Interest income recognized on impaired loans . 7.0 12.7 16.9 All interest income on impaired loans was recognized on the cash basis of income recognition. -47- As of December 31, 1997 and 1996, LNC had restructured loans of $38,500,000 and $39,600,000, respectively. LNC recorded $3,800,000 and $4,000,000 of interest income on these restructured loans in 1997 and 1996, respectively. Interest income in the amount of $3,900,000 and $4,000,000 would have been recorded on these loans according to their original terms in 1997 and 1996, respectively. As of December 31, 1997 and December 31, 1996, LNC had no outstanding commitments to lend funds on restructured loans. An investment in real estate is considered impaired when the projected undiscounted cash flow from the investment is less than the carrying value. When LNC determines that an investment in real estate is impaired, it is written-down to reduce the carrying value to the estimated value. As of December 31, 1997, LNC's investment commitments for fixed maturity securities (primarily private placements), mortgage loans on real estate and real estate were $367,900,000. For the year ended December 31, 1997, fixed maturity securities available-for-sale, mortgage loans on real estate and real estate investments which were non-income producing were not significant. The cost information for mortgage loans on real estate, real estate and other long-term investments are net of allowances for losses. The balance sheet account for other liabilities includes a reserve for guarantees of third-party debt. The amount of allowances and reserves for such items is as follows: December 31 (in millions) 1997 1996 Mortgage loans on real estate. . . . . . . . . . . $ 5.0 $12.4 Real estate . . . . . . . . . . . . . . . . . . . 1.5 3.0 Guarantees . . . . . . . . . . . . . . . . . . . . .8 1.8 4. Federal Income Taxes The Federal income tax expense (benefit) is as follows: Year Ended December 31 (in millions) 1997 1996 1995 Current . . . . . . . . . . . . . . . . $137.4 $129.8 $173.9 Deferred . . . . . . . . . . . . . . . (124.7) 17.9 (60.9) Total for Continuing Operations . . $ 12.7 $147.7 $113.0 The effective tax rate on pre-tax income is lower than the prevailing corporate Federal income tax rate. A reconciliation of this difference is as follows: Year Ended December 31 (in millions) 1997 1996 1995 Tax rate times pre-tax income from continuing operations . . . . . . . . . $12.2 $176.4 $145.0 Effect of: Tax-preferred investment income . . . . . (34.8) (25.6) (21.8) Change in valuation allowance . . . . . . 43.5 -- -- Other items . . . . . . . . . . . . . . (8.2) (3.1) (10.2) Provision for income taxes . . . . . $12.7 $147.7 $113.0 Effective tax rate . . . . . . . . . 36% 29% 27% Federal income tax recoverable (liability) is as follows: December 31 (in millions) 1997 1996 Current . . . . . . . . . . . . . . . . . . . . . . . $(431.8) $ 20.7 Deferred . . . . . . . . . . . . . . . . . . . . . . (56.0) (182.2) Total for continuing operations . . . . . . . . (487.8) (161.5) Discontinued operations. . . . . . . . . . . . . . . -- 127.8 Total Federal income tax recoverable (liability) . .$(487.8) $ (33.7) -48- Significant components of LNC's net deferred tax asset (liability) for continuing operations are as follows: December 31 (in millions) 1997 1996 Deferred tax assets: Insurance and investment contract liabilities .......... $ 914.3 $ 752.7 Net operating loss ..................................... 66.3 90.0 Postretirement benefits other than pensions ............ 39.4 36.6 Other .................................................. 102.9 108.7 Total deferred tax assets ........................... 1,122.9 988.0 Valuation allowance for deferred tax assets ............ 43.5 -- Net deferred tax asset .............................. 1,079.4 988.0 Deferred tax liabilities: Deferred acquisition costs ............................. 271.2 367.0 Premiums and fees receivable ........................... 3.9 55.7 Investment asset related ............................... 27.9 43.9 Net unrealized gain on securities available-for-sale ... 520.0 337.2 Present value of business in-force ..................... 211.2 220.4 Other................................................... 101.2 146.0 Total deferred tax liabilities ....................... 1,135.4 1,170.2 Net deferred tax asset (liability) .................. $ (56.0) $ (182.2) LNC's Lincoln UK segment has incurred losses in its pension business which under U.K. tax law can only be utilized against its future pension business earnings. At December 31, 1997 the deferred tax asset related to these pension business losses was $92,000,000. The valuation allowance shown in the table above was established as an offset to this deferred tax asset. Cash paid for Federal income taxes in 1997, 1996 and 1995 was $158,000,000, $143,800,000 and $38,300,000 respectively. The cash paid in 1995 is net of a $147,400,000 cash refund related to the carryback of 1994 capital losses to prior years. At December 31, 1997, LNC had net operating loss carryforwards of $99,900,000 for Federal income tax purposes related to its foreign life reinsurance companies that expire in years 2005 through 2009. Delaware Management Holdings, Inc. ("Delaware"), acquired in 1995, has net operating loss carryforwards for Federal income tax purposes of $89,400,000 at December 31, 1997, which expire in the years 2002 through 2010. These carryforwards will only be available to reduce the respective taxable income of the foreign life reinsurance companies and Delaware. Prior to 1984, a portion of the life companies' current income was not subject to income tax, but was accumulated for income tax purposes in a memorandum account designated as the "policyholders' surplus account". Due to changes in the tax law, the total of the life companies' balances in their respective "Policyholders' surplus accounts" have not increased since December 31, 1983. However, the portion of current income on which income taxes have been paid continues to accumulate in a memorandum account designated as the "shareholders' surplus account", and this balance is available for dividends to shareholders without additional payment of tax. The December 31, 1997 total of the life companies' account balances for their "shareholders' surplus accounts" was $2,074,000,000. Should dividends to shareholders for each life company exceed its respective "shareholders' surplus account", amounts would be transferred from its respective "policyholders' surplus account" and would be subject to Federal income tax at that time. Under existing or foreseeable circumstances, LNC neither expects nor intends that distribution will be made from the $196,000,000 "policyholders' surplus account" that would result in any such tax. Accordingly, no provision for deferred income taxes has been provided by LNC on its "policyholders' surplus account". In the event that such excess distributions were made, it is estimated that income taxes of approximately $68,600,000 would be due. LNC has declared its intention to reinvest the undistributed earnings of Lincoln National (UK) and will not provide U.S. income tax on these undistributed earnings. At December 31, 1997, for the years covered by this declaration there was a deficit in earnings for Lincoln National (UK). -49- 5. Supplemental Financial Data Reinsurance transactions included in the income statement caption, "Insurance Premiums," are as follows: Year Ended December 31 (in millions) 1997 1996 1995 Insurance assumed. . . . . . . . . . . $1,079.1 $1,201.0 $1,247.9 Insurance ceded . . . . . . . . . . . . 315.0 168.6 391.0 Net reinsurance premiums . . . . . $ 764.1 $1,032.4 $ 856.9 The income statement caption, "Benefits," is net of reinsurance recoveries of $393,000,000, $250,100,000, and $386,900,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The income statement caption, "Underwriting, Acquisition, Insurance and Other Expenses," includes amortization of deferred acquisition costs of $468,000,000, $428,500,000 and $327,400,000 for the years ended December 31, 1997, 1996 and 1995, respectively. An additional $(78,200,000), $(65,200,000) and $(85,200,000) of deferred acquisition costs was restored (amortized) and netted against "Realized Gain (Loss) on Investments" for the years ended December 31, 1997, 1996 and 1995, respectively. The balance sheet captions, "Real Estate" and "Property and Equipment," are shown net of allowances for depreciation as follows: December 31 (in millions) 1997 1996 Real estate. . . . . . . . . . . . . . . . . . . $ 50.2 $ 44.1 Property and equipment. . . . . . . . . . . . . . . 155.9 147.9 Details underlying the balance sheet caption, "Contractholder Funds," are as follows: December 31 (in millions) 1997 1996 Premium deposit funds . . . . . . . . . . . . . . . $19,803.0 $20,894.5 Undistributed earnings on participating business . . 79.8 81.9 Other . . . . . . . . . . . . . . . . . . . . . . . . 180.6 189.0 Total . . . . . . . . . . . . . . . . . . . . . $20,063.4 $21,165.4 A reconciliation of the present value of business in-force for LNC's insurance subsidiaries included in other intangible assets is as follows:
December 31 (in millions) 1997 1996 1995 Balance at beginning-of-year . . . . . . . . . . . . . . $602.4 $407.4 $ 38.0 Acquisitions of insurance companies/business . . . . . . 22.0 163.5 388.7 Interest accrued on unamortized balance . . . . . . . . . 36.9 37.9 30.7 Balance sheet reclassification related to Lincoln UK . . (94.8) -- -- Amortization . . . . . . . . . . . . . . . . . . . . . . (48.1) (47.6) (50.0) Foreign exchange adjustment . . . . . . . . . . . . . . . (17.1) 41.2 -- Balance at end-of-year . . . . . . . . . . . . . . . . 501.3 602.4 407.4 Other intangible assets (non-insurance) . . . . . . . . . 112.6 106.0 121.5 Total other intangible assets at end-of-year . . . . . $613.9 $708.4 $528.9
Future estimated amortization of the present value of business in-force net of interest on unamortized balance for LNC's insurance subsidiaries is as follows (in millions): 1998 - $12.0 2000 - $14.9 2002 - $ 20.0 1999 - 14.7 2001 - 18.5 Thereafter - 421.2 The amounts shown do not include future amortization associated with the purchase of a block of individual life insurance and annuity business in January 1998 (see note 12 to the consolidated financial statements on page 65). -50- Details underlying the balance sheet captions, "Short-term and Long-term Debt," are as follows: December 31 (in millions) 1997 1996 Short-term debt: Commercial paper . . . . . . . . . . . . . . . . $286.3 $164.5 Other short-term notes . . . . . . . . . . . . 1.3 .7 Current portion of long-term debt. . . . . . . . 9.6 23.8 Total short-term debt . . . . . . . . . . . $297.2 $189.0 Long-term debt less current portion: 7 1/8% notes payable, due 1999 . . . . . . . . . $ 99.7 $ 99.5 7 5/8% notes payable, due 2002 . . . . . . . . . 99.4 99.3 7 1/4% notes payable, due 2005 . . . . . . . . . 191.4 197.9 9 1/8% notes payable, due 2024 . . . . . . . . . 119.8 199.1 Mortgages and other notes payable. . . . . . . . .7 30.5 Total long-term debt. . . . . . . . . . . . $511.0 $626.3 The commercial paper outstanding at December 31, 1997 and 1996, had a weighted average interest rate of approximately 5.83% and 5.87%, respectively. Future maturities of long-term debt are as follows (in millions): 1998 - $ 9.6 2000 - $ .1 2002 - $100.0 1999 - 100.1 2001 - .5 Thereafter - 313.3 LNC also has access to capital from minority interest in preferred securities of subsidiary companies. In May 1996, LNC filed a shelf registration with the Securities and Exchange Commission that would allow LNC to offer and sell up to $500 million of various forms of hybrid securities. These securities, which combine debt and equity characteristics, are offered through a series of three trusts (Lincoln National Capital I, II and III). These trusts were formed solely for the purpose of issuing preferred securities and lending the proceeds to LNC. The common securities of these trusts are owned by LNC. The only assets of Lincoln National Capital I, II and III are the notes receivable from LNC for such loans. Distributions are paid by these trusts to the preferred securityholders on a quarterly basis. The principal obligations of these trusts are irrevocably guaranteed by LNC. Upon liquidation of these trusts the holders of the preferred securities would be entitled to a fixed amount per share plus accumulated and unpaid distributions. LNC reserves the right to: 1) redeem the preferred securities at a fixed price plus accumulated and unpaid distributions and; 2) extend the stated redemption date up to 19 years if certain conditions are met. In July 1996, Lincoln National Capital I issued 8,600,000 shares or $215,000,000, 8.75% Quarterly Income Preferred Securities ("QUIPS"). In August 1996, Lincoln National Capital II issued 4,000,000 shares or $100,000,000, 8.35% Trust Originated Preferred Securities ("TOPrS"). Both issues mature in 2026 at $25 per share and are redeemable in whole or in part at LNC's option any time after 2001. LNC may offer and sell up to an additional $185,000,000 of securities under this shelf registration. Finally, LNC maintains a revolving credit agreement with a group of domestic and foreign banks in the aggregate amount of $750,000,000. This agreement, which expires in October 2001, provides for interest on borrowings based on various money market indices. Under the terms of this agreement, debt levels must remain below 45% of adjusted consolidated net worth if debt ratings fall below a prescribed level. LNC's current debt ratings are above this prescribed level. LNC must maintain a prescribed level of adjusted consolidated net worth. At December 31, 1997, LNC had no outstanding borrowings under this agreement. During 1997, 1996 and 1995, fees paid for maintaining revolving credit agreements amounted to $670,000, $715,000, and $649,000, respectively. Cash paid for interest for 1997, 1996 and 1995 was $96,000,000; $83,200,000, and $73,200,000, respectively. -51- 6. Employee Benefit Plans Incentive Plans. LNC has various incentive plans for key employees, agents and directors of LNC and its subsidiaries that provide for the issuance of stock options, stock appreciation rights, restricted stock awards and stock incentive awards. These plans are comprised primarily of stock option incentive plans. Stock options granted under the stock option incentive plans are at the market value at the date of grant and, subject to termination of employment, expire 10 years from the date of grant. Such options are transferable only upon death and are exercisable one year from date of grant for options issued prior to 1992. Options issued subsequent to 1991 are exercisable in 25% increments on the option issuance anniversary in the four years following issuance. Financial Accounting Standard No. 123 entitled "Accounting for Stock-Based Compensation" ("FAS 123") issued in October 1995, was adopted by LNC as of December 31, 1995. Pursuant to the provisions of FAS 123, LNC has elected to continue its practice of recognizing compensation expense for its stock option incentive plans using the intrinsic value based method of accounting (see note 1 on page 43) and to provide the required pro forma information for stock options granted after December 31, 1994. Accordingly, no compensation expense has been recognized for stock option incentive plans. Had compensation expense for LNC's stock option incentive plans for options granted after December 31, 1994 been determined based on the estimated fair value at the grant dates for awards under those plans, LNC's pro forma net income and earnings per share for 1997, 1996 and 1995 would have been $925,994,000 ($8.90 per share), $510,518,000 ($4.84 per share) and $479,814,000 ($4.58 per share), respectively (a decrease of $7,994,000 or $.08 per share, $3,040,000 or $.03 per share and $2,372,000 or $.02 per share, respectively). These effects on pro forma net income and earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net income for future years due to factors such as the vesting period of the stock options and the potential for issuance of additional stock options in future years. The fair value of options granted after December 31, 1994, used as a basis for the above pro forma disclosures, was estimated as of the date of grant using a Black-Scholes option pricing model. The option price assumptions used were as follows: Year Ended December 31 1997 1996 1995 Dividend yield . . . . . . . . . . . . . . . . . 3.8% 4.1% 4.4% Expected volatility. . . . . . . . . . . . . . . 19.0% 18.0% 22.0% Risk-Free interest rate . . . . . . . . . . . . 6.6% 6.5% 6.3% Expected life (years). . . . . . . . . . . . . . 6 5 5 Weighted-average fair values per option granted . $11.24 $7.35 $7.15 Information with respect to incentive plan stock options outstanding at December 31, 1997 is as follows:
Options Outstanding Options Exercisable Weighted- Average Weighted- Number Weighted- Range of Number Out- Remaining Average Exercisable Average Exercise standing at Contractual Exercise at Exercise Prices Dec 31, 1997 Life (Years) Price Dec 31, 1997 Price $21 - $30 608,059 3.37 $26.21 608,059 $26.21 31 - 40 633,168 5.86 39.56 567,445 39.60 41 - 50 955,135 7.95 44.31 401,068 43.94 51 - 60 1,045,046 9.30 58.76 25,400 52.36 61 - 70 48,832 5.25 67.76 -- -- 71 - 80 10,646 4.14 72.20 -- -- $21 - $80 3,300,886 1,601,972
Restricted stock (non-vested stock) awarded from 1995 through 1997 was as follows: Year Ended December 31 1997 1996 1995 Restricted stock (number of shares). . . . . . . . 118,836 55,538 335,126 Weighted-average price per share at time of grant . $61.98 $46.16 $41.09 -52- Information with respect to the incentive plans involving stock options is as follows: Options Outstanding Weighted- Shares Average Available Exercise for Grant Shares Price Balance at January 1,1995 . . . . . . 8,423,014 2,672,189 30.56 Granted . . . . . . . . . . . . . . . (510,150 510,150 42.57 Exercised . . . . . . . . . . . . . . . -- (313,612) 25.70 Expired . . . . . . . . . . . . . . . . (5,273) (275) 19.97 Forfeited . . . . . . . . . . . . . . . 175,446 (36,172) 34.64 Restricted stock awarded . . . . . . . (335,126) Balance at December 31, 1995. . . . 7,747,911 2,832,280 33.21 Granted . . . . . . . . . . . . . . . (636,500) 636,500 45.69 Exercised . . . . . . . . . . . . . . . -- (273,967) 26.68 Expired . . . . . . . . . . . . . . . . (1,600) (1,000) 27.75 Forfeited . . . . . . . . . . . . . . . 151,818 (38,650) 36.03 Restricted stock awarded . . . . . . . (55,538) Balance at December 31, 1996 . . . 7,206,091 3,155,163 36.29 Additional authorized . . . . . . . . . 11,613,256 Granted. . . . . . . . . . . . . . . . (1,094,229) 1,094,229 59.49 Exercised . . . . . . . . . . . . . . -- (903,407) 31.67 Expired . . . . . . . . . . . . . . . . -- (783) 71.07 Forfeited . . . . . . . . . . . . . . . 60,797 (44,316) 46.43 Restricted stock awarded . . . . . . . (118,836) Balance at December 31, 1997 . . . 17,667,079 3,300,886 Shares under options that were exercisable are as follows: December 31 1997 1996 1995 Options exercisable (number of shares) . . . .1,601,972 1,833,269 1,647,872 Weighted-average exercise price (per share). . $35.81 $31.22 $28.56 Other Benefit Plans. LNC maintains defined benefit pension plans for its U.S. and U.K. employees and a defined contribution plan for its U.S. agents. LNC also maintains 401(k) Plans, deferred compensation plans and postretirement medical and life insurance plans for its U.S. employees and agents. The aggregate expenses and accumulated obligations for these plans are not material to LNC's consolidated statements of income or financial position for any of the periods shown in the accompanying consolidated financial statements. 7. Restrictions, Commitments and Contingencies Statutory Information and Restrictions Net income as determined in accordance with statutory accounting practices for LNC's insurance subsidiaries was $345,200,000, $384,600,000 and $300,300,000 for 1997, 1996 and 1995, respectively. Statutory net income for 1997, 1996 and 1995, excluding LNC's foreign life reinsurance companies, was $299,100,000, $342,700,000 and $336,700,000, respectively. Shareholders' equity as determined in accordance with statutory accounting practices for LNC's insurance subsidiaries was $2,660,900,000 and $1,990,700,000 for December 31, 1997 and 1996, respectively. -53- The National Association of Insurance Commissioners is involved in a multi-year project to examine and challenge the appropriateness of current statutory accounting practices. This project could result in changes to statutory accounting practices that could cause changes to the statutory net income and shareholders' equity data shown above. LNC's insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payments of dividends to LNC. In 1998, LNC's insurance subsidiaries can transfer up to $44,200,000 without seeking prior approval from the insurance regulators. Disability Income Claims The liability for disability income claims net of the related asset for amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net liability of $1,654,000,000 and $1,561,000,000, respectively, excluding deferred acquisition costs. The December 31, 1997 amount includes a change in estimate for this liability (see note 2 on page 43). This liability is based on the assumption that recent experience will continue in the future. If incidence levels and/or claim termination rates fluctuate significantly from the assumptions underlying the reserves, adjustments to reserves could be required in the future. Accordingly, this liability may prove to be deficient or excessive. However, it is management's opinion that such future development will not materially affect the consolidated financial position of LNC. LNC reviews reserve levels on an ongoing basis. United Kingdom Pension Products Operations in the U.K. include the sale of pension products to individuals. Regulatory agencies have raised questions as to what constitutes appropriate advice to individuals who bought pension products as an alternative to participation in an employer sponsored plan. In cases of inappropriate advice, an extensive investigation may have to be done and the individual put in a position similar to what would have been attained if the individual had remained in the employer sponsored plan. At December 31, 1997 and 1996, liabilities of $291,000,000, and $86,700,000, respectively, had been established for this issue. The December 31, 1997 amount includes a change in estimate for this liability (see note 2 on page 43). These liabilities, which are net of expected recoveries, have been established for the estimated cost of this issue following regulatory guidance as to activities to be undertaken. These liabilities were booked net of expected recoveries of $113,000,000 and $31,400,000, respectively, from previous owners of companies acquired over the last few years as specified in the indemnification clauses of the purchase agreements. These liabilities and recoveries are based on various estimates that are subject to considerable uncertainty. Accordingly, these liabilities may prove to be deficient or excessive. However, it is management's opinion that such future development will not materially affect the consolidated financial position of LNC. Personal Accident Programs LNC's Reinsurance segment accepts personal accident reinsurance programs from insurance companies. Most of these programs are presented to the company by independent brokers who represent the ceding companies. Certain excess of loss personal accident reinsurance programs created in the London market during 1993-1996 are producing significant losses. Such programs represented approximately 2.5% of the total programs written during this period. Based on a review of the programs, LNC strengthened its reserve for losses during the fourth quarter of 1997 by $175,000,000 (see note 2 on page 43). This reserve is based on various estimates that are subject to considerable uncertainty. Accordingly, this reserve may prove to be deficient or excessive. However, it is management's opinion that such future development will not materially affect the consolidated financial position of LNC. LNC is involved in an on-going investigation to determine the way these programs were designed and to evaluate all legal and other remedies which may exist to minimize future losses. Marketing and Compliance Issues Regulators continue to focus on market conduct and compliance issues. Under certain circumstances companies operating in the insurance and financial services markets have been held responsible for providing incomplete or misleading sales materials and for replacing existing policies with policies that were less advantageous to the policyholder. LNC's management continues to monitor the company's sales materials and compliance procedures and is making an extensive effort to minimize any potential liability. Due to the uncertainty surrounding such matters, it is not possible to provide a meaningful estimate of the range of potential outcomes at this time; however, it is management's opinion that such future development will not materially affect the consolidated financial position of LNC. -54- Group Pension Annuities The liabilities for guaranteed interest and group pension annuity contracts, which are no longer sold by LNC, are supported by a single portfolio of assets that attempts to match the duration of these liabilities. Due to the long-term nature of group pension annuities and the resulting inability to exactly match cash flows, a risk exists that future cash flows from investments will not be reinvested at rates as high as currently earned by the portfolio. Accordingly, these liabilities may prove to be deficient or excessive. However, it is management's opinion that such future development will not materially affect the consolidated financial position of LNC. Leases Certain of LNC's subsidiaries lease their home office properties through sale-leaseback agreements. The agreements provide for a 25 year lease period with options to renew for six additional terms of five years each. The agreements also provide LNC with the right of first refusal to purchase the properties during the term of the lease, including renewal periods, at a price defined in the agreements. LNC also has the option to purchase the leased properties at fair market value as defined in the agreements on the last day of the initial 25-year lease period ending in 2009 or the last day of any of the renewal periods. Total rental expense on operating leases in 1997, 1996 and 1995 was $62,500,000, $54,500,000 and $49,500,000, respectively. Future minimum rental commitments are as follows (in millions): 1998 - $49.4 2000 - $44.6 2002 - $ 35.4 1999 - 47.6 2001 - 41.2 Thereafter - 222.6 The future commitments include amounts for space and equipment to be used by the personnel that were added on January 2, 1998 as a result of the purchase of a block of individual life and annuity business (see note 11 on page 64). Information Technology Commitment In February 1998, Lincoln Life signed a seven-year contract with IBM Global Services for information technology services for the Fort Wayne operations. Annual costs are dependent on usage but are expected to range from $33,600,000 to $56,800,000. Insurance Ceded and Assumed LNC's insurance companies cede insurance to other companies. The portion of risks exceeding each company's retention limit is reinsured with other insurers. LNC seeks reinsurance coverage within the business segments that sell life insurance to limit its liabilities. Prior to December 31, 1997, LNC had limited its maximum coverage that it would retain on a single individual to $3,000,000. Based on a review of the capital assigned to the insurance business and the amount of business in-force (including the addition of the block of business described in note 11), effective in January 1998, LNC will change the amount it will retain on a single individual to $10,000,000. Portions of LNC's deferred annuity business have also been co-insured with other companies to limit its exposure to interest rate risks. At December 31, 1997, the reserves associated with these reinsurance arrangements totaled $1,760,000,000. To cover products other than life insurance, LNC acquires other insurance coverages with retentions and limits that management believes are appropriate for the circumstances. The accompanying financial statements reflect premiums, benefits and deferred acquisition costs, net of insurance ceded (see note 5 on page 49). LNC's insurance companies remain liable if their reinsurers are unable to meet contractual obligations under applicable reinsurance agreements. Certain LNC insurance companies assume insurance from other companies. At December 31, 1997, LNC's insurance companies have provided $245,800,000 of statutory surplus relief to other insurance companies under reinsurance transactions. Generally, such amounts are offset by corresponding receivables from the ceding company, which are secured by future profits on the reinsured business. However, LNC's insurance companies are subject to the risk that the ceding company may become insolvent and the right of offset would not be permitted. Associated with these transactions, LNC's foreign insurance companies have obtained letters of credit in favor of various unaffiliated insurance companies from which LNC assumes business. This allows the ceding companies to take statutory reserve credit. The letters of credit issued by the banks represent a guarantee of performance under the reinsurance agreements. At December 31, 1997, there was a total of $680,700,000 in outstanding bank letters of credit. In exchange for the letters of credit, LNC paid the banks approximately $1,380,000 in fees in 1997. -55- Vulnerability from Concentrations At December 31, 1997, LNC did not have a material concentration of financial instruments in a single investee, industry or geographic location. Also at December 31, 1997, LNC did not have a concentration of: 1) business transactions with a particular customer, lender or distributor; 2) revenues from a particular product or service; 3) sources of supply of labor or services used in the business or; 4) a market or geographic area in which business is conducted that makes it vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a severe impact to LNC's financial condition. Other Contingency Matters LNC and its subsidiaries are involved in various pending or threatened legal proceedings arising from the conduct of business. Most of these proceedings are routine in the ordinary course of business. LNC maintains professional liability insurance coverage for claims in excess of $5 million. The degree of applicability of this coverage will depend on the specific facts of each proceeding. In some instances, these proceedings include claims for compensatory and punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that the ultimate liability, if any, under these suits will not have a material adverse effect on the consolidated financial condition of LNC. Two lawsuits involve alleged fraud in the sale of interest sensitive universal and whole life insurance policies. These two suits have been filed as class actions against Lincoln Life, although the court has not certified a class in either case. Plaintiffs seek unspecified damages and penalties for themselves and on behalf of the putative class. While the relief sought in these cases is substantial, the cases are in the early stages of litigation, and it is premature to make assessments about potential loss, if any. Management intends to defend these suits vigorously. The amount of liability, if any, which may arise as a result of these suits cannot be reasonably estimated at this time. The number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. LNC has accrued for expected assessments net of estimated future premium tax deductions. Guarantees LNC has guarantees with off-balance-sheet risks whose contractual amounts represent credit exposure. Outstanding guarantees with off-balance-sheet risks, shown in notional or contract amounts along with their carrying value and estimated fair values, are as follows:
Assets (Liabilities) Notional or Carrying Fair Carrying Fair Contract Amounts Value Value Value Value December 31 (in millions) 1997 1996 1997 1997 1996 1996 Industrial revenue bonds . . . . . . . . . . . . $27.9 $36.4 $ (.8) $ -- $(1.8) $ -- Real estate partnerships. . . . . . . . . . . . . 2.9 3.5 -- -- -- -- Mortgage loan pass-through certificates . . . . . 41.6 50.3 -- -- -- -- Total guarantees . . . . . . . . . . . . . $72.4 $90.2 $ (.8) $ -- $(1.8) $ --
Certain subsidiaries of LNC have invested in real estate partnerships which use industrial revenue bonds to finance their projects. LNC has guaranteed the repayment of principal and interest on these bonds. Certain subsidiaries of LNC are also involved in other real estate partnerships that use conventional mortgage loans. In some cases, the terms of these arrangements involve guarantees by each of the partners to indemnify the mortgagor in the event a partner is unable to pay its principal and interest payments. In addition, certain subsidiaries of LNC have sold commercial mortgage loans through grantor trusts which issued pass-through certificates. These subsidiaries have agreed to repurchase any mortgage loans which remain delinquent for 90 days at a repurchase price substantially equal to the outstanding principal balance plus accrued interest thereon to the date of repurchase. It is management's opinion that the value of the properties underlying these commitments is sufficient that in the event of default the impact would not be material to LNC. -56 Derivatives LNC has derivatives with off-balance-sheet risks whose notional or contract amounts exceed the credit exposure. LNC has entered into derivative transactions to reduce its exposure to fluctuations in interest rates, the widening of bond yield spreads over comparable maturity U.S. Government obligations, increased liabilities associated with certain reinsurance agreements, foreign exchange risks and fluctuations in the FTSE and S&P indexes. In addition, LNC is subject to the risks associated with changes in the value of its derivatives; however, such changes in value generally are offset by changes in the value of the items being hedged by such contracts. Outstanding derivatives with off-balance-sheet risks, shown in notional or contract amounts along with their carrying value and estimated fair values, are as follows:
Assets (Liabilities) Notional or Carrying Fair Carrying Fair Contract Amounts Value Value Value Value December 31 (in millions) 1997 1996 1997 1997 1996 1996 Interest rate derivatives: Interest rate cap agreements . . . . . . $4,900.0 $5,500.0 $13.9 $ .9 $20.8 $8.2 Swaptions . . . . . . . . . . . . . . . . 1,752.0 672.0 6.9 6.9 10.6 10.6 Spread-lock agreements . . . . . . . . . . -- -- -- -- -- -- Financial futures . . . . . . . . . . . . -- 147.7 -- -- (2.4) (2.4) Interest rate swaps . . . . . . . . . . . 10.0 -- .2 .2 -- -- Total interest rate derivatives . . . . 6,662.0 6,319.7 21.0 8.0 29.0 16.4 Foreign currency derivatives: Forward exchange forward contracts: Foreign subsidiary . . . . . . . . . . . . -- -- -- -- -- -- Foreign investments . . . . . . . . . . . 163.1 251.6 5.4 5.4 (.2) (.2) Foreign currency options . . . . . . . . . -- 50.2 -- -- (.3) (.3) Foreign currency swaps . . . . . . . . . . 15.0 15.0 (2.1) (2.1) (2.1) (2.1) Total foreign currency derivatives. . 178.1 316.8 3.3 3.3 (2.6) (2.6) Equity indexed derivatives: Call options (based on FTSE) . . . . . . 14.1 14.7 13.5 13.5 10.5 10.5 Call options (based on S&P) . . . . . . . 5.3 -- 1.1 1.1 -- -- Total derivatives . . . . . . . . . . . . $6,859.5 $6,651.2 $38.9 $25.9 $36.9 $24.3
A reconciliation and discussion of the notional or contract amounts for the significant programs using derivative agreements and contracts is as follows:
Interest Rate Caps Swaptions December 31 (in millions) 1997 1996 1997 1996 Balance at beginning-of-year . . . . . . $5,500.0 $5,110.0 $ 672.0 $ -- New contracts . . . . . . . . . . . . . -- 1,183.0 1,080.0 1,161.1 Terminations and maturities . . . . . . . (600.0) (793.0) -- (489.1) Balance at end-of-year . . . . . . . . $4,900.0 $5,500.0 $1,752.0 $ 672.0
Financial Spread-Lock Futures Interest Rate Agreements Contracts Swap Agreements December 31 (in millions) 1997 1996 1997 1996 1997 1996 Balance at beginning-of-year . . . . . . . $ -- $ 600.0 $ 147.7 $ 106.7 $ -- $ -- New contracts . . . . . . . . . . . . . . 50.0 15.0 88.3 7,578.9 10.0 -- Terminations and maturities . . . . . (50.0) (615.0) (236.0) (7,537.9) -- -- Balance at end-of-year. . . . . . . . $ -- $ -- $ -- $ 147.7 $ 10.0 $ --
Foreign Currency Derivatives (Foreign Investments) Foreign Exchange Foreign Foreign Forward Currency Currency Contracts Options Swaps December 31 (in millions) 1997 1996 1997 1996 1997 1996 Balance at beginning-of-year . . . . $ 251.6 $ 15.7 $ 50.2 $ 99.2 $ 15.0 $15.0 New contracts . . . . . . . . . . . . . . . 833.1 406.7 -- 1,168.6 -- -- Terminations and maturities . . . . (921.6) (170.8) (50.2) (1,217.6) -- -- Balance at end-of-year . . . . . . . $ 163.1 $ 251.6 $ -- $ 50.2 $ 15.0 $15.0
-57-
Foreign Exchange Forward Contracts Call Options Call Options (Foreign Subsidiary) (Based on FSTE) (Based on S&P) December 31 (in millions) 1997 1996 1997 1996 1997 1996 Balance at beginning-of-year . . . . $ -- $ 398.8 $14.7 $13.3 $ -- $ -- New contracts . . . . . . . . . . . -- 255.5 -- -- 5.3 -- Terminations and maturities . . . . . -- (654.3) -- -- -- -- Foreign exchange adjustment . . . . -- -- (.6) 1.4 -- -- Balance at end-of-year . . . . . . . $ -- $ -- $14.1 $14.7 $5.3 $ --
Interest Rate Caps. The interest rate cap agreements, which expire in 1998 through 2003, entitle LNC to receive quarterly payments from the counterparties on specified future reset dates, contingent on future interest rates. For each cap, the amount of such payments, if any, is determined by the excess of a market interest rate over a specified cap rate multiplied by the notional amount divided by four. The purpose of LNC's interest rate cap agreement program is to protect its annuity line of business from the effect of rising interest rates. The premium paid for the interest rate caps is included in other assets ($13,900,000 as of December 31, 1997) and is being amortized over the terms of the agreements. This amortization is included in net investment income. Swaptions. Swaptions, which expire in 2002 through 2003, entitle LNC to receive settlement payments from the counterparties on specified expiration dates, contingent on future interest rates. For each swaption, the amount of such settlement payments, if any, is determined by the present value of the difference between the fixed rate on a market rate swap and the strike rate multiplied by the notional amount. The purpose of LNC's swaption program is to protect its annuity line of business from the effect of rising interest rates. The premium paid for the swaptions is included in other long-term investments (amortized cost of $20,200,000 as of December 31, 1997) and is being amortized over the terms of the agreements. This amortization is included in net investment income. Spread-Lock Agreements. Spread-lock agreements provide for a lump sum payment to or by LNC, depending on whether the spread between the swap rate and a specified Government note is larger or smaller than a contractually specified spread. Cash payments are based on the product of the notional amount, the spread between the swap rate and the yield of an equivalent maturity Government security, and the price sensitivity of the swap at that time. The purpose of LNC's spread-lock program is to protect a portion of its fixed maturity securities against widening spreads. Financial Futures. LNC uses exchange-traded financial futures contracts to hedge against interest rate risks and to manage duration of a portion of its fixed maturity securities. Financial futures contracts obligate LNC to buy or sell a financial instrument at a specified future date for a specified price. They may be settled in cash or through delivery of the financial instrument. Cash settlements on the change in market values of financial futures contracts are made daily. Interest Rate Swaps. LNC uses interest rate swap agreements to hedge its exposure to floating rate bond coupon payments, replicating a fixed rate bond. An interest rate swap is a contractual agreement to exchange payments at one or more times based on the actual or expected price, level, performance or value of one or more underlying interests rates. LNC is required to pay the counterparty to the agreements the stream of variable coupon payments generated from the bonds, and in turn, receives a fixed payment from the counterpart, at a predetermined interest rate. The net receipts/payments from interest rate swaps are recorded in net investment income. Foreign Currency Derivatives (Foreign Investments). LNC uses a combination of foreign exchange forward contracts, foreign currency options and foreign currency swaps, all of which are traded over-the-counter, to hedge some of the foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. The foreign currency forward contracts obligate LNC to deliver a specified amount of currency at a future date at a specified exchange rate. Foreign currency options give LNC the right, but not the obligation, to buy or sell a foreign currency at a specified exchange rate during a specified time period. A foreign currency swap is a contractual agreement to exchange the currencies of two different countries pursuant to an agreement to re-exchange the two currencies at the same rate of exchange at a specified future date. -58- Foreign Exchange Forward Contracts (Foreign Subsidiary). LNC has used foreign exchange forward contracts, which are traded over-the-counter, to hedge the foreign exchange risk assumed with its investment in its U.K. subsidiary, Lincoln National (UK). The foreign exchange forward contracts obligated LNC to deliver a specified amount of currency at a future date at a specified exchange rate. LNC terminated these contracts in the third quarter of 1996. Call Options. LNC uses both FTSE index and S&P 500 index call options. Call options which expire in 1998 through 2005, provide LNC with settlement payments from the counterparties on specified expiration dates. The payment, if any, is the percentage increase in the index, over the strike price defined in the contract, applied to the notional amount. The purpose of LNC's FTSE call option program is to offset the cost of increases in the liabilities of certain single premium investment contracts which are tied to the FTSE index. The purpose of LNC's S&P 500 call option program is to offset the increase in its liabilities resulting from certain reinsurance agreements which guarantee payment of the appreciation of the S&P 500 index on certain underlying annuity products. The premium paid for the S&P 500 index call options is included in other assets ($1,200,000 as of December 31, 1997) and is being amortized over the terms of the agreements. This amortization is included in net investment income. Additional Derivative Information. Expenses for the agreements and contracts described above amounted to $10,000,000 and $8,000,000 in 1997 and 1996, respectively. Deferred losses of $600,000 as of December 31, 1997, were the result of: 1) terminated and expired spread-lock agreements and; 2) financial futures contracts. These losses are included with the related fixed maturity securities to which the hedge applied and are being amortized over the life of such securities. LNC is exposed to credit loss in the event of nonperformance by counterparties on interest rate cap agreements, swaptions, spread-lock agreements, interest rate swaps, call options, foreign exchange forward contracts, foreign currency options and foreign currency swaps. However, LNC does not anticipate nonperformance by any of the counterparties. The credit risk associated with such agreements is minimized by purchasing such agreements from financial institutions with long-standing, superior performance records. The amount of such exposure is essentially the net replacement cost or market value for such agreements with each counterparty if the net market value is in LNC's favor. At December 31, 1997, the exposure was $26,400,000. 8. Fair Value of Financial Instruments The following discussion outlines the methodologies and assumptions used to determine the estimated fair value of LNC's financial instruments. Considerable judgment is required to develop these fair values. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of LNC's financial instruments. Fixed Maturity and Equity Securities. Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services. In the case of private placements, fair values are estimated by discounting expected future cash flows using a current market rate applicable to the coupon rate, credit quality and maturity of the investments. The fair values for equity securities are based on quoted market prices. Mortgage Loans on Real Estate. The estimated fair value of mortgage loans on real estate was established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt service coverage, loan to value, caliber of tenancy, borrower and payment record. Fair values for impaired mortgage loans are based on: 1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the loan's market price or; 3) the fair value of the collateral if the loan is collateral dependent. Policy Loans. The estimated fair value of investments in policy loans was calculated on a composite discounted cash flow basis using Treasury interest rates consistent with the maturity durations assumed. These durations were based on historical experience. -59- Other Investments, and Cash and Invested Cash. The carrying value for assets classified as other investments, and cash and invested cash in the accompanying balance sheets approximates their fair value. Investment Type Insurance Contracts. The balance sheet captions, "Future Policy Benefits, Claims and Claim Expenses" and "Contractholder Funds," include investment type insurance contracts (i.e. deposit contracts and guaranteed interest contracts). The fair values for the deposit contracts and certain guaranteed interest contracts are based on their approximate surrender values. The fair values for the remaining guaranteed interest and similar contracts are estimated using discounted cash flow calculations. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. The remainder of the balance sheet captions "Future Policy Benefits, Claims and Claim Expenses" and "Contractholder Funds" that do not fit the definition of "investment type insurance contracts" are considered insurance contracts. Fair value disclosures are not required for these insurance contracts and have not been determined by LNC. It is LNC's position that the disclosure of the fair value of these insurance contracts is important because readers of these financial statements could draw inappropriate conclusions about LNC's shareholders' equity determined on a fair value basis. It could be misleading if only the fair value of assets and liabilities defined as financial instruments are disclosed. LNC and other companies in the insurance industry are monitoring the related actions of the various rule-making bodies and attempting to determine an appropriate methodology for estimating and disclosing the "fair value" of their insurance contract liabilities. Short-term and Long-term Debt. Fair values for long-term debt issues are estimated using discounted cash flow analysis based on LNC's current incremental borrowing rate for similar types of borrowing arrangements. For short-term debt, the carrying value approximates fair value. Minority Interest - Preferred Securities of Subsidiary Companies. Fair values for minority interest- preferred securities of subsidiary companies are based on quoted market prices less the unamortized cost of issue. Guarantees. LNC's guarantees include guarantees related to industrial revenue bonds, real estate partnerships and mortgage loan pass-through certificates. Based on historical performance where repurchases have been negligible and the current status, which indicates none of the loans are delinquent, the fair value liability for the guarantees related to the mortgage loan pass-through certificates is insignificant. Derivatives. LNC's derivatives include interest rate cap agreements, swaptions, spread-lock agreements, foreign currency exchange contracts, financial futures contracts, interest rate swaps, call options, foreign currency options and foreign currency swaps. Fair values for these contracts are based on current settlement values. These values are based on: 1) quoted market prices for the foreign currency exchange contracts and financial futures contracts and; 2) brokerage quotes that utilized pricing models or formulas using current assumptions for all other swaps and agreements. Investment Commitments. Fair values for commitments to make investments in fixed maturity securities (primarily private placements), mortgage loans on real estate and real estate are based on the difference between the value of the committed investments as of the date of the accompanying balance sheets and the commitment date. These estimates would take into account changes in interest rates, the counterparties' credit standing and the remaining terms of the commitments. -60- The carrying values and estimated fair values of LNC's financial instruments are as follows:
Carrying Fair Carrying Fair Value Value Value Value December 31 (in millions) 1997 1997 1996 1996 Assets (liabilities): Fixed maturities securities . . . . . . . . . . . . . $ 24,066.4 $ 24,066.4 $ 24,096.7 $ 24,096.7 Equity securities. . . . . . . . . . . . . . . . . . . 660.4 660.4 557.6 557.6 Mortgage loans on real estate . . . . . . . . . . . . . 3,288.1 3,473.5 3,132.3 3,240.7 Policy loans . . . . . . . . . . . . . . . . . . . . 763.1 754.4 734.8 734.8 Other investments . . . . . . . . . . . . . . . . . . . 464.8 464.8 445.3 445.3 Cash and invested cash . . . . . . . . . . . . . . . . 3,794.7 3,794.7 1,144.8 1,144.8 Investment type insurance contracts: Deposit contracts and certain guaranteed interest contracts . . . . . . . . . . (17,844.6) (17,489.1) (18,369.9) (17,987.9) Remaining guaranteed interest and similar contracts . . . . . . . . . . . . . . (2,032.0) (2,010.0) (2,539.0) (2,508.7) Short-term debt . . . . . . . . . . . . . . . . . . (297.2) (297.2) (189.0) (189.0) Long-term debt . . . . . . . . . . . . . . . . . . . (511.0) (541.7) (626.3) (622.7) Minority interest-preferred securities of subsidiary companies . . . . . . . . . (315.0) (322.9) (315.0) (315.7) Guarantees . . . . . . . . . . . . . . . . . . . . . . (.8) -- (1.8) -- Derivatives . . . . . . . . . . . . . . . . . . . . . . 38.9 25.9 36.9 24.3 Investment commitments . . . . . . . . . . . . . . . . -- .3 -- .3
As of December 31, 1997 and 1996, the carrying value of the deposit contracts and certain guaranteed contracts is net of deferred acquisition costs of $96,400,000 and $176,000,000, respectively, excluding adjustments for deferred acquisition costs applicable to changes in fair value of securities. The carrying values of these contracts are stated net of deferred acquisition costs so that they are comparable with the fair value basis. 9. Segment Information LNC has four business segments: Life Insurance and Annuities, Lincoln UK, Reinsurance and Investment Management. The Life Insurance and Annuities segment offers annuities, universal life, pension products and other individual coverages through a network of career agents, independent general agencies, and insurance agencies located within a variety of financial institutions. These products are sold throughout the United States. The Lincoln UK segment offers similar products within the United Kingdom through sales representatives. Reinsurance sells reinsurance products and services to insurance companies, HMOs, self-funded employers and other primary risk accepting organizations in the U.S. and economically attractive international markets. Effective in the fourth quarter of 1995, operating results of the direct disability income business previously included in the Life Insurance and Annuities segment, were included in the Reinsurance segment. This direct disability income business, which is no longer being sold, is now managed by the Reinsurance segment along with its own disability income business. The Investment Management segment offers a variety of asset management services to institutional and retail customers primarily throughout the United States. Activity which is not included in the major business segments is shown as "Other Operations." "Other Operations" includes operations not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate debt and unallocated overhead expenses). LNC's other operations also includes data for: 1) the 29% owned unconsolidated affiliate engaged in the life-health benefit business prior to the sale of this interest in 1995 and, 2) its investment management company that services LNC's business segments. -61-
Financial data by segment for 1995 through 1997 is as follows: Year Ended December 31 (in millions) 1997 1996 1995 Revenue, excluding net investment income and realized gain (loss) on investments and subsidiaries: Life Insurance and Annuities . . . . . . . . . . . . . . . $ 867.0 $ 755.9 $ 737.4 Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . 340.1 311.4 280.7 Reinsurance.. . . . . . . . . . . . . . .. . . . . . . . . 1,073.7 1,279.2 1,181.9 Investment Management.. . . . . . . . . . . . . . . . . . 257.7 215.0 148.8 Other Operations (includes consolidating adjustments) . . (13.4) (8.3) 17.9 Total . . . . . . . . . . . . . .. . . . . . . . . . . $ 2,525.1 $2,553.2 $2,366.7 Net Investment Income: Life Insurance and Annuities . . . . . . . . . . . . . . $ 1,842.4 $1,741.7 $1,755.5 Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . 85.1 82.0 71.1 Reinsurance . . . . . . . . . . . . . . . . . . . . . . . 284.4 263.7 164.1 Investment Management. . . . . . . . . . . . . . . . . . . .5 .7 .5 Other Operations . . . . . . . . . . . . . . . . . . . . 38.4 (.2) (11.5) Total . . . . . . . . . . . . . . . . . . . . . . . . $ 2,250.8 $2,087.9 $1,979.7 Realized gain (loss) on investments and subsidiaries: Life Insurance and Annuities . . . . . . . . . . . . . . . $ 82.1 $ 65.5 $ 122.4 Lincoln UK. . . . . . . . . . . . . . .. . . . . . . . . . 2.1 (.2) (.3) Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . 23.6 18.1 16.4 Investment Management . . . . . . . . . . . . . . . . . 5.9 8.1 6.6 Other Operations . . . . . . . . . . . . . . . . . . . . . 8.9 1.0 95.0 Total . . . . . . . . . . . . . . . . . . . . . . . . $ 122.6 $ 92.5 $ 240.1 Net income (loss) from continuing operations before Federal income taxes: Life Insurance and Annuities. . . . . . . . . . . . . . . . $ 397.3 $ 346.7 $ 378.1 Lincoln UK. . . . . . . . . . . . . . . . . . . . . . . . . (96.8) 101.5 72.5 Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . (210.2) 131.1 (65.5) Investment Management. . . . . . . . . . . . . . . . . . . 20.9 32.4 33.8 Other Operations (includes interest expense) . . . . . . . (76.3) (107.6) (4.5) Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 34.9 $ 504.1 $ 414.4 Income tax expense (benefit): Life Insurance and Annuities. . . . . . . . . . . . . . . . $ 94.0 $ 95.7 $ 104.1 Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . 10.0 35.5 26.8 Reinsurance . . . . . . . . . . . . . . . . . . . . . . . (73.8) 45.4 (23.5) Investment Management. . . . . . . . . . . . . . . . . . . 13.1 17.0 16.2 Other Operations . . . . . . . . . . . . . . . . . . . . . (30.6) (45.9) (10.6) Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 12.7 $ 147.7 $ 113.0 Net income (loss) from continuing operations: Life Insurance and Annuities . . . . . . . . . . . . . . . $ 303.3 $ 251.0 $ 274.0 Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . (106.8) 66.0 45.7 Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . (136.4) 85.7 (42.0) Investment Management . . . . . . . . . . . . . . . . . . . 7.8 15.4 17.6 Other Operations (includes interest expense). . . . . . . . (45.7) (61.7) 6.1 Total net income from continuing operations . . . . . 22.2 356.4 301.4 Discontinued Operations . . . . . . . . . . . . . . . . . . 911.8 157.2 180.8 Total net income. . . . . . . . . . . . . . . . . . . . $ 934.0 $ 513.6 $ 482.2
-62-
Year Ended December 31 (in millions) 1997 1996 1995 Assets: Life Insurance and Annuities . . . . . . . . . . . . . . . $60,604.4 $53,089.3 $45,791.4 Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . . 7,923.8 7,331.8 6,114.1 Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . 5,540.2 5,196.1 5,220.3 Investment Management . . . . . . . . . . . . . . . . . . . . 697.4 623.4 616.2 Other Operations . . . . . . . . . . . . . . . . . . . . . . 2,408.9 (9.9) (170.6) Sub-total . . . . . . . . . . . . . . . . . . . . . . . . 77,174.7 66,230.7 57,571.4 Discontinued Operations . . . . . . . . . . . . . . . . . . -- 5,482.7 5,686.3 Total . . . . . . . . . . . . . . . . . . . . . . . . . .$77,174.7 $71,713.4 $63,257.7
Acquisitions and dispositions of affiliated companies during 1994 - 1996 (see note 11 on page 64) resulted in LNC's foreign operations being more significant relative to LNC's consolidated totals. Substantially all of LNC's foreign operations are conducted by Lincoln National (UK) plc, a United Kingdom company. The data for this company is shown above under the Lincoln UK segment heading. Foreign intracompany revenue is not significant. All earnings from LNC's U.K. operations have been retained in the U.K. 10. Shareholders' Equity LNC's common and preferred stock is without par value. All of the issued and outstanding series A preferred stock is $3 Cumulative Convertible and is convertible at any time into shares of common stock. The conversion rate is eight shares of common stock for each share of series A preferred stock, subject to adjustment for certain events. The series A preferred stock is redeemable at the option of LNC at $80 per share plus accrued and unpaid dividends. Outstanding series A preferred stock has full voting rights, subject to adjustment if LNC is in default as to the payment of dividends. If LNC is liquidated or dissolved, holders of series A preferred stock will be entitled to payments of $80.00 per share. The difference between the aggregate preference on liquidation value and the financial statement balance for the series A preferred stock was $1,650,000 at December 31, 1997. On June 30, 1995, Dia-ichi Mutual Life Insurance Company, the owner of LNC's series E and F preferred stock which was 5 1/2% cumulative convertible exchangeable, converted its entire holdings to LNC common stock. Based on a conversion rate of two shares of common stock for each share of series E and F preferred stock, 2,201,443 shares of series E and 2,216,454 shares of series F were converted into 8,835,794 shares of common stock. LNC has outstanding one common share purchase right ("Right") on each outstanding share of LNC's common stock. A Right will also be issued with each share of LNC's common stock that is issued before the Rights become exercisable or expire. If a person or group announces an offer that would result in beneficial ownership of 15% or more of LNC's common stock, the Rights will become exercisable and each Right will entitle its holder to purchase one share of LNC's common stock for $200. Upon the acquisition of 15% or more of LNC's common stock, each holder of a Right (other than the person acquiring the 15% or more) will have the right to acquire the number of shares of LNC common stock that have a market value of two times the exercise price of the Right. If LNC is acquired in a business combination transaction in which LNC does not survive, each holder of a Right (other than the acquiring person) will have the right to acquire common stock of the acquiring person having a market value of two times the exercise price of the Right. LNC can redeem each Right for one cent at any time prior to the tenth day after a person or group has acquired 15% or more of LNC's common stock. The Rights expire on November 14, 2006. As of December 31, 1997, there were 100,859,478 Rights outstanding. -63- During 1997 and 1996, LNC purchased and retired 4,948,900 and 694,582 shares, respectively, of its common stock at a total cost of $325,300,000 and $35,000,000. The common stock account was reduced for these purchases in proportion to the percentage of share acquired. The remainder of the purchase price was charged to retained earnings. Per share amounts for net income from continuing operations are shown on the income statement using 1) an earnings per common share basic calculation and 2) an earnings per common share-assuming dilution calculation. A reconciliation of the factors used in the two calculations are as follows:
