<PAGE>-1-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended June 30, 1999 Commission file number 1-6028
LINCOLN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1140070
(State of incorporation) (I.R.S. Employer Identification No.)
200 East Berry Street, Fort Wayne, Indiana 46802-2706*
(Address of principal executive offices)
Registrant's telephone number (219) 455-2000*
As of July 23, 1999 LNC had 198,816,323 shares of Common Stock outstanding.
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
*Effective August 16, 1999, the principal executive offices will be located at
Centre Square, 1500 Market Street, Suite 3900, Philadelphia, Pennsylvania
19102-2112. The telephone number for these offices which will also be
effective August 16, 1999 is (215) 448-1400.
The exhibit index to this report is located on page 22.
<PAGE>-2-
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
(000s omitted) 1999 1998
-------------- ---- ----
ASSETS
Investments:
<S> <C> <C>
Securities available-for-sale, at fair value:
Fixed maturity (cost 1999 -$29,493,730;
1998 - $28,639,558)......................................... $29,579,290 $30,232,892
Equity (cost 1999 - $385,016;
1998 - $436,718)............................................ 505,662 542,843
Mortgage loans on real estate................................... 4,570,451 4,393,082
Real estate..................................................... 449,783 488,722
Policy loans.................................................... 1,847,444 1,839,970
Other investments............................................... 409,932 431,964
----------- -----------
Total Investments............................................. 37,362,562 37,929,473
Investment in unconsolidated affiliates........................... 22,335 18,811
Cash and invested cash............................................ 2,151,089 2,433,350
Property and equipment............................................ 180,659 174,762
Deferred acquisition costs........................................ 2,398,309 1,964,366
Premiums and fees receivable...................................... 268,984 246,203
Accrued investment income......................................... 569,062 528,500
Assets held in separate accounts.................................. 47,864,349 43,408,858
Federal income taxes.............................................. 478,402 204,075
Amounts recoverable from reinsurers............................... 3,121,344 3,127,093
Goodwill.......................................................... 1,428,283 1,484,343
Other intangible assets........................................... 1,764,946 1,848,442
Other assets...................................................... 651,113 467,984
---------- ------------
Total Assets.................................................. $98,261,437 $93,836,260
</TABLE>
See notes to consolidated financial statements on pages 7 - 12
<PAGE>-3-
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
<TABLE>
<CAPTION>
June 30 December 31
(000s omitted) 1999 1998
-------------- ---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Insurance and Investment Contract Liabilities:
Insurance policy and claim reserves.................................. $20,198,234 $20,139,982
Contractholder funds................................................. 20,579,499 20,753,064
Liabilities related to separate accounts............................. 47,864,349 43,408,858
---------- ----------
Total Insurance and Investment Contract Liabilities............... 88,642,082 84,301,904
Short-term debt........................................................ 380,194 314,610
Long-term debt......................................................... 712,066 712,171
Minority interest-preferred securities of subsidiary companies......... 745,000 745,000
Other liabilities...................................................... 2,964,717 2,374,634
------------- -----------
Total Liabilities................................................. 93,444,059 88,448,319
Shareholders' Equity:
Series A preferred stock-10,000,000 shares authorized
(6/30/99 liquidation value - $2,463................................... 1,012 1,083
Common stock - 800,000,000 shares authorized........................... 1,005,060 994,472
Retained earnings...................................................... 3,791,768 3,790,038
Accumulated Other Comprehensive Income:
Foreign currency translation adjustment.............................. 20,661 49,979
Net unrealized gain (loss) on securities available-for-sale.......... (1,123) 552,369
------------ ----------
Total Accumulated Other Comprehensive Income...................... 19,538 602,348
----------- -----------
Total Shareholders' Equity........................................ 4,817,378 5,387,941
----------- ----------
Total Liabilities and Shareholders' Equity ....................... $98,261,437 $93,836,260
</TABLE>
See notes to consolidated financial statements on pages 7 - 12.
<PAGE>-4-
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
(000s omitted, except per share amounts) 1999 1998 1999 1998
---------------------------------------- ---- ---- ---- ----
Revenue:
<S> <C> <C> <C> <C>
Insurance premiums .................................. $ 873,379 $ 721,565 $ 434,316 $ 373,976
Insurance fees....................................... 758,828 628,301 380,827 328,407
Investment advisory fees............................. 115,100 117,040 56,310 59,161
Net investment income................................ 1,410,376 1,317,079 700,838 658,720
Equity in earnings of unconsolidated affiliates...... 2,719 1,538 1,113 41
Realized gain (loss) on investments.................. (2,122) 49,463 (4,049) 25,540
Other revenue and fees............................... 195,406 120,526 108,973 61,648
--------- ------- --------- ----------
Total Revenue..................................... 3,353,686 2,955,512 1,678,328 1,507,493
Benefits and Expenses:
Benefits............................................. 1,797,459 1,583,140 906,225 795,903
Underwriting, acquisition,
insurance and other expenses........................ 1,084,293 942,274 537,758 471,273
Interest and debt expense............................ 65,736 51,040 32,632 27,672
------------ ---------- --------- ---------
Total Benefits and Expenses ...................... 2,947,488 2,576,454 1,476,615 1,294,848
--------- --------- --------- ---------
Net Income Before Federal Income Taxes............ 406,198 379,058 201,713 212,645
Federal income taxes................................. 112,786 108,336 53,363 63,966
--------- --------- --------- ----------
Net Income........................................ $ 293,412 $ 270,722 $ 148,350 $ 148,679
Net Income Per Common Share-Basic...................... $1.47 $1.35 $.74 $ .74
Net Income Per Common Share-Diluted.................... $1.45 $1.33 $.73 $ .73
</TABLE>
See notes to consolidated financial statements on pages 7 - 12.
<PAGE>-5-
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Six Months Ended June 30
Number of Shares Amounts
(000s omitted from dollar amounts) 1999 1998 1999 1998
---------------------------------- ----- ---- ---- ----
Series A Preferred Stock:
<S> <C> <C> <C> <C>
Balance at beginning-of-year.................. 32,959 35,091 $ 1,083 $ 1,153
Conversion into common stock.................. (2,168) (983) (71) (33)
------- ------- ------- -------
Balance at June 30....................... 30,791 34,108 1,012 1,120
Common Stock:
Balance at beginning-of-year.................. 202,111,174 201,718,956 994,472 966,461
Conversion of series A preferred stock........ 34,688 15,728 71 33
Issued for benefit plans...................... 626,953 555,388 27,169 8,902
Issued for acquisition of subsidiaries........ 86,228 -- 3,547 --
Retirement of common stock ................... (4,090,000) (1,246,562) (20,199) (5,972)
----------- ---------- -------- ---------
Balance at June 30....................... 198,769,043 201,043,510 1,005,060 969,424
Retained Earnings:
Balance at beginning-of-year.................. 3,790,038 3,533,105
Comprehensive income (loss)................... (289,398) 309,882
Less other comprehensive income (loss):
Foreign currency translation................. (29,318) 5,604
Net unrealized gain (loss) on
securities available-for-sale............... (553,492) 33,556
--------- ----------
Net Income............................... 293,412 270,722
Retirement of common stock.................... (182,489) (40,899)
Dividends declared:
Series A preferred ($.75 per share)........... (47) (51)
Common stock (1999-$.55; 1998-$.52)........... (109,146) (103,930)
--------- --------
Balance at June 30....................... 3,791,768 3,658,947
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning-of-year............................ 49,979 46,204
Change during the period...................... (29,318) 5,604
-------- ----------
Balance at June 30....................... 20,661 51,808
Net Unrealized Gain (Loss) on
Securities Available-for-Sale:
Balance at beginning-of-year.................. 552,369 435,992
Change during the period...................... (553,492) 33,556
---------- -----------
Balance at June 30....................... (1,123) 469,548
Total Shareholders' Equity at June 30.... $4,817,378 $5,150,847
Common Stock at End of Quarter:
Assuming conversion of preferred stock........ 199,261,699 201,589,238
Diluted basis................................. 200,914,470 204,509,630
</TABLE>
See notes to consolidated financial statements on pages 7 - 12.
<PAGE>-6-
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30
(000s omitted) 1999 1998
-------------- ---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net income.............................................................. $ 293,412 $ 270,722
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred acquisition costs.......................................... (127,557) (72,684)
Premiums and fees receivable........................................ (22,781) (55,548)
Accrued investment income........................................... (40,562) (7,492)
Policy liabilities and accruals..................................... (101,683) 192,605
Contractholder funds................................................ 503,208 395,020
Amounts recoverable from reinsurers................................. 5,750 (23,268)
Federal income taxes................................................ 22,029 (92,873)
Equity in earnings of unconsolidated affiliates..................... (2,719) (1,538)
Provisions for depreciation ........................................ 35,046 29,700
Amortization of goodwill and other intangible assets................ 68,892 63,342
Realized gain on investments........................................ 2,122 (49,463)
Other............................................................... 54,093 (32,270)
-------- -------
Net Adjustments................................................... 395,838 345,531
------- ---------
Net Cash Provided by Operating Activities......................... 689,250 616,253
Cash Flows from Investing Activities:
Securities-available-for-sale:
Purchases............................................................. (3,978,743) (5,484,270)
Sales................................................................. 1,989,395 4,268,177
Maturities............................................................ 1,176,673 1,045,495
Purchase of other investments........................................... (952,583) (662,783)
Sale or maturity of other investments................................... 813,729 873,285
Purchase of affiliates/blocks of business............................... - (1,426,000)
Increase in cash collateral on loaned securities........................ 541,447 110,509
Other................................................................... (142,049) 106,081
--------- -------------
Net Cash Used in Investing Activities............................. (552,131) (1,169,506)
Cash Flows from Financing Activities:
Decrease in long-term debt (includes payments and
transfer to short-term debt)........................................... (240) (74)
Issuance of long-term debt.............................................. -- 299,198
Net increase (decrease) in short-term debt.............................. 65,584 (20,127)
Universal life and investment contract deposits......................... 1,014,832 492,069
Universal life and investment contract withdrawals...................... (1,218,444) (1,455,908)
Common stock issued for benefit plans................................... 27,052 8,902
Retirement of common stock.............................................. (197,773) (46,871)
Dividends paid to shareholders.......................................... (110,391) (104,528)
--------- --------
Net Cash Used in Financing Activities............................. (419,380) (827,339)
--------- --------
Net Decrease in Cash and Invested Cash............................ (282,261) (1,380,592)
Cash and Invested Cash at Beginning-of-Year............................... 2,433,350 3,794,706
---------- -----------
Cash and Invested Cash at June 30................................. $2,151,089 $2,414,114
</TABLE>
See notes to consolidated financial statements on pages 7 - 12.
<PAGE>-7-
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements include Lincoln National
Corporation ("LNC") and its majority-owned subsidiaries. Through subsidiary
companies, LNC operates multiple insurance and investment management businesses.
The collective group of companies uses "Lincoln Financial Group" as its
marketing identity. Operations are divided into four business segments. Less
than majority-owned entities in which LNC has at least a 20% interest are
reported on the equity basis. These unaudited consolidated statements have been
prepared in conformity with generally accepted accounting principles, except
that they do not contain complete notes. However, in the opinion of management,
these statements include all normal recurring adjustments necessary for a fair
presentation of the results. These financial statements should be read in
conjunction with the audited consolidated financial statements and the
accompanying notes included in LNC's latest annual report on Form 10-K for the
year ended December 31, 1998.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1999.
2. Changes in Accounting Principle
In June 1998, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which may be adopted at the
beginning of any fiscal quarter but no later than the first quarter of 2000. In
July 1999, the FASB issued Statement of Financial Accounting Standard No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" ("FAS 137"), which delays the
effective date of FAS 133 one year (i.e., adoption required no later than the
first quarter of 2000). LNC has not completed the analysis necessary to provide
a precise estimate of the effects of or to specify the quarter in which it plans
to adopt the standard.
On January 1, 1999, LNC implemented the Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 defines internal use software and when the costs
associated with internal use software should be capitalized. The implementation
did not have a material impact on LNC's financial statements.
3. Federal Income Taxes
The effective tax rate on net income is lower than the prevailing corporate
federal income tax rate. The difference for both 1999 and 1998 resulted
principally from tax-preferred investment income.
4. Common Stock Split
On May 13, 1999, LNC's Board of Directors approved a two-for-one stock split for
its common stock. The record date for the stock split was June 4, 1999 and the
additional shares were distributed to shareholders on June 21, 1999. All shares
and per share amounts in the consolidated financial statements have been
adjusted to reflect the effects of the common stock split for all periods
presented. Following this common stock split, the conversion rate of LNC's
preferred stock series A changed from eight shares of common stock to sixteen
shares of common stock for each series A preferred stock.
5. Restrictions, Commitments and Contingencies
Statutory Restriction. LNC's insurance subsidiaries are subject to certain
insurance department regulatory restrictions as to the transfer of funds and
payments of dividends to LNC. LNC's primary insurance subsidiary, Lincoln
National Life Insurance Company ("Lincoln Life") acquired a block of individual
life insurance and annuity business from CIGNA in January 1998 and the domestic
individual life insurance business from Aetna in October 1998. These
acquisitions were structured as indemnity reinsurance transactions. Statutory
accounting regulations do not allow goodwill to be recognized on indemnity
reinsurance transactions and therefore, the related ceding commission flows
through the statutory statement of operations as an expense resulting in a
reduction of earned surplus. As a result of these acquisitions and the dividends
declared, Lincoln Life's statutory earned surplus is negative. It is necessary
for Lincoln Life to obtain the prior approval of the Indiana Insurance
Commissioner before paying any dividends to LNC until such time as statutory
earned surplus is positive. Although no assurance can be given that additional
dividends to LNC will be approved, during the second quarter 1999, Lincoln Life
received regulatory approval and paid an extraordinary dividend
<PAGE>-8-
of $350 million to LNC. Statutory earned surplus could return to a positive
position within 2 1/2 years from the closing of the Aetna transaction described
above assuming a level of statutory earnings coinciding with recent earnings
patterns. If statutory earnings are less than recent patterns due, for example,
to adverse operating conditions or further indemnity reinsurance transactions of
this nature or if dividends are approved or paid at amounts higher than recent
history, the statutory earned surplus may not return to a positive position in a
2 1/2 half year time frame. In the event such approvals are not obtained,
management believes that LNC can obtain the funds required to satisfy its
obligations from its existing credit facilities and other sources.
Disability Income Claims. The liability for disability income claims net of the
related asset for amounts recoverable from reinsurers at June 30, 1999 and
December 31, 1998 is a net liability of $1.822 billion and $1.813 billion,
respectively, excluding deferred acquisition costs. The 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 on-going basis.
In May 1999, LNC reached an agreement to transfer a block of direct individual
disability income business to MetLife. Under an indemnity reinsurance agreement,
LNC will transfer to MetLIfe cash equal to statutory reserves, net of ceding
commissions of approximately $500 million. The transaction is expected to close
later in 1999.
