UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended June 30, 1998 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
As of June 30, 1998 LNC had 100,521,755 shares of Common Stock outstanding.
Indicate by check mark whether 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 for such shorter periods 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 [ ]
The exhibit index to this report is located on page 20.
Page 1 of 50
<PAGE>
2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
(000's omitted) 1998 1997
--------------- ---- ----
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity (cost 1998 - $26,233,485;
1997 - $22,626,036)......................................... $27,786,933 $24,066,376
Equity (cost 1998 - $528,450;
1997 - $517,156)............................................ 648,873 660,428
Mortgage loans on real estate................................... 4,434,864 3,288,112
Real estate..................................................... 498,985 575,956
Policy loans.................................................... 1,499,597 763,148
Other investments............................................... 402,572 464,826
---------- -----------
Total Investments............................................. 35,271,824 29,818,846
Investment in unconsolidated affiliates........................... 23,143 20,975
Cash and invested cash............................................ 2,414,114 3,794,706
Property and equipment............................................ 191,667 189,811
Deferred acquisition costs........................................ 1,749,263 1,623,845
Premiums and fees receivable...................................... 250,828 197,509
Accrued investment income......................................... 508,029 423,008
Assets held in separate accounts.................................. 42,247,222 37,138,845
Amounts recoverable from reinsurers............................... 2,373,512 2,350,766
Federal income taxes.............................................. 188,888 --
Goodwill.......................................................... 1,168,693 457,729
Other intangible assets........................................... 1,255,007 613,909
Other assets...................................................... 722,430 544,759
----------- -----------
Total Assets.................................................. $88,364,620 $77,174,708
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<PAGE>
3
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
<TABLE>
<CAPTION>
June 30 December 31
(000's omitted) 1998 1997
--------------- ---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance and Investment Contract Liabilities:
Insurance policy and claim reserves.................................. $17,452,405 $11,266,272
Contractholder funds................................................. 19,403,500 20,063,393
Liabilities related to separate accounts ........................... 42,247,222 37,138,845
----------- ----------
Total Insurance and Investment Contract Liabilities............... 79,103,127 68,468,510
Federal income taxes................................................... -- 487,805
Short-term debt........................................................ 277,080 297,208
Long-term debt......................................................... 811,759 511,037
Minority interest - preferred securities
of subsidiary companies.............................................. 315,000 315,000
Other liabilities...................................................... 2,706,807 2,112,233
----------- ----------
Total Liabilities................................................. 83,213,773 72,191,793
Shareholders' Equity:
Series A preferred stock-10,000,000 shares authorized
(6/30/98 liquidation value - $2,729).................................. 1,120 1,153
Common stock - 800,000,000 shares authorized........................... 969,424 966,461
Retained earnings...................................................... 3,658,947 3,533,105
Accumulated Other Comprehensive Income:
Foreign currency translation adjustment.............................. 51,808 46,204
Net unrealized gain on securities available-for-sale................. 469,548 435,992
---------- ----------
Total Accumulated Other Comprehensive Income...................... 521,356 482,196
---------- ----------
Total Shareholders' Equity........................................ 5,150,847 4,982,915
------------ ----------
Total Liabilities and Shareholders' Equity ...................... $88,364,620 $77,174,708
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<PAGE>
4
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
(000's omitted, except per share amounts) 1998 1997 1998 1997
----------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Insurance premiums ......................................... $ 721,565 $ 630,414 $ 373,976 $ 273,403
Insurance fees.............................................. 628,301 391,391 328,407 198,000
Investment advisory fees ................................ 117,040 100,463 59,161 56,120
Net investment income....................................... 1,317,079 1,117,185 658,720 557,825
Equity in earnings of unconsolidated affiliates............. 1,538 1,274 41 425
Realized gain on investments ............................ 49,463 14,636 25,540 2,526
Other revenue and fees ................................... 120,526 70,779 61,648 39,772
---------- ---------- ---------- ----------
Total Revenue............................................ 2,955,512 2,326,142 1,507,493 1,128,071
Benefits and Expenses:
Benefits.................................................... 1,583,140 1,419,198 795,903 714,876
Underwriting, acquisition,
insurance and other expenses ............................ 942,274 836,961 471,273 479,578
Interest and debt expense ................................. 51,040 45,534 27,672 23,199
---------- ---------- ---------- ---------
Total Benefits and Expenses ............................ 2,576,454 2,301,693 1,294,848 1,217,653
---------- ----------- ---------- ---------
Net Income (Loss) From Continuing Operations
Before Federal Income Taxes .......................... 379,058 24,449 212,645 (89,582)
Federal income taxes ..................................... 108,336 (10,613) 63,966 (41,624)
--------- ---------- ---------- ---------
Net Income (Loss) From Continuing Operations ......... 270,722 35,062 148,679 (47,958)
Discontinued Operations (Net of income taxes):
Net income prior to disposal................................ -- 88,519 -- 40,197
Gain on sale ............................................. -- -- -- --
--------- ---------- --------- ----------
Net Income (Loss) ...................................... $ 270,722 $ 123,581 $ 148,679 $ (7,761)
Earnings Per Common Share-Basic:
Restated Restated
Net Income (Loss) From Continuing Operations ......... $2.70 $ .34 $1.48 $(.46)
Discontinued Operations..................................... -- .85 -- .39
------ ----- ----- -----
Net Income (Loss) .................................. $2.70 $1.19 $1.48 $(.07)
Earnings Per Common Share-Diluted:
Net Income (Loss) From Continuing Operations ......... $2.66 $ .34 $1.46 $(.46)
Discontinued Operations..................................... -- .84 -- .39
------ ----- ------ -----
Net Income (Loss)........................................ $2.66 $1.18 $1.46 $(.07)
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<PAGE>
5
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Six Months Ended June 30
Number of Shares Amounts
(000's omitted from dollar amounts) 1998 1997 1998 1997
----------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Series A Preferred Stock:
Balance at beginning-of-year ................. 35,091 36,885 $ 1,153 $ 1,212
Conversion into common stock ................. (983) (1,154) (33) (38)
------ --------- ---- -------
Balance at June 30....................... 34,108 35,731 1,120 1,174
Common Stock:
Balance at beginning-of-year ................. 100,859,478 103,658,575 966,461 904,331
Conversion of series A preferred stock........ 7,864 9,232 33 38
Issued for benefit plans ................... 277,694 253,878 8,902 5,271
Issued for purchase of subsidiary............. -- 1,320,902 -- 68,688
Retirement of common stock ................... (623,281) (1,232,700) (5,972) (10,760)
------------ ----------- --------- -------
Balance at June 30 ..................... 100,521,755 104,009,887 969,424 967,568
Retained Earnings:
Balance at beginning-of-year.................. 3,533,105 3,082,368
Comprehensive income.......................... 309,882 116,206
Less other comprehensive income (loss):
Foreign currency translation.................. 5,604 (19,480)
Net unrealized gain on securities
available-for-sale........................... 33,556 12,105
-------- ---------
Net Income............................... 270,722 123,581
Retirement of common stock.................... (40,899) (63,219)
Dividends declared:
Series A preferred ($1.50 per share).......... (51) (54)
Common stock (1998-$1.04 1997-$.98)........... (103,930) (101,346)
---------- ---------
Balance at June 30....................... 3,658,947 3,041,330
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning-of-year........................... 46,204 66,454
Change during the period...................... 5,604 (19,480)
--------- -------
Balance at June 30....................... 51,808 46,974
Net Unrealized Gain on
Securities Available-for-Sale:
Balance at beginning-of-year.................. 435,992 415,591
Change during the period...................... 33,556 12,105
-------- --------
Balance at June 30....................... 469,548 427,696
Total Shareholders' Equity at June 30.... $5,150,847 $4,484,742
Common Stock at End of Quarter:
Assuming conversion of preferred stock........ 100,794,619 104,295,735
Diluted basis................................. 102,254,815 105,455,162
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<PAGE>
6
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30
(000's omitted) 1998 1997
--------------- ---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................................. $ 270,722 $ 123,581
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred acquisition costs.......................................... (72,684) 46,422
Premiums and fees receivable........................................ (55,548) 29,466
Accrued investment income........................................... (7,492) (17,765)
Policy liabilities and accruals..................................... 192,605 (66,961)
Contractholder funds................................................ 395,020 492,603
Amounts recoverable from reinsurers................................. (23,268) 23,996
Federal income taxes................................................ (92,873) (103,251)
Equity in earnings of unconsolidated affiliates..................... (1,538) (1,274)
Provisions for depreciation ...................................... 29,700 29,034
Amortization of goodwill and other intangible assets................ 63,342 50,327
Realized gain on investments........................................ (49,463) (14,636)
Other............................................................... (33,869) (84,961)
-------- ------
Net Adjustments................................................... 343,932 383,000
------- -------
Net Cash Provided by Operating Activities......................... 614,654 506,581
Cash Flows from Investing Activities:
Securities-available-for-sale:
Purchases............................................................. (5,484,270) (6,010,834)
Sales................................................................. 4,268,177 5,131,987
Maturities............................................................ 1,045,495 759,903
Purchase of other investments........................................... (662,783) (814,069)
Sale or maturity of other investments................................... 873,285 890,332
Purchase of affiliates/blocks of business............................... (1,426,000) --
Increase in cash collateral on loaned securities........................ 110,509 219,108
Other .................................................................. 106,081 273,565
---------- -------
Net Cash Provided by (Used in) Investing Activities............... (1,169,506) 449,992
Cash Flows from Financing Activities:
Principal payments on long-term debt.................................... (74) (113,299)
Issuance of long-term debt.............................................. 300,797 329
Net increase (decrease) in short-term debt.............................. (20,127) 168,474
Universal life and investment contract deposits......................... 492,069 655,465
Universal life and investment contract withdrawals...................... (1,455,908) (1,369,638)
Common stock issued for benefit plans................................... 8,902 5,271
Retirement of common stock.............................................. (46,871) (73,979)
Dividends paid to shareholders.......................................... (104,528) (101,134)
---------- ---------
Net Cash Used in Financing Activities............................. (825,740) (828,511)
Net Increase (Decrease) in Cash................................... (1,380,592) 128,062
Cash at Beginning-of-Year................................................. 3,794,706 1,144,766
---------- ---------
Cash at June 30................................................... $2,414,114 $1,272,828
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<PAGE>
7
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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. Less than majority-owned
entities in which LNC has at least a 20% interest are reported on the equity
basis. These unaudited consolidated statements have been prepared in conformity
with generally accepted accounting principles, except that they do not contain
complete notes. However, in the opinion of management, these statements include
all normal recurring adjustments necessary for a fair presentation of the
results. These financial statements should be read in conjunction with the
consolidated audited financial statements and the accompanying notes included in
LNC's latest annual report on Form 10-K for the year ended December 31, 1997.
Operating results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the full year ending
December 31, 1998.
2. Accounting for Derivative Instruments and Hedging Activities ("FAS 133")
The Financial Accounting Standards Board issued FAS 133 in June 1998. This
standard indicates that adoption may occur immediately or be delayed to as late
as the first quarter of 2000. While LNC has not completed the analysis necessary
to provide a precise estimate of the effect of this statement or to specify the
quarter in which it plans to adopt the standard, it is not expected to have a
material effect on LNC's financial position or results of operations.
3. Federal Income Taxes
The effective tax rate on net income is lower than the prevailing corporate
federal income tax rate. The difference for both 1998 and 1997 resulted
principally from tax-preferred investment income.
4. Debt
In March, 1998 LNC issued notes of 1) $100 million, 6.5% due 2008 and 2) $200
million, 7% due 2018. The proceeds from these offerings were 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.
5. Change in Estimate for Disability Income Reserve
During the second quarter of 1997, LNC completed an in-depth review of
experience on its disability income business. As a result of this study, LNC's
Reinsurance segment strengthened its disability income reserve by $92.8 million,
wrote-off deferred acquisition costs of $71.1 million and reduced related assets
by $36.1 million. Combined, these actions reduced net income by $130 million or
$1.25 per diluted share ($200 million pre-tax).
6. Contingencies
Disability Income Claims. The liability for disability income claims net of the
related asset for amounts recoverable from reinsurers at June 30, 1998 and
December 31, 1997 is a net liability of $1.810 billion and $1.654 billion,
respectively, excluding deferred acquisition costs. Both net liability amounts
include the impact of the special addition in the second quarter of 1997 (see
note 5 above). 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 on-going basis.
