Document:

Filed by Bowne Pure Compliance

Exhibit 10.68

COINSURANCE AGREEMENT

between the

AETNA LIFE INSURANCE AND ANNUITY COMPANY

(referred to as the Company)

and

LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK

(referred to as the Reinsurer)

Dated as of October 1, 1998

 

 

 

INDEX OF SCHEDULES

Schedule 1.1(A)     Policy Forms

Schedule 1.1(B)     Separate Account Assets

Schedule 1.1(C)     Separate Accounts

Schedule 1.1(D)     Third-Party Reinsurance

INDEX OF EXHIBITS

Exhibit A     Recapture Fee Formula

Exhibit B     Form of Security Trust Agreement

Exhibit C     Closing Date Liabilities Methodology

Exhibit D     Calculation of Reinsurance Trust Required Balance

 

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	ARTICLE I
	 	 	 	 
	DEFINITIONS
	 	 	 	 
	1.1 Definitions
	 	 	 	 
	 
	 	 	 	 
	ARTICLE II
	 	 	 	 
	BASIS OF COINSURANCE AND BUSINESS COINSURED
	 	 	 	 
	2.1 Coinsurance
	 	 	 	 
	2.2 Reinsurer Extra Contractual Obligations
	 	 	 	 
	2.3 Reinstatements, Conversions and Exchanges
	 	 	 	 
	2.4 Certain Policy Elements
	 	 	 	 
	2.5 Reserves
	 	 	 	 
	2.6 Separate Account Reserves
	 	 	 	 
	2.7 Policy Changes or Reductions
	 	 	 	 
	 
	 	 	 	 
	ARTICLE III
	 	 	 	 
	ACCOUNTINGS AND TRANSFER OF ASSETS
	 	 	 	 
	3.1 Ceding Commission
	 	 	 	 
	3.2 Transfer of Assets
	 	 	 	 
	3.3 Post-Closing Adjustments
	 	 	 	 
	3.4 Interim Monthly Accountings
	 	 	 	 
	3.5 Monthly Accountings
	 	 	 	 
	3.6 Monthly Payments
	 	 	 	 
	3.7 Delayed Payments
	 	 	 	 
	3.8 Offset Rights
	 	 	 	 
	3.9 Third-Party Reinsurance
	 	 	 	 
	3.10 Premium Taxes and Assessments
	 	 	 	 
	 
	 	 	 	 
	ARTICLE IV
	 	 	 	 
	POLICY ADMINISTRATION
	 	 	 	 
	4.1 Interim Servicing
	 	 	 	 
	4.2 Transfer of Servicing Obligations
	 	 	 	 
	4.3 Regulatory Matters
	 	 	 	 
	4.4 Policy Changes
	 	 	 	 
	 
	 	 	 	 
	ARTICLE V
	 	 	 	 
	OVERSIGHTS
	 	 	 	 
	5.1 Oversights
	 	 	 	 
	 
	 	 	 	 
	ARTICLE VI
	 	 	 	 
	CONDITIONS PRECEDENT
	 	 	 	 
	6.1 Conditions Precedent
	 	 	 	 
	 
	 	 	 	 
	ARTICLE VII
	 	 	 	 
	DUTY OF COOPERATION
	 	 	 	 
	7.1 Cooperation
	 	 	 	 
	 
	 	 	 	 
	ARTICLE VIII
	 	 	 	 
	DAC TAX
	 	 	 	 
	8.1 Election
	 	 	 	 

 

 

 

	 	 	 	 	 
	 
	 	 	 	 
	ARTICLE IX
	 	 	 	 
	INDEMNIFICATION AND RECAPTURE
	 	 	 	 
	9.1 Reinsurer’s Obligation to Indemnify
	 	 	 	 
	9.2 Company’s Obligation to Indemnify
	 	 	 	 
	9.3 Certain Definitions and Procedures
	 	 	 	 
	9.4 Security Trust Account and Recapture Rights
	 	 	 	 
	 
	 	 	 	 
	ARTICLE X
	 	 	 	 
	DISPUTE RESOLUTION
	 	 	 	 
	10.1 Other Disputes over Calculations
	 	 	 	 
	 
	 	 	 	 
	ARTICLE XI
	 	 	 	 
	INSOLVENCY
	 	 	 	 
	11.1 Insolvency Clause
	 	 	 	 
	 
	 	 	 	 
	ARTICLE XII
	 	 	 	 
	DURATION
	 	 	 	 
	12.1 Duration
	 	 	 	 
	12.2 Reinsurer’s Liability
	 	 	 	 
	12.3 Survival
	 	 	 	 
	 
	 	 	 	 
	ARTICLE XIII
	 	 	 	 
	MISCELLANEOUS
	 	 	 	 
	13.1 Notices
	 	 	 	 
	13.2 Confidentiality
	 	 	 	 
	13.3 Entire Agreement
	 	 	 	 
	13.4 Waivers and Amendments
	 	 	 	 
	13.5 No Third Party Beneficiaries
	 	 	 	 
	13.6 Assignment
	 	 	 	 
	13.7 Governing Law
	 	 	 	 
	13.8 Counterparts
	 	 	 	 
	13.9 Severability
	 	 	 	 
	13.10 Schedules, Exhibits and Paragraph Headings
	 	 	 	 
	13.11 Expenses
	 	 	 	 
	13.12 No Prejudice
	 	 	 	 

 

 

 

COINSURANCE AGREEMENT

THIS COINSURANCE AGREEMENT (the “Agreement”) made by and between Aetna Life Insurance and
Annuity Company, a Connecticut domiciled stock life insurance company (the “Company”) and Lincoln
Life & Annuity Company of New York, a New York domiciled stock life insurance company (the
“Reinsurer”).

WHEREAS, the Company has issued or reinsured from other insurance companies, including
Aetna Life Insurance Company, a Connecticut domiciled stock life insurance company (“ALIC”),
certain Policies (as defined below);

WHEREAS, the Company, ALIC, the Reinsurer, and The Lincoln National Life Insurance
Company, a stock life insurance company organized under the laws of the State of Indiana, have
entered into a Second Amended and Restated Asset Purchase Agreement, dated as of May 21, 1998
(the “Asset Purchase Agreement”),

pursuant to which the Company has agreed to cede and transfer to the Reinsurer certain liabilities
arising under the Policies (as defined below) and the Post-Closing Policies (as defined below)
for the consideration specified herein and the Reinsurer has agreed to reinsure such liabilities on the terms and conditions set forth
herein; and

WHEREAS, the Company desires that the Reinsurer perform certain administrative
functions on behalf of the Company with respect to the Policies, and the Company, ALIC and
Reinsurer have entered into the NY Administrative Services Agreement of even date herewith
(the “NY Administrative Services Agreement”) pursuant to which the Reinsurer shall provide such
administrative services.

NOW, THEREFORE, in consideration of the mutual and several promises and undertakings herein
contained, and for other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Company and the Reinsurer agree as follows:

ARTICLE I

DEFINITIONS

1.1 Definitions. The following terms shall have the respective meanings set forth below
throughout this Agreement:

“Accounting” means an Interim Monthly Accounting or a Monthly Accounting, as applicable.

“Affiliate” means, with respect to any Person, at the time in question, any other Person
Controlling, Controlled by or under common Control with such Person. “Control” (including the
terms “Controlling,” “Controlled by” and “under common Control with”) means the possession, direct
or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the
ownership of voting securities, the holding of policyholders’ proxies by contract other than a
commercial contract for goods or non-management services, or otherwise, unless the power is the
result of an official position with or corporate office held by the Person. Except as provided
otherwise in this Agreement, control is presumed to exist if any Person, directly or indirectly,
owns, controls, holds with the power to vote, or holds shareholders’ proxies representing 25% or
more of the voting securities of any other Person, or holds or controls sufficient policyholders’
proxies, or is entitled by contract or otherwise, to nominate, appoint or to elect the majority of
the board of directors or comparable governing body of any other Person.

“ALIAC” means Aetna Life Insurance and Annuity Company, a stock life insurance company
organized under the laws of the State of Connecticut.

“ALIC” means Aetna Life Insurance Company, a stock life insurance company organized under the
laws of the State of Connecticut.

“Ancillary Agreements” means the various agreements collectively defined as “Ancillary
Agreements” in the Asset Purchase Agreement.

 

 

 

“Annual Statement” means the Company’s convention form statutory annual statement, together
with all required schedules and supplements thereto, as filed with the Insurance Department of
the State of Connecticut.

“Applicable Law” means any domestic or foreign federal, state or local statute, law,
ordinance or code, or any written rules, regulations or administrative interpretations
issued by any Governmental Authority pursuant to

any of the foregoing, and any order, writ, injunction, directive, judgment or decree of a court
of competent jurisdiction applicable to the parties hereto.

“Asset Purchase Agreement” means the Second Amended and Restated Asset Purchase Agreement by
and among the Company, ALIC, the Reinsurer and The Lincoln National Life Insurance Company, dated
as of May 21, 1998.

“Books and Records” means the originals or copies of all customer lists, policy
information, policy forms and rating plans, disclosure and other documents and filings,
including statutory filings, required under all

Applicable Laws, administrative records, reinsurance records, claim records, sales records,
underwriting records, financial records, Tax records and compliance records in the
possession or control of the Company and relating principally to the operation of the Business
including, without limitation, any database, magnetic or optical media (to the extent not
subject to licensing restrictions) and any other form of recorded, computer generated or
stored information or process, but excluding: (a) the Company’s original certificate of
incorporation, bylaws, corporate seal, licenses to do business, minute books and other corporate
records relating to corporate organization and capitalization; (b) original Tax and corporate
accounting records relating to the Business; (c) any original books and records relating to the Retained Liabilities; (d) any records that are
subject to attorney-client privilege; and (e) the Retained Contracts and any records relating
thereto.

“Business” means marketing, issuing and administering the Policies in the United States and
the other business activities reasonably related thereto, in each case as currently conducted
by the Company or, where so specified herein, as to be conducted by the Reinsurer following the
Closing Date.

“Business Day” means any day other than a Saturday, Sunday, a day on which banking
institutions in the State of Connecticut are permitted or obligated by Applicable Law to
be closed or a day on which the New York Stock Exchange is closed for trading.

“Ceding Commission” means the aggregate ceding allowance payable by the Reinsurer to the
Company in connection with the reinsurance of the Policies hereunder.

“Closing” means the closing of the transact ions contemplated by this Agreement.

“Closing Balance Sheet” means the pro forma balance sheet of the Business as of the
last day of the second month preceding the month in which the Closing shall occur, which shall be
prepared and delivered by the Company to the Reinsurer not later than the fifth day prior to the
Closing Date in accordance with Article II of the Asset Purchase Agreement.

“Closing Date” means the date on which the Closing occurs.

“Closing Date Liabilities” means, as of any date, the General Account Reserves and other
statutory liabilities relating to the Business, which shall be (a) estimated and reflected in
the Closing Balance Sheet as of the last day

of the second month preceding the month in which the Closing shall occur; and (b) subsequently
adjusted and reflected in the Revised Closing Balance Sheet and Final Closing Balance Sheet as of
11:59 p.m. Eastern Time on the last day of the month immediately preceding the month in which the Closing Date falls. The
Closing Date Liabilities shall be determined and reported in accordance with the methodology set
forth on Exhibit C.

“Code” means the Internal Revenue Code of 1986, as amended, and the rules and regulations
thereunder.

“Commissions” mean all commissions, expense allowances, benefit credits and other fees and
compensation payable to Producers.

 

 

 

“Connecticut SAP” means the statutory accounting principles and practices prescribed
or permitted by the Insurance Department of the State of Connecticut.

“Contract Date” means May 21, 1998.

“Distribution Agreements” mean th e agreements between the Company, on one hand, and
Producers, on the other, with respect to the Policies as of April 13, 1998.

“Effective Date” means 12:01 a.m. Eastern Time on October 1, 1998.

“Election Notice” means a notice given by the Company to the Reinsurer with respect to the
exercise of recapture or Security Trust remedies pursuant to Section 9.4 hereof.

“Event of Default” means any event described in Section 9.4 hereof which gives rise to
Recapture Rights or other remedy.

“Extra Contractual Obligations” means all liabilities or obligations arising under the
Policies and Post-Closing Policies, exclusive of liabilities or obligations arising under the
express terms and conditions of the Policies and Post-Closing Policies and the other
Liabilities, but including, without limitation, any liability for fines, penalties, forfeitures,
punitive, special, exemplary or other form of extra-contractual damages, which liabilities or
obligations arise from any act, error or omission, whether or not intentional, negligent, in bad
faith or otherwise relating to: (a) the marketing, sale, underwriting, production, issuance,
cancellation or administration of the Policies or Post-Closing Policies; (b) the
investigation, defense, trial, settlement or handling of claims, benefits, or payments under
the Policies or Post-Closing Policies; or (c) the failure to pay, the delay in payment, or
errors in calculating or administering the payment of benefits, claims or any other amounts due
or alleged to be due under or in connection with the Policies or Post-Closing Policies.

“Final Closing Balance Sheet” means the final pro forma balance sheet of the Business as of
the Closing Date prepared in accordance with Article II of the Asset Purchase Agreement.

“GAAP” means United States generally accepted accounting principles as in effect from time to
time.