United Kingdom Pension Products. Operations in the UK include the sale of
pension products to individuals. Regulatory agencies have raised questions as to
what constitutes appropriate advice to individuals who bought pension products
as an alternative to participation in an employer sponsored plan. In cases of
inappropriate advice, an extensive investigation may have to be done and the
individuals put in a position similar to what would have been attained if they
had remained in the employer sponsored plan. At June 30, 1999 and December 31,
1998, liabilities of $139.5 million and $202.1 million, respectively, were
carried on the books for this issue. The decrease in the level of the reserve
reflects the settlement payouts that have occurred during the six months ended
June 30, 1999. These liabilities, which are net of expected recoveries, have
been established for the estimated cost of this issue following regulatory
guidance as to activities to be undertaken. The expected recoveries from
previous owners of companies acquired over the last few years as specified in
the indemnification clauses of the purchase agreements were $80.2 million and
$84.9 million at June 30, 1999 and December 31, 1998, respectively. These
liabilities and recoveries are based on various estimates that are subject to
considerable uncertainty. Also, there is further uncertainty from the regulatory
perspective as additional guidelines were issued in December of 1998 that extend
the review to a wider range client population. These guidelines specify actions
expected from the companies that issued such products. 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. In the past, LNC's Reinsurance segment accepted
personal accident reinsurance programs from other insurance companies. Most of
these programs are presented to the Reinsurance segment by independent brokers
who represent the ceding companies. Certain excess of loss personal accident
reinsurance programs created in the London market from 1993 to 1996 have
produced and have potential to produce significant losses. The liabilities for
these programs, net of related assets recoverable from reinsurers were $176.4
million and $177.4 million at June 30, 1999 and December 31, 1998, respectively.
These amounts are based on various estimates that are subject to considerable
uncertainty. Accordingly, the liabilities may prove to be deficient or
excessive. However, it is management's opinion that future developments in these
programs will not materially affect the consolidated financial position of LNC.
LNC continues its investigation into its participation in workers' compensation
carve out (i.e., life and health risks associated with workers' compensation
coverage) programs managed by Unicover Managers, Inc. One of Unicover's
retrocessionaires has initiated arbitration to attempt to rescind its
reinsurance coverage to the carriers participating in Unicover programs. LNC
denies the validity of this action. At this time, LNC (1) does not have
sufficient information to determine whether or not it is probable that
additional losses have been incurred in relation to these programs, and (2)
can not accurately estimate the ultimate cost or timing of the outcome on these
programs.
<PAGE>-9-
Marketing and Compliance Issues. Regulators continue to focus on market conduct
and compliance issues. Under certain circumstances, companies operating in the
insurance and financial services markets have been held responsible for
providing incomplete or misleading sales materials and for replacing existing
policies with policies that were less advantageous to the policyholder. LNC's
management continues to monitor the company's sales materials and compliance
procedures and is making an extensive effort to minimize any potential
liability. Due to the uncertainty surrounding such matters, it is not possible
to provide a meaningful estimate of the range of potential outcomes at this
time. However, it is management's opinion that future developments related to
marketing and compliance issues will not materially affect the consolidated
financial position of LNC.
Group Pension Annuities. The liabilities for guaranteed interest and group
pension annuity contracts are supported by a single portfolio of assets that
attempts to match the duration of these liabilities. Due to the long-term nature
of group pension annuities and the resulting inability to exactly match cash
flows, a risk exists that future cash flows from investments will not be
reinvested at rates as high as currently earned by the portfolio. Accordingly,
these liabilities may prove to be deficient or excessive. However, it is
management's opinion that the future development in this business will not
materially affect the consolidated financial position of LNC.
Other Contingency Matters. LNC and its subsidiaries are involved in various
pending or threatened legal proceedings arising from the conduct of business.
Most of this litigation is routine in the ordinary course of business. LNC
maintains professional liability insurance coverage for claims in excess of $5
million. The degree of applicability of this coverage will depend on the
specific facts of each proceeding. In some instances, these proceedings include
claims for compensatory and punitive damages and similar types of relief in
addition to amounts for alleged contractual liability or requests for equitable
relief. After consultation with legal counsel and a review of available facts,
it is management's opinion that the ultimate liability, if any, under these
suits will not have a material adverse effect on the consolidated financial
condition of LNC.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, Lincoln Life now has
three such actions pending. While they each seek class action status, the court
has not certified a class in any of these cases. Two other similar lawsuits have
been resolved and dismissed. 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 discovery 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.
UK regulatory authorities have completed a review of Lincoln UK selling
practices. This review does not include matters related to the pension product
mis-selling investigations. Management is currently working with the regulators
to address compliance issues that have been raised in the course of this review.
The extent of corrective measures and potential disciplinary actions, if any,
that may result from this review are actively being discussed with the
regulatory authorities. It is not possible to provide a meaningful estimate of
the potential outcome of this matter at the present time. However, it is
management's opinion that the resolution of these matters will not materially
affect the consolidated financial position of LNC.
In December 1997, LNC invested $85 million for a 49% share of Seguros Serfin
Lincoln ("SSL"), a Mexican bancassurance company, that sells life, auto and
homeowners insurance to the customers of Banca Serfin. Grupo Financiero Serfin
S.A. ("GFS") owns 51% of SSL and 100% of Banca Serfin. On July 8, 1999, the
private shareholders of GFS declined to contribute additional capital to Banca
Serfin as required by the Mexican Government. Accordingly, the Bank Savings
Protection Institute ("IPAB"), a government agency, took control of GFS. IPAB
has stated that it will inject the required capital into Banca Serfin and place
GFS up for auction. At present, both Banca Serfin and SSL continue to conduct
business as usual, and LNC expects this status to continue through the auction
process. LNC is monitoring developments closely; however, at this time
management does not believe these changes will have a material adverse financial
impact on LNC's 49% investment in SSL or on the consolidated financial condition
of LNC.
<PAGE>-10-
6. Segment Disclosures
The following tables show financial data by segment:
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30 Ended June 30
(in millions) 1999 1998 1999 1998
------------- ---- ---- ---- ----
Revenue: (Reclassified) (Reclassified)
<S> <C> <C> <C> <C>
Life Insurance and Annuities............................... $2,065.0 $1,774.5 $1,033.7 $ 899.4
Lincoln UK................................................. 232.2 227.7 113.1 124.2
Reinsurance................................................ 840.3 729.6 423.1 376.8
Investment Management...................................... 231.1 236.1 114.3 118.0
Other Operations (includes consolidating adjustments)...... (14.9) (12.4) (5.9) (10.9)
-------- -------- --------- --------
Total.................................................... $3,353.7 $2,955.5 $1,678.3 $1,507.5
Net Income (Loss) before Federal Income Taxes:
Life Insurance and Annuities............................... $323.1 $261.3 $161.1 $162.4
Lincoln UK................................................. 52.2 58.8 25.3 32.0
Reinsurance................................................ 84.4 79.2 34.1 35.1
Investment Management...................................... 9.3 20.0 11.6 10.4
Other Operations (includes interest expense)............... (62.8) (40.3) (30.4) (27.3)
------ ------ -------- -------
Total.................................................... $406.2 $379.0 $201.7 $212.6
Federal Income Taxes (Credits):
Life Insurance and Annuities............................... $ 86.5 $ 65.3 $43.6 $44.4
Lincoln UK................................................. 14.2 24.1 5.3 14.7
Reinsurance................................................ 29.8 27.8 12.0 12.3
Investment Management...................................... 5.1 8.8 4.1 4.6
Other Operations........................................... (22.8) (17.7) (11.7) (12.1)
------ ------ ------ -----
Total.................................................... $112.8 $108.3 $53.3 $63.9
Net Income (Loss):
Life Insurance and Annuities............................... $236.6 $196.0 $117.5 $118.0
Lincoln UK................................................. 38.0 34.7 20.0 17.3
Reinsurance................................................ 54.6 51.4 22.1 22.8
Investment Management...................................... 4.2 11.2 7.5 5.8
Other Operations (includes interest expense)............... (40.0) (22.6) (18.7) (15.2)
------ ----- ------ -----
Total.................................................... $293.4 $270.7 $148.4 $148.7
</TABLE>
<TABLE>
<CAPTION>
June 30 December 31
(in millions) 1999 1998
------------- ---- ----
Assets:
<S> <C> <C>
Life Insurance and Annuities............................... $77,291.2 $73,966.1
Lincoln UK................................................. 8,909.6 8,757.3
Reinsurance................................................ 6,449.9 6,408.0
Investment Management...................................... 1,508.6 1,622.6
Other Operations........................................... 4,102.1 3,082.3
------- ---------
Total.................................................... $98,261.4 $93,836.3
</TABLE>
Select data shown above for the Investment Management segment, Life Insurance &
Annuities segment and Other Operations for the three months and six months ended
June 30, 1998 has been reclassified due to a change in the reporting
relationship for LNC's internal investment advisor and 401(k) pension unit.
<PAGE>-11-
7. Earnings Per Share
Per share amounts for net income are shown in the income statement using 1) an
earnings per common share basic calculation and 2) an earnings per common
share-assuming dilution calculation, after consideration of the June 1999
two-for-one stock split (see note 4).
Reconciliations of the factors used in the two calculations are as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
Numerator: [in millions] 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income as used in basic calculation.............. $293.4 $270.6 $148.4 $148.7
Dividends on convertible preferred stock............ * .1 * *
------ ------ ------ ------
Net income as used in diluted calculation....... $293.4 $270.7 $148.4 $148.7
* Less than $100,000.
</TABLE>
<TABLE>
<CAPTION>
Denominator: [number of shares]
<S> <C> <C> <C> <C>
Weighted average shares, as used
in basic calculation............................ 200,146,975 200,520,000 199,119,557 200,608,448
Shares to cover conversion of
preferred stock................................. 509,045 551,556 501,912 547,428
Shares to cover non-vested stock................. 510,629 349,244 500,381 326,294
Average stock options outstanding
during the period............................... 7,364,108 6,419,968 9,315,306 6,428,438
Assumed acquisition of shares
with assumed proceeds and tax
benefits from exercising stock options
(at average market price during the period) .... (5,858,867) (3,896,680) (7,514,657) (3,976,078)
---------- ------------- ----------- -------------
Weighted-average shares, as
used in diluted calculation............. 202,671,890 203,944,088 201,922,499 203,934,530
</TABLE>
In the event the average market price of LNC's common stock exceeds the issue
price of stock options, such options would be dilutive to LNC's earnings per
share and will be shown in the table above. Also, LNC has purchase contracts
outstanding which require the holder to purchase LNC common stock by August 16,
2001. These purchase contracts were issued in conjunction with the FELINE PRIDES
financing. The common shares involved are not dilutive to LNC's earnings per
share as of June 30, 1999 and will not be dilutive in the future except during
periods when the average market price of LNC's common stock exceeds a threshold
price of $55.725 per share.
8. Comprehensive Income
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
(in millions) 1999 1998 1999 1998
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income...................................... $ 293.4 $270.7 $ 148.4 $148.7
Foreign currency translation.................... (29.3) 5.6 (9.4) (.6)
Net unrealized gain (loss) on securities........ (553.5) 33.6 (255.8) (5.5)
------- ------- ------- ------
Comprehensive Income (Loss)................ $(289.4) $309.9 $(116.8) $142.6
</TABLE>
9. Acquisition of Individual Life Insurance and Annuity Business and
Organizational Reviews On January 2, 1998, LNC acquired a block of individual
life insurance and annuity business from CIGNA Corporation for $1.414 billion.
Additional funds of $228.5 million were required to cover expenses associated
with the purchase and to provide additional capital for the Life Insurance and
Annuities segment to support this business. Funding used to complete this
acquisition was from the proceeds of LNC's sale of the property-casualty
business in 1997. This transaction was accounted for using purchase accounting
and, accordingly, operating results generated by this block of business after
the closing date are included in LNC's consolidated financial statements. At
the time of closing, this block of business had liabilities, measured on a
statutory basis, of approximately $5.5 billion that became LNC's obligations.
LNC also received assets, measured on a historical statutory basis, equal to the
liabilities. Subsequent to this acquisition, LNC announced that it had reached
an agreement to sell the administration rights to a variable annuity portfolio
that had been acquired as a part of the block of business acquired January 2,
1998. The sale closed on October 12, 1998 with an effective date of August 1,
1998. As of June 30, 1999, the application of purchase accounting to this block
of business, net of the administration rights sold and net of amortization,
resulted in goodwill and other intangible
<PAGE>-12-
assets of $747.2 million and $428.1 million, respectively. The goodwill amount
shown includes adjustments to the amount shown at December 31, 1998. These first
quarter 1999 adjustments resulted from reaching final agreement with the seller
as to the value of the assets and liabilities transferred to LNC. During the
first quarter of 1998, in connection with this acquisition, LNC recorded a
charge to its Life Insurance and Annuities segment of $20.0 million ($30.8
million pre-tax). This charge was for certain costs of integrating the new block
of business with existing operations. The pattern of actual expenses for
integrating this block of business have matched the expected expenditures.
On October 1, 1998, LNC acquired the domestic individual life insurance business
from Aetna, Inc. for $1.0 billion. This transaction was accounted for using
purchase accounting and, accordingly, the operating results generated by this
block of business after the closing are included in LNC's consolidated financial
statements. At the time of closing, this block of business had estimated
liabilities, measured on a statutory basis, of $3.3 billion. These liabilities
became LNC's obligations at the time of closing. At closing LNC received assets,
measured on a historic statutory basis, equal to the liabilities. On August 7,
1998, LNC announced that it had reached an agreement to sell the sponsored life
business acquired as part of the Aetna block of business. The sale closed on
October 14, 1998 with an effective date of October 1, 1998 at a sales price of
$99.5 million. During 1997, after deducting the sponsored life income statement
amounts, the block of business being purchased produced premiums and fees of
$227.8 million and net income of $65.0 million on the basis of generally
accepted accounting principles (prior to adjustments required by purchase
accounting). As of June 30, 1999, the application of purchase accounting to this
block of business, net of the sponsored life business and net of amortization,
resulted in goodwill and other intangible assets of $221.4 million and $792.6
million, respectively. The additional analysis of this block of business during
1999 could result in a change in the amounts or the shifting of amounts between
goodwill and other intangible assets. Approximately one-half of the funding for
this acquisition came from available funds within the consolidated group. The
other half was from the proceeds of the third quarter 1998 public securities
offerings from available shelf registrations.
During the first quarter of 1999, LNC recorded a charge to its Investment
Management segment of $12.1 million ($16.9 million pre-tax). The charge was for
certain costs of downsizing and consolidation of back office operations at Lynch
& Mayer.
<PAGE>-13-
Item 2 Management's Discussion and Analysis of Financial Information
The pages to follow review LNC's results of consolidated operations and
financial condition. Historical financial information is presented and analyzed.
Where appropriate, factors that may affect future financial performance are
identified and discussed. Actual results could differ materially from those
indicated in forward-looking statements due to, among other specific changes
currently not known, subsequent significant changes in: the company (e.g.,
acquisitions and divestitures), financial markets (e.g., interest rates and
securities markets), legislation (e.g., taxes and product taxation), regulations
(e.g., insurance and securities regulations), acts of God (e.g., hurricanes,
earthquakes and storms), other insurance risks (e.g., policyholder mortality and
morbidity) and competition.
REVIEW OF CONSOLIDATED OPERATIONS
The discussion that follows focuses on net income for the six months ended June
30, 1999 compared to the results for the six months ended June 30, 1998. The
factors affecting the current quarter to prior quarter comparisons are
essentially the same as the year-to-date factors except as noted. As a result of
the purchase of a block of individual life insurance business from Aetna in
October 1998 (see note 9 on page 12) select income statement accounts increased
in 1999 versus 1998. Such increases over comparable 1998 periods are expected to
continue through the third quarter of 1999.
Life Insurance and Annuity Premiums
Life insurance and annuity premiums for the first six months of 1999 increased
$151.4 million or 37% compared with the first six months of 1998. These
increases were the result of increases in business volume from the Life
Insurance & Annuities, Lincoln UK and Reinsurance segments. A portion of the
increase from the Life Insurance and Annuities segment is the result of the
acquisition of the block of business described above.