<PAGE>
8
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
individuals put in a position similar to what would have been attained if they
had remained in the employer sponsored plan. At June 30, 1998 and December 31,
1997 liabilities of $244.1 million and $291.0 million, respectively, had been
established for this issue. The decrease in the level of the reserve reflects
the settlement payouts that have occurred during the six months ended June 30,
1998. 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. The expected recoveries from previous owners
of companies acquired over the last few years as specified in the
indemnification clauses of the purchase agreements were $114.1 million and
$113.0 million at June 30, 1998 and December 31, 1997, respectively. 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 other insurance companies. Certain excess of loss
personal accident reinsurance programs created in the London market during
1993-1996 are producing much higher claims than expected at the time the
programs were written. The loss reserves for these programs net of related
assets recoverable from reinsurers at June 30, 1998 and December 31, 1997 were
$182.3 million and $186.3 million, respectively. This liability is based on
various estimates that are subject to considerable uncertainty. Accordingly,
this liability may prove to be deficient or excessive. However, it is
management's opinion that future developments in these programs will not
materially affect the consolidated financial position of LNC.
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 future developments related to
marketing and compliance issues will not materially affect the consolidated
financial position of LNC.
Group Pension Annuities. The liabilities for guaranteed interest and group
pension annuity contracts 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 the future development in this business will not
materially affect the consolidated financial position of LNC.
Legal Proceedings. LNC and its subsidiaries are involved in various pending or
threatened legal proceedings arising from the conduct of business. Most of this
litigation is 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.
Three lawsuits involving alleged fraud in the sale of interest sensitive
universal and whole life insurance policies have been filed as class actions
against Lincoln Life, although the court has not certified a class in any of
these cases. 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.
<PAGE>
9
7. Segment Disclosures
The following tables show financial data by segment:
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30 Ended June 30
(in millions) 1998 1997 1998 1997
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Life Insurance and Annuities.................................... $1,830.4 $1,360.2 $ 927.6 $ 681.2
Lincoln UK...................................................... 227.7 202.2 124.2 103.0
Reinsurance..................................................... 729.6 649.3 376.8 285.9
Investment Management........................................... 153.0 117.5 76.3 64.1
Other Operations (includes consolidating adjustments)........... 14.8 (3.1) 2.6 (6.1)
--------- --------- -------- --------
Total......................................................... $2,955.5 $2,326.1 $1,507.5 $1,128.1
Net Income (Loss) from Continuing
Operations before Federal Income Taxes:
Life Insurance and Annuities.................................... $261.1 $ 166.5 $ 161.9 $ 88.7
Lincoln UK...................................................... 58.8 48.4 32.0 24.8
Reinsurance..................................................... 79.2 (133.2) 35.1 (167.0)
Investment Management........................................... 19.3 5.0 10.5 4.3
Other Operations (includes interest expense).................... (39.4) (62.2) (26.9) (40.4)
----- ----- -------- ------
Total......................................................... $379.0 $ 24.5 $ 212.6 $(89.6)
Federal Income Taxes (Credits):
Life Insurance and Annuities.................................... $ 64.9 $ 43.3 $ 44.0 $23.1
Lincoln UK...................................................... 24.1 14.1 14.7 7.4
Reinsurance..................................................... 27.8 (47.0) 12.3 (58.3)
Investment Management........................................... 9.0 4.4 4.8 3.0
Other Operations................................................ (17.5) (25.4) (11.9) (16.8)
----- ----- ----- -----
Total......................................................... $108.3 $ (10.6) $ 63.9 $(41.6)
Net Income (Loss) from Continuing Operations:
Life Insurance and Annuities.................................... $196.2 $ 123.2 $117.9 $ 65.6
Lincoln UK...................................................... 34.7 34.3 17.3 17.4
Reinsurance..................................................... 51.4 (86.2) 22.8 (108.7)
Investment Management........................................... 10.3 .6 5.7 1.3
Other Operations (includes interest expense).................... (21.9) (36.8) ( 15.0) (23.6)
----- ---- ------ ------
Total Net Income (Loss ) from Continuing Operations........... 270.7 35.1 148.7 (48.0)
Discontinued Operations......................................... -- 88.5 -- 40.2
-------- ------ ------ ------
Total Net Income (Loss)....................................... $270.7 $ 123.6 $148.7 $ (7.8)
</TABLE>
<TABLE>
<CAPTION>
June 30 December 31
(in millions) 1998 1997
------------- ---- ----
<S> <C> <C>
Assets:
Life Insurance and Annuities.................................... $72,019.4 $60,604.4
Lincoln UK...................................................... 8,700.2 7,923.8
Reinsurance..................................................... 6,052.1 5,540.2
Investment Management........................................... 697.6 697.4
Other Operations................................................ 895.3 2,408.9
--------- ---------
Total......................................................... $88,364.6 $77,174.7
</TABLE>
Reinsurance's net income for the 1997 periods includes a $130.0 million
after-tax ($200.0 million pre-tax) reserve strengthening for its disability
income business. Life Insurance and Annuities' revenue, net income and assets
increased in 1998 compared to 1997 due to the addition of a block of individual
life insurance and annuity business (see note 10 on page 10).
<PAGE>
10
8. Earnings Per Share
Financial Accounting Standard No. 128 entitled "Earnings per Share" was adopted
in the fourth quarter of 1997. All prior period earnings per share amounts have
been restated to conform to the provisions of this standard. Per share amounts
for net income from continuing operations are shown in the income statement
using 1) an earnings per common share basic calculation and 2) an earnings per
common share-assuming dilution calculation. Reconciliations of the factors used
in the two calculations are as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator: [in millions]
Net income (loss) from continuing operations,
as used in basic calculation........................ $270.6 $123.5 $148.7 $(7.8)
Dividends on convertible preferred stock............. .1 .1 * *
------- --------- -------- ------
Net income (loss) from continuing
operations, as used in diluted calculation...... $270.7 $123.6 $148.7 $(7.8)
Denominator: [number of shares]
Weighted average shares,
as used in basic calculation........................ 100,260,000 103,441,782 100,304,224 103,883,397
Shares to cover conversion of preferred stock........ 275,778 291,408 273,714 288,336
Shares to cover restricted stock..................... 174,622 205,231 163,147 194,880
Average stock options outstanding
during the period................................... 3,209,984 2,949,125 3,214,219 2,859,301
Assumed acquisition of shares with assumed
proceeds from exercising stock options (at
average market price during the period) ........... (1,948,340) (1,950,744) (1,988,039) (1,819,347)
----------- ----------- ----------- -----------
Weighted-average shares, as
used in diluted calculation.................. 101,972,044 104,936,802 101,967,265 105,406,567
</TABLE>
* Less than $100,000.
9. Discontinued Operations
On June 9, 1997, LNC announced that it agreed to sell its 83.3% ownership in
American States Financial Corporation for $2.65 billion. As this sale resulted
in an exit from the property-casualty business (previously a business segment),
the financial data for periods prior to the closing date related to the units
being sold is shown as discontinued operations in the accompanying consolidated
financial statements. June 9, 1997 is the measurement date for purposes of
reporting the units sold as discontinued operations. The gain on sale of $1.225
billion ($776.9 million after-tax) resulting from the October 1, 1997 closing
was reported with discontinued operations in the fourth quarter of 1997. LNC
used most of the proceeds from this sale to expand its other businesses (see
note 10 below) and repurchased $341.8 million of its own common stock as
authorized by the Board of Directors in June of 1997.
10. Acquisition of Individual Life Insurance and Annuity Business
On January 2, 1998, LNC acquired a block of individual life insurance and
annuity business for $1.414 billion. Additional funds of $228.5 million were
required to cover expenses associated with the purchase and to provide
additional capital for the Life Insurance and Annuities segment to support this
business. This transaction was accounted for using purchase accounting and,
accordingly, operating results generated by this block of business after the
closing date are included in LNC's consolidated financial statements. At the
time of closing this block of business had liabilities, measured on a statutory
basis, of approximately $5.5 billion that became LNC's obligations. LNC also
received assets, measured on a historical statutory basis, equal to the
liabilities. The application of purchase accounting to this block of business
indicates that goodwill and other intangible assets will be approximately $725
million and $685 million, respectively. The additional analysis of this block of
business during the remainder of 1998 may result in a change in the amounts or
the shifting of amounts between goodwill and other intangible assets.
<PAGE>
11
During the first quarter of 1998, in connection with this acquisition, LNC
recorded a charge to its Life Insurance and Annuities segment of $20.0 million
($30.8 million pre-tax). This charge was for certain costs of integrating the
new block of business with existing operations.
On May 21, 1998, LNC announced that it signed a definitive agreement to acquire
a block of individual life business from Aetna, Inc. for $1.0 billion. This
acquisition is expected to involve additional expenditures to cover expenses
associated with the purchase and to provide additional capital to the Life
Insurance and Annuities segment to support this business totaling approximately
$165 million. This transaction will be accounted for using purchase accounting
and, accordingly, the operating results generated by this block of business
after the closing will be included in LNC's consolidated financial statements
from the closing date. As of June 30, 1998, this block of business had
liabilities, measured on a statutory basis, of $3.0 billion. The liabilities as
updated to the closing date will become LNC's obligation at the time of closing.
LNC will also receive assets, measured on a historic statutory basis, equal to
the liabilities. During 1997, this block produced premiums and fees of $277
million and net income of $77 million on the basis of generally accepted
accounting principles (prior to adjustments required by purchase accounting). An
initial application of purchase accounting to this block of business would
indicate that goodwill and other intangible assets will be approximately $300
million and $800 million, respectively. The additional analysis of this block of
business after closing could result in a change in the amounts or the shifting
of amounts between goodwill and other intangible assets. Approximately one-half
of the funding for this acquisition will come from available funds within the
consolidated group. The other half will be obtained from the proceeds of public
securities offerings from available shelf registrations.
11. Subsequent Event
On July 10, 1998 LNC filed a Prospectus Supplement with the Securities and
Exchange Commission for a take-down of $200 million of Series C Trust Originated
Preferred Securities ("Series C TOPrS") from a previously filed shelf
registration. These securities were priced on July 17, 1998 to have a dividend
rate of 7.40% and funds were received on July 24, 1998. As noted above, these
funds will be used to fund a portion of the purchase of a block of individual
life business being acquired from Aetna, Inc.
<PAGE>
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
The pages to follow review LNC's results of consolidated 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.
REVIEW OF CONSOLIDATED OPERATIONS
The discussion that follows focuses on net income from continuing operations for
the six months ended June 30, 1998 compared to the results for the six months
ended June 30, 1997. The factors affecting the current quarter to prior year
quarter comparisons are essentially the same as the year-to-date factors except
as noted. As a result of the purchase of a block of individual life insurance
and annuity business (see note 10 on page 10) select income statement accounts
increased in 1998 versus 1997. Increases over comparable 1997 periods are
expected to continue for the remainder of 1998.
Life Insurance and Annuity Premiums
Life insurance and annuity premiums for the first six months of 1998 increased
$48.6 million or 14% compared with the first six months of 1997. This increase
is the result of increases in business volume from the Life Insurance &
Annuities and Reinsurance segments. A portion of the increase from the Life
Insurance and Annuities segment is the result of the acquisition of the block of
business described above.
Health Premiums
Health premiums increased $42.6 million or 16% for the first six months of 1998
compared with the first six months of 1997 as a result of increased volumes of
business in the Reinsurance segment.
Insurance Fees
Insurance fees in the Life Insurance & Annuities and Lincoln UK segments from
universal life, other interest-sensitive life insurance contracts and variable
life insurance contracts increased $236.9 million or 61% compared with the first
six months of 1997. This increase was the result of increases in the volume of
business (including the block of business purchased) and a market-driven
increase in the value of existing customer accounts upon which some of the fees
are based.
Investment Advisory Fees
Investment advisory fees increased by $16.6 million or 17% for the first six
months of 1998 as a result of increased volumes of business and the increase in
the market value of assets managed.
Net Investment Income
Net investment income increased $199.9 million or 18% when compared with the
first six months of 1997. This increase is the net result of a 20% increase in
mean invested assets and a decrease in the overall yield on investments from
7.51% to 7.36% (all calculations on a cost basis). The increase in mean invested
assets is the result of increased volumes of business in all the business
segments and funds held in Corporate and Other that will be applied to the
purchase of an additional block of business in the fourth quarter of 1998 (see
note 10 on page 11). The increase in the Life Insurance and Annuity segment
includes the acquisition of the block of business on January 2, 1998 as
described above.
