UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 1-6028
LINCOLN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1140070
State of incorporation) (I.R.S. Employer Identification No.)
200 East Berry Street, Fort Wayne, Indiana 46802-2706
(Address of principal executive offices)
Registrant's telephone number (219) 455-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchanges on which registered
Common Stock (Without Par Value) New York, Chicago, Pacific and London
Common Share Purchase Rights New York, Chicago and Pacific
$3.00 Cumulative Convertible Preferred New York and Chicago
Stock, Series A (Without Par Value)
8.75% Cumulative Quarterly Income New York
Preferred Securities, Series A*
8.35% Trust Originated Preferred New York
Securities, Series B*
*Issued by Lincoln National Capital I and Lincoln National Capital II,
respectively. Payments of distributions and payments on liquidation or
redemption are guaranteed by Lincoln National Corporation.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
As of February 27, 1998, 100,316,069 shares of common stock were outstanding.
The aggregate market value of such shares (based upon the closing price of these
shares on the New York Stock Exchange) held by nonaffiliates was approximately
$8,426,500,000.
Select materials from the Proxy statement for the Annual meeting of
Shareholders, scheduled for May 14, 1998, have been incorporated by reference
into Part III of this Form 10-K.
The exhibit index to this report is located on page 79.
Page 1 of 222
<PAGE> -2-
Lincoln National Corporation
Table of Contents
Item Page
PART I
1. Business
A. General Description . . . . . . . . . . . . . . . . . . . . . . .3
B. Description of Business Segments:
Life Insurance and Annuities . . . . . . . . . . . . . . . . . . .3
Lincoln UK. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Management . . . . . . . . . . . . . . . . . . . . . . 4
C. Other Matters:
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 6
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters .6
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . .7
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . .8
8. Financial Statements and Supplementary Data . . . . . . . . . . . . 33
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures . . . . . . . . . . . . . . . . . . . . 66
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . 67
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 68
12. Security Ownership of Certain Beneficial Owners and Management. . . . 68
13. Certain Relationships and Related Transactions . . . . . . . . . . . 68
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . 68
Index to Exhibits. . . . . . . . . . . . . . . . .. . . . . . . . . .79
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .80
<PAGE> -3-
PART I
Item 1. Business
Lincoln National Corporation ("LNC") is a holding company. Through subsidiary
companies, LNC operates multiple insurance and investment management businesses.
During 1998, the collective group of companies will be adopting "Lincoln
Financial Group" as its marketing identity. LNC is the 40th largest (based on
assets) U.S. corporation (1996 Fortune 500, Largest U.S. Corporations, April
1997). Operations are divided into four business segments, 1) Life Insurance and
Annuities, 2) Lincoln UK 3) Reinsurance and 4) Investment Management. Over the
past five years, segments have been redefined as noted below. Prior to 1997, LNC
had a Property-Casualty segment. This operation was sold in 1997 and the related
data has been reclassified to discontinued operations (see note 11 to the
consolidated financial statements on page 65). The Lincoln UK segment is new in
1997. Prior to the adoption of Financial Accounting Standard No. 131 (see note 2
to the consolidated financial statements on page 43), this unit was included in
the Life Insurance and Annuities segment. The Investment Management segment was
added in April of 1995 following the acquisition of Delaware Management
Holdings, Inc. (see note 11 to the consolidated financial statements on page
64). Prior to the sale of 71% of its direct writer of employee life-health
coverages in the first quarter of 1994, LNC operated in a business segment
entitled Employee Life-Health Benefits. After the sale, the earnings from the
29% minority interest retained were included in "Other Operations" as described
below. Although one of the subsidiaries held by LNC was formed as early as 1905,
LNC itself was formed in 1968. LNC is an Indiana corporation with its principal
office at 200 East Berry Street, Fort Wayne, Indiana 46802-2706. As of December
31, 1997, there were 245 persons on the staff of LNC. Total employment of
Lincoln National Corporation at December 31, 1997 on a consolidated basis was
8,120.
Revenues, pre-tax income, and assets for LNC's major business segments and other
operations are shown in this 10-K report as part of the consolidated financial
statements (see note 9 to the consolidated financial statements on page 61).
The LNC "Other Operations" category includes the financial data for an
unconsolidated affiliate (subsequent to the first quarter of 1994 and prior to
the sale of this holding in October of 1995) engaged in the employee life-health
benefits business, an investment management company that services LNC's business
segments, certain other operations that are not directly related to the business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on short-term and long-term borrowings and unallocated
corporate overhead expenses).
Following is a brief description of the four business segments:
1. Life Insurance and Annuities
The primary companies within this business segment are The Lincoln National Life
Insurance Company ("Lincoln Life"); First Penn-Pacific Life Insurance Company
("First Penn"); and Lincoln Life & Annuity Company of New York ("LLANY").
Lincoln Life, an Indiana corporation headquartered in Fort Wayne, Indiana, is
the 7th largest U.S. stockholder-owned life insurance company, based on
revenues, (1996 Fortune Rankings of Largest Life Insurance Companies by
Revenues, April 1997) and the 12th largest, based on assets, (Best's Review
Life-Health Edition, October 1997). A network of 68 life insurance agencies,
independent life insurance brokers, insurance agencies located within financial
institutions and specifically trained employees sells fixed annuities, variable
annuities, pension products, universal life insurance, variable universal life
insurance and other individual insurance coverages in most states of the United
States. The distribution network includes approximately 2,200 career agents,
15,600 brokers and access to 51,800 stockbrokers and financial planners. The
network of agencies and career agents shown above includes 30 and 600,
respectively, that were added January 2, 1998 as the result of the acquisition
of a block of individual life insurance and annuity business (see note 11 to the
consolidated financial statements on page 64).
First Penn is an Indiana Corporation headquartered in Oakbrook Terrace,
Illinois. Its universal life, term life and deferred annuity products are
distributed through stockbrokers, financial planners, banks and personal
producing general agents. It also manufactures universal life, term life and
deferred annuity products for Lincoln Life for distribution through its career
agents and banks. These products are marketed in most states of the United
States.
LLANY is a New York company, headquartered in Syracuse, New York. This company
was formed and licensed prior to the completion of the purchase of the
tax-qualified annuity business from UNUM Corporation's affiliates (see note 11
to the consolidated financial statements on page 64). LLANY also offers other
types of annuities, pension and insurance products within the state of New York.
<PAGE> -4-
A portion of the block of individual life insurance and annuities acquired
January 2, 1998 (see Lincoln Life paragraph above) was reinsured into this
corporate structure.
Other companies within this segment include various general business
corporations that support the segment's sales, service and administrative
efforts.
Approximately 4,575 employees are involved in this business segment. This count
includes employees associated with the block of individual life and annuity
businesses acquired January 2, 1998 (see note 11 to the consolidated financial
statements on page 64).
2. Lincoln UK
Business in this segment is conducted through a series of operating companies
owned by Lincoln National (UK). Lincoln National (UK) is headquartered in
Gloucester, England, and is licensed to do business throughout the United
Kingdom. The principal products produced by this operation, unit-linked life
and pension products, are similar to U.S. produced variable life and annuity
products. The distribution network includes approximately 1,800 sales
representatives. Lincoln National (UK) was the 12th largest writer of
unit-linked new business premiums in the UK for 1996 (Money Management
Magazine-New Business Trends, June 1997).
Approximately 1,340 employees are involved in this business segment.
3. Reinsurance
The primary companies within this business segment are Lincoln National
Reassurance Company ("LNRAC"), Lincoln National Health & Casualty Insurance
Company ("LNH&C"), Lincoln Life, Lincoln National Reinsurance Company Ltd
(Bermuda), Old Fort Insurance Company Ltd (Bermuda) and Lincoln National
Reinsurance Company Ltd (Barbados). LNRAC and Lincoln Life offer reinsurance
programs for individual life, group life, group medical, disability income,
personal accident and annuity products to U.S. and international clients. LNH&C
offers group medical products and services on both a direct and reinsurance
basis as well as personal accident reinsurance. The insurance companies in
Bermuda and Barbados offer specialized reinsurance programs for life, health and
annuity business. They also offer funded cover programs to property-casualty
carriers in the U.S. and select international markets.
This segment offers a broad range of risk management products and services to
insurance companies, HMOs, self-funded employers and other primary market risk
accepting organizations throughout the United States and economically attractive
international markets. Marketing efforts are conducted primarily through the
efforts of a reinsurance sales staff. Some business is presented by reinsurance
intermediaries and brokers. The reinsurance organization is one of the leading
life-health reinsurers worldwide measured on gross premiums, net of ceded
(Standard & Poor's Global Reinsurance Highlights, August 1997).
Other companies in this business segment include various general business
corporations that support the segment's sales, service and administration
efforts.
Approximately 775 employees are involved in this business segment.
4. Investment Management
The primary companies within this business segment include Lincoln National
Investments, Inc. ("LNI"), Lincoln National Investment Companies, Inc. ("LNIC"),
Delaware Management Holdings, Inc. ("Delaware"), Lynch & Mayer, Inc. ("L&M") and
Vantage Global Advisors, Inc. ("Vantage"). LNI and LNIC are intermediate level
holding companies that own the operating companies within this segment. The
operating companies provide a variety of asset management services to
institutional and retail customers including pension plans, college endowment
funds, individuals and trusts. These companies serve as investment advisor to
approximately 610 pension funds and other institutional accounts; act as
investment manager/national distributor and/or shareholder services agent for
99 open-end funds; and serve as investment manager for 10 closed-end funds.
Approximately 920 employees are involved in this business segment.
<PAGE> -5-
LNC's insurance subsidiaries protect themselves against losses greater than the
amount they are willing to retain on any one risk or event by purchasing
reinsurance from unaffiliated insurance companies (see note 7 to the
consolidated financial statements on page 54).
All businesses LNC is involved in are highly competitive due to the market
structure and the large number of competitors.
At the end of 1996, the latest year for which data is available, there were more
than 1,700 life insurance companies in the United States. Lincoln Life is among
the 15 largest stock and mutual life insurance companies in the United States
based on premiums (Best's Review Life-Health Edition, October 1997).
LNC's investment management companies were the 33rd largest U.S. investment
management group at the end of 1996 (1996 Institutional Investor 300 Money
Managers, July 1997).
LNC's Life Insurance & Annuities, Lincoln UK and Reinsurance business segments,
in common with those of other insurance companies, are subject to regulation and
supervision by the states, territories and countries in which they are licensed
to do business. The laws of these jurisdictions generally establish supervisory
agencies with broad administrative powers relative to granting and revoking
licenses to transact business, regulating trade practices, licensing agents,
prescribing and approving policy forms, regulating premium rates for some lines
of business, establishing reserve requirements, regulating competitive matters,
prescribing the form and content of financial statements and reports, regulating
the type and amount of investments permitted and prescribing minimum levels of
capital. The ability to continue an insurance business is dependent upon the
maintenance of the licenses in the various jurisdictions.
LNC's Investment Management segment, in common with other investment management
groups, is subject to regulation and supervision by the Securities and Exchange
Commission, National Association of Securities Dealers, the Investment
Management Regulator Organization ("IMRO"), the Pennsylvania Department of
Banking and jurisdictions of the states, territories and foreign countries in
which they are licensed to do business.
Because of the nature of the insurance and investment management businesses,
there is no single customer or group of customers upon whom the business is
dependent. Factors such as backlog, raw materials, seasonality, patents
(including trademarks, licenses, franchises and any other concessions held) or
environmental impact do not have a material effect upon such businesses.
However, within LNC's Reinsurance segment, Lincoln National Risk Management,
Inc., does hold a patent for "The Method and Apparatus for Evaluating a
Potentially Insurable Risk" and markets multiple knowledge-based underwriting
products that rely on this product. LNC does not have a separate unit that
conducts market research. Research activities related to new products or
services, or the improvement of existing products or services, are conducted
within the business segments. Expenses related to such activities are not
material. Also, sales are not dependent upon select geographic areas. LNC has
foreign operations that are significant in relationship to the consolidated
group (see note 9 to the consolidated financial statements on page 62).
Item 2. Properties
LNC and the various Fort Wayne operating businesses own or lease approximately
1.5 million square feet of office space in the Fort Wayne area. The businesses
operating in suburban Chicago, Illinois; Philadelphia, Pennsylvania; Hartford,
Connecticut and areas near London, England own or lease another 700,000 square
feet of office space. An additional 1.0 million square feet of office space is
owned or leased in other U.S. cities and foreign countries for branch offices
and other smaller operations. As shown in the notes to the consolidated
financial statements (see note 7 to the consolidated financial statements on
page 54), the rental expense on operating leases for office space and equipment
for continuing operations totaled $62.5 million for 1997. Office space rent
expense accounts for $47.2 million of this total. This discussion regarding
properties does not include information on investment properties.
<PAGE> -6-
Item 3. Legal Proceedings
LNC and its subsidiaries are involved in various pending or threatened legal
proceedings arising from the conduct of business. In some instances, these
proceedings include claims for unspecified or substantial punitive damages and
similar types of relief in addition to amounts for alleged contractual liability
or requests for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that these proceedings
ultimately will be resolved without materially affecting the consolidated
financial position of LNC.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1997, no matters were submitted to securityholders
for a vote.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Stock Market and Dividend Information
The dividend on LNC's common stock is approved each quarter by the Corporation's
Board of Directors. In determining dividends, the Board takes into consideration
items such as LNC's financial condition, including current and expected
earnings, projected cash flows and anticipated financing needs. The market
prices and cash dividends declared by calendar quarter for the past two years
are as follows:
Common Stock Data: (per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
1997
High. . . . . . . . . . . . . . . $61.625 $68.625 $73.000 $78.125
Low . . . . . . . . . . . . . . . 51.375 49.000 63.813 64.625
Dividend declared . . . . . . . . $.49 $.49 $.49 $.52
1996
High . . . . . . . . . . . . . . $57.000 $52.875 $47.000 $54.625
Low. . . . . . . . . . . . . . . 48.000 45.875 40.750 44.000
Dividend declared . . . . . . . $.46 $.46 $.46 $.49
Notes:
(1) At December 31, 1997, the number of shareholders of record of LNC's
common stock was 12,575.
(2) The payment of dividends to shareholders is subject to the restrictions
described in notes 5, Supplemental Financial Data, and 7, Restrictions,
Commitments and Contingencies to the consolidated financial statements
(see pages 50 and 53, respectively) and is discussed in the Management's
Discussion and Analysis of Financial Condition (see page 33).
Exchanges: New York, Chicago, Pacific, and London.
Stock Exchange Symbol: LNC
<PAGE> -7-
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(Millions of dollars, except per share data)
Year Ended December 31 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total revenue ............................... 4,898.5 4,733.6 4,586.5 3,932.7 4,937.2
Net income from continuing operations
before cumulative effect of
accounting change (1) ...................... 22.2 356.4 301.4 165.5 172.8
Net income from discontinued operations ..... 134.9 157.2 180.8 184.4 242.5
Gain on sale of discontinued operations ..... 776.9 -- -- -- --
Cumulative effect of accounting change ...... -- -- -- -- (96.4)
Net Income (1) .......................... 934.0 513.6 482.2 349.9 318.9
Per Share Data: (2)
Net income from continuing operations
before cumulative effect of
accounting change .......................... $ .21 $ 3.31 $ 2.81 $ 1.59 $ 1.68
Net income from discontinued operations ..... 1.30 1.49 1.72 1.76 2.35
Gain on sale of discontinued operations ..... 7.47 -- -- -- --
Cumulative effect of accounting change ...... -- -- -- -- (.94)
Net Income-Diluted .......................... 8.98 4.87 4.60 3.35 3.09
Net Income-Basic ......................... 9.11 4.95 4.78 3.52 3.24
Common stock dividend ....................... $ 1.99 $ 1.87 $ 1.75 $ 1.66 $ 1.55
December 31 ................................. 1997 1996 1995 1994 1993
Assets ...................................... 77,174.7 71,713.4 63,257.7 48,864.8 47,825.1
Long-term debt .............................. 511.0 626.3 659.3 474.2 417.1
Minority interest-preferred securities of
subsidiary companies ....................... 315.0 315.0 -- -- --
Shareholders' equity ........................ 4,982.9 4,470.0 4,378.1 3,042.1 4,072.3
Per Share Data: (2)
Shareholders' equity (Securities at market).. $ 49.27 43.00 41.89 29.35 39.39
Shareholders' equity (Securities at cost) ... 44.96 39.03 35.21 32.35 30.54
Market value of common stock ................ 78.13 52.50 53.75 35.00 43.50
</TABLE>
(1) Factors affecting the comparability of net income from continuing operations
before cumulative effect of accounting change and net income from continuing
operations for the 1993-1997 period are shown on page 8 (see "Supplemental
Data"). Other factors affecting comparability are shown within the review of
operations for each segment (see pages 9-17).
(2) Per share amounts were also affected by the issuance of 9,200,000 and
1,398,112 shares of common stock in 1993 and 1997, respectively, and the
retirement of 500,000; 694,582 and 4,948,900 shares of common stock in 1994,
1996 and 1997, respectively. The per share amounts for prior years have been
restated to conform to the provisions of Financial Accounting
Standard No. 128 (see note 2 to the consolidated financial
statement on page 43).
<PAGE> -8-
Supplemental Data
The following table presents a reconciliation of "Income (Loss) from Continuing
Operations" to "Net Income (Loss) from Continuing Operations" determined in
accordance with generally accepted accounting principles. Income (Loss) from
Continuing Operations is LNC's alternative measure of operating performance
which excludes the after-tax realized gain (loss) on investments and associated
items, gain (loss) on sale of subsidiaries, restructuring charges and
non-recurring accounting changes.
Year Ended December 31 (in millions) 1997 1996 1995 1994 1993
Income (loss) from continuing
operations (1) . . . . . . . . . $(50.7) $298.8 $140.9 $218.6 $197.5
Realized gain (loss) on investments,
net of associated amortization of
deferred policy acquisition costs,
investment expenses and income taxes 72.9 57.6 102.2 (101.9) 73.8
Gain (loss) on sale of subsidiary,
net of taxes . . . . . . . . . . . -- -- 58.3 48.8 (98.5)
Cumulative effect of accounting
change (postretirement benefits). . -- -- -- -- (96.4)
Net Income (Loss) from Continuing
Operations . . . . . . . . . . . . $ 22.2 $356.4 $301.4 $165.5 $ 76.4
(1) Income from continuing operations for 1997, 1995 and 1993 includes the
impact of the changes in estimate of the reserve level needed for LNC's
disability income business ($130.0 million, $121.6 million and $32.8
million, after-tax, respectively). Also 1997 includes a change in estimate
for reserves for 1) Lincoln UK's pension business of $174.9 million
after-tax and 2) Reinsurance's personal accident programs of $113.7 million
after-tax.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The pages to follow review LNC's results of operations and financial condition.
Historical financial information is presented and analyzed. Where appropriate,
factors that may affect future financial performance are identified and
discussed. Actual results could differ materially from those indicated in
forward-looking statements due to, among other specific changes currently not
known, subsequent significant changes in: the company (e.g., acquisitions and
divestitures), financial markets (e.g., interest rates and securities markets),
legislation (e.g., taxes and product taxation), regulations (e.g., insurance and
securities regulations), acts of God (e.g., hurricanes, earthquakes and storms),
other insurance risks (e.g., policyholder mortality and morbidity) and
competition.
On pages 9 through 17, the financial results of LNC's four business segments and
other operations are presented and discussed. Within these business segment
discussions, reference is made to "Income from Operations". This alternative
measure of earnings is defined as "Net income less realized gain (loss) on sale
of investments, gain (loss) on sale of subsidiaries, restructuring charges and
cumulative effect of accounting change, all net of taxes." Page 18 discusses
factors affecting LNC's consolidated investment performance. Pages 19 through 33
discuss factors that have affected specific elements of the consolidated
financial statements as well as information pertaining to LNC as a whole.
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" should be read in conjunction with the audited consolidated
financial statements and accompanying notes presented on pages 34 through 66.
<PAGE> -9-
<TABLE>
<CAPTION>
Review of Operations: Life Insurance and Annuities
Year Ended December 31 (in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Financial Results by Source
Annuities ........................................... $ 203.0 $ 165.0 $ 149.3 $ 120.0 $ 96.5
Insurance ........................................... 36.1 36.4 31.1 34.2 37.8
Pensions ............................................ 6.3 2.9 22.1 22.4 30.6
Disability Income (1) ............................... -- -- (18.3) (14.9) 3.5
Other ............................................... 10.4 8.2 8.5 (5.5) (17.0)
Income from Operations (2) ....................... 255.8 212.5 192.7 156.2 151.4
Realized Gain (Loss) on Investments (3) ............. 47.5 38.5 81.3 (93.4) 53.8
Net Income (2) ................................... $ 303.3 $ 251.0 $ 274.0 $ 62.8 $ 205.2
December 31 ....................... (in billions) 1997 1996 1995 1994 1993
Account Values
Annuities ........................................... $ 44.6 $ 38.0 $ 30.3 $ 24.6 $ 20.9
Reinsurance Ceded - Annuities ....................... (1.8) (1.8) (1.7) (1.5) (.7)
Universal and Variable Life Insurance ............... 3.0 2.9 2.6 2.4 2.2
401k Retirement Plans ............................... 3.4 2.9 2.4 1.9 1.5
Other Pensions ...................................... 4.5. 4.9. 5.6 5.5 5.5
Total Account Values .............................. $ 53.7 $ 46.9 $ 39.2 $ 32.9 $ 29.4
</TABLE>
(1) Lincoln stopped writing disability income coverages on a direct basis at the
end of March 1996. The administration of this business was moved to the
Reinsurance segment at the end of September 1995.
(2) Income from operations and net income of the annuities and pension sub-
segments for 1993 include an increase in the estimate of net investment
income ($26.0 million after-tax) related to a refinement in the method used
to calculate the estimated effective yields on mortgage-backed securities.
(3) Realized gain (loss) on investments for 1993 includes an increase in the
allowance for losses for mortgage loans ($42.3 million after-tax) related
to a change in accounting for the impairment of mortgage loans as
prescribed by Financial Accounting Standard No. 114.
LNC's Life Insurance and Annuities segment reported record income from
operations of $255.8 million in 1997, a 20% increase over the $212.5 million
reported in 1996. The continuing double-digit growth in the annuity business was
the primary factor in this segment's earnings performance.
Profile: The Life Insurance and Annuities segment is composed of Lincoln
National Life Insurance Company ("Lincoln Life"), First Penn-Pacific Life
Insurance Company ("First Penn") and Lincoln Life & Annuity Company of New York
("LLANY"). As shown above, account values for this segment's annuities, 401(k)
retirement plans, life insurance and pensions total $53.7 billion as of December
31, 1997. Life insurance in-force for these companies as of December 31, 1997,
totaled $63.5 billion, an increase of 29% in comparison with $49.1 billion as of
December 31, 1996.
Lincoln Life, which is based in Fort Wayne, Ind., is the 12th largest life
insurer in the United States when measured by assets (Best's Review, Life/Health
Edition, October 1997). First Penn, which has its headquarters in Oakbrook
Terrace, Ill., is recognized for its product innovations. One recent
introduction is MoneyGuard, a life insurance policy that incorporates long-term
care benefits. LLANY, which is based in Syracuse, N.Y., provides group
tax-sheltered annuities and other insurance products in New York State.
LNC completed the acquisition of a block of individual life insurance and
annuities business on January 2, 1998, from CIGNA Corporation, adding a career
agency system of 600 producers; a life brokerage operation; an annuity
distribution system; and $41 billion of individual life insurance in-force.
Varied Distribution: Products from the companies in this segment are sold
through multiple distribution channels, reflecting a marketplace where consumers
increasingly want to do business on their own terms. These channels are career
agents, independent agencies, insurance brokers, banks, stockbrokers and
financial planners.
<PAGE> -10-
Lincoln Life's and LLANY's wealth accumulation and wealth protection products
include: fixed and variable annuities; tax-deferred annuities; term, universal
and variable universal life insurance; and 401(k) retirement plans. These
products are sold in 50 states through the 68 regional offices of Lincoln
Financial Advisors ("LFA"), a broker/dealer that serves approximately 2,200
career agents and 15,600 insurance brokers, as well as through 51,800
stockbrokers and financial planners. The network of agencies and career agents
includes 30 and 600, respectively, that were added January 2, 1998 as the result
of the acquisition of a block of individual life insurance and annuity business
(see note 11 to the consolidated financial statements on page 64).
LFA is a new corporation that includes a network of regional financial planning
offices that serve as the preferred distributor of Lincoln Life products. LFA
offers a full range of financial planning services and investments, and is a
securities broker/dealer and registered investment advisor.
First Penn offers annuities through banks, universal life insurance through
independent marketers and life insurance through brokers and LFA agents.
Lincoln Life Technology: Lincoln Life has invested $70 million over the past
three years to provide the infrastructure that improves customer service, adds
products and lowers expense levels. The objective, realized through voice
response technology and other developments, is to serve the customer from a
single platform, rather than from multiple product platforms. In addition to
better service, a single platform offers greater opportunities to cross-sell
products to existing customers. Also during 1997 came the decision to enter into
a relationship with IBM for providing information technology services for the
Fort Wayne operation. This decision stemmed from the rapid acceleration of the
technology industry and the realization that top technology people, whether
experienced or recently graduated, are going to work for technology companies.
The relationship with IBM will enable Lincoln Life to leverage that
technological expertise. A seven-year contract was signed with IBM in February
1998 (see note 7 to the consolidated financial statements on page 54).
Annuities: Annuity earnings in this segment increased 23% in 1997, reaching a
record $203.0 million. As of December 31, 1997, annuity account values were
$44.6 billion, up from $38.0 billion the year before. Variable annuity account
values at year-end were $27.3 billion, while fixed annuities represented $17.2
billion.
Annuity deposits in 1997 were $4.0 billion. Annuity deposits sold through
producers were $2.2 billion, while annuity deposits sold through stockbrokers
were $1.7 billion. The latter compares with $2.0 billion in deposits from
stockbrokers in 1996. American Funds Distributors ("AFD"), which markets the
American Legacy variable annuity product sold through stockbrokers, plans to
expand its annuity distribution staff and to be more aggressive in product
innovations.
Lincoln Life is a leading writer of annuities in the United States (National
Underwriter, July 1997).
Life Insurance: Operating income from life insurance was $36.1 million, about
even with 1996. Combined universal life and variable universal life insurance
account values increased 6 percent in 1997 to $3.0 billion. Individual life
insurance sales increased 15% for the year to $18.7 billion.
Pensions: This segment's pension business is focused on 401(k) retirement plans
for businesses with fewer than 100 employees. Account values for these plans
were $3.4 billion as of December 31, 1997, a 17% increase over 1996.
Deposits totaled $742 million.
The remainder of this segment's pension business consists primarily of
guaranteed interest contracts ("GICs") and group pension annuities ("GPAs"),
both of which Lincoln Life stopped writing in 1995 as it focused its operations
on the small business retirement market. Account values in this portion of the
pension business declined to $4.4 billion at year-end.
Alliances: As Lincoln Life has exited small lines of business that were outside
its primary operating focus, it has entered into alliances in order to provide
its distribution force with access to products. Among these lines have been
long-term care, disability income insurance, pension plan termination annuities
and GICs. In 1997, Lincoln Life exited the employer-sponsored life insurance
market and entered into an alliance with Colonial Life & Accident for the
servicing and re-enrollment of Lincoln Life's block of business.
<PAGE> -11-
Outlook: The acquisition and integration of the individual life and annuity
business from CIGNA Corporation will add breadth to Lincoln Life's distribution
structure and product portfolio. The transaction brings approximately 600
financial planners along with products to serve higher net-worth individuals
seeking wealth accumulation and protection. It also will add a new, more
competitive, multiple manager variable annuity to market through the various
distribution channels. In addition, changes in the American Legacy annuity and
distribution should improve deposits from this source.
In connection with the completion of the acquisition mentioned above, LNC
expects to record a charge to its Life Insurance & Annuities segment during the
first quarter of 1998 of approximately $20 million, after-tax. This charge will
cover certain costs of integrating the existing operations with the new block of
business.
<TABLE>
<CAPTION>
Review of Operations: Lincoln UK (1)
Year Ended December 31 (in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Financial Results
Income (Loss) from Operations (2) ................... $ (108.3) $ 66.1 $ 45.9 $ 17.2 $ 11.9
Realized Gain (Loss) on Investments ................. 1.5 (.1) (.2) 1.3 .7
Net Income (Loss)(2)............................. $ (106.8) $ 66.0 $ 45.7 $ 18.5 $ 12.6
Net Initial Commission Value (3) .................... $ 55.4 $ 47.2 $ 39.4 $ 32.1 $ 26.0
December 31 (in billions) 1997 1996 1995 1994 1993
Unit-Linked Assets .................................. $ 5.643 $ 5.074 $ 4.307 $ 1.320 $ 1.235
Individual Life Insurance In-Force .................. $ 25.026 $23.835 $ 23.509 $ 9.412 $ 8.044
Exchange Rate Ratio - U.S. Dollars to Pounds Sterling
Average for the Year ................................ 1.644 1.567 1.582 1.536 1.500
End of Year ......................................... 1.651 1.713 1.553 1.565 1.480
</TABLE>
(1) This segment was added in 1997 (with restatement of prior year amounts) as
required by the adoption of Financial Accounting Standard No. 131
(see note 2 to the consolidated financial statements on page 43). Lincoln
UK was previously reported with the Life Insurance and Annuities segment.
(2) Income (loss) from operations and net income (loss) for 1997 include a
charge of $174.9 million ($199.4 million pre-tax) for a change in estimate
of the cost of settling pension mis-selling liabilities (see note 2 to the
consolidated financial statements on page 43).
(3) Net Initial Commissions is a measure used by Lincoln UK to measure sales
progress and future profitability.
LNC's Lincoln UK segment, conducted through Lincoln National (UK) and its
operating subsidiaries reported income from operations of $66.6 million in 1997,
excluding a charge of $174.9 million, after-tax, to strengthen reserves for
future liabilities concerning past sales of pension products to individuals.
Including the special charge, Lincoln UK had a loss from operations of $108.3
million. Income from operations in 1996 was $66.1 million.
Profile: Lincoln UK offers life, investment and income protection and retirement
planning products primarily through 1,800 direct sales representatives and tied
agents. Lincoln UK sells predominantly unit-linked products where the investment
risk is borne by the policyholder. These products are similar to variable life
products sold in the U.S. After rapid growth prompted by the acquisition of
three life insurance companies between 1993 and 1995, its home office operations
are divided between Uxbridge, Middlesex, and Barnwood, Gloucester, England.
<PAGE> -12-
Markets: Account values in the unit-linked asset business were $5.6 billion as
of December 31, 1997, an increase of 11% over the year before (15% calculated
using pounds sterling). Net initial commission values increased $8.2 million or
17% in 1997(12% using pounds sterling). Individual life insurance in-force as of
December 31, 1997, was $25.0 billion.
Exchange Rates: LNC's subsidiary in the United Kingdom, as with subsidiaries in
other foreign countries, has its balance sheet accounts and income statements
translated at the current exchange and average exchange rates for the year,
respectively. The average exchange rate for 1997 was $1.644 per British pound
sterling. This was 5% higher than the 1996 average exchange rate of $1.567 per
British pound.
Acquisition: In December 1997, City Financial Partners Ltd. ("CFPL"), Lincoln
UK's largest tied agent, was acquired and is now a wholly-owned subsidiary.
Founded in 1992 as a tied agent of Citibank Life, which was acquired by LNC in
1993, CFPL had a contract with Lincoln UK. It offers the full range of Lincoln
UK pensions, life assurance and unit trust products.
Pension Product Mis-selling: A charge of $174.9 million after-tax was taken in
the fourth quarter of 1997 to increase reserves for liabilities in the so-called
"pension mis-selling" situation in the United Kingdom. In December 1993,
regulatory agencies raised questions as to whether individuals who bought
pensions in the UK and exited employer plans between 1988 and 1993 were given
appropriate advice by insurance agents and brokers. The regulatory agencies
asked the insurance companies to review their cases and to provide redress to
those individuals harmed by the activities of agents or brokers. As a result of
what the government viewed as a slow response by the insurance industry,
regulators have set targets, publicly named companies that it sees as tardy in
their resolution of cases and taken disciplinary actions.
A subsidiary of Lincoln UK incurred a small fine in 1997 in one of these
actions. Lincoln UK has expressed its commitment to complete its review as
quickly as possible so that appropriate action can be taken. The timetable has
proved challenging, however, especially since 75% of the priority cases to be
reviewed relate to companies Lincoln UK recently acquired. Considerable staff
has been added to undertake the review and outside consultants have been
retained to expedite the process. Lincoln UK achieved its target of completing
90% of the top-priority cases by December 1997 and is making a strong effort to
meet the regulatory target of having all remaining priority cases reviewed by
the end of 1998.
As of December 31, 1997, and December 31, 1996, liabilities of $291.0 million
and $86.7 million had been established for this issue. These liabilities, which
are net of expected recoveries, were established for the estimated cost of this
issue following regulatory guidance as to activities to be undertaken. These
liabilities were booked net of expected recoveries of $113.0 million and $31.4
million, respectively, from previous owners of companies acquired over the last
few years as specified in the indemnification clauses of the purchase
agreements.
Outlook: With resolution to the "pension mis-selling" situation expected in
1998, Lincoln UK expects a stable earnings picture going forward. Lincoln UK
anticipates growing faster than the rest of the U.K. life insurance industry
through increased distribution, a superior trained sales force, improved
products and investment performance and suitable acquisitions.
<PAGE> -13-
<TABLE>
<CAPTION>
Review of Operations: Reinsurance
Year Ended December 31 (in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Financial Results by Source
Individual Markets .................................... $ 71.9 $ 49.9 $ 43.4 $ 41.4 $ 34.6
Group Markets ......................................... 103.3) 19.0 25.2 21.6 19.5
Financial Reinsurance ................................. 14.4 16.4 10.2 15.5 20.5
Other ................................................. (.3) (.2) .7 (1.9) (1.7)
Income (Loss) from Operations,
excluding Disability Income ...................... (17.3) 85.1 79.5 76.6 72.9
Disability Income (1) ................................. (134.3) (11.1 (132.2) (10.0) (54.0)
Income (Loss) from Operations (1) ................. (151.6) 74.0 (52.7) 66.6 18.9
Realized Gain (Loss) on Investments ................... 15.2 11.7 10.7 .5 (1.6)
Net Income (Loss) (1) ............................. (136.4) $ 85.7 $ (42.0) $ 67.1 $ 17.3
Individual Life Sales (in billions) ................... $ 39.5 $ 26.6 $ 22.7 $ 19.9 $ 17.3
December 31 (in billions) 1997 1996 1995 1994 1993
Individual and Group Life
Insurance In-Force ................................... $ 183.5 $ 160.9 $ 142.8 $ 125.6 $ 118.0
</TABLE>
(1) Income (loss) from operations and net income (loss) for 1997, 1995 and 1993
include the impact of a change in estimate of the reserve level needed for
LNC's disability income business ($130.0 million, $121.6 million and $32.8
million after-tax, respectively). Also, income (loss) from operations and
net income (loss) for 1997 include a charge of $113.7 million after-tax for
the impact of a change in estimate of the reserve level needed for personal
accident programs.
LNC's Reinsurance segment, conducted through the Lincoln National Reinsurance
companies ("Lincoln Re"), reported income from operations, excluding special
charges, of $92.1 million in 1997. The two charges were $130 million for
disability income reserve strengthening and $113.7 million for certain personal
accident reinsurance business. As of December 31, 1997, Lincoln Re's individual
and group life business in-force was $183.5 billion, an increase of 14% for the
year.
Profile: One of the leading life-health reinsurers in the world, Lincoln Re
reported consolidated, worldwide net premium income of $1.7 billion in 1997.
This compares with $2.1 billion net premium income reported in 1996. Lincoln Re
opened an office in Buenos Aires in 1997 to better serve clients in Argentina
and Chile and has offices in Toronto, Brussels, London, Mexico City, Manila and
Singapore. Lincoln Re does business in more than 50 countries.
Lincoln Re is also charged with managing LNC's activities in several emerging
markets. In 1997, LNC entered into a joint venture through the purchase of 49%
of Seguros Serfin Lincoln which sells insurance products through Banca Serfin,
Mexico's oldest and third largest bank. This joint venture enables LNC to
leverage the insurance expertise of this segment in an under-insured market with
long-term potential. In addition, LNC maintains representative offices in China
(Beijing, Shanghai, Guangzhou) and is working to gain a license to conduct
insurance business in the People's Republic of China.
Mass Customization: Lincoln Re's approach is that the traditional risk-transfer
commodity business is in decline and that today's reinsurer must provide
innovative, tailored programs. As a result, Lincoln Re uses a mass customization
approach. This involves packaging and distributing modular pricing,
underwriting, systems, alliance resources, marketing consultation, product
development and claims management components to meet the needs of client
companies. More than 600 such customized transactions were completed by Lincoln
Re in 1997. It has a current client base of more than 1,700 U.S. and 350
international companies, and a client retention rate of more than 95%.
<PAGE> -14-
Knowledge Management: Lincoln Re's intellectual capital is critical to its
success. It demonstrated this more than a decade ago by introducing an
underwriting manual that quickly became the industry standard for life and
health risk selection. The formation of Lincoln National Risk Management
("LNRM") to develop proprietary knowledge-based systems was the next step.
Today, its systems are used throughout the insurance industry.
Foremost among these systems is LNRM's patented Life Underwriting System, a
state-of-the-art risk management technology now licensed to more than 50
insurers. Other proprietary systems assist health insurers, claims processors
and agents. Datalliance [registered trademark] is an electronic data interchange
that can link agents, insurers, information sources, medical labs and
reinsurers.
The most recent addition to the Lincoln Re portfolio is the Lincoln Mortality
System which aids insurers developing preferred term life insurance products.
Alliance Management: Lincoln Re's approach also involves the capabilities of
more than 40 alliance partners. These include direct marketers, medical
equipment suppliers, electronic information providers, specialized legal firms,
accountants, variable life and annuity administrators, all ready to form a
"virtual organization" to help a Lincoln Re client do business.
Individual Markets: Strong sales in recent years contributed to record income
from operations for individual markets in 1997. Income from operations was $71.9
million, a 44% increase over 1996. Very favorable life mortality throughout the
year was an integral factor in the strong performance. Sales volume, measured by
face amount of new business, was a record $39.5 billion in 1997.
Group Markets: Income from operations in 1997 in group markets was $10.4
million, excluding the special charge for personal accident programs. This
compares with $19.0 million in 1996. Total annualized premium of $202.2 million
represents an increase of 5% over the $193.3 million in 1996.
Financial Reinsurance: Income from operations declined slightly in the financial
reinsurance area in 1997. Income from operations was $14.4 million, compared
with $16.4 million in 1996.
Disability Income: The disability income business has proved to be one of the
most difficult for the industry in this decade. Lincoln Life, the largest
company in LNC's Life Insurance and Annuities segment, withdrew from the
disability income market in 1996 and its block of business was transferred to
Lincoln Re where it has been managed along with a block of reinsurance
disability income business.
In the fourth quarter of 1995, LNC took a $121.6 million after-tax charge
against earnings to strengthen reserves for the direct and reinsurance
disability income business. These reserves were established assuming that the
current experience would continue. In the second quarter of 1997, LNC took an
additional charge of $130 million against earnings when it obtained new
information indicating that experience had deteriorated further.
Personal Accident Programs: Certain excess-of-loss personal accident reinsurance
programs created in the London market in which Lincoln Re participated from 1993
to 1996 have produced unexpectedly heavy losses. Investigations and audits of
ceding companies conducted in late 1997 led LNC to conclude that many more
claims will be reported than previously estimated. As a result, LNC took a
charge of $113.7 million against earnings. LNC is investigating the manner in
which the programs were designed and intends to pursue negotiated settlements or
other remedies.
Outlook: Lincoln Re continues to enhance its reputation as a leading life-health
reinsurer in the world with the development of new knowledge-based tools and
marketing methods. It continues to build partnerships inside and outside the
traditional insurance marketplace as it seeks to exceed $100 million in annual
operating earnings.
<PAGE> -15-
Review of Operations: Investment Management (1)
Year Ended December 31 (in millions) 1997 1996 1995
Financial Results
Fees:
Investment Advisory Fees . . . . . . . $219.6 $190.4 130.1
Other Revenue and Fees . . . . . . . . 38.1 24.6 18.7
Income:
Income from Operations . . . . . . . . . $ 4.5 $ 10.2 $ 13.3
Realized Gain on Investments . . . . . . 3.3 5.2 4.3
Net Income . . . . . . . . . . . . . $ 7.8 $ 15.4 $ 17.6
Income from Operations-Excluding
Amortization of Intangibles. . . . . . $ 31.6 $ 34.1 $ 28.1
December 31 (in billions) 1997 1996 1995
Assets Under Management
Retail-Fixed . . . . . . . . . . . . . $ 6.9 $ 4.6 $ 4.8
Retail-Equity . . . . . . . . . . . . 15.6 11.5 8.8
Total Retail . . . . . . . . . . . 22.5 16.1 13.6
Institutional-Fixed . . . . . . . . . 5.7 3.6 3.0
Institutional-Equity . . . . . . . . 25.8 3.5 22.1
Total Institutional . . . . . . . . 31.5 27.1 25.1
Total Assets Under Management . . . $ 54.0 $ 43.2 $ 38.7
(1) Data is not shown for this segment for 1993 and 1994 as this segment was
added in April 1995 following the acquisition of Delaware Management
Holdings, Inc. (see note 11 to the consolidated financial statements on page
64).
(2) Certain amounts previously shown in the 1996 and 1995 columns have been
reallocated to "Other Operations" in order to conform to the 1997
presentation.
LNC's Investment Management segment reported income from operations of $4.5
million in 1997, compared with $10.2 million in 1996. The segment's 1997
operating income, excluding amortization of goodwill and other intangible
assets, was $31.6 million.
The decrease in income from operations was attributable to increased expenses
related to efforts to expand retail operations at Delaware Management Holdings,
Inc. ("Delaware"). These efforts included increasing marketing personnel,
broadening product offerings and upgrading customer service.
Profile: Although investment management has long been an area of expertise
within LNC, the addition of Delaware in 1995 signaled LNC's intention to expand
its role as a money manager and meet its objective of becoming a top-tier
company in the financial services industry. Particular emphasis is being given
to accelerating the growth of Delaware's retail mutual funds operation.
The operating companies that comprise this segment are: Delaware; Lynch & Mayer,
Inc. ("Lynch & Mayer"); and Vantage Global Advisors, Inc ("Vantage"). Delaware
has its headquarters in Philadelphia, with offices also in London and
Minneapolis. Lynch & Mayer and Vantage each maintain headquarters in New York.
Complementary Approaches: Delaware, Lynch & Mayer and Vantage operate
autonomously and are encouraged to preserve their distinctive investment styles.
Their breadth of complementary styles and strengths is a prudent way to
diversify risks, especially in the sometimes uncertain and volatile investment
markets.
Delaware, founded in 1929 and acquired by LNC in 1995, is best known for a
conservative, "value" investment style that focuses on stocks with above average
dividend yields. It is also recognized for its small-cap and mid-cap growth
investment styles and its expertise in municipal and high-yield bonds. It is
active in both retail and institutional business. Its subsidiary Delaware
International Advisors, Ltd., was formed in 1990 and provides international
investment expertise from its base in London.
<PAGE> -16-
Lynch & Mayer, founded in 1976 and acquired by LNC in 1985, is primarily an
institutional investment firm with an equity growth focus. It manages equities
and convertible securities as separate accounts, commingled funds and mutual
funds and is now sub-advising a growth equity fund in Delaware's retail mutual
fund family. Vantage founded in 1979 and also acquired in 1985, invests in
undervalued companies that have strong potential for above-average growth.
Employing a disciplined, systematic, risk-controlled investment approach,
Vantage primarily manages part of Lincoln Life's variable U.S. life and annuity
products. It also sub-advises on two of Delaware's retail mutual funds.
Assets Under Management: As shown above, the Investment Management segment has
assets of $54.0 billion under management as of December 31, 1997. Domestic
institutional assets represent $24.4 billion of the Investment Management's
total assets under management. Domestic retail assets represent $21.8 billion of
the total. International equity and global bond assets managed by Delaware
International Advisors account for $7.8 billion.
Distribution: Multiple distribution channels enable the businesses in the
Investment Management segment to deliver their broad range of products to an
expanding community of retail and institutional investors. Retail mutual funds
are marketed through regional and national broker/dealers; financial planners;
insurance agents, including those associated with the regional marketing offices
of Lincoln Life and banks. Institutional products are marketed primarily by an
employed sales force in conjunction with pension consultants. They also are
offered to defined benefit and defined contribution plan sponsors, endowments,
foundations and insurance companies.
Retail Mutual Funds: The Investment Management segment's retail mutual fund and
wrap fee assets totaled $22.5 billion at December 31, 1997, which is a 40%
increase from the $16.1 billion at December 31, 1996. Delaware, which operates
the retail mutual funds, offers 63 open-end retail mutual funds and eight
closed-end funds. These funds had assets under management of $12.3 billion. The
remaining $10.2 billion was from wrap-fee business and retail mutual funds
managed by Lynch & Mayer and Vantage.
The retail mutual fund operations experienced both internal and external growth
during the year. The external growth occurred with the acquisition and
integration of the tax-free bond specialist, Voyageur Fund Managers. This added
a family of 32 open end bond funds and six closed end funds and a total of $2.6
billion in assets. On the internal side, the number of wholesalers was increased
to 37 as of December 31, 1997 from 31 as of December 31, 1996. Delaware
strengthened its service quality foundation in order to consistently achieve
exceptional customer service. As a result of enhancing service quality
measurement techniques, improving training and automating business processes,
Delaware's Dalbar National Rankings improved in substantially all of the Main
Office - Operations categories. An impressive climb in the Overall Operations
Service category from a ranking of 16th in 1996 to a ranking of 8th in 1997;
illustrated Delaware's commitment to exceed customer expectations. The tracking
and measuring was done by two independent outside vendors, National Quality
Review, and Technical Assistance Research Programs.
Delaware undertook several strategic initiatives in its retail operation during
the year, increasing the number of wholesalers and products. These efforts,
combined with improved performance and service, contributed to Delaware
increasing its retail non-money market sales to $2.0 billion in 1997, up 63% in
comparison with $1.2 billion for 1996.
Institutional Investments: The institutional investment management business had
assets under management of $31.5 billion as of December 31, 1997, compared with
$27.1 billion at December 31, 1996. The 1995 acquisition of Delaware Management
Holdings complemented the position already held by Lynch & Mayer and Vantage in
this mature, but still growing, business. Delaware International Advisors, Ltd's
institutional investment management business is experiencing exceptional growth
as evidenced by assets increasing to $7.1 billion as of December 31, 1997 from
$4.4 billion on December 31, 1996.
Investment Performance: In terms of performance, the number of Delaware funds
ranked as four- and five-star funds by Morningstar, Inc., (a service that
assigns rankings to mutual funds according to their investment styles with one
star as the lowest to five stars as the highest) was 21 as of December 31, 1997,
compared with seven as of December 31, 1996. High ratings are significant:
Across the mutual fund industry, nearly 75% of net new fund flows in 1996 were
into funds with four- or five-star ratings from Morningstar. The 21 funds
represented 69% of the company's mutual fund assets under management. The
largest five of these funds were: Decatur Income, Delchester, Decatur Total
Return, Tax Free PA and Tax Free USA.
<PAGE>-17-
The return for the Social Awareness Fund managed by Vantage was 36.1% in 1997,
well ahead of the 29.9% return for the top decile variable annuity in the
Morningstar Growth Universe. This performance earned an 8th place ranking among
885 variable annuity funds in that Morningstar category. Also, over the long
term, the fund was the top ranked fund in Growth Universe for three and five
years versus the 637 and 414 of such funds.
Among institutional investment managers, Delaware produced strong results in the
value equity category, with a return of 32.2% that qualified as a top quintile
performance as measured by Callan's Value Universe. In the international equity
category, Delaware's return of 7.9% exceeded the 1.8% return for its comparative
Morgan Stanley Capital International Europe, Australia, Far East (EAFE) index.
Outlook: The Investment Management segment's objective is to reach $50 billion
in retail fund assets and $80 billion in total assets under management by the
end of 2000. Steady progress was made toward this objective in 1997 and further
progress is expected through internal growth and niche acquisitions.
Review of Other Operations:
<TABLE>
<CAPTION>
Year Ended December 31 (in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Financial Results by Source
Lincoln Investment Management (1) ............. $ 1.4 $ 1.5 $ 1.7 $ 7.1 $ 6.1
LNC Financing .................................. (31.9) (49.7) (52.7) (31.7) (26.7)
LNC Operations ................................. (18.4) (14.8) (19.5) (21.8) (22.3)
Other Corporate ................................ (2.2) (.9) (1.5) (3.9) 4.0
Earnings from Unconsolidated Affiliate ......... -- -- 13.7 14.8 --
Income (Loss) from Operations .............. (51.1) (63.9) (58.3) (35.5) (38.9)
Realized Gain (Loss) on Investments ............ 5.4 2.2 6.1 (10.6) 19.8
Gain (Loss) on Sale of Subsidiaries ............ -- -- 58.3 48.8 (98.5)
Cumulative Effect of Accounting
Change (Postretirement Benefits) .............. -- -- -- -- (96.4)
Net Income (Loss) .......................... $ (45.7) $ (61.7) $ 6.1 $ 2.7 $ (214.0)
</TABLE>
(1) The data shown in the 1996 and 1995 columns includes amounts previously
shown within the Investment Management segment. These reallocations were
initiated in order to conform to the 1997 presentation.
The income (loss) from operations shown above includes the earnings from Lincoln
Investment Management, certain other operations that are not directly related
to the business segments and unallocated corporate revenues and expenses, such
as corporate investment income, interest expense on short-term and long-term
borrowings, and corporate overhead expenses. Other operations also included
LNC's investment in an unconsolidated affiliate engaged in the employee life-
health benefits business prior to the sale of this holding in October 1995.
Lincoln Investment Management provides investment advisory services and asset
management services for LNC's Corporate portfolios and entities not owned by
LNC.
Corporate interest expense included within the LNC financing line above was
greater for 1995 - 1996 than years prior to 1995 as the result of additions to
long-term debt and minority interest-preferred securities of subsidiary
companies. The 1997 amount was less than the 1995 - 1996 due to reduced interest
expense and investment earnings in the fourth quarter of 1997 that resulted from
the use of proceeds from the sale of discontinued operations (see liquidity and
cash flow discussion on page 31). This benefit will not continue into 1998 as
most of these funds were used to purchase a block of individual life and annuity
business on January 2, 1998 (see note 12 to the consolidated financial
statements on page 65).
Net income (loss) shown above for "Other Operations" includes the items
described above under loss from operations plus the realized gain (loss) on sale
of certain investments, the gain (loss) on sale of subsidiaries (see note 11 to
the consolidated financial statements on page 64) and the cumulative effect of
the 1993 accounting change for the consolidated group of companies related to
postretirement benefits.
<PAGE> -18-
Discussion and Analysis of Consolidated Investments
<TABLE>
<CAPTION>
December 31 (in billions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Assets Managed (by advisor)
Investment Management Segment (1) .. $ 54.0 $ 43.2 $ 38.7 $ -- $ --
Lincoln Investment Management:
Regular Fees ....................... 2.9 8.2 4.2 11.8 8.3
At Cost For Business Units ......... 33.9 30.6 33.3 36.3 37.7
Lincoln UK ......................... 6.8 6.1 5.3 1.0 .9
Within Business Units (Policy Loans) .8 .8 .6 .6 .6
Non-LNC Affiliates ................. 20.7 16.2 12.7 9.4 9.9
Total Assets Managed ........... $119.1 $105.1 $ 94.8 $ 59.1 $ 57.4
</TABLE>
(1) See Investment Management segment data on page 15 for additional detail.
The following discussion covers select general investment matters. The review of
consolidated operations, which begins on page 19, includes the fact that LNC's
net investment income for the year ended December 31, 1997 was $2.3 billion, an
increase of 8% over 1996. Also, this discussion indicates that during 1997 net
gains on investments totaling $122.6 million were realized. The review of
consolidation financial condition begins on page 22 and discusses the
composition and quality of the LNC portfolio.
Total Return Strategy: LNC follows a total return strategy that focuses on the
economic value of its assets in addition to current income. This approach
permits LNC to be more effective in its asset-liability management efforts,
since decisions can be made based upon the true economic value of assets and
true economic value of liabilities. The total return approach requires the
evaluation of risk and expected return of each asset class utilized.
Asset Diversification: Fundamental to LNC's investment policy is diversification
across asset classes. LNC's investment portfolio, excluding cash and invested
cash, is composed of fixed maturity securities; equities; mortgage loans on real
estate; real estate either wholly owned or in joint ventures and other long-term
investments. LNC purchases investments that have yield, duration and other
characteristics which take into account the liabilities of the products being
supported. The dominant investment held is fixed maturity securities, which
represent 81% of the investment portfolio.
Fixed Maturity Performance: In 1997, the LNC fixed maturity portfolio produced a
return of 10.56%, compared to the Lehman Brothers Government/Corporate index
which produced 9.76%.
Use Of Derivatives: The primary use of derivatives at LNC is to hedge interest
rate risk that is embedded in either life and annuity product liabilities or
investment portfolios. To a lesser extent, derivatives are also used to hedge
exposures to foreign currency and equity market risks.
<PAGE> -19-
<TABLE>
<CAPTION>
REVIEW OF CONSOLIDATED OPERATIONS AND FINANCIAL CONDITION
Summary Information Increase
(Decrease)
Year Ended December 31 (in millions) 1997 1996 1995 1997 1996
<S> <C> <C> <C> <C> <C>
Continuing Operations:
Life insurance and annuity premiums .......... $ 756.2 $ 728.7 $ 707.0 4% 3%
Health premiums .............................. 572.5 790.5 807.0 (28%) (2%)
Insurance fees ............................... 832.2 713.5 600.3 17% 19%
Investment advisory fees ..................... 204.9 180.8 125.6 13%
Net investment income ........................ 2,250.8 2,087.9 1,979.7 8% 5%
Equity in earnings of
unconsolidated affiliates ................... -- 1.4 13.9
Realized gain (loss) on investments .......... 122.6 92.5 157.6
Gain (loss) on sale of subsidiaries ......... -- -- 82.5
Other revenue and fees ....................... 159.3 138.3 112.9 16% 22%
Life insurance and annuity benefits .......... 2,358.7 2,036.3 2,031.2 16%
Health benefits .............................. 833.1 673.6 820.1 24% (18%)
Underwriting, acquisition, insurance
and other expenses .......................... 1 ,579.3 1,434.9 1,248.3 10% 15%
Interest and debt expenses ................... 92.5 84.7 72.5 9% 17%
Federal income taxes ......................... 12.7 147.7 113.0 31%
Net Income from Continuing Operations ... 22.2 356.4 301.4 18%
Discontinued Operations:
Income prior to disposal ..................... 134.9 157.2 180.8
Gain on disposal ............................. 776.9 -- --
Net Income .............................. $ 934.0 $ 513.6 $ 482.2 7%
</TABLE>
REVIEW OF CONSOLIDATED OPERATIONS
As the result of the purchase of a block of individual life insurance and
annuity business in January of 1998, select income statement accounts listed
above are expected to increase in future periods (see note 12 to the
consolidated financial statements on page 65).
Life Insurance and Annuity Premiums
Life insurance and annuity premiums increased $27.5 million or 4% in 1997 and
$21.7 million or 3% in 1996 as the result of increases in volumes of business in
the Lincoln UK and Reinsurance segments being partially offset by decreases in
premium in the Life Insurance and Annuities segment. Barring the passage of
unfavorable tax legislation that would eliminate the tax-advantages for some of
LNC's life and annuity products, LNC expects growth in life insurance and
annuity premium in 1998.
Health Premiums
Health premiums decreased $218.0 million or 28% in 1997 as a result of decreased
volume in the Reinsurance segment. Health premiums decreased $16.5 million or 2%
in 1996 as a result of increased volumes of business in the Reinsurance segment
being more than offset by decreases in the Life Insurance and Annuities segment
due to the withdrawal from the disability income business.
Insurance Fees
Insurance fees from universal life, other interest-sensitive life insurance
contracts and variable life insurance contracts increased $118.7 million or 17%
in 1997 and $113.2 million or 19% in 1996. These increases are the result of an
increase in the volume of transactions and a market-driven increase in the value
of existing customer accounts upon which some of the fees are based in the Life
Insurance & Annuities and Lincoln UK segments. The growth in fees from this
business is expected to continue in 1998.
<PAGE> -20-
Investment Advisory Fees
This line was added to the consolidated statements of income in the second
quarter of 1995 following LNC's purchase of Delaware Management Holdings, Inc.
(see note 11 to the consolidated financial statements on page 64). Investment
advisory fees increased $24.1 million or 13% in 1997 and on an annualized basis
increased 8% in 1996. These increases were the result of increased volumes of
business and an increase in the market value of customer accounts.
Net Investment Income
Net investment income increased $162.9 million or 8% in 1997 as the net result
of a 9% increase in mean invested assets, a decrease in the yield on investments
from 7.52% to 7.46% and a benefit of a reduction in the recurring adjustments of
discount on mortgaged-backed securities. In 1997, this adjustment was a charge
of $.4 million versus a charge of $7.6 million in 1996. Net investment income
increased $108.2 million or 5% in 1996. The impact of a 7% increase in mean
invested assets was partially offset by: 1) a decrease in the yield on
investments from 7.67% to 7.52% (all calculations on a cost basis) and; 2) a
charge of $7.6 million in 1996 versus a benefit of $27.5 million in 1995 from
the recurring adjustment of discount on mortgage-backed securities. The increase
in mean invested assets for both years was the result of increased volumes of
business in the Life Insurance and Annuities segment.
Equity in Earnings of Unconsolidated Affiliates
This line was added to the consolidated statements of income in 1994 to report
the earnings from the remaining 29% ownership following LNC's sale of 71% of the
ownership of its primary direct writer of employee life-health benefit
coverages. LNC sold its 29% interest in this company in October 1995. This
accounts for the minimal amounts since that date. In 1998, equity in earnings of
unconsolidated affiliates is expected to increase due to the investment in a 49%
joint venture in Mexico in December 1997, known as Seguros Serfin Lincoln.
Realized Gain on Investments
The pre-tax realized gain on investments, net of related amortization and
expenses was $122.6 million, $92.5 million and $157.6 million in 1997, 1996 and
1995, respectively. The after-tax gain in 1997, 1996 and 1995 was $72.9 million,
$57.6 million and $102.2 million, respectively. These gains were primarily the
result of the sale of investments. Some modest write-downs and provisions for
losses offset a portion of the realized gains. During 1996, LNC completed a bulk
sale of performing and non-performing mortgage loans and real estate holdings
through a sealed bid process. The selling price for these holdings was $6.1
million in excess of the carrying value, resulting in a gain on sale.
Securities available-for-sale, mortgage loans on real estate and real estate
that were deemed to have declines in fair value that were other than temporary
were written down. The fixed maturity securities to which these write-downs
apply were generally of investment grade quality at the time of purchase but
were classified as "below-investment-grade" at the time of the write-downs.
Also, write-downs and allowances for losses on select mortgage loans on real
estate, real estate and other investments were established when the underlying
value of the property was deemed to be less than the carrying value. These
write-downs and provisions for losses are disclosed within the notes to the
accompanying financial state ments (see note 3 to the consolidated financial
statements on page 44).
Gain on Sale of Subsidiaries
In 1995, LNC recorded the gain on sale of the remaining 29% of the employee
life-health benefits company.
Other Revenue and Fees
Other revenue and fees increased $21.0 million or 16% in 1997 and $25.4 million
or 22% in 1996 as the result of increases in the volume of transactions in the
Reinsurance and Investment Management segments.
Life Insurance and Annuity Benefits
Life insurance and annuity benefits in 1997 increased $322.4 million or 16% as
compared to 1996. This increase was the result of increases of $89.4 million or
6% from the Life Insurance and Annuities segment, $25.6 million or 7% from the
Reinsurance segment and $207.1 million from the Lincoln UK segment. The Lincoln
UK increase includes a change in estimate for its pension mis-selling liability
(see note 2 to the consolidated financial statements on page 43). Life insurance
and annuity benefits increased $5.1 million in 1996 as compared to 1995. This
increase was the result of decreased volumes of business and improved mortality
in the Life Insurance and Annuities segment being essentially offset by
<PAGE> -21-
increased volumes of business in the Reinsurance and Lincoln UK segments. In
1998, the increase in life insurance and annuity benefits are expected to
parallel the growth in life insurance and annuity premiums.
Health Benefits
Health benefits increased $159.5 million in 1997 as the net result of decreased
volumes of business being more than offset by additions to the reserves for
disability income business and personal accident programs within the Reinsurance
segment. Health benefits increased $40.5 million or 6% in 1996 compared to 1995
health benefits after excluding the special addition to the disability income
reserve in 1995. See note 2 to the consolidated financial statements on page 43.
Underwriting, Acquisition, Insurance and Other Expenses
These expenses increased $144.4 million or 10% in 1997. The primary drivers
behind this increase beyond the general inflation rate was increased business
volumes in the various segments due to general growth and the acquisition of
blocks of business/subsidiary companies (see note 11 to the consolidated
financial statements on page 64) and the write-off of deferred acquisition costs
associated with the disability income business (see note 2 to the consolidated
financial statements on page 43). These expenses increased $186.7 million or 15%
in 1996 as the result of increased business volumes in all business segments and
the addition of the operating costs of companies acquired in 1995 and 1996. In
1998, all business segments will continue to adjust staff levels as appropriate
to match business volumes.
Interest and Debt Expense
Interest and debt expense increased $7.8 million or 9% in 1997 and $12.2 million
or 17% in 1996. These increases were the result of increases in the average debt
outstanding and the impact of changes in the composition of debt outstanding
(see page 31). During 1997, Standard and Poor's, Moody's, and Duff & Phelps
re-affirmed LNC's debt ratings as A ("Excellent"), A2 ("Very Good, Strong or
High") and AA- ("Excellent"), respectively.
Federal Income Taxes
Federal income taxes decreased from $147.7 million in 1996 to $12.7 million in
1997 as the result of a decrease in pre-tax earnings. Federal income taxes
increased $34.7 million or 31% in 1996 as the result of an increase in the
pre-tax earnings.
Discontinued Operations
In 1997, lines were added to the income statement to accommodate the operating
activity and gain on sale associated with LNC's decision to sell its 83.3%
ownership in American States Financial Corporation (see note 11 to the
consolidated financial statements on page 64).
Summary
Net income for 1997 was $934.0 million compared with $513.6 million in 1996.
Excluding realized gain (loss) on investments, gain (loss) on sale of
subsidiaries, discontinued operations and the special 1997 additions to the
disability income, personal accident programs and UK pension product reserves,
all net of taxes, LNC earned $368.0 million for 1997 compared to $298.8 million
in 1996. This increase is the result of increased earnings in the Life Insurance
& Annuities, Lincoln UK and Reinsurance segments. In the fourth quarter of 1997
the Corporate and Other unit benefited from earnings on proceeds from
discontinued operations. This benefit will not continue into 1998 as most of
these funds were used to purchase a block of individual life and annuity
business on January 2, 1998 (see note 12 to the consolidated financial
statements on page 65). Net income for 1996 was $513.6 million compared with
$482.2 million in 1995. Excluding realized gain (loss) on investments, gain on
sale of subsidiaries, discontinued operations and the special 1995 addition to
the disability income reserve, LNC earned $298.8 million for 1996 compared to
$262.2 million in 1995. This increase is the result of increased earnings in the
Life Insurance & Annuities, Lincoln UK and Reinsurance segments.
Century Compliance
The year 2000 issue is pervasive and complex and affects virtually every aspect
of LNC's businesses. LNC's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners are particularly
vulnerable. The inability to properly recognize date sensitive electronic
information and transfer data between systems could cause errors or even a
complete systems failure which would result in a temporary inability to process
transactions correctly and engage in normal business activities for one or more
of LNC's businesses. LNC is redirecting a large portion of its internal
information technology efforts and contracting with outside consultants to
update its systems to accommodate the year 2000. Also, LNC has initiated formal
<PAGE> -22-
communications with critical parties that interface with LNC's systems to gain
an understanding of their progress in addressing year 2000 issues. While LNC is
making every effort to address its own systems and the systems with which it
interfaces, it is not possible to provide assurance that operational problems
will not occur. LNC presently believes that, with the modification of existing
computer systems, updates by vendors and conversion to new software and
hardware, the year 2000 issue will not pose significant operational problems for
its computer systems. In addition, LNC is developing contingency plans in the
event that, despite its best efforts, there are unresolved year 2000 problems.
If the remediation efforts noted above are not completed timely or properly,
the year 2000 issue could have a material adverse impact on the operation of
LNC's businesses.
During 1996 and 1997, LNC identified expenditures of approximately $11 million
($7 million after-tax) that it had spent to address this issue. LNC's financial
plans for 1998-2000 include expected expenditures of an additional $39 million
($25 million after-tax) on this issue. The cost of addressing year 2000 issues
and the timeliness of completion will be closely monitored by management and are
based on management's current best estimates which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third party modification plans and other factors.
Nevertheless, there can be no guarantee that these estimated costs will be
achieved and actual results could differ significantly from those anticipated.
Specific factors that might cause such differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer problems, and other uncertainties.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
As a result of the purchase of a block of individual life insurance and annuity
business in January of 1998, select balance sheet accounts described below will
increase (see note 12 to the consolidated financial statements on page 65).
Investments
The investment portfolio, excluding cash and invested cash, is comprised of
fixed maturity securities; equities; mortgage loans on real estate; real estate,
either wholly owned or joint ventures; and other long-term investments. LNC
purchases investments for its segmented portfolios with yield, duration and
other characteristics that take into account the liabilities of the products
being supported. The total investment portfolio increased $88.9 million in 1997.
This minimal increase was the net result of increases from 1) the fair value of
securities available-for-sale and 2) the new purchases of investments from cash
flow generated by the business units being mostly offset by 1) the sale of
select investments to raise cash for the January 2, 1998 purchase of a block of
individual life insurance and annuity business and 2) the continuation of fixed
annuity contractholders opting to transfer funds to variable annuity contracts.
LNC maintains a high-quality fixed maturity securities portfolio. As of December
31, 1997, $8.4 billion or 35.1% of its fixed maturity securities portfolio had
ratings of AA or better. Fixed maturity securities with below-investment-grade
ratings (BB or less) were $1.7 billion or 7.3% of the total fixed maturity
securities portfolio (see note 3 to the consolidated financial statements on
page 46). The below-investment-grade fixed maturity securities represent 5.9% of
LNC's total investment portfolio. The interest rates available on these
below-investment-grade securities are significantly higher than are available on
other corporate debt securities. Also, the risk of loss due to default by the
borrower is significantly greater with respect to such below investment grade
securities because these securities are generally unsecured, often subordinated
to other creditors of the issuer and issued by companies that usually have high
levels of indebtedness. LNC attempts to minimize the risks associated with these
below investment grade securities by limiting the exposure to any one issuer and
by closely monitoring the credit worthiness of such issuers. For the year ended
December 31, 1997, the aggregate cost of below investment grade securities
purchased was $1.8 billion. Aggregate proceeds from such investments sold were
$1.6 billion, resulting in a realized pre-tax gain at the time of sale of $81.9
million.
LNC's entire fixed maturity and equity securities portfolio is classified as
"available-for-sale" and is carried at fair value. Changes in fair values, net
of related deferred acquisition costs, amounts required to satisfy policyholder
commitments and taxes are charged or credited directly to shareholders' equity.
Note 3 to the consolidated financial statements on page 45 shows the gross
unrealized gains and losses as of December 31, 1997.
<PAGE> -23-
LNC's fixed maturity securities available-for-sale include mortgage-backed
securities. The mortgage-backed securities included in LNC's investment
portfolio are subject to risks associated with variable prepayments or delayed
repayments. This may result in these securities having a different actual cash
flow and maturity than planned at the time of purchase. Securities that have an
amortized cost greater than par and backed by mortgages that prepay faster than
expected will incur a reduction in yield or a loss. Those securities with an
amortized cost lower than par that prepay faster than expected will generate an
increase in yield or a gain. Repayments occurring slower than expected have the
opposite impact. The degree to which a security is susceptible to either gains
or losses is influenced by the difference between its amortized cost and par,
the relative sensitivity of the underlying mortgages backing the assets to
prepayment or delayed repayments in a changing interest rate environment and the
repayment priority of the securities in the overall securitization structure.
LNC limits the extent of its risk on mortgage-backed securities by generally
avoiding the purchase of securities with a cost that significantly exceeds par,
by purchasing securities backed by stable collateral, and by concentrating on
securities with enhanced priority in their trust structure. Such securities with
reduced risk typically have a lower yield (but higher liquidity) than higher-
risk mortgage-backed securities. At selected times, higher-risk securities
may be purchased if they do not compromise the safety of the general portfolio.