Health Premiums
Health premiums for the first six months of 1999 were essentially equal to the
comparable 1998 period. This is the net result of increases in premiums from the
group business being offset by decreases from areas where reinsurance is
curtailing its writing of such coverages. Future periods are expected to have
approximately $65 million less in health premiums (annual amount) due to the
expected sale of a block of disability income business later in 1999 (see note 5
on page 8).
Insurance Fees
Insurance fees in the Life Insurance & Annuities and Lincoln UK segments from
universal life, other interest-sensitive life insurance contracts and variable
life insurance contracts increased $130.5 million or 21% compared with the first
six months of 1998. This increase was the result of increases in the volume of
business (including the block of business purchased) and a market-driven
increase in the value of existing customer accounts upon which some of the fees
are based.
Investment Advisory Fees
Investment advisory fees for the first six months of 1999 were essentially equal
to the comparable 1998 period. This is the net result of an increase in fees
from new sales and appreciation in existing accounts being offset by decreases
in fees due to the withdrawal of funds.
Net Investment Income
Net investment income increased $93.3 million or 7% when compared with the first
six months of 1998. This increase is the result of a 9% increase in mean
invested assets, partially offset by a decrease in the overall yield on
investments from 7.36% to 7.20% (all calculations on a cost basis). The
increase in mean invested assets is the result of increased volumes of business
in the Life Insurance & Annuities and Reinsurance segments and the acquisition
of the block of business described above.
Realized Gain (Loss) on Investments
The first six months of 1999 and 1998 had realized gains (losses) on investments
of $(2.1) million and $49.5 million, respectively. These gains (losses) which
are net of related deferred acquisition costs and expenses, were the result of
net gains on sales of investments, less write-downs and provisions for losses.
The 1998 amount includes gains that resulted from LNC reducing its position in
equity securities. Securities available-for-sale that were deemed to have
declines in fair value that are other than temporary were written down.
<PAGE>-14-
Also, LNC records write-downs and allowances on select mortgage loans on real
estate, real estate and other investments when the underlying value of the
property is deemed to be less than the carrying value.
The pre-tax write-downs of securities available-for-sale for the first six
months of 1999 and 1998 were $19.5 million and $34.2 million, respectively. The
fixed maturity securities to which write-downs apply were generally of
investment grade quality at the time of purchase, but were classified as "below
investment grade" at the time of the write-downs. During the first six months of
1999, LNC released $.5 million in reserves on real estate and mortgage loans on
real estate compared to reserves released of $3.5 million for the first six
months of 1998. Net write-downs and reserve releases for all investments for the
six months ended June 30, 1999 and 1998 were $19.0 million and $30.7 million,
respectively.
Other Revenue and Fees
Other revenue and fees increased $74.9 million when compared to the first six
months of 1998 as the result of increased volumes of fee income from the Life
Insurance & Annuities, Reinsurance and Investment Management segments.
Life Insurance and Annuity Benefits
Life insurance and annuity benefits increased $195.5 million or 15% when
compared with the first six months of 1998. This increase is the result of
increases in business volume from the Life Insurance & Annuities, Lincoln UK and
Reinsurance segments. A portion of the increase from the Life Insurance and
Annuities segment is the result of the acquisition of the block of business
described above.
Health Benefits
Health benefits increased $18.8 million or 6% for the first six months of 1999
when compared with the first six months of 1998 as a result of increased volumes
of business and higher claim activity within Reinsurance group markets. As noted
under "health premiums" above, a block of disability income is in the process of
being sold. This will result in a reduction in health benefits proportionate to
the health premium reductions.
Underwriting, Acquisition, Insurance and Other Expenses
These expenses increased $142.0 million or 15% for the first six months of 1999
compared with the first six months of 1998. The increase is a result of
increases in business volume in the Life Insurance & Annuities and Reinsurance
segments and the acquisition of the block of business described above.
Interest and Debt Expense
Interest and debt expense increased $14.7 million or 29% as compared with
the first six months of 1998. This was the result of higher average debt
outstanding.
Federal Income Taxes
Federal income taxes increased $4.5 million in the first six months of 1999 as
compared with the first six months of 1998. The increase in federal income taxes
is a result of an increase in pre-tax earnings.
Summary
Net income for the first six months of 1999 was $293.4 million or $1.45 per
diluted share compared with $270.7 million or $1.33 per diluted share in the
first six months of 1998. Excluding realized gains and losses on investments and
restructuring charges, LNC earned $307.5 million for the first six months of
1999 compared with $260.3 million for the first six months of 1998. This
increase was the result of increased earnings from each of the business
segments.
Trends in the United Kingdom for pension and life insurance businesses are
changing rapidly, due in large part to government mandated product design
changes that are expected to be imposed upon the industry within the next year
or two. In anticipation of these marketplace changes, a review of strategic
alternatives for Lincoln UK was initiated earlier this year. From this review,
it was determined that significant changes in Lincoln UK's operations are needed
to enable Lincoln UK to continue its success in the United Kingdom marketplace.
This conclusion resulted in a decision to engage external consultants and to
devote internal resources to a transformation program encompassing Lincoln UK's
products, distribution, investment performance and cost structure. At this early
stage in the transformation program, management has not yet determined what
restructuring actions might be taken and what impact, if any, these actions may
have on future earnings. These decisions are expected to be made early 2000.
<PAGE>-15-
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. LNC and its operating subsidiaries have been redirecting a large
portion of internal Information Technology ("IT") efforts and contracting with
outside consultants to update systems to address Year 2000 issues. Experts have
been engaged to assist in developing work plans, cost estimates and remediation
activities.
LNC identified expenditures for the first six months of 1999 of $31.8 million
($20.7 million after-tax) to address this issue. This brings the expenditures
for 1996 through second quarter 1999 to $80.3 million ($52.2 million after-tax).
LNC's financial plans for the remainder of 1999 and the year 2000 include
expected expenditures of an additional $17.9 million ($11.6 million after-tax)
bringing estimated overall Year 2000 expenditures to $98.2 million ($63.8
million after-tax). Because updating systems and procedures is an integral part
of LNC's on-going operations, approximately 50% of the expenditures shown above
are expected to continue after all Year 2000 issues have been resolved. All Year
2000 expenditures are expected to be funded from operating cash flows. The
anticipated cost of addressing Year 2000 issues is 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. LNC's management continues to closely
monitor these costs, but there can be no guarantee that actual costs will not be
higher than these estimated costs. 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 relevant
computer problems and other uncertainties.
The scope of the overall Year 2000 program includes the following four major
project areas: 1) addressing the readiness of business applications, operating
systems and hardware on mainframe, personal computer and Local Area Network
platforms (IT); 2) addressing the readiness of embedded chips, end-user
developed spreadsheets and software (non-IT); 3) addressing the readiness
of key business partners and 4) establishing year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases. Phase
one involves raising awareness and creating an inventory of all IT and non-IT
assets. The second phase consists of assessing all items inventoried to
initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
LNC has completed these four phases for all of its high priority IT systems,
including those provided by software vendors. As of June 30, 1999, the status of
projects addressing readiness of high priority IT assets is: 100% of IT assets
have been inventoried (Phase 1), assessed (Phase 2), and remediated (Phase 3);
99% of IT projects have completed the testing phase (Phase 4) with the last
affiliate interface testing finished as part of related environmental
testing in July. LNC defines the IT testing phase as comprehensive testing of
Year 2000 systems changes for both Year 2000 functionality and regression
testing to confirm that the Year 2000 changes have not inadvertently modified
existing processing. This IT testing includes simulated future date unit tests,
systems tests and integration tests with LNC affiliates and was completed in
July, as noted above. Environmental and external agent/vendor testing, which are
subject to external factors such as vendor readiness, will continue through the
third quarter of 1999 as planned. Re-testing of systems as part of the
pre-production quality assurance process (Aclean management@) as well as
participation in industry-wide testing will continue throughout the year.
As of June 30, 1999, the status of projects that address readiness of high
priority non-IT assets is: 100% of non-IT assets have been inventoried (Phase
1), assessed (Phase 2), and remediated (Phase 3); 92% of non-IT projects have
completed the testing phase (Phase 4). LNC expects to have all phases related to
high priority non-IT completed by the end of October 1999.
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being developed.
<PAGE>-16-
The most significant categories of key business partners are financial
institutions, software vendors, and utility providers (gas, electric and
telecommunications). Surveys have been mailed to key business partners. Based on
responses received, current levels of readiness are being assessed, follow-up
contacts are underway, alternative strategies are being developed and testing is
being scheduled or is already underway where feasible.
Some of LNC's business partners have indicated that they cannot test with all
partners. In those instances where LNC is not testing with a high priority
business partner, LNC will review test results of clients having similar systems
and determine LNC's comfort level with their testing. This effort is expected to
continue well into the third quarter of 1999. As noted above, software vendor
assessments are considered part of the IT projects and, therefore, would follow
the schedule shown above for such projects.
The complexity of the Year 2000 issue gives rise to numerous uncertainties.
Regardless of best efforts, LNC recognizes the possibility that failures may
occur. LNC is putting significant emphasis on Year 2000 contingency planning.
Year 2000 contingency plans are currently being developed. Testing of the plans
and training will continue throughout the second half of 1999. Contingency plans
consider failures due to either internal or external Y2K events ranging from
such things as systems failures to utility outages to external provider
failures. Alternative providers have been identified and in some cases
contacted; year-end staffing plans are being finalized; manual work arounds are
being documented and prioritization processes for problem resolution are being
developed.
While LNC is working to meet the various schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty include
a possible loss of technical resources to perform the work, failure to identify
all susceptible systems, non-compliance by third parties whose systems and
operations impact LNC and other uncertainties.
A worst case scenario might include LNC's inability to achieve Year 2000
readiness with respect to one or more of LNC's significant policyholder systems,
resulting in a material disruption to LNC's operations. Specifically, LNC could
experience an interruption in its ability to collect and process premiums or
deposits, process claim payments, accurately maintain policyholder information,
accurately maintain accounting records, and/or perform adequate customer
service. Should the worst case scenario occur, it could, depending on its
duration, have a material impact on LNC's results of operations and financial
position. Simple failures might be repaired and returned to production within a
matter of hours with no material impact. Unanticipated failures with a longer
service disruption period might have a more serious impact. For this reason, LNC
is placing significant emphasis on risk management and Year 2000 contingency
planning. As noted above, LNC is in the process of modifying its contingency
plans to address potential Year 2000 issues. Where these efforts identify either
high risks due to unacceptable work around procedures or significant readiness
risks, appropriate risk management techniques are being defined. These
techniques, such as resource shifting or use of alternate providers, will be
employed if needed to provide stronger assurances of readiness. LNC has gone
through exercises to identify worst case scenario failures. At this time, LNC
believes its plans are sufficient to mitigate identified worst case scenarios.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
The total investment portfolio decreased $566.9 million in the first six months
of 1999. This is the net result of purchases of investments from cash flow
generated by the business segments being more than offset by the decrease in the
fair value of securities available-for-sale, and by fixed annuity
contractholders opting to transfer funds to variable annuity contracts.
The quality of LNC's fixed maturity securities portfolio as of June 30, 1999 was
as follows:
Treasuries and AAA 25.5% BBB 32.5%
AA 7.0% BB 4.1%
A 28.0% Less than BB 2.9%
As of June 30, 1999, $2.1 billion or 7.0% of fixed maturity securities was
invested in below investment grade securities (less than BBB). This represents
6.0% of the total investment portfolio. The interest rates available on these
below investment grade securities are significantly higher than are available on
other corporate debt securities. Also, the risk of loss due to default by the
borrower is significantly greater with respect to such
<PAGE>-17-
below investment grade securities because these securities are generally
unsecured, often subordinated to other creditors of the issuer and issued by
companies that usually have high levels of indebtedness. LNC attempts to
minimize the risks associated with these below investment grade securities by
limiting the exposure to any one issuer and by closely monitoring the credit
worthiness of such issuers. During the six months ended June 30, 1999, the
aggregate cost of such investments purchased was $334.1 million. Aggregate
proceeds from such investments sold were $367.7 million, resulting in a net
realized pre-tax loss at the time of sale of $25.3 million.
LNC's entire fixed maturity and equity securities portfolio is classified as
"available-for-sale" and is carried at fair value. Changes in fair value, net of
related deferred acquisition costs, amounts required to satisfy policyholder
commitments and taxes, are charged or credited directly to shareholders' equity.
As of June 30, 1999, mortgage loans on real estate and real estate represented
12% and 1% of LNC's total investment portfolio, respectively. As of June 30,
1999, the underlying properties supporting the mortgage loans on real estate
consisted of 28% in commercial office buildings, 31% in retail stores, 18% in
apartments, 12% in industrial buildings, 6% in hotels/motels and 5% in other. In
addition to the dispersion by property type, the mortgage loan portfolio is
geographically diversified throughout the United States.
The following summarizes key information on mortgage loans:
<TABLE>
<CAPTION>
June 30 December 31
(in millions) 1999 1998
------------- ---- ----
<S> <C> <C>
Total Portfolio (net of reserves)...................................... $4,570.5 $4,393.1
Mortgage loans two or more payments
delinquent (including in process of foreclosure)...................... 18.3 2.4
Restructured loans in good standing.................................... 30.0 32.0
Reserve for mortgage loans............................................. 4.3 4.8
</TABLE>
Fixed maturity securities available-for-sale, mortgage loans on real estate and
real estate that were non-income producing for the six months ended June 30,
1999 were not significant.
Cash and Invested Cash
Cash and invested cash decreased by $282.3 million in the first six months
of 1999, primarily as a result of the purchase and retirement of common stock at
a cost of $197.8 million.
Deferred Acquisition Costs
Deferred acquisition costs increased $433.9 million during the first six months
of 1999 as the net result of increases in new business being partially offset by
reductions related to the decrease in unrealized gain on securities
available-for-sale.
Premiums and Fees Receivable
Premiums and fees receivable increased $22.8 million in the first six months of
1999 as a net result of increased volumes of business being partially offset by
the collection of premium receipts from high fourth quarter 1998 sales in the
Life Insurance and Annuities segment.
Assets Held in Separate Accounts
This asset account as well as the corresponding liability account increased by
$4.5 billion in the first six months of 1999 reflecting an increase in annuity
funds under management. This increase resulted from market appreciation and new
deposits exceeding benefit payments and withdrawals.
Goodwill and Other Intangible Assets
The decrease in these amounts is the result of the amortization of account
balances for the six months ended June 30, 1999 and the adjustment made to
goodwill in the first quarter of 1999 resulting from reaching final settlement
with the seller as to the value of assets and liabilities transferred to Lincoln
on the business acquired January 2, 1998 (see note 9 on page 11).
Other Assets
The increase in other assets of $183.1 million is the result of having a higher
receivable related to investment securities sold in the last few days of the
second quarter of 1999 versus the end of 1998.
<PAGE>-18-
Total Liabilities
Total liabilities increased by $5.0 billion in the first six months of 1999.
Insurance policy reserves increased $58.3 million. Contractholder funds
decreased $173.6 million which is the net result of new deposits being more than
offset by the withdrawal upon maturity of guaranteed interest contracts.
Liabilities related to separate accounts increased $4.5 billion (see discussion
of Assets Held in Separate Accounts above). Total debt increased $65.5 million
and all other liabilities increased $590.1 million as a result of an increase in
certain investing activities during the first six months of 1999. LNC's
liabilities include some contingency items (see note 5 on page 7).