Year Ended December 31 1997 1996 1995 Numerator: [in millions] Net income from continuing operations, as used in basic calculation . . . . . . . . . . . . . . . $22.1 $356.3 $292.8 Dividends on convertible preferred stock . . . . . . . . . . .1 .1 8.6 Net income from continuing operations, as used in diluted calculation. . . . . . . . . . . . . . . $22.2 $356.4 $301.4 Denominator: [number of shares] Weighted average shares, as used in basic calculation. . . 102,495,557 103,828,451 99,067,540 Shares to cover conversion of preferred stock. . . . . . . . . 287,077 307,784 4,690,011 Shares to cover restricted stock . . . . . . . . . . . . . . 208,664 423,112 358,099 Average stock options outstanding during the year . . . . . . 3,199,539 2,979,244 2,744,248 Assumed acquisition of shares with assumed proceeds from exercising stock options (at average market price during the year) . . . . . . . . . . . . . . . . . . . (2,194,950) (2,167,199) (2,086,759) Weighted-average shares, as used in diluted calculation . . . . . . . . . . . . . . . . 103,995,887 105,371,392 104,773,139
Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on Securities Available-for-Sale," are as follows: December 31 (in millions) 1997 1996 Fair value of securities available-for-sale. . . . . . . . . . . . . . . . . . . $24,726.8 $24,654.2 Cost of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . 23,143.2 23,639.8 Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,583.6 1,014.4 Adjustments to deferred acquisition costs. . . . . . . . . . . . . . . . . . . (355.9) (282.1) Amounts required to satisfy policyholder commitments . . . . . . . . . . (571.1) (313.9) Deferred income credits (taxes) . . . . . . . . . . . . . . . . . . . . . . . (207.6) (136.4) Net unrealized gain on securities available-for-sale for continuing operations. . . . . . . . . . . . . . . . . 449.0 282.0 Change in fair value of derivatives designated as a hedge (classified as other investment). . . . . . . . . . . . . . . . . . . . . . . . (13.0) (2.8) Discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 136.4 Net unrealized gain on securities available for sale . . . . . . . . . . . . . $ 436.0 $ 415.6
Adjustments to deferred acquisition costs and amounts required to satisfy policyholder commitments are netted against the Deferred Acquisition Costs asset line and included within the Insurance Policy and Claim Reserve line on the balance sheet, respectively. -64- The "Net Unrealized Gain (Loss) on Securities Available-for-Sale" shown above is net of realized gain (loss) on investments. Following is the detail of the realized gain (loss) on investments and gross unrealized gain (loss) on securities available-for-sale:
Year Ended December 31 (in millions) 1997 1996 Continuing operations: Pre-tax realized gain (loss) on securities available-for-sale . . . . . . . . $112.2 $ 88.6 Federal income taxes @ 35%. . . . . . . . . . . . . . . . . . . . . . . . . . . 39.3 31.0 Realized gain (loss) on securities available-for-sale . . . . . . . . . . . . $ 72.9 $ 57.6 Discontinued operations: Pre-tax realized gain (loss) on securities available-for-sale . . . . . . . . . $ 38.2 $ 33.7 Federal income taxes @ 35%. . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 11.8 Realized gain (loss) on securities available-for-sale . . . . . . . . . . . . $ 24.8 $ 21.9 Previously unrealized gains on securities that became realized at time of sale of discontinued operations: Pre-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $271.7 $ -- After-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176.6 -- Gross unrealized gain (loss) on securities available- for-sale arising during the period: Pre-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $256.9 $(434.8) After-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197.0 (282.6)
11. Acquisitions and Sales of Subsidiaries and Discontinued Operations In January and April 1995, LNC completed the acquisitions of Liberty Life Assurance Company and Laurentian Financial Group plc, respectively. These companies provide unit-linked life and pension products in the United Kingdom. The combined purchase price was $274,500,000 including the assumption of $44,000,000 in debt. These acquisitions, which were accounted for using purchase accounting, resulted in other intangible assets of $388,700,000. The results of these operations are included in LNC's consolidated financial statements from their respective purchase dates. In April 1995, LNC completed the acquisition of Delaware Management Holdings, Inc. ("Delaware"). Delaware provides a variety of asset management services through its operating companies. The purchase price, including LNC's expenses associated with the acquisition, was $305,000,000. This acquisition also involved the assumption of $25,000,000 in short-term debt and $180,000,000 (face amount) in long-term debt. In May 1995, this debt was repaid from the proceeds of an LNC debt offering of $200,000,000 plus available cash. This acquisition, which was accounted for using purchase accounting, resulted in goodwill of $339,900,000 and other intangible assets of $131,500,000. The results of Delaware's operations are included in LNC's consolidated financial statements from April 3, 1995. The Delaware acquisition agreement included a provision for contingent payments of up to $22,500,000 based on the levels of investment management revenues from the date of acquisition through December 31, 1996, with any such additional payments to be accounted for as goodwill. Payments under this provision totaling $9,300,000 million were made during 1997. In May 1996, 16.7% of American States Financial Corporation ("ASFC"), the holding company of LNC's principal property-casualty subsidiary, was sold to the public in the form of an initial public offering of its common stock. ASFC received net proceeds of $215,200,000 from the sale of this 16.7% minority interest and LNC recorded a non-taxable realized gain, net of expenses, directly in shareholders' equity of $15,000,000. LNC continued to fully consolidate this operation within its financial statements and tax reporting until the sale of the remaining 83.3% (see below). In October 1996, LNC purchased a block of group tax-qualified annuity business from UNUM Corporation's affiliates. The bulk of the transaction was completed in the form of a reinsurance transaction, which resulted in a ceding commission of $71,800,000. The ceding commission, along with $67,000,000 to cover expenses associated with the purchase, represents the present value of business in-force and accordingly has been classified as an intangible asset. LNC's assets and policy liabilities and accruals increased $3,200,000,000 as a result of this transaction. -65- In April 1997, LNC completed the acquisition of Voyageur Fund Managers, Inc. ("Voyageur") for $74,000,000. While this includes cash paid out for expenses associated with the purchase, the bulk of the purchase price was covered by the issuance of 1,323,144 shares of LNC common stock to the previous owners of Voyageur. Purchase accounting has been applied to this acquisition resulting in intangible assets of $78,900,000. Voyageur's operating results are included in LNC's consolidated financial statements from the closing date. On June 9, 1997, LNC announced that it agreed to sell its 83.3% ownership in American States Financial Corporation for $2,650,000,000. As this sale resulted in an exit from the property-casualty business (previously a business segment), the financial data from the units being sold are shown as discontinued operations in the accompanying financial statements. June 9, 1997, is the measurement date for purposes of discontinued operations. Following the closing of this transaction on October 1, 1997, the gain on sale of $776,900,000 ($1,224,500,000 pre-tax) was recorded within discontinued operations. LNC used $294,900,000 to repurchase 4,370,000 shares of its own common stock, $85,000,000 to purchase a 49% ownership in Seguros Serfin Lincoln and $99,800,000 to retire a portion of its long-term debt. Also, $447,600,000 was set aside to cover the income taxes related to the sale of discontinued operations and $1,642,500,000 was set aside for use in purchasing a block of individual life insurance and annuity business in January 1998 (see note 12 below). The remainder was used to pay off a portion of LNC's short-term debt and to invest for general corporate purposes, which could include additional acquisitions of business or companies. Net Income from discontinued operations was as follows: Year Ended Nine Months Ended December 31 September 30, 1997 1996 1995 Revenue ....................... $1,538.5 $1,987.7 $2,046.8 Benefits and expenses ......... 1,363.6 1,799.0 1,834.6 Pre-tax net income ........ 174.9 188.7 212.2 Federal income taxes .......... 40.0 31.5 31.4 Net income ................ $ 134.9 $ 157.2 $ 180.8 12. Subsequent Event On January 2, 1998, LNC completed the purchase of a block of individual life insurance and annuity business from CIGNA Corporation for approximately $1,414,000,000. This acquisition involved additional expenditures to cover expenses associated with the purchase and to provide additional capital for the Life Insurance and Annuities segment to support this business totaling $228,500,000. This transaction is being accounted for using purchase accounting and, accordingly, the operating results generated by this block of business after the closing date will be included in LNC's consolidated financial statements from the closing date. At the time of closing this block of business had liabilities, measured on a statutory basis, of $5,500,000,000 that became LNC's obligation. LNC also received assets, measured on a historical statutory basis, equal to the liabilities. During 1997, this block produced premiums, fees and deposits of $1,181,000,000 and earnings of $98,000,000 on a basis of generally accepted accounting principles and is prior to any adjustments that will be required by purchase accounting. A preliminary application of purchase accounting to this block of business indicates that intangible assets and goodwill will be approximately $1,400,000,000. The additional analysis of this block of business that will occur during 1998 may result in a change in this amount. In connection with the completion of this acquisition, LNC expects to record a charge to its Life Insurance and Annuities segment during the first quarter of 1998 of approximately $20,000,000 ($31,000,000 pre-tax). This charge will cover certain costs of integrating the existing operations with the new block of business. -66- Report of Ernst & Young LLP, Independent Auditors Board of Directors Lincoln National Corporation We have audited the accompanying consolidated balance sheets of Lincoln National Corporation as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and schedules 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 referred to above present fairly, in all material respects, the consolidated financial position of Lincoln National Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP Fort Wayne, Indiana February 5, 1998 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures There have been no disagreements with LNC's independent auditors which are reportable pursuant to Item 304 of Regulation S-K. -67- PART III Item 10. Directors and Executive Officers of the Registrant Information for this item relating to directors of LNC is incorporated by reference to the sections captioned "NOMINEES FOR DIRECTOR", "DIRECTORS CONTINUING IN OFFICE" and "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934", of LNC's Proxy Statement for the Annual Meeting scheduled for May 14, 1998. Executive Officers of the Registrant as of March 1, 1998 were as follows: Name Position with LNC and Business Experience (Age)** During the Past Five Years Ian M. Rolland Chairman and Director, LNC (since 1992). President and )65) Director, LNC (1975-1991). Chief Executive Officer, LNC (since 1977). Jon A. Boscia President and Director, LNC (since January 1998). Chief (46) Executive Officer, Lincoln Life* (1996 - January, 1998). President, Chief Operating Officer, Lincoln Life* (1994-1996). Executive Vice President, LNC (1991-1994). President, Lincoln National Investment Companies ("LNIC")* (1991-1994). Bernard G. Brown Managing Director, Lincoln National (UK)* (since January (47) 1998). Operations Director, Lincoln National (UK)* (1995 - January 1998). Managing Director, Liberty Life Assurance Company, Ltd. (1992- 1995). George E. Davis Senior Vice President, LNC (since 1993). Vice President, (55) Eastman Kodak Co. (1985-1993). June E. Drewry Senior Vice President, LNC (since 1996).President, (48) Systematized Benefit Administrators, Inc. (1995-May 1996). Vice President, Aetna Life Insurance and Annuity Co. (1991-1996). Jack D. Hunter Executive Vice President, LNC (since 1986). General (61) Counsel (since 1971). Barbara S. Kowalczyk Senior Vice President, LNC (since 1994). Senior Vice (47) President, LNIC* (1992-1994). Vice President LNIC* (1985-1992). H. Thomas McMeekin Executive Vice President, LNC (since 1994). President, (45) LNIC* (1994-1996). Senior Vice President, LNC (1992-1994). Executive Vice President, LNIC* (February 1992-November 1992). Senior Vice President, LNIC* (1987-1992). Jeffrey J. Nick President and Chief Executive Officer, LNI* (since 1996). (45) Managing Director, Lincoln National (UK) plc* (1992-1996). Senior Vice President, LNC (1990-1992). Richard S. Robertson Executive Vice President, LNC (since 1986). (56) Lawrence T. Rowland President and Chief Executive Officer, Lincoln National (46) Reassurance Company* and other Lincoln Re affiliates* (since 1996). Senior Vice President, LNRC* (1995-1996). Vice President, Lincoln Re* (1991-1994). Gabriel L. Shaheen President and Chief Executive Officer, Lincoln Life* (44) (since January 1998). Managing Director Lincoln National (UK)* (1996 - January 1998). President and Chief Executive Officer, Lincoln Re* (1994-1996). Senior Vice President, Lincoln Life* (1991-1994). -68 Donald L. Van Wyngarden Second Vice President and Controller, LNC (since 1975). (58) Richard C. Vaughan Executive Vice President and Chief Financial Officer, (48) LNC (since 1995). Senior Vice President and Chief Financial Officer, LNC (1992-1994). * Denotes a subsidiary of LNC ** Age shown is based on nearest birthdate to March 1, 1998. There is no family relationship between any of the foregoing executive officers, all of whom are elected annually. Item 11. Executive Compensation Information for this item is incorporated by reference to the section captioned "EXECUTIVE COMPENSATION" of LNC's Proxy Statement for the Annual Meeting scheduled for May 14, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management Information for this item is incorporated by reference to the sections captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS" of LNC's Proxy Statement for the Annual Meeting scheduled for May 14, 1998. Item 13. Certain Relationships and Related Transactions Information for this item is incorporated by reference to the section captioned "TERMINATION OF EMPLOYMENT ARRANGEMENT" of LNC's Proxy Statement for the Annual Meeting scheduled for May 14, 1998. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Item 14(a)(1) Financial Statements The following consolidated financial statements of Lincoln National Corporation are included in Item 8: Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity - Years ended December 31,1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors -69- Item 14(a)(2) Financial Statement Schedules The following consolidated financial statement schedules of Lincoln National Corporation are included in Item 14(d): I - Summary of Investments - Other than Investments in Related Parties II - Condensed Financial Information of Registrant III - Supplementary Insurance Information IV - Reinsurance V - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included in the consolidated financial statements, and therefore omitted. Item 14(a)(3) Listing of Exhibits The following exhibits of Lincoln National Corporation are included in Item 14 - Note: The numbers preceding the exhibits correspond to the specific numbers within Item 601 of Regulation S-K.): 3(a) The Articles of Incorporation of LNC as last amended effective May 12, 1994 are incorporated by reference to LNC's Form S-3/A (File No. 33-55379) filed with the Commission on September 15, 1994. 3(b) The Bylaws of LNC as last amended January 14, 1998. 4(a) Indenture of LNC dated as of January 15, 1987 (Commission File No. 33-22658) is incorporated by reference to Exhibit 4(a) of LNC's Form 10-K for the year ended December 31, 1994, filed with the Commission on March 27, 1995. 4(b) First Supplemental Indenture dated as of July 1, 1992, to Indenture of LNC dated as of January 15, 1987 is incorporated by reference to Exhibit 4(b) of LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(c) Specimen Notes for 7 1/8% Notes due July 15, 1999 (Commission File No. 33-22658) and for 7 5/8% Notes due July 15, 2002 (Commission File No. 33-22658) are incorporated by reference to Exhibit 4(c) of LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(d) Rights Agreement of LNC as last amended November 14, 1996 is incorporated by reference to LNC's Form 8-K filed with the Commission on November 22, 1996. 4(e) Indenture of LNC dated as of September 15, 1994, between LNC and The Bank of New York, as Trustee, is incorporated by reference to Exhibit No. 4(c) of LNC's Form S-3/A (Commission File No. 33-55379), filed with the Commission on September 15, 1994. 4(f) Form of Note is incorporated by reference to Exhibit No.4(d) to LNC's Registration Statement on Form S-3/A (Commission File No. 33-55379), filed with the Commission on September 15, 1994. 4(g) Form of Zero Coupon Security is incorporated by reference to Exhibit No. 4(f) of LNC's Registration Statement on Form S-3/A (Commission File No. 33-55379), filed with the Commission on September 15, 1994. 4(h) Specimen of LNC's 9 1/8% Debentures due October 1, 2024 (Commission File No. 33-55379) is incorporated by reference to Schedule I of LNC's Form 8-K filed with the Commission on September 29, 1994. 4(i) Specimen of LNC's 7 1/4% Debenture due May 15, 2005 (Commission File Nos. 33-55379 and 33- 59785) is incorporated by reference to Schedule III of LNC's Form 8-K filed with the Commission on May 17, 1995. -70- 4(j) Junior Subordinated Indenture dated as of May 1, 1996 between LNC and The First National Bank of Chicago is incorporated by reference to Exhibit 4(j) of LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(k) Guarantee Agreement for Lincoln National Capital I is incorporated by reference to Exhibit 4(k) of LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(l) Guarantee Agreement for Lincoln National Capital II is incorporated by reference to Exhibit 4(l) of LNC's form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(m) Form of Lincoln National Capital I 8.75% Cumulative Quarterly Income Preferred Securities, Series A (Commission File No. 333-04133) is incorporated by reference to Exhibit 4(m) to LNC's Form 10- K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(n) Form of Lincoln National Capital II 8.35% Trust Originated Preferred Securities, Series B (Commission File No. 333-04133) is incorporated by reference to Exhibit 4(n) to LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 10(a)* The Lincoln National Corporation 1986 Stock Option Incentive Plan (Commission File No. 33-13445 and 33-62315) as last amended effective May 12, 1994 is incorporated by reference to Exhibit No.1 of LNC's Proxy filed with the Commission on March 31, 1994. 10(b)* The Lincoln National Corporation 1982 Stock Option Incentive Plan (Commission File No. 2-77599) as last amended effective May 7, 1987 is incorporated by reference to Exhibit 10(b) of LNC's Form 10-K for the year ended December 31, 1993, filed with the Commission on March 30, 1994. 10(c)* The Lincoln National Corporation Executives' Salary Continuation Plan as last amended January 1, 1992. 10(d)* The Lincoln National Corporation Executive Value Sharing Plan as Amended and Restated effective January 1, 1994 is incorporated by reference to Exhibit No. 4 of LNC's Proxy filed with the Commission on March 31, 1994. 10(e)* Lincoln National Corporation Executives' Severance Benefit Plan as Amended and Restated effective November 9, 1995 is incorporated by reference to Exhibit 10(e) of LNC's Form 10-K for the year ended December 31, 1995, filed with the Commission on March 27, 1996. 10(f)* The Lincoln National Corporation Outside Directors Retirement Plan as last amended effective March 15, 1990 is incorporated by reference to Exhibit 10(f) of LNC's Form 10-K for the year ended December 31, 1995, filed with the Commission on March 27, 1996. 10(g)* The Lincoln National Corporation Outside Directors Benefits Plan. 10(h)* Lincoln National Corporation Directors' Value Sharing Plan as last amended effective May 15, 1997. 10(i)* Lincoln National Corporation Executive Deferred Compensation Plan for Employees (Commission File No. 33-51721) as last amended effective February 16, 1998. 10(j)* Lincoln National Corporation 1993 Stock Plan for Non-Employee Directors (Commission File No. 33-58113) as last amended effective November 14, 1996 is incorporated by reference to Exhibit 10(j) to LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 10(k)* Lincoln National Corporation Executives' Excess Compensation Benefit Plan is incorporated by reference to Exhibit 10(r) of LNC's Form 10-K for the year ended December 31, 1993, filed with the Commission on March 30, 1994. -71- 10(l)* Lincoln National Corporation 1997 Incentive Compensation Plan effective May 15, 1997 is incorporated by reference to Exhibit A of LNC's proxy filed April 14, 1997. 10(m)* Descriptions of compensation arrangements with Executive Officers. 10(n) Lease and Agreement dated August 1, 1984, with respect to LNL's Home Office property located at Magnavox Way, Fort Wayne, Indiana are incorporated by reference to Exhibit 10(m) of LNC's Form 10-K for the year ended December 31, 1995, filed with the Commission on March 27, 1996. 10(o) Lease and Agreement dated August 1, 1984, with respect to LNL's Home Office properties located at Clinton Street and Harrison Street, Fort Wayne, Indiana are incorporated by reference to Exhibit 10(n) of LNC's Form 10-K for the year ended December 31, 1995, filed with the Commission on March 27, 1996. 10(p) Lease and Agreement dated December 1, 1994, with respect to LNC's Corporate Office located at 200 East Berry Street, Fort Wayne, Indiana, are incorporated by reference to Exhibit 10(p) of LNC's Form 10-K for the year ended December 31, 1994, filed with the Commission on March 27, 1995. 10(q) Agreement of Lease dated February 17, 1998, with respect to Lincoln Life's life products headquarters located at Church Street, Hartford, Connecticut. *This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14 of this report. 12 Historical Ratio of Earnings to Fixed Charges. 21 List of Subsidiaries of LNC. 23 Consent of Ernst & Young LLP, Independent Auditors. 27 Financial Data Schedule. Item 14(b) During the fourth quarter ending December 31, 1997, two Form 8-Ks were filed with the Commission. The first filing (dated October 7, 1997) which included pro forma financial statements, was related to the divestiture of LNC's remaining interest (83.3%) in American States Financial Corporation. The second filing (dated December 16, 1997) was a copy of LNC's press release regarding the amount of gain on the divestiture of American States and expected charges to fourth quarter earnings for changes in estimates for the reserves for United Kingdom pension mis-selling and personal accident programs. Item 14 The exhibits of Lincoln National Corporation are listed in Item 14(a)(3) above. Item 14(d) The financial statement schedules for Lincoln National Corporation follow on pages 72 through 78. -72- LINCOLN NATIONAL CORPORATION SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1997 (000's omitted) Column A Column B Column C Column D Amount at Which Shown in the Type of Investment Cost Value Balance Sheet Fixed maturity securities available-for-sale: Bonds: United States Government and government agencies and authorities . . . . . . . . . . . . . . . . . . . $ 591,950 $ 662,405 $ 662,405 States, municipalities and political subdivisions . . . . . . . . 236,142 241,426 241,426 Mortgage-backed securities . . . . . . . . . . . . . . . . . . . 4,303,543 4,529,349 4,529,349 Foreign governments . . . . . . . . . . . . . . . . . . . . . . . 1,683,418 1,804,436 1,804,436 Public utilities . . . . . . . . . . . . . . . . . . . . . . . . 2,688,014 2,832,715 2,832,715 Convertibles and bonds with warrants attached. . . . . . . . . . 80,852 82,743 82,743 All other corporate bonds . . . . . . . . . . . . . . . . . . . . . 12,854,008 13,717,793 13,717,793 Redeemable preferred stocks. . . . . . . . . . . . . . . . . . . . 188,109 195,509 195,509 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,626,036 24,066,376 24,066,376 Equity securities available-for-sale: Common stocks: Public utilities . . . . . . . . . . . . . . . . . . . . . . . 19,507 24,456 24,456 Banks, trusts and insurance companies . . . . . . . . . . . . . 46,597 73,083 73,083 Industrial, miscellaneous and all other . . . . . . . . . . . . 366,119 474,739 474,739 Nonredeemable preferred stocks . . . . . . . . . . . . . . . . 84,933 88,150 88,150 Total Equity Securities. . . . . . . . . . . . . . . . . . . . 517,156 660,428 660,428 Mortgage loans on real estate. . . . . . . . . . . . . . . . . . . 3,293,131 3,288,112(1) Real estate: Investment properties. . . . . . . . . . . . . . . . . . . . . . 508,999 508,999 Acquired in satisfaction of debt . . . . . . . . . . . . . . . . 66,957 66,957 Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 763,148 763,148 Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . 464,826 464,826 Total Investments . . . . . . . . . . . . . . . . . . . . . . . $28,240,253 $29,818,846
(1) Investments deemed to have declines in value that are other than temporary are written down or reserved for to reduce their carrying value to their estimated realizable value. -73- LINCOLN NATIONAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS Lincoln National Corporation (Parent Company Only)
December 31 (000's omitted) 1997 1996 Assets: Investments in subsidiaries* . . . . . . . . . . . . . . . . . . . $5,341,786 $5,055,185 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,931 227,234 Investment in unconsolidated affiliate . . . . . . . . . . . . . . 18,500 16,041 Cash and invested cash . . . . . . . . . . . . . . . . . . . . . . 1,230,180 133,833 Property and equipment . . . . . . . . . . . . . . . . . . . . . . 10,316 10,543 Accrued investment income . . . . . . . . . . . . . . . . . . . . 4,071 26,078 Receivable from subsidiaries*. . . . . . . . . . . . . . . . . . . 433,580 103,024 Dividends receivable from subsidiaries*. . . . . . . . . . . . . . 12,875 285 Loans to subsidiaries*. . . . . . . . . . . . . . . . . . . . . . 32,299 446,968 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,500 5,747 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 48,470 25,281 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . $7,430,508 $6,050,219 Liabilities and Shareholders' Equity Liabilities: Cash collateral on loaned securities . . . . . . . . . . . . . . $ 123,688 $ 145,594 Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . 52,167 50,651 Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 82,767 69,711 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 510,301 596,052 Loans from subsidiaries* . . . . . . . . . . . . . . . . . . . . . 1,040,431 586,120 Federal income taxes payable (recoverable) . . . . . . . . . . . . 418,783 (1,398) Accrued expenses and other liabilities . . . . . . . . . . . . . . 219,456 133,533 Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,447,593 1,580,263 Shareholders' Equity Series A preferred stock. . . . . . . . . . . . . . . . . . . . . 1,153 1,212 Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 966,461 904,331 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 3,533,105 3,082,368 Foreign currency translation adjustment . . . . . . . . . . . . . 46,204 66,454 Net unrealized gain (loss) on securities available-for-sale [including unrealized gain (loss) of subsidiaries and discontinued operations: 1997 - $410,281; 1996 - $397,154]. . . . 435,992 415,591 Total Shareholders' Equity. . . . . . . . . . . . . . . . . . . 4,982,915 4,469,956 Total Liabilities and Shareholders' Equity . . . . . . . . . . . $7,430,508 $6,050,219
*Eliminated in consolidation. These condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation (see pages 40 through 66). -74- LINCOLN NATIONAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) STATEMENTS OF INCOME Lincoln National Corporation (Parent Company Only)
Year Ended December 31 (000's omitted) 1997 1996 1995 Revenue: Dividends from subsidiaries*. . . . . . . . . . . . $ 250,725 $601,701 $538,515 Interest from subsidiaries* . . . . . . . . . . . . 22,807 18,945 9,558 Equity in earnings of unconsolidated affiliate . . -- 1,428 5,075 Net investment income . . . . . . . . . . . . . . 38,108 21,790 21,720 Realized gain (loss) on investments . . . . . . . . (1,403) (432) 30,189 Gain on sale of subsidiaries and discontinued operations . . . . . . . . . . . . . 1,192,226 -- 74,284 Other . . . . . . . . . . . . . . . . . . . . . . 1,180 1,127 1,292 Total Revenue . . . . . . . . . . . . . . . . . 1,503,643 644,559 680,633 Expenses: Operating and administrative. . . . . . . . . . . . 34,610 33,808 41,884 Interest-subsidiaries*. . . . . . . . . . . . . . . 25,703 23,529 32,864 Interest-other . . . . . . . . . . . . . . . . . . 87,442 74,553 63,624 Total Expenses . . . . . . . . . . . . . . . . . 147,755 131,890 138,372 Income before Federal Income Tax Expense (Benefit), Equity in Income of Subsidiaries and Discontinued Operations, Less Dividends. . . 1,355,888 512,669 542,261 Federal income tax expense (benefit). . . . . . . . . 389,791 (34,157) 37,780 Income Before Equity in Income of Subsidiaries and Discontinued Operations, Less Dividends. . . 966,097 546,826 504,481 Equity in income of subsidiaries and discontinued operations, less dividends . . . . . . (32,109) (33,268) (22,295) Net Income. . . . . . . . . . . . . . . . . . . . $ 933,988 $513,558 $482,186
*Eliminated in consolidation. These condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation (see pages 40 through 66). -75- LINCOLN NATIONAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) STATEMENTS OF CASH FLOWS Lincoln National Corporation (Parent Company Only)
Year Ended December 31 (000's omitted) 1997 1996 1995 Cash Flows from Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . .$ 933,988 $ 513,558 $ 482,186 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in income of subsidiaries and discontinued operations less than (greater than) distributions* . . . . . . . . . 18,950 (262,268) 86,889 Equity in undistributed earnings of unconsolidated affiliate . . . . . . . . . . . . -- (1,428) (5,075) Realized (gain) loss on investments . . . . . . . 1,403 432 (30,189) Gain on sale of subsidiaries and discontinued operations . . . . . . . . . . . . (1,192,226) -- (74,284) Tax on sale of discontinued operations . . . . . . 415,354 -- -- Other . . . . . . . . . . . . . . . . . . . . . 25,451 (81,276) 47,967 Net Adjustments . . . . . . . . . . . . . . . (731,068) (344,540) 25,308 Net Cash Provided by Operating Activities . . 202,920 169,018 507,494 Cash Flows from Investing Activities: Net sales (purchases) of investments . . . . . . 4,157 91,161 16,614 Cash collateral on loaned securities . . . . . . (21,906) (53,406) (4,531) Decrease (increase) in investment in subsidiaries*. (116,824) 217,844 (697,106) Sale of (investment in) unconsolidated affiliate . (68,959) (16,041) 193,975 Sale of discontinued operations . . . . . . . . . 822,500 -- -- Net (purchase) sale of property and equipment . . . (1,417) (790) (3,158) Other . . . . . . . . . . . . . . . . . . . . . . (1,096) (26,883) 17,675 Net Cash Provided by (Used in) Investing Activities . . . . . . . . . . . . . . 616,455 211,885 (476,531) Cash Flows from Financing Activities: Principal payments on long-term debt . . . . . . . (86,338) -- -- Issuance of long-term debt . . . . . . . . . . . 587 561 197,785 Net increase (decrease) in short-term debt . . . . 13,056 (179,033) 19,300 Increase (decrease) in loans from subsidiaries* . . 454,311 28,224 (42,413) Decrease (increase) in loans to subsidiaries* . . 414,669 (303,506) (106,982) Increase in receivables from subsidiaries* . . . (23,000) (36,000) (300) Common stock issued for benefit plans . . . . . . 33,199 (153) 24,096 Retirement of common stock . . . . . . . . . . . . (327,585) (32,716) -- Dividends paid to shareholders . . . . . . . . . . (201,927) (191,223) (178,805) Net Cash Used in Financing Activities . . . . . . 276,972 (713,846) (87,319) Net Increase (Decrease) in Cash . . . . . . . . . 1,096,347 (332,943) (56,356) Cash at beginning-of-year . . . . . . . . . . . . . 133,833 466,776 523,132 Cash at End-of-Year . . . . . . . . . . . . . . $ 1,230,180 $ 133,833 $ 466,776
*Eliminated in consolidation. These condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation (see pages 40 through 66). -76 LINCOLN NATIONAL CORPORATION SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
Column A Column B Column C Column D Column E Column F Insurance Other Policy Deferred Policy and Claims and Acquisition Claim Unearned Benefits Premium Segment Costs Reserves Premiums Payable Revenue(1) Year Ended December 31, 1997 (000's Omitted) Life Insurance and Annuities .................... $ 779,703 $ 6,418,417 $ $ $ 788,040 Lincoln UK ..................................... 563,080 1,442,768 336,721 Reinsurance .................................... 281,062 3,513,311 1,036,127 Investment Management .......................... Other (incl. consol. adj's.) ................... (108,224) Total ........................................ $ 1,623,845 $ 11,266,272 $ -- $ -- $ 2,160,888 Year Ended December 31, 1996 Life Insurance and Annuities ................... $ 926,593 $ 6,180,970 $ $ $ 676,047 Lincoln UK ..................................... 440,414 1,252,276 306,238 Reinsurance .................................... 322,709 3,144,785 1,250,403 Investment Management .......................... Other (incl. consol. adj's.) ................... (120,135) Total ........................................ $ 1,689,716 $ 10,457,896 $ -- $ -- $ 2,232,688 Year Ended December 31, 1995 Life Insurance and Annuities ................... $ 705,913 $ 6,166,645 $ $ $ 670,344 Lincoln UK ..................................... 134,993 831,762 272,771 Reinsurance .................................... 396,588 3,100,275 1,171,165 Investment Management .......................... Other (incl.consol.adj's.) ..................... (91,254) Total ........................................ $ 1,237,494 $ 10,007,428 $ -- $ -- $ 2,114,280
Column A Column G Column H Column I Column J Column K Amortization of Net Deferred Policy Other Investment Acquisition Operating Premiums Segment Income (2) Benefits Costs Expenses( 2) Written Year Ended December 31, 1997 (000's Omitted) Life Insurance and Annuities.................... $ 1,842,351 $ 1,646,581 $ 316,346 $ 431,301 $ Lincoln UK ..................................... 85,132 339,637 4,342 180,132 Reinsurance .................................... 284,430 1,205,515 147,300 239,135 Investment Management .......................... 457 243,206 Other (incl. consol. adj's.) ................... 38,394 110,103 Total ........................................ $ 2,250,764 $ 3,191,733 $ 467,988 $ 1,203,877 $ -- Year Ended December 31, 1996 Life Insurance and Annuities ................... $ 1,741,649 $ 1,562,087 $ 266,343 $ 388,020 $ Lincoln UK ..................................... 81,955 133,927 157,732 Reinsurance .................................... 263,870 1,013,867 162,150 253,880 Investment Management .......................... 701 191,416 Other (incl. consol. adj's) .................... (229) 100,128 Total ........................................ $ 2,087,946 $ 2,709,881 $ 428,493 $ 1,091,176 $ -- Year Ended December 31, 1995 Life Insurance and Annuities ................... $ 1,755,452 $ 1,637,901 $ 267,548 $ 331,690 $ Lincoln UK ..................................... 71,098 124,922 154,017 Reinsurance .................................... 164,105 1,088,498 59,910 279,724 Investment Management (3) ..................... 518 122,127 Other (incl. consol. adj's.) ................... (11,510) 105,733 Total ........................................ $ 1,979,663 $ 2,851,321 $ 327,458 $ 993,291 $ --
(1) Includes insurance fees on universal life and other interest sensitive products. (2) The allocation of expenses between investments and other operations are based on a number of assumptions and estimates. Results would change if different methods were applied. (3) Includes data from the April 1, 1995 date when Investment Management segment was initiated because of the purchase of Delaware Management Holdings, Inc. (4) Amounts have been adjusted to reflect a reclassification for discontinued operations. 77 LINCOLN NATIONAL CORPORATION SCHEDULE IV - REINSURANCE (1)
Column A Column B Column C Column D Column E Column F Percentage Ceded Assumed of Amount Gross to Other from Other Net Assumed Amount Companies Companies Amount to Net (000's Omitted) Year Ended December 31, 1997 Individual life insurance in force . . . $125,800,000 $37,300,000 $124,000,000 $212,500,000 58.4% Premiums: Life insurance (2) . . . . . . . . . . $ 1,235,085 $ 196,929 $ 550,173 $ 1,588,329 34.6% Health insurance . . . . . . . . . . . 161,693 118,083 528,949 572,559 92.4% Total . . . . . . . . . . . . . . . . $ 1,396,778 $ 315,012 $ 1,079,122 $ 2,160,888 Year Ended December 31, 1996 Individual life insurance in force . . . $110,700,000 $37,600,000 $130,400,000 $203,500,000 64.0% Premiums: Life insurance (2) . . . . . . . . . . .$ 1,031,740 $ 96,999 $ 507,512 $ 1,442,253 35.2% Health insurance . . . . . . . . . . . 168,545 71,636 693,526 790,435 87.7% Total l . . . . . . . . . . . . . . . $ 1,200,285 $ 168,635 $ 1,201,038 $ 2,232,688 Year Ended December 31, 1995 Individual life insurance in force . . . $ 92,700,000 $32,500,000 $118,900,000 $179,100,000 66.4% Premiums: Life insurance (2) . . . . . . . . . . .$ 949,453 $ 178,618 $ 536,398 $ 1,307,233 41.0% Health insurance . . . . . . . . . . . 307,895 212,422 711,574 807,047 88.2% Total . . . . . . . . . . . . . . . .$ 1,257,348 $ 391,040 $ 1,247,972 $ 2,114,280
(1) Special-purpose bulk reinsurance transactions have been excluded. (2) Includes insurance fees on universal life and other interest sensitive products. (3) Amounts have been adjusted to reflect a reclassification for discontinued operations. -78- LINCOLN NATIONAL CORPORATION SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E Additions Charged Balance at Charged to Other Balance at Description Beginning to Costs Accounts- Deductions- End of of Period Expenses(1) Describe Describe(2) Period (000's Omitted) Year Ended December 31, 1997 Deducted from Asset Accounts: Reserve for Mortgage Loans on Real Estate . . . . . . . . . . . $12,385 $ 1,778 $(9,144) $ 5,019 Reserve for Real Estate . . . . . . . 3,000 (1,500) 1,500 Included in Other Liabilities: Investment Guarantees . . . . . . . 1,775 (985) 790 Year Ended December 31, 1996 Deducted from Asset Accounts: Reserve for Mortgage Loans on Real Estate . . . . . . . . . . . $29,592 $ 3,136 $(20,343) $12,385 Reserve for Real Estate . . . . . . 58,029 3,000 $(51,517) (6,512) 3,000 Reserve for Other Long-term, Investments . . . . . . . . . . . . . 13,644 (388) (12,971) (285) -- Included in Other Liabilities: Investment Guarantees . . . . . . . . 7,099 (886) (4,438) 1,775 Year Ended December 31, 1995 Deducted from Asset Accounts: Reserve for Mortgage Loans on Real Estate . . . . . . . . . . . $62,675 $ 2,288 $(35,371) $29,592 Reserve for Real Estate . . . . . . . . 78,638 (9,203) (11,406) 58,029 Reserve for Other Long-term Investments. . . . . . . . . . . . . . 23,776 (2,415) (7,717) 13,644 Included in Other Liabilities: Investment Guarantees . . . . . . . . . 13,076 (2,617) (3,360) 7,099
(1) Excludes charges for the direct write-offs of assets. The negative amounts shown in the additions columns represent improvements in the underlying assets and guarantees for which valuation accounts had previously been established. (2) Deductions reflect sales or foreclosures of the underlying holdings. (3) Amounts have been adjusted to reflect a reclassification for discontinued operations. -79- LINCOLN NATIONAL CORPORATION EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 1997 Exhibit Number Page 3(a) Articles of Incorporation dated as of May 12, 1994.* 3(b) Bylaws of LNC as last amended January 14, 1998. 81 4(a) Indenture of LNC dated as of January 15, 1987.* 4(b) LNC First Supplemental Indenture dated July 1, 1992, to Indenture of LNC dated as of January 15, 1987.* 4(c) Specimen Notes for 7 1/8% Notes due July 15, 1999 and 7 5/8% Notes due July 15, 2002.* 4(d) Rights Agreement dated November 14, 1996.* 4(e) Indenture of LNC dated as of September 15, 1994.* 4(f) Form of Note dated as of September 15, 1994.* 4(g) Form of Zero Coupon Security dated as of September 15, 1994.* 4(h) Specimen Debenture for 9 1/8% Notes due October 1, 2024.* 4(i) Specimen of 7 1/4% Debenture due May 15, 2005.* 4(j) Junior Subordinated Indenture of LNC as of May 1, 1996.* 4(k) Guarantee Agreement for Lincoln National Capital I.* 4(l) Guarantee Agreement for Lincoln National Capital II.* 4(m) Form of Lincoln National Capital I Preferred Securities, Series A.* 4(n) Form of Lincoln National Capital II Preferred Securities, Series B.* 10(a) LNC 1986 Stock Option Incentive Plan.* 10(b) LNC 1982 Stock Option Incentive Plan.* 10(c) The LNC Executives' Salary Continuation Plan. 94 10(d) The LNC Executive Value Sharing Plan.* 10(e) LNC Executives' Severance Benefit Plan.* 10(f) The LNC Outside Directors Retirement Plan.* 10(g) The LNC Outside Directors Benefits Plan. 100 10(h) LNC Directors' Value Sharing Plan. 103 10(i) The LNC Executive Deferred Compensation Plan for Employees. 111 10(j) LNC 1993 Stock Plan for Non-Employee Directors.* 10(k) LNC Executives' Excess Compensation Benefit Plan.* 10(l) LNC 1997 Incentive Compensation Plan.* 10(m) Description of compensation arrangements with Executive Officers. 127 10(n) Lease and Agreement dated August 1, 1984, with respect to Lincoln Life's home office property.* 10(o) Lease and Agreement dated August 1, 1984, with respect to additional Lincoln Life home office property.* 10(p) Lease dated December 1, 1994, with respect to LNC's Corporate Offices.* 10(q) Lease and Agreement dated February 17, 1998 with respect to additional Lincoln Life headquarter property. 150 12 Historical Ratio of Earnings to Fixed Charges. 207 21 List of Subsidiaries of LNC. 208 23 Consent of Ernst & Young LLP, Independent Auditors. 221 27 Financial Data Schedule. 222 *Incorporated by Reference -80- Signature Page LINCOLN NATIONAL CORPORATION Pursuant to the requirements By /s/ Ian M. Rolland March 12, 1998 of Section 13 or 15(d) of Ian M. Rolland, the Securities Exchange Act (Chairman, Chief Executive Officer and of 1934, LNC has duly caused Director this report to be signed on its behalf by the under- By /s/ Jon A. Boscia March 12, 1998 signed, thereunto duly Jon A. Boscia, authorized. (President and Director) By /s/ Richard C. Vaughan March 12, 1998 Richard C. Vaughan, (Executive Vice President and Chief Financial Officer) By /s/ Donald L. Van Wyngarden March 12, 1998 Donald L. Van Wyngarden (Second Vice President and Controller) Pursuant to the requirements By /s/ J. Patrick Barrett March 12, 1998 of the Securities Exchange J. Patrick Barrett Act of 1934, this report has been signed below by By /s/ Thomas D. Bell, Jr. March 12, 1998 the following Directors Thomas D. Bell, Jr. of LNC on the date indicated. By /s/ Daniel R. Efroymson March 12, 1998 Daniel R. Efroymson By /s/ Harry L. Kavetas March 12, 1998 Harry L. Kavetas By /s/ M. Leanne Lachman March 12, 1998 M. Leanne Lachman By /s/ Earl L. Neal March 12, 1998 Earl L. Neal By /s/ Roel Pieper March 12, 1998 Roel Pieper By /s/ John M. Pietruski March 12, 1998 John M. Pietruski By /s/ Jill S. Ruckelshaus March 12, 1998 Jill S. Ruckelshaus By /s/ Gordon A. Walker March 12, 1998 Gordon A. Walker By /s/ Gilbert R. Whitaker, Jr. March 12, 1998 Gilbert R. Whitaker, Jr. EX-3 2 Exhibit 3(b) - -81- Adopted January 17, 1968; as Last Amended January 14, 1998 BYLAWS OF LINCOLN NATIONAL CORPORATION ARTICLE I Shareholders Section 1. Annual Meeting. An annual meeting of the shareholders shall be held at such hour and on such date as the board of directors may select in each year for the purpose of electing directors for the terms hereinafter provided and for the transaction of such other business as may properly come before the meeting. (Amended January 9, 1991) Section 2. Special Meetings. Special meetings of the shareholders may be called by the board of directors. Only business within the purpose or purposes described in the meeting notice may be conducted at a special shareholders meeting. (Last amended May 15, 1997) Section 3. Place of Meetings. All meetings of shareholders shall be held at the principal office of the corporation in Fort Wayne, Indiana, or at such other place, either within or without the State of Indiana, as may be designated by the board of directors. (Amended November 6, 1986) Section 4. Notice of Meetings. A written or printed notice, stating the place, day and hour of the meeting, and in the case of a special meeting or when required by law or by the articles of incorporation or these bylaws, the purpose or purposes for which the meeting is called, shall be delivered or mailed by or at the direction of the secretary no fewer than ten nor more than sixty days before the date of the meeting, to each shareholder of record entitled to vote at such meeting at such address as appears upon the stock records of the corporation. (Last amended August 10, 1989) Section 5. Quorum. Unless otherwise provided by the articles of incorporation or these bylaws, at any meeting of shareholders the majority of the outstanding shares entitled to vote at such meeting, represented in person or by proxy, shall constitute a quorum. If less than a majority of such shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. (Amended November 6, 1986) Section 6. Adjourned Meetings. At any adjourned meeting at which a quorum shall be represented any business may be transacted as might have been transacted at the meeting as originally notified. If a new record date is or must be established pursuant to law, notice of the adjourned meeting must be given to persons who are shareholders as of the new record date. (Added November 6, 1986) Section 7. Proxies. At all meetings of shareholders, a shareholder may vote either in person or by proxy executed in writing by the shareholder or a duly authorized attorney in fact. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Section 8. Voting of Shares. Except as otherwise provided by law, by the articles of incorporation, or by these bylaws, every shareholder shall have the right at every shareholders' meeting to one vote for each share standing in his name on the books of the corporation on the date established by the board of directors as the record date for determination of shareholders entitled to vote at such meeting. (Amended May 7, 1987) Section 9. Order of Business. The order of business at each shareholders' meeting shall be established by the person presiding at the meeting. (Amended March 16, 1972) Section 10. Notice of Shareholder Business. At any meeting of the shareholders, only such business may be conducted as shall have been properly brought before the meeting, and as shall have been determined to be lawful and appropriate for consideration by shareholders at the meeting. To be properly brought before a meeting business must be (a) specified in the notice of meeting given in accordance with Section 4 of this Article I, (b) otherwise properly brought before the meeting by or at the direction of the board of directors or the chief executive officer, or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before a meeting by a shareholder pursuant to clause (c) above, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal office of the corporation, not less than fifty days nor more than ninety days prior to the meeting; provided, however, that in the event that less than sixty days' notice of the date of the meeting is given to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was given. A shareholder's notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting, (b) the name and address, as they appear on the corporation's stock records, of the shareholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the shareholder, and (d) any interest of the shareholder in such business. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 10. The person presiding at the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the bylaws, or that business was not lawful or appropriate for consideration by shareholders at the meeting, and if he should so determine, he shall so declare to the meeting and any such business shall not be transacted. (Last amended January 11, 1987) Section 11. Notice of Shareholder Nominees. Nominations of persons for election to the board of directors of the corporation may be made at any meeting of shareholders by or at the direction of the board of directors or by any shareholder of the corporation entitled to vote for the election of directors at the meeting. Shareholder nominations shall be made pursuant to timely notice given in writing to the secretary of the corporation in accordance with Section 10 of this Article I. Such shareholder's notice shall set forth, in addition to the information required by Section 10, as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required to be disclosed in solicitation of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and (v) the qualifications of the nominee to serve as a director of the corporation. No shareholder nomination shall be effective unless made in accordance with the procedures set forth in this Section 11. The person presiding at the meeting shall, if the facts warrant, determine and declare to the meeting that a shareholder nomination was not made in accordance with the bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (Last amended January 11, 1987) Section 12. Control Share Acquisitions. As used in this Section 12, the terms "control shares" and "control share acquisition" shall have the same meanings as set forth in Indiana Code Section 23-1-42-1 et seq. (the "Act"). Control shares of the corporation acquired in a control share acquisition shall have only such voting rights as are conferred by the Act. Control shares of the corporation acquired in a control share acquisition with respect to which the acquiring person has not filed with the corporation the statement required by the Act may, at any time during the period ending sixty days after the last acquisition of control shares by the acquiring person, be redeemed by the corporation at the fair value thereof pursuant to procedures authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances. (Added May 7, 1987) Section 13. Voting Procedures on Change of Control. In addition to any other authority granted under Indiana law for the corporation to enter into any arrangement, agreement or understanding with respect to the voting of voting shares, pursuant to the authority granted in Indiana Code Section 23-1- 22-4, the corporation shall have the power to enter into any arrangement, agreement or understanding of any nature whatsoever and for any duration whereby the board of directors or any group of directors of the corporation can specify or direct the voting by any other person of any shares of any class or series beneficially owned by such person, or as to which such person has the direct or indirect power to direct the voting, in connection with a change of control of the corporation. As used in this Section 13, the term "control" shall have the same meaning as set forth in Indiana Code Section 23- 1-22-4. In the event that an arrangement, agreement or understanding is in effect, and the voting shares of the corporation are not voted in accordance with any such arrangement, agreement or understanding, neither such voting shares nor such votes shall be counted in connection with any vote of the corporation's shareholders relating to any aspect of a change of control. (Added June 25, 1990) ARTICLE II Board of Directors Section 1. General Powers, Number, Classes and Tenure. The business of the corporation shall be managed by a board of directors. The number of directors which shall constitute the whole board of directors of the corporation shall be thirteen. The number of directors may be increased or decreased from time to time by amendment of these bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. The directors shall be divided into three classes, each class to consist, as nearly as may be, of one-third of the number of directors then constituting the whole board of directors, with one class to be elected annually by shareholders for a term of three years, to hold office until their respective successors are elected and qualified; except that (Last amended effective January 14, 1998) (1) the terms of office of directors initially elected shall be staggered so that the term of office of one class shall expire in each year; (2) the term of office of a director who is elected by either the directors or shareholders to fill a vacancy in the board of directors shall expire at the end of the term of office of the succeeded director's class or at the end of the term of office of such other class as determined by the board of directors to be necessary or desirable in order to equalize the number of directors among the classes; (3) the board of directors may adopt a policy limiting the time beyond which certain directors are not to continue to serve, the effect of which may be to produce classes of unequal size or to cause certain directors either to be nominated for election for a term of less than three years or to cease to be a director before expiration of the term of the director's class. In case of any increase in the number of directors, the additional directors shall be distributed among the several classes to make the size of the classes as equal as possible. (Last amended January 1, 1992) Section 2. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, either within or without the State of Indiana, for the holding of additional regular meetings without other notice than such resolution. Section 3. Special Meetings. Special meetings of the board of directors may be called by the chief executive officer. The secretary shall call special meetings of the board of directors when requested in writing to do so by a majority of the members thereof. Special meetings of the board of directors may be held either within or without the State of Indiana. (Last amended August 10, 1989) Section 4. Notice of Meetings. Except as otherwise provided in these bylaws, notice of any meeting of the board of directors shall be given, not less than two days before the date fixed for such meeting, by oral, telegraphic, telephonic, electronic or written communication stating the time and place thereof and delivered personally to each member of the board of directors or telegraphed or mailed to him at his business address as it appears on the books of the corporation; provided, that in lieu of such notice, a director may sign a written waiver of notice either before the time of the meeting, at the time of the meeting or after the time of the meeting. (Last amended November 6, 1986) Section 5. Quorum. A majority of the whole board of directors shall be necessary to constitute a quorum for the transaction of any business except the filling of vacancies, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. Section 6. Manner of Acting. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the board of directors, unless the act of a greater number is required by law or by the articles of incorporation or these bylaws. Unless otherwise provided by the articles of incorporation, any action required or permitted to be taken at any meeting of the board of directors may be taken without a meeting, if a written consent to such action is signed by all members of the board of directors and such written consent is filed with the minutes of proceedings of the board of directors. Unless otherwise provided by the articles of incorporation, any or all members of the board of directors may participate in a meeting of the board of directors by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can communicate with each other, and participation in this manner constitutes presence in person at the meeting. (Last amended effective March 14, 1991) Section 7. Vacancies. Except as otherwise provided in the articles of incorporation, any vacancy occurring in the board of directors may be filled by a majority vote of the remaining directors, though less than a quorum of the board of directors, or, at the discretion of the board of directors, any vacancy may be filled by a vote of the shareholders. (Amended November 6, 1986) Section 8. Notice to Shareholders. Shareholders shall be notified of any increase in the number of directors and the name, address, principal occupation and other pertinent information about any director elected by the board of directors to fill any vacancy. Such notice shall be given in the next mailing sent to shareholders following any such increase or election, or both, as the case may be. ARTICLE III Officers Section 1. Elected Officers. The elected officers of the corporation shall be a president, a secretary, and a treasurer, and may also include a chairman of the board, one or more vice presidents of a class or classes as the board of directors may determine, and such other officers as the board of directors may determine. The chairman of the board and the president shall be chosen from among the directors. Any two or more offices may be held by the same person. (Last amended November 6, 1986) Section 2. Appointed Officers. The appointed officers of the corporation shall be one or more second vice presidents, assistant vice presidents, assistant treasurers, and assistant secretaries. (Added November 6, 1986) Section 3. Election or Appointment and Term of Office. The elected officers of the corporation shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of the shareholders. The appointed officers of the corporation shall be appointed annually by the chief executive officer immediately following the first meeting of the board of directors held after each annual meeting of the shareholders. Additional elected officers may be elected at any regular or special meeting of the board of directors, to serve until the regular meeting of the board held after the next annual meeting of shareholders, and additional appointed officers may be appointed by the chief executive officer at any time to serve until the next annual appointment of officers. Each officer shall hold office until his successor shall have been duly elected or appointed and shall have qualified or until his death or until he shall resign or retire or shall have been removed. (Amended November 6, 1986) Section 4. Removal. Any officer may be removed by the board of directors and any appointed officer may be removed by the chief executive officer, whenever in their judgment the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. (Last amended August 13, 1987) Section 5. Vacancies. A vacancy in the office of president or secretary or treasurer because of death, resignation, retirement, removal or otherwise, shall be filled by the board of directors, and a vacancy in any other elected office may be filled by the board of directors. Section 6. Chief Executive Officer. If the elected officers of the corporation include both a chairman of the board and a president, the board of directors shall designate one of such officers to be the chief executive officer of the corporation. If the office of chairman of the board be vacant, the president shall be the chief executive officer of the corporation. The chief executive officer of the corporation shall be, subject to the board of directors, in general charge of the affairs of the corporation. (Amended March 7, 1968) Section 7. Chairman of the Board. The chairman of the board shall preside at all meetings of the shareholders and of the board of directors at which he may be present and shall have such other powers and duties as may be determined by the board of directors. Section 8. President. The president shall have such powers and duties as may be determined by the board of directors. In the absence of the chairman of the board, or if such office be vacant, the president shall have all the powers of the chairman of the board and shall perform all his duties. Section 9. Vice Presidents. A vice president shall perform such duties as may be assigned by the chief executive officer or the board of directors. In the absence of the president and in accordance with such order of priority as may be established by the board of directors, he may perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. (Amended September 14, 1972) Section 10. Second Vice Presidents and Assistant Vice Presidents. A second vice president and an assistant vice president shall perform such duties as may be assigned by the chief executive officer or the board of directors. (Added November 6, 1986) Section 11. Secretary. The secretary shall (a) keep the minutes of the shareholders' and board of directors' meetings in one or more books provided for that purpose, (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law, (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized, and (d) in general perform all duties incident to the office of secretary and such other duties as may be assigned by the chief executive officer or the board of directors. (Amended September 14, 1972) Section 12. Assistant Secretaries. In the absence of the secretary, an assistant secretary shall have the power to perform his duties including the certification, execution and attestation of corporate records and corporate instruments. Assistant secretaries shall perform such other duties as may be assigned to them by the chief executive officer or the board of directors. (Last amended November 6, 1986) Section 13. Treasurer. The treasurer shall (a) have charge and custody of all funds and securities of the corporation, (b) receive and give receipts for monies due and payable to the corporation from any source whatsoever, (c) deposit all such monies in the name of the corporation in such depositories as are selected by the board of directors, and (d) in general perform all duties incident to the office of treasurer and such other duties as may be assigned by the chief executive officer or the board of directors. If required by the board of directors, the treasurer shall give a bond for the faithful discharge of his duties in such form and with such surety or sureties as the board of directors shall determine. (Amended September 14, 1972) Section 14. Assistant Treasurers. In the absence of the treasurer, an assistant treasurer shall have the power to perform his duties. Assistant treasurers shall perform such other duties as may be assigned to them by the chief executive officer or the board of directors. (Last amended November 6, 1986) ARTICLE IV Committees Section 1. Board Committees. The board of directors may, by resolution adopted by a majority of the whole board of directors, from time to time designate from among its members one or more committees each of which, to the extent provided in such resolution and except as otherwise provided by law, shall have and exercise all the authority of the board of directors. Each such committee shall serve at the pleasure of the board of directors. The designation of any such committee and the delegation thereto of authority shall not operate to relieve the board of directors, or any member thereof, of any responsibility imposed by law. Each such committee shall keep a record of its proceedings and shall adopt its own rules of procedure. It shall make such reports to the board of directors of its actions as may be required by the board. (Amended March 16, 1972) Section 2. Advisory Committees. The board of directors may, by resolution adopted by a majority of the whole board of directors, from time to time designate one or more advisory committees, a majority of whose members shall be directors. An advisory committee shall serve at the pleasure of the board of directors, keep a record of its proceedings and adopt its own rules of procedure. It shall make such reports to the board of directors of its actions as may be required by the board. (Amended March 16, 1972) Section 3. Manner of Acting. Unless otherwise provided by the articles of incorporation, any action required or permitted to be taken at any meeting of a committee established under this Article IV may be taken without a meeting, if a written consent to such action is signed by all members of the committee and such written consent is filed with the minutes of proceedings of the committee. Unless otherwise provided by the articles of incorporation, any or all members of such committee may participate in a meeting of the committee by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can communicate with each other, and participation in this manner constitutes presence in person at the meeting. (Last amended effective March 14, 1991) ARTICLE V Corporate Instruments and Loans Section 1. Corporate Instruments. The board of directors may authorize any officer or officers to execute and deliver any instrument in the name of or on behalf of the corporation, and such authority may be general or confined to specific instances. (Amended September 14, 1972) Section 2. Loans. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances. ARTICLE VI Stock Certificates, Transfer of Shares, Stock Records Section 1. Certificates for Shares. Each shareholder shall be entitled to a certificate, signed by the president or a vice president and the secretary or any assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. If such certificate is countersigned by the written signature of a transfer agent other than the corporation or its employee, the signatures of the officers of the corporation may be facsimiles. If such certificate is countersigned by the written signature of a registrar other than the corporation or its employee, the signatures of the transfer agent and the officers of the corporation may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of its issue. Certificates representing shares of the corporation shall be in such form consistent with the laws of the State of Indiana as shall be determined by the board of directors. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer records of the corporation. (Amended May 28, 1969) Section 2. Transfer of Shares. Transfer of shares of the corporation shall be made on the stock transfer records of the corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the corporation, and, except as otherwise provided in these bylaws, on surrender for cancellation of the certificates for such shares. (Amended May 28, 1969) Section 3. Lost, Destroyed or Wrongfully Taken Certificates. Any person claiming a certificate of stock to have been lost, destroyed or wrongfully taken, and who requests the issuance of a new certificate before the corporation has notice that the certificate alleged to have been lost, destroyed or wrongfully taken has been acquired by a bona fide purchaser, shall make an affidavit of that fact and shall give the corporation and its transfer agents and registrars a bond of indemnity with unlimited liability, in form and with one or more corporate sureties satisfactory to the chief executive officer or treasurer of the corporation (except that the chief executive officer or treasurer may authorize the acceptance of a bond of different amount, or a bond with personal surety thereon, or a personal agreement of indemnity), whereupon in the discretion of the chief executive officer or the treasurer and except as otherwise provided by law a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to have been lost, destroyed or wrongfully taken. In lieu of a separate bond of indemnity in each case, the chief executive officer of the corporation may accept an assumption of liability under a blanket bond issued in favor of the corporation and its transfer agents and registrars by one or more corporate sureties satisfactory to him. (Amended September 14, 1972) Section 4. Transfer Agent and Registrars. The board of directors by resolution may appoint a transfer agent or agents or a registrar or registrars of transfer, or both. All such appointments shall confer such powers, rights, duties and obligations consistent with the laws of the State of Indiana as the board of directors shall determine. The board of directors may appoint the treasurer of the corporation and one or more assistant treasurers to serve as transfer agent or agents. (Amended May 28, 1969) Section 5. Record Date. For the purposes of determining shareholders entitled to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as a record date for any such determination of shareholders, such date in any case to be not more than seventy days before the meeting or action requiring a determination of shareholders. (Amended November 6, 1986) ARTICLE VII Liability No person or his personal representatives shall be liable to the corporation for any loss or damage suffered by it on account of any action taken or omitted to be taken by such person in good faith as an officer or employee of the corporation, or as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not, which he serves or served at the request of the corporation, if such person (a) exercised and used the same degree of care and skill as a prudent man would have exercised and used under like circumstances, charged with a like duty, or (b) took or omitted to take such action in reliance upon advice of counsel for the corporation or such enterprise or upon statements made or information furnished by persons employed or retained by the corporation or such enterprise upon which he had reasonable grounds to rely. The foregoing shall not be exclusive of other rights and defenses to which such person or his personal representatives may be entitled under law. (Last amended November 6, 1986) ARTICLE VIII Indemnification Section 1. Actions by a Third Party. The corporation shall indemnify any person who is or was a party, or is threatened to be made a defendant or respondent, to a proceeding, including any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than actions by or in the right of the corporation), and whether formal or informal, who is or was a director, officer, or employee of the corporation or who, while a director, officer, or employee of the corporation, is or was serving at the corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not, against: (a) any reasonable expenses (including attorneys' fees) incurred with respect to a proceeding, if such person is wholly successful on the merits or otherwise in the defense of such proceeding, or (b) judgments, settlements, penalties, fines (including excise taxes assessed with respect to employee benefit plans) and reasonable expenses (including attorneys' fees) incurred with respect to a proceeding where such person is not wholly successful on the merits or otherwise in the defense of the proceeding if: (i) the individual's conduct was in good faith; and (ii) the individual reasonably believed: (A) in the case of conduct in the individual's capacity as a director, officer or employee of the corporation, that the individual's conduct was in the corporation's best interests; and (B) in all other cases, that the individual's conduct was at least not opposed to the corporation's best interests; and (iii) in the case of any criminal proceeding, the individual either: (A) had reasonable cause to believe the individual's conduct was lawful; or (B) had no reasonable cause to believe the individual's conduct was unlawful. The termination of a proceeding by a judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director, officer, or employee did not meet the standard of conduct described in this section. (Last amended November 6, 1986) Section 2. Actions by or in the Right of the Corporation. The corporation shall indemnify any person who is or was a party or is threatened to be made a defendant or respondent, to a proceeding, including any threatened, pending or completed action, suit or proceeding, by or in the right of the corporation to procure a judgment in its favor, by reason of the fact that such person is or was a director, officer, or employee of the corporation or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not, against any reasonable expenses (including attorneys' fees): (a) if such person is wholly successful on the merits or otherwise in the defense of such proceeding, or (b) if not wholly successful: (i) the individual's conduct was in good faith; and (ii) the individual reasonably believed: (A) in the case of conduct in the individual's capacity as a director, officer, or employee of the corporation, that the individual's conduct was in the corporation's best interests; and (B) in all other cases, that the individual's conduct was at least not opposed to the corporation's best interests, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application, that despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses which such court shall deem proper. (Last amended November 6, 1986) Section 3. Methods of Determining Whether Standards for Indemnification Have Been Met. Any indemnification under Sections 1 or 2 of this Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, or employee is proper in the circumstances because he has met the applicable standards of conduct set forth in Section 1 or 2. In the case of directors of the corporation such determination shall be made by any one of the following procedures: (a) by the board of directors by a majority vote of a quorum consisting of directors not at the time parties to the proceeding; (b) if a quorum cannot be obtained under (a), by majority vote of a committee duly designated by the board of directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding; (c) by special legal counsel: (i) selected by the board of directors or a committee thereof in the manner prescribed in (a) or (b); or (ii) if a quorum of the board of directors cannot be obtained under (a) and a committee cannot be designated under (b), selected by a majority vote of the full board of directors (in which selection directors who are parties may participate). In the case of persons who are not directors of the corporation, such determination shall be made (a) by the chief executive officer of the corporation or (b) if the chief executive officer so directs or in his absence, in the manner such determination would be made if the person were a director of the corporation. (Last amended November 6, 1986) Section 4. Advancement of Defense Expenses. The corporation may pay for or reimburse the reasonable expenses incurred by a director, officer, or employee who is a party to a proceeding described in Section 1 or 2 of this Article in advance of the final disposition of said proceeding if: (a) the director, officer, or employee furnishes the corporation a written affirmation of his good faith belief that he has met the standard of conduct described in Section 1 or 2; and (b) the director, officer, or employee furnishes the corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that the director, officer or employee did not meet the standard of conduct; and (c) a determination is made that the facts then known to those making the determination would not preclude indemnification under Section 1 or 2. The undertaking required by this Section must be an unlimited general obligation of the director, officer, or employee but need not be secured and may be accepted by the corporation without reference to the financial ability of such person to make repayment. (Last amended November 6, 1986) Section 5. Non-Exclusiveness of Indemnification. The indemnification and advancement of expenses provided for or authorized by this Article does not exclude any other rights to indemnification or advancement of expenses that a person may have under: (a) the corporation's articles of incorporation or bylaws; (b) any resolution of the board of directors or the shareholders of the corporation; (c) any other authorization adopted by the shareholders; or (d) otherwise as provided by law, both as to such person's actions in his capacity as a director, officer, or employee of the corporation and as to actions in another capacity while holding such office. Such indemnification shall continue as to a person who has ceased to be a director, officer, or employee, and shall inure to the benefit of the heirs and personal representatives of such person. (Last amended November 6, 1986) ARTICLE IX Amendments These bylaws may be altered, amended or repealed and new bylaws may be made by a majority of the whole board of directors at any regular or special meeting of the board of directors. (Amended effective May 11, 1978) PC DOC No. 52160 EX-10 3 Exhibit 10(c) - -94- Salary Continuation Plan for Executives of Lincoln National Corporation and Affiliates as amended through January 1, 1992 Section 1. History and Effective Date. The following provisions constitute an amendment, restatement, and continuation of the Salary Continuation Plan for Executives of Lincoln National Corporation and Affiliates (the "Plan"). Section 2. Purpose. The Plan was established because certain highly-compensated employees ("Executives") have been and will be key persons in the successful operation of the Company and other Employers. Lincoln National Corporation (the "Company") desires (a) to assure that it will have the benefit of the Executives' services until retirement; and (b) after termination of service, but prior to age 65, to retain the Executive's exclusive consultative services. The Company and each Affiliate (as defined below) which with the consent of the Chief Executive Officer of the Company has adopted or hereafter adopts the Plan are referred to below collectively as the "Employers" and individually as an "Employer." The term "Affiliate" means any corporation 50 percent or more of the voting stock of which is owned, directly or indirectly, by the Company. Section 3. Employees Eligible to Participate. Individuals from a select group of highly- compensated employees shall be eligible to participate in the Plan as determined by the Chief Executive Officer of the Company. Such an eligible employee who participates in the Plan is hereinafter called "Executive". Section 4. Effective Date of Executive's Participation. The Plan shall become effective for an Executive on the date specified in the Joinder Agreement signed by the Executive and agreed to by the Company. Section 5. Amount of Salary Continuation Benefit. The amount of salary continuation benefit shall be based on 2% of the Executive's final monthly salary multiplied by the total number of years of participation in the Plan up to a maximum of 10% of the Executive's final monthly salary. An Executive's final monthly salary shall be that monthly rate of salary which is being paid at termination of service unless the Executive retires after age 65, in which case, the final monthly salary shall be the monthly rate of salary which is being paid at the time the Executive attains age 65. Effective January 1, 1992, the maximum final monthly salary used to calculate the Salary Continuation Benefit shall be the greater of $16,667.00 and the monthly salary in effect on December 31, 1991. Years of participation shall be counted beginning with the effective date of an Executive's Participation as described in Section 4. A year of participation shall be a 12 month period beginning with the Executive's effective date of participation and ending with the day preceding the first anniversary of such effective date. Each succeeding 12 month period of participation shall be counted as a year of participation in the Plan. An Executive who does not have five full years of participation in the Plan and who retires while participating will be granted a full year of participation for any final partial year. Section 6. Salary Continuation Benefits upon Retirement at or after Age 65. Upon retirement at or after age 65, the Company or the Affiliate for which the Executive last performed services, agrees to pay salary continuation benefits to the Executive in the amount calculated in Section 5. Section 7. Salary Continuation Benefits upon Retirement prior to Age 65. Upon retirement prior to age 65 and under circumstances entitling him to receive retirement benefits in accordance with the provisions of the Company's employees' retirement plan, the Company agrees to pay salary continuation benefits to the Executive. The amount of such benefit shall be the amount calculated in Section 5, actuarially reduced in accordance with the following table and with such linear interpolations as shall in the sole discretion of the Company be necessary to take into account the exact age (including fractions) of the Executive at the date of retirement: Applicable Factor Applicable Factor Applicable Factor If Executive Has At If Executive Has If Executive Has Less Least 25 Vesting Yrs 20-25 Vesting Yrs Than 20 Vesting Yrs Executive's of Service Under the of Service Under the of Service Under the Age at Company's Employees' Company's Employees' Company's Employees' Retirement Retirement Plan Retirement Plan Retirement Plan 65 1.00 1.00 1.00 64 1.00 .92 .91 63 1.00 .85 .83 62 1.00 .79 .75 61 .95 .74 .67 60 .90 .70 .60 59 .85 .66 .55 58 .80 .62 .50 57 .75 .58 .45 56 .69 .54 .40 55 .63 .50 .35 Section 8. Method and Duration of Payment of Benefits. Benefit payments under Sections 6 and 7 shall be made on the first day of the first calendar month following the date of retirement and on the first day of each calendar month thereafter so long as the Executive shall live; provided, however, that in no event shall the Company make less than one hundred twenty (120) such payments, whether to the Executive or to the Beneficiary. Section 9. Death Benefit Before Retirement and Before Age 65. For Executives who signed a Joinder Agreement on or before December 31, 1991, if the Executive dies prior to termination of service and prior to attaining age 65, all of the rights of the Executive hereunder shall terminate, except that the Beneficiary shall receive a payment equal to 25% of the Executive's annual rate of salary, immediately upon receipt by the Company of satisfactory proof of death, and an equal amount thereafter on the yearly anniversary of the Executive's death until the Executive, if alive, would have attained age 65, and until a total of at least ten (10) payments have been made. Effective January 1, 1992, the annual salary used to calculate the death benefit shall not exceed the greater of $200,000 and the annual salary in effect on December 31, 1991. Section 10. Death Before Retirement but After Age 65. If the Executive dies before retiring but after attaining age 65, all rights of the Executive hereunder shall terminate except that upon receipt of satisfactory proof of the Executive's death immediately there shall be paid to the Beneficiary and thereafter paid on the monthly anniversary of the Executive's death, an amount calculated in accordance with Section 5 for an aggregate of one hundred twenty (120) payments. Section 11. Death After Retirement. If the Executive dies after retiring and prior to receiving one hundred twenty (120) salary continuation benefit payments, payments to the Beneficiary shall be continued, if living, until combined payments to the Executive and the Beneficiary shall total one hundred twenty (120) payments. Section 12. Payments to an Estate. If the Executive fails to designate a valid Beneficiary in the Joinder Agreement or if there is no designated Beneficiary surviving the Executive, then any remaining payments due shall be commuted and paid to the Executive's estate. If the Beneficiary shall die after receiving one or more payments, but before all payments have been made, any remaining payments shall be commuted and paid to such Beneficiary's estate. Section 13. Voluntary Termination of Service. If the Executive voluntarily terminates employment with the Company and all Affiliates (a) prior to attaining age 55, or (b) after attaining age 55, but prior to attaining 65 and completing 5 years of service, neither the Executive nor any Beneficiary shall be entitled to any benefits under this Plan. Section 14. Involuntary Termination of Service. If the Executive involuntarily terminates employment with the Company and all Affiliates primarily from circumstances not within the control of the Executive, but other than by death, disability or for cause, and if he continues to provide exclusive consultative services after such termination of employment, his salary continuation benefit shall be paid to the Executive beginning on the first day of the first calendar month following the date the Executive reaches age 65 and on the first day each calendar month thereafter so long as the Executive shall live; provided, however, that after payments begin at age 65, in no event shall the Company and all Affiliates make less than one hundred twenty (120) such payments, whether to the Executive or to the Beneficiary. If the terminated Executive dies before age 65, no benefit shall be paid under this Plan. Section 15. Termination of Service After a Change In Control of the Company. In the event of a voluntary or involuntary termination of service of the Executive within two years subsequent to a change in control of the Company, as defined in the LNC Executive Severance Benefit Plan, in effect immediately preceding such change in control, such Executive shall be treated as continuing employment with the Company until age 65, and the conditions for benefits in Section 16, below, shall not apply. Section 16. Conditions for Benefits. In the event of an Executive's involuntary termination of service, all benefits as provided in this Plan shall be forfeited if the Executive fails to act, directly or indirectly, as an exclusive consultant to the Company until age 65; provided, however, that the Company may waive the requirements in this Section 16 in a written document signed by its Chief Executive Officer. Section 17. No Right or Title to Funds. The Company shall have no obligation to set aside, earmark, or entrust any fund, policy, or money with which to pay any obligations under this Plan. The Executive, and any successor in interest to him, shall be and remain simply a general creditor of the Company with respect to any promises to pay under this Plan in the same manner as any other creditor who has a general claim for an unpaid liability. Neither the Executive nor any Beneficiary shall acquire any right in or title to any funds or assets of the Company otherwise than by and through the actual payment of the monthly or annual payments hereunder. The Company shall not make any loans or extend credit to an Executive which will be offset by benefits payable under this Plan. Section 18. Definitions and Rules of Construction. Except where the context clearly indicates to the contrary, the following terms have the meanings specified: (a ) "Beneficiary" means the beneficiary or beneficiaries designated in the Joinder Agreement by the Executive. The designation of beneficiary by the Executive in the last Joinder Agreement executed prior to death shall control. Payments under this Plan to the last designated beneficiary or his estate shall relieve the Company from all responsibility to any beneficiary designated in a prior Joinder Agreement. (b) "Joinder Agreement" means the document agreed to by the Company by which the Executive affirmatively demonstrates a desire to participate in the Plan according to the terms and conditions herein and designates a Beneficiary. (c) The pronouns "he" and "his" include the other gender. (d) The terms "herein," "hereof," and "hereunder" refer to the Plan in its entirety. (e) This Plan may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (f) The headings in this Plan are for purposes of reference only and shall not limit or otherwise affect any of the terms hereof. Section 19. No Assignments, etc. Neither the Executive nor a Beneficiary, shall have power to transfer, assign, anticipate, mortgage or otherwise encumber in advance any of the payments provided by this Plan; nor shall said payments be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, or be transferable by operation of law in event of bankruptcy, insolvency or otherwise. Upon the occurrence of any event in violation or attempted violation of this provision, any payments thereafter payable hereunder shall, in the sole and uncontrolled discretion of the Company, be subject to cancellation; whereupon, the Company may, but need not, make such payments to someone else deemed by it to be a natural object of the bounty of the Executive, and such payments shall relieve the Company and all Affiliates of any further or other obligation hereunder. Section 20. Amendment, Suspension or Termination of Plan. This Plan may be amended or terminated at any time and from time to time by the Company without an Executive's consent, but no amendment shall operate to give the Executive, or his Beneficiary, either directly or indirectly, any interest whatsoever in any funds or assets of the Company and any Affiliates, except the right upon fulfillment of all terms and conditions hereof to receive the payments herein provided. Likewise, no amendment, suspension or termination of this Plan shall, in and of itself, result in the forfeiture of any salary continuation benefit promise accrued to an Executive who is in the active employment of the Company at such time or to an Executive who's service has been involuntarily terminated as described in Section 14 and no amendment, suspension or termination of this Plan shall operate to reduce or diminish any benefit after payment of such benefit has begun. Section 21. No Effect on Employment. This Plan shall not supersede any other contract of employment, whether oral or in writing, between the Company, its Affiliates and the Executive, nor shall it affect or impair the rights and obligations of the Company and the Executive, respectively, thereunder; and nothing contained herein shall impose any obligation on the Company to continue the employment of the Executive. IN WITNESS WHEREOF, the Company has caused its name to be subscribed to this amendment, restatement, and continuation. LINCOLN NATIONAL CORPORATION By _________________________ Ian M. Rolland, Its Chairman Lincoln National Corporation Salary Continuation Plan for Executives Joinder Agreement I, _______________________________________, ("Executive") hereby agree to the terms and conditions of the Salary Continuation Plan for Executives of Lincoln National Corporation and Affiliates ("the Plan"), as amended through January 1, 1992, and as it may be amended, and request participation thereunder effective as of ___________________________, 19 __. I acknowledge that the Company is under no obligation to continue the Plan and that being a participant thereunder in no way guarantees my employment. Until further notice, I request that any death benefits be payable to: - ------------------------------------------------------------------------------ Name - ------------------------------------------------------------------------------ Address Relationship - --------------------------- ------------------------------ Date Signature of Executive Lincoln National Corporation agrees to the terms and conditions of the Plan and participation in that Plan by the Executive and acknowledges his/her request for participation this ________ day of ____________________________, 19 __. LINCOLN NATIONAL CORPORATION By __________________________ Title _______________________ PCDocs No. 44128\1 EX-10 4 Exhibit 10(g) - -100- Lincoln National Corporation Compensation and Benefits Highlights for the Board of Directors This brochure explains the comprehensive compensation and benefits package currently available to you as an outside director of Lincoln National Corporation or The Lincoln National Life Insurance Company. It includes information on your retainer and meeting fees, deferred compensation, retirement benefit, health and life insurance coverages, and other items. It is intended to serve as a reference and as an aid to your personal financial planning. This information is intended to be a summary only. More detailed information on the provisions of the various plans is contained in several documents and will be supplied upon request. Retainer and Meeting Fees Your current annual retainer as a director of the Lincoln National board is $23,000. In addition, for each board meeting and committee meeting you attend, you receive a $1,000 fee. If a committee meeting takes place on the same day as a board meeting, you receive two $1,000 fees. If two committee meetings of substantially similar nature are attended on one day only one $1,000 fee is paid. Your retainer and meeting fees are paid to you at the end of each quarter. Expense Reimbursement You will receive reimbursement for reasonable business expenses associated with board meetings and activities. These expenses include transportation, hotel accommodations, parking, meals and other necessary expenses. Deferred Compensation Plan As an outside director you have an opportunity to defer part or all of your annual fees (retainer and meeting) for succeeding calendar years. On or before December 31 of a year you may make this election for the following year and subsequent years. An election to defer fees shall continue from year to year unless you terminate it in writing. No amount deferred will be paid until you cease to be a director. Amounts deferred under the plan, together with accumulated interest, are distributable either as a lump sum within 30 days after you cease being a director, or in equal annual installments over a 10-year period beginning with January 1 of the calendar year immediately following the year in which you cease being a director. Provisions are also available for you to direct payments to your designated beneficiary in the event of your death either while a director or after you've ceased being a director. Retirement Plan When you cease being an outside director, you will be eligible to receive a monthly retirement benefit equal to one twelfth of the product of .833% of the annual retainer in effect on your retirement date, multiplied by the number of months you served as a director (maximum of 120 months). The normal form of payment is a single life annuity, but the following optional forms are available on an actuarially equivalent basis: a lump sum distribution or a life annuity with a 50% spouse's survivor annuity. Payments will begin on the first day of the month following your resignation or retirement from the board. Travel Accident Insurance Plan Any time you or your spouse is traveling at Lincoln National expense, you are each covered by $100,000 of travel accident insurance. This coverage is provided to you at no cost. The full $100,000 amount is payable to your designated beneficiary for the accidental loss of life, and to you for the accidental loss of both hands or both feet, the loss of your sight of both eyes or any combination thereof, or for the loss of your speech or hearing. One half the full amount is paid for the loss of one hand, one foot, the sight of one eye, or for the loss of speech or hearing. One fourth the full amount is paid for the loss of the thumb and index finger of either hand. If more than one loss is sustained from an accident, only one amount, the largest, will be paid. Liability Insurance Under the company's bylaws, the company will indemnify you to the fullest extent permitted by law if you are made a party to any suit or proceeding by reason of the fact that you are or were a director. You are also insured against liability caused by breeches of duty, negligent acts or errors of omission while acting in your capacity as a director of Lincoln National. Coverage of up to $50 million is currently provided. The liability insurance is subject to certain exclusions, as stated in the policies. Medical, Dental and Life Insurance Coverage Choices in various levels of life insurance and medical and dental coverage are available to you. You may choose coverage under one, two or all three of the benefit plans. Premium deductions for any coverages you select will be made at the end of each quarter from your director fees. Every year you will have an opportunity to change your life and health selections. The Medical Plan You may choose from three medical options: Medical 150, Medical 300 and Medical 600. All three options cover the same services and pay 80% of eligible expenses after the deductible has been met. They differ in the cost of the coverage and in your total out-of-pocket expense. The options also have three coverage cost levels relating to the number of persons you cover. The medical plan covers such expenses as hospital room and board, doctor and surgeon fees, inpatient hospital services, X-rays and lab tests, drugs and medicines, medical supplies, and outpatient services. The Dental Plan You may choose from two dental plan options: Dental 50 and Dental 100. Both options cover the same services and differ only in the cost and level of expenses you may have to pay. Covered services include preventive care, basic restorative care, major restorative care and orthodontia. The dental plan pays either 80% or 50% after the deductible, depending upon the type of treatment. The deductible is applied only to basic restorative and major restorative treatments. Life Insurance The life insurance plan offers you coverage of either 1, 2, 3 or 4 times your annual retainer. Such amount is payable to your designated beneficiary. This is group term insurance with no cash value, and the cost is age-related. If you select life insurance, you are also covered by accidental death and dismemberment insurance. If your death is the result of an accident, your beneficiary will also receive an AD&D benefit equal to your life insurance benefit. The AD&D coverage will also pay all or a portion of the benefit if you receive certain injuries, such as loss of a limb or eyesight, as a result of an accident. Matching College Contributions Program Under Lincoln National's Matching College Contributions Program, the company will match contributions between the amounts of $50 and $2,000 annually that you make to certain educational institutions. Eligible institutions are private and state-supported colleges and universities and their foundations and alumni funds. Only those U.S. educational accredited institutions listed in "Accredited Institutions of Postsecondary Education" are eligible for matching funds. Not eligible are gifts to seminaries and any non-academic programs (such as radio and television stations and athletic activities). The contributions must be used for general operating needs, scholarships or capital improvements. A Matching College Contribution form can be obtained from the Corporate Secretary's office. To apply for a match, please complete the form and mail it along with your gift to the college. Gifts will be matched in the year made and until April 30 of the following year. PCD66778 EX-10 5 Exhibit 10(h) - -103- LINCOLN NATIONAL CORPORATION DIRECTORS' VALUE SHARING PLAN (Including All Amendments Through May 15, 1997) ARTICLE I - PURPOSE OF PLAN 1.1 Establishment of Plan. Lincoln National Corporation (the "Corporation") adopts the Directors' Value Sharing Plan (the "Plan") to provide the benefits specified in the Plan for members of the Board of Directors of the Corporation who are not employees of the Corporation or any of its affiliates or subsidiaries ("Non-Employee Directors"). 1.2 Purpose of the Plan. The purpose of the Plan is to provide Non-Employee Directors with an increased economic interest in the Corporation in order to attract and retain well-qualified individuals to serve as Non-Employee Directors and to enhance the identity of interests between Non-Employee Directors and the shareholders of the Corporation. The Corporation intends that its Non-Employee Directors' Base Compensation (i.e., retainer and meeting fees) approximate the median of that for peer companies within the industry. The Plan is designed to provide additional compensation to Non-Employee Directors linked to overall return to the Corporation's shareholders. The Plan increases the Non-Employee Directors' financial interest in the Corporation through the payment of stock units based on: 1) Performance of the Corporation's stock relative to a group of peer companies, and 2) Service on the Board. ARTICLE II - ELIGIBILITY AND PARTICIPATION All Non-Employee Directors are eligible and shall participate in the Plan in accordance with the terms and conditions set forth herein. ARTICLE III - VALUE SHARING AWARD: STOCK PERFORMANCE 3.1 Stock Units. At the end of (i) the one-year period ending December 31, 1996; (ii) the two-year period ending December 31, 1997; and (iii) the three-year period ending December 31, 1998 and each succeeding three-year period ending annually thereafter (each such period, a "Performance Cycle"), the Corporation shall award each Non-Employee Director a whole number of stock units (the "Stock Units"), as determined under Section 3.2, in consideration for services rendered as a Non-Employee Director. Each Stock Unit shall represent an unfunded, unsecured obligation of the Corporation to pay an amount equal to the fair market value of a share of common stock of the Corporation ("Stock"), determined as of any business day by averaging the high and low sales price of the Stock quoted on the New York Stock Exchange Composite Listing on the preceding business day on which there were such quotations for the day in question. 3.2 Calculation of Stock Unit Award. The number of Stock Units awarded to each Non-Employee Director at the end of each Performance Cycle shall be based on the total shareholder return on the Stock as compared with that of the peer companies set forth in Exhibit A (the "Peer Companies") for that Performance Cycle. For purposes of this Section 3.2, the Corporation's total shareholder return shall be equal to the appreciation in the value of Stock times the accumulated number of shares held at the end of the Performance Cycle divided by the value of Stock at the beginning of the Performance Cycle. The accumulated number of shares is the sum of the shares acquired through the purchase of fractional shares by reinvesting the quarterly cash or cash-equivalent dividends in Stock, plus the original share of Stock. The value of Stock at the beginning of the Performance Cycle is the average of the closing prices of Stock on the last trading date of October, November, and December prior to a Performance Cycle beginning January 1. The value of Stock at the end of the Performance Cycle is the average of the closing price of Stock on the last trading date of October, November, and December for a Performance Cycle ending December 31. The total shareholder return for each Peer Company shall be calculated in the same manner. For purposes of the awards below, Peer Company Average Return, Top Tier Shareholder Return, and Top Company Shareholder Return are calculated as follows: Peer Company Average Return. The Peer Companies producing the 3 highest and the 3 lowest shareholder returns in the Peer Companies shall be disregarded for purposes of determining the Peer Company Average for each Performance Cycle. The Peer Company Average for the Performance Cycle shall be computed by averaging the shareholder total returns of the companies ranked fourth highest through eleventh highest. Top Tier Shareholder Return. The Top Tier Shareholder Return for each Performance Cycle shall be determined by averaging the companies contained in the Peer Company ranked third, fourth, and fifth highest in terms of Shareholder Return. Top Company Shareholder Return. The Top Company Shareholder Return for each Performance Cycle shall equal the greatest shareholder return of the Peer Companies during that Cycle. ARTICLE IV - VALUE SHARING AWARD: BOARD SERVICE 4.1 In addition to the awards based on stock performance described in Article III, the Corporation shall award Stock Units in lieu of participation in any pension or other retirement program of the Corporation to each Non-Employee Director who on or before March 31, 1996, waived any entitlement under (or who never becomes entitled to benefits under) such a program. 4.2 The number of such Stock Units to be granted each eligible Director shall be determined by (i) calculating the dollar amount (the "Level Funding") required to fund in equal quarterly payments over the Calculation Period (defined below) a notional lump sum amount payable as of age 70 of .185 of the current annual retainer multiplied by the number of quarters in the Calculation Period; and then (ii) applying the provisions of 4.3 through 4.9 of this Plan. The Level Funding shall be calculated assuming such payments were credited at the end of each calendar quarter commencing on the later of April 1, 1986, or the beginning of the calendar quarter which includes the date on which the individual first became a Non-Employee Director and terminating at the end of the Calculation Period and assuming an effective annual interest rate of 7.5% during the Calculation Period and during the period from the end of the Calculation Period to age 70. The Calculation Period shall be a period equal to the lesser of forty calendar quarters or the number of calendar quarters commencing with the calendar quarter which includes the date on which the individual's service as a Non-Employee Director began and ending with the calendar quarter immediately preceding the calendar quarter during which attainment of age 70 occurs. (See Exhibit B.) 4.3 An initial grant of stock units shall be made to each Non-Employee Director who has waived benefits as provided in 4.1 above by calculating (i) the dollar amount that would have accumulated had such Level Funding outlined in 4.2(i) above taken place during the period beginning the later of April 1, 1986 or the quarter which includes the date the individual became a Non-Employee Director and ending on March 31, 1996, including interest at 7.5% and dividing this amount by (ii) the value of a share of Stock determined in the manner set forth in 3.1 above (the "Stock Value") on March 31, 1996. 4.4 For an individual who as of March 31, 1996 has served as a Non-Employee Director for a period equal to or greater than the Calculation Period, the initial grant as described in 4.3 above shall constitute the entire basic Board Service Value Sharing Award and shall be supplemented by additional Board Service grants only as provided in 4.6 below. 4.5 For a Non-Employee Director who as of March 31, 1996 has not served as a Non-Employee Director for a period equal to or greater than the Calculation Period, the Corporation shall continue to make grants of Stock Units at the end of calendar quarters beginning April 1, 1996, and thereafter equal to the Level Funding amount calculated under 4.2(i) divided by the Stock Value as of the date of grant until grants have been made for each of the remaining quarters in the Calculation Period during which the individual continues to serve as a Non-Employee Director. 4.6 To the extent that the current annual retainer payable to Non-Employee Directors is increased in any year, each Non-Employee Director serving for such year shall also receive a grant of Stock Units equal to (i) .185 of the dollar amount of such increase times the number of quarters (to a maximum of forty) then served as a Non-Employee Director discounted at 7.5% interest from the Non-Employee Director's age 70 to the last day of the quarter during which such increase in retainer occurred, divided by (ii) the Stock Value as of the last day of the quarter in which such increase in retainer occurred. 4.7 For a Non-Employee Director who, as of the date any increase in retainer occurs, has not served as a Non-Employee Director for a period equal to or greater than the Calculation Period, the amount of any quarterly payment made in quarters following the quarter during which the increase in retainer occurred will be increased to an amount equal to the then current quarterly payment times the ratio of the new retainer to the then current retainer. 4.8 The beneficiary of a Non-Employee Director who dies while serving as a Non-Employee Director and who prior to March 31, 1996, waived his or her rights under any pension or retirement plan as provided in 4.1 above shall be entitled to receive an additional amount credited to his or her Account equal to the amount by which (i) the lump sum death benefit which would have been payable under the Lincoln National Corporation Directors' Retirement Plan had the Non-Employee Director continued to participate in that plan until his or her date of death exceeds (ii) the value as of the date of his or her death of the Stock Units calculated under the provisions of 4.2 through 4.7 and the Dividend Equivalent Payments provided by Article VI attributable to such Stock Units. No additional amount shall be credited under 4.8 if 4.8(ii) exceeds 4.8(i). 4.9 In no event shall grants under this Article IV be increased or decreased to reflect increases or decreases in Stock Value subsequent to the date of grant. ARTICLE V - STOCK UNIT TERMS AND CONDITIONS Stock Units shall be represented by and recorded in a bookkeeping account set up in each Non-Employee Director's name (the "Account"). The following terms and conditions shall apply to Stock Units: (i) a Dividend Equivalent Payment, as defined in Article VI below, shall be credited to the Account and shall have the same terms and conditions as the Stock Units; (ii) none of the Stock Units may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of; and (iii) the Stock Units and Dividend Equivalent Payments shall vest on the date the Non-Employee Director ceases to be a Director of the Corporation. ARTICLE VI - DIVIDEND EQUIVALENT PAYMENTS As of each dividend payment date with respect to Stock, each Non-Employee Director shall be awarded a Dividend Equivalent Payment equal to the product of (i) the per share cash dividend payable with respect to each share of Stock on such date; and (ii) the total number of Stock Units and Dividend Equivalent Payments credited to the Non-Employee Director's Account, as of the record date corresponding to such dividend payment date, divided by the fair market value. The Dividend Equivalent Payments are subject to the restrictions specified in Article V. ARTICLE VII - PAYMENT OF BENEFITS As soon as practicable following the date the Non-Employee Director ceases to be a director of the Corporation (the "Date"), the Corporation shall pay to the Non-Employee Director (or his or her designated beneficiary) an amount equal in value to the Stock Units and Dividend Equivalent Payments credited to his or her Account in a lump sum valued as of the Date. In lieu of a lump sum, at age 70 or after, a Director who has so elected may receive payments in annual installments over a 5, 10 or 15 year period. ARTICLE VIII - ADJUSTMENT UPON CHANGES IN CAPITALIZATION In the event of a Stock dividend, Stock split or combination, reclassification, recapitalization or other capital adjustment of shares of Stock, the number of Stock Units and the amount of Dividend Equivalent Payments credited to Accounts shall be appropriately adjusted by the Board of Directors of the Corporation, whose determination shall be final, binding and conclusive. The award of Stock Units pursuant to this Plan shall not affect in any way the right or power of the Corporation to issue additional Stock or other securities, to make adjustments, reclassification, reorganizations or other changes in its corporate, capital or business structure, to participate in a merger, consolidation or share exchange or to transfer its assets or dissolve or liquidate. ARTICLE IX - TERMINATION OR AMENDMENT OF PLAN 9.1 In General. The Board of Directors of the Corporation may at any time terminate, suspend or amend this Plan. 9.2 Written Consents. No amendment may, without the written consent of such Non-Employee Director, adversely affect the right of any Non-Employee Director to receive any Stock Units or any Dividend Equivalent Payments previously awarded. ARTICLE X - GOVERNMENT REGULATIONS The obligations of the Corporation under this Plan shall be subject to all applicable laws, rules and regulations and the obtaining of all such approvals by government agencies as may be deemed necessary or appropriate by the Board of Directors of the Corporation. ARTICLE XI - MISCELLANEOUS 11.1 Unfunded Plan. The Plan shall at all times be entirely unfunded. Any Account established and maintained under the Plan is solely for accounting purposes and shall not require a segregation of any assets of the Corporation. A Non-Employee Director's right to receive any payment under this Plan shall be no greater than the rights of an unsecured general creditor of the Corporation. 11.2 Assignment; Encumbrances. Stock Units and Dividend Equivalent Payments under this Plan are not assignable or transferrable and shall not be subject to any encumbrances, liens, pledges or charges of the Non-Employee Director or his or her creditors. Any attempt to assign, transfer or hypothecate any Stock Units or Dividend Equivalent Payments shall be void and of no force and effect whatsoever. 11.3 Applicable Law. This Plan shall be governed by the laws of the State of Indiana to the extent not preempted by Federal law. 11.4 Headings. The headings in this Plan are for reference purposes only and shall not affect the meaning or interpretation of this Plan. 11.5 Plan Administration. The Plan shall be administered by a DVSP Administration Committee (the "Committee"). At any date, the members of the Committee shall be those members of the Nominating and Governance Committee of the Board of Directors who are Non- Employee Directors as such term is defined in Section 16 of the Securities Exchange Act of 1934, as it may be amended from time to time. The Committee may not exercise its authority at any time there are less than 2 members. The Committee shall exercise its authority only by a majority vote of its members at a meeting or by a writing without meeting. ARTICLE XII - EFFECTIVE DATE OF PLAN This Plan shall become effective as of January 1, 1996. PCDocs No. 5580\4 June 10, 1997 EXHIBIT A Peer Group Designations The following companies shall compose the Peer Group of companies for Performance Cycles beginning in 1996: Allstate Corp. ReliaStar(formerly The NWNL Cos.) First Colony Corp. Provident Life & Accident Ins. Co. American General Corp. SAFECO Corp. Providian Corp. Transamerica Corp. (formerly Capital Holding Corp.) The Equitable Companies, Inc. Torchmark Corp. USLIFE Corp. CIGNA Corp. Traveler's Inc. USF&G Corp. Alternates: 1. Equitable of Iowa Companies 2. Reinsurance Group of America, Inc. 3. Western National Corp. 4. SunAmerica, Inc. The following companies shall compose the Peer Group of companies for the 1997-1999 Performance Cycle: Allstate Corp. ReliaStar Equitable of Iowa Provident Life & Accident Ins. Co. American General Corp. SAFECO Corp. Reinsurance Group of America Transamerica Corp. Torchmark Corp. The Equitable Companies, Inc. CIGNA Corp. Sun America Traveler's Inc. USF&G Corp. Alternates: 1. Protective Life 2. Western National Corp. If, as a result of a (1) merger, (2) consolidation, (3) liquidation, (4) similar corporate reorganization or restructuring, (5) insolvency, or (6) takeover, any of the members of this Peer Group of companies ceases to exist as a publicly-held corporation or if a Peer Group Company's primary business changes, the company so affected (the "terminated company") shall cease to be a member of the Peer Group, effective as of the beginning of the year during which such event occurred. In such event, the First Remaining company contained in the Alternate list shall replace the terminated company, provided that such designation shall be effective only beginning with the year during which the terminated company was removed. In the case of a terminated company and its related replacement company, the total shareholder return over the Performance Cycle shall be the compounded return of the two companies using the total shareholder return from the year(s) each was deemed to be part of the Peer Group. If it is necessary to replace more than one company during any year, a replacement company is paired with a terminating company based on the first company available from the Alternate list and the earliest date at which one of the terminating companies was deemed to cease to exist or changed its primary business. EXHIBIT B DVSP Board Service Quarterly Contribution Calculated for $30,000 Retainer at 7.5% Interest Calculation Become Period Director Quarterly at Age Contribution 69 5,400 68 5,205 67 5,015 66 4,829 65 4,649 64 4,473 63 4,302 62 4,136 61 3,974 60 3,817 59 3,551 58 3,303 57 3,073 56 2,858 55 2,659 54 2,473 53 2,301 52 2,140 51 1,991 50 1,852 49 1,723 48 1,603 47 1,491 46 1,387 45 1,290 44 1,200 43 1,116 42 1,039 41 966 40 899 39 836 38 778 EX-10 6 Exhibit 10(i) - -111- LINCOLN NATIONAL CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN FOR EMPLOYEES Amended Effective May 1, 1996 This Lincoln National Corporation Executive Deferred Compensation Plan for Employees is established by Lincoln National Corporation ("LNC"). Section 1: Definitions The following definitions are provided for key terms contained within this document: 1.01. Account. The term "Account" refers to a separate deferred compensation account established by the Employer in the name of each Participant. 