At December 31, 1997, LNC did not have a significant amount of higher-risk
mortgage-backed securities. There are negligible default risks in the mortgage-
backed securities portfolio as a whole as the vast majority of the assets are
either guaranteed by U.S. government-sponsored entities or are supported in the
securitization structure by junior securities enabling the assets to achieve
high investment grade status. Note 3 to the consolidated financial statements
on page 45 shows additional detail about the underlying collateral.
As of December 31, 1997, mortgage loans on real estate and investments in real
estate represented 11% and 1.9% of the total investment portfolio. As of
December 31, 1997, the underlying properties supporting the mortgage loans on
real estate consisted of 20.7% in commercial office buildings, 30.4% in retail
stores, 21.5% in apartments, 14.6% in industrial buildings, 4.2% in
hotels/motels and 8.6% in other. In addition to the dispersion by type of
property, the mortgage loan portfolio is geographically diversified throughout
the United States.
Cash and Invested Cash
Cash and invested cash increased by $2.6 billion in 1997. This increase is the
result of accumulating funds at the end of 1997 in anticipation of the purchase
of a block of individual life and annuity business on January 2, 1998 (see note
12 to the consolidated financial statements on page 65).
Deferred Acquisition Costs
Deferred acquisition costs decreased $65.9 million in 1997. This decrease was
the net result of an increase related to the growth in business being more than
offset by decreases related to the write-off of such costs in conjunction with
the strengthening of disability income reserves (see note 2 to the consolidated
financial statements on page 43) and reductions related to the increase in
unrealized gain on securities available-for-sale.
Premiums and Fees Receivable
Premiums and fees receivable decreased $39.8 million in 1997 as the result of
decreased volumes of business in the Reinsurance segment more than offsetting
the increase in volumes of business in the Investment Management segment.
Assets Held in Separate Accounts
This asset account, as well as the corresponding liability account, increased by
$8.3 billion in 1997 as a result of increases in annuity and pension funds under
management. This increase resulted from new deposits, market appreciation and
the continuation of fixed annuity contractholders opting to transfer funds to
variable annuity contracts.
Amounts Recoverable from Reinsurers
The increase of $22.3 million in amounts recoverable from reinsurers was the
result of an increased volume of business ceded in the Life Insurance and
Annuities segment.
Goodwill
The increase of $106.0 million is the net result of additions related to
business acquired (see note 11 to the consolidated financial statements on page
64) being more than the on-going amortization.
<PAGE> -24-
Other Intangible Assets
The decrease of $94.5 million is the net result of additions related to the
purchase of subsidiary (see note 11 to the consolidated financial statements on
page 64) being more than offset by the on-going amortization and an adjustment
to the Lincoln UK amount to more closely conform this segments classifications
to LNC's U.S. operations.
Other Assets
The decrease in other assets of $51.6 million is the result of having a lower
receivable related to investment securities sold in the last few days of 1997
versus the end of 1996.
Total Liabilities
Total liabilities from continuing operations increased by $9.1 billion in 1997.
The primary item underlying this increase is the increase of $8.3 billion
related to separate accounts (see explanation under "Assets Held in Separate
Accounts" above). The increase of $808.4 million in insurance policy and claim
reserves is the result of increased volumes of business and reserve
strengthening as described in note 2 to the consolidated financial statements on
page 43. The reduction in contractholder funds is the net result of new deposits
being more than offset by the withdrawal of guaranteed interest contract funds
because of the decision to exit this business. The increases in the other
liability categories essentially offset the reduction in contractholder funds.
The increase in other liabilities relates to an increase in the expected payouts
for securities purchased in the last few days of 1996 versus a lower volume of
such transactions late in 1995.
While it is management's judgement that, based on available information, the
appropriate level of liabilities have been recorded, LNC has areas where changes
in estimates of related liabilities required could occur in the near term. These
areas include claims for disability income coverages, liabilities and recoveries
related to inappropriate selling of pension products in the United Kingdom,
liabilities for marketing and compliance issues, the reserve for the run-off of
group pension annuities and liabilities for personal accident programs (see note
7 to the consolidated financial statements on page 53).
Shareholders' Equity
Total shareholders' equity increased $513.0 million during the year ended
December 31, 1997. Excluding the increase of $20.4 million related to an
increase in the unrealized gain (loss) on securities available-for-sale,
shareholders' equity increased $492.6 million. This increase in shareholders'
equity was the net result of increases due to $934.0 million of net income,
$74.3 million from the issuance of stock related to the purchase of subsidiary
companies and $33.2 million from the issuance of common stock related to benefit
plans and decreases of $203.3 million related to the declaration of dividends to
shareholders, $20.3 million related to a decrease in the accumulated foreign
exchange gain and $325.3 million for the retirement of common stock.
Capital adequacy is a primary measure used by insurance regulators to determine
the financial stability of an insurance company. In the U.S., risk-based capital
guidelines are used by the National Association of Insurance Commissioners to
determine the amount of capital that represents minimum acceptable operating
amounts related to insurance and investment risks. Regulatory action is
triggered when an insurer's statutory-basis capital falls below the
formula-produced capital level. At December 31, 1997, statutory-basis capital
for each of LNC's U.S. insurance subsidiaries was substantially in excess of
regulatory action levels of risk-based capital required by the jurisdiction of
domicile.
As noted above, shareholders' equity includes net unrealized gain (loss) on
securities available-for-sale. At December 31, 1997, the book value of $49.27
per share included $4.31 of unrealized gains on securities and at December 31,
1996, the book value of $43.00 per share included $3.97 of unrealized gains on
securities.
A significant portion of both realized and unrealized gains or losses on
investments that support long-term life insurance, pension and annuity contracts
are expected to be applied to contract benefits. These realized and unrealized
gains or losses are included in net income and shareholders' equity,
respectively. Current accounting standards do not require or permit adjustment
of policyholder reserves to recognize the full effect of these realized and
unrealized gains or losses on future benefit payments in the absence of a
contractual obligation requiring their attribution to policyholders.
<PAGE> -25-
Market Risk Exposures of Financial Instruments
LNC analyzes and manages the risks arising from market exposures of financial
instruments, as well as other risks, in an integrated asset-liability management
process that takes diversification into account. By aggregating the potential
effect of market and other risks of the entire enterprise, LNC estimates,
reviews and in some cases manages the risk to its earnings and shareholder
value. LNC has material exposures to several market risks including interest
rate, default risk, foreign currency exchange and equity price risks.
The exposures of financial instruments to market risks, and the related risk
management processes, are most important in the Life Insurance and Annuities
segment. This segment is where most of the invested assets support accumulation
and investment oriented insurance products. As an important element of its
integrated asset-liability management process, LNC uses derivatives to minimize
the effects of changes in interest rate levels and the shape of the yield curve.
In this context, derivatives are designated as a hedge and serve to reduce
interest rate risk by mitigating the effect of large rises in interest rates on
LNC's stream of earnings. Additional market exposures exist in LNC's other
general account insurance products and in its debt structure and derivatives
positions. The primary sources of market risk are: 1) substantial, relatively
rapid and sustained increases or decreases in interest rates, 2) fluctuations in
currency exchange rates 3) a sharp drop in equity market values. Each of these
market risks are discussed in detail in the following pages.
1) Interest Rate Risk
Accumulation and Investment Oriented Insurance Products. General account assets
supporting accumulation and investment oriented insurance products total $22.4
billion or 75% of total invested assets. Fixed maturity and equity securities
are held at fair value on the balance sheet, mortgage loans on real estate are
held at amortized cost and real estate is held at cost less depreciation while
liabilities are generally held at account values less surrender charges (see
note 1 to the consolidated financial statements on page 40). The fair values for
mortgage loans on real estate and guaranteed interest rate contracts are
calculated on a discounted cash flow basis while fixed annuities and other
deposit liabilities are at policy cash surrender value (see note 8 to the
consolidated financial statements on page 58).
With respect to these products, LNC seeks to earn a stable and profitable spread
between investment income and interest credited to account values. If LNC has
adverse experience on investments that cannot be passed through to customers,
its spreads are reduced. Alternatively, LNC may seek to maintain spreads and
this may result in crediting rates that are not competitive in the market place.
This strategy could result in adverse surrender experience on policies and could
force LNC to liquidate a portion of its portfolio to fund excess cash surrender
value benefits.
LNC does not view the near term risk to spreads over the next twelve months to
be material. The combination of a probable range of interest rate changes over
the next twelve months, asset-liability management strategies, flexibility in
adjusting crediting rate levels and protection afforded by policy surrender
charges and other switching costs all work together to minimize this risk. The
interest rate scenarios of concern are those in which there is a substantial,
relatively rapid increase or decrease in interest rates that is then sustained
over a long period.
Fixed Deferred Annuities. Assets of $15.6 billion supports the biggest category
of accumulation and investment oriented insurance products, fixed deferred
annuities. For these products, LNC may adjust renewal crediting rates monthly or
annually, subject to guaranteed minimums ranging from 3.0% to 4.5%. The higher
minimums apply to in-force blocks of older products that no longer are sold.
Annuity insurance customers have the right to surrender their policies at
account value less a surrender charge that grades to zero over periods ranging
from 5 to 10 years from policy issue date or, in some cases, the date of each
premium received. Due to LNC's ability to change crediting rates to reflect
investment experience, the underlying assets are assumed to be a good proxy for
the interest rate risk inherent in these liabilities. This assumption is
appropriate for probable movements in interest rates over the next 12 months.
This assumption may not be appropriate for a substantial, relatively rapid
increase or decrease in interest rates that is then sustained over a long
period.
Universal Life. LNC has $3.4 billion in assets supporting universal life
insurance on which it has the right to adjust renewal crediting rates subject to
guaranteed minimums ranging from 4% to 5% at December 31, 1997. Similar to
annuities, universal life insurance customers have the right to surrender their
policies at account value less a surrender charge that grades to zero over
periods ranging from 5 to 10 years from policy issue date or, in some cases, the
date of each premium received.
<PAGE> -26-
Guaranteed Interest Contracts and Group Pension Annuities. LNC has assets
totaling $3.4 billion that support guaranteed interest contracts, group pension
annuities and immediate annuities. Generally, the cash flows expected on these
liabilities do not vary with fluctuations in market interest rates and are not
adjustable by LNC. Accordingly, if experience on the assets supporting these
products is more adverse than the assumptions used in pricing the products,
spreads will tend to be below expectations. LNC limits exposure to interest rate
risk by managing the duration and maturity structure of each investment
portfolio in relation to the liabilities it supports.
Other General Account Insurance products. LNC has $7.4 billion of assets
supporting general account products, including disability income and term life
insurance. For these products, the liability cash flows may have actuarial
uncertainty. However, their amounts and timing do not vary significantly with
interest rates. LNC limits interest rate risk by analyzing the duration of the
projected cash flows and structuring investment portfolios with similar
durations.
Interest Rate Risk--Falling Rates. After rising in 1994, interest rates fell in
1995, rose again in 1996 and declined in 1997. For example, the five-year
Treasury yield rose from 5.2% to 7.8% during 1994 and fell back to 5.4% at the
end of 1995, increased to 6.2% by the end of 1996 and decreased to 5.7 % by the
end of 1997. Under scenarios in which interest rates fall and remain at levels
significantly lower than those prevailing at December 31, 1997, minimum
guarantees on annuity and universal life insurance policies (generally 3.0% to
4.5% or an average of approximately 4%) could cause the spread between the yield
on the portfolio and the interest rate credited to policyholders to deteriorate.
Select contracts that specify these minimum guarantees can be amended
periodically to reflect current interest rate conditions. The earned rate on the
annuity and universal life insurance portfolios averaged 7.8% and 7.9%,
respectively, for the year ended December 31, 1997, providing a cushion for
further decline before the earned rates would be insufficient to cover minimum
guaranteed rates plus the target spread. The maturity structure and call
provisions of the related portfolios are structured to afford protection against
erosion of this cushion for a period of time. However, spreads would be at risk
if interest rates continued to fall and remained lower for a long period. LNC
manages these exposures by maintaining a suitable maturity structure and by
limiting its exposure to call risk in each respective investment portfolio.
LNC believes that the portfolios supporting its accumulation and investment
oriented insurance products have a prudent degree of call protection
individually and on a consolidated basis. The mortgage-backed securities ("MBS")
and asset- backed securities ("ABS") portion of the portfolio represents a total
of $4.5 billion or 20% of the $22.4 billion of general account assets supporting
such products. Of this portfolio, 13% of general account assets or $3.0 billion
is subject to residential prepayment risk from investments made in
Collateralized Mortgage Obligations ("CMOs"), mortgage pass-throughs,
manufactured housing and home equity loans. LNC's MBS portfolio has equal to or
slightly less prepayment risk than the MBS pass-through market in general
primarily due to holding more seasoned securities in the portfolio. Due to the
combination of recent lower interest rates and increased efficiency by
mortgage-holders in exercising their prepayment options, the riskiness of these
securities has increased over the last few years without a compensating
adjustment to risk premiums. This trend has also reduced the degree of
protection provided by the purchase of protected amortization class CMOs. As a
result, LNC has reduced its exposure to the MBS asset class in recent years.
Interest Rate Risk--Rising Rates. For both annuities and universal life
insurance, a rapid and sustained rise in interest rates poses risks of
deteriorating spreads and high surrenders. The portfolios supporting these
products have fixed-rate assets laddered over maturities generally ranging from
one to ten years or more. Accordingly, the earned rate on each portfolio lags
behind changes in market yields. As rates rise, the lag may be increased by
slowing MBS prepayments. The greater and faster the rise in interest rates, the
more the earned rate will tend to lag behind market rates. If LNC sets renewal
crediting rates to earn the desired spread, the gap between its renewal
crediting rates and competitors' new money rates may be wide enough to cause
increased surrenders. If LNC credits more competitive renewal rates to limit
surrenders, its spreads will narrow. LNC devotes extensive effort to evaluating
these risks by simulating asset and liability cash flows for a wide range of
interest rate scenarios. Such analysis has led to adjustments in the target
maturity structure and to hedging the risk of rising rates by buying
out-of-the-money interest rate cap agreements and swaptions (see discussion
below). With this hedge, the potential adverse impact of a rapid and sustained
rise in rates is kept within corporate risk tolerances. LNC believes that the
risks of rising interest rates are also mitigated by its emphasis on periodic
premium products.
<PAGE> -27-
Debt. LNC has short-term debt, long-term debt, and minority interest-preferred
securities of subsidiary companies totaling $1.1 billion ($835.6 million of this
debt is at fixed rates and $287.6 million is at floating rates). LNC manages the
timing of maturities and the mixture of fixed-rate and floating-rate debt as
part of the process of integrated management of interest rate risk for the
entire enterprise.
Derivatives. As indicated in note 7 to the consolidated financial statements on
page 56, LNC has entered into derivative transactions to reduce its exposure to
rapid rises in interest rates. The four programs discussed below are used to
help LNC achieve more stable margins while providing competitive crediting rates
to policyholders during periods when interest rates are rising. Failure to
maintain competitive crediting rates could cause policyholders to withdraw their
funds and place them in more competitive products.
LNC uses interest rate cap agreements to hedge against the negative impact of a
significant and sustained rise in interest rates. Interest rate caps are
contracts that require counterparties to pay LNC at specified future dates the
amount, if any, by which a specified market interest rate exceeds the cap rate
stated in the agreements, applied to a notional amount. As of December 31, 1997,
LNC had agreements with notional amounts of $4.9 billion with cap rates ranging
from 245 to 504 basis points above prevailing interest rates. The cap rates in
some contracts increase over time. These agreements expire in 1998 through 2003.
LNC also uses swaptions to hedge against the negative impact of a significant
and sustained rise in interest rates. Swaptions are options to enter into a swap
at a specified future date. If the option is exercised at expiration, the option
is either settled in cash or exercised into a swap agreement. LNC purchases
swaptions to be settled in cash. At expiration, the counterparty is required to
pay LNC the amount, if any, of the present value of the difference between the
fixed rate on a market rate swap and the strike rate stated in the agreement,
applied to a notional amount. As of December 31, 1997, LNC had agreements with
notional amounts of $1.752 billion with strike rates ranging from 224 to 350
basis points above prevailing interest rates. These agreements expire in 2002
and 2003.
For future periods, the fair value of LNC's interest rate caps and swaptions
depends on the levels of interest rates on U.S. Treasury securities with
maturities of two, five, seven and 10 years and U.S. dollar swap rates with
five, seven and 10 year maturities. The table below analyzes fair value levels
at December 31, 1997 and for the next five years if the rates were 2%, 4%, 6%,
8%,10% or 12% higher than they were at December 31, 1997. In relation to the
level of these rates at December 31, 1997, the cap and swaption rates were from
2.24% to 5.04% out-of-the-money, i.e., higher. The table below shows the fair
value levels of interest rate caps and swaptions under these scenarios.
<TABLE>
<CAPTION>
Year Ended December 31 (in millions) 1997 1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C> <C>
No change................................... $ 7.8 $ 4.0 $ 1.4 $ .0 $ .0 $ .0
Up 2% .................................... 54.6 32.3 14.6 0.1 .0 .0
Up 4% .................................... 188.3 123.0 70.8 27.7 6.0 0.4
Up 6% .................................... 422.2 304.1 198.6 111.9 54.4 23.2
Up 8% .................................... 681.4 522.2 367.3 233.7 136.0 79.5
Up 10% ..................................... 936.3 746.6 550.4 376.2 242.5 158.7
Up 12% ..................................... 1181.0 970.4 741.8 533.4 367.7 259.5
</TABLE>
LNC uses exchange-traded financial futures contracts and options on financial
futures to hedge against interest rate risks and to manage duration of a portion
of its fixed maturity securities. Financial futures contracts obligate LNC to
buy or sell a financial instrument at a specified future date for a specified
price. They may be settled in cash or through delivery of the financial
instrument. Cash settlements on the change in market values of financial futures
contracts are made daily. Put options on a financial futures contract give LNC
the right, but not the obligation, to assume a long or short position in the
underlying futures contract at a specified price during a specified time period.
As of December 31, 1997, LNC did not have any open futures or options on
futures.
LNC uses interest rate swap agreements to hedge its exposure to floating rate
bond coupon payments, replicating a fixed rate bond. An interest rate swap is a
contractual agreement to exchange payments at one or more times based on the
actual or expected price, level, performance or value of one or more underlying
interests. LNC is required to pay the counterparty the stream of variable coupon
payments generated from the bonds, and in turn, receives a fixed payment from
the counterparty, at a predetermined interest rate. As of December 31, 1997, LNC
had a swap agreement with a notional amount of $10.0 million that expires in
2000.
<PAGE> -28-
In addition to continuing existing programs, LNC may use derivative products in
other strategies to limit risk and enhance returns, particularly in the
management of investment spread businesses. LNC has established policies,
guidelines and internal control procedures for the use of derivatives as tools
to enhance management of the overall portfolio of risks assumed in LNC's
operations.
The table below provides a general measure of LNC's significant interest rate
risk (principal amounts are shown by year of maturity and include amortization
of premiums and discounts) as of December 31, 1997.
<TABLE>
<CAPTION>
There- Fair
(in millions of dollars) 1998 1999 2000 2001 2002 after Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Fixed maturity securities . . . 665 855 904 1,086 1,197 20,665 25,373 24,066
Average interest rate . . . . 8.01% 7.73% 7.38% 7.67% 7.43% 7.96% 7.88%
Mortgage loans . . . . . . . . . 188.3 119.2 266.0 138.0 233.4 2,349.8 3,294.8 3,473.5
Average interest rate . . . . . 9.37% 9.36% 9.13% 8.71% 8.60% 8.54% 8.68%
Rate Sensitive Liabilities:
Guaranteed interest contracts:
Interest paid out annually. . . . 148.4 179.9 106.1 434.4 446.2
Average interest rate . . . . . . 6.55% 7.20% 6.97% 6.92%
Interest paid at maturity . . . . 327.9 130.7 159.9 34.9 1.4 49.8 704.6 723.7
Average interest rate . . . . . 6.45% 6.87% 7.16% 8.15% 6.18% 10.70% 7.07%
Investment type insurance
contracts, excluding
guaranteed insurance
contracts (1) . . . . . . . . . 583.6 705.3 800.5 952.2 1,154.9 13,436.2 17,632.7 18,329.2
Average interest rate . . . . . 8.12% 7.74% 7.77% 7.80% 7.62% 8.00% 7.99%
Debt(2) . . . . . . . . . . . . 297.2 100.1 .1 .5 100.0 628.3 1,126.2 1,161.8
Average interest rate . . . . 5.83% 7.13% 7.63% 8.30% 7.48%
Rate Sensitive Derivative
Financial Instruments:
Interest rate caps and
swaptions (3)
Outstanding cap notional . . 3,100.0 2,041.0 2,619.0 3.107.0 2,459.0 517.0 7.8
Average strike rate (4) . . 9.6% 9.9% 9.2% 8.9% 8.8% 9.1%
Forward CMT curve (5) . . . 5.7% 5.8% 5.8% 5.8% 5.8% 5.9%
</TABLE>
(1) The information shown is for the fixed maturity securities and mortgage
loans that support these insurance contracts.
(2) Includes minority interest-preferred securities of subsidiary companies.
(3) Swaptions notional is shown converted to cap equivalent.
(4) The indexes are a mixture of five-year and ten-year Constant Maturity
Treasury ("CMT") and Constant Maturity Swap ("CMS").
(5) The CMT curve is the five-year constant maturity treasury forward curve.
2) Foreign Currency Risk
Foreign Currency Denominated Investments. LNC invests in foreign currency
securities for incremental return and risk diversification relative to United
States Dollar-Denominated ("USD") securities. The fair value of foreign
securities which are denominated in 16 different foreign currencies, as of
December 31, 1997 was $519.8 million. LNC periodically uses a combination of
foreign exchange forward contracts, foreign currency options, and foreign
currency swaps to hedge some of the foreign exchange risk related to its
investments in securities denominated in foreign currencies. The currency risk
is hedged using foreign currency derivatives of the same currency as the bonds.
Unhedged, a 10% adverse move in the currency would create a $52.0 million
<PAGE> -29-
pre-tax loss. The aggregate USD equivalent of forward currency positions hedging
the portfolio was $172.8 million; the unhedged amount of the portfolio was
$347.0 million. A 10% adverse currency move has thus been reduced to $34.7
million pre-tax through hedging. This number is approximate because not
all foreign currency derivatives are "at- the-money spot." The table below shows
LNC's exposure to foreign currency securities. Also included is the relevant
information relating the foreign currency derivatives that are hedging the
currency risk of these securities. The table below presents the principal
(notional) amount in U.S. dollar equivalents by expected maturity for LNC's
foreign currency denominated investments.
<TABLE>
<CAPTION>
December 31, 1997 There- Fair
(in millions of dollars) 1998 1999 2000 2001 2002 after Total Value
<S> <C> <C> <C> <C> <C> <C> <C>
Currencies
Canadian Dollar. . . . . 2.9 15.4 .6 7.0 3.6 54.0 83.5 91.2
Interest Rate . . . . . . 8.76% 8.78% 5.57% 7.73% 8.16% 6.97%
British Pound . . . . . . 78.3 78.3 90.0
Interest Rate . . . . . 7.25%
Japanese Yen . . . 28.5 36.6 65.1 73.6
Interest Rate . . . . 1.08% 1.77%
German Mark . . . . . 18.0 44.1 62.1 67.3
Interest Rate . . . . . 4.90% 5.34%
Italian Lira . . . . . . . 44.9 44.9 54.8
Interest Rate . . . . . 7.16%
All Other Currencies . 16.3 2.0 25.2 11.6 7.5 72.3 134.9 142.9
Interest Rate . . . . . 17.44% 13.12% 8.18% 7.90% 6.61% 6.21%
Derivatives
Forwards . . . . . . . . . 163.1 163.1 5.4
Swaps . . . . . . . . . 15.0 15.0 (2.1)
</TABLE>
Foreign Currency Forward Contracts. LNC uses foreign currency forward contracts
to actively hedge some of the foreign exchange risk related to its investments
in fixed maturity securities denominated in foreign currencies. LNC typically
engages in short-term currency forward contracts of less than six months and
actively monitors currency markets in determining those currencies to hedge, the
duration of the hedge and the nominal amount to hedge. A foreign currency
forward contract obligates LNC to deliver a specified amount of currency at a
future date at a specified exchange rate. The value of the foreign exchange
forward contracts at any given point fluctuates according to the underlying
level of exchange rate and interest rate differentials. As of December 31, 1997,
LNC had agreements with notional amounts of $163.1 million in foreign exchange
forward contracts for an average overall hedge ratio of 38%. These contracts
include hedges against British Pounds (60% hedged), Japanese Yen (73% hedged)
and Italian Lira (25% hedged) with average forward foreign exchange rates of
1.610, 120.750 and 1826.100, respectively. LNC periodically uses foreign
exchange forward contracts to hedge against foreign exchange risk related to
LNC's investment in its British subsidiary, Lincoln National (UK). As of
December 31, 1997, LNC did not have any open foreign exchange forward contracts
related to its investment in Lincoln National (UK).
Foreign Currency Options. A foreign currency option gives LNC the right, but not
the obligation, to buy or sell a foreign currency at a specific exchange rate
during a specified time period. LNC has historically used options that were
slightly "out-of-the-money" resulting in a "corridor" of currency risk assumed,
but limited the risk above the strike price. At December 31, 1997, LNC did not
have any open positions in foreign currency options.
Foreign Currency Swaps. A foreign currency swap is a contractual agreement to
exchange the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date. As of December 31, 1997, LNC had a foreign currency swap with a
notional amount of $15.0 million.
<PAGE> -30-
3) Equity Market Exposures
LNC's revenues, assets, liabilities and derivatives are exposed to equity market
risk.
Fee Revenues. The fee revenues of LNC's Investment Management segment and fees
earned from variable annuities are exposed to the risk of a decline in equity
market values. These fees are generally a fixed percentage of the market value
of assets under management. In a severe equity market decline, fee income could
be reduced by not only reduced market valuations but also by customer
withdrawals. Such withdrawals from equity funds and accounts might be partially
offset by transfers to LNC's fixed-income accounts and the transfer of funds to
LNC by its competitors' customers.
Assets. While LNC invests in equity assets with the expectation of achieving
higher returns than would be available in its core fixed-income investments, the
returns on, and values of, these equity investments are subject to somewhat
greater market risk than its fixed income investments. These investments,
however, add diversification benefits to LNC's fixed income investments. The
table below shows the sensitivity of price changes to LNC's equity assets owned
as of December 31, 1997.
10% Fair 10% Fair
Carrying Fair Value Value
December 31, 1997(in millions) Value Value Increase Decrease
U.S. Equities . . . . . . $ 498.1 $ 498.1 $ 547.9 $ 448.3
Foreign Equities . . . . . 157.7 157.7 173.5 141.9
Emerging Market Equities . 4.6 4.6 5.1 4.1
Sub-Total . . . . . . . 660.4 660.4 726.5 594.3
Real Estate . . . . . . . . 576.0 621.3 683.4 559.2
Other Equity Interests . . . 202.1 245.5 270.1 220.9
Total . . . . . . . . $1,438.5 $1,527.2 $1,680.0 $1,374.4
Liabilities. LNC has an exposure to foreign currency equity risk with respect to
unit-linked annuity policies issued in the UK. As of December 31, 1997, the
aggregate U.S dollar equivalent amount of account value is $59.4 million. LNC
also has a small exposure to U.S. equity markets through reinsurance contracts
that reinsure equity-indexed annuities. The aggregate amount of account value of
these annuities is $6.6 million. These risks are being hedged with equity
derivatives as discussed below.
Derivatives Hedging Equity Risks. LNC has two programs hedging equity market
risk in annuities issued in the U.K. and U.S. that contain equity features.
LNC uses Over-the-Counter ("OTC") foreign currency equity call options to hedge
against the foreign equity market risk component contained in its U.K.
unit-linked annuities which are a function of the Financial Times Stock Exchange
("FTSE") index. These call options require the counterparties to pay LNC at
specified future expiration dates the amount, if any, of the percentage increase
in the FTSE index over the strike price defined in the contract, applied to a
notional amount. As of December 31, 1997, LNC had agreements with notional
amounts of $14.1 million. The call options expirations are matched to the
liabilities and expire in 1998 through 2001.
LNC uses OTC equity call options on the S&P 500 index to hedge against the
increase in its liabilities resulting from certain reinsurance agreements which
guarantee payment of the appreciation of the S&P 500 index on certain underlying
annuity products. These call options require the counterparty to pay LNC at
specified future expiration dates the amount, if any, of the percentage increase
in the S&P 500 index over the strike price defined in the contract, applied to
the notional amount. The reinsurance agreement then requires LNC to pay any
appreciation on the S&P 500 index to the reinsurance client. As of December 31,
1997, LNC had agreements with notional amounts of $5.3 million. The call options
expirations are matched to the liabilities and expire in 2005.
<PAGE> -31-
Default Risk. In assessing the risk that the rate of default losses for each
category of asset may be higher than the rates assumed in pricing its products,
LNC considers the entire $29.8 billion portfolio of invested assets, taking
diversification into account. Of this total, $16.6 billion consists of corporate
bonds and $3.3 billion consists of commercial mortgages. LNC manages the risk of
adverse default experience on these investments by applying disciplined credit
evaluation and underwriting standards, prudently limiting allocations to
lower-quality, higher-yielding investments, and diversifying exposures by
issuer, industry, region and property type. For each counterparty or borrowing
entity and its affiliates, LNC's exposures from all transactions are aggregated
and managed in relation to formal limits set by rating quality and industry
group. LNC remains exposed to occasional adverse cyclical economic downturns
during which default rates may be significantly higher than the long-term
historical average used in pricing.
LNC is depending on the ability of derivative product dealers and their
guarantors to honor their obligations to pay the contract amounts under interest
rate cap agreements, swaptions, spread-lock agreements, interest rate swaps,
call options, foreign currency exchange contracts, foreign currency options and
foreign currency swaps. In order to minimize the risk of default losses, LNC
diversifies its exposures among several dealers and limits the amount of
exposure in accordance with the credit rating of each dealer or its guarantor.
LNC generally limits its selection of counterparties that are obligated under
these derivative contracts to those with an A credit rating or above.
Credit-Related Derivatives. LNC periodically uses spread-lock agreements to
hedge a portion of the value of its fixed maturity securities against the risk
of widening in the spreads between their yields and the yields of comparable
maturity U.S. or other Government obligations. The actual risk being hedged by
these agreements is the potential widening of bond spreads that would be caused
by widening swap spreads. Under these agreements, LNC assumed the right and the
obligation to enter into an interest rate swap at a future date in which LNC
would pay a fixed rate equal to a contractually specified spread over the yield
of a specified Government security and receive a floating rate. As of December
31, 1997, LNC did not have any open spread-lock agreements.
LIQUIDITY AND CASH FLOW
Liquidity refers to the ability of an enterprise to generate adequate amounts of
cash from its normal operations to meet cash requirements with a prudent margin
of safety. Because of the interval of time from receipt of a deposit or premium
until payment of benefits or claims, LNC and other insurers employ investment
portfolios as an integral element of operations. By segmenting its investment
portfolios along product lines, LNC enhances the focus and discipline it can
apply to managing the liquidity as well as the interest rate and credit risk of
each portfolio commensurate with the profile of the liabilities. For example,
portfolios backing products with less certain cash flows and/or withdrawal
provisions are kept more liquid than portfolios backing products with more
predictable cash flows.
The consolidated statements of cash flows on page 37 indicate that operating
activities provided cash of $1.1 billion, $1.4 billion and $2.2 billion in 1997,
1996 and 1995, respectively. This statement also classifies the other sources
and uses of cash by investing activities and financing activities and discloses
the amount of cash available at the end of the year to meet LNC's obligations.
Although LNC generates adequate cash flow to meet the needs of its normal
operations, periodically LNC may issue debt or equity securities to fund
internal expansion, acquisitions, investment opportunities and the retirement of
LNC's debt and equity. As of December 31, 1997, LNC had a shelf registration
with an unused balance of $600 million that would allow LNC to issue debt or
equity securities. In 1996, LNC filed another shelf registration for $500
million which included the right to offer various forms of hybrid securities.
These securities, which have a combination of both debt and equity
characteristics, are offered through a series of three newly formed trusts
(Lincoln National Capital I, II and III). All of these trusts' common securities
are owned by LNC. As of December 31, 1997, LNC had an unused balance of $185
million related to this hybrid security registration. Cash funds also are
available from LNC's revolving credit agreement, which provides for borrowing up
to $750 million (see note 5 to the consolidated financial statements on page
50).
Recent transactions also include LNC's purchase and retirement of 4,948,900 and
694,582 shares of common stock at a cost of $325.3 million and $35.0 million in
1997 and 1996, respectively. The 4,948,900 shares purchased in 1997 includes
4,370,000 shares at a cost of $294.9 million that have been purchased since the
June 1997 board authorization to repurchase up to $500 million of common stock.
<PAGE> -32-
This leaves a Board authorization to repurchase an additional $205.1 million of
LNC's common stock. From January 1, 1998 through February 27, 1998 LNC purchased
an additional 623,281 shares at a cost of $46.9 million. Also LNC issued
1,323,144 shares of LNC common stock in 1997 to purchase a subsidiary company
(see note 12 to the consolidated financial statements on page 65).
Another transaction that occurred in 1997 that had a major impact on LNC's cash
flow was the sale of a subsidiary for $2.65 billion (see note 11 to the
consolidated financial statements on page 65). LNC used these proceeds to 1)
repurchase $294.9 million of its own common stock, 2) retire $86.7 million in
long-term debt and 3) $85.0 million to purchase 49% of Sequrous Serfin Lincoln.
Also $447.6 million was set aside to pay the taxes related to the gain on sale
of discontinued operations and $1.4 billion was set aside for use in purchasing
a block of individual life insurance and annuity business in January 1998 (see
note 12 to the consolidated financial statements on page 65). The remaining
balance was applied to pay off a portion of LNC's short-term debt and invested
for general corporate purposes which could include the purchase of additional
subsidiary companies or blocks of business.
In order to maximize the use of available cash, the holding company (Lincoln
National Corporation) maintains a facility where subsidiaries can borrow from
the holding company to meet their short-term needs and can invest their
short-term funds with the holding company. Depending on the overall cash
availability or need, the holding company invests excess cash in short-term
investments or borrows funds in the financial markets. In addition to
facilitating the management of cash, the holding company receives dividends from
its subsidiaries, invests in operating companies, maintains an investment
portfolio and pays shareholder dividends and certain corporate expenses.
<TABLE>
<CAPTION>
Holding Company Cash Flow
Year Ended December 31 (in millions) 1997 1996 1995
<S> <C> <C> <C>
Dividends from subsidiaries:
Lincoln Life . . . . . . . . . . . . . . . . . . . $ 150.0 $ 135.0 $ 310.0
American States (subsidiary subsequently
transferred to discontinued operations ) . . . . 24.7 74.7 199.0
Other . . . . . . . . . . . . . . . . . . . . . . . 63.2 96.4 29.5
Net investment income . . . . . . . . . . . . . . . . 10.7 4.3 2.9
Operating expenses . . . . . . . . . . . . . . . . . (36.9) (44.6) (41.7)
Interest . . . . . . . . . . . . . . . . . . . . . . . (84.1) (67.8) (57.3)
Net sales (purchases) of investments . . . . . . . . . 4.2 91.2 16.6
Increase (decrease) in cash collateral on
loaned securities . . . . . . . . . . . . . . . . . (21.9) (53.4) (4.5)
Decrease (increase) in investment in subsidiaries . . (116.8) 217.8 (697.1)
Sale of subsidiary (discontinued operations) . . . . 822.5 -- --
(Investment in) sale of unconsolidated affiliates . . (69.0) (16.0) 194.0
Net increase (decrease) in debt . . . . . . . . . . . (72.7) (178.5) 217.1
Increase in receivables from subsidiaries . . . . . . (23.0) (36.0) (.3)
Increase (decrease) in loans from subsidiaries . . . . 454.3 28.2 (42.4)
Decrease (increase) in loans to subsidiaries . . . . . 414.7 (303.5) (107.0)
Federal income taxes paid . . . . . . . . . . . . . . (158.0) (143.8) (38.3)
Net tax receipts from subsidiaries . . . . . . . . . . 206.8 122.3 61.5
Dividends paid to shareholders . . . . . . . . . . (201.9) (191.2) (178.8)
Common stock issued for benefit plans . . . . . . . . . 33.2 (0.2) 24.1
Retirement of common stock . . . . . . . . . . . . . (327.6) (32.7) --
Other . . . . . . . . . . . . . . . . . . . . . . . 24.0 (35.2) 56.4
Cash and invested cash - December 31 . . . . . . . . . $1,230.2 $ 133.8 $ 466.8
Other investments - December 31 . . . . . . . . . . . 232.0 227.2 20.3
Debt - December 31 . . . . . . . . . . . . . . . . . . 1,633.5 1,251.9 1,402.1
</TABLE>
The table above shows the cash flow activity for the holding company from 1995
through 1997. The line, "net tax receipts from (payments to) subsidiaries",
recognizes that the holding company receives tax payments from subsidiaries,
pays the consolidated tax liability and reimburses subsidiaries for the tax
effect of any taxable operating and capital losses.
<PAGE> -33-
LNC's insurance subsidiaries are subject to certain insurance department
regulatory restrictions as to the transfer of funds and payments of dividends to
the holding company (see note 7 to the consolidated financial statements on page
53). However, these restrictions pose no short-term liquidity concerns for the
holding company. The financial strength and stability of the subsidiaries permit
ready access to short-term or long-term credit sources for the holding company.
Effect of Inflation
LNC's insurance affiliates, as well as other companies in the insurance
industry, attempt to minimize the effect of inflation on their revenues and
expenses by anticipating inflationary trends in the pricing of their products.
Inflation, except for changes in interest rates, does not have a significant
effect on LNC's balance sheet due to the minimal amount of dollars invested in
property, plant and equipment and the absence of inventories.
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
(in millions, except per share)
Operating Results by Quarter 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
<S> <C> <C> <C> <C>
1997 Data
Premiums and other considerations .......................... $ 626.6 $ 567.8 $ 661.5 $ 669.2
Net investment income ...................................... 559.4 557.8 548.5 585.1
Realized gain on investments ............................... 12.1 2.5 57.0 51.0
Net income (loss) from continuing operations (1) ........... $ 83.0 $ (48.0) $ 124.9 $ (137.7)
Discontinued operations (1) ................................ 48.3 40.2 46.4 776.9
Net Income (Loss) ....................................... $ 131.3 $ (7.8) $ 171.3 $ 639.2
Net income (loss) from continuing
operations per share (2) .................................. $ .79 $ (.46) $ 1.20 $ (1.34)
Discontinued operations per share (2) ...................... .47 .39 .45 7.55
Net Income (Loss) Per Share (2) ......................... $ 1.26 $ (.07) $ 1.65 $ 6.21
1996 Data
Premiums and other considerations .......................... $ 584.7 $ 617.1 $ 688.1 $ 663.3
Net investment income ...................................... 491.2 505.8 520.0 570.9
Realized gain (loss) on investments ........................ 50.1 22.2 (.7) 20.9
Net income from continuing operations ...................... $ 93.4 $ 85.3 $ 83.0 $ 94.7
Discontinued operations .................................... 46.6 26.1 36.3 48.2
Net Income .............................................. 140.0 $ 111.4 $ 119.3 $ 142.9
Net income from continuing
operations per share (2) .................................. $ .88 $ .81 $ .78 $ .90
Discontinued operations per share (2) ...................... .45 .25 .35 .46
Net Income Per Share (2) .................................. $ 1.33 $ 1.06 $ 1.13 $ 1.36
</TABLE>
(1) Net income (loss) from continuing operations for the second and fourth
quarters of 1997 include special charges for changes in estimates on
reserves. The discontinued operations amount for the fourth quarter of
1997 includes the gain on sale of the discontinued operations (see notes 2
and 11 to the consolidated financial statements on pages 43 and 64,
respectively).
(2) Per share amounts for all periods shown are shown on a diluted basis in
conformance with the provisions of Financial Accounting Standard No. 128
(see note 2 to the consolidated financial statements on page 43).
Consolidated Financial Statements
The consolidated financial statements of Lincoln National Corporation and
Subsidiaries follow on pages 34 through 66.
<PAGE> -34-
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31 (000s omitted) 1997 1996
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity
(cost: 1997-$22,626,036; 1996-$23,205,273) .... $24,066,376 $24,096,669
Equity
(cost: 1997-$517,156; 1996-$434,502) ......... 660,428 557,565
Mortgage loans on real estate ................... 3,288,112 3,240,686
Real estate ..................................... 575,956 655,024
Policy loans .................................... 763,148 734,773
Other investments ............................... 464,826 445,279
Total Investments ............................ 29,818,846 29,729,996
Investment in unconsolidated affiliates ........... 20,975 21,004
Cash and invested cash ............................ 3,794,706 1,144,766
Property and equipment ............................ 189,811 196,044
Deferred acquisition costs ........................ 1,623,845 1,689,716
Premiums and fees receivable ...................... 197,509 237,345
Accrued investment income ......................... 423,008 417,582
Assets held in separate accounts .................. 37,138,845 28,809,137
Amounts recoverable from reinsurers ............... 2,350,766 2,328,514
Goodwill .......................................... 457,729 351,707
Other intangible assets ........................... 613,909 708,446
Other assets ...................................... 544,759 596,420
Discontinued operations - investment assets ....... -- 4,314,968
Discontinued operations - other assets ............ -- 1,167,760
Total Assets .................................. $77,174,708 $71,713,405
<PAGE> -35-
<TABLE>
<CAPTION>
December 31 (000s omitted) 1997 1996
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance and Investment Contract Liabilities:
Insurance policy and claim reserves ......................... $11,266,272 $10,457,896
Contractholder funds ........................................ 20,063,393 21,165,410
Liabilities related to separate accounts .................... 37,138,845 28,809,137
Total Insurance and Investment Contract Liabilities ...... 68,468,510 60,432,443
Federal income taxes ........................................ 487,805 161,501
Short-term debt ............................................. 297,208 188,960
Long-term debt .............................................. 511,037 626,311
Minority interest - preferred securities of
subsidiary companies ....................................... 315,000 315,000
Other liabilities ........................................... 2,112,233 1,417,377
Discontinued operations-insurance liabilities ............... -- 3,650,805
Discontinued operations-other liabilities ................... -- 451,052
Total Liabilities....................................... 72,191,793 67,243,449
Shareholders' Equity:
Series A preferred stock - 10,000,000 shares authorized
(1997 liquidation value - $2,807) .......................... 1,153 1,212
Common stock - 800,000,000 shares authorized ............... 966,461 904,331
Retained earnings............................................ 3,533,105 3,082,368
Accumulated Other Comprehensive Income:
Foreign currency translation adjustment ..................... 46,204 66,454
Net unrealized gain (loss) on securities available-for-sale . 435,992 415,591
Total Accumulated Other Comprehensive Income ............ 482,196 482,045
Total Shareholders' Equity .............................. 4,982,915 4,469,956
Total Liabilities and Shareholders' Equity .............. $77,174,708 $71,713,405
</TABLE>
See notes to the consolidated financial statements on pages 40 - 65.
<PAGE> -36-
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (000s omitted) 1997 1996 1995
<S> <C> <C> <C>
Revenue:
Insurance premiums .................................$1,328,735 $1,519,169 $1,514,001
Insurance fees .................................... 832,153 713,519 600,279
Investment advisory fees ........................... 204,926 180,792 125,593
Net investment income .............................. 2,250,764 2,087,946 1,979,663
Equity in earnings of unconsolidated affiliates ... -- 1,416 13,887
Realized gain (loss) on investments ................ 122,570 92,520 157,606
Gain on sale of subsidiaries ....................... -- -- 82,545
Other revenue and fees ............................. 159,331 138,246 112,913
Total Revenue .................................... 4,898,479 4,733,608 4,586,487
Benefits and Expenses:
Benefits ........................................... 3,191,733 2,709,881 2,851,321
Underwriting, acquisition,
insurance and other expenses ..................... 1,579,341 1,434,948 1,248,233
Interest and debt expense .......................... 92,524 84,721 72,516
Total Benefits and Expenses ...................... 4,863,598 4,229,550 4,172,070
Net Income from Continuing Operations
Before Federal Income Taxes ..................... 34,881 504,058 414,417
Federal income tax expense ........................... 12,651 147,669 113,007
Net Income from Continuing Operations ............ 22,230 356,389 301,410
Discontinued Operations (Net of income taxes):
Income prior to disposal ........................... 134,886 157,169 180,776
Gain on disposal ................................... 776,872 -- --
Net Income .......................................$ 933,988 $ 513,558 $ 482,186
Earnings Per Common Share-Basic: ..................... Restated Restated
Net Income (Loss) from Continuing Operations .......$ .22 $ 3.43 $ 2.99
Discontinued Operations ............................ 8.89 1.52 1.79
Net Income ......................................$ 9.11 $ 4.95 $ 4.78
Earnings Per Common Share-Diluted:
Net Income (Loss) from Continuing Operations .......$ .21 $ 3.38 $ 2.88
Discontinued Operations ............................ 8.77 1.49 1.72
Net Income.......................................$ 8.98 $ 4.87 $ 4.60
</TABLE>
See notes to the consolidated financial statements on pages 40-65.
<PAGE> -37-
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (000s omitted) 1997 1996 1995
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . .$ 933,988 $ 513,558 $ 482,186
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred acquisition costs . . . . . . . . . . . . . (23,519) 34,471 (44,710)
Premiums and fees receivable . . . . . . . . . . . . 39,836 (77,379) (22,633)
Accrued investment income . . . . . . . . . . . . . (5,426) (22,079) (49,059)
Policy liabilities and accruals . . . . . . . . . . 540,676 71,471 273,247
Contractholder funds . . . . . . . . . . . . . . . . 636,600 1,280,205 1,630,708
Amounts recoverable from reinsurers . . . . . . . . (22,252) (128,538) (462,032)
Federal income taxes . . . . . . . . . . . . . . . . 255,105 30,418 264,856
Equity in undistributed earnings of
unconsolidated affiliates . . . . . . . . . . . . . -- (1,428) (11,493)
Provisions for depreciation . . . . . . . . . . . . . 58,136 51,328 49,292
Amortization of goodwill and other
intangible assets . . . . . . . . . . . . . . . . 82,396 70,748 51,632
Realized (gain) loss on investments . . . . . . . . . (122,570) (92,520) (157,606)
Gain on sale of subsidiaries/
discontinued operations . . . . . . . . . . . . . . . (1,192,226) -- (82,545)
Other . . . . . . . . . . . . . . . . . . . . . . . . (69,056) (358,901) 264,447
Net Adjustments . . . . . . . . . . . . . . . . . 177,700 857,796 1,704,104
Net Cash Provided by Operating Activities . . . . 1,111,688 1,371,354 2,186,290
Cash Flows from Investing Activities:
Securities available-for-sale:
Purchases . . . . . . . . . . . . . . . . . . . . . (10,740,292) (13,127,740) (14,291,590)
Sales . . . . . . . . . . . . . . . . . . . . . . . 10,098,697 12,135,338 13,149,321
Maturities . . . . . . . . . . . . . . . . . . . . 1,461,390 981,264 965,460
Purchase of other investments . . . . . . . . . . . . (2,128,852) (2,333,222) (1,759,349)
Sale or maturity of other investments . . . . . . . . 1,961,551 2,187,615 990,125
Sale of subsidiary/discontinued operations . . . . . . 2,650,000 -- 186,900
Purchase of affiliates/business . . . . . . . . . . . (11,847) (71,593) (736,966)
Increase (decrease) in cash collateral on
loaned securities . . . . . . . . . . . . . . . . . . 353,550 (97,257) (39,223)
Other . . . . . . . . . . . . . . . . . . . . . . . . . 121,065 (146,768) (212,898)
Net Cash Provided by (Used in)
Investing Activities . . . . . . . . . . . . . . . . 3,765,262 (472,363) (1,748,220)
Cash Flows from Financing Activities:
Principal payments on long-term debt . . . . . . . . . . . (116,942) (35,074) (14,182)
Issuance of long-term debt . . . . . . . . . . . . . . 1,118 2,082 197,785
Net increase (decrease) in short-term debt . . . . . . 108,248 (237,888) 25,785
Minority interest-preferred securities of
subsidiary companies . . . . . . . . . . . . . . . . -- 315,000 --
Universal life and investment contract deposits . . . . 986,541 1,125,532 2,094,239
Universal life and investment contract withdrawals . . (2,709,662) (2,366,725) (2,149,326)
Common stock issued for benefit plans . . . . . . . . . 33,199 (565) 24,097
Retirement of common stock . . . . . . . . . . . . . . . (327,585) (32,716) --
Proceeds from sale of minority interest in subsidiary -- 215,182 --
Dividends paid to shareholders . . . . . . . . . . . . . (201,927) (191,223) (178,805)
Net Cash Provided by (Used in) Financing Activities (2,227,010) (1,206,395) (407)
Net Increase (Decrease) in Cash . . . . . . . . . . . 2,649,940 (307,404) 437,663
Cash at Beginning-of-Year . . . . . . . . . . . . . . . . 1,144,766 1,452,170 1,014,507
Cash at End-of-Year . . . . . . . . . . . . . . . . . $ 3,794,706 $ 1,144,766 $ 1,452,170
See notes to the consolidated financial statements on pages 40-65
</TABLE>
<PAGE> -38-
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31 (000s omitted) 1997 1996 1995
<S> <C> <C> <C> <C>
Preferred Stock:
Series A Preferred Stock:
Balance at beginning-of-year .........................$ 1,212 $ 1,335 $ 1,420
Conversion into common stock ......................... (59) (123) (85)
Balance at End-of-Year ............................. 1,153 1,212 1,335
Series E and F Preferred Stock:
Balance at beginning-of-year ......................... -- -- 309,913
Conversion into common stock ......................... -- -- (309,913)
Balance at End-of-Year ............................. -- -- --
Common Stock:
Balance at beginning-of-year .......................... 904,331 907,432 573,338
Conversion of series A preferred stock ................ 59 123 85
Conversion of series E and F preferred stock .......... -- -- 309,913
Issued for benefit plans ............................. 34,592 7,597 26,888
Shares forfeited under benefit plans ................. (1,393) (4,771) (2,792)
Issued for purchase of subsidiaries ................... 74,390 -- --
Retirement of common stock ............................ (45,518) (6,050) --
Balance at End-of-Year ............................ 966,461 904,331 907,432
Retained Earnings:
Balance at beginning-of-year ......................... 3,082,368 2,757,762 2,461,576
Comprehensive income ................................. 934,139 284,010 1,497,966
Less other comprehensive income (loss):
Foreign currency translation ....................... (20,250) 53,041 6,523
Net unrealized gain (loss) on securities
available-for-sale ................................ 20,401 (282,589) 1,009,257
Net Income ................................... 933,988 513,558 482,186
Realized gain (loss) on sale of minority
interest in subsidiary ............................. -- 34,121 --
Retirement of common stock ........................... (279,808) (28,925) --
Dividends declared:
Series A Preferred ($3.00 per share)................ (106) (112) (123)
Series E Preferred ($1.89 per share) ............... -- -- (4,168)
Series F Preferred ($1.97 per share) ............... -- -- (4,364)
Common stock (1997 - $1.99;
1996 - $1.87; 1995 - $1.75) ...................... (203,337) (194,036) (177,345)
Balance at End-of-Year ........................... 3,533,105 3,082,368 2,757,762
</TABLE>
<PAGE> - 39-
<TABLE>
<CAPTION>
Year Ended December 31 (000s omitted) 1997 1996 1995
<S> <C> <C> <C>
Foreign Currency Translation Adjustment:
Accumulated adjustment at beginning-of-year .... 66,454 13,413 6,890
Change during the year.......................... (20,250) 53,041 6,523
Balance at End-of-Year ...................... 46,204 66,454 13,413
Net Unrealized Gain (Loss) on Securities
Available-for-sale:
Balance at beginning-of-year ................... 415,591 698,180 (311,077)
Realized gain (loss) on sale of
minority interest in subsidiary ............... -- (19,101) --
Removal of discontinued operations ............. (176,603) -- --
Other change during the year ................... 197,004 (263,488) 1,009,257
Balance at End-of-Year ....................... 435,992 415,591 698,180
Total Shareholders' Equity at End-of-Year ... $4,982,915 $ 4,469,956 $ 4,378,122
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 (Number of Shares) 1997 1996 1995
<S> <C> <C> <C>
Preferred Stock:
Series A Preferred Stock:
Balance at beginning-of-year ......................... 36,885 40,646 43,218
Conversion into common stock ......................... (1,794) (3,761) (2,572)
Balance Issued and Outstanding at End-of-Year ...... 35,091 36,885 40,646
Series E and F Preferred Stock:
Balance at beginning-of-year ......................... -- -- 4,417,897
Conversion into common stock ......................... -- -- (4,417,897)
Balance Issued and Outstanding at End-of-Year ...... -- -- --
Common Stock:
Balance at beginning-of-year ........................... 103,658,575 104,185,117 94,477,942
Conversion of series A preferred stock ................. 14,352 30,088 20,576
Conversion of series E and F preferred stock ........... -- -- 8,835,794
Issued for benefit plans ............................... 759,330 250,072 905,361
Shares forfeited under benefit plans ................... (21,991) (112,120) (54,556)
Issued for purchase of subsidiaries ................... 1,398,112 -- --
Retirement of common stock ............................. 4,948,900 (694,582) --
Balance Issued and Outstanding at End-of-Year ......... 100,859,478 103,658,575 104,185,117
Average Common Stock Outstanding for the Year ............ 102,704,221 104,253,043 99,425,639
Common Stock at End-of-Year
(assuming conversion of Preferred Stock) ................ 101,140,206 103,953,655 104,510,285
</TABLE>
See notes to the consolidated financial statements on pages 40-65.
<PAGE> -40-
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
include Lincoln National Corporation ("LNC") and its majority-owned
subsidiaries. Through subsidiary companies, LNC operates multiple insurance and
investment management businesses. Operations are divided into four business
segments (see note 9 on page 60). Less than majority-owned entities in which LNC
has at least a 20% interest are reported on the equity basis. These consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles. Certain prior year amounts have been reclassified to
conform to the current year presentation, including reclassification of amounts
related to discontinued operations (see note 11 on page 64).
Use of Estimates. The nature of the insurance and investment management
businesses requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Investments. LNC classifies its fixed maturity and equity securities as
available-for-sale and, accordingly, such securities are carried at fair value.
The cost of fixed maturity securities is adjusted for amortization of premiums
and discounts. The cost of fixed maturity and equity securities is adjusted for
declines in value that are other than temporary.
For the mortgage-backed securities portion of the fixed maturity securities
portfolio, LNC recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities. When
estimates of prepayments change, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net investment in
the securities is adjusted to the amount that would have existed had the new
effective yield been applied at the time of acquisition. This adjustment is
reflected in net investment income.
Mortgage loans on real estate are carried at the outstanding principal balances
less unaccrued discounts. Investment real estate is carried at cost less
allowances for depreciation. The cost for both mortgage loans and real estate
and investment real estate is adjusted for declines in value that are other than
temporary. Also, allowances for losses are established, as appropriate, for real
estate holdings that are in the process of being sold. Real estate acquired
through foreclosure proceedings is recorded at fair value on the settlement date
which establishes a new cost basis. If a subsequent periodic review of a
foreclosed property indicates the fair value, less estimated costs to sell, is
lower than the carrying value at the settlement date, the carrying value is
adjusted to the lower amount. Any changes to the reserves for mortgage loans on
real estate and real estate are reported as realized gain (loss) on investments.
Policy loans are carried at aggregate unpaid balances.
Cash and invested cash are carried at cost and include all highly liquid debt
instruments purchased with a maturity of three months or less.
Realized gain (loss) on investments is recognized in net income, net of
associated amortization of deferred acquisition costs and capital gains
expenses, using the specific identification method. Changes in the fair values
of securities carried at fair value are reflected directly in shareholders'
equity, after deductions for related adjustments for deferred acquisition costs
and amounts required to satisfy policyholder commitments that would have been
recorded had these securities been sold at their fair value, and after deferred
taxes or credits to the extent deemed recoverable.
Realized gain (loss) on sale of subsidiaries, net of taxes, is recognized in net
income. Realized gain (loss) on sale of minority interests in subsidiaries is
reflected directly in shareholders' equity net of deferred taxes, if any.
<PAGE> -41-
Derivatives. LNC hedges certain portions of its exposure to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations, fluctuations in the Financial Times Stock Exchange
("FTSE") index, increased liabilities associated with certain reinsurance
agreements and foreign exchange risk by entering into derivative transactions. A
description of LNC's accounting for its hedging of such risks is discussed in
the following two paragraphs.
The premiums paid for interest rate caps, swaptions and S&P call options are
deferred and amortized to net investment income on a straight-line basis over
the term of the respective derivative. Any settlement received in accordance
with the terms of the interest rate caps is also recorded as net investment
income. Realized gain (loss) from the termination of the interest rates caps is
included in net income. Settlements received on swaptions are deferred and
amortized over the life of the hedged assets as an adjustment to yield.
Swaptions, spread-lock agreements, interest rate swaps and financial futures
that hedge fixed maturity securities available-for-sale are carried at fair
value. The change in fair value is reflected directly in shareholders' equity.
Realized gain (loss) from the settlement of such derivatives is deferred and
amortized over the life of the hedged assets as an adjustment to the yield.
Over-the-counter call options are carried at fair value. The change in fair
value is reflected directly in shareholders' equity. Any gain (loss) realized
upon termination of these call options is included in net income. Foreign
exchange forward contracts, which hedge LNC's investment in its British
subsidiary, Lincoln National (UK), are carried at fair value. The change in fair
value and realized gain (loss) on such contracts is reflected directly in the
foreign currency translation adjustment component of shareholders' equity.
Foreign exchange forward contracts, foreign currency options and foreign
currency swaps, which hedge some of the foreign exchange risk of investments in
fixed maturity securities denominated in foreign currencies, are carried at fair
value. The change in fair value is included in shareholders' equity. Realized
gain (loss) from the settlement of such derivatives is included in net income.
Hedge accounting is applied as indicated above after LNC determines that the
items to be hedged expose LNC to interest rate fluctuations, the widening of
bond yield spreads over comparable maturity U.S. Government obligations,
fluctuations in the FTSE index, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives used
are designated as a hedge and reduce the indicated risk by having a high
correlation between changes in the value of the derivatives and the items being
hedged at both the inception of the hedge and throughout the hedge period.
Should such criteria not be met or if the hedged items have been sold,
terminated or matured, the change in value of the derivatives is included in net
income.
Loaned Securities. Securities loaned are treated as collateralized financing
transactions and a liability is recorded equal to the repurchase price. It is
LNC's policy to take possession of securities with a market value at least equal
to the securities loaned. Securities loaned are recorded at fair value as long
as the value of the related collateral is sufficient. LNC's agreements with
third parties generally contain contractual provisions to allow for additional
collateral to be obtained when necessary. LNC values collateral daily and
obtains additional collateral when deemed appropriate.
Property and Equipment. Property and equipment owned for company use is carried
at cost less allowances for depreciation.
Premiums and Fees. Revenue for universal life and other interest-sensitive
insurance policies consists of policy charges for the cost of insurance, policy
initiation and administration, and surrender charges that have been assessed.
Traditional individual life-health and annuity premiums are recognized as
revenue over the premium-paying period of the policies. Group health premiums
are prorated over the contract term of the policies.
Investment Advisory Fees. As specified in the investment advisory agreements
with the mutual funds, fees are determined and recognized as revenues monthly,
based on the average daily net assets of the mutual funds managed. Investment
advisory contracts generally provide for the determination and payment of
advisory fees based on market values of managed portfolios at the end of a
calendar month or quarter. Investment management and advisory contracts are
renewable annually with cancellation clauses ranging from 30 to 90 days.
Assets Held in Separate Accounts/Liabilities Related to Separate Accounts. These
assets and liabilities represent segregated funds administered and invested by
LNC's insurance subsidiaries for the exclusive benefit of pension and variable
life and annuity contractholders. The fees earned by LNC's insurance
subsidiaries for administrative and contractholder maintenance services
performed for these separate accounts are included in insurance fee revenue.
<PAGE> - 42-
Deferred Acquisition Costs. Commissions and other costs of acquiring universal
life insurance, variable universal life insurance, traditional life insurance,
unit-linked products, annuities and group health insurance which vary with and
are primarily related to the production of new business, have been deferred to
the extent recoverable. Acquisition costs for universal and variable universal
life insurance policies and unit-linked products are being amortized over the
lives of the policies in relation to the incidence of estimated gross profits
from surrender charges and investment, mortality, and expense margins, and
actual realized gain (loss) on investments. That amortization is adjusted
retrospectively when estimates of current or future gross profits to be realized
from a group of products are revised. Traditional life-health and annuity
acquisition costs are being amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy reserves.
Benefits and Expenses. Benefits for universal and variable universal life
insurance policies include interest credited to policy account balances and
benefit claims incurred during the period in excess of policy account balances.
Interest crediting rates associated with funds invested in the insurance
company's general account during 1995 through 1997 ranged from 5.9% to 8.0%.
Interest and debt expense includes interest on Minority Interest-Preferred
Securities of Subsidiary Companies.
Goodwill and Other Intangible Assets. The cost of acquired subsidiaries or
blocks of business in excess of the fair value of net assets (goodwill) is
amortized using the straight-line method over periods of 20 to 40 years which
corresponds with the benefits expected to be derived from the acquisitions.
Other intangible assets for the non-insurance subsidiaries (i.e., institutional
customer relationships, covenants not to compete and mutual fund customer
relationships) have been recorded in connection with the acquisition of asset
management services companies. These assets are amortized on a straight-line
basis over 6 to 15 years.
The carrying value of goodwill and other intangible assets is reviewed
periodically for indicators of impairment in value.
Insurance and Investment Contract Liabilities. The liabilities for future policy
and claim reserves for universal and variable universal life insurance policies
consist of policy account balances that accrue to the benefit of the
policyholders, excluding surrender charges. The liabilities for future insurance
policy and claim reserves for traditional life policies and immediate and
deferred paid-up annuities are computed using a net level premium method and
assumptions for investment yields, mortality and withdrawals based principally
on company experience projected at the time of policy issue, with provision for
possible adverse deviations. Interest assumptions for traditional direct
individual life reserves for all policies range from 2.6% to 8.4% graded to 5.7%
after 30 years depending on time of policy issue. Interest rate assumptions for
reinsurance reserves range from 5.0% to 11.0% graded to 8.0% after 20 years. The
interest assumptions for immediate and deferred paid-up annuities range from
4.75% to 11.0%.
With respect to its insurance and investment contract liabilities, LNC
continually reviews its: 1) overall reserve position; 2) reserving techniques
and; 3) reinsurance arrangements. As experience develops and new information
becomes known, liabilities are adjusted as deemed necessary. The effects of
changes in estimates are included in the operating results for the period in
which such changes occur.
Reinsurance. LNC's insurance companies enter into reinsurance agreements with
other companies in the normal course of their business. LNC's insurance
subsidiaries may assume reinsurance from unaffiliated companies and/or cede
reinsurance to such companies. Assets/liabilities and premiums/benefits from
certain reinsurance contracts that grant statutory surplus to other insurance
companies have been netted on the balance sheets and income statements,
respectively, since there is a right of offset. All other reinsurance agreements
are reported on a gross basis.
Depreciation. Provisions for depreciation of investment real estate and property
and equipment owned for company use are computed principally on the
straight-line method over the estimated useful lives of the assets.
Postretirement Medical and Life Insurance Benefits. LNC accounts for its
postretirement medical and life insurance benefits using the full accrual
method.
<PAGE> -43-
Stock Options. LNC recognizes compensation expense for its stock option
incentive plans using the intrinsic value method of accounting. Under the terms
of the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date, or other measurement date,
over the amount an employee must pay to acquire the stock.
Foreign Exchange. LNC's foreign subsidiaries' balance sheet accounts and income
statement items are translated at the current exchange and average exchange
rates for the year, respectively. Resulting translation adjustments are reported
as a component of shareholders' equity. Other translation adjustments for
foreign currency transactions that affect cash flows are reported in earnings.
2. Changes in Accounting Principles and Change in Estimates.
Change in Estimate for Disability Income Reserve. During the fourth quarter of
1995, LNC completed an in-depth review of the experience of its disability
income business. As a result of this study, and based on the assumption that
recent experience would continue in the future, net income was decreased by
$121,600,000 or $1.15 per share ($187,000,000 pre-tax) as a result of
strengthening the disability income reserve by $103,700,000 and writing-off
deferred acquisition costs of $83,300,000 in the Reinsurance segment.
Because of continuing adverse experience and worsening projections of future
experience, LNC conducted an additional in-depth review of loss experience on
its disability income business during the second quarter of 1997. As a result of
this study, the reserve level was deemed to be inadequate to meet future
obligations if current incident levels were to continue in the future. In order
to address this situation, LNC's Reinsurance segment strengthened its disability
income reserve by $92,800,000, wrote-off deferred acquisition costs of
$71,100,000 and reduced related assets by $36,100,000. Combined these actions
reduced net income by $130,000,000 or $1.23 per share ($200,000,000 pre-tax).
Change in Estimate for United Kingdom Pension Mis-selling. During the fourth
quarter of 1997, an in-depth review was completed of the United Kingdom
regulatory environment, settlements to date and the remaining liability
established to settle claims associated with this business. As a result of this
study, the Lincoln UK segment strengthened its liability by $199,400,000
reducing net income by $174,900,000 after-tax or $1.70 per share.
Change in Estimate for Personal Accident Programs. During the fourth quarter of
1997, an in-depth review was completed of certain excess-of-loss personal
accident reinsurance programs written by LNC's Reinsurance segment. Based on a
concern that these programs were generating claims substantially in excess of
expectations, an investigation and audit was conducted covering all such
programs. While LNC continues to investigate the manner in which these programs
were designed and all legal remedies available, it has been determined that the
incurred but not reported reserve liability related to this business should be
strengthened. Accordingly, a charge of $175,000,000 ($113,700,000 after-tax or
$1.11 per share) was taken in the fourth quarter of 1997.
Disclosures about Segments of an Enterprise and Related Information. Financial
Accounting Standard No. 131 entitled "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131") issued in June 1997, was adopted
by LNC in the second quarter of 1997 on a retroactive basis as permitted by the
standard. Under FAS 131 business segments are defined on the same basis that the
company is managed versus the product or market approach previously used. For
LNC this redefinition involved moving LNC's major United Kingdom operation from
within the Life Insurance and Annuities segment into a separate segment entitled
"Lincoln UK." Data shown for all periods has been restated to conform to the
current period presentation (see note 9 on page 60).
Earnings per Share. Financial Accounting Standard No. 128 entitled "Earnings per
Share" ("FAS 128") issued in February 1997, was adopted by LNC during the fourth
quarter of 1997. All prior period earnings per share amounts have been restated
to conform to the provisions of this standard. See note 10 on page 63 for
further earnings per share disclosures.
Reporting Comprehensive Income. Financial Accounting Standard No. 130 entitled
"Reporting Comprehensive Income" ("FAS 130") issued in June 1997 was adopted by
LNC during the fourth quarter of 1997 on a retroactive basis as permitted by the
standard. FAS 130 requires that select changes in shareholders' equity be added
to net income and reported as Comprehensive Income. LNC reported this
information within the consolidated statements of shareholders' equity (see page
38). This standard also requires disclosures related to the tax effects of each
component of comprehensive income (see note 10 on page 64).