“General Account Reserves” means the general account statutory reserves of the Company before
reduction for accrued for expense allowances recognized in Separate Account Reserves (without
regard to the transactions contemplated by this Agreement) with respect to the Policies or
Post-Closing Policies, as applicable, determined in accordance with Connecticut SAP.

“Governmental Authority” means any court, administrative or regulatory agency or commission,
or other federal, state or local governmental authority or instrumentality or the National
Association of Securities Dealers or national securities exchanges having jurisdiction over any
party hereto.

“Interim Monthly Accounting” shall mean a monthly accounting prepared in accordance with
Connecticut SAP and delivered by the Company to the Reinsurer in accordance with the provisions of
Section 3.4 hereof.

“Liabilities” means all gross liabilities and obligations arising out of or relating to
the Policies and Post-Closing Policies, other than the Retained Liabilities and Extra
Contractual Obligations. The Liabilities shall include, without limitation: (a) the General Account Reserves; (b) all liabilities for
incurred but not reported claims, benefits, interest on death claims or other payments
arising under or relating to the Policies and
Post-Closing Policies, whether or not (i) included within the General Account Reserves, or
(ii) incurred before or after the Effective Date; (c) all liabilities arising out of any
changes to the terms and conditions of the
Policies and Post-Closing Policies mandated by Applicable Law whether or not incurred before or
after the Effective Date; (d) premium Taxes due in respect of Premiums paid on or after the
Effective Date (without giving effect to any credits due to the Company for any guaranty fund
assessments paid by the Company prior to Closing), and all other Tax liabilities arising out of
or relating to the Business or Post-Closing Policies for periods commencing on or after the
Effective Date (except for income Taxes imposed on the Company under Subtitle A of the Code);

 

 

 

(e) assessments and similar charges in connection with participation by
the Company or Reinsurer, whether voluntary or involuntary, in any guaranty association
established or governed by any state or other jurisdiction, arising on account of
direct Premiums paid on or after the Effective Date; (f) Commissions payable with respect
to the Policies and Post-Closing Policies to or for the benefit of the Producers who marketed
or produced the Policies, in any case payable on or after the Effective Date; (g) any liability
arising under the Transferred Contracts; (h) premiums, payments, fees or other consideration or
amounts due on or after the Effective Date under any Third Party Reinsurance Agreements which
are included with the Transferred Contracts; (i) all liabilities for amounts payable on or
after the Effective Date for returns or refunds of Premiums, (j) all liabilities which relate to
(i) amounts transferred from the Separate Accounts to the Company’s general accounts
pending distribution to owners of the Variable Policies; and (ii) amounts held in the Company’s
general account pending transfer to the Separate Accounts; (iii) any insurance liabilities or
obligations arising under the Variable Policies (including any Variable Policies included
within the Post-Closing Policies) that are not payable out of the assets of the Company’s Separate
Account; and (k) all unclaimed property liabilities arising under or relating to the Policies
and Post-Closing Policies.

“LIBOR” means a rate per annum equal to the three month London Interbank Offered Rate
as published in The Wall Street Journal, Eastern Edition, in effect on the Closing Date.

“Market Value” means the market value of the assets held in a Security Trust, determined
pursuant to Section 4.01 of the Security Trust Agreement.

“Monthly Accounting” shall mean a monthly accounting prepared in accordance with
Connecticut SAP and delivered by the Reinsurer to the Company in accordance with the provisions of
Section 3.5 hereof.

“NAIC” means the National Association of Insurance Commissioners.

“Non-Guaranteed Elements” mean cost of insurance charges, loads and expense charges,
credited interest rates, mortality and expense charges, administrative expense risk charges,
variable premium rates and variable paid-up amounts, as applicable, under the Policies and
Post-Closing Policies.

“NY Administrative Services Agreement” means the NY Administrative Services Agreement by
and between the Company, ALIC and the Reinsurer of even date herewith.

“NY Modified Coinsurance Agreement” means the Modified Coinsurance Agreement between the
Company and the Reinsurer in the form of Exhibit Q to the Asset Purchase Agreement.

“Other Assets” mean the specific assets of the Company listed in Schedule 1.1(A) to the
Asset Purchase Agreement and such other fixed assets as may be mutually agreed among the parties.

“Person” means any individual, corporation, partnership, firm, joint venture, association,
joint-stock company, limited liability company, trust, unincorporated organization,
governmental, judicial or regulatory body, business unit, division or other entity.

“Policies” mean all of the Company’s individual universal life, individual corporate
owned life, individual traditional life, sponsored life and individual participating life
insurance policies and participating annuities,
together with all related binders, slips and certificates (including applications
therefor and all supplements, endorsements, riders and agreements in connection therewith)
that were delivered or issued for delivery to policyowners that were New York residents, and which have been issued or reinsured by the
Company in connection with the Business (in accordance with, and as determined by reference to,
the Company’s historical practices), which policies shall include, but not be limited to (a)
all policies issued on the policy forms included in the list of base codes set forth on Schedule
1.1(A) and which: (i) are effected, bound or issued on or prior to the Effective Date; and (ii)
are in force as of the Effective Date; or (iii) are subject to being renewed or reinstated
in accordance with their terms on the Effective Date; and (b) all individual life policies which
are required to be issued by the Company prior to or after the Effective Date following the
exercise of conversion rights in accordance with the terms of the individual life policies
coinsured by the Reinsurer under this Agreement.

 

 

 

“Policyholders” means policyholders, insureds and assignees under the Policies and
Post-Closing Policies.

“Post-Closing Policies” means the policies issued by ALIAC after the Effective Date
pursuant to Article V of the Asset Purchase Agreement.

“Premiums” means premiums, considerations, deposits and similar receipts with respect
to the Policies or Post-Closing Policies.

“Producers” mean all LBMs, MGAs, brokers, agents, general agents, COLI specialty brokers,
re-enrollers under the Company’s sponsored life products, broker-dealers, producers or other
Persons who market or produce the Policies and who (a) have been appointed by the Company, and (b)
are entitled to receive Commissions from the Company.

“Recapture Fee” means the amount determined in accordance with the formula set forth on
Exhibit A hereto, which is payable by the Reinsurer to the Company in connection with recapture of
the Policies and Post-Closing Policies by the Company pursuant to Section 9.4 hereof.

“Recapture Rights” mean the right of the Company to recapture the Policies and Post
Closing Policies pursuant to Section 9.4 hereof.

“Reinsured Liabilities” means the Liabilities reinsured pursuant to this Agreement.

“Reinsurer Extra Contractual Obligations” means: (a) all Extra Contractual
Obligations to the extent such obligations arise out of acts, errors or omissions occurring (or,
in the case of omissions, failing to occur) at any
time on or after the Effective Date by any of the Reinsurer or its directors, officers,
employees, Affiliates, agents, representatives, successors and assigns; (b) all of the
Sellers’ Extra Contractual Obligations except to the extent otherwise provided in Articles
VIII and IX of the Asset Purchase Agreement; and (c) all liabilities and obligations
(exclusive of obligations rising under the express terms and conditions of the Policies and
Post-Closing Policies and the other Liabilities) to the extent such obligations arise out of or
relate to the Company’s administration of claims, Non-Guaranteed Elements, and other aspects of
or relating to the Policies or the Post-Closing Policies on and after the Effective Date pursuant
to the recommendations from the Reinsurer pursuant to this Agreement, the NY Administrative
Services Agreement or the Transition Services Agreement.

“Required Balance” means one hundred percent (100%) of the amount equal to (a) the Reserves on
the Policies and Post-Closing Policies, plus (b) other liabilities relating to the Policies and
Post-Closing Policies, which shall be calculated in accordance with the methodology set forth
on Exhibit D hereto, minus (c) the amount of outstanding loans under the Policies and
Post-Closing Policies (to the extent such loans constitute admitted assets under Connecticut SAP).

“Reserves” means the sum of all reserves and liabilities required to be maintained by the
Company for the Policies and Post-Closing Policies issued or reinsured by it, calculated
consistent with (a) the reserve requirements, statutory accounting rules and actuarial
principles applicable to the Company under the law of each state in which the Policies and
Post-Closing Policies were issued or delivered, and (b) otherwise in accordance with the
methodologies used by the Company to calculate the reserves and liabilities for the Policies and
Post-Closing Policies in accordance with Connecticut SAP and sound actuarial principles and any
valuation bases and methods of determining reserves as provided in the forms of Policies and
Post-Closing Policies, as applicable; provided, however, the term “Reserves” shall not include the Separate Account Reserves.

“Retained Contracts” means all contracts, agreements, leases, software licenses, rights,
obligations or other commitments of the Company that (a) arise out of or are related exclusively
to any business or operation of the Company other than the Business, or (b) arise out of or are
related in any way to the Business and which, in the case of both clauses (a) and (b) herein, are
not Transferred Contracts.

 

 

 

“Retained Liabilities” means the liabilities of the Company arising solely from any of the
following: (a) premium taxes due in respect of Premiums paid prior to the Effective Date; (b)
amounts payable prior to the Effective Date for returns or refunds of Premiums; (c) Commissions
payable with respect to the Policies to or for the
benefit of Producers, in any case payable prior to the Effective Date; (d) assessments and
similar charges in connection with participation by the Company, whether voluntary or
involuntary, in any guaranty association established or governed by any state or other
jurisdiction, arising on account of direct Premiums paid prior to the Effective Date; (e) the
Retained Contracts; (f) premiums, payments, fees or other consideration or amounts due
prior to the Effective Date under the Third-Party Reinsurance Agreements; (g) death claims under
the Policies which are reported prior to the Closing Date; (h) the pending litigation
described on Schedule 3.03 to the Asset Purchase Agreement; (i) interest stabilization reserve
relating to the Policies; (j) liabilities or obligations relating to the Business to the
extent such liabilities or obligations have been accrued for on Company’s books and records as of
11:59 p.m. Eastern Time on the day immediately preceding the Effective Date in accordance
with Connecticut SAP but are not reflected on the Final Closing Balance Sheet; and (k) all
other liabilities, obligations or indemnities expressly assumed by the Company under the
terms of the Asset Purchase
Agreement, this Agreement or any Ancillary Agreement.

“Revised Closing Balance Sheet” means the pro forma balance sheet of the Business as of the
Closing Date prepared and delivered by the Company to the Reinsurer in accordance with Article II
of the Asset Purchase Agreement.

“Secured Policies” means the Policies and Post-Closing Policies secured by the Security Trust
established under Section 9.4 hereof.

“Security Trust” means a trust account established with a Trustee for the purpose of
securing the Reinsurer’s obligations to the Company in accordance with Article IX hereof.

“Security Trust Agreement” means the trust agreement governing the Security Trust, which
shall be substantially in the form of Exhibit B hereto.

“Sellers’ Extra Contractual Obligations” means all Extra Contractual Obligations to the
extent such obligations arise out of acts, errors or omissions occurring (or, in the case of
omissions, failing to occur) at any time prior to the Effective Date by the Company or its
directors, officers, employees, Affiliates, agents or representatives.

“Separate Account Assets” means the assets described on Schedule 1.1(B) hereto which
constitute the Separate Accounts.

“Separate Account Reserves” means the reserves associated with the Variable Policies
which are held in the Company’s Separate Accounts, determined in accordance with Connecticut SAP.

“Separate Accounts” means the specific separate accounts of the Company identified in Schedule
1.1(C) hereto.

“Taxes” (or “Tax” as the context may require) means any tax, however denominated, imposed
by any federal, state, local, municipal, territorial, provincial or foreign government or any
agency or political subdivision of any such government (a “Taxing Authority”), including,
without limitation, any tax imposed under Subtitle A of the Code and any net income, alternative
or add-on minimum tax, gross income, gross receipts, sales, use, gains, goods and
services, production, documentary, recording, social security, unemployment,
disability, workers’ compensation, estimated, ad valorem, value added, transfer, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp, capital
stock, occupation, personal or real property, environmental or windfall profit tax,
premiums, custom, duty or other tax, governmental fee or other like assessment or charge of
any kind whatsoever, together with any interest, penalty, addition to tax or additional
amount imposed by any Taxing Authority relating thereto.

“Termination Date” shall mean the date on which this Agreement is terminated in
accordance with the terms and conditions of Article XII hereof.

“Third-Party Reinsurance Agreements” means the reinsurance agreements identified on
Schedule 1.1(D) hereto under which the Company has ceded liabilities to non-Affiliated
reinsurers with respect to the Policies.

 

 

 

“Transferred Assets” means: (a) cash or cash equivalents equal to the amount as of the
Closing Date of (A) the Closing Date Liabilities, minus (B) the amount of outstanding loans
under the Policies (to the extent such loans constitute admitted assets under Connecticut
SAP), minus (C) the aggregate amounts ascribed to the Other Assets in the Closing Balance
Sheet, Revised Closing Balance Sheet or Final Closing Balance Sheet, as applicable, and minus
(D) the Ceding Commission; (b) as between the parties hereto, all of the Company’s rights and
interests under the Policies to receive principal and interest paid on policy loans on or after
the Effective Date; and (c) as between the parties hereto, all of the Company’s rights and
interests to premiums due or to become due, premiums deferred and uncollected, premium adjustments and any and all amounts,
payments or consideration which are or were held, received or collected by the Company on or after
the Effective Date, or which are now due or will become due from any source under or in
connection with the Policies except, however, to the extent that any such premiums, adjustments,
amounts, payments or consideration are included within clause (a) herein.