Realized Gain on Investments
The first six months of 1998 and 1997 had pre-tax realized gain on investments
of $49.5 million and $14.6 million, respectively. These gains, which are net of
related deferred acquisition costs and expenses, were the result of net gains on
sales of investments, less some modest write-downs and provisions for losses.
Securities available-for-sale that were deemed to have declines in fair value
that are other than temporary were written down. Also, when the underlying value
of the property is deemed to be less than the carrying value, LNC records
write-downs and allowances on select mortgage loans on real estate, real estate
and other investments.
<PAGE>
13
The pre-tax write-downs of securities available-for-sale for the first six
months of 1998 and 1997 were $34.2 million and $13.0 million, respectively. The
fixed maturity securities to which 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. During the first six months of
1998, LNC released $3.5 million in reserves on real estate and mortgage loans on
real estate. During the first six months of 1997, LNC released $4.7 million from
allowances for losses which is net of $1.7 million of additions.
Other Revenue and Fees
Other revenue and fees increased $49.7 million when compared to the first six
months of 1997 as the result of increased volumes of fee income from each of the
business segments.
Life Insurance and Annuity Benefits
Life insurance and annuity benefits increased $252.2 million or 24% when
compared with the first six months of 1997. This increase is the result of
increases in business volume from the Life Insurance & Annuities, Lincoln UK and
Reinsurance segments. A portion of the increase from the Life Insurance and
Annuities segment is the result of the acquisition of the block of business
described above.
Health Benefits
Health benefits decreased $88.3 million for the first six months of 1998 when
compared with the first six months of 1997 as a net result of increased volumes
of business and the absence of a special addition to the reserve (see note 5 on
page 7) in the Reinsurance segment.
Underwriting, Acquisition, Insurance and Other Expenses
These expenses increased $105.3 million or 13% for the first six months of 1998
compared with the first six months of 1997. The primary cause of this increase
was the additional expenses associated with the acquisition of the block of
business (see note 10 on page 10).
Interest and Debt Expense
Interest and debt expense increased $5.5 million or 12% as compared with the
first six months of 1997. This was the net result of the impact of reduced
interest rates being more than offset by higher average debt outstanding.
Federal Income Taxes
Federal income taxes increased from a tax credit of $10.6 million in the first
six months of 1997 to a tax expense of $108.3 million in the first six months of
1998. The increase in federal income taxes is a result of an increase in pre-tax
earnings. The increase in pre-tax earnings relates to the absense of a special
addition to the health reserve in 1998.
Summary
Net income for the first six months of 1998 was $270.7 million or $2.66 per
diluted share compared with $123.6 million or $1.18 per diluted share in the
first six months of 1997. Excluding realized gain on investments and
restructuring charges, LNC earned $260.3 million for the first six months of
1998 compared with $28.5 million for the first six months of 1997. This increase
was the result of increased earnings from each of the business segments and the
absence of a special addition to the disability income reserve (see note 5 on
page 7).
Century Compliance
As indicated within the Management's Discussion and Analysis section of LNC's
Form 10-K for the year ended December 31, 1997, LNC and its operating
subsidiaries are redirecting a large portion of internal information technology
efforts and contracting with outside consultants to update systems to address
year 2000 issues (see page 21 of LNC's Form 10-K for the year ended December 31,
1997, filed with the Commission on March 18, 1998). These efforts continue along
with the development of contingency plans in the event, despite its best
efforts, there are unresolved year 2000 problems. The text to follow is an
update to the year-end disclosure.
Most mission critical systems which had been planned to be remediated are
expected to be remediated by December 31, 1998. However, three mission critical
systems which had originally been planned to be replaced instead will have to be
remediated. These three systems are expected to be remediated by March 31, 1999.
LNC and its operating subsidiaries are heavily involved in the process of
testing mission critical systems. LNC's testing consists of several phases. The
final phases, especially external vendor integration testing and full year 2000
environmental testing will extend into 1999.
<PAGE>
14
The work that has been performed and the additional analysis that has occurred
during the past six months has led to the conclusion that the amount of year
2000 estimated expenditures for the 1998-2000 time frame is expected to increase
by approximately $20 million ($13.7 million after-tax). The primary cause of the
increase is the remediation of the three systems discussed above. The remainder
of the increase is the result of incurring higher costs than anticipated,
especially in the use of outside consultants. Some additional costs will be
added to the expected costs after the completion of the acquisition of a block
of individual life insurance business (see note 10 on page 11).
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
As the result of the purchase of a block of individual life insurance and
annuity business (see note 10 on page 10) select balance sheet accounts
increased from December 31, 1997 to June 30, 1998.
Investments
The total investment portfolio increased $5.5 billion in the first six months of
1998. This is the net result of increases from the addition of the $4.8 billion
in invested assets related to the block of business acquired on January 2, 1998;
purchases of investments from cash flow generated by the business segments and
the increase in the fair value of securities available-for-sale, being partially
offset by fixed annuity contractholders opting to transfer funds to variable
annuity contracts.
The quality of LNC's fixed maturity securities portfolio as of June 30, 1998 was
as follows:
Treasuries and AAA 26.5% BBB 31.1%
AA 7.2% BB 3.8%
A 28.0% Less than BB 3.4%
As of June 30, 1998, $2.007 billion or 7.2% of fixed maturity securities was
invested in below investment grade securities (less than BBB). This represents
5.7% of the 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. During the six
months ended June 30, 1998, the aggregate cost of such investments purchased was
$942.3 million. Aggregate proceeds from such investments sold were $701.0
million, resulting in a net realized pre-tax gain at the time of sale of $13.0
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 value, net of
related deferred acquisition costs, amounts required to satisfy policyholder
commitments and taxes, are charged or credited directly to shareholders' equity.
As of June 30, 1998, mortgage loans on real estate and real estate represented
12.6% and 1.4% of LNC's total investment portfolio. As of June 30, 1998, the
underlying properties supporting the mortgage loans on real estate consisted of
22.9% in commercial office buildings, 37.2% in retail stores, 19.0% in
apartments, 11.0% in industrial buildings, 4.0% in hotels/motels and 5.9% in
other. In addition to the dispersion by property type, the mortgage loan
portfolio is geographically diversified throughout the United States.
Impaired loans along with the related allowance for losses are as follows:
June 30 December 31
(in millions) 1998 1997
------------- ---- ----
Impaired loans with allowance for losses......... $38.0 $41.2
Allowance for losses............................. (4.6) (5.0)
Impaired loans with no allowance for losses...... 2.2 --
----- -----
Net Impaired Loans............................. $35.6 $36.2
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.
<PAGE>
15
A reconciliation of the mortgage loan allowance for losses for these impaired
mortgage loans is as follows:
Six Months
Ended June 30
(in millions) 1998 1997
------------- ---- ----
Balance at beginning of year................. $5.0 $12.4
Provisions for losses........................ .2 1.6
Releases due to sales........................ (.6) (2.6)
Releases due to foreclosures................. -- (3.4)
---- -----
Balance at End of Period................... $4.6 $8.0
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
Six Months
Ended June 30
(in millions) 1998 1997
------------- ---- ----
Average recorded investment in impaired loans... $37.8 $75.2
Interest income recognized on impaired loans ... 1.8 3.5
All interest income on impaired loans was recognized on the cash basis of income
recognition.
As of June 30, 1998 and 1997, LNC had restructured loans of $32.5 million and
$39.2 million, respectively. LNC recorded $1.6 million and $1.9 million of
interest income on these restructured loans for the six months ended June 30,
1998 and 1997, respectively, as compared to interest income of $1.6 million and
$2.0 million that would have been recorded according to their original terms.
Fixed maturity securities available-for-sale, mortgage loans on real estate and
real estate that were non-income producing for the six months ended June 30,
1998 were not significant.
Cash and Invested Cash
Cash and invested cash decreased by $1.4 billion in the first six months of
1998. This decrease is the result of paying out funds accumulated in the fourth
quarter of 1997 to purchase a block of individual life and annuity business on
January 2, 1998 (see note 10 on page 10).
Deferred Acquisition Costs
Deferred acquisition costs increased $125.4 million during the first six months
of 1998 as the net result of increases in new business being partially offset by
reductions related to the increase in unrealized gain on securities
available-for-sale.
Premiums and Fees Receivable
Premiums and fees receivable increased $53.3 million in the first six months of
1998 as the net result of increased volumes of business in the Life Insurance &
Annuity, Reinsurance and Investment Management segments.
Assets Held in Separate Accounts
This asset account as well as the corresponding liability account increased by
$5.1 billion in the first six months of 1998, reflecting an increase in annuity
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.
Goodwill and Other Intangible Assets
The increase in these amounts is the net result of the additions associated with
the block of individual life insurance and annuity business (see note 10 on page
10) being more than the amortization for the six months ended June 30, 1998.
Other Assets
The increase in other assets of $177.7 million is the result of having a higher
receivable related to investment securities sold in the last few days of the
second quarter of 1998 versus the end of 1997.
<PAGE>
16
Total Liabilities
Total liabilities increased by $11.0 billion in the first six months of 1998.
The primary item underlying this increase is the addition of the block of
individual life insurance and annuity business described above. Insurance policy
reserves increased $6.2 billion as a result of the new block of business and
increased levels of business in the Life Insurance and Annuities segment. The
decrease in contractholder funds of $659.9 million is the net result of new
deposits and the acquisition of business being more than offset by the
withdrawal upon maturity of guaranteed interest contracts. Liabilities related
to separate accounts increased $5.1 billion as a result of increased levels of
business in the Life Insurance and Annuities segment. Total debt increased
$280.6 million as the result of issuing new debt in the first quarter of 1998
(see note 4 on page 7). LNC's liabilities include some contingency items (see
note 6 on page 7).
Shareholders' Equity
Total shareholders' equity increased $167.9 million in the first six months of
1998. Excluding the increase of $33.6 million related to an increase in the
unrealized gains on securities available-for-sale, shareholders' equity
increased $134.3 million. This increase was the net result of increases due to
$270.7 million from net income, $8.9 million from the issuance of common stock
related to benefit plans and an increase of $5.6 million in the cumulative
foreign currency translation adjustment, being offset by the repurchase of
common shares ($46.9 million), and the declaration of dividends to shareholders
($104.0 million).
Derivatives
As discussed in note 7 to the consolidated financial statements for the year
ended December 31, 1997 (see page 56 of LNC's Form 10-K), 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 risks associated with changes in the
value of its derivatives; however, such changes in value are generally offset by
changes in the value of the items being hedged by such contracts. Modifications
to LNC's derivative strategy are initiated periodically upon review of the
company's overall risk assessment. Select increases in LNC's derivative
positions noted below are the result of derivatives received in conjunction with
the acquisition of a block of individual life insurance and annuity business
(see note 10 on page 10). During the first six months of 1998, LNC's derivative
positions have changed as follows:
1. Decreased its use of interest rate cap agreements that are used to hedge
its annuity business from the effect of fluctuating interest rates from
$4.9 billion notional to $4.7 billion notional. The decrease in notional
is a result of expirations and therefore no gain or loss has been
recognized.
2. Added $218.3 million in notional amount of swaptions. In addition, $28.8
million notional amount of swaptions expired, resulting in a remaining
balance of $1.9 billion in notional amount of swaptions hedging various
portfolios of interest rate sensitive assets.
3. Increased its use of interest rate swap agreements from $10.0 million
notional to $40.5 million notional. These interest rate swap agreements
are part of a replication strategy which will result in a higher yield on
bonds held by LNC. Also entered into $1.8 billion notional of interest
rate swaps to hedge the anticipated purchase of an individual life
insurance block of business.
4. Entered into put option agreements with a notional amount of $21.3
million. These put option agreements are part of a replication strategy
which establishes a fixed maturity date for various perpetual bonds owned
by LNC.
5. Decreased its use of foreign exchange forward contracts that are hedging
the foreign currency risk of its portfolio of foreign bonds from $163.1
million notional to $41.2 million notional. LNC's decision to terminate
this contract was based on the fact that the U.S. dollar had strengthened
against the foreign currencies hedged.
6. Entered into foreign currency swap agreements with a notional amount of
$39.2 million. These foreign currency swap agreements are part of a
replication strategy. LNC owns various foreign issue securities. Interest
payments from these securities are received in a foreign currency and
then swapped into U.S.dollars, replicating a foreign issue, U.S. dollar
paying security.
7. Entered into gold commodity swap agreements with a notional amount of
$8.1 million. This gold commodity swap is part of a replication strategy.
LNC owns a foreign issue bond that makes its coupon payments to its bond
holders in ounces of gold. The gold bullion is then swapped into U.S.
dollars, replicating a foreign issue, U.S. dollar paying security.