Shareholders' Equity
Total shareholders' equity decreased $570.6 million in the first six months of
1999. Excluding the decrease of $553.5 million related to a decrease in the
unrealized gains on securities available-for-sale, shareholders' equity
decreased $17.1 million. This decrease was the net result of increases due to
$293.4 million from net income, $27.2 million from the issuance of common stock
related to benefit plans and $3.5 million from the issuance of common stock
related to the acquisition of subsidiaries being offset by a decrease of $29.3
million in the cumulative foreign currency translation adjustment, $202.7
million for the repurchase of common shares and $109.2 million for the
declaration of dividends to shareholders.
Due to reduced levels of net unrealized gains on securities available-for-sale,
consolidated deferred taxes are in a net deferred tax asset position as of June
30, 1999. Realization of the deferred tax asset is based upon offsetting
existing taxable temporary differences, carrybacks to prior years, and
expectations of future taxable income. Existing levels of pre-tax earnings are
sufficient to generate the minimum amount of future taxable income over the next
few years necessary to fully support the realization of the net deferred tax
asset.
Liquidity and Cash Flow
Liquidity refers to the ability of an enterprise to generate adequate amounts of
cash from its normal operations to meet cash requirements with a prudent margin
of safety. Because of the interval of time from receipt of a deposit or premium
until payment of benefits or claims, LNC and other insurers employ investment
portfolios as an integral element of operations. By segmenting its investment
portfolios along product lines, LNC enhances the focus and discipline it can
apply to managing the liquidity as well as the interest rate and credit risk of
each portfolio commensurate with the profile of the liabilities. For example,
portfolios backing products with less certain cash flows and/or withdrawal
provisions are kept more liquid than portfolios backing products with more
predictable cash flows.
The consolidated statements of cash flows on page 6, indicates that operating
activities provided cash of $689.3 million during the first six months of 1999.
This statement also classifies the other sources and uses of cash by investing
activities and financing activities and discloses the total amount of cash
available to meet LNC's obligations.
Although LNC generates adequate cash flow to meet the needs of its normal
operations, periodically LNC may issue debt or equity securities to fund
internal expansion, acquisitions, investment opportunities and the retirement of
LNC's debt and equity. As of June 30, 1999, LNC has a shelf registration with an
unused balance of $825 million that would allow LNC to issue a variety of
securities, including debt, preferred stock, common stock and hybrid securities.
Finally, cash funds are available from LNC's revolving credit agreement which
provides for borrowing up to $750 million.
Transactions that occurred recently include the purchase and retirement of
shares of common stock at a cost of $197.8 million in the first six months of
1999. In May 1999, the LNC board authorized $500 million to repurchase shares of
common stock. Since the May 1999 board authorization repurchases of $69.0
million through July 30, 1999 have reduced the board authorization to $431.0
million.
LNC's insurance subsidiaries are subject to certain insurance department
regulatory restrictions, as to the transfer of funds and payment of dividends to
the holding company (LNC). Generally, these restrictions pose no short-term
liquidity concerns for the holding company. However, as discussed in detail
within note 5 on page 7, the acquisition of two blocks of business in 1998
placed further restrictions on the ability of LNC's primary insurance
subsidiary, Lincoln National Life Insurance Company ("Lincoln Life"), to declare
and pay dividends. As a result of these acquisitions and the dividends declared,
Lincoln Life's statutory earned surplus is negative.
<PAGE>-19-
It is necessary for Lincoln Life to obtain the prior approval of the Indiana
Insurance Commissioner before paying any dividends to LNC until such time as
statutory earned surplus is positive. Although no assurance can be given that
additional dividends will be approved, during the second quarter 1999, Lincoln
Life received regulatory approval and paid an extraordinary dividend of $350
million to LNC. Statutory earned surplus could return to a positive position
within 2 1/2 years from the closing of the Aetna transaction described above
assuming a level of statutory earnings coinciding with recent earnings patterns.
If statutory earnings are less than recent patterns due, for example, to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or if dividends are approved or paid at amounts higher than recent
history, the statutory earned surplus may not return to a positive position in a
2 1/2 half year time frame. In the event such approvals are not obtained,
management believes that LNC can obtain the funds required to satisfy its
obligations from its existing credit facilities and other sources.
Item 3 Quantitative and Qualitative Disclosure of Market Risk
In Item 7A of Part II for the year ended December 31, 1998 (see page 28 of LNC's
Form 10-K), LNC provided a discussion of its market risk. During the first six
months of 1999, there was no substantive change to LNC's market risk. The
following is a discussion of changes to LNC's derivative positions.
Derivatives
As discussed in note 7 to the consolidated financial statements for the year
ended December 31, 1998 (see page 57 of LNC's Form 10-K), LNC has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations, increased liabilities associated with certain
reinsurance agreements, foreign exchange risks and fluctuations in the FTSE and
S&P indexes. In addition, LNC is subject to risks associated with changes in the
value of its derivatives; however, such changes in value are generally offset by
changes in the value of the items being hedged by such contracts. Modifications
to LNC's derivative strategy are initiated periodically upon review of the
company's overall risk assessment. During the first six months of 1999, the more
significant changes in LNC's derivative positions are as follows:
1. Decreased its use of interest rate cap agreements that are used to hedge
its annuity business from the effect of fluctuating interest rates from
$4.1 billion notional to $3.5 billion notional. The decrease in notional
is a result of expirations and, therefore, no gain or loss has been
recognized.
2. Increased its use of interest rate swap agreements from $258.3 million
notional to $377.0 million notional. During the first six months, $.6
million notional expired with no gain or loss recognized. These interest
rate swap agreements are part of a replication strategy which will result
in a higher yield on bonds held by LNC.
3. Decreased its use of foreign exchange forward contracts from $1.5 million
notional to $.3 million notional. This reduction was initiated as the
result of the U.S. dollar strengthening against the foreign currencies
hedged. LNC entered into $30.0 million notional of foreign exchange
forward contracts to hedge LNC's exposure to currency fluctuations
associated with its commercial paper program in the United Kingdom.
4. Decreased its use of foreign currency swaps that are hedging the foreign
currency risk of its portfolio of foreign bonds from $47.2 million
notional to $44.8 million notional. This reduction in notional resulted
in a recognized gain of $.3 million. These foreign currency swaps are
part of a replication strategy. LNC owns various foreign issue
securities. Interest payments from these securities are received in a
foreign currency and then swapped into U.S. dollars, replicating a
foreign issue, U.S.
dollar paying security.
5. Decreased its use of FTSE index call options from $11.1 million notional
to $6.4 million notional. As a result of this termination, a $.7 million
gain was recognized. The purpose of LNC's FTSE index call option program
is to offset the cost of increases in the liabilities of certain single
premium investment contracts which are tied to the appreciation of the
FTSE index.
<PAGE>-20-
6. Increased its use of S&P 500 index options from $79.9 million notional to
$97.7 million notional. New options in the amount of $20.6 million were
entered into during the first six months and $2.8 million were
terminated, resulting in a $.2 million gain. These call options continue
to offset LNC's increased liabilities resulting from certain reinsurance
agreements which guarantee payment for a specified portion of the
appreciation of the S&P 500 index on certain underlying annuity products.
LNC is exposed to credit loss in the event of non-performance by counterparties
on interest rate cap agreements, swaptions, spread-lock agreements, interest
rate swaps, put options, foreign exchange forward contracts, foreign currency
options, foreign currency swaps, commodity swaps and call options. However, LNC
does not anticipate non-performance by any of the counterparties. The credit
risk associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing superior performance records.
PART II - OTHER INFORMATION AND EXHIBITS
Items 1, 2, 3 and 5 of Part II are either inapplicable or are answered in the
negative and are omitted pursuant to the instructions to Part II.
Item 4. Submission of Matters to Vote Securityholders
(a) The matters discussed below were submitted to and voted on by
Shareholders of the Registrant at the Annual Meeting of Shareholders of
the Registrant on May 13, 1999.
1. To elect four directors for three year terms
J. Patrick Barrett Daniel R. Efroymson
Votes cast for = 86,804,940 Votes cast for = 86,867,806
Votes withheld = 963,359 Votes withheld = 900,493
Thomas D. Bell, Jr. Roel Pieper
Votes cast for = 86,803,963 Votes cast for = 75,182,356
Votes withheld = 964,336 Votes withheld = 12,585,943
2. To approve Shareholders Proposal relating to Tobacco Investments
Votes cast for = 8,434,627
Votes cast against = 71,058,276
Number of abstentions = 3,003,709
Number of non-votes = 5,271,687
(Note: The number of shares voted for both matters above were before the
two-for-one common stock split.)
Item 6 Exhibits and Reports on Form 8-K
(a) The following Exhibits of the Registrant are included in this report.
(Note: The number preceding the exhibit corresponds to the specific
number within Item 601 of Regulation S-K.)
10(a) 1997 Incentive Compensation Plan
10(b) Descriptions of Compensation with Executive Officers
12 Historical Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1999.
<PAGE>-21-
SIGNATURE PAGE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LINCOLN NATIONAL CORPORATION
By /S/Richard C. Vaughan
Richard C. Vaughan,
Executive Vice President and
Chief Financial Officer
By /S/Casey J.Trumble
Casey J. Trumble
Senior Vice President and
Chief Accounting Officer
Date August 4, 1999
<PAGE>-22-
LINCOLN NATIONAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended June 30, 1999
Exhibit Number Description Page Number
10(a) Lincoln National Corporation 1997
Incentive Compensation Plan 23
10(b) Descriptions of Compensations with
Executive Officers 40
12 Historical Ratio of Earnings to
Fixed Charges 73
27 Financial Data Schedule 74
<PAGE>-23-
Exhibit 10(a)
LINCOLN NATIONAL CORPORATION
1997 Incentive Compensation Plan
<PAGE>-24-
LINCOLN NATIONAL CORPORATION
1997 Incentive Compensation Plan
Page
1. Purpose........................................................... 4
2. Definitions....................................................... 4
3. Administration.................................................... 6
(a) Authority of the Committee................................. 6
(b) Manner of Exercise of Committee Authority.................. 6
(c) Limitation of Liability.................................... 7
4. Stock Subject to Plan............................................. 7
(a) Overall Number of Shares Available for Delivery............ 7
(b) Application of Limitation to Grants of Awards.............. 7
(c) Availability of Shares Not Delivered under Awards ......... 7
5. Eligibility; Per-Person Award Limitations......................... 8
6. Specific Terms of Awards.......................................... 8
(a) General.................................................... 8
(b) Options.................................................... 8
(c) Stock Appreciation Rights.................................. 9
(d) Restricted Stock........................................... 9
(e) Deferred Stock Units....................................... 10
(f) Bonus Stock and Awards in Lieu of Obligations.............. 10
(g) Other Stock-Based Awards................................... 10
7. Certain Provisions Applicable to Awards........................... 11
(a) Stand-Alone, Additional, Tandem, and Substitute Awards .... 11
(b) Term of Awards............................................. 11
(c) Form and Timing of Payment under Awards; Deferrals ........ 11
(d) Exemptions from Section 16(b) Liability.................... 11
(e) Cancellation and Rescission of Awards ..................... 11
8. Performance and Annual Incentive Awards........................... 13
(a) Performance Conditions..................................... 13
(b) Performance Awards Granted to Designated Covered Employees 13
(c) Annual Incentive Awards Granted to Designated Covered
Employees................................................. 14
(d) Written Determinations..................................... 15
(e) Status of Section 8(b) and 8(c) Awards under Code Section
162(m) ................................................... 15
<PAGE>-25-
Page
9. Change of Control................................................ 16
(a) Options and SARs ......................................... 16
(b) Restricted Stock and Deferred Stock Units................. 16
(c) Other Awards.............................................. 16
10. General Provisions............................................... 16
(a) Compliance with Legal and Other Requirements.............. 16
(b) Limits on Transferability; Beneficiaries.................. 16
(c) Adjustments............................................... 17
(d) Taxes..................................................... 17
(e) Changes to the Plan and Awards............................ 18
(f) Limitation on Rights Conferred under Plan................. 18
(g) Unfunded Status of Awards; Creation of Trusts............. 18
(h) Nonexclusivity of the Plan................................ 18
(i) Payments in the Event of Forfeitures; Fractional Shares .. 19
(j) Governing Law............................................. 19
(k) Awards under Preexisting Plans............................ 19
(l) Plan Effective Date and Shareholder Approval.............. 19
<PAGE>-26-
LINCOLN NATIONAL CORPORATION
1997 Incentive Compensation Plan
1. Purpose. The purpose of this 1997 Incentive Compensation Plan (the
"Plan") is to assist Lincoln National Corporation, an Indiana corporation (the
"Corporation"), and its subsidiaries in attracting, retaining, and rewarding
high-quality executives, employees, and other persons who provide services to
the Corporation and/or its subsidiaries, enabling such persons to acquire or
increase a proprietary interest in the Corporation in order to strengthen the
mutuality of interests between such persons and the Corporation's shareholders,
and providing such persons with annual and long-term performance incentives to
expend their maximum efforts in the creation of shareholder value. The Plan is
also intended to qualify certain compensation awarded under the Plan for tax
deductibility under Code Section 162(m) (as hereafter defined) to the extent
deemed appropriate by the Committee (or any successor committee) of the Board of
Directors of the Corporation.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof:
(a) "Annual Incentive Award" means a conditional right granted to
a Participant under Section 8(c) hereof to receive a cash payment, Stock
or other Award, unless otherwise determined by the Committee, after the
end of a specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock Units, Stock granted as a bonus or in
lieu of another award, Other Stock-Based Award, Performance Award or
Annual Incentive Award, together with any other right or interest granted
to a Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards
or other rights are transferred if and to the extent permitted under
Section 10(b) hereof. If, upon a Participant's death, there is no
designated Beneficiary or surviving designated Beneficiary, then the term
Beneficiary means the person, persons, trust or trusts entitled by will
or the laws of descent and distribution to receive such benefits.
(d) "Board" means the Corporation's Board of Directors.
(e) "Change of Control" shall have the same meaning ascribed to
such term in the Lincoln National Corporation Executives' Severance
Benefit Plan (the "Severance Benefit Plan") on the date immediately
preceding the Change of Control.
(f) "Change of Control Price" means an amount in cash equal to the
higher of (i) the amount of cash and Fair Market Value of property that
is the highest price per share paid (including extraordinary dividends)
in any transaction triggering the Change of Control or any liquidation of
shares following a sale of substantially all assets of the Corporation,
or (ii) the highest Fair Market Value per share at any time during the
60-day period preceding and 60-day period following the Change of
Control.
(g) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, including regulations thereunder and successor
provisions and regulations thereto.
(h) "Committee" means at any date each of those members of the
Compensation Committee
<PAGE>-27-
of the Board who shall be (i) a "non-employee
director" within the meaning of Rule 16b-3 under the Exchange Act, unless
administration of the Plan by "non-employee directors" is not then
required in order for exemptions under Rule 16b-3 to apply to
transactions under the Plan, and (ii) an "outside director" as defined
under Code Section 162(m), unless the action taken pursuant to the Plan
is not required to be taken by "outside directors" in order to qualify
for tax deductibility under Code Section 162(m). Unless otherwise
designated by the Board, the Committee shall include not fewer than three
members. In the event that fewer than three members of the Compensation
Committee are eligible to serve on the Committee, the Board may appoint
one or more of its other members who is otherwise eligible to serve on
the Committee until such time as three members of the Compensation
Committee are eligible to serve.
(i) "Covered Employee" means an Eligible Person who is a Covered
Employee as specified in Section 8(e) of the Plan.
(j) "Deferred Stock Unit" means a right, granted to a Participant
under Section 6(e) hereof, to receive Stock, cash or a combination
thereof at the end of a specified deferral period.
(k) "Effective Date" means January 1, 1997.