“Transferred Contracts” means: (a) the contracts, agreements, leases, software licenses,
rights, obligations or other commitments of the Company (to the extent freely assignable) used
exclusively by the Company in the Business (but excluding the Policies and the Distribution
Agreements); and (b) contracts, agreements, leases, software licenses, rights, obligations,
and other commitments relating to the Business (but excluding the Policies and the
Distribution Agreements) identified on Schedule 3.17 to the Asset Purchase Agreement or listed
on the supplement to such Schedule 3.17 contemplated by the Asset Purchase Agreement.

“Transition Services Agreement” means the Transition Services Agreement among the Company,
ALIC, The Lincoln National Life Insurance Company and the Reinsurer.

“Trustee” means a bank or trust company reasonably acceptable to the parties to this
Agreement, which acts as trustee of a Security Trust pursuant to the terms and conditions of a
Security Trust Agreement; provided, however, that such bank or trust company shall (a) possess
assets of at least $10 billion; and (b) be rated at least A1 by each of Moody’s Investors
Services, Inc. and A+ by Standard & Poor’s Corporation.

“Variable Policies” means the individual variable life insurance policies issued by the
Company, which are funded, in whole or in part, by the Separate Accounts.

ARTICLE II

BASIS OF COINSURANCE AND BUSINESS COINSURED

2.1 Coinsurance. Subject to the terms and conditions of this Agreement, the Company hereby
cedes or retrocedes, as the case may be, on a coinsurance basis to the Reinsurer as of the
Effective Date, and the Reinsurer hereby accepts and agrees to indemnity reinsure on a
coinsurance basis as of the Effective Date, one hundred percent (100%) of all Liabilities
arising under or relating to the Policies and the Post-Closing Policies. This Agreement shall not
continue or create any legal relationship whatsoever between the Reinsurer and Persons who own or
are insured under the Policies and the Post-Closing Policies. Except as expressly provided herein,
this Agreement does not reinsure any policy written by the Company or the Reinsurer after
the Effective Date. The reinsurance effected under this Agreement shall be maintained in
force, without reduction, unless such reinsurance is terminated, reduced or recaptured as
provided herein.

2.2 Reinsurer Extra Contractual Obligations. In addition to the Reinsurer’s coinsurance
of Liabilities, the Reinsurer hereby accepts and agrees to assume and discharge one hundred
percent (100%) of all Reinsurer Extra Contractual Obligations.

2.3 Reinstatements, Conversions and Exchanges. In no event shall the coinsurance provided
hereunder with respect to a particular Policy be in force and binding unless such Policy is in
force and binding as of the Effective Date; provided, however that the Policies and Post-Closing
Policies reinsured shall include (a) all Post-Closing Policies; (b) all lapsed or surrendered
Policies or Post-Closing Policies reinstated in accordance with their terms on and after the
Effective Date; and (c) all Policies or Post-Closing Policies issued on and after the
Effective Date pursuant to (i) any option provided under the terms of any Variable Policy issued
at any time by the Company for the exchange of such contract for a non-variable life insurance
contract; or (ii) any option provided under the terms
of any of the Policies or Post-Closing Policies for the conversion of such Policies or
Post-Closing Policies to an individual life insurance policy. Upon the reinstatement of any
lapsed or surrendered Policy or Post-Closing Policy, or the issuance of any exchange or converted
life insurance Policy or Post-Closing Policy, such Policy or Post-Closing Policy shall be
automatically reinsured hereunder. If the Company collects Premiums in arrears from a Policyholder or ceding company of a reinstated Policy or Post-Closing Policy, the
Company shall pay to the Reinsurer all Premiums so collected.

 

 

 

2.4 Certain Policy Elements. From and after the Effective Date, the Reinsurer may make
recommendations to the Company with respect to (a) the Non-Guaranteed Elements of the
Policies and the Post-Closing Policies; and (b) the reserving methodology related to the Policies
and the Post-Closing Policies (including changes required by Applicable Law, GAAP or Connecticut
SAP). The Company shall set all Non-Guaranteed Elements of the Policies and the
Post-Closing Policies, taking into account the recommendations of the Reinsurer with respect
thereto. Notwithstanding the foregoing, however, the Reinsurer hereby acknowledges and agrees
that any claim, liability or obligation, to the extent such claim, liability or obligation
arises out of or relates to the Company’s establishment of Non-Guaranteed Elements pursuant to
the Reinsurer’s recommendations with respect thereto, is included within the Reinsurer Extra
Contractual Obligations that the Reinsurer has expressly assumed pursuant to the Asset Purchase
Agreement, this Agreement and the other Ancillary Agreements and for which the Reinsurer has
agreed to indemnify the Company pursuant to Article IX of the Asset Purchase Agreement and Article
IX of this Agreement.

2.5 Reserves. On and after the Closing Date, the Reinsurer shall establish and
maintain as a liability on its statutory financial statements Reserves for the Policies and
the Post-Closing Policies ceded hereunder,
calculated consistent with (a) the reserve requirements, statutory accounting rules and
actuarial principles applicable to the Company under the law of the State of New York and each
state in which the Policies and the Post-Closing Policies were issued or delivered; and (b)
otherwise in accordance with the methodologies used by the Company to calculate the reserves and
liabilities for the Policies and the Post-Closing Policies in accordance with Connecticut SAP
and sound actuarial principles and any valuation bases and methods of determining
reserves as provided in the forms of Policies and Post-Closing Policies. The Reinsurer shall
provide the Company, not less than annually, with copies of all actuarial opinions and actuarial
memoranda and all reserve
evaluations pertaining to the Reserves, including, without limitation, any actuarial opinions
and reserve evaluations performed by independent actuaries, auditors or other outside
consultants. At the option of the Company, the Company may, at its own cost at any time following
the Closing, examine the Books and Records maintained by the Reinsurer and review its reserve
procedures. If the results of such examination are not reasonably satisfactory to the Company,
the Reinsurer shall, at the Company’s request and expense, obtain and deliver to the Company an
actuarial opinion as to the adequacy of the Reserves, produced by an independent actuary
acceptable to the Company. The Reinsurer shall promptly adjust the amount of the Reserves and
implement appropriate changes to its reserve procedures if an actuarial opinion, reserve
evaluation or review,
including, without limitation, any evaluation or review made by the Company, reasonably
indicates an inadequacy in the Reserves or in the Reinsurer’s reserve procedures.

2.6 Separate Account Reserves. Notwithstanding anything to the contrary herein, effective as
of the Effective Date the Company and the Reinsurer shall reinsure the Separate Account Reserves
on a modified coinsurance basis, subject to the execution and delivery of the NY Modified
Coinsurance Agreement; provided, however, that the Company shall retain, control and own all
Separate Account Assets and Separate Account Reserves whether or not the NY Modified
Coinsurance Agreement is executed and delivered.

2.7 Policy Changes or Reductions. In the event of a material change in the provisions and
conditions of a Policy or a Post-Closing Policy (provided that such change is not in violation
of Section 4.4 hereof), a corresponding change in the related coinsurance and appropriate cash
adjustments shall be made consistent with the policy change rules of the Company. If the face
amount of a Policy or a Post-Closing Policy is reduced or increased, the amount coinsured by the
Reinsurer shall be reduced or increased accordingly.

 

 

 

ARTICLE III

ACCOUNTINGS AND TRANSFER OF ASSETS

3.1 Ceding Commission. The Reinsurer shall pay to the Company on the Closing Date a Ceding
Commission in the amount of $116,487,000. The Ceding Commission shall be credited to the
Company as a reduction in the amount of cash or cash equivalents included within the Transferred
Assets to be transferred by the Company to the Reinsurer at Closing in accordance with the provisions of Sections 3.2
hereof.

3.2 Transfer of Assets. On the Closing Date, the Company shall sell, assign and transfer to
the Reinsurer as reinsurance premium all of the Company’s right, title and interest in the
Transferred Assets, including, without limitation, cash or cash equivalents in an aggregate amount (subject to adjustment
pursuant to Section 3.3 hereof) equal to the amount as of the Closing Date of: (A) Closing Date
Liabilities, minus (B) the amount of outstanding loans under the Policies (to the extent such loans
constitute admitted assets under Connecticut SAP), minus (C) the aggregate amounts ascribed to
the Other Assets, and minus (D) the Ceding Commission, all as reflected on that part of the
Closing Balance Sheet relating to the Policies reinsured hereunder.

3.3 Post-Closing Adjustments. (a) In the event that the aggregate amount of cash or cash
equivalents transferred by the Company to the Reinsurer on the Closing Date is less than the
amount of (A) Closing Date Liabilities, minus (B) the amount of outstanding loans under the
Policies (to the extent that such loans constitute admitted assets under Connecticut SAP),
minus (C) the aggregate amounts ascribed to the Other Assets, and minus (D) the Ceding
Commission, all as reflected on that part of the Final Closing Balance Sheet relating to the
Policies reinsured hereunder, the Company shall transfer to the Reinsurer additional cash or
cash equivalents equal to the amount of such difference, together with interest thereon from
and including the Closing Date to, but not including the date of, such transfer computed at LIBOR.

(b) In the event that the aggregate amount of cash or cash equivalents transferred to the
Reinsurer on the Closing Date is greater than the amount of (A) Closing Date Liabilities, minus
(B) the amount of outstanding loans under the Policies (to the extent that such loans constitute
admitted assets under Connecticut SAP), minus (C) the aggregate amounts ascribed to the Other
Assets, and minus (D) the Ceding Commission, all as reflected on the portion of the Final
Closing Balance Sheet relating to the Policies reinsured hereunder, the Reinsurer shall
transfer to the Company cash or cash equivalents equal to the amount of such difference, together
with interest thereon from and including the Closing Date to, but not including the date of, such
transfer computed at LIBOR.

3.4 Interim Monthly Accountings. The Company shall provide the Reinsurer with an
Interim Monthly Accounting as of the end of each calendar month, no later than fifteen (15)
Business Days after the end of such month; provided, however, that the first Interim Monthly
Accounting shall be provided to the Reinsurer no later than fifteen (15) Business Days after the
end of the month in which the Closing Date fell and the final Interim Monthly Accounting shall
be delivered no later than fifteen (15) Business Days after the date on which the Company is
no longer providing accounting services under the Transition Services Agreement. The
Company shall provide such Accounting in a format that is mutually acceptable to the Company and
the Reinsurer.

3.5 Monthly Accountings. Beginning with and after the first calendar month during which the
Company is no longer providing accounting services under the Transition Services Agreement, the
Reinsurer shall provide the Company with a Monthly Accounting as of the end of each calendar month,
no later than fifteen (15) Business Days after the end of such month; provided, however, that
the first Monthly Accounting shall be provided to the Company no later than fifteen (15) Business
Days after the end of the first calendar month during which the
Company is no longer providing accounting services pursuant to the Transition Services
Agreement and the Reinsurer shall deliver the final Monthly Accounting no later than fifteen (15)
Business Days after the Termination Date; provided, further, that in the event that subsequent
data or calculations require revision of the final Monthly Accounting, the required revision
and any appropriate payments shall be made in cash by the parties five (5) Business Days after
they mutually agree as to the appropriate revision. The Reinsurer shall provide such Accounting
in a format that is mutually acceptable to the Company and the Reinsurer.

3.6 Monthly Payments. If an Accounting reflects a balance due to the party to which the
Accounting is delivered and/or the Security Trust, the amount(s) shown as due shall be paid
within five (5) Business Days of the delivery of the Accounting. If (a) an Accounting
reflects a balance due the party that prepared the Accounting or the Security Trust and (b)
the party receiving the Accounting does not object to the Accounting within five (5) Business
Days of its delivery, the amount(s) shown as due shall be paid within seven (7) Business
Days after the date on which the Accounting was delivered. Any dispute over any amount shown
on an Accounting that cannot be amicably resolved by the parties shall be resolved pursuant to
the procedures set forth in Article X. If the Security Trust is established while the Company is collecting funds
pursuant to the Transition Services Agreement, the Company may remit directly to the Trustee on
behalf of the Reinsurer that portion of any amount due the Reinsurer needed to fully fund the
Security Trust and the balance only of any amount due the Reinsurer shall be remitted to the
Reinsurer.

 

 

 

3.7 Delayed Payments. If there is a delayed settlement of any payment due hereunder,
interest will accrue on such payment at the three month London Interbank Offering Rate (LIBOR) as
published in The Wall Street Journal, Eastern Edition, in effect on the day such payment is due.
For purposes of this Section 3.7, a payment will be considered overdue, and such interest
will begin to accrue, on the date which is five (5) Business Days after the date such payment is
due.

3.8 Offset Rights. Any debts or credits incurred on and after the Effective Date in
favor of or against either the Company or Reinsurer with respect to this Agreement are deemed
mutual debts or credits, as the case may be, and shall be set off, and only the balance shall be allowed or paid.

3.9 Third-Party Reinsurance. In the event the Reinsurer desires to retrocede to any
third-party reinsurer (whether or not Affiliated with the Reinsurer) any portion of the
Liabilities reinsured by it under this Agreement, the Reinsurer shall be responsible for obtaining such retrocessional coverage at its sole expense.