<PAGE>
17
8. Increased its use of S&P 500 index options from $5.3 million notional to
$50.3 million notional. These options continue to offset LNC's increased
liabilities resulting from certain reinsurance agreements which guarantee
payment for a specified portion of the appreciation of the S&P 500 index
on certain underlying annuity products.
The following is additional information regarding two new hedging strategies LNC
entered into since year-end 1997:
Put Options. LNC uses put options, combined with various perpetual fixed income
securities, to replicate a fixed income, fixed maturity investment. The put
options give LNC the right, but not the obligation, to sell to the counterparty
of the agreement the specified securities on a specified date at a fixed price.
Commodity Swap. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a known amount of cash. LNC owns a
fixed income security that meets its coupon payment obligations in gold bullion.
LNC is obligated to pay to the counterparty the gold bullion, and in return,
receives from the counterparty a stream of fixed income payments. The fixed
income payments are the product of the swap notional multiplied by the fixed
rate stated in the swap agreement. The net receipts/payments from commodity
swaps are recorded in net investment income.
LNC is exposed to credit loss in the event of non-performance by counterparties
on interest rate cap agreements, swaptions, spread-lock agreements, interest
rate swaps, put options, foreign exchange forward contracts, foreign currency
options, foreign currency swaps, commodity swaps and call options. However, LNC
does not anticipate non-performance 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.
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 6, indicates that operating
activities provided cash of $614.7 million during the first six months of 1998.
This statement also classifies the other sources and uses of cash by investing
activities and financing activities and discloses the total amount of cash
available 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. In April 1998, LNC filed a shelf registration for $1.3
billion. The $1.3 billion included an aggregate of $300 million that had not
been utilized from a previously filed shelf registration. The registration
statement included the right to offer and sell a variety of securities including
debt, preferred stock, common stock and hybrid securities. Also, as of June 30,
1998, LNC had an unused balance of $185 million related to a registration that
included the right to offer and sell various forms of hybrid securities. LNC is
expected to offer securities totaling $450 million in the third quarter of 1998
to pay a portion of the acquisition price of a block of business as described in
notes 10 and 11 on page 11. Finally, cash funds are available from LNC's
revolving credit agreement which provides for borrowing up to $750 million.
Transactions such as those described in the preceding paragraph that occurred
recently include the issuance of $300 million of debt in March 1998 and the
purchase and retirement of 623,281 shares of common stock at a cost of $46.9
million in the first six months of 1998. The shares purchased in 1998, along
with shares purchased in 1997, have reduced the June 1997 board authorization of
$500 million to $158.2 million at June 30, 1998. Within the May announcement
concerning the expected purchase of a block of business (see note 9 on page 10),
LNC indicated it would curtail further share repurchases for the near-term.
<PAGE>
18
PART II - OTHER INFORMATION AND EXHIBITS
Items 1, 2, 3 and 5 of this Part II are either inapplicable or are answered in
the negative and are omitted pursuant to the instructions to Part II.
Item 4. Submission of Matters to Vote of Securityholders
(a) The matter discussed below was submitted to a vote at the Annual Meeting
of Shareholders of the Registrant on May 14, 1998.
At the meeting referred to in (a) above, Shareholders of the Registrant
voted on the election of four directors for three-year terms.
Jon A. Boscia
Votes cast for = 86,563,751
Votes withheld = 747,701
Eric G. Johnson
Votes cast for = 86,613,000
Votes withheld = 698,452
John M. Pietruski
Votes cast for = 86,621,930
Votes withheld = 689,522
Gilbert R. Whitaker, Jr.
Votes cast for = 86,598,771
Votes withheld = 712,681
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits of the Registrant are included in this report.
(Note: The number preceding the exhibit corresponds to the specific
number within Item 601 of Regulation S-K.)
10 Material Contracts
(a) Lincoln National Corporation 1997 Incentive Compensation Plan
(b) Lincoln National Corporation Directors' Value Sharing Plan
(c) Restricted Stock Award Agreement
12 Historical Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) During the quarter ended June 30, 1998, a Form 8-K was filed with the
Commission regarding LNC's press release announcing its signing of a
definitive agreement to acquire a block of individual life insurance
business from Aetna, Inc. This filing received a filing date of May 28,
1998.
<PAGE>
19
SIGNATURE PAGE
Pursuant to the requirements of the securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINCOLN NATIONAL CORPORATION
By /S/ Richard C. Vaughan
Richard C. Vaughan,
Executive Vice President and
Chief Financial Officer
By /S/ Donald L. Van Wyngarden
Donald L. Van Wyngarden,
Second Vice President and Controller
Date July 27, 1998
<PAGE>
20
LINCOLN NATIONAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended June 30, 1998
Exhibit Page
Number Description Number
10(a) Lincoln National Corporation 1997 Incentive Compensation Plan 21
10(b) Lincoln National Corporation Directors' Value Sharing Plan 37
10(c) Restricted Stock Award Agreement 46
12 Historical Ratio of Earnings to Fixed Charges 49
27 Financial Data Schedule 50
Exhibit 10(a) 21
LINCOLN NATIONAL CORPORATION
- -------------------------------------------------------------------------------
1997 Incentive Compensation Plan
<PAGE>
LINCOLN NATIONAL CORPORATION
- -------------------------------------------------------------------------------
1997 Incentive Compensation Plan
- -------------------------------------------------------------------------------
Page
1. Purpose................................................................ 4
2. Definitions............................................................ 4
3. Administration......................................................... 6
(a) Authority of the Committee........................................ 6
(b) Manner of Exercise of Committee Authority......................... 6
(c) Limitation of Liability........................................... 7
4. Stock Subject to Plan.................................................. 7
(a) Overall Number of Shares Available for Delivery................... 7
(b) Application of Limitation to Grants of Awards..................... 7
(c) Availability of Shares Not Delivered under Awards ................ 7
5. Eligibility; Per-Person Award Limitations.............................. 7
6. Specific Terms of Awards............................................... 8
(a) General........................................................... 8
(b) Options........................................................... 8
(c) Stock Appreciation Rights......................................... 8
(d) Restricted Stock.................................................. 9
(e) Deferred Stock Units.............................................. 10
(f) Bonus Stock and Awards in Lieu of Obligations..................... 10
(g) Other Stock-Based Awards.......................................... 10
7. Certain Provisions Applicable to Awards................................ 10
(a) Stand-Alone, Additional, Tandem, and Substitute Awards ........... 10
(b) Term of Awards.................................................... 11
(c) Form and Timing of Payment under Awards; Deferrals ............... 11
(d) Exemptions from Section 16(b) Liability........................... 11
(e) Cancellation and Rescission of Awards ............................ 11
8. Performance and Annual Incentive Awards................................ 12
(a) Performance Conditions............................................ 12
(b) Performance Awards Granted to Designated Covered Employees ....... 12
(c) Annual Incentive Awards Granted to Designated Covered Employees... 14
(d) Written Determinations............................................ 15
(e) Status of Section 8(b) and 8(c) Awards under Code Section 162(m) . 15
-2-
<PAGE>
LINCOLN NATIONAL CORPORATION
- -------------------------------------------------------------------------------
1997 Incentive Compensation Plan
- -------------------------------------------------------------------------------
Page
9. Change of Control....................................................... 15
(a) Options and SARs .................................................. 15
(b) Restricted Stock and Deferred Stock Units.......................... 15
(c) Other Awards....................................................... 15
10.General Provisions...................................................... 16
(a) Compliance with Legal and Other Requirements....................... 16
(b) Limits on Transferability; Beneficiaries........................... 16
(c) Adjustments........................................................ 16
(d) Taxes.............................................................. 17
(e) Changes to the Plan and Awards..................................... 17
(f) Limitation on Rights Conferred under Plan.......................... 17
(g) Unfunded Status of Awards; Creation of Trusts...................... 18
(h) Nonexclusivity of the Plan......................................... 18
(i) Payments in the Event of Forfeitures; Fractional Shares ........... 18
(j) Governing Law...................................................... 18
(k) Awards under Preexisting Plans..................................... 18
(l) Plan Effective Date and Shareholder Approval....................... 18
-3-
<PAGE>
LINCOLN NATIONAL CORPORATION
1997 Incentive Compensation Plan
1. Purpose. The purpose of this 1997 Incentive Compensation Plan (the
"Plan") is to assist Lincoln National Corporation, an Indiana corporation (the
"Corporation"), and its subsidiaries in attracting, retaining, and rewarding
high-quality executives, employees, and other persons who provide services to
the Corporation and/or its subsidiaries, enabling such persons to acquire or
increase a proprietary interest in the Corporation in order to strengthen the
mutuality of interests between such persons and the Corporation's shareholders,
and providing such persons with annual and long-term performance incentives to
expend their maximum efforts in the creation of shareholder value. The Plan is
also intended to qualify certain compensation awarded under the Plan for tax
deductibility under Code Section 162(m) (as hereafter defined) to the extent
deemed appropriate by the Committee (or any successor committee) of the Board
of Directors of the Corporation.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof:
(a) "Annual Incentive Award" means a conditional right granted to
a Participant under Section 8(c) hereof to receive a cash payment, Stock
or other Award, unless otherwise determined by the Committee, after the
end of a specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock Units, Stock granted as a bonus or in
lieu of another award, Other Stock-Based Award, Performance Award or
Annual Incentive Award, together with any other right or interest granted
to a Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards
or other rights are transferred if and to the extent permitted under
Section 10(b) hereof. If, upon a Participant's death, there is no
designated Beneficiary or surviving designated Beneficiary, then the term
Beneficiary means the person, persons, trust or trusts entitled by will
or the laws of descent and distribution to receive such benefits.
(d) "Board" means the Corporation's Board of Directors.
(e) "Change of Control" shall have the same meaning ascribed to
such term in the Lincoln National Corporation Executives' Severance
Benefit Plan (the "Severance Benefit Plan") on the date immediately
preceding the Change of Control.
(f) "Change of Control Price" means an amount in cash equal to the
higher of (i) the amount of cash and Fair Market Value of property that
is the highest price per share paid (including extraordinary dividends)
in any transaction triggering the Change of Control or any liquidation of
shares following a sale of substantially all assets of the Corporation,
or (ii) the highest Fair Market Value per share at any time during the
60-day period preceding and 60-day period following the Change of
Control.
(g) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, including regulations thereunder and successor
provisions and regulations thereto.
(h) "Committee" means at any date each of those members of the
Compensation Committee of the Board who shall be (i) a "non-employee
director" within the meaning of Rule 16b-3 under the Exchange Act, unless
administration of the Plan by "non-employee directors" is not then
required in order for exemptions under Rule 16b-3 to apply to
transactions under the Plan, and (ii) an "outside director" as defined
under Code Section
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162(m), unless the action taken pursuant to the Plan is not required to
be taken by "outside directors" in order to qualify for tax deductibility
under Code Section 162(m). Unless otherwise designated by the Board, the
Committee shall include not fewer than three members. In the event that
fewer than three members of the Compensation Committee are eligible to
serve on the Committee, the Board may appoint one or more of its other
members who is otherwise eligible to serve on the Committee until such
time as three members of the Compensation Committee are eligible to
serve.
(i) "Covered Employee" means an Eligible Person who is a Covered
Employee as specified in Section 8(e) of the Plan.
(j) "Deferred Stock Unit" means a right, granted to a Participant
under Section 6(e) hereof, to receive Stock, cash or a combination
thereof at the end of a specified deferral period.
(k) "Effective Date" means January 1, 1997.
(l) "Eligible Person" means each Executive Officer and other
officers and employees of the Corporation or of any subsidiary, including
employees, agents and brokers who may also be directors of the
Corporation. An employee on leave of absence may be considered as still
in the employ of the Corporation or a subsidiary for purposes of
eligibility for participation in the Plan.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(n) "Executive Officer" means an executive officer of the
Corporation as defined under the Exchange Act.
(o) "Fair Market Value" means the Fair Market Value of Stock,
Awards or other property as determined by the Committee or under
procedures established by the Committee. Unless otherwise determined by
the Committee the Fair Market Value of Stock shall be the average of the
highest and lowest prices of a share of Stock, as quoted on the composite
transactions table on the New York Stock Exchange, on the last trading
day prior to the date on which the determination of Fair Market Value is
being made.
(p) "Incentive Stock Option" or "ISO" means any Option intended to
be and designated as an incentive stock option within the meaning of Code
Section 422 or any successor provision thereto.
(q) "Limited SAR" means a right granted to a Participant under
Section 6(c) hereof.