(l) "Eligible Person" means each Executive Officer and other
officers and employees of the Corporation or of any subsidiary, including
employees, agents and brokers who may also be directors of the
Corporation. An employee on leave of absence may be considered as still
in the employ of the Corporation or a subsidiary for purposes of
eligibility for participation in the Plan.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(n) "Executive Officer" means an executive officer of the
Corporation as defined under the Exchange Act.
(o) "Fair Market Value" means the Fair Market Value of Stock,
Awards or other property as determined by the Committee or under
procedures established by the Committee. Unless otherwise determined by
the Committee the Fair Market Value of Stock shall be the average of the
highest and lowest prices of a share of Stock, as quoted on the composite
transactions table on the New York Stock Exchange, on the last trading
day prior to the date on which the determination of Fair Market Value is
being made.
(p) "Incentive Stock Option" or "ISO" means any Option intended to
be and designated as an incentive stock option within the meaning of Code
Section 422 or any successor provision thereto.
(q) "Limited SAR" means a right granted to a Participant under
Section 6(c) hereof.
(r) "Option" means a right, granted to a Participant under Section
6(b) hereof, to purchase Stock or other Awards at a specified price
during specified time periods.
(s) "Other Stock-Based Awards" means Awards granted to a
Participant under Section 6(g) hereof.
(t) "Participant" means a person who has been granted an Award
under the Plan which remains outstanding, including a person who is no
longer an Eligible Person.
(u) "Performance Award" means a right, granted to a Participant
under Section 8 hereof, to receive Awards based upon performance criteria
specified by the Committee.
<PAGE>-28-
(v) "Preexisting Plans" mean the Lincoln National Corporation 1986
Stock Option Incentive Plan (the "Stock Option Plan") and the 1994
Amended and Restated Lincoln National Corporation Executive Value Sharing
Plan (the "EVSP").
(w) "Restricted Stock" means Stock granted to a Participant under
Section 6(d) hereof, that is subject to certain restrictions and to a
risk of forfeiture.
(x) "Rule 16b-3" means Rule 16b-3, as from time to time in effect
and applicable to the Plan and Participants, promulgated by the
Securities and Exchange Commission under Section 16 of the Exchange Act
or any similar law or regulation that may be a successor thereto.
(y) "Stock" means the Corporation's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(z) "Stock Appreciation Right" or "SAR" means a right granted to a
Participant under Section 6(c) hereof.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by
the Committee. The Committee shall have full and final authority, in each
case subject to and consistent with the provisions of the Plan, to
interpret the provisions of the Plan, select Eligible Persons to become
Participants, grant Awards, determine the type, number and other terms
and conditions of, and all other matters relating to, Awards, prescribe
Award agreements (which need not be identical for each Participant),
adopt, amend and rescind rules and regulations for the administration of
the Plan, construe and interpret the Plan and Award agreements and
correct defects, supply omissions or reconcile inconsistencies therein,
ensure that awards continue to qualify under Rule 16b-3, and make all
other decisions and determinations as the Committee may deem necessary or
advisable for the administration of the Plan.
(b) Manner of Exercise of Committee. Any action of the Committee
shall be final, conclusive and binding on all persons, including the
Corporation, its subsidiaries, Participants, Beneficiaries, transferees
under Section 10(b) hereof or other persons claiming rights from or
through a Participant, and shareholders. The Committee shall exercise its
authority only by a majority vote of its members at a meeting or without
a meeting by a writing signed by a majority of its members. The express
grant of any specific power to the Committee, and the taking of any
action by the Committee, shall not be construed as limiting any power or
authority of the Committee. The Committee may delegate to officers or
managers of the Corporation or any subsidiary, or committees thereof, the
authority, subject to such terms as the Committee shall determine, (i) to
perform administrative functions, (ii) with respect to Participants not
subject to Section 16 of the Exchange Act, to perform such other
functions as the Committee may determine, and (iii) with respect to
Participants subject to Section 16, to perform such other functions of
the Committee as the Committee may determine to the extent performance of
such functions will not result in the loss of an exemption under Rule
16b-3 otherwise available for transactions by such persons, in each case
to the extent permitted under applicable law and subject to the
requirements and restrictions set forth in Section 8(e). The Committee
may appoint agents to assist it in administering the Plan.
(c) Limitation of Liability. The Committee and each member thereof
shall be entitled, in good faith, to rely or act upon any report or other
information furnished to it, him or her by any executive officer, other
officer or employee of the Corporation or a subsidiary, the Corporation's
independent auditors, consultants or any other agents assisting in the
administration of the Plan. Members of the Committee and any officer or
employee of the Corporation or a subsidiary acting at the direction or on
behalf of the Committee shall not be personally liable for any action or
determination taken or made in good faith with respect to the Plan, and
shall, to the extent permitted by law, be fully indemnified and protected
by the Corporation with respect to any such action or determination.
<PAGE>-29-
4. Stock Subject to Plan.
(a) Overall Number of Shares Available for Delivery. Subject to
adjustment as provided in Section 10(c) hereof, the total number of
shares of Stock reserved and available for delivery in connection with
Awards under the Plan shall be 12,700,000, less any shares of Stock which
are the subject of an option granted or other award made under the
Preexisting Plans after March 12, 1997; provided, however, that the total
number of shares of Stock with respect to which ISOs may be granted shall
not exceed 1,000,000; and provided, further, that the total number of
shares of Restricted Stock that may be granted shall not exceed
3,000,000, less any shares of restricted stock awarded under the
Preexisting Plans after March 12, 1997. Any shares of Stock delivered
under the Plan shall consist of authorized and unissued shares.
(b) Application of Limitation to Grants of Awards. No Award may be
granted if the number of shares of Stock to be delivered in connection
with such Award or, in the case of an Award relating to shares of Stock
but settleable only in cash (such as cash-only SARs), the number of
shares to which such Award relates, exceeds the number of shares of Stock
remaining available under the Plan minus the number of shares of Stock
issuable in settlement of or relating to then-outstanding Awards. The
Committee may adopt reasonable counting procedures to ensure appropriate
counting, avoid double counting (as, for example, in the case of tandem
or substitute awards) and make adjustments if the number of shares of
Stock actually delivered differs from the number of shares previously
counted in connection with an Award.
(c) Availability of Shares Not Delivered under Awards. Shares of
Stock subject to an Award under the Plan or award under a Preexisting
Plan that is canceled, expired, forfeited, settled in cash or otherwise
terminated without a delivery of shares to the Participant, including (i)
the number of shares withheld in payment of any exercise or purchase
price of an Award or award or taxes relating to Awards or awards, and
(ii) the number of shares surrendered in payment of any exercise or
purchase price of an Award or award or taxes relating to any Award or
award, will again be available for Awards under the Plan, except that if
any such shares could not again be available for Awards to a particular
Participant under any applicable law or regulation, such shares shall be
available exclusively for Awards to Participants who are not subject to
such limitation.
5. Eligibility; Per-Person Award Limitations. Awards may be granted under
the Plan only to Eligible Persons. In each fiscal year during any part of
which the Plan is in effect, an Eligible Person may not be granted Awards
relating to more than 1,000,000 shares of Stock, subject to adjustment
as provided in Section 10(c), under each of the following separate
provisions: Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g), 8(b) and
8(c). In addition, the maximum cash amount that may be earned under
Section 8(c) of the Plan as an Annual Incentive Award or other cash
annual Award payable in cash (currently or on a deferred basis) in
respect of any fiscal year by any one Participant shall be $8,000,000,
and the maximum cash amount that may be earned under Section 8(b) of the
Plan as a Performance Award or other cash Award payable in cash
(currently or on a deferred basis) in respect of any individual
performance period by any one Participant shall be $8,000,000.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set
forth in this Section 6, provided, however, that no Award shall be made
under this Section 6 prior to the date on which shareholders of the
Corporation approve the adoption of the Plan. In addition, the Committee
may impose on any Award or the exercise thereof, at the date of grant or
thereafter (subject to Section 10(e)), such additional terms and
conditions, not inconsistent with the provisions of the Plan, as the
Committee shall determine, including terms requiring forfeiture of Awards
in the event of termination of employment by the Participant and terms
permitting a Participant to make elections relating to his or her Award.
The Committee shall retain full power and discretion to accelerate, waive
or modify, at any time, any term or condition of an Award that is not
mandatory under the Plan. Except in cases in which the Committee is
authorized to require other forms of consideration under the Plan, or to
the extent other forms of consideration must be paid to satisfy the
requirements of Indiana law, no consideration other than services may be
required for the grant (but not the exercise) of any Award. Any Award or
the value of any Award that is made under this Plan may, subject to any
requirements of applicable law or regulation, in the Committee or its
designee's sole discretion, be converted into Deferred Stock Units and
treated as provided in Section 6(e) below.
<PAGE>-30-
(b) Options. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee,
provided that such exercise price shall be not less than the Fair
Market Value of a share of Stock on the date of grant of such
Option.
(ii) Time and Method of Exercise. The Committee shall
determine, at the date of grant or thereafter, the time or times
at which or the circumstances under which an Option may be
exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the methods
by which such exercise price may be paid or deemed to be paid, the
form of such payment, including, without limitation, cash, Stock,
other Awards or awards granted under other plans of the
Corporation or any subsidiary, or other property (including notes
or other contractual obligations of Participants to make payment
on a deferred basis), and the methods by or forms in which Stock
will be delivered or deemed to be delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan
shall comply in all respects with the provisions of Code Section
422. Anything in the Plan to the contrary notwithstanding, no term
of the Plan relating to ISOs (including any SAR in tandem
therewith) shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be exercised, so as
to disqualify either the Plan or any ISO under Code Section 422,
unless the Participant has first requested the change that will
result in such disqualification.
(c) Stock Appreciation Rights. The Committee is authorized to
grant SAR's to Participants on the following terms and conditions:
(i) Right to Payment. A SAR shall confer on the Participant
to whom it is granted a right to receive, upon exercise thereof,
the excess of (A) the Fair Market Value of one share of Stock on
the date of exercise (or, in the case of a "Limited SAR," the Fair
Market Value determined by reference to the Change of Control
Price) over (B) the grant price of the SAR as determined by the
Committee.
(ii) Other Terms. The Committee shall determine, at the date
of grant or thereafter, the time or times at which and the
circumstances under which a SAR may be exercised in whole or in
part (including based on achievement of performance goals and/or
future service requirements), the method of exercise, method of
settlement, form of consideration payable in settlement, method by
or forms in which any Stock payable will be delivered or deemed to
be delivered to Participants, whether or not a SAR shall be in
tandem or in combination with any other Award, and any other terms
and conditions of any SAR. Limited SARs that may only be exercised
in connection with a Change of Control or other event as specified
by the Committee may be granted on such terms, not inconsistent
with this Section 6(c), as the Committee may determine. SARs and
Limited SARs may be either freestanding or in tandem with other
Awards.
<PAGE>-31-
(d) Restricted Stock. The Committee is authorized to grant
Restricted Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be
subject to such restrictions on transferability, risk of
forfeiture and other restrictions, if any, as the Committee may
impose, which restrictions may lapse separately or in combination
at such times, under such circumstances (including based on
achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee
may determine at the date of grant or thereafter. Except to the
extent restricted under any Award agreement relating to the
Restricted Stock, a Participant granted Restricted Stock shall
have all of the rights of a shareholder, including the right to
vote the Restricted Stock and the right to receive dividends
thereon (subject to any mandatory reinvestment or other
requirement imposed by the Committee). During the restricted
period applicable to the Restricted Stock, subject to Section
10(b) below, the Restricted Stock may not be sold, transferred,
pledged, hypothecated, margined or otherwise encumbered by the
Participant.
(ii) Forfeiture. Except as otherwise determined by the
Committee, upon termination of employment during the applicable
restriction period, Restricted Stock that is at that time subject
to restrictions shall be forfeited and reacquired by the
Corporation; provided that the Committee may, in its discretion,
in any individual case provide for waiver in whole or in part of
restrictions or forfeiture conditions relating to Restricted
Stock.
(iii) Certificates for Stock. Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee shall
determine. If certificates representing Restricted Stock are
registered in the name of the Participant, the Committee may
require that such certificates bear an appropriate legend
referring to the terms, conditions and restrictions applicable to
such Restricted Stock, that the Corporation retain physical
possession of the certificates, and that the Participant deliver a
stock power to the Corporation, endorsed in blank, relating to the
Restricted Stock.
(iv) Dividends and Splits. As a condition to the grant of an
Award of Restricted Stock, the Committee may require that any cash
dividends paid on a share of Restricted Stock be automatically
reinvested in additional shares of Restricted Stock or applied to
the purchase of additional Awards under the Plan. Unless otherwise
determined by the Committee, Stock distributed in connection with
a Stock split or Stock dividend, and other property distributed as
a dividend, shall be subject to restrictions and a risk of
forfeiture to the same extent as the Restricted Stock with respect
to which such Stock or other property has been distributed.
(e) Deferred Stock Units. The Committee is authorized to grant to
Participants Deferred Stock Units, which are rights to receive Stock,
cash, or a combination thereof at the end of a specified deferral period.
Unless otherwise specified by the Committee, Deferred Stock Units shall
be credited as of the date of award to a bookkeeping reserve account
maintained by the Employer under the Lincoln National Corporation
Executive Deferred Compensation Plan for Employees or its successor (the
"Deferred Compensation Plan") in units which are equivalent in value to
shares of Common Stock ("Deferred Stock Units"). Once credited to such
account, Deferred Stock Units shall be governed by the terms of the
Deferred Compensation Plan.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee
is authorized to grant Stock as a bonus, or to grant Stock or other
Awards in lieu of obligations to pay cash or deliver other property under
the Plan or under other plans or compensatory arrangements, provided
that, in the case of Participants subject to Section 16 of the Exchange
Act, the amount of such grants remains within the discretion of the
Committee to the extent necessary to ensure that acquisitions of Stock or
other Awards do not impair a participant's exemption from liability under
Section 16(b) of the Exchange Act. Stock or Awards granted hereunder
shall be subject to such other terms as shall be determined by the
Committee.
<PAGE>-32-
(g) Other Stock-Based Awards. The Committee is authorized, subject
to limitations under applicable law, to grant to Participants such other
Awards that may be denominated or payable in, valued in whole or in part
by reference to, or otherwise based on, or related to, Stock, as deemed
by the Committee to be consistent with the purposes of the Plan,
including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase
rights for Stock, Awards with value and payment contingent upon
performance of the Corporation or any other factors designated by the
Committee, and Awards valued by reference to the book value of Stock or
the value of securities of or the performance of specified subsidiaries.
The Committee shall determine the terms and conditions of such Awards.
Stock delivered pursuant to an Award in the nature of a purchase right
granted under this Section 6(g) shall be purchased for such
consideration, paid for at such times, by such methods, and in such
forms, including, without limitation, cash, Stock, other Awards, or other
property, as the Committee shall determine. Cash awards, as an element of
or supplement to any other Award under the Plan, may also be granted
pursuant to this Section 6(g).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards
granted under the Plan may, in the discretion of the Committee, be
granted either alone or in addition to, in tandem with, or in
substitution or exchange for, any other Award or any award granted under
another plan of the Corporation, any subsidiary, or any business entity
to be acquired by the Corporation or a subsidiary, or any other right of
a Participant to receive payment from the Corporation or any subsidiary.
Such additional, tandem, and substitute or exchange Awards may be granted
at any time. If an Award is granted in substitution or exchange for
another Award or award, the Committee shall require the surrender of such
other Award or award in consideration for the grant of the new Award.
(b) Term of Awards. The term of each Award shall be for such
period as may be determined by the Committee; provided that in no event
shall the term of any Option or SAR exceed a period of ten years (or such
shorter term as may be required in respect of an ISO under Code Section
422).