3.10 Premium Taxes and Assessments. The Reinsurer shall pay the Company on a monthly basis an
amount equal to two percent (2%) of the gross Premiums on the Policies and the Post-Closing
Policies collected by the Reinsurer, as an advance against the Reinsurer’s liabilities for
premium Taxes payable by the Company and assessments to the Company by state guaranty or
insolvency or similar associations or funds, to the extent that such Taxes and assessments are
allocable to Premiums paid on or after the Effective Date. Amounts payable pursuant to this
Section 3.10 shall be reflected on the Accountings delivered hereunder and shall be paid
pursuant to the provisions of Section 3.6. Not later than June 30 after each calendar year falling
within the term of this Agreement, the Company shall provide the Reinsurer with an accounting of
its actual premium Tax and guaranty fund assessment liability with respect to the Policies and the
Post-Closing Policies for such calendar year (without giving effect to any credits due to the
Company for any guaranty fund assessments paid by the Company prior to Closing). If such accounting reflects amounts owed to the Reinsurer, the Company shall
pay such amounts in cash to the Reinsurer with the accounting. If it reflects amounts owed to the
Company (including any interest or penalties relating to underpayment of estimated Taxes based on
information provided by the Reinsurer), the Reinsurer shall pay such amounts in cash to the
Company withinfive (5) Business Days of receiving the accounting. The Company shall pay or
provide the Reinsurer with the benefit of guaranty fund assessments previously reimbursed by the
Reinsurer to the extent such payments were actually utilized to reduce the Company’s tax
liabilities. The utilization of any outstanding assessments by the Company shall be determined on
a FIFO basis (those assessments made in earlier years shall be considered used first).

ARTICLE IV

POLICY ADMINISTRATION

4.1 Interim Servicing. During the period from the Effective Date through the
termination of the Transition Services Agreement with respect to each service provided by the
Company thereunder, the Company has agreed to continue to provide certain Policyholder
services for the Policies and the Post-Closing Policies.

4.2 Transfer of Servicing Obligations. On and after the date on which a service is no longer
being provided pursuant to the Transition Services Agreement, and pursuant to the NY
Administrative Services Agreement, the Reinsurer has agreed to provide Policyholder service
for the Policies and the Post-Closing Policies and to supply to the Company on a timely basis
copies of accounting and other records pertaining to such service. The parties hereby agree
that the Policies and the Post-Closing Policies shall be administrated pursuant to the NY
Administrative Services Agreement. Reinsurer’s compensation for all services provided to the
Company pursuant to the NY Administrative Services Agreement shall be included in the
reinsurance premium paid by the Company to Reinsurer pursuant to Section 3.2 above and the
Company shall not be obligated to pay any additional monies to Reinsurer for such
administrative services.

 

 

 

4.3 Regulatory Matters. If the Company or the Reinsurer receives notice of, or otherwise
becomes aware of any regulatory inquiry, investigation or proceeding relating to the Policies
or the Post-Closing Policies, the Company or the Reinsurer, as applicable, shall promptly
notify the other party thereof, whereupon the parties shall cooperate in good faith and use
their respective commercially reasonable efforts to resolve such matter in a mutually
satisfactory manner, in light of all the relevant business, regulatory and legal facts and
circumstances. The parties recognize that, as the issuing company, the Company retains ultimate
responsibility for resolution of the matters described in this section.

4.4 Policy Changes. Neither the Company nor the Reinsurer shall make any changes to the
Company’s policy forms except with the express written consent of the other party (which
consent shall not be unreasonably withheld) or if (a) the changes are required by Applicable Law
and (b) the Reinsurer gives the Company prior notice in writing of the nature of such required
changes in the manner provided by the NY Administrative Services Agreement.

ARTICLE V

OVERSIGHTS

5.1 Oversights. Inadvertent delays, errors or omissions made in connection with this
Agreement or any transaction hereunder shall not relieve either party from any liability which
would have attached had such delay, error or omission not occurred, provided always that
such error or omission is rectified as soon as possible after discovery, and provided that
the party making such error or omission or responsible for such delay shall be responsible for any
additional liability which attaches as a result.

ARTICLE VI

CONDITIONS PRECEDENT

6.1 Conditions Precedent. This Agreement shall not become effective unless and until (a)
all state insurance regulatory authorities whose approval is required shall have approved
this Agreement in writing, and (b) all applicable waiting periods under any federal or state statute or regulation shall have expired
or been terminated.

ARTICLE VII

DUTY OF COOPERATION

7.1 Cooperation. Each party hereto shall cooperate fully with the other in all reasonable
respects in order to accomplish the objectives of this Agreement.

ARTICLE VIII

DAC TAX

8.1 Election. In accordance with Treasury Regulations Section 1.848-2(g)(8), the
Company and Reinsurer hereby elect to determine specified policy acquisition expenses with
respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1)
of the Code.

(a) All uncapitalized terms used herein shall have the meanings set forth in the
regulations under Section 848 of the Code.

(b) The party with net positive consideration under this Agreement for each taxable year
shall capitalize specified policy acquisition expenses with respect to this Agreement without
regard to the general deductions limitation of Section 848(c)(1) of the Code.

(c) Both parties agree to exchange information pertaining to the amount of net consideration
under this Agreement each year to ensure consistency.

 

 

 

(d) The Company shall submit a schedule to the Reinsurer by May 1 of each year of its
calculation of the net consideration under this Agreement for the preceding taxable year. This
schedule of calculations shall be accompanied by a statement signed by an authorized representative of the Company stating that
the Company shall report such net consideration in its federal income tax return for the
preceding taxable year.

(e) The Reinsurer may contest such calculation by providing an alternative
calculation to the Company in writing within thirty (30) days after the date on which the
Reinsurer receives the Company’s calculation. If the Reinsurer does not so notify the Company, the Reinsurer shall report the net consideration
under this Agreement as determined by the Company in the Reinsurer’s federal income tax
return for the preceding taxable year.

(f) If Reinsurer contests the Company’s calculation of the net consideration under
this Agreement, the parties shall act in good faith to reach an agreement as to the correct amount
of net consideration within thirty (30) days after the date on which the Reinsurer submits its alternative calculation. If Reinsurer and
the Company reach agreement as to the amount of net consideration under this Agreement,
each party shall report such amount in its federal income tax return for the preceding taxable
year.

If, during such period, Reinsurer and the Company are unable to reach agreement, they shall
promptly thereafter cause independent accountants of nationally recognized standing
reasonably satisfactory to Reinsurer and the Company (who shall not have any material
relationship with Reinsurer or the Company), promptly to review (which review shall commence no
later than five (5) days after the selection of such independent accountants), this Agreement
and the calculations of Reinsurer and the Company for the purpose of calculating the
net consideration under this Agreement. In making such calculation, such independent
accountants shall consider only those items or amounts in the Company’s calculation as to
which the Reinsurer has disagreed.

Such independent accountants shall deliver to Reinsurer and the Company, as promptly
as practicable (but no later than sixty (60) days after the commencement of their review), a
report setting forth such calculation, which calculation shall result in a net consideration
between the amount thereof shown in the Company’s calculation delivered pursuant to Section 8.1(d)
and the amount thereof shown in Reinsurer’s calculation delivered pursuant to Section 8.1(e).
Such report shall be final and binding upon Reinsurer and the Company. The fees, costs and
expenses of such independent accountant shall be borne (i) by the Company if the difference
between the net consideration as calculated by the independent accountants and the Company’s
calculation delivered pursuant to Section 8.1(d) is greater than the difference between the net
consideration as calculated by the independent
accountants and Reinsurer’s calculation delivered pursuant to Section 8.1(e), (ii) by the
Reinsurer if the first such difference is less than the second such difference, and (iii)
otherwise equally by Reinsurer and the Company.

(g) This election shall be effective for the 1998 taxable year and for all subsequent taxable
years for which this Agreement remains in effect.

(h) Both parties agree to attach a schedule to their respective federal income tax returns
for the first taxable year ending after the date on which this election becomes effective which
identifies this Agreement as a reinsurance
agreement for which an election has been made under Treasury Regulations Section 1.848-2(g)(8).

ARTICLE IX

INDEMNIFICATION AND RECAPTURE

9.1 Reinsurer’s Obligation to Indemnify. Subject to any limitation contained in the Asset
Purchase Agreement, Reinsurer hereby agrees to indemnify, defend and hold harmless the Company and
its directors, officers, employees, representatives (excluding the Producers), Affiliates,
successors and permitted assigns (collectively, the “Company Indemnified Parties”) from and
against all Losses asserted against, imposed upon or incurred by any Company Indemnified Party
arising from: (i) the Liabilities; (ii) the Reinsurer Extra Contractual
Obligations (including, but not limited to, all claims that constitute Sellers’ Extra Contractual
Obligations but for which the Company’s indemnification obligation has expired pursuant
to Section 8.01(c) of the Asset Purchase Agreement); (iii) any breach or nonfulfillment by
Reinsurer of, or any failure by Reinsurer to perform, any of the covenants, terms or conditions
of, or any duties or obligations under, this Agreement; and (iv) any enforcement of this
indemnity.

 

 

 

9.2 Company’s Obligation to Indemnify. Subject to any limitation contained in the
Asset Purchase Agreement, the Company hereby agrees to indemnify, defend and hold harmless
the Reinsurer and its directors, officers, employees, representatives (excluding the Producers), Affiliates, successors and
permitted assigns (collectively, the “Reinsurer Indemnified Parties”) from and against all Losses
asserted against, imposed upon or incurred by any Reinsurer Indemnified Party arising from:
(i) the Retained Liabilities; (ii) Sellers’ Extra Contractual Obligations (but only to the
extent that the Company’s indemnification obligation for Sellers’ Extra Contractual
Obligations has not expired pursuant to Section 8.01(c) of the Asset Purchase Agreement); (iii)
any breach or nonfulfillment by the Company of, or any failure by the Company to perform, any of the
covenants, terms or conditions of, or any duties or obligations under, this Agreement; and
(iv) any enforcement of this indemnity.

9.3 Certain Definitions and Procedures. For purposes of this Article IX, “Loss” or “Losses”
shall mean actions, claims, losses, liabilities, damages, costs, expenses (including reasonable
attorneys’ fees), interest and penalties. In the event either Reinsurer or the Company shall have
a claim for indemnity against the other party under the terms of this Agreement, the parties
shall follow the procedures set forth in Sections 9.02, 9.03 and 9.04 of the Asset Purchase
Agreement.

9.4 Security Trust Account and Recapture Rights.

(a) Events of Default. From and after the Closing Date, any of the following occurrences
shall constitute an event that entitles the Company to require the Reinsurer to deposit and
maintain assets in a Security Trust in accordance with the terms and conditions of this Section 9.4 (individually or collectively, as
the context indicates, an “Event of Default”):

	 	(i)	 	the Reinsurer ceases to maintain any of (A) an A.M.Best Company rating
of at least B++, (B) a Standard & Poor’s Corporation insurer financial strength
rating of at least BBB-, and (C) Moody’s Investors Services, Inc. claims-paying
ability rating of at least Baa3; or
	 
	 	(ii)	 	the Reinsurer fails to (A) maintain a ratio of (i) Total Adjusted Capital
(as defined in the Risk-Based Capital (RBC) Model Act or in the rules and procedures
prescribed by the NAIC with respect thereto, in each case as in effect as of
December 31, 1997) to (ii) the Company Action Level RBC (as defined in the Risk-Based
Capital (RBC) Model Act or in the rules and procedures prescribed by the NAIC with
respect thereto, in each case as in effect as of December 31, 1997) of at least 185
percent, or (B) maintain a Standard & Poor’s Corporation’s capital adequacy ratio
(calculated in accordance with the rules and procedures in effect on the Contract
Date) of at least 115 percent; or
	 
	 	(iii)	 	(A) the Reinsurer ceases to be licensed as a life insurer or ceases to
qualify as an accredited reinsurer in a particular jurisdiction under circumstances
that would cause the Company to be denied credit for reinsurance ceded hereunder on
the financial statements filed by the Company in said jurisdiction, or (B) the
Company is denied credit for reinsurance ceded hereunder on the financial statements
filed by the Company in any jurisdiction: or
	 
	 	(iv)	 	a petition for insolvency, rehabilitation, conservation, supervision,
liquidation or similar proceeding is filed by or against the Reinsurer or its
statutory representative in any jurisdiction; or
	 
	 	(v)	 	any Person other than one of the Affiliates of the Reinsurer in existence
on the Closing Date acquires or assumes (A) Control of the Reinsurer, whether by
merger, consolidation, stock acquisition, or otherwise (including, without
limitation, the acquisition or assumption of the power to direct the Reinsurer’s
management and policies by means of a management or services agreement or other
contractual arrangement) or (B) all or substantially all of the assets or liabilities
of the Reinsurer by reinsurance (whether indemnity or assumption) or otherwise;
	 
	 	(vi)	 	this Agreement is terminated in accordance with its terms; or
	 
	 	(vii)	 	an Event of Default occurs pursuant to Section 9.07(a)(vii) of the Asset Purchase
Agreement.

The occurrence of any Event of Default shall entitle the Company to elect to require the
Reinsurer to establish a Security Trust regardless of whether or not such an occurrence constitutes
a Recapture Event, provided, that the Company has not delivered an Election Notice electing
recapture.