(r) "Option" means a right, granted to a Participant under Section
6(b) hereof, to purchase Stock or other Awards at a specified price
during specified time periods.
(s) "Other Stock-Based Awards" means Awards granted to a
Participant under Section 6(g) hereof.
(t) "Participant" means a person who has been granted an Award
under the Plan which remains outstanding, including a person who is no
longer an Eligible Person.
(u) "Performance Award" means a right, granted to a Participant
under Section 8 hereof, to receive Awards based upon performance criteria
specified by the Committee.
(v) "Preexisting Plans" mean the Lincoln National Corporation 1986
Stock Option Incentive Plan (the "Stock Option Plan") and the 1994
Amended and Restated Lincoln National Corporation Executive Value Sharing
Plan (the "EVSP").
(w) "Restricted Stock" means Stock granted to a Participant under
Section 6(d) hereof, that is subject to certain restrictions and to a
risk of forfeiture.
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(x) "Rule 16b-3" means Rule 16b-3, as from time to time in effect
and applicable to the Plan and Participants, promulgated by the
Securities and Exchange Commission under Section 16 of the Exchange Act
or any similar law or regulation that may be a successor thereto.
(y) "Stock" means the Corporation's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(z) "Stock Appreciation Right" or "SAR" means a right granted to a
Participant under Section 6(c) hereof.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by
the Committee. The Committee shall have full and final authority, in each
case subject to and consistent with the provisions of the Plan, to
interpret the provisions of the Plan, select Eligible Persons to become
Participants, grant Awards, determine the type, number and other terms
and conditions of, and all other matters relating to, Awards, prescribe
Award agreements (which need not be identical for each Participant),
adopt, amend and rescind rules and regulations for the administration of
the Plan, construe and interpret the Plan and Award agreements and
correct defects, supply omissions or reconcile inconsistencies therein,
ensure that awards continue to qualify under Rule 16b-3, and make all
other decisions and determinations as the Committee may deem necessary or
advisable for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. Any action of the
Committee shall be final, conclusive and binding on all persons,
including the Corporation, its subsidiaries, Participants, Beneficiaries,
transferees under Section 10(b) hereof or other persons claiming rights
from or through a Participant, and shareholders. The Committee shall
exercise its authority only by a majority vote of its members at a
meeting or without a meeting by a writing signed by a majority of its
members. The express grant of any specific power to the Committee, and
the taking of any action by the Committee, shall not be construed as
limiting any power or authority of the Committee. The Committee may
delegate to officers or managers of the Corporation or any subsidiary, or
committees thereof, the authority, subject to such terms as the Committee
shall determine, (i) to perform administrative functions, (ii) with
respect to Participants not subject to Section 16 of the Exchange Act, to
perform such other functions as the Committee may determine, and (iii)
with respect to Participants subject to Section 16, to perform such other
functions of the Committee as the Committee may determine to the extent
performance of such functions will not result in the loss of an exemption
under Rule 16b-3 otherwise available for transactions by such persons, in
each case to the extent permitted under applicable law and subject to the
requirements and restrictions set forth in Section 8(e). The Committee
may appoint agents to assist it in administering the Plan.
(c) Limitation of Liability. The Committee and each member thereof
shall be entitled, in good faith, to rely or act upon any report or other
information furnished to it, him or her by any executive officer, other
officer or employee of the Corporation or a subsidiary, the Corporation's
independent auditors, consultants or any other agents assisting in the
administration of the Plan. Members of the Committee and any officer or
employee of the Corporation or a subsidiary acting at the direction or on
behalf of the Committee shall not be personally liable for any action or
determination taken or made in good faith with respect to the Plan, and
shall, to the extent permitted by law, be fully indemnified and protected
by the Corporation with respect to any such action or determination.
4. Stock Subject to Plan.
(a) Overall Number of Shares Available for Delivery. Subject to
adjustment as provided in Section 10(c) hereof, the total number of
shares of Stock reserved and available for delivery in connection with
Awards under the Plan shall be 12,700,000, less any shares of Stock which
are the subject of an option granted or other award made under the
Preexisting Plans after March 12, 1997; provided, however, that the total
number of shares of Stock with respect to which ISOs may be granted shall
not exceed 1,000,000; and provided, further, that the total number of
shares of Restricted Stock that may be granted shall not exceed
3,000,000, less any shares
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of restricted stock awarded under the Preexisting Plans after March 12,
1997. Any shares of Stock delivered under the Plan shall consist of
authorized and unissued shares.
(b) Application of Limitation to Grants of Awards. No Award may be
granted if the number of shares of Stock to be delivered in connection
with such Award or, in the case of an Award relating to shares of Stock
but settleable only in cash (such as cash-only SARs), the number of
shares to which such Award relates, exceeds the number of shares of Stock
remaining available under the Plan minus the number of shares of Stock
issuable in settlement of or relating to then-outstanding Awards. The
Committee may adopt reasonable counting procedures to ensure appropriate
counting, avoid double counting (as, for example, in the case of tandem
or substitute awards) and make adjustments if the number of shares of
Stock actually delivered differs from the number of shares previously
counted in connection with an Award.
(c) Availability of Shares Not Delivered under Awards. Shares of
Stock subject to an Award under the Plan or award under a Preexisting
Plan that is canceled, expired, forfeited, settled in cash or otherwise
terminated without a delivery of shares to the Participant, including (i)
the number of shares withheld in payment of any exercise or purchase
price of an Award or award or taxes relating to Awards or awards, and
(ii) the number of shares surrendered in payment of any exercise or
purchase price of an Award or award or taxes relating to any Award or
award, will again be available for Awards under the Plan, except that if
any such shares could not again be available for Awards to a particular
Participant under any applicable law or regulation, such shares shall be
available exclusively for Awards to Participants who are not subject to
such limitation.
5. Eligibility; Per-Person Award Limitations. Awards may be granted under
the Plan only to Eligible Persons. In each fiscal year during any part of which
the Plan is in effect, an Eligible Person may not be granted Awards relating to
more than 1,000,000 shares of Stock, subject to adjustment as provided in
Section 10(c), under each of the following separate provisions: Sections 6(b),
6(c), 6(d), 6(e), 6(f), 6(g), 8(b) and 8(c). In addition, the maximum cash
amount that may be earned under Section 8(c) of the Plan as an Annual Incentive
Award or other cash annual Award payable in cash (currently or on a deferred
basis) in respect of any fiscal year by any one Participant shall be $8,000,000,
and the maximum cash amount that may be earned under Section 8(b) of the Plan as
a Performance Award or other cash Award payable in cash (currently or on a
deferred basis) in respect of any individual performance period by any one
Participant shall be $8,000,000.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set
forth in this Section 6, provided, however, that no Award shall be made
under this Section 6 prior to the date on which shareholders of the
Corporation approve the adoption of the Plan. In addition, the Committee
may impose on any Award or the exercise thereof, at the date of grant or
thereafter (subject to Section 10(e)), such additional terms and
conditions, not inconsistent with the provisions of the Plan, as the
Committee shall determine, including terms requiring forfeiture of Awards
in the event of termination of employment by the Participant and terms
permitting a Participant to make elections relating to his or her Award.
The Committee shall retain full power and discretion to accelerate, waive
or modify, at any time, any term or condition of an Award that is not
mandatory under the Plan. Except in cases in which the Committee is
authorized to require other forms of consideration under the Plan, or to
the extent other forms of consideration must be paid to satisfy the
requirements of Indiana law, no consideration other than services may be
required for the grant (but not the exercise) of any Award. Any Award or
the value of any Award that is made under this Plan may, subject to any
requirements of applicable law or regulation, in the Committee or its
designee's sole discretion, be converted into Deferred Stock Units and
treated as provided in Section 6(e) below.
(b) Options. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee,
provided that such exercise price shall be not less than the Fair
Market Value of a share of Stock on the date of grant of such
Option.
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(ii) Time and Method of Exercise. The Committee shall
determine, at the date of grant or thereafter, the time or times
at which or the circumstances under which an Option may be
exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the methods
by which such exercise price may be paid or deemed to be paid, the
form of such payment, including, without limitation, cash, Stock,
other Awards or awards granted under other plans of the
Corporation or any subsidiary, or other property (including notes
or other contractual obligations of Participants to make payment
on a deferred basis), and the methods by or forms in which Stock
will be delivered or deemed to be delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan
shall comply in all respects with the provisions of Code Section
422. Anything in the Plan to the contrary notwithstanding, no term
of the Plan relating to ISOs (including any SAR in tandem
therewith) shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be exercised, so as
to disqualify either the Plan or any ISO under Code Section 422,
unless the Participant has first requested the change that will
result in such disqualification.
(c) Stock Appreciation Rights. The Committee is authorized to
grant SAR's to Participants on the following terms and conditions:
(i) Right to Payment. A SAR shall confer on the Participant
to whom it is granted a right to receive, upon exercise thereof,
the excess of (A) the Fair Market Value of one share of Stock on
the date of exercise (or, in the case of a "Limited SAR," the Fair
Market Value determined by reference to the Change of Control
Price) over (B) the grant price of the SAR as determined by the
Committee.
(ii) Other Terms. The Committee shall determine, at the date
of grant or thereafter, the time or times at which and the
circumstances under which a SAR may be exercised in whole or in
part (including based on achievement of performance goals and/or
future service requirements), the method of exercise, method of
settlement, form of consideration payable in settlement, method by
or forms in which any Stock payable will be delivered or deemed to
be delivered to Participants, whether or not a SAR shall be in
tandem or in combination with any other Award, and any other terms
and conditions of any SAR. Limited SARs that may only be exercised
in connection with a Change of Control or other event as specified
by the Committee may be granted on such terms, not inconsistent
with this Section 6(c), as the Committee may determine. SARs and
Limited SARs may be either freestanding or in tandem with other
Awards.
(d) Restricted Stock. The Committee is authorized to grant
Restricted Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be
subject to such restrictions on transferability, risk of
forfeiture and other restrictions, if any, as the Committee may
impose, which restrictions may lapse separately or in combination
at such times, under such circumstances (including based on
achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee
may determine at the date of grant or thereafter. Except to the
extent restricted under any Award agreement relating to the
Restricted Stock, a Participant granted Restricted Stock shall
have all of the rights of a shareholder, including the right to
vote the Restricted Stock and the right to receive dividends
thereon (subject to any mandatory reinvestment or other
requirement imposed by the Committee). During the restricted
period applicable to the Restricted Stock, subject to Section
10(b) below, the Restricted Stock may not be sold, transferred,
pledged, hypothecated, margined or otherwise encumbered by the
Participant.
(ii) Forfeiture. Except as otherwise determined by the
Committee, upon termination of employment during the applicable
restriction period, Restricted Stock that is at that time subject
to restrictions shall be forfeited and reacquired by the
Corporation; provided that the Committee may, in its discretion,
in any individual case provide for waiver in whole or in part of
restrictions or forfeiture conditions relating to Restricted
Stock.
(iii) Certificates for Stock. Restricted Stock granted under
the Plan may be evidenced in such
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manner as the Committee shall determine. If certificates
representing Restricted Stock are registered in the name of the
Participant, the Committee may require that such certificates bear
an appropriate legend referring to the terms, conditions and
restrictions applicable to such Restricted Stock, that the
Corporation retain physical possession of the certificates, and
that the Participant deliver a stock power to the Corporation,
endorsed in blank, relating to the Restricted Stock.
(iv) Dividends and Splits. As a condition to the grant of an
Award of Restricted Stock, the Committee may require that any cash
dividends paid on a share of Restricted Stock be automatically
reinvested in additional shares of Restricted Stock or applied to
the purchase of additional Awards under the Plan. Unless otherwise
determined by the Committee, Stock distributed in connection with
a Stock split or Stock dividend, and other property distributed as
a dividend, shall be subject to restrictions and a risk of
forfeiture to the same extent as the Restricted Stock with respect
to which such Stock or other property has been distributed.
(e) Deferred Stock Units. The Committee is authorized to grant to
Participants Deferred Stock Units, which are rights to receive Stock,
cash, or a combination thereof at the end of a specified deferral period.