1.02. Beneficiary. The word "Beneficiary" refers to an individual designated by the Participant to receive certain benefits enumerated in this Plan. 1.03. Benefits Administrator. The "Benefits Administrator" shall be the LNC Senior Vice President of Human Resources. 1.04. Bonus. The term "Bonus" refers to an amount calculated by reference to the Lincoln National Management Incentive Plan ("MIP"), the LNC Executive Value Sharing Plan ("EVSP"), the American States Insurance Companies Sustained Performance Incentive Plan for Senior Management, the American States' Executive Performance Incentive Compensation Plan ("EPIC"), or any similar bonus plan currently in effect or which may be adopted by Employers in the future. 1.05. Change in Control. A "Change in Control" means that LNC has had a change of control as that term is defined in the LNC Executives' Severance Benefit Plan, as in effect immediately prior to Change of Control. This definition shall always be identical to the definition of "Change in Control" contained in the LNC Executives' Severance Benefit Plan (or any successor plan). Any amendment of the definition contained in the LNC Executives' Severance Benefit Plan (or any successor plan) shall be deemed an amendment of the definition of Change in Control contained in this Plan. Furthermore, in the event of a "Change in Control" the term "Change in Control" shall have the definition which was operative on the day immediately preceding that event. 1.06. Compensation. For purposes of the Plan, "Compensation" means the basic cash compensation paid or payable to Participant by the Employer at regular intervals, plus the amounts by which such compensation is reduced pursuant to the Participant's voluntary election, but excluding bonuses, overtime earnings, service awards, and other special compensation. 1.07. Deferrals. The word "Deferrals" refers to the amount that a Participant specifies in his or her Election to defer pursuant to the terms and conditions of this Plan. 1.08. Election. The term "Election" refers to the act of the Participant of stating in writing that he or she intends to participate in the Plan for the calendar year following the year of the execution of the Election. 1.09. Employer(s). The term "Employer" when used in the singular refers to LNC or any individual Subsidiary and when used in the plural (Employers) refers to LNC and all subsidiaries collectively. 1.10. 401(k) Plan. The phrase "401(k) Plan" refers to the LNC and the American States Financial Corporation Employees' Savings and Profit-Sharing Plans, either singly or together as the context implies. 1.11. Hardship. "Hardship" shall mean an unforeseeable emergency to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Internal Revenue Code of 1986, as amended) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. 1.12. Insider. "Insider" means those individuals subject to the short- swing profit recovery provisions of Section 16 of the Securities Exchange Act of 1934. 1.13. LNCC. "LNCC" means the LNC Compensation Committee constituted as described in the LNC Bylaws. 1.14. Match. The term "Match" refers to a contribution to the Plan made by the Employer equal to (i) 6% of the Participant's Compensation for such year multiplied by the percentage specified in the 401(k) Plan for such calendar year representing the Employer contribution, less (ii) the actual Employer contribution to the 401(k) Plan pursuant thereto for such calendar year, less (iii) the amount credited by the Employer to the LNC Employees' Supplemental Savings and Profit-Sharing Plan and to the American States' Supplemental Savings and Profit-Sharing Plan on behalf of the Participant for such calendar year, and, less (iv) any amount Employer decides in its sole discretion to pay directly to Participant. 1.15. Match Units. "Match Units" means Units contributed pursuant to the Match. 1.16. Paid Units. "Paid Units" means Units with respect to which the Participant has paid the purchase price. 1.17. Participant. The word "Participant" refers to an employee who is a member of a select group of management or highly compensated employees of the Employers. 1.18. Plan. The word "Plan" refers to this LNC Executive Deferred Compensation Plan for Employees. 1.19. Subsidiary. The term "Subsidiary" means any corporation of which 50% or more of the voting stock is owned, directly or indirectly, by LNC. 1.20. Unpaid Units. "Unpaid Units" means Units awarded to the Participant and which are not vested. 1.21. Vested Units. "Vested Units" are Units awarded to the Participant that are no longer subject to forfeiture. Section 2: Eligibility, Participation, and Disbursements This Plan is executed by Employers for the benefit of a select group of management and highly compensated Participants, pursuant to which Participants may elect to defer payment of a portion of Compensation and/or Bonus under the Plan. 2.01. The Participant may elect to defer payment of a portion of his or her Compensation under certain conditions hereinafter provided; additionally, Participant may defer a portion of his or her Bonus upon the terms and conditions hereinafter provided. 2.02. The Employer shall have discretion to determine the eligibility of employees to participate under this Plan provided, however, that in order to be eligible, all Participants must be members of a select group of management or highly compensated employees of an Employer. 2.03. Subject to the terms of this Plan, the Participant and the Employer may make the following types of annual Compensation Deferrals for a calendar year: a. The Participant may elect to defer a portion of Compensation not to exceed 70% of such Participant's annual Compensation; b. Provided that the Participant has made Pre-Tax Contributions to his or her 401(k) Plan in the maximum amount permitted under the terms of the Plan for a calendar year, the Employer shall provide a contribution equal to the Match which will be invested in LNC Phantom Stock if the Match is under the LNC 401(k) Plan or ASFC Phantom Stock if the Match is under the ASFC 401(k) plan. c. The Participant may elect to defer a specified amount of Bonus which may be earned by the Participant during the subsequent calendar year, and which is typically paid within six (6) months after the close of the calendar year to which the election relates. d. To the extent that a Participant in the 401(k) Plan reaches the contribution limit for that Plan, he or she may elect to defer the additional amounts that otherwise would have been placed in the 401(k) Plan into this Plan. 2.04. The Participant shall file an Election with the Employer in the form attached hereto, which shall specify the timing and amount of Deferrals, if any, to be made under the Plan by the Participant for the prospective pay periods. The Participant shall file an Election prior to the date that such Compensation is earned. The amount deferred may be changed no more frequently than annually and such change is only effective for Compensation paid after the first day of the next succeeding calendar year. An Election shall be irrevocable for any calendar year, provided, however, that in the case of a Hardship withdrawal from one of the 401(k) Plans, the Participant's Election shall be automatically revoked beginning with the first day of the next regularly scheduled payroll period for the remainder of the calendar year. 2.05. If a Deferral or a Match is made for any calendar year, the Employer shall establish an Account in the name of the Participant, to which shall be credited all Deferrals and Matches made on behalf of such Participant. The Employer shall also credit such Account with earnings which would otherwise accrue if the Account were actually invested in the investment options selected by the Participant from among the options offered from time to time by the Employer, provided, however, that any expenses incurred by an Employer (including expenses for Federal and State income taxes) in connection with such Participant's Account may be charged against the Participant's Account. Additionally, Employer makes the following representations concerning the investment options available under the Plan: a. Due care will be taken to assure that all Deferrals and Matches are credited in proper proportions to sub- accounts for the phantom investment options selected by the Participant. b. The phantom investment options available under this Plan are those set forth on the specimen Form which forms Appendix A of this Plan, including, but not limited to, phantom stock units of LNC common stock. Employees of American States Financial Corporation ("ASFC") and its subsidiaries, may be permitted to specify phantom stock units in ASFC common stock. To the extent such option is made available, the characteristics of ASFC Phantom Stock units shall have the same characteristics and be valued in the same manner as LNC Phantom Stock Units as described in the Plan. c. With respect to the phantom stock units, no actual shares of common stock will be issued directly or indirectly under the Plan, and no voting or other rights of any kind associated with the ownership of common stock shall inure to any Participant by virtue of his/her entitlement to phantom stock units under this Plan. d. With respect to the other investment options currently available under the Plan, Participants have no rights to any assets of any of the funds arising from participation in this Plan. e. Participants may change investment option selections, under conditions prescribed by the Benefits Administrator. LNC reserves the right to eliminate, change, and add investment options at any time. LNC is under no obligation to offer any particular investment option, nor to effectuate a selection by a Participant. Any selection shall be treated by the Employer as a mere expression of investment preference on the part of the Participant. 2.06. The Participant's Account shall be paid to the Participant (or his or her Beneficiary) in one lump sum not later than thirty (30) days following the earliest to occur of the Participant's (a) death, (b) total disability, (c) termination of any and all service with the Employer, or (d) solely in the case of Participants providing services to an Employer in a country other than the United States, such other period as determined in the sole discretion of the Benefits Administrator. 2.07. Notwithstanding the provisions of Section 2.06, a Participant may elect an option other than a lump sum payment prior to the Participant's retirement or termination from service subject to the restrictions contained in this Section 2.07. The election must be made in writing, may be made no less than twelve (12) months prior to the occurrence of the Participant's termination of service with the Employer, and must request an annuity payment option of a type offered by The Lincoln National Life Insurance Company (LNL) to the public. Under no circumstances shall this Section 2.07 be used to enable a Participant to receive any part of his or her Deferrals pursuant to this Plan prior to the earliest to occur of Participant's death, disability, or termination of any and all service with Employer. An election under this Section 2.07 shall become irrevocable once the Participant is within twelve (12) months of termination. 2.08. Notwithstanding the provisions of Section 2.06, a Participant may make separate elections to receive other than a lump sum payment which shall be applicable in the event of the Participant's death or disability prior to termination of service with the Employer. Such elections must be made in writing and shall under no circumstances require payments to commence prior to twelve (12) months after the date of execution of the election. An election made pursuant to this Section 2.08 is irrevocable once made. 2.09. In the event that any legislative body shall pass a statute or a regulatory body or court of competent jurisdiction shall interpret any law to limit the deductibility of any amount otherwise payable under this Plan, then such amount and earnings thereon shall automatically be subject to additional deferral as determined by the LNCC but not for more than five (5) years until the Employer is permitted to claim a deduction for amounts paid out pursuant to this Plan. If any amount is deferred pursuant to this Section 2.09 for five (5) years, then it shall be presumed that the amount will never be deductible by the Employer and payments will commence pursuant to this Plan as if the Participant had terminated from service in the year of the determination that such amount shall never be deductible. 2.10. If a Participant plans to voluntarily terminate from service with Employer within twelve (12) months from the effective date of this Plan, he or she may elect to further defer payment by Employer beyond his or her termination date, subject to the following terms and conditions. Such election must be made in writing at least sixty (60) days prior to Participant's termination date. The election shall specify an alternative payment schedule in the form of an annuity of a type currently offered by LNL. Payments made pursuant to such an election shall not commence prior to either twelve (12) months from the date of the election or within sixty (60) days of the termination date of the Participant whichever is later. An election made pursuant to this Section 2.10 is irrevocable once made. 2.11. A Participant may request that the Employer make an immediate, accelerated distribution from his or her Account in the event such Participant has incurred a severe financial Hardship. Payments under this Plan for a severe financial Hardship will not be made to the extent that such Hardship is relieved through insurance proceeds, liquidation of Participant's assets (only to the extent that such liquidation would not itself cause a severe financial Hardship) or by cessation of Deferrals under this Plan. Payments for severe financial Hardship under this Plan are limited to the extent necessary to comply with Treas. Reg. Section 1.457-2. The Employer shall determine whether the Participant has incurred a severe financial Hardship and, in its sole discretion, may grant the immediate, accelerated distribution of all, or a portion of, the amounts then credited to the Participant's Account, provided, however, that such distribution shall not exceed the amount determined by the Employer to be necessary for such Participant to alleviate the severe financial Hardship. If a Participant is an Insider, then such Participant is not eligible for Hardship withdrawals from this Plan. 2.12. The Participant may designate a Beneficiary to receive amounts payable to him or her under this Plan in the event of death. The Participant may revoke or change a Beneficiary designation and name a new Beneficiary by filing a written notice of revocation or other notice of change of Beneficiary with the Employer (on a form prescribed by the Employer), at any time. In the absence of a surviving Beneficiary or a valid Beneficiary designation, the balance in a Participant's Account, if any, shall be paid in one single lump sum to the Participant's estate. 2.13. Interests in this Plan shall not be transferred, assigned, pledged or encumbered. Prior to the time payment is actually made to the Participant or his or her Beneficiary, such Participant or Beneficiary shall have no rights by way of anticipation or otherwise to assign or dispose of any interest under this Plan. 2.14. If the Deferrals of a Participant who is providing services to an Employer in a country other than the United States is subject to the deferral provision described in Section 2.06(d), such Participant may elect in writing to extend such deferral period to be consistent with the normal terms and conditions of this Plan, provided such written election is made at least twelve (12) months prior to the time when such Participant would otherwise be entitled to receive cash and such election is irrevocable once made. Section 3: Administration of Phantom Stock Units 3.01. Administration of Match Units, Paid Units and Vested Units. a. General. The administration of the Match Units, Paid Units and Vested Units shall be done in accordance with rules and definitions that the Benefits Administrator shall in his or her absolute discretion develop from time to time. The Benefits Administrator may delegate his or her responsibilities to other persons, or retain the services of lawyers, accountants, or other outside third parties to assist with the administration of the Plan. b. Restrictions on Transfers. A Participant may transfer amounts into or out of Units pursuant to an election made during a thirty (30) day window period following the release of either a quarterly statement of earnings of LNC or the Annual Statement to Shareholders. In the case of any Insider, an election by either the Employer or the Participant to place amounts into Match Units, Paid Units, or Vested Units must remain in Units until death, disability, termination of service, or six (6) months after termination of Insider status occurs. 3.02. Administration of Unit Grants. a. Grant of Awards. The LNCC shall have full and complete authority in its discretion, but consistent with and subject to the express provisions of the Plan, to (i) select the Participants to whom Unpaid Units shall be awarded under the Plan, (ii) determine the number of Unpaid Units to be awarded, and (iii) adopt such rules and restrictions and make all other determinations deemed necessary or desirable for the administration of Unpaid Units pursuant to the Plan. Those individuals who receive Unpaid Units under the Plan for a given year shall be individuals who qualify for participation in the LNC Executive Deferred Compensation Plan for Employees and who are selected by the LNCC as persons who are expected to materially contribute to the growth and profitability of LNC's business. A Participant may be granted Unpaid Units under the Plan upon more than one occasion. b. Awards to be Performance Based. Notwithstanding anything contained in this Plan to the contrary, the LNCC will only grant awards based upon the attainment of performance goals which measure the LNC's relative performance against a peer group of companies selected by the LNCC. Each performance goal must be established prior to the beginning of the year or years for which an award is granted. Each performance goal shall measure the value achieved for shareholders of LNC as compared to its peer group of companies. c. Timing. The LNCC may award Unpaid Units under the Plan for any year after the effective date of the Plan and after adoption of the Plan by the board of directors of LNC (the "Board"). Awards may be made as of the first day of the first calendar quarter commencing after adoption of the Plan by the Board (the "Plan Inception Date.") d. General Vesting Rules. Unpaid Units (unless forfeited in accordance with Section 3.02(g)) shall become Vested Units on either: (i) the date specified by the LNCC at the time that such Units are awarded which is at least six (6) months after the date of the grant or (ii) if the LNCC does not specify a vesting date, then the third anniversary date of the day on which such shares were awarded by the LNCC. e. Certain Terminations of Employment Causing Vesting. If a Participant ceases to be in the employ of the Employer by reason of the Participant's: (i) involuntary termination within one year of a Change in Control of LNC, (ii) death, (iii) disability, (iv) termination of employment on account of retirement on or after age 55, or, (v) involuntary termination other than for cause, any Unpaid Units of the Participant shall vest as of the last day of such Participant's employment with the Employer or six (6) months after the date of grant, whichever is later. f. Action of LNCC. The LNCC may for any reason vest any Unpaid Units. g. Forfeiture of Unvested Units. Subject to Section 3.03(e) (relating to vesting of Unpaid Units upon death, disability, involuntary termination of employment other than for cause), and any action taken by the LNCC pursuant to Section 3.03(f), all of a Participant's Unvested Units shall be forfeited immediately upon the Participant's termination of employment with the Employer for any reason. 3.03. Phantom Dividends on Units. To the extent dividends are paid by LNC or ASFC on common stock of the same class as the Phantom Stock Units, Participants will be credited with phantom dividends. Phantom dividends shall be calculated, on each dividend payment date, as an amount equal to the product of the dividend paid on a share of common stock multiplied by the number of Phantom Stock Units. Any dividends on Unpaid Units are also subject to forfeiture pursuant to Section 3.02(g). 3.04. Determination of Price for Units. The value of a Phantom Stock Unit shall be equal to the final sales price quoted by the New York Stock Exchange Composite Listing of a share of LNC or ASFC common stock of the same class as the Phantom Stock Units on the last business day immediately preceding the calculation. 3.05. Changes in Capital and Corporate Structure. In the event of any change in the outstanding shares of common stock of LNC or ASFC by reason of an issuance of additional shares, recapitalization, reclassification, reorganization, stock split, reverse stock split, combination of shares, stock dividend or similar transaction, the number of Phantom Stock Units held by Participants under the Plan shall be proportionately adjusted, in an equitable manner. The foregoing adjustment shall be made in a manner that will cause the relationship between the aggregate appreciation in outstanding common stock and earnings per share of LNC or ASFC and the increase in value of each Phantom Stock Unit granted hereunder to remain unchanged as a result of the applicable transaction. 3.06. Voting. Participant shall not be entitled to any voting rights with respect to the Common Stock of LNC or ASFC as a result of receipt of Match Units, Paid Units, Unpaid Units, or Vested Units. 3.07. Maximum Number of Units. The maximum number of LNC Phantom Stock Units which may be outstanding pursuant to the Plan and the LNC Phantom Stock Plan for Agents together is equal to 1% of the outstanding shares of LNC common stock as of December 31 of the year prior to the year for which the calculation is being made. 3.08. Nontransferability of Units. Units shall not be transferred, assigned, pledged or encumbered. 3.09. Legal Requirements. At the time of the award of Units, LNC may, (i) postpone the date of delivery of the Units until such time as LNC has available for delivery to the Participant a prospectus meeting the requirements of all applicable securities laws, or (ii) impose any reasonable requirements or restrictions on the award of Units. Section 4: Miscellaneous Rights, Duties, and Plan Interpretations 4.01. This Plan incorporates the LNC Phantom Stock Plan for Employees. In the event that such incorporation is found to violate any legal requirement then the most recent version of the LNC Phantom Stock Plan for Employees shall be deemed effective and the provisions in this Plan applicable to phantom stock shall be null and void. 4.02. This Plan is not intended to create a contract of employment. The provisions of this Plan shall not limit the right of the Employer to discharge the Participant, or limit the right of the Participant to voluntarily terminate from the service of the Employer. 4.03. The rights of the Participant under this Plan (as well as any right of his or her Beneficiary or estate) shall be solely those of an unsecured general creditor of the Employer and such rights shall not constitute an interest in any specific asset of the Employer. 4.04. The Plan shall be administered by the Benefits Administrator. The Benefits Administrator may establish administrative rules from time to time that are consistent with the provisions of this Plan and may, delegate his or her responsibilities to other persons, or retain the services of lawyers, accountants, or other outside third parties to assist with the administration of the Plan. 4.05. LNC retains the right to amend this Plan prospectively at any time. This Plan may be amended by action of the Board at a meeting held either in person or by telephone or other electronic means, or by unanimous consent in lieu of a meeting. The Board may delegate this amendment power to an officer of LNC or Committee of the Board, in whole or in part, by resolution adopted by the Board. Pursuant to Resolution Number 1193 of the Board, adopted November 8, 1990, the Chief Executive Officer of LNC has been authorized to make any modification to this Plan if such modification is, in the opinion of counsel, required by local, state or federal law or regulation, and the authority to make any discretionary modification to this Plan if such modification is estimated to cost LNC no more than $500,000 in the next full calendar year after the effective date of such modifications. No amendment to this Plan shall serve to reduce amounts previously credited to the Accounts of Participants except as required by state or federal statute, regulation, or court order, or except as provided in Sections 4.08 and 4.10. 4.06. LNC, by action of its Board of Directors, may terminate this Plan for any reason at any time. The Plan will terminate as to all of the Employers on any day specified by LNC if thirty (30) days' advance written notice of the termination is given to the Employers. The Plan will terminate as to any individual Employer on the first to occur of the following: a. the date it is terminated by that Employer if thirty (30) days' advance written notice is given to LNC; b. the date that Employer is judicially declared bankrupt or insolvent; c. the dissolution, merger, consolidation or reorganization of the Employer, or the sale by that Employer of all or substantially all of its assets, except as otherwise provided in Section 4.12; or d. the date specified by the Board in an action terminating this Plan for one or more specific Employers provided that thirty (30) days' advance written notice is given to the Employer prior to termination of the Plan. 4.07. By participating in the Plan, Participant waives the right to litigate any dispute arising pursuant to this Agreement in any court of otherwise competent jurisdiction. In the event that a Participant disagrees with any decision, action or interpretation of this Plan made by his or her Employer, he or she shall submit in writing a full description of the disagreement. The determination of the Employer as to any disputed questions relating to and concerning construction and interpretation, shall be final, binding, and conclusive upon all persons. The Employer may, but is not required to, agree to assistance in the resolution of any dispute arising under this Plan from a mediator who shall be a disinterested party to the dispute. 4.08. The Employer may in its sole discretion deduct from all contributions, payments and distributions any federal, state, or local taxes or such other amounts as may be required by law to be withheld with respect to such payments. Alternatively, the Employer may in its sole discretion charge each Participant a flat fee based upon the amount of money deferred pursuant to the Plan for purposes of covering any taxes or other amounts required by law to be withheld from payments pursuant to this Plan. 4.09. When appropriate, the singular nouns in this Plan include the plural, and vice versa. 4.10. The Employer may make equitable adjustments under this Plan from time to time, including retroactive adjustments to correct mathematical, accounting, or factual errors made in good faith by the Employer or a Participant. Any such adjustments will be final and binding on all Participants and Beneficiaries. 4.11. This Plan shall be governed and construed in accordance with the laws of the State of Indiana. 4.12. If a Subsidiary ("Affected Corporation") shall cease to meet the definition of a Subsidiary of LNC as a result of sale, merger or other disposition by LNC, LNC shall negotiate in good faith with Affected Corporation or the entity purchasing Affected Corporation whichever is appropriate, to have Affected Corporation assume responsibility for the Plan and all liabilities to Participants who are employees of that Affected Corporation. In the event that LNC is unable to divest itself of all liability of the Affected Corporation, then the Participant shall be treated as if he or she had terminated service with the Affected Corporation for purposes of his or her participation in the Plan as an employee of the Affected Corporation. Nothing in this Section 4.12 shall be interpreted to prevent a Participant who remains employed by an Employer from participating in the Plan for future years. 4.13. In the event that LNC fails to maintain and operate a Subsidiary as a separate and identifiable legal entity or diverts assets of a Subsidiary by either declaring dividends or unilaterally causing a Subsidiary to expand its business to such an extent that the diversion of assets results in the Subsidiary having insufficient capital to fund its operations or meet its financial obligations, then, to the extent that Subsidiary is rendered unable to honor its liabilities under the Plan, the Trustee of the LNC Rabbi Trust ("Trust") shall automatically pay all Participants from that Subsidiary their respective account balances in the Plan. In the event the assets within the Trust are insufficient to make such payments, then LNC shall be obligated to pay the balance due to the Participants from the Subsidiary, and to the extent that the Subsidiary is able to honor its obligations under the Plan, the Subsidiary must reimburse either Trustee or LNC for amounts paid on its behalf. Nothing in this Section 4.13 shall be interpreted to require LNC to make a payment under the Plan except to the extent that a Subsidiary is unable to meet its obligations under the Plan as a direct result of specific actions taken by LNC. 4.14. Any payment payable under this Plan to an incompetent or otherwise incapacitated person may, at the sole discretion of the Employer, be made directly to such person or for the benefit of such person through payment to an institution or other entity caring for or rendering service to or for such person or to a guardian of such person or to another person with whom such person resides. The receipt of such payment by the institution, entity, guardian or other person shall be a full discharge of that amount of the obligation by the Employer to the Employee or Beneficiary. 4.15. Notwithstanding anything contained in Section 2.06, Section 2.07 or any other provision in this Plan to the contrary, in the event that a Participant is involuntarily terminated for fraud or other fidelity crimes, Participant automatically and irrevocably forfeits all amounts contained in all Accounts established by Employer pursuant to this Plan. 4.16. This amended and restated Plan shall be effective as of May 1, 1996. If any provision of this Plan is deemed invalid or unenforceable, the remaining provisions shall continue in effect. This amendment and restatement of this Lincoln National Corporation Executive Deferred Compensation Plan for Employees is hereby approved. ___________________________________ April 22, 1996 Ian M. Rolland Chief Executive Officer Lincoln National Corporation ___________________________________ April 22, 1996 Witness XLW/PCDocs No. 13021\1 4/22/96 APPENDIX A INVESTMENT OPTIONS The amount of earnings credited to each Participant's Account will be in accordance with the performance of the LNL Variable Annuity Account C Multi-Funds which the Participant selects. Neither the Employers nor Lincoln National Corporation is under any obligation to effectuate any investment option selection. ______ Money Market Fund ______ Putnam Master Fund ______ Social Awareness Fund ______ Growth Fund ______ Fixed Fund ______ Bond Fund ______ Managed Fund ______ Special Opportunities Fund ______ International Fund ______ Lincoln National Equity Income Fund, Inc. ______ Lincoln National Aggres- ______ Lincoln National Capital Growth Fund, Inc. Appreciation Fund, Inc. ______ LNC Phantom Stock ______ ASFC Phantom Stock AMENDMENT TO LINCOLN NATIONAL CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN FOR EMPLOYEES By virtue and in exercise of the power granted to the Chief Executive Officer of Lincoln National Corporation by resolution of its Board of Directors, the Lincoln National Corporation Executive Deferred Compensation Plan for Employees (the "Plan"), is hereby amended effective January 1,1996, by adding the following Supplement A thereto: SUPPLEMENT A TO LINCOLN NATIONAL CORPORATION Executive Deferred Compensation Plan Purpose and Application. The purpose of this Supplement A is to modify and supplement the provisions of the Plan, as applied to each individual who was at the time of the deferral an employee of the Delaware Management Holdings, Inc. ("DMH") or its subsidiaries, hereinafter referred to as a "DMH Participant." Definitions. Unless the context of the Plan or this Supplement A clearly implies or indicates the contrary, a word, term or phrase used or defined in the Plan is similarly used or defined in this Supplement A. Modification of Plan. The following provisions, sections and subsections of the Plan shall be modified, deleted, or added as indicated with respect to participation in the Plan by DMH Participants: 1. Subsections 2.03(b) and (d) relating to the 401(k) Plan do not apply; 2. All references in Section 2 to the Match are not applicable; 3. The reference in subsection 2.04 to a hardship withdrawal from the 401(k) Plan causing an automatic revocation in the Plan, shall be changed so that a hardship withdrawal from any defined contribution plan maintained by DMH or any subsidiary, shall also cause automatic revocation of participation in the Plan for the remainder of the calendar year; 4. Subsection 2.10 shall apply for the 12 month period beginning on January 1, 1996, the date DMH and its subsidiaries began participation in the Plan; 5. DMH shall not be eligible for Unit Grants under subsection 3.02; 6. Subsections 4.12 and 4.15 shall be inapplicable to DMH Participants. In the event that DMH is no longer a subsidiary of LNC, DMH will retain full liability for all payments under the terms of the Plan relating to periods that individuals were employed by DMH and its subsidiaries; and 7. Subsection 4.13 is modified to provide that LNC (rather than a Rabbi Trust) shall make payments to DMH Participants in the event that specific actions taken by LNC (listed in the subsection) cause DMH to be unable to meet its obligation to a DMH Participant, and further, that the payment of such amount is not accelerated but will be made at a time when the payments under the Plan shall otherwise be due. DMC Profit-Sharing Plan. In the event that an individual's deferral of compensation under the Plan causes a reduction in the amount that would have been contributed to the Delaware Management Company Employee Profit Sharing Plan ("DMC Profit Sharing Plan"), such additional amount that would have been contributed to the DMC Profit Sharing Plan shall be credited to this Plan as of the same date as the contribution to the DMH Profit Sharing Plan is made, and shall be subject to the same vesting schedule. Investment Options. The Investment Options listed on Appendix A that are offered to DMH Participants may be limited as determined in the sole discretion of the Chairman of DMH or his designee. IN WITNESS WHEREOF, the Chief Executive Officer of the Corporation has executed this Amendment this _______ day of July, 1996. LINCOLN NATIONAL CORPORATION By: Ian M. Rolland Chief Executive Officer XLW/PCDocs No. 2699\1 7/09/96 SECOND AMENDMENT LINCOLN NATIONAL CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN FOR EMPLOYEES By virtue and in exercise of the power granted to the President of Lincoln National Corporation by resolution of its Compensation Committee on February 16, 1998, the Lincoln National Corporation Executive Deferred Compensation Plan for Employees (the "Plan"), is hereby amended effective as of February 16, 1998 as follows: 1. Section 2.06 is deleted in its entirety and replaced with the following: 2.06. The Participant's Account shall be paid to the Participant (or his or her Beneficiary) in one lump sum not later than thirty (30) days following the first to occur of the Participant's (a) death, (b) total disability, (c) termination of any and all services as an employee with the Employer, or (d) solely in the case of Participants providing services to an Employer in a country other than the United States, such other period as determined in the sole discretion of the Benefits Administrator. 2. Section 3.01.b. is deleted in its entirety and replaced with the following: 3.01.b. Restrictions on Transfers. A Participant may transfer amounts into or out of Units pursuant to an election made during a thirty (30) day window period following the release of either a quarterly report of earnings of LNC or the annual report to shareholders. In the case of any Insider, an election by either the Employer or the Participant to place amounts into Match Units, Paid Units, or Vested Units will remain in Units until the earlier of (a) the first to occur that is six (6) months after the date of the date of death, disability, or termination of service of the Insider, or (b) the date that is six (6) months after termination of Insider status; provided, however, that the LNCC or its delegate may permit an Insider to transfer amounts out of Units subject to all conditions specified to assure compliance with Section 16 of the Securities Exchange Act of 1934, as amended. IN WITNESS WHEREOF, the President of the Corporation has executed this Second Amendment this _______ day of February 1998. LINCOLN NATIONAL CORPORATION By: Jon A. Boscia President PCDocs No. 67031\1 February 18, 1998 EX-10 7 Exhibit 10(m) - -127- DESCRIPTION OF COMPENSATION ARRANGEMENTS WITH EXECUTIVE OFFICERS Item 1: With respect to June E. Drewry, Senior Vice President and Chief Knowledge and Technology Officer with an employment date of May 28, 1996, LNC agreed that if, during the first three years of her employment, LNC terminated her employment for other than cause or causes a significant diminution in her job responsibilities, she will be eligible for one year of severance at her then current base salary. ************************ Item 2: With respect to Richard C. Vaughan, Executive Vice President and Chief Financial Officer, LNC agreed to pay one year of his then base salary if the corporation terminates his employment between June 18, 1996 and age 55. ************************* Item 3: Agreement dated January 1, 1997 by and between American States Financial Corporation and Robert A. Anker: AGREEMENT AGREEMENT made as of January 1, 1997, by and between American States Financial Corporation (hereinafter called "Company"), an Indiana corporation having its principal place of business in Indianapolis, Indiana, and Robert A. Anker (hereinafter called "Employee"): WITNESSETH: WHEREAS, Employee desires to render faithful and efficient service to Company; and WHEREAS, Company desires to receive the benefit of Employee's service; and WHEREAS, Employee is willing to be employed by Company; and WHEREAS, Company deems it essential to formalize the conditions of Employee's employment by written agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties agree as follows: 1. Office. Company hereby employs Employee as its Chief Executive Officer, and Employee hereby agrees to serve Company in such capacity or in such other capacity as the Board of Directors of Company may from time to time designate. 2. Term of Employment. Employee's employment shall be for the "Employment Period," with the term commencing on January 1, 1997 and ending on December 31, 1997. During the Employment Period, Employee's employment may be terminated for Cause as defined in Section 5. Employee's employment may continue by mutual agreement at the will of Company after the expiration of the Employment Period or Employee and Employer may extend this contract by mutual written agreement. During any such period of at will employment, the provisions of Sections 12, 15, 16 and 17 of this Agreement shall continue to apply as if the Employment Period under this Agreement had not ended. 3. Incapacity. If during the Employment Period, Employee should be prevented from performing Employee's duties or fulfilling Employee's responsibilities by reason of any incapacity or disability that is reasonably expected to continue for a period of six (6) months or until death, then Company, in its sole and absolute discretion, may, based on the opinion of a qualified physician, consider such incapacity or disability to be total and may on ninety (90) days written notice to Employee terminate the Employment Period. 4. Death. The Employment Period shall automatically terminate upon the death of Employee. 5. For Cause. For purposes of this Agreement, Cause means a determination by the Board of Directors of Company or the Chief Executive Officer of Lincoln National Corporation ("Lincoln"), made in good faith, without being bound by Company's progressive discipline policy for employees: a. that Employee has engaged in acts or omissions against Company, its parent company, or any of its subsidiaries constituting dishonesty, intentional breach of fiduciary obligation or intentional wrongdoing or misfeasance; b. that Employee has been arrested or indicted in a possible criminal violation involving fraud or dishonesty; c. after due consideration and with prior written notice to the Employee, that Employee has performed poorly; d. that Employee has failed or refused to perform Employee's duties set forth in paragraph 6 hereof, or willfully failed to execute any reasonable instruction relating to Employee's duties with Company given him by the Board of Directors of Company, or the Chief Executive Officer of Lincoln, if either such failure or refusal is not corrected within ten (10) business days after Employee's receipt of written notification of such failure or refusal; or e. that Employee has intentionally and in bad faith acted in a manner which results in a material detriment to the assets, business or prospects of Lincoln, Company or the subsidiaries or affiliates of either of them. 6. Responsibilities. During the period of Employee's employment, Employee shall devote Employee's entire business time and attention, except during reasonable vacation periods, to, and exert Employee's best efforts to promote, the affairs of Company, and shall render such services to Company as may be required by the Board of Directors of Company consistent with services required by virtue of the office set forth in paragraph 1 hereof and shall perform such other services as may now or hereafter be specified or enumerated in the By-Laws of Company consistent with such office. While employed by Company, Employee shall not, directly or indirectly, alone or as a member of a partnership or association, or as an officer, director, advisor, consultant, agent or employee of any other company, be engaged in or concerned with any other duties or pursuits requiring Employee's personal services except with the prior written consent of the Board of Directors of Company. Nothing herein contained shall preclude the ownership by Employee of stocks or other investment securities. Nothing herein contained shall preclude service by Employee on boards of directors or trustees of charitable or other not-for-profit entities not engaged in any business competitive with the business of Company so long as such service does not materially interfere with Employee's responsibilities to Company. 7. Compensation. During the Employment Period, Employee shall receive a base salary that shall be at an annual rate of not less than $565,000 payable in accordance with the payroll practices of Company as from time to time in effect with regard to executive personnel. 8. Benefit Plans and Programs. During the Employment Period, Employee shall be eligible for participation in all benefit plans and programs made available by Company to its employees generally (other than Company's generally available severance program) and in those benefit plans and programs applicable to executives of the Employee's level to the extent Employee is not eligible for comparable benefits from Lincoln. The bonus payable by Company for periods which include the Employment Period will be payable under the terms of Company's Executive Performance Incentive Compensation Plan ("EPIC"). Employee's performance goals and target and maximum awards are set out in Exhibit A. To the extent an EPIC bonus is payable in the form of stock, phantom stock, or stock units, it shall be awarded and payable in the form of (or, in the case of phantom stock or stock units, measured by reference to) Common Stock of Company. Employee shall be entitled through March 31, 1998 to the benefit of Company's standard relocation package for executives at Employee's level. 9. Stock Options and Restricted Stock Awards. Among the benefit plans and programs to be made available by Company to certain of its employees is Company's Stock Option Plan. Any options granted to Employee shall be options for Company Common Stock at the appropriate level for his position. 10. Payments after Termination. If Employee's employment with Company terminates at the end of the Employment Period referred to in Section 2 hereof for reasons other than incapacity or death or Cause, Employee shall be entitled to all the following upon execution of a release satisfactory to Company and Lincoln ("Release"): a. Company shall pay to the Employee $600,000 in 26 equal biweekly installments; b. Employee shall become entitled to EPIC bonus payments as set out on Exhibit A; c. Employee shall be entitled to receive an early retirement benefit without adjustment for Employee's age; d. Employee shall be entitled to outplacement benefits through Right & Associates' standard program for executives or a similar firm approved by Company; and e. Employee shall be entitled to executive financial planning benefits for calendar year 1998. In the event that Employee's employment terminates prior to the end of the Employment Period due to death or disability, the amounts specified in subsections a, b and c above shall still be payable. If Employee's employment terminates during the Employment Period for the reasons specified in Section 5c, upon execution of a Release, Employee shall be entitled to receive $285,000 in 26 equal biweekly installments and the benefit specified in subsection c above shall also be payable. If Employee's employment terminates during the Employment Period for the reasons specified in Section 5b, upon execution of a Release, the Employee shall be entitled to receive $285,000 in 26 equal biweekly installments. The amounts provided under subsections b and c above shall be payable only if the indictment or charges are dismissed or Employee is acquitted as a result of a trial. 11. Expenses. During the Employment Period, Company shall allow Employee reasonable expense of travel and business entertainment incurred in the performance of Employee's duties hereunder, subject to the rules and regulations adopted by Company for the handling of such business expenses. 12. Other Obligations of Employee. All payments to the Employee provided for under Section 10 of this Agreement or under the Executive Salary Continuation Plan of Company, the exercise of any options for stock of Company and the vesting or payment of any restricted stock (or restricted phantom stock or restricted stock units) of Company or Lincoln shall be subject, to the extent permitted by law, to Employee's compliance with the following provisions. (For purposes of this Section, Company and Lincoln shall be deemed to include their affiliates and subsidiaries.) a. Assistance in Litigation. At all times during and after the term of this Agreement, Employee shall, upon reasonable notice, furnish such information and proper assistance to Company or Lincoln as may reasonably be required by Company or Lincoln in connection with any litigation in which it is, or may become, a party. b. Confidential Information. At all times during and after the term of this Agreement, Employee shall not knowingly disclose or reveal to any unauthorized person any trade secret or other confidential information relating to Company or Lincoln or to any of the businesses operated by them. Employee acknowledges, understands and agrees that any amounts payable under this Agreement that have not been paid shall be immediately forfeited in the event Employee divulges or appropriates to Employee's own use or the use of any other person or organization, except as otherwise ordered by a court of competent jurisdiction, any secret or confidential information or knowledge pertaining to the businesses of Company or Lincoln obtained during Employee's employment with Company or Lincoln. Employee recognizes and acknowledges that (1) all plans, systems, methods, designs, programs, procedures, books and records relating to the operations, practices and personnel of Company or Lincoln (whether instituted or commenced prior or subsequent to the date Employee was first employed by Company or Lincoln and whether or not devised, created or initially instituted by Company or Lincoln) and (2) all other records, documents and information concerning the business activities, practices and procedures, as they may exist from time to time, constitute and will constitute secret or confidential information or knowledge pertaining to the businesses of Company or Lincoln. The information and material described in this paragraph shall constitute secret or confidential information or knowledge only to the extent such information and material has remained confidential (except for unauthorized disclosures) and except as otherwise ordered by a court of competent jurisdiction. The provisions of this Section 12b shall not be construed as prohibiting or limiting Company or Lincoln from pursuing any other remedies for the divulgence or appropriation or threatened divulgence or appropriation of secret or confidential information or knowledge relating to Company or Lincoln. c. Non-competition. During the term of Employee's employment and for a period of three (3) years following the termination of Employee's employment, Employee will not act as a director, officer, employee, consultant or advisor to, nor directly or indirectly become associated with any person, firm, company or corporation where his activities relate to any business competitive with Company or Lincoln; provided, however, that this prohibition shall not extend to the Property Casualty Reinsurance business. Employee specifically acknowledges that the geographic region to which this restriction applies is the same geographic region in which Employee personally was present and performed services for Lincoln during the past two (2) years. This restriction does not prohibit Employee from buying, selling, or otherwise trading in the securities of any corporation which is listed on any recognized securities exchange, and he may engage in any other business activities not competitive with Company or Lincoln. Neither Company nor Lincoln will object to Employee's service on the boards of other companies as a Director so long as there is no conflict with the terms of this subsection or subsection b above or e below. Employee may request an interpretation by the Chief Executive Officer of Lincoln of the applicability of this provision to specific activities in which Employee contemplates engaging. d. Non-solicitation. During the term of Employee's employment and for a period of three (3) years following the termination of the Employee's employment, Employee shall not directly or indirectly solicit or endeavor to entice away from Company or Lincoln any person who is employed with Company or Lincoln. e. Change in Control. During the term of Employee's employment and for a period of three (3) years following the termination of Employee's employment, Employee agrees that neither he nor any entity directly or indirectly controlled by him will directly or indirectly participate in a proscribed activity. A "proscribed activity" shall mean either (1) soliciting others to invest in the Common Stock of Lincoln for the purpose of effecting an acquisition of control of Lincoln or Employee's directly investing in more than 1% of the Common Stock of Lincoln or (2) using confidential information (as described in subparagraph b above) to assist any person, entity or group of persons which intends to or does attempt to effect an acquisition of control of Lincoln. The term "Control" shall be defined for purposes of this subparagraph to have the meaning of control contained in Ind. Code Ann. Sec. 27-1-23-1(e) (West, 1996). f. Consideration and Legal Action. As consideration for the receipt of the amounts payable under this Agreement, Employee acknowledges, understands and agrees that any such amounts that have not been paid will be immediately forfeited if Employee breaches any provision of this Section 12 during the term of Employee's employment and for a period of three (3) years following the termination of Employee's employment. Employee acknowledges that the restrictions contained in this Section 12 b, c, d and e are reasonable and necessary to protect the legitimate interests of Company and Lincoln; and that, therefore, Company or Lincoln shall be entitled to seek preliminary and permanent injunctive and other equitable relief (including, without limitation, and equitable accounting of all earnings, profits and other benefits arising from such violation) in any court of competent jurisdiction, which rights shall be cumulative and in addition to any other rights or remedies to which Company or Lincoln may be entitled. Employee hereby irrevocably consents to the personal jurisdiction over him of the courts of the State of Indiana and of any Federal court located in such state in connection with any action or proceeding arising out of or relating to this Section 12 or any related breach of this Agreement involved in such action or proceeding and further agrees, and shall not contest, that the proper venue for filing and maintaining any such action or proceeding shall be in the State of Indiana. 13. Effect of Termination of the Employment Period. Except as specifically provided in Sections 2, 10 and 12, this Agreement shall terminate upon the termination of the Employment Period. The obligations of the Employee under Section 12 and the rights and remedies available to Company under that Section for any breach of such obligations, however, shall in all events survive. 14. Notice. Any notice required to be given by Company hereunder to Employee shall be in proper form and signed by an Officer or Director of Company. Until one party shall advise the other in writing to the contrary, notices shall be deemed delivered: a. to Company if delivered to Lynda Van Kirk, Vice President, with a copy to Tom Ober, General Counsel, or, if mailed, certified or registered mail, postage prepaid, to the above-named individuals at American States Insurance Company, 500 North Meridian Street, Indianapolis, IN 46204; and a copy to George Davis, Senior Vice President, Lincoln National Corporation, 200 East Berry Street, Fort Wayne, IN 46802. b. to Employee if delivered to Employee, or if mailed to him, certified or registered mail, postage prepaid, at 3603 West Hamilton Road, Fort Wayne, IN 46804. 15. Alternative Dispute Resolution. With the exception of actions under Sections 12b, c, d and e of this Agreement, any controversy, dispute or questions arising out of, in connection with or in relation to this Agreement or its interpretation, performance or nonperformance or any breach thereof shall be resolved through mediation. In the event mediation fails to resolve the dispute within sixty (60) days after a mediator has been agreed upon or such other longer period as may be agreed to by the parties, such controversy, dispute or question shall be settled by arbitration in accordance with the Center for Public Resources Rules for Non-Administered Arbitration of Business Disputes, by a sole arbitrator. The arbitrator shall be governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. The place of the arbitration shall be Indianapolis, Indiana. In any such controversy or dispute, regardless of the party by whom such controversy or dispute is initiated, Company shall, if written notice is given and upon presentation of appropriate vouchers, pay all legal expenses, including reasonable attorneys' fees, court costs and ordinary and necessary out-of-pocket costs of attorneys, billed to and payable by the Employee in connection with the bringing, prosecuting, defending, litigating, negotiating, or settling such controversy or dispute; provided, however, that such expenses, fees and costs shall not be paid by Company unless and until the Employee is successful on the merits; further provided, however, that in the event such controversy or dispute is settled, the settlement agreement shall provide for the allocation of such expenses, fees and costs between the parties. 16. Benefit. This Agreement shall bind and inure to the benefit of Company and the Employee, their respective heirs, successors and assigns. 17. Conditions. This Agreement is effective upon the approval of the Agreement by the non-interested members of the Board of Directors of Company or its designated compensation committee. Should the aforementioned conditions not be satisfied, this Agreement shall become null and void and shall have no effect whatsoever on any previous agreement, expressed or implied, between Employee and Company. 