(c) Form and Timing of Payment under Awards; Deferrals. Subject to
the terms of the Plan and any applicable Award agreement, payments to be
made by the Corporation or a subsidiary upon the exercise of an Option or
other Award or settlement of an Award may be made in such forms as the
Committee shall determine, including, without limitation, cash, Stock,
other Awards or other property, and may be made in a single payment or
transfer, in installments, or on a deferred basis. The settlement of any
Award may be accelerated, and cash paid in lieu of Stock in connection
with such settlement, in the discretion of the Committee or upon
occurrence of one or more specified events (in addition to a Change of
Control). Installment or deferred payments may be required by the
Committee (subject to Section 10(e) of the Plan, including the consent
provisions thereof) in the case of any deferral of an outstanding Award
not provided for in the original Award agreement, except that this
provision shall not prevent the Committee or its designee from converting
an Award to Deferred Stock Units as provided under Section 6(a) above or
permitted at the election of the Participant on terms and conditions
established by the Committee. Payments may include, without limitation,
provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or crediting of dividend
equivalents or other amounts in respect of installment or deferred
payments denominated in Stock.
(d) Exemptions from Section 16(b) Liability. It is the intent of
the Corporation that the grant of any Awards to or other transaction by a
Participant who is subject to Section 16 of the Exchange Act shall be
exempt under Rule 16b-3 (except for transactions acknowledged in writing
to be non-exempt by such Participant). Accordingly, if any provision of
this Plan or any Award agreement does not comply with the requirements of
Rule 16b-3 as then applicable to any such transaction, unless the
Participant shall have acknowledged in writing that a transaction
pursuant to such provision is to be non-exempt, such provision shall be
construed or deemed amended to the extent necessary to conform to the
applicable requirements of Rule 16b-3 so that such Participant shall
avoid liability under Section 16(b) of the Exchange Act.
<PAGE>-33-
(e) Cancellation and Rescission of Awards. Unless the Award
agreement specifies otherwise, the Committee may cancel any unexpired,
unpaid, or deferred Awards at any time, and the Corporation shall have
the additional rights set forth in Section 7(e)(iv) below, if the
Participant is not in compliance with all applicable provisions of the
Award agreement and the Plan including the following conditions:
(i) A Participant shall not render services for any
organization or engage directly or indirectly in any business
which, in the judgment of the Chief Executive Officer of the
Corporation or other senior officer designated by the Committee,
is or becomes competitive with the Corporation. For Participants
whose employment has terminated, the judgment of the Chief
Executive Officer or other senior officer designated by the
Committee shall be based on the Participant's position and
responsibilities while employed by the Corporation, the
Participant's post-employment responsibilities and position with
the other organization or business, the extent of past, current
and potential competition or conflict between the Corporation and
the other organization or business, the effect on the
Corporation's shareholders, customers, suppliers and competitors
of the Participant assuming the post-employment position and such
other considerations as are deemed relevant given the applicable
facts and circumstances. A Participant who has terminated
employment shall be free, however, to purchase as an investment or
otherwise, stock or other securities of such organization or
business so long as they are listed upon a recognized securities
exchange or traded over-the-counter, and such investment does not
represent a greater than five percent equity interest in the
organization or business.
(ii) A Participant shall not, without prior written
authorization from the Corporation, disclose to anyone outside the
Corporation, or use in other than the Corporation's business, any
confidential information or material relating to the business of
the Corporation that is acquired by the Participant either during
or after employment with the Corporation.
(iii) A Participant shall disclose promptly and assign to
the Corporation all right, title, and interest in any invention or
idea, patentable or not, made or conceived by the Participant
during employment by the Corporation, relating in any manner to
the actual or anticipated business, research or development work
of the Corporation and shall do anything reasonably necessary to
enable the Corporation to secure a patent where appropriate in the
United States and in foreign countries.
(iv) Upon exercise, settlement, payment or delivery pursuant
to an Award, the Participant shall certify on a form acceptable to
the Committee that he or she is in compliance with the terms and
conditions of the Plan. Failure to comply with the provisions of
this Section 7(e) prior to, or during the six months after, any
exercise, payment or delivery pursuant to an Award shall cause
such exercise, payment or delivery to be rescinded. The
Corporation shall notify the Participant in writing of any such
rescission within two years after such exercise, payment or
delivery; provided, however, that the Corporation may, in its
discretion, in any individual case provide for waiver in whole or
in part of compliance with the provisions of this Section 7(e).
Within ten days after receiving such a notice from the
Corporation, the Participant shall pay to the Corporation the
amount of any gain realized or payment received as a result of the
rescinded exercise, payment or delivery pursuant to an Award. Such
payment shall be made either in cash or by returning to the
Corporation the number of shares of Stock that the Participant
received in connection with the rescinded exercise, payment or
delivery. In the case of any Participant whose employment is
terminated by the Corporation and its subsidiaries without "cause"
(as defined in the Award agreement), however, a failure of the
Participant to comply with the provisions of Section 7(e)(i) after
such termination of employment shall not in itself cause
rescission or require repayment with respect to any Award
exercised, paid or delivered before such termination.
<PAGE>-34-
8. Performance and Annual Incentive Awards.
(a) Performance Conditions. The right of a Participant to exercise
or receive a grant or settlement of any Award, and the timing thereof,
may be subject to such performance conditions as may be specified by the
Committee. The Committee may use such business criteria and other
measures of performance as it may deem appropriate in establishing any
performance conditions, and may exercise its discretion to reduce or
increase the amounts payable under any Award subject to performance
conditions, except as limited under Sections 8(b) and 8(c) hereof in the
case of a Performance Award or Annual Incentive Award intended to qualify
under Code Section 162(m).
(b) Performance Awards Granted to Designated Covered Employees. If
the Committee determines that a Performance Award to be granted to an
Eligible Person who is or may become a Covered Employee should qualify as
"performance-based compensation" for purposes of Code Section 162(m), the
grant, exercise and/or settlement of such Performance Award shall be
contingent upon achievement of preestablished performance goals and other
terms set forth in this Section 8(b).
(i) Performance Goals Generally. The performance goals for
such Performance Awards shall consist of one or more business
criteria and a targeted level or levels of performance and
associated maximum Award payments with respect to each of such
criteria, as specified by the Committee consistent with this
Section 8(b). Performance goals shall be objective and shall
otherwise meet the requirements of Code Section 162(m) and
regulations thereunder (including Regulation 1.162-27 and
successor regulations thereto), including the requirement that the
level or levels of performance targeted by the Committee result in
the achievement of performance goals being "substantially
uncertain." The Committee may determine that such Performance
Awards shall be granted, exercised and/or settled upon achievement
of any performance goal or that more than one performance goal
must be achieved as a condition to grant, exercise and/or
settlement of such Performance Awards. Performance goals may
differ for Performance Awards granted to any one Participant or to
different Participants.
(ii) Business Criteria. One or more of the following
business criteria for the Corporation, as defined by the
Committee, on a consolidated basis, and/or for specified
subsidiaries or business units of the Corporation (except with
respect to the total shareholder return and earnings per share
criteria), shall be used by the Committee in establishing
performance goals for such Performance Awards: (1) earnings per
share; (2) revenues; (3) cash flow; (4) cash flow return on
investment; (5) return on assets, return on investment, return on
capital, return on equity; (6) economic value added; (7) operating
margin; (8) net income; pretax earnings; pretax earnings before
interest, depreciation and amortization; pretax operating earnings
after interest expense and before incentives, service fees, and
extraordinary or special items; operating earnings; income from
operations; (9) total shareholder return; (10) any of the above
goals as compared to the performance of a published or special
index deemed applicable by the Committee including, but not
limited to, the Standard & Poor's 500 Stock Index or a group of
comparator companies; and (11) any criteria comparable to those
listed above that shall be approved by the Committee. One or more
of the foregoing business criteria shall also be exclusively used
in establishing performance goals for Annual Incentive Awards
granted to a Covered Employee under Section 8(c) hereof.
<PAGE>-35-
(iii) Performance Period; Timing for Establishing
Performance Goals. Achievement of performance goals in respect of
such Performance Awards shall be measured over a performance
period, which may overlap with another performance period or
periods, of up to ten years, as specified by the Committee.
Performance goals shall be established not later than 90 days
after the beginning of any performance period applicable to such
Performance Awards, or at such other date as may be required or
permitted for "performance-based compensation" under Code Section
162(m).
(iv) Performance Award Pool. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for
purposes of measuring performance of the Corporation in connection
with Performance Awards. The amount of such Performance Award pool
shall be based upon the achievement of a performance goal or goals
based on one or more of the business criteria set forth in Section
8(b)(ii) hereof during the given performance period, as specified
by the Committee in accordance with Section 8(b)(iii) hereof. The
Committee may specify the amount of the Performance Award pool as
a percentage of any of such business criteria, a percentage
thereof in excess of a threshold amount, or as another amount
which need not bear a strictly mathematical relationship to such
business criteria.
(v) Settlement of Performance Awards; Other Terms.
Settlement of such Performance Awards shall be in cash, Stock,
other Awards or other property, including deferred payments in any
such forms, in the discretion of the Committee. The Committee may,
in its discretion, reduce the amount of a settlement otherwise to
be made in connection with such Performance Awards, but may not
exercise discretion to increase any such amount payable to a
Covered Employee in respect of a Performance Award subject to this
Section 8(b). The Committee shall specify the circumstances in
which such Performance Awards shall be paid or forfeited in the
event of termination of employment by the Participant prior to the
end of a performance period or settlement of Performance Awards.
(c) Annual Incentive Awards Granted to Designated Covered
Employees. If the Committee determines that an Annual Incentive Award to
be granted to an Eligible Person who is or may become a Covered Employee
should qualify as "performance-based compensation" for purposes of Code
Section 162(m), the grant, exercise and/or settlement of such Annual
Incentive Award shall be contingent upon achievement of preestablished
performance goals and other terms set forth in this Section 8(c).
(i) Annual Incentive Award Pool. The Committee may establish
an Annual Incentive Award pool, which shall be an unfunded pool,
for purposes of measuring performance of the Corporation in
connection with Annual Incentive Awards. The amount of such Annual
Incentive Award pool shall be based upon the achievement of a
performance goal or goals based on one or more of the business
criteria set forth in Section 8(b)(ii) hereof during the given
performance period, as specified by the Committee in accordance
with Section 8(b)(iii) hereof. The Committee may specify the
amount of the Annual Incentive Award pool as a percentage of any
of such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a
strictly mathematical relationship to such business criteria.
(ii) Potential Annual Incentive Awards. Not later than the
end of the 90th day after the beginning of each fiscal year, or at
such other date as may be required or permitted in the case of
Awards intended to be "performance-based compensation" under Code
Section 162(m), the Committee shall determine the Eligible Persons
who will potentially receive Annual Incentive Awards, and the
amounts potentially payable thereunder, for that fiscal year,
either out of an Annual Incentive Award pool established by such
date under Section 8(c)(i) hereof or as individual Annual
Incentive Awards. In the case of individual Annual Incentive
Awards intended to qualify under Code Section 162(m), the amount
potentially payable shall be based upon the achievement of a
performance goal or goals based on one or more of the business
criteria set forth in Section 8(b)(ii) hereof in the given
performance year, as specified by the Committee; in other cases,
such amount shall be based on such criteria as shall be
established by the Committee. In all cases, the maximum Annual
Incentive Award of any Participant shall be subject to the
limitation set forth in Section 5 hereof.
<PAGE>-36-
(iii) Payout of Annual Incentive Awards. After the end of
each fiscal year, the Committee shall determine the amount, if
any, of (A) the Annual Incentive Award pool, and the maximum
amount of potential Annual Incentive Award payable to each
Participant in the Annual Incentive Award pool, or (B) the amount
of potential Annual Incentive Award otherwise payable to each
Participant. The Committee may, in its discretion, determine that
the amount payable to any Participant as a final Annual Incentive
Award shall be increased or reduced from the amount of his or her
potential Annual Incentive Award, including a determination to
make no final Award whatsoever, but may not exercise discretion to
increase any such amount in the case of an Annual Incentive Award
intended to qualify under Code Section 162(m). The Committee shall
specify the circumstances in which an Annual Incentive Award shall
be paid or forfeited in the event of termination of employment by
the Participant prior to the end of a fiscal year or settlement of
such Annual Incentive Award.
(d) Written Determinations. All determinations by the Committee as
to the establishment of performance goals, the amount of any Performance
Award pool or potential individual Performance Awards and as to the
achievement of performance goals relating to Performance Awards under
Section 8(b), and the amount of any Annual Incentive Award pool or
potential individual Annual Incentive Awards and the amount of final
Annual Incentive Awards under Section 8(c), shall be made in writing in
the case of any Award intended to qualify under Code Section 162(m). The
Committee may not delegate any responsibility relating to such
Performance Awards or Annual Incentive Awards.
(e) Status of Section 8(b) and Section 8(c) Awards under Code
Section 162(m). It is the intent of the Corporation that Performance
Awards and Annual Incentive Awards under Sections 8(b) and 8(c) hereof
granted to persons who are designated by the Committee as likely to be
Covered Employees within the meaning of Code Section 162(m) and
regulations thereunder (including Regulation 1.162-27 and successor
regulations thereto) shall, if so designated by the Committee, constitute
"performance-based compensation" within the meaning of Code Section
162(m) and regulations thereunder. Accordingly, the terms of Sections
8(b), (c), (d) and (e), including the definitions of Covered Employee and
other terms used therein, shall be interpreted in a manner consistent
with Code Section 162(m) and regulations thereunder. If any provision of
the Plan as in effect on the date of adoption or any agreements relating
to Performance Awards or Annual Incentive Awards that are designated as
intended to comply with Code Section 162(m) does not comply or is
inconsistent with the requirements of Code Section 162(m) or regulations
thereunder, such provision shall be construed or deemed amended to the
extent necessary to conform to such requirements.
9. Change of Control. In the event of a "Change of Control," the
following provisions shall apply unless otherwise provided in the
Award agreement:
(a) Options and SARs. Any Option or SAR carrying a right to
exercise that was not previously exercisable and vested shall become
fully exercisable and vested as of the time of the Change of Control and
shall remain exercisable and vested for the balance of the stated term of
such Option or SAR without regard to any termination of employment by the
Participant, subject only to applicable restrictions set forth in Section
10(a) hereof;
<PAGE>-37-
(b) Restricted Stock and Deferred Stock Units. The restrictions,
deferral of settlement, and forfeiture conditions applicable to any
Restricted Stock or Deferred Stock Unit granted under the Plan shall
lapse and such Awards shall be deemed fully vested as of the time of the
Change of Control, except to the extent of any waiver by the Participant
and subject to applicable restrictions set forth in Section 10(a) hereof;
and
(c) Other Awards. The rights and obligations respecting, and the
payment of, all other Awards under the Plan shall be governed solely by
the provisions of the Severance Benefit Plan.
10. General Provisions.
(a) Compliance with Legal and Other Requirements. The Corporation
may, to the extent deemed necessary or advisable by the Committee,
postpone the issuance or delivery of Stock or payment of other benefits
under any Award until completion of such registration or qualification of
such Stock or other required action under any federal or state law, rule
or regulation, listing or other required action with respect to any stock
exchange or automated quotation system upon which the Stock or other
securities of the Corporation are listed or quoted, or compliance with
any other obligation of the Corporation, as the Committee may consider
appropriate, and may require any Participant to make such
representations, furnish such information and comply with or be subject
to such other conditions as it may consider appropriate in connection
with the issuance or delivery of Stock or payment of other benefits in
compliance with applicable laws, rules, and regulations, listing
requirements, or other obligations. The foregoing notwithstanding, in
connection with a Change of Control, the Corporation shall take or cause
to be taken no action, and shall undertake or permit to arise no legal or
contractual obligation, that results or would result in any postponement
of the issuance or delivery of Stock or payment of benefits under any
Award or the imposition of any other conditions on such issuance,
delivery or payment, to the extent that such postponement or other
condition would represent a greater burden on a Participant than existed
on the 90th day preceding the Change of Control.