<PAGE> -44-
3. Investments
The major categories of net investment income are as follows:
Year Ended December 31 (in millions) 1997 1996 1995
Fixed maturity securities . . . . . . . $1,832.1 $1,690.1 $1,610.1
Equity securities . . . . . . . . . . . 19.2 14.4 11.9
Mortgage loans on real estate . . . . . 279.2 292.7 268.5
Real estate. . . . . . . . . . . . . . . 99.4 125.4 117.9
Policy loans . . . . . . . . . . . . . . 44.5 40.7 36.6
Invested cash . . . . . . . . . . . . . 102.4 69.2 31.6
Other investments . . . . . . . . . . . 20.6 14.7 52.0
Investment revenue. . . . . . . . . . 2,397.4 2,247.2 2,128.6
Investment expense . . . . . . . . . . . 146.6 159.3 148.9
Net investment income . . . . . . . . $2,250.8 $2,087.9 $1,979.7
The realized gain (loss) on investments is as follows:
Year Ended December 31 (in millions) 1997 1996 1995
Fixed maturity securities available-for-sale:
Gross gain . . . . . . . . . . . . . . $240.0 $ 209.5 $ 245.9
Gross loss . . . . . . . . . . . . . (91.5) (202.6) (90.6)
Equity securities available-for-sale:
Gross gain . . . . . . . . . . . . . . 136.8 152.7 97.5
Gross loss . . . . . . . . . . . . . (41.8) (37.8) (46.9)
Other investments . . . . . . . . . . (32.3) 40.4 36.9
Amortization of deferred acquisition costs,
provision for policyholder commitments and
capital gains expenses . . . . . . . . (88.6) (69.7) (85.2)
Total . . . . . . . . . . . . . . $122.6 $ 92.5 $ 157.6
Provisions (credits) for write-downs and net changes in allowances for loss,
which are included in the realized gain (loss) on investments shown above, are
as follows:
Year Ended December 31 (in millions) 1997 1996 1995
Fixed maturity securities . . .. . . . . $ 13.1 $ 12.3 $ 13.6
Equity securities . . . . . . . . . . . .3 3.2 .3
Mortgage loans on real estate . . . . . . (8.9) 3.1 14.1
Real estate . . . . . . . . . . . . . . . (13.6) 4.6 (9.2)
Other long-term investments . . . . . . . (6.5) (.8) (4.7)
Guarantees . . . . . . . . . . . . . . . -- .2 (2.6)
Total . . . . . . . . . . . . . . . $(15.6) $ 22.6 $ 11.5
The change in unrealized appreciation (depreciation) on investments in fixed
maturity and equity securities is as follows:
Year Ended December 31 (in millions) 1997 1996 1995
Fixed maturity securities available-for-sale .$549.0 $(735.5) $2,138.2
Equity securities available-for-sale . . . . 20.2 (42.1) 93.3
Total . . . . . . . . . . . . . . . . . $569.2 $(777.6) $2,231.5
<PAGE> - 45-
The cost, gross unrealized gain and loss, and fair value of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
Amortized Fair
December 31 (in millions) Cost Gain Loss Value
<S> <C> <C> <C> <C>
1997:
Corporate bonds ................................ $ 15,622.9 $1,077.2 $ 66.8 $ 16,633.3
U.S. Government bonds .......................... 591.9 70.7 .2 662.4
Foreign governments bonds ...................... 1,683.4 129.0 7.9 1,804.5
Mortgage-backed securities:
Mortgage pass-through securities ............. 952.5 34.8 2.6 984.7
Collateralized mortgage obligations .......... 3,340.0 197.8 4.3 3,533.5
Other mortgage-backed securities ............. 11.1 -- -- 11.1
State and municipal bonds ...................... 236.1 5.3 -- 241.4
Redeemable preferred stocks .................... 188.1 8.0 .6 195.5
Total fixed maturity securities ............ 22,626.0 1,522.8 82.4 24,066.4
Equity securities .............................. 517.2 163.9 20.7 660.4
Total ..................................... $ 23,143.2 $1,686.7 $ 103.1 $ 24,726.8
1996:
Corporate bonds ................................ $ 14,887.0 $ 651.2 $ 87.2 $ 15,451.0
U.S. Government bonds .......................... 1,279.2 44.8 18.9 1,305.1
Foreign governments bonds ...................... 1,664.7 148.5 31.7 1,781.5
Mortgage-backed securities:
Mortgage pass-through securities ............. 1,244.5 27.0 6.7 1,264.8
Collateralized mortgage obligations .......... 3,719.4 168.2 9.1 3,878.5
Other mortgage-backed securities ............. .8 .4 -- 1.2
State and municipal bonds ...................... 234.7 6.7 4.2 237.2
Redeemable preferred stocks .................... 175.0 4.0 1.6 177.4
Total fixed maturity securities ............ 23,205.3 1,050.8 159.4 24,096.7
Equity securities .............................. 434.5 163.7 40.7 557.5
Total ..................................... $ 23,639.8 $1,214.5 $ 200.1 $ 24,654.2
</TABLE>
Future maturities of fixed maturity securities available-for-sale are as
follows:
1997
Amortized Fair
December 31 (in millions) Cost Value
Due in one year or less . . . . . . . . . $ 650.5 $ 653.5
Due after one year through five years . . 4,001.0 4,109.0
Due after five years through ten years . 5,876.6 6,124.4
Due after ten years . . . . . . . . . . 7,794.3 8,650.2
Subtotal . . . . . . . . . . . . 18,322.4 19,537.1
Mortgage-backed securities . . . . . . . . 4,303.6 4,529.3
Total . . . . . . . . . . . . . . . . $ 22,626.0 $ 24,066.4
The foregoing data is based on stated maturities. Actual maturities will differ
in some cases because borrowers may have the right to call or pre-pay
obligations.
At December 31, 1997, the par value, amortized cost and estimated fair value of
investments in mortgage-backed securities summarized by interest rates of the
underlying collateral are as follows:
Par Amortized Fair
December 31 (in millions) Value Cost Value
Below 7%. . . . . . . . . . . . . . . $ 62.5 $ 59.6 $ 61.3
7% - 8% . . . . . . . . . . . . . . 1,675.7 1,645.3 1,691.5
8% - 9% . . . . . . . . . . . . . 1,372.7 1,322.8 1,396.5
Above 9% . . . . . . . . . . . . . . 1,316.4 1,275.9 1,380.0
Total . . . . . . . . . . . . . . $ 4,427.3 $ 4,303.6 $ 4,529.3
<PAGE> -46-
The quality ratings of fixed maturity securities available-for-sale are as
follows:
December 31 1997
Treasuries and AAA . . . . . . . . . . . . . . . . . . . . . . . . . . 27.6%
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.1
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.5
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4
Less than BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9
100.0%
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that LNC will be unable to collect all
amounts due according to the contractual terms of the loan agreement. When LNC
determines that a loan is impaired, the cost is adjusted or a provision for loss
is established equal to the difference between the initial cost of the mortgage
loan and the estimated value. Estimated value is based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest rate;
2) the loan's observable market price or; 3) the fair value of the collateral.
The provision for losses is reported as realized gain (loss) on investments.
Mortgage loans deemed to be uncollectible are charged against the allowance for
losses and subsequent recoveries, if any, are credited to the allowance for
losses.
The allowance for losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance for losses is based on LNC's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the timing
of future payments), the estimated value of the underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective as it requires
estimating the amounts and timing of future cash flows expected to be received
on impaired loans that may be susceptible to significant change.
Impaired loans along with the related allowance for losses are as follows:
December 31 (in millions) 1997 1996
Impaired loans with allowance for losses . . . . . . $41.2 $71.9
Allowance for losses. . . . . . . . . . . . . . . . . (5.0) (12.4)
Impaired loans with no allowance for losses . . . . . -- 2.3
Net impaired loans . . . . . . . . . . . . . . . $36.2 $61.8
Impaired loans with no allowance for losses are a result of: 1) direct write-
downs or; 2) collateral dependent loans where the fair value of the collateral
is greater than the recorded investment in the loan.
A reconciliation of the mortgage loan allowance for losses for these impaired
mortgage loans is as follows:
Year Ended December 31 (in millions) 1997 1996 1995
Balance at beginning-of-year . . . . . . . . . $12.4 $ 29.6 $ 62.7
Provisions for losses . . . . . . . . . . . . .8 3.1 14.2
Releases due to write-downs . . . . . . . . . -- -- (11.9)
Releases due to sales . . . . . . . . . . . . . (4.8) (19.9) (20.2)
Releases due to foreclosures. . . . . . . . . . (3.4) (.4) (15.2)
Balance at end-of-year . . . . . . . . . . $ 5.0 $ 12.4 $ 29.6
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
Year Ended December 31 (in millions) 1997 1996 1995
Average recorded investment in impaired loans . $74.9 $139.6 $189.6
Interest income recognized on impaired loans . 7.0 12.7 16.9
All interest income on impaired loans was recognized on the cash basis of income
recognition.
<PAGE> -47-
As of December 31, 1997 and 1996, LNC had restructured loans of $38,500,000 and
$39,600,000, respectively. LNC recorded $3,800,000 and $4,000,000 of interest
income on these restructured loans in 1997 and 1996, respectively. Interest
income in the amount of $3,900,000 and $4,000,000 would have been recorded on
these loans according to their original terms in 1997 and 1996, respectively. As
of December 31, 1997 and December 31, 1996, LNC had no outstanding commitments
to lend funds on restructured loans.
An investment in real estate is considered impaired when the projected
undiscounted cash flow from the investment is less than the carrying value. When
LNC determines that an investment in real estate is impaired, it is written-down
to reduce the carrying value to the estimated value.
As of December 31, 1997, LNC's investment commitments for fixed maturity
securities (primarily private placements), mortgage loans on real estate and
real estate were $367,900,000.
For the year ended December 31, 1997, fixed maturity securities
available-for-sale, mortgage loans on real estate and real estate investments
which were non-income producing were not significant.
The cost information for mortgage loans on real estate, real estate and other
long-term investments are net of allowances for losses. The balance sheet
account for other liabilities includes a reserve for guarantees of third-party
debt. The amount of allowances and reserves for such items is as follows:
December 31 (in millions) 1997 1996
Mortgage loans on real estate. . . . . . . . . . . $ 5.0 $12.4
Real estate . . . . . . . . . . . . . . . . . . . 1.5 3.0
Guarantees . . . . . . . . . . . . . . . . . . . . .8 1.8
4. Federal Income Taxes
The Federal income tax expense (benefit) is as follows:
Year Ended December 31 (in millions) 1997 1996 1995
Current . . . . . . . . . . . . . . . . $137.4 $129.8 $173.9
Deferred . . . . . . . . . . . . . . . (124.7) 17.9 (60.9)
Total for Continuing Operations . . $ 12.7 $147.7 $113.0
The effective tax rate on pre-tax income is lower than the prevailing corporate
Federal income tax rate. A reconciliation of this difference is as follows:
Year Ended December 31 (in millions) 1997 1996 1995
Tax rate times pre-tax income from
continuing operations . . . . . . . . . $12.2 $176.4 $145.0
Effect of:
Tax-preferred investment income . . . . . (34.8) (25.6) (21.8)
Change in valuation allowance . . . . . . 43.5 -- --
Other items . . . . . . . . . . . . . . (8.2) (3.1) (10.2)
Provision for income taxes . . . . . $12.7 $147.7 $113.0
Effective tax rate . . . . . . . . . 36% 29% 27%
Federal income tax recoverable (liability) is as follows:
December 31 (in millions) 1997 1996
Current . . . . . . . . . . . . . . . . . . . . . . . $(431.8) $ 20.7
Deferred . . . . . . . . . . . . . . . . . . . . . . (56.0) (182.2)
Total for continuing operations . . . . . . . . (487.8) (161.5)
Discontinued operations. . . . . . . . . . . . . . . -- 127.8
Total Federal income tax recoverable (liability) . .$(487.8) $ (33.7)
<PAGE> -48-
Significant components of LNC's net deferred tax asset (liability) for
continuing operations are as follows:
December 31 (in millions) 1997 1996
Deferred tax assets:
Insurance and investment contract liabilities .......... $ 914.3 $ 752.7
Net operating loss ..................................... 66.3 90.0
Postretirement benefits other than pensions ............ 39.4 36.6
Other .................................................. 102.9 108.7
Total deferred tax assets ........................... 1,122.9 988.0
Valuation allowance for deferred tax assets ............ 43.5 --
Net deferred tax asset .............................. 1,079.4 988.0
Deferred tax liabilities:
Deferred acquisition costs ............................. 271.2 367.0
Premiums and fees receivable ........................... 3.9 55.7
Investment asset related ............................... 27.9 43.9
Net unrealized gain on securities available-for-sale ... 520.0 337.2
Present value of business in-force ..................... 211.2 220.4
Other................................................... 101.2 146.0
Total deferred tax liabilities ....................... 1,135.4 1,170.2
Net deferred tax asset (liability) .................. $ (56.0) $ (182.2)
LNC's Lincoln UK segment has incurred losses in its pension business which under
U.K. tax law can only be utilized against its future pension business earnings.
At December 31, 1997 the deferred tax asset related to these pension business
losses was $92,000,000. The valuation allowance shown in the table above was
established as an offset to this deferred tax asset.
Cash paid for Federal income taxes in 1997, 1996 and 1995 was $158,000,000,
$143,800,000 and $38,300,000 respectively. The cash paid in 1995 is net of a
$147,400,000 cash refund related to the carryback of 1994 capital losses to
prior years.
At December 31, 1997, LNC had net operating loss carryforwards of $99,900,000
for Federal income tax purposes related to its foreign life reinsurance
companies that expire in years 2005 through 2009. Delaware Management Holdings,
Inc. ("Delaware"), acquired in 1995, has net operating loss carryforwards for
Federal income tax purposes of $89,400,000 at December 31, 1997, which expire in
the years 2002 through 2010. These carryforwards will only be available to
reduce the respective taxable income of the foreign life reinsurance companies
and Delaware.
Prior to 1984, a portion of the life companies' current income was not subject
to income tax, but was accumulated for income tax purposes in a memorandum
account designated as the "policyholders' surplus account". Due to changes in
the tax law, the total of the life companies' balances in their respective
"Policyholders' surplus accounts" have not increased since December 31, 1983.
However, the portion of current income on which income taxes have been paid
continues to accumulate in a memorandum account designated as the "shareholders'
surplus account", and this balance is available for dividends to shareholders
without additional payment of tax. The December 31, 1997 total of the life
companies' account balances for their "shareholders' surplus accounts" was
$2,074,000,000. Should dividends to shareholders for each life company exceed
its respective "shareholders' surplus account", amounts would be transferred
from its respective "policyholders' surplus account" and would be subject to
Federal income tax at that time. Under existing or foreseeable circumstances,
LNC neither expects nor intends that distribution will be made from the
$196,000,000 "policyholders' surplus account" that would result in any such tax.
Accordingly, no provision for deferred income taxes has been provided by LNC on
its "policyholders' surplus account". In the event that such excess
distributions were made, it is estimated that income taxes of approximately
$68,600,000 would be due.
LNC has declared its intention to reinvest the undistributed earnings of Lincoln
National (UK) and will not provide U.S. income tax on these undistributed
earnings. At December 31, 1997, for the years covered by this declaration there
was a deficit in earnings for Lincoln National (UK).
<PAGE> -49-
5. Supplemental Financial Data
Reinsurance transactions included in the income statement caption, "Insurance
Premiums," are as follows:
Year Ended December 31 (in millions) 1997 1996 1995
Insurance assumed. . . . . . . . . . . $1,079.1 $1,201.0 $1,247.9
Insurance ceded . . . . . . . . . . . . 315.0 168.6 391.0
Net reinsurance premiums . . . . . $ 764.1 $1,032.4 $ 856.9
The income statement caption, "Benefits," is net of reinsurance recoveries of
$393,000,000, $250,100,000, and $386,900,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
The income statement caption, "Underwriting, Acquisition, Insurance and Other
Expenses," includes amortization of deferred acquisition costs of $468,000,000,
$428,500,000 and $327,400,000 for the years ended December 31, 1997, 1996 and
1995, respectively. An additional $(78,200,000), $(65,200,000) and $(85,200,000)
of deferred acquisition costs was restored (amortized) and netted against
"Realized Gain (Loss) on Investments" for the years ended December 31, 1997,
1996 and 1995, respectively.
The balance sheet captions, "Real Estate" and "Property and Equipment," are
shown net of allowances for depreciation as follows:
December 31 (in millions) 1997 1996
Real estate. . . . . . . . . . . . . . . . . . . $ 50.2 $ 44.1
Property and equipment. . . . . . . . . . . . . . . 155.9 147.9
Details underlying the balance sheet caption, "Contractholder Funds," are as
follows:
December 31 (in millions) 1997 1996
Premium deposit funds . . . . . . . . . . . . . . . $19,803.0 $20,894.5
Undistributed earnings on participating business . . 79.8 81.9
Other . . . . . . . . . . . . . . . . . . . . . . . . 180.6 189.0
Total . . . . . . . . . . . . . . . . . . . . . $20,063.4 $21,165.4
A reconciliation of the present value of business in-force for LNC's insurance
subsidiaries included in other intangible assets is as follows:
<TABLE>
<CAPTION>
December 31 (in millions) 1997 1996 1995
<S> <C> <C> <C>
Balance at beginning-of-year . . . . . . . . . . . . . . $602.4 $407.4 $ 38.0
Acquisitions of insurance companies/business . . . . . . 22.0 163.5 388.7
Interest accrued on unamortized balance . . . . . . . . . 36.9 37.9 30.7
Balance sheet reclassification related to Lincoln UK . . (94.8) -- --
Amortization . . . . . . . . . . . . . . . . . . . . . . (48.1) (47.6) (50.0)
Foreign exchange adjustment . . . . . . . . . . . . . . . (17.1) 41.2 --
Balance at end-of-year . . . . . . . . . . . . . . . . 501.3 602.4 407.4
Other intangible assets (non-insurance) . . . . . . . . . 112.6 106.0 121.5
Total other intangible assets at end-of-year . . . . . $613.9 $708.4 $528.9
</TABLE>
Future estimated amortization of the present value of business in-force net of
interest on unamortized balance for LNC's insurance subsidiaries is as follows
(in millions):
1998 - $12.0 2000 - $14.9 2002 - $ 20.0
1999 - 14.7 2001 - 18.5 Thereafter - 421.2
The amounts shown do not include future amortization associated with the
purchase of a block of individual life insurance and annuity business in January
1998 (see note 12 to the consolidated financial statements on page 65).
<PAGE> -50-
Details underlying the balance sheet captions, "Short-term and Long-term Debt,"
are as follows:
December 31 (in millions) 1997 1996
Short-term debt:
Commercial paper . . . . . . . . . . . . . . . . $286.3 $164.5
Other short-term notes . . . . . . . . . . . . 1.3 .7
Current portion of long-term debt. . . . . . . . 9.6 23.8
Total short-term debt . . . . . . . . . . . $297.2 $189.0
Long-term debt less current portion:
7 1/8% notes payable, due 1999 . . . . . . . . . $ 99.7 $ 99.5
7 5/8% notes payable, due 2002 . . . . . . . . . 99.4 99.3
7 1/4% notes payable, due 2005 . . . . . . . . . 191.4 197.9
9 1/8% notes payable, due 2024 . . . . . . . . . 119.8 199.1
Mortgages and other notes payable. . . . . . . . .7 30.5
Total long-term debt. . . . . . . . . . . . $511.0 $626.3
The commercial paper outstanding at December 31, 1997 and 1996, had a weighted
average interest rate of approximately 5.83% and 5.87%, respectively.
Future maturities of long-term debt are as follows (in millions):
1998 - $ 9.6 2000 - $ .1 2002 - $100.0
1999 - 100.1 2001 - .5 Thereafter - 313.3
LNC also has access to capital from minority interest in preferred securities
of subsidiary companies. In May 1996, LNC filed a shelf registration with the
Securities and Exchange Commission that would allow LNC to offer and sell up to
$500 million of various forms of hybrid securities. These securities, which
combine debt and equity characteristics, are offered through a series of three
trusts (Lincoln National Capital I, II and III). These trusts were formed solely
for the purpose of issuing preferred securities and lending the proceeds to LNC.
The common securities of these trusts are owned by LNC. The only assets of
Lincoln National Capital I, II and III are the notes receivable from LNC for
such loans. Distributions are paid by these trusts to the preferred
securityholders on a quarterly basis. The principal obligations of these trusts
are irrevocably guaranteed by LNC. Upon liquidation of these trusts the holders
of the preferred securities would be entitled to a fixed amount per share plus
accumulated and unpaid distributions. LNC reserves the right to: 1) redeem the
preferred securities at a fixed price plus accumulated and unpaid distributions
and; 2) extend the stated redemption date up to 19 years if certain conditions
are met.
In July 1996, Lincoln National Capital I issued 8,600,000 shares or
$215,000,000, 8.75% Quarterly Income Preferred Securities ("QUIPS"). In August
1996, Lincoln National Capital II issued 4,000,000 shares or $100,000,000, 8.35%
Trust Originated Preferred Securities ("TOPrS"). Both issues mature in 2026 at
$25 per share and are redeemable in whole or in part at LNC's option any time
after 2001. LNC may offer and sell up to an additional $185,000,000 of
securities under this shelf registration.
Finally, LNC maintains a revolving credit agreement with a group of domestic and
foreign banks in the aggregate amount of $750,000,000. This agreement, which
expires in October 2001, provides for interest on borrowings based on various
money market indices. Under the terms of this agreement, debt levels must remain
below 45% of adjusted consolidated net worth if debt ratings fall below a
prescribed level. LNC's current debt ratings are above this prescribed level.
LNC must maintain a prescribed level of adjusted consolidated net worth. At
December 31, 1997, LNC had no outstanding borrowings under this agreement.
During 1997, 1996 and 1995, fees paid for maintaining revolving credit
agreements amounted to $670,000, $715,000, and $649,000, respectively.
Cash paid for interest for 1997, 1996 and 1995 was $96,000,000; $83,200,000, and
$73,200,000, respectively.
<PAGE> -51-
6. Employee Benefit Plans
Incentive Plans. LNC has various incentive plans for key employees, agents and
directors of LNC and its subsidiaries that provide for the issuance of stock
options, stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the market
value at the date of grant and, subject to termination of employment, expire 10
years from the date of grant. Such options are transferable only upon death and
are exercisable one year from date of grant for options issued prior to 1992.
Options issued subsequent to 1991 are exercisable in 25% increments on the
option issuance anniversary in the four years following issuance.
Financial Accounting Standard No. 123 entitled "Accounting for Stock-Based
Compensation" ("FAS 123") issued in October 1995, was adopted by LNC as of
December 31, 1995. Pursuant to the provisions of FAS 123, LNC has elected to
continue its practice of recognizing compensation expense for its stock option
incentive plans using the intrinsic value based method of accounting (see note 1
on page 43) and to provide the required pro forma information for stock options
granted after December 31, 1994. Accordingly, no compensation expense has been
recognized for stock option incentive plans. Had compensation expense for LNC's
stock option incentive plans for options granted after December 31, 1994 been
determined based on the estimated fair value at the grant dates for awards under
those plans, LNC's pro forma net income and earnings per share for 1997, 1996
and 1995 would have been $925,994,000 ($8.90 per share), $510,518,000 ($4.84 per
share) and $479,814,000 ($4.58 per share), respectively (a decrease of
$7,994,000 or $.08 per share, $3,040,000 or $.03 per share and $2,372,000 or
$.02 per share, respectively). These effects on pro forma net income and
earnings per share of expensing the estimated fair value of stock options are
not necessarily representative of the effects on reported net income for future
years due to factors such as the vesting period of the stock options and the
potential for issuance of additional stock options in future years.
The fair value of options granted after December 31, 1994, used as a basis for
the above pro forma disclosures, was estimated as of the date of grant using a
Black-Scholes option pricing model.
The option price assumptions used were as follows:
Year Ended December 31 1997 1996 1995
Dividend yield . . . . . . . . . . . . . . . . . 3.8% 4.1% 4.4%
Expected volatility. . . . . . . . . . . . . . . 19.0% 18.0% 22.0%
Risk-Free interest rate . . . . . . . . . . . . 6.6% 6.5% 6.3%
Expected life (years). . . . . . . . . . . . . . 6 5 5
Weighted-average fair values per option granted . $11.24 $7.35 $7.15
Information with respect to incentive plan stock options outstanding at December
31, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Number Weighted-
Range of Number Out- Remaining Average Exercisable Average
Exercise standing at Contractual Exercise at Exercise
Prices Dec 31, 1997 Life (Years) Price Dec 31, 1997 Price
<S> <C> <C> <C> <C> <C>
$21 - $30 608,059 3.37 $26.21 608,059 $26.21
31 - 40 633,168 5.86 39.56 567,445 39.60
41 - 50 955,135 7.95 44.31 401,068 43.94
51 - 60 1,045,046 9.30 58.76 25,400 52.36
61 - 70 48,832 5.25 67.76 -- --
71 - 80 10,646 4.14 72.20 -- --
$21 - $80 3,300,886 1,601,972
</TABLE>
Restricted stock (non-vested stock) awarded from 1995 through 1997 was as
follows:
Year Ended December 31 1997 1996 1995
Restricted stock (number of shares). . . . . . . . 118,836 55,538 335,126
Weighted-average price per share at time of grant . $61.98 $46.16 $41.09
<PAGE> -52-
Information with respect to the incentive plans involving stock options is as
follows:
Options Outstanding
Weighted-
Shares Average
Available Exercise
for Grant Shares Price
Balance at January 1,1995 . . . . . . 8,423,014 2,672,189 30.56
Granted . . . . . . . . . . . . . . . (510,150 510,150 42.57
Exercised . . . . . . . . . . . . . . . -- (313,612) 25.70
Expired . . . . . . . . . . . . . . . . (5,273) (275) 19.97
Forfeited . . . . . . . . . . . . . . . 175,446 (36,172) 34.64
Restricted stock awarded . . . . . . . (335,126)
Balance at December 31, 1995. . . . 7,747,911 2,832,280 33.21
Granted . . . . . . . . . . . . . . . (636,500) 636,500 45.69
Exercised . . . . . . . . . . . . . . . -- (273,967) 26.68
Expired . . . . . . . . . . . . . . . . (1,600) (1,000) 27.75
Forfeited . . . . . . . . . . . . . . . 151,818 (38,650) 36.03
Restricted stock awarded . . . . . . . (55,538)
Balance at December 31, 1996 . . . 7,206,091 3,155,163 36.29
Additional authorized . . . . . . . . . 11,613,256
Granted. . . . . . . . . . . . . . . . (1,094,229) 1,094,229 59.49
Exercised . . . . . . . . . . . . . . -- (903,407) 31.67
Expired . . . . . . . . . . . . . . . . -- (783) 71.07
Forfeited . . . . . . . . . . . . . . . 60,797 (44,316) 46.43
Restricted stock awarded . . . . . . . (118,836)
Balance at December 31, 1997 . . . 17,667,079 3,300,886
Shares under options that were exercisable are as follows:
December 31 1997 1996 1995
Options exercisable (number of shares) . . . .1,601,972 1,833,269 1,647,872
Weighted-average exercise price (per share). . $35.81 $31.22 $28.56
Other Benefit Plans. LNC maintains defined benefit pension plans for its U.S.
and U.K. employees and a defined contribution plan for its U.S. agents. LNC
also maintains 401(k) Plans, deferred compensation plans and postretirement
medical and life insurance plans for its U.S. employees and agents. The
aggregate expenses and accumulated obligations for these plans are not material
to LNC's consolidated statements of income or financial position for any of the
periods shown in the accompanying consolidated financial statements.
7. Restrictions, Commitments and Contingencies
Statutory Information and Restrictions
Net income as determined in accordance with statutory accounting practices for
LNC's insurance subsidiaries was $345,200,000, $384,600,000 and $300,300,000 for
1997, 1996 and 1995, respectively. Statutory net income for 1997, 1996 and 1995,
excluding LNC's foreign life reinsurance companies, was $299,100,000,
$342,700,000 and $336,700,000, respectively.
Shareholders' equity as determined in accordance with statutory accounting
practices for LNC's insurance subsidiaries was $2,660,900,000 and $1,990,700,000
for December 31, 1997 and 1996, respectively.
<PAGE> -53-
The National Association of Insurance Commissioners is involved in a multi-year
project to examine and challenge the appropriateness of current statutory
accounting practices. This project could result in changes to statutory
accounting practices that could cause changes to the statutory net income and
shareholders' equity data shown above.
LNC's insurance subsidiaries are subject to certain insurance department
regulatory restrictions as to the transfer of funds and payments of dividends to
LNC. In 1998, LNC's insurance subsidiaries can transfer up to $44,200,000
without seeking prior approval from the insurance regulators.
Disability Income Claims
The liability for disability income claims net of the related asset for amounts
recoverable from reinsurers at December 31, 1997 and 1996 is a net liability of
$1,654,000,000 and $1,561,000,000, respectively, excluding deferred acquisition
costs. The December 31, 1997 amount includes a change in estimate for this
liability (see note 2 on page 43). This liability is based on the assumption
that recent experience will continue in the future. If incidence levels and/or
claim termination rates fluctuate significantly from the assumptions underlying
the reserves, adjustments to reserves could be required in the future.
Accordingly, this liability may prove to be deficient or excessive. However, it
is management's opinion that such future development will not materially affect
the consolidated financial position of LNC. LNC reviews reserve levels on an
ongoing basis.
United Kingdom Pension Products
Operations in the U.K. include the sale of pension products to individuals.
Regulatory agencies have raised questions as to what constitutes appropriate
advice to individuals who bought pension products as an alternative to
participation in an employer sponsored plan. In cases of inappropriate advice,
an extensive investigation may have to be done and the individual put in a
position similar to what would have been attained if the individual had remained
in the employer sponsored plan. At December 31, 1997 and 1996, liabilities of
$291,000,000, and $86,700,000, respectively, had been established for this
issue. The December 31, 1997 amount includes a change in estimate for this
liability (see note 2 on page 43). These liabilities, which are net of expected
recoveries, have been established for the estimated cost of this issue following
regulatory guidance as to activities to be undertaken. These liabilities were
booked net of expected recoveries of $113,000,000 and $31,400,000, respectively,
from previous owners of companies acquired over the last few years as specified
in the indemnification clauses of the purchase agreements. These liabilities and
recoveries are based on various estimates that are subject to considerable
uncertainty. Accordingly, these liabilities may prove to be deficient or
excessive. However, it is management's opinion that such future development will
not materially affect the consolidated financial position of LNC.
Personal Accident Programs
LNC's Reinsurance segment accepts personal accident reinsurance programs from
insurance companies. Most of these programs are presented to the company by
independent brokers who represent the ceding companies. Certain excess of loss
personal accident reinsurance programs created in the London market during
1993-1996 are producing significant losses. Such programs represented
approximately 2.5% of the total programs written during this period. Based on a
review of the programs, LNC strengthened its reserve for losses during the
fourth quarter of 1997 by $175,000,000 (see note 2 on page 43). This reserve is
based on various estimates that are subject to considerable uncertainty.
Accordingly, this reserve may prove to be deficient or excessive. However, it is
management's opinion that such future development will not materially affect the
consolidated financial position of LNC. LNC is involved in an on-going
investigation to determine the way these programs were designed and to evaluate
all legal and other remedies which may exist to minimize future losses.
Marketing and Compliance Issues
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. LNC's management continues to
monitor the company's sales materials and compliance procedures and is making an
extensive effort to minimize any potential liability. Due to the uncertainty
surrounding such matters, it is not possible to provide a meaningful estimate of
the range of potential outcomes at this time; however, it is management's
opinion that such future development will not materially affect the consolidated
financial position of LNC.
<PAGE> -54-
Group Pension Annuities
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer sold by LNC, are supported by a single portfolio of assets
that attempts to match the duration of these liabilities. Due to the long-term
nature of group pension annuities and the resulting inability to exactly match
cash flows, a risk exists that future cash flows from investments will not be
reinvested at rates as high as currently earned by the portfolio. Accordingly,
these liabilities may prove to be deficient or excessive. However, it is
management's opinion that such future development will not materially affect the
consolidated financial position of LNC.
Leases
Certain of LNC's subsidiaries lease their home office properties through
sale-leaseback agreements. The agreements provide for a 25 year lease period
with options to renew for six additional terms of five years each. The
agreements also provide LNC with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a price
defined in the agreements. LNC also has the option to purchase the leased
properties at fair market value as defined in the agreements on the last day of
the initial 25-year lease period ending in 2009 or the last day of any of the
renewal periods.
Total rental expense on operating leases in 1997, 1996 and 1995 was $62,500,000,
$54,500,000 and $49,500,000, respectively. Future minimum rental commitments are
as follows (in millions):
1998 - $49.4 2000 - $44.6 2002 - $ 35.4
1999 - 47.6 2001 - 41.2 Thereafter - 222.6
The future commitments include amounts for space and equipment to be used by the
personnel that were added on January 2, 1998 as a result of the purchase of a
block of individual life and annuity business (see note 11 on page 64).
Information Technology Commitment
In February 1998, Lincoln Life signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Annual costs are dependent on usage but are expected to range from $33,600,000
to $56,800,000.
Insurance Ceded and Assumed
LNC's insurance companies cede insurance to other companies. The portion of
risks exceeding each company's retention limit is reinsured with other insurers.
LNC seeks reinsurance coverage within the business segments that sell life
insurance to limit its liabilities. Prior to December 31, 1997, LNC had limited
its maximum coverage that it would retain on a single individual to $3,000,000.
Based on a review of the capital assigned to the insurance business and the
amount of business in-force (including the addition of the block of business
described in note 11), effective in January 1998, LNC will change the amount it
will retain on a single individual to $10,000,000. Portions of LNC's deferred
annuity business have also been co-insured with other companies to limit its
exposure to interest rate risks. At December 31, 1997, the reserves associated
with these reinsurance arrangements totaled $1,760,000,000. To cover products
other than life insurance, LNC acquires other insurance coverages with
retentions and limits that management believes are appropriate for the
circumstances. The accompanying financial statements reflect premiums, benefits
and deferred acquisition costs, net of insurance ceded (see note 5 on page 49).
LNC's insurance companies remain liable if their reinsurers are unable to meet
contractual obligations under applicable reinsurance agreements.
Certain LNC insurance companies assume insurance from other companies. At
December 31, 1997, LNC's insurance companies have provided $245,800,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receivables
from the ceding company, which are secured by future profits on the reinsured
business. However, LNC's insurance companies are subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
Associated with these transactions, LNC's foreign insurance companies have
obtained letters of credit in favor of various unaffiliated insurance companies
from which LNC assumes business. This allows the ceding companies to take
statutory reserve credit. The letters of credit issued by the banks represent a
guarantee of performance under the reinsurance agreements. At December 31, 1997,
there was a total of $680,700,000 in outstanding bank letters of credit. In
exchange for the letters of credit, LNC paid the banks approximately $1,380,000
in fees in 1997.
<PAGE> -55-
Vulnerability from Concentrations
At December 31, 1997, LNC did not have a material concentration of financial
instruments in a single investee, industry or geographic location. Also at
December 31, 1997, LNC did not have a concentration of: 1) business transactions
with a particular customer, lender or distributor; 2) revenues from a particular
product or service; 3) sources of supply of labor or services used in the
business or; 4) a market or geographic area in which business is conducted that
makes it vulnerable to an event that is at least reasonably possible to occur in
the near term and which could cause a severe impact to LNC's financial
condition.
Other Contingency Matters
LNC and its subsidiaries are involved in various pending or threatened legal
proceedings arising from the conduct of business. Most of these proceedings are
routine in the ordinary course of business. LNC maintains professional liability
insurance coverage for claims in excess of $5 million. The degree of
applicability of this coverage will depend on the specific facts of each
proceeding. In some instances, these proceedings include claims for compensatory
and punitive damages and similar types of relief in addition to amounts for
alleged contractual liability or requests for equitable relief. After
consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits will
not have a material adverse effect on the consolidated financial condition of
LNC.
Two lawsuits involve alleged fraud in the sale of interest sensitive universal
and whole life insurance policies. These two suits have been filed as class
actions against Lincoln Life, although the court has not certified a class in
either case. Plaintiffs seek unspecified damages and penalties for themselves
and on behalf of the putative class. While the relief sought in these cases is
substantial, the cases are in the early stages of litigation, and it is
premature to make assessments about potential loss, if any. Management intends
to defend these suits vigorously. The amount of liability, if any, which may
arise as a result of these suits cannot be reasonably estimated at this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabilitated
companies. Mandatory assessments may be partially recovered through a reduction
in future premium taxes in some states. LNC has accrued for expected assessments
net of estimated future premium tax deductions.
Guarantees
LNC has guarantees with off-balance-sheet risks whose contractual amounts
represent credit exposure. Outstanding guarantees with off-balance-sheet risks,
shown in notional or contract amounts along with their carrying value and
estimated fair values, are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
Notional or Carrying Fair Carrying Fair
Contract Amounts Value Value Value Value
December 31 (in millions) 1997 1996 1997 1997 1996 1996
<S> <C> <C> <C> <C> <C>
Industrial revenue bonds . . . . . . . . . . . . $27.9 $36.4 $ (.8) $ -- $(1.8) $ --
Real estate partnerships. . . . . . . . . . . . . 2.9 3.5 -- -- -- --
Mortgage loan pass-through certificates . . . . . 41.6 50.3 -- -- -- --
Total guarantees . . . . . . . . . . . . . $72.4 $90.2 $ (.8) $ -- $(1.8) $ --
</TABLE>
Certain subsidiaries of LNC have invested in real estate partnerships which use
industrial revenue bonds to finance their projects. LNC has guaranteed the
repayment of principal and interest on these bonds. Certain subsidiaries of LNC
are also involved in other real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event a
partner is unable to pay its principal and interest payments. In addition,
certain subsidiaries of LNC have sold commercial mortgage loans through grantor
trusts which issued pass-through certificates. These subsidiaries have agreed to
repurchase any mortgage loans which remain delinquent for 90 days at a
repurchase price substantially equal to the outstanding principal balance plus
accrued interest thereon to the date of repurchase. It is management's opinion
that the value of the properties underlying these commitments is sufficient that
in the event of default the impact would not be material to LNC.
<PAGE> -56
Derivatives
LNC has derivatives with off-balance-sheet risks whose notional or contract
amounts exceed the credit exposure. LNC has entered into derivative transactions
to reduce its exposure to fluctuations in interest rates, the widening of bond
yield spreads over comparable maturity U.S. Government obligations, increased
liabilities associated with certain reinsurance agreements, foreign exchange
risks and fluctuations in the FTSE and S&P indexes. In addition, LNC is subject
to the risks associated with changes in the value of its derivatives; however,
such changes in value generally are offset by changes in the value of the items
being hedged by such contracts. Outstanding derivatives with off-balance-sheet
risks, shown in notional or contract amounts along with their carrying value and
estimated fair values, are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
Notional or Carrying Fair Carrying Fair
Contract Amounts Value Value Value Value
December 31 (in millions) 1997 1996 1997 1997 1996 1996
<S> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements . . . . . . $4,900.0 $5,500.0 $13.9 $ .9 $20.8 $8.2
Swaptions . . . . . . . . . . . . . . . . 1,752.0 672.0 6.9 6.9 10.6 10.6
Spread-lock agreements . . . . . . . . . . -- -- -- -- -- --
Financial futures . . . . . . . . . . . . -- 147.7 -- -- (2.4) (2.4)
Interest rate swaps . . . . . . . . . . . 10.0 -- .2 .2 -- --
Total interest rate derivatives . . . . 6,662.0 6,319.7 21.0 8.0 29.0 16.4
Foreign currency derivatives:
Forward exchange forward contracts:
Foreign subsidiary . . . . . . . . . . . . -- -- -- -- -- --
Foreign investments . . . . . . . . . . . 163.1 251.6 5.4 5.4 (.2) (.2)
Foreign currency options . . . . . . . . . -- 50.2 -- -- (.3) (.3)
Foreign currency swaps . . . . . . . . . . 15.0 15.0 (2.1) (2.1) (2.1) (2.1)
Total foreign currency derivatives. . 178.1 316.8 3.3 3.3 (2.6) (2.6)
Equity indexed derivatives:
Call options (based on FTSE) . . . . . . 14.1 14.7 13.5 13.5 10.5 10.5
Call options (based on S&P) . . . . . . . 5.3 -- 1.1 1.1 -- --
Total derivatives . . . . . . . . . . . . $6,859.5 $6,651.2 $38.9 $25.9 $36.9 $24.3
</TABLE>
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts is as follows:
<TABLE>
<CAPTION>
Interest
Rate Caps Swaptions
December 31 (in millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Balance at beginning-of-year . . . . . . $5,500.0 $5,110.0 $ 672.0 $ --
New contracts . . . . . . . . . . . . . -- 1,183.0 1,080.0 1,161.1
Terminations and maturities . . . . . . . (600.0) (793.0) -- (489.1)
Balance at end-of-year . . . . . . . . $4,900.0 $5,500.0 $1,752.0 $ 672.0
</TABLE>
<TABLE>
<CAPTION>
Financial
Spread-Lock Futures Interest Rate
Agreements Contracts Swap Agreements
December 31 (in millions) 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning-of-year . . . . . . . $ -- $ 600.0 $ 147.7 $ 106.7 $ -- $ --
New contracts . . . . . . . . . . . . . . 50.0 15.0 88.3 7,578.9 10.0 --
Terminations and maturities . . . . . (50.0) (615.0) (236.0) (7,537.9) -- --
Balance at end-of-year. . . . . . . . $ -- $ -- $ -- $ 147.7 $ 10.0 $ --
</TABLE>
<TABLE>
<CAPTION>
Foreign Currency Derivatives (Foreign Investments)
Foreign Exchange Foreign Foreign
Forward Currency Currency
Contracts Options Swaps
December 31 (in millions) 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning-of-year . . . . $ 251.6 $ 15.7 $ 50.2 $ 99.2 $ 15.0 $15.0
New contracts . . . . . . . . . . . . . . . 833.1 406.7 -- 1,168.6 -- --
Terminations and maturities . . . . (921.6) (170.8) (50.2) (1,217.6) -- --
Balance at end-of-year . . . . . . . $ 163.1 $ 251.6 $ -- $ 50.2 $ 15.0 $15.0
</TABLE>
<PAGE> -57-
<TABLE>
<CAPTION>
Foreign Exchange
Forward Contracts Call Options Call Options
(Foreign Subsidiary) (Based on FSTE) (Based on S&P)
December 31 (in millions) 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning-of-year . . . . $ -- $ 398.8 $14.7 $13.3 $ -- $ --
New contracts . . . . . . . . . . . -- 255.5 -- -- 5.3 --
Terminations and maturities . . . . . -- (654.3) -- -- -- --
Foreign exchange adjustment . . . . -- -- (.6) 1.4 -- --
Balance at end-of-year . . . . . . . $ -- $ -- $14.1 $14.7 $5.3 $ --
</TABLE>
Interest Rate Caps. The interest rate cap agreements, which expire in 1998
through 2003, entitle LNC to receive quarterly payments from the counterparties
on specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional amount
divided by four. The purpose of LNC's interest rate cap agreement program is to
protect its annuity line of business from the effect of rising interest rates.
The premium paid for the interest rate caps is included in other assets
($13,900,000 as of December 31, 1997) and is being amortized over the terms of
the agreements. This amortization is included in net investment income.
Swaptions. Swaptions, which expire in 2002 through 2003, entitle LNC to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of LNC's swaption program is to
protect its annuity line of business from the effect of rising interest rates.
The premium paid for the swaptions is included in other long-term investments
(amortized cost of $20,200,000 as of December 31, 1997) and is being amortized
over the terms of the agreements. This amortization is included in net
investment income.
Spread-Lock Agreements. Spread-lock agreements provide for a lump sum payment to
or by LNC, depending on whether the spread between the swap rate and a specified
Government note is larger or smaller than a contractually specified spread. Cash
payments are based on the product of the notional amount, the spread between the
swap rate and the yield of an equivalent maturity Government security, and the
price sensitivity of the swap at that time. The purpose of LNC's spread-lock
program is to protect a portion of its fixed maturity securities against
widening spreads.
Financial Futures. LNC uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its fixed
maturity securities. Financial futures contracts obligate LNC to buy or sell a
financial instrument at a specified future date for a specified price. They may
be settled in cash or through delivery of the financial instrument. Cash
settlements on the change in market values of financial futures contracts are
made daily.
Interest Rate Swaps. LNC uses interest rate swap agreements to hedge its
exposure to floating rate bond coupon payments, replicating a fixed rate bond.
An interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or value of
one or more underlying interests rates. LNC is required to pay the counterparty
to the agreements the stream of variable coupon payments generated from the
bonds, and in turn, receives a fixed payment from the counterpart, at a
predetermined interest rate. The net receipts/payments from interest rate swaps
are recorded in net investment income.
Foreign Currency Derivatives (Foreign Investments). LNC uses a combination of
foreign exchange forward contracts, foreign currency options and foreign
currency swaps, all of which are traded over-the-counter, to hedge some of the
foreign exchange risk of investments in fixed maturity securities denominated in
foreign currencies. The foreign currency forward contracts obligate LNC to
deliver a specified amount of currency at a future date at a specified exchange
rate. Foreign currency options give LNC the right, but not the obligation, to
buy or sell a foreign currency at a specified exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange the
currencies of two different countries pursuant to an agreement to re-exchange
the two currencies at the same rate of exchange at a specified future date.
<PAGE> -58-
Foreign Exchange Forward Contracts (Foreign Subsidiary). LNC has used foreign
exchange forward contracts, which are traded over-the-counter, to hedge the
foreign exchange risk assumed with its investment in its U.K. subsidiary,
Lincoln National (UK). The foreign exchange forward contracts obligated LNC to
deliver a specified amount of currency at a future date at a specified exchange
rate. LNC terminated these contracts in the third quarter of 1996.
Call Options. LNC uses both FTSE index and S&P 500 index call options. Call
options which expire in 1998 through 2005, provide LNC with settlement payments
from the counterparties on specified expiration dates. The payment, if any, is
the percentage increase in the index, over the strike price defined in the
contract, applied to the notional amount. The purpose of LNC's FTSE call option
program is to offset the cost of increases in the liabilities of certain single
premium investment contracts which are tied to the FTSE index. The purpose of
LNC's S&P 500 call option program is to offset the increase in its liabilities
resulting from certain reinsurance agreements which guarantee payment of the
appreciation of the S&P 500 index on certain underlying annuity products. The
premium paid for the S&P 500 index call options is included in other assets
($1,200,000 as of December 31, 1997) and is being amortized over the terms of
the agreements. This amortization is included in net investment income.
Additional Derivative Information. Expenses for the agreements and contracts
described above amounted to $10,000,000 and $8,000,000 in 1997 and 1996,
respectively. Deferred losses of $600,000 as of December 31, 1997, were the
result of: 1) terminated and expired spread-lock agreements and; 2) financial
futures contracts. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life of
such securities.
LNC is exposed to credit loss in the event of nonperformance by counterparties
on interest rate cap agreements, swaptions, spread-lock agreements, interest
rate swaps, call options, foreign exchange forward contracts, foreign currency
options and foreign currency swaps. However, LNC does not anticipate
nonperformance by any of the counterparties. The credit risk associated with
such agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount of
such exposure is essentially the net replacement cost or market value for such
agreements with each counterparty if the net market value is in LNC's favor. At
December 31, 1997, the exposure was $26,400,000.
8. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of LNC's financial instruments. Considerable
judgment is required to develop these fair values. Accordingly, the estimates
shown are not necessarily indicative of the amounts that would be realized in a
one-time, current market exchange of all of LNC's financial instruments.
Fixed Maturity and Equity Securities. Fair values for fixed maturity securities
are based on quoted market prices, where available. For fixed maturity
securities not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a current
market rate applicable to the coupon rate, credit quality and maturity of the
investments. The fair values for equity securities are based on quoted market
prices.
Mortgage Loans on Real Estate. The estimated fair value of mortgage loans on
real estate was established using a discounted cash flow method based on credit
rating, maturity and future income. The ratings for mortgages in good standing
are based on property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loans are based on: 1) the present value of
expected future cash flows discounted at the loan's effective interest rate; 2)
the loan's market price or; 3) the fair value of the collateral if the loan is
collateral dependent.
Policy Loans. The estimated fair value of investments in policy loans was
calculated on a composite discounted cash flow basis using Treasury interest
rates consistent with the maturity durations assumed.
These durations were based on historical experience.
<PAGE> -59-
Other Investments, and Cash and Invested Cash. The carrying value for assets
classified as other investments, and cash and invested cash in the accompanying
balance sheets approximates their fair value.
Investment Type Insurance Contracts. The balance sheet captions, "Future Policy
Benefits, Claims and Claim Expenses" and "Contractholder Funds," include
investment type insurance contracts (i.e. deposit contracts and guaranteed
interest contracts). The fair values for the deposit contracts and certain
guaranteed interest contracts are based on their approximate surrender values.
The fair values for the remaining guaranteed interest and similar contracts are
estimated using discounted cash flow calculations. These calculations are based
on interest rates currently offered on similar contracts with maturities that
are consistent with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits, Claims and
Claim Expenses" and "Contractholder Funds" that do not fit the definition of
"investment type insurance contracts" are considered insurance contracts. Fair
value disclosures are not required for these insurance contracts and have not
been determined by LNC. It is LNC's position that the disclosure of the fair
value of these insurance contracts is important because readers of these
financial statements could draw inappropriate conclusions about LNC's
shareholders' equity determined on a fair value basis. It could be misleading if
only the fair value of assets and liabilities defined as financial instruments
are disclosed. LNC and other companies in the insurance industry are monitoring
the related actions of the various rule-making bodies and attempting to
determine an appropriate methodology for estimating and disclosing the "fair
value" of their insurance contract liabilities.
Short-term and Long-term Debt. Fair values for long-term debt issues are
estimated using discounted cash flow analysis based on LNC's current incremental
borrowing rate for similar types of borrowing arrangements. For short-term debt,
the carrying value approximates fair value.
Minority Interest - Preferred Securities of Subsidiary Companies. Fair values
for minority interest- preferred securities of subsidiary companies are based on
quoted market prices less the unamortized cost of issue.
Guarantees. LNC's guarantees include guarantees related to industrial revenue
bonds, real estate partnerships and mortgage loan pass-through certificates.
Based on historical performance where repurchases have been negligible and the
current status, which indicates none of the loans are delinquent, the fair value
liability for the guarantees related to the mortgage loan pass-through
certificates is insignificant.
Derivatives. LNC's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial futures
contracts, interest rate swaps, call options, foreign currency options and
foreign currency swaps. Fair values for these contracts are based on current
settlement values. These values are based on: 1) quoted market prices for the
foreign currency exchange contracts and financial futures contracts and; 2)
brokerage quotes that utilized pricing models or formulas using current
assumptions for all other swaps and agreements.
Investment Commitments. Fair values for commitments to make investments in fixed
maturity securities (primarily private placements), mortgage loans on real
estate and real estate are based on the difference between the value of the
committed investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
<PAGE> -60-
The carrying values and estimated fair values of LNC's financial instruments are
as follows:
<TABLE>
<CAPTION>
Carrying Fair Carrying Fair
Value Value Value Value
December 31 (in millions) 1997 1997 1996 1996
<S> <C> <C> <C> <C>
Assets (liabilities):
Fixed maturities securities . . . . . . . . . . . . . $ 24,066.4 $ 24,066.4 $ 24,096.7 $ 24,096.7
Equity securities. . . . . . . . . . . . . . . . . . . 660.4 660.4 557.6 557.6
Mortgage loans on real estate . . . . . . . . . . . . . 3,288.1 3,473.5 3,132.3 3,240.7
Policy loans . . . . . . . . . . . . . . . . . . . . 763.1 754.4 734.8 734.8
Other investments . . . . . . . . . . . . . . . . . . . 464.8 464.8 445.3 445.3
Cash and invested cash . . . . . . . . . . . . . . . . 3,794.7 3,794.7 1,144.8 1,144.8
Investment type insurance contracts:
Deposit contracts and certain
guaranteed interest contracts . . . . . . . . . . (17,844.6) (17,489.1) (18,369.9) (17,987.9)
Remaining guaranteed interest
and similar contracts . . . . . . . . . . . . . . (2,032.0) (2,010.0) (2,539.0) (2,508.7)
Short-term debt . . . . . . . . . . . . . . . . . . (297.2) (297.2) (189.0) (189.0)
Long-term debt . . . . . . . . . . . . . . . . . . . (511.0) (541.7) (626.3) (622.7)
Minority interest-preferred
securities of subsidiary companies . . . . . . . . . (315.0) (322.9) (315.0) (315.7)
Guarantees . . . . . . . . . . . . . . . . . . . . . . (.8) -- (1.8) --
Derivatives . . . . . . . . . . . . . . . . . . . . . . 38.9 25.9 36.9 24.3
Investment commitments . . . . . . . . . . . . . . . . -- .3 -- .3
</TABLE>
As of December 31, 1997 and 1996, the carrying value of the deposit contracts
and certain guaranteed contracts is net of deferred acquisition costs of
$96,400,000 and $176,000,000, respectively, excluding adjustments for deferred
acquisition costs applicable to changes in fair value of securities. The
carrying values of these contracts are stated net of deferred acquisition costs
so that they are comparable with the fair value basis.
9. Segment Information
LNC has four business segments: Life Insurance and Annuities, Lincoln UK,
Reinsurance and Investment Management. The Life Insurance and Annuities segment
offers annuities, universal life, pension products and other individual
coverages through a network of career agents, independent general agencies, and
insurance agencies located within a variety of financial institutions. These
products are sold throughout the United States. The Lincoln UK segment offers
similar products within the United Kingdom through sales representatives.
Reinsurance sells reinsurance products and services to insurance companies,
HMOs, self-funded employers and other primary risk accepting organizations in
the U.S. and economically attractive international markets. Effective in the
fourth quarter of 1995, operating results of the direct disability income
business previously included in the Life Insurance and Annuities segment, were
included in the Reinsurance segment. This direct disability income business,
which is no longer being sold, is now managed by the Reinsurance segment along
with its own disability income business. The Investment Management segment
offers a variety of asset management services to institutional and retail
customers primarily throughout the United States. Activity which is not included
in the major business segments is shown as "Other Operations."
"Other Operations" includes operations not directly related to the business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on corporate debt and unallocated overhead expenses). LNC's
other operations also includes data for: 1) the 29% owned unconsolidated
affiliate engaged in the life-health benefit business prior to the sale of this
interest in 1995 and, 2) its investment management company that services LNC's
business segments.
<PAGE> -61-
<TABLE>
<CAPTION>
Financial data by segment for 1995 through 1997 is as follows:
Year Ended December 31 (in millions) 1997 1996 1995
<S> <C> <C> <C>
Revenue, excluding net investment income and realized
gain (loss) on investments and subsidiaries:
Life Insurance and Annuities . . . . . . . . . . . . . . . $ 867.0 $ 755.9 $ 737.4
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . 340.1 311.4 280.7
Reinsurance.. . . . . . . . . . . . . . .. . . . . . . . . 1,073.7 1,279.2 1,181.9
Investment Management.. . . . . . . . . . . . . . . . . . 257.7 215.0 148.8
Other Operations (includes consolidating adjustments) . . (13.4) (8.3) 17.9
Total . . . . . . . . . . . . . .. . . . . . . . . . . $ 2,525.1 $2,553.2 $2,366.7
Net Investment Income:
Life Insurance and Annuities . . . . . . . . . . . . . . $ 1,842.4 $1,741.7 $1,755.5
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . 85.1 82.0 71.1
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . 284.4 263.7 164.1
Investment Management. . . . . . . . . . . . . . . . . . . .5 .7 .5
Other Operations . . . . . . . . . . . . . . . . . . . . 38.4 (.2) (11.5)
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 2,250.8 $2,087.9 $1,979.7
Realized gain (loss) on investments and subsidiaries:
Life Insurance and Annuities . . . . . . . . . . . . . . . $ 82.1 $ 65.5 $ 122.4
Lincoln UK. . . . . . . . . . . . . . .. . . . . . . . . . 2.1 (.2) (.3)
Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . 23.6 18.1 16.4
Investment Management . . . . . . . . . . . . . . . . . 5.9 8.1 6.6
Other Operations . . . . . . . . . . . . . . . . . . . . . 8.9 1.0 95.0
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 122.6 $ 92.5 $ 240.1
Net income (loss) from continuing operations
before Federal income taxes:
Life Insurance and Annuities. . . . . . . . . . . . . . . . $ 397.3 $ 346.7 $ 378.1
Lincoln UK. . . . . . . . . . . . . . . . . . . . . . . . . (96.8) 101.5 72.5
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . (210.2) 131.1 (65.5)
Investment Management. . . . . . . . . . . . . . . . . . . 20.9 32.4 33.8
Other Operations (includes interest expense) . . . . . . . (76.3) (107.6) (4.5)
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 34.9 $ 504.1 $ 414.4
Income tax expense (benefit):
Life Insurance and Annuities. . . . . . . . . . . . . . . . $ 94.0 $ 95.7 $ 104.1
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . 10.0 35.5 26.8
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . (73.8) 45.4 (23.5)
Investment Management. . . . . . . . . . . . . . . . . . . 13.1 17.0 16.2
Other Operations . . . . . . . . . . . . . . . . . . . . . (30.6) (45.9) (10.6)
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 12.7 $ 147.7 $ 113.0
Net income (loss) from continuing operations:
Life Insurance and Annuities . . . . . . . . . . . . . . . $ 303.3 $ 251.0 $ 274.0
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . (106.8) 66.0 45.7
Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . (136.4) 85.7 (42.0)
Investment Management . . . . . . . . . . . . . . . . . . . 7.8 15.4 17.6
Other Operations (includes interest expense). . . . . . . . (45.7) (61.7) 6.1
Total net income from continuing operations . . . . . 22.2 356.4 301.4
Discontinued Operations . . . . . . . . . . . . . . . . . . 911.8 157.2 180.8
Total net income. . . . . . . . . . . . . . . . . . . . $ 934.0 $ 513.6 $ 482.2
</TABLE>
<PAGE> -62-
<TABLE>
<CAPTION>
Year Ended December 31 (in millions) 1997 1996 1995
<S> <C> <C> <C>
Assets:
Life Insurance and Annuities . . . . . . . . . . . . . . . $60,604.4 $53,089.3 $45,791.4
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . . 7,923.8 7,331.8 6,114.1
Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . 5,540.2 5,196.1 5,220.3
Investment Management . . . . . . . . . . . . . . . . . . . . 697.4 623.4 616.2
Other Operations . . . . . . . . . . . . . . . . . . . . . . 2,408.9 (9.9) (170.6)
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . 77,174.7 66,230.7 57,571.4
Discontinued Operations . . . . . . . . . . . . . . . . . . -- 5,482.7 5,686.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . .$77,174.7 $71,713.4 $63,257.7
</TABLE>
Acquisitions and dispositions of affiliated companies during 1994 - 1996 (see
note 11 on page 64) resulted in LNC's foreign operations being more significant
relative to LNC's consolidated totals. Substantially all of LNC's foreign
operations are conducted by Lincoln National (UK) plc, a United Kingdom company.
The data for this company is shown above under the Lincoln UK segment heading.
Foreign intracompany revenue is not significant. All earnings from LNC's U.K.
operations have been retained in the U.K.
10. Shareholders' Equity
LNC's common and preferred stock is without par value.
All of the issued and outstanding series A preferred stock is $3 Cumulative
Convertible and is convertible at any time into shares of common stock. The
conversion rate is eight shares of common stock for each share of series A
preferred stock, subject to adjustment for certain events. The series A
preferred stock is redeemable at the option of LNC at $80 per share plus accrued
and unpaid dividends.
Outstanding series A preferred stock has full voting rights, subject to
adjustment if LNC is in default as to the payment of dividends. If LNC is
liquidated or dissolved, holders of series A preferred stock will be entitled to
payments of $80.00 per share. The difference between the aggregate preference on
liquidation value and the financial statement balance for the series A preferred
stock was $1,650,000 at December 31, 1997.
On June 30, 1995, Dia-ichi Mutual Life Insurance Company, the owner of LNC's
series E and F preferred stock which was 5 1/2% cumulative convertible
exchangeable, converted its entire holdings to LNC common stock. Based on a
conversion rate of two shares of common stock for each share of series E and F
preferred stock, 2,201,443 shares of series E and 2,216,454 shares of series F
were converted into 8,835,794 shares of common stock.
LNC has outstanding one common share purchase right ("Right") on each
outstanding share of LNC's common stock. A Right will also be issued with each
share of LNC's common stock that is issued before the Rights become exercisable
or expire. If a person or group announces an offer that would result in
beneficial ownership of 15% or more of LNC's common stock, the Rights will
become exercisable and each Right will entitle its holder to purchase one share
of LNC's common stock for $200. Upon the acquisition of 15% or more of LNC's
common stock, each holder of a Right (other than the person acquiring the 15% or
more) will have the right to acquire the number of shares of LNC common stock
that have a market value of two times the exercise price of the Right. If LNC is
acquired in a business combination transaction in which LNC does not survive,
each holder of a Right (other than the acquiring person) will have the right to
acquire common stock of the acquiring person having a market value of two times
the exercise price of the Right. LNC can redeem each Right for one cent at any
time prior to the tenth day after a person or group has acquired 15% or more of
LNC's common stock. The Rights expire on November 14, 2006. As of December 31,
1997, there were 100,859,478 Rights outstanding.
<PAGE> -63-
During 1997 and 1996, LNC purchased and retired 4,948,900 and 694,582 shares,
respectively, of its common stock at a total cost of $325,300,000 and
$35,000,000. The common stock account was reduced for these purchases in
proportion to the percentage of share acquired. The remainder of the purchase
price was charged to retained earnings.
Per share amounts for net income from continuing operations are shown on the
income statement using 1) an earnings per common share basic calculation and 2)
an earnings per common share-assuming dilution calculation. A reconciliation of
the factors used in the two calculations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
Numerator: [in millions]
<S> <C> <C> <C>
Net income from continuing operations,
as used in basic calculation . . . . . . . . . . . . . . . $22.1 $356.3 $292.8
Dividends on convertible preferred stock . . . . . . . . . . .1 .1 8.6
Net income from continuing operations,
as used in diluted calculation. . . . . . . . . . . . . . . $22.2 $356.4 $301.4
Denominator: [number of shares]
Weighted average shares, as used in basic calculation. . . 102,495,557 103,828,451 99,067,540
Shares to cover conversion of preferred stock. . . . . . . . . 287,077 307,784 4,690,011
Shares to cover restricted stock . . . . . . . . . . . . . . 208,664 423,112 358,099
Average stock options outstanding during the year . . . . . . 3,199,539 2,979,244 2,744,248
Assumed acquisition of shares with assumed proceeds
from exercising stock options (at average market
price during the year) . . . . . . . . . . . . . . . . . . . (2,194,950) (2,167,199) (2,086,759)
Weighted-average shares, as used
in diluted calculation . . . . . . . . . . . . . . . . 103,995,887 105,371,392 104,773,139
</TABLE>
<TABLE>
<CAPTION>
Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on
Securities Available-for-Sale," are as follows:
December 31 (in millions) 1997 1996
<S> <C> <C>
Fair value of securities available-for-sale. . . . . . . . . . . . . . . . . . . $24,726.8 $24,654.2
Cost of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . 23,143.2 23,639.8
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,583.6 1,014.4
Adjustments to deferred acquisition costs. . . . . . . . . . . . . . . . . . . (355.9) (282.1)
Amounts required to satisfy policyholder commitments . . . . . . . . . . (571.1) (313.9)
Deferred income credits (taxes) . . . . . . . . . . . . . . . . . . . . . . . (207.6) (136.4)
Net unrealized gain on securities
available-for-sale for continuing operations. . . . . . . . . . . . . . . . . 449.0 282.0
Change in fair value of derivatives designated as a hedge
(classified as other investment). . . . . . . . . . . . . . . . . . . . . . . . (13.0) (2.8)
Discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 136.4
Net unrealized gain on securities available for sale . . . . . . . . . . . . . $ 436.0 $ 415.6
</TABLE>
Adjustments to deferred acquisition costs and amounts required to satisfy
policyholder commitments are netted against the Deferred Acquisition Costs asset
line and included within the Insurance Policy and Claim Reserve line on the
balance sheet, respectively.
<PAGE> -64-
The "Net Unrealized Gain (Loss) on Securities Available-for-Sale" shown above is
net of realized gain (loss) on investments. Following is the detail of the
realized gain (loss) on investments and gross unrealized gain (loss) on
securities available-for-sale:
<TABLE>
<CAPTION>
Year Ended December 31 (in millions) 1997 1996
<S> <C> <C>
Continuing operations:
Pre-tax realized gain (loss) on securities available-for-sale . . . . . . . . $112.2 $ 88.6
Federal income taxes @ 35%. . . . . . . . . . . . . . . . . . . . . . . . . . . 39.3 31.0
Realized gain (loss) on securities available-for-sale . . . . . . . . . . . . $ 72.9 $ 57.6
Discontinued operations:
Pre-tax realized gain (loss) on securities available-for-sale . . . . . . . . . $ 38.2 $ 33.7
Federal income taxes @ 35%. . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 11.8
Realized gain (loss) on securities available-for-sale . . . . . . . . . . . . $ 24.8 $ 21.9
Previously unrealized gains on securities that became
realized at time of sale of discontinued operations:
Pre-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $271.7 $ --
After-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176.6 --
Gross unrealized gain (loss) on securities available-
for-sale arising during the period:
Pre-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $256.9 $(434.8)
After-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197.0 (282.6)
</TABLE>
11. Acquisitions and Sales of Subsidiaries and Discontinued Operations
In January and April 1995, LNC completed the acquisitions of Liberty Life
Assurance Company and Laurentian Financial Group plc, respectively. These
companies provide unit-linked life and pension products in the United Kingdom.
The combined purchase price was $274,500,000 including the assumption of
$44,000,000 in debt. These acquisitions, which were accounted for using purchase
accounting, resulted in other intangible assets of $388,700,000. The results of
these operations are included in LNC's consolidated financial statements from
their respective purchase dates.
In April 1995, LNC completed the acquisition of Delaware Management Holdings,
Inc. ("Delaware"). Delaware provides a variety of asset management services
through its operating companies. The purchase price, including LNC's expenses
associated with the acquisition, was $305,000,000. This acquisition also
involved the assumption of $25,000,000 in short-term debt and $180,000,000 (face
amount) in long-term debt. In May 1995, this debt was repaid from the proceeds
of an LNC debt offering of $200,000,000 plus available cash. This acquisition,
which was accounted for using purchase accounting, resulted in goodwill of
$339,900,000 and other intangible assets of $131,500,000. The results of
Delaware's operations are included in LNC's consolidated financial statements
from April 3, 1995. The Delaware acquisition agreement included a provision for
contingent payments of up to $22,500,000 based on the levels of investment
management revenues from the date of acquisition through December 31, 1996, with
any such additional payments to be accounted for as goodwill. Payments under
this provision totaling $9,300,000 million were made during 1997.
In May 1996, 16.7% of American States Financial Corporation ("ASFC"), the
holding company of LNC's principal property-casualty subsidiary, was sold to the
public in the form of an initial public offering of its common stock. ASFC
received net proceeds of $215,200,000 from the sale of this 16.7% minority
interest and LNC recorded a non-taxable realized gain, net of expenses, directly
in shareholders' equity of $15,000,000. LNC continued to fully consolidate this
operation within its financial statements and tax reporting until the sale of
the remaining 83.3% (see below).
In October 1996, LNC purchased a block of group tax-qualified annuity business
from UNUM Corporation's affiliates. The bulk of the transaction was completed in
the form of a reinsurance transaction, which resulted in a ceding commission of
$71,800,000. The ceding commission, along with $67,000,000 to cover expenses
associated with the purchase, represents the present value of business in-force
and accordingly has been classified as an intangible asset. LNC's assets and
policy liabilities and accruals increased $3,200,000,000 as a result of this
transaction.
<PAGE> -65-
In April 1997, LNC completed the acquisition of Voyageur Fund Managers, Inc.
("Voyageur") for $74,000,000. While this includes cash paid out for expenses
associated with the purchase, the bulk of the purchase price was covered by the
issuance of 1,323,144 shares of LNC common stock to the previous owners of
Voyageur. Purchase accounting has been applied to this acquisition resulting in
intangible assets of $78,900,000. Voyageur's operating results are included in
LNC's consolidated financial statements from the closing date.
On June 9, 1997, LNC announced that it agreed to sell its 83.3% ownership in
American States Financial Corporation for $2,650,000,000. As this sale resulted
in an exit from the property-casualty business (previously a business segment),
the financial data from the units being sold are shown as discontinued
operations in the accompanying financial statements. June 9, 1997, is the
measurement date for purposes of discontinued operations. Following the closing
of this transaction on October 1, 1997, the gain on sale of $776,900,000
($1,224,500,000 pre-tax) was recorded within discontinued operations. LNC used
$294,900,000 to repurchase 4,370,000 shares of its own common stock, $85,000,000
to purchase a 49% ownership in Seguros Serfin Lincoln and $99,800,000 to retire
a portion of its long-term debt. Also, $447,600,000 was set aside to cover the
income taxes related to the sale of discontinued operations and $1,642,500,000
was set aside for use in purchasing a block of individual life insurance and
annuity business in January 1998 (see note 12 below). The remainder was used to
pay off a portion of LNC's short-term debt and to invest for general corporate
purposes, which could include additional acquisitions of business or companies.
Net Income from discontinued operations was as follows:
Year Ended
Nine Months Ended December 31
September 30, 1997 1996 1995
Revenue ....................... $1,538.5 $1,987.7 $2,046.8
Benefits and expenses ......... 1,363.6 1,799.0 1,834.6
Pre-tax net income ........ 174.9 188.7 212.2
Federal income taxes .......... 40.0 31.5 31.4
Net income ................ $ 134.9 $ 157.2 $ 180.8
12. Subsequent Event
On January 2, 1998, LNC completed the purchase of a block of individual life
insurance and annuity business from CIGNA Corporation for approximately
$1,414,000,000. This acquisition involved additional expenditures to cover
expenses associated with the purchase and to provide additional capital for the
Life Insurance and Annuities segment to support this business totaling
$228,500,000. This transaction is being accounted for using purchase accounting
and, accordingly, the operating results generated by this block of business
after the closing date will be included in LNC's consolidated financial
statements from the closing date. At the time of closing this block of business
had liabilities, measured on a statutory basis, of $5,500,000,000 that became
LNC's obligation. LNC also received assets, measured on a historical statutory
basis, equal to the liabilities. During 1997, this block produced premiums, fees
and deposits of $1,181,000,000 and earnings of $98,000,000 on a basis of
generally accepted accounting principles and is prior to any adjustments that
will be required by purchase accounting. A preliminary application of purchase
accounting to this block of business indicates that intangible assets and
goodwill will be approximately $1,400,000,000. The additional analysis of this
block of business that will occur during 1998 may result in a change in this
amount.