18. Effect on Previous Agreements. Should this Agreement become effective, it will supersede all employment related agreements between Employee and Company or Lincoln or their affiliates or subsidiaries. 19. Amendments. This Agreement may only be amended by the written agreement of Employee and Company with the written approval of Lincoln. 20. Severability. In case any part of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. In lieu of any such illegal, invalid or unenforceable provision, there automatically will be added as part of this Agreement a legal, valid and enforceable provision as similar in terms and intent to such illegal, invalid or unenforceable provision as possible. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. American States Financial Corporation By: Name: William J. Lawson Title: Employee By: Name: Robert A. Anker Title: EXHIBIT A Executive Performance Incentive Compensation Plan Performance Threshold Target Maximum Cycle 1996-1997 $174,825 $436,230 $765,900 These numbers were established taking into account Employee's actual Employment Period with Company during the Performance Cycle. If employment terminates as set out in Section 10, Employee shall be entitled to receive a pro rata award for the 1997-1999 EPIC cycle. **************** ITEM 4: LNC's ongoing benefit obligations to Robert A. Anker as of and after the transfer of his employment from LNC to American states as set forth in letter dated January 10, 1997: January 10, 1997 Mr. Robert A. Anker Chairman & CEO American States Insurance Company 500 North Meridian Street Indianapolis, IN 46204 This letter outlines LNC's ongoing benefit obligations to you as of and after the transfer of your employment from LNC to American States. This is just a summary and is not intended to modify the terms of your employment agreement with American States nor to modify the terms of the specific plans. LNC EVSP The LNC Compensation Committee has agreed to pay out all performance cycles in which you currently participate on a prorata basis based on your service as LNC COO through 12-31-96. This means that in 1997 you will be eligible for a full award for the 1994-1996 cycle. In 1998 you will be eligible to receive 2/3 of the award for the 1995-1997 cycle. In 1999 you will be eligible to receive 1/3 of the award for the 1996-1998 cycle. These awards have traditionally been paid in cash and LNC restricted stock and, as you know, the amount of the award for each cycle is determined by the Compensation Committee. LNC Options Your outstanding LNC stock options will not be affected by the transfer and will continue to vest as provided in the option agreement. LNC Restricted Shares and Restricted Phantom The Compensation Committee has the right to convert some or all of your restricted shares which are scheduled to vest on January 1, 1997 into phantom stock due to Internal Revenue Code section 162(m) -- the $1 million cap. Service with ASI will continue to count toward the vesting requirements of your restricted phantom shares. LNC Deferred Compensation American States is a participating employer under the terms of this plan. LNC Employees Savings and Profit Sharing Plan Upon transfer to American States, this account balance remains in the plan since the transfer of employment is not a "distributable event" and your account balance cannot be rolled into the American States plan. Any additional employer matching contribution declared by the LNC Board at its May 1997 meeting will be credited to your account under this plan. LNC Employees Retirement Plan Currently, there is a liability under both the American States and the Non-Life retirement plans for your retirement benefit. At the end of 1997 there will be a transfer of assets between the Non-Life and American States plans so that your qualified benefit will be under the American States plan. Because this is a funded plan, this will not have any impact on the ultimate benefit. LNC Excess Compensation Plan This is an unfunded plan which provides retirement benefits based on salary amounts in excess of $150,000 (as adjusted for cost of living). This liability will be transferred to American States. LNC Supplemental Pension Plan This is also an unfunded plan which provides retirement benefits in excess of the IRC section 415 limits. To the extent that any benefits are payable from this plan, ASI will be responsible for making these payments since your participation will be transferred to the ASI plan. LNC Executive Salary Continuation Plan Your participation will be transferred from this plan to the identical American States plan. This plan provides an additional monthly payment of 10% per month after retirement subject to the terms of the plan. LNC Executive Severance Benefit Plan This is the plan which goes into effect in the event of a change of control of LNC. As CEO of American States, you will continue to be a participant. Split Dollar Plan Currently this contract is between you and LNC, this contract will need to be amended so that it is consistent with those of the other officers of American States. There will be no change in the benefit. LNC Medical for Retired Employees If you retire as of December 31, 1997, and at any time thereafter lose your coverage under another group health plan (including the American States Medical Plan for Retired Employees), you may elect to participate within 60 days of losing such coverage, but not later than your attaining age 65. The receipt of amounts outlined above which are in addition to amounts to which you are otherwise entitled, is conditioned on your execution of an agreement and release provided to you by LNC upon termination of your employment. The terms of the agreement will be substantially identical to the ones set out in Section 12 of your Employment Agreement with American States effective January 1, 1997. The release will be the same one required by Section 10 of that Employment Agreement. **************** Item 5: Letter Agreement dated April 1, 1997 between American States Financial Corporation and Robert A. Anker: American States Financial Corporation 500 North Meridian Street Indianapolis, IN 46204 April 1, 1997 Robert A. Anker 3603 W. Hamilton Road Ft. Wayne, IN 46804 Dear Bob: Thank you for the substantial contributions you have made to the growth and success of American States Insurance Company ("ASI") and American States Financial Corporation ("ASFC"). As you know, we are seeking a buyer for ASFC, and during this transition, your continued service and loyalty are essential to ASI and ASFC. This letter sets forth our mutual agreement with respect to compensation and benefits matters that otherwise might be of concern to you during the transition. Our objectives are not only to reward you for your past service to ASI, but also to give you an added incentive to remain with ASI and help us reach our goals of achieving the highest possible return to ASFC shareholders and assuring an orderly transition. By fairly compensating you for the personal risk that the potential sale of ASFC entails, we seek to ensure your continuing dedication to your duties and that you will be in a position to work with and advise other ASI and ASFC officers and the Board concerning purchase proposals without being influenced by any uncertainties regarding your own situation. As described in detail below, two types of benefits will be provided to you -- automatic change of control benefits and a retention incentive benefit. Retention incentive benefits will be payable after a change of control at the earlier of your completion of a specified period of employment or your termination of employment on or after the end of the term of your employment contract. Please note that the term "change of control"has a specific meaning for purposes of this letter agreement; the meanings of this term and certain other terms are set forth in Exhibit A to this letter. Automatic Change of Control Benefits. Automatically upon a change of control of ASFC, you will be entitled to the following benefit enhancements: 1. Restricted phantom stock units granted to you under the Lincoln National Corporation 1986 Stock Option Incentive Plan will become 100% vested (i.e., nonforfeitable). You will be treated as a retiree under this Plan for all outstanding Options. 2. All Restricted Stock Awards and Dividend Equivalent Rights granted to you under the American States Financial Corporation Stock Option Incentive Plan ("ASFC Option Plan") will become 100% vested. Retention Incentive Benefits/1997 Option Replacement. After a change of control of ASFC, you will be entitled to the following retention incentive benefit: upon the earlier of 12 months of employment after the change of control or the termination of your employment on or after the end of the term of your employment contract, you will receive a cash payment equal to a percentage of your base salary. The amount of the payment will be based on the sale price of ASFC common stock; if the price is $34.00 per share or less, the payment will be 50% of your base salary as of the date of this letter. Each $1.00 increase in the sale price of ASFC common stock above $34.00 per share will produce a payment equal to an additional 25% of your base salary as of the date of this letter, with linear interpolation between $1.00 increments. To illustrate this formula, if the sale price is $36.00 per share, you will receive 100% of your base salary; if the sale price is $40.00 per share, you will receive 200% of your base salary. There is no cap on the maximum benefit payable. A retention incentive benefit will ordinarily be paid to you in cash within 30 days after you become entitled to the payment. Alternatively, you may elect within 14 days after the date of this letter to defer payment of all or a portion of the retention incentive benefit under the Lincoln National Corporation Executive Deferred Compensation Plan for Employees (or the successor to that plan) ("Deferred Compensation Plan"). To make a deferral election for the retention incentive benefit, please complete the election form attached to this letter as Exhibit B, and return the form to Lynda Van Kirk within 14 days from the date of this letter. If there is no change of control of ASFC by March 31, 1998, the Retention Incentive Benefits set out above shall terminate as of such date. Employment Contract. Except as otherwise specifically provided in this letter agreement, including Exhibit A, this agreement will not supersede or alter the terms of your employment contract in any manner. Other. We will negotiate with any buyer of ASFC to have the buyer assume ASFC's liabilities to pay benefits to you under the Deferred Compensation Plan, if any. If the buyer is unwilling to accept that liability, we will assure that those benefits will be paid. Taxes. To the extent that any of the benefits under this letter agreement are taxable to you, income and employment taxes will be withheld from the benefit payments you receive. If you incur any federal excise tax as a result of the payment of any of the benefits provided under this letter agreement (although we believe you will not), ASFC will make an additional cash payment to you to make you whole. That is, ASFC will pay you an amount equal to any federal excise tax you must pay, plus any income tax and employment taxes on the payment from ASFC for the excise tax. ASFC will pay the amount to you within 30 days after you present to the General Counsel of ASI either proof of payment of the excise tax or an assessment from the Internal Revenue Service for the tax. If any amount becomes payable under this letter agreement while you are a covered employee as defined in section 162(m) of the Internal Revenue Code and the amount (either alone or in combination with other remuneration) would exceed the limit under that section, ASFC reserves the right to defer the payment until you are no longer a covered employee. In this case, the amount may be unilaterally deferred and credited with interest or other earnings in accordance with the terms of the Deferred Compensation Plan. Mediation/Arbitration. Generally, ASFC, acting through the Compensation Committee of its Board or its Chief Executive Officer, will determine whether you are entitled to benefits under this letter agreement (for example, if you terminate employment, whether your termination was for good reason) and the amount of benefits to which you are entitled. If, however, you disagree with any determination regarding your eligibility for benefits or the amount of benefits, the dispute will be resolved through mediation. If mediation fails to resolve the dispute within 60 days after a mediator has been agreed upon (or any other longer period to which you and ASFC agree), the dispute will be settled by arbitration. Please refer to Exhibit A for a description of the arbitration rules that will apply, including the rules for payment of your expenses by ASFC if you are successful in the arbitration. Release and Agreement. In consideration for the benefits provided in this letter agreement, prior to the receipt of these benefits, you must sign a release in the form acceptable to ASFC waiving all claims or potential claims against ASI, ASFC, Lincoln National Corporation ("LNC") or any affiliate. In addition, by accepting this letter agreement, you agree to release and waive all rights to any Options granted to you under the ASFC Option Plan which have not vested before the change of control. By accepting this letter agreement, you also agree to retain in confidence any confidential information regarding ASI, ASFC, LNC or any affiliate that you became privy to during your employment, unless you are required by law to divulge that information. Board Approval. Because the process of seeking a buyer for ASFC has been evolving very rapidly, and we are eager to provide you with assurance concerning your own situation, we are providing this letter agreement to you before obtaining formal approval of the Compensation Committee of the Board and the Board. Therefore, you should be aware that this agreement is being offered to you subject to the approval of the Compensation Committee and the Board. We are pleased to provide you with the benefits described in this letter agreement in recognition of your service and dedication to ASI and ASFC. Please sign the attached copy of this letter to confirm your acceptance of this agreement and the benefits provided for you. Kindly return the copy of the letter with your signature to Lynda Van Kirk by the close of business on April 3, 1997. Sincerely, William J. Lawson President American States Financial Corporation In consideration of the foregoing, I,________________ _______________, hereby accept the benefits provided under this letter agreement, and I accept and agree to be bound by the terms of this letter agreement. Moreover, I release and waive all my rights to any Options granted to me in 1996 under the ASFC Option Plan that are unvested on the date of a change of control. I further agree that such Options shall automatically be canceled and become null and void upon the occurrence of a change of control. - ----------------- --------------------------------- Date Signature of Employee Exhibit A Definitions and Special Rules I. Definitions. As used in the letter agreement, the following terms have the following meanings. 1. Affiliate. "Affiliate" means any corporation which directly or indirectly controls or is controlled by or is under common control with ASI, ASFC or LNC. For purposes of this definition, control means the power to direct or cause the direction of management and policies of a corporation through the ownership of voting securities. 2. Change of Control. "Change of control" means the acquisition by any individual, entity or group (as defined in Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of the then outstanding shares of common stock of ASFC; provided, however, that the following acquisitions shall not constitute a change of control: (a) any acquisition directly from ASFC other than an acquisition by virtue of the exercise of a conversion privilege, (b) any acquisition by ASFC, or (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by ASFC, or any entity controlled by ASFC. 3. Per Share Price . "Per share price paid for ASFC common stock in the change of control" or "sale price of ASFC common stock" means the per share price of ASFC common stock paid by the purchaser in the transaction giving rise to the change of control. II. Special Rules. 1. Arbitration. Any arbitration under the letter agreement shall be conducted in accordance with the Center for Public Resources Rules for Non-Administered Arbitration of Business Disputes, by a sole arbitrator. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. The place of the arbitration shall be Indianapolis, Indiana. In any controversy or dispute, regardless of whether the employee or ASFC initiates the controversy or dispute, if the employee provides written notice and presents appropriate vouchers, ASFC will pay all of the employee's legal expenses, including reasonable attorneys' fees, court costs and ordinary and necessary out-of-pocket costs of attorneys, billed to and payable by the employee in connection with the controversy or dispute (i.e., the bringing, prosecuting, defending, litigating, negotiating, or settling of it), but only if (and after) the employee is successful on the merits in the arbitration. Furthermore, if the controversy or dispute is settled, the settlement agreement will provide for the allocation of such expenses, fees and costs between the employee and ASFC. 2. Successors. References to ASI and ASFC in the letter agreement, including this Exhibit to the letter agreement, shall include and apply to any successor to or assign of ASI or ASFC. Furthermore, the obligations under the letter agreement shall be binding upon and inure to the benefit of the employee, his beneficiary or estate, ASI or ASFC and any successor to ASI or ASFC. ************************* Item 6: On August 13, 1997, the LNC Compensation Committee cancelled the options of Jeffrey J. Nick under the Cannon Lincoln Limited Phantom Stock Plan and awarded Mr. Nick credit in the amount of $2,530,659 under the LNC Executive Deferred Compensation Plan for Employees. Provided, however, that Mr. Nick will have a vested interest in such amount as follows: $1,146,042 shall vest as of January 1, 1999; $ 461,539 shall vest as of January 1, 2000; $ 461,539 shall vest as of January 1, 2001; $ 461,539 shall vest as of January 1, 2002; (or, if earlier, on the first to occur of the date of death, disability, or a resignation within two years of a change in control of the Corporation). ************************* Item 7: Agreement, Waiver and General Release, signed by Robert A. Anker on January 16, 1998 (effective January 24, 1998) and accepted by Lincoln National Corporation and American States Financial Corporation: AGREEMENT, WAIVER AND GENERAL RELEASE This Agreement, Waiver and General Release ("Agreement") is made and entered into by and between Robert A. Anker (hereinafter referred to as "Employee"), American States Financial Corporation and Lincoln National Corporation, each corporation on behalf of itself and its affiliates and subsidiaries, and each of their directors, officers, representatives, agents, attorneys, employees, successors, and assigns and any other person acting through, by, under or in concert with any of them (such subsidiaries or persons affiliated or connected with American States Financial Corporation hereinafter collectively referred to as "ASFC," and all other such affiliates, subsidiaries or persons hereinafter collectively referred to as "Lincoln"), and shall become effective eight (8) days after the date of execution hereof by Employee. RECITALS A. Employee and ASFC entered into an Employment Agreement dated as of January 1, 1997 (the "Employment Agreement") which specifies that Employee will be entitled to certain payments and other benefits during and at the end of the Employment Period (as defined in the Employment Agreement). B. Employee and ASFC entered into a "Letter Agreement" dated April 1, 1997, which specifies that Lincoln and ASFC shall provide automatic change of control, retention incentive and certain other benefits (with the amount of Employee's Retention Incentive Benefits/1997 Option Replacement acknowledged in Exhibit A hereto) to Employee in the event of a "Change of Control" of ASFC (as defined in Exhibit A of the Letter Agreement), subject to the conditions set forth in the Letter Agreement. C. Employee received a letter dated January 10, 1997 from Ian M. Rolland, Chief Executive Officer of Lincoln (hereinafter referred to as the "January 10, 1997 Letter") outlining certain of Lincoln's ongoing benefit obligations to Employee. D. The parties have agreed and acknowledged that the Employment Period will end, and Employee's employment with ASFC will cease at the end of the last day of calendar year 1997 (December 31, 1997), and that at (or prior to) that time, Employee shall no longer be an officer or director of ASFC or Lincoln, nor shall he serve as an agent, trustee or fiduciary or in any similar capacity for ASFC, Lincoln or any of their respective profit-sharing or other employee benefit or welfare plans, although, with respect to Lincoln, Employee shall continue to be a person to whom the restrictions of Section 16b of the Securities Exchange Act of 1934 apply for a period determined under the Securities Exchange Act. E. A Change of Control with respect to ASFC has occurred. In consideration of the premises and mutual promises and agreements of the parties contained herein, it is agreed as follows: 1. Employee shall receive those automatic change of control, retention incentive and other benefits specified in the Letter Agreement upon the occurrence or fulfillment of the conditions for the payment or provision of any particular benefit as are set forth in the Letter Agreement. This Agreement constitutes the agreement and release referred to in the Employment Agreement, the Letter Agreement and the January 10, 1997 Letter and is acceptable and satisfactory to ASFC and Lincoln. 2. Employee and Lincoln hereby agree that payment for the Lincoln phantom stock units currently credited to Employee and of Employee's account under the Lincoln National Corporation Executive Deferred Compensation Plan (such payments hereinafter collectively referred to as "Lincoln Deferred Compensation Payments") shall commence upon the first day of the month on or next following the fourth anniversary of the Change of Control of ASFC and shall be made in non-annuity monthly installments over a period of 120 months, as acknowledged in an attachment to this Agreement. 3. Employee, for and in consideration of the payment or provision of the benefits specified in the Letter Agreement and the agreement set forth in Paragraph 2, waives any right to personal recovery and hereby irrevocably, unconditionally and generally releases, acquits, and forever discharges to the fullest extent permitted by law, ASFC and Lincoln from all charges, complaints, actions, causes of actions, suits, rights, grievances, costs, losses, debts, expenses, sums of money, accounts, covenants, contracts, agreements, claims, damages and demands of any nature whatsoever, known or unknown, in law or in equity ("Claim" or "Claims"), which against them Employee at any time heretofore ever had, owned, or held or claimed to have had, owned, or held or which Employee now has, owns, or holds, or claims to have, own, or hold, or which Employee can, shall or may have, or which Employee's heirs, executors, administrators, personal representatives, successors, or assigns hereinafter can, shall or may have, in any way connected with or relating to Employee's employment and/or the termination of his employment with ASFC. 4. Paragraph 3 above includes, but is not limited to, claims, disputes or causes of action or right to personal recovery under tort, contract or other law of the State of Indiana, (including, but by no means limited to, claims arising out of or alleging breach of contract, wrongful termination, breach of implied employment, breach of good faith and fair dealing, impairment of economic opportunity, intentional infliction of emotional harm or emotional distress, actual or constructive fraud), under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 621, et seq., as amended, under Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2000e, et seq., as amended, by the Civil Rights Act of 1991, under the Americans with Disabilities Act of 1990, 42 U.S.C. 12101, et seq., as amended, under the Family and Medical Leave Act of 1993, 29 U.S.C. 2601, et seq., under 42 U.S.C. Section 1981, under any theory of retaliation, under any federal or state law or municipal ordinance relating to discrimination in employment, or under any other laws, ordinances, executive orders, rules, regulations or administrative or judicial case law arising under the statutory or common laws of the United States, the State of Indiana, or any political subdivision of the State of Indiana. 5. Employee knowingly and voluntarily specifically waives any rights or claims arising under the Age Discrimination in Employment Act of 1967, 29 U.S.C. 621 et seq., as amended and, more specifically, any right or claim under 29 U.S.C. 626. Employee specifically states and acknowledges that: A. This waiver is part of an Agreement written in a manner calculated to be understood by him. B. He does not waive rights or claims that may arise after the date that this Agreement is executed. C. He is receiving consideration in addition to anything of value to which he would already have been entitled prior to executing this Agreement; specifically, Employee will receive the benefits set forth in the Letter Agreement only if he waives the rights and claims in Paragraph 3 above by signing this Agreement and not revoking it within the seven-day period described in Paragraph 6 below. D. He has been and is hereby advised, in writing, to consult an attorney prior to executing this Agreement. E. He further acknowledges that he has been given a period of at least twenty-one (21) days within which to consider this Agreement. 6. It is provided that for a period of seven (7) days following the execution of this Agreement, Employee may revoke said Agreement by notice to ASFC. Further, this Agreement shall not become effective or enforceable until the revocation period has expired. 7. Notwithstanding any provision of this Agreement to the contrary, nothing in this Agreement shall, nor shall any provision of this Agreement be interpreted or applied so as to: A. Provide for the forfeiture or deny Employee the right to payment of any benefit under (i) any employee benefit plan (within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974 as amended, 29 U.S.C. 1001, et seq.) maintained by ASFC or Lincoln, or (ii) any other bonus or benefit plan or arrangement maintained by ASFC or Lincoln that is listed in the Agreement and Plan of Merger dated June 6, 1997 by and among ASFC, SAFECO Corporation and ASFC Acquisition Co. as such plan or arrangement is in effect on the date of the Change of Control of ASFC, provided that Lincoln shall have no responsibility or liability to fund or provide funding for any such benefit after the date of the Change of Control of ASFC to the extent that the benefit is payable under a plan or arrangement maintained by ASFC or under which ASFC is or was a participating or adopting employer and except to the extent (a) that the Letter Agreement specifically provides that a benefit to be provided under the Letter Agreement shall replace and be paid in lieu of a benefit provided under any other plan or program maintained by ASFC or Lincoln, or (b) any benefit ceases to be paid or payable under Paragraph 15 as a result of a breach of this Agreement. B. Supersede, nullify, replace or alter any terms of the Letter Agreement or the January 10, 1997 Letter. C. Supersede, nullify, replace or alter any terms of the Employment Agreement entered into by Employee and ASFC as of January 1, 1997, except to the extent the Letter Agreement specifically provides that a benefit to be provided under the Letter Agreement shall replace and be paid in lieu of a benefit provided under the Employment Agreement or the terms of the Letter Agreement otherwise specifically supplement or specifically supersede the terms of the Employment Agreement. D. Release, acquit or discharge ASFC or Lincoln from, and each of ASFC and Lincoln agrees to provide to Employee, indemnification and related rights with respect to expenses, including reasonable attorney's fees, judgments, penalties, fines and amounts paid in settlement, actually incurred by him, arising out of his employment with ASFC or Lincoln, service as a director, officer, agent, representative fiduciary or trustee of any such company or affiliated company or any of their respective pension, profit-sharing or other employee benefit or welfare plans, to the extent and on the same terms and conditions as provided in the Articles of Incorporation, Bylaws or indemnification provisions or agreements of ASFC, or Lincoln or under any applicable law. E. Release, acquit or discharge any person or entity from any rights or claims which Employee may now or hereafter have with respect to policies of errors and omissions, directors and officers liability, fiduciary liability or any similar insurance coverage carried for the benefit of its employees, officers and directors of ASFC, Lincoln or any of their respective affiliates. F. Bar Employee from asserting any and all claims he may have against ASFC or Lincoln as a defense or compulsory counterclaim (as described in Indiana Trial Rule 13) to the extent, and only to the extent, that such compulsory counterclaim offsets any recovery by ASFC and/or LNC to any action or proceeding brought by ASFC or Lincoln, against Employee to recover damages or other relief related to or connected with his employment by or service as a director, officer, agent, representative, fiduciary or trustee of ASFC, Lincoln, or any of their respective profit-sharing, employee benefits or welfare benefit plans, to the same extent as if this Agreement had not been signed, provided, however, that Employee may not assert any such claim as a defense with respect to any action or proceeding brought by ASFC or Lincoln against Employee under this Agreement or to the extent of Employee's continuing obligations thereunder, the Employment Agreement, Letter Agreement or the January 10, 1997 Letter. 8. Employee warrants and represents that in executing this document he does so with full knowledge of any and all rights which he may have with respect to all matters released. Employee further understands, acknowledges and agrees that the payment of any consideration is not an admission of liability on the part of ASFC or Lincoln, but to the contrary, represents a negotiated compromise and agreement. This Agreement, shall not in any way be interpreted to render Employee a "prevailing party" for any purpose, including, but not limited to, an award of attorney's fees under any statute or otherwise. 9. Employee represents that he has not filed any complaints or claims against ASFC or Lincoln with any local, state or federal court or agency, that Employee will not do so at any time hereafter for claims which arose prior to the date he signs this Agreement, and that if any such court or agency assumes jurisdiction of any complaint or claim against ASFC or Lincoln which arose prior to the execution of this Agreement, he will immediately request such court or agency to dismiss the matter and take all such additional steps necessary to facilitate such dismissal with prejudice. As a further material inducement to ASFC and Lincoln to enter into this Agreement, except as contemplated by Paragraph 7.F. above, Employee covenants and agrees not to sue, or join with others in suing, ASFC or Lincoln on any of the released Claims. 10. Employee, due to the knowledge and information he possesses gained as a result of his employment with ASFC and Lincoln hereby agrees to make himself available, at reasonable times, and upon reasonable notice, to cooperate, consult, testify, etc. as may be reasonably requested by ASFC or Lincoln with respect to current and future legal actions including but not limited to litigation, arbitrations, mediation, administrative, and/or regulatory proceedings in which ASFC and Lincoln is a party. ASFC and Lincoln will pay Employee for the reasonable value of his time with the express understanding that any such payment is not made for or as an inducement to the substance of his testimony. 11. Employee, ASFC and Lincoln represent and acknowledge that the terms, obligations and commitments set forth in the Employment Agreement, the Letter Agreement and the January 10, 1997 Letter continue to apply in accordance with the terms of such agreements, except as specifically and expressly agreed otherwise in writing, and, notwithstanding any other provision of this Agreement, Employee, ASFC and Lincoln shall comply with all of the terms specified in the Employment Agreement, the Letter Agreement and the January 10, 1997 Letter that continue to apply, including obligations or commitments that survive the termination of any such agreement. 12. Employee warrants and represents that no other person or entity has any interest in the matters released and that he has not assigned or transferred or purported to assign or transfer to any person or entity all or any portion of the matters released. 13. Employee represents and acknowledges that he is not relying and has not relied on any representation or statements made by ASFC or Lincoln, or any of them, with respect to any of the matters released or with regard to his rights or asserted rights in connection therewith. Employee hereby assumes the risk of any mistake of fact with regard to any of the matters released or with regard to any of the facts which are now unknown to him relating thereto. 14. Employee represents and agrees that he shall not communicate the terms of this Agreement and that he will not hereafter disclose any information concerning this Agreement, or any information discussed by the parties in negotiation of this Agreement to any person, corporation, or other entity, other than representatives of ASFC or Lincoln, for any purpose whatsoever without prior written permission from ASFC and Lincoln, except to Employee's spouse, and to the extent necessary to an out placement firm or counselor, Employee's attorney, tax preparer, accountant, the trustees of any trust of which the Employee is either a settlor or a beneficiary, other financial advisor, or as required by law. Employee shall inform any such individual to whom he discloses any such information of the confidential nature thereof, and shall request that such individual agree to maintain the information in confidence and refrain from any further disclosure. 15. If any provision of this Agreement is breached or violated by Employee in any material respect, all payments then being made to Employee by ASFC and Lincoln under the Letter Agreement and the Lincoln Deferred Compensation Payments then being made shall immediately stop. In the event Employee cures such breach to the reasonable satisfaction of ASFC and Lincoln within a reasonable period of time, payments under the Letter Agreement and the Lincoln Deferred Compensation Payments shall resume, and any such payments that would have been made during the interim between the breach and the cure shall be made as soon as practicable after ASFC and Lincoln determine that the cure is satisfactory. Following the breach and failure to cure, however, no additional benefits shall be paid or provided to Employee under the Letter Agreement and no additional Lincoln Deferred Compensation Payments shall be made. 16. This Agreement may not be introduced in evidence or relied on by either party in subsequent legal proceedings except only proceedings alleging or arising out of, and seeking redress for breach of the terms hereof. 17. Each of ASFC and Lincoln hereby represent and warrant that as of the date of Employee's execution of this Agreement, there are no written or unwritten agreements, between ASFC and/or Lincoln, as the case may be, on the one hand and any affiliate of either one of them, on the other hand, that would materially alter any term of the Employment Agreement, the Letter Agreement, the January 10, 1997 Letter or this Agreement, or the rights or obligations of the Employee hereunder. 18. ASFC agrees that the proper interpretation of the Letter Agreement is that the cash payment described under the heading "Retention Incentive Benefits/1997 Option Replacement" shall be paid not earlier than January 1, 1998 and not later than thirty (30) days after Employee shall become entitled thereto. 19. This Agreement shall be binding upon and inure to the benefit of Employee and his heirs, executors, administrators, personal representatives, successors and assigns, and shall be binding upon and inure to the benefit of ASFC and Lincoln and each of them, and to their respective, successors and assigns, as the case may be. 20. This Agreement is made and entered into in the State of Indiana, and shall in all respects be interpreted, enforced and governed under the internal laws (and not the conflicts of laws rules) of said State. Should any provision of this Agreement be declared or determined to be null, void, inoperative, illegal or invalid for any reason, the validity of the remaining parts, terms or provisions shall not be affected thereby and they shall retain their full force and effect, and said null, void, inoperative, illegal or invalid part, term, or provision shall be deemed not to be a part of this Agreement. As used in this Agreement, the singular or plural number shall be deemed to include the other whenever the context so indicates or requires. The language of all parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties. 21. This Agreement sets forth the entire agreement between the parties hereto, and fully supersedes any and all prior negotiations, agreements or understandings between the parties hereto pertaining to the subject matter hereof, except to the extent specifically provided otherwise above. This Agreement may not be modified or amended except by a written agreement signed by the parties hereto. PLEASE READ CAREFULLY. THIS AGREEMENT, WAIVER AND GENERAL RELEASE INCLUDES A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS AFFIRMATION OF RELEASOR I warrant that this Agreement reflects the entire settlement between myself and ASFC and Lincoln. I have read this Agreement carefully, and I have been given the opportunity to consult with private counsel concerning its terms and effect and concerning my rights. I fully understand that this Agreement generally releases all of my claims, both known and unknown, arising prior to the execution hereof, against ASFC and Lincoln, except as specifically otherwise provided herein. I execute this Agreement voluntarily and of my own choice with full and complete knowledge and understanding of its significance and effect. Dated:________________, 1997 __________________________________ Employee STATE OF __________) ) SS: COUNTY OF__________) Subscribed and sworn to before me, a Notary Public in and for said County and State, this day of , 1997. --------------------------------- Notary Public My Commission Expires: County of Residence: ACCEPTANCE OF LINCOLN The undersigned accepts the foregoing Agreement on behalf of Lincoln National Corporation and represents and warrants that he has all necessary corporate authority to do so. Dated:________________, 1997 ________________________________ Ian M. Rolland, Chairman and CEO STATE OF____________ ) ) SS: COUNTY OF __________ ) Subscribed and sworn to before me, a Notary Public in and for said County and State, this _________ day of ___________________________, 1997. _________________________________ Notary Public My Commission Expires:________________ County of Residence:__________________ ACCEPTANCE OF ASFC The undersigned accepts the foregoing Agreement on behalf of American States Financial Corporation and represents and warrants that he has all necessary corporate authority to do so. Dated:______________, 1997 __________________________________ Roger H. Eigsti, Chairman and CEO STATE OF____________ ) ) SS: COUNTY OF __________ ) Subscribed and sworn to before me, a Notary Public in and for said County and State, this ___________ day of _______________________, 1997. --------------------------------- Notary Public My Commission Expires:_____________ County of Residence:_______________ ACKNOWLEDGMENT Employee and Lincoln hereby acknowledge their mutual understanding and agreement as set forth in the Agreement to which this Acknowledgment is attached that, in consideration for the premises set forth in the Agreement, payment for the Lincoln phantom stock units currently credited to Employee and of Employee's account under the Lincoln Deferred Compensation Plan shall commence on the first day of the month on or next following the fourth anniversary of the Change of Control of ASFC and shall be made in non-annuity monthly installments over a period of 120 months. And Ian M. Rolland hereby represents and warrants that he has all necessary corporate authority to execute this Acknowledgment. Dated:________________, 1997 ________________________________ Employee Dated:________________, 1997 ________________________________ Ian M. Rolland, Chairman and CEO STATE OF____________ ) ) SS: COUNTY OF __________ ) Subscribed and sworn to before me, a Notary Public in and for said County and State, this ______ day of ________________, 1997 by Robert A. Anker. __________________________________ Notary Public My Commission Expires:_________________ County of Residence:___________________ STATE OF____________ ) ) SS: COUNTY OF __________ ) Subscribed and sworn to before me, a Notary Public in and for said County and State, this _______ day of _____________, 1997 by Ian M. Rolland. _________________________________ Notary Public My Commission Expires:________________ County of Residence:__________________ EXHIBIT A Acknowledgment of Amount of Retention Incentive/ 1997 Option Replacement Pursuant to Letter Agreement Dated April 1, 1997 The parties acknowledge that pursuant to the Letter Agreement dated April 1, 1997, Employee shall receive as his Retention Incentive Benefits/1997 Option Replacement, an amount equal to $2,118,750, representing 3.75 times his current base salary of $565,000. PCDocs No. 66396\1 EX-10 8 Exhibit 10(q) - -150- AGREEMENT OF LEASE BY AND BETWEEN NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP (LANDLORD) AND THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (TENANT) INDEX TO LEASE ARTICLES NUMBER CAPTION ARTICLE 1 Basic Lease Provisions and Enumeration of Exhibits..............4 ARTICLE 2 Description of Premises and Appurtenant Rights..................6 ARTICLE 3 Rent and Additional Rent........................................8 ARTICLE 4 Landlord's Covenants, Interruptions and Delays.................15 ARTICLE 5 Tenant's Covenants.............................................17 ARTICLE 6 Assignment, Subletting, and Mortgaging.........................22 ARTICLE 7 Casualty and Taking............................................24 ARTICLE 8 Defaults; Events; Remedies.....................................26 ARTICLE 9 Rights of Mortgagee/Ground Lessor..............................28 ARTICLE 10 Miscellaneous Provisions.......................................29 10.1 Title..........................................................29 10.2 Notices........................................................29 10.3 Bind and Inure.................................................30 10.4 Partial Invalidity.............................................30 10.5 No Waiver......................................................30 10.6 No Surrender...................................................30 10.7 No Accord and Satisfaction.....................................30 10.8 Intentionally Deleted..........................................30 10.9 Self-Help......................................................30 10.10 Estoppel Certificates..........................................31 10.11 Waiver of Subrogation..........................................32 10.12 Governing Law..................................................32 10.13 Acts of God....................................................32 10.14 Consent........................................................32 10.15 Brokerage Commissions..........................................32 10.16 Intentionally Deleted..........................................33 10.17 Limitation of Liability........................................33 10.18 Intentionally Deleted..........................................33 10.19 Recording......................................................33 10.20 Intentionally Deleted..........................................33 10.21 Term Commencement Date.........................................33 10.22 Improvements...................................................34 10.23 Electricity....................................................36 10.24 Option to Extend...............................................37 10.25 Hazardous Materials............................................39 10.26 Right of First Offer...........................................40 10.27 Right of First Refusal.........................................42 10.28 Right to Reduce Space..........................................43 10.29 Storage Premises...............................................44 10.30 Antenna Installation...........................................45 10.31 Exterior Signage...............................................48 10.32 Food Service Facility..........................................49 10.33 Exercise Facility..............................................49 10.34 Temporary Premises.............................................49 10.35 Testing of Building HVAC System................................50 DATE OF LEASE EXECUTION: February __, 1998 ARTICLE I REFERENCE 1.1 Subjects Referred To. Each reference in this Lease to any of the following subjects shall be construed to incorporate the data for that subject in this Article. PARTIES: LANDLORD: NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP, a Massachusetts limited partnership MANAGING AGENT: NORTHLAND INVESTMENT CORPORATION LANDLORD'S/MANAGING AGENT'S ADDRESS FOR NOTICES: Northland Investment Corporation 2150 Washington Street Newton, MA 02162 MAKE CHECKS PAYABLE TO: NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP SEND CHECKS TO: c/o Northland P.O. Box 620601 Newton Lower Falls, MA 02162-0601 TENANT: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, an Indiana corporation TENANT'S ADDRESS (FOR NOTICE AND BILLING): 350 Church Street Hartford, CT 06103 Attn: Peter Gourley Vice President, Financial Reporting & Pricing BUILDING & LEASED PREMISES: Approximately 149,778 rentable square feet comprising the entire seventh (7th) through twelfth (12th) floors (collectively, the "Premises") of the building known as the Metro Center and located at 350 Church Street, Hartford, Connecticut (the "Building"), substantially as shown on the Plans attached hereto as Exhibit "A". All measurements and determinations of area required pursuant to this Lease shall be made in accordance with the Building Owners and Managers Association ("BOMA") standards, BOMA publication ANSI 265.1-1996. Prior to the Term Commencement Date, as hereinafter defined, the area of the Premises will be remeasured in accordance with BOMA standards. If such remeasurement discloses a different rentable area for the Premises than that set forth above, then the Base Rent and Tenant's Proportionate Share (as such terms are hereinafter defined) shall be adjusted accordingly. PROPERTY: The Building, the parking structure (the "Garage") with an address at 150 High Street, Hartford, Connecticut, and the land parcel(s) on which the Building and the Garage are located, including exterior grounds and sidewalks, if any. TERM COMMENCEMENT DATE: See Section 10.21 EXPIRATION DATE: The date which is one hundred twenty (120) months and two (2) weeks after the Term Commencement Date; provided, however, if such date shall fall on other than the last day of a calendar month, the Expiration Date shall be deemed to be the last day of the calendar month in which such date shall occur. TERM: One hundred twenty (120) months and two (2) weeks (plus the partial month, if any, at the end of the Term), as the same may be sooner terminated or extended in accordance with the terms of this Lease. OPTION TO EXTEND: See Section 10.24 BASE RENT RATE: Months 1- 24: $12.00 per rentable square foot of the Premises per year Months 25-60: $17.00 per rentable square foot of the Premises per year Months 61-84: $22.00 per rentable square foot of the Premises per year Months 85-96: $24.00 per rentable square foot of the Premises per year Months 97-108: $24.50 per rentable square foot of the Premises per year Months 109- Expiration Date: $25.00 per rentable square foot of the Premises per year PROPORTIONATE SHARE: 52.56%, being a fraction, the numerator of which is the rentable area of the Premises and the denominator of which is the rentable area of the Building. OPERATING COSTS FOR THE BASE CALENDAR YEAR: The actual amount of Operating Costs for the first twelve (12) months of the Term - ------------------------------------------- REAL ESTATE TAXES FOR THE BASE CALENDAR YEAR: The actual amount of Landlord's Tax Expense for the first twelve (12) months of the - ----------------------------------------------- Term PERMITTED USE OF PREMISES: General office use only (without associated bulk storage or uses requiring above building standard structural, electrical or HVAC facilities), and for no other use or purpose. TENANT INSURANCE REQUIREMENTS: Public Liability Insurance Combined Single Limit Bodily Injury & Property Damage: $3,000,000.00/$5,000,000.00 SECURITY DEPOSIT: None GUARANTOR: None BROKER: Cushman & Wakefield of Connecticut, Inc. 1.2 Exhibits & Riders. The Exhibits and Riders listed below in this Section are incorporated in this Lease by reference and are to be construed as part of this Lease: Exhibit A Plan of Premises Exhibit B Landlord Services Exhibit B-1 Cleaning Specifications Exhibit C Rules and Regulations Exhibit D Form of Subordination, Non-Disturbance and Attornment Agreement Exhibit E Plan of Storage Premises Exhibit F Form of Metro Center Fitness Club Usage Agreement ARTICLE II DESCRIPTION OF PREMISES AND APPURTENANT RIGHTS 2.1 Location of Premises. Landlord hereby demises and leases to Tenant, and Tenant hereby accepts from Landlord, the Premises suitably identified in the foregoing portion of this Lease. 2.2 Appurtenant Rights and Reservations. Tenant shall have, as appurtenant to the Premises, the non-exclusive right to use, and permit its invitees to use in common with others, the public or common lobbies, hallways, stairways, passenger elevators and sanitary facilities in the Building, but such rights shall always be subject to the Rules and Regulations set forth on Exhibit C (as the same may be amended or modified from time to time by Landlord by prior notice to Tenant), and to the right of Landlord to designate and change from time to time areas and facilities so to be used (provided that Tenant's use and enjoyment thereof and of the Premises and Tenant's rights under this Lease are not materially adversely affected thereby). Tenant shall also have, as appurtenant to the Premises, subject to obtaining Landlord's prior written consent, the non-exclusive right to use reasonable portions of common area conduits, chutes and pipes adjacent to the Premises for the purpose of running wires and cabling between floors of the Premises to serve Tenant's equipment located within the Premises. Tenant agrees that Landlord shall have the right, upon reasonable prior written notice to Tenant, to place in, over and upon the Premises (but in such a manner as to reduce interference with Tenant's use of the Premises and not be visible from within the Premises) utility lines, pipes, equipment and the like to serve the Premises or premises other than the Premises, and to replace, maintain and/or repair such utility lines, pipes, equipment and the like. During the hours of 7:00 A.M. to 6:00 P.M., Monday through Friday, legal holidays recognized generally in first-class office buildings in downtown Hartford excepted (hereinafter referred to as "Normal Building Operating Hours"), the Building shall be open and access to the Premises shall be freely available, subject to interruption due to causes beyond Landlord's reasonable control. During all periods other than Normal Building Operating Hours Tenant shall have access to the Premises, and at all times Tenant shall have access to the Garage, but always subject to reasonable rules and regulations therefor from time to time established by Landlord by suitable notice. 2.3 Parking. During the Term of this Lease, Landlord will make available for the use by Tenant and its employees four (4) Garage parking passes for each one thousand (1,000) rentable square feet of the Premises. Notwithstanding the foregoing, Tenant shall have the one-time right, upon thirty (30) days prior written notice to Landlord, which notice must be given on or before the third (3rd) anniversary of the Term Commencement Date, to reduce the number of Garage parking passes available for its use to three (3) Garage parking passes for each one thousand (1,000) rentable square feet of the Premises; and, if Tenant shall exercise such right, the number of Garage parking passes shall be so reduced effective as of the expiration of such thirty (30) day period. Said parking passes shall be paid for by Tenant at the following rates (in each case plus applicable State sales tax): $50.00 per pass per month for months 1-24 of the Term; $70.00 per pass per month for months 25-36 of the Term; $80.00 per pass per month for months 37-48 of the Term; $100.00 per pass per month for months 49-60 of the Term; $125.00 per pass per month for one-half (1/2) of the passes for months 61 through the Expiration Date of the Term; and at the then current prevailing rate in the Garage, as such rate may vary from time to time, for the other one-half (1/2) of the passes for months 61 through the Expiration Date of the Term. All parking passes (and the parking spaces in the Garage) will be on an unassigned, non-reserved basis, except for thirty (30) spaces, twenty (20) of which shall be designated by Landlord as reserved for Tenant's exclusive use and ten (10) of which shall be designated by Landlord as reserved for the use by Tenant's visitors and guests. Such thirty (30) spaces shall be in a preferred location in the Garage (as designated by Landlord) and shall be indicated by signage (or other form of identification) installed by Landlord and approved by Tenant; provided, however, that in no event shall Landlord be obligated to police the use of such thirty (30) spaces. Notwithstanding the preceding sentence, upon written notice from Tenant that unauthorized persons are using any of such thirty (30) spaces, Landlord shall use reasonable efforts to cause such persons not to use such spaces; provided, however, that Landlord shall have no obligation to terminate any lease to which Landlord and such persons may be parties by reason of such unauthorized use. The use of all parking spaces in the Garage shall be subject to rules and regulations promulgated by Landlord from time to time. Except in connection with a permitted sublease or assignment under Article VI hereof, Tenant shall have no right to sublet, assign or otherwise transfer said parking passes without Landlord's prior written consent. If Tenant shall desire to sublet, assign or otherwise transfer any of said parking passes, Tenant shall submit to Landlord in writing the name of the proposed transferee, the terms and conditions of the transfer (including copies of the proposed sublease or assignment) and any other information reasonably requested by Landlord. Landlord shall have the right, exercisable by written notice to Tenant within ten (10) business days after Landlord's receipt of Tenant's notice, to recapture any or all of the parking passes which are the subject of the proposed sublease, assignment or other transfer. If Landlord shall exercise such right, Tenant shall have no further right to such parking passes (and shall return the same to Landlord) effective as of the date and for the period of time set forth in Landlord's recapture notice. If Landlord shall not exercise such right, Landlord's consent to the proposed sublease, assignment or other transfer shall not unreasonably withheld or unduly delayed; provided, however, that Landlord may withhold its consent if in the exercise of its sole judgment Landlord determines that (i) the financial condition or general reputation of the proposed transferee is not consistent with the extent of the obligations undertaken by the proposed sublease, assignment or other transfer, or (ii) Tenant proposes to sublet or assign to one who, at the time of Tenant's request for consent, is a tenant or occupant of the Building and/or is using parking spaces in the Garage or to one with whom Landlord or its agents is (are) actively negotiating for space in the Building or for parking spaces or passes in the Garage, or (iii) the charges for the parking passes which the transferee is obligated to pay are less than the then current prevailing rate (from time to time) in the Garage. Tenant acknowledges that Landlord's consent may be conditioned upon, inter alia, a requirement that all charges payable for the use of such parking passes in excess of the charges payable hereunder for such parking passes be paid to Landlord. ARTICLE III RENT AND ADDITIONAL RENT 3.1 Rent. All monies payable by Tenant to Landlord under this Lease shall be deemed to be rent and shall be payable and recoverable as rent in a manner herein provided. Rent shall be paid to the Landlord, commencing on the Term Commencement Date, and on the first day of each calendar month during the Term of this Lease without any withholding, offset, abatement, reduction, prior notice or demand, except as otherwise expressly set forth in this Lease. Until notice of some other designation is given, rent and all other charges shall be paid by check to the order of Landlord at Landlord's mailing address set forth in Section 1.1 hereof, receipt of same being subject to collection. Notwithstanding the foregoing, provided that Tenant is not in default under this Lease, Tenant shall be entitled to a credit against Base Rent payable hereunder in the amount of $.50 for each rentable square foot of the Premises not occupied by Tenant for business during the first two (2) weeks of the Term, the amount of such credit to be confirmed in writing by Landlord and Tenant promptly after the expiration of such first two (2) week period. If Tenant shall fail to pay rent when due, such unpaid amount shall bear interest until paid at the rate of 1.5% per month for all sums which are in excess of ten (10) business days overdue. In the event Tenant pays any rent or other charge by check or draft, and said check or draft is not honored by the bank on which it is drawn, interest as set forth herein and an additional charge of $15.00 shall be due from Tenant to Landlord. 