 

 

 

(b) Recapture Events. From and after the Closing Date, and whether or not an Event of
Default has occurred or Security Trust has been established pursuant to Section 9.4(a)
hereof, any of the following occurrences shall constitute an event that entitles the Company
to exercise the recapture remedy set forth in this Section 9.4 (individually or collectively,
as the context indicates, a “Recapture Event”):

	 	(i)	 	Reinsurer ceases to maintain any of (A) an A.M. Best Company rating of
at least B+, (B) a Standard & Poor’s Corporation insurer financial strength
rating of at least BB+, and (C) a Moody’s Investors Services, Inc.
claims-paying ability rating of at least Ba1; or
	 
	 	(ii)	 	Reinsurer fails to (A) maintain a ratio of (i) Total Adjusted Capital
(as defined in the Risk-Based Capital (RBC) Model Act or in the rules and
procedures prescribed by the NAIC with respect thereto, in each case as in
effect as of December 31, 1997) to (ii) the Company Action Level RBC (as
defined in the Risk-Based Capital (RBC) Model Act or in the rules and procedures
prescribed by the NAIC with respect thereto, in each case as in effect as of
December 31, 1997) of at least 160 percent; or (B) maintain a Standard & Poor’s
Corporation’s capital adequacy ratio (calculated in accordance with the rules
and procedures in effect on the Contract Date) of at least 100 percent; or
	 
	 	(iii)	 	a petition for insolvency, rehabilitation, conservation, supervision,
liquidation or similar proceeding is filed by or against the Reinsurer or its
statutory representative in any jurisdiction; or
	 
	 	(iv)	 	within thirty (30) calendar days of its receipt of a demand therefor
delivered pursuant to Section 9.4(d), Reinsurer fails to execute the Security
Trust Agreement or deposit and maintain asset in trust on the terms provided in
Section 9.4(f) and in the Security Trust Agreement, provided, however, that the
Company executes such Security Trust Agreement contemporaneously with the delivery
of the demand; or
	 
	 	(v)	 	this Agreement is terminated in accordance with its terms; or
	 
	 	(vi)	 	within thirty (30) calendar days of the termination of the NY
Administrative Services Agreement in accordance with its terms, (A) Reinsurer does
not take all steps necessary to arrange for a third-party administrator acceptable to
the Company in its sole discretion, reasonably exercised, to provide all
administrative services to be provided pursuant to the terminated NY Administrative
Services Agreement at the cost of Reinsurer or (B) such third-party administrator
fails to enter into an administrative service agreement with the Company,
satisfactory in form and substance to the Company in its sole discretion, reasonably
exercised; or
	 
	 	(vii)	 	a judgment or order is entered by a court of competent jurisdiction
declaring the invalidity of the Security Trust or finding that the assets held in a
Security Trust are general assets of Reinsurer or otherwise do not constitute a
“secured claim” within the meaning of the laws of Reinsurer’s domiciliary state;
or
	 
	 	(viii)	 	a Security Trust is established for the benefit of the Company pursuant to Section
9.4(a)(iii) and the Company is denied credit on its financial statements filed in
any jurisdiction with respect to the reinsurance provided by the Reinsurer,
and the Reinsurer does not take all steps necessary to enable the Company to
obtain credit on its financial statements within thirty (30) calendar days of
the Reinsurer’s receipt of written notice from the Company as to the
occurrence described herein; or
	 
	 	(ix)	 	a Recapture Event occurs pursuant to Section 9.07(b)(ix) of the Asset Purchase Agreement.

The occurrence of any Recapture Event shall entitle the Company to elect recapture remedies
hereunder regardless of whether (1) such an occurrence also constitutes an Event of Default, (2)
the Reinsurer has previously established a Security Trust or (3) the Company has previously
delivered an Election Notice requiring Reinsurer to establish a Security Trust.

 

 

 

(c) Notice to The Company. The Reinsurer shall provide the Company with:

	 	(i)	 	written notice of any downgrade in the Reinsurer’s A. M. Best Company
rating or its Standard & Poor’s Corporation insurer financial strength rating or
its Moody’s Investors Services, Inc. claims-paying ability rating within three (3)
Business Days after the Reinsurer’s receipt of notice of such adjustment;
	 
	 	(ii)	 	a written report of the calculation of the Reinsurer’s Total Adjusted Capital and Authorized
Control Level RBC (based on the Risk-Based Capital (RBC) Model Act and/or the
rules and procedures in effect as of December 31, 1997) and Standard & Poor’s
Corporation’s capital adequacy ratio (based on the rules and procedures in effect
on the Contract Date) as of the end of each calendar quarter within fifteen (15)
Business Days after the end of such quarter;
	 
	 	(iii)	 	written notice of the occurrence of any Event of Default or Recapture
Event within two (2) Business Days after its occurrence; and
	 
	 	(iv)	 	not less than annually, a written report, in form reasonably satisfactory
to the Company, certifying that no Event of Default or
Recapture Event has occurred during the period covered by such report or is
continuing as of the last day of such period, together with the appropriate
calculations and back up reasonably necessary to substantiate the basis of the
Reinsurer’s certification.

The Company may, at its own expense, review the Reinsurer’s books and records to confirm the risk
based capital calculations provided by the Reinsurer pursuant to Section 9.4(c)(ii). In addition,
Reinsurer shall (A) cooperate fully with the Company and promptly respond to the Company’s
inquiries from time to time concerning the Reinsurer’s financial condition, operating
results and any events, occurrences or other matters which arise on and after the Effective Date
and which reasonably relate to the Business or Reinsurer’s ability to perform and discharge its
obligations under the Asset Purchase Agreement, this Agreement or the Ancillary Agreements and
(B) provide to the Company such financial statements, reports, internal control letters and
reports prepared by auditors and other third parties, SAS-70 reports and other documents of the
Reinsurer as the Company may reasonably request from time to time.

(d) Election of Remedies. Upon the occurrence of any Event of Default, the Company may elect
to require the Reinsurer to maintain assets in a Security Trust for the purpose of securing the
Reinsured Liabilities under the Policies and Post-Closing Policies ceded to it pursuant to
this Agreement. Upon the occurrence of any Recapture Event, the Company may elect to recapture,
subject to the terms and conditions set forth below all, but not less than all, of the Policies
and the Post-Closing Policies ceded hereunder. The Company shall give the Reinsurer written
notice of its election (the “Election Notice”) specifying (x) the grounds for the exercise of its
remedies pursuant to this Section 9.4 and either (y) if it elects to recapture the Policies and
Post-Closing Policies, the fact of recapture, and the effective date of recapture or (z) if it
elects a Security Trust, the fact that the Reinsurer is obligated to execute the Security Trust
Agreement and to deposit and maintain assets in the Security Trust for the
purpose of securing such Reinsured Liabilities (the “Secured Policies”). The Reinsurer may
unwind and terminate a Security Trust if, prior to the second anniversary of the date on which
the Event of Default which originally gave rise to the establishment of such Security Trust
occurred, both (A) the original Event of Default has been cured or remediated, and (B) no new
Event of Default or Recapture Event has occurred; provided that (i) prior to such second
anniversary date, the Company has not properly provided an Election Notice to recapture the
Policies and Post-Closing Policies ceded by it; and (ii) the termination of the Security
Trust shall not prejudice or be deemed a waiver of the Company’s right to demand the establishment
of a new Security Trust or elect recapture upon the occurrence of any other or new Event of
Default or Recapture Event.

 

 

 

(e) Recapture. Any recapture by the Company shall not be deemed to have been consummated
until (i) the Company has given the Reinsurer an Election Notice pursuant to Section 9.4(d);
and (ii) the Company has received payment of the entire Recapture Fee as determined in accordance with Exhibit A hereto.
If the Reinsured Liabilities under the Policies and Post-Closing Policies to be recaptured are
secured pursuant to a Security
Trust established pursuant to Section 9.4(f), the Company may, in its sole discretion,
withdraw assets from the Security Trust having an aggregate Market Value (determined pursuant to
the Security Trust Agreement governing such Security Trust) not to exceed the amount of the
Recapture Fee. The Reinsurer shall promptly pay the Company the full amount of the Recapture Fee,
reduced by the amount, if any, withdrawn from the Security Trust. Following the
consummation of the recapture of Policies and Post-Closing Policies pursuant to
this Section 9.4(e), no additional premiums, deposits or other amounts payable under such
Policies and Post-Closing Policies shall be ceded to the Reinsurer hereunder.

(f) Security Trust. (i) Establishment of the Trust Account. Within thirty (30) calendar
days of the Company’s delivery to the Reinsurer of an Election Notice requiring that the Reinsurer
secure the Reinsured Liabilities ceded by the Company with a Security Trust, the Reinsurer
shall execute the Security Trust Agreement and deposit into an account with the Trustee (the
“Security Trust”), naming the Company as the sole beneficiary thereof, assets having a market
value in an amount no less than the Required Balance, for the purpose of securing the Reinsured
Liabilities under Secured Policies. The Security Trust Agreement shall be substantially in the
form of Exhibit B hereto.

(ii) Trust Assets. At the direction of the Reinsurer, the assets held in the Security
Trust shall be held in the form of (A) cash and cash-equivalents, (B) Certificates of deposit,
(C) obligations of the United States Government or its agencies, (D) investment grade bonds,
(E) whole (not participations) investment grade (as determined in accordance with the
Reinsurer’s internal rating systems) commercial mortgages; provided that the aggregate market
value of such commercial mortgages held in the Security Trust shall not exceed 15 percent of the
aggregate market value of the assets held in the Security Trust, and (F) straight Ginnie Mae,
Freddie Mac and Fannie Mae 30-year mortgage-backed securities rated AA+ and above; provided that the aggregate
market value of such mortgage-backed securities held in the Security Trust shall not exceed
15 percent of the aggregate market value of the assets held in the Security Trust; and provided,
further, that in the event a Security Trust is established pursuant to Section 9.4(a)(v), the
assets held in the Security Trust may be invested in accordance with the Reinsurer’s internal
investment policies for its individual life insurance business, a copy of which has been
provided to the Company. The aggregate Market Value of the assets held in the Security Trust
shall at all times be at least equal to the Required Balance. As long as the Security Trust
Agreement remains in force, the Reinsurer shall calculate the Required Balance as of the last day
of each calendar month and report the amount of the Required Balance to the Company and the
Trustee within ten (10) Business Days after the end of such month. In connection with such
calculation, the Company shall direct the Trustee to make the payment to the Reinsurer of any
amounts in the Security Trust which exceed the Required Balance, and Reinsurer shall promptly
deposit such additional permitted assets as may be necessary to increase the Market Value of
the Security Trust assets to the Required Balance. The form and duration of assets to be held
in the Security Trust shall be appropriate in light of the Reinsured Liabilities under the
Secured Policies. Prior to delivering any assets for deposit in the Security Trust, the Reinsurer shall execute assignments or endorsements in blank of all of the
Reinsurer’s right, title and interest in such assets (according to procedures set forth in
the Security Trust Agreement), so that the Company, or the Trustee upon the Company’s direction,
may whenever necessary negotiate title to any such assets without consent or signature from the
Reinsurer or any other entity.

(iii) Permitted Withdrawals. The Company may withdraw assets from the Security Trust at
any time and from time to time, notwithstanding any other provisions of the Asset Purchase
Agreement, this Agreement or any other Ancillary Agreement, and such assets may be utilized
and applied by the Company, or any successor by operation of law of the Company, including,
without limitation, any liquidator, rehabilitator, receiver or conservator of the Company,
without diminution because of insolvency on the part of the Company or Reinsurer; provided,
however, that the Company may only withdraw such assets for one or more of the following purposes:

	 	(A)	 	to reimburse the Company for any Reinsured Liabilities under the Secured Policies paid
by the Company to the extent not paid by the Reinsurer when due;
	 
	 	(B)	 	to make payment to the Reinsurer of any amounts that exceed the Required Balance;
	 
	 	(C)	 	to pay all or any portion of any Recapture Fee due in
connection with the recapture the Secured Policies; or
	 
	 	(D)	 	to pay any other amounts that are due to the Company under
this Agreement, the Asset Purchase Agreement or any of the Ancillary
Agreements to the extent not paid directly to Company by Reinsurer when due.

 

 

 

(g) Resort to Collateral. Notwithstanding the remedies contemplated by this Section 9.4,
the other Ancillary Agreements and the Asset Purchase Agreement, the Company may, in its
sole discretion, require direct payment by the Reinsurer of any sum in default under the Asset
Purchase Agreement, this Agreement or any other Ancillary Agreement in lieu of exercising the
remedies in this Section 9.4, and it shall be no defense to any such claim that the Company might
have had recourse to the Security Trust or recapture remedy.

(h) Certain Remedies. The Company and Reinsurer acknowledge that any damage caused to the
Company by reason of the breach by the Reinsurer or any of its successors in interest of this
Section 9.4 could not be adequately compensated for in monetary damages alone; therefore, each
party agrees that, in addition to any other remedies at law or otherwise, the Company shall
be entitled to specific performance of this Section 9.4 or an injunction to be issued by a
court of competent jurisdiction pursuant to Section 13.7 hereof restraining and enjoining any
violation of this Section 9.4, in addition to such other equitable or legal remedies as such court
may determine. The Company and Reinsurer hereby release, waive and discharge any and all claims
and causes of action asserting in any way that: (a) any Security Trust is not valid, binding or enforceable;
and (b) any remedy of the Company including, without limitation, the Company’s recapture and
Security Trust remedies hereunder and under Article IX of the Asset Purchase Agreement is not
valid, binding or enforceable. The Company and the Reinsurer are forever estopped and barred
from making any such assertion in any context or forum whatsoever.