In connection with the completion of this acquisition, LNC expects to record a
charge to its Life Insurance and Annuities segment during the first quarter of
1998 of approximately $20,000,000 ($31,000,000 pre-tax). This charge will cover
certain costs of integrating the existing operations with the new block of
business.
<PAGE> -66-
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Lincoln National Corporation
We have audited the accompanying consolidated balance sheets of Lincoln National
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lincoln National
Corporation at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Fort Wayne, Indiana
February 5, 1998
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
There have been no disagreements with LNC's independent auditors which are
reportable pursuant to Item 304 of Regulation S-K.
<PAGE> -67-
PART III
Item 10. Directors and Executive Officers of the Registrant
Information for this item relating to directors of LNC is incorporated by
reference to the sections captioned "NOMINEES FOR DIRECTOR", "DIRECTORS
CONTINUING IN OFFICE" and "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND
EXCHANGE ACT OF 1934", of LNC's Proxy Statement for the Annual Meeting scheduled
for May 14, 1998.
Executive Officers of the Registrant as of March 1, 1998 were as follows:
Name Position with LNC and Business Experience
(Age)** During the Past Five Years
Ian M. Rolland Chairman and Director, LNC (since 1992). President and
)65) Director, LNC (1975-1991).
Chief Executive Officer, LNC (since 1977).
Jon A. Boscia President and Director, LNC (since January 1998). Chief
(46) Executive Officer, Lincoln Life* (1996 - January, 1998).
President, Chief Operating Officer, Lincoln Life*
(1994-1996). Executive Vice President, LNC (1991-1994).
President, Lincoln National Investment Companies ("LNIC")*
(1991-1994).
Bernard G. Brown Managing Director, Lincoln National (UK)* (since January
(47) 1998). Operations Director, Lincoln National (UK)* (1995
- January 1998). Managing Director, Liberty Life Assurance
Company, Ltd. (1992- 1995).
George E. Davis Senior Vice President, LNC (since 1993). Vice President,
(55) Eastman Kodak Co. (1985-1993).
June E. Drewry Senior Vice President, LNC (since 1996).President,
(48) Systematized Benefit Administrators, Inc. (1995-May 1996).
Vice President, Aetna Life Insurance and Annuity Co.
(1991-1996).
Jack D. Hunter Executive Vice President, LNC (since 1986). General
(61) Counsel (since 1971).
Barbara S. Kowalczyk Senior Vice President, LNC (since 1994). Senior Vice
(47) President, LNIC* (1992-1994). Vice President LNIC*
(1985-1992).
H. Thomas McMeekin Executive Vice President, LNC (since 1994). President,
(45) LNIC* (1994-1996). Senior Vice President, LNC (1992-1994).
Executive Vice President, LNIC* (February 1992-November
1992). Senior Vice President, LNIC* (1987-1992).
Jeffrey J. Nick President and Chief Executive Officer, LNI* (since 1996).
(45) Managing Director, Lincoln National (UK) plc* (1992-1996).
Senior Vice President, LNC (1990-1992).
Richard S. Robertson Executive Vice President, LNC (since 1986).
(56)
Lawrence T. Rowland President and Chief Executive Officer, Lincoln National
(46) Reassurance Company* and other Lincoln Re affiliates*
(since 1996). Senior Vice President, LNRC* (1995-1996).
Vice President, Lincoln Re* (1991-1994).
Gabriel L. Shaheen President and Chief Executive Officer, Lincoln Life*
(44) (since January 1998). Managing Director Lincoln National
(UK)* (1996 - January 1998). President and Chief Executive
Officer, Lincoln Re* (1994-1996). Senior Vice President,
Lincoln Life* (1991-1994).
<PAGE> -68
Donald L. Van Wyngarden Second Vice President and Controller, LNC (since 1975).
(58)
Richard C. Vaughan Executive Vice President and Chief Financial Officer,
(48) LNC (since 1995). Senior Vice President and Chief
Financial Officer, LNC (1992-1994).
* Denotes a subsidiary of LNC
** Age shown is based on nearest birthdate to March 1, 1998.
There is no family relationship between any of the foregoing executive officers,
all of whom are elected annually.
Item 11. Executive Compensation
Information for this item is incorporated by reference to the section captioned
"EXECUTIVE COMPENSATION" of LNC's Proxy Statement for the Annual Meeting
scheduled for May 14, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information for this item is incorporated by reference to the sections captioned
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS" of LNC's Proxy Statement for the
Annual Meeting scheduled for May 14, 1998.
Item 13. Certain Relationships and Related Transactions
Information for this item is incorporated by reference to the section captioned
"TERMINATION OF EMPLOYMENT ARRANGEMENT" of LNC's Proxy Statement for the Annual
Meeting scheduled for May 14, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 14(a)(1) Financial Statements
The following consolidated financial statements of Lincoln National Corporation
are included in Item 8:
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Shareholders' Equity - Years ended
December 31,1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996
and 1995
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
<PAGE> -69-
Item 14(a)(2) Financial Statement Schedules
The following consolidated financial statement schedules of Lincoln National
Corporation are included in Item 14(d):
I - Summary of Investments - Other than Investments in Related Parties
II - Condensed Financial Information of Registrant
III - Supplementary Insurance Information
IV - Reinsurance
V - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable, or the required information is included
in the consolidated financial statements, and therefore omitted.
Item 14(a)(3) Listing of Exhibits
The following exhibits of Lincoln National Corporation are included in Item 14 -
Note: The numbers preceding the exhibits correspond to the specific numbers
within Item 601 of Regulation S-K.):
3(a) The Articles of Incorporation of LNC as last amended effective May
12, 1994 are incorporated by reference to LNC's Form S-3/A (File No.
33-55379) filed with the Commission on September 15, 1994.
3(b) The Bylaws of LNC as last amended January 14, 1998.
4(a) Indenture of LNC dated as of January 15, 1987 (Commission File No.
33-22658) is incorporated by reference to Exhibit 4(a) of LNC's Form
10-K for the year ended December 31, 1994, filed with the Commission
on March 27, 1995.
4(b) First Supplemental Indenture dated as of July 1, 1992, to Indenture
of LNC dated as of January 15, 1987 is incorporated by reference to
Exhibit 4(b) of LNC's Form 10-K for the year ended December 31, 1996,
filed with the Commission on March 13, 1997.
4(c) Specimen Notes for 7 1/8% Notes due July 15, 1999 (Commission File
No. 33-22658) and for 7 5/8% Notes due July 15, 2002 (Commission File
No. 33-22658) are incorporated by reference to Exhibit 4(c) of LNC's
Form 10-K for the year ended December 31, 1996, filed with the
Commission on March 13, 1997.
4(d) Rights Agreement of LNC as last amended November 14, 1996 is
incorporated by reference to LNC's Form 8-K filed with the Commission
on November 22, 1996.
4(e) Indenture of LNC dated as of September 15, 1994, between LNC and The
Bank of New York, as Trustee, is incorporated by reference to Exhibit
No. 4(c) of LNC's Form S-3/A (Commission File No.
33-55379), filed with the Commission on September 15, 1994.
4(f) Form of Note is incorporated by reference to Exhibit No.4(d) to LNC's
Registration Statement on Form S-3/A (Commission File No. 33-55379),
filed with the Commission on September 15, 1994.
4(g) Form of Zero Coupon Security is incorporated by reference to Exhibit
No. 4(f) of LNC's Registration Statement on Form S-3/A (Commission
File No. 33-55379), filed with the Commission on September 15, 1994.
4(h) Specimen of LNC's 9 1/8% Debentures due October 1, 2024 (Commission
File No. 33-55379) is incorporated by reference to Schedule I of
LNC's Form 8-K filed with the Commission on September 29, 1994.
4(i) Specimen of LNC's 7 1/4% Debenture due May 15, 2005 (Commission File
Nos. 33-55379 and 33- 59785) is incorporated by reference to Schedule
III of LNC's Form 8-K filed with the Commission on May 17, 1995.
<PAGE> -70-
4(j) Junior Subordinated Indenture dated as of May 1, 1996 between LNC and
The First National Bank of Chicago is incorporated by reference to
Exhibit 4(j) of LNC's Form 10-K for the year ended December 31, 1996,
filed with the Commission on March 13, 1997.
4(k) Guarantee Agreement for Lincoln National Capital I is incorporated by
reference to Exhibit 4(k) of LNC's Form 10-K for the year ended
December 31, 1996, filed with the Commission on March 13, 1997.
4(l) Guarantee Agreement for Lincoln National Capital II is incorporated
by reference to Exhibit 4(l) of LNC's form 10-K for the year ended
December 31, 1996, filed with the Commission on March 13, 1997.
4(m) Form of Lincoln National Capital I 8.75% Cumulative Quarterly Income
Preferred Securities, Series A (Commission File No. 333-04133) is
incorporated by reference to Exhibit 4(m) to LNC's Form 10- K for the
year ended December 31, 1996, filed with the Commission on March 13,
1997.
4(n) Form of Lincoln National Capital II 8.35% Trust Originated Preferred
Securities, Series B (Commission File No. 333-04133) is incorporated
by reference to Exhibit 4(n) to LNC's Form 10-K for the year ended
December 31, 1996, filed with the Commission on March 13, 1997.
10(a)* The Lincoln National Corporation 1986 Stock Option Incentive Plan
(Commission File No. 33-13445 and 33-62315) as last amended effective
May 12, 1994 is incorporated by reference to Exhibit No.1 of LNC's
Proxy filed with the Commission on March 31, 1994.
10(b)* The Lincoln National Corporation 1982 Stock Option Incentive Plan
(Commission File No. 2-77599) as last amended effective May 7, 1987
is incorporated by reference to Exhibit 10(b) of LNC's Form 10-K for
the year ended December 31, 1993, filed with the Commission on March
30, 1994.
10(c)* The Lincoln National Corporation Executives' Salary Continuation Plan
as last amended January 1, 1992.
10(d)* The Lincoln National Corporation Executive Value Sharing Plan as
Amended and Restated effective January 1, 1994 is incorporated by
reference to Exhibit No. 4 of LNC's Proxy filed with the Commission
on March 31, 1994.
10(e)* Lincoln National Corporation Executives' Severance Benefit Plan as
Amended and Restated effective November 9, 1995 is incorporated by
reference to Exhibit 10(e) of LNC's Form 10-K for the year ended
December 31, 1995, filed with the Commission on March 27, 1996.
10(f)* The Lincoln National Corporation Outside Directors Retirement Plan as
last amended effective March 15, 1990 is incorporated by reference to
Exhibit 10(f) of LNC's Form 10-K for the year ended December 31,
1995, filed with the Commission on March 27, 1996.
10(g)* The Lincoln National Corporation Outside Directors Benefits Plan.
10(h)* Lincoln National Corporation Directors' Value Sharing Plan as last
amended effective May 15, 1997.
10(i)* Lincoln National Corporation Executive Deferred Compensation Plan for
Employees (Commission File No. 33-51721) as last amended effective
February 16, 1998.
10(j)* Lincoln National Corporation 1993 Stock Plan for Non-Employee
Directors (Commission File No. 33-58113) as last amended effective
November 14, 1996 is incorporated by reference to Exhibit 10(j) to
LNC's Form 10-K for the year ended December 31, 1996, filed with the
Commission on March 13, 1997.
10(k)* Lincoln National Corporation Executives' Excess Compensation Benefit
Plan is incorporated by reference to Exhibit 10(r) of LNC's Form 10-K
for the year ended December 31, 1993, filed with the Commission on
March 30, 1994.
<PAGE> -71-
10(l)* Lincoln National Corporation 1997 Incentive Compensation Plan
effective May 15, 1997 is incorporated by reference to Exhibit A of
LNC's proxy filed April 14, 1997.
10(m)* Descriptions of compensation arrangements with Executive Officers.
10(n) Lease and Agreement dated August 1, 1984, with respect to LNL's Home
Office property located at Magnavox Way, Fort Wayne, Indiana are
incorporated by reference to Exhibit 10(m) of LNC's Form 10-K for the
year ended December 31, 1995, filed with the Commission on March 27,
1996.
10(o) Lease and Agreement dated August 1, 1984, with respect to LNL's Home
Office properties located at Clinton Street and Harrison Street, Fort
Wayne, Indiana are incorporated by reference to Exhibit 10(n) of
LNC's Form 10-K for the year ended December 31, 1995, filed with the
Commission on March 27, 1996.
10(p) Lease and Agreement dated December 1, 1994, with respect to LNC's
Corporate Office located at 200 East Berry Street, Fort Wayne,
Indiana, are incorporated by reference to Exhibit 10(p) of LNC's Form
10-K for the year ended December 31, 1994, filed with the Commission
on March 27, 1995.
10(q) Agreement of Lease dated February 17, 1998, with respect to Lincoln
Life's life products headquarters located at Church Street, Hartford,
Connecticut.
*This exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this form
pursuant to Item 14 of this report.
12 Historical Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries of LNC.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
Item 14(b)
During the fourth quarter ending December 31, 1997, two Form 8-Ks were filed
with the Commission. The first filing (dated October 7, 1997) which included pro
forma financial statements, was related to the divestiture of LNC's remaining
interest (83.3%) in American States Financial Corporation. The second filing
(dated December 16, 1997) was a copy of LNC's press release regarding the amount
of gain on the divestiture of American States and expected charges to fourth
quarter earnings for changes in estimates for the reserves for United Kingdom
pension mis-selling and personal accident programs.
Item 14
The exhibits of Lincoln National Corporation are listed in Item 14(a)(3) above.
Item 14(d)
The financial statement schedules for Lincoln National Corporation follow on
pages 72 through 78.
<PAGE> -72-
LINCOLN NATIONAL CORPORATION
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS
IN RELATED PARTIES
<TABLE>
<CAPTION>
December 31, 1997 (000's omitted)
Column A Column B Column C Column D
Amount
at Which
Shown in the
Type of Investment Cost Value Balance Sheet
Fixed maturity securities available-for-sale:
<S> <C> <C> <C>
Bonds:
United States Government and government
agencies and authorities . . . . . . . . . . . . . . . . . . . $ 591,950 $ 662,405 $ 662,405
States, municipalities and political subdivisions . . . . . . . . 236,142 241,426 241,426
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . 4,303,543 4,529,349 4,529,349
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . 1,683,418 1,804,436 1,804,436
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . 2,688,014 2,832,715 2,832,715
Convertibles and bonds with warrants attached. . . . . . . . . . 80,852 82,743 82,743
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . 12,854,008 13,717,793 13,717,793
Redeemable preferred stocks. . . . . . . . . . . . . . . . . . . . 188,109 195,509 195,509
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,626,036 24,066,376 24,066,376
Equity securities available-for-sale:
Common stocks:
Public utilities . . . . . . . . . . . . . . . . . . . . . . . 19,507 24,456 24,456
Banks, trusts and insurance companies . . . . . . . . . . . . . 46,597 73,083 73,083
Industrial, miscellaneous and all other . . . . . . . . . . . . 366,119 474,739 474,739
Nonredeemable preferred stocks . . . . . . . . . . . . . . . . 84,933 88,150 88,150
Total Equity Securities. . . . . . . . . . . . . . . . . . . . 517,156 660,428 660,428
Mortgage loans on real estate. . . . . . . . . . . . . . . . . . . 3,293,131 3,288,112(1)
Real estate:
Investment properties. . . . . . . . . . . . . . . . . . . . . . 508,999 508,999
Acquired in satisfaction of debt . . . . . . . . . . . . . . . . 66,957 66,957
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 763,148 763,148
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . 464,826 464,826
Total Investments . . . . . . . . . . . . . . . . . . . . . . . $28,240,253 $29,818,846
</TABLE>
(1) Investments deemed to have declines in value that are other than temporary
are written down or reserved for to reduce their carrying value to their
estimated realizable value.
<PAGE> -73-
LINCOLN NATIONAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
Lincoln National Corporation (Parent Company Only)
<TABLE>
<CAPTION>
December 31 (000's omitted) 1997 1996
<S> <C> <C>
Assets:
Investments in subsidiaries* . . . . . . . . . . . . . . . . . . . $5,341,786 $5,055,185
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,931 227,234
Investment in unconsolidated affiliate . . . . . . . . . . . . . . 18,500 16,041
Cash and invested cash . . . . . . . . . . . . . . . . . . . . . . 1,230,180 133,833
Property and equipment . . . . . . . . . . . . . . . . . . . . . . 10,316 10,543
Accrued investment income . . . . . . . . . . . . . . . . . . . . 4,071 26,078
Receivable from subsidiaries*. . . . . . . . . . . . . . . . . . . 433,580 103,024
Dividends receivable from subsidiaries*. . . . . . . . . . . . . . 12,875 285
Loans to subsidiaries*. . . . . . . . . . . . . . . . . . . . . . 32,299 446,968
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,500 5,747
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 48,470 25,281
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . $7,430,508 $6,050,219
Liabilities and Shareholders' Equity
Liabilities:
Cash collateral on loaned securities . . . . . . . . . . . . . . $ 123,688 $ 145,594
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . 52,167 50,651
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 82,767 69,711
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 510,301 596,052
Loans from subsidiaries* . . . . . . . . . . . . . . . . . . . . . 1,040,431 586,120
Federal income taxes payable (recoverable) . . . . . . . . . . . . 418,783 (1,398)
Accrued expenses and other liabilities . . . . . . . . . . . . . . 219,456 133,533
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,447,593 1,580,263
Shareholders' Equity
Series A preferred stock. . . . . . . . . . . . . . . . . . . . . 1,153 1,212
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 966,461 904,331
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 3,533,105 3,082,368
Foreign currency translation adjustment . . . . . . . . . . . . . 46,204 66,454
Net unrealized gain (loss) on securities available-for-sale
[including unrealized gain (loss) of subsidiaries and
discontinued operations: 1997 - $410,281; 1996 - $397,154]. . . . 435,992 415,591
Total Shareholders' Equity. . . . . . . . . . . . . . . . . . . 4,982,915 4,469,956
Total Liabilities and Shareholders' Equity . . . . . . . . . . . $7,430,508 $6,050,219
</TABLE>
*Eliminated in consolidation.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of Lincoln National
Corporation (see pages 40 through 66).
<PAGE> -74-
LINCOLN NATIONAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF INCOME
Lincoln National Corporation (Parent Company Only)
<TABLE>
<CAPTION>
Year Ended December 31 (000's omitted) 1997 1996 1995
<S> <C> <C> <C>
Revenue:
Dividends from subsidiaries*. . . . . . . . . . . . $ 250,725 $601,701 $538,515
Interest from subsidiaries* . . . . . . . . . . . . 22,807 18,945 9,558
Equity in earnings of unconsolidated affiliate . . -- 1,428 5,075
Net investment income . . . . . . . . . . . . . . 38,108 21,790 21,720
Realized gain (loss) on investments . . . . . . . . (1,403) (432) 30,189
Gain on sale of subsidiaries and
discontinued operations . . . . . . . . . . . . . 1,192,226 -- 74,284
Other . . . . . . . . . . . . . . . . . . . . . . 1,180 1,127 1,292
Total Revenue . . . . . . . . . . . . . . . . . 1,503,643 644,559 680,633
Expenses:
Operating and administrative. . . . . . . . . . . . 34,610 33,808 41,884
Interest-subsidiaries*. . . . . . . . . . . . . . . 25,703 23,529 32,864
Interest-other . . . . . . . . . . . . . . . . . . 87,442 74,553 63,624
Total Expenses . . . . . . . . . . . . . . . . . 147,755 131,890 138,372
Income before Federal Income Tax Expense
(Benefit), Equity in Income of Subsidiaries
and Discontinued Operations, Less Dividends. . . 1,355,888 512,669 542,261
Federal income tax expense (benefit). . . . . . . . . 389,791 (34,157) 37,780
Income Before Equity in Income of Subsidiaries
and Discontinued Operations, Less Dividends. . . 966,097 546,826 504,481
Equity in income of subsidiaries and
discontinued operations, less dividends . . . . . . (32,109) (33,268) (22,295)
Net Income. . . . . . . . . . . . . . . . . . . . $ 933,988 $513,558 $482,186
</TABLE>
*Eliminated in consolidation.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of Lincoln National
Corporation (see pages 40 through 66).
<PAGE> -75-
LINCOLN NATIONAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF CASH FLOWS
Lincoln National Corporation (Parent Company Only)
<TABLE>
<CAPTION>
Year Ended December 31 (000's omitted) 1997 1996 1995
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . .$ 933,988 $ 513,558 $ 482,186
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Equity in income of subsidiaries and
discontinued operations less than
(greater than) distributions* . . . . . . . . . 18,950 (262,268) 86,889
Equity in undistributed earnings of
unconsolidated affiliate . . . . . . . . . . . . -- (1,428) (5,075)
Realized (gain) loss on investments . . . . . . . 1,403 432 (30,189)
Gain on sale of subsidiaries and
discontinued operations . . . . . . . . . . . . (1,192,226) -- (74,284)
Tax on sale of discontinued operations . . . . . . 415,354 -- --
Other . . . . . . . . . . . . . . . . . . . . . 25,451 (81,276) 47,967
Net Adjustments . . . . . . . . . . . . . . . (731,068) (344,540) 25,308
Net Cash Provided by Operating Activities . . 202,920 169,018 507,494
Cash Flows from Investing Activities:
Net sales (purchases) of investments . . . . . . 4,157 91,161 16,614
Cash collateral on loaned securities . . . . . . (21,906) (53,406) (4,531)
Decrease (increase) in investment in subsidiaries*. (116,824) 217,844 (697,106)
Sale of (investment in) unconsolidated affiliate . (68,959) (16,041) 193,975
Sale of discontinued operations . . . . . . . . . 822,500 -- --
Net (purchase) sale of property and equipment . . . (1,417) (790) (3,158)
Other . . . . . . . . . . . . . . . . . . . . . . (1,096) (26,883) 17,675
Net Cash Provided by (Used in)
Investing Activities . . . . . . . . . . . . . . 616,455 211,885 (476,531)
Cash Flows from Financing Activities:
Principal payments on long-term debt . . . . . . . (86,338) -- --
Issuance of long-term debt . . . . . . . . . . . 587 561 197,785
Net increase (decrease) in short-term debt . . . . 13,056 (179,033) 19,300
Increase (decrease) in loans from subsidiaries* . . 454,311 28,224 (42,413)
Decrease (increase) in loans to subsidiaries* . . 414,669 (303,506) (106,982)
Increase in receivables from subsidiaries* . . . (23,000) (36,000) (300)
Common stock issued for benefit plans . . . . . . 33,199 (153) 24,096
Retirement of common stock . . . . . . . . . . . . (327,585) (32,716) --
Dividends paid to shareholders . . . . . . . . . . (201,927) (191,223) (178,805)
Net Cash Used in Financing Activities . . . . . . 276,972 (713,846) (87,319)
Net Increase (Decrease) in Cash . . . . . . . . . 1,096,347 (332,943) (56,356)
Cash at beginning-of-year . . . . . . . . . . . . . 133,833 466,776 523,132
Cash at End-of-Year . . . . . . . . . . . . . . $ 1,230,180 $ 133,833 $ 466,776
</TABLE>
*Eliminated in consolidation.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of Lincoln National
Corporation (see pages 40 through 66).
<PAGE> -76
LINCOLN NATIONAL CORPORATION
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
Insurance Other Policy
Deferred Policy and Claims and
Acquisition Claim Unearned Benefits Premium
Segment Costs Reserves Premiums Payable Revenue(1)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997 (000's Omitted)
Life Insurance and Annuities .................... $ 779,703 $ 6,418,417 $ $ $ 788,040
Lincoln UK ..................................... 563,080 1,442,768 336,721
Reinsurance .................................... 281,062 3,513,311 1,036,127
Investment Management ..........................
Other (incl. consol. adj's.) ................... (108,224)
Total ........................................ $ 1,623,845 $ 11,266,272 $ -- $ -- $ 2,160,888
Year Ended December 31, 1996
Life Insurance and Annuities ................... $ 926,593 $ 6,180,970 $ $ $ 676,047
Lincoln UK ..................................... 440,414 1,252,276 306,238
Reinsurance .................................... 322,709 3,144,785 1,250,403
Investment Management ..........................
Other (incl. consol. adj's.) ................... (120,135)
Total ........................................ $ 1,689,716 $ 10,457,896 $ -- $ -- $ 2,232,688
Year Ended December 31, 1995
Life Insurance and Annuities ................... $ 705,913 $ 6,166,645 $ $ $ 670,344
Lincoln UK ..................................... 134,993 831,762 272,771
Reinsurance .................................... 396,588 3,100,275 1,171,165
Investment Management ..........................
Other (incl.consol.adj's.) ..................... (91,254)
Total ........................................ $ 1,237,494 $ 10,007,428 $ -- $ -- $ 2,114,280
</TABLE>
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
Amortization of
Net Deferred Policy Other
Investment Acquisition Operating Premiums
Segment Income (2) Benefits Costs Expenses( 2) Written
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997 (000's Omitted)
Life Insurance and Annuities.................... $ 1,842,351 $ 1,646,581 $ 316,346 $ 431,301 $
Lincoln UK ..................................... 85,132 339,637 4,342 180,132
Reinsurance .................................... 284,430 1,205,515 147,300 239,135
Investment Management .......................... 457 243,206
Other (incl. consol. adj's.) ................... 38,394 110,103
Total ........................................ $ 2,250,764 $ 3,191,733 $ 467,988 $ 1,203,877 $ --
Year Ended December 31, 1996
Life Insurance and Annuities ................... $ 1,741,649 $ 1,562,087 $ 266,343 $ 388,020 $
Lincoln UK ..................................... 81,955 133,927 157,732
Reinsurance .................................... 263,870 1,013,867 162,150 253,880
Investment Management .......................... 701 191,416
Other (incl. consol. adj's) .................... (229) 100,128
Total ........................................ $ 2,087,946 $ 2,709,881 $ 428,493 $ 1,091,176 $ --
Year Ended December 31, 1995
Life Insurance and Annuities ................... $ 1,755,452 $ 1,637,901 $ 267,548 $ 331,690 $
Lincoln UK ..................................... 71,098 124,922 154,017
Reinsurance .................................... 164,105 1,088,498 59,910 279,724
Investment Management (3) ..................... 518 122,127
Other (incl. consol. adj's.) ................... (11,510) 105,733
Total ........................................ $ 1,979,663 $ 2,851,321 $ 327,458 $ 993,291 $ --
</TABLE>
(1) Includes insurance fees on universal life and other interest sensitive
products.
(2) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(3) Includes data from the April 1, 1995 date when Investment Management segment
was initiated because of the purchase of Delaware Management Holdings, Inc.
(4) Amounts have been adjusted to reflect a reclassification for discontinued
operations.
<PAGE> 77
LINCOLN NATIONAL CORPORATION
SCHEDULE IV - REINSURANCE (1)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
(000's Omitted)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Individual life insurance in force . . . $125,800,000 $37,300,000 $124,000,000 $212,500,000 58.4%
Premiums:
Life insurance (2) . . . . . . . . . . $ 1,235,085 $ 196,929 $ 550,173 $ 1,588,329 34.6%
Health insurance . . . . . . . . . . . 161,693 118,083 528,949 572,559 92.4%
Total . . . . . . . . . . . . . . . . $ 1,396,778 $ 315,012 $ 1,079,122 $ 2,160,888
Year Ended December 31, 1996
Individual life insurance in force . . . $110,700,000 $37,600,000 $130,400,000 $203,500,000 64.0%
Premiums:
Life insurance (2) . . . . . . . . . . .$ 1,031,740 $ 96,999 $ 507,512 $ 1,442,253 35.2%
Health insurance . . . . . . . . . . . 168,545 71,636 693,526 790,435 87.7%
Total l . . . . . . . . . . . . . . . $ 1,200,285 $ 168,635 $ 1,201,038 $ 2,232,688
Year Ended December 31, 1995
Individual life insurance in force . . . $ 92,700,000 $32,500,000 $118,900,000 $179,100,000 66.4%
Premiums:
Life insurance (2) . . . . . . . . . . .$ 949,453 $ 178,618 $ 536,398 $ 1,307,233 41.0%
Health insurance . . . . . . . . . . . 307,895 212,422 711,574 807,047 88.2%
Total . . . . . . . . . . . . . . . .$ 1,257,348 $ 391,040 $ 1,247,972 $ 2,114,280
</TABLE>
(1) Special-purpose bulk reinsurance transactions have been excluded.
(2) Includes insurance fees on universal life and other interest sensitive
products.
(3) Amounts have been adjusted to reflect a reclassification for discontinued
operations.
<PAGE> -78-
LINCOLN NATIONAL CORPORATION
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Charged
Balance at Charged to Other Balance at
Description Beginning to Costs Accounts- Deductions- End of
of Period Expenses(1) Describe Describe(2) Period
(000's Omitted)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate . . . . . . . . . . . $12,385 $ 1,778 $(9,144) $ 5,019
Reserve for Real Estate . . . . . . . 3,000 (1,500) 1,500
Included in Other Liabilities:
Investment Guarantees . . . . . . . 1,775 (985) 790
Year Ended December 31, 1996
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate . . . . . . . . . . . $29,592 $ 3,136 $(20,343) $12,385
Reserve for Real Estate . . . . . . 58,029 3,000 $(51,517) (6,512) 3,000
Reserve for Other Long-term,
Investments . . . . . . . . . . . . . 13,644 (388) (12,971) (285) --
Included in Other Liabilities:
Investment Guarantees . . . . . . . . 7,099 (886) (4,438) 1,775
Year Ended December 31, 1995
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate . . . . . . . . . . . $62,675 $ 2,288 $(35,371) $29,592
Reserve for Real Estate . . . . . . . . 78,638 (9,203) (11,406) 58,029
Reserve for Other Long-term
Investments. . . . . . . . . . . . . . 23,776 (2,415) (7,717) 13,644
Included in Other Liabilities:
Investment Guarantees . . . . . . . . . 13,076 (2,617) (3,360) 7,099
</TABLE>
(1) Excludes charges for the direct write-offs of assets. The negative amounts
shown in the additions columns represent improvements in the underlying
assets and guarantees for which valuation accounts had previously been
established.
(2) Deductions reflect sales or foreclosures of the underlying holdings.
(3) Amounts have been adjusted to reflect a reclassification for discontinued
operations.
<PAGE> -79-
LINCOLN NATIONAL CORPORATION
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1997
Exhibit
Number Page
3(a) Articles of Incorporation dated as of May 12, 1994.*
3(b) Bylaws of LNC as last amended January 14, 1998. 81
4(a) Indenture of LNC dated as of January 15, 1987.*
4(b) LNC First Supplemental Indenture dated July 1, 1992, to
Indenture of LNC dated as of January 15, 1987.*
4(c) Specimen Notes for 7 1/8% Notes due July 15, 1999 and
7 5/8% Notes due July 15, 2002.*
4(d) Rights Agreement dated November 14, 1996.*
4(e) Indenture of LNC dated as of September 15, 1994.*
4(f) Form of Note dated as of September 15, 1994.*
4(g) Form of Zero Coupon Security dated as of September 15, 1994.*
4(h) Specimen Debenture for 9 1/8% Notes due October 1, 2024.*
4(i) Specimen of 7 1/4% Debenture due May 15, 2005.*
4(j) Junior Subordinated Indenture of LNC as of May 1, 1996.*
4(k) Guarantee Agreement for Lincoln National Capital I.*
4(l) Guarantee Agreement for Lincoln National Capital II.*
4(m) Form of Lincoln National Capital I Preferred Securities, Series A.*
4(n) Form of Lincoln National Capital II Preferred Securities, Series B.*
10(a) LNC 1986 Stock Option Incentive Plan.*
10(b) LNC 1982 Stock Option Incentive Plan.*
10(c) The LNC Executives' Salary Continuation Plan. 94
10(d) The LNC Executive Value Sharing Plan.*
10(e) LNC Executives' Severance Benefit Plan.*
10(f) The LNC Outside Directors Retirement Plan.*
10(g) The LNC Outside Directors Benefits Plan. 100
10(h) LNC Directors' Value Sharing Plan. 103
10(i) The LNC Executive Deferred Compensation Plan for Employees. 111
10(j) LNC 1993 Stock Plan for Non-Employee Directors.*
10(k) LNC Executives' Excess Compensation Benefit Plan.*
10(l) LNC 1997 Incentive Compensation Plan.*
10(m) Description of compensation arrangements with Executive Officers. 127
10(n) Lease and Agreement dated August 1, 1984, with respect
to Lincoln Life's home office property.*
10(o) Lease and Agreement dated August 1, 1984, with respect
to additional Lincoln Life home office property.*
10(p) Lease dated December 1, 1994, with respect to LNC's
Corporate Offices.*
10(q) Lease and Agreement dated February 17, 1998 with respect to
additional Lincoln Life headquarter property. 150
12 Historical Ratio of Earnings to Fixed Charges. 207
21 List of Subsidiaries of LNC. 208
23 Consent of Ernst & Young LLP, Independent Auditors. 221
27 Financial Data Schedule. 222
*Incorporated by Reference
<PAGE> -80-
Signature Page
LINCOLN NATIONAL CORPORATION
Pursuant to the requirements By /s/ Ian M. Rolland March 12, 1998
of Section 13 or 15(d) of Ian M. Rolland,
the Securities Exchange Act (Chairman, Chief Executive Officer and
of 1934, LNC has duly caused Director
this report to be signed on
its behalf by the under- By /s/ Jon A. Boscia March 12, 1998
signed, thereunto duly Jon A. Boscia,
authorized. (President and Director)
By /s/ Richard C. Vaughan March 12, 1998
Richard C. Vaughan,
(Executive Vice President and Chief
Financial Officer)
By /s/ Donald L. Van Wyngarden March 12, 1998
Donald L. Van Wyngarden
(Second Vice President and Controller)
Pursuant to the requirements By /s/ J. Patrick Barrett March 12, 1998
of the Securities Exchange J. Patrick Barrett
Act of 1934, this report
has been signed below by By /s/ Thomas D. Bell, Jr. March 12, 1998
the following Directors Thomas D. Bell, Jr.
of LNC on the date indicated.
By /s/ Daniel R. Efroymson March 12, 1998
Daniel R. Efroymson
By /s/ Harry L. Kavetas March 12, 1998
Harry L. Kavetas
By /s/ M. Leanne Lachman March 12, 1998
M. Leanne Lachman
By /s/ Earl L. Neal March 12, 1998
Earl L. Neal
By /s/ Roel Pieper March 12, 1998
Roel Pieper
By /s/ John M. Pietruski March 12, 1998
John M. Pietruski
By /s/ Jill S. Ruckelshaus March 12, 1998
Jill S. Ruckelshaus
By /s/ Gordon A. Walker March 12, 1998
Gordon A. Walker
By /s/ Gilbert R. Whitaker, Jr. March 12, 1998
Gilbert R. Whitaker, Jr.
Exhibit 3(b)
- -81-
Adopted January 17, 1968; as Last Amended January 14, 1998
BYLAWS
OF
LINCOLN NATIONAL CORPORATION
ARTICLE I
Shareholders
Section 1. Annual Meeting. An annual meeting of the shareholders shall
be held at such hour and on such date as the board of directors may select in
each year for the purpose of electing directors for the terms hereinafter
provided and for the transaction of such other business as may properly come
before the meeting. (Amended January 9, 1991)
Section 2. Special Meetings. Special meetings of the shareholders may
be called by the board of directors. Only business within the purpose or
purposes described in the meeting notice may be conducted at a special
shareholders meeting. (Last amended May 15, 1997)
Section 3. Place of Meetings. All meetings of shareholders shall be
held at the principal office of the corporation in Fort Wayne, Indiana, or at
such other place, either within or without the State of Indiana, as may be
designated by the board of directors. (Amended November 6, 1986)
Section 4. Notice of Meetings. A written or printed notice, stating the
place, day and hour of the meeting, and in the case of a special meeting or when
required by law or by the articles of incorporation or these bylaws, the purpose
or purposes for which the meeting is called, shall be delivered or mailed by or
at the direction of the secretary no fewer than ten nor more than sixty days
before the date of the meeting, to each shareholder of record entitled to vote
at such meeting at such address as appears upon the stock records of the
corporation. (Last amended August 10, 1989)
Section 5. Quorum. Unless otherwise provided by the articles of
incorporation or these bylaws, at any meeting of shareholders the majority of
the outstanding shares entitled to vote at such meeting, represented in person
or by proxy, shall constitute a quorum. If less than a majority of such shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time. The shareholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum. (Amended November 6, 1986)
Section 6. Adjourned Meetings. At any adjourned meeting at which a
quorum shall be represented any business may be transacted as might have been
transacted at the meeting as originally notified. If a new record date is or
must be established pursuant to law, notice of the adjourned meeting must be
given to persons who are shareholders as of the new record date. (Added November
6, 1986)
Section 7. Proxies. At all meetings of shareholders, a shareholder may
vote either in person or by proxy executed in writing by the shareholder or a
duly authorized attorney in fact. No proxy shall be valid after eleven months
from the date of its execution, unless otherwise provided in the proxy.
Section 8. Voting of Shares. Except as otherwise provided by law, by
the articles of incorporation, or by these bylaws, every shareholder shall have
the right at every shareholders' meeting to one vote for each share standing in
his name on the books of the corporation on the date established by the board of
directors as the record date for determination of shareholders entitled to vote
at such meeting. (Amended May 7, 1987)
Section 9. Order of Business. The order of business at each
shareholders' meeting shall be established by the person presiding at the
meeting. (Amended March 16, 1972)
Section 10. Notice of Shareholder Business. At any meeting of the
shareholders, only such business may be conducted as shall have been properly
brought before the meeting, and as shall have been determined to be lawful and
appropriate for consideration by shareholders at the meeting. To be properly
brought before a meeting business must be (a) specified in the notice of meeting
given in accordance with Section 4 of this Article I, (b) otherwise properly
brought before the meeting by or at the direction of the board of directors or
the chief executive officer, or (c) otherwise properly brought before the
meeting by a shareholder. For business to be properly brought before a meeting
by a shareholder pursuant to clause (c) above, the shareholder must have given
timely notice thereof in writing to the secretary of the corporation. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal office of the corporation, not less than fifty days nor more than
ninety days prior to the meeting; provided, however, that in the event that less
than sixty days' notice of the date of the meeting is given to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was given. A shareholder's notice to the secretary shall set
forth as to each matter the shareholder proposes to bring before the meeting (a)
a brief description of the business desired to be brought before the meeting,
(b) the name and address, as they appear on the corporation's stock records, of
the shareholder proposing such business, (c) the class and number of shares of
the corporation which are beneficially owned by the shareholder, and (d) any
interest of the shareholder in such business. Notwithstanding anything in these
bylaws to the contrary, no business shall be conducted at a meeting except in
accordance with the procedures set forth in this Section 10. The person
presiding at the meeting shall, if the facts warrant, determine and declare to
the meeting that business was not properly brought before the meeting in
accordance with the bylaws, or that business was not lawful or appropriate for
consideration by shareholders at the meeting, and if he should so determine, he
shall so declare to the meeting and any such business shall not be transacted.
(Last amended January 11, 1987)
Section 11. Notice of Shareholder Nominees. Nominations of persons for
election to the board of directors of the corporation may be made at any meeting
of shareholders by or at the direction of the board of directors or by any
shareholder of the corporation entitled to vote for the election of directors at
the meeting. Shareholder nominations shall be made pursuant to timely notice
given in writing to the secretary of the corporation in accordance with Section
10 of this Article I. Such shareholder's notice shall set forth, in addition to
the information required by Section 10, as to each person whom the shareholder
proposes to nominate for election or re-election as a director, (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares
of the corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required to be disclosed in
solicitation of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including without limitation such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected), and (v) the qualifications of the nominee to serve as a director of
the corporation. No shareholder nomination shall be effective unless made in
accordance with the procedures set forth in this Section 11. The person
presiding at the meeting shall, if the facts warrant, determine and declare
to the meeting that a shareholder nomination was not made in accordance with
the bylaws, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded. (Last amended January 11,
1987)
Section 12. Control Share Acquisitions. As used in this Section 12, the
terms "control shares" and "control share acquisition" shall have the same
meanings as set forth in Indiana Code Section 23-1-42-1 et seq. (the "Act").
Control shares of the corporation acquired in a control share acquisition shall
have only such voting rights as are conferred by the Act. Control shares of the
corporation acquired in a control share acquisition with respect to which the
acquiring person has not filed with the corporation the statement required by
the Act may, at any time during the period ending sixty days after the last
acquisition of control shares by the acquiring person, be redeemed by the
corporation at the fair value thereof pursuant to procedures authorized by a
resolution of the board of directors. Such authority may be general or confined
to specific instances. (Added May 7, 1987)
Section 13. Voting Procedures on Change of Control. In addition to any
other authority granted under Indiana law for the corporation to enter into any
arrangement, agreement or understanding with respect to the voting of voting
shares, pursuant to the authority granted in Indiana Code Section 23-1- 22-4,
the corporation shall have the power to enter into any arrangement, agreement or
understanding of any nature whatsoever and for any duration whereby the board of
directors or any group of directors of the corporation can specify or direct the
voting by any other person of any shares of any class or series beneficially
owned by such person, or as to which such person has the direct or indirect
power to direct the voting, in connection with a change of control of the
corporation. As used in this Section 13, the term "control" shall have the same
meaning as set forth in Indiana Code Section 23- 1-22-4.
In the event that an arrangement, agreement or understanding is in
effect, and the voting shares of the corporation are not voted in accordance
with any such arrangement, agreement or understanding, neither such voting
shares nor such votes shall be counted in connection with any vote of the
corporation's shareholders relating to any aspect of a change of control.
(Added June 25, 1990)
ARTICLE II
Board of Directors
Section 1. General Powers, Number, Classes and Tenure. The business of
the corporation shall be managed by a board of directors. The number of
directors which shall constitute the whole board of directors of the corporation
shall be thirteen. The number of directors may be increased or decreased from
time to time by amendment of these bylaws, but no decrease shall have the effect
of shortening the term of any incumbent director. The directors shall be divided
into three classes, each class to consist, as nearly as may be, of one-third of
the number of directors then constituting the whole board of directors, with one
class to be elected annually by shareholders for a term of three years, to hold
office until their respective successors are elected and qualified; except that
(Last amended effective January 14, 1998)
(1) the terms of office of directors initially elected shall be
staggered so that the term of office of one class shall expire
in each year;
(2) the term of office of a director who is elected by either the
directors or shareholders to fill a vacancy in the board of
directors shall expire at the end of the term of office of the
succeeded director's class or at the end of the term of office
of such other class as determined by the board of directors to
be necessary or desirable in order to equalize the number of
directors among the classes;
(3) the board of directors may adopt a policy limiting the time
beyond which certain directors are not to continue to serve,
the effect of which may be to produce classes of unequal size
or to cause certain directors either to be nominated for
election for a term of less than three years or to cease to be
a director before expiration of the term of the director's
class.
In case of any increase in the number of directors, the additional directors
shall be distributed among the several classes to make the size of the classes
as equal as possible. (Last amended January 1, 1992)
Section 2. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw immediately after,
and at the same place as, the annual meeting of shareholders. The board of
directors may provide, by resolution, the time and place, either within or
without the State of Indiana, for the holding of additional regular meetings
without other notice than such resolution.
Section 3. Special Meetings. Special meetings of the board of directors
may be called by the chief executive officer. The secretary shall call special
meetings of the board of directors when requested in writing to do so by a
majority of the members thereof. Special meetings of the board of directors
may be held either within or without the State of Indiana. (Last amended
August 10, 1989)
Section 4. Notice of Meetings. Except as otherwise provided in these
bylaws, notice of any meeting of the board of directors shall be given, not less
than two days before the date fixed for such meeting, by oral, telegraphic,
telephonic, electronic or written communication stating the time and place
thereof and delivered personally to each member of the board of directors or
telegraphed or mailed to him at his business address as it appears on the books
of the corporation; provided, that in lieu of such notice, a director may sign a
written waiver of notice either before the time of the meeting, at the time of
the meeting or after the time of the meeting. (Last amended November 6, 1986)
Section 5. Quorum. A majority of the whole board of directors shall be
necessary to constitute a quorum for the transaction of any business except the
filling of vacancies, but if less than such majority is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice.
Section 6. Manner of Acting. The act of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
board of directors, unless the act of a greater number is required by law or by
the articles of incorporation or these bylaws. Unless otherwise provided by the
articles of incorporation, any action required or permitted to be taken at any
meeting of the board of directors may be taken without a meeting, if a written
consent to such action is signed by all members of the board of directors and
such written consent is filed with the minutes of proceedings of the board of
directors. Unless otherwise provided by the articles of incorporation, any or
all members of the board of directors may participate in a meeting of the board
of directors by means of a conference telephone or similar communications
equipment by which all persons participating in the meeting can communicate with
each other, and participation in this manner constitutes presence in person at
the meeting. (Last amended effective March 14, 1991)
Section 7. Vacancies. Except as otherwise provided in the articles of
incorporation, any vacancy occurring in the board of directors may be filled by
a majority vote of the remaining directors, though less than a quorum of the
board of directors, or, at the discretion of the board of directors, any vacancy
may be filled by a vote of the shareholders. (Amended November 6, 1986)
Section 8. Notice to Shareholders. Shareholders shall be notified of
any increase in the number of directors and the name, address, principal
occupation and other pertinent information about any director elected by the
board of directors to fill any vacancy. Such notice shall be given in the next
mailing sent to shareholders following any such increase or election, or both,
as the case may be.
ARTICLE III
Officers
Section 1. Elected Officers. The elected officers of the corporation
shall be a president, a secretary, and a treasurer, and may also include a
chairman of the board, one or more vice presidents of a class or classes as the
board of directors may determine, and such other officers as the board of
directors may determine. The chairman of the board and the president shall be
chosen from among the directors. Any two or more offices may be held by the
same person. (Last amended November 6, 1986)
Section 2. Appointed Officers. The appointed officers of the
corporation shall be one or more second vice presidents, assistant vice
presidents, assistant treasurers, and assistant secretaries. (Added November 6,
1986)
Section 3. Election or Appointment and Term of Office. The elected
officers of the corporation shall be elected annually by the board of directors
at the first meeting of the board of directors held after each annual meeting of
the shareholders. The appointed officers of the corporation shall be appointed
annually by the chief executive officer immediately following the first meeting
of the board of directors held after each annual meeting of the shareholders.
Additional elected officers may be elected at any regular or special meeting of
the board of directors, to serve until the regular meeting of the board held
after the next annual meeting of shareholders, and additional appointed officers
may be appointed by the chief executive officer at any time to serve until the
next annual appointment of officers. Each officer shall hold office until his
successor shall have been duly elected or appointed and shall have qualified or
until his death or until he shall resign or retire or shall have been removed.
(Amended November 6, 1986)
Section 4. Removal. Any officer may be removed by the board of
directors and any appointed officer may be removed by the chief executive
officer, whenever in their judgment the best interests of the corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. (Last amended August 13, 1987)
Section 5. Vacancies. A vacancy in the office of president or secretary
or treasurer because of death, resignation, retirement, removal or otherwise,
shall be filled by the board of directors, and a vacancy in any other elected
office may be filled by the board of directors.
Section 6. Chief Executive Officer. If the elected officers of the
corporation include both a chairman of the board and a president, the board of
directors shall designate one of such officers to be the chief executive officer
of the corporation. If the office of chairman of the board be vacant, the
president shall be the chief executive officer of the corporation. The chief
executive officer of the corporation shall be, subject to the board of
directors, in general charge of the affairs of the corporation. (Amended
March 7, 1968)
Section 7. Chairman of the Board. The chairman of the board shall
preside at all meetings of the shareholders and of the board of directors at
which he may be present and shall have such other powers and duties as may be
determined by the board of directors.
Section 8. President. The president shall have such powers and duties
as may be determined by the board of directors. In the absence of the chairman
of the board, or if such office be vacant, the president shall have all the
powers of the chairman of the board and shall perform all his duties.
Section 9. Vice Presidents. A vice president shall perform such duties
as may be assigned by the chief executive officer or the board of directors.
In the absence of the president and in accordance with such order of priority
as may be established by the board of directors, he may perform the duties of
the president, and when so acting, shall have all the powers of and be subject
to all the restrictions upon the president. (Amended September 14, 1972)
Section 10. Second Vice Presidents and Assistant Vice Presidents. A
second vice president and an assistant vice president shall perform such
duties as may be assigned by the chief executive officer or the board of
directors. (Added November 6, 1986)
Section 11. Secretary. The secretary shall (a) keep the minutes of the
shareholders' and board of directors' meetings in one or more books provided for
that purpose, (b) see that all notices are duly given in accordance with the
provisions of these bylaws or as required by law, (c) be custodian of the
corporate records and of the seal of the corporation and see that the seal of
the corporation is affixed to all documents the execution of which on behalf of
the corporation under its seal is duly authorized, and (d) in general perform
all duties incident to the office of secretary and such other duties as may be
assigned by the chief executive officer or the board of directors.
(Amended September 14, 1972)
Section 12. Assistant Secretaries. In the absence of the secretary, an
assistant secretary shall have the power to perform his duties including the
certification, execution and attestation of corporate records and corporate
instruments. Assistant secretaries shall perform such other duties as may be
assigned to them by the chief executive officer or the board of directors.
(Last amended November 6, 1986)
Section 13. Treasurer. The treasurer shall (a) have charge and custody
of all funds and securities of the corporation, (b) receive and give receipts
for monies due and payable to the corporation from any source whatsoever, (c)
deposit all such monies in the name of the corporation in such depositories as
are selected by the board of directors, and (d) in general perform all duties
incident to the office of treasurer and such other duties as may be assigned by
the chief executive officer or the board of directors. If required by the board
of directors, the treasurer shall give a bond for the faithful discharge of his
duties in such form and with such surety or sureties as the board of directors
shall determine. (Amended September 14, 1972)
Section 14. Assistant Treasurers. In the absence of the treasurer, an
assistant treasurer shall have the power to perform his duties. Assistant
treasurers shall perform such other duties as may be assigned to them by the
chief executive officer or the board of directors. (Last amended November 6,
1986)
ARTICLE IV
Committees
Section 1. Board Committees. The board of directors may, by resolution
adopted by a majority of the whole board of directors, from time to time
designate from among its members one or more committees each of which, to the
extent provided in such resolution and except as otherwise provided by law,
shall have and exercise all the authority of the board of directors. Each such
committee shall serve at the pleasure of the board of directors. The designation
of any such committee and the delegation thereto of authority shall not operate
to relieve the board of directors, or any member thereof, of any responsibility
imposed by law. Each such committee shall keep a record of its proceedings and
shall adopt its own rules of procedure. It shall make such reports to the board
of directors of its actions as may be required by the board. (Amended March 16,
1972)
Section 2. Advisory Committees. The board of directors may, by
resolution adopted by a majority of the whole board of directors, from time to
time designate one or more advisory committees, a majority of whose members
shall be directors. An advisory committee shall serve at the pleasure of the
board of directors, keep a record of its proceedings and adopt its own rules of
procedure. It shall make such reports to the board of directors of its actions
as may be required by the board. (Amended March 16, 1972)
Section 3. Manner of Acting. Unless otherwise provided by the articles
of incorporation, any action required or permitted to be taken at any meeting of
a committee established under this Article IV may be taken without a meeting, if
a written consent to such action is signed by all members of the committee and
such written consent is filed with the minutes of proceedings of the committee.
Unless otherwise provided by the articles of incorporation, any or all members
of such committee may participate in a meeting of the committee by means of a
conference telephone or similar communications equipment by which all persons
participating in the meeting can communicate with each other, and participation
in this manner constitutes presence in person at the meeting. (Last amended
effective March 14, 1991)
ARTICLE V
Corporate Instruments and Loans
Section 1. Corporate Instruments. The board of directors may authorize
any officer or officers to execute and deliver any instrument in the name of
or on behalf of the corporation, and such authority may be general or confined
to specific instances. (Amended September 14, 1972)
Section 2. Loans. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the board of directors. Such authority
may be general or confined to specific instances.
ARTICLE VI
Stock Certificates, Transfer of Shares, Stock Records
Section 1. Certificates for Shares. Each shareholder shall be entitled
to a certificate, signed by the president or a vice president and the secretary
or any assistant secretary of the corporation, certifying the number of shares
owned by him in the corporation. If such certificate is countersigned by the
written signature of a transfer agent other than the corporation or its
employee, the signatures of the officers of the corporation may be facsimiles.
If such certificate is countersigned by the written signature of a registrar
other than the corporation or its employee, the signatures of the transfer agent
and the officers of the corporation may be facsimiles. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of its issue. Certificates representing shares of the
corporation shall be in such form consistent with the laws of the State of
Indiana as shall be determined by the board of directors. All certificates for
shares shall be consecutively numbered or otherwise identified. The name and
address of the person to whom the shares represented thereby are issued, with
the number of shares and date of issue, shall be entered on the stock transfer
records of the corporation. (Amended May 28, 1969)
Section 2. Transfer of Shares. Transfer of shares of the corporation
shall be made on the stock transfer records of the corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the corporation, and, except as otherwise
provided in these bylaws, on surrender for cancellation of the certificates for
such shares. (Amended May 28, 1969)
Section 3. Lost, Destroyed or Wrongfully Taken Certificates. Any person
claiming a certificate of stock to have been lost, destroyed or wrongfully
taken, and who requests the issuance of a new certificate before the corporation
has notice that the certificate alleged to have been lost, destroyed or
wrongfully taken has been acquired by a bona fide purchaser, shall make an
affidavit of that fact and shall give the corporation and its transfer agents
and registrars a bond of indemnity with unlimited liability, in form and with
one or more corporate sureties satisfactory to the chief executive officer or
treasurer of the corporation (except that the chief executive officer or
treasurer may authorize the acceptance of a bond of different amount, or a bond
with personal surety thereon, or a personal agreement of indemnity), whereupon
in the discretion of the chief executive officer or the treasurer and except as
otherwise provided by law a new certificate may be issued of the same tenor and
for the same number of shares as the one alleged to have been lost, destroyed or
wrongfully taken. In lieu of a separate bond of indemnity in each case, the
chief executive officer of the corporation may accept an assumption of liability
under a blanket bond issued in favor of the corporation and its transfer agents
and registrars by one or more corporate sureties satisfactory to him. (Amended
September 14, 1972)
Section 4. Transfer Agent and Registrars. The board of directors by
resolution may appoint a transfer agent or agents or a registrar or registrars
of transfer, or both. All such appointments shall confer such powers, rights,
duties and obligations consistent with the laws of the State of Indiana as the
board of directors shall determine. The board of directors may appoint the
treasurer of the corporation and one or more assistant treasurers to serve as
transfer agent or agents. (Amended May 28, 1969)
Section 5. Record Date. For the purposes of determining shareholders
entitled to vote at any meeting of shareholders or any adjournment thereof, or
shareholders entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the board of
directors shall fix in advance a date as a record date for any such
determination of shareholders, such date in any case to be not more than seventy
days before the meeting or action requiring a determination of shareholders.
(Amended November 6, 1986)
ARTICLE VII
Liability
No person or his personal representatives shall be liable to the
corporation for any loss or damage suffered by it on account of any action taken
or omitted to be taken by such person in good faith as an officer or employee of
the corporation, or as a director, officer, partner, trustee, employee, or agent
of another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, whether for profit or not, which he
serves or served at the request of the corporation, if such person (a) exercised
and used the same degree of care and skill as a prudent man would have exercised
and used under like circumstances, charged with a like duty, or (b) took or
omitted to take such action in reliance upon advice of counsel for the
corporation or such enterprise or upon statements made or information furnished
by persons employed or retained by the corporation or such enterprise upon which
he had reasonable grounds to rely. The foregoing shall not be exclusive of other
rights and defenses to which such person or his personal representatives may be
entitled under law. (Last amended November 6, 1986)
ARTICLE VIII
Indemnification
Section 1. Actions by a Third Party. The corporation shall indemnify
any person who is or was a party, or is threatened to be made a defendant or
respondent, to a proceeding, including any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than actions by or in the right of the corporation), and
whether formal or informal, who is or was a director, officer, or employee of
the corporation or who, while a director, officer, or employee of the
corporation, is or was serving at the corporation's request as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, whether for profit or not, against:
(a) any reasonable expenses (including attorneys' fees) incurred with
respect to a proceeding, if such person is wholly successful on the
merits or otherwise in the defense of such proceeding, or
(b) judgments, settlements, penalties, fines (including excise taxes
assessed with respect to employee benefit plans) and reasonable
expenses (including attorneys' fees) incurred with respect to a
proceeding where such person is not wholly successful on the merits or
otherwise in the defense of the proceeding if:
(i) the individual's conduct was in good faith; and
(ii) the individual reasonably believed:
(A) in the case of conduct in the individual's
capacity as a director, officer or employee of the
corporation, that the individual's conduct was in the
corporation's best interests; and
(B) in all other cases, that the individual's conduct
was at least not opposed to the corporation's best
interests; and
(iii) in the case of any criminal proceeding, the individual
either:
(A) had reasonable cause to believe the individual's
conduct was lawful; or
(B) had no reasonable cause to believe the
individual's conduct was unlawful.
The termination of a proceeding by a judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent is not, of itself,
determinative that the director, officer, or employee did not meet the standard
of conduct described in this section. (Last amended November 6, 1986)
Section 2. Actions by or in the Right of the Corporation. The
corporation shall indemnify any person who is or was a party or is threatened to
be made a defendant or respondent, to a proceeding, including any threatened,
pending or completed action, suit or proceeding, by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person is or was a director, officer, or employee of the corporation or is or
was serving at the request of the corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
whether for profit or not, against any reasonable expenses (including attorneys'
fees):
(a) if such person is wholly successful on the merits or otherwise in
the defense of such proceeding, or
(b) if not wholly successful:
(i) the individual's conduct was in good faith; and
(ii) the individual reasonably believed:
(A) in the case of conduct in the individual's
capacity as a director, officer, or employee of the
corporation, that the individual's conduct was in the
corporation's best interests; and
(B) in all other cases, that the individual's conduct
was at least not opposed to the corporation's best
interests,
except that no indemnification shall be made in respect of any claim, issue, or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine upon application, that despite the adjudication
of liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnification for such expenses which such court
shall deem proper. (Last amended November 6, 1986)
Section 3. Methods of Determining Whether Standards for Indemnification
Have Been Met. Any indemnification under Sections 1 or 2 of this Article (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, or employee is proper in the circumstances because he has met the
applicable standards of conduct set forth in Section 1 or 2. In the case of
directors of the corporation such determination shall be made by any one of the
following procedures:
(a) by the board of directors by a majority vote of a quorum consisting
of directors not at the time parties to the proceeding;
(b) if a quorum cannot be obtained under (a), by majority vote of a
committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting
solely of two or more directors not at the time parties to the
proceeding;
(c) by special legal counsel:
(i) selected by the board of directors or a committee thereof
in the manner prescribed in (a) or (b); or
(ii) if a quorum of the board of directors cannot be obtained
under (a) and a committee cannot be designated under (b),
selected by a majority vote of the full board of directors (in
which selection directors who are parties may participate).
In the case of persons who are not directors of the corporation, such
determination shall be made (a) by the chief executive officer of the
corporation or (b) if the chief executive officer so directs or in his absence,
in the manner such determination would be made if the person were a director of
the corporation. (Last amended November 6, 1986)
Section 4. Advancement of Defense Expenses. The corporation may pay for
or reimburse the reasonable expenses incurred by a director, officer, or
employee who is a party to a proceeding described in Section 1 or 2 of this
Article in advance of the final disposition of said proceeding if:
(a) the director, officer, or employee furnishes the corporation a
written affirmation of his good faith belief that he has met the
standard of conduct described in Section 1 or 2; and
(b) the director, officer, or employee furnishes the corporation a
written undertaking, executed personally or on his behalf, to repay the
advance if it is ultimately determined that the director, officer or
employee did not meet the standard of conduct; and
(c) a determination is made that the facts then known to those making
the determination would not preclude indemnification under Section 1 or
2.
The undertaking required by this Section must be an unlimited general obligation
of the director, officer, or employee but need not be secured and may be
accepted by the corporation without reference to the financial ability of such
person to make repayment. (Last amended November 6, 1986)
Section 5. Non-Exclusiveness of Indemnification. The indemnification
and advancement of expenses provided for or authorized by this Article does not
exclude any other rights to indemnification or advancement of expenses that a
person may have under:
(a) the corporation's articles of incorporation or bylaws;
(b) any resolution of the board of directors or the shareholders of the
corporation;
(c) any other authorization adopted by the shareholders; or
(d) otherwise as provided by law, both as to such person's actions in
his capacity as a director, officer, or employee of the corporation and
as to actions in another capacity while holding such office.
Such indemnification shall continue as to a person who has ceased to be a
director, officer, or employee, and shall inure to the benefit of the heirs and
personal representatives of such person. (Last amended November 6, 1986)
ARTICLE IX
Amendments
These bylaws may be altered, amended or repealed and new bylaws may be
made by a majority of the whole board of directors at any regular or special
meeting of the board of directors. (Amended effective May 11, 1978)
PC DOC No. 52160
Exhibit 10(c)
- -94-
Salary Continuation Plan for Executives of
Lincoln National Corporation and Affiliates
as amended through January 1, 1992
Section 1. History and Effective Date. The following provisions
constitute an amendment, restatement, and continuation of the Salary
Continuation Plan for Executives of Lincoln National Corporation and
Affiliates (the "Plan").
Section 2. Purpose. The Plan was established because certain
highly-compensated employees ("Executives") have been and will be key persons in
the successful operation of the Company and other Employers. Lincoln National
Corporation (the "Company") desires (a) to assure that it will have the benefit
of the Executives' services until retirement; and (b) after termination of
service, but prior to age 65, to retain the Executive's exclusive consultative
services. The Company and each Affiliate (as defined below) which with the
consent of the Chief Executive Officer of the Company has adopted or hereafter
adopts the Plan are referred to below collectively as the "Employers" and
individually as an "Employer." The term "Affiliate" means any corporation 50
percent or more of the voting stock of which is owned, directly or indirectly,
by the Company.
Section 3. Employees Eligible to Participate. Individuals from a select
group of highly- compensated employees shall be eligible to participate in the
Plan as determined by the Chief Executive Officer of the Company. Such an
eligible employee who participates in the Plan is hereinafter called
"Executive".
Section 4. Effective Date of Executive's Participation. The Plan shall
become effective for an Executive on the date specified in the Joinder Agreement
signed by the Executive and agreed to by the Company.
Section 5. Amount of Salary Continuation Benefit. The amount of salary
continuation benefit shall be based on 2% of the Executive's final monthly
salary multiplied by the total number of years of participation in the Plan up
to a maximum of 10% of the Executive's final monthly salary. An Executive's
final monthly salary shall be that monthly rate of salary which is being paid at
termination of service unless the Executive retires after age 65, in which case,
the final monthly salary shall be the monthly rate of salary which is being paid
at the time the Executive attains age 65. Effective January 1, 1992, the maximum
final monthly salary used to calculate the Salary Continuation Benefit shall be
the greater of $16,667.00 and the monthly salary in effect on December 31, 1991.
Years of participation shall be counted beginning with the effective date of an
Executive's Participation as described in Section 4. A year of participation
shall be a 12 month period beginning with the Executive's effective date of
participation and ending with the day preceding the first anniversary of such
effective date. Each succeeding 12 month period of participation shall be
counted as a year of participation in the Plan. An Executive who does not have
five full years of participation in the Plan and who retires while participating
will be granted a full year of participation for any final partial year.
Section 6. Salary Continuation Benefits upon Retirement at or after Age
65. Upon retirement at or after age 65, the Company or the Affiliate for which
the Executive last performed services, agrees to pay salary continuation
benefits to the Executive in the amount calculated in Section 5.
Section 7. Salary Continuation Benefits upon Retirement prior to Age
65. Upon retirement prior to age 65 and under circumstances entitling him to
receive retirement benefits in accordance with the provisions of the Company's
employees' retirement plan, the Company agrees to pay salary continuation
benefits to the Executive. The amount of such benefit shall be the amount
calculated in Section 5, actuarially reduced in accordance with the following
table and with such linear interpolations as shall in the sole discretion of the
Company be necessary to take into account the exact age (including fractions) of
the Executive at the date of retirement:
Applicable Factor Applicable Factor Applicable Factor
If Executive Has At If Executive Has If Executive Has Less
Least 25 Vesting Yrs 20-25 Vesting Yrs Than 20 Vesting Yrs
Executive's of Service Under the of Service Under the of Service Under the
Age at Company's Employees' Company's Employees' Company's Employees'
Retirement Retirement Plan Retirement Plan Retirement Plan
65 1.00 1.00 1.00
64 1.00 .92 .91
63 1.00 .85 .83
62 1.00 .79 .75
61 .95 .74 .67
60 .90 .70 .60
59 .85 .66 .55
58 .80 .62 .50
57 .75 .58 .45
56 .69 .54 .40
55 .63 .50 .35
Section 8. Method and Duration of Payment of Benefits. Benefit payments
under Sections 6 and 7 shall be made on the first day of the first calendar
month following the date of retirement and on the first day of each calendar
month thereafter so long as the Executive shall live; provided, however, that
in no event shall the Company make less than one hundred twenty (120) such
payments, whether to the Executive or to the Beneficiary.
Section 9. Death Benefit Before Retirement and Before Age 65. For Executives
who signed a Joinder Agreement on or before December 31, 1991, if the Executive
dies prior to termination of service and prior to attaining age 65, all of the
rights of the Executive hereunder shall terminate, except that the Beneficiary
shall receive a payment equal to 25% of the Executive's annual rate of salary,
immediately upon receipt by the Company of satisfactory proof of death, and an
equal amount thereafter on the yearly anniversary of the Executive's death until
the Executive, if alive, would have attained age 65, and until a total of at
least ten (10) payments have been made. Effective January 1, 1992, the annual
salary used to calculate the death benefit shall not exceed the greater of
$200,000 and the annual salary in effect on December 31, 1991.
Section 10. Death Before Retirement but After Age 65. If the Executive dies
before retiring but after attaining age 65, all rights of the Executive
hereunder shall terminate except that upon receipt of satisfactory proof of the
Executive's death immediately there shall be paid to the Beneficiary and
thereafter paid on the monthly anniversary of the Executive's death, an amount
calculated in accordance with Section 5 for an aggregate of one hundred twenty
(120) payments.
Section 11. Death After Retirement. If the Executive dies after retiring and
prior to receiving one hundred twenty (120) salary continuation benefit
payments, payments to the Beneficiary shall be continued, if living, until
combined payments to the Executive and the Beneficiary shall total one hundred
twenty (120) payments.
Section 12. Payments to an Estate. If the Executive fails to designate a
valid Beneficiary in the Joinder Agreement or if there is no designated
Beneficiary surviving the Executive, then any remaining payments due shall be
commuted and paid to the Executive's estate. If the Beneficiary shall die after
receiving one or more payments, but before all payments have been made, any
remaining payments shall be commuted and paid to such Beneficiary's estate.
Section 13. Voluntary Termination of Service. If the Executive voluntarily
terminates employment with the Company and all Affiliates
(a) prior to attaining age 55, or
(b) after attaining age 55, but prior to attaining 65 and completing 5 years
of service, neither the Executive nor any Beneficiary shall be entitled
to any benefits under this Plan.
Section 14. Involuntary Termination of Service. If the Executive
involuntarily terminates employment with the Company and all Affiliates
primarily from circumstances not within the control of the Executive, but other
than by death, disability or for cause, and if he continues to provide exclusive
consultative services after such termination of employment, his salary
continuation benefit shall be paid to the Executive beginning on the first day
of the first calendar month following the date the Executive reaches age 65 and
on the first day each calendar month thereafter so long as the Executive shall
live; provided, however, that after payments begin at age 65, in no event shall
the Company and all Affiliates make less than one hundred twenty (120) such
payments, whether to the Executive or to the Beneficiary. If the terminated
Executive dies before age 65, no benefit shall be paid under this Plan.
Section 15. Termination of Service After a Change In Control of the Company.
In the event of a voluntary or involuntary termination of service of the
Executive within two years subsequent to a change in control of the Company, as
defined in the LNC Executive Severance Benefit Plan, in effect immediately
preceding such change in control, such Executive shall be treated as continuing
employment with the Company until age 65, and the conditions for benefits in
Section 16, below, shall not apply.
Section 16. Conditions for Benefits. In the event of an Executive's
involuntary termination of service, all benefits as provided in this Plan shall
be forfeited if the Executive fails to act, directly or indirectly, as an
exclusive consultant to the Company until age 65; provided, however, that the
Company may waive the requirements in this Section 16 in a written document
signed by its Chief Executive Officer.
Section 17. No Right or Title to Funds. The Company shall have no obligation
to set aside, earmark, or entrust any fund, policy, or money with which to pay
any obligations under this Plan. The Executive, and any successor in interest to
him, shall be and remain simply a general creditor of the Company with respect
to any promises to pay under this Plan in the same manner as any other creditor
who has a general claim for an unpaid liability. Neither the Executive nor any
Beneficiary shall acquire any right in or title to any funds or assets of the
Company otherwise than by and through the actual payment of the monthly or
annual payments hereunder. The Company shall not make any loans or extend credit
to an Executive which will be offset by benefits payable under this Plan.