3.2 Operating Cost Increase. If the Operating Costs for any calendar year or partial calendar year during the Term are greater than the Operating Costs for the Base Calendar Year set forth in Section 1.1 (or a prorated amount thereof for any partial calendar year), then Tenant shall pay to Landlord its Proportionate Share set forth in Section 1.1 of such excess, as the same may be adjusted in the event of a remeasurement or change in size of the Premises or Building. Operating Costs for the Base Calendar Year shall be adjusted to reflect an occupancy rate in the Building of ninety-five percent (95%). Landlord may from time to time reasonably estimate the amount due from Tenant under this Section with respect to any calendar year or portion thereof and, commencing no sooner than the first (1st) anniversary of the Term Commencement Date, Tenant shall pay periodically as Landlord may determine, but not more frequently than monthly, the amount of Landlord's estimate as rent with the next due payment of monthly Base Rent. Not later than one hundred twenty (120) days after the end of each calendar year, Landlord shall render Tenant a statement of Operating Costs for such calendar year and any amount due from Tenant or any credit due to Tenant hereunder. Payment by Tenant of any amount due shall be made as additional rent with Tenant's next due payment of monthly Base Rent (or, if the term of this Lease has ended, within ten (10) days of receipt of such statement), and Landlord shall credit the amount of any overpayment against subsequent obligations of Tenant under this clause (or refund such overpayment, if the term of this Lease has ended and Tenant has no further obligations to Landlord). Failure by Landlord to deliver such statement within the one hundred twenty (120) day period does not relieve Tenant of its obligation to pay the charges described herein; provided, however, that in the event that Landlord fails to furnish Tenant with such statement within two (2) years after the end of any calendar year, then Tenant shall not be required to pay Tenant's Proportionate Share of any increase in Operating Costs for that calendar year. Tenant shall have the right, at Tenant's cost and expense (subject to the penultimate sentence of this paragraph), to examine Landlord's books and records of Operating Costs for any year with respect to which Tenant has made its payments on account thereof, subject to the following provisions: (a) Such books and records shall be made available to Tenant at the offices where Landlord keeps the same during normal business hours. (b) Tenant shall have the right to make such examination no more than once in respect of any period in which Landlord has given Tenant a statement of the actual amount of Operating Costs. (c) Any request for examination in respect of any year may be made no more than one (1) year after Landlord renders the statement of the actual amount of Operating Costs for such year, and such examination shall be performed within such one (1) year period. (d) Such examination may be made only by an independent certified public accountant reasonably acceptable to Landlord. Without limiting Landlord's approval rights, Landlord may withhold its approval of any examiner of Tenant who is being paid by Tenant on a contingent fee basis. (e) As a condition to performing any such examination, Tenant and its examiners shall be required to execute and deliver to Landlord an agreement, in form acceptable to Landlord, agreeing to keep confidential any information which it discovers about Landlord or the Building in connection with such examination. If it is determined that Landlord overstated Operating Costs for the year to which Tenant's examination relates by more than 4%, Landlord shall reimburse Tenant for the reasonable costs and expenses incurred by Tenant in performing such examination, but in no event shall such reimbursement exceed $2,000.00; and if it is determined that Landlord understated Operating Costs for the year to which Tenant's examination relates, Landlord shall reimburse Tenant for the reasonable costs and expenses incurred by Tenant in performing such examination, but in no event shall such reimbursement exceed the amount of Tenant's underpayment on account of Operating Costs for such year. If it is determined that there was an overpayment or underpayment on account of Operating Costs for the year to which Tenant's examination relates, Landlord shall reimburse Tenant, or Tenant shall pay to Landlord, within thirty (30) days of such determination, the amount of such overpayment or underpayment (as the case may be). 3.3 Definition of "Operating Costs." The term "Operating Costs" is defined to be the aggregate of costs and expenses incurred for operating, maintaining, repairing, cleaning and managing the Property, including, without limitation, the following: salaries, wages, employment taxes, reasonable, customary and mandatory benefits for employees of Landlord or its managing agent (provided, however, that with respect to any employee who performs services for buildings other than the Building, the salaries, wages, taxes and benefits payable or allocable to such employee shall be equitably apportioned among the buildings to which such employee renders services based upon the time which such employee spent performing services for each such building), costs of providing HVAC and elevator service, costs of any contractor of Landlord engaged in the cleaning, operating, maintenance or management of the Property, electricity properly chargeable hereunder, gas, oil, water (including chilled water) and steam (including sewer rental and any utility tax), rubbish removal, Landlord's insurance of every description and type related to the Property, repairs, replacements, maintenance of any grounds, landscaping and planting, building supplies, costs of operating the food service facility described in Section 10.32 below (unless such food service facility is operated by a rent-paying tenant, in which event only the costs of operating the food service facility in excess of the rent paid by such tenant shall be included in Operating Costs), costs of operating (including the maintenance and replacement of equipment for) the exercise facility described in Section 10.33 below, snow removal, window cleaning, building security, service contracts with independent contractors for any of the foregoing (including elevator and air conditioning maintenance), the cost of capital replacements, the cost of new (i.e., as opposed to replacement) capital improvements which are reasonably projected to reduce energy or other operating costs (provided, however, that the cost of all capital expenditures (both for replacements and new improvements) shall be amortized over their useful life in accordance with generally accepted accounting principles, consistently applied ("GAAP"), together with market interest on the unamortized balance), management fees, energy audits, and legal and accounting fees directly related to the operating of the Property. For purposes of this Lease, the aggregate controllable expenses includable in Operating Costs for any calendar year shall not exceed one hundred five percent (105%) of the aggregate controllable expenses for the prior calendar year. "Controllable" shall mean within the reasonable control of Landlord and not determined by a third party. For example, utility rates, insurance premiums, mandated minimum wages and tax rates or assessments are not controllable. Notwithstanding the foregoing, the following items shall be excluded from the definition of Operating Costs: (a) Costs of decorating, redecorating or special cleaning or other services provided to a particular tenant (but not all tenants) of the Building; (b) Wages, salaries, fees and fringe benefits paid to officers or partners of Landlord or personnel above the level of Property Manager; (c) Any charge for depreciation of the Building or Building equipment; (d) Any charge for Landlord's income taxes, excess profit taxes, franchise taxes or similar taxes on Landlord's business; (e) All costs directly relating to activities for the solicitation and execution of leases of space in the Building; (f) All costs and expenses of operating the Garage; (g) All costs for which Tenant or any other tenant in the Building is separately charged (other than through the operating cost escalation provisions of the lease with such other tenant); (h) The cost of any electric current furnished to office tenants for non-customary office machinery and equipment; (i) The cost of correcting defects in the original construction of the Building, except that conditions (not occasioned by construction defects) resulting from ordinary wear and tear will not be deemed defects for the purpose of this clause (i); (j) The cost of correcting defects in Building equipment to the extent such cost is covered by warranty, except that conditions resulting from ordinary wear and tear will not be deemed defects for the purpose of this clause (j); (k) The cost of any repair made by Landlord because of the total or partial destruction of the Building by fire or other casualty (except that reasonable deductible amounts may be included in Operating Costs) or the condemnation of a portion of the Building; (l) Any increase in Landlord's insurance premiums to the extent that such increase is caused by or attributable to the particular use, occupancy or act of another tenant; (m) The cost of any items for which Landlord is reimbursed by insurance or otherwise compensated by other parties (other than tenants of the Building through the operating cost escalation provisions of the leases with such tenants); (n) The cost of capital expenditures, except as set forth above; (o) The cost of any removal, treatment or abatement of asbestos or any other hazardous substance or gas in the Building or on the Premises (other than those customarily handled and disposed of incident to the normal operation, maintenance or repair of the Property, such as cleaning materials); (p) Any amount paid to an affiliate of Landlord which is in excess of the amount which would be paid in the absence of such relationship (it being acknowledged and agreed, however, that a management fee not exceeding 4% of gross revenues from the Property payable to an affiliate of Landlord will not violate this clause (p)); (q) The cost of any work or service performed for or facilities furnished to any tenant of the Building to a greater extent or in a manner more favorable to such tenant that that performed for or furnished to Tenant; (r) The cost of preparing, improving or altering space in the Building leased to other tenants; (s) The cost of overtime or other expense to Landlord in curing its defaults; and (t) Ground rent or similar payments to a ground lessor. Landlord shall compute Operating Costs on an accrual basis in accordance with GAAP. Until such time as the occupancy rate in the Building is at least ninety-five percent (95%), Landlord shall have the right to adjust those Operating Costs which may vary based on occupancy levels to reflect a ninety-five percent (95%) occupancy rate in the Building. In the event that Operating Costs shall contain any costs of operating or maintaining any system or providing any services which shall serve the Premises but less than the entire Building, then such portion of Operating Costs shall be calculated separately from other costs within Operating Costs. With respect to such costs, Tenant shall not pay its Proportionate Share as defined in Section 1.1 but rather a proportionate share calculated as a fraction, the numerator of which is the rentable square footage of the Premises as established in Article I, and the denominator of which shall be the rentable square footage of the space served by the system or receiving the services, as the case may be. 3.4 Real Estate Tax Increase. If Landlord's Tax Expense for any calendar year or partial calendar year during the Term is greater than the Real Estate Taxes for the Base Calendar Year set forth in Section 1.1, Tenant shall pay to Landlord, as additional rent, its Proportionate Share set forth in Section 1.1 of such excess, as the same may be adjusted in the event of a remeasurement or change in size of the Premises or Building. Landlord may from time to time reasonably estimate the amount due from Tenant under this Section with respect to any calendar year or portion thereof and, commencing no sooner than the first (1st) anniversary of the Term Commencement Date, Tenant shall pay periodically as Landlord may determine, but not more frequently than monthly, the amount of Landlord's estimate as rent with the next due payment of monthly Base Rent. Not later than one hundred twenty (120) days after Landlord's Tax Expense for the applicable period is determined, Landlord shall render Tenant a statement (which shall include copies of real estate tax bills and invoices from tax abatement consultants, if any) showing for the applicable period Landlord's Tax Expense and any other amount due from Tenant or any credit due to Tenant hereunder. Payment by Tenant of any amount due shall be made as additional rent with Tenant's next due payment of monthly Base Rent (or, if the term of this Lease has ended, within ten (10) days of receipt of such statement), and Landlord shall credit the amount of any overpayment against subsequent obligations of Tenant under this clause (or refund such overpayment, if the term of this Lease has ended and Tenant has no further obligations to Landlord). Failure by Landlord to deliver such statement within the one hundred twenty (120) day period does not relieve Tenant of its obligation to pay the charges described herein. The term "Landlord's Tax Expense" shall mean all taxes, betterments and assessments of every kind and nature assessed by any governmental authority on the Property which Landlord shall become obligated to pay because of or in connection with the ownership, leasing and/or operating of the Property plus the reasonable costs incurred in any attempt to obtain a real estate tax abatement for the real estate taxes due during the term hereof, whether or not successful, subject to the following: (a) The amount of special taxes or special assessments to be included shall be limited to the amount of the installment (plus any interest, other than penalty interest, payable thereon) of such special tax or special assessment required to be paid during the year in which such taxes are being determined; (b) There shall be excluded from such taxes interest and penalties due to Landlord's failure to pay taxes when they are due and all income taxes, excess profit taxes, excise taxes, franchise taxes, estate, succession, inheritance and transfer taxes; provided, however, that if at any time during the Term the present system of ad valorem taxation of real property shall be changed so that in lieu of the whole or any part of the ad valorem tax on real property, there shall be assessed on Landlord a capital levy or other tax on the gross rents received with respect to the Property or a federal, state, county, municipal or other local income, franchise, excise or similar tax, assessment, levy or charge (distinct from any now in effect) measured by or based, in whole or in part, upon any such gross rents, then any and all of such taxes, assessments, levies or charges, to the extent so measured or based, shall be deemed to be included within the term "Landlord's Tax Expense" but only to the extent that the same would be payable if the Property were the only property of Landlord; and (c) Landlord's Tax Expense shall be reduced by the amount of any abatements or refunds actually received net of the reasonable expenses, including without limitation legal fees and expert witness fees, incurred in obtaining such abatements or refunds. Although real estate taxes in Connecticut are payable on the basis of a July 1- June 30 fiscal/tax year, for the purposes of this Section 3.4, Landlord's Tax Expense shall be computed on a calendar year basis, based upon the sum of one-half (1/2) of Landlord's Tax Expense payable in respect of one fiscal/tax year, plus one-half (1/2) of Landlord's Tax Expense payable in respect of the next fiscal/tax year. (For example, Landlord's Tax Expense for 1997 would be 1/2 of Landlord's Tax Expense in respect of the 1997 fiscal/tax year, plus 1/2 of Landlord's Tax Expense in respect of the 1998 fiscal/tax year.) ARTICLE IV LANDLORD'S COVENANTS, INTERRUPTIONS AND DELAYS 4.1 Landlord Covenants. 4.1.1 To furnish services, facilities and supplies set forth in Exhibit B, comparable to first-class office buildings in downtown Hartford. 4.1.2 Except as otherwise provided in Article VII and except in the case of damage caused by any act or negligence of Tenant, its employees, agents, contractors, invitees or servants, to make such repairs to the roof, exterior walls, floor slabs and common areas and facilities of the Building as may be necessary to keep them in serviceable condition. 4.1.3 That Tenant, on paying the rent and performing Tenant's obligations in this Lease, shall peacefully and quietly have, hold and enjoy the Premises, free from claims of Landlord or those claiming under Landlord, subject to all of the terms and provisions hereof. 4.1.4 Landlord shall carry commercial general liability insurance for the Building with a combined single limit of at least $5,000,000 (and, upon written request, Landlord shall provide Tenant with a certificate of insurance evidencing such coverage), as well as fire and hazard insurance coverage for the Building. The coverages provided in the preceding sentence shall also satisfy all requirements of Landlord's mortgagee. Landlord or Landlord's managing agent shall carry appropriate workers' compensation and employer's liability insurance on those employees who may at any time enter the Premises. 4.1.5 Landlord shall comply with all federal, state and local laws, ordinances, regulations and codes relating to the operation of the Building generally as an office building (specifically excluding, without limitation, the manner of use by Tenant of the Premises or by other tenants of other premises in the Building). Without limiting the foregoing, Landlord shall cause the common areas of the Building to comply with the Americans with Disabilities Act of 1990 (the "ADA") as in effect on the date hereof. 4.1.6 Subject to the provisions of Section 10.11 hereof, Landlord agrees to hold Tenant harmless and to defend, exonerate and indemnify Tenant from any against any and all claims, liabilities or penalties (including, without limitation, reasonable attorneys' fees) asserted by or on behalf of any third party against Tenant for damage to property or injuries to persons sustained or occurring in the Building to the extent arising from the negligence or willful misconduct of Landlord or Landlord's agents, employees or contractors. 4.2 Interruption and Delay. Landlord reserves the right to stop any service or utility system when necessary by reason of accident or emergency or until necessary repairs have been completed; provided, however, that in each instance of stoppage, Landlord shall exercise reasonable diligence to eliminate the cause thereof. Except in case of emergency repairs, Landlord will give Tenant reasonable advance notice of any contemplated stoppage and will use reasonable efforts to avoid unnecessary inconvenience to Tenant by reason thereof. In case Landlord is prevented or delayed from making any repairs, alterations or improvements, or furnishing any services or performing any other covenant or duty to be performed on Landlord's part, by reason of any cause reasonably beyond Landlord's control, including without limitation the causes set forth in Section 10.13 hereof, Landlord shall not be liable to Tenant, nor shall the same give rise to a claim in Tenant's favor that such failure constitutes actual or constructive, total or partial, eviction from the Premises, and Tenant's sole remedies shall be in the following circumstances, as and to the extent described: (a) If, due to Landlord's failure to provide any service or utility (including electricity) required to be provided by Landlord under this Lease, the Premises or any portion thereof becomes untenantable so that, for the Premises Untenantability Cure Period, as hereinafter defined, the continued operation in the ordinary course of Tenant's business is materially adversely affected, then, provided that Tenant ceases to use the affected portion of the Premises during the entirety of the Premises Untenantability Cure Period (except for such temporary access thereto as is necessary to obtain files, records and the like) and that such untenantability and Landlord's inability to cure such condition are not caused by the fault or neglect of Tenant or Tenant's agents, employees or contractors or any other cause beyond Landlord's reasonable control, Base Rent and Tenant's payments on account of Operating Costs and Landlord's Tax Expense shall thereafter be abated in proportion to such untenantability until the day such condition is corrected. For the purposes hereof, the "Premises Untenantability Cure Period" shall be defined as five (5) consecutive business days after Landlord's receipt of written notice from Tenant of the condition causing untenantability in the Premises. (b) If, due to Landlord's failure to provide any service or utility (including electricity) required to be provided by Landlord under this Lease, the Premises or any portion thereof becomes untenantable, the untenantability of which materially adversely affects the continued operation in the ordinary course of Tenant's business, and if (i) such untenantability continues for sixty (60) consecutive days after Landlord's receipt of written notice of such condition from Tenant, and (ii) such untenantability and Landlord's inability to cure such condition are not caused by the fault or neglect of Tenant or Tenant's agents, employees, or contractors, then, provided that Tenant ceases to use the affected portion of the Premises during the entirety of such sixty (60) day period (except for such temporary access thereto as is necessary to obtain files, records and the like), Tenant shall have the right to terminate this Lease exercisable by giving Landlord a written termination notice as follows. Upon the giving of such notice, this Lease shall terminate as of the date which is thirty (30) days after Landlord's receipt thereof, unless Landlord shall have cured such condition on or before such thirtieth (30th) day. The provisions of clauses (a) and (b) above shall not apply in the event of untenantability caused by fire or other casualty or taking (see Article VII). ARTICLE V TENANT'S COVENANTS Tenant covenants during the Term and such further time as Tenant occupies any part of the Premises: 5.1 Tenant's Payments. To pay when due all rent and additional rent and all charges for utility services rendered to the Premises therefor including electricity costs and, as further additional rent, all charges for additional services agreed to from time to time. 5.2 Repairs & Yielding Up. To keep and maintain the Premises in good order and condition, reasonable wear and tear and damage by casualty or taking excepted, and to notify Landlord promptly of any repairs to be made in or to the Premises. At the expiration or termination of this Lease, Tenant shall peaceably yield up the Premises and all alterations, additions and improvements (it is agreed that alterations, additions and improvements made to the Premises, except for the installation of so-called Liebert units which Tenant may remove, shall become part of the Premises and the property of Landlord), unless Landlord requests removal of same by Tenant, in good order and repair and in the same condition as said Premises were in at Term Commencement Date or thereafter may be put in accordance with this Lease, reasonable wear and tear or damage by casualty or taking excepted, first removing all personal property, trade fixtures, business equipment and other goods and effects of Tenant (including, without limitation, all telephone and computer equipment), and repairing any damage caused by such removal and restoring the Premises and leaving them broom clean and neat. Any of Tenant's property which shall remain in the Building or on the Premises after the expiration or earlier termination of the Lease shall be deemed conclusively to have been abandoned and either may be retained by Landlord as its property or may be disposed of in such manner as Landlord may see fit, at Tenant's sole cost and expense. 5.3 Occupancy & Use. Continuously from the Term Commencement Date to use and occupy the Premises for only the Permitted Use of Premises; to comply with all applicable federal, state and local laws, ordinances, regulations and codes in its use and occupancy of the Premises; not to injure or deface the Premises, Building or any other portion of the Property; and not to dump, flush, or in any way introduce any hazardous, toxic or chemical substances into the septic, sewage or other waste disposal system; and not to use, generate, store or dispose of hazardous, toxic or chemical substances in or on the Premises (except those in customary types and quantities and ordinarily used by office tenants, and then only in accordance with law and manufacturer's specifications therefor); and not to permit the emission from the Premises of any objectionable noise or odor, or to create any nuisance, and not to use the Premises for an auction sale or any purpose which is inconsistent with the tenancy of the Building, or which is improper, offensive, contrary to law or ordinance or liable to invalidate or increase the premiums for any insurance on the Building or its contents or liable to render necessary any alteration or addition to the Building; and not to obstruct in any manner any portion of the Building not hereby leased or any portion thereof or of the Building used by Tenant in common with others and not without prior written consent of Landlord, permit the painting or placing of any curtains, blinds, shades, awnings, aerials, signs, flagpoles or the like, visible from outside the Premises. 5.4 Rules & Regulations. To comply with the Rules and Regulations attached hereto as Exhibit C and all other reasonable rules and regulations hereafter made or modified by Landlord, of which Tenant has been given notice, provided that such other rules and regulations shall not materially adversely affect Tenant's rights under this Lease. Landlord shall use reasonable efforts to uniformly enforce such rules and regulations against all tenants of the Building; provided, however, that in no event shall Landlord be obligated to terminate the lease of any tenant of the Building by reason of a violation of any rule or regulation. 5.5 Alterations by Tenant. In connection with making any changes, additions and improvements to the Premises, to (i) obtain the prior written consent of Landlord of the same (except for changes, additions or improvements costing no more than $80,000 in the aggregate per calendar year and which are non-structural in nature and not visible from outside the Premises, notice of which is given to Landlord prior to the commencement of the same) and of plans, specifications and the licensed contractor to be used by Tenant and any other data reasonably required to be furnished by Tenant; (ii) comply with all governmental requirements; including but not limited to building, electrical and plumbing codes; (iii) equal or exceed the current construction standard for the Building; (iv) provide Landlord with evidence of the insurance covering such work; and (v) provide Landlord with "as-built" drawings and specifications upon completion of such work. All work performed shall be done in such a manner as not to disturb or disrupt the operation of the Building or any other occupants in the Building. Any increase in Landlord's Tax Expense or insurance premiums on the Property attributable to such change, addition or improvements shall be paid by Tenant. Tenant agrees that it will not, either directly or indirectly, use any contractors and/or materials if their use will create any difficulty, whether in the nature of a labor dispute or otherwise, with other contractors and/or labor engaged by Tenant or Landlord or others in the construction, maintenance and/or operation of the Property or any part thereof. 5.6 Indemnity. To defend with counsel duly licensed in the state in which the Building is located, save harmless, and indemnify Landlord and its agents and employees from any liability for injury, loss, accident or damage to any person or property, and from any claims, actions, proceedings and expenses and costs in connection therewith, including without limitation reasonable counsel fees, (i) arising from the negligence or willful misconduct of Tenant or Tenant's servants, agents, employees, contractors, licensees or invitees, or arising from any use made or thing done or occurring in or on the Premises not due to the negligence or willful misconduct of Landlord, subject in any such case to the provisions of Section 10.11 hereof, or (ii) resulting from the failure of Tenant to perform and discharge its covenants and obligations under this Lease. Tenant shall also indemnify and hold Landlord and its agents and employees harmless from and against any losses, costs, damages or claims of whatever nature arising out of or in connection with the compliance requirements set forth in the ADA relating to Tenant's design, renovation, alteration and/or construction of the Premises. The preceding sentence, however, shall not apply to Tenant's initial design of the Premises as reflected in the Construction Drawings (as hereinafter defined) or to the performance of Landlord's Work (as hereinafter defined). 5.7 Tenant's Liability Insurance. To maintain with responsible companies qualified to do business in the state in which the Building is located public liability insurance covering the Premises insuring Landlord, the Managing Agent and others in interest whom Landlord may reasonably request as well as Tenant with the limits set forth in Section 1.1, which limits may be increased based on industry standards, and worker's compensation insurance with statutory limits covering all of Tenant's employees working in the Premises. All policies shall be noncancelable and nonamendable with respect to Landlord, the Managing Agent and Landlord's designees without thirty (30) days prior notice to Landlord. A certificate of insurance evidencing the above agreements shall be delivered to Landlord on or before Term Commencement Date. If Tenant fails to comply with the foregoing requirements, Landlord may obtain such insurance and keep same in effect, and all sums paid by Landlord for such insurance hereunder shall be and are hereby declared additional rent, due and payable forthwith. 5.8 Tenant's Property. That all of the furnishings, fixtures, equipment, effects and property of every kind, nature and description of Tenant and of all persons claiming by, through or under Tenant shall be insured to the full replacement cost thereof under a broad form "all risk" insurance policy and kept in the Premises or the Building at the sole risk and hazard to Tenant, and if the whole or any part thereof shall be destroyed or damaged by fire, water or other casualty including the leakage or bursting of water pipes, steam pipes, or other pipes, or by theft or from any other cause, no part of said loss or damage is to be charged to or borne by Landlord unless, subject to Section 10.11 hereof, such loss or damage is due to the negligence of the Landlord, in which case Landlord shall bear loss or damage only to "ordinary office property" (as hereinafter defined). For purposes of this Section 5.8, "ordinary office property" shall mean merchandise, furniture and other tangible personal property of a kind and quantity which may customarily be expected to be found within comparable business offices in downtown Hartford, and excluding any unusually valuable or exotic property, works of art and the like. At Tenant's option, (a) Tenant may provide the insurance coverages required under Sections 5.7 and/or 5.8 through blanket policies of insurance covering more than one location, provided the entire amount of insurance required of Tenant hereunder is applicable to the Premises without regard to any other location, and (b) Tenant may elect to self-insure for the liabilities and casualties required to be covered by the insurance policies described in Sections 5.7 and/or 5.8, provided that Tenant's net worth at all times during such self-insurance remains at least equal to $1,000,000,000 and Landlord is given written notice reasonably in advance of the effective date of such self-insurance. 5.9 Landlord's Right to Entry. Upon at least twenty-four (24) hours prior written notice to Tenant (except that no notice shall be required in an emergency or for cleaning or routine repair and maintenance operations), to permit Landlord and its agents entry to the Premises at reasonable times to examine the same, make any repairs or replacements or, with Tenant's prior written consent, improvements and/or additions, to carry out any right granted by Section 10.9 and to show the Premises to prospective tenants during the nine (9) months preceding expiration of the Term and to prospective purchasers and mortgagees at all reasonable times. Landlord shall exercise its rights of access to the Premises permitted hereunder in such manner so as to minimize interference with Tenant's use and occupation of the Premises, but in no event shall Landlord's entry prevent Tenant's use of the Premises (except as may be required in an emergency). Except in an emergency, Tenant shall have the opportunity to have a representative of Tenant present during any entry by Landlord into the Premises. 5.10 Loading. Not to place a load upon the Premises exceeding 100 pounds of combined load per square foot of floor area, and not to move any safe, vault or other heavy equipment in, about or out of the Premises except in such manner and at such time as Landlord shall in each instance authorize. Tenant's business machines and mechanical equipment shall be installed to prevent vibration or noise outside the Premises. 5.11 Liens & Property Taxes. Not to cause or allow liens of any kind to be filed or placed against the Premises or the Property, and to immediately, at its sole cost and expense, eliminate or bond over said lien and to pay promptly when due all taxes which may be imposed upon personal property (including, without limitation, fixtures and equipment) in the Premises to whomever assessed. 5.12 Attorney's Fees. In the event of any litigation between the parties concerning the enforcement of any obligations under this Lease, the prevailing party shall be entitled to recover from the other party the reasonable attorneys' fees and other expenses of litigation incurred by the prevailing party. 5.13 Holding Over. (a) Tenant shall have the right (which, if timely and properly exercised as provided herein, shall be in lieu of the then applicable option, if any, to extend the Term as provided in Section 10.24 below) to extend the Term of this Lease for an additional period of three (3) months (the "Elected Holdover Period"), such right to be exercised by notice to Landlord no later than nine (9) months prior to the expiration of the then current Term of this Lease. Said notice shall be effective only if given in the timely manner described; however, Tenant's exercise of such right may be deemed void in Landlord's sole discretion if Tenant is not occupying the Premises for the Permitted Use or is in default under the terms of this Lease either on the date of the notice or on the date of the expiration of the then current Term hereof. If Tenant fails to give timely notice to Landlord as herein provided, Tenant shall have no right to extend the Term for the Elected Holdover Period, time being of the essence of this Section 5.13(a). Upon the timely giving of such notice by Tenant, the Term of this Lease shall be extended for the Elected Holdover Period upon all of the same terms and conditions of this Lease in effect as of the expiration of the then current Term of this Lease, except that the Base Rent shall equal one hundred twenty-five percent (125%) of the Base Rent in effect at the expiration of the then current Term of this Lease. Notwithstanding the fact that, upon Tenant's exercise of its right to extend the Term for the Elected Holdover Period, such extension shall be self-executing, as aforesaid, upon request of either party, the parties shall promptly execute a lease amendment reflecting such extension of the Term following Tenant's exercise of such right. (b) If Tenant continues to occupy the Premises after the expiration or sooner termination of the Term of this Lease (as the same may be extended for the Elected Holdover Period or pursuant to Section 10.24 below) without Landlord's written consent (which consent may be withheld in Landlord's sole and absolute discretion), Tenant shall pay, as a charge for use and occupancy and liquidated damages (and not as rent), for each month of continued occupancy an amount equal to one hundred fifty percent (150%) of the total monthly rent payment (rent and all other monthly charges) in effect prior to such holdover, and shall also pay all damages, both direct and/or indirect (including, without limitation, loss of a tenant(s) or of rental income), sustained by Landlord on account of such holding over if Landlord shall have secured another tenant to lease the Premises or any part thereof. No receipt of money by Landlord from Tenant after expiration or termination of this Lease shall reinstate or extend this Lease. 5.14 Safety Requirements. To keep the Premises equipped with all safety appliances required by law or ordinance or any other regulation of any public authority because of any use made by Tenant (except that Tenant shall not be required to install safety appliances that Landlord is required to install generally throughout the Property), and to procure all licenses and permits so required because of such use and, if requested by Landlord, to do any work so required because of such use, it being understood that the foregoing provisions shall not be construed to broaden in any way the Permitted Use of the Premises. ARTICLE VI ASSIGNMENT, SUBLETTING, AND MORTGAGING 6.1 Procedure. (a) Tenant will not, by operation of law or otherwise, assign, mortgage or encumber this Lease, or sublet or permit the Premises or any part thereof to be used by others, without Landlord's prior express written consent in each instance. The consent by Landlord to any assignment or subletting shall not in any manner be construed to relieve Tenant from obtaining Landlord's express written consent to any other or further assignment or subletting nor shall any assignment or subletting, with or without consent by Landlord, serve to relieve or release Tenant from its obligations to fully and faithfully observe and perform all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed. (b) If Tenant shall desire to assign this Lease or to sublet the Premises, Tenant shall submit to Landlord in writing (i) the name of the proposed assignee or subtenant; (ii) the terms and conditions of the proposed assignment or subletting (including copies of the proposed assignment or sublease); (iii) the nature and character of the business and credit of the proposed assignee or subtenant; and (iv) any other information reasonably requested by the Landlord. Landlord's consent to any such proposed assignment or subletting shall not be unreasonably withheld or unduly delayed, provided, however, that Landlord may withhold consent thereto if in the exercise of its sole judgment it determines that: 1. The financial condition or general reputation of the proposed assignee or subtenant is not consistent with the extent of the obligations undertaken by the proposed assignment or sublease; or 2. The proposed use of the Premises is not in keeping with the character of the existing tenancies of the Building or permitted by Section 1.1 of this Lease; or 3. The nature of the occupancy of the proposed assignee or subtenant will cause an excessive density of employees or traffic or make excessive demands on the Building's services or facilities or in any other way will lessen the character of the Building; or 4. The Tenant proposes to assign or sublet to one who at the time is a tenant or occupant of premises in the Building (unless such tenant or occupant is expanding and not relinquishing space and Landlord has no other available space to lease to such tenant or occupant in the Building) or to one with whom Landlord or its agents are actively negotiating for space in the Building; or 5. The Tenant proposes to assign or sublet all or a portion of the Premises at a rental rate less than the rental rate Landlord is then asking for other space in the Building. (c) Any instrument of sublease shall specifically state that such sublease is subject to all of the terms, covenants and conditions of this Lease. Each assignee or sublessee shall assume in writing this Lease and shall be jointly and severally liable with Tenant for the full performance of all covenants hereunder. An original or duplicate original of the assignment or sublease shall be delivered to Landlord within ten (10) days following the making thereof. (d) Tenant shall pay to Landlord, as additional rent, (1) in the event of an assignment, fifty percent (50%) of the amount of all monies, if any, which the assignee has agreed to and does pay to Tenant in consideration of the making of such assignment, after deduction for Tenant's reasonable out-of-pocket costs in connection with such assignment, as set forth in a reasonably detailed accounting (with supporting invoices) submitted by Tenant to Landlord, and (2) in the event of a subletting, fifty percent (50%) of the amount, if any, by which the rent and additional rent (including parking charges, if any) payable by the sublessee to Tenant shall exceed the sum of (x) the Base Rent plus additional rent (including parking charges) allocable to that part of the Premises affected by such sublease, plus (y) all of Tenant's reasonable out-of-pocket costs in connection with such sublease, as set forth in a reasonably detailed accounting (with supporting invoices) submitted by Tenant to Landlord. Such additional rent payments shall be made monthly to Landlord within ten (10) days after receipt of the same by Tenant. (e) Landlord may collect rent directly from the assignee or, after a monetary default by Tenant, subtenant or occupant upon notice thereof by Landlord and apply the net amount collected (which may be treated by Landlord as rent for use and occupancy) to the rent due hereunder or to cure Tenant's default. Such collection of rent shall not be deemed a waiver of the covenants in this Article, nor shall it be deemed acceptance of the assignee, subtenant or occupant. 6.2 Affiliate Transfers. Notwithstanding anything to the contrary herein contained, provided that Tenant is not in default under any terms of this Lease, Tenant shall have the right, without Landlord's prior written consent, but upon prior written notice to Landlord, to assign its interest in this Lease or to sublease the Premises to an Affiliated Entity, as hereinafter defined, so long as such Affiliated Entity remains in such relationship with Tenant and has not been formed for the purpose of subverting the restraints on alienation contained herein. For purposes hereof, an "Affiliated Entity" shall be defined as (a) any entity which is controlled by, is under common control with or which controls Tenant (control, for purposes hereof, shall mean the direct or indirect ownership of more than fifty percent (50%) of the beneficial interest of the entity in question), or (b) a successor to Tenant by way of merger or purchase of all or substantially all of Tenant's assets, provided that such successor has a net worth at least equal to the net worth of Tenant as of the date hereof or immediately prior to such merger or purchase, whichever is greater (as evidenced by financial information submitted and reasonably acceptable to Landlord). As a further condition to and prior to or simultaneously with any such assignment, such Affiliated Entity shall execute and deliver to Landlord an agreement in form and substance reasonably acceptable to Landlord whereby the assignee agrees to be bound by and to assume the obligations of the tenant under this Lease. 6.3 Further Limitations. In no event shall Landlord be obligated either to consent to any proposed assignment or subletting or to elect to terminate this Lease if at the time of proposal of assignment or subletting, Tenant is in default under any terms of this Lease. If Landlord fails to respond to Tenant's request for consent to any assignment or sublease within thirty (30) days of receipt of Tenant's request therefor, and such failure continues for ten (10) days after a reminder notice from Tenant to Landlord, Landlord shall be deemed to have consented to the assignment or sublease in question. Anything contained in the foregoing provision of this Article to the contrary notwithstanding, neither Tenant nor any other person having an interest in the possession, use, occupancy or utilization of the Premises shall enter into any lease, sublease, license, concession or other agreement for use, occupancy or utilization of space in the Premises which provides for rental or other payment for such use, occupancy or utilization based, in whole or in part, on the net income or profits derived by any person from the Premises leased, used, occupied or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales), and any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use, occupancy or utilization of any part of the Premises. ARTICLE VII CASUALTY AND TAKING 7.1 Casualty and Taking. If, during the Term, all or any substantial part of the Premises, the Building or the Property is damaged materially by fire or other casualty or taken by eminent domain or by action of public or other authority in consequence thereof, or Landlord receives compensable damage by reason of anything lawfully done in pursuance of public or other authority, this Lease shall terminate at Landlord's election, which may be made notwithstanding Landlord's entire interest may have been divested, by notice given to Tenant within thirty-seven (37) days after such casualty or taking specifying the effective date of termination which shall not be less than thirty (30) nor more than sixty (60) days after the date of notice of such termination. If in any such case the Premises, the Building or the Property are rendered unfit for use and occupancy and this Lease is not terminated, Landlord shall use due diligence to restore the same or, in case of taking, what may remain thereof (excluding in each case any items installed or paid for by Tenant which Tenant may be required or permitted to remove) to substantially the same condition as existed immediately prior to such fire or other casualty or taking to the extent permitted by laws and ordinances then in effect and by the net award of insurance or damages actually received by Landlord, and a just proportion of the rent, according to the nature and extent to which the Premises have been rendered untenantable, shall be abated until the substantial completion of such work. 7.2 Reservation of Award. Landlord reserves to itself any and all rights to receive awards made for damages to the Premises, the Building, the Property and the leasehold hereby created, or any one or more of them, accruing by reason of exercise of eminent domain or by anything lawfully done pursuant to public or other authority. Tenant hereby releases and assigns to Landlord all Tenant's rights to such awards, and covenants to deliver such further assignments and assurances thereof as Landlord may from time to time request. It is agreed and understood, however, that Landlord does not reserve to itself, and Tenant does not assign to Landlord, any damages payable for movable trade fixtures installed by Tenant or anybody claiming under Tenant at its own expense or relocation expenses recoverable by Tenant from such authority in a separate action, provided said award does not diminish Landlord's award in any way. 7.3 Tenant's Termination Rights. (a) If the Premises or any portion thereof are damaged by fire or other casualty or taking, Landlord shall notify Tenant (the "Damage Notice") in writing within thirty-seven (37) days of the occurrence of the damage as to whether (i) the repair of such damage is susceptible of being substantially completed within one hundred eighty (180) days after the occurrence (Landlord hereby agreeing to submit to Tenant with the Damage Notice an engineering estimate as to the length of time necessary to substantially complete the repair of such damage, such estimated repair period being hereinafter referred to as the "Estimated Repair Period"), (ii) sufficient insurance proceeds or condemnation awards (together with other funds which Landlord may commit) will be available for the repair of such damage, and (iii) in the case of damage by fire or other casualty (and not by taking), less than ninety percent (90%) of the rentable area of the Premises existing immediately prior to the damage will be available for Tenant's use and occupation after the repair of such damage is completed. If (x) the damage to the Premises or any portion thereof shall materially adversely interfere with the conduct of Tenant's business in the Premises in the ordinary course as reasonably determined by Tenant, and the Estimated Repair Period is in excess of one hundred eighty (180) days after the occurrence of such damage, or (y) the Damage Notice states that there will not be sufficient insurance proceeds or condemnation awards (together with other funds which Landlord may commit) available for the repair of such damage, or (z) in the case of damage by fire or other casualty (and not by taking), the Damage Notice states that less than ninety percent (90%) of the rentable area of the Premises existing immediately prior to the damage will be available for Tenant's use and occupation after the repair of such damage is completed, then Tenant may, by written notice to Landlord within fifteen (15) days after the giving of the Damage Notice to Tenant, terminate this Lease as of the date of occurrence of such damage. If such damage can be repaired within one hundred eighty (180) days from the date of occurrence of the damage, this Lease is not terminated, and Landlord fails to substantially complete the repairs within such period without fault or neglect of Tenant or its agents, employees or contractors, then Tenant may terminate this Lease by giving written notice to Landlord, in which case this Lease shall terminate thirty (30) days after the giving of such termination notice unless within such thirty (30) day period Landlord substantially completes said repairs. If the Estimated Repair Period is in excess of one hundred eighty (180) days from the date of occurrence of the damage, this Lease is not terminated, and Landlord fails to substantially complete the repairs within the Estimated Repair Period without fault or neglect of Tenant or its agents, employees or contractors, then Tenant may terminate this Lease by giving written notice to Landlord, in which case this Lease shall terminate thirty (30) days after the giving of such termination notice unless within such thirty (30) day period Landlord substantially completes said repairs. (b) If, during the Term, all or any part of the Premises or the Garage or access thereto are taken by eminent domain or by action of public or other authority in consequence thereof, and such taking materially adversely interferes with Tenant's business operations in the Premises in the ordinary course, then Tenant shall have the right to terminate this Lease by notice given to Landlord within thirty-seven (37) days after such taking specifying the effective date of termination which shall not be less than thirty (30) nor more than sixty (60) days after the date of notice of such termination. ARTICLE VIII DEFAULTS; EVENTS; REMEDIES 8.1 Events of Default. The occurrence of any one of the following events shall constitute a default of this Lease by Tenant: 8.1.1 Failure of Tenant to make any payment of rent or other required payment (including parking charges) when due, and such failure continues for a period of ten (10) days after receipt by Tenant of written notice from Landlord; 8.1.2 Failure of Tenant to comply with any provision of this Lease, other than payment of rent, and such failure shall continue for thirty (30) days after receipt by Tenant of written notice from Landlord; provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its cure, Tenant shall not be in default if Tenant commences such cure within thirty (30) days and diligently pursues such cure to completion; 8.1.3 The making of an assignment or general arrangement for the benefit of creditors by Tenant or any guarantor of Tenant's obligations hereunder, or the appointment of a receiver or trustee for all or substantially all the assets of Tenant or any guarantor of Tenant's obligations hereunder and such receivership shall not have been terminated or stayed within ninety (90) days, or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located in the Premises or Tenant's interest in this Lease where such seizure is not discharged within thirty (30) days; 8.1.4 The filing by Tenant or any guarantor of Tenant's obligations hereunder of petition under any bankruptcy or insolvency Law; or the filing of such a petition against Tenant or such guarantor which is not dismissed within ninety (90) days; or 8.1.5 Using the Premises for other than the Permitted Use, if such use continues for a period of seven (7) days after receipt by Tenant of written notice from Landlord. 8.2 Remedies in Event of Default. Landlord or its servants and agents may, in addition to and not in derogation of any remedies for any preceding breach of any covenant, immediately or at any time thereafter while such default continues and without further notice, at Landlord's election, do any one or more of the following: (1) give Tenant written notice stating that the Lease is terminated effective upon the giving of such notice or upon a date stated in such notice, as Landlord may elect, in which event the Lease shall be irrevocably extinguished and terminated as stated in such notice without any further action or (2) with or without process of law, in a lawful manner, enter and repossess the Premises, and expel Tenant and those claiming through or under Tenant, and remove its and their effects, without being guilty of trespass, in which event this Lease shall be irrevocably extinguished and terminated at the time of such entry, or (3) pursue any other rights or remedies permitted by law. Any such termination of this Lease shall be without prejudice to any remedies which might otherwise be used for arrears of rent or prior breach of any covenant and in the event of such termination, Tenant shall remain liable under this Lease as hereinafter provided. Tenant hereby waives all statutory rights (including, without limitation, rights of redemption, if any) to the extent such rights may be lawfully waived, and Landlord without notice to Tenant may store Tenant's effects and those of any person claiming through or under Tenant at the expense and risk of Tenant and, if Landlord so elects, may sell such effects at public auction or private sale and apply the net proceeds to the payment of all sums due to Landlord from Tenant, if any, and pay over the balance if any, to Tenant. 8.3 Tenant's Obligations After Termination. In the event that this Lease is terminated for breach of any obligation of Tenant, Tenant covenants to pay forthwith to Landlord, as compensation, the excess (discounted to present value at the prime rate then being offered by the largest commercial bank in the United States) of the total rent due for the residue of the Term over the fair market rental value of the Premises for said residue of the Term. Tenant further covenants to pay punctually to Landlord all the sums and perform all the obligations which Tenant covenants in this Lease to pay and to perform in the same manner and to the same extent and at the same time as if this Lease had not been terminated; however, Tenant shall be credited with any amount paid to Landlord as compensation as provided in the first sentence of this Section 8.3 and also with the net proceeds of any rents obtained by Landlord by reletting the Premises, after deducting all Landlord's expenses in connection with such reletting, including, without implied limitation, all repossession costs, brokerage commissions, fees for legal services and expenses of preparing the Premises for such reletting, it being agreed by Tenant that Landlord may relet the Premises or any part or parts thereof on such terms as Landlord seems fit, and make such alterations or repairs in the Premises as Landlord in its sole judgment considers necessary to relet the same and no action of Landlord in accordance with the foregoing or failure to relet or to collect rent under reletting shall operate or be construed to release or reduce Tenant's liability as aforesaid. ARTICLE IX RIGHTS OF MORTGAGEE/GROUND LESSOR 9.1 Subordination and Attornment. (a) This Lease and the rights of Tenant hereunder are subject and subordinate in all respects to all mortgages and ground leases which may now or hereafter be placed on or affect all or any part of the real property of which the Premises are a part and/or Landlord's interest or estate in such real property or ground leases, and to each advance made and/or hereafter to be made under any such mortgages, and to all renewals, modifications, consolidations, replacements and extensions thereof and all substitutions therefor. Notwithstanding anything to the contrary in this Article IX contained, as to any future mortgages or ground leases, the herein provided subordination and attornment shall be effective only if the mortgagee or ground lessor therein, as the case may be, agrees, by a written instrument in recordable form and otherwise in a form reasonably acceptable to Tenant and such mortgagee or ground lessor, that, as long as Tenant shall not be in terminable default of the obligations on its part to be kept and performed under the terms of this Lease, this Lease will not be affected and Tenant's possession hereunder will not be disturbed by any default under and/or foreclosure or termination of such mortgage or ground lease. Tenant acknowledges and agrees that the form of subordination, non-disturbance and attornment agreement attached hereto as Exhibit D is acceptable to Tenant for future mortgages and ground leases. (b) The term "mortgage" as used in this Lease shall include any mortgage or deed of trust. The term "mortgagee" as used in this Lease shall include any mortgagee or any trustee and beneficiary under a deed of trust or receiver appointed under a mortgage or deed of trust, including, without limitation, all persons or entities which may acquire Landlord's interest in the Property or any part thereof by purchase at foreclosure or deed or acquisition in lieu thereof, and all successors in title to such persons or entities. 