(b) Limits on Transferability; Beneficiaries. No Award or other
right or interest of a Participant under the Plan shall be pledged,
hypothecated or otherwise encumbered or subject to any lien, obligation
or liability of such Participant to any party (other than the Corporation
or a subsidiary), or assigned or transferred by such Participant
otherwise than by will or the laws of descent and distribution or to a
Beneficiary upon the death of a Participant, and such Awards or rights
that may be exercisable shall be exercised during the lifetime of the
Participant only by the Participant or his or her guardian or legal
representative, except that Awards and other rights (other than ISOs and
SARs in tandem therewith) may be transferred to one or more Beneficiaries
or other transferees during the lifetime of the Participant, and may be
exercised by such transferees in accordance with the terms of such Award,
but only if and to the extent such transfers are permitted by the
Committee pursuant to the express terms of an Award agreement (subject to
any terms and conditions which the Committee may impose thereon). A
Beneficiary, transferee, or other person claiming any rights under the
Plan from or through any Participant shall be subject to all terms and
conditions of the Plan and any Award agreement applicable to such
Participant, except as otherwise determined by the Committee, and to any
additional terms and conditions deemed necessary or appropriate by the
Committee.
<PAGE>-38-
(c) Adjustments. In the event that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, share exchange,
liquidation, dissolution or other similar corporate transaction or event
affects the Stock such that an adjustment is determined by the Committee
to be appropriate under the Plan, then the Committee shall, in such
manner as it may deem equitable, adjust any or all of (i) the number and
kind of shares of Stock which may be delivered in connection with Awards
granted thereafter, (ii) the number and kind of shares of Stock by which
annual per-person Award limitations are measured under Section 5 hereof,
(iii) the number and kind of shares of Stock subject to or deliverable in
respect of outstanding Awards and (iv) the exercise price, grant price or
purchase price relating to any Award and/or make provision for payment of
cash or other property in respect of any outstanding Award. In addition,
the Committee is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Awards (including
Performance Awards and performance goals, and Annual Incentive Awards and
any Annual Incentive Award pool or performance goals relating thereto) in
recognition of unusual or nonrecurring events (including, without
limitation, events described in the preceding sentence, as well as
acquisitions and dispositions of businesses and assets) affecting the
Corporation, any subsidiary or any business unit, or the financial
statements of the Corporation or any subsidiary, or in response to
changes in applicable laws, regulations, accounting principles, tax rates
and regulations or business conditions or in view of the Committee's
assessment of the business strategy of the Corporation, any subsidiary or
business unit thereof, performance of comparable organizations, economic
and business conditions, personal performance of a Participant, and any
other circumstances deemed relevant; provided that no such adjustment
shall be authorized or made if and to the extent that such authority or
the making of such adjustment would cause Options, SARs, Performance
Awards granted under Section 8(b) hereof or Annual Incentive Awards
granted under Section 8(c) hereof to Participants designated by the
Committee as Covered Employees and intended to qualify as
"performance-based compensation" under Code Section 162(m) and
regulations thereunder to otherwise fail to qualify as "performance-based
compensation" under Code Section 162(m) and regulations thereunder.
(d) Taxes. The Corporation and any subsidiary is authorized to
withhold from any Award granted, any payment relating to an Award under
the Plan, including from a distribution of Stock, or any payroll or other
payment to a Participant, amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an
Award, and to take such other action as the Committee may deem advisable
to enable the Corporation and Participants to satisfy obligations for the
payment of withholding taxes and other tax obligations relating to any
Award. This authority shall include authority to withhold or receive
Stock or other property and to make cash payments in respect thereof in
satisfaction of a Participant's tax obligations, either on a mandatory or
elective basis in the discretion of the Committee. However, this
authority shall not include withholding of taxes above the statutorily
required withholding amounts where such excess withholding would result
in an earnings charge to the Corporation under U.S. Generally Accepted
Accounting Principles.
(e) Changes to the Plan and Awards. The Board, or the Committee
acting pursuant to such authority as may be delegated to it by the Board,
may amend, alter, suspend, discontinue or terminate the Plan or the
Committee's authority to grant Awards under the Plan without the consent
of shareholders or Participants, except that any amendment or alteration
to the Plan shall be subject to the approval of the Corporation's
shareholders not later than the annual meeting next following such Board
action if such shareholder approval is required by any federal or state
law or regulation or the rules of any stock exchange or automated
quotation system on which the Stock may then be listed or quoted, and the
Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to shareholders for approval; provided that, without
the consent of an affected Participant, no such Board action may
materially and adversely affect the rights of such Participant under any
previously granted and outstanding Award. The Committee may waive any
conditions or rights under, or amend, alter, suspend, discontinue or
terminate any Award theretofore granted and any Award agreement relating
thereto, except as otherwise provided in the Plan; provided that, without
the consent of an affected Participant, no such Committee action may
materially and adversely affect the rights of such Participant under such
Award. Notwithstanding anything in the Plan to the contrary, if any right
under this Plan would cause a transaction to be ineligible for pooling of
interest accounting that would, but for the right hereunder, be eligible
for such accounting treatment, the Committee may modify or adjust the
right so that pooling of interest accounting shall be available,
including the substitution of Stock having a Fair Market Value equal to
the cash otherwise payable hereunder for the right which caused the
transaction to be ineligible for pooling of interest accounting.
<PAGE>-39-
(f) Limitation on Rights Conferred under Plan. Neither the Plan
nor any action taken hereunder shall be construed as (i) giving any
Eligible Person or Participant the right to continue as an Eligible
Person or Participant or in the employ or service of the Corporation or a
subsidiary, (ii) interfering in any way with the right of the Corporation
or a subsidiary to terminate any Eligible Person's or Participant's
employment or service at any time, (iii) giving an Eligible Person or
Participant any claim to be granted any Award under the Plan or to be
treated uniformly with other Participants and employees, or (iv)
conferring on a Participant any of the rights of a shareholder of the
Corporation unless and until the Participant is duly issued or
transferred shares of Stock in accordance with the terms of an Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant
or obligation to deliver Stock pursuant to an Award, nothing contained in
the Plan or any Award shall give any such Participant any rights that are
greater than those of a general creditor of the Corporation; provided
that the Committee may authorize the creation of trusts and deposit
therein cash, Stock, other Awards or other property, or make other
arrangements to meet the Corporation's obligations under the Plan. Such
trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant. The trustee of such trusts may be
authorized to dispose of trust assets and reinvest the proceeds in
alternative investments, subject to such terms and conditions as the
Committee may specify and in accordance with applicable law.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan
by the Board nor its submission to the shareholders of the Corporation
for approval shall be construed as creating any limitations on the power
of the Board or a committee thereof to adopt such other compensation and
incentive arrangements for employees, agents and brokers of the
Corporation and its subsidiaries as it may deem desirable.
(i) Payments in the Event of Forfeitures; Fractional Shares.
Unless otherwise determined by the Committee, in the event of a
forfeiture of an Award with respect to which a Participant paid cash or
other consideration, the Participant shall be repaid the amount of such
cash or other consideration. No fractional shares of Stock shall be
issued or delivered pursuant to the Plan or any Award. The Committee
shall determine whether cash, other Awards or other property shall be
issued or paid in lieu of such fractional shares or whether such
fractional shares or any rights thereto shall be forfeited or otherwise
eliminated.
(j) Governing Law. The validity, construction and effect of the
Plan, any rules and regulations under the Plan, and any Award agreement
shall be determined in accordance with Indiana law, without giving effect
to principles of conflicts of laws, and applicable federal law.
(k) Awards under Preexisting Plans. No further awards shall be
granted under the Preexisting Plans, after the Effective Date with
respect to the EVSP and after Midnight, May 15, 1997 with respect to the
Stock Option Plan. The Committee may waive any conditions or rights under
or amend or alter any awards granted under the Preexisting Plans to the
extent provided in either (i) the Preexisting Plan under which the award
was made or (ii) Section 10(e) hereof.
(l) Plan Effective Date and Shareholder Approval. The Plan has
been adopted by the Board as of the Effective Date, subject to approval
by the shareholders of the Corporation.
<PAGE>-40-
Exhibit 10(b)
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.
<PAGE>-41-
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.
<PAGE>-42-
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
<PAGE>-43-
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.
<PAGE>-44-
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.
<PAGE>-45-
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.
<PAGE>-46-
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
<PAGE>-47-
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.
<PAGE>-48-
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.
****************
<PAGE>-49-
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.
<PAGE>-50-
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.
<PAGE>-51-
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
<PAGE>-52-
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.
<PAGE>-53-
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: 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.
<PAGE>-54-
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.
<PAGE>-55-
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.
<PAGE>-56-
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.
<PAGE>-57-
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.
<PAGE>-58-
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.
<PAGE>-59-
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
<PAGE>-60-
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:__________________
<PAGE>-61-
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 __________ )
<PAGE>-62-
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.
**************************
Item 7 Increased Compensation to Bernard Brown to Market Value
On March 11, 1998, the Compensation Committee ("Committee") concluded that the
proposed target total direct compensation amount for Bernard Brown was too low
relative to similar Corporate positions in the United States. The Total Direct
Compensation for Mr. Brown was decided in the amount of $704,000 which
represents a 50% blend in both the U.S. and U.K. market data.
<PAGE>-63-
******************************
Item 8 Payments to Ian Rolland Upon Retirement
On March 11, 1998, the Compensation Committee ("Committee") agreed that upon Ian
Rolland's retirement he would receive a payment representing pro rata shares of
the 1996-1998, 1997-1999 and 1998-2000 Executive Value Sharing Plan ("EVSP")
cycles under the Lincoln National Corporation 1997 Incentive Compensation Plan
("ICP")and the predecessor 1994 Amended and Restated Lincoln National
Corporation Executive Value Sharing Plan ("1994 Plan"). In recognition of Mr.
Rolland's significant contributions to developing and implementing the steps
necessary for the future strategic direction of the Corporation the Committee
and Mr. Rolland agreed that he would receive $3,750,000 representing full
payment for performance cycles referred to above. The value of all restricted
stock units were paid to Mr. Rolland in cash within thirty (30) days after the
units vested on January 1, 1999. All other deferred compensation obligations
under the Lincoln National Corporation Executive Deferred Compensation Plan for
Employees were discharged through a lump sum payment to Mr. Rolland upon his
retirement. Mr. Rolland and the Committee agreed that the payment of $4,657,000
and the payout of the restricted stock units fully satisfied the Corporation's
EVSP bonus obligations to him under both the 1994 Plan and the ICP
***********************************
Item 9 Compensation to Ian Rolland for Services Performed After Retirement
The Board of Directors agreed on May 14, 1998, that Ian Rolland would serve as
Chairman of the Board of Directors of the Corporation after his retirement as
Chief Executive Officer of the Corporation on July 1, 1998, and would continue
to represent the Corporation on the Board of the American Counsil of Life
Insurance. Mr. Rolland received $100,000 for services rendered in two equal
payments on August 31, 1998 and November 30, 1998.
**********************************
Item 10 Bonus Awards to Ian Rolland and Jon Boscia
On June 30, 1998, the Compensation Committee approved bonus award amounts for
both Jon Boscia and Ian Rolland of $124,000 and $907,000 respectively.
**********************************
Item 11: 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 12 Agreement, Waiver and General Release, signed by Jeffrey J. Nick on June
4, 1999 and accepted by Lincoln National Corporation:
<PAGE>-64-
AGREEMENT, WAIVER AND GENERAL RELEASE
This Agreement, Waiver and General Release ("Agreement") is made and
entered into on , 1999 by and between Jeffrey J. Nick (hereinafter referred to
as "Mr. Nick"), and Lincoln National Corporation, their 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 (hereinafter individually and
collectively referred to as "LFG"), and shall become effective eight (8) days
after the date of execution hereof by Mr. Nick.
RECITALS
A. Mr. Nick has been employed with LFG from April 17, 1989 and tendered
his resignation attached as Exhibit A.
B. Mr. Nick and LFG have carefully explored this situation and in spirit
of compromise have agreed to enter into the following Agreement.
In consideration of the premises and mutual promises and agreements of
the parties contained herein, it is agreed as follows:
1. Mr. Nick will receive as severance Four Hundred Sixty Thousand Dollars
and no/100 ($460,000), paid bi-weekly, less applicable withholding
taxes and deductions, which includes any amounts due under the LNC
Employees' Severance Pay Policy Plan.
2. Mr. Nick's employee medical, dental and life benefit elections shall
continue until July 1, 1999. At that time, Mr. Nick's COBRA elections
period commences.
3. Mr. Nick will be paid Three Hundred Sixty-Eight Thousand Dollars and
no/100 ($368,000) which is a pro rata share of his 1999 EVSP bonus,
less applicable taxes, paid within one week after this Agreement
becomes effective.
4. Mr. Nick's outstanding unvested non-qualified Lincoln stock options
will be vested as of July 1, 1999 and will be exercisable until
October 1, 1999. His 1997 restricted stock grant of 4586 shares will
be vested as of August 2, 1999 and the dividend equivalent rights will
be paid out in cash as of that date. All of his restricted phantom
units and dividend equivalent rights (20,918.2527 units in total as of
May 13, 1997) will vest as of August 2, 1999 and will be paid out in a
lump sum by August 9, 1999.
5. The 18,000 restricted shares that Mr. Nick was granted under the Long
Term Incentive Plan will be forfeited.
6. Mr. Nick will be paid any accrued and unused managed time as of July
1, 1999.
7. Mr. Nick shall receive the career transition assistance plan for
Key Executives from Right Management Consultants.
8. Mr. Nick will be eligible for up to $10,000 for financial planning
through 1999 and up to $1,000 for tax return preparation assistance
for the 1999 tax year.
9. Mr. Nick's split dollar policy will be cancelled. He will be
reimbursed for any taxes he incurs as a result of such cancellation on
a "grossed up" basis.
<PAGE>-65-
10. Mr. Nick, for and in consideration of receiving the above, waives
any right to personal recovery and hereby irrevocably, unconditionally
and generally releases, acquits, and forever discharges to the fullest
extent permitted by law, LFG from all charges, complaints, actions,
causes of actions, suits, rights, grievances, costs, losses, debts,
expenses, sums of money, accounts, covenants, contracts, agreements,
claims, damages, liabilities, obligations, and demands of any nature
whatsoever, known or unknown, in law or in equity ("Claim"or"Claims"),
which against them Mr. Nick at any time heretofore ever had, owned,
or held or claimed to have had, owned, or held or which Mr. Nick now
has, owns, or holds, or claims to have, own, or hold, or which Mr.
Nick can, shall or may have, or which Mr. Nick's heirs, executors,
administrators, personal representatives, successors, or assigns
hereinafter can, shall or may have, in any way connected with or
relating to Mr. Nick's employment and/or the termination of his
employment with LFG.