Section 18. Definitions and Rules of Construction. Except where the
context clearly indicates to the contrary, the following terms have the
meanings specified:
(a ) "Beneficiary" means the beneficiary or beneficiaries designated in the
Joinder Agreement by the Executive. The designation of beneficiary by the
Executive in the last Joinder Agreement executed prior to death shall
control. Payments under this Plan to the last designated beneficiary or his
estate shall relieve the Company from all responsibility to any beneficiary
designated in a prior Joinder Agreement.
(b) "Joinder Agreement" means the document agreed to by the Company by which
the Executive affirmatively demonstrates a desire to participate in the Plan
according to the terms and conditions herein and designates a Beneficiary.
(c) The pronouns "he" and "his" include the other gender.
(d) The terms "herein," "hereof," and "hereunder" refer to the Plan in its
entirety.
(e) This Plan may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
(f) The headings in this Plan are for purposes of reference only and shall
not limit or otherwise affect any of the terms hereof.
Section 19. No Assignments, etc. Neither the Executive nor a Beneficiary,
shall have power to transfer, assign, anticipate, mortgage or otherwise encumber
in advance any of the payments provided by this Plan; nor shall said payments be
subject to seizure for the payment of any debts, judgments, alimony or separate
maintenance, or be transferable by operation of law in event of bankruptcy,
insolvency or otherwise. Upon the occurrence of any event in violation or
attempted violation of this provision, any payments thereafter payable hereunder
shall, in the sole and uncontrolled discretion of the Company, be subject to
cancellation; whereupon, the Company may, but need not, make such payments to
someone else deemed by it to be a natural object of the bounty of the Executive,
and such payments shall relieve the Company and all Affiliates of any further or
other obligation hereunder.
Section 20. Amendment, Suspension or Termination of Plan. This Plan may be
amended or terminated at any time and from time to time by the Company without
an Executive's consent, but no amendment shall operate to give the Executive, or
his Beneficiary, either directly or indirectly, any interest whatsoever in any
funds or assets of the Company and any Affiliates, except the right upon
fulfillment of all terms and conditions hereof to receive the payments herein
provided. Likewise, no amendment, suspension or termination of this Plan shall,
in and of itself, result in the forfeiture of any salary continuation benefit
promise accrued to an Executive who is in the active employment of the Company
at such time or to an Executive who's service has been involuntarily terminated
as described in Section 14 and no amendment, suspension or termination of this
Plan shall operate to reduce or diminish any benefit after payment of such
benefit has begun.
Section 21. No Effect on Employment. This Plan shall not supersede any other
contract of employment, whether oral or in writing, between the Company, its
Affiliates and the Executive, nor shall it affect or impair the rights and
obligations of the Company and the Executive, respectively, thereunder; and
nothing contained herein shall impose any obligation on the Company to continue
the employment of the Executive.
IN WITNESS WHEREOF, the Company has caused its name to be subscribed to this
amendment, restatement, and continuation.
LINCOLN NATIONAL CORPORATION
By _________________________
Ian M. Rolland, Its Chairman
Lincoln National Corporation
Salary Continuation Plan for Executives Joinder Agreement
I, _______________________________________, ("Executive") hereby agree to
the terms and conditions of the Salary Continuation Plan for Executives of
Lincoln National Corporation and Affiliates ("the Plan"), as amended through
January 1, 1992, and as it may be amended, and request participation thereunder
effective as of ___________________________, 19 __.
I acknowledge that the Company is under no obligation to continue the Plan
and that being a participant thereunder in no way guarantees my employment.
Until further notice, I request that any death benefits be payable to:
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address Relationship
- --------------------------- ------------------------------
Date Signature of Executive
Lincoln National Corporation agrees to the terms and conditions of the Plan
and participation in that Plan by the Executive and acknowledges his/her request
for participation this ________ day of ____________________________, 19 __.
LINCOLN NATIONAL CORPORATION
By __________________________
Title _______________________
PCDocs No. 44128\1
Exhibit 10(g)
- -100-
Lincoln National Corporation
Compensation and Benefits Highlights
for the Board of Directors
This brochure explains the comprehensive compensation and benefits package
currently available to you as an outside director of Lincoln National
Corporation or The Lincoln National Life Insurance Company. It includes
information on your retainer and meeting fees, deferred compensation, retirement
benefit, health and life insurance coverages, and other items. It is intended to
serve as a reference and as an aid to your personal financial planning.
This information is intended to be a summary only. More detailed information on
the provisions of the various plans is contained in several documents and will
be supplied upon request.
Retainer and Meeting Fees
Your current annual retainer as a director of the Lincoln National board is
$23,000.
In addition, for each board meeting and committee meeting you attend, you
receive a $1,000 fee. If a committee meeting takes place on the same day as a
board meeting, you receive two $1,000 fees. If two committee meetings of
substantially similar nature are attended on one day only one $1,000 fee is
paid.
Your retainer and meeting fees are paid to you at the end of each quarter.
Expense Reimbursement
You will receive reimbursement for reasonable business expenses associated with
board meetings and activities. These expenses include transportation, hotel
accommodations, parking, meals and other necessary expenses.
Deferred Compensation Plan
As an outside director you have an opportunity to defer part or all of your
annual fees (retainer and meeting) for succeeding calendar years.
On or before December 31 of a year you may make this election for the following
year and subsequent years. An election to defer fees shall continue from year to
year unless you terminate it in writing. No amount deferred will be paid until
you cease to be a director.
Amounts deferred under the plan, together with accumulated interest, are
distributable either as a lump sum within 30 days after you cease being a
director, or in equal annual installments over a 10-year period beginning with
January 1 of the calendar year immediately following the year in which you cease
being a director.
Provisions are also available for you to direct payments to your designated
beneficiary in the event of your death either while a director or after you've
ceased being a director.
Retirement Plan
When you cease being an outside director, you will be eligible to receive a
monthly retirement benefit equal to one twelfth of the product of .833% of the
annual retainer in effect on your retirement date, multiplied by the number of
months you served as a director (maximum of 120 months).
The normal form of payment is a single life annuity, but the following optional
forms are available on an actuarially equivalent basis: a lump sum distribution
or a life annuity with a 50% spouse's survivor annuity.
Payments will begin on the first day of the month following your resignation or
retirement from the board.
Travel Accident Insurance Plan
Any time you or your spouse is traveling at Lincoln National expense, you are
each covered by $100,000 of travel accident insurance. This coverage is provided
to you at no cost.
The full $100,000 amount is payable to your designated beneficiary for the
accidental loss of life, and to you for the accidental loss of both hands or
both feet, the loss of your sight of both eyes or any combination thereof, or
for the loss of your speech or hearing.
One half the full amount is paid for the loss of one hand, one foot, the sight
of one eye, or for the loss of speech or hearing. One fourth the full amount is
paid for the loss of the thumb and index finger of either hand.
If more than one loss is sustained from an accident, only one amount, the
largest, will be paid.
Liability Insurance
Under the company's bylaws, the company will indemnify you to the fullest extent
permitted by law if you are made a party to any suit or proceeding by reason of
the fact that you are or were a director.
You are also insured against liability caused by breeches of duty, negligent
acts or errors of omission while acting in your capacity as a director of
Lincoln National. Coverage of up to $50 million is currently provided.
The liability insurance is subject to certain exclusions, as stated in the
policies.
Medical, Dental and Life Insurance Coverage
Choices in various levels of life insurance and medical and dental coverage are
available to you. You may choose coverage under one, two or all three of the
benefit plans. Premium deductions for any coverages you select will be made at
the end of each quarter from your director fees. Every year you will have an
opportunity to change your life and health selections.
The Medical Plan
You may choose from three medical options: Medical 150, Medical 300 and Medical
600.
All three options cover the same services and pay 80% of eligible expenses after
the deductible has been met. They differ in the cost of the coverage and in your
total out-of-pocket expense. The options also have three coverage cost levels
relating to the number of persons you cover.
The medical plan covers such expenses as hospital room and board, doctor and
surgeon fees, inpatient hospital services, X-rays and lab tests, drugs and
medicines, medical supplies, and outpatient services.
The Dental Plan
You may choose from two dental plan options: Dental 50 and Dental 100.
Both options cover the same services and differ only in the cost and level of
expenses you may have to pay. Covered services include preventive care, basic
restorative care, major restorative care and orthodontia.
The dental plan pays either 80% or 50% after the deductible, depending upon the
type of treatment. The deductible is applied only to basic restorative and major
restorative treatments.
Life Insurance
The life insurance plan offers you coverage of either 1, 2, 3 or 4 times your
annual retainer. Such amount is payable to your designated beneficiary. This is
group term insurance with no cash value, and the cost is age-related.
If you select life insurance, you are also covered by accidental death and
dismemberment insurance. If your death is the result of an accident, your
beneficiary will also receive an AD&D benefit equal to your life insurance
benefit. The AD&D coverage will also pay all or a portion of the benefit if you
receive certain injuries, such as loss of a limb or eyesight, as a result of an
accident.
Matching College Contributions Program
Under Lincoln National's Matching College Contributions Program, the company
will match contributions between the amounts of $50 and $2,000 annually that you
make to certain educational institutions. Eligible institutions are private and
state-supported colleges and universities and their foundations and alumni
funds. Only those U.S. educational accredited institutions listed in
"Accredited Institutions of Postsecondary Education" are eligible for matching
funds. Not eligible are gifts to seminaries and any non-academic programs (such
as radio and television stations and athletic activities). The contributions
must be used for general operating needs, scholarships or capital improvements.
A Matching College Contribution form can be obtained from the Corporate
Secretary's office. To apply for a match, please complete the form and mail it
along with your gift to the college. Gifts will be matched in the year made and
until April 30 of the following year.
PCD66778
Exhibit 10(h)
- -103-
LINCOLN NATIONAL CORPORATION
DIRECTORS' VALUE SHARING PLAN
(Including All Amendments Through May 15, 1997)
ARTICLE I - PURPOSE OF PLAN
1.1 Establishment of Plan. Lincoln National Corporation (the
"Corporation") adopts the Directors' Value Sharing Plan (the "Plan") to provide
the benefits specified in the Plan for members of the Board of Directors of the
Corporation who are not employees of the Corporation or any of its affiliates or
subsidiaries ("Non-Employee Directors").
1.2 Purpose of the Plan. The purpose of the Plan is to provide
Non-Employee Directors with an increased economic interest in the Corporation in
order to attract and retain well-qualified individuals to serve as Non-Employee
Directors and to enhance the identity of interests between Non-Employee
Directors and the shareholders of the Corporation.
The Corporation intends that its Non-Employee Directors' Base
Compensation (i.e., retainer and meeting fees) approximate the median of that
for peer companies within the industry. The Plan is designed to provide
additional compensation to Non-Employee Directors linked to overall return to
the Corporation's shareholders.
The Plan increases the Non-Employee Directors' financial interest in
the Corporation through the payment of stock units based on:
1) Performance of the Corporation's stock relative to a group
of peer companies, and
2) Service on the Board.
ARTICLE II - ELIGIBILITY AND PARTICIPATION
All Non-Employee Directors are eligible and shall participate in the
Plan in accordance with the terms and conditions set forth herein.
ARTICLE III - VALUE SHARING AWARD: STOCK PERFORMANCE
3.1 Stock Units. At the end of (i) the one-year period ending December
31, 1996; (ii) the two-year period ending December 31, 1997; and (iii) the
three-year period ending December 31, 1998 and each succeeding three-year period
ending annually thereafter (each such period, a "Performance Cycle"), the
Corporation shall award each Non-Employee Director a whole number of stock units
(the "Stock Units"), as determined under Section 3.2, in consideration for
services rendered as a Non-Employee Director. Each Stock Unit shall represent
an unfunded, unsecured obligation of the Corporation to pay an amount equal to
the fair market value of a share of common stock of the Corporation ("Stock"),
determined as of any business day by averaging the high and low sales price of
the Stock quoted on the New York Stock Exchange Composite Listing on the
preceding business day on which there were such quotations for the day in
question.
3.2 Calculation of Stock Unit Award. The number of Stock Units awarded
to each Non-Employee Director at the end of each Performance Cycle shall be
based on the total shareholder return on the Stock as compared with that of the
peer companies set forth in Exhibit A (the "Peer Companies") for that
Performance Cycle. For purposes of this Section 3.2, the Corporation's total
shareholder return shall be equal to the appreciation in the value of Stock
times the accumulated number of shares held at the end of the Performance Cycle
divided by the value of Stock at the beginning of the Performance Cycle. The
accumulated number of shares is the sum of the shares acquired through the
purchase of fractional shares by reinvesting the quarterly cash or
cash-equivalent dividends in Stock, plus the original share of Stock. The value
of Stock at the beginning of the Performance Cycle is the average of the closing
prices of Stock on the last trading date of October, November, and December
prior to a Performance Cycle beginning January 1. The value of Stock at the end
of the Performance Cycle is the average of the closing price of Stock on the
last trading date of October, November, and December for a Performance Cycle
ending December 31.
The total shareholder return for each Peer Company shall be calculated
in the same manner. For purposes of the awards below, Peer Company Average
Return, Top Tier Shareholder Return, and Top Company Shareholder Return are
calculated as follows:
Peer Company Average Return. The Peer Companies producing the 3 highest
and the 3 lowest shareholder returns in the Peer Companies shall be disregarded
for purposes of determining the Peer Company Average for each Performance Cycle.
The Peer Company Average for the Performance Cycle shall be computed by
averaging the shareholder total returns of the companies ranked fourth highest
through eleventh highest.
Top Tier Shareholder Return. The Top Tier Shareholder Return for each
Performance Cycle shall be determined by averaging the companies contained in
the Peer Company ranked third, fourth, and fifth highest in terms of Shareholder
Return.
Top Company Shareholder Return. The Top Company Shareholder Return for
each Performance Cycle shall equal the greatest shareholder return of the Peer
Companies during that Cycle.
ARTICLE IV - VALUE SHARING AWARD: BOARD SERVICE
4.1 In addition to the awards based on stock performance described in
Article III, the Corporation shall award Stock Units in lieu of participation in
any pension or other retirement program of the Corporation to each Non-Employee
Director who on or before March 31, 1996, waived any entitlement under (or who
never becomes entitled to benefits under) such a program.
4.2 The number of such Stock Units to be granted each eligible Director
shall be determined by (i) calculating the dollar amount (the "Level Funding")
required to fund in equal quarterly payments over the Calculation Period
(defined below) a notional lump sum amount payable as of age 70 of .185 of the
current annual retainer multiplied by the number of quarters in the Calculation
Period; and then (ii) applying the provisions of 4.3 through 4.9 of this Plan.
The Level Funding shall be calculated assuming such payments were credited at
the end of each calendar quarter commencing on the later of April 1, 1986, or
the beginning of the calendar quarter which includes the date on which the
individual first became a Non-Employee Director and terminating at the end of
the Calculation Period and assuming an effective annual interest rate of 7.5%
during the Calculation Period and during the period from the end of the
Calculation Period to age 70. The Calculation Period shall be a period equal to
the lesser of forty calendar quarters or the number of calendar quarters
commencing with the calendar quarter which includes the date on which the
individual's service as a Non-Employee Director began and ending with the
calendar quarter immediately preceding the calendar quarter during which
attainment of age 70 occurs. (See Exhibit B.)
4.3 An initial grant of stock units shall be made to each Non-Employee
Director who has waived benefits as provided in 4.1 above by calculating (i) the
dollar amount that would have accumulated had such Level Funding outlined in
4.2(i) above taken place during the period beginning the later of April 1, 1986
or the quarter which includes the date the individual became a Non-Employee
Director and ending on March 31, 1996, including interest at 7.5% and dividing
this amount by (ii) the value of a share of Stock determined in the manner set
forth in 3.1 above (the "Stock Value") on March 31, 1996.
4.4 For an individual who as of March 31, 1996 has served as a
Non-Employee Director for a period equal to or greater than the Calculation
Period, the initial grant as described in 4.3 above shall constitute the entire
basic Board Service Value Sharing Award and shall be supplemented by additional
Board Service grants only as provided in 4.6 below.
4.5 For a Non-Employee Director who as of March 31, 1996 has not served
as a Non-Employee Director for a period equal to or greater than the Calculation
Period, the Corporation shall continue to make grants of Stock Units at the end
of calendar quarters beginning April 1, 1996, and thereafter equal to the Level
Funding amount calculated under 4.2(i) divided by the Stock Value as of the date
of grant until grants have been made for each of the remaining quarters in the
Calculation Period during which the individual continues to serve as a
Non-Employee Director.
4.6 To the extent that the current annual retainer payable to
Non-Employee Directors is increased in any year, each Non-Employee Director
serving for such year shall also receive a grant of Stock Units equal to (i)
.185 of the dollar amount of such increase times the number of quarters (to a
maximum of forty) then served as a Non-Employee Director discounted at 7.5%
interest from the Non-Employee Director's age 70 to the last day of the quarter
during which such increase in retainer occurred, divided by (ii) the Stock
Value as of the last day of the quarter in which such increase in retainer
occurred.
4.7 For a Non-Employee Director who, as of the date any increase in
retainer occurs, has not served as a Non-Employee Director for a period equal to
or greater than the Calculation Period, the amount of any quarterly payment made
in quarters following the quarter during which the increase in retainer occurred
will be increased to an amount equal to the then current quarterly payment times
the ratio of the new retainer to the then current retainer.
4.8 The beneficiary of a Non-Employee Director who dies while serving
as a Non-Employee Director and who prior to March 31, 1996, waived his or her
rights under any pension or retirement plan as provided in 4.1 above shall be
entitled to receive an additional amount credited to his or her Account equal to
the amount by which (i) the lump sum death benefit which would have been payable
under the Lincoln National Corporation Directors' Retirement Plan had the
Non-Employee Director continued to participate in that plan until his or her
date of death exceeds (ii) the value as of the date of his or her death of the
Stock Units calculated under the provisions of 4.2 through 4.7 and the Dividend
Equivalent Payments provided by Article VI attributable to such Stock Units. No
additional amount shall be credited under 4.8 if 4.8(ii) exceeds 4.8(i).
4.9 In no event shall grants under this Article IV be increased or
decreased to reflect increases or decreases in Stock Value subsequent to the
date of grant.
ARTICLE V - STOCK UNIT TERMS AND CONDITIONS
Stock Units shall be represented by and recorded in a bookkeeping
account set up in each Non-Employee Director's name (the "Account"). The
following terms and conditions shall apply to Stock Units: (i) a Dividend
Equivalent Payment, as defined in Article VI below, shall be credited to the
Account and shall have the same terms and conditions as the Stock Units; (ii)
none of the Stock Units may be sold, transferred, assigned, pledged, or
otherwise encumbered or disposed of; and (iii) the Stock Units and Dividend
Equivalent Payments shall vest on the date the Non-Employee Director ceases to
be a Director of the Corporation.
ARTICLE VI - DIVIDEND EQUIVALENT PAYMENTS
As of each dividend payment date with respect to Stock, each
Non-Employee Director shall be awarded a Dividend Equivalent Payment
equal to the product of (i) the per share cash dividend payable with
respect to each share of Stock on such date; and (ii) the total number
of Stock Units and Dividend Equivalent Payments credited to the
Non-Employee Director's Account, as of the record date corresponding to
such dividend payment date, divided by the fair market value. The Dividend
Equivalent Payments are subject to the restrictions specified in Article V.
ARTICLE VII - PAYMENT OF BENEFITS
As soon as practicable following the date the Non-Employee Director
ceases to be a director of the Corporation (the "Date"), the Corporation shall
pay to the Non-Employee Director (or his or her designated beneficiary) an
amount equal in value to the Stock Units and Dividend Equivalent Payments
credited to his or her Account in a lump sum valued as of the Date. In lieu of a
lump sum, at age 70 or after, a Director who has so elected may receive payments
in annual installments over a 5, 10 or 15 year period.
ARTICLE VIII - ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event of a Stock dividend, Stock split or combination,
reclassification, recapitalization or other capital adjustment of shares of
Stock, the number of Stock Units and the amount of Dividend Equivalent Payments
credited to Accounts shall be appropriately adjusted by the Board of Directors
of the Corporation, whose determination shall be final, binding and conclusive.
The award of Stock Units pursuant to this Plan shall not affect in any way the
right or power of the Corporation to issue additional Stock or other securities,
to make adjustments, reclassification, reorganizations or other changes in its
corporate, capital or business structure, to participate in a merger,
consolidation or share exchange or to transfer its assets or dissolve or
liquidate.
ARTICLE IX - TERMINATION OR AMENDMENT OF PLAN
9.1 In General. The Board of Directors of the Corporation may at any
time terminate, suspend or amend this Plan.
9.2 Written Consents. No amendment may, without the written consent of
such Non-Employee Director, adversely affect the right of any Non-Employee
Director to receive any Stock Units or any Dividend Equivalent Payments
previously awarded.
ARTICLE X - GOVERNMENT REGULATIONS
The obligations of the Corporation under this Plan shall be subject to
all applicable laws, rules and regulations and the obtaining of all such
approvals by government agencies as may be deemed necessary or appropriate by
the Board of Directors of the Corporation.
ARTICLE XI - MISCELLANEOUS
11.1 Unfunded Plan. The Plan shall at all times be entirely unfunded.
Any Account established and maintained under the Plan is solely for accounting
purposes and shall not require a segregation of any assets of the Corporation. A
Non-Employee Director's right to receive any payment under this Plan shall be no
greater than the rights of an unsecured general creditor of the Corporation.
11.2 Assignment; Encumbrances. Stock Units and Dividend Equivalent
Payments under this Plan are not assignable or transferrable and shall not be
subject to any encumbrances, liens, pledges or charges of the Non-Employee
Director or his or her creditors. Any attempt to assign, transfer or hypothecate
any Stock Units or Dividend Equivalent Payments shall be void and of no force
and effect whatsoever.
11.3 Applicable Law. This Plan shall be governed by the laws of the
State of Indiana to the extent not preempted by Federal law.
11.4 Headings. The headings in this Plan are for reference purposes
only and shall not affect the meaning or interpretation of this Plan.
11.5 Plan Administration. The Plan shall be administered by a DVSP
Administration Committee (the "Committee"). At any date, the members of the
Committee shall be those members of the Nominating and Governance Committee of
the Board of Directors who are Non- Employee Directors as such term is defined
in Section 16 of the Securities Exchange Act of 1934, as it may be amended from
time to time. The Committee may not exercise its authority at any time there are
less than 2 members. The Committee shall exercise its authority only by a
majority vote of its members at a meeting or by a writing without meeting.
ARTICLE XII - EFFECTIVE DATE OF PLAN
This Plan shall become effective as of January 1, 1996.
PCDocs No. 5580\4
June 10, 1997
EXHIBIT A
Peer Group Designations
The following companies shall compose the Peer Group of companies for
Performance Cycles beginning in 1996:
Allstate Corp. ReliaStar(formerly The NWNL Cos.)
First Colony Corp. Provident Life & Accident Ins. Co.
American General Corp. SAFECO Corp.
Providian Corp. Transamerica Corp.
(formerly Capital Holding Corp.) The Equitable Companies, Inc.
Torchmark Corp. USLIFE Corp.
CIGNA Corp.
Traveler's Inc.
USF&G Corp.
Alternates:
1. Equitable of Iowa Companies
2. Reinsurance Group of America, Inc.
3. Western National Corp.
4. SunAmerica, Inc.
The following companies shall compose the Peer Group of companies for
the 1997-1999 Performance Cycle:
Allstate Corp. ReliaStar
Equitable of Iowa Provident Life & Accident Ins. Co.
American General Corp. SAFECO Corp.
Reinsurance Group of America Transamerica Corp.
Torchmark Corp. The Equitable Companies, Inc.
CIGNA Corp. Sun America
Traveler's Inc.
USF&G Corp.
Alternates:
1. Protective Life
2. Western National Corp.
If, as a result of a (1) merger, (2) consolidation, (3) liquidation,
(4) similar corporate reorganization or restructuring, (5) insolvency, or (6)
takeover, any of the members of this Peer Group of companies ceases to exist as
a publicly-held corporation or if a Peer Group Company's primary business
changes, the company so affected (the "terminated company") shall cease to be a
member of the Peer Group, effective as of the beginning of the year during which
such event occurred. In such event, the First Remaining company contained in the
Alternate list shall replace the terminated company, provided that such
designation shall be effective only beginning with the year during which the
terminated company was removed. In the case of a terminated company and its
related replacement company, the total shareholder return over the Performance
Cycle shall be the compounded return of the two companies using the total
shareholder return from the year(s) each was deemed to be part of the Peer
Group. If it is necessary to replace more than one company during any year, a
replacement company is paired with a terminating company based on the first
company available from the Alternate list and the earliest date at which one of
the terminating companies was deemed to cease to exist or changed its primary
business.
EXHIBIT B
DVSP Board Service Quarterly Contribution
Calculated for $30,000 Retainer at 7.5% Interest
Calculation
Become Period
Director Quarterly
at Age Contribution
69 5,400
68 5,205
67 5,015
66 4,829
65 4,649
64 4,473
63 4,302
62 4,136
61 3,974
60 3,817
59 3,551
58 3,303
57 3,073
56 2,858
55 2,659
54 2,473
53 2,301
52 2,140
51 1,991
50 1,852
49 1,723
48 1,603
47 1,491
46 1,387
45 1,290
44 1,200
43 1,116
42 1,039
41 966
40 899
39 836
38 778
Exhibit 10(i)
- -111-
LINCOLN NATIONAL CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN FOR EMPLOYEES
Amended Effective May 1, 1996
This Lincoln National Corporation Executive Deferred Compensation
Plan for Employees is established by Lincoln National Corporation
("LNC").
Section 1: Definitions
The following definitions are provided for key terms contained
within this document:
1.01. Account. The term "Account" refers to a separate deferred
compensation account established by the Employer in the name
of each Participant.
1.02. Beneficiary. The word "Beneficiary" refers to an individual
designated by the Participant to receive certain benefits
enumerated in this Plan.
1.03. Benefits Administrator. The "Benefits Administrator" shall be
the LNC Senior Vice President of Human Resources.
1.04. Bonus. The term "Bonus" refers to an amount calculated by
reference to the Lincoln National Management Incentive Plan
("MIP"), the LNC Executive Value Sharing Plan ("EVSP"), the
American States Insurance Companies Sustained Performance
Incentive Plan for Senior Management, the American States'
Executive Performance Incentive Compensation Plan ("EPIC"), or
any similar bonus plan currently in effect or which may be
adopted by Employers in the future.
1.05. Change in Control. A "Change in Control" means that LNC has
had a change of control as that term is defined in the LNC
Executives' Severance Benefit Plan, as in effect immediately
prior to Change of Control. This definition shall always be
identical to the definition of "Change in Control" contained
in the LNC Executives' Severance Benefit Plan (or any
successor plan). Any amendment of the definition contained in
the LNC Executives' Severance Benefit Plan (or any successor
plan) shall be deemed an amendment of the definition of Change
in Control contained in this Plan. Furthermore, in the event
of a "Change in Control" the term "Change in Control" shall
have the definition which was operative on the day immediately
preceding that event.
1.06. Compensation. For purposes of the Plan, "Compensation" means
the basic cash compensation paid or payable to Participant by
the Employer at regular intervals, plus the amounts by which
such compensation is reduced pursuant to the Participant's
voluntary election, but excluding bonuses, overtime earnings,
service awards, and other special compensation.
1.07. Deferrals. The word "Deferrals" refers to the amount that a
Participant specifies in his or her Election to defer pursuant
to the terms and conditions of this Plan.
1.08. Election. The term "Election" refers to the act of the
Participant of stating in writing that he or she intends to
participate in the Plan for the calendar year following the
year of the execution of the Election.
1.09. Employer(s). The term "Employer" when used in the singular
refers to LNC or any individual Subsidiary and when used in
the plural (Employers) refers to LNC and all subsidiaries
collectively.
1.10. 401(k) Plan. The phrase "401(k) Plan" refers to the LNC and
the American States Financial Corporation Employees' Savings
and Profit-Sharing Plans, either singly or together as the
context implies.
1.11. Hardship. "Hardship" shall mean an unforeseeable emergency to
the Participant resulting from a sudden and unexpected illness
or accident of the Participant or of a dependent (as defined
in Section 152(a) of the Internal Revenue Code of 1986, as
amended) of the Participant, loss of the Participant's
property due to casualty, or other similar extraordinary and
unforeseeable circumstances arising as a result of events
beyond the control of the Participant.
1.12. Insider. "Insider" means those individuals subject to the
short- swing profit recovery provisions of Section 16 of the
Securities Exchange Act of 1934.
1.13. LNCC. "LNCC" means the LNC Compensation Committee constituted
as described in the LNC Bylaws.
1.14. Match. The term "Match" refers to a contribution to the Plan
made by the Employer equal to (i) 6% of the Participant's
Compensation for such year multiplied by the percentage
specified in the 401(k) Plan for such calendar year
representing the Employer contribution, less (ii) the actual
Employer contribution to the 401(k) Plan pursuant thereto for
such calendar year, less (iii) the amount credited by the
Employer to the LNC Employees' Supplemental Savings and
Profit-Sharing Plan and to the American States' Supplemental
Savings and Profit-Sharing Plan on behalf of the Participant
for such calendar year, and, less (iv) any amount Employer
decides in its sole discretion to pay directly to Participant.
1.15. Match Units. "Match Units" means Units contributed pursuant
to the Match.
1.16. Paid Units. "Paid Units" means Units with respect to which
the Participant has paid the purchase price.
1.17. Participant. The word "Participant" refers to an employee who
is a member of a select group of management or highly
compensated employees of the Employers.
1.18. Plan. The word "Plan" refers to this LNC Executive Deferred
Compensation Plan for Employees.
1.19. Subsidiary. The term "Subsidiary" means any corporation of
which 50% or more of the voting stock is owned, directly or
indirectly, by LNC.
1.20. Unpaid Units. "Unpaid Units" means Units awarded to the
Participant and which are not vested.
1.21. Vested Units. "Vested Units" are Units awarded to the
Participant that are no longer subject to forfeiture.
Section 2: Eligibility, Participation, and Disbursements
This Plan is executed by Employers for the benefit of a select group
of management and highly compensated Participants, pursuant to which
Participants may elect to defer payment of a portion of Compensation
and/or Bonus under the Plan.
2.01. The Participant may elect to defer payment of a portion of his
or her Compensation under certain conditions hereinafter
provided; additionally, Participant may defer a portion of his
or her Bonus upon the terms and conditions hereinafter
provided.
2.02. The Employer shall have discretion to determine the
eligibility of employees to participate under this Plan
provided, however, that in order to be eligible, all
Participants must be members of a select group of management
or highly compensated employees of an Employer.
2.03. Subject to the terms of this Plan, the Participant and the
Employer may make the following types of annual Compensation
Deferrals for a calendar year:
a. The Participant may elect to defer a portion of
Compensation not to exceed 70% of such Participant's
annual Compensation;
b. Provided that the Participant has made Pre-Tax
Contributions to his or her 401(k) Plan in the maximum
amount permitted under the terms of the Plan for a
calendar year, the Employer shall provide a contribution
equal to the Match which will be invested in LNC Phantom
Stock if the Match is under the LNC 401(k) Plan or ASFC
Phantom Stock if the Match is under the ASFC 401(k) plan.
c. The Participant may elect to defer a specified amount of
Bonus which may be earned by the Participant during the
subsequent calendar year, and which is typically paid
within six (6) months after the close of the calendar
year to which the election relates.
d. To the extent that a Participant in the 401(k) Plan
reaches the contribution limit for that Plan, he or she
may elect to defer the additional amounts that otherwise
would have been placed in the 401(k) Plan into this Plan.
2.04. The Participant shall file an Election with the Employer in
the form attached hereto, which shall specify the timing and
amount of Deferrals, if any, to be made under the Plan by the
Participant for the prospective pay periods. The Participant
shall file an Election prior to the date that such
Compensation is earned. The amount deferred may be changed no
more frequently than annually and such change is only
effective for Compensation paid after the first day of the
next succeeding calendar year. An Election shall be
irrevocable for any calendar year, provided, however, that in
the case of a Hardship withdrawal from one of the 401(k)
Plans, the Participant's Election shall be automatically
revoked beginning with the first day of the next regularly
scheduled payroll period for the remainder of the calendar
year.
2.05. If a Deferral or a Match is made for any calendar year, the
Employer shall establish an Account in the name of the
Participant, to which shall be credited all Deferrals and
Matches made on behalf of such Participant. The Employer
shall also credit such Account with earnings which would
otherwise accrue if the Account were actually invested in the
investment options selected by the Participant from among the
options offered from time to time by the Employer, provided,
however, that any expenses incurred by an Employer (including
expenses for Federal and State income taxes) in connection
with such Participant's Account may be charged against the
Participant's Account. Additionally, Employer makes the
following representations concerning the investment options
available under the Plan:
a. Due care will be taken to assure that all Deferrals and
Matches are credited in proper proportions to sub-
accounts for the phantom investment options selected by
the Participant.
b. The phantom investment options available under this Plan
are those set forth on the specimen Form which forms
Appendix A of this Plan, including, but not limited to,
phantom stock units of LNC common stock. Employees of
American States Financial Corporation ("ASFC") and its
subsidiaries, may be permitted to specify phantom stock
units in ASFC common stock. To the extent such option
is made available, the characteristics of ASFC Phantom
Stock units shall have the same characteristics and be
valued in the same manner as LNC Phantom Stock Units as
described in the Plan.
c. With respect to the phantom stock units, no actual shares
of common stock will be issued directly or indirectly
under the Plan, and no voting or other rights of any kind
associated with the ownership of common stock shall inure
to any Participant by virtue of his/her entitlement to
phantom stock units under this Plan.
d. With respect to the other investment options currently
available under the Plan, Participants have no rights to
any assets of any of the funds arising from participation
in this Plan.
e. Participants may change investment option selections,
under conditions prescribed by the Benefits Administrator.
LNC reserves the right to eliminate, change, and add
investment options at any time. LNC is under no obligation
to offer any particular investment option, nor to effectuate
a selection by a Participant. Any selection shall be treated
by the Employer as a mere expression of investment preference
on the part of the Participant.
2.06. The Participant's Account shall be paid to the Participant (or
his or her Beneficiary) in one lump sum not later than thirty
(30) days following the earliest to occur of the Participant's
(a) death, (b) total disability, (c) termination of any and
all service with the Employer, or (d) solely in the case of
Participants providing services to an Employer in a country
other than the United States, such other period as determined
in the sole discretion of the Benefits Administrator.
2.07. Notwithstanding the provisions of Section 2.06, a Participant
may elect an option other than a lump sum payment prior to the
Participant's retirement or termination from service subject
to the restrictions contained in this Section 2.07. The
election must be made in writing, may be made no less than
twelve (12) months prior to the occurrence of the
Participant's termination of service with the Employer, and
must request an annuity payment option of a type offered by
The Lincoln National Life Insurance Company (LNL) to the
public. Under no circumstances shall this Section 2.07 be
used to enable a Participant to receive any part of his or her
Deferrals pursuant to this Plan prior to the earliest to occur
of Participant's death, disability, or termination of any and
all service with Employer. An election under this Section
2.07 shall become irrevocable once the Participant is within
twelve (12) months of termination.
2.08. Notwithstanding the provisions of Section 2.06, a Participant
may make separate elections to receive other than a lump sum
payment which shall be applicable in the event of the
Participant's death or disability prior to termination of
service with the Employer. Such elections must be made in
writing and shall under no circumstances require payments to
commence prior to twelve (12) months after the date of
execution of the election. An election made pursuant to this
Section 2.08 is irrevocable once made.
2.09. In the event that any legislative body shall pass a statute or
a regulatory body or court of competent jurisdiction shall
interpret any law to limit the deductibility of any amount
otherwise payable under this Plan, then such amount and
earnings thereon shall automatically be subject to additional
deferral as determined by the LNCC but not for more than five
(5) years until the Employer is permitted to claim a deduction
for amounts paid out pursuant to this Plan. If any amount is
deferred pursuant to this Section 2.09 for five (5) years,
then it shall be presumed that the amount will never be
deductible by the Employer and payments will commence pursuant
to this Plan as if the Participant had terminated from service
in the year of the determination that such amount shall never
be deductible.
2.10. If a Participant plans to voluntarily terminate from service
with Employer within twelve (12) months from the effective
date of this Plan, he or she may elect to further defer
payment by Employer beyond his or her termination date,
subject to the following terms and conditions. Such election
must be made in writing at least sixty (60) days prior to
Participant's termination date. The election shall specify an
alternative payment schedule in the form of an annuity of a
type currently offered by LNL. Payments made pursuant to such
an election shall not commence prior to either twelve (12)
months from the date of the election or within sixty (60) days
of the termination date of the Participant whichever is later.
An election made pursuant to this Section 2.10 is irrevocable
once made.
2.11. A Participant may request that the Employer make an immediate,
accelerated distribution from his or her Account in the event
such Participant has incurred a severe financial Hardship.
Payments under this Plan for a severe financial Hardship will
not be made to the extent that such Hardship is relieved
through insurance proceeds, liquidation of Participant's
assets (only to the extent that such liquidation would not
itself cause a severe financial Hardship) or by cessation of
Deferrals under this Plan. Payments for severe financial
Hardship under this Plan are limited to the extent necessary
to comply with Treas. Reg. Section 1.457-2. The Employer
shall determine whether the Participant has incurred a severe
financial Hardship and, in its sole discretion, may grant the
immediate, accelerated distribution of all, or a portion of,
the amounts then credited to the Participant's Account,
provided, however, that such distribution shall not exceed the
amount determined by the Employer to be necessary for such
Participant to alleviate the severe financial Hardship. If a
Participant is an Insider, then such Participant is not
eligible for Hardship withdrawals from this Plan.
2.12. The Participant may designate a Beneficiary to receive amounts
payable to him or her under this Plan in the event of death.
The Participant may revoke or change a Beneficiary designation
and name a new Beneficiary by filing a written notice of
revocation or other notice of change of Beneficiary with the
Employer (on a form prescribed by the Employer), at any time.
In the absence of a surviving Beneficiary or a valid
Beneficiary designation, the balance in a Participant's
Account, if any, shall be paid in one single lump sum to the
Participant's estate.
2.13. Interests in this Plan shall not be transferred, assigned,
pledged or encumbered. Prior to the time payment is actually
made to the Participant or his or her Beneficiary, such
Participant or Beneficiary shall have no rights by way of
anticipation or otherwise to assign or dispose of any interest
under this Plan.
2.14. If the Deferrals of a Participant who is providing services to
an Employer in a country other than the United States is
subject to the deferral provision described in Section
2.06(d), such Participant may elect in writing to extend such
deferral period to be consistent with the normal terms and
conditions of this Plan, provided such written election is
made at least twelve (12) months prior to the time when such
Participant would otherwise be entitled to receive cash and
such election is irrevocable once made.
Section 3: Administration of Phantom Stock Units
3.01. Administration of Match Units, Paid Units and Vested Units.
a. General. The administration of the Match Units, Paid
Units and Vested Units shall be done in accordance with
rules and definitions that the Benefits Administrator
shall in his or her absolute discretion develop from time
to time. The Benefits Administrator may delegate his or
her responsibilities to other persons, or retain the
services of lawyers, accountants, or other outside third
parties to assist with the administration of the Plan.
b. Restrictions on Transfers. A Participant may transfer
amounts into or out of Units pursuant to an election made
during a thirty (30) day window period following the
release of either a quarterly statement of earnings of
LNC or the Annual Statement to Shareholders. In the case
of any Insider, an election by either the Employer or the
Participant to place amounts into Match Units, Paid
Units, or Vested Units must remain in Units until death,
disability, termination of service, or six (6) months
after termination of Insider status occurs.
3.02. Administration of Unit Grants.
a. Grant of Awards. The LNCC shall have full and complete
authority in its discretion, but consistent with and
subject to the express provisions of the Plan, to (i)
select the Participants to whom Unpaid Units shall be
awarded under the Plan, (ii) determine the number of
Unpaid Units to be awarded, and (iii) adopt such rules
and restrictions and make all other determinations deemed
necessary or desirable for the administration of Unpaid
Units pursuant to the Plan. Those individuals who
receive Unpaid Units under the Plan for a given year
shall be individuals who qualify for participation in the
LNC Executive Deferred Compensation Plan for Employees
and who are selected by the LNCC as persons who are
expected to materially contribute to the growth and
profitability of LNC's business. A Participant may be
granted Unpaid Units under the Plan upon more than one
occasion.
b. Awards to be Performance Based. Notwithstanding anything
contained in this Plan to the contrary, the LNCC will
only grant awards based upon the attainment of
performance goals which measure the LNC's relative
performance against a peer group of companies selected by
the LNCC. Each performance goal must be established
prior to the beginning of the year or years for which an
award is granted. Each performance goal shall measure
the value achieved for shareholders of LNC as compared to
its peer group of companies.
c. Timing. The LNCC may award Unpaid Units under the Plan
for any year after the effective date of the Plan and
after adoption of the Plan by the board of directors of
LNC (the "Board"). Awards may be made as of the first
day of the first calendar quarter commencing after
adoption of the Plan by the Board (the "Plan Inception
Date.")
d. General Vesting Rules. Unpaid Units (unless forfeited in
accordance with Section 3.02(g)) shall become Vested
Units on either: (i) the date specified by the LNCC at
the time that such Units are awarded which is at least
six (6) months after the date of the grant or (ii) if the
LNCC does not specify a vesting date, then the third
anniversary date of the day on which such shares were
awarded by the LNCC.
e. Certain Terminations of Employment Causing Vesting. If a
Participant ceases to be in the employ of the Employer by
reason of the Participant's: (i) involuntary termination
within one year of a Change in Control of LNC, (ii)
death, (iii) disability, (iv) termination of employment
on account of retirement on or after age 55, or, (v)
involuntary termination other than for cause, any Unpaid
Units of the Participant shall vest as of the last day of
such Participant's employment with the Employer or six
(6) months after the date of grant, whichever is later.
f. Action of LNCC. The LNCC may for any reason vest any
Unpaid Units.
g. Forfeiture of Unvested Units. Subject to Section 3.03(e)
(relating to vesting of Unpaid Units upon death,
disability, involuntary termination of employment other
than for cause), and any action taken by the LNCC
pursuant to Section 3.03(f), all of a Participant's
Unvested Units shall be forfeited immediately upon the
Participant's termination of employment with the Employer
for any reason.
3.03. Phantom Dividends on Units. To the extent dividends are paid
by LNC or ASFC on common stock of the same class as the
Phantom Stock Units, Participants will be credited with
phantom dividends. Phantom dividends shall be calculated, on
each dividend payment date, as an amount equal to the product
of the dividend paid on a share of common stock multiplied by
the number of Phantom Stock Units. Any dividends on Unpaid
Units are also subject to forfeiture pursuant to Section
3.02(g).
3.04. Determination of Price for Units. The value of a Phantom
Stock Unit shall be equal to the final sales price quoted by
the New York Stock Exchange Composite Listing of a share of
LNC or ASFC common stock of the same class as the Phantom
Stock Units on the last business day immediately preceding the
calculation.
3.05. Changes in Capital and Corporate Structure. In the event of
any change in the outstanding shares of common stock of LNC or
ASFC by reason of an issuance of additional shares,
recapitalization, reclassification, reorganization, stock
split, reverse stock split, combination of shares, stock
dividend or similar transaction, the number of Phantom Stock
Units held by Participants under the Plan shall be
proportionately adjusted, in an equitable manner. The
foregoing adjustment shall be made in a manner that will cause
the relationship between the aggregate appreciation in
outstanding common stock and earnings per share of LNC or
ASFC and the increase in value of each Phantom Stock Unit
granted hereunder to remain unchanged as a result of the
applicable transaction.
3.06. Voting. Participant shall not be entitled to any voting
rights with respect to the Common Stock of LNC or ASFC as a
result of receipt of Match Units, Paid Units, Unpaid Units, or
Vested Units.
3.07. Maximum Number of Units. The maximum number of LNC Phantom
Stock Units which may be outstanding pursuant to the Plan and
the LNC Phantom Stock Plan for Agents together is equal to 1%
of the outstanding shares of LNC common stock as of December
31 of the year prior to the year for which the calculation is
being made.
3.08. Nontransferability of Units. Units shall not be transferred,
assigned, pledged or encumbered.
3.09. Legal Requirements. At the time of the award of Units, LNC
may, (i) postpone the date of delivery of the Units until such
time as LNC has available for delivery to the Participant a
prospectus meeting the requirements of all applicable
securities laws, or (ii) impose any reasonable requirements
or restrictions on the award of Units.
Section 4: Miscellaneous Rights, Duties, and Plan Interpretations
4.01. This Plan incorporates the LNC Phantom Stock Plan for
Employees. In the event that such incorporation is found to
violate any legal requirement then the most recent version of
the LNC Phantom Stock Plan for Employees shall be deemed
effective and the provisions in this Plan applicable to
phantom stock shall be null and void.
4.02. This Plan is not intended to create a contract of employment.
The provisions of this Plan shall not limit the right of the
Employer to discharge the Participant, or limit the right of
the Participant to voluntarily terminate from the service of
the Employer.
4.03. The rights of the Participant under this Plan (as well as any
right of his or her Beneficiary or estate) shall be solely
those of an unsecured general creditor of the Employer and
such rights shall not constitute an interest in any specific
asset of the Employer.
4.04. The Plan shall be administered by the Benefits Administrator.
The Benefits Administrator may establish administrative rules
from time to time that are consistent with the provisions of
this Plan and may, delegate his or her responsibilities to
other persons, or retain the services of lawyers, accountants,
or other outside third parties to assist with the
administration of the Plan.
4.05. LNC retains the right to amend this Plan prospectively at any
time. This Plan may be amended by action of the Board at a
meeting held either in person or by telephone or other
electronic means, or by unanimous consent in lieu of a
meeting. The Board may delegate this amendment power to an
officer of LNC or Committee of the Board, in whole or in part,
by resolution adopted by the Board. Pursuant to Resolution
Number 1193 of the Board, adopted November 8, 1990, the Chief
Executive Officer of LNC has been authorized to make any
modification to this Plan if such modification is, in the
opinion of counsel, required by local, state or federal law or
regulation, and the authority to make any discretionary
modification to this Plan if such modification is estimated to
cost LNC no more than $500,000 in the next full calendar year
after the effective date of such modifications. No amendment
to this Plan shall serve to reduce amounts previously credited
to the Accounts of Participants except as required by state or
federal statute, regulation, or court order, or except as
provided in Sections 4.08 and 4.10.
4.06. LNC, by action of its Board of Directors, may terminate this
Plan for any reason at any time. The Plan will terminate as
to all of the Employers on any day specified by LNC if thirty
(30) days' advance written notice of the termination is given
to the Employers. The Plan will terminate as to any
individual Employer on the first to occur of the following:
a. the date it is terminated by that Employer if thirty (30)
days' advance written notice is given to LNC;
b. the date that Employer is judicially declared bankrupt
or insolvent;
c. the dissolution, merger, consolidation or reorganization
of the Employer, or the sale by that Employer of all or
substantially all of its assets, except as otherwise
provided in Section 4.12; or
d. the date specified by the Board in an action terminating
this Plan for one or more specific Employers provided
that thirty (30) days' advance written notice is given to
the Employer prior to termination of the Plan.
4.07. By participating in the Plan, Participant waives the right to
litigate any dispute arising pursuant to this Agreement in any
court of otherwise competent jurisdiction. In the event that
a Participant disagrees with any decision, action or
interpretation of this Plan made by his or her Employer, he or
she shall submit in writing a full description of the
disagreement. The determination of the Employer as to any
disputed questions relating to and concerning construction and
interpretation, shall be final, binding, and conclusive upon
all persons. The Employer may, but is not required to, agree
to assistance in the resolution of any dispute arising under
this Plan from a mediator who shall be a disinterested party
to the dispute.
4.08. The Employer may in its sole discretion deduct from all
contributions, payments and distributions any federal, state,
or local taxes or such other amounts as may be required by law
to be withheld with respect to such payments. Alternatively,
the Employer may in its sole discretion charge each
Participant a flat fee based upon the amount of money deferred
pursuant to the Plan for purposes of covering any taxes or
other amounts required by law to be withheld from payments
pursuant to this Plan.
4.09. When appropriate, the singular nouns in this Plan include the
plural, and vice versa.
4.10. The Employer may make equitable adjustments under this Plan
from time to time, including retroactive adjustments to
correct mathematical, accounting, or factual errors made in
good faith by the Employer or a Participant. Any such
adjustments will be final and binding on all Participants and
Beneficiaries.
4.11. This Plan shall be governed and construed in accordance with
the laws of the State of Indiana.
4.12. If a Subsidiary ("Affected Corporation") shall cease to meet
the definition of a Subsidiary of LNC as a result of sale,
merger or other disposition by LNC, LNC shall negotiate in
good faith with Affected Corporation or the entity purchasing
Affected Corporation whichever is appropriate, to have
Affected Corporation assume responsibility for the Plan and
all liabilities to Participants who are employees of that
Affected Corporation. In the event that LNC is unable to
divest itself of all liability of the Affected Corporation,
then the Participant shall be treated as if he or she had
terminated service with the Affected Corporation for purposes
of his or her participation in the Plan as an employee of the
Affected Corporation. Nothing in this Section 4.12 shall be
interpreted to prevent a Participant who remains employed by
an Employer from participating in the Plan for future years.
4.13. In the event that LNC fails to maintain and operate a
Subsidiary as a separate and identifiable legal entity or
diverts assets of a Subsidiary by either declaring dividends
or unilaterally causing a Subsidiary to expand its business to
such an extent that the diversion of assets results in the
Subsidiary having insufficient capital to fund its operations
or meet its financial obligations, then, to the extent that
Subsidiary is rendered unable to honor its liabilities under
the Plan, the Trustee of the LNC Rabbi Trust ("Trust") shall
automatically pay all Participants from that Subsidiary their
respective account balances in the Plan. In the event the
assets within the Trust are insufficient to make such
payments, then LNC shall be obligated to pay the balance due
to the Participants from the Subsidiary, and to the extent
that the Subsidiary is able to honor its obligations under the
Plan, the Subsidiary must reimburse either Trustee or LNC for
amounts paid on its behalf. Nothing in this Section 4.13
shall be interpreted to require LNC to make a payment under
the Plan except to the extent that a Subsidiary is unable to
meet its obligations under the Plan as a direct result of
specific actions taken by LNC.
4.14. Any payment payable under this Plan to an incompetent or
otherwise incapacitated person may, at the sole discretion of
the Employer, be made directly to such person or for the
benefit of such person through payment to an institution or
other entity caring for or rendering service to or for such
person or to a guardian of such person or to another person
with whom such person resides. The receipt of such payment by
the institution, entity, guardian or other person shall be a
full discharge of that amount of the obligation by the
Employer to the Employee or Beneficiary.
4.15. Notwithstanding anything contained in Section 2.06, Section
2.07 or any other provision in this Plan to the contrary, in
the event that a Participant is involuntarily terminated for
fraud or other fidelity crimes, Participant automatically and
irrevocably forfeits all amounts contained in all Accounts
established by Employer pursuant to this Plan.
4.16. This amended and restated Plan shall be effective as of May 1,
1996. If any provision of this Plan is deemed invalid or
unenforceable, the remaining provisions shall continue in
effect.
This amendment and restatement of this Lincoln National Corporation
Executive Deferred Compensation Plan for Employees is hereby
approved.
___________________________________ April 22, 1996
Ian M. Rolland
Chief Executive Officer
Lincoln National Corporation
___________________________________ April 22, 1996
Witness
XLW/PCDocs No. 13021\1
4/22/96
APPENDIX A
INVESTMENT OPTIONS
The amount of earnings credited to each Participant's Account will
be in accordance with the performance of the LNL Variable Annuity
Account C Multi-Funds which the Participant selects. Neither the
Employers nor Lincoln National Corporation is under any obligation
to effectuate any investment option selection.
______ Money Market Fund ______ Putnam Master Fund
______ Social Awareness Fund ______ Growth Fund
______ Fixed Fund ______ Bond Fund
______ Managed Fund ______ Special Opportunities Fund
______ International Fund ______ Lincoln National Equity
Income Fund, Inc.
______ Lincoln National Aggres- ______ Lincoln National Capital
Growth Fund, Inc. Appreciation Fund, Inc.
______ LNC Phantom Stock ______ ASFC Phantom Stock
AMENDMENT TO
LINCOLN NATIONAL CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN FOR EMPLOYEES
By virtue and in exercise of the power granted to the Chief
Executive Officer of Lincoln National Corporation by resolution of
its Board of Directors, the Lincoln National Corporation Executive
Deferred Compensation Plan for Employees (the "Plan"), is hereby
amended effective January 1,1996, by adding the following Supplement
A thereto:
SUPPLEMENT A
TO
LINCOLN NATIONAL CORPORATION
Executive Deferred Compensation Plan
Purpose and Application.
The purpose of this Supplement A is to modify and supplement the
provisions of the Plan, as applied to each individual who was at the
time of the deferral an employee of the Delaware Management
Holdings, Inc. ("DMH") or its subsidiaries, hereinafter referred to
as a "DMH Participant."
Definitions.
Unless the context of the Plan or this Supplement A clearly implies
or indicates the contrary, a word, term or phrase used or defined in
the Plan is similarly used or defined in this Supplement A.
Modification of Plan.
The following provisions, sections and subsections of the Plan
shall be modified, deleted, or added as indicated with respect to
participation in the Plan by DMH Participants:
1. Subsections 2.03(b) and (d) relating to the 401(k) Plan do
not apply;
2. All references in Section 2 to the Match are not applicable;
3. The reference in subsection 2.04 to a hardship withdrawal
from the 401(k) Plan causing an automatic revocation in the
Plan, shall be changed so that a hardship withdrawal from
any defined contribution plan maintained by DMH or any
subsidiary, shall also cause automatic revocation of
participation in the Plan for the remainder of the calendar
year;
4. Subsection 2.10 shall apply for the 12 month period
beginning on January 1, 1996, the date DMH and its
subsidiaries began participation in the Plan;
5. DMH shall not be eligible for Unit Grants under subsection
3.02;
6. Subsections 4.12 and 4.15 shall be inapplicable to DMH
Participants. In the event that DMH is no longer a
subsidiary of LNC, DMH will retain full liability for all
payments under the terms of the Plan relating to periods
that individuals were employed by DMH and its subsidiaries;
and
7. Subsection 4.13 is modified to provide that LNC (rather than
a Rabbi Trust) shall make payments to DMH Participants in
the event that specific actions taken by LNC (listed in the
subsection) cause DMH to be unable to meet its obligation to
a DMH Participant, and further, that the payment of such
amount is not accelerated but will be made at a time when
the payments under the Plan shall otherwise be due.
DMC Profit-Sharing Plan.
In the event that an individual's deferral of compensation under the
Plan causes a reduction in the amount that would have been
contributed to the Delaware Management Company Employee Profit
Sharing Plan ("DMC Profit Sharing Plan"), such additional amount
that would have been contributed to the DMC Profit Sharing Plan
shall be credited to this Plan as of the same date as the
contribution to the DMH Profit Sharing Plan is made, and shall be
subject to the same vesting schedule.
Investment Options.
The Investment Options listed on Appendix A that are offered to DMH
Participants may be limited as determined in the sole discretion of
the Chairman of DMH or his designee.
IN WITNESS WHEREOF, the Chief Executive Officer of the
Corporation has executed this Amendment this _______ day of July,
1996.
LINCOLN NATIONAL CORPORATION
By:
Ian M. Rolland
Chief Executive Officer
XLW/PCDocs No. 2699\1
7/09/96
SECOND AMENDMENT
LINCOLN NATIONAL CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN FOR EMPLOYEES
By virtue and in exercise of the power granted to the President
of Lincoln National Corporation by resolution of its Compensation
Committee on February 16, 1998, the Lincoln National Corporation
Executive Deferred Compensation Plan for Employees (the "Plan"), is
hereby amended effective as of February 16, 1998 as follows:
1. Section 2.06 is deleted in its entirety and replaced with
the following:
2.06. The Participant's Account shall be paid to the
Participant (or his or her Beneficiary) in one
lump sum not later than thirty (30) days following
the first to occur of the Participant's (a)
death, (b) total disability, (c) termination of
any and all services as an employee with the
Employer, or (d) solely in the case of
Participants providing services to an Employer in
a country other than the United States, such other
period as determined in the sole discretion of the
Benefits Administrator.
2. Section 3.01.b. is deleted in its entirety and replaced with
the following:
3.01.b. Restrictions on Transfers. A Participant may
transfer amounts into or out of Units pursuant to
an election made during a thirty (30) day window
period following the release of either a quarterly
report of earnings of LNC or the annual report to
shareholders. In the case of any Insider, an
election by either the Employer or the Participant
to place amounts into Match Units, Paid Units, or
Vested Units will remain in Units until the
earlier of (a) the first to occur that is six (6)
months after the date of the date of death,
disability, or termination of service of the
Insider, or (b) the date that is six (6) months
after termination of Insider status; provided,
however, that the LNCC or its delegate may permit
an Insider to transfer amounts out of Units
subject to all conditions specified to assure
compliance with Section 16 of the Securities
Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, the President of the Corporation has
executed this Second Amendment this _______ day of February 1998.
LINCOLN NATIONAL CORPORATION
By:
Jon A. Boscia
President
PCDocs No. 67031\1
February 18, 1998
Exhibit 10(m)
- -127-
DESCRIPTION OF COMPENSATION ARRANGEMENTS WITH
EXECUTIVE OFFICERS
Item 1: With respect to June E. Drewry, Senior Vice President and Chief
Knowledge and Technology Officer with an employment date of May 28, 1996,
LNC agreed that if, during the first three years of her employment, LNC
terminated her employment for other than cause or causes a significant
diminution in her job responsibilities, she will be eligible for one year of
severance at her then current base salary.
************************
Item 2: With respect to Richard C. Vaughan, Executive Vice President and
Chief Financial Officer, LNC agreed to pay one year of his then base salary
if the corporation terminates his employment between June 18, 1996 and age
55.
*************************
Item 3: Agreement dated January 1, 1997 by and between American States
Financial Corporation and Robert A. Anker:
AGREEMENT
AGREEMENT made as of January 1, 1997, by and between American States
Financial Corporation (hereinafter called "Company"), an Indiana corporation
having its principal place of business in Indianapolis, Indiana, and Robert A.
Anker (hereinafter called "Employee"):
WITNESSETH:
WHEREAS, Employee desires to render faithful and efficient service to
Company; and
WHEREAS, Company desires to receive the benefit of Employee's service;
and
WHEREAS, Employee is willing to be employed by Company; and
WHEREAS, Company deems it essential to formalize the conditions of
Employee's employment by written agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties agree as follows:
1. Office. Company hereby employs Employee as its Chief Executive Officer,
and Employee hereby agrees to serve Company in such capacity or in such other
capacity as the Board of Directors of Company may from time to time designate.
2. Term of Employment. Employee's employment shall be for the
"Employment Period," with the term commencing on January 1, 1997 and ending on
December 31, 1997. During the Employment Period, Employee's employment may be
terminated for Cause as defined in Section 5. Employee's employment may continue
by mutual agreement at the will of Company after the expiration of the
Employment Period or Employee and Employer may extend this contract by mutual
written agreement. During any such period of at will employment, the provisions
of Sections 12, 15, 16 and 17 of this Agreement shall continue to apply as if
the Employment Period under this Agreement had not ended.
3. Incapacity. If during the Employment Period, Employee should be
prevented from performing Employee's duties or fulfilling Employee's
responsibilities by reason of any incapacity or disability that is reasonably
expected to continue for a period of six (6) months or until death, then
Company, in its sole and absolute discretion, may, based on the opinion of a
qualified physician, consider such incapacity or disability to be total and may
on ninety (90) days written notice to Employee terminate the Employment Period.
4. Death. The Employment Period shall automatically terminate upon the
death of Employee.
5. For Cause. For purposes of this Agreement, Cause means a determination
by the Board of Directors of Company or the Chief Executive Officer of Lincoln
National Corporation ("Lincoln"), made in good faith, without being bound by
Company's progressive discipline policy for employees:
a. that Employee has engaged in acts or omissions against Company, its
parent company, or any of its subsidiaries constituting dishonesty, intentional
breach of fiduciary obligation or intentional wrongdoing or misfeasance;
b. that Employee has been arrested or indicted in a possible criminal
violation involving fraud or dishonesty;
c. after due consideration and with prior written notice to the
Employee, that Employee has performed poorly;
d. that Employee has failed or refused to perform Employee's duties
set forth in paragraph 6 hereof, or willfully failed to execute any reasonable
instruction relating to Employee's duties with Company given him by the Board of
Directors of Company, or the Chief Executive Officer of Lincoln, if either such
failure or refusal is not corrected within ten (10) business days after
Employee's receipt of written notification of such failure or refusal; or
e. that Employee has intentionally and in bad faith acted in a manner
which results in a material detriment to the assets, business or prospects of
Lincoln, Company or the subsidiaries or affiliates of either of them.
6. Responsibilities. During the period of Employee's employment, Employee
shall devote Employee's entire business time and attention, except during
reasonable vacation periods, to, and exert Employee's best efforts to promote,
the affairs of Company, and shall render such services to Company as may be
required by the Board of Directors of Company consistent with services required
by virtue of the office set forth in paragraph 1 hereof and shall perform such
other services as may now or hereafter be specified or enumerated in the By-Laws
of Company consistent with such office. While employed by Company, Employee
shall not, directly or indirectly, alone or as a member of a partnership or
association, or as an officer, director, advisor, consultant, agent or employee
of any other company, be engaged in or concerned with any other duties or
pursuits requiring Employee's personal services except with the prior
written consent of the Board of Directors of Company. Nothing herein contained
shall preclude the ownership by Employee of stocks or other investment
securities. Nothing herein contained shall preclude service by Employee on
boards of directors or trustees of charitable or other not-for-profit entities
not engaged in any business competitive with the business of Company so long as
such service does not materially interfere with Employee's responsibilities to
Company.
7. Compensation. During the Employment Period, Employee shall receive a
base salary that shall be at an annual rate of not less than $565,000 payable in
accordance with the payroll practices of Company as from time to time in effect
with regard to executive personnel.
8. Benefit Plans and Programs. During the Employment Period, Employee shall
be eligible for participation in all benefit plans and programs made available
by Company to its employees generally (other than Company's generally available
severance program) and in those benefit plans and programs applicable to
executives of the Employee's level to the extent Employee is not eligible for
comparable benefits from Lincoln.
The bonus payable by Company for periods which include the Employment Period
will be payable under the terms of Company's Executive Performance Incentive
Compensation Plan ("EPIC"). Employee's performance goals and target and maximum
awards are set out in Exhibit A. To the extent an EPIC bonus is payable in the
form of stock, phantom stock, or stock units, it shall be awarded and payable in
the form of (or, in the case of phantom stock or stock units, measured by
reference to) Common Stock of Company.
Employee shall be entitled through March 31, 1998 to the benefit of Company's
standard relocation package for executives at Employee's level.
9. Stock Options and Restricted Stock Awards. Among the benefit plans and
programs to be made available by Company to certain of its employees is
Company's Stock Option Plan. Any options granted to Employee shall be options
for Company Common Stock at the appropriate level for his position.
10. Payments after Termination. If Employee's employment with Company
terminates at the end of the Employment Period referred to in Section 2 hereof
for reasons other than incapacity or death or Cause, Employee shall be entitled
to all the following upon execution of a release satisfactory to Company and
Lincoln ("Release"):
a. Company shall pay to the Employee $600,000 in 26 equal
biweekly installments;
b. Employee shall become entitled to EPIC bonus payments as set out on
Exhibit A;
c. Employee shall be entitled to receive an early retirement benefit
without adjustment for Employee's age;
d. Employee shall be entitled to outplacement benefits through Right &
Associates' standard program for executives or a similar firm approved by
Company; and
e. Employee shall be entitled to executive financial planning benefits
for calendar year 1998. In the event that Employee's employment terminates prior
to the end of the Employment Period due to death or disability, the amounts
specified in subsections a, b and c above shall still be payable. If Employee's
employment terminates during the Employment Period for the reasons specified in
Section 5c, upon execution of a Release, Employee shall be entitled to receive
$285,000 in 26 equal biweekly installments and the benefit specified in
subsection c above shall also be payable. If Employee's employment terminates
during the Employment Period for the reasons specified in Section 5b, upon
execution of a Release, the Employee shall be entitled to receive $285,000 in 26
equal biweekly installments. The amounts provided under subsections b and c
above shall be payable only if the indictment or charges are dismissed or
Employee is acquitted as a result of a trial.
11. Expenses. During the Employment Period, Company shall allow Employee
reasonable expense of travel and business entertainment incurred in the
performance of Employee's duties hereunder, subject to the rules and regulations
adopted by Company for the handling of such business expenses.
12. Other Obligations of Employee. All payments to the Employee provided
for under Section 10 of this Agreement or under the Executive Salary
Continuation Plan of Company, the exercise of any options for stock of Company
and the vesting or payment of any restricted stock (or restricted phantom stock
or restricted stock units) of Company or Lincoln shall be subject, to the extent
permitted by law, to Employee's compliance with the following provisions. (For
purposes of this Section, Company and Lincoln shall be deemed to include their
affiliates and subsidiaries.)
a. Assistance in Litigation. At all times during and after the term of
this Agreement, Employee shall, upon reasonable notice, furnish such information
and proper assistance to Company or Lincoln as may reasonably be required by
Company or Lincoln in connection with any litigation in which it is, or may
become, a party.
b. Confidential Information. At all times during and after the term of
this Agreement, Employee shall not knowingly disclose or reveal to any
unauthorized person any trade secret or other confidential information relating
to Company or Lincoln or to any of the businesses operated by them. Employee
acknowledges, understands and agrees that any amounts payable under this
Agreement that have not been paid shall be immediately forfeited in the event
Employee divulges or appropriates to Employee's own use or the use of any other
person or organization, except as otherwise ordered by a court of competent
jurisdiction, any secret or confidential information or knowledge pertaining to
the businesses of Company or Lincoln obtained during Employee's employment with
Company or Lincoln. Employee recognizes and acknowledges that (1) all plans,
systems, methods, designs, programs, procedures, books and records relating to
the operations, practices and personnel of Company or Lincoln (whether
instituted or commenced prior or subsequent to the date Employee was first
employed by Company or Lincoln and whether or not devised, created or initially
instituted by Company or Lincoln) and (2) all other records, documents and
information concerning the business activities, practices and procedures, as
they may exist from time to time, constitute and will constitute secret or
confidential information or knowledge pertaining to the businesses of Company
or Lincoln. The information and material described in this paragraph shall
constitute secret or confidential information or knowledge only to the extent
such information and material has remained confidential (except for unauthorized
disclosures) and except as otherwise ordered by a court of competent
jurisdiction. The provisions of this Section 12b shall not be construed as
prohibiting or limiting Company or Lincoln from pursuing any other remedies for
the divulgence or appropriation or threatened divulgence or appropriation of
secret or confidential information or knowledge relating to Company or Lincoln.
c. Non-competition. During the term of Employee's employment and for a
period of three (3) years following the termination of Employee's employment,
Employee will not act as a director, officer, employee, consultant or advisor
to, nor directly or indirectly become associated with any person, firm, company
or corporation where his activities relate to any business competitive with
Company or Lincoln; provided, however, that this prohibition shall not extend to
the Property Casualty Reinsurance business. Employee specifically acknowledges
that the geographic region to which this restriction applies is the same
geographic region in which Employee personally was present and performed
services for Lincoln during the past two (2) years. This restriction does not
prohibit Employee from buying, selling, or otherwise trading in the securities
of any corporation which is listed on any recognized securities exchange, and he
may engage in any other business activities not competitive with Company or
Lincoln. Neither Company nor Lincoln will object to Employee's service on the
boards of other companies as a Director so long as there is no conflict with the
terms of this subsection or subsection b above or e below. Employee may request
an interpretation by the Chief Executive Officer of Lincoln of the applicability
of this provision to specific activities in which Employee contemplates
engaging.
d. Non-solicitation. During the term of Employee's employment and for
a period of three (3) years following the termination of the Employee's
employment, Employee shall not directly or indirectly solicit or endeavor to
entice away from Company or Lincoln any person who is employed with Company or
Lincoln.
e. Change in Control. During the term of Employee's employment and for
a period of three (3) years following the termination of Employee's employment,
Employee agrees that neither he nor any entity directly or indirectly controlled
by him will directly or indirectly participate in a proscribed activity. A
"proscribed activity" shall mean either (1) soliciting others to invest in the
Common Stock of Lincoln for the purpose of effecting an acquisition of control
of Lincoln or Employee's directly investing in more than 1% of the Common Stock
of Lincoln or (2) using confidential information (as described in subparagraph b
above) to assist any person, entity or group of persons which intends to or does
attempt to effect an acquisition of control of Lincoln. The term "Control"
shall be defined for purposes of this subparagraph to have the meaning of
control contained in Ind. Code Ann. Sec. 27-1-23-1(e) (West, 1996).
f. Consideration and Legal Action. As consideration for the receipt of
the amounts payable under this Agreement, Employee acknowledges, understands and
agrees that any such amounts that have not been paid will be immediately
forfeited if Employee breaches any provision of this Section 12 during the term
of Employee's employment and for a period of three (3) years following the
termination of Employee's employment. Employee acknowledges that the
restrictions contained in this Section 12 b, c, d and e are reasonable and
necessary to protect the legitimate interests of Company and Lincoln; and that,
therefore, Company or Lincoln shall be entitled to seek preliminary and
permanent injunctive and other equitable relief (including, without limitation,
and equitable accounting of all earnings, profits and other benefits arising
from such violation) in any court of competent jurisdiction, which rights shall
be cumulative and in addition to any other rights or remedies to which Company
or Lincoln may be entitled. Employee hereby irrevocably consents to the personal
jurisdiction over him of the courts of the State of Indiana and of any Federal
court located in such state in connection with any action or proceeding arising
out of or relating to this Section 12 or any related breach of this Agreement
involved in such action or proceeding and further agrees, and shall not contest,
that the proper venue for filing and maintaining any such action or proceeding
shall be in the State of Indiana.