9.2 No Prepayment of Rent. Tenant acknowledges that this Lease has been or may be assigned from time to time by Landlord as collateral security for Landlord's obligations under one or more mortgages. No fixed rent, additional rent or any other charge shall be paid more than thirty (30) days prior to the due date thereof and payments made in violation of this provision shall (except to the extent that such payments are actually received by a mortgagee) be a nullity as against any mortgagee and Tenant shall be liable for the amount of such payments to such mortgagee taking possession of the Building. ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Title. The titles of the Articles are for convenience and are not to be considered in construing this Lease. 10.2 Notices. Whenever, by the terms of this Lease, notice shall or may be given either to Landlord or to Tenant, such notice shall be in writing, addressed, if to Landlord, at Landlord's address in Section 1.1 or, if to Tenant, at Tenant's address in Section 1.1, or such other address as last designated in writing by either Landlord or Tenant, and shall be deemed duly given if deposited with or picked up by an overnight delivery service or deposited with the U.S. Postal Service by registered or certified mail, postage prepaid. Any notice given by an agent or attorney of Landlord shall be deemed notice given by Landlord. In the event a notice mailed with sufficient postage as above provided shall not be received upon attempted delivery thereof to the proper address and shall be returned by the Postal Service to the sender because of a refusal of receipt, the absence of a person to receive, or otherwise, the time of the giving of such notice shall be the time of such attempted delivery. 10.3 Bind and Inure. The obligations of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Landlord named herein and each successive owner of the Premises shall be liable only for the obligations accruing during the period of its ownership. Whenever the Premises are owned by a trustee or trustees, the obligations of Landlord shall be binding upon Landlord's trust estate, but not upon any trustee, beneficiary or shareholder of the trust individually. 10.4 Partial Invalidity. If any term of this Lease, or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such term to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term of this Lease shall be valid and enforceable to the fullest extent permitted by law. 10.5 No Waiver. No provisions of this Lease shall be deemed to have been waived by Landlord or Tenant unless such waiver is in writing signed by the applicable party waiving its rights. The failure of Landlord or Tenant to seek redress for violation of, or to insist upon the strict performance of, any covenant, condition or rule of this Lease, or in the case of Landlord, failure to enforce any Rules or Regulation against Tenant or any other tenant, shall not be deemed a waiver of such breach or prevent a subsequent act, which would have originally constituted a breach, from having the effect of any original breach. Landlord's receipt of rent with knowledge of a breach by Tenant of any term or condition of this Lease shall not be deemed a waiver of such breach. 10.6 No Surrender. No act or thing done by Landlord, its agents or employees during the term of this Lease shall be deemed an acceptance of a surrender of the Premises or shall be valid unless in writing signed by Landlord. The delivery of keys to any of Landlord's agents or employees shall not operate as a termination of this Lease or a surrender of the Premises. 10.7 No Accord and Satisfaction. No payment by Tenant, or receipt by Landlord, of a lesser amount than the rent due shall be deemed to be other than on account and as allocated in Landlord's sole discretion, nor shall any endorsement or statement on any check or any letter accompanying or such payment be deemed an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy available to Landlord. 10.8 Intentionally Deleted. 10.9 Self-Help. (a) Landlord may, but shall not be obligated to, cure, at any time, without notice in case of emergency, or on reasonable notice in cases other than an emergency, any failure of Tenant to fully comply with any of its obligations or duties under this Lease, and/or any default or breach by Tenant under this Lease beyond the expiration of applicable notice and cure periods; and whenever Landlord so elects, all costs and expenses incurred by Landlord, including, without limitation reasonable attorney's fees, together with interest on the amount of costs and expenses so incurred at the rate of twelve percent (12%) per annum, shall be paid by Tenant to Landlord forthwith on demand, and shall be recoverable as additional rent. (b) If Landlord shall fail to make any repair required to be made by Landlord under this Lease, and such failure shall continue for thirty (30) days after receipt by Landlord of written notice from Tenant (or such additional time as is reasonably required to make such repair if Landlord commences such repair within such thirty (30) day period and diligently pursues such repair to completion), Tenant may, but shall not be obligated to, upon prior written notice to Landlord, perform such repair on Landlord's behalf. If Tenant exercises such right, Landlord shall reimburse Tenant for the reasonable costs and expenses incurred by Tenant in making such repair. If Landlord fails to reimburse Tenant for such reasonable costs and expenses within thirty (30) days after written notice from Tenant to Landlord, Tenant shall have the right to offset against rent such reasonable costs and expenses so incurred by Tenant. Any sum so reimbursed by Landlord to Tenant or offset against rent may be included in Operating Costs to the extent the cost of the repair would have been included in Operating Costs if the repair were performed by Landlord itself. 10.10 Estoppel Certificates. Tenant shall, without charge, at any time and from time to time (but no more than five (5) times per calendar year), within ten (10) days after written request by Landlord, certify by written instrument (in recordable form if requested) duly executed, acknowledged and delivered to Landlord, or to any mortgagee or proposed mortgagee, or any purchaser or proposed purchaser, or to any other entity reasonably specified by Landlord: (1) The Term Commencement Date, the original expiration date, the present expiration date, and the existence, number, and term of any option periods. (2) Whether or not, to Tenant's actual knowledge, Landlord is in default, in any way, in the performance of any of the covenants, conditions and agreements to be performed by Landlord in accordance with this Lease and if there is any such default alleged, specifying the nature of same. (3) What the amount of rent is pursuant to the terms of this Lease, and the dates, if any, to which the rental and other charges hereunder have been paid in advance. (4) That this Lease is unmodified and in full force and effect, or in the event that there have been modifications, that the same is in full force and effect as modified and setting forth the modifications. (5) Whether or not, to Tenant's actual knowledge, there are then existing any claims, setoffs or defenses against the enforcement of any of the agreements, terms, covenants or conditions hereof upon the part of Tenant to be performed or complied with, and if so, specifying the same. (6) The status of any other matter relative to this Lease or the relation of the parties, reasonably requested. 10.11 Waiver of Subrogation. Property insurance carried by either party with respect to the Premises and property therein or occurrences thereon shall include a clause or endorsement denying to the insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to occurrence of injury or loss. Each party, notwithstanding any provisions of this Lease to the contrary, hereby waives any rights of recovery against the other for injury or loss due to hazards covered by property insurance containing such clause or endorsement carried (or required hereunder to be carried, without regard to rights of self-insurance) by such party. 10.12 Governing Law. This Lease shall be governed exclusively by the provisions hereof and by the laws of the State in which the Premises are located, as said laws may from time to time exist. 10.13 Acts of God. In any case where either party is required to do any act, delays caused by or resulting from Acts of God, war, civil commotion, fire, flood or other casualty, labor difficulties, shortages of labor or materials or equipment in the ordinary course of trade, government regulations or other causes not reasonably within such party's control shall not be counted in determining the time during which such act shall be completed, whether such time be designated by fixed date, a fixed time or "a reasonable time", and such time shall be deemed to be extended by the period of such delay. Financial inability of either party shall not be considered to be a circumstance or cause beyond the reasonable control of such party. 10.14 Consent. Unless otherwise specifically provided herein, whenever consent or approval of Landlord or Tenant is required under the terms of this Lease, such consent or approval shall not be unreasonably withheld or delayed. Each party's sole remedy if the other party unreasonably withholds or delays consent or approval shall be an action for specific performance and such other party shall not be liable for damages. If either party withholds any consent or approval, such party shall on written request deliver to the other party a written statement giving the reasons therefor. 10.15 Brokerage Commissions. Each party warrants that it has had no dealings with any broker or agent in connection with the negotiation or execution of this Lease other than the broker named in Section 1.1. Each party agrees to indemnify the other and hold the other harmless from and against any and all costs, expenses, claims or liability arising in breach of the foregoing warranty. Landlord agrees to pay the broker named in Section 1.1. 10.16 Intentionally Deleted. 10.17 Limitation of Liability. In the event Landlord shall default in the performance of its obligations hereunder, Tenant agrees to look only to Landlord's then equity interest in the Building for the satisfaction of any judgment. In no event shall Landlord be liable for any lost profits or indirect or consequential damages, and if Landlord is a partnership or trust, no general or limited partner of such partnership nor any trustee or beneficiary of any Trust shall be liable but Landlord alone shall be liable and then as limited hereby to Landlord's then equity interest in the Building. 10.18 Intentionally Deleted. 10.19 Recording. Neither party shall record this Lease but each party shall, at the request of the other made at any time after the Term Commencement Date is known, execute a memorandum or notice thereof in recordable form satisfactory to both Landlord and Tenant specifying the Term Commencement Date and Expiration Date of the term of this Lease and other information required by statute. The requesting party may then record said memorandum or notice of lease. 10.20 Intentionally Deleted. 10.21 Term Commencement Date. For purposes of this Lease, the "Term Commencement Date" shall be defined as the earlier of (A) the first date on which Tenant occupies all or any part of the Premises for the conduct of business, or (B) fourteen (14) days after the date on which both of the following shall occur: (i) Landlord's Work shall be (or be deemed to be) substantially completed (notwithstanding the incompleteness of (x) so-called "punch list" items, (y) work to be undertaken by Landlord which does not materially impair Tenant's use of the Premises for the purposes allowed herein, and (z) finishes and exterior landscaping to the Property), and (ii) a certificate of occupancy has been (or is deemed to have been) issued with respect to the Premises (or the building inspector has (or is deemed to have) provided a verbal "sign off" on Landlord's Work and indicated that a certificate of occupancy will issue in due course). If Tenant (or any agent, employee or contractor of Tenant) causes any delay in the performance or substantial completion of Landlord's Work (including, without limitation, by failing to timely prepare the Construction Drawings), then Landlord's Work shall be deemed to have been substantially completed on the date that Landlord's Work would have been substantially completed but for such delay, and the certificate of occupancy for the Premises (or building inspector "sign off" as aforesaid) shall be deemed to have been issued (or provided) on the date it would have been issued (or provided) but for such delay. Landlord shall use reasonable efforts to substantially complete Landlord's Work by the date (as the same may be modified by Landlord at or prior to the time of its approval of the Construction Drawings as provided in the second paragraph of Section 10.22, the "Estimated Substantial Completion Date") which is ninety (90) days after Landlord's final approval of the Construction Drawings, but Tenant shall not have any claim against Landlord, and Landlord shall have no liability to Tenant, if Landlord's Work is not substantially completed by the Estimated Substantial Completion Date. Notwithstanding the foregoing, if Landlord fails to substantially complete Landlord's Work on or before the date which is sixty (60) days after the Estimated Substantial Completion Date due to Landlord's fault or neglect, then Tenant shall be entitled to a credit (offset) against Base Rent due and payable as of the Term Commencement Date in the amount of one (1) day of Base Rent for each day after the Estimated Substantial Completion Date that Landlord's Work shall not have been substantially completed. 10.22 Improvements. Landlord agrees to perform, at Landlord's expense (except as hereinafter provided), the work ("Landlord's Work") within the Premises described in or shown on, and substantially in accordance with, the Construction Drawings. Tenant shall, at its expense (except as provided in the next sentence), prepare the construction drawings (the "Construction Drawings") for Landlord's Work. Provided that Tenant is not in default under this Lease beyond the expiration of applicable notice and cure periods and shall have taken occupancy of the Premises for business, Landlord shall reimburse Tenant up to $55,908.17 (the "Plan Allowance") for the architectural and engineering fees incurred by Tenant in preparing the Construction Drawings, such reimbursement to be made within thirty (30) days of Landlord's receipt of a reasonably detailed invoice from Tenant describing such fees. The Construction Drawings shall be subject to Landlord's approval; and Landlord shall have the right, by notice to Tenant at or prior to the time of its approval of the Construction Drawings, to modify the Estimated Substantial Completion Date based upon the nature of the work shown on the Construction Drawings. Tenant agrees that the Construction Drawings shall be prepared in a diligent and efficient manner so that Landlord's final approval thereof is obtained by March 15, 1998. Tenant acknowledges and agrees that the general contractor for Landlord's Work shall be Bartlett Brainard & Eacott Inc. ("BB&E"). The general contractor's fee to be charged by BB&E shall not exceed three (3%) percent of the aggregate costs of Landlord's Work; and the general conditions component of the costs of Landlord's Work shall not comprise more than six (6%) percent of the aggregate costs of Landlord's Work. Landlord agrees to require BB&E to obtain, to the extent reasonably obtainable, bids from no more than five (5) and no less than three (3) subcontractors for all trades necessary to complete Landlord's Work. All subcontractor bids shall be subject to Tenant's approval. If Tenant fails to respond to a request for approval of a subcontractor bid within three (3) business days of Landlord's request therefor, such approval shall be deemed given. Landlord agrees to undertake construction of the Premises in accordance with the provisions hereof in a good and workmanlike fashion and in compliance with applicable codes. Without limiting the foregoing, Landlord shall, at its expense (in addition to the Plan Allowance and Landlord's Contribution, as hereinafter defined), cause the restrooms on each floor of the Premises to comply with the ADA as in effect on the date hereof. Tenant's vendors and contractors shall be permitted entry to the Premises prior to the Term Commencement Date for the installation of Tenant's equipment and furnishings (including cabling and wiring) and the performance of such other work as Tenant may desire (subject to the provisions of Section 5.5 hereof), provided that such installation and other work shall not unreasonably interfere with the performance of Landlord's Work. Landlord shall use reasonable efforts to coordinate and schedule Landlord's Work so that Tenant may perform its work on a floor-by-floor basis. In the event that Tenant shall request and Landlord shall approve supplementary plans or specifications or work or changes to the Construction Drawings, then Landlord shall render to Tenant an estimate of the additional cost of such plans or specifications, work or changes and (unless such cost, when added to the other costs of Landlord's Work, will not exceed Landlord's Contribution) Tenant shall pay such amount to Landlord prior to Landlord having any obligation to undertake any such work; provided, however, that Tenant shall be responsible for any delays in the performance or substantial completion of Landlord's Work on account of any such supplementary plans or specifications, work or changes requested by Tenant. Landlord shall notify Tenant of any such delays, and of any delays caused by any change order requests initiated by Landlord, promptly upon Landlord becoming aware of the same. The costs and expenses to prepare any supplementary plans or specifications or to make any changes to the Construction Drawings shall be Tenant's responsibility. Landlord shall respond to any request for approval under this paragraph within three (3) business days of Tenant's written request therefor; and if Landlord fails to respond within such three (3) business day period, Landlord's approval of the supplementary plans or specifications or work or the changes to the Construction Drawings shall be deemed given. Landlord shall contribute $17.50 per square foot of rentable area of the Premises ("Landlord's Contribution") towards the costs of Landlord's Work, which costs shall include, without limitation, demolition costs and the costs, if any, incurred by Landlord to engage an architect or engineer to review the Construction Drawings to determine their compliance with the ADA. Tenant shall reimburse Landlord for all costs of Landlord's Work in excess of Landlord's Contribution within thirty (30) days of billing(s) from time to time (whether before or after the Term Commencement Date) therefor (accompanied by documentation supporting such excess costs). If Landlord's Contribution exceeds the costs of Landlord's Work and Tenant is not in default under this Lease beyond the expiration of applicable notice and cure periods, such excess shall, at Tenant's election, be paid by Landlord to Tenant within thirty (30) days of Tenant's notice to Landlord of such election or be credited against Tenant's obligation to pay Base Rent until such excess is reduced to zero. 10.23 Electricity. (a) Except as provided in this Section 10.23, Landlord shall furnish to Tenant, as an incident of this Lease, electric current for normal office equipment comprising a combined lighting and standard electrical load not to exceed 6 watts per square foot. (b) In the event that Landlord shall in its reasonable discretion determine that Tenant is at any time using or proposing to use equipment which is other than normal office equipment of the type described in subsection 10.23(a) or is, on a regular basis, using electric current during other than Normal Building Operating Hours, Landlord may at its option either (i) install at Tenant's expense or require Tenant to install separate electric metering for such equipment in which event Tenant shall pay the cost of such separately metered electricity or (ii) reasonably and equitably charge to Tenant a fair increment specially allocable to Tenant's use in which event the increment charged to Tenant shall not be includable as an Operating Cost under Article III. Without limiting the foregoing, Landlord reserves the right, at Tenant's expense, to submeter for electricity and/or chilled water any computer or other room(s) in the Premises using or requiring special heating or cooling equipment, and Tenant shall pay for all electricity and chilled water so submetered and subsequently billed by Landlord to Tenant from time to time. (c) If Tenant shall require electric current for use in the Premises in excess of the quantity to be furnished for such use as hereinabove provided and if (i) in Landlord's reasonable judgment Landlord's facilities are inadequate for such excess requirements or (ii) such excess use shall result in an additional burden on the Building heating/air conditioning system or electrical system and additional cost to Landlord on account thereof then, as the case may be, (x) Landlord, upon written request and at the sole cost and expense of Tenant, will furnish and install such additional wire, conduits, feeders, switchboards and appurtenances as reasonably may be required to supply such additional requirements of Tenant if current therefor be available to Landlord, provided that the same shall be permitted by applicable laws and insurance regulations and shall not cause damage or injury to the Building or the Premises or cause a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs or interfere with or disturb other tenants or occupants of the Building, or (y) Tenant shall reimburse Landlord for such additional cost, as aforesaid. (d) Tenant agrees that it will not make any material alteration or material addition to the electrical equipment and/or appliances in the Premises without the prior written consent of Landlord in each instance first obtained, which consent will not be unreasonably withheld. (e) Notwithstanding the provision of Section 10.23(a) through (d), in the event a separate meter or meters is (are) installed which measure(s) electric current, Tenant agrees to pay for all such electricity so metered and subsequently billed. An amount equal to seventy-five cents ($.75) per square foot of the Premises shall be deducted from Tenant's Base Rent specified in Article I, beginning with the date Tenant's electric liability is separately metered and charged to Tenant hereunder. 10.24 Option To Extend. Tenant shall have the option to extend the Term of this Lease for two (2) successive terms of five (5) years each (each being referred to as an "extended term"). The option shall be exercised only by notice no more than twelve (l2) months and no less than nine (9) months prior to the expiration of the original Term or the first extended term, as the case may be. Said notice shall be effective only if given in the timely manner described; however, Tenant's exercise of its option may be deemed void in Landlord's sole discretion if Tenant is not occupying the Premises for the Permitted Use, is in default under the terms of this Lease either on the date of the notice or on the date of the expiration of the original Term or of the first extended term, as the case may be, or has assigned this Lease or sublet more than fifty percent (50%) of the Premises (other than to an Affiliated Entity). The demise of the Premises for each extended term shall be on the same terms and conditions as the original Term or the first extended term, as the case may be, except that Landlord shall have no obligation to construct or renovate the Premises or to provide any allowance or contribution with respect thereto and the charge for all parking passes to be used during the extended term shall be at the then current prevailing rate in the Garage, as such rate may vary from time to time (but not less than the highest rate being charged to Tenant for its parking passes as of the expiration of the then current Term of this Lease), and except that the Base Rent, the Operating Costs for the Base Calendar Year and the Real Estate Taxes for the Base Calendar Year during such extended term shall be as set forth hereinafter. All other items of additional rent shall be the same. Once the Term is duly extended, any reference in this Lease to the "term" or "Term" of this Lease shall mean the Term as so extended. If Tenant fails to give timely notice, as aforesaid, Tenant shall have no further right to extend the Term of this Lease, time being of the essence in respect of this Section 10.24. Tenant shall have no option to extend the Term of this Lease other than the two (2) additional five (5) year terms herein provided for. Notwithstanding the fact that, upon Tenant's exercise of the herein option to extend the Term of this Lease, such extension(s) shall be self-executing, as aforesaid, the parties shall promptly execute a lease amendment reflecting such extended term after Tenant exercises the option in question and the Base Rent, Operating Costs for the Base Calendar Year and Real Estate Taxes for the Base Calendar Year during such extended term are determined. The Base Rent for each extended term shall be 95% of the fair market rental value (as hereinafter defined) of the Premises as of the commencement date of such extended term. However, in no event shall the sum of the Base Rent and amounts required to be paid by Tenant on account of Operating Costs and Landlord's Tax Expense for any twelve (12) month period during such extended term be less than the sum of the Base Rent and amounts required to be paid by Tenant on account of Operating Costs and Landlord's Tax Expense for the twelve (12) month period immediately preceding the commencement of such extended term. "Fair market rental value" shall be computed as of the date in question at the then current annual rental charge (i.e., the sum of Base Rent plus escalation and other charges), including provisions for subsequent increases and other adjustments, for leases or agreements to lease then currently being negotiated or executed for comparable space located in first-class buildings (including the Building) in downtown Hartford. In determining fair market rental value, the following factors, among others, shall be taken into account and given effect: size, location of premises, lease term, building amenities, finishes and condition of building, tenant improvement allowances, creditworthiness of the landlord and the tenant, availability of exterior signage, and services provided by the landlord. Notwithstanding anything to the contrary herein contained, the parties hereby agree that, upon the determination of any fair market rental value, Operating Costs for the Base Calendar Year and Real Estate Taxes for the Base Calendar Year shall be changed from that stated in Section 1.1 above to an amount equal to the actual amount of Operating Costs and Landlord's Tax Expense, respectively, for the calendar year immediately preceding the calendar year in which the commencement date of the extended term occurs. In such event, the amount of Base Rent payable hereunder shall be commensurately adjusted to reflect such change in such base years. Landlord shall initially designate fair market rental value and Landlord shall furnish data in support of such designation. If Tenant disagrees with Landlord's designation of a fair market rental value, Tenant shall have the right, by written notice given within thirty (30) days after Tenant has been notified of Landlord's designation, to submit such fair market rental value to appraisal. Fair market rental value shall be submitted to appraisal as follows: fair market rental value shall be determined by impartial MAI appraisers, one to be chosen by Landlord, one to be chosen by Tenant, and a third to be selected, if necessary, as below provided. The unanimous written decision of the two first chosen, without selection and participation of a third appraiser, or otherwise, the written decision of a majority of three appraisers chosen and selected as aforesaid, shall be conclusive and binding upon Landlord and Tenant. Landlord and Tenant shall each notify the other of its chosen appraiser within ten (10) days following the call for appraisal and, unless such two appraisers shall have reached a unanimous decision within thirty (30) days after their designation, they shall so notify the President of the Hartford Bar Association (or such organization as may succeed to said Hartford Bar Association) and request him or her to select an impartial third MAI appraiser to determine fair market rental value as herein defined. Such third appraiser and the first two chosen shall hear the parties and their evidence and render their decision within thirty (30) days following the conclusion of such hearing and notify Landlord and Tenant thereof. Landlord and Tenant shall bear the expense of the third appraiser (if any) equally. The decision of the appraisers shall be binding and conclusive, and judgment upon the award or decision of the arbitrators may be entered in the appropriate court of law; and the parties consent to the jurisdiction of such court and further agree that any process or notice of motion or other application to such court or a Judge thereof may be served outside the State of Connecticut by registered mail or by personal service, provided a reasonable time for appearance is allowed. If the dispute between the parties as to a fair market rental value has not been resolved before the commencement of Tenant's obligation to pay rent based upon such fair market rental value, then Tenant shall pay Base Rent and other charges under this Lease in respect of the premises in question based upon the fair market rental value designated by Landlord until either the agreement of the parties as to the fair market rental value, or the decision of the appraisers, as the case may be, at which time Tenant shall pay any underpayment of rent and other charges to Landlord, or Landlord shall refund any overpayment of rent and other charges to Tenant. 10.25 Hazardous Materials. Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances or materials. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Premises or Building or land on which the Building is located any such materials or substances except to use in the ordinary course of Tenant's business, and then only after written notice is given to Landlord of the identity of such substances or materials. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of hazardous materials and such testing concludes that Tenant or its agents, employees, contractors, invitees or others claiming by, through or under Tenant caused such release, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional charges. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's request concerning Tenant's best knowledge and belief regarding the presence of hazardous substances or materials on the Premises. In all events, Tenant shall indemnify Landlord and its agents and employees in the manner elsewhere provided in this Lease from any release of hazardous materials on the Premises occurring while Tenant is in possession, or elsewhere if caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or earlier termination of the term of this Lease. Landlord represents and warrants that, to Landlord's knowledge, the Building is free of any material concentrations of hazardous substances or materials. Landlord shall indemnify Tenant against any liability incurred by Tenant arising as a result of (i) a breach of the representation and warranty contained in the preceding sentence, or (ii) the presence of hazardous substances or materials in the Building not caused by Tenant or its agents, employees, contractors, invitees or others claiming by, through or under Tenant. 10.26 Right of First Offer. On the conditions (which conditions Landlord may waive, at its election, by written notice to Tenant at any time) that Tenant is not in default of its covenants and obligations under this Lease and that The Lincoln National Life Insurance Company, itself, or an Affiliated Entity is occupying at least fifty percent (50%) of the Premises then demised to Tenant, both at the time that Landlord is required to give Landlord's Notice, as hereinafter defined, and as of the Term Commencement Date in respect of the RFO Premises, as hereinafter defined, Tenant shall have the following right to lease the RFO Premises, as hereinafter defined, when the RFO Premises become available for lease to Tenant, as hereinafter defined. "RFO Premises" shall be defined as any separately demised area on the sixth (6th) floor of the Building which is not leased by Tenant pursuant to Section 10.27 below and becomes available for lease to Tenant during the Term of this Lease; provided, however, that if Tenant shall have exercised its right to reduce the size of the Premises pursuant to Section 10.28 below, RFO Premises shall be defined as the Give-Back Premises (as hereinafter defined) and any other separately demised area on the floor of the Building below the lowest floor of the Building on which any portion of the Premises is located, when the Give-Back Premises or such other area becomes available for lease to Tenant during the initial Term of this Lease. For the purposes of this Section 10.26, an RFO Premises shall be deemed to be "available for lease to Tenant" if the existing tenant of such RFO Premises has vacated or will vacate the same and when Landlord intends to offer such RFO Premises for lease (it being understood and agreed that in no event shall Tenant have any right to lease RFO Premises pursuant to this Section 10.26 unless and until Landlord leases such RFO Premises to another tenant and such tenant has vacated or will vacate the same and Landlord intends to offer such RFO Premises for lease). Notwithstanding anything to the contrary herein contained, (a) in no event shall Tenant have any rights under this Section 10.26 after the date which is nine (9) months prior to the expiration of the Term of this Lease (i.e., Landlord shall have no obligation to give Landlord's Notice to Tenant after the date which is nine (9) months prior to the expiration of the Term of this Lease), and (b) Tenant's rights to lease RFO Premises shall be subject and subordinate to the rights of then existing tenants of the Building to lease such RFO Premises. Landlord shall give Tenant written notice ("Landlord's Notice") at the time that Landlord determines that an RFO Premises will become available for lease to Tenant. Landlord's Notice shall set forth the terms upon which Landlord intends to offer such RFO Premises for lease, including (i) the size and exact location of such RFO Premises, (ii) the Base Rent applicable to such RFO Premises, which shall be based upon the delivery of such RFO Premises to Tenant in "as-is" condition, but shall be subject to adjustment as provided in clause (2) below, and (iii) the estimated date of delivery of such RFO Premises to Tenant in such condition. Tenant shall have the right, exercisable upon written notice ("Tenant's Exercise Notice") given to Landlord within fifteen (15) business days after the receipt of Landlord's Notice, to lease the RFO Premises. If Tenant fails timely to give Tenant's Exercise Notice, Tenant shall have no further right to lease such RFO Premises pursuant to this Section 10.26; provided, however, that the failure to give Tenant's Exercise Notice as to such RFO Premises shall not waive Tenant's right to lease, pursuant to the provisions of this Section 10.26, any other RFO Premises which thereafter become available for lease to Tenant during the initial Term of this Lease until Tenant's right to lease RFO Premises has lapsed. Upon the timely giving of Tenant's Exercise Notice, Landlord shall lease and demise to Tenant, and Tenant shall hire and take from Landlord, the RFO Premises in question, upon the terms set forth in Landlord's Notice and otherwise upon all of the same terms and conditions of this Lease, except as follows: (1) Term Commencement Date The Term Commencement Date in respect of such RFO Premises shall be the date that Landlord delivers such RFO Premises to Tenant (x) in the "as-is" condition described in Landlord's Notice, or (y) if within the fifteen (15) business day period referred to above Landlord and Tenant shall have agreed upon work to be performed by Landlord to prepare such RFO Premises for Tenant's occupancy, substantially in accordance with the plans and specifications for such work, as the case may be. If Landlord and Tenant shall not have agreed upon the scope of any such work to be performed by Landlord within the fifteen (15) business day period referred to above, then Tenant shall accept such RFO Premises in "as-is" condition unless Tenant rescinds Tenant's Exercise Notice within two (2) business days after the expiration of such fifteen (15) business day period, in which event Tenant shall have no right to lease such RFO Premises from Landlord, and Landlord shall be free to lease such RFO Premises to another party. (2) Base Rent The Base Rent rental rate in respect of such RFO Premises shall be the Base Rent rental rate set forth in Landlord's Notice, which shall be based upon Landlord's determination of the fair market rental value of such RFO Premises, which determination shall take into account, among other things, the condition in which such RFO Premises shall be delivered to Tenant, including the cost of the work, if any, to be performed by Landlord with respect thereto. (3) Tenant's Proportionate Share Tenant's Proportionate Share in respect of such RFO Premises shall be determined by dividing the rentable area of such RFO Premises by the total rentable area of the Building. (4) Parking The charge for parking passes in respect of such RFO Premises (which shall be provided at the same ratio as then being offered to prospective tenants of the Building) shall be at the then current prevailing rate in the Garage, as such rate may vary from time to time. Tenant shall have no right to additional reserved (i.e., as opposed to unassigned) parking spaces by reason of the demise of such RFO Premises. Notwithstanding the fact that Tenant's exercise of the above-described option to lease RFO Premises shall be self-executing, as aforesaid, the parties hereby agree to execute a lease amendment reflecting the addition of an RFO Premises promptly after the exercise by Tenant of its right to lease the same. The execution of such lease amendment shall not be deemed to waive any of the conditions to Tenant's exercise of the herein option to lease RFO Premises, unless otherwise specifically provided in such lease amendment. 10.27 Right of First Refusal. If, within the first twelve (12) months of the initial Term of this Lease, Landlord is in, or is about to enter into, negotiations to lease space on the sixth (6th) floor of the Building and Tenant is not then in default of its covenants and obligations under this Lease and The Lincoln National Life Insurance Company, itself, or an Affiliated Entity is occupying at least fifty percent (50%) of the Premises then demised to Tenant, Landlord shall provide written notice to Tenant of such negotiations, such notice to be directed to Gilbert Holmes, Vice President-Director of Facilities, Lincoln National Corporation, 1300 South Clinton Street, Fort Wayne, IN 46801. Tenant shall have the right to lease such space by written notice to Landlord within seven (7) business days after Tenant's receipt of such notice from Landlord. If Tenant fails to timely exercise such right (time being of the essence in respect of this Section 10.27), Landlord shall have no obligation to lease such space to Tenant pursuant to the terms of this Section 10.27. If Tenant timely exercises such right, then Landlord shall lease such space to Tenant upon the same terms and conditions of this Lease (including, without limitation, the Expiration Date, the Base Rent rental rate then (and from time to time) applicable to the other premises demised to Tenant under this Lease, the right to parking passes at the same ratio provided for the other premises then demised to Tenant under this Lease, and the obligation to pay charges for parking passes at the rate then (and from time to time) applicable to the other parking passes provided to Tenant under this Lease). Notwithstanding the foregoing, (a) Landlord shall contribute towards the cost of the build-out of such space and Tenant's costs to prepare the Construction Drawings for such space an amount equal to $17.50 per rentable square foot and $.43 per usable square foot (respectively) of such space, in each case multiplied by a fraction, the numerator of which is the number of full calendar months remaining in the initial Term of this Lease after the commencement date of the leasing of such space, and the denominator of which is one hundred twenty (120), (b) Tenant shall prepare the Construction Drawings for the build-out of such space in a diligent and efficient manner so that Landlord's final approval thereof is obtained no later than forty-five (45) days after the giving to Landlord of Tenant's notice exercising its right to lease such space, and (c) Tenant shall have no right to additional reserved (i.e., as opposed to unassigned) parking spaces by reason of the demise of such space. Notwithstanding the fact that Tenant's exercise of the above-described right to lease such space shall be self-executing, as aforesaid, the parties hereby agree to execute a lease amendment reflecting the addition of such space promptly after the exercise by Tenant of its right to lease the same. The execution of such lease amendment shall not be deemed to waive any of the conditions to Tenant's exercise of the herein right to lease such space, unless otherwise specifically provided in such lease amendment. Notwithstanding anything to the contrary herein contained, in no event shall Tenant have any rights under this Section 10.27 if Tenant shall have previously exercised its right to reduce the size of the Premises pursuant to Section 10.28 below. 10.28 Right to Reduce Space. (a) On the condition (which condition Landlord may waive, at its election, by written notice to Tenant at any time) that Tenant is not in default of its covenants and obligations under this Lease, Tenant shall have the right to reduce the size of the Premises by up to ten percent (10%) of the rentable area thereof by written notice to Landlord prior to the commencement of Landlord's Work. The portion of the Premises which Tenant elects to give back to Landlord (the "Give-Back Premises") and the remaining portion of the Premises on the floor(s) of the Building where the Give-Back Premises are located shall be of a marketable configuration (as determined by Landlord in its sole and absolute discretion) and otherwise in a location reasonably acceptable to Landlord. If Tenant shall timely exercise such right, (i) Tenant shall, within thirty (30) days of billing(s) therefor (accompanied by supporting documentation), reimburse Landlord for the costs and expenses incurred by Landlord in connection with the proposed preparation of the Give-Back Premises for Tenant's occupancy, and (ii) the parties shall promptly execute and deliver an amendment to this Lease confirming the location of the Give-Back Premises and making any changes to the terms and provisions of this Lease required as a result of the Give-Back Premises no longer being part of the Premises (e.g., modification to Tenant's Proportionate Share). If Tenant fails to timely exercise its right under this Section 10.28(a), Tenant shall have no right to reduce the size of the Premises pursuant to this Section 10.28(a), time being of the essence in respect of this Section 10.28(a). (b) On the condition (which condition Landlord may waive, at its election, by written notice to Tenant at any time) that Tenant is not in default of its covenants and obligations under this Lease, and provided that Tenant shall not have exercised its rights under Section 10.28(a) above, Tenant shall have the right to reduce the size of the Premises by up to ten percent (10%) of the rentable area thereof by written notice to Landlord on or before the date which is nine (9) months after the Term Commencement Date. The portion of the Premises which Tenant elects to give back to Landlord (the "Give-Back Premises") and the remaining portion of the Premises on the floor(s) of the Building where the Give-Back Premises are located shall be of a marketable configuration (as determined by Landlord in its sole and absolute discretion) and otherwise in a location reasonably acceptable to Landlord. If Tenant shall timely exercise such right, Tenant shall vacate and surrender the Give-Back Premises to Landlord as of the date (the "Give-Back Premises Termination Date") which is ninety (90) days after the giving of such notice to Landlord in the condition required by the terms and provisions of this Lease (including, without limitation, Section 5.2 hereof), and Tenant shall pay to Landlord, not later than thirty (30) days prior to the Give-Back Premises Termination Date, the Termination Fee (as hereinafter defined) and the costs and expenses (to be) incurred by Landlord to separate the Give-Back Premises from the remainder of the Premises. Base Rent and other charges in respect of the Give-Back Premises shall be apportioned as of the Give-Back Premises Termination Date. For purposes hereof, the "Termination Fee" shall be equal to the product of (i) Landlord's Transaction Costs (as hereinafter defined) multiplied by (ii) a fraction, the numerator of which is the number of months (or portion thereof) from the Give-Back Premises Termination Date to the Expiration Date, and the denominator of which is one hundred twenty (120). "Landlord's Transaction Costs" shall be the aggregate amount of all costs and expenses incurred by Landlord in entering into this Lease, including, without limitation, the amount of the Plan Allowance and Landlord's Contribution and all brokerage commissions and legal fees. Landlord shall, upon written request of Tenant, promptly after Landlord's Transaction Costs have been determined, advise Tenant of the amount thereof. Promptly after the exercise of Tenant's right to reduce the size of the Premises pursuant to this Section 10.28(b), the parties shall execute and deliver an amendment to this Lease confirming the location of the Give-Back Premises and making any changes to the terms and provisions of this Lease required as a result of the Give-Back Premises no longer being part of the Premises (e.g., modification to Tenant's Proportionate Share). If Tenant fails to timely exercise its right under this Section 10.28(b), Tenant shall have no right to reduce the size of the Premises pursuant to this Section 10.28(b), time being of the essence in respect of this Section 10.28(b). (c) Notwithstanding anything to the contrary herein contained, Tenant shall have no right to reduce the size of the Premises pursuant to Section 10.28(a) or 10.28(b) if Tenant shall have previously leased other space on the sixth (6th) floor of the Building pursuant to Section 10.27 above. 10.29 Storage Premises. Landlord hereby demises and leases to Tenant and Tenant hereby hires and takes from Landlord storage premises ("Storage Premises") containing approximately 6,145 square feet of usable area. The Storage Premises are located in the lower level of the Building and are substantially as shown on Exhibit E hereto. Said demise of the Storage Premises shall be upon all of the same terms and conditions of this Lease except: (1) The Term Commencement Date in respect of the Storage Premises shall be the Term Commencement Date in respect of the original Premises demised to Tenant under this Lease. (2) The Base Rent payable in respect of the Storage Premises shall be $9.00 per usable square foot of the Storage Premises per year for the first five (5) years of the Term, and $10.00 per usable square foot of the Storage Premises per year for the remainder of the initial Term. The Base Rent payable in respect of the Storage Premises during any extended term shall be based upon the fair market rental value of the Storage Premises as of the commencement date of such extended term, as determined by Landlord. (3) The Storage Premises shall be leased by Tenant "as-is", in the condition in which the Storage Premises are in as of the Term Commencement Date in respect of the Storage Premises, without any obligation on the part of Landlord to prepare or construct the Storage Premises for Tenant or to provide any allowance or contribution with respect thereto. Notwithstanding the foregoing, Landlord shall, at its expense, (a) deliver the Storage Premises in broom-clean condition, (b) touch-up the interior walls of the Storage Premises with paint, as needed, and (c) if not previously installed, install demising partitions to separate the Storage Premises from the remainder of the space on the lower level of the Building. (4) Tenant shall have no obligation to make payments on account of Operating Costs or Landlord's Tax Expense in respect of the Storage Premises. (5) Landlord shall have no obligation to provide any services to the Storage Premises other than heat and air conditioning appropriate for storage space (which Tenant acknowledges may be at a level below the specifications set forth in paragraph 1(a) of Exhibit B hereto) and electricity for the electric lighting fixture in the Storage Premises. (6) Tenant shall have no right to additional parking spaces or passes by reason of the demise of the Storage Premises. (7) Tenant shall use the Storage Premises for storage purposes in connection with its use of the Premises demised under this Lease and for no other purposes whatsoever. 10.30 Antenna Installation. Subject to the following provisions of this Section 10.30, Landlord grants Tenant the right, in common with Landlord and other tenants, to install, operate and maintain, at Tenant's expense and risk, a lawfully permitted antenna(e), satellite dish and associated equipment (the "Antenna Equipment") required for the proper conduct of Tenant's business in the Premises at a location on the roof of the Building mutually acceptable to Landlord and Tenant (the "Antenna Premises"): (a) Tenant shall submit to Landlord, for its approval, a full set of engineering plans and specifications for the proposed Antenna Equipment installation. The installation of the proposed Antenna Equipment shall be designed so as to be removable without damage to the roof of the Building. The parties hereby acknowledge and agree, by way of illustration and not limitation, that Landlord shall have the right to withhold its approval of Tenant's plans and specifications hereunder, and shall not be deemed to be unreasonable in doing so, if Tenant's intended placement or method of installation or operation of the Antenna Equipment (i) may subject other then existing licensees, tenants or occupants of the Building, or other surrounding or neighboring landowners or their then existing occupants, to signal interference, Tenant hereby acknowledging that a shield may be required in order to prevent such interference, (ii) does not minimize to the fullest extent practicable the obstruction of the views from the windows of the Building or such adjoining building that are adjacent to the Antenna Equipment, if any, (iii) does not complement (in Landlord's sole judgment, which shall not, however, require Tenant to incur unreasonable expense) the design and finish of the Building, (iv) may damage the structural integrity of the Building or the roof thereof, or (v) may constitute a violation of any consent, approval, permit or authorization necessary for the lawful installation of the Antenna Equipment. (b) Tenant shall make all required conduit or cable connections between Tenant's equipment in the Premises and the Antenna Equipment utilizing Building services, subject to (i) Tenant's payment of reasonable costs for such services, and (ii) approval of such connections by Landlord. (c) Any Antenna Equipment installed by Tenant shall not interfere with the operation of any previously erected antenna(e), satellite dish(es) or the like. (d) Tenant shall obtain and maintain (and submit copies to Landlord of) all necessary municipal, state and federal permits and authorizations required to install, maintain, use and operate the Antenna Equipment and shall pay any charges levied by government agencies which are the result of Tenant having the Antenna Equipment. Landlord agrees to fully cooperate with Tenant in obtaining all such permits and authorizations, at no cost or expense to Landlord. (e) Tenant agrees to maintain the Antenna Equipment and Antenna Premises in a good state of repair and to save Landlord and its agents and employees harmless from any claims, liability, loss, damage or expenses resulting from the erection, maintenance, existence, operation, use or removal of the Antenna Equipment, except to the extent such claims, liability, loss, damage or expenses are due to the negligence or willful misconduct of Landlord or its agents, employees or contractors. (f) At the conclusion of the Term, Tenant shall remove the Antenna Equipment and surrender the Antenna Premises to Landlord in the same condition as delivered to Tenant, except for loss or damage resulting from casualty, condemnation, act of God or ordinary wear and tear. (g) The liability and property insurance to be carried by Tenant pursuant to the provisions of this Lease shall include coverage for Tenant's activity on the Antenna Premises and the Antenna Equipment. (h) Notwithstanding anything to the contrary contained in this Section 10.30, if Landlord, in its sole judgment, determines that the presence of the Antenna Equipment creates or poses a health risk or other danger to persons or property, Landlord shall have the right to require Tenant to remove the Antenna Equipment from the roof of the Building by giving written notice to Tenant. Upon the giving of such notice, Tenant shall remove the Antenna Equipment from the roof of the Building and surrender the Antenna Premises to Landlord in the condition required by clause (f) above. (i) The frequency and transmission power at which the Antenna Equipment shall operate shall be subject to Landlord's prior written approval and may not be changed or modified at any time. (j) Except for electricity, Landlord shall have no obligation to provide any services to the Antenna Premises. Any services required by Tenant in connection with Tenant's use of the Antenna Premises or the Antenna Equipment shall be installed by Tenant, at Tenant's expense, subject to Landlord's prior approval. Without limiting the foregoing, Tenant shall, at its expense, submeter the Antenna Premises and pay for all electricity so submetered and subsequently billed by Landlord. (k) Tenant shall have no right to make any changes, alterations or other improvements to the Antenna Premises or to the Antenna Equipment without Landlord's prior written consent, except for routine maintenance. (l) Landlord shall provide Tenant with 24-hour access to the Antenna Premises, subject to Landlord's reasonable security procedures and restrictions based on emergency conditions and to force majeure. Tenant shall give Landlord reasonable advance written notice of the need for access to the Antenna Premises (except that such notice may be oral in an emergency), and a representative of Landlord must be present during any entry by Tenant onto the Antenna Premises. Each notice for access shall either (as the case may be) (A) state the date access is needed and that routine maintenance is to be performed, or (B) if other than routine maintenance is to be performed, describe, as applicable, the date access is needed, the name of the contractor or other personnel requiring access, the areas to which access is required, the common areas (if any) of the Building to be impacted (risers, electrical rooms, etc.) and evidence of Landlord's approval of any work to be done in the Antenna Premises, if and to the extent such consent is required. In the event of an emergency, such notice shall follow within five (5) days after access to the Antenna Premises. (m) Tenant shall be responsible for the cost of repairing any damage to the roof of the Building caused by the installation, maintenance or removal of the Antenna Equipment by or on behalf of Tenant. (n) Tenant shall have no right to sublet the Antenna Premises. (o) Except for Tenant, no person, firm or entity (including, without limitation, other tenants, licensees or occupants of the Building) shall have the right to benefit from the services provided by the Antenna Equipment. (p) In the event that Landlord performs repairs to or replacement of the roof, and the removal of the Antenna Equipment is necessary to effect such repair or replacement, Tenant shall, at Tenant's cost, remove the Antenna Equipment until such time as Landlord has completed such repairs or replacement. (q) Tenant shall take the Antenna Premises "as-is" without any obligation of Landlord to prepare or construct the same for Tenant's use or to provide any allowance or contribution with respect thereto. (r) Tenant shall comply with all applicable laws, ordinances and regulations relating to Tenant's use, maintenance and operation of the Antenna Premises and the Antenna Equipment. (s) Landlord shall have the right, upon at least thirty (30) days notice to Tenant, to require Tenant to relocate the Antenna Premises to another area ("Relocation Antenna Premises") on the roof of the Building suitable for the use of the Antenna Equipment. In such event, Tenant shall, at Landlord's sole cost and expense, on or before the date set forth in Landlord's notice, relocate all of its Antenna Equipment from the Antenna Premises to the Relocation Antenna Premises. (t) Tenant's use of the Antenna Premises shall otherwise be upon and subject to the terms and provisions of this Lease, except to the extent inconsistent with the state of facts contemplated by the use of the Antenna Premises. Without limiting the foregoing, Tenant shall have no obligation to pay rent for its use of the Antenna Premises. 