Unless otherwise specified by the Committee, Deferred Stock Units shall
be credited as of the date of award to a bookkeeping reserve account
maintained by the Employer under the Lincoln National Corporation
Executive Deferred Compensation Plan for Employees or its successor (the
"Deferred Compensation Plan") in units which are equivalent in value to
shares of Common Stock ("Deferred Stock Units"). Once credited to such
account, Deferred Stock Units shall be governed by the terms of the
Deferred Compensation Plan.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee
is authorized to grant Stock as a bonus, or to grant Stock or other
Awards in lieu of obligations to pay cash or deliver other property under
the Plan or under other plans or compensatory arrangements, provided
that, in the case of Participants subject to Section 16 of the Exchange
Act, the amount of such grants remains within the discretion of the
Committee to the extent necessary to ensure that acquisitions of Stock or
other Awards do not impair a participant's exemption from liability under
Section 16(b) of the Exchange Act. Stock or Awards granted hereunder
shall be subject to such other terms as shall be determined by the
Committee.
(g) Other Stock-Based Awards. The Committee is authorized, subject
to limitations under applicable law, to grant to Participants such other
Awards that may be denominated or payable in, valued in whole or in part
by reference to, or otherwise based on, or related to, Stock, as deemed
by the Committee to be consistent with the purposes of the Plan,
including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase
rights for Stock, Awards with value and payment contingent upon
performance of the Corporation or any other factors designated by the
Committee, and Awards valued by reference to the book value of Stock or
the value of securities of or the performance of specified subsidiaries.
The Committee shall determine the terms and conditions of such Awards.
Stock delivered pursuant to an Award in the nature of a purchase right
granted under this Section 6(g) shall be purchased for such
consideration, paid for at such times, by such methods, and in such
forms, including, without limitation, cash, Stock, other Awards, or other
property, as the Committee shall determine. Cash awards, as an element of
or supplement to any other Award under the Plan, may also be granted
pursuant to this Section 6(g).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards
granted under the Plan may, in the discretion of the Committee, be
granted either alone or in addition to, in tandem with, or in
substitution or exchange for, any other Award or any award granted under
another plan of the Corporation, any subsidiary, or any business entity
to be acquired by the Corporation or a subsidiary, or any other right of
a Participant to receive payment from the Corporation or any subsidiary.
Such additional, tandem, and substitute or exchange Awards may be granted
at any time. If an Award is granted in substitution or exchange for
another Award or award, the Committee shall require the surrender of such
other Award or award in consideration for the grant of the new Award.
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(b) Term of Awards. The term of each Award shall be for such
period as may be determined by the Committee; provided that in no event
shall the term of any Option or SAR exceed a period of ten years (or such
shorter term as may be required in respect of an ISO under Code Section
422).
(c) Form and Timing of Payment under Awards; Deferrals. Subject to
the terms of the Plan and any applicable Award agreement, payments to be
made by the Corporation or a subsidiary upon the exercise of an Option or
other Award or settlement of an Award may be made in such forms as the
Committee shall determine, including, without limitation, cash, Stock,
other Awards or other property, and may be made in a single payment or
transfer, in installments, or on a deferred basis. The settlement of any
Award may be accelerated, and cash paid in lieu of Stock in connection
with such settlement, in the discretion of the Committee or upon
occurrence of one or more specified events (in addition to a Change of
Control). Installment or deferred payments may be required by the
Committee (subject to Section 10(e) of the Plan, including the consent
provisions thereof) in the case of any deferral of an outstanding Award
not provided for in the original Award agreement, except that this
provision shall not prevent the Committee or its designee from converting
an Award to Deferred Stock Units as provided under Section 6(a) above or
permitted at the election of the Participant on terms and conditions
established by the Committee. Payments may include, without limitation,
provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or crediting of dividend
equivalents or other amounts in respect of installment or deferred
payments denominated in Stock.
(d) Exemptions from Section 16(b) Liability. It is the intent of
the Corporation that the grant of any Awards to or other transaction by a
Participant who is subject to Section 16 of the Exchange Act shall be
exempt under Rule 16b-3 (except for transactions acknowledged in writing
to be non-exempt by such Participant). Accordingly, if any provision of
this Plan or any Award agreement does not comply with the requirements of
Rule 16b-3 as then applicable to any such transaction, unless the
Participant shall have acknowledged in writing that a transaction
pursuant to such provision is to be non-exempt, such provision shall be
construed or deemed amended to the extent necessary to conform to the
applicable requirements of Rule 16b-3 so that such Participant shall
avoid liability under Section 16(b) of the Exchange Act.
(e) Cancellation and Rescission of Awards. Unless the Award
agreement specifies otherwise, the Committee may cancel any unexpired,
unpaid, or deferred Awards at any time, and the Corporation shall have
the additional rights set forth in Section 7(e)(iv) below, if the
Participant is not in compliance with all applicable provisions of the
Award agreement and the Plan including the following conditions:
(i) A Participant shall not render services for any
organization or engage directly or indirectly in any business
which, in the judgment of the Chief Executive Officer of the
Corporation or other senior officer designated by the Committee,
is or becomes competitive with the Corporation. For Participants
whose employment has terminated, the judgment of the Chief
Executive Officer or other senior officer designated by the
Committee shall be based on the Participant's position and
responsibilities while employed by the Corporation, the
Participant's post-employment responsibilities and position with
the other organization or business, the extent of past, current
and potential competition or conflict between the Corporation and
the other organization or business, the effect on the
Corporation's shareholders, customers, suppliers and competitors
of the Participant assuming the post-employment position and such
other considerations as are deemed relevant given the applicable
facts and circumstances. A Participant who has terminated
employment shall be free, however, to purchase as an investment or
otherwise, stock or other securities of such organization or
business so long as they are listed upon a recognized securities
exchange or traded over-the-counter, and such investment does not
represent a greater than five percent equity interest in the
organization or business.
(ii) A Participant shall not, without prior written
authorization from the Corporation, disclose to anyone outside the
Corporation, or use in other than the Corporation's business, any
confidential information or material relating to the business of
the Corporation that is acquired by the Participant either during
or after employment with the Corporation.
(iii) A Participant shall disclose promptly and assign to
the Corporation all right, title, and interest in any invention or
idea, patentable or not, made or conceived by the Participant
during employment by
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the Corporation, relating in any manner to the actual or
anticipated business, research or development work of the
Corporation and shall do anything reasonably necessary to enable
the Corporation to secure a patent where appropriate in the United
States and in foreign countries.
(iv) Upon exercise, settlement, payment or delivery pursuant
to an Award, the Participant shall certify on a form acceptable to
the Committee that he or she is in compliance with the terms and
conditions of the Plan. Failure to comply with the provisions of
this Section 7(e) prior to, or during the six months after, any
exercise, payment or delivery pursuant to an Award shall cause
such exercise, payment or delivery to be rescinded. The
Corporation shall notify the Participant in writing of any such
rescission within two years after such exercise, payment or
delivery; provided, however, that the Corporation may, in its
discretion, in any individual case provide for waiver in whole or
in part of compliance with the provisions of this Section 7(e).
Within ten days after receiving such a notice from the
Corporation, the Participant shall pay to the Corporation the
amount of any gain realized or payment received as a result of the
rescinded exercise, payment or delivery pursuant to an Award. Such
payment shall be made either in cash or by returning to the
Corporation the number of shares of Stock that the Participant
received in connection with the rescinded exercise, payment or
delivery. In the case of any Participant whose employment is
terminated by the Corporation and its subsidiaries without "cause"
(as defined in the Award agreement), however, a failure of the
Participant to comply with the provisions of Section 7(e)(i) after
such termination of employment shall not in itself cause
rescission or require repayment with respect to any Award
exercised, paid or delivered before such termination.
8. Performance and Annual Incentive Awards.
(a) Performance Conditions. The right of a Participant to exercise
or receive a grant or settlement of any Award, and the timing thereof,
may be subject to such performance conditions as may be specified by the
Committee. The Committee may use such business criteria and other
measures of performance as it may deem appropriate in establishing any
performance conditions, and may exercise its discretion to reduce or
increase the amounts payable under any Award subject to performance
conditions, except as limited under Sections 8(b) and 8(c) hereof in the
case of a Performance Award or Annual Incentive Award intended to qualify
under Code Section 162(m).
(b) Performance Awards Granted to Designated Covered Employees. If
the Committee determines that a Performance Award to be granted to an
Eligible Person who is or may become a Covered Employee should qualify as
"performance-based compensation" for purposes of Code Section 162(m), the
grant, exercise and/or settlement of such Performance Award shall be
contingent upon achievement of preestablished performance goals and other
terms set forth in this Section 8(b).
(i) Performance Goals Generally. The performance goals for
such Performance Awards shall consist of one or more business
criteria and a targeted level or levels of performance and
associated maximum Award payments with respect to each of such
criteria, as specified by the Committee consistent with this
Section 8(b). Performance goals shall be objective and shall
otherwise meet the requirements of Code Section 162(m) and
regulations thereunder (including Regulation 1.162-27 and
successor regulations thereto), including the requirement that the
level or levels of performance targeted by the Committee result in
the achievement of performance goals being "substantially
uncertain." The Committee may determine that such Performance
Awards shall be granted, exercised and/or settled upon achievement
of any performance goal or that more than one performance goal
must be achieved as a condition to grant, exercise and/or
settlement of such Performance Awards. Performance goals may
differ for Performance Awards granted to any one Participant or to
different Participants.
(ii) Business Criteria. One or more of the following
business criteria for the Corporation, as defined by the
Committee, on a consolidated basis, and/or for specified
subsidiaries or business units of the Corporation (except with
respect to the total shareholder return and earnings per share
criteria), shall be used by the Committee in establishing
performance goals for such Performance Awards: (1) earnings per
share; (2) revenues; (3) cash flow; (4) cash flow return on
investment; (5) return on assets, return on investment, return on
capital, return on equity; (6) economic value added; (7) operating
margin; (8) net
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income; pretax earnings; pretax earnings before interest,
depreciation and amortization; pretax operating earnings after
interest expense and before incentives, service fees, and
extraordinary or special items; operating earnings; income from
operations; (9) total shareholder return; (10) any of the above
goals as compared to the performance of a published or special
index deemed applicable by the Committee including, but not
limited to, the Standard & Poor's 500 Stock Index or a group of
comparator companies; and (11) any criteria comparable to those
listed above that shall be approved by the Committee. One or more
of the foregoing business criteria shall also be exclusively used
in establishing performance goals for Annual Incentive Awards
granted to a Covered Employee under Section 8(c) hereof.
(iii) Performance Period; Timing for Establishing
Performance Goals. Achievement of performance goals in respect of
such Performance Awards shall be measured over a performance
period, which may overlap with another performance period or
periods, of up to ten years, as specified by the Committee.
Performance goals shall be established not later than 90 days
after the beginning of any performance period applicable to such
Performance Awards, or at such other date as may be required or
permitted for "performance-based compensation" under Code Section
162(m).
(iv) Performance Award Pool. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for
purposes of measuring performance of the Corporation in connection
with Performance Awards. The amount of such Performance Award pool
shall be based upon the achievement of a performance goal or goals
based on one or more of the business criteria set forth in Section
8(b)(ii) hereof during the given performance period, as specified
by the Committee in accordance with Section 8(b)(iii) hereof. The
Committee may specify the amount of the Performance Award pool as
a percentage of any of such business criteria, a percentage
thereof in excess of a threshold amount, or as another amount
which need not bear a strictly mathematical relationship to such
business criteria.
(v) Settlement of Performance Awards; Other Terms.
Settlement of such Performance Awards shall be in cash, Stock,
other Awards or other property, including deferred payments in any
such forms, in the discretion of the Committee. The Committee may,
in its discretion, reduce the amount of a settlement otherwise to
be made in connection with such Performance Awards, but may not
exercise discretion to increase any such amount payable to a
Covered Employee in respect of a Performance Award subject to this
Section 8(b). The Committee shall specify the circumstances in
which such Performance Awards shall be paid or forfeited in the
event of termination of employment by the Participant prior to the
end of a performance period or settlement of Performance Awards.
(c) Annual Incentive Awards Granted to Designated Covered
Employees. If the Committee determines that an Annual Incentive Award to
be granted to an Eligible Person who is or may become a Covered Employee
should qualify as "performance-based compensation" for purposes of Code
Section 162(m), the grant, exercise and/or settlement of such Annual
Incentive Award shall be contingent upon achievement of preestablished
performance goals and other terms set forth in this Section 8(c).
(i) Annual Incentive Award Pool. The Committee may establish
an Annual Incentive Award pool, which shall be an unfunded pool,
for purposes of measuring performance of the Corporation in
connection with Annual Incentive Awards. The amount of such Annual
Incentive Award pool shall be based upon the achievement of a
performance goal or goals based on one or more of the business
criteria set forth in Section 8(b)(ii) hereof during the given
performance period, as specified by the Committee in accordance
with Section 8(b)(iii) hereof. The Committee may specify the
amount of the Annual Incentive Award pool as a percentage of any
of such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a
strictly mathematical relationship to such business criteria.