13. Effect of Termination of the Employment Period. Except as specifically
provided in Sections 2, 10 and 12, this Agreement shall terminate upon the
termination of the Employment Period. The obligations of the Employee under
Section 12 and the rights and remedies available to Company under that Section
for any breach of such obligations, however, shall in all events survive.
14. Notice. Any notice required to be given by Company hereunder to
Employee shall be in proper form and signed by an Officer or Director of
Company. Until one party shall advise the other in writing to the contrary,
notices shall be deemed delivered:
a. to Company if delivered to Lynda Van Kirk, Vice President, with a
copy to Tom Ober, General Counsel, or, if mailed, certified or registered mail,
postage prepaid, to the above-named individuals at American States Insurance
Company, 500 North Meridian Street, Indianapolis, IN 46204; and a copy to George
Davis, Senior Vice President, Lincoln National Corporation, 200 East Berry
Street, Fort Wayne, IN 46802.
b. to Employee if delivered to Employee, or if mailed to him,
certified or registered mail, postage prepaid, at 3603 West Hamilton Road, Fort
Wayne, IN 46804.
15. Alternative Dispute Resolution. With the exception of actions under
Sections 12b, c, d and e of this Agreement, any controversy, dispute or
questions arising out of, in connection with or in relation to this Agreement or
its interpretation, performance or nonperformance or any breach thereof shall be
resolved through mediation. In the event mediation fails to resolve the dispute
within sixty (60) days after a mediator has been agreed upon or such other
longer period as may be agreed to by the parties, such controversy, dispute or
question shall be settled by arbitration in accordance with the Center for
Public Resources Rules for Non-Administered Arbitration of Business Disputes,
by a sole arbitrator. The arbitrator shall be governed by the United States
Arbitration Act, 9 U.S.C. Sec. 1-16, and judgment upon the award rendered by
the arbitrator may be entered by any court having jurisdiction thereof.
The place of the arbitration shall be Indianapolis, Indiana. In any such
controversy or dispute, regardless of the party by whom such controversy or
dispute is initiated, Company shall, if written notice is given and upon
presentation of appropriate vouchers, pay all legal expenses, including
reasonable attorneys' fees, court costs and ordinary and necessary out-of-pocket
costs of attorneys, billed to and payable by the Employee in connection with
the bringing, prosecuting, defending, litigating, negotiating, or settling such
controversy or dispute; provided, however, that such expenses, fees and costs
shall not be paid by Company unless and until the Employee is successful on the
merits; further provided, however, that in the event such controversy or dispute
is settled, the settlement agreement shall provide for the allocation of such
expenses, fees and costs between the parties.
16. Benefit. This Agreement shall bind and inure to the benefit of Company
and the Employee, their respective heirs, successors and assigns.
17. Conditions. This Agreement is effective upon the approval of the
Agreement by the non-interested members of the Board of Directors of Company or
its designated compensation committee. Should the aforementioned conditions not
be satisfied, this Agreement shall become null and void and shall have no effect
whatsoever on any previous agreement, expressed or implied, between Employee and
Company.
18. Effect on Previous Agreements. Should this Agreement become effective,
it will supersede all employment related agreements between Employee and Company
or Lincoln or their affiliates or subsidiaries.
19. Amendments. This Agreement may only be amended by the written agreement
of Employee and Company with the written approval of Lincoln.
20. Severability. In case any part of this Agreement shall be invalid,
illegal or otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
In lieu of any such illegal, invalid or unenforceable provision, there
automatically will be added as part of this Agreement a legal, valid and
enforceable provision as similar in terms and intent to such illegal, invalid or
unenforceable provision as possible.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
American States Financial Corporation
By:
Name: William J. Lawson
Title:
Employee
By:
Name: Robert A. Anker
Title:
EXHIBIT A
Executive Performance Incentive Compensation Plan
Performance Threshold Target Maximum
Cycle
1996-1997 $174,825 $436,230 $765,900
These numbers were established taking into account Employee's actual Employment
Period with Company during the Performance Cycle.
If employment terminates as set out in Section 10, Employee shall be entitled to
receive a pro rata award for the 1997-1999 EPIC cycle.
****************
ITEM 4: LNC's ongoing benefit obligations to Robert A. Anker as of and after the
transfer of his employment from LNC to American states as set forth in letter
dated January 10, 1997:
January 10, 1997
Mr. Robert A. Anker
Chairman & CEO
American States Insurance Company
500 North Meridian Street
Indianapolis, IN 46204
This letter outlines LNC's ongoing benefit obligations to you as of and after
the transfer of your employment from LNC to American States. This is just a
summary and is not intended to modify the terms of your employment agreement
with American States nor to modify the terms of the specific plans.
LNC EVSP
The LNC Compensation Committee has agreed to pay out all performance cycles
in which you currently participate on a prorata basis based on your service
as LNC COO through 12-31-96. This means that in 1997 you will be eligible
for a full award for the 1994-1996 cycle. In 1998 you will be eligible to
receive 2/3 of the award for the 1995-1997 cycle. In 1999 you will be
eligible to receive 1/3 of the award for the 1996-1998 cycle. These awards
have traditionally been paid in cash and LNC restricted stock and, as you
know, the amount of the award for each cycle is determined by the
Compensation Committee.
LNC Options
Your outstanding LNC stock options will not be affected by the transfer and
will continue to vest as provided in the option agreement.
LNC Restricted Shares and Restricted Phantom The Compensation Committee has the
right to convert some or all of your restricted shares which are scheduled
to vest on January 1, 1997 into phantom stock due to Internal Revenue Code
section 162(m) -- the $1 million cap. Service with ASI will continue to
count toward the vesting requirements of your restricted phantom shares.
LNC Deferred Compensation
American States is a participating employer under the terms of this plan.
LNC Employees Savings and Profit Sharing Plan Upon transfer to American States,
this account balance remains in the plan since the transfer of employment
is not a "distributable event" and your account balance cannot be rolled
into the American States plan. Any additional employer matching
contribution declared by the LNC Board at its May 1997 meeting will be
credited to your account under this plan.
LNC Employees Retirement Plan
Currently, there is a liability under both the American States and the
Non-Life retirement plans for your retirement benefit. At the end of 1997
there will be a transfer of assets between the Non-Life and American States
plans so that your qualified benefit will be under the American States
plan. Because this is a funded plan, this will not have any impact on the
ultimate benefit.
LNC Excess Compensation Plan
This is an unfunded plan which provides retirement benefits based on salary
amounts in excess of $150,000 (as adjusted for cost of living). This
liability will be transferred to American States.
LNC Supplemental Pension Plan
This is also an unfunded plan which provides retirement benefits in excess
of the IRC section 415 limits. To the extent that any benefits are payable
from this plan, ASI will be responsible for making these payments since
your participation will be transferred to the ASI plan.
LNC Executive Salary Continuation Plan
Your participation will be transferred from this plan to the identical
American States plan. This plan provides an additional monthly payment of
10% per month after retirement subject to the terms of the plan.
LNC Executive Severance Benefit Plan
This is the plan which goes into effect in the event of a change of control
of LNC. As CEO of American States, you will continue to be a participant.
Split Dollar Plan
Currently this contract is between you and LNC, this contract will need to
be amended so that it is consistent with those of the other officers of
American States. There will be no change in the benefit.
LNC Medical for Retired Employees
If you retire as of December 31, 1997, and at any time thereafter lose your
coverage under another group health plan (including the American States
Medical Plan for Retired Employees), you may elect to participate within 60
days of losing such coverage, but not later than your attaining age 65.
The receipt of amounts outlined above which are in addition to amounts to which
you are otherwise entitled, is conditioned on your execution of an agreement and
release provided to you by LNC upon termination of your employment. The terms of
the agreement will be substantially identical to the ones set out in Section 12
of your Employment Agreement with American States effective January 1, 1997. The
release will be the same one required by Section 10 of that Employment
Agreement.
****************
Item 5: Letter Agreement dated April 1, 1997 between American States
Financial Corporation and Robert A. Anker:
American States Financial Corporation
500 North Meridian Street
Indianapolis, IN 46204
April 1, 1997
Robert A. Anker
3603 W. Hamilton Road
Ft. Wayne, IN 46804
Dear Bob:
Thank you for the substantial contributions you have made to
the growth and success of American States Insurance Company ("ASI") and
American States Financial Corporation ("ASFC"). As you know, we are seeking a
buyer for ASFC, and during this transition, your continued service and loyalty
are essential to ASI and ASFC. This letter sets forth our mutual agreement with
respect to compensation and benefits matters that otherwise might be of concern
to you during the transition. Our objectives are not only to reward you for your
past service to ASI, but also to give you an added incentive to remain with ASI
and help us reach our goals of achieving the highest possible return to ASFC
shareholders and assuring an orderly transition. By fairly compensating you for
the personal risk that the potential sale of ASFC entails, we seek to ensure
your continuing dedication to your duties and that you will be in a position to
work with and advise other ASI and ASFC officers and the Board concerning
purchase proposals without being influenced by any uncertainties regarding your
own situation.
As described in detail below, two types of benefits will be
provided to you -- automatic change of control benefits and a retention
incentive benefit. Retention incentive benefits will be payable after a change
of control at the earlier of your completion of a specified period of employment
or your termination of employment on or after the end of the term of your
employment contract. Please note that the term "change of control"has a specific
meaning for purposes of this letter agreement; the meanings of this term and
certain other terms are set forth in Exhibit A to this letter.
Automatic Change of Control Benefits. Automatically upon a
change of control of ASFC, you will be entitled to the following benefit
enhancements:
1. Restricted phantom stock units granted to you under the
Lincoln National Corporation 1986 Stock Option Incentive Plan will become 100%
vested (i.e., nonforfeitable). You will be treated as a retiree under this Plan
for all outstanding Options.
2. All Restricted Stock Awards and Dividend Equivalent Rights
granted to you under the American States Financial Corporation Stock Option
Incentive Plan ("ASFC Option Plan") will become 100% vested.
Retention Incentive Benefits/1997 Option Replacement. After a
change of control of ASFC, you will be entitled to the following retention
incentive benefit: upon the earlier of 12 months of employment after the change
of control or the termination of your employment on or after the end of the term
of your employment contract, you will receive a cash payment equal to a
percentage of your base salary. The amount of the payment will be based on the
sale price of ASFC common stock; if the price is $34.00 per share or less, the
payment will be 50% of your base salary as of the date of this letter. Each
$1.00 increase in the sale price of ASFC common stock above $34.00 per share
will produce a payment equal to an additional 25% of your base salary as of the
date of this letter, with linear interpolation between $1.00 increments. To
illustrate this formula, if the sale price is $36.00 per share, you will receive
100% of your base salary; if the sale price is $40.00 per share, you will
receive 200% of your base salary. There is no cap on the maximum benefit
payable.
A retention incentive benefit will ordinarily be paid to you
in cash within 30 days after you become entitled to the payment. Alternatively,
you may elect within 14 days after the date of this letter to defer payment of
all or a portion of the retention incentive benefit under the Lincoln National
Corporation Executive Deferred Compensation Plan for Employees (or the successor
to that plan) ("Deferred Compensation Plan"). To make a deferral election for
the retention incentive benefit, please complete the election form attached to
this letter as Exhibit B, and return the form to Lynda Van Kirk within 14 days
from the date of this letter.
If there is no change of control of ASFC by March 31, 1998,
the Retention Incentive Benefits set out above shall terminate as of such date.
Employment Contract. Except as otherwise specifically provided
in this letter agreement, including Exhibit A, this agreement will not supersede
or alter the terms of your employment contract in any manner.
Other. We will negotiate with any buyer of ASFC to have the
buyer assume ASFC's liabilities to pay benefits to you under the Deferred
Compensation Plan, if any. If the buyer is unwilling to accept that liability,
we will assure that those benefits will be paid.
Taxes. To the extent that any of the benefits under this
letter agreement are taxable to you, income and employment taxes will be
withheld from the benefit payments you receive. If you incur any federal excise
tax as a result of the payment of any of the benefits provided under this letter
agreement (although we believe you will not), ASFC will make an additional cash
payment to you to make you whole. That is, ASFC will pay you an amount equal to
any federal excise tax you must pay, plus any income tax and employment taxes on
the payment from ASFC for the excise tax. ASFC will pay the amount to you within
30 days after you present to the General Counsel of ASI either proof of payment
of the excise tax or an assessment from the Internal Revenue Service for the
tax.
If any amount becomes payable under this letter agreement
while you are a covered employee as defined in section 162(m) of the Internal
Revenue Code and the amount (either alone or in combination with other
remuneration) would exceed the limit under that section, ASFC reserves the right
to defer the payment until you are no longer a covered employee. In this case,
the amount may be unilaterally deferred and credited with interest or other
earnings in accordance with the terms of the Deferred Compensation Plan.
Mediation/Arbitration. Generally, ASFC, acting through the
Compensation Committee of its Board or its Chief Executive Officer, will
determine whether you are entitled to benefits under this letter agreement (for
example, if you terminate employment, whether your termination was for good
reason) and the amount of benefits to which you are entitled. If, however, you
disagree with any determination regarding your eligibility for benefits or the
amount of benefits, the dispute will be resolved through mediation. If mediation
fails to resolve the dispute within 60 days after a mediator has been agreed
upon (or any other longer period to which you and ASFC agree), the dispute will
be settled by arbitration. Please refer to Exhibit A for a description of the
arbitration rules that will apply, including the rules for payment of your
expenses by ASFC if you are successful in the arbitration.
Release and Agreement. In consideration for the benefits
provided in this letter agreement, prior to the receipt of these benefits, you
must sign a release in the form acceptable to ASFC waiving all claims or
potential claims against ASI, ASFC, Lincoln National Corporation ("LNC") or any
affiliate. In addition, by accepting this letter agreement, you agree to release
and waive all rights to any Options granted to you under the ASFC Option Plan
which have not vested before the change of control. By accepting this letter
agreement, you also agree to retain in confidence any confidential information
regarding ASI, ASFC, LNC or any affiliate that you became privy to during your
employment, unless you are required by law to divulge that information.
Board Approval. Because the process of seeking a buyer for
ASFC has been evolving very rapidly, and we are eager to provide you with
assurance concerning your own situation, we are providing this letter agreement
to you before obtaining formal approval of the Compensation Committee of the
Board and the Board. Therefore, you should be aware that this agreement is being
offered to you subject to the approval of the Compensation Committee and the
Board.
We are pleased to provide you with the benefits described in
this letter agreement in recognition of your service and dedication to ASI and
ASFC. Please sign the attached copy of this letter to confirm your acceptance of
this agreement and the benefits provided for you. Kindly return the copy of the
letter with your signature to Lynda Van Kirk by the close of business on April
3, 1997.
Sincerely,
William J. Lawson
President
American States Financial Corporation
In consideration of the foregoing, I,________________
_______________, hereby accept the benefits provided under this letter
agreement, and I accept and agree to be bound by the terms of this letter
agreement. Moreover, I release and waive all my rights to any Options granted to
me in 1996 under the ASFC Option Plan that are unvested on the date of a change
of control. I further agree that such Options shall automatically be canceled
and become null and void upon the occurrence of a change of control.
- ----------------- ---------------------------------
Date Signature of Employee
Exhibit A
Definitions and Special Rules
I. Definitions. As used in the letter agreement, the following terms
have the following meanings.
1. Affiliate. "Affiliate" means any corporation which directly
or indirectly controls or is controlled by or is under common control with ASI,
ASFC or LNC. For purposes of this definition, control means the power to direct
or cause the direction of management and policies of a corporation through the
ownership of voting securities.
2. Change of Control. "Change of control" means the
acquisition by any individual, entity or group (as defined in Section 13(d)(3)
or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of beneficial ownership (as defined in Rule 13d-3 promulgated under the
Exchange Act) of more than fifty percent (50%) of the then outstanding shares of
common stock of ASFC; provided, however, that the following acquisitions shall
not constitute a change of control: (a) any acquisition directly from ASFC other
than an acquisition by virtue of the exercise of a conversion privilege, (b) any
acquisition by ASFC, or (c) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by ASFC, or any entity controlled by
ASFC.
3. Per Share Price . "Per share price paid for ASFC common
stock in the change of control" or "sale price of ASFC common stock" means the
per share price of ASFC common stock paid by the purchaser in the transaction
giving rise to the change of control.
II. Special Rules.
1. Arbitration. Any arbitration under the letter agreement
shall be conducted in accordance with the Center for Public Resources Rules for
Non-Administered Arbitration of Business Disputes, by a sole arbitrator. The
arbitration shall be governed by the United States Arbitration Act, 9 U.S.C.
Sec. 1-16, and judgment upon the award rendered by the arbitrator may be entered
by any court having jurisdiction thereof. The place of the arbitration shall be
Indianapolis, Indiana. In any controversy or dispute, regardless of whether the
employee or ASFC initiates the controversy or dispute, if the employee provides
written notice and presents appropriate vouchers, ASFC will pay all of the
employee's legal expenses, including reasonable attorneys' fees, court costs and
ordinary and necessary out-of-pocket costs of attorneys, billed to and payable
by the employee in connection with the controversy or dispute (i.e., the
bringing, prosecuting, defending, litigating, negotiating, or settling of it),
but only if (and after) the employee is successful on the merits in the
arbitration. Furthermore, if the controversy or dispute is settled, the
settlement agreement will provide for the allocation of such expenses, fees and
costs between the employee and ASFC.
2. Successors. References to ASI and ASFC in the letter
agreement, including this Exhibit to the letter agreement, shall include
and apply to any successor to or assign of ASI or ASFC. Furthermore, the
obligations under the letter agreement shall be binding upon and inure to
the benefit of the employee, his beneficiary or estate, ASI or ASFC and any
successor to ASI or ASFC.
*************************
Item 6: On August 13, 1997, the LNC Compensation Committee cancelled the
options of Jeffrey J. Nick under the Cannon Lincoln Limited Phantom Stock
Plan and awarded Mr. Nick credit in the amount of $2,530,659 under the LNC
Executive Deferred Compensation Plan for Employees. Provided, however,
that Mr. Nick will have a vested interest in such amount as follows:
$1,146,042 shall vest as of January 1, 1999; $ 461,539 shall vest as of January
1, 2000; $ 461,539 shall vest as of January 1, 2001; $ 461,539 shall vest as of
January 1, 2002;
(or, if earlier, on the first to occur of the date of death, disability, or a
resignation within two years of a change in control of the Corporation).
*************************
Item 7: Agreement, Waiver and General Release, signed by Robert A. Anker on
January 16, 1998 (effective January 24, 1998) and accepted by Lincoln National
Corporation and American States Financial Corporation:
AGREEMENT, WAIVER AND GENERAL RELEASE
This Agreement, Waiver and General Release ("Agreement") is made and
entered into by and between Robert A. Anker (hereinafter referred to as
"Employee"), American States Financial Corporation and Lincoln National
Corporation, each corporation on behalf of itself and its affiliates and
subsidiaries, and each of their directors, officers, representatives, agents,
attorneys, employees, successors, and assigns and any other person acting
through, by, under or in concert with any of them (such subsidiaries or persons
affiliated or connected with American States Financial Corporation hereinafter
collectively referred to as "ASFC," and all other such affiliates, subsidiaries
or persons hereinafter collectively referred to as "Lincoln"), and shall become
effective eight (8) days after the date of execution hereof by Employee.
RECITALS
A. Employee and ASFC entered into an Employment Agreement dated as of
January 1, 1997 (the "Employment Agreement") which specifies that
Employee will be entitled to certain payments and other benefits
during and at the end of the Employment Period (as defined in the
Employment Agreement).
B. Employee and ASFC entered into a "Letter Agreement" dated April 1,
1997, which specifies that Lincoln and ASFC shall provide automatic
change of control, retention incentive and certain other benefits
(with the amount of Employee's Retention Incentive Benefits/1997
Option Replacement acknowledged in Exhibit A hereto) to Employee in
the event of a "Change of Control" of ASFC (as defined in Exhibit A
of the Letter Agreement), subject to the conditions set forth in the
Letter Agreement.
C. Employee received a letter dated January 10, 1997 from Ian M. Rolland,
Chief Executive Officer of Lincoln (hereinafter referred to as the
"January 10, 1997 Letter") outlining certain of Lincoln's ongoing
benefit obligations to Employee.
D. The parties have agreed and acknowledged that the Employment Period
will end, and Employee's employment with ASFC will cease at the end
of the last day of calendar year 1997 (December 31, 1997), and that
at (or prior to) that time, Employee shall no longer be an officer or
director of ASFC or Lincoln, nor shall he serve as an agent, trustee
or fiduciary or in any similar capacity for ASFC, Lincoln or any of
their respective profit-sharing or other employee benefit or welfare
plans, although, with respect to Lincoln, Employee shall continue to
be a person to whom the restrictions of Section 16b of the Securities
Exchange Act of 1934 apply for a period determined under the
Securities Exchange Act.
E. A Change of Control with respect to ASFC has occurred.
In consideration of the premises and mutual promises and agreements of
the parties contained herein, it is agreed as follows:
1. Employee shall receive those automatic change of control, retention
incentive and other benefits specified in the Letter Agreement upon
the occurrence or fulfillment of the conditions for the payment or
provision of any particular benefit as are set forth in the Letter
Agreement. This Agreement constitutes the agreement and release
referred to in the Employment Agreement, the Letter Agreement and the
January 10, 1997 Letter and is acceptable and satisfactory to ASFC
and Lincoln.
2. Employee and Lincoln hereby agree that payment for the Lincoln
phantom stock units currently credited to Employee and of Employee's
account under the Lincoln National Corporation Executive Deferred
Compensation Plan (such payments hereinafter collectively referred to
as "Lincoln Deferred Compensation Payments") shall commence upon the
first day of the month on or next following the fourth anniversary of
the Change of Control of ASFC and shall be made in non-annuity
monthly installments over a period of 120 months, as acknowledged in
an attachment to this Agreement.
3. Employee, for and in consideration of the payment or provision of the
benefits specified in the Letter Agreement and the agreement set
forth in Paragraph 2, waives any right to personal recovery and
hereby irrevocably, unconditionally and generally releases, acquits,
and forever discharges to the fullest extent permitted by law, ASFC
and Lincoln from all charges, complaints, actions, causes of actions,
suits, rights, grievances, costs, losses, debts, expenses, sums of
money, accounts, covenants, contracts, agreements, claims, damages
and demands of any nature whatsoever, known or unknown, in law or in
equity ("Claim" or "Claims"), which against them Employee at any time
heretofore ever had, owned, or held or claimed to have had, owned, or
held or which Employee now has, owns, or holds, or claims to have,
own, or hold, or which Employee can, shall or may have, or which
Employee's heirs, executors, administrators, personal
representatives, successors, or assigns hereinafter can, shall or may
have, in any way connected with or relating to Employee's employment
and/or the termination of his employment with ASFC.
4. Paragraph 3 above includes, but is not limited to, claims, disputes or
causes of action or right to personal recovery under tort, contract
or other law of the State of Indiana, (including, but by no
means limited to, claims arising out of or alleging breach of
contract, wrongful termination, breach of implied employment, breach
of good faith and fair dealing, impairment of economic opportunity,
intentional infliction of emotional harm or emotional distress, actual
or constructive fraud), under the Age Discrimination in Employment Act
of 1967, 29 U.S.C. Section 621, et seq., as amended, under Title VII
of the Civil Rights Act of 1964, 42 U.S.C. Section 2000e, et seq., as
amended, by the Civil Rights Act of 1991, under the Americans with
Disabilities Act of 1990, 42 U.S.C. 12101, et seq., as amended, under
the Family and Medical Leave Act of 1993, 29 U.S.C. 2601, et seq.,
under 42 U.S.C. Section 1981, under any theory of retaliation, under
any federal or state law or municipal ordinance relating to
discrimination in employment, or under any other laws, ordinances,
executive orders, rules, regulations or administrative or judicial
case law arising under the statutory or common laws of the United
States, the State of Indiana, or any political subdivision of the
State of Indiana.
5. Employee knowingly and voluntarily specifically waives any rights or
claims arising under the Age Discrimination in Employment Act of 1967,
29 U.S.C. 621 et seq., as amended and, more specifically, any right or
claim under 29 U.S.C. 626. Employee specifically states and
acknowledges that:
A. This waiver is part of an Agreement written in a manner
calculated to be understood by him.
B. He does not waive rights or claims that may arise after the date
that this Agreement is executed.
C. He is receiving consideration in addition to anything of value to
which he would already have been entitled prior to executing this
Agreement; specifically, Employee will receive the benefits set
forth in the Letter Agreement only if he waives the rights and
claims in Paragraph 3 above by signing this Agreement and not
revoking it within the seven-day period described in Paragraph 6
below.
D. He has been and is hereby advised, in writing, to consult an
attorney prior to executing this Agreement.
E. He further acknowledges that he has been given a period of at
least twenty-one (21) days within which to consider this
Agreement.
6. It is provided that for a period of seven (7) days following the
execution of this Agreement, Employee may revoke said Agreement by
notice to ASFC. Further, this Agreement shall not become effective or
enforceable until the revocation period has expired.
7. Notwithstanding any provision of this Agreement to the contrary,
nothing in this Agreement shall, nor shall any provision of this
Agreement be interpreted or applied so as to:
A. Provide for the forfeiture or deny Employee the right to
payment of any benefit under (i) any employee benefit plan
(within the meaning of section 3(3) of the Employee Retirement
Income Security Act of 1974 as amended, 29 U.S.C. 1001, et
seq.) maintained by ASFC or Lincoln, or (ii) any other bonus or
benefit plan or arrangement maintained by ASFC or Lincoln that
is listed in the Agreement and Plan of Merger dated June 6,
1997 by and among ASFC, SAFECO Corporation and ASFC Acquisition
Co. as such plan or arrangement is in effect on the date of the
Change of Control of ASFC, provided that Lincoln shall have no
responsibility or liability to fund or provide funding for any
such benefit after the date of the Change of Control of ASFC to
the extent that the benefit is payable under a plan or
arrangement maintained by ASFC or under which ASFC is or was a
participating or adopting employer and except to the extent (a)
that the Letter Agreement specifically provides that a benefit
to be provided under the Letter Agreement shall replace and be
paid in lieu of a benefit provided under any other plan or
program maintained by ASFC or Lincoln, or (b) any benefit
ceases to be paid or payable under Paragraph 15 as a result of
a breach of this Agreement.
B. Supersede, nullify, replace or alter any terms of the Letter
Agreement or the January 10, 1997 Letter.
C. Supersede, nullify, replace or alter any terms of the
Employment Agreement entered into by Employee and ASFC as of
January 1, 1997, except to the extent the Letter Agreement
specifically provides that a benefit to be provided under the
Letter Agreement shall replace and be paid in lieu of a benefit
provided under the Employment Agreement or the terms of the
Letter Agreement otherwise specifically supplement or
specifically supersede the terms of the Employment Agreement.
D. Release, acquit or discharge ASFC or Lincoln from, and each of
ASFC and Lincoln agrees to provide to Employee, indemnification
and related rights with respect to expenses, including
reasonable attorney's fees, judgments, penalties, fines and
amounts paid in settlement, actually incurred by him, arising
out of his employment with ASFC or Lincoln, service as a
director, officer, agent, representative fiduciary or trustee
of any such company or affiliated company or any of their
respective pension, profit-sharing or other employee benefit or
welfare plans, to the extent and on the same terms and
conditions as provided in the Articles of Incorporation, Bylaws
or indemnification provisions or agreements of ASFC, or Lincoln
or under any applicable law.
E. Release, acquit or discharge any person or entity from any rights
or claims which Employee may now or hereafter have with respect
to policies of errors and omissions, directors and officers
liability, fiduciary liability or any similar insurance coverage
carried for the benefit of its employees, officers and directors
of ASFC, Lincoln or any of their respective affiliates.
F. Bar Employee from asserting any and all claims he may have
against ASFC or Lincoln as a defense or compulsory counterclaim
(as described in Indiana Trial Rule 13) to the extent, and only
to the extent, that such compulsory counterclaim offsets any
recovery by ASFC and/or LNC to any action or proceeding brought
by ASFC or Lincoln, against Employee to recover damages or
other relief related to or connected with his employment by or
service as a director, officer, agent, representative,
fiduciary or trustee of ASFC, Lincoln, or any of their
respective profit-sharing, employee benefits or welfare benefit
plans, to the same extent as if this Agreement had not been
signed, provided, however, that Employee may not assert any such
claim as a defense with respect to any action or proceeding
brought by ASFC or Lincoln against Employee under this
Agreement or to the extent of Employee's continuing obligations
thereunder, the Employment Agreement, Letter Agreement or the
January 10, 1997 Letter.
8. Employee warrants and represents that in executing this document he
does so with full knowledge of any and all rights which he may have
with respect to all matters released. Employee further understands,
acknowledges and agrees that the payment of any consideration is not
an admission of liability on the part of ASFC or Lincoln, but to the
contrary, represents a negotiated compromise and agreement. This
Agreement, shall not in any way be interpreted to render Employee a
"prevailing party" for any purpose, including, but not limited to, an
award of attorney's fees under any statute or otherwise.
9. Employee represents that he has not filed any complaints or claims
against ASFC or Lincoln with any local, state or federal court or
agency, that Employee will not do so at any time hereafter for claims
which arose prior to the date he signs this Agreement, and that if
any such court or agency assumes jurisdiction of any complaint or
claim against ASFC or Lincoln which arose prior to the execution of
this Agreement, he will immediately request such court or agency to
dismiss the matter and take all such additional steps necessary to
facilitate such dismissal with prejudice. As a further material
inducement to ASFC and Lincoln to enter into this Agreement, except
as contemplated by Paragraph 7.F. above, Employee covenants and
agrees not to sue, or join with others in suing, ASFC or Lincoln on
any of the released Claims.
10. Employee, due to the knowledge and information he possesses gained as
a result of his employment with ASFC and Lincoln hereby agrees to
make himself available, at reasonable times, and upon reasonable
notice, to cooperate, consult, testify, etc. as may be reasonably
requested by ASFC or Lincoln with respect to current and future legal
actions including but not limited to litigation, arbitrations,
mediation, administrative, and/or regulatory proceedings in which ASFC
and Lincoln is a party. ASFC and Lincoln will pay Employee for the
reasonable value of his time with the express understanding that any
such payment is not made for or as an inducement to the substance of
his testimony.
11. Employee, ASFC and Lincoln represent and acknowledge that the terms,
obligations and commitments set forth in the Employment Agreement,
the Letter Agreement and the January 10, 1997 Letter continue to
apply in accordance with the terms of such agreements, except as
specifically and expressly agreed otherwise in writing, and,
notwithstanding any other provision of this Agreement, Employee, ASFC
and Lincoln shall comply with all of the terms specified in the
Employment Agreement, the Letter Agreement and the January 10, 1997
Letter that continue to apply, including obligations or commitments
that survive the termination of any such agreement.
12. Employee warrants and represents that no other person or entity has
any interest in the matters released and that he has not assigned or
transferred or purported to assign or transfer to any person or entity
all or any portion of the matters released.
13. Employee represents and acknowledges that he is not relying and has
not relied on any representation or statements made by ASFC or
Lincoln, or any of them, with respect to any of the matters released
or with regard to his rights or asserted rights in connection
therewith. Employee hereby assumes the risk of any mistake of fact
with regard to any of the matters released or with regard to any of
the facts which are now unknown to him relating thereto.
14. Employee represents and agrees that he shall not communicate the
terms of this Agreement and that he will not hereafter disclose any
information concerning this Agreement, or any information discussed
by the parties in negotiation of this Agreement to any person,
corporation, or other entity, other than representatives of ASFC or
Lincoln, for any purpose whatsoever without prior written permission
from ASFC and Lincoln, except to Employee's spouse, and to the extent
necessary to an out placement firm or counselor, Employee's attorney,
tax preparer, accountant, the trustees of any trust of which the
Employee is either a settlor or a beneficiary, other financial
advisor, or as required by law. Employee shall inform any such
individual to whom he discloses any such information of the
confidential nature thereof, and shall request that such individual
agree to maintain the information in confidence and refrain from any
further disclosure.
15. If any provision of this Agreement is breached or violated by
Employee in any material respect, all payments then being made to
Employee by ASFC and Lincoln under the Letter Agreement and the
Lincoln Deferred Compensation Payments then being made shall
immediately stop. In the event Employee cures such breach to the
reasonable satisfaction of ASFC and Lincoln within a reasonable
period of time, payments under the Letter Agreement and the Lincoln
Deferred Compensation Payments shall resume, and any such payments
that would have been made during the interim between the breach and
the cure shall be made as soon as practicable after ASFC and Lincoln
determine that the cure is satisfactory. Following the breach and
failure to cure, however, no additional benefits shall be paid or
provided to Employee under the Letter Agreement and no additional
Lincoln Deferred Compensation Payments shall be made.
16. This Agreement may not be introduced in evidence or relied on by
either party in subsequent legal proceedings except only proceedings
alleging or arising out of, and seeking redress for breach of the
terms hereof.
17. Each of ASFC and Lincoln hereby represent and warrant that as of the
date of Employee's execution of this Agreement, there are no written
or unwritten agreements, between ASFC and/or Lincoln, as the case may
be, on the one hand and any affiliate of either one of them, on the
other hand, that would materially alter any term of the Employment
Agreement, the Letter Agreement, the January 10, 1997 Letter or this
Agreement, or the rights or obligations of the Employee hereunder.
18. ASFC agrees that the proper interpretation of the Letter Agreement is
that the cash payment described under the heading "Retention Incentive
Benefits/1997 Option Replacement" shall be paid not earlier than
January 1, 1998 and not later than thirty (30) days after Employee
shall become entitled thereto.
19. This Agreement shall be binding upon and inure to the benefit of
Employee and his heirs, executors, administrators, personal
representatives, successors and assigns, and shall be binding upon and
inure to the benefit of ASFC and Lincoln and each of them, and to
their respective, successors and assigns, as the case may be.
20. This Agreement is made and entered into in the State of Indiana, and
shall in all respects be interpreted, enforced and governed under the
internal laws (and not the conflicts of laws rules) of said State.
Should any provision of this Agreement be declared or determined to
be null, void, inoperative, illegal or invalid for any reason, the
validity of the remaining parts, terms or provisions shall not be
affected thereby and they shall retain their full force and effect,
and said null, void, inoperative, illegal or invalid part, term, or
provision shall be deemed not to be a part of this Agreement. As
used in this Agreement, the singular or plural number shall be deemed
to include the other whenever the context so indicates or requires.
The language of all parts of this Agreement shall in all cases be
construed as a whole, according to its fair meaning, and not strictly
for or against any of the parties.
21. This Agreement sets forth the entire agreement between the parties
hereto, and fully supersedes any and all prior negotiations,
agreements or understandings between the parties hereto pertaining to
the subject matter hereof, except to the extent specifically provided
otherwise above. This Agreement may not be modified or amended except
by a written agreement signed by the parties hereto.
PLEASE READ CAREFULLY. THIS AGREEMENT, WAIVER
AND GENERAL RELEASE INCLUDES A GENERAL
RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS
AFFIRMATION OF RELEASOR
I warrant that this Agreement reflects the entire settlement between
myself and ASFC and Lincoln. I have read this Agreement carefully, and I have
been given the opportunity to consult with private counsel concerning its terms
and effect and concerning my rights. I fully understand that this Agreement
generally releases all of my claims, both known and unknown, arising prior to
the execution hereof, against ASFC and Lincoln, except as specifically otherwise
provided herein. I execute this Agreement voluntarily and of my own choice with
full and complete knowledge and understanding of its significance and effect.
Dated:________________, 1997 __________________________________
Employee
STATE OF __________)
) SS:
COUNTY OF__________)
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this day of
, 1997.
---------------------------------
Notary Public
My Commission Expires:
County of Residence:
ACCEPTANCE OF LINCOLN
The undersigned accepts the foregoing Agreement on behalf of Lincoln
National Corporation and represents and warrants that he has all necessary
corporate authority to do so.
Dated:________________, 1997 ________________________________
Ian M. Rolland, Chairman and CEO
STATE OF____________ )
) SS:
COUNTY OF __________ )
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this _________ day of ___________________________, 1997.
_________________________________
Notary Public
My Commission Expires:________________
County of Residence:__________________
ACCEPTANCE OF ASFC
The undersigned accepts the foregoing Agreement on behalf of American
States Financial Corporation and represents and warrants that he has all
necessary corporate authority to do so.
Dated:______________, 1997 __________________________________
Roger H. Eigsti, Chairman and CEO
STATE OF____________ )
) SS:
COUNTY OF __________ )
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this ___________ day of _______________________, 1997.
---------------------------------
Notary Public
My Commission Expires:_____________
County of Residence:_______________
ACKNOWLEDGMENT
Employee and Lincoln hereby acknowledge their mutual understanding and
agreement as set forth in the Agreement to which this Acknowledgment is attached
that, in consideration for the premises set forth in the Agreement, payment for
the Lincoln phantom stock units currently credited to Employee and of Employee's
account under the Lincoln Deferred Compensation Plan shall commence on the first
day of the month on or next following the fourth anniversary of the Change of
Control of ASFC and shall be made in non-annuity monthly installments over a
period of 120 months. And Ian M. Rolland hereby represents and warrants that he
has all necessary corporate authority to execute this Acknowledgment.
Dated:________________, 1997 ________________________________
Employee
Dated:________________, 1997 ________________________________
Ian M. Rolland, Chairman and CEO
STATE OF____________ )
) SS:
COUNTY OF __________ )
Subscribed and sworn to before me, a Notary Public in and for said
County and State, this ______ day of ________________, 1997 by Robert A. Anker.
__________________________________
Notary Public
My Commission Expires:_________________
County of Residence:___________________
STATE OF____________ )
) SS:
COUNTY OF __________ )
Subscribed and sworn to before me, a Notary Public in and for said
County and State, this _______ day of _____________, 1997 by Ian M. Rolland.
_________________________________
Notary Public
My Commission Expires:________________
County of Residence:__________________
EXHIBIT A
Acknowledgment of Amount of Retention Incentive/
1997 Option Replacement
Pursuant to Letter Agreement Dated April 1, 1997
The parties acknowledge that pursuant to the Letter Agreement dated April 1,
1997, Employee shall receive as his Retention Incentive Benefits/1997 Option
Replacement, an amount equal to $2,118,750, representing 3.75 times his current
base salary of $565,000.
PCDocs No. 66396\1
Exhibit 10(q)
- -150-
AGREEMENT OF LEASE
BY AND BETWEEN
NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP
(LANDLORD)
AND
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(TENANT)
INDEX TO LEASE
ARTICLES NUMBER CAPTION
ARTICLE 1 Basic Lease Provisions and Enumeration of Exhibits..............4
ARTICLE 2 Description of Premises and Appurtenant Rights..................6
ARTICLE 3 Rent and Additional Rent........................................8
ARTICLE 4 Landlord's Covenants, Interruptions and Delays.................15
ARTICLE 5 Tenant's Covenants.............................................17
ARTICLE 6 Assignment, Subletting, and Mortgaging.........................22
ARTICLE 7 Casualty and Taking............................................24
ARTICLE 8 Defaults; Events; Remedies.....................................26
ARTICLE 9 Rights of Mortgagee/Ground Lessor..............................28
ARTICLE 10 Miscellaneous Provisions.......................................29
10.1 Title..........................................................29
10.2 Notices........................................................29
10.3 Bind and Inure.................................................30
10.4 Partial Invalidity.............................................30
10.5 No Waiver......................................................30
10.6 No Surrender...................................................30
10.7 No Accord and Satisfaction.....................................30
10.8 Intentionally Deleted..........................................30
10.9 Self-Help......................................................30
10.10 Estoppel Certificates..........................................31
10.11 Waiver of Subrogation..........................................32
10.12 Governing Law..................................................32
10.13 Acts of God....................................................32
10.14 Consent........................................................32
10.15 Brokerage Commissions..........................................32
10.16 Intentionally Deleted..........................................33
10.17 Limitation of Liability........................................33
10.18 Intentionally Deleted..........................................33
10.19 Recording......................................................33
10.20 Intentionally Deleted..........................................33
10.21 Term Commencement Date.........................................33
10.22 Improvements...................................................34
10.23 Electricity....................................................36
10.24 Option to Extend...............................................37
10.25 Hazardous Materials............................................39
10.26 Right of First Offer...........................................40
10.27 Right of First Refusal.........................................42
10.28 Right to Reduce Space..........................................43
10.29 Storage Premises...............................................44
10.30 Antenna Installation...........................................45
10.31 Exterior Signage...............................................48
10.32 Food Service Facility..........................................49
10.33 Exercise Facility..............................................49
10.34 Temporary Premises.............................................49
10.35 Testing of Building HVAC System................................50
DATE OF LEASE EXECUTION: February __, 1998
ARTICLE I
REFERENCE
1.1 Subjects Referred To. Each reference in this Lease to any of the following
subjects shall be construed to incorporate the data for that subject in this
Article.
PARTIES:
LANDLORD: NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP, a Massachusetts
limited partnership
MANAGING AGENT: NORTHLAND INVESTMENT CORPORATION
LANDLORD'S/MANAGING AGENT'S ADDRESS FOR NOTICES:
Northland Investment Corporation
2150 Washington Street
Newton, MA 02162
MAKE CHECKS PAYABLE TO: NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP
SEND CHECKS TO: c/o Northland
P.O. Box 620601
Newton Lower Falls, MA 02162-0601
TENANT: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY,
an Indiana corporation
TENANT'S ADDRESS (FOR NOTICE AND BILLING):
350 Church Street
Hartford, CT 06103
Attn: Peter Gourley
Vice President, Financial Reporting & Pricing
BUILDING & LEASED PREMISES: Approximately 149,778 rentable square feet
comprising the entire seventh (7th) through twelfth (12th) floors (collectively,
the "Premises") of the building known as the Metro Center and located at 350
Church Street, Hartford, Connecticut (the "Building"), substantially as shown on
the Plans attached hereto as Exhibit "A". All measurements and determinations of
area required pursuant to this Lease shall be made in accordance with the
Building Owners and Managers Association ("BOMA") standards, BOMA publication
ANSI 265.1-1996. Prior to the Term Commencement Date, as hereinafter defined,
the area of the Premises will be remeasured in accordance with BOMA standards.
If such remeasurement discloses a different rentable area for the Premises than
that set forth above, then the Base Rent and Tenant's Proportionate Share (as
such terms are hereinafter defined) shall be adjusted accordingly.
PROPERTY: The Building, the parking structure (the "Garage") with an address at
150 High Street, Hartford, Connecticut, and the land parcel(s) on which the
Building and the Garage are located, including exterior grounds and sidewalks,
if any.
TERM COMMENCEMENT DATE: See Section 10.21
EXPIRATION DATE: The date which is one hundred twenty (120) months and two (2)
weeks after the Term Commencement Date; provided, however, if such date shall
fall on other than the last day of a calendar month, the Expiration Date shall
be deemed to be the last day of the calendar month in which such date shall
occur.
TERM: One hundred twenty (120) months and two (2) weeks (plus the partial month,
if any, at the end of the Term), as the same may be sooner terminated or
extended in accordance with the terms of this Lease.
OPTION TO EXTEND: See Section 10.24
BASE RENT RATE:
Months 1- 24: $12.00 per rentable square foot of the Premises per year
Months 25-60: $17.00 per rentable square foot of the Premises per year
Months 61-84: $22.00 per rentable square foot of the Premises per year
Months 85-96: $24.00 per rentable square foot of the Premises per year
Months 97-108: $24.50 per rentable square foot of the Premises per year
Months 109-
Expiration Date: $25.00 per rentable square foot of the Premises per year
PROPORTIONATE SHARE: 52.56%, being a fraction, the numerator of which is the
rentable area of the Premises and the denominator of which is the rentable
area of the Building.
OPERATING COSTS FOR THE BASE CALENDAR YEAR: The actual amount of Operating
Costs for the first twelve (12) months of the Term
- -------------------------------------------
REAL ESTATE TAXES FOR THE BASE CALENDAR YEAR: The actual amount of
Landlord's Tax Expense for the first twelve (12) months of the
- -----------------------------------------------
Term
PERMITTED USE OF PREMISES: General office use only (without associated bulk
storage or uses requiring above building standard structural, electrical or HVAC
facilities), and for no other use or purpose.
TENANT INSURANCE REQUIREMENTS: Public Liability Insurance
Combined Single Limit
Bodily Injury & Property Damage: $3,000,000.00/$5,000,000.00
SECURITY DEPOSIT: None
GUARANTOR: None
BROKER: Cushman & Wakefield of Connecticut, Inc.
1.2 Exhibits & Riders. The Exhibits and Riders listed below in this Section are
incorporated in this Lease by reference and are to be construed as part of this
Lease:
Exhibit A Plan of Premises
Exhibit B Landlord Services
Exhibit B-1 Cleaning Specifications
Exhibit C Rules and Regulations
Exhibit D Form of Subordination, Non-Disturbance and Attornment
Agreement
Exhibit E Plan of Storage Premises
Exhibit F Form of Metro Center Fitness Club Usage Agreement
ARTICLE II
DESCRIPTION OF PREMISES AND APPURTENANT RIGHTS
2.1 Location of Premises. Landlord hereby demises and leases to Tenant, and
Tenant hereby accepts from Landlord, the Premises suitably identified in the
foregoing portion of this Lease.
2.2 Appurtenant Rights and Reservations. Tenant shall have, as appurtenant to
the Premises, the non-exclusive right to use, and permit its invitees to use in
common with others, the public or common lobbies, hallways, stairways, passenger
elevators and sanitary facilities in the Building, but such rights shall always
be subject to the Rules and Regulations set forth on Exhibit C (as the same may
be amended or modified from time to time by Landlord by prior notice to Tenant),
and to the right of Landlord to designate and change from time to time areas and
facilities so to be used (provided that Tenant's use and enjoyment thereof and
of the Premises and Tenant's rights under this Lease are not materially
adversely affected thereby). Tenant shall also have, as appurtenant to the
Premises, subject to obtaining Landlord's prior written consent, the
non-exclusive right to use reasonable portions of common area conduits, chutes
and pipes adjacent to the Premises for the purpose of running wires and cabling
between floors of the Premises to serve Tenant's equipment located within the
Premises.
Tenant agrees that Landlord shall have the right, upon reasonable prior
written notice to Tenant, to place in, over and upon the Premises (but in such a
manner as to reduce interference with Tenant's use of the Premises and not be
visible from within the Premises) utility lines, pipes, equipment and the like
to serve the Premises or premises other than the Premises, and to replace,
maintain and/or repair such utility lines, pipes, equipment and the like.
During the hours of 7:00 A.M. to 6:00 P.M., Monday through Friday,
legal holidays recognized generally in first-class office buildings in downtown
Hartford excepted (hereinafter referred to as "Normal Building Operating
Hours"), the Building shall be open and access to the Premises shall be freely
available, subject to interruption due to causes beyond Landlord's reasonable
control. During all periods other than Normal Building Operating Hours Tenant
shall have access to the Premises, and at all times Tenant shall have access to
the Garage, but always subject to reasonable rules and regulations therefor from
time to time established by Landlord by suitable notice.
2.3 Parking. During the Term of this Lease, Landlord will make available for the
use by Tenant and its employees four (4) Garage parking passes for each one
thousand (1,000) rentable square feet of the Premises. Notwithstanding the
foregoing, Tenant shall have the one-time right, upon thirty (30) days prior
written notice to Landlord, which notice must be given on or before the third
(3rd) anniversary of the Term Commencement Date, to reduce the number of Garage
parking passes available for its use to three (3) Garage parking passes for each
one thousand (1,000) rentable square feet of the Premises; and, if Tenant shall
exercise such right, the number of Garage parking passes shall be so reduced
effective as of the expiration of such thirty (30) day period. Said parking
passes shall be paid for by Tenant at the following rates (in each case plus
applicable State sales tax): $50.00 per pass per month for months 1-24 of the
Term; $70.00 per pass per month for months 25-36 of the Term; $80.00 per pass
per month for months 37-48 of the Term; $100.00 per pass per month for months
49-60 of the Term; $125.00 per pass per month for one-half (1/2) of the passes
for months 61 through the Expiration Date of the Term; and at the then current
prevailing rate in the Garage, as such rate may vary from time to time, for the
other one-half (1/2) of the passes for months 61 through the Expiration Date of
the Term. All parking passes (and the parking spaces in the Garage) will be on
an unassigned, non-reserved basis, except for thirty (30) spaces, twenty (20) of
which shall be designated by Landlord as reserved for Tenant's exclusive use and
ten (10) of which shall be designated by Landlord as reserved for the use by
Tenant's visitors and guests. Such thirty (30) spaces shall be in a preferred
location in the Garage (as designated by Landlord) and shall be indicated by
signage (or other form of identification) installed by Landlord and approved by
Tenant; provided, however, that in no event shall Landlord be obligated to
police the use of such thirty (30) spaces. Notwithstanding the preceding
sentence, upon written notice from Tenant that unauthorized persons are using
any of such thirty (30) spaces, Landlord shall use reasonable efforts to cause
such persons not to use such spaces; provided, however, that Landlord shall have
no obligation to terminate any lease to which Landlord and such persons may be
parties by reason of such unauthorized use. The use of all parking spaces in the
Garage shall be subject to rules and regulations promulgated by Landlord from
time to time.
Except in connection with a permitted sublease or assignment under
Article VI hereof, Tenant shall have no right to sublet, assign or otherwise
transfer said parking passes without Landlord's prior written consent. If Tenant
shall desire to sublet, assign or otherwise transfer any of said parking passes,
Tenant shall submit to Landlord in writing the name of the proposed transferee,
the terms and conditions of the transfer (including copies of the proposed
sublease or assignment) and any other information reasonably requested by
Landlord. Landlord shall have the right, exercisable by written notice to Tenant
within ten (10) business days after Landlord's receipt of Tenant's notice, to
recapture any or all of the parking passes which are the subject of the proposed
sublease, assignment or other transfer. If Landlord shall exercise such right,
Tenant shall have no further right to such parking passes (and shall return the
same to Landlord) effective as of the date and for the period of time set forth
in Landlord's recapture notice. If Landlord shall not exercise such right,
Landlord's consent to the proposed sublease, assignment or other transfer shall
not unreasonably withheld or unduly delayed; provided, however, that Landlord
may withhold its consent if in the exercise of its sole judgment Landlord
determines that (i) the financial condition or general reputation of the
proposed transferee is not consistent with the extent of the obligations
undertaken by the proposed sublease, assignment or other transfer, or (ii)
Tenant proposes to sublet or assign to one who, at the time of Tenant's request
for consent, is a tenant or occupant of the Building and/or is using parking
spaces in the Garage or to one with whom Landlord or its agents is (are)
actively negotiating for space in the Building or for parking spaces or passes
in the Garage, or (iii) the charges for the parking passes which the transferee
is obligated to pay are less than the then current prevailing rate (from time to
time) in the Garage. Tenant acknowledges that Landlord's consent may be
conditioned upon, inter alia, a requirement that all charges payable for the use
of such parking passes in excess of the charges payable hereunder for such
parking passes be paid to Landlord.
ARTICLE III
RENT AND ADDITIONAL RENT
3.1 Rent. All monies payable by Tenant to Landlord under this Lease shall be
deemed to be rent and shall be payable and recoverable as rent in a manner
herein provided. Rent shall be paid to the Landlord, commencing on the Term
Commencement Date, and on the first day of each calendar month during the Term
of this Lease without any withholding, offset, abatement, reduction, prior
notice or demand, except as otherwise expressly set forth in this Lease. Until
notice of some other designation is given, rent and all other charges shall be
paid by check to the order of Landlord at Landlord's mailing address set forth
in Section 1.1 hereof, receipt of same being subject to collection.
Notwithstanding the foregoing, provided that Tenant is not in default under this
Lease, Tenant shall be entitled to a credit against Base Rent payable hereunder
in the amount of $.50 for each rentable square foot of the Premises not occupied
by Tenant for business during the first two (2) weeks of the Term, the amount of
such credit to be confirmed in writing by Landlord and Tenant promptly after the
expiration of such first two (2) week period.
If Tenant shall fail to pay rent when due, such unpaid amount shall
bear interest until paid at the rate of 1.5% per month for all sums which are in
excess of ten (10) business days overdue. In the event Tenant pays any rent or
other charge by check or draft, and said check or draft is not honored by the
bank on which it is drawn, interest as set forth herein and an additional charge
of $15.00 shall be due from Tenant to Landlord.
3.2 Operating Cost Increase. If the Operating Costs for any calendar year or
partial calendar year during the Term are greater than the Operating Costs for
the Base Calendar Year set forth in Section 1.1 (or a prorated amount thereof
for any partial calendar year), then Tenant shall pay to Landlord its
Proportionate Share set forth in Section 1.1 of such excess, as the same may be
adjusted in the event of a remeasurement or change in size of the Premises or
Building. Operating Costs for the Base Calendar Year shall be adjusted to
reflect an occupancy rate in the Building of ninety-five percent (95%).
Landlord may from time to time reasonably estimate the amount due from
Tenant under this Section with respect to any calendar year or portion thereof
and, commencing no sooner than the first (1st) anniversary of the Term
Commencement Date, Tenant shall pay periodically as Landlord may determine, but
not more frequently than monthly, the amount of Landlord's estimate as rent with
the next due payment of monthly Base Rent.
Not later than one hundred twenty (120) days after the end of each
calendar year, Landlord shall render Tenant a statement of Operating Costs for
such calendar year and any amount due from Tenant or any credit due to Tenant
hereunder. Payment by Tenant of any amount due shall be made as additional rent
with Tenant's next due payment of monthly Base Rent (or, if the term of this
Lease has ended, within ten (10) days of receipt of such statement), and
Landlord shall credit the amount of any overpayment against subsequent
obligations of Tenant under this clause (or refund such overpayment, if the term
of this Lease has ended and Tenant has no further obligations to Landlord).
Failure by Landlord to deliver such statement within the one hundred twenty
(120) day period does not relieve Tenant of its obligation to pay the charges
described herein; provided, however, that in the event that Landlord fails to
furnish Tenant with such statement within two (2) years after the end of any
calendar year, then Tenant shall not be required to pay Tenant's Proportionate
Share of any increase in Operating Costs for that calendar year.
Tenant shall have the right, at Tenant's cost and expense (subject to
the penultimate sentence of this paragraph), to examine Landlord's books and
records of Operating Costs for any year with respect to which Tenant has made
its payments on account thereof, subject to the following provisions:
(a) Such books and records shall be made available to Tenant at the
offices where Landlord keeps the same during normal business hours.
(b) Tenant shall have the right to make such examination no more than
once in respect of any period in which Landlord has given Tenant a statement of
the actual amount of Operating Costs.
(c) Any request for examination in respect of any year may be made no
more than one (1) year after Landlord renders the statement of the actual amount
of Operating Costs for such year, and such examination shall be performed within
such one (1) year period.
(d) Such examination may be made only by an independent certified
public accountant reasonably acceptable to Landlord. Without limiting Landlord's
approval rights, Landlord may withhold its approval of any examiner of Tenant
who is being paid by Tenant on a contingent fee basis.
(e) As a condition to performing any such examination, Tenant and its
examiners shall be required to execute and deliver to Landlord an agreement, in
form acceptable to Landlord, agreeing to keep confidential any information which
it discovers about Landlord or the Building in connection with such examination.
If it is determined that Landlord overstated Operating Costs for the year to
which Tenant's examination relates by more than 4%, Landlord shall reimburse
Tenant for the reasonable costs and expenses incurred by Tenant in performing
such examination, but in no event shall such reimbursement exceed $2,000.00; and
if it is determined that Landlord understated Operating Costs for the year to
which Tenant's examination relates, Landlord shall reimburse Tenant for the
reasonable costs and expenses incurred by Tenant in performing such examination,
but in no event shall such reimbursement exceed the amount of Tenant's
underpayment on account of Operating Costs for such year. If it is determined
that there was an overpayment or underpayment on account of Operating Costs for
the year to which Tenant's examination relates, Landlord shall reimburse Tenant,
or Tenant shall pay to Landlord, within thirty (30) days of such determination,
the amount of such overpayment or underpayment (as the case may be).
3.3 Definition of "Operating Costs." The term "Operating Costs" is defined to be
the aggregate of costs and expenses incurred for operating, maintaining,
repairing, cleaning and managing the Property, including, without limitation,
the following: salaries, wages, employment taxes, reasonable, customary and
mandatory benefits for employees of Landlord or its managing agent (provided,
however, that with respect to any employee who performs services for buildings
other than the Building, the salaries, wages, taxes and benefits payable or
allocable to such employee shall be equitably apportioned among the buildings to
which such employee renders services based upon the time which such employee
spent performing services for each such building), costs of providing HVAC and
elevator service, costs of any contractor of Landlord engaged in the cleaning,
operating, maintenance or management of the Property, electricity properly
chargeable hereunder, gas, oil, water (including chilled water) and steam
(including sewer rental and any utility tax), rubbish removal, Landlord's
insurance of every description and type related to the Property, repairs,
replacements, maintenance of any grounds, landscaping and planting, building
supplies, costs of operating the food service facility described in Section
10.32 below (unless such food service facility is operated by a rent-paying
tenant, in which event only the costs of operating the food service facility in
excess of the rent paid by such tenant shall be included in Operating Costs),
costs of operating (including the maintenance and replacement of equipment for)
the exercise facility described in Section 10.33 below, snow removal, window
cleaning, building security, service contracts with independent contractors for
any of the foregoing (including elevator and air conditioning maintenance), the
cost of capital replacements, the cost of new (i.e., as opposed to replacement)
capital improvements which are reasonably projected to reduce energy or other
operating costs (provided, however, that the cost of all capital expenditures
(both for replacements and new improvements) shall be amortized over their
useful life in accordance with generally accepted accounting principles,
consistently applied ("GAAP"), together with market interest on the unamortized
balance), management fees, energy audits, and legal and accounting fees directly
related to the operating of the Property.
For purposes of this Lease, the aggregate controllable expenses
includable in Operating Costs for any calendar year shall not exceed one hundred
five percent (105%) of the aggregate controllable expenses for the prior
calendar year. "Controllable" shall mean within the reasonable control of
Landlord and not determined by a third party. For example, utility rates,
insurance premiums, mandated minimum wages and tax rates or assessments are not
controllable.
Notwithstanding the foregoing, the following items shall be excluded
from the definition of Operating Costs:
(a) Costs of decorating, redecorating or special cleaning or other
services provided to a particular tenant (but not all tenants) of the Building;
(b) Wages, salaries, fees and fringe benefits paid to officers or
partners of Landlord or personnel above the level of Property Manager;
(c) Any charge for depreciation of the Building or Building equipment;
(d) Any charge for Landlord's income taxes, excess profit taxes,
franchise taxes or similar taxes on Landlord's business;
(e) All costs directly relating to activities for the solicitation and
execution of leases of space in the Building;
(f) All costs and expenses of operating the Garage;
(g) All costs for which Tenant or any other tenant in the Building is
separately charged (other than through the operating cost escalation provisions
of the lease with such other tenant);
(h) The cost of any electric current furnished to office tenants for
non-customary office machinery and equipment;
(i) The cost of correcting defects in the original construction of the
Building, except that conditions (not occasioned by construction defects)
resulting from ordinary wear and tear will not be deemed defects for the purpose
of this clause (i);
(j) The cost of correcting defects in Building equipment to the extent
such cost is covered by warranty, except that conditions resulting from ordinary
wear and tear will not be deemed defects for the purpose of this clause (j);
(k) The cost of any repair made by Landlord because of the total or
partial destruction of the Building by fire or other casualty (except that
reasonable deductible amounts may be included in Operating Costs) or the
condemnation of a portion of the Building;
(l) Any increase in Landlord's insurance premiums to the extent that
such increase is caused by or attributable to the particular use, occupancy or
act of another tenant;
(m) The cost of any items for which Landlord is reimbursed by insurance
or otherwise compensated by other parties (other than tenants of the Building
through the operating cost escalation provisions of the leases with such
tenants);
(n) The cost of capital expenditures, except as set forth above;
(o) The cost of any removal, treatment or abatement of asbestos or any
other hazardous substance or gas in the Building or on the Premises (other than
those customarily handled and disposed of incident to the normal operation,
maintenance or repair of the Property, such as cleaning materials);
(p) Any amount paid to an affiliate of Landlord which is in excess of
the amount which would be paid in the absence of such relationship (it being
acknowledged and agreed, however, that a management fee not exceeding 4% of
gross revenues from the Property payable to an affiliate of Landlord will not
violate this clause (p));
(q) The cost of any work or service performed for or facilities
furnished to any tenant of the Building to a greater extent or in a manner more
favorable to such tenant that that performed for or furnished to Tenant;
(r) The cost of preparing, improving or altering space in the Building
leased to other tenants;
(s) The cost of overtime or other expense to Landlord in curing its
defaults; and
(t) Ground rent or similar payments to a ground lessor.
Landlord shall compute Operating Costs on an accrual basis in
accordance with GAAP. Until such time as the occupancy rate in the Building is
at least ninety-five percent (95%), Landlord shall have the right to adjust
those Operating Costs which may vary based on occupancy levels to reflect a
ninety-five percent (95%) occupancy rate in the Building.
In the event that Operating Costs shall contain any costs of operating
or maintaining any system or providing any services which shall serve the
Premises but less than the entire Building, then such portion of Operating Costs
shall be calculated separately from other costs within Operating Costs. With
respect to such costs, Tenant shall not pay its Proportionate Share as defined
in Section 1.1 but rather a proportionate share calculated as a fraction, the
numerator of which is the rentable square footage of the Premises as established
in Article I, and the denominator of which shall be the rentable square footage
of the space served by the system or receiving the services, as the case may be.
3.4 Real Estate Tax Increase. If Landlord's Tax Expense for any calendar year or
partial calendar year during the Term is greater than the Real Estate Taxes for
the Base Calendar Year set forth in Section 1.1, Tenant shall pay to Landlord,
as additional rent, its Proportionate Share set forth in Section 1.1 of such
excess, as the same may be adjusted in the event of a remeasurement or change in
size of the Premises or Building.
Landlord may from time to time reasonably estimate the amount due from
Tenant under this Section with respect to any calendar year or portion thereof
and, commencing no sooner than the first (1st) anniversary of the Term
Commencement Date, Tenant shall pay periodically as Landlord may determine, but
not more frequently than monthly, the amount of Landlord's estimate as rent with
the next due payment of monthly Base Rent.
Not later than one hundred twenty (120) days after Landlord's Tax
Expense for the applicable period is determined, Landlord shall render Tenant a
statement (which shall include copies of real estate tax bills and invoices from
tax abatement consultants, if any) showing for the applicable period Landlord's
Tax Expense and any other amount due from Tenant or any credit due to Tenant
hereunder. Payment by Tenant of any amount due shall be made as additional rent
with Tenant's next due payment of monthly Base Rent (or, if the term of this
Lease has ended, within ten (10) days of receipt of such statement), and
Landlord shall credit the amount of any overpayment against subsequent
obligations of Tenant under this clause (or refund such overpayment, if the term
of this Lease has ended and Tenant has no further obligations to Landlord).
Failure by Landlord to deliver such statement within the one hundred twenty
(120) day period does not relieve Tenant of its obligation to pay the charges
described herein.
The term "Landlord's Tax Expense" shall mean all taxes, betterments and
assessments of every kind and nature assessed by any governmental authority on
the Property which Landlord shall become obligated to pay because of or in
connection with the ownership, leasing and/or operating of the Property plus the
reasonable costs incurred in any attempt to obtain a real estate tax abatement
for the real estate taxes due during the term hereof, whether or not successful,
subject to the following:
(a) The amount of special taxes or special assessments to be included
shall be limited to the amount of the installment (plus any interest, other than
penalty interest, payable thereon) of such special tax or special assessment
required to be paid during the year in which such taxes are being determined;
(b) There shall be excluded from such taxes interest and penalties due
to Landlord's failure to pay taxes when they are due and all income taxes,
excess profit taxes, excise taxes, franchise taxes, estate, succession,
inheritance and transfer taxes; provided, however, that if at any time during
the Term the present system of ad valorem taxation of real property shall be
changed so that in lieu of the whole or any part of the ad valorem tax on real
property, there shall be assessed on Landlord a capital levy or other tax on the
gross rents received with respect to the Property or a federal, state, county,
municipal or other local income, franchise, excise or similar tax, assessment,
levy or charge (distinct from any now in effect) measured by or based, in whole
or in part, upon any such gross rents, then any and all of such taxes,
assessments, levies or charges, to the extent so measured or based, shall be
deemed to be included within the term "Landlord's Tax Expense" but only to the
extent that the same would be payable if the Property were the only property of
Landlord; and
(c) Landlord's Tax Expense shall be reduced by the amount of any
abatements or refunds actually received net of the reasonable expenses,
including without limitation legal fees and expert witness fees, incurred in
obtaining such abatements or refunds.
Although real estate taxes in Connecticut are payable on the basis of a July 1-
June 30 fiscal/tax year, for the purposes of this Section 3.4, Landlord's Tax
Expense shall be computed on a calendar year basis, based upon the sum of
one-half (1/2) of Landlord's Tax Expense payable in respect of one fiscal/tax
year, plus one-half (1/2) of Landlord's Tax Expense payable in respect of the
next fiscal/tax year. (For example, Landlord's Tax Expense for 1997 would be 1/2
of Landlord's Tax Expense in respect of the 1997 fiscal/tax year, plus 1/2 of
Landlord's Tax Expense in respect of the 1998 fiscal/tax year.)
ARTICLE IV
LANDLORD'S COVENANTS, INTERRUPTIONS AND DELAYS
4.1 Landlord Covenants.
4.1.1 To furnish services, facilities and supplies set forth in Exhibit
B, comparable to first-class office buildings in downtown Hartford.
4.1.2 Except as otherwise provided in Article VII and except in the
case of damage caused by any act or negligence of Tenant, its employees, agents,
contractors, invitees or servants, to make such repairs to the roof, exterior
walls, floor slabs and common areas and facilities of the Building as may be
necessary to keep them in serviceable condition.
4.1.3 That Tenant, on paying the rent and performing Tenant's
obligations in this Lease, shall peacefully and quietly have, hold and enjoy the
Premises, free from claims of Landlord or those claiming under Landlord, subject
to all of the terms and provisions hereof.
4.1.4 Landlord shall carry commercial general liability insurance for
the Building with a combined single limit of at least $5,000,000 (and, upon
written request, Landlord shall provide Tenant with a certificate of insurance
evidencing such coverage), as well as fire and hazard insurance coverage for the
Building. The coverages provided in the preceding sentence shall also satisfy
all requirements of Landlord's mortgagee. Landlord or Landlord's managing agent
shall carry appropriate workers' compensation and employer's liability insurance
on those employees who may at any time enter the Premises.
4.1.5 Landlord shall comply with all federal, state and local laws,
ordinances, regulations and codes relating to the operation of the Building
generally as an office building (specifically excluding, without limitation, the
manner of use by Tenant of the Premises or by other tenants of other premises in
the Building). Without limiting the foregoing, Landlord shall cause the common
areas of the Building to comply with the Americans with Disabilities Act of 1990
(the "ADA") as in effect on the date hereof.
4.1.6 Subject to the provisions of Section 10.11 hereof, Landlord
agrees to hold Tenant harmless and to defend, exonerate and indemnify Tenant
from any against any and all claims, liabilities or penalties (including,
without limitation, reasonable attorneys' fees) asserted by or on behalf of any
third party against Tenant for damage to property or injuries to persons
sustained or occurring in the Building to the extent arising from the negligence
or willful misconduct of Landlord or Landlord's agents, employees or
contractors.