10.31 Exterior Signage. (a) Tenant shall have the right, at its sole cost and expense, to provide and install two (2) signs bearing Tenant's name and/or logo on the exterior of the Building below the roof-line thereof. The size, design and location of such signs shall be subject to the prior written consent of Landlord, and Tenant agrees to obtain and present to Landlord, prior to the installation thereof, any and all permits and approvals required by regulatory authorities having jurisdiction with respect to such signs. Landlord agrees to reasonably cooperate with Tenant to obtain such permits and approvals, but at no cost to Landlord. Tenant shall, at its expense, maintain such signs in good order and condition throughout the Term of this Lease (Tenant hereby assuming all risk and liability with respect thereto) and remove such signs upon the expiration or sooner termination of the Term of this Lease and restore the facade(s) of the Building to the condition existing prior to the installation thereof. For so long as this Lease is in full force and effect, Landlord agrees not to permit the installation of a sign on the exterior of the Building at a height parallel to or above the location of Tenant's exterior signs. Provided that The Lincoln National Life Insurance Company, itself, or an Affiliated Entity is occupying at least fifty percent (50%) of the Building and is not in default under this Lease, Landlord agrees not to permit the installation of a sign on the exterior of the Building which is proportionately larger (based upon the amount of space occupied by the tenant in question as compared to the amount of space occupied by Tenant and the size of Tenant's signs) than any of Tenant's exterior signs. (b) Landlord shall, at its expense, install a monument sign (of a size and design determined by Landlord in its sole discretion) at the entrance to the Property and shall install Tenant's name (but not logo) in a prominent position on such sign. Tenant shall, within thirty (30) days of billing therefor, reimburse Landlord for the costs and expenses to obtain and install Tenant's name on such sign. 10.32 Food Service Facility. Landlord shall operate, or cause to be operated, throughout the Term of this Lease a full-service food service facility (which shall include capacity for seating of at least 150 persons) serving the tenants of the Building. The hours of operation of such food service facility shall be at least 7:00 a.m. to 9:00 a.m. and 11:00 a.m. to 2:00 p.m., Monday through Friday, legal holidays excepted. Tenant agrees that the Premises shall not contain a food service facility in any form, except for a reasonable number of vending machines serving products reasonably acceptable to Landlord. 10.33 Exercise Facility. Landlord shall operate, or cause to be operated, throughout the Term of this Lease an exercise facility (which may or may not be staffed, at Landlord's sole election) for use by employees of all tenants of the Building containing exercise equipment, men's and women's showers and locker facilities. Notwithstanding the foregoing, such exercise facility shall be available for use on a temporary basis by visiting employees of Tenant's affiliates. Employees of Tenant and its affiliates shall not be separately charged for the use of such exercise facility. Such exercise facility shall be available for use by employees of Tenant and its affiliates during Normal Building Operating Hours, legal holidays excepted. As a condition to the use of such exercise facility, each employee shall be required to execute and deliver to the Building management office prior to the first such use the Metro Center Fitness Club Usage Agreement in the form attached hereto as Exhibit F. 10.34 Temporary Premises. Tenant desires to lease temporary premises in the Building until the Term Commencement Date of this Lease. Therefore, Landlord hereby demises and leases to Tenant, and Tenant hereby hires and takes from Landlord, the Temporary Premises, as hereinafter defined. The demise of the Temporary Premises shall be upon the terms and conditions hereinafter set forth. (a) The "Temporary Premises" shall be comprised of up to a full floor of the Building (other than any floor which is a part of the Premises) as designated by Landlord, but subject to change by Landlord from time to time. (b) The demise of the Temporary Premises shall be upon all of the same terms and conditions of this Lease, except as follows: (1) The Term Commencement Date in respect of the Temporary Premises shall be the date on which this Lease has been fully executed and delivered by Landlord and Tenant. (2) The Term of this Lease in respect of the Temporary Premises shall expire on the day immediately preceding the Term Commencement Date of this Lease (the "Temporary Premises Termination Date"). (3) The Temporary Premises shall be leased by Tenant "as-is", in the condition in which the Temporary Premises are in as of the Term Commencement Date in respect of the Temporary Premises, without any obligation on the part of Landlord to prepare or construct the Temporary Premises for Tenant or to provide any allowance or contribution with respect thereto. (4) Tenant shall have no obligation to pay Base Rent or to make any payments on account of Operating Costs or Landlord's Tax Expense in respect of the Temporary Premises. (5) Landlord shall have no obligation to provide any services to the Temporary Premises. (6) Tenant shall have no right to additional parking spaces or passes by reason of the demise of the Temporary Premises. (7) Tenant shall use the Temporary Premises for oversight of construction, employee orientation, interviews or any other use permitted by law and approved by Landlord. (c) As of the Temporary Premises Termination Date, Tenant shall vacate the Temporary Premises and deliver the Temporary Premises to Landlord in the condition in which the Temporary Premises were delivered to Tenant. 10.35 Testing of Building HVAC System. Within a reasonable period of time after the execution and delivery of this Lease and prior to the commencement of Landlord's Work, Landlord shall cause an environmental consulting firm reasonably satisfactory to Tenant to test the indoor air on each floor of the Premises to determine whether elevated levels of fungus or mold are emanating from the Building HVAC system. Air samples shall also be collected from outside of the Building as a control. If, in the reasonable opinion of a certified industrial hygienist employed by said consulting firm (the "CIH"), such testing indicates that no response actions related to elevated levels of mold or fungus emanating from the Building HVAC system are necessary, Landlord shall be deemed to have satisfied its obligations under this Section 10.35 and Tenant shall reimburse Landlord for the costs and expenses incurred by Landlord in performing such testing within thirty (30) days after receipt of an invoice from Landlord therefor. If, in the reasonable opinion of the CIH, such testing indicates that response actions are necessary in order to address elevated levels of fungus or mold emanating from the Building HVAC system, Landlord shall pay for such testing and shall use reasonable efforts to eliminate such elevated mold and/or fungus emissions. Tenant acknowledges and agrees that Rizzo Associates, Inc. is an acceptable environmental consulting firm. Submission of this instrument for examination or signature does not constitute a reservation of or option to lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. This Lease contains all of the agreements of the parties with respect to the subject matter thereof and supersedes all prior dealings between them with respect to such subject matters. No representations, inducements, promises or agreements, oral or otherwise, between Landlord and Tenant or any of their respective brokers, employees or agents, not embodied herein, shall be of any force or effect. IN WITNESS THEREOF the parties hereto have set their hands and seals in multiple counterpart copies, each of which counterpart copy shall be deemed an original for all purposes, as of the date and year first above written. LANDLORD: NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP BY: Northland Metro Partners Limited Partnership, its General Partner BY: Northland Metro Partners Incorporated, its General Partner BY: Name: Title: TENANT: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY BY: Name: Title: EXHIBIT A PLAN OF PREMISES EXHIBIT B LANDLORD SERVICES 1) Heating, Ventilating and Air Conditioning a) Landlord will furnish the foregoing as required to provide comfortable temperatures in compliance with applicable codes and ordinances, government or quasi-governmental regulations, during Normal Building Operating Hours and on Saturdays from 8:00 a.m. to 1:00 p.m. (collectively, "Standard HVAC Hours"). "Comfortable temperatures" shall mean a maximum inside temperature of 76 F, provided the outside temperature is no more than 88 F dry bulb/72 F wet bulb, and a minimum inside temperature of 72 F, provided the outside temperature is no less than 6 F dry bulb. Landlord will maintain the base Building heating, ventilating and air conditioning equipment, the cost of which shall be billed to tenants pursuant to Article III hereof. b) The air conditioning system is designed to provide cooling for normal office occupancy, one person per 208 square feet, and normal office equipment comprising a combined lighting and standard electrical load not to exceed 6 watts per square foot. If special occupancy requirements or special equipment require additional cooling or if Tenant otherwise exceeds those conditions or introduces onto the Premises equipment which overloads the systems and/or in any other way causes the systems not adequately to perform their proper functions, then at Landlord's option reasonable supplementary or alternative systems may be installed by Landlord and the acquisition, installation, maintenance and operating cost of such equipment will be at Tenant's expense. c) Tenant may request heating and/or air conditioning during other periods in addition to Standard HVAC Hours by submitting its request in writing to the Building Manager's office no later than 2:00 p.m. the preceding workday (Monday through Friday) on forms available from the Building Manager. The request shall clearly state the start and stop hours of the "off-hour" service. Tenant shall submit to the Building Manager a list of personnel who are authorized to make such requests. Charges are to be determined by the Building Manager on the additional hours of operations and shall be fair and reasonable and reflect the additional operating costs involved without profit to Landlord. 2) Electrical Service Landlord shall furnish electricity service to the Premises in accordance with Section 10.23 of the Lease. 3) Water Landlord shall furnish water for ordinary cleaning, toilet, lavatory and drinking purposes only. If Tenant requires, uses or consumes water for any purpose other than the aforesaid, Landlord may (i) assess a reasonable charge for the additional water so used or consumed by Tenant, or (ii) install a water meter at Tenant's expense and thereby measure Tenant's water consumption for all purposes. In the latter event, Tenant agrees to pay for water consumed, as shown on said meter, together with the sewer charge based on said meter charges, as and when bills are rendered. 4) Elevator There shall be an elevator for the use of all tenants and the general public for access to and from all floors of the Building. 5) Relamping of Light Fixtures Landlord shall replace all lamps, ballasts and starters within the Premises upon Tenant's request from time to time, the cost of which shall be reimbursed by Tenant to Landlord upon Landlord's request therefor from time to time. 6) Office Cleaning and Janitorial Service Office cleaning and janitorial service in accordance with the Cleaning Specifications attached hereto as Exhibit B-1. 7) Security Landlord shall provide security for the Building similar to the security provided in other first-class office buildings in downtown Hartford, although Landlord makes no representation, warranty or guaranty of the efficacy of its efforts in this regard. 8) Parking Attendant Landlord shall cause a parking attendant to be located in the Garage. EXHIBIT B-1 CLEANING SPECIFICATIONS FOR METRO CENTER, 350 CHURCH STREET, HARTFORD, CT FREQUENCY: Five nights per week, Monday through Friday, between the hours of 5:30 p.m. and 9:30 p.m., excluding holidays. GENERAL OFFICE AREA DAILY: 1. Spot vacuum all traffic lanes and obviously soiled carpeted surfaces. 2. Inspect carpet for spots and stains, removing where possible. 3. Dust mop or sweep hard surface floor areas thoroughly. 4. Dust all horizontal surfaces of desks, chairs, tables and office equipment. 5. Dust all exposed filing cabinets, bookcases and shelves. 6. Dust to hand height all horizontal surfaces of equipment, ledges, sills, shelves, radiators, frames, and partitions. 7. Dust all telephones. 8. Empty all waste receptacles and remove trash to handling area. 9. Clean and sanitize all drinking fountains. 10. Turn out lights and lock tenant building doors. WEEKLY: 1. Vacuum clean all exposed carpeting including difficult areas such as under desks, tables, counters. 2. Replace plastic liners in wastebaskets. 3. Wash glass in tenant doors, sidelights and interior partitions. 4. Damp mop and spray buff floors. 5. Spot clean by damp wiping fingerprints, smears and smudges on walls, doors, frames, kick and push plates, handles, light switches and glass surfaces. MONTHLY: 1. Dust vertical blinds. 2. Detail vacuum corners and edges. 3. Vacuum all fabric office furniture, including chairs and couches. QUARTERLY: 1. Dust above hand height all horizontal surfaces including shelving, moldings, ledges, partitions, pipes, etc. 2. Vacuum clean or dust all air-conditioning and heating grilles. SEMI ANNUALLY: 1. Machine strip clean and refinish all floor surfaces as required but not less than once per year. 2. Damp wipe and clean light fixtures. LOBBY AND COMMON AREAS DAILY: 1. Dust walls up to normal reach in lobby. 2. Spot clean by damp wiping fingerprints, smears and smudges on walls, doors, frames, kick and push plates, handles, light switches, glass surfaces, directory and tenant signage and elevator call buttons, etc. 3. Vacuum clean all carpeting and inspect for spots and stains, removing where possible. 4. Sweep and police all exterior plaza and sidewalk areas. 5. Clean all lobby glass, including revolving door. QUARTERLY: 1. Dust walls from ceiling to floor. 2. Vacuum all fabric-covered walls. RESTROOMS DAILY: 1. Clean and polish all chrome fittings and brightwork, including shelves, flushometers and metal dispensers. 2. Clean and sanitize both sides of every toilet seat with a germicidal solution. 3. Clean, sanitize and polish all vitreous fixtures, including toilet bowls, urinals and sinks, using a germicidal detergent solution. 4. Clean and polish all mirrors and glass. 5. Dust and spot clean all toilet partitions, tile walls, dispensers and receptacles. 6. Empty all disposal receptacles, inserting liners as needed. 7. Refill all dispensers, including napkin, soap, tissue, towels, cups, liners, etc. 8. Remove spots, stains and splashes from wall areas. 9. Wash and rinse all floors thoroughly, using a germicidal detergent solution. 10. Spot clean by damp wiping fingerprints, smears and smudges on walls, doors, frames, kick and push plates, handles, light switches and glass surfaces. MONTHLY: 1. Wash and sanitize all partitions, tile walls and enamel surfaces. 2. Dust or vacuum clean all heating and air-conditioning ceiling vents. QUARTERLY: 1. Machine scrub and rinse all floor surfaces. STAIRWELLS DAILY: 1. Spot clean by damp wiping fingerprints, smears, and smudges on walls, doors, frames, kick and push plates, and handles. MONTHLY: 1. Vacuum and/or dry mop using a chemically treated dry mop all stairwells. 2. Dust all handrails. ELEVATORS DAILY: 1. Sweep or vacuum floors. 2. Inspect carpet for spots and stains, removing where possible. 3. Clean elevator tracks. 4. Clean walls and polish brightwork. 5. Wipe down all surfaces in freight elevator. MONTHLY: 1. Wash light fixtures. EXHIBIT C RULES AND REGULATIONS 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or used for any purpose other than for ingress to and egress from the Premises and for delivery of merchandise and equipment in a prompt and efficient manner, using elevators and passageways designated for such delivery by Landlord. There shall not be used in any space, or in public hall of the Building, either by any Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No Tenant shall sweep or throw or permit to be swept or thrown from the Premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the Building, and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals, other than seeing eye dogs, be kept in or about the Building. Smoking or carrying lighted cigars or cigarettes in the Building is prohibited. 4. No awnings, antennae, or other projections shall be attached to the outside walls of the Building. 5. No curtains, blinds, shades, or screens other than those furnished by Landlord shall be attached to, hung in or used in connection with any window or door of the Premises without the prior written consent of Landlord. 6. No advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the Premises or the Building or on the inside of the Premises if the same is visible from the outside of the Premises without the prior written consent of Landlord, except that the name of Tenant may appear on the entrance door of the Premises. In the event of the violation of the foregoing by any Tenant, Landlord may remove same without any liability, and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for each Tenant by Landlord at the expense of such Tenant, and shall be of a size, color and style acceptable to Landlord. 7. No Tenant shall mark, paint, drill into, or in any way deface any part of the Premises or the Building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Landlord, and as Landlord may direct. No Tenant shall lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the Premises, and, if linoleum or other similar floor covering is desired to be used in interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 8. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any Tenant, nor shall any changes be made in existing locks or mechanism thereof. Each Tenant must, upon the termination of his tenancy, restore to Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Landlord the cost thereof. 9. Freight, furniture, business equipment, safes, merchandise and bulky matter of any description shall be delivered to and removed from the Premises only on the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by Landlord. Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of these Rules and Regulations of the Lease of which these Rules and Regulations are a part. 10. Canvassing, soliciting and peddling in the Building is prohibited and each Tenant shall cooperate to prevent the same. 11. Landlord shall have the right to prohibit any advertising by any Tenant which, in Landlord's opinion, tends to impair the reputation of the Building or its desirability as Building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 12. Tenant shall not bring or permit to be brought or kept in or on the Premises, any flammable, combustible or explosive fluid, material, chemical or substance or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the Premises. Without limiting the foregoing, Tenant shall not permit any cooking within the Premises, except that a coffee bar and microwave may be used by Tenant's employees in the Premises. 13. Tenant shall comply with all security measures from time to time established by Landlord for the Building. 14. Tenant assumes full responsibility for protecting its space from theft, robbery and pilferage, which includes keeping doors locked and any other means of entry to the Premises closed and secured. 15. Tenant shall comply with all applicable federal, state and municipal laws, ordinances and regulations and Building rules and shall not, directly or indirectly, make any use of the Premises which may be prohibited by any thereof or which shall be dangerous to person or property or shall increase the cost of insurance or require additional insurance coverage. 16. Tenant shall not waste electricity, water, heat or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning, and shall refrain from attempting to adjust any controls other than room thermostats installed for Tenant's use. 17. Tenant shall not install and operate machinery or any mechanical devices of a nature not directly related to Tenant's ordinary use of the Premises without the written permission of Landlord. 18. No person or contractor not employed or approved by Landlord shall be used to perform window washing, cleaning, repair or other work in the Premises. 19. No vending machines other than those furnished by the Landlord are to be placed in any hallways or Building common areas. 20. No parking in front of the main entrance of the Building is permitted. 21. Tenant shall comply with the Building's recycling program, as the same may be established or changed by Landlord from time to time. EXHIBIT D SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT This SUBORDINATION, NON-DISTURBANCE, AND ATTORNMENT AGREEMENT is made as of this _____ day of ____________, 1998, by and among NOMURA ASSET CAPITAL CORPORATION, a Delaware corporation, (together with its successors and assigns, "Mortgagee"), THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, an Indiana corporation ("Tenant"), and NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP, a Massachusetts limited partnership ("Landlord"). RECITALS A. Landlord is the owner of those certain premises commonly known as Metro Center, 350 Church Street, Hartford, Connecticut, more particularly described in Exhibit A attached hereto as (the "Real Estate"); B. Mortgagee is now or will be the owner and holder of a note (the "Note") evidencing a loan (the "Loan") made by Mortgagee to Landlord, and a mortgage (the "Mortgage")securing the Loan, in each case executed by Landlord to Mortgagee; C. The Mortgage constitutes or will constitute a first lien upon, among other things, the Real Estate and the current and future improvements (the "Improvements") situated thereon (collectively, the "Property"); D. Under the terms of a certain Lease (the "Lease") dated on or about the date hereof, Landlord leased to Tenant the Real Estate and the Improvements, or a portion thereof, as more particularly described in the Lease; and E. The parties are entering into this Agreement as a condition of Mortgagee's agreement to make the Loan evidenced by the Note. AGREEMENTS 1. Subordination. The Lease is and at all times shall be subordinate to the Mortgage and to all substitutions, renewals, modifications and amendments of and to the Mortgage (including, without limitation, any of the foregoing which increase the indebtedness secured thereby). 2. Non-Disturbance. In the event of foreclosure of the Mortgage (by judicial process, power of sale or otherwise) or conveyance in lieu of foreclosure, which foreclosure, power of sale, or conveyance occurs prior to the expiration date of the Lease, including any extensions and renewals of the lease now provided thereunder, and so long as Tenant is not in default under any of the terms, covenants and conditions of the lease beyond any applicable grace or cure period, Mortgagee agrees on behalf of itself, its successors and assigns, and on behalf of any purchaser at such foreclosure ("Purchaser") that Tenant shall not be disturbed in the quiet and peaceful possession of the premises demised under the Lease, subject to the terms and conditions of the Lease. 3. Attornment. In the event of foreclosure of or other execution on the Mortgage or conveyance in lieu of foreclosure, which foreclosure, execution or conveyance occurs prior to the expiration date of the Lease, including any extensions and renewals of the lease now provided thereunder, Tenant shall attorn to Mortgagee or Purchaser and recognize Mortgagee or Purchaser as Tenant's landlord under the Lease, and so long as Tenant is not in default under any of the terms, covenants and conditions of the Lease beyond any applicable grace or cure period, Mortgagee or Purchaser shall recognize and accept Tenant as its tenant thereunder, whereupon the Lease shall continue, without further agreement, in full force and effect as a direct lease between Mortgagee or Purchaser and Tenant for the remaining term thereof, together with all extensions and renewals now provided thereunder, upon the same terms, covenants and conditions as therein provided, and Mortgagee or Purchaser shall thereafter assume and perform all of Landlord's subsequent obligations, as landlord under the Lease, and Tenant shall thereafter make all rent payments directly to either Mortgagee or Purchaser, as the case may be, subject to the limitations contained in Section 4 and Section 8 below. 4. Limitation of Liability. Notwithstanding anything to the contrary contained herein or in the Lease, in the event of foreclosure of or other execution on the Mortgage (by judicial process, power of sale or otherwise) or conveyance in lieu of foreclosure, which foreclosure, power of sale or conveyance occurs prior to the expiration date of the Lease, including any extensions and renewals of the Lease now provided thereunder, the liability of Mortgagee or Purchaser, as the case may be, shall be limited as set forth below in Section 8 below, provided, however, that Mortgagee or Purchaser, as the case may be, shall in no event or to any extent: (a) be liable to Tenant for any past act, omission or default on the part of the original or any other landlord under the Lease and Tenant shall have no right to assert the same or any damages arising therefrom as an offset, claim, defense or deficiency against Mortgagee, Purchaser, or the successors or assigns of any of them; provided, however, that if notice of such act, omission or default is given to Mortgagee and Mortgagee or any Purchaser succeeds to the interest of Landlord under the Lease, then Mortgagee or such Purchaser shall be subject to any abatement or offset right to which Tenant may be entitled under the Lease on account of such act, omission or default; (b) be liable to Tenant for any payment of rent more than thirty (30) days in advance or any deposit, rental security or any other sums deposited with the original or any other landlord under the Lease and not delivered to Mortgagee; (c) be bound by any cancellation, surrender, amendment or modification of the Lease entered into by Tenant unless: (i) Tenant is allowed to take such action as a matter of right under the Lease; (ii) Such action does not affect the monetary obligations of the Tenant with respect to the Property; or (iii) Mortgagee provides its prior written consent to such action, which consent shall not be unreasonably withheld or delayed. (d) be liable to Tenant for construction, or delays in construction, of the Improvements or the portion thereof leased to Tenant; or (e) be bound by any option or right of first refusal to purchase the Real Estate granted to Tenant under the Lease. 5. Further Documents. The foregoing provisions shall be self- operative and effective without the execution of any further instruments on the part of any party hereto. Each party agrees, however, to execute and deliver to the other or to any person to whom Tenant herein agrees to attorn such other instruments as either shall reasonably request in order to confirm said provisions. 6. Notice and Cure. Tenant agrees that if there occurs a default by Landlord under the Lease: (a) Tenant shall use best efforts to give a copy of each default notice given to Landlord pursuant to the Lease to Mortgagee; and (b) Mortgagee shall have the right, but not the obligation, to cure the default within the time prescribed by the Lease or, if such default cannot reasonably be cured within that time, then such additional time not to exceed forty-five (45) days as may be necessary if Mortgagee shall have commenced and shall be diligently pursuing the remedies necessary to cure such default. 7. Notices. All notices, demands and requests given or required to be given hereunder shall be in writing and shall be deemed to have been properly given when personally served or if sent by U. S. registered or certified mail, postage prepaid, addressed as follows: Mortgagee: Nomura Asset Capital Corporation 633 West Fifth Avenue, 68th Floor Los Angeles, CA 90071 Attention: David Walker Tenant: The Lincoln National Life Insurance Company 350 Church Street Hartford, Connecticut 06103 Attention: Peter Gourley, Vice President Financial Reporting & Pricing Landlord: c/o Northland Investment Corporation 2150 Washington Street Newton, Massachusetts 02162 Attention: President 8. Limitation of Personal Liability. At any time before or after Mortgagee or Purchaser succeeds to the interest of Landlord, Tenant agrees to look only to such Mortgagee's or Purchaser's interest in the Property to satisfy any of the respective obligations of Mortgagee or Purchaser to Tenant. 9. Payment of Rent. Tenant hereby acknowledges that the Lease and the rents and all other sums due thereunder have been assigned to Mortgagee as security for the Loan evidenced by the Note and secured by the Mortgage. If Mortgagee notifies Tenant of the occurrence of a default under the Note, Mortgage or any other document, instrument or agreement evidencing or securing the indebtedness and/or demands that Tenant pay rents and all other sums due or to be become due under the Lease directly to Mortgagee, Tenant shall pay rent and all other sums due under the Lease directly to Mortgagee or as otherwise directed in writing by Mortgagee without the need on the part of Mortgagee to document or otherwise establish any default. Landlord hereby irrevocably authorizes and directs Tenant to make the foregoing payments to Mortgagee upon such notice and demand without the need to inquire of Landlord as to the validity of such notice or any contrary notice or direction from Landlord and Landlord agrees not to seek payment from Tenant of any such payments made to Mortgagee. 10. Binding Effect. The terms, covenants and conditions hereof shall inure to the benefit of and be binding upon the parties hereto, and their respective heirs, executors, administrators, successors and assigns. 11. Modification. This Agreement may not be modified orally or in a manner other than by an agreement signed by the parties hereto or their respective successors in interest. 12. Choice of Law. This Agreement shall be governed by the internal law (and not the law of conflicts) of the State in which the Property is located. 13. Counterparts. This Agreement may be executed in two or more counterparts which, when taken together, shall constitute one and the same original. [Signatures commence on following page] WITNESS the due execution of this instrument by the parties hereto the day and year first above written. MORTGAGEE: NOMURA ASSET CAPITAL CORPORATION, a Delaware corporation Signed, sealed and delivered in the presence of: _____________________________ _____________________________ By:____________________________________ Name: Title: TENANT: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, an Indiana corporation Signed, sealed and delivered in the presence of: _____________________________ _____________________________ By:____________________________________ Name: Title: LANDLORD: NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP, a Massachusetts limited partnership By: Northland Metro Partners Limited Partnership, its General Partner By: Northland Metro Partners Incorporated, its General Signed, sealed and delivered Partner in the presence of: _____________________________ _____________________________ By:_______________________ Name: Title: STATE OF ____________) COUNTY OF ___________) The foregoing instrument was acknowledged before me this ______ day of ____________, 1998 by _______________________________________, a ______________ of Nomura Asset Capital Corporation, a Delaware corporation. WITNESS my hand and official seal. Signature _________________________ (Seal) Notary Public My commission expires: STATE OF ____________) COUNTY OF ___________) The foregoing instrument was acknowledged before me this ______ day of ____________, 1998 by _______________________________________, a ______________ of The Lincoln National Life Insurance Company, an Indiana corporation. WITNESS my hand and official seal. Signature _________________________ (Seal) Notary Public My commission expires: COMMONWEALTH OF MASSACHUSETTS ) COUNTY OF ___________ ) The foregoing instrument was acknowledged before me this _____ day of ____________, 1998 by ____________________________________, the ______________ of (Northland Metro Partners Incorporated as General Partner for Northland Metro Partners Limited Partnership, as General Partner for Northland Metro Portfolio Limited Partnership, a Massachusetts limited partnership). WITNESS my hand and official seal. Signature _________________________ (Seal) Notary Public My commission expires: Record and Return to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Attn: Joseph B. Heil, Esquire EXHIBIT E PLAN OF STORAGE PREMISES EXHIBIT F METRO CENTER FITNESS CLUB USAGE AGREEMENT - -------------------------------------------------------------------------- FIRST NAME MIDDLE NAME LAST NAME __________________________________________________________________________ COMPANY NAME SUITE # - -------------------------------------------------------------------------- HOME PHONE WORK PHONE IN AN EMERGENCY, PLEASE NOTIFY: - -------------------------------------------------------------------------- NAME WORK PHONE/HOME PHONE The undersigned wishes to use the equipment and/or services of the Metro Center Fitness Club. The undersigned understands that his/her application is subject to review and approval of the Metro Center Fitness Club. Usage may be immediately terminated or suspended by the building owner (the "Owner") if the undersigned, in the judgment of the Owner, violated any rules, regulations or policies of the Metro Center Fitness Club or if the undersigned, or any guest of the undersigned, in the judgment of the Owner, conducts himself/herself in a manner detrimental to the Owner or its participants or in any manner that the Metro Center Fitness Club deems inappropriate or disruptive. As a participant, the undersigned agrees to conform to and be bound by the rules, regulations and policies of the Metro Center Fitness Club, as they may be amended from time to time. HEALTH WARRANTY AND WAIVER OF LIABILITY The undersigned hereby represents and warrants that he/she has consulted with a physician and has no disability, impairment or ailment that will prevent him/her from safely engaging in exercise or that will be detrimental or dangerous to his/her health, safety or physical condition if he/she does participate in exercising or the use of any of the facilities and services provided by the Metro Center Fitness Club to the maximum extent provided by law. The undersigned assumes any and all risks of injury, damage or property loss associated with the use of the Metro Center Fitness Club's facilities and equipment, and releases the Owner and its agents, employees and contractors from any claims, damages or loss which arises as a result of any injury, property loss or other damage sustained in or about the Metro Center Fitness Club facilities. The undersigned acknowledges that the Metro Center Fitness Club is an unattended facility and assumes all risks arising from such fact. The undersigned represents to the Owner that he/she is familiar with all the equipment in the Metro Center Fitness Club and is experienced in the safe and proper usage of said equipment. Signature___________________________________________________________ Name: Date______________________________________ METRO CENTER FITNESS CLUB Rules and Policies The following rules and policies are subject to change at any time. The Metro Center Fitness Club shall have complete charge of its facilities at all time. If you have questions or concerns, please contact the Management Office. - ------------------------------------------------------------------------ The Metro Center Fitness Club shall not be held responsible or liable by any participant for personal injury, damage or loss of property for any reason. Anyone using the Club facilities does so at their own risk. Participants must be at least eighteen (18) years of age. A fitness consultation with your physician must be performed prior to Club participation. Free temporary lockers are available in the dressing rooms during club usage. Any articles left in temporary lockers overnight will be removed by Management. Wipe off equipment after use. When using free weights, return to rack and bend knees when setting weights down. (Do not drop weights.) PARTICIPANTS ARE URGED TO AVOID BRINGING VALUABLES INTO CLUB PREMISES. THE METRO CENTER FITNESS CLUB AND ITS OWNERS, AGENTS, EMPLOYEES AND CONTRACTORS SHALL NOT BE LIABLE FOR THE LOSS OR THEFT OF, OR DAMAGE TO, THE PERSONAL PROPERTY OF CLUB PARTICIPANTS. Report damaged or loose machine parts to Management. Report any incident or accident to Management immediately. Pets are not allowed in the Club. No smoking is permitted anywhere in the Club. No alcoholic beverages or illegal substances of any kind may be brought into the Club. Violation of this rule will result in immediate termination of usage. No food is to be eaten in the Club. Be considerate of others. Loud or abusive language will not be tolerated. Personal radios anywhere in the Club are limited to headphone use. Proper attire, including shoes and shirt, must be worn at all times. Workout at a safe intensity level (not your neighbor's intensity level). THE METRO CENTER FITNESS CLUB RESERVES THE RIGHT TO ESTABLISH AND CHANGE HOURS OF OPERATION AND CLUB AVAILABILITY. EX-12 9 207 LINCOLN NATIONAL CORPORATION EXHIBIT 12 - HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, (millions of dollars) 1997(4) 1996 1995 1994 1993 Net Income before Taxes, Accounting Change and Minority Interests ................ 1427.1 692.7 626.6 376.3 587.8 Equity in the Earnings of Unconsolidated Affiliates .................... -- (1.4) (12.4) (14.6) -- Sub-total of Fixed Charges .................... 113.4 108.6 94.4 66.6 62.9 Sub-total of Adjusted Net Income ........... 1540.5 799.9 708.6 428.3 650.7 Interest on Annuities & Financial Products .... 1478.5 1435.6 1400.0 1359.0 1315.8 Adjusted Income Base ....................... 3019.0 2235.5 2108.6 1787.3 1966.5 Rent Expense .................................. 62.7 71.6 65.7 51.3 55.8 Fixed Charges: Interest and Debt Expense ..................... 92.5 84.7 72.5 49.5 44.3 Rent (Pro-rated) .............................. 20.9 23.9 21.9 17.1 18.6 Sub-total of Fixed Charges ................. 113.4 108.6 94.4 66.6 62.9 Interest on Annuities & Financial Products .... 1478.5 1435.6 1400.0 1359.0 1315.8 Sub-total of Fixed Charges ................ 1591.9 1544.2 1494.4 1425.6 1378.7 Preferred Dividends (Pre-tax) ................. .2 .2 13.4 24.2 24.2 Total Fixed Charges ........................ 1592.1 1544.4 1507.8 1449.8 1402.9 Ratio of Earnings to Fixed Charges: Excluding Interest on Annuities and Financial Products (1) .................. 13.58 7.37 7.51 6.43 10.35 Including Interest on Annuities and Financial Products (2) .................. 1.90 1.45 1.41 1.25 1.43 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (3) ............................... 1.90 1.45 1.40 1.23 1.40
(1) For purposes of determining this ratio, earnings consist of income before federal income taxes, cumulative effect of accounting change and minority interests adjusted for the difference between income or losses from unconsolidated equity investments and cash distributions from such investments, plus fixed charges. Fixed charges consist of 1) interest and debt expense on short and long-term debt and distributions to minority interest-preferred securities of subsidiary companies and 2) the portion of operating leases that are representative of the interest factor. (2) Same as the ratio of earnings to fixed charges, excluding interest on annuities and financial products, except fixed charges and earnings include interest on annuities and financial products. (3) Same as the ratio of earnings to fixed charges, including interest on annuities and financial products, except that fixed charges include the pre-tax earnings required to cover preferred stock dividend requirements. (4) Coverage ratios for 1997 are higher than other historical periods shown due to the inclusion of the gain on sale of discontinued operations (see note 11 to the consolidated financial statements on page 64). EX-21 10 - -208- EXHIBIT A ORGANIZATIONAL CHART OF THE LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM All the members of the holding company system are corporations, with the exception of, Delaware Distributors, L.P and Founders CBO, L.P. Lincoln National Corporation Indiana - Holding Company | |--| City Financial Planners, Ltd. | | 100% - Englad/Wales - Distribution of life | | assurance & pension products | |--| The Insurers' Fund, Inc. # | | 100% - Maryland - Inactive | |--| LNC Administrative Services Corporation | | 100% - Indiana - Third Party Administrator | |--| Lincoln Funds Corporation | | 100% - Delaware - Intermediate Holding Company | |--|Lincoln National Financial Institutions Group, Inc. | |(fka The Richard Leahy Corporation) | | 100% - Indiana - Insurance Agency | | | |--| The Financial Alternative, Inc. | | | 100% - Utah- Insurance Agency | | | |--| Financial Alternative Resources, Inc. | | | 100% - Kansas - Insurance Agency | | | |--| Financial Choices, Inc. | | | 100% - Pennsylvania - Insurance Agency | | | | | Financial Investment Services, Inc. | |--| (formerly Financial Services Department, Inc.) | | | 100% - Indiana - Insurance Agency | | | | | Financial Investments, Inc. | |--| (formerly Insurance Alternatives, Inc.) | | | 100% - Indiana - Insurance Agency | | | |--| The Financial Resources Department, Inc. | | | 100% - Michigan - Insurance Agency | | | |--| Investment Alternatives, Inc. | | | 100% - Pennsylvania - Insurance Agency | | | |--| The Investment Center, Inc. | | | 100% - Tennessee - Insurance Agency | | | |--| The Investment Group, Inc. | | | 100% - New Jersey - Insurance Agency | Lincoln National Corporation | | Indiana - Holding Company | | |--|Lincoln National Financial Institutions Group, Inc.| | |(fka The Richard Leahy Corporation) | | | 100% - Indiana - Insurance Agency | | | | |--| Personal Financial Resources, Inc. | | | | 100% - Arizona - Insurance Agency | | | | |--| Personal Investment Services, Inc. | | | 100% - Pennsylvania - Insurance Agency | | |--| LincAm Properties, Inc. | | | 50% - Delaware - Real Estate Investment | | | | | Lincoln Financial Group, Inc. | |--| (formerly Lincoln National Sales Corporation)| | | 100% - Indiana - Insurance Agency | | | | |--| Lincoln Financial Advisors Corporation | | | | (formerly LNC Equity Sales Corporation)| | | | 100% - Indiana - Broker-Dealer | | | | | |Corporate agencies: Lincoln Financial Group, Inc. ("LFG") | | |--|has subsidiaries of which LFG owns from 80%-100% of the | | | |common stock (see Attachment #1). These subsidiaries serve | | | |as the corporate agency offices for the marketing and | | | |servicing of products of The Lincoln National Life Insurance | | | |Company. Each subsidiary's assets are less than 1% of the | | | |total assets of the ultimate controlling person. | | | | |--| Professional Financial Planning, Inc. | | | 100% - Indiana - Financial Planning Services | | |--| Lincoln Life Improved Housing, Inc. | | | 100% - Indiana | | | |--| Lincoln National (China) Inc. | | | 100% - Indiana - China Representative Office | | | |--| Lincoln National (India) Inc. | | | 100% - Indiana - India Representative Office | | |--| Lincoln National Intermediaries, Inc. | | | 100% - Indiana - Reinsurance Intermediary | | |__| Lincoln National Investments, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | | | |--| Lincoln National Investment Companies, Inc.| | | |(fka Lincoln National Investments, Inc.) | | | | 100% - Indiana - Holding Company | | Lincoln National Corporation | | Indiana - Holding Company | | |__| Lincoln National Investments, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | |--| Lincoln National Investment Companies, Inc.| | |(fka Lincoln National Investments, Inc.) | | | 100% - Indiana - Holding Company | | | |--|Delaware Management Holdings, Inc.| | | 100% - Delaware - Holding Company| | | | |--| DMH Corp. | | | | 100% - Delaware - Holding Company | | |--| Delaware International Advisers Ltd. | | | 81.1% - England - Investment Advisor | | |--| Delaware Management Trust Company | | | 100% - Pennsylvania - Trust Service | | |__| Delaware International Holdings, Ltd. | | | 100% - Bermuda - Investment Advisor | | |--| Delaware International Advisers, Ltd.| | | 18.9% - England - Investment Advisor | |__| Delvoy, Inc. | | | 100% - Minnesota - Holding Company | | |--| Delaware Management Company, Inc. | | | 100% - Delaware - Investment Advisor | | |--| Delaware Distributors, L.P. | |98%-Delaware-MutualFund Distributor| | & Broker/Dealer | |1% Equity-Delaware Capital | | Management, Inc. | |1% Equity-Delaware Distributors, Inc.| | |--| Founders Holdings, Inc. | | | 100% - Delaware - General Partner | | |--| Founders CBO, L.P. | |1%-Delaware-Investment Partnership | |99% held by outside investors | | |--|Founders CBO Corporation | | |100%-Delaware-Co-Issuer with| | |Founders CBO | | Lincoln National Corporation | | Indiana - Holding Company | | |__| Lincoln National Investments, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | |--| Lincoln National Investment Companies, Inc.| | |(fka Lincoln National Investments, Inc.) | | | 100% - Indiana - Holding Company | | |--|Delaware Management Holdings, Inc.| | 100% - Delaware - Holding Company| | |--| DMH Corp. | | | 100% - Delaware - Holding Company | | |__| Delvoy, Inc. | | 100% - Minnesota - Holding Company | | |--| Delaware Distributors, Inc. | | | 100% - Delaware - General Partner | | |--| Delaware Distributors, L.P. | |98%-Delaware-MutualFund Distributor | & Broker/Dealer | |1% Equity-Delaware Capital | | Management, Inc. | |1% Equity-Delaware Distributors, Inc.| | |--| Delaware Capital Management, Inc. | | |(formerly Delaware Investment Counselors, | | | Inc.) | | |100% - Delaware - Investment Advisor | | |--| Delaware Distributors, L.P. | |98%-Delaware-MutualFund Distributor| | & Broker/Dealer | |1% Equity-Delaware Capital | | Management, Inc. | |1% Equity-Delaware Distributors, Inc.| | |--| Delaware Service Company, Inc. | | | 100%-Delaware-Shareholder Services &| | Transfer Agent | | |__| Delaware Investment & Retirement | | | Services, Inc. | | | 100%-Delaware-Registered Transfer Agent | | |--| Lynch & Mayer, Inc. | | | 100% - Indiana - Investment Adviser | | | | |--| Lynch & Mayer Asia, Inc. | | |100% - Delaware - Investment Management | | |--| Lynch & Mayer Securities Corp. | | 100% - Delaware - Securities Broker | | | | Vantage Global Advisors, Inc. | |--| (formerly Modern Portfolio Theory Associates, Inc.)| | | 100% - Delaware - Investment Adviser | | Lincoln National Corporation | | Indiana - Holding Company | | |__| Lincoln National Investments, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | | | Lincoln Investment Management, Inc. | |--| (formerly Lincoln National Investment Management Company) | | | 100% - Illinois - Mutual Fund Manager and | | | Registered Investment Adviser | | |--| The Lincoln National Life Insurance Company | | | 100% - Indiana | |--|AnnuityNet, Inc. | | |100% - Indiana - Distribution of annuity products | | |--|Cigna Associates, Inc. | | | 100% - Connecticut - Insurance Agency | | | Cigna Associates of Massachusetts, Inc. | |--| 100% - Massachusetts - Insurance Agency | | |--|Cigna Financial Advisors, Inc. | | | 100% - Connecticut - Broker Dealer | | |--| First Penn-Pacific Life Insurance Company | | | 100% - Indiana | | |--| Lincoln Life & Annuity Company of New York | | | 100% - New York | | |--| Lincoln National Aggressive Growth Fund, Inc. | | | 100% - Maryland - Mutual Fund | | |--| Lincoln National Bond Fund, Inc. | | | 100% - Maryland - Mutual Fund | | |--| Lincoln National Capital Appreciation Fund, Inc. | | | 100% - Maryland - Mutual Fund | | |--| Lincoln National Equity-Income Fund, Inc. | | | 100% - Maryland - Mutual Fund | | | Lincoln National Global Asset Allocation Fund, Inc. | |--| (formerly Lincoln National Putnam Master Fund, Inc.) | | | 100% - Maryland - Mutual Fund | | | | Lincoln National Growth and Income Fund, Inc. | |--| (formerly Lincoln National Growth Fund, Inc.) | | | 100% - Maryland - Mutual Fund | | Lincoln National Corporation | | Indiana - Holding Company | | |--| The Lincoln National Life Insurance Company | | | 100% - Indiana | | |--| Lincoln National Health & Casualty Insurance Company | | | 100% - Indiana | | |--| Lincoln Re, S.A. | | | 1% Argentina - General Business Corp | | | (Remaining 99% owned by Lincoln National | | | Reassurance Company) | | |--| Lincoln National International Fund, Inc. | | | 100% - Maryland - Mutual Fund | | |--| Lincoln National Managed Fund, Inc. | | | 100% - Maryland - Mutual Fund | | |--| Lincoln National Money Market Fund, Inc. | | | 100% - Maryland - Mutual Fund | | |--| Lincoln National Social Awareness Fund, Inc. | | | 100% - Maryland - Mutual Fund | | |--| Lincoln National Special Opportunities Fund, Inc. | | | 100% - Maryland - Mutual Fund | | |--| Lincoln National Reassurance Company | | 100% - Indiana - Life Insurance | | |--| Lincoln Re, S.A. | | | 99% Argentina - General Business Corp | | | (Remaining 1% owned by Lincoln National Health| | | & Casualty Insurance Company) | | |--| Special Pooled Risk Administrators, Inc. | | 100% - New Jersey - Catastrophe Reinsurance | | Pool Administrator | | |--| Lincoln National Management Services, Inc. | | | 100% - Indiana - Underwriting and Management Services | | |--| Lincoln National Realty Corporation | | | 100% - Indiana - Real Estate | | |--| Lincoln National Reinsurance Company (Barbados) Limited | | | 100% - Barbados | | |--| Lincoln National Reinsurance Company Limited | | | (formerly Heritage Reinsurance, Ltd.) | | | 100% ** - Bermuda | | |--| Lincoln European Reinsurance S.A. | | | 79% - Belgium | | | (Remaining 21% owned by Lincoln National Underwriting | | | Services, Ltd. | | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National Reinsurance Company Limited | | | (formerly Heritage Reinsurance, Ltd.) | | | 100% ** - Bermuda | | | | Lincoln National Underwriting Services, Ltd. | |--| 90% - England/Wales - Life/Accident/Health Underwriter | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) | |--| Lincoln European Reinsurance S.A. | | | 21% - Belgium | | |(Remaining 79% owned by Lincoln National Reinsurance| | | Company Limited | | | | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. | |--| 51% - Mexico - Reinsurance Underwriter | | (Remaining 49% owned by Lincoln National Corp.) | | |--| Lincoln National Risk Management, Inc. | | | 100% - Indiana - Risk Management Services | | |--| Lincoln National Structured Settlement, Inc. | | | 100% - New Jersey | | |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | | | |--| Allied Westminster & Company Limited | | | (formerly One Olympic Way Financial Services Limited) | | | 100% - England/Wales - Sales Services | | |--|Cannon Fund Managers Limited | | | 100% - England/Wales - Inactive | | |--| Culverin Property Services Limited | | | 100% - England/Wales - Property Development Services | | |--| HUTM Limited | | | 100% - England/Wales - Unit Trust Management (Inactive) | | |--| ILI Supplies Limited | | | 100% - England/Wales - Computer Leasing | | | |--| Lincoln Financial Advisers Limited | | | (formerly: Laurentian Financial Advisers Ltd.) | | | 100% - England/Wales - Sales Company | | |--| Lincoln Financial Group PLC | | | (formerly: Laurentian Financial Group PLC) | | | 100% - England/Wales - Holding Company | | |--| Lincoln Unit Trust Management Limited | |(formerly: Laurentian Unit Trust Management Limited)| | 100% - England/Wales - Unit Trust Management | | |--| LUTM Nominees Limited | | |100% - England/Wales - Nominee Services (Dormat)| | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | |--| Lincoln Financial Group PLC | | | (formerly: Laurentian Financial Group PLC) | | | 100% - England/Wales - Holding Company | | | |--| Lincoln Milldon Limited | | |(formerly: Laurentian Milldon Limited) | | | 100% - England/Wales - Sales Company | | |--| Laurtrust Limited | | 100% - England/Wales - Pension Scheme Trustee (Inactive) | | |--| Lincoln Management Services Limited | | |(formerly: Laurentian Management Services Limited)| | | 100% - England/Wales - Management Services | | |--|Laurit Limited | | |100% - England/Wales - Data Processing Systems | | |--| Liberty Life Pension Trustee Company Limited | | | 100% - England/Wales - Corporate Pension Fund (Dormat) | | |--| LN Management Limited | | | 100% - England/Wales - Administrative Services (Dormat) | | |--| UK Mortgage Securities Limited | | 100% - England/Wales - Inactive | | |--| Liberty Press Limited | | | 100% - England/Wales - Printing Services | | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | |--| Lincoln General Insurance Co. Ltd. | | | 100% - Accident & Health Insurance | | |--|Lincoln Assurance Limited | | |100% ** - England/Wales - Life Assurance | | |--|Barnwood Property Group Limited | | |100% - England/Wales - Property Management Co| | |--| Barnwood Developments Limited | | | 100% England/Wales - Property Development| | |--| Barnwood Properties Limited | | | | 100% - England/Wales - Property Investment | | |--|IMPCO Properties G.B. Ltd. | |100% - England/Wales - Property Investment (Inactive)| | |--| Lincoln Insurance Services Limited | | | 100% - Holding Company | | |--| British National Life Sales Ltd.| | | 100% - Inactive | | |--| BNL Trustees Limited | | | 100% - England/Wales - Corporate Pension | | | Fund (Inactive) | | |--| Chapel Ash Financial Services Ltd. | | | 100% - Direct Insurance Sales | | |--| P.N. Kemp-Gee & Co. Ltd. | | | 100% - Inactive | | Lincoln National Corporation | | Indiana - Holding Company | | | |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | |--| Lincoln Unit Trust Managers Limited | | | 100% - England/Wales - Investment Management | | |--| LIV Limited (formerly Lincoln Investment Management Ltd.)| | | 100% - England/Wales - Investment Management Services | | | |--| CL CR Management Ltd. | | 50% - England/Wales - Administrative Services | |--| Lincoln Independent Limited | | |(formerly: Laurentian Independent Financial Planning Ltd.) | | | 100% - England/Wales - Independent Financial Adviser | | | |--| Lincoln Investment Management Limited | | |(formerly: Laurentian Fund Management Ltd.) | | | 100% - England/Wales - Investment Management | | |--| LN Securities Limited | | | 100% - England/Wales - Nominee Company | | |--| Niloda Limited | | | 100% - England/Wales - Investment Company | | |--| Lincoln National Training Services Limited | | | 100% - England/Wales - Training Company | | |--| Lincoln Pension Trustees Limited | | | 100% - England/Wales - Corporate Pension Fund | | |--| Lincoln National (Jersey) Limited | | | 100% - England/Wales - Dormat | | |--| Lincoln National (Guernsey) Limited | | | 100% - England/Wales - Dormat | | |--| Lincoln SBP Trustee Limited | | | 100% - England/Wales | | Lincoln National Corporation | | Indiana - Holding Company | | | | Linsco Reinsurance Company | |--| (formerly Lincoln National Reinsurance Company) | | | 100% - Indiana - Property/Casualty | | | |--| Old Fort Insurance Company, Ltd. | | | 100% ** - Bermuda | | | | Lincoln National Underwriting Services, Ltd. | |--| 10% - England/Wales - Life/Accident/Health Underwriter | | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) | | | | Solutions Holdings, Inc. | |--| 100% - Delaware - General Business Corporation | | |--|Solutions Reinsurance Limited | | | 100% - Bermuda - Class III Insurance Co| | | | Seguros Serfin Lincoln, S.A. | |--| 49% - Mexico - Insurance | | | | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. | |--| 49% - Mexico - Reinsurance Underwriter | | | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) | | | |--| Underwriters & Management Services, Inc. | | 100% - Indiana - Underwriting Services | Footnotes: * The funds contributed by the Underwriters were, and continue to be subject to trust agreements between American States Insurance Company, the grantor, and each Underwriter, as trustee. ** Except for director-qualifying shares # Lincoln National Corporation has subscribed for and paid for 100 shares of Common Stock (with a par value of $1.00 per share) at a price of $10 per share, as part of the organizing of the fund. As such stock is further sold, the ownership of voting securities by Lincoln National Corporation will decline and fluctuate. 11 ATTACHMENT #1 LINCOLN FINANCIAL GROUP, INC. CORPORATE AGENCY SUBSIDIARIES 1) Lincoln Financial Group, Inc. (AL) 2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ) 3) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA) 3a) California Fringe Benefit and Insurance Marketing Corporation DBA/California Fringe Benefit Company (Walnut Creek, CA) 4) Colorado-Lincoln Financial Group, Inc. (Denver, CO) 5) Lincoln National Financial Services, Inc. (Lake Worth, FL) 6) CMP Financial Services, Inc. (Chicago, IL) 7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN) 8) Financial Planning Partners, Ltd. (Mission, KS) 9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA) 10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD) 11) Lincoln Financial Services and Insurance Brokerage of New England, Inc. (formerly: Lincoln National of New England Insurance Agency, Inc.) (Worcester, MA) 12) Lincoln Financial Group of Michigan, Inc. (Troy, MI) 12a) Financial Consultants of Michigan, Inc. (Troy, MI) 13) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore & Associates, Inc.) (St. Louis, MO) 14) Beardslee & Associates, Inc. (Clifton, NJ) 15) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc. (Albuquerque, NM) 16) Lincoln Cascades, Inc. (Portland, OR) 17) Lincoln Financial Group, Inc. (Salt Lake City, (UT) EX-23 11 -221- LINCOLN NATIONAL CORPORATION EXHIBIT 23 - CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Forms S-3 and S-8 (Securities and Exchange Commission Registration Numbers 33-51415, 33-51721, 33-58113, 33-52667, 33-59785, 33-04711, 33-13445, 33-62315, 333-04133, and 333-32667) of Lincoln National Corporation and in the related Prospectuses of our report dated February 5, 1998, with respect to the consolidated financial statements and schedules of Lincoln National Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1997. /S/ ERNST & YOUNG LLP Fort Wayne, Indiana March 16, 1998 EX-27 12 ARTICLE 7 FDS FOR 10-K
7 This schedule contains summary financial information extracted from the condensed consolidated financial statements of Lincoln National Corporation and is qualified in its entirety by reference to such condensed consolidated financial statements. 0000059558 Lincoln National Corporation YEAR DEC-31-1997 JAN-31-1997 DEC-31-1997 24,066,376,000 0 0 660,428,000 3,288,112,000 575,956,000 29,818,846,000 3,794,706,000 2,350,766,000 1,623,845,000 71,174,708,000 11,266,272,000 0 0 20,063,393,000 1,123,245,000 0 1,153,000 966,461,000 4,015,301,000 71,174,708,000 2,160,888,000 2,250,764,000 486,827,000 3,191,733,000 715,915,000 863,426,000 715,915,000 34,881,000 12,651,000 22,230,000 911,758,000 0 0 933,988,000 9.11 8.98 0 0 0 0 0 0 0
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