(ii) Potential Annual Incentive Awards. Not later than the
end of the 90th day after the beginning of each fiscal year, or at
such other date as may be required or permitted in the case of
Awards intended to be "performance-based compensation" under Code
Section 162(m), the Committee shall determine the Eligible Persons
who will potentially receive Annual Incentive Awards, and the
amounts potentially payable thereunder, for that fiscal year,
either out of an Annual Incentive Award pool
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established by such date under Section 8(c)(i) hereof or as
individual Annual Incentive Awards. In the case of individual
Annual Incentive Awards intended to qualify under Code Section
162(m), the amount potentially payable shall be based upon the
achievement of a performance goal or goals based on one or more of
the business criteria set forth in Section 8(b)(ii) hereof in the
given performance year, as specified by the Committee; in other
cases, such amount shall be based on such criteria as shall be
established by the Committee. In all cases, the maximum Annual
Incentive Award of any Participant shall be subject to the
limitation set forth in Section 5 hereof.
(iii) Payout of Annual Incentive Awards. After the end of
each fiscal year, the Committee shall determine the amount, if
any, of (A) the Annual Incentive Award pool, and the maximum
amount of potential Annual Incentive Award payable to each
Participant in the Annual Incentive Award pool, or (B) the amount
of potential Annual Incentive Award otherwise payable to each
Participant. The Committee may, in its discretion, determine that
the amount payable to any Participant as a final Annual Incentive
Award shall be increased or reduced from the amount of his or her
potential Annual Incentive Award, including a determination to
make no final Award whatsoever, but may not exercise discretion to
increase any such amount in the case of an Annual Incentive Award
intended to qualify under Code Section 162(m). The Committee shall
specify the circumstances in which an Annual Incentive Award shall
be paid or forfeited in the event of termination of employment by
the Participant prior to the end of a fiscal year or settlement of
such Annual Incentive Award.
(d) Written Determinations. All determinations by the Committee as
to the establishment of performance goals, the amount of any Performance
Award pool or potential individual Performance Awards and as to the
achievement of performance goals relating to Performance Awards under
Section 8(b), and the amount of any Annual Incentive Award pool or
potential individual Annual Incentive Awards and the amount of final
Annual Incentive Awards under Section 8(c), shall be made in writing in
the case of any Award intended to qualify under Code Section 162(m). The
Committee may not delegate any responsibility relating to such
Performance Awards or Annual Incentive Awards.
(e) Status of Section 8(b) and Section 8(c) Awards under Code
Section 162(m). It is the intent of the Corporation that Performance
Awards and Annual Incentive Awards under Sections 8(b) and 8(c) hereof
granted to persons who are designated by the Committee as likely to be
Covered Employees within the meaning of Code Section 162(m) and
regulations thereunder (including Regulation 1.162-27 and successor
regulations thereto) shall, if so designated by the Committee, constitute
"performance-based compensation" within the meaning of Code Section
162(m) and regulations thereunder. Accordingly, the terms of Sections
8(b), (c), (d) and (e), including the definitions of Covered Employee and
other terms used therein, shall be interpreted in a manner consistent
with Code Section 162(m) and regulations thereunder. If any provision of
the Plan as in effect on the date of adoption or any agreements relating
to Performance Awards or Annual Incentive Awards that are designated as
intended to comply with Code Section 162(m) does not comply or is
inconsistent with the requirements of Code Section 162(m) or regulations
thereunder, such provision shall be construed or deemed amended to the
extent necessary to conform to such requirements.
9. Change of Control. In the event of a "Change of Control," the
following provisions shall apply unless otherwise provided in the Award
agreement:
(a) Options and SARs. Any Option or SAR carrying a right to
exercise that was not previously exercisable and vested shall become
fully exercisable and vested as of the time of the Change of Control and
shall remain exercisable and vested for the balance of the stated term of
such Option or SAR without regard to any termination of employment by the
Participant, subject only to applicable restrictions set forth in Section
10(a) hereof;
(b) Restricted Stock and Deferred Stock Units. The restrictions,
deferral of settlement, and forfeiture conditions applicable to any
Restricted Stock or Deferred Stock Unit granted under the Plan shall
lapse and such Awards shall be deemed fully vested as of the time of the
Change of Control, except to the extent of any waiver by the Participant
and subject to applicable restrictions set forth in Section 10(a) hereof;
and
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(c) Other Awards. The rights and obligations respecting, and the
payment of, all other Awards under the Plan shall be governed solely by
the provisions of the Severance Benefit Plan.
10. General Provisions.
(a) Compliance with Legal and Other Requirements. The Corporation
may, to the extent deemed necessary or advisable by the Committee,
postpone the issuance or delivery of Stock or payment of other benefits
under any Award until completion of such registration or qualification of
such Stock or other required action under any federal or state law, rule
or regulation, listing or other required action with respect to any stock
exchange or automated quotation system upon which the Stock or other
securities of the Corporation are listed or quoted, or compliance with
any other obligation of the Corporation, as the Committee may consider
appropriate, and may require any Participant to make such
representations, furnish such information and comply with or be subject
to such other conditions as it may consider appropriate in connection
with the issuance or delivery of Stock or payment of other benefits in
compliance with applicable laws, rules, and regulations, listing
requirements, or other obligations. The foregoing notwithstanding, in
connection with a Change of Control, the Corporation shall take or cause
to be taken no action, and shall undertake or permit to arise no legal or
contractual obligation, that results or would result in any postponement
of the issuance or delivery of Stock or payment of benefits under any
Award or the imposition of any other conditions on such issuance,
delivery or payment, to the extent that such postponement or other
condition would represent a greater burden on a Participant than existed
on the 90th day preceding the Change of Control.
(b) Limits on Transferability; Beneficiaries. No Award or other
right or interest of a Participant under the Plan shall be pledged,
hypothecated or otherwise encumbered or subject to any lien, obligation
or liability of such Participant to any party (other than the Corporation
or a subsidiary), or assigned or transferred by such Participant
otherwise than by will or the laws of descent and distribution or to a
Beneficiary upon the death of a Participant, and such Awards or rights
that may be exercisable shall be exercised during the lifetime of the
Participant only by the Participant or his or her guardian or legal
representative, except that Awards and other rights (other than ISOs and
SARs in tandem therewith) may be transferred to one or more Beneficiaries
or other transferees during the lifetime of the Participant, and may be
exercised by such transferees in accordance with the terms of such Award,
but only if and to the extent such transfers are permitted by the
Committee pursuant to the express terms of an Award agreement (subject to
any terms and conditions which the Committee may impose thereon). A
Beneficiary, transferee, or other person claiming any rights under the
Plan from or through any Participant shall be subject to all terms and
conditions of the Plan and any Award agreement applicable to such
Participant, except as otherwise determined by the Committee, and to any
additional terms and conditions deemed necessary or appropriate by the
Committee.
(c) Adjustments. In the event that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, share exchange,
liquidation, dissolution or other similar corporate transaction or event
affects the Stock such that an adjustment is determined by the Committee
to be appropriate under the Plan, then the Committee shall, in such
manner as it may deem equitable, adjust any or all of (i) the number and
kind of shares of Stock which may be delivered in connection with Awards
granted thereafter, (ii) the number and kind of shares of Stock by which
annual per-person Award limitations are measured under Section 5 hereof,
(iii) the number and kind of shares of Stock subject to or deliverable in
respect of outstanding Awards and (iv) the exercise price, grant price or
purchase price relating to any Award and/or make provision for payment of
cash or other property in respect of any outstanding Award. In addition,
the Committee is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Awards (including
Performance Awards and performance goals, and Annual Incentive Awards and
any Annual Incentive Award pool or performance goals relating thereto) in
recognition of unusual or nonrecurring events (including, without
limitation, events described in the preceding sentence, as well as
acquisitions and dispositions of businesses and assets) affecting the
Corporation, any subsidiary or any business unit, or the financial
statements of the Corporation or any subsidiary, or in response to
changes in applicable laws, regulations, accounting principles, tax rates
and regulations or business conditions or in view of the Committee's
assessment of the business strategy of the Corporation, any subsidiary or
business unit thereof, performance of comparable organizations, economic
and business conditions, personal performance of a Participant, and any
other circumstances deemed relevant;
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<PAGE>
provided that no such adjustment shall be authorized or made if and to
the extent that such authority or the making of such adjustment would
cause Options, SARs, Performance Awards granted under Section 8(b) hereof
or Annual Incentive Awards granted under Section 8(c) hereof to
Participants designated by the Committee as Covered Employees and
intended to qualify as "performance-based compensation" under Code
Section 162(m) and regulations thereunder to otherwise fail to qualify as
"performance-based compensation" under Code Section 162(m) and
regulations thereunder.
(d) Taxes. The Corporation and any subsidiary is authorized to
withhold from any Award granted, any payment relating to an Award under
the Plan, including from a distribution of Stock, or any payroll or other
payment to a Participant, amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an
Award, and to take such other action as the Committee may deem advisable
to enable the Corporation and Participants to satisfy obligations for the
payment of withholding taxes and other tax obligations relating to any
Award. This authority shall include authority to withhold or receive
Stock or other property and to make cash payments in respect thereof in
satisfaction of a Participant's tax obligations, either on a mandatory or
elective basis in the discretion of the Committee.
(e) Changes to the Plan and Awards. The Board, or the Committee
acting pursuant to such authority as may be delegated to it by the Board,
may amend, alter, suspend, discontinue or terminate the Plan or the
Committee's authority to grant Awards under the Plan without the consent
of shareholders or Participants, except that any amendment or alteration
to the Plan shall be subject to the approval of the Corporation's
shareholders not later than the annual meeting next following such Board
action if such shareholder approval is required by any federal or state
law or regulation or the rules of any stock exchange or automated
quotation system on which the Stock may then be listed or quoted, and the
Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to shareholders for approval; provided that, without
the consent of an affected Participant, no such Board action may
materially and adversely affect the rights of such Participant under any
previously granted and outstanding Award. The Committee may waive any
conditions or rights under, or amend, alter, suspend, discontinue or
terminate any Award theretofore granted and any Award agreement relating
thereto, except as otherwise provided in the Plan; provided that, without
the consent of an affected Participant, no such Committee action may
materially and adversely affect the rights of such Participant under such
Award. Notwithstanding anything in the Plan to the contrary, if any right
under this Plan would cause a transaction to be ineligible for pooling of
interest accounting that would, but for the right hereunder, be eligible
for such accounting treatment, the Committee may modify or adjust the
right so that pooling of interest accounting shall be available,
including the substitution of Stock having a Fair Market Value equal to
the cash otherwise payable hereunder for the right which caused the
transaction to be ineligible for pooling of interest accounting.
(f) Limitation on Rights Conferred under Plan. Neither the Plan
nor any action taken hereunder shall be construed as (i) giving any
Eligible Person or Participant the right to continue as an Eligible
Person or Participant or in the employ or service of the Corporation or a
subsidiary, (ii) interfering in any way with the right of the Corporation
or a subsidiary to terminate any Eligible Person's or Participant's
employment or service at any time, (iii) giving an Eligible Person or
Participant any claim to be granted any Award under the Plan or to be
treated uniformly with other Participants and employees, or (iv)
conferring on a Participant any of the rights of a shareholder of the
Corporation unless and until the Participant is duly issued or
transferred shares of Stock in accordance with the terms of an Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant
or obligation to deliver Stock pursuant to an Award, nothing contained in
the Plan or any Award shall give any such Participant any rights that are
greater than those of a general creditor of the Corporation; provided
that the Committee may authorize the creation of trusts and deposit
therein cash, Stock, other Awards or other property, or make other
arrangements to meet the Corporation's obligations under the Plan. Such
trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant. The trustee of such trusts may be
authorized to dispose of trust assets and reinvest the proceeds in
alternative investments, subject to such terms and conditions as the
Committee may specify and in accordance with applicable law.
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<PAGE>
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan
by the Board nor its submission to the shareholders of the Corporation
for approval shall be construed as creating any limitations on the power
of the Board or a committee thereof to adopt such other compensation and
incentive arrangements for employees, agents and brokers of the
Corporation and its subsidiaries as it may deem desirable.
(i) Payments in the Event of Forfeitures; Fractional Shares.