4.2 Interruption and Delay. Landlord reserves the right to stop any service or
utility system when necessary by reason of accident or emergency or until
necessary repairs have been completed; provided, however, that in each instance
of stoppage, Landlord shall exercise reasonable diligence to eliminate the cause
thereof. Except in case of emergency repairs, Landlord will give Tenant
reasonable advance notice of any contemplated stoppage and will use reasonable
efforts to avoid unnecessary inconvenience to Tenant by reason thereof. In case
Landlord is prevented or delayed from making any repairs, alterations or
improvements, or furnishing any services or performing any other covenant or
duty to be performed on Landlord's part, by reason of any cause reasonably
beyond Landlord's control, including without limitation the causes set forth in
Section 10.13 hereof, Landlord shall not be liable to Tenant, nor shall the same
give rise to a claim in Tenant's favor that such failure constitutes actual or
constructive, total or partial, eviction from the Premises, and Tenant's sole
remedies shall be in the following circumstances, as and to the extent
described:
(a) If, due to Landlord's failure to provide any service or utility
(including electricity) required to be provided by Landlord under this Lease,
the Premises or any portion thereof becomes untenantable so that, for the
Premises Untenantability Cure Period, as hereinafter defined, the continued
operation in the ordinary course of Tenant's business is materially adversely
affected, then, provided that Tenant ceases to use the affected portion of the
Premises during the entirety of the Premises Untenantability Cure Period (except
for such temporary access thereto as is necessary to obtain files, records and
the like) and that such untenantability and Landlord's inability to cure such
condition are not caused by the fault or neglect of Tenant or Tenant's agents,
employees or contractors or any other cause beyond Landlord's reasonable
control, Base Rent and Tenant's payments on account of Operating Costs and
Landlord's Tax Expense shall thereafter be abated in proportion to such
untenantability until the day such condition is corrected. For the purposes
hereof, the "Premises Untenantability Cure Period" shall be defined as five (5)
consecutive business days after Landlord's receipt of written notice from Tenant
of the condition causing untenantability in the Premises.
(b) If, due to Landlord's failure to provide any service or utility
(including electricity) required to be provided by Landlord under this Lease,
the Premises or any portion thereof becomes untenantable, the untenantability of
which materially adversely affects the continued operation in the ordinary
course of Tenant's business, and if (i) such untenantability continues for sixty
(60) consecutive days after Landlord's receipt of written notice of such
condition from Tenant, and (ii) such untenantability and Landlord's inability to
cure such condition are not caused by the fault or neglect of Tenant or Tenant's
agents, employees, or contractors, then, provided that Tenant ceases to use the
affected portion of the Premises during the entirety of such sixty (60) day
period (except for such temporary access thereto as is necessary to obtain
files, records and the like), Tenant shall have the right to terminate this
Lease exercisable by giving Landlord a written termination notice as follows.
Upon the giving of such notice, this Lease shall terminate as of the date which
is thirty (30) days after Landlord's receipt thereof, unless Landlord shall have
cured such condition on or before such thirtieth (30th) day.
The provisions of clauses (a) and (b) above shall not apply in the event of
untenantability caused by fire or other casualty or taking (see Article VII).
ARTICLE V
TENANT'S COVENANTS
Tenant covenants during the Term and such further time as Tenant
occupies any part of the Premises:
5.1 Tenant's Payments. To pay when due all rent and additional rent and all
charges for utility services rendered to the Premises therefor including
electricity costs and, as further additional rent, all charges for additional
services agreed to from time to time.
5.2 Repairs & Yielding Up. To keep and maintain the Premises in good order and
condition, reasonable wear and tear and damage by casualty or taking excepted,
and to notify Landlord promptly of any repairs to be made in or to the Premises.
At the expiration or termination of this Lease, Tenant shall peaceably yield up
the Premises and all alterations, additions and improvements (it is agreed that
alterations, additions and improvements made to the Premises, except for the
installation of so-called Liebert units which Tenant may remove, shall become
part of the Premises and the property of Landlord), unless Landlord requests
removal of same by Tenant, in good order and repair and in the same condition as
said Premises were in at Term Commencement Date or thereafter may be put in
accordance with this Lease, reasonable wear and tear or damage by casualty or
taking excepted, first removing all personal property, trade fixtures, business
equipment and other goods and effects of Tenant (including, without limitation,
all telephone and computer equipment), and repairing any damage caused by such
removal and restoring the Premises and leaving them broom clean and neat. Any of
Tenant's property which shall remain in the Building or on the Premises after
the expiration or earlier termination of the Lease shall be deemed conclusively
to have been abandoned and either may be retained by Landlord as its property or
may be disposed of in such manner as Landlord may see fit, at Tenant's sole cost
and expense.
5.3 Occupancy & Use. Continuously from the Term Commencement Date to use and
occupy the Premises for only the Permitted Use of Premises; to comply with all
applicable federal, state and local laws, ordinances, regulations and codes in
its use and occupancy of the Premises; not to injure or deface the Premises,
Building or any other portion of the Property; and not to dump, flush, or in any
way introduce any hazardous, toxic or chemical substances into the septic,
sewage or other waste disposal system; and not to use, generate, store or
dispose of hazardous, toxic or chemical substances in or on the Premises (except
those in customary types and quantities and ordinarily used by office tenants,
and then only in accordance with law and manufacturer's specifications
therefor); and not to permit the emission from the Premises of any objectionable
noise or odor, or to create any nuisance, and not to use the Premises for an
auction sale or any purpose which is inconsistent with the tenancy of the
Building, or which is improper, offensive, contrary to law or ordinance or
liable to invalidate or increase the premiums for any insurance on the Building
or its contents or liable to render necessary any alteration or addition to the
Building; and not to obstruct in any manner any portion of the Building not
hereby leased or any portion thereof or of the Building used by Tenant in common
with others and not without prior written consent of Landlord, permit the
painting or placing of any curtains, blinds, shades, awnings, aerials, signs,
flagpoles or the like, visible from outside the Premises.
5.4 Rules & Regulations. To comply with the Rules and Regulations attached
hereto as Exhibit C and all other reasonable rules and regulations hereafter
made or modified by Landlord, of which Tenant has been given notice, provided
that such other rules and regulations shall not materially adversely affect
Tenant's rights under this Lease. Landlord shall use reasonable efforts to
uniformly enforce such rules and regulations against all tenants of the
Building; provided, however, that in no event shall Landlord be obligated to
terminate the lease of any tenant of the Building by reason of a violation of
any rule or regulation.
5.5 Alterations by Tenant. In connection with making any changes, additions and
improvements to the Premises, to (i) obtain the prior written consent of
Landlord of the same (except for changes, additions or improvements costing no
more than $80,000 in the aggregate per calendar year and which are
non-structural in nature and not visible from outside the Premises, notice of
which is given to Landlord prior to the commencement of the same) and of plans,
specifications and the licensed contractor to be used by Tenant and any other
data reasonably required to be furnished by Tenant; (ii) comply with all
governmental requirements; including but not limited to building, electrical and
plumbing codes; (iii) equal or exceed the current construction standard for the
Building; (iv) provide Landlord with evidence of the insurance covering such
work; and (v) provide Landlord with "as-built" drawings and specifications upon
completion of such work. All work performed shall be done in such a manner as
not to disturb or disrupt the operation of the Building or any other occupants
in the Building. Any increase in Landlord's Tax Expense or insurance premiums on
the Property attributable to such change, addition or improvements shall be paid
by Tenant. Tenant agrees that it will not, either directly or indirectly, use
any contractors and/or materials if their use will create any difficulty,
whether in the nature of a labor dispute or otherwise, with other contractors
and/or labor engaged by Tenant or Landlord or others in the construction,
maintenance and/or operation of the Property or any part thereof.
5.6 Indemnity. To defend with counsel duly licensed in the state in which the
Building is located, save harmless, and indemnify Landlord and its agents and
employees from any liability for injury, loss, accident or damage to any person
or property, and from any claims, actions, proceedings and expenses and costs in
connection therewith, including without limitation reasonable counsel fees, (i)
arising from the negligence or willful misconduct of Tenant or Tenant's
servants, agents, employees, contractors, licensees or invitees, or arising from
any use made or thing done or occurring in or on the Premises not due to the
negligence or willful misconduct of Landlord, subject in any such case to the
provisions of Section 10.11 hereof, or (ii) resulting from the failure of Tenant
to perform and discharge its covenants and obligations under this Lease. Tenant
shall also indemnify and hold Landlord and its agents and employees harmless
from and against any losses, costs, damages or claims of whatever nature arising
out of or in connection with the compliance requirements set forth in the ADA
relating to Tenant's design, renovation, alteration and/or construction of the
Premises. The preceding sentence, however, shall not apply to Tenant's initial
design of the Premises as reflected in the Construction Drawings (as hereinafter
defined) or to the performance of Landlord's Work (as hereinafter defined).
5.7 Tenant's Liability Insurance. To maintain with responsible companies
qualified to do business in the state in which the Building is located public
liability insurance covering the Premises insuring Landlord, the Managing Agent
and others in interest whom Landlord may reasonably request as well as Tenant
with the limits set forth in Section 1.1, which limits may be increased based on
industry standards, and worker's compensation insurance with statutory limits
covering all of Tenant's employees working in the Premises. All policies shall
be noncancelable and nonamendable with respect to Landlord, the Managing Agent
and Landlord's designees without thirty (30) days prior notice to Landlord. A
certificate of insurance evidencing the above agreements shall be delivered to
Landlord on or before Term Commencement Date. If Tenant fails to comply with the
foregoing requirements, Landlord may obtain such insurance and keep same in
effect, and all sums paid by Landlord for such insurance hereunder shall be and
are hereby declared additional rent, due and payable forthwith.
5.8 Tenant's Property. That all of the furnishings, fixtures, equipment, effects
and property of every kind, nature and description of Tenant and of all persons
claiming by, through or under Tenant shall be insured to the full replacement
cost thereof under a broad form "all risk" insurance policy and kept in the
Premises or the Building at the sole risk and hazard to Tenant, and if the whole
or any part thereof shall be destroyed or damaged by fire, water or other
casualty including the leakage or bursting of water pipes, steam pipes, or other
pipes, or by theft or from any other cause, no part of said loss or damage is to
be charged to or borne by Landlord unless, subject to Section 10.11 hereof, such
loss or damage is due to the negligence of the Landlord, in which case Landlord
shall bear loss or damage only to "ordinary office property" (as hereinafter
defined). For purposes of this Section 5.8, "ordinary office property" shall
mean merchandise, furniture and other tangible personal property of a kind and
quantity which may customarily be expected to be found within comparable
business offices in downtown Hartford, and excluding any unusually valuable or
exotic property, works of art and the like. At Tenant's option, (a) Tenant may
provide the insurance coverages required under Sections 5.7 and/or 5.8 through
blanket policies of insurance covering more than one location, provided the
entire amount of insurance required of Tenant hereunder is applicable to the
Premises without regard to any other location, and (b) Tenant may elect to
self-insure for the liabilities and casualties required to be covered by the
insurance policies described in Sections 5.7 and/or 5.8, provided that Tenant's
net worth at all times during such self-insurance remains at least equal to
$1,000,000,000 and Landlord is given written notice reasonably in advance of the
effective date of such self-insurance.
5.9 Landlord's Right to Entry. Upon at least twenty-four (24) hours prior
written notice to Tenant (except that no notice shall be required in an
emergency or for cleaning or routine repair and maintenance operations), to
permit Landlord and its agents entry to the Premises at reasonable times to
examine the same, make any repairs or replacements or, with Tenant's prior
written consent, improvements and/or additions, to carry out any right granted
by Section 10.9 and to show the Premises to prospective tenants during the nine
(9) months preceding expiration of the Term and to prospective purchasers and
mortgagees at all reasonable times. Landlord shall exercise its rights of
access to the Premises permitted hereunder in such manner so as to minimize
interference with Tenant's use and occupation of the Premises, but in no event
shall Landlord's entry prevent Tenant's use of the Premises (except as may be
required in an emergency). Except in an emergency, Tenant shall have the
opportunity to have a representative of Tenant present during any entry by
Landlord into the Premises.
5.10 Loading. Not to place a load upon the Premises exceeding 100 pounds of
combined load per square foot of floor area, and not to move any safe, vault or
other heavy equipment in, about or out of the Premises except in such manner and
at such time as Landlord shall in each instance authorize. Tenant's business
machines and mechanical equipment shall be installed to prevent vibration or
noise outside the Premises.
5.11 Liens & Property Taxes. Not to cause or allow liens of any kind to be filed
or placed against the Premises or the Property, and to immediately, at its sole
cost and expense, eliminate or bond over said lien and to pay promptly when due
all taxes which may be imposed upon personal property (including, without
limitation, fixtures and equipment) in the Premises to whomever assessed.
5.12 Attorney's Fees. In the event of any litigation between the parties
concerning the enforcement of any obligations under this Lease, the prevailing
party shall be entitled to recover from the other party the reasonable
attorneys' fees and other expenses of litigation incurred by the prevailing
party.
5.13 Holding Over.
(a) Tenant shall have the right (which, if timely and properly
exercised as provided herein, shall be in lieu of the then applicable option, if
any, to extend the Term as provided in Section 10.24 below) to extend the Term
of this Lease for an additional period of three (3) months (the "Elected
Holdover Period"), such right to be exercised by notice to Landlord no later
than nine (9) months prior to the expiration of the then current Term of this
Lease. Said notice shall be effective only if given in the timely manner
described; however, Tenant's exercise of such right may be deemed void in
Landlord's sole discretion if Tenant is not occupying the Premises for the
Permitted Use or is in default under the terms of this Lease either on the date
of the notice or on the date of the expiration of the then current Term hereof.
If Tenant fails to give timely notice to Landlord as herein provided, Tenant
shall have no right to extend the Term for the Elected Holdover Period, time
being of the essence of this Section 5.13(a). Upon the timely giving of such
notice by Tenant, the Term of this Lease shall be extended for the Elected
Holdover Period upon all of the same terms and conditions of this Lease in
effect as of the expiration of the then current Term of this Lease, except that
the Base Rent shall equal one hundred twenty-five percent (125%) of the Base
Rent in effect at the expiration of the then current Term of this Lease.
Notwithstanding the fact that, upon Tenant's exercise of its right to extend the
Term for the Elected Holdover Period, such extension shall be self-executing, as
aforesaid, upon request of either party, the parties shall promptly execute a
lease amendment reflecting such extension of the Term following Tenant's
exercise of such right.
(b) If Tenant continues to occupy the Premises after the expiration or
sooner termination of the Term of this Lease (as the same may be extended for
the Elected Holdover Period or pursuant to Section 10.24 below) without
Landlord's written consent (which consent may be withheld in Landlord's sole and
absolute discretion), Tenant shall pay, as a charge for use and occupancy and
liquidated damages (and not as rent), for each month of continued occupancy an
amount equal to one hundred fifty percent (150%) of the total monthly rent
payment (rent and all other monthly charges) in effect prior to such holdover,
and shall also pay all damages, both direct and/or indirect (including, without
limitation, loss of a tenant(s) or of rental income), sustained by Landlord on
account of such holding over if Landlord shall have secured another tenant to
lease the Premises or any part thereof. No receipt of money by Landlord from
Tenant after expiration or termination of this Lease shall reinstate or extend
this Lease.
5.14 Safety Requirements. To keep the Premises equipped with all safety
appliances required by law or ordinance or any other regulation of any public
authority because of any use made by Tenant (except that Tenant shall not be
required to install safety appliances that Landlord is required to install
generally throughout the Property), and to procure all licenses and permits so
required because of such use and, if requested by Landlord, to do any work so
required because of such use, it being understood that the foregoing provisions
shall not be construed to broaden in any way the Permitted Use of the Premises.
ARTICLE VI
ASSIGNMENT, SUBLETTING, AND MORTGAGING
6.1 Procedure.
(a) Tenant will not, by operation of law or otherwise, assign, mortgage
or encumber this Lease, or sublet or permit the Premises or any part thereof to
be used by others, without Landlord's prior express written consent in each
instance. The consent by Landlord to any assignment or subletting shall not in
any manner be construed to relieve Tenant from obtaining Landlord's express
written consent to any other or further assignment or subletting nor shall any
assignment or subletting, with or without consent by Landlord, serve to relieve
or release Tenant from its obligations to fully and faithfully observe and
perform all of the terms, covenants and conditions of this Lease on Tenant's
part to be observed and performed.
(b) If Tenant shall desire to assign this Lease or to sublet the
Premises, Tenant shall submit to Landlord in writing (i) the name of the
proposed assignee or subtenant; (ii) the terms and conditions of the proposed
assignment or subletting (including copies of the proposed assignment or
sublease); (iii) the nature and character of the business and credit of the
proposed assignee or subtenant; and (iv) any other information reasonably
requested by the Landlord.
Landlord's consent to any such proposed assignment or subletting shall
not be unreasonably withheld or unduly delayed, provided, however, that Landlord
may withhold consent thereto if in the exercise of its sole judgment it
determines that:
1. The financial condition or general reputation of the proposed
assignee or subtenant is not consistent with the extent of the obligations
undertaken by the proposed assignment or sublease; or
2. The proposed use of the Premises is not in keeping with the
character of the existing tenancies of the Building or permitted by Section 1.1
of this Lease; or
3. The nature of the occupancy of the proposed assignee or subtenant
will cause an excessive density of employees or traffic or make excessive
demands on the Building's services or facilities or in any other way will lessen
the character of the Building; or
4. The Tenant proposes to assign or sublet to one who at the time is a
tenant or occupant of premises in the Building (unless such tenant or occupant
is expanding and not relinquishing space and Landlord has no other available
space to lease to such tenant or occupant in the Building) or to one with whom
Landlord or its agents are actively negotiating for space in the Building; or
5. The Tenant proposes to assign or sublet all or a portion of the
Premises at a rental rate less than the rental rate Landlord is then asking for
other space in the Building.
(c) Any instrument of sublease shall specifically state that such
sublease is subject to all of the terms, covenants and conditions of this Lease.
Each assignee or sublessee shall assume in writing this Lease and shall be
jointly and severally liable with Tenant for the full performance of all
covenants hereunder. An original or duplicate original of the assignment or
sublease shall be delivered to Landlord within ten (10) days following the
making thereof.
(d) Tenant shall pay to Landlord, as additional rent, (1) in the event
of an assignment, fifty percent (50%) of the amount of all monies, if any, which
the assignee has agreed to and does pay to Tenant in consideration of the making
of such assignment, after deduction for Tenant's reasonable out-of-pocket costs
in connection with such assignment, as set forth in a reasonably detailed
accounting (with supporting invoices) submitted by Tenant to Landlord, and (2)
in the event of a subletting, fifty percent (50%) of the amount, if any, by
which the rent and additional rent (including parking charges, if any) payable
by the sublessee to Tenant shall exceed the sum of (x) the Base Rent plus
additional rent (including parking charges) allocable to that part of the
Premises affected by such sublease, plus (y) all of Tenant's reasonable
out-of-pocket costs in connection with such sublease, as set forth in a
reasonably detailed accounting (with supporting invoices) submitted by Tenant to
Landlord. Such additional rent payments shall be made monthly to Landlord within
ten (10) days after receipt of the same by Tenant.
(e) Landlord may collect rent directly from the assignee or, after a
monetary default by Tenant, subtenant or occupant upon notice thereof by
Landlord and apply the net amount collected (which may be treated by Landlord as
rent for use and occupancy) to the rent due hereunder or to cure Tenant's
default. Such collection of rent shall not be deemed a waiver of the covenants
in this Article, nor shall it be deemed acceptance of the assignee, subtenant or
occupant.
6.2 Affiliate Transfers. Notwithstanding anything to the contrary herein
contained, provided that Tenant is not in default under any terms of this Lease,
Tenant shall have the right, without Landlord's prior written consent, but upon
prior written notice to Landlord, to assign its interest in this Lease or to
sublease the Premises to an Affiliated Entity, as hereinafter defined, so long
as such Affiliated Entity remains in such relationship with Tenant and has not
been formed for the purpose of subverting the restraints on alienation contained
herein. For purposes hereof, an "Affiliated Entity" shall be defined as (a) any
entity which is controlled by, is under common control with or which controls
Tenant (control, for purposes hereof, shall mean the direct or indirect
ownership of more than fifty percent (50%) of the beneficial interest of the
entity in question), or (b) a successor to Tenant by way of merger or purchase
of all or substantially all of Tenant's assets, provided that such successor has
a net worth at least equal to the net worth of Tenant as of the date hereof or
immediately prior to such merger or purchase, whichever is greater (as evidenced
by financial information submitted and reasonably acceptable to Landlord). As a
further condition to and prior to or simultaneously with any such assignment,
such Affiliated Entity shall execute and deliver to Landlord an agreement in
form and substance reasonably acceptable to Landlord whereby the assignee agrees
to be bound by and to assume the obligations of the tenant under this Lease.
6.3 Further Limitations. In no event shall Landlord be obligated either to
consent to any proposed assignment or subletting or to elect to terminate this
Lease if at the time of proposal of assignment or subletting, Tenant is in
default under any terms of this Lease. If Landlord fails to respond to Tenant's
request for consent to any assignment or sublease within thirty (30) days of
receipt of Tenant's request therefor, and such failure continues for ten (10)
days after a reminder notice from Tenant to Landlord, Landlord shall be deemed
to have consented to the assignment or sublease in question. Anything contained
in the foregoing provision of this Article to the contrary notwithstanding,
neither Tenant nor any other person having an interest in the possession, use,
occupancy or utilization of the Premises shall enter into any lease, sublease,
license, concession or other agreement for use, occupancy or utilization of
space in the Premises which provides for rental or other payment for such use,
occupancy or utilization based, in whole or in part, on the net income or
profits derived by any person from the Premises leased, used, occupied or
utilized (other than an amount based on a fixed percentage or percentages of
receipts or sales), and any such purported lease, sublease, license, concession
or other agreement shall be absolutely void and ineffective as a conveyance of
any right or interest in the possession, use, occupancy or utilization of any
part of the Premises.
ARTICLE VII
CASUALTY AND TAKING
7.1 Casualty and Taking. If, during the Term, all or any substantial part of the
Premises, the Building or the Property is damaged materially by fire or other
casualty or taken by eminent domain or by action of public or other authority in
consequence thereof, or Landlord receives compensable damage by reason of
anything lawfully done in pursuance of public or other authority, this Lease
shall terminate at Landlord's election, which may be made notwithstanding
Landlord's entire interest may have been divested, by notice given to Tenant
within thirty-seven (37) days after such casualty or taking specifying the
effective date of termination which shall not be less than thirty (30) nor more
than sixty (60) days after the date of notice of such termination.
If in any such case the Premises, the Building or the Property are
rendered unfit for use and occupancy and this Lease is not terminated, Landlord
shall use due diligence to restore the same or, in case of taking, what may
remain thereof (excluding in each case any items installed or paid for by Tenant
which Tenant may be required or permitted to remove) to substantially the same
condition as existed immediately prior to such fire or other casualty or taking
to the extent permitted by laws and ordinances then in effect and by the net
award of insurance or damages actually received by Landlord, and a just
proportion of the rent, according to the nature and extent to which the Premises
have been rendered untenantable, shall be abated until the substantial
completion of such work.
7.2 Reservation of Award. Landlord reserves to itself any and all rights to
receive awards made for damages to the Premises, the Building, the Property and
the leasehold hereby created, or any one or more of them, accruing by reason of
exercise of eminent domain or by anything lawfully done pursuant to public or
other authority. Tenant hereby releases and assigns to Landlord all Tenant's
rights to such awards, and covenants to deliver such further assignments and
assurances thereof as Landlord may from time to time request. It is agreed and
understood, however, that Landlord does not reserve to itself, and Tenant does
not assign to Landlord, any damages payable for movable trade fixtures installed
by Tenant or anybody claiming under Tenant at its own expense or relocation
expenses recoverable by Tenant from such authority in a separate action,
provided said award does not diminish Landlord's award in any way.
7.3 Tenant's Termination Rights.
(a) If the Premises or any portion thereof are damaged by fire or other
casualty or taking, Landlord shall notify Tenant (the "Damage Notice") in
writing within thirty-seven (37) days of the occurrence of the damage as to
whether (i) the repair of such damage is susceptible of being substantially
completed within one hundred eighty (180) days after the occurrence (Landlord
hereby agreeing to submit to Tenant with the Damage Notice an engineering
estimate as to the length of time necessary to substantially complete the repair
of such damage, such estimated repair period being hereinafter referred to as
the "Estimated Repair Period"), (ii) sufficient insurance proceeds or
condemnation awards (together with other funds which Landlord may commit) will
be available for the repair of such damage, and (iii) in the case of damage by
fire or other casualty (and not by taking), less than ninety percent (90%) of
the rentable area of the Premises existing immediately prior to the damage will
be available for Tenant's use and occupation after the repair of such damage is
completed. If (x) the damage to the Premises or any portion thereof shall
materially adversely interfere with the conduct of Tenant's business in the
Premises in the ordinary course as reasonably determined by Tenant, and the
Estimated Repair Period is in excess of one hundred eighty (180) days after the
occurrence of such damage, or (y) the Damage Notice states that there will not
be sufficient insurance proceeds or condemnation awards (together with other
funds which Landlord may commit) available for the repair of such damage, or (z)
in the case of damage by fire or other casualty (and not by taking), the Damage
Notice states that less than ninety percent (90%) of the rentable area of the
Premises existing immediately prior to the damage will be available for Tenant's
use and occupation after the repair of such damage is completed, then Tenant
may, by written notice to Landlord within fifteen (15) days after the giving of
the Damage Notice to Tenant, terminate this Lease as of the date of occurrence
of such damage. If such damage can be repaired within one hundred eighty (180)
days from the date of occurrence of the damage, this Lease is not terminated,
and Landlord fails to substantially complete the repairs within such period
without fault or neglect of Tenant or its agents, employees or contractors, then
Tenant may terminate this Lease by giving written notice to Landlord, in which
case this Lease shall terminate thirty (30) days after the giving of such
termination notice unless within such thirty (30) day period Landlord
substantially completes said repairs. If the Estimated Repair Period is in
excess of one hundred eighty (180) days from the date of occurrence of the
damage, this Lease is not terminated, and Landlord fails to substantially
complete the repairs within the Estimated Repair Period without fault or neglect
of Tenant or its agents, employees or contractors, then Tenant may terminate
this Lease by giving written notice to Landlord, in which case this Lease shall
terminate thirty (30) days after the giving of such termination notice unless
within such thirty (30) day period Landlord substantially completes said
repairs.
(b) If, during the Term, all or any part of the Premises or the Garage
or access thereto are taken by eminent domain or by action of public or other
authority in consequence thereof, and such taking materially adversely
interferes with Tenant's business operations in the Premises in the ordinary
course, then Tenant shall have the right to terminate this Lease by notice given
to Landlord within thirty-seven (37) days after such taking specifying the
effective date of termination which shall not be less than thirty (30) nor more
than sixty (60) days after the date of notice of such termination.
ARTICLE VIII
DEFAULTS; EVENTS; REMEDIES
8.1 Events of Default. The occurrence of any one of the following events
shall constitute a default of this Lease by Tenant:
8.1.1 Failure of Tenant to make any payment of rent or other required
payment (including parking charges) when due, and such failure continues for a
period of ten (10) days after receipt by Tenant of written notice from Landlord;
8.1.2 Failure of Tenant to comply with any provision of this Lease,
other than payment of rent, and such failure shall continue for thirty (30) days
after receipt by Tenant of written notice from Landlord; provided, however, that
if the nature of Tenant's default is such that more than thirty (30) days are
reasonably required for its cure, Tenant shall not be in default if Tenant
commences such cure within thirty (30) days and diligently pursues such cure to
completion;
8.1.3 The making of an assignment or general arrangement for the
benefit of creditors by Tenant or any guarantor of Tenant's obligations
hereunder, or the appointment of a receiver or trustee for all or substantially
all the assets of Tenant or any guarantor of Tenant's obligations hereunder and
such receivership shall not have been terminated or stayed within ninety (90)
days, or the attachment, execution or other judicial seizure of substantially
all of Tenant's assets located in the Premises or Tenant's interest in this
Lease where such seizure is not discharged within thirty (30) days;
8.1.4 The filing by Tenant or any guarantor of Tenant's obligations
hereunder of petition under any bankruptcy or insolvency Law; or the filing of
such a petition against Tenant or such guarantor which is not dismissed within
ninety (90) days; or
8.1.5 Using the Premises for other than the Permitted Use,
if such use continues for a period of seven (7) days after receipt by Tenant
of written notice from Landlord.
8.2 Remedies in Event of Default. Landlord or its servants and agents may, in
addition to and not in derogation of any remedies for any preceding breach of
any covenant, immediately or at any time thereafter while such default continues
and without further notice, at Landlord's election, do any one or more of the
following: (1) give Tenant written notice stating that the Lease is terminated
effective upon the giving of such notice or upon a date stated in such notice,
as Landlord may elect, in which event the Lease shall be irrevocably
extinguished and terminated as stated in such notice without any further action
or (2) with or without process of law, in a lawful manner, enter and repossess
the Premises, and expel Tenant and those claiming through or under Tenant, and
remove its and their effects, without being guilty of trespass, in which event
this Lease shall be irrevocably extinguished and terminated at the time of such
entry, or (3) pursue any other rights or remedies permitted by law. Any such
termination of this Lease shall be without prejudice to any remedies which might
otherwise be used for arrears of rent or prior breach of any covenant and in the
event of such termination, Tenant shall remain liable under this Lease as
hereinafter provided. Tenant hereby waives all statutory rights (including,
without limitation, rights of redemption, if any) to the extent such rights may
be lawfully waived, and Landlord without notice to Tenant may store Tenant's
effects and those of any person claiming through or under Tenant at the expense
and risk of Tenant and, if Landlord so elects, may sell such effects at public
auction or private sale and apply the net proceeds to the payment of all sums
due to Landlord from Tenant, if any, and pay over the balance if any, to Tenant.
8.3 Tenant's Obligations After Termination. In the event that this Lease is
terminated for breach of any obligation of Tenant, Tenant covenants to pay
forthwith to Landlord, as compensation, the excess (discounted to present value
at the prime rate then being offered by the largest commercial bank in the
United States) of the total rent due for the residue of the Term over the fair
market rental value of the Premises for said residue of the Term. Tenant further
covenants to pay punctually to Landlord all the sums and perform all the
obligations which Tenant covenants in this Lease to pay and to perform in the
same manner and to the same extent and at the same time as if this Lease had not
been terminated; however, Tenant shall be credited with any amount paid to
Landlord as compensation as provided in the first sentence of this Section 8.3
and also with the net proceeds of any rents obtained by Landlord by reletting
the Premises, after deducting all Landlord's expenses in connection with such
reletting, including, without implied limitation, all repossession costs,
brokerage commissions, fees for legal services and expenses of preparing the
Premises for such reletting, it being agreed by Tenant that Landlord may relet
the Premises or any part or parts thereof on such terms as Landlord seems fit,
and make such alterations or repairs in the Premises as Landlord in its sole
judgment considers necessary to relet the same and no action of Landlord in
accordance with the foregoing or failure to relet or to collect rent under
reletting shall operate or be construed to release or reduce Tenant's liability
as aforesaid.
ARTICLE IX
RIGHTS OF MORTGAGEE/GROUND LESSOR
9.1 Subordination and Attornment.
(a) This Lease and the rights of Tenant hereunder are subject and
subordinate in all respects to all mortgages and ground leases which may now or
hereafter be placed on or affect all or any part of the real property of which
the Premises are a part and/or Landlord's interest or estate in such real
property or ground leases, and to each advance made and/or hereafter to be made
under any such mortgages, and to all renewals, modifications, consolidations,
replacements and extensions thereof and all substitutions therefor.
Notwithstanding anything to the contrary in this Article IX contained, as to any
future mortgages or ground leases, the herein provided subordination and
attornment shall be effective only if the mortgagee or ground lessor therein, as
the case may be, agrees, by a written instrument in recordable form and
otherwise in a form reasonably acceptable to Tenant and such mortgagee or ground
lessor, that, as long as Tenant shall not be in terminable default of the
obligations on its part to be kept and performed under the terms of this Lease,
this Lease will not be affected and Tenant's possession hereunder will not be
disturbed by any default under and/or foreclosure or termination of such
mortgage or ground lease. Tenant acknowledges and agrees that the form of
subordination, non-disturbance and attornment agreement attached hereto as
Exhibit D is acceptable to Tenant for future mortgages and ground leases.
(b) The term "mortgage" as used in this Lease shall include any
mortgage or deed of trust. The term "mortgagee" as used in this Lease shall
include any mortgagee or any trustee and beneficiary under a deed of trust or
receiver appointed under a mortgage or deed of trust, including, without
limitation, all persons or entities which may acquire Landlord's interest in the
Property or any part thereof by purchase at foreclosure or deed or acquisition
in lieu thereof, and all successors in title to such persons or entities.
9.2 No Prepayment of Rent. Tenant acknowledges that this Lease has been or may
be assigned from time to time by Landlord as collateral security for Landlord's
obligations under one or more mortgages. No fixed rent, additional rent or any
other charge shall be paid more than thirty (30) days prior to the due date
thereof and payments made in violation of this provision shall (except to the
extent that such payments are actually received by a mortgagee) be a nullity as
against any mortgagee and Tenant shall be liable for the amount of such payments
to such mortgagee taking possession of the Building.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Title. The titles of the Articles are for convenience and are not
to be considered in construing this Lease.
10.2 Notices. Whenever, by the terms of this Lease, notice shall or may be given
either to Landlord or to Tenant, such notice shall be in writing, addressed, if
to Landlord, at Landlord's address in Section 1.1 or, if to Tenant, at Tenant's
address in Section 1.1, or such other address as last designated in writing by
either Landlord or Tenant, and shall be deemed duly given if deposited with or
picked up by an overnight delivery service or deposited with the U.S. Postal
Service by registered or certified mail, postage prepaid. Any notice given by an
agent or attorney of Landlord shall be deemed notice given by Landlord.
In the event a notice mailed with sufficient postage as above provided
shall not be received upon attempted delivery thereof to the proper address and
shall be returned by the Postal Service to the sender because of a refusal of
receipt, the absence of a person to receive, or otherwise, the time of the
giving of such notice shall be the time of such attempted delivery.
10.3 Bind and Inure. The obligations of this Lease shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, except that the Landlord named herein and each successive owner of the
Premises shall be liable only for the obligations accruing during the period of
its ownership. Whenever the Premises are owned by a trustee or trustees, the
obligations of Landlord shall be binding upon Landlord's trust estate, but not
upon any trustee, beneficiary or shareholder of the trust individually.
10.4 Partial Invalidity. If any term of this Lease, or the application thereof
to any person or circumstances, shall to any extent be invalid or unenforceable,
the remainder of this Lease, or the application of such term to persons or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected thereby, and each term of this Lease shall be valid and
enforceable to the fullest extent permitted by law.
10.5 No Waiver. No provisions of this Lease shall be deemed to have been waived
by Landlord or Tenant unless such waiver is in writing signed by the applicable
party waiving its rights. The failure of Landlord or Tenant to seek redress for
violation of, or to insist upon the strict performance of, any covenant,
condition or rule of this Lease, or in the case of Landlord, failure to enforce
any Rules or Regulation against Tenant or any other tenant, shall not be deemed
a waiver of such breach or prevent a subsequent act, which would have originally
constituted a breach, from having the effect of any original breach. Landlord's
receipt of rent with knowledge of a breach by Tenant of any term or condition of
this Lease shall not be deemed a waiver of such breach.
10.6 No Surrender. No act or thing done by Landlord, its agents or employees
during the term of this Lease shall be deemed an acceptance of a surrender of
the Premises or shall be valid unless in writing signed by Landlord. The
delivery of keys to any of Landlord's agents or employees shall not operate as a
termination of this Lease or a surrender of the Premises.
10.7 No Accord and Satisfaction. No payment by Tenant, or receipt by Landlord,
of a lesser amount than the rent due shall be deemed to be other than on account
and as allocated in Landlord's sole discretion, nor shall any endorsement or
statement on any check or any letter accompanying or such payment be deemed an
accord and satisfaction and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy available to Landlord.
10.8 Intentionally Deleted.
10.9 Self-Help.
(a) Landlord may, but shall not be obligated to, cure, at any time,
without notice in case of emergency, or on reasonable notice in cases other than
an emergency, any failure of Tenant to fully comply with any of its obligations
or duties under this Lease, and/or any default or breach by Tenant under this
Lease beyond the expiration of applicable notice and cure periods; and whenever
Landlord so elects, all costs and expenses incurred by Landlord, including,
without limitation reasonable attorney's fees, together with interest on the
amount of costs and expenses so incurred at the rate of twelve percent (12%) per
annum, shall be paid by Tenant to Landlord forthwith on demand, and shall be
recoverable as additional rent.
(b) If Landlord shall fail to make any repair required to be made by
Landlord under this Lease, and such failure shall continue for thirty (30) days
after receipt by Landlord of written notice from Tenant (or such additional time
as is reasonably required to make such repair if Landlord commences such repair
within such thirty (30) day period and diligently pursues such repair to
completion), Tenant may, but shall not be obligated to, upon prior written
notice to Landlord, perform such repair on Landlord's behalf. If Tenant
exercises such right, Landlord shall reimburse Tenant for the reasonable costs
and expenses incurred by Tenant in making such repair. If Landlord fails to
reimburse Tenant for such reasonable costs and expenses within thirty (30) days
after written notice from Tenant to Landlord, Tenant shall have the right to
offset against rent such reasonable costs and expenses so incurred by Tenant.
Any sum so reimbursed by Landlord to Tenant or offset against rent may be
included in Operating Costs to the extent the cost of the repair would have been
included in Operating Costs if the repair were performed by Landlord itself.
10.10 Estoppel Certificates. Tenant shall, without charge, at any time and from
time to time (but no more than five (5) times per calendar year), within ten
(10) days after written request by Landlord, certify by written instrument (in
recordable form if requested) duly executed, acknowledged and delivered to
Landlord, or to any mortgagee or proposed mortgagee, or any purchaser or
proposed purchaser, or to any other entity reasonably specified by Landlord:
(1) The Term Commencement Date, the original expiration date, the
present expiration date, and the existence, number, and term of any option
periods.
(2) Whether or not, to Tenant's actual knowledge, Landlord is in
default, in any way, in the performance of any of the covenants, conditions and
agreements to be performed by Landlord in accordance with this Lease and if
there is any such default alleged, specifying the nature of same.
(3) What the amount of rent is pursuant to the terms of this Lease, and
the dates, if any, to which the rental and other charges hereunder have been
paid in advance.
(4) That this Lease is unmodified and in full force and effect, or in
the event that there have been modifications, that the same is in full force and
effect as modified and setting forth the modifications.
(5) Whether or not, to Tenant's actual knowledge, there are then
existing any claims, setoffs or defenses against the enforcement of any of the
agreements, terms, covenants or conditions hereof upon the part of Tenant to be
performed or complied with, and if so, specifying the same.
(6) The status of any other matter relative to this Lease or the
relation of the parties, reasonably requested. 10.11 Waiver of Subrogation.
Property insurance carried by either party with respect to the Premises and
property therein or occurrences thereon shall include a clause or endorsement
denying to the insurer rights of subrogation against the other party to the
extent rights have been waived by the insured prior to occurrence of injury or
loss. Each party, notwithstanding any provisions of this Lease to the contrary,
hereby waives any rights of recovery against the other for injury or loss due to
hazards covered by property insurance containing such clause or endorsement
carried (or required hereunder to be carried, without regard to rights of
self-insurance) by such party.
10.12 Governing Law. This Lease shall be governed exclusively by the provisions
hereof and by the laws of the State in which the Premises are located, as said
laws may from time to time exist.
10.13 Acts of God. In any case where either party is required to do any act,
delays caused by or resulting from Acts of God, war, civil commotion, fire,
flood or other casualty, labor difficulties, shortages of labor or materials or
equipment in the ordinary course of trade, government regulations or other
causes not reasonably within such party's control shall not be counted in
determining the time during which such act shall be completed, whether such time
be designated by fixed date, a fixed time or "a reasonable time", and such time
shall be deemed to be extended by the period of such delay. Financial inability
of either party shall not be considered to be a circumstance or cause beyond the
reasonable control of such party.
10.14 Consent. Unless otherwise specifically provided herein, whenever consent
or approval of Landlord or Tenant is required under the terms of this Lease,
such consent or approval shall not be unreasonably withheld or delayed. Each
party's sole remedy if the other party unreasonably withholds or delays consent
or approval shall be an action for specific performance and such other party
shall not be liable for damages. If either party withholds any consent or
approval, such party shall on written request deliver to the other party a
written statement giving the reasons therefor.
10.15 Brokerage Commissions. Each party warrants that it has had no dealings
with any broker or agent in connection with the negotiation or execution of this
Lease other than the broker named in Section 1.1. Each party agrees to indemnify
the other and hold the other harmless from and against any and all costs,
expenses, claims or liability arising in breach of the foregoing warranty.
Landlord agrees to pay the broker named in Section 1.1.
10.16 Intentionally Deleted.
10.17 Limitation of Liability. In the event Landlord shall default in the
performance of its obligations hereunder, Tenant agrees to look only to
Landlord's then equity interest in the Building for the satisfaction of any
judgment. In no event shall Landlord be liable for any lost profits or indirect
or consequential damages, and if Landlord is a partnership or trust, no general
or limited partner of such partnership nor any trustee or beneficiary of any
Trust shall be liable but Landlord alone shall be liable and then as limited
hereby to Landlord's then equity interest in the Building.
10.18 Intentionally Deleted.
10.19 Recording. Neither party shall record this Lease but each party shall, at
the request of the other made at any time after the Term Commencement Date is
known, execute a memorandum or notice thereof in recordable form satisfactory to
both Landlord and Tenant specifying the Term Commencement Date and Expiration
Date of the term of this Lease and other information required by statute. The
requesting party may then record said memorandum or notice of lease.
10.20 Intentionally Deleted.
10.21 Term Commencement Date. For purposes of this Lease, the "Term Commencement
Date" shall be defined as the earlier of (A) the first date on which Tenant
occupies all or any part of the Premises for the conduct of business, or (B)
fourteen (14) days after the date on which both of the following shall occur:
(i) Landlord's Work shall be (or be deemed to be) substantially completed
(notwithstanding the incompleteness of (x) so-called "punch list" items, (y)
work to be undertaken by Landlord which does not materially impair Tenant's use
of the Premises for the purposes allowed herein, and (z) finishes and exterior
landscaping to the Property), and (ii) a certificate of occupancy has been (or
is deemed to have been) issued with respect to the Premises (or the building
inspector has (or is deemed to have) provided a verbal "sign off" on Landlord's
Work and indicated that a certificate of occupancy will issue in due course). If
Tenant (or any agent, employee or contractor of Tenant) causes any delay in the
performance or substantial completion of Landlord's Work (including, without
limitation, by failing to timely prepare the Construction Drawings), then
Landlord's Work shall be deemed to have been substantially completed on the date
that Landlord's Work would have been substantially completed but for such delay,
and the certificate of occupancy for the Premises (or building inspector "sign
off" as aforesaid) shall be deemed to have been issued (or provided) on the date
it would have been issued (or provided) but for such delay. Landlord shall use
reasonable efforts to substantially complete Landlord's Work by the date (as the
same may be modified by Landlord at or prior to the time of its approval of the
Construction Drawings as provided in the second paragraph of Section 10.22, the
"Estimated Substantial Completion Date") which is ninety (90) days after
Landlord's final approval of the Construction Drawings, but Tenant shall not
have any claim against Landlord, and Landlord shall have no liability to Tenant,
if Landlord's Work is not substantially completed by the Estimated Substantial
Completion Date. Notwithstanding the foregoing, if Landlord fails to
substantially complete Landlord's Work on or before the date which is sixty (60)
days after the Estimated Substantial Completion Date due to Landlord's fault or
neglect, then Tenant shall be entitled to a credit (offset) against Base Rent
due and payable as of the Term Commencement Date in the amount of one (1) day of
Base Rent for each day after the Estimated Substantial Completion Date that
Landlord's Work shall not have been substantially completed.
10.22 Improvements. Landlord agrees to perform, at Landlord's expense (except as
hereinafter provided), the work ("Landlord's Work") within the Premises
described in or shown on, and substantially in accordance with, the Construction
Drawings.
Tenant shall, at its expense (except as provided in the next sentence),
prepare the construction drawings (the "Construction Drawings") for Landlord's
Work. Provided that Tenant is not in default under this Lease beyond the
expiration of applicable notice and cure periods and shall have taken occupancy
of the Premises for business, Landlord shall reimburse Tenant up to $55,908.17
(the "Plan Allowance") for the architectural and engineering fees incurred by
Tenant in preparing the Construction Drawings, such reimbursement to be made
within thirty (30) days of Landlord's receipt of a reasonably detailed invoice
from Tenant describing such fees. The Construction Drawings shall be subject to
Landlord's approval; and Landlord shall have the right, by notice to Tenant at
or prior to the time of its approval of the Construction Drawings, to modify the
Estimated Substantial Completion Date based upon the nature of the work shown on
the Construction Drawings. Tenant agrees that the Construction Drawings shall be
prepared in a diligent and efficient manner so that Landlord's final approval
thereof is obtained by March 15, 1998.
Tenant acknowledges and agrees that the general contractor for
Landlord's Work shall be Bartlett Brainard & Eacott Inc. ("BB&E"). The general
contractor's fee to be charged by BB&E shall not exceed three (3%) percent of
the aggregate costs of Landlord's Work; and the general conditions component of
the costs of Landlord's Work shall not comprise more than six (6%) percent of
the aggregate costs of Landlord's Work. Landlord agrees to require BB&E to
obtain, to the extent reasonably obtainable, bids from no more than five (5) and
no less than three (3) subcontractors for all trades necessary to complete
Landlord's Work. All subcontractor bids shall be subject to Tenant's approval.
If Tenant fails to respond to a request for approval of a subcontractor bid
within three (3) business days of Landlord's request therefor, such approval
shall be deemed given.
Landlord agrees to undertake construction of the Premises in accordance
with the provisions hereof in a good and workmanlike fashion and in compliance
with applicable codes. Without limiting the foregoing, Landlord shall, at its
expense (in addition to the Plan Allowance and Landlord's Contribution, as
hereinafter defined), cause the restrooms on each floor of the Premises to
comply with the ADA as in effect on the date hereof.
Tenant's vendors and contractors shall be permitted entry to the
Premises prior to the Term Commencement Date for the installation of Tenant's
equipment and furnishings (including cabling and wiring) and the performance of
such other work as Tenant may desire (subject to the provisions of Section 5.5
hereof), provided that such installation and other work shall not unreasonably
interfere with the performance of Landlord's Work. Landlord shall use reasonable
efforts to coordinate and schedule Landlord's Work so that Tenant may perform
its work on a floor-by-floor basis.
In the event that Tenant shall request and Landlord shall approve
supplementary plans or specifications or work or changes to the Construction
Drawings, then Landlord shall render to Tenant an estimate of the additional
cost of such plans or specifications, work or changes and (unless such cost,
when added to the other costs of Landlord's Work, will not exceed Landlord's
Contribution) Tenant shall pay such amount to Landlord prior to Landlord having
any obligation to undertake any such work; provided, however, that Tenant shall
be responsible for any delays in the performance or substantial completion of
Landlord's Work on account of any such supplementary plans or specifications,
work or changes requested by Tenant. Landlord shall notify Tenant of any such
delays, and of any delays caused by any change order requests initiated by
Landlord, promptly upon Landlord becoming aware of the same. The costs and
expenses to prepare any supplementary plans or specifications or to make any
changes to the Construction Drawings shall be Tenant's responsibility. Landlord
shall respond to any request for approval under this paragraph within three (3)
business days of Tenant's written request therefor; and if Landlord fails to
respond within such three (3) business day period, Landlord's approval of the
supplementary plans or specifications or work or the changes to the Construction
Drawings shall be deemed given.
Landlord shall contribute $17.50 per square foot of rentable area of
the Premises ("Landlord's Contribution") towards the costs of Landlord's Work,
which costs shall include, without limitation, demolition costs and the costs,
if any, incurred by Landlord to engage an architect or engineer to review the
Construction Drawings to determine their compliance with the ADA. Tenant shall
reimburse Landlord for all costs of Landlord's Work in excess of Landlord's
Contribution within thirty (30) days of billing(s) from time to time (whether
before or after the Term Commencement Date) therefor (accompanied by
documentation supporting such excess costs). If Landlord's Contribution exceeds
the costs of Landlord's Work and Tenant is not in default under this Lease
beyond the expiration of applicable notice and cure periods, such excess shall,
at Tenant's election, be paid by Landlord to Tenant within thirty (30) days of
Tenant's notice to Landlord of such election or be credited against Tenant's
obligation to pay Base Rent until such excess is reduced to zero.
10.23 Electricity.
(a) Except as provided in this Section 10.23, Landlord shall furnish to
Tenant, as an incident of this Lease, electric current for normal office
equipment comprising a combined lighting and standard electrical load not to
exceed 6 watts per square foot.
(b) In the event that Landlord shall in its reasonable discretion
determine that Tenant is at any time using or proposing to use equipment which
is other than normal office equipment of the type described in subsection
10.23(a) or is, on a regular basis, using electric current during other than
Normal Building Operating Hours, Landlord may at its option either (i) install
at Tenant's expense or require Tenant to install separate electric metering for
such equipment in which event Tenant shall pay the cost of such separately
metered electricity or (ii) reasonably and equitably charge to Tenant a fair
increment specially allocable to Tenant's use in which event the increment
charged to Tenant shall not be includable as an Operating Cost under Article
III. Without limiting the foregoing, Landlord reserves the right, at Tenant's
expense, to submeter for electricity and/or chilled water any computer or other
room(s) in the Premises using or requiring special heating or cooling equipment,
and Tenant shall pay for all electricity and chilled water so submetered and
subsequently billed by Landlord to Tenant from time to time.
(c) If Tenant shall require electric current for use in the Premises in
excess of the quantity to be furnished for such use as hereinabove provided and
if (i) in Landlord's reasonable judgment Landlord's facilities are inadequate
for such excess requirements or (ii) such excess use shall result in an
additional burden on the Building heating/air conditioning system or electrical
system and additional cost to Landlord on account thereof then, as the case may
be, (x) Landlord, upon written request and at the sole cost and expense of
Tenant, will furnish and install such additional wire, conduits, feeders,
switchboards and appurtenances as reasonably may be required to supply such
additional requirements of Tenant if current therefor be available to Landlord,
provided that the same shall be permitted by applicable laws and insurance
regulations and shall not cause damage or injury to the Building or the Premises
or cause a dangerous or hazardous condition or entail excessive or unreasonable
alterations or repairs or interfere with or disturb other tenants or occupants
of the Building, or (y) Tenant shall reimburse Landlord for such additional
cost, as aforesaid.
(d) Tenant agrees that it will not make any material alteration or
material addition to the electrical equipment and/or appliances in the Premises
without the prior written consent of Landlord in each instance first obtained,
which consent will not be unreasonably withheld.
(e) Notwithstanding the provision of Section 10.23(a) through (d), in
the event a separate meter or meters is (are) installed which measure(s)
electric current, Tenant agrees to pay for all such electricity so metered and
subsequently billed. An amount equal to seventy-five cents ($.75) per square
foot of the Premises shall be deducted from Tenant's Base Rent specified in
Article I, beginning with the date Tenant's electric liability is separately
metered and charged to Tenant hereunder.
10.24 Option To Extend. Tenant shall have the option to extend the Term of this
Lease for two (2) successive terms of five (5) years each (each being referred
to as an "extended term"). The option shall be exercised only by notice no more
than twelve (l2) months and no less than nine (9) months prior to the expiration
of the original Term or the first extended term, as the case may be. Said notice
shall be effective only if given in the timely manner described; however,
Tenant's exercise of its option may be deemed void in Landlord's sole discretion
if Tenant is not occupying the Premises for the Permitted Use, is in default
under the terms of this Lease either on the date of the notice or on the date of
the expiration of the original Term or of the first extended term, as the case
may be, or has assigned this Lease or sublet more than fifty percent (50%) of
the Premises (other than to an Affiliated Entity). The demise of the Premises
for each extended term shall be on the same terms and conditions as the original
Term or the first extended term, as the case may be, except that Landlord shall
have no obligation to construct or renovate the Premises or to provide any
allowance or contribution with respect thereto and the charge for all parking
passes to be used during the extended term shall be at the then current
prevailing rate in the Garage, as such rate may vary from time to time (but not
less than the highest rate being charged to Tenant for its parking passes as of
the expiration of the then current Term of this Lease), and except that the Base
Rent, the Operating Costs for the Base Calendar Year and the Real Estate Taxes
for the Base Calendar Year during such extended term shall be as set forth
hereinafter. All other items of additional rent shall be the same. Once the Term
is duly extended, any reference in this Lease to the "term" or "Term" of this
Lease shall mean the Term as so extended. If Tenant fails to give timely notice,
as aforesaid, Tenant shall have no further right to extend the Term of this
Lease, time being of the essence in respect of this Section 10.24. Tenant shall
have no option to extend the Term of this Lease other than the two (2)
additional five (5) year terms herein provided for. Notwithstanding the fact
that, upon Tenant's exercise of the herein option to extend the Term of this
Lease, such extension(s) shall be self-executing, as aforesaid, the parties
shall promptly execute a lease amendment reflecting such extended term after
Tenant exercises the option in question and the Base Rent, Operating Costs for
the Base Calendar Year and Real Estate Taxes for the Base Calendar Year during
such extended term are determined.
The Base Rent for each extended term shall be 95% of the fair market
rental value (as hereinafter defined) of the Premises as of the commencement
date of such extended term. However, in no event shall the sum of the Base Rent
and amounts required to be paid by Tenant on account of Operating Costs and
Landlord's Tax Expense for any twelve (12) month period during such extended
term be less than the sum of the Base Rent and amounts required to be paid by
Tenant on account of Operating Costs and Landlord's Tax Expense for the twelve
(12) month period immediately preceding the commencement of such extended term.
"Fair market rental value" shall be computed as of the date in question
at the then current annual rental charge (i.e., the sum of Base Rent plus
escalation and other charges), including provisions for subsequent increases and
other adjustments, for leases or agreements to lease then currently being
negotiated or executed for comparable space located in first-class buildings
(including the Building) in downtown Hartford. In determining fair market rental
value, the following factors, among others, shall be taken into account and
given effect: size, location of premises, lease term, building amenities,
finishes and condition of building, tenant improvement allowances,
creditworthiness of the landlord and the tenant, availability of exterior
signage, and services provided by the landlord.
Notwithstanding anything to the contrary herein contained, the parties
hereby agree that, upon the determination of any fair market rental value,
Operating Costs for the Base Calendar Year and Real Estate Taxes for the Base
Calendar Year shall be changed from that stated in Section 1.1 above to an
amount equal to the actual amount of Operating Costs and Landlord's Tax Expense,
respectively, for the calendar year immediately preceding the calendar year in
which the commencement date of the extended term occurs. In such event, the
amount of Base Rent payable hereunder shall be commensurately adjusted to
reflect such change in such base years.
Landlord shall initially designate fair market rental value and
Landlord shall furnish data in support of such designation. If Tenant disagrees
with Landlord's designation of a fair market rental value, Tenant shall have the
right, by written notice given within thirty (30) days after Tenant has been
notified of Landlord's designation, to submit such fair market rental value to
appraisal. Fair market rental value shall be submitted to appraisal as follows:
fair market rental value shall be determined by impartial MAI appraisers, one to
be chosen by Landlord, one to be chosen by Tenant, and a third to be selected,
if necessary, as below provided. The unanimous written decision of the two first
chosen, without selection and participation of a third appraiser, or otherwise,
the written decision of a majority of three appraisers chosen and selected as
aforesaid, shall be conclusive and binding upon Landlord and Tenant. Landlord
and Tenant shall each notify the other of its chosen appraiser within ten (10)
days following the call for appraisal and, unless such two appraisers shall have
reached a unanimous decision within thirty (30) days after their designation,
they shall so notify the President of the Hartford Bar Association (or such
organization as may succeed to said Hartford Bar Association) and request him or
her to select an impartial third MAI appraiser to determine fair market rental
value as herein defined. Such third appraiser and the first two chosen shall
hear the parties and their evidence and render their decision within thirty (30)
days following the conclusion of such hearing and notify Landlord and Tenant
thereof. Landlord and Tenant shall bear the expense of the third appraiser (if
any) equally. The decision of the appraisers shall be binding and conclusive,
and judgment upon the award or decision of the arbitrators may be entered in the
appropriate court of law; and the parties consent to the jurisdiction of such
court and further agree that any process or notice of motion or other
application to such court or a Judge thereof may be served outside the State of
Connecticut by registered mail or by personal service, provided a reasonable
time for appearance is allowed. If the dispute between the parties as to a fair
market rental value has not been resolved before the commencement of Tenant's
obligation to pay rent based upon such fair market rental value, then Tenant
shall pay Base Rent and other charges under this Lease in respect of the
premises in question based upon the fair market rental value designated by
Landlord until either the agreement of the parties as to the fair market rental
value, or the decision of the appraisers, as the case may be, at which time
Tenant shall pay any underpayment of rent and other charges to Landlord, or
Landlord shall refund any overpayment of rent and other charges to Tenant.
10.25 Hazardous Materials. Tenant shall not (either with or without negligence)
cause or permit the escape, disposal or release of any biologically or
chemically active or other hazardous substances or materials. Tenant shall not
allow the storage or use of such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the industry for the
storage and use of such substances or materials, nor allow to be brought into
the Premises or Building or land on which the Building is located any such
materials or substances except to use in the ordinary course of Tenant's
business, and then only after written notice is given to Landlord of the
identity of such substances or materials. Without limitation, hazardous
substances and materials shall include those described in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as
amended, 42 U.S.C. Section 6901 et seq., any applicable state or local laws and
the regulations adopted under these acts. If any lender or governmental agency
shall ever require testing to ascertain whether or not there has been any
release of hazardous materials and such testing concludes that Tenant or its
agents, employees, contractors, invitees or others claiming by, through or under
Tenant caused such release, then the reasonable costs thereof shall be
reimbursed by Tenant to Landlord upon demand as additional charges. In addition,
Tenant shall execute affidavits, representations and the like from time to time
at Landlord's request concerning Tenant's best knowledge and belief regarding
the presence of hazardous substances or materials on the Premises. In all
events, Tenant shall indemnify Landlord and its agents and employees in the
manner elsewhere provided in this Lease from any release of hazardous materials
on the Premises occurring while Tenant is in possession, or elsewhere if caused
by Tenant or persons acting under Tenant. The within covenants shall survive the
expiration or earlier termination of the term of this Lease. Landlord represents
and warrants that, to Landlord's knowledge, the Building is free of any material
concentrations of hazardous substances or materials. Landlord shall indemnify
Tenant against any liability incurred by Tenant arising as a result of (i) a
breach of the representation and warranty contained in the preceding sentence,
or (ii) the presence of hazardous substances or materials in the Building not
caused by Tenant or its agents, employees, contractors, invitees or others
claiming by, through or under Tenant.
10.26 Right of First Offer. On the conditions (which conditions Landlord may
waive, at its election, by written notice to Tenant at any time) that Tenant is
not in default of its covenants and obligations under this Lease and that The
Lincoln National Life Insurance Company, itself, or an Affiliated Entity is
occupying at least fifty percent (50%) of the Premises then demised to Tenant,
both at the time that Landlord is required to give Landlord's Notice, as
hereinafter defined, and as of the Term Commencement Date in respect of the RFO
Premises, as hereinafter defined, Tenant shall have the following right to lease
the RFO Premises, as hereinafter defined, when the RFO Premises become available
for lease to Tenant, as hereinafter defined.
"RFO Premises" shall be defined as any separately demised area on the
sixth (6th) floor of the Building which is not leased by Tenant pursuant to
Section 10.27 below and becomes available for lease to Tenant during the Term of
this Lease; provided, however, that if Tenant shall have exercised its right to
reduce the size of the Premises pursuant to Section 10.28 below, RFO Premises
shall be defined as the Give-Back Premises (as hereinafter defined) and any
other separately demised area on the floor of the Building below the lowest
floor of the Building on which any portion of the Premises is located, when the
Give-Back Premises or such other area becomes available for lease to Tenant
during the initial Term of this Lease. For the purposes of this Section 10.26,
an RFO Premises shall be deemed to be "available for lease to Tenant" if the
existing tenant of such RFO Premises has vacated or will vacate the same and
when Landlord intends to offer such RFO Premises for lease (it being understood
and agreed that in no event shall Tenant have any right to lease RFO Premises
pursuant to this Section 10.26 unless and until Landlord leases such RFO
Premises to another tenant and such tenant has vacated or will vacate the same
and Landlord intends to offer such RFO Premises for lease). Notwithstanding
anything to the contrary herein contained, (a) in no event shall Tenant have any
rights under this Section 10.26 after the date which is nine (9) months prior to
the expiration of the Term of this Lease (i.e., Landlord shall have no
obligation to give Landlord's Notice to Tenant after the date which is nine (9)
months prior to the expiration of the Term of this Lease), and (b) Tenant's
rights to lease RFO Premises shall be subject and subordinate to the rights of
then existing tenants of the Building to lease such RFO Premises.
Landlord shall give Tenant written notice ("Landlord's Notice") at the
time that Landlord determines that an RFO Premises will become available for
lease to Tenant. Landlord's Notice shall set forth the terms upon which Landlord
intends to offer such RFO Premises for lease, including (i) the size and exact
location of such RFO Premises, (ii) the Base Rent applicable to such RFO
Premises, which shall be based upon the delivery of such RFO Premises to Tenant
in "as-is" condition, but shall be subject to adjustment as provided in clause
(2) below, and (iii) the estimated date of delivery of such RFO Premises to
Tenant in such condition. Tenant shall have the right, exercisable upon written
notice ("Tenant's Exercise Notice") given to Landlord within fifteen (15)
business days after the receipt of Landlord's Notice, to lease the RFO Premises.
If Tenant fails timely to give Tenant's Exercise Notice, Tenant shall have no
further right to lease such RFO Premises pursuant to this Section 10.26;
provided, however, that the failure to give Tenant's Exercise Notice as to such
RFO Premises shall not waive Tenant's right to lease, pursuant to the provisions
of this Section 10.26, any other RFO Premises which thereafter become available
for lease to Tenant during the initial Term of this Lease until Tenant's right
to lease RFO Premises has lapsed.
Upon the timely giving of Tenant's Exercise Notice, Landlord shall
lease and demise to Tenant, and Tenant shall hire and take from Landlord, the
RFO Premises in question, upon the terms set forth in Landlord's Notice and
otherwise upon all of the same terms and conditions of this Lease, except as
follows:
(1) Term Commencement Date
The Term Commencement Date in respect of such RFO Premises
shall be the date that Landlord delivers such RFO Premises to Tenant (x) in the
"as-is" condition described in Landlord's Notice, or (y) if within the fifteen
(15) business day period referred to above Landlord and Tenant shall have agreed
upon work to be performed by Landlord to prepare such RFO Premises for Tenant's
occupancy, substantially in accordance with the plans and specifications for
such work, as the case may be. If Landlord and Tenant shall not have agreed upon
the scope of any such work to be performed by Landlord within the fifteen (15)
business day period referred to above, then Tenant shall accept such RFO
Premises in "as-is" condition unless Tenant rescinds Tenant's Exercise Notice
within two (2) business days after the expiration of such fifteen (15) business
day period, in which event Tenant shall have no right to lease such RFO Premises
from Landlord, and Landlord shall be free to lease such RFO Premises to another
party.
(2) Base Rent
The Base Rent rental rate in respect of such RFO Premises
shall be the Base Rent rental rate set forth in Landlord's Notice, which shall
be based upon Landlord's determination of the fair market rental value of such
RFO Premises, which determination shall take into account, among other things,
the condition in which such RFO Premises shall be delivered to Tenant, including
the cost of the work, if any, to be performed by Landlord with respect thereto.
(3) Tenant's Proportionate Share
Tenant's Proportionate Share in respect of such RFO Premises
shall be determined by dividing the rentable area of such RFO Premises by the
total rentable area of the Building.
(4) Parking
The charge for parking passes in respect of such RFO Premises
(which shall be provided at the same ratio as then being offered to prospective
tenants of the Building) shall be at the then current prevailing rate in the
Garage, as such rate may vary from time to time. Tenant shall have no right to
additional reserved (i.e., as opposed to unassigned) parking spaces by reason of
the demise of such RFO Premises.
Notwithstanding the fact that Tenant's exercise of the above-described
option to lease RFO Premises shall be self-executing, as aforesaid, the parties
hereby agree to execute a lease amendment reflecting the addition of an RFO
Premises promptly after the exercise by Tenant of its right to lease the same.
The execution of such lease amendment shall not be deemed to waive any of the
conditions to Tenant's exercise of the herein option to lease RFO Premises,
unless otherwise specifically provided in such lease amendment.
10.27 Right of First Refusal. If, within the first twelve (12) months of the
initial Term of this Lease, Landlord is in, or is about to enter into,
negotiations to lease space on the sixth (6th) floor of the Building and Tenant
is not then in default of its covenants and obligations under this Lease and The
Lincoln National Life Insurance Company, itself, or an Affiliated Entity is
occupying at least fifty percent (50%) of the Premises then demised to Tenant,
Landlord shall provide written notice to Tenant of such negotiations, such
notice to be directed to Gilbert Holmes, Vice President-Director of Facilities,
Lincoln National Corporation, 1300 South Clinton Street, Fort Wayne, IN 46801.
Tenant shall have the right to lease such space by written notice to Landlord
within seven (7) business days after Tenant's receipt of such notice from
Landlord. If Tenant fails to timely exercise such right (time being of the
essence in respect of this Section 10.27), Landlord shall have no obligation to
lease such space to Tenant pursuant to the terms of this Section 10.27. If
Tenant timely exercises such right, then Landlord shall lease such space to
Tenant upon the same terms and conditions of this Lease (including, without
limitation, the Expiration Date, the Base Rent rental rate then (and from time
to time) applicable to the other premises demised to Tenant under this Lease,
the right to parking passes at the same ratio provided for the other premises
then demised to Tenant under this Lease, and the obligation to pay charges for
parking passes at the rate then (and from time to time) applicable to the other
parking passes provided to Tenant under this Lease). Notwithstanding the
foregoing, (a) Landlord shall contribute towards the cost of the build-out of
such space and Tenant's costs to prepare the Construction Drawings for such
space an amount equal to $17.50 per rentable square foot and $.43 per usable
square foot (respectively) of such space, in each case multiplied by a fraction,
the numerator of which is the number of full calendar months remaining in the
initial Term of this Lease after the commencement date of the leasing of such
space, and the denominator of which is one hundred twenty (120), (b) Tenant
shall prepare the Construction Drawings for the build-out of such space in a
diligent and efficient manner so that Landlord's final approval thereof is
obtained no later than forty-five (45) days after the giving to Landlord of
Tenant's notice exercising its right to lease such space, and (c) Tenant shall
have no right to additional reserved (i.e., as opposed to unassigned) parking
spaces by reason of the demise of such space. Notwithstanding the fact that
Tenant's exercise of the above-described right to lease such space shall be
self-executing, as aforesaid, the parties hereby agree to execute a lease
amendment reflecting the addition of such space promptly after the exercise by
Tenant of its right to lease the same. The execution of such lease amendment
shall not be deemed to waive any of the conditions to Tenant's exercise of the
herein right to lease such space, unless otherwise specifically provided in such
lease amendment. Notwithstanding anything to the contrary herein contained, in
no event shall Tenant have any rights under this Section 10.27 if Tenant shall
have previously exercised its right to reduce the size of the Premises pursuant
to Section 10.28 below.
10.28 Right to Reduce Space.
(a) On the condition (which condition Landlord may waive, at its
election, by written notice to Tenant at any time) that Tenant is not in default
of its covenants and obligations under this Lease, Tenant shall have the right
to reduce the size of the Premises by up to ten percent (10%) of the rentable
area thereof by written notice to Landlord prior to the commencement of
Landlord's Work. The portion of the Premises which Tenant elects to give back to
Landlord (the "Give-Back Premises") and the remaining portion of the Premises on
the floor(s) of the Building where the Give-Back Premises are located shall be
of a marketable configuration (as determined by Landlord in its sole and
absolute discretion) and otherwise in a location reasonably acceptable to
Landlord. If Tenant shall timely exercise such right, (i) Tenant shall, within
thirty (30) days of billing(s) therefor (accompanied by supporting
documentation), reimburse Landlord for the costs and expenses incurred by
Landlord in connection with the proposed preparation of the Give-Back Premises
for Tenant's occupancy, and (ii) the parties shall promptly execute and deliver
an amendment to this Lease confirming the location of the Give-Back Premises and
making any changes to the terms and provisions of this Lease required as a
result of the Give-Back Premises no longer being part of the Premises (e.g.,
modification to Tenant's Proportionate Share). If Tenant fails to timely
exercise its right under this Section 10.28(a), Tenant shall have no right to
reduce the size of the Premises pursuant to this Section 10.28(a), time being of
the essence in respect of this Section 10.28(a).