ARTICLE X

DISPUTE RESOLUTION

10.1 Other Disputes over Calculations. After the Closing Date, any dispute between the
parties with respect to the calculation of amounts which are to be calculated, reported, or which
may be audited pursuant to this Agreement (other than disputes relating to: (i) the Closing Balance
Sheet, which shall be resolved in accordance with the Asset Purchase Agreement; or (ii)
calculations relating to DAC tax, which shall be resolved in accordance with Article VIII
hereof), which cannot be resolved by the parties within sixty (60) calendar days, shall be
referred to an independent accounting firm of national recognized standing (which shall not have
any material relationship with the Reinsurer or the Company) mutually agreed to by the parties;
provided, however, that where the dispute involves an actuarial issue, the dispute shall
instead be referred to an independent actuarial firm of national recognized standing (which
shall not have any material relationship with the Reinsurer or the Company) mutually agreed to by
the parties. There shall be no appeal from the decision made by such firm except that,
pursuant to Section 11.07 of the Asset Purchase Agreement, either party may petition a
court having jurisdiction over the parties and subject matter to reduce the arbitrator’s
decision to judgment. The fees charged by the accounting firm or actuarial firm, as applicable, to
resolve the dispute shall be allocated between the Company and the Reinsurer by such firm in
accordance with its judgment as to the relative merits of the parties’ positions in respect of
the dispute.

ARTICLE XI

INSOLVENCY

11.1 Insolvency Clause. In the event of the insolvency of the Company, all coinsurance made,
ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the
Reinsurer directly to the Company or to its liquidator, receiver or statutory successor on the
basis of the liability of the Company under the Policies and Post-Closing Policies without
diminution because of the insolvency of the Company. It is understood, however, that in the event
of the insolvency of the Company, the liquidator or receiver or statutory successor of the
Company shall give written notice of the pendency of a claim against the Company on a Policy
or Post-Closing Policy within a reasonable period of time after such claim is filed in the
insolvency proceedings and that during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its
own expense, in the proceeding where such claim is to be adjudicated any defense or defenses
which it may deem available to the Company or its liquidator or receiver or statutory successor. It is further understood that the
expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the
Company as part of the expense of liquidation to the extent of a proportionate share of the
benefit which may accrue to the Company solely as a result of the defense undertaken by the
Reinsurer.

 

 

 

ARTICLE XII

DURATION

12.1 Duration. This Agreement shall continue in force until such time that the Reinsurer’s
liability with respect to all Policies and Post-Closing Policies reinsured hereunder is
terminated pursuant to Section 12.2.

12.2 Reinsurer’s Liability. The liability of the Reinsurer under this Agreement with
respect to any Policy or Post-Closing Policy will begin simultaneously with that of the
Company, but not prior to the Effective Date. The Reinsurer’s liability with respect to any Policy will terminate on the earliest of: (a)
the date such Policy or Post-Closing Policy is recaptured in accordance with Section 9.4; or
(b) the date the Company’s liability on such Policy or Post-Closing Policy is terminated in accordance with its terms. Termination of
the Reinsurer’s liability under clauses (a) and (b) herein is subject to the Company’s actual
receipt of payments which discharge such liability in full in accordance with the provisions
of this Agreement. In no event shall the interpretation of this Section 12.2 imply a unilateral
right of the Reinsurer to terminate this Agreement.

12.3 Survival. Notwithstanding the other provisions of this Article XII, the terms and
conditions of Article I, VIII, IX and X and Section 13.2 shall remain in full force and effect
after the Termination Date.

ARTICLE XIII

MISCELLANEOUS

13.1 Notices. Any notice or other communication required or permitted under this Agreement
shall be in writing and shall be deemed to have been duly given when (a) mailed by United States
registered or certified mail, return receipt requested, (b) mailed by overnight express mail
or other nationally recognized overnight or same-day delivery service or (c) delivered in person
to the parties at the following addresses:

If to the Company, to:

Aetna Life Insurance and Annuity Company

151 Farmington Avenue

Hartford, Connecticut 06156

Attention: Chief Financial Officer

With copies (which shall not constitute notice) to:

Aetna Retirement Services, Inc.

151 Farmington Avenue

Hartford, Connecticut 06156

Attention: General Counsel

Lord, Bissell & Brook

115 South LaSalle Street

Chicago, Illinois 60603

Attention: James R. Dwyer

If to the Reinsurer, to:

Lincoln Life & Annuity Company of New York

120 Madison Street, Suite 1700

Syracuse, NY 13202

Attention: Philip L. Holstein

With a copy (which shall not constitute notice) to:

Sutherland, Asbill & Brennan LLP

1275 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

Attention: David A. Massey

Either party may change the names or addresses where notice is to be given by providing notice
to the other party of such change in accordance with this Section 13.1.

 

 

 

13.2 Confidentiality. Each of the parties shall maintain the confidentiality of
all information related to the Policies and Post-Closing Policies and all other information
denominated as confidential by the other party provided to it in connection with this
Agreement, and shall not disclose such information to any third parties without prior written
consent of the other party, except as may be permitted by Sections 5.18 and 11.02 of the Asset
Purchase Agreement.

13.3 Entire Agreement. This Agreement, the other Ancillary Agreements, the Asset Purchase
Agreement, the other agreements contemplated hereby and thereby, and the Exhibits and the
Schedules hereto and thereto contain the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements, written or oral, with respect thereto.

13.4 Waivers and Amendments. Any term or condition of this Agreement may be waived at any
time by the party that is entitled to the benefit thereof. Such waiver must be in writing and must
be executed by an executive officer of such party. A waiver on one occasion shall not be deemed
to be a waiver of the same or any other term or condition on a future occasion. This Agreement may
be modified or amended only by a writing duly executed by an executive officer of the Company and
the Reinsurer, respectively.

13.5 No Third Party Beneficiaries. This Agreement constitutes an indemnity reinsurance
agreement solely between the Company and the Reinsurer, and is intended solely for the benefit of
the parties hereto and their permitted successors and assigns, and it is not the intention of the
parties to confer any rights as a third-party beneficiary to this Agreement upon any other Person
as to the Transferred Assets or any other term, condition or provision of this Agreement.

13.6 Assignment. This Agreement shall not be assigned by either of the parties hereto without
the prior written approval of the other party.

13.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CONNECTICUT, WITHOUT REGARD TO ITS
CONFLICTS OF LAW DOCTRINE. ALL ISSUES RELATING TO VENUE AND JURISDICTION SHALL
BE GOVERNED BY SECTION 11.07 OF THE ASSET PURCHASE AGREEMENT.

13.8 Counterparts. This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which shall constitute one
and the same instrument.

13.9 Severability. If any provision of this Agreement is held to be illegal, invalid or
unenforceable under any present or future law or if determined by a court of competent
jurisdiction to be unenforceable, and if the
rights or obligations of the Company or the Reinsurer under this Agreement will not be materially
and adversely affected thereby, such provision shall be fully severable, and this Agreement will
be construed and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain
in full force and effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom.

13.10 Schedules, Exhibits and Paragraph Headings. Schedules and Exhibits attached
hereto are made a part of this Agreement. Paragraph headings are provided for reference
purposes only and are not made a part of this Agreement.

 

 

 

13.11 Expenses. Except as explicitly provided to the contrary herein or in the Asset Purchase
Agreement, each party shall be solely responsible for all expenses it incurs in connection with
this Agreement or in consummating the transactions contemplated hereby or performing the
obligations imposed hereby, including, without limitation, the cost of its attorneys, accountants
and other professional advisors.

13.12 No Prejudice. The parties agree that this Agreement has been jointly negotiated
and drafted by the parties hereto and that the terms hereof shall not be construed in favor of
or against any party on account of its participation in such negotiations and drafting.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective
this 1st day of October, 1998.

AETNA LIFE INSURANCE AND ANNUITY COMPANY

LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK2005 Stock Incentive Plan

Exhibit 10.2

MARVEL ENTERPRISES, INC.

2005 STOCK INCENTIVE PLAN

As Amended and Restated on December 31, 2008

 

 

 

MARVEL ENTERPRISES, INC.

2005 STOCK INCENTIVE PLAN

	 	 	 	 	 
	 	 	Page	 
	 
	 	 	 	 
	1. PURPOSE
	 	 	1	 
	 
	 	 	 	 
	2. DEFINITIONS
	 	 	1	 
	 
	 	 	 	 
	3. ADMINISTRATION
	 	 	3	 
	 
	 	 	 	 
	4. STOCK SUBJECT TO PLAN
	 	 	4	 
	 
	 	 	 	 
	5. ELIGIBILITY; PER-PERSON AWARD LIMITATIONS
	 	 	5	 
	 
	 	 	 	 
	6. SPECIFIC TERMS OF AWARDS
	 	 	6	 
	 
	 	 	 	 
	7. PERFORMANCE AWARDS
	 	 	10	 
	 
	 	 	 	 
	8. CERTAIN PROVISIONS APPLICABLE TO AWARDS
	 	 	12	 
	 
	 	 	 	 
	9. CHANGE IN CONTROL
	 	 	13	 
	 
	 	 	 	 
	10. GENERAL PROVISIONS
	 	 	14	 
	 
	 	 	 	 
	EXHIBIT A: COMPLIANCE WITH CODE SECTION 409A
	 	 	20	 
	 
	 	 	 	 
	EXHIBIT B: DEFERRAL ELECTION RULES
	 	 	25	 
	 
	 	 	 	 

 

-i-

 

MARVEL
ENTERPRISES, INC.

2005 STOCK INCENTIVE PLAN

1. Purpose. The purpose of this 2005 Stock Incentive Plan (the “Plan”) is to aid Marvel
Enterprises, Inc., a Delaware corporation (together with its successors and assigns, the
“Company”), in attracting, retaining, motivating and rewarding officers, employees and directors of
the Company and its subsidiaries and consultants and advisors to the Company or its subsidiaries
(“Participants”), to provide for equitable and competitive compensation opportunities, to recognize
individual contributions and reward achievement of Company goals, and promote the creation of
long-term value for stockholders by closely aligning the interests of Participants with those of
stockholders. The Plan authorizes stock-based incentives for Participants.

2. Definitions. In addition to the terms defined in Section 1 above and elsewhere in the
Plan, the following capitalized terms used in the Plan have the respective meanings set forth in
this Section:

(a) “Annual Limit” shall have the meaning specified in Section 5(b).

(b) “Award” means any Option, SAR, Restricted Stock, Deferred Stock, Stock granted as a bonus
or in lieu of another award, Dividend Equivalent, Other Stock-Based Award, or Performance Award,
together with any related right or interest, granted to a Participant under the Plan.

(c) “Beneficiary” means the legal representatives of the Participant’s estate entitled by will
or the laws of descent and distribution to receive the benefits under a Participant’s Award upon a
Participant’s death, provided that, if and to the extent authorized by the Committee, a Participant
may be permitted to designate a Beneficiary, in which case the “Beneficiary” instead will be the
person, persons, trust or trusts (if any are then surviving) which have been designated by the
Participant in his or her most recent written and duly filed beneficiary designation to receive the
benefits specified under the Participant’s Award upon such Participant’s death. Unless otherwise
determined by the Committee, any designation of a Beneficiary other than a Participant’s spouse
shall be subject to the written consent of such spouse.

(d) “Board” means the Company’s Board of Directors.

(e) “Cause” means “cause” as defined in an employment agreement between the Company and the
Participant in effect at the time of Termination of Employment. If, however, there is no such
employment agreement or no definition of “cause” therein, Cause means an individual’s (i)
intentional failure to perform reasonably assigned duties, (ii) dishonesty or willful misconduct in
the performance of duties, (iii) involvement in a transaction in connection with the performance of
duties to the Company or any of its Subsidiaries thereof which transaction is adverse to the
interests of the Company or any of its Subsidiaries and which is engaged in for personal profit,
(iv) knowing or grossly negligent misconduct which results in the Company being required to prepare
an accounting restatement due to the material noncompliance of the Company with any financial
reporting requirement under the securities laws, (v) willful violation of any law, rule or
regulation in connection with the performance of duties (other than traffic violations or similar
offenses), or (v) the commission of an act of fraud or intentional misappropriation or conversion
of assets or opportunities of the Company or any Subsidiary; provided, however, that
the Committee may vary the definition of “Cause” in any agreement or document relating to an
Award.

 

-1-

 

(f) “Code” means the Internal Revenue Code of 1986, as amended. References to any provision
of the Code or regulation thereunder shall include any successor provisions and regulations,
including any applicable guidance or pronouncement of the Department of the Treasury and Internal
Revenue Service.

(g) “Committee” means the Compensation Committee of the Board, the composition and governance
of which is established in the Committee’s Charter as approved from time to time by the Board and
subject to Section 303A.05 of the Listed Company Manual of the New York Stock Exchange, and other
corporate governance documents of the Company. No action of the Committee shall be void or deemed
to be without authority due to the failure of any member, at the time the action was taken, to meet
any qualification standard set forth in the Committee Charter or this Plan. The full Board may
perform any function of the Committee hereunder, except to the extent limited under Section 303A.05
of the Listed Company Manual or by law, in which case the term “Committee” shall refer to the
Board.