11. Paragraph 10 above includes, but is not limited to, claims, disputes
or causes of action or right to personal recovery under tort,
contract, or other laws of the State of Indiana or the Commonwealth of
Pennsylvania (including, but by no means limited to, claims for
unemployment compensation and 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, fraud [actual or constructive]), defamation
[libel or slander], under the Age Discrimination in Employment
Act of 1967, 29 U.S.C.ss.621, et seq., as amended by the Older
Worker's Benefit Protection Act ("OWBPA"), under Title VII of the
Civil Rights Act of 1964, 42 U.S.C.ss.2000e, et seq., as amended, by
the Civil Rights Act of 1991, under the Americans with Disabilities
Act of 1990, 42 U.S.C.ss.12101, et seq., as amended, under the Family
and Medical Leave Act of 1993, 29 U.S.C.ss.2601, et seq., under 42
U.S.C.ss.1981, under the Fair Labor Standards Act, 29 U.S.C.ss.201,
et seq., 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
and the Commonwealth of Pennsylvania, or any political subdivision
of the State of Indiana and the Commonwealth of Pennsylvania.
12. Mr. Nick knowingly and voluntarily specifically waives any rights or
claims arising under 29 U.S.C.621 et seq., as amended by the OWBPA
and, more specifically, any right or claim under 29 U.S.C.626. Mr.
Nick 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.
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.
13. It is provided that for a period of seven (7) days following the
execution of this Agreement, Mr. Nick may revoke said Agreement by
notice to LFG. Further, this Agreement shall not become effective or
enforceable until the revocation period has expired.
14. Mr. Nick 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. Mr. Nick further understands,
acknowledges and agrees that the payment of any consideration is not
an admission of liability on the part of LFG, but to the contrary,
represents a negotiated compromise and agreement. This Agreement,
shall not in any way be interpreted to render Mr. Nick a "prevailing
party" for any purpose, including, but not limited to, an award of
attorney's fees under any statute or otherwise.
<PAGE>-66-
15. Mr. Nick represents that he has not filed any complaints or claims
against LFG with any local, state or federal court or agency, that Mr.
Nick 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 LFG
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 LFG to enter into
this Agreement, Mr. Nick covenants and agrees not to sue, or join with
others in suing, LFG on any of the released Claims.
16. Mr. Nick, due to the knowledge and information he possesses which was
gained as a result of his employment with LFG, hereby agrees to make
himself available, at reasonable times, to cooperate, consult,
testify, etc. with respect to current and future legal actions
including but not limited to litigation, arbitrations, mediation,
administrative, and/or regulatory proceedings in which LFG is a party.
LFG will pay Mr. Nick 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.
17. Mr. Nick will be entitled to indemnification by LFG to the extent
permitted by its bylaws on the same basis as the indemnification
provided to other former officers. Mr. Nick will be entitled to
coverage under LFG's directors and officers liability insurance policy
on the same basis as the coverage provided to other former officers.
18. As a result of Mr. Nick's positions as Chief Executive Officer of
both Lincoln National Investment Companies, Inc. and Delaware
Management Holdings, Inc. and his service on LFG's Senior Management
Committee since May of 1995, he has been instrumental in developing
the strategic direction of LFG's investment management businesses
and has participated in the development of LFG's overall strategic
direction. He also has developed, obtained or learned specific
confidential information and trade secrets which are the property
of LFG. Mr. Nick hereby covenants and agrees to use his best efforts
and utmost diligence to guard and protect such confidential
information and trade secrets and to not disclose or permit to be
disclosed to any third party by any method whatsoever any such
confidential information or trade secrets. Confidential information
or trade secrets shall include, but not be limited to, any and all
records, notes, memoranda, data, ideas, processes, methods, devices,
programs, computer software, writings, research, personnel
information, customer information, financial information, strategies,
plans or any information of whatever nature, in the possession or
control of LFG which has not or have not been published or disclosed
to the general public or which gives LFG an opportunity to obtain
an advantage over competitors who do not know or use it.
19. For a period of two (2) years following the execution of this
Agreement, Mr. Nick will not act as a director, officer, employee,
agent, consultant or advisor to, nor directly or indirectly become
associated with any person, firm, company or corporation whose
principal activity is competitive with LFG's third party investment
management businesses, including but not limited to those set out
in Exhibit A, nor will he directly or indirectly solicit or endeavor
to entice away from LFG any person who is currently employed by LFG or
any current wholesale/institutional customer of LFG's investment
management businesses. Mr. Nick specifically acknowledges that the
geographic region to which this restriction applies is national in
scope since that is the region in which Mr. Nick performed services
for LFG during the past two years. This restriction does not prohibit
Mr. Nick 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 the LFG investment management businesses which are
setout in Exhibit A. LFG will not object to Mr. Nick's service on the
boards of other companies as a director so long as there is no
conflict with the terms of this paragraph. Mr. Nick may request a
waiver by the Chief Executive Officer of LFG ("CEO") of the
applicability of this provision to specific activities in which
Mr. Nick contemplates engaging, in which case such waiver request
will be considered by the CEO in good faith, taking into consideration
all of the facts and circumstances.
<PAGE>-67-
20. For a period of three (3) years following the termination of Mr.
Nick's employment, he 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 National Corporation ("LNC") for the purpose of effecting an
acquisition of control of LNC or his directly investing in more than
1% of the common stock of LNC or (2) using confidential information or
trade secrets (as described in Paragraph 18 above) to assist any
person, entity or group of persons which intends to or does attempt to
effect an acquisition of control of LNC. The term "Control" shall be
defined for purposes of this paragraph to have the meaning of control
contained in Ind. Code Ann. Sec.
27-1-23-1(e) [Burns, 1998 Supp.].
21. Mr.Nick will receive as consideration for his covenants and agreements
contained in Paragraphs 19 and 20 of this Agreement the lump sum
payments of Two Hundred Seventy-three Thousand Dollars and no/100
($273,000) on July 1, 2000, and July 1, 2001. Mr. Nick acknowledges,
understands and agrees that all amounts that have not been paid will
be immediately forfeited if he breaches any provision specified in
Paragraphs 18, 19 or 20 during the term specified in each paragraph.
Mr. Nick acknowledges that the restrictions contained in such
paragraphs are reasonable and necessary to protect the legitimate
interests of LFG; and that, therefore, LFG shall be entitled to
seek preliminary and permanent injunctive and other equitable
relief (including, without limitation, an 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 LFG may be entitled. Mr. Nick hereby irrevocably consents
to the personal jurisdiction over him of the courts of the State of
Indiana and Commonwealth of Pennsylvania and of any Federal court
located in such state or commonwealth in connection with any action
or proceeding arising out of or relating to this Paragraph 21 or
any related breach of this Agreement involved in such action or
proceeding and further agrees, and shall not contest, that the
proper places for filing and maintaining any such action or
proceeding shall be in the State of Indiana or Commonwealth of
Pennsylvania.
22. Mr. Nick 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.
23. Mr. Nick represents and acknowledges that he is not relying and has
not relied on any representation or statements made by LFG, with
respect to any of the matters released or with regard to his rights or
asserted rights in connection therewith. Mr. Nick 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.
24. Mr. Nick 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 for any purpose whatsoever without prior
written permission from LFG, except to the extent necessary to Right
Management Consultants, Mr. Nick's attorney, tax preparer, accountant,
or other financial advisor, or as required by law.
25. LFG hereby releases Mr. Nick of any and all claims, demands, actions,
liabilities or indebtedness, whether known or unknown, arising out of
his employment and services provided to LFG, excepting, however, claims
not known to LFG involving fraud, theft, or misappropriation of LFG
property, assets, confidential information or trade secrets or which
arise under this Agreement, including, but not limited to, Paragraphs
18, 19, 20 and 21.
26. 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.
<PAGE>-68-
27. This Agreement shall be binding upon Mr. Nick and upon his heirs,
executors, administrators, personal representatives, successors and
assigns, and shall inure to the benefit of LFG, and to their
respective heirs, administrators, representatives, executors,
successors and assigns, as the case may be.
28. This Agreement shall in all respects be interpreted, enforced and
governed under the internal laws (and not the conflicts of laws rules)
of the State of Indiana. 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.
29. 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. This Agreement may not be modified or
amended except by a written agreement signed by the parties hereto.
<PAGE>-69-
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 LFG. 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 LFG, 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:____________________, 1999
Jeffrey J. Nick
STATE OF ____________ )
) SS:
COUNTY OF__________ )
Subscribed and sworn to before me, a Notary Public in and fo
said County and State, this day of , 1999.
- ------------------------------------------------
Notary Public
My Commission Expires:
County of Residence:
<PAGE>-70-
ACCEPTANCE OF LFG
The undersigned accepts the foregoing Agreement on behalf of LFG.
Dated:____________________, 1999
----------------------------------
Authorized to execute this Agreement
on behalf of Lincoln National
Corporation
STATE OF_____________ )
) SS:
COUNTY OF __________ )
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this day of , 1999.
- ------------------------------------------------
Notary Public
My Commission Expires:
County of Residence:
<PAGE>-71-
EXHIBIT A
TO: C. Suzanne Womack
Secretary, Lincoln National Corporation
Joanne O. Hutcheson
Senior Vice President, Delaware Management Holdings, Inc.
SUBJECT: Resignation
Effective __________, 1999, I resign as director and/or officer of all
Lincoln National Corporation ("LNC"), Delaware Management Holdings, Inc.
("DMH"), Lincoln National Investment Companies, Inc. ("LNIC") and all of the
entities which are controlled directly or indirectly by LNC, DMH or LNIC in
which I hold a director or officer position, including, but not limited to the
following:
Chief Executive Officer, President and Director:
Lincoln National Investment Companies, Inc.
Delaware Management Holdings, Inc.
Chief Executive Officer, President, Chairman and Director:
DMH Corporation
Delvoy, Inc.
Delaware Management Business Trust
Founders Holdings, Inc.
Chief Executive Officer, Chairman and Director:
Delaware Management Company, Inc.
Delaware Distributors, Inc.
Delaware International Holdings Ltd.
Delaware International Advisers Ltd.
Chief Executive Officer and Chairman:
Delaware Management Company of Delaware Management Business Trust
Chairman and Director:
Delaware Capital Management, Inc.
Director:
Delaware Service Company, Inc.
Retirement Financial Services, Inc.
Lynch & Mayer, Inc.
Vantage Global Advisors
Chairman:
<PAGE>-72-
Delaware Investment Advisers of Delaware Management Business
Trust
Delaware Distributors, L.P.
Effective ________________, 1999, I further resign as a director
and/or officer of the Lincoln National Income Fund, Inc., Lincoln National
Convertible Securities Fund, Inc., and each fund in the Delaware Investment
Family of Funds.
Effective July 1, 1999, I resign my employment with LNIC.
Dated:____________________, 1999
Jeffrey J. Nick
<PAGE>-73-
Exhibit 12
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months
Ended June 30 Year Ended December 31,
-----------------------
(millions of dollars) 1999 1998 1998 1997(4) 1996 1995 1994
- --------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income before Federal
Income Taxes and
Accounting Change.................. 406.2 379.0 697.4 1427.1 692.7 626.6 376.3
Equity (Earnings) in
Unconsolidated Affiliates.......... (2.7) (1.5) (3.3) (2.1) (1.4) (12.4) (14.6)
Sub-total of Fixed Charges.......... 79.2 62.0 144.1 113.3 108.6 94.4 66.6
----- ---- ----- ------ ------ ---- ----
Sub-total of Adjusted
Net Income...................... 482.7 439.5 838.2 1538.3 799.9 708.6 428.3
Interest on Annuities and
Financial Products................. 752.2 727.1 1446.2 1253.5 1185.6 1147.1 1064.5
----- ------ ------ ------ ------ ----- ------
Adjusted Income Base............ 1,234.9 1166.6 2284.4 2791.8 1985.5 1855.7 1492.8
Rent Expense........................ 40.6 33.0 81.3 62.5 71.6 65.7 51.3
Fixed Charges:
Interest and Debt Expense........... 65.7 51.0 117.1 92.5 84.7 72.5 49.5
Rent (Pro-rated).................... 13.5 11.0 27.0 20.8 23.9 21.9 17.1
---- ---- ----- ------- ---- ---- ----
Sub-total of Fixed Charges....... 79.2 62.0 144.1 113.3 108.6 94.4 66.6
Interest on Annuities and
Financial Products................. 752.2 727.1 1446.2 1253.5 1185.6 1147.1 1064.5
----- ----- ------ ------- ------ ------ ------
Sub-total of Fixed Charges....... 831.4 789.1 1590.3 1366.8 1294.2 1241.5 1131.1
Preferred Dividends (Pre-tax)....... * .1 .1 .2 .2 13.4 24.2
------ ----- ------ ------ ------ ------ ------
Total Fixed Charges.............. 831.4 789.2 1590.4 1367.0 1294.4 1254.9 1155.3
</TABLE>
*Less than $100,000
<TABLE>
<CAPTION>
Ratio of Earnings to Fixed Charges:
<S> <C> <C> <C> <C> <C> <C> <C>
Excluding Interest on
Annuities and Financial
Products (1) ..................... 6.09 7.09 5.82 13.57 7.37 7.51 6.43
Including Interest on
Annuities and Financial
Products (2)...................... 1.49 1.48 1.44 2.04 1.53 1.49 1.32
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividends (3)..................... 1.49 1.48 1.44 2.04 1.53 1.48 1.29
</TABLE>
(1) For purposes of determining this ratio, earnings consist of income before
federal income taxes and cumulative effect of accounting change adjusted
for the difference between income or losses from unconsolidated equity
investments and cash distributions from such investments, plus fixed
charges. Fixed charges consist of 1) interest and debt expense on short
and long-term debt and distributions to minority interest-preferred
securities of subsidiary companies and 2) the portion of operating leases
that are representative of the interest factor.
(2) Same as the ratio of earnings to fixed charges, excluding interest on
annuities and financial products, except fixed charges and earnings
include interest on annuities and financial products.
(3) Same as the ratio of earnings to fixed charges, including interest on
annuities and financial products, except that fixed charges include the
pre-tax earnings required to cover preferred stock dividend requirements.
(4) The coverage ratios for the year 1997 are higher than the other periods
shown due to the inclusion of the gain on sale of a major subsidiary in
net income.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements of Lincoln National Corporation and
is qualified in its entirety by reference to such condensed consolidated
financial statements.
</LEGEND>
<CIK> 0000059558
<NAME> Lincoln National Corporation
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<DEBT-HELD-FOR-SALE> 29,579,290,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 505,662,000
<MORTGAGE> 4,570,451,000
<REAL-ESTATE> 449,783,000
<TOTAL-INVEST> 37,362,562,000
<CASH> 2,151,089,000
<RECOVER-REINSURE> 3,121,344,000
<DEFERRED-ACQUISITION> 2,398,309,000
<TOTAL-ASSETS> 98,261,437,000
<POLICY-LOSSES> 20,198,324,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 20,579,499,000
<NOTES-PAYABLE> 1,837,260,000
0
1,012,000
<COMMON> 1,005,060,000
<OTHER-SE> 3,811,306,000
<TOTAL-LIABILITY-AND-EQUITY> 98,261,437,000
1,632,207,000
<INVESTMENT-INCOME> 1,410,376,000
<INVESTMENT-GAINS> (2,122,000)
<OTHER-INCOME> 313,225,000
<BENEFITS> 1,797,459,000
<UNDERWRITING-AMORTIZATION> 188,046,000
<UNDERWRITING-OTHER> 896,247,000
<INCOME-PRETAX> 406,198,000
<INCOME-TAX> 112,786,000
<INCOME-CONTINUING> 293,412,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293,412,000
<EPS-BASIC> 1.47<F1>
<EPS-DILUTED> 1.45<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> The per share data on this exhibit and throughout this 10-Q reflects the
implementation of a two-for-one split of Lincoln National Corporation's common
stock during the second quarter of 1999. The Exhibit 27 for prior periods have
not been restated.
</FN>
</TABLE>