(b) On the condition (which condition Landlord may waive, at its
election, by written notice to Tenant at any time) that Tenant is not in default
of its covenants and obligations under this Lease, and provided that Tenant
shall not have exercised its rights under Section 10.28(a) above, Tenant shall
have the right to reduce the size of the Premises by up to ten percent (10%) of
the rentable area thereof by written notice to Landlord on or before the date
which is nine (9) months after the Term Commencement Date. The portion of the
Premises which Tenant elects to give back to Landlord (the "Give-Back Premises")
and the remaining portion of the Premises on the floor(s) of the Building where
the Give-Back Premises are located shall be of a marketable configuration (as
determined by Landlord in its sole and absolute discretion) and otherwise in a
location reasonably acceptable to Landlord. If Tenant shall timely exercise such
right, Tenant shall vacate and surrender the Give-Back Premises to Landlord as
of the date (the "Give-Back Premises Termination Date") which is ninety (90)
days after the giving of such notice to Landlord in the condition required by
the terms and provisions of this Lease (including, without limitation, Section
5.2 hereof), and Tenant shall pay to Landlord, not later than thirty (30) days
prior to the Give-Back Premises Termination Date, the Termination Fee (as
hereinafter defined) and the costs and expenses (to be) incurred by Landlord to
separate the Give-Back Premises from the remainder of the Premises. Base Rent
and other charges in respect of the Give-Back Premises shall be apportioned as
of the Give-Back Premises Termination Date. For purposes hereof, the
"Termination Fee" shall be equal to the product of (i) Landlord's Transaction
Costs (as hereinafter defined) multiplied by (ii) a fraction, the numerator of
which is the number of months (or portion thereof) from the Give-Back Premises
Termination Date to the Expiration Date, and the denominator of which is one
hundred twenty (120). "Landlord's Transaction Costs" shall be the aggregate
amount of all costs and expenses incurred by Landlord in entering into this
Lease, including, without limitation, the amount of the Plan Allowance and
Landlord's Contribution and all brokerage commissions and legal fees. Landlord
shall, upon written request of Tenant, promptly after Landlord's Transaction
Costs have been determined, advise Tenant of the amount thereof. Promptly after
the exercise of Tenant's right to reduce the size of the Premises pursuant to
this Section 10.28(b), the parties shall execute and deliver an amendment to
this Lease confirming the location of the Give-Back Premises and making any
changes to the terms and provisions of this Lease required as a result of the
Give-Back Premises no longer being part of the Premises (e.g., modification to
Tenant's Proportionate Share). If Tenant fails to timely exercise its right
under this Section 10.28(b), Tenant shall have no right to reduce the size of
the Premises pursuant to this Section 10.28(b), time being of the essence in
respect of this Section 10.28(b).
(c) Notwithstanding anything to the contrary herein contained, Tenant
shall have no right to reduce the size of the Premises pursuant to Section
10.28(a) or 10.28(b) if Tenant shall have previously leased other space on the
sixth (6th) floor of the Building pursuant to Section 10.27 above.
10.29 Storage Premises. Landlord hereby demises and leases to Tenant and Tenant
hereby hires and takes from Landlord storage premises ("Storage Premises")
containing approximately 6,145 square feet of usable area. The Storage Premises
are located in the lower level of the Building and are substantially as shown on
Exhibit E hereto. Said demise of the Storage Premises shall be upon all of the
same terms and conditions of this Lease except:
(1) The Term Commencement Date in respect of the Storage Premises shall
be the Term Commencement Date in respect of the original Premises demised to
Tenant under this Lease.
(2) The Base Rent payable in respect of the Storage Premises shall be
$9.00 per usable square foot of the Storage Premises per year for the first five
(5) years of the Term, and $10.00 per usable square foot of the Storage Premises
per year for the remainder of the initial Term. The Base Rent payable in respect
of the Storage Premises during any extended term shall be based upon the fair
market rental value of the Storage Premises as of the commencement date of such
extended term, as determined by Landlord.
(3) The Storage Premises shall be leased by Tenant "as-is", in the
condition in which the Storage Premises are in as of the Term Commencement Date
in respect of the Storage Premises, without any obligation on the part of
Landlord to prepare or construct the Storage Premises for Tenant or to provide
any allowance or contribution with respect thereto. Notwithstanding the
foregoing, Landlord shall, at its expense, (a) deliver the Storage Premises in
broom-clean condition, (b) touch-up the interior walls of the Storage Premises
with paint, as needed, and (c) if not previously installed, install demising
partitions to separate the Storage Premises from the remainder of the space on
the lower level of the Building.
(4) Tenant shall have no obligation to make payments on account of
Operating Costs or Landlord's Tax Expense in respect of the Storage Premises.
(5) Landlord shall have no obligation to provide any services to the
Storage Premises other than heat and air conditioning appropriate for storage
space (which Tenant acknowledges may be at a level below the specifications set
forth in paragraph 1(a) of Exhibit B hereto) and electricity for the electric
lighting fixture in the Storage Premises.
(6) Tenant shall have no right to additional parking spaces or passes
by reason of the demise of the Storage Premises.
(7) Tenant shall use the Storage Premises for storage purposes in
connection with its use of the Premises demised under this Lease and for no
other purposes whatsoever.
10.30 Antenna Installation. Subject to the following provisions of this Section
10.30, Landlord grants Tenant the right, in common with Landlord and other
tenants, to install, operate and maintain, at Tenant's expense and risk, a
lawfully permitted antenna(e), satellite dish and associated equipment (the
"Antenna Equipment") required for the proper conduct of Tenant's business in the
Premises at a location on the roof of the Building mutually acceptable to
Landlord and Tenant (the "Antenna Premises"):
(a) Tenant shall submit to Landlord, for its approval, a full set of
engineering plans and specifications for the proposed Antenna Equipment
installation. The installation of the proposed Antenna Equipment shall be
designed so as to be removable without damage to the roof of the Building. The
parties hereby acknowledge and agree, by way of illustration and not limitation,
that Landlord shall have the right to withhold its approval of Tenant's plans
and specifications hereunder, and shall not be deemed to be unreasonable in
doing so, if Tenant's intended placement or method of installation or operation
of the Antenna Equipment (i) may subject other then existing licensees, tenants
or occupants of the Building, or other surrounding or neighboring landowners or
their then existing occupants, to signal interference, Tenant hereby
acknowledging that a shield may be required in order to prevent such
interference, (ii) does not minimize to the fullest extent practicable the
obstruction of the views from the windows of the Building or such adjoining
building that are adjacent to the Antenna Equipment, if any, (iii) does not
complement (in Landlord's sole judgment, which shall not, however, require
Tenant to incur unreasonable expense) the design and finish of the Building,
(iv) may damage the structural integrity of the Building or the roof thereof, or
(v) may constitute a violation of any consent, approval, permit or authorization
necessary for the lawful installation of the Antenna Equipment.
(b) Tenant shall make all required conduit or cable connections between
Tenant's equipment in the Premises and the Antenna Equipment utilizing Building
services, subject to (i) Tenant's payment of reasonable costs for such services,
and (ii) approval of such connections by Landlord.
(c) Any Antenna Equipment installed by Tenant shall not interfere with
the operation of any previously erected antenna(e), satellite dish(es) or the
like.
(d) Tenant shall obtain and maintain (and submit copies to Landlord of)
all necessary municipal, state and federal permits and authorizations required
to install, maintain, use and operate the Antenna Equipment and shall pay any
charges levied by government agencies which are the result of Tenant having the
Antenna Equipment. Landlord agrees to fully cooperate with Tenant in obtaining
all such permits and authorizations, at no cost or expense to Landlord.
(e) Tenant agrees to maintain the Antenna Equipment and Antenna
Premises in a good state of repair and to save Landlord and its agents and
employees harmless from any claims, liability, loss, damage or expenses
resulting from the erection, maintenance, existence, operation, use or removal
of the Antenna Equipment, except to the extent such claims, liability, loss,
damage or expenses are due to the negligence or willful misconduct of Landlord
or its agents, employees or contractors.
(f) At the conclusion of the Term, Tenant shall remove the Antenna
Equipment and surrender the Antenna Premises to Landlord in the same condition
as delivered to Tenant, except for loss or damage resulting from casualty,
condemnation, act of God or ordinary wear and tear.
(g) The liability and property insurance to be carried by Tenant
pursuant to the provisions of this Lease shall include coverage for Tenant's
activity on the Antenna Premises and the Antenna Equipment.
(h) Notwithstanding anything to the contrary contained in this Section
10.30, if Landlord, in its sole judgment, determines that the presence of the
Antenna Equipment creates or poses a health risk or other danger to persons or
property, Landlord shall have the right to require Tenant to remove the Antenna
Equipment from the roof of the Building by giving written notice to Tenant. Upon
the giving of such notice, Tenant shall remove the Antenna Equipment from the
roof of the Building and surrender the Antenna Premises to Landlord in the
condition required by clause (f) above.
(i) The frequency and transmission power at which the Antenna Equipment
shall operate shall be subject to Landlord's prior written approval and may not
be changed or modified at any time.
(j) Except for electricity, Landlord shall have no obligation to
provide any services to the Antenna Premises. Any services required by Tenant in
connection with Tenant's use of the Antenna Premises or the Antenna Equipment
shall be installed by Tenant, at Tenant's expense, subject to Landlord's prior
approval. Without limiting the foregoing, Tenant shall, at its expense, submeter
the Antenna Premises and pay for all electricity so submetered and subsequently
billed by Landlord.
(k) Tenant shall have no right to make any changes, alterations or
other improvements to the Antenna Premises or to the Antenna Equipment without
Landlord's prior written consent, except for routine maintenance.
(l) Landlord shall provide Tenant with 24-hour access to the Antenna
Premises, subject to Landlord's reasonable security procedures and restrictions
based on emergency conditions and to force majeure. Tenant shall give Landlord
reasonable advance written notice of the need for access to the Antenna Premises
(except that such notice may be oral in an emergency), and a representative of
Landlord must be present during any entry by Tenant onto the Antenna Premises.
Each notice for access shall either (as the case may be) (A) state the date
access is needed and that routine maintenance is to be performed, or (B) if
other than routine maintenance is to be performed, describe, as applicable, the
date access is needed, the name of the contractor or other personnel requiring
access, the areas to which access is required, the common areas (if any) of the
Building to be impacted (risers, electrical rooms, etc.) and evidence of
Landlord's approval of any work to be done in the Antenna Premises, if and to
the extent such consent is required. In the event of an emergency, such notice
shall follow within five (5) days after access to the Antenna Premises.
(m) Tenant shall be responsible for the cost of repairing any damage to
the roof of the Building caused by the installation, maintenance or removal of
the Antenna Equipment by or on behalf of Tenant.
(n) Tenant shall have no right to sublet the Antenna Premises.
(o) Except for Tenant, no person, firm or entity (including, without
limitation, other tenants, licensees or occupants of the Building) shall have
the right to benefit from the services provided by the Antenna Equipment.
(p) In the event that Landlord performs repairs to or replacement of
the roof, and the removal of the Antenna Equipment is necessary to effect such
repair or replacement, Tenant shall, at Tenant's cost, remove the Antenna
Equipment until such time as Landlord has completed such repairs or replacement.
(q) Tenant shall take the Antenna Premises "as-is" without any
obligation of Landlord to prepare or construct the same for Tenant's use or to
provide any allowance or contribution with respect thereto.
(r) Tenant shall comply with all applicable laws, ordinances and
regulations relating to Tenant's use, maintenance and operation of the Antenna
Premises and the Antenna Equipment.
(s) Landlord shall have the right, upon at least thirty (30) days
notice to Tenant, to require Tenant to relocate the Antenna Premises to another
area ("Relocation Antenna Premises") on the roof of the Building suitable for
the use of the Antenna Equipment. In such event, Tenant shall, at Landlord's
sole cost and expense, on or before the date set forth in Landlord's notice,
relocate all of its Antenna Equipment from the Antenna Premises to the
Relocation Antenna Premises.
(t) Tenant's use of the Antenna Premises shall otherwise be upon and
subject to the terms and provisions of this Lease, except to the extent
inconsistent with the state of facts contemplated by the use of the Antenna
Premises. Without limiting the foregoing, Tenant shall have no obligation to pay
rent for its use of the Antenna Premises.
10.31 Exterior Signage.
(a) Tenant shall have the right, at its sole cost and expense, to
provide and install two (2) signs bearing Tenant's name and/or logo on the
exterior of the Building below the roof-line thereof. The size, design and
location of such signs shall be subject to the prior written consent of
Landlord, and Tenant agrees to obtain and present to Landlord, prior to the
installation thereof, any and all permits and approvals required by regulatory
authorities having jurisdiction with respect to such signs. Landlord agrees to
reasonably cooperate with Tenant to obtain such permits and approvals, but at no
cost to Landlord. Tenant shall, at its expense, maintain such signs in good
order and condition throughout the Term of this Lease (Tenant hereby assuming
all risk and liability with respect thereto) and remove such signs upon the
expiration or sooner termination of the Term of this Lease and restore the
facade(s) of the Building to the condition existing prior to the installation
thereof. For so long as this Lease is in full force and effect, Landlord agrees
not to permit the installation of a sign on the exterior of the Building at a
height parallel to or above the location of Tenant's exterior signs. Provided
that The Lincoln National Life Insurance Company, itself, or an Affiliated
Entity is occupying at least fifty percent (50%) of the Building and is not in
default under this Lease, Landlord agrees not to permit the installation of a
sign on the exterior of the Building which is proportionately larger (based upon
the amount of space occupied by the tenant in question as compared to the amount
of space occupied by Tenant and the size of Tenant's signs) than any of Tenant's
exterior signs.
(b) Landlord shall, at its expense, install a monument sign (of a size
and design determined by Landlord in its sole discretion) at the entrance to the
Property and shall install Tenant's name (but not logo) in a prominent position
on such sign. Tenant shall, within thirty (30) days of billing therefor,
reimburse Landlord for the costs and expenses to obtain and install Tenant's
name on such sign.
10.32 Food Service Facility. Landlord shall operate, or cause to be operated,
throughout the Term of this Lease a full-service food service facility (which
shall include capacity for seating of at least 150 persons) serving the tenants
of the Building. The hours of operation of such food service facility shall be
at least 7:00 a.m. to 9:00 a.m. and 11:00 a.m. to 2:00 p.m., Monday through
Friday, legal holidays excepted. Tenant agrees that the Premises shall not
contain a food service facility in any form, except for a reasonable number of
vending machines serving products reasonably acceptable to Landlord.
10.33 Exercise Facility. Landlord shall operate, or cause to be operated,
throughout the Term of this Lease an exercise facility (which may or may not be
staffed, at Landlord's sole election) for use by employees of all tenants of the
Building containing exercise equipment, men's and women's showers and locker
facilities. Notwithstanding the foregoing, such exercise facility shall be
available for use on a temporary basis by visiting employees of Tenant's
affiliates. Employees of Tenant and its affiliates shall not be separately
charged for the use of such exercise facility. Such exercise facility shall be
available for use by employees of Tenant and its affiliates during Normal
Building Operating Hours, legal holidays excepted. As a condition to the use of
such exercise facility, each employee shall be required to execute and deliver
to the Building management office prior to the first such use the Metro Center
Fitness Club Usage Agreement in the form attached hereto as Exhibit F.
10.34 Temporary Premises. Tenant desires to lease temporary premises in the
Building until the Term Commencement Date of this Lease. Therefore, Landlord
hereby demises and leases to Tenant, and Tenant hereby hires and takes from
Landlord, the Temporary Premises, as hereinafter defined. The demise of the
Temporary Premises shall be upon the terms and conditions hereinafter set forth.
(a) The "Temporary Premises" shall be comprised of up to a full floor
of the Building (other than any floor which is a part of the Premises) as
designated by Landlord, but subject to change by Landlord from time to time.
(b) The demise of the Temporary Premises shall be upon all of the same
terms and conditions of this Lease, except as follows:
(1) The Term Commencement Date in respect of the Temporary
Premises shall be the date on which this Lease has been fully executed and
delivered by Landlord and Tenant.
(2) The Term of this Lease in respect of the Temporary
Premises shall expire on the day immediately preceding the Term Commencement
Date of this Lease (the "Temporary Premises Termination Date").
(3) The Temporary Premises shall be leased by Tenant "as-is",
in the condition in which the Temporary Premises are in as of the Term
Commencement Date in respect of the Temporary Premises, without any obligation
on the part of Landlord to prepare or construct the Temporary Premises for
Tenant or to provide any allowance or contribution with respect thereto.
(4) Tenant shall have no obligation to pay Base Rent or to
make any payments on account of Operating Costs or Landlord's Tax Expense in
respect of the Temporary Premises.
(5) Landlord shall have no obligation to provide any services
to the Temporary Premises.
(6) Tenant shall have no right to additional parking spaces
or passes by reason of the demise of the Temporary Premises.
(7) Tenant shall use the Temporary Premises for oversight of
construction, employee orientation, interviews or any other use permitted by law
and approved by Landlord.
(c) As of the Temporary Premises Termination Date, Tenant shall vacate
the Temporary Premises and deliver the Temporary Premises to Landlord in the
condition in which the Temporary Premises were delivered to Tenant.
10.35 Testing of Building HVAC System. Within a reasonable period of time after
the execution and delivery of this Lease and prior to the commencement of
Landlord's Work, Landlord shall cause an environmental consulting firm
reasonably satisfactory to Tenant to test the indoor air on each floor of the
Premises to determine whether elevated levels of fungus or mold are emanating
from the Building HVAC system. Air samples shall also be collected from outside
of the Building as a control. If, in the reasonable opinion of a certified
industrial hygienist employed by said consulting firm (the "CIH"), such testing
indicates that no response actions related to elevated levels of mold or fungus
emanating from the Building HVAC system are necessary, Landlord shall be deemed
to have satisfied its obligations under this Section 10.35 and Tenant shall
reimburse Landlord for the costs and expenses incurred by Landlord in performing
such testing within thirty (30) days after receipt of an invoice from Landlord
therefor. If, in the reasonable opinion of the CIH, such testing indicates that
response actions are necessary in order to address elevated levels of fungus or
mold emanating from the Building HVAC system, Landlord shall pay for such
testing and shall use reasonable efforts to eliminate such elevated mold and/or
fungus emissions. Tenant acknowledges and agrees that Rizzo Associates, Inc. is
an acceptable environmental consulting firm.
Submission of this instrument for examination or signature does not
constitute a reservation of or option to lease, and it is not effective as a
lease or otherwise until execution and delivery by both Landlord and Tenant.
This Lease contains all of the agreements of the parties with respect
to the subject matter thereof and supersedes all prior dealings between them
with respect to such subject matters.
No representations, inducements, promises or agreements, oral or
otherwise, between Landlord and Tenant or any of their respective brokers,
employees or agents, not embodied herein, shall be of any force or effect.
IN WITNESS THEREOF the parties hereto have set their hands and seals in
multiple counterpart copies, each of which counterpart copy shall be deemed an
original for all purposes, as of the date and year first above written.
LANDLORD: NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP
BY: Northland Metro Partners Limited Partnership,
its General Partner
BY: Northland Metro Partners Incorporated,
its General Partner
BY:
Name:
Title:
TENANT: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BY:
Name:
Title:
EXHIBIT A
PLAN OF PREMISES
EXHIBIT B
LANDLORD SERVICES
1) Heating, Ventilating and Air Conditioning
a) Landlord will furnish the foregoing as required to provide
comfortable temperatures in compliance with applicable codes and ordinances,
government or quasi-governmental regulations, during Normal Building Operating
Hours and on Saturdays from 8:00 a.m. to 1:00 p.m. (collectively, "Standard HVAC
Hours"). "Comfortable temperatures" shall mean a maximum inside temperature of
76 F, provided the outside temperature is no more than 88 F dry bulb/72 F wet
bulb, and a minimum inside temperature of 72 F, provided the outside temperature
is no less than 6 F dry bulb. Landlord will maintain the base Building heating,
ventilating and air conditioning equipment, the cost of which shall be billed to
tenants pursuant to Article III hereof.
b) The air conditioning system is designed to provide cooling for
normal office occupancy, one person per 208 square feet, and normal office
equipment comprising a combined lighting and standard electrical load not to
exceed 6 watts per square foot. If special occupancy requirements or special
equipment require additional cooling or if Tenant otherwise exceeds those
conditions or introduces onto the Premises equipment which overloads the systems
and/or in any other way causes the systems not adequately to perform their
proper functions, then at Landlord's option reasonable supplementary or
alternative systems may be installed by Landlord and the acquisition,
installation, maintenance and operating cost of such equipment will be at
Tenant's expense.
c) Tenant may request heating and/or air conditioning during other
periods in addition to Standard HVAC Hours by submitting its request in writing
to the Building Manager's office no later than 2:00 p.m. the preceding workday
(Monday through Friday) on forms available from the Building Manager. The
request shall clearly state the start and stop hours of the "off-hour" service.
Tenant shall submit to the Building Manager a list of personnel who are
authorized to make such requests. Charges are to be determined by the Building
Manager on the additional hours of operations and shall be fair and reasonable
and reflect the additional operating costs involved without profit to Landlord.
2) Electrical Service
Landlord shall furnish electricity service to the Premises in accordance with
Section 10.23 of the Lease.
3) Water
Landlord shall furnish water for ordinary cleaning, toilet, lavatory and
drinking purposes only. If Tenant requires, uses or consumes water for any
purpose other than the aforesaid, Landlord may (i) assess a reasonable charge
for the additional water so used or consumed by Tenant, or (ii) install a water
meter at Tenant's expense and thereby measure Tenant's water consumption for all
purposes. In the latter event, Tenant agrees to pay for water consumed, as shown
on said meter, together with the sewer charge based on said meter charges, as
and when bills are rendered.
4) Elevator
There shall be an elevator for the use of all tenants and the general public for
access to and from all floors of the Building.
5) Relamping of Light Fixtures
Landlord shall replace all lamps, ballasts and starters within the Premises upon
Tenant's request from time to time, the cost of which shall be reimbursed by
Tenant to Landlord upon Landlord's request therefor from time to time.
6) Office Cleaning and Janitorial Service
Office cleaning and janitorial service in accordance with the Cleaning
Specifications attached hereto as Exhibit B-1.
7) Security
Landlord shall provide security for the Building similar to the security
provided in other first-class office buildings in downtown Hartford, although
Landlord makes no representation, warranty or guaranty of the efficacy of its
efforts in this regard.
8) Parking Attendant
Landlord shall cause a parking attendant to be located in the Garage.
EXHIBIT B-1
CLEANING SPECIFICATIONS FOR
METRO CENTER, 350 CHURCH STREET, HARTFORD, CT
FREQUENCY: Five nights per week, Monday through Friday, between the hours
of 5:30 p.m. and 9:30 p.m., excluding holidays.
GENERAL OFFICE AREA
DAILY:
1. Spot vacuum all traffic lanes and obviously soiled carpeted surfaces.
2. Inspect carpet for spots and stains, removing where possible.
3. Dust mop or sweep hard surface floor areas thoroughly.
4. Dust all horizontal surfaces of desks, chairs, tables and office
equipment.
5. Dust all exposed filing cabinets, bookcases and shelves.
6. Dust to hand height all horizontal surfaces of equipment, ledges,
sills, shelves, radiators, frames, and partitions.
7. Dust all telephones.
8. Empty all waste receptacles and remove trash to handling area.
9. Clean and sanitize all drinking fountains.
10. Turn out lights and lock tenant building doors.
WEEKLY:
1. Vacuum clean all exposed carpeting including difficult areas such as
under desks, tables, counters. 2. Replace plastic liners in
wastebaskets.
3. Wash glass in tenant doors, sidelights and interior partitions.
4. Damp mop and spray buff floors.
5. Spot clean by damp wiping fingerprints, smears and smudges on walls,
doors, frames, kick and push plates, handles, light switches and glass
surfaces.
MONTHLY:
1. Dust vertical blinds.
2. Detail vacuum corners and edges.
3. Vacuum all fabric office furniture, including chairs and couches.
QUARTERLY:
1. Dust above hand height all horizontal surfaces including shelving,
moldings, ledges, partitions, pipes, etc.
2. Vacuum clean or dust all air-conditioning and heating grilles.
SEMI ANNUALLY:
1. Machine strip clean and refinish all floor surfaces as required but
not less than once per year.
2. Damp wipe and clean light fixtures.
LOBBY AND COMMON AREAS
DAILY:
1. Dust walls up to normal reach in lobby.
2. Spot clean by damp wiping fingerprints, smears and smudges on walls,
doors, frames, kick and push plates, handles, light switches, glass
surfaces, directory and tenant signage and elevator call buttons, etc.
3. Vacuum clean all carpeting and inspect for spots and stains, removing
where possible.
4. Sweep and police all exterior plaza and sidewalk areas.
5. Clean all lobby glass, including revolving door.
QUARTERLY:
1. Dust walls from ceiling to floor.
2. Vacuum all fabric-covered walls.
RESTROOMS
DAILY:
1. Clean and polish all chrome fittings and brightwork, including shelves,
flushometers and metal dispensers.
2. Clean and sanitize both sides of every toilet seat with a germicidal
solution.
3. Clean, sanitize and polish all vitreous fixtures, including toilet
bowls, urinals and sinks, using a germicidal detergent solution.
4. Clean and polish all mirrors and glass.
5. Dust and spot clean all toilet partitions, tile walls, dispensers and
receptacles.
6. Empty all disposal receptacles, inserting liners as needed.
7. Refill all dispensers, including napkin, soap, tissue, towels, cups,
liners, etc.
8. Remove spots, stains and splashes from wall areas.
9. Wash and rinse all floors thoroughly, using a germicidal detergent
solution.
10. Spot clean by damp wiping fingerprints, smears and smudges on walls,
doors, frames, kick and push plates, handles, light switches and glass
surfaces.
MONTHLY:
1. Wash and sanitize all partitions, tile walls and enamel surfaces.
2. Dust or vacuum clean all heating and air-conditioning ceiling vents.
QUARTERLY:
1. Machine scrub and rinse all floor surfaces.
STAIRWELLS
DAILY:
1. Spot clean by damp wiping fingerprints, smears, and smudges on walls,
doors, frames, kick and push plates, and handles.
MONTHLY:
1. Vacuum and/or dry mop using a chemically treated dry mop all
stairwells.
2. Dust all handrails.
ELEVATORS
DAILY:
1. Sweep or vacuum floors.
2. Inspect carpet for spots and stains, removing where possible.
3. Clean elevator tracks.
4. Clean walls and polish brightwork.
5. Wipe down all surfaces in freight elevator.
MONTHLY:
1. Wash light fixtures.
EXHIBIT C
RULES AND REGULATIONS
1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules,
stairways, corridors or halls shall not be obstructed or used for any purpose
other than for ingress to and egress from the Premises and for delivery of
merchandise and equipment in a prompt and efficient manner, using elevators and
passageways designated for such delivery by Landlord. There shall not be used in
any space, or in public hall of the Building, either by any Tenant or by jobbers
or others in the delivery or receipt of merchandise, any hand trucks, except
those equipped with rubber tires and sideguards.
2. The water and wash closets and plumbing fixtures shall not be used for any
purposes other than those for which they were designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein,
and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No Tenant shall sweep or throw or permit to be swept or thrown from the
Premises any dirt or other substances into any of the corridors or halls,
elevators, or out of the doors or windows or stairways of the Building, and
Tenant shall not use, keep or permit to be used or kept any foul or noxious gas
or substance in the Premises, or permit or suffer the Premises to be occupied or
used in a manner offensive or objectionable to Landlord or other occupants of
the Building by reason of noise, odors and/or vibrations, or interfere in any
way with other tenants or those having business therein, nor shall any animals,
other than seeing eye dogs, be kept in or about the Building. Smoking or
carrying lighted cigars or cigarettes in the Building is prohibited.
4. No awnings, antennae, or other projections shall be attached to the outside
walls of the Building.
5. No curtains, blinds, shades, or screens other than those furnished by
Landlord shall be attached to, hung in or used in connection with any window or
door of the Premises without the prior written consent of Landlord.
6. No advertisement, notice or other lettering shall be exhibited, inscribed,
painted or affixed by any Tenant on any part of the outside of the Premises or
the Building or on the inside of the Premises if the same is visible from the
outside of the Premises without the prior written consent of Landlord, except
that the name of Tenant may appear on the entrance door of the Premises. In the
event of the violation of the foregoing by any Tenant, Landlord may remove same
without any liability, and may charge the expense incurred by such removal to
Tenant or Tenants violating this rule. Interior signs on doors and directory
tablet shall be inscribed, painted or affixed for each Tenant by Landlord at the
expense of such Tenant, and shall be of a size, color and style acceptable to
Landlord.
7. No Tenant shall mark, paint, drill into, or in any way deface any part of the
Premises or the Building of which they form a part. No boring, cutting or
stringing of wires shall be permitted, except with the prior written consent of
Landlord, and as Landlord may direct. No Tenant shall lay linoleum, or other
similar floor covering, so that the same shall come in direct contact with the
floor of the Premises, and, if linoleum or other similar floor covering is
desired to be used in interlining of builder's deadening felt shall be first
affixed to the floor, by a paste or other material, soluble in water, the use of
cement or other similar adhesive material being expressly prohibited.
8. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any Tenant, nor shall any changes be made in existing locks
or mechanism thereof. Each Tenant must, upon the termination of his tenancy,
restore to Landlord all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such Tenant, and in the event of the
loss of any keys, so furnished, such Tenant shall pay to Landlord the cost
thereof.
9. Freight, furniture, business equipment, safes, merchandise and bulky matter
of any description shall be delivered to and removed from the Premises only on
the freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Landlord. Landlord reserves the right
to inspect all freight to be brought into the Building and to exclude from the
Building all freight which violates any of these Rules and Regulations of the
Lease of which these Rules and Regulations are a part.
10. Canvassing, soliciting and peddling in the Building is prohibited and each
Tenant shall cooperate to prevent the same.
11. Landlord shall have the right to prohibit any advertising by any Tenant
which, in Landlord's opinion, tends to impair the reputation of the Building or
its desirability as Building for offices, and upon written notice from Landlord,
Tenant shall refrain from or discontinue such advertising. 12. Tenant shall not
bring or permit to be brought or kept in or on the Premises, any flammable,
combustible or explosive fluid, material, chemical or substance or cause or
permit any odors of cooking or other processes, or any unusual or other
objectionable odors to permeate in or emanate from the Premises. Without
limiting the foregoing, Tenant shall not permit any cooking within the Premises,
except that a coffee bar and microwave may be used by Tenant's employees in the
Premises.
13. Tenant shall comply with all security measures from time to time established
by Landlord for the Building.
14. Tenant assumes full responsibility for protecting its space from theft,
robbery and pilferage, which includes keeping doors locked and any other means
of entry to the Premises closed and secured.
15. Tenant shall comply with all applicable federal, state and municipal laws,
ordinances and regulations and Building rules and shall not, directly or
indirectly, make any use of the Premises which may be prohibited by any thereof
or which shall be dangerous to person or property or shall increase the cost of
insurance or require additional insurance coverage.
16. Tenant shall not waste electricity, water, heat or air conditioning and
agrees to cooperate fully with Landlord to assure the most effective operation
of the Building's heating and air conditioning, and shall refrain from
attempting to adjust any controls other than room thermostats installed for
Tenant's use.
17. Tenant shall not install and operate machinery or any mechanical devices of
a nature not directly related to Tenant's ordinary use of the Premises without
the written permission of Landlord.
18. No person or contractor not employed or approved by Landlord shall be used
to perform window washing, cleaning, repair or other work in the Premises.
19. No vending machines other than those furnished by the Landlord are to be
placed in any hallways or Building common areas.
20. No parking in front of the main entrance of the Building is permitted.
21. Tenant shall comply with the Building's recycling program, as the same may
be established or changed by Landlord from time to time.
EXHIBIT D
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
This SUBORDINATION, NON-DISTURBANCE, AND ATTORNMENT AGREEMENT is made
as of this _____ day of ____________, 1998, by and among NOMURA ASSET CAPITAL
CORPORATION, a Delaware corporation, (together with its successors and assigns,
"Mortgagee"), THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, an Indiana
corporation ("Tenant"), and NORTHLAND METRO PORTFOLIO LIMITED PARTNERSHIP, a
Massachusetts limited partnership ("Landlord").
RECITALS
A. Landlord is the owner of those certain premises commonly known
as Metro Center, 350 Church Street, Hartford, Connecticut, more particularly
described in Exhibit A attached hereto as (the "Real Estate");
B. Mortgagee is now or will be the owner and holder of a note
(the "Note") evidencing a loan (the "Loan") made by Mortgagee to Landlord, and a
mortgage (the "Mortgage")securing the Loan, in each case executed by Landlord to
Mortgagee;
C. The Mortgage constitutes or will constitute a first lien upon,
among other things, the Real Estate and the current and future improvements (the
"Improvements") situated thereon (collectively, the "Property");
D. Under the terms of a certain Lease (the "Lease") dated on or
about the date hereof, Landlord leased to Tenant the Real Estate and the
Improvements, or a portion thereof, as more particularly described in the Lease;
and
E. The parties are entering into this Agreement as a condition of
Mortgagee's agreement to make the Loan evidenced by the Note.
AGREEMENTS
1. Subordination. The Lease is and at all times shall be
subordinate to the Mortgage and to all substitutions, renewals, modifications
and amendments of and to the Mortgage (including, without limitation, any of the
foregoing which increase the indebtedness secured thereby).
2. Non-Disturbance. In the event of foreclosure of the Mortgage
(by judicial process, power of sale or otherwise) or conveyance in lieu of
foreclosure, which foreclosure, power of sale, or conveyance occurs prior to the
expiration date of the Lease, including any extensions and renewals of the lease
now provided thereunder, and so long as Tenant is not in default under any of
the terms, covenants and conditions of the lease beyond any applicable grace or
cure period, Mortgagee agrees on behalf of itself, its successors and assigns,
and on behalf of any purchaser at such foreclosure ("Purchaser") that Tenant
shall not be disturbed in the quiet and peaceful possession of the premises
demised under the Lease, subject to the terms and conditions of the Lease.
3. Attornment. In the event of foreclosure of or other execution
on the Mortgage or conveyance in lieu of foreclosure, which foreclosure,
execution or conveyance occurs prior to the expiration date of the Lease,
including any extensions and renewals of the lease now provided thereunder,
Tenant shall attorn to Mortgagee or Purchaser and recognize Mortgagee or
Purchaser as Tenant's landlord under the Lease, and so long as Tenant is not in
default under any of the terms, covenants and conditions of the Lease beyond any
applicable grace or cure period, Mortgagee or Purchaser shall recognize and
accept Tenant as its tenant thereunder, whereupon the Lease shall continue,
without further agreement, in full force and effect as a direct lease between
Mortgagee or Purchaser and Tenant for the remaining term thereof, together with
all extensions and renewals now provided thereunder, upon the same terms,
covenants and conditions as therein provided, and Mortgagee or Purchaser shall
thereafter assume and perform all of Landlord's subsequent obligations, as
landlord under the Lease, and Tenant shall thereafter make all rent payments
directly to either Mortgagee or Purchaser, as the case may be, subject to the
limitations contained in Section 4 and Section 8 below.
4. Limitation of Liability. Notwithstanding anything to the
contrary contained herein or in the Lease, in the event of foreclosure of or
other execution on the Mortgage (by judicial process, power of sale or
otherwise) or conveyance in lieu of foreclosure, which foreclosure, power of
sale or conveyance occurs prior to the expiration date of the Lease, including
any extensions and renewals of the Lease now provided thereunder, the liability
of Mortgagee or Purchaser, as the case may be, shall be limited as set forth
below in Section 8 below, provided, however, that Mortgagee or Purchaser, as the
case may be, shall in no event or to any extent:
(a) be liable to Tenant for any past act, omission or default on the
part of the original or any other landlord under the Lease and
Tenant shall have no right to assert the same or any damages arising
therefrom as an offset, claim, defense or deficiency against
Mortgagee, Purchaser, or the successors or assigns of any of them;
provided, however, that if notice of such act, omission or default
is given to Mortgagee and Mortgagee or any Purchaser succeeds to the
interest of Landlord under the Lease, then Mortgagee or such
Purchaser shall be subject to any abatement or offset right to which
Tenant may be entitled under the Lease on account of such act,
omission or default;
(b) be liable to Tenant for any payment of rent more than thirty (30)
days in advance or any deposit, rental security or any other sums
deposited with the original or any other landlord under the Lease
and not delivered to Mortgagee;
(c) be bound by any cancellation, surrender, amendment or modification
of the Lease entered into by Tenant unless:
(i) Tenant is allowed to take such action as a matter of right
under the Lease;
(ii) Such action does not affect the monetary obligations of the
Tenant with respect to the Property; or
(iii) Mortgagee provides its prior written consent to such action,
which consent shall not be unreasonably withheld or delayed.
(d) be liable to Tenant for construction, or delays in construction, of
the Improvements or the portion thereof leased to Tenant; or
(e) be bound by any option or right of first refusal to purchase the
Real Estate granted to Tenant under the Lease.
5. Further Documents. The foregoing provisions shall be self-
operative and effective without the execution of any further instruments on the
part of any party hereto. Each party agrees, however, to execute and deliver to
the other or to any person to whom Tenant herein agrees to attorn such other
instruments as either shall reasonably request in order to confirm said
provisions.
6. Notice and Cure. Tenant agrees that if there occurs a default by
Landlord under the Lease:
(a) Tenant shall use best efforts to give a copy of each default notice
given to Landlord pursuant to the Lease to Mortgagee; and
(b) Mortgagee shall have the right, but not the obligation, to cure the
default within the time prescribed by the Lease or, if such default
cannot reasonably be cured within that time, then such additional
time not to exceed forty-five (45) days as may be necessary if
Mortgagee shall have commenced and shall be diligently pursuing the
remedies necessary to cure such default.
7. Notices. All notices, demands and requests given or required to be
given hereunder shall be in writing and shall be deemed to have been properly
given when personally served or if sent by U. S. registered or certified mail,
postage prepaid, addressed as follows:
Mortgagee: Nomura Asset Capital Corporation
633 West Fifth Avenue, 68th Floor
Los Angeles, CA 90071
Attention: David Walker
Tenant: The Lincoln National Life Insurance Company
350 Church Street
Hartford, Connecticut 06103
Attention: Peter Gourley, Vice President
Financial Reporting & Pricing
Landlord: c/o Northland Investment Corporation
2150 Washington Street
Newton, Massachusetts 02162
Attention: President
8. Limitation of Personal Liability. At any time before or after
Mortgagee or Purchaser succeeds to the interest of Landlord, Tenant agrees to
look only to such Mortgagee's or Purchaser's interest in the Property to satisfy
any of the respective obligations of Mortgagee or Purchaser to Tenant.
9. Payment of Rent. Tenant hereby acknowledges that the Lease and
the rents and all other sums due thereunder have been assigned to Mortgagee as
security for the Loan evidenced by the Note and secured by the Mortgage. If
Mortgagee notifies Tenant of the occurrence of a default under the Note,
Mortgage or any other document, instrument or agreement evidencing or securing
the indebtedness and/or demands that Tenant pay rents and all other sums due or
to be become due under the Lease directly to Mortgagee, Tenant shall pay rent
and all other sums due under the Lease directly to Mortgagee or as otherwise
directed in writing by Mortgagee without the need on the part of Mortgagee to
document or otherwise establish any default. Landlord hereby irrevocably
authorizes and directs Tenant to make the foregoing payments to Mortgagee upon
such notice and demand without the need to inquire of Landlord as to the
validity of such notice or any contrary notice or direction from Landlord and
Landlord agrees not to seek payment from Tenant of any such payments made to
Mortgagee.
10. Binding Effect. The terms, covenants and conditions hereof shall
inure to the benefit of and be binding upon the parties hereto, and their
respective heirs, executors, administrators, successors and assigns.
11. Modification. This Agreement may not be modified orally or in a
manner other than by an agreement signed by the parties hereto or their
respective successors in interest.
12. Choice of Law. This Agreement shall be governed by the internal
law (and not the law of conflicts) of the State in which the Property is
located.
13. Counterparts. This Agreement may be executed in two or more
counterparts which, when taken together, shall constitute one and the same
original.
[Signatures commence on following page]
WITNESS the due execution of this instrument by the parties hereto the day
and year first above written.
MORTGAGEE:
NOMURA ASSET CAPITAL CORPORATION,
a Delaware corporation
Signed, sealed and delivered
in the presence of:
_____________________________
_____________________________ By:____________________________________
Name:
Title:
TENANT:
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY,
an Indiana corporation
Signed, sealed and delivered
in the presence of:
_____________________________
_____________________________ By:____________________________________
Name:
Title:
LANDLORD:
NORTHLAND METRO PORTFOLIO LIMITED
PARTNERSHIP, a Massachusetts limited
partnership
By: Northland Metro Partners Limited
Partnership, its General Partner
By: Northland Metro Partners
Incorporated, its General
Signed, sealed and delivered Partner
in the presence of:
_____________________________
_____________________________ By:_______________________
Name:
Title:
STATE OF ____________)
COUNTY OF ___________)
The foregoing instrument was acknowledged before me this ______ day of
____________, 1998 by _______________________________________, a ______________
of Nomura Asset Capital Corporation, a Delaware corporation.
WITNESS my hand and official seal.
Signature _________________________ (Seal)
Notary Public
My commission expires:
STATE OF ____________)
COUNTY OF ___________)
The foregoing instrument was acknowledged before me this ______ day of
____________, 1998 by _______________________________________, a ______________
of The Lincoln National Life Insurance Company, an Indiana corporation.
WITNESS my hand and official seal.
Signature _________________________ (Seal)
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS )
COUNTY OF ___________ )
The foregoing instrument was acknowledged before me this _____ day of
____________, 1998 by ____________________________________, the ______________
of (Northland Metro Partners Incorporated as General Partner for Northland Metro
Partners Limited Partnership, as General Partner for Northland Metro Portfolio
Limited Partnership, a Massachusetts limited partnership).
WITNESS my hand and official seal.
Signature _________________________ (Seal)
Notary Public
My commission expires:
Record and Return to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attn: Joseph B. Heil, Esquire
EXHIBIT E
PLAN OF STORAGE PREMISES
EXHIBIT F
METRO CENTER FITNESS CLUB
USAGE AGREEMENT
- --------------------------------------------------------------------------
FIRST NAME MIDDLE NAME LAST NAME
__________________________________________________________________________
COMPANY NAME SUITE #
- --------------------------------------------------------------------------
HOME PHONE WORK PHONE
IN AN EMERGENCY, PLEASE NOTIFY:
- --------------------------------------------------------------------------
NAME WORK PHONE/HOME PHONE
The undersigned wishes to use the equipment and/or services of the Metro Center
Fitness Club. The undersigned understands that his/her application is subject to
review and approval of the Metro Center Fitness Club.
Usage may be immediately terminated or suspended by the building owner (the
"Owner") if the undersigned, in the judgment of the Owner, violated any rules,
regulations or policies of the Metro Center Fitness Club or if the undersigned,
or any guest of the undersigned, in the judgment of the Owner, conducts
himself/herself in a manner detrimental to the Owner or its participants or in
any manner that the Metro Center Fitness Club deems inappropriate or disruptive.
As a participant, the undersigned agrees to conform to and be bound by the
rules, regulations and policies of the Metro Center Fitness Club, as they may be
amended from time to time.
HEALTH WARRANTY AND WAIVER OF LIABILITY
The undersigned hereby represents and warrants that he/she has consulted with a
physician and has no disability, impairment or ailment that will prevent him/her
from safely engaging in exercise or that will be detrimental or dangerous to
his/her health, safety or physical condition if he/she does participate in
exercising or the use of any of the facilities and services provided by the
Metro Center Fitness Club to the maximum extent provided by law. The undersigned
assumes any and all risks of injury, damage or property loss associated with the
use of the Metro Center Fitness Club's facilities and equipment, and releases
the Owner and its agents, employees and contractors from any claims, damages or
loss which arises as a result of any injury, property loss or other damage
sustained in or about the Metro Center Fitness Club facilities.
The undersigned acknowledges that the Metro Center Fitness Club is an unattended
facility and assumes all risks arising from such fact.
The undersigned represents to the Owner that he/she is familiar with all the
equipment in the Metro Center Fitness Club and is experienced in the safe and
proper usage of said equipment.
Signature___________________________________________________________
Name:
Date______________________________________
METRO CENTER FITNESS CLUB
Rules and Policies
The following rules and policies are subject to change at any time. The Metro
Center Fitness Club shall have complete charge of its facilities at all time.
If you have questions or concerns, please contact the Management Office.
- ------------------------------------------------------------------------
The Metro Center Fitness Club shall not be held responsible or liable by any
participant for personal injury, damage or loss of property for any reason.
Anyone using the Club facilities does so at their own risk.
Participants must be at least eighteen (18) years of age.
A fitness consultation with your physician must be performed prior to Club
participation.
Free temporary lockers are available in the dressing rooms during club usage.
Any articles left in temporary lockers overnight will be removed by Management.
Wipe off equipment after use.
When using free weights, return to rack and bend knees when setting weights
down. (Do not drop weights.)
PARTICIPANTS ARE URGED TO AVOID BRINGING VALUABLES INTO CLUB PREMISES. THE METRO
CENTER FITNESS CLUB AND ITS OWNERS, AGENTS, EMPLOYEES AND CONTRACTORS SHALL NOT
BE LIABLE FOR THE LOSS OR THEFT OF, OR DAMAGE TO, THE PERSONAL PROPERTY OF CLUB
PARTICIPANTS.
Report damaged or loose machine parts to Management.
Report any incident or accident to Management immediately.
Pets are not allowed in the Club.
No smoking is permitted anywhere in the Club.
No alcoholic beverages or illegal substances of any kind may be brought into the
Club. Violation of this rule will result in immediate termination of usage.
No food is to be eaten in the Club.
Be considerate of others. Loud or abusive language will not be tolerated.
Personal radios anywhere in the Club are limited to headphone use.
Proper attire, including shoes and shirt, must be worn at all times.
Workout at a safe intensity level (not your neighbor's intensity level).
THE METRO CENTER FITNESS CLUB RESERVES THE RIGHT TO ESTABLISH AND CHANGE HOURS
OF OPERATION AND CLUB AVAILABILITY.
<PAGE> 207
LINCOLN NATIONAL CORPORATION
EXHIBIT 12 - HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31,
(millions of dollars) 1997(4) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Income before Taxes, Accounting
Change and Minority Interests ................ 1427.1 692.7 626.6 376.3 587.8
Equity in the Earnings of
Unconsolidated Affiliates .................... -- (1.4) (12.4) (14.6) --
Sub-total of Fixed Charges .................... 113.4 108.6 94.4 66.6 62.9
Sub-total of Adjusted Net Income ........... 1540.5 799.9 708.6 428.3 650.7
Interest on Annuities & Financial Products .... 1478.5 1435.6 1400.0 1359.0 1315.8
Adjusted Income Base ....................... 3019.0 2235.5 2108.6 1787.3 1966.5
Rent Expense .................................. 62.7 71.6 65.7 51.3 55.8
Fixed Charges:
Interest and Debt Expense ..................... 92.5 84.7 72.5 49.5 44.3
Rent (Pro-rated) .............................. 20.9 23.9 21.9 17.1 18.6
Sub-total of Fixed Charges ................. 113.4 108.6 94.4 66.6 62.9
Interest on Annuities & Financial Products .... 1478.5 1435.6 1400.0 1359.0 1315.8
Sub-total of Fixed Charges ................ 1591.9 1544.2 1494.4 1425.6 1378.7
Preferred Dividends (Pre-tax) ................. .2 .2 13.4 24.2 24.2
Total Fixed Charges ........................ 1592.1 1544.4 1507.8 1449.8 1402.9
Ratio of Earnings to Fixed Charges:
Excluding Interest on Annuities
and Financial Products (1) .................. 13.58 7.37 7.51 6.43 10.35
Including Interest on Annuities
and Financial Products (2) .................. 1.90 1.45 1.41 1.25 1.43
Ratio of Earnings to Combined
Fixed Charges and Preferred Stock
Dividends (3) ............................... 1.90 1.45 1.40 1.23 1.40
</TABLE>
(1) For purposes of determining this ratio, earnings consist of income before
federal income taxes, cumulative effect of accounting change and minority
interests adjusted for the difference between income or losses from
unconsolidated equity investments and cash distributions from such
investments, plus fixed charges. Fixed charges consist of 1) interest and
debt expense on short and long-term debt and distributions to minority
interest-preferred securities of subsidiary companies and 2) the portion
of operating leases that are representative of the interest factor.
(2) Same as the ratio of earnings to fixed charges, excluding interest on
annuities and financial products, except fixed charges and earnings include
interest on annuities and financial products.
(3) Same as the ratio of earnings to fixed charges, including interest on
annuities and financial products, except that fixed charges include the
pre-tax earnings required to cover preferred stock dividend requirements.
(4) Coverage ratios for 1997 are higher than other historical periods shown due
to the inclusion of the gain on sale of discontinued operations (see note
11 to the consolidated financial statements on page 64).
- -208-
EXHIBIT A
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with
the exception of, Delaware Distributors, L.P and Founders CBO, L.P.
Lincoln National Corporation
Indiana - Holding Company
|
|--| City Financial Planners, Ltd.
| | 100% - Englad/Wales - Distribution of life
| | assurance & pension products
|
|--| The Insurers' Fund, Inc. #
| | 100% - Maryland - Inactive
|
|--| LNC Administrative Services Corporation
| | 100% - Indiana - Third Party Administrator
|
|--| Lincoln Funds Corporation
| | 100% - Delaware - Intermediate Holding Company
|
|--|Lincoln National Financial Institutions Group, Inc.
| |(fka The Richard Leahy Corporation)
| | 100% - Indiana - Insurance Agency
| |
| |--| The Financial Alternative, Inc.
| | | 100% - Utah- Insurance Agency
| |
| |--| Financial Alternative Resources, Inc.
| | | 100% - Kansas - Insurance Agency
| |
| |--| Financial Choices, Inc.
| | | 100% - Pennsylvania - Insurance Agency
| |
| | | Financial Investment Services, Inc.
| |--| (formerly Financial Services Department, Inc.)
| | | 100% - Indiana - Insurance Agency
| |
| | | Financial Investments, Inc.
| |--| (formerly Insurance Alternatives, Inc.)
| | | 100% - Indiana - Insurance Agency
| |
| |--| The Financial Resources Department, Inc.
| | | 100% - Michigan - Insurance Agency
| |
| |--| Investment Alternatives, Inc.
| | | 100% - Pennsylvania - Insurance Agency
| |
| |--| The Investment Center, Inc.
| | | 100% - Tennessee - Insurance Agency
| |
| |--| The Investment Group, Inc.
| | | 100% - New Jersey - Insurance Agency
| Lincoln National Corporation |
| Indiana - Holding Company |
|
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| | 100% - Indiana - Insurance Agency |
| |
| |--| Personal Financial Resources, Inc. |
| | | 100% - Arizona - Insurance Agency |
| |
| |--| Personal Investment Services, Inc. |
| | 100% - Pennsylvania - Insurance Agency |
|
|--| LincAm Properties, Inc. |
| | 50% - Delaware - Real Estate Investment |
|
|
| | Lincoln Financial Group, Inc. |
|--| (formerly Lincoln National Sales Corporation)|
| | 100% - Indiana - Insurance Agency |
| |
| |--| Lincoln Financial Advisors Corporation |
| | | (formerly LNC Equity Sales Corporation)|
| | | 100% - Indiana - Broker-Dealer |
| |
| | |Corporate agencies: Lincoln Financial Group, Inc. ("LFG") |
| |--|has subsidiaries of which LFG owns from 80%-100% of the |
| | |common stock (see Attachment #1). These subsidiaries serve |
| | |as the corporate agency offices for the marketing and |
| | |servicing of products of The Lincoln National Life Insurance |
| | |Company. Each subsidiary's assets are less than 1% of the |
| | |total assets of the ultimate controlling person. |
| |
| |--| Professional Financial Planning, Inc. |
| | 100% - Indiana - Financial Planning Services |
|
|--| Lincoln Life Improved Housing, Inc. |
| | 100% - Indiana |
|
|
|--| Lincoln National (China) Inc. |
| | 100% - Indiana - China Representative Office |
|
|
|--| Lincoln National (India) Inc. |
| | 100% - Indiana - India Representative Office |
|
|--| Lincoln National Intermediaries, Inc. |
| | 100% - Indiana - Reinsurance Intermediary |
|
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| |
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| Lincoln National Corporation |
| Indiana - Holding Company |
|
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
|
|--| Lincoln National Investment Companies, Inc.|
| |(fka Lincoln National Investments, Inc.) |
| | 100% - Indiana - Holding Company |
| |
|--|Delaware Management Holdings, Inc.|
| | 100% - Delaware - Holding Company|
| |
| |--| DMH Corp. |
| | | 100% - Delaware - Holding Company |
|
|--| Delaware International Advisers Ltd. |
| | 81.1% - England - Investment Advisor |
|
|--| Delaware Management Trust Company |
| | 100% - Pennsylvania - Trust Service |
|
|__| Delaware International Holdings, Ltd. |
| | 100% - Bermuda - Investment Advisor |
|
|--| Delaware International Advisers, Ltd.|
| | 18.9% - England - Investment Advisor |
|__| Delvoy, Inc. |
| | 100% - Minnesota - Holding Company |
|
|--| Delaware Management Company, Inc. |
| | 100% - Delaware - Investment Advisor |
|
|--| Delaware Distributors, L.P. |
|98%-Delaware-MutualFund Distributor|
| & Broker/Dealer |
|1% Equity-Delaware Capital |
| Management, Inc. |
|1% Equity-Delaware Distributors, Inc.|
|
|--| Founders Holdings, Inc. |
| | 100% - Delaware - General Partner |
|
|--| Founders CBO, L.P.
| |1%-Delaware-Investment Partnership
| |99% held by outside investors |
|
|--|Founders CBO Corporation |
| |100%-Delaware-Co-Issuer with|
| |Founders CBO |
| Lincoln National Corporation |
| Indiana - Holding Company |
|
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
|
|--| Lincoln National Investment Companies, Inc.|
| |(fka Lincoln National Investments, Inc.) |
| | 100% - Indiana - Holding Company |
|
|--|Delaware Management Holdings, Inc.|
| 100% - Delaware - Holding Company|
|
|--| DMH Corp. |
| | 100% - Delaware - Holding Company |
|
|__| Delvoy, Inc. |
| 100% - Minnesota - Holding Company |
|
|--| Delaware Distributors, Inc. |
| | 100% - Delaware - General Partner |
|
|--| Delaware Distributors, L.P. |
|98%-Delaware-MutualFund Distributor
| & Broker/Dealer |
|1% Equity-Delaware Capital |
| Management, Inc. |
|1% Equity-Delaware Distributors, Inc.|
|
|--| Delaware Capital Management, Inc. |
| |(formerly Delaware Investment Counselors, |
| | Inc.) |
| |100% - Delaware - Investment Advisor |
|
|--| Delaware Distributors, L.P. |
|98%-Delaware-MutualFund Distributor|
| & Broker/Dealer |
|1% Equity-Delaware Capital |
| Management, Inc. |
|1% Equity-Delaware Distributors, Inc.|
|
|--| Delaware Service Company, Inc. |
| | 100%-Delaware-Shareholder Services &|
| Transfer Agent |
|
|__| Delaware Investment & Retirement |
| | Services, Inc. |
| | 100%-Delaware-Registered Transfer Agent |
|
|--| Lynch & Mayer, Inc. |
| | 100% - Indiana - Investment Adviser |
| |
| |--| Lynch & Mayer Asia, Inc. |
| |100% - Delaware - Investment Management |
|
|--| Lynch & Mayer Securities Corp. |
| 100% - Delaware - Securities Broker |
|
| | Vantage Global Advisors, Inc. |
|--| (formerly Modern Portfolio Theory Associates, Inc.)|
| | 100% - Delaware - Investment Adviser |
| Lincoln National Corporation |
| Indiana - Holding Company |
|
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
|
| | Lincoln Investment Management, Inc. |
|--| (formerly Lincoln National Investment Management Company) |
| | 100% - Illinois - Mutual Fund Manager and |
| | Registered Investment Adviser |
|
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
|--|AnnuityNet, Inc. |
| |100% - Indiana - Distribution of annuity products |
|
|--|Cigna Associates, Inc. |
| | 100% - Connecticut - Insurance Agency |
| | Cigna Associates of Massachusetts, Inc. |
|--| 100% - Massachusetts - Insurance Agency |
|
|--|Cigna Financial Advisors, Inc. |
| | 100% - Connecticut - Broker Dealer |
|
|--| First Penn-Pacific Life Insurance Company |
| | 100% - Indiana |
|
|--| Lincoln Life & Annuity Company of New York |
| | 100% - New York |
|
|--| Lincoln National Aggressive Growth Fund, Inc. |
| | 100% - Maryland - Mutual Fund |
|
|--| Lincoln National Bond Fund, Inc. |
| | 100% - Maryland - Mutual Fund |
|
|--| Lincoln National Capital Appreciation Fund, Inc. |
| | 100% - Maryland - Mutual Fund |
|
|--| Lincoln National Equity-Income Fund, Inc. |
| | 100% - Maryland - Mutual Fund |
| | Lincoln National Global Asset Allocation Fund, Inc. |
|--| (formerly Lincoln National Putnam Master Fund, Inc.) |
| | 100% - Maryland - Mutual Fund |
|
| | Lincoln National Growth and Income Fund, Inc. |
|--| (formerly Lincoln National Growth Fund, Inc.) |
| | 100% - Maryland - Mutual Fund |
| Lincoln National Corporation |
| Indiana - Holding Company |
|
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
|
|--| Lincoln National Health & Casualty Insurance Company |
| | 100% - Indiana |
|
|--| Lincoln Re, S.A. |
| | 1% Argentina - General Business Corp |
| | (Remaining 99% owned by Lincoln National |
| | Reassurance Company) |
|
|--| Lincoln National International Fund, Inc. |
| | 100% - Maryland - Mutual Fund |
|
|--| Lincoln National Managed Fund, Inc. |
| | 100% - Maryland - Mutual Fund |
|
|--| Lincoln National Money Market Fund, Inc. |
| | 100% - Maryland - Mutual Fund |
|
|--| Lincoln National Social Awareness Fund, Inc. |
| | 100% - Maryland - Mutual Fund |
|
|--| Lincoln National Special Opportunities Fund, Inc. |
| | 100% - Maryland - Mutual Fund |
|
|--| Lincoln National Reassurance Company |
| 100% - Indiana - Life Insurance |
|
|--| Lincoln Re, S.A. |
| | 99% Argentina - General Business Corp |
| | (Remaining 1% owned by Lincoln National Health|
| | & Casualty Insurance Company) |
|
|--| Special Pooled Risk Administrators, Inc. |
| 100% - New Jersey - Catastrophe Reinsurance |
| Pool Administrator |
|
|--| Lincoln National Management Services, Inc. |
| | 100% - Indiana - Underwriting and Management Services |
|
|--| Lincoln National Realty Corporation |
| | 100% - Indiana - Real Estate |
|
|--| Lincoln National Reinsurance Company (Barbados) Limited |
| | 100% - Barbados |
|
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
|
|--| Lincoln European Reinsurance S.A. |
| | 79% - Belgium |
| | (Remaining 21% owned by Lincoln National Underwriting |
| | Services, Ltd. |
| Lincoln National Corporation |
| Indiana - Holding Company |
|
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
|
| | Lincoln National Underwriting Services, Ltd. |
|--| 90% - England/Wales - Life/Accident/Health Underwriter |
| (Remaining 10% owned by Old Fort Ins. Co. Ltd.) |
|--| Lincoln European Reinsurance S.A. |
| | 21% - Belgium |
| |(Remaining 79% owned by Lincoln National Reinsurance|
| | Company Limited |
|
| | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
|--| 51% - Mexico - Reinsurance Underwriter |
| (Remaining 49% owned by Lincoln National Corp.) |
|
|--| Lincoln National Risk Management, Inc. |
| | 100% - Indiana - Risk Management Services |
|
|--| Lincoln National Structured Settlement, Inc. |
| | 100% - New Jersey |
|
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| |
| |--| Allied Westminster & Company Limited |
| | (formerly One Olympic Way Financial Services Limited) |
| | 100% - England/Wales - Sales Services |
|
|--|Cannon Fund Managers Limited |
| | 100% - England/Wales - Inactive |
|
|--| Culverin Property Services Limited |
| | 100% - England/Wales - Property Development Services |
|
|--| HUTM Limited |
| | 100% - England/Wales - Unit Trust Management (Inactive) |
|
|--| ILI Supplies Limited |
| | 100% - England/Wales - Computer Leasing |
| |
|--| Lincoln Financial Advisers Limited |
| | (formerly: Laurentian Financial Advisers Ltd.) |
| | 100% - England/Wales - Sales Company |
|
|--| Lincoln Financial Group PLC |
| | (formerly: Laurentian Financial Group PLC) |
| | 100% - England/Wales - Holding Company |
|
|--| Lincoln Unit Trust Management Limited |
|(formerly: Laurentian Unit Trust Management Limited)|
| 100% - England/Wales - Unit Trust Management |
|
|--| LUTM Nominees Limited |
| |100% - England/Wales - Nominee Services (Dormat)|
| Lincoln National Corporation |
| Indiana - Holding Company |
|
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
|
|--| Lincoln Financial Group PLC |
| | (formerly: Laurentian Financial Group PLC) |
| | 100% - England/Wales - Holding Company |
| |
|--| Lincoln Milldon Limited |
| |(formerly: Laurentian Milldon Limited) |
| | 100% - England/Wales - Sales Company |
|
|--| Laurtrust Limited |
| 100% - England/Wales - Pension Scheme Trustee (Inactive) |
|
|--| Lincoln Management Services Limited |
| |(formerly: Laurentian Management Services Limited)|
| | 100% - England/Wales - Management Services |
|
|--|Laurit Limited |
| |100% - England/Wales - Data Processing Systems |
|
|--| Liberty Life Pension Trustee Company Limited |
| | 100% - England/Wales - Corporate Pension Fund (Dormat) |
|
|--| LN Management Limited |
| | 100% - England/Wales - Administrative Services (Dormat) |
|
|--| UK Mortgage Securities Limited |
| 100% - England/Wales - Inactive |
|
|--| Liberty Press Limited |
| | 100% - England/Wales - Printing Services |
| Lincoln National Corporation |
| Indiana - Holding Company |
|
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
|
|--| Lincoln General Insurance Co. Ltd. |
| | 100% - Accident & Health Insurance |
|
|--|Lincoln Assurance Limited |
| |100% ** - England/Wales - Life Assurance |
|
|--|Barnwood Property Group Limited |
| |100% - England/Wales - Property Management Co|
|
|--| Barnwood Developments Limited |
| | 100% England/Wales - Property Development|
|
|--| Barnwood Properties Limited |
| | | 100% - England/Wales - Property Investment |
|
|--|IMPCO Properties G.B. Ltd. |
|100% - England/Wales - Property Investment (Inactive)|
|
|--| Lincoln Insurance Services Limited |
| | 100% - Holding Company |
|
|--| British National Life Sales Ltd.|
| | 100% - Inactive |
|
|--| BNL Trustees Limited |
| | 100% - England/Wales - Corporate Pension |
| | Fund (Inactive) |
|
|--| Chapel Ash Financial Services Ltd. |
| | 100% - Direct Insurance Sales |
|
|--| P.N. Kemp-Gee & Co. Ltd. |
| | 100% - Inactive |
| Lincoln National Corporation |
| Indiana - Holding Company |
|
|
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
|
|--| Lincoln Unit Trust Managers Limited |
| | 100% - England/Wales - Investment Management |
|
|--| LIV Limited (formerly Lincoln Investment Management Ltd.)|
| | 100% - England/Wales - Investment Management Services |
| |
|--| CL CR Management Ltd. |
| 50% - England/Wales - Administrative Services |
|--| Lincoln Independent Limited |
| |(formerly: Laurentian Independent Financial Planning Ltd.) |
| | 100% - England/Wales - Independent Financial Adviser |
| |
|--| Lincoln Investment Management Limited |
| |(formerly: Laurentian Fund Management Ltd.) |
| | 100% - England/Wales - Investment Management |
|
|--| LN Securities Limited |
| | 100% - England/Wales - Nominee Company |
|
|--| Niloda Limited |
| | 100% - England/Wales - Investment Company |
|
|--| Lincoln National Training Services Limited |
| | 100% - England/Wales - Training Company |
|
|--| Lincoln Pension Trustees Limited |
| | 100% - England/Wales - Corporate Pension Fund |
|
|--| Lincoln National (Jersey) Limited |
| | 100% - England/Wales - Dormat |
|
|--| Lincoln National (Guernsey) Limited |
| | 100% - England/Wales - Dormat |
|
|--| Lincoln SBP Trustee Limited |
| | 100% - England/Wales |
| Lincoln National Corporation |
| Indiana - Holding Company |
|
| | Linsco Reinsurance Company |
|--| (formerly Lincoln National Reinsurance Company) |
| | 100% - Indiana - Property/Casualty |
|
|
|--| Old Fort Insurance Company, Ltd. |
| | 100% ** - Bermuda |
|
| | Lincoln National Underwriting Services, Ltd. |
|--| 10% - England/Wales - Life/Accident/Health Underwriter |
| (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) |
|
| | Solutions Holdings, Inc. |
|--| 100% - Delaware - General Business Corporation |
|
|--|Solutions Reinsurance Limited |
| | 100% - Bermuda - Class III Insurance Co|
|
| | Seguros Serfin Lincoln, S.A. |
|--| 49% - Mexico - Insurance |
|
| | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
|--| 49% - Mexico - Reinsurance Underwriter |
| | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) |
|
|
|--| Underwriters & Management Services, Inc. |
| 100% - Indiana - Underwriting Services |
Footnotes:
* The funds contributed by the Underwriters were, and continue to be subject
to trust agreements between American States Insurance Company, the grantor,
and each Underwriter, as trustee.
** Except for director-qualifying shares
# Lincoln National Corporation has subscribed for and paid for 100 shares of
Common Stock (with a par value of $1.00 per share) at a price of $10 per
share, as part of the organizing of the fund. As such stock is further
sold, the ownership of voting securities by Lincoln National Corporation
will decline and fluctuate.
11
ATTACHMENT #1
LINCOLN FINANCIAL GROUP, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ)
3) Lincoln Financial and Insurance Services Corporation
(Walnut Creek, CA)
3a) California Fringe Benefit and Insurance Marketing Corporation
DBA/California Fringe Benefit Company (Walnut Creek, CA)
4) Colorado-Lincoln Financial Group, Inc. (Denver, CO)
5) Lincoln National Financial Services, Inc. (Lake Worth, FL)
6) CMP Financial Services, Inc. (Chicago, IL)
7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN)
8) Financial Planning Partners, Ltd. (Mission, KS)
9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport,
LA)
10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD)
11) Lincoln Financial Services and Insurance Brokerage of
New England, Inc.
(formerly: Lincoln National of New England Insurance Agency, Inc.)
(Worcester, MA)
12) Lincoln Financial Group of Michigan, Inc. (Troy, MI)
12a) Financial Consultants of Michigan, Inc. (Troy, MI)
13) Lincoln Financial Group of Missouri, Inc.
(formerly: John J. Moore & Associates, Inc.) (St. Louis, MO)
14) Beardslee & Associates, Inc. (Clifton, NJ)
15) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.
(Albuquerque, NM)
16) Lincoln Cascades, Inc. (Portland, OR)
17) Lincoln Financial Group, Inc. (Salt Lake City, (UT)
<PAGE> -221-
LINCOLN NATIONAL CORPORATION
EXHIBIT 23 - CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Forms S-3 and S-8 (Securities and Exchange Commission Registration Numbers
33-51415, 33-51721, 33-58113, 33-52667, 33-59785, 33-04711, 33-13445, 33-62315,
333-04133, and 333-32667) of Lincoln National Corporation and in the related
Prospectuses of our report dated February 5, 1998, with respect to the
consolidated financial statements and schedules of Lincoln National Corporation
included in this Annual Report (Form 10-K) for the year ended December 31, 1997.
/S/ ERNST & YOUNG LLP
Fort Wayne, Indiana
March 16, 1998
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 24,066,376,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 660,428,000
<MORTGAGE> 3,288,112,000
<REAL-ESTATE> 575,956,000
<TOTAL-INVEST> 29,818,846,000
<CASH> 3,794,706,000
<RECOVER-REINSURE> 2,350,766,000
<DEFERRED-ACQUISITION> 1,623,845,000
<TOTAL-ASSETS> 71,174,708,000
<POLICY-LOSSES> 11,266,272,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 20,063,393,000
<NOTES-PAYABLE> 1,123,245,000
0
1,153,000
<COMMON> 966,461,000
<OTHER-SE> 4,015,301,000
<TOTAL-LIABILITY-AND-EQUITY> 71,174,708,000
2,160,888,000
<INVESTMENT-INCOME> 2,250,764,000
<INVESTMENT-GAINS> 486,827,000
<OTHER-INCOME> 3,191,733,000
<BENEFITS> 715,915,000
<UNDERWRITING-AMORTIZATION> 863,426,000
<UNDERWRITING-OTHER> 715,915,000
<INCOME-PRETAX> 34,881,000
<INCOME-TAX> 12,651,000
<INCOME-CONTINUING> 22,230,000
<DISCONTINUED> 911,758,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 933,988,000
<EPS-PRIMARY> 9.11
<EPS-DILUTED> 8.98
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