(h) “Covered Employee” means an Eligible Person who is a Covered Employee as specified in
Section 10(j).

(i) “Deferred Stock” means a right, granted under this Plan, to receive Stock or other Awards
or a combination thereof at the end of a specified deferral period.

(j) “Dividend Equivalent” means a right, granted under this Plan, to receive cash, Stock,
other Awards or other property equal in value to all or a specified portion of the dividends paid
with respect to a specified number of shares of Stock.

(k) “Effective Date” means the effective date specified in Section 10(q).

(l) “Eligible Person” has the meaning specified in Section 5(a).

(m) “Exchange Act” means the Securities Exchange Act of 1934, as amended. References to any
provision of the Exchange Act or rule (including a proposed rule) thereunder shall include any
successor provisions and rules.

(n) “Fair Market Value” means the fair market value of Stock, Awards or other property as
determined in good faith 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 closing sales
price per share of Stock reported on a consolidated basis for securities listed on the principal
stock exchange or market on which Stock is traded on the trading day prior to the day such value is
being determined. Fair Market Value relating to the exercise price or base price of any Non-Code
Section 409A Option or SAR shall conform to requirements under Code Section 409A.

(o) “Code Section 409A Awards” means Awards that constitute a deferral of compensation under
Code Section 409A and regulations thereunder. “Non-Code Section 409A Awards” means Awards other
than Code Section 409A Awards. Although the Committee retains authority under the Plan to grant
Options, SARs and Restricted Stock on terms that will qualify those Awards as Code Section 409A
Awards, Options, SARs exercisable for Stock, and
Restricted Stock are intended to be Non-Code Section 409A Awards unless otherwise expressly
specified by the Committee.

 

-2-

 

(p) “Incentive Stock Option” or “ISO” means any Option designated as an incentive stock option
within the meaning of Code Section 422 and qualifying thereunder.

(q) “Option” means a right, granted under this Plan, to purchase Stock.

(r) “Other Stock-Based Awards” means Awards granted to a Participant under Section 6(h).

(s) “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.

(t) “Performance Award” means a conditional right, granted to a Participant under Sections
6(i) and 7, to receive cash, Stock or other Awards or payments.

(u) “Preexisting Plan” means the Company’s 1998 Stock Incentive Plan.

(v) “Restricted Stock” means Stock granted under this Plan which is subject to certain
restrictions and to a risk of forfeiture.

(w) “Rule 16b-3” means Rule 16b-3, as from time to time in effect and applicable to
Participants, promulgated by the Securities and Exchange Commission under Section 16 of the
Exchange Act.

(x) “Stock” means the Company’s Common Stock, par value $0.01 per share, and any other equity
securities of the Company that may be substituted or resubstituted for Stock pursuant to Section
10(c).

(y) “Stock Appreciation Rights” or “SAR” means a right granted to a Participant under Section
6(c).

3. Administration.

(a) Authority of the Committee. The Plan shall be administered by the Committee, which shall
have full and final authority, in each case subject to and consistent with the provisions of the
Plan, to select Eligible Persons to become Participants; to grant Awards; to determine the type and
number of Awards, the dates on which Awards may be exercised and on which the risk of forfeiture or
deferral period relating to Awards shall lapse or terminate, the acceleration of any such dates,
the expiration date of any Award, whether, to what extent, and under what circumstances an Award
may be settled, or the exercise price of an Award may be paid, in cash, Stock, other Awards, or
other property, and other terms and conditions of, and all other matters relating to, Awards; to
prescribe documents evidencing or setting terms of Awards (such Award documents need not be
identical for each Participant), amendments thereto, and rules and regulations for the
administration of the Plan and amendments thereto; to construe and interpret the Plan and Award
documents and correct defects, supply omissions or reconcile inconsistencies therein; and to make
all other decisions and determinations as the Committee may deem necessary or advisable for the
administration of the Plan. Decisions of the Committee with respect to the administration and
interpretation of the Plan shall be final, conclusive, and binding upon all persons interested in
the Plan, including Participants, Beneficiaries, transferees under
Section 10(b) and other persons claiming rights from or through a Participant, and
stockholders. The foregoing notwithstanding, the Board shall perform the functions of the
Committee for purposes of granting Awards under the Plan to non-employee directors (the functions
of the Committee with respect to other aspects of non-employee director awards is not exclusive to
the Board, however).

 

-3-

 

(b) Manner of Exercise of Committee Authority. 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 act through subcommittees, including for
purposes of perfecting exemptions under Rule 16b-3 or qualifying Awards under Code Section 162(m)
as performance-based compensation, in which case the subcommittee shall be subject to and have
authority under the charter applicable to the Committee, and the acts of the subcommittee shall be
deemed to be acts of the Committee hereunder. The Committee may delegate to officers or managers
of the Company or any subsidiary or affiliate, or committees thereof, the authority, subject to
such terms as the Committee shall determine, to perform such functions, including administrative
functions, as the Committee may determine, to the extent (i) that such delegation will not result
in the loss of an exemption under Rule 16b-3(d) or (e) for Awards granted to Participants subject
to Section 16 of the Exchange Act in respect of the Company and will not cause Awards intended to
qualify as “performance-based compensation” under Code Section 162(m) to fail to so qualify, and
(ii) permitted under Section 157 and other applicable provisions of the Delaware General
Corporation Law.

(c) Limitation of Liability. Each member of the Committee and the Board of Directors, and any
person to whom authority or duties are delegated hereunder, shall be entitled to, in good faith,
rely or act upon any report or other information furnished to him or her by any officer or other
employee of the Company or a subsidiary or affiliate, the Company’s independent certified public
accountants, or any executive compensation consultant, legal counsel, or other professional
retained by the Company to assist in the administration of the Plan. No member of the Board or
Committee, nor any person to whom authority or duties are delegated hereunder, shall be personally
liable for any action, determination, or interpretation taken or made in good faith with respect to
the Plan, and any such person shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action, determination, or interpretation.

4. Stock Subject To Plan.

(a) Overall Number of Shares Available for Delivery. The total number of shares of Stock
reserved and available for delivery in connection with Awards under the Plan shall be (i) four
million shares, plus (ii) the number of shares that, immediately prior to the Effective Date,
remain available for new awards under the Preexisting Plan plus (iii) the number of shares subject
to awards under the Preexisting Plan which become available in accordance with Section 4(b) after
the Effective Date; provided, however, that the total number of shares with respect to which ISOs
may be granted shall not exceed the number specified under clause (i) above. The total number of
shares available is subject to adjustment as provided in Section 10(c). Any shares of Stock
delivered under the Plan shall consist of authorized and unissued shares or treasury shares.

 

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(b) Share Counting Rules. 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 in accordance with this Section 4(b). For purposes of the Plan,
shares shall be counted against those reserved to the extent such shares have
been delivered and are no longer subject to a risk of forfeiture. Accordingly, (i) to the
extent that an Award under the Plan or award under a Preexisting Plan is canceled, expired,
forfeited, settled in cash, settled by issuance of fewer shares than the number underlying the
award, or otherwise terminated without delivery of shares to the Participant, the shares retained
by or returned to the Company will be available under the Plan; and (ii) shares that are withheld
from such an award or separately surrendered by the Participant in payment of the exercise price or
taxes relating to such an award shall be deemed to constitute shares not delivered to the
Participant and will be available under the Plan. The Committee may determine that Awards may be
outstanding that relate to more shares than the aggregate remaining available under the Plan so
long as such Awards will not in fact result in delivery and vesting of shares in excess of the
number then available. In addition, in the case of any Award granted in assumption of or in
substitution for an award of a company or business acquired by the Company or a subsidiary or
affiliate or with which the Company or a subsidiary or affiliate combines, shares issued or
issuable in connection with such substitute Award shall not be counted against the number of shares
reserved under the Plan.

5. Eligibility; Per-Person Award Limitations.

(a) Eligibility. Awards may be granted under the Plan only to Eligible Persons. For purposes
of the Plan, an “Eligible Person” means an employee of the Company or any subsidiary or affiliate,
including any executive officer or non-employee director of the Company or a subsidiary or
affiliate, and any person who has been offered employment by the Company or a subsidiary or
affiliate, provided that such prospective employee may not receive any payment or exercise any
right relating to an Award until such person has commenced employment with the Company or a
subsidiary or affiliate. An employee on leave of absence may be considered as still in the employ
of the Company or a subsidiary or affiliate for purposes of eligibility for participation in the
Plan, to the extent specified by the Committee. Consultants and advisors to the Company or its
subsidiaries or affiliates shall also be eligible for participation in the Plan. For purposes of
the Plan, a joint venture in which the Company or a subsidiary has a substantial direct or indirect
equity investment shall be deemed an affiliate, if so determined by the Committee. Holders of
awards granted by a company or business acquired by the Company or a subsidiary or affiliate, or
with which the Company or a subsidiary or affiliate combines, are eligible for grants of substitute
awards granted in assumption of or in substitution for such outstanding awards previously granted
under the Plan in connection with such acquisition or combination transaction. If a non-employee
director is required by contract to deliver any compensation from the Company to the director’s
employer, the Committee may specify or permit the director to elect that Awards be made or
transferred to such director’s employer; in such case, vesting, exercisability and termination
provisions and other Award provisions specified by the Committee shall continue to apply to the
individual director and his or her service to the Company.

(b) Per-Person Award Limitations. In each calendar year during any part of which the Plan is
in effect, an Eligible Person may be granted Awards intended to qualify as “performance-based
compensation” under Code Section 162(m) under the Plan relating to up to his or her Annual Limit.
A Participant’s Annual Limit, in any year during any part of which the Participant is then eligible
under the Plan, shall equal two million shares plus the amount of the Participant’s unused Annual
Limit relating to the same type of Award as of the close of the previous year, subject to
adjustment as provided in Section 10(c). For this purpose, (i) “earning” means satisfying
performance conditions so that an amount becomes payable, without regard to whether it is to be
paid currently or on a deferred basis or continues to be subject to any service requirement or
other non-performance condition, and (ii) a Participant’s Annual Limit is used to
the extent an amount or number of shares may be potentially earned or paid under an Award,
regardless of whether such amount or shares are in fact earned or paid.

 

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(c) Limits on Non-Employee Director Awards. Non-employee directors may be granted any type of
Award under the Plan, but the aggregate number of shares that may be delivered in connection with
Awards granted to non-employee directors shall be twenty percent of the total reserved under the
Plan, and in any five-year period a non-employee director may be granted Awards under the Plan
relating to no more than 250,000 shares, subject to adjustment as provided in Section 10(c).

6. Specific Terms Of Awards.

(a) General. Awards may be granted on the terms and conditions set forth in this Section 6.
In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or
thereafter (subject to Sections 10(e) and 10(k)), 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 or service by the
Participant, terms requiring forfeiture of Awards and gains realized upon exercise, vesting or
settlement of Awards in cases in which the Participant engages in conduct harmful to the Company,
and terms permitting a Participant to make elections relating to his or her Award. The Committee
shall retain full power and discretion with respect to any term or condition of an Award that is
not mandatory under the Plan, subject to Section 10(k). The Committee shall require the payment of
lawful consideration for an Award to the extent necessary to satisfy the requirements of the
Delaware General Corporation Law, and may otherwise require payment of consideration for an Award
except as limited by the Plan.

(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 (including both ISOs and non-qualified Options) 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, subject to Section
8(a). Notwithstanding the foregoing, any substitute award granted in assumption of or
in substitution for an outstanding award granted by a company or business acquired by
the Company or a subsidiary or affiliate, or with which the Company or a subsidiary or
affiliate combines may be granted with an exercise price per share of Stock other than
as required above.

	 	(ii)	 	Option Term; Time and Method of Exercise. The Committee shall determine the
term of each Option, provided that in no event shall the term of any Option exceed a
period of ten years from the date of grant. The Committee shall determine 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 and the form of such payment (subject to Sections 10(k) and 10(l)), including,
without limitation, cash, Stock (including by withholding Stock deliverable upon
exercise, if such withholding or withholding feature will not result in additional
accounting expense to the Company), other Awards or awards granted under other plans
of the Company or any subsidiary or affiliate, or other property (including through
broker-assisted “cashless exercise” arrangements, to the extent permitted by
applicable law), and the methods by or forms in which Stock will be delivered or
deemed to be delivered in satisfaction of Options to Participants (including, in
the case of Code Section 409A Awards, deferred delivery of shares subject to the
Option, as mandated by the Committee, with such deferred shares subject to any
vesting, forfeiture or other terms as the Committee may specify).

 

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	 	(iii)	 	ISOs. The terms of any ISO granted under the Plan shall comply in all
respects with the provisions of Code Section 422.

(c) Stock Appreciation Rights. The Committee is authorized to grant SAR’s to Participants on
the following terms and conditions:

	 	(i)	 	Right to Payment. An 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 over (B) the grant price of the
SAR, which shall be determined by the Committee but which in any event shall be not
less than the Fair Market Value of a share of Stock on the date of grant of the SAR,
subject to Section 8(a).