Unless otherwise determined by the Committee, in the event of a
forfeiture of an Award with respect to which a Participant paid cash or
other consideration, the Participant shall be repaid the amount of such
cash or other consideration. No fractional shares of Stock shall be
issued or delivered pursuant to the Plan or any Award. The Committee
shall determine whether cash, other Awards or other property shall be
issued or paid in lieu of such fractional shares or whether such
fractional shares or any rights thereto shall be forfeited or otherwise
eliminated.
(j) Governing Law. The validity, construction and effect of the
Plan, any rules and regulations under the Plan, and any Award agreement
shall be determined in accordance with Indiana law, without giving effect
to principles of conflicts of laws, and applicable federal law.
(k) Awards under Preexisting Plans. No further awards shall be
granted under the Preexisting Plans, after the Effective Date with
respect to the EVSP and after Midnight, May 15, 1997 with respect to the
Stock Option Plan. The Committee may waive any conditions or rights under
or amend or alter any awards granted under the Preexisting Plans to the
extent provided in either (i) the Preexisting Plan under which the award
was made or (ii) Section 10(e) hereof.
(l) Plan Effective Date and Shareholder Approval. The Plan has
been adopted by the Board as of the Effective Date, subject to approval
by the shareholders of the Corporation.
PCDocs No. 73635
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<PAGE> 37
Exhibit 10(b)
LINCOLN NATIONAL CORPORATION
DIRECTORS' VALUE SHARING PLAN
(Including All Amendments Through May 14, 1998)
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
<PAGE> 1
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 Companies ranked third, fourth, and fifth highest
in terms of Shareholder Return.
<PAGE> 2
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.
For each Performance Cycle, each Director shall be awarded a whole
number of Stock Units having a value as follows:
Performance Relative Value of
to Peer Companies Stock Units
Median $ 0
Top Tier (75th percentile) 16,000
Top Company 41,000
If the Corporation's performance falls between the above referenced points, the
value of the Stock Units awarded will be based on the interpolation of the value
to be awarded between the relevant referenced points. To the extent that the
formula described in this Section 3.2 does not result in a whole number of Stock
Units, the result shall be rounded upwards to the next whole number such that no
fractional Stock Units shall be issued under the Plan.
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
<PAGE> 3
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
<PAGE> 4
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.
<PAGE> 5
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.
<PAGE> 6
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\5
<PAGE> 7
EXHIBIT A
Peer Companies Designations
The following companies shall compose the Peer Companies for Performance Cycles
beginning in 1998:
American General Corporation Life Re Corporation
AmerUS Life Holdings, Inc. Nationwide Financial Services, Inc.
Conseco, Inc. Reinsurance Group of America, Inc.
The Equitable Companies, Inc. ReliaStar Financial Corporation
Hartford Life, Inc. SunAmerica, Inc.
Jefferson-Pilot Corporation Torchmark Corporation
Liberty Financial Companies, Inc. Transamerica Corporation
The following companies shall compose the Peer Companies for the 1996-1998 and
1997-1999 Performance Cycles:
Allstate Corporation ReliaStar Financial Corporation
American General Corporation SAFECO Corporation
CIGNA Corporation SunAmerica, Inc.
The Equitable Companies, Inc. Torchmark Corporation
Jefferson-Pilot Corporation Transamerica Corporation
Provident Life & Accident Insurance Co. Travelers Group, Inc.
Reinsurance Group of America, Inc. USF&G Corporation
<PAGE>
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
<PAGE>
<PAGE> 46
Exhibit 10(c)
RESTRICTED STOCK AWARD AGREEMENT
This Restricted Stock Award Agreement (the "Agreement") effective
_______________, 1998, by and between Lincoln National Corporation ("LNC") and
_____________________________ (the "Grantee"), evidences the grant by LNC on
March 31, 1998 ("Date of Grant"), of a Restricted Stock Award to the Grantee,
and the Grantee's acceptance of the Restricted Stock Award in accordance with
the provisions of the Lincoln National Corporation 1997 Incentive Compensation
Plan (the "Plan") and this Agreement. LNC and Grantee agree as follows:
1. Number of Shares Granted. The Grantee is awarded __________ shares of LNC
common stock (the "Restricted Shares") subject to the restrictions set out in
the Plan and in this Agreement. In the event of a stock dividend or stock split,
the number of Restricted Shares shall be automatically increased in the same
manner as all outstanding shares of LNC common stock ("Shares") and shall be
subject to the same restrictions as the underlying Shares.
2. Restrictions. The Restricted Shares may not be sold, pledged or otherwise
encumbered. Grantee shall have voting rights on the Restricted Shares after the
Restricted Shares have been issued.
3. Dividend Equivalent Rights. No dividends shall be payable on the
Restricted Shares. A Dividend Equivalent Rights Payment Account ("DER Account")
shall be established and maintained for Grantee. Stock units equal in value to
dividends attributable to the Restricted Shares shall be credited to the DER
Account as of the dividend payable date. These stock units have the same
restrictions as the underlying Restricted Shares.
4. Issuance of Shares. Six months after the Date of Grant, the Secretary of
LNC will issue the Restricted Shares, registered in the name of the Grantee, to
be held in book entry by the Transfer Agent until the restrictions lapse or
until the Restricted Shares are canceled or forfeited. The transfer of these
Restricted Shares is restricted under the terms of this Agreement.
5. Forfeitures.
(a) At the sole discretion of the Compensation Committee of
the LNC Board of Directors ("Committee"), all or part
of the Restricted Shares and DER Account will be
forfeited and transferred back to LNC as of December
31, 2000 if the corporate performance goals established
by the Committee for the 1998-2000 Long-Term Incentive
Cycle ("Cycle") are not fully achieved.
(b) Before January 1, 2001, if Grantee's employment with
LNC and all subsidiaries terminates or if Grantee is
removed from Senior Contributor status, all Restricted
Shares and the DER Account shall be forfeited and
transferred back to LNC unless otherwise determined by
the Committee.
6. Compliance with the Noncompete, Nondisclosure and Ideas Provision. This
- 1 -
<PAGE>
award may be canceled by action of the Committee if the Grantee fails to comply
with the noncompetition, nondisclosure and ideas provisions of the Plan. The
Grantee must provide the Secretary of LNC with a certification of compliance
with these provisions ("Certification") prior to the distribution of Restricted
Shares and the DER Account once the restrictions have lapsed.
7. Lapse of Restrictions. Unless all Restricted Shares have been canceled,
forfeited or converted to phantom units (as described below), after receipt of
the Certification, any remaining Restricted Shares and Shares representing the
number of stock units held in the DER Account shall be immediately distributed
to Grantee (or his estate) without restrictions as of a date no later than the
first to occur of:
(a) January 1, 2004;
(b) the date of a Change of Control of LNC as that term is defined in
the Plan;
(c) the date of Grantee's retirement on or after January 1,
2001 with Committee consent;
(d) the date (on or after January 1, 2001) on which the
Committee determines the total disability of Grantee;
(e) the date of Grantee's death if on or after January 1, 2001; or
(f) the date (on or after January 1, 2001) on which the
Committee, in its sole discretion, removes restrictions
from a pro-rata portion of any such Shares if, before
January 1, 2001, Grantee shall have retired with
Committee consent, died, became totally disabled or
been involuntarily terminated without cause.
The Committee may exercise its sole discretion and cause all or a portion of
such Restricted Shares and the DER Account to be converted to phantom units to
be administered under the terms of the Lincoln National Corporation Executive
Deferred Compensation Plan for Employees in the event Grantee is a Reporting
Person under Section 16(a) of the Securities Exchange Act of 1934 and the
Grantee's employer would be denied a deduction for the value of such converted
Restricted Shares and the DER Account.
8. Tax Withholding. The Grantee must remit to the Secretary of LNC an amount
equal to the required tax withholding on the value of the Restricted Shares and
the DER Account at such time as they are taxable to the Grantee. Grantee may
elect, in accordance with procedures
- 2 -
<PAGE>
established by the Committee, to surrender Shares (including the Shares which
are a part of this award) with a Fair Market Value (as defined in the Plan) on
the date of surrender which satisfies all or part of the Grantee's and LNC's
withholding requirements.
IN WITNESS WHEREOF, LNC, by its duly authorized officer has signed this
Agreement as of the effective date set out above.
LINCOLN NATIONAL CORPORATION
By:
Jon A. Boscia
President
PCDocs No. 71029/2
Special LTIC Grant
- 3 -
<PAGE>
<PAGE> 49
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months
Ended June 30 Year Ended December 31,
-----------------------
(millions of dollars) 1998 1997(4) 1997(4) 1996 1995 1994 1993
- --------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Income before Federal
Income Taxes and
Accounting Change.................. 379.0 138.3 1427.1 692.7 626.6 376.3 587.8
Equity Loss (Earnings) in
Unconsolidated Affiliates.......... (1.5) (1.3) (2.1) (1.4) (12.4) (14.6) --
Sub-total of Fixed Charges.......... 62.0 57.5 113.4 108.6 94.4 66.6 62.9
----- ----- ------ ------ ---- ---- ----
Sub-total of Adjusted
Net Income...................... 439.5 194.5 1538.4 799.9 708.6 428.3 650.7
Interest on Annuities &
Financial Products................. 827.1 762.1 1478.5 1435.6 1400.0 1359.0 1315.8
------ ------ -------- ------- ------- ------- ------
Adjusted Income Base............ 1266.6 956.6 3016.9 2235.5 2108.6 1787.3 1966.5
Rent Expense........................ 33.0 36.0 62.7 71.6 65.7 51.3 55.8
Fixed Charges:
Interest and Debt Expense........... 51.0 45.5 92.5 84.7 72.5 49.5 44.3
Rent (Pro-rated).................... 11.0 12.0 20.9 23.9 21.9 17.1 18.6
----- ---- ------- ---- ---- ---- ----
Sub-total of Fixed Charges....... 62.0 57.5 113.4 108.6 94.4 66.6 62.9
Interest on Annuities &
Financial Products................. 827.1 762.1 1478.5 1435.6 1400.0 1359.0 1315.8
----- ------ ------- ------ ------ ------ ------
Sub-total of Fixed Charges....... 889.1 819.6 1591.9 1544.2 1494.4 1425.6 1378.7
Preferred Dividends (Pre-tax)....... .1 .1 .2 .2 13.4 24.2 24.2
------- ------- ------ ------ ------ ------ -------
Total Fixed Charges.............. 889.2 819.7 1592.1 1544.4 1507.8 1449.8 1402.9
Ratio of Earnings to Fixed Charges:
Excluding Interest on
Annuities and Financial
Products (1) ..................... 7.09 3.38 13.57 7.37 7.51 6.43 10.35
Including Interest on
Annuities and Financial
Products (2)...................... 1.42 1.17 1.90 1.45 1.41 1.25 1.43
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividends (3)..................... 1.42 1.17 1.89 1.45 1.40 1.23 1.40
</TABLE>
(1) For purposes of determining this ratio, earnings consist of income before
federal income taxes and cumulative effect of accounting change 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) The coverage ratios for the six months ended June 30, 1997 are lower than
the other periods shown due to the reduction in net income caused by the
reserve strengthening in LNC's disability income business. The coverage
ratios for the year 1997 are higher than the other periods shown due to
the inclusion of the gain on sale of a major subsidiary in net income.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
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.
</LEGEND>
<CIK> 0000059558
<NAME> Lincoln National Corporation
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<DEBT-HELD-FOR-SALE> 27,786,933,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 648,873,000
<MORTGAGE> 4,434,864,000
<REAL-ESTATE> 498,985,000
<TOTAL-INVEST> 35,271,824,000
<CASH> 2,414,114,000
<RECOVER-REINSURE> 2,373,512,000
<DEFERRED-ACQUISITION> 1,749,263,000
<TOTAL-ASSETS> 88,364,620,000
<POLICY-LOSSES> 17,452,405,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 19,403,500,000
<NOTES-PAYABLE> 1,403,839,000
0
1,120,000
<COMMON> 969,424,000
<OTHER-SE> 4,180,303,000
<TOTAL-LIABILITY-AND-EQUITY> 88,364,620,000
1,349,866,000
<INVESTMENT-INCOME> 1,317,079,000
<INVESTMENT-GAINS> 49,463,000
<OTHER-INCOME> 239,104,000
<BENEFITS> 1,583,140,000
<UNDERWRITING-AMORTIZATION> 154,419,000
<UNDERWRITING-OTHER> 787,855,000
<INCOME-PRETAX> 379,058,000
<INCOME-TAX> 108,336,000
<INCOME-CONTINUING> 270,722,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 270,722,000
<EPS-PRIMARY> 2.70
<EPS-DILUTED> 2.66
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