	 	(ii)	 	Other Terms. The Committee shall determine the term of each SAR, provided
that in no event shall the term of an SAR exceed a period of ten years from the date
of grant. 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 Stock will be delivered or deemed
to be delivered to Participants, whether or not a SAR shall be free-standing or in
tandem or combination with any other Award, and whether or not the SAR will be a Code
Section 409A Award or Non-Code Section 409A Award (cash SARs will in all cases be Code
Section 409A Awards, except as otherwise provided under applicable Code Section 409A
regulations). The Committee may require that an outstanding Option be exchanged for
an SAR exercisable for Stock having vesting, expiration, and other terms substantially
the same as the Option, so long as such exchange will not result in additional
accounting expense to the Company.

(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 and under
such other circumstances as the Committee may determine at the date of grant or
thereafter. Except to the extent restricted under the terms of the Plan and any Award
document relating to the Restricted Stock, a Participant granted Restricted Stock
shall have all of the rights of a stockholder, 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).

 

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	 	(ii)	 	Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment or service during the applicable restriction period,
Restricted Stock that is at that time subject to restrictions shall be forfeited and
reacquired by the Company; provided that the Committee may provide, by rule or
regulation or in any Award document, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Restricted Stock will lapse in whole
or in part, including in the event of terminations resulting from specified causes.

	 	(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
Company retain physical possession of the certificates, and that the Participant
deliver a stock power to the Company, 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 dividends paid on a share of Restricted
Stock shall be either (A) paid with respect to such Restricted Stock at the dividend
payment date in cash, in kind, or in a number of shares of unrestricted Stock having a
Fair Market Value equal to the amount of such dividends, or (B) automatically
reinvested in additional Restricted Stock or held in kind, which shall be subject to
the same terms as applied to the original Restricted Stock to which it relates, or (C)
deferred as to payment, either as a cash deferral or with the amount or value thereof
automatically deemed reinvested in shares of Deferred Stock, other Awards or other
investment vehicles, subject to such terms as the Committee shall determine or permit
a Participant to elect. 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. The Committee is authorized to grant Deferred Stock to Participants,
subject to the following terms and conditions:

	 	(i)	 	Award and Restrictions. Issuance of Stock will occur upon expiration of the
deferral period specified for an Award of Deferred Stock by the Committee (or, if
permitted by the Committee, as elected by the Participant). In addition, Deferred
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
at the expiration of the deferral period or at earlier specified times (including
based on achievement of performance goals and/or future service requirements),
separately or in combination, in installments or otherwise, and under such other
circumstances as the Committee may determine at the date of grant or thereafter.
Deferred Stock may be satisfied by delivery of Stock, other
Awards, or a combination thereof (subject to Section 10(l)), as determined by the
Committee at the date of grant or thereafter.

 

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	 	(ii)	 	Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment or service during the applicable deferral period or portion
thereof to which forfeiture conditions apply (as provided in the Award document
evidencing the Deferred Stock), all Deferred Stock that is at that time subject to
such forfeiture conditions shall be forfeited; provided that the Committee may
provide, by rule or regulation or in any Award document, or may determine in any
individual case, that restrictions or forfeiture conditions relating to Deferred Stock
will lapse in whole or in part, including in the event of terminations resulting from
specified causes. Deferred Stock subject to a risk of forfeiture may be called
“restricted stock units” or otherwise designated by the Committee.

	 	(iii)	 	Dividend Equivalents. Unless otherwise determined by the Committee,
Dividend Equivalents on the specified number of shares of Stock covered by an Award of
Deferred Stock shall be either (A) paid with respect to such Deferred Stock at the
dividend payment date in cash or in shares of unrestricted Stock having a Fair Market
Value equal to the amount of such dividends, or (B) deferred with respect to such
Deferred Stock, either as a cash deferral or with the amount or value thereof
automatically deemed reinvested in additional Deferred Stock, other Awards or other
investment vehicles having a Fair Market Value equal to the amount of such dividends,
as the Committee shall determine or permit a Participant to elect.

(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 of the Company or a subsidiary
or affiliate to pay cash or deliver other property under the Plan or under other plans or
compensatory arrangements, subject to such terms as shall be determined by the Committee.

(g) Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to a
Participant, which may be awarded on a free-standing basis or in connection with another Award.
The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or
shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles,
and subject to restrictions on transferability, risks of forfeiture and such other terms as the
Committee may specify.

(h) 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 or factors
that may influence the value of Stock, 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 Company or business units thereof
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 or affiliates
or other business units. 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(h) 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(h).

 

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(i) Performance Awards. Performance Awards, denominated in cash or in Stock or other Awards,
may be granted by the Committee in accordance with Section 7. A Performance Award constitutes an
Award authorized under Section 6(b) — (h) to which performance conditions have been attached. In
addition, cash-denominated awards that may be settled by delivery of shares of Stock issued under
this Plan or other Awards may be authorized under the Company’s 2005 Incentive Compensation Plan,
subject to the terms and conditions of that plan.

7. Performance Awards.

(a) Performance Awards Generally. Performance Awards may be denominated as a number of shares
of Stock or specified number of other Awards (or a combination) which may be earned upon
achievement or satisfaction of performance conditions specified by the Committee. In addition, the
Committee may specify that any other Award shall constitute a Performance Award by conditioning the
right of a Participant to exercise the Award or have it settled, and the timing thereof, upon
achievement or satisfaction of 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 7(b) and 7(c) in the case of a Performance Award intended to qualify as
“performance-based compensation” under Code Section 162(m).

(b) Performance Awards Granted to Covered Employees. If the Committee determines that a
Performance Award to be granted to an Eligible Person who is designated by the Committee as likely
to be 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 a preestablished performance goal and other terms set forth in this Section
7(b).

	 	(i)	 	Performance Goal Generally. The performance goal for such Performance Awards
shall consist of one or more business criteria and a targeted level or levels of
performance with respect to each of such criteria, as specified by the Committee
consistent with this Section 7(b). The performance goal shall be objective and shall
otherwise meet the requirements of Code Section 162(m) and regulations thereunder,
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 one performance goal or that two or
more of the performance goals 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.

 

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	 	(ii)	 	Business Criteria. One or more of the following business criteria for the
Company, on a consolidated basis, and/or for specified subsidiaries or divisions or
affiliates or other business units of the Company shall be used by the Committee in
establishing the Performance Goal for such Award Opportunities: (1) net sales,
revenues or royalties; (2) gross profit or pre-tax profit; (3) operating
income, earnings before or after taxes, earnings before or after interest,
depreciation, amortization, or extraordinary or special items; (4) net income or
net income per common share (basic or fully diluted); (5) return measures,
including, but not limited to, return on assets (gross or net), return on
investment, return on capital, or return on equity; (6) cash flow, free cash flow,
cash flow return on investment (discounted or otherwise), net cash provided by
operations, or cash flow in excess of cost of capital; (7) economic value created
or economic profit; (8) operating margin or profit margin; (9) stockholder value
creation measures, including but not limited to stock price or total stockholder
return; (10) royalties or revenues from specific assets, projects, fees or payments
received or lines of business; (11) targets relating to expense or operating
expense, working capital targets, or operating efficiency; and (12) strategic
business criteria, consisting of one or more objectives based on meeting specified
goals relating to market penetration, new projects, new products, new ventures,
geographic business expansion, operating goals, cost targets, customer
satisfaction, employee satisfaction, human resources management, supervision of
litigation and information technology, and acquisitions or divestitures of
subsidiaries, affiliates or joint ventures. The targeted level or levels of
performance with respect to such business criteria may be established at such
levels and in such terms as the Committee may determine, in its discretion,
including in absolute terms, as a goal relative to performance in prior periods, or
as a goal compared to the performance of one or more comparable companies or an
index covering multiple companies

	 	(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 of up to one year or more than one year, as specified by the
Committee. A performance goal shall be established not later than the earlier of (A)
90 days after the beginning of any performance period applicable to such Performance
Award or (B) the time 25% of such performance period has elapsed.

	 	(iv)	 	Settlement of Performance Awards; Other Terms. Settlement of Performance
Awards shall be in cash, Stock, other Awards or other property, in the discretion of
the Committee. The Committee may, in its discretion, increase or 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 7(b). Any settlement which
changes the form of payment from that originally specified shall be implemented in a
manner such that the Performance Award and other related Awards do not, solely for
that reason, fail to qualify as “performance-based compensation” for purposes of Code
Section 162(m). 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 or other event (including a change in control) prior to
the end of a performance period or settlement of such Performance Awards.

 

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(c) Written Determinations. Determinations by the Committee as to the establishment of
performance goals, the amount potentially payable in respect of Performance Awards, the level of
actual achievement of the specified performance goals relating to
Performance Awards, and the amount of any final Performance Award shall be recorded in writing
in the case of Performance Awards intended to qualify under Section 162(m). Specifically, the
Committee shall certify in writing, in a manner conforming to applicable regulations under Section
162(m), prior to settlement of each such Award granted to a Covered Employee, that the performance
objective relating to the Performance Award and other material terms of the Award upon which
settlement of the Award was conditioned have been satisfied.

8. 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
Company, any subsidiary or affiliate, or any business entity to be acquired by the Company or a
subsidiary or affiliate, or any other right of a Participant to receive payment from the Company or
any subsidiary or affiliate; provided, however, that a Code Section 409A Award may not be granted
in tandem with a Non-Code Section 409A Award. Awards granted in addition to or in tandem with
other Awards or awards may be granted either as of the same time as or a different time from the
grant of such other Awards or awards. Subject to Sections 10(k) and (l), the Committee may
determine that, in granting a new Award, the in-the-money value or fair value of any surrendered
Award or award or the value of any other right to payment surrendered by the Participant may be
applied to reduce the exercise price of any Option, grant price of any SAR, or purchase price of
any other Award.

(b) Term of Awards. The term of each Award shall be for such period as may be determined by
the Committee, subject to the express limitations set forth in Sections 6(b)(ii), 6(c)(ii) and 8 or
elsewhere in the Plan.

(c) Form and Timing of Payment under Awards; Deferrals. Subject to the terms of the Plan
(including Sections 10(k) and (l)) and any applicable Award document, payments to be made by the
Company or a subsidiary or affiliate 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, subject to Sections 10(k) and (l). Subject to
Section 10(k), installment or deferred payments may be required by the Committee (subject to
Section 10(e)) 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. In the case of any Code Section 409A Award that is vested and no longer subject to a risk
of forfeiture (within the meaning of Code Section 83), such Award will be distributed to the
Participant, upon application of the Participant, if the Participant has had an unforeseeable
emergency within the meaning of Code Sections 409A(a)(2)(A)(vi) and 409A(a)(2)(B)(ii), in
accordance with Code Section 409A(a)(2)(B)(ii).

 

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(d) Additional Award Forfeiture Provisions. The Committee may condition a Participant’s right
to receive a grant of an Award, to exercise the Award, to retain cash, Stock, other Awards, or
other property acquired in connection with an Award, or to retain the profit or gain realized by a
Participant in connection with an Award, including cash or other proceeds received upon sale of
Stock acquired in connection with an Award, upon compliance by the
Participant with specified conditions relating to non-competition, confidentiality of
information relating to or possessed by the Company, non-solicitation of customers, suppliers, and
employees of the Company, cooperation in litigation, non-disparagement of the Company and its
officers, directors and affiliates, and other restrictions upon or covenants of the Participant for
the protection of the Company and its business interests, including during specified periods
following termination of a Participant’s employment or service to the Company.

9. Change in Control. Other provisions of the Plan notwithstanding but subject to the
limitations set forth in this Section 9, the Committee may provide, in an Award agreement or in
such other manner as the Committee may specify, that in the event of a change in control or a
termination of employment or service following a change in control, any or all of the following
terms will apply:

	 	(i)	 	That an outstanding Award will vest in whole or in part, thereby becoming
non-forfeitable and entitling the Participant to exercise specified rights under the
Award, and that the Award will remain outstanding for specified periods thereafter
(but not beyond the maximum term of the Award permitted under the Plan);

	 	(ii)	 	That a period in which settlement of an outstanding Award is to be deferred
beyond the date of vesting will immediately end, except as limited under Code Section
409A;

	 	(iii)	 	That, with respect to an outstanding Award subject to the achievement of
performance goals and conditions, such performance goals and conditions will be deemed
to be met at a specified level (for example, at target level or maximum level), or
that such level of performance will be determined in some other manner; and/or

	 	(iv)	 	That an outstanding Award will be immediately settled by payment of cash, or
the Participant will be permitted during a specified period to elect such a cash
settlement, with the amount of cash payable equal to the intrinsic value or fair value
of the Award, or a value determined in another specified manner, at a specified date
or during a specified period, except as limited under Code Section 409A.

For purposes of the Plan, the term “change in control” shall be defined by the Committee, and need
not be the same for all Participants. Any of the terms of Awards relating to a change in control
shall apply to a Non-Code Section 409A Award only to the extent permitted without causing the Award
to become subject to Code Section 409A, and shall apply to a Code Section 409A Award only to the
extent permitted under Code Section 409A. For this purpose, Code Section 409A may permit some of
the terms specified above to apply only if the change in control constitutes a change in the
ownership or effective control of the Company, or in the ownership of a substantial portion of the
assets of the Company, within the meaning of Code Section 409A(a)(2)(A)(v).

 

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10. General Provisions.

(a) Compliance with Legal and Other Requirements. The Company may, to the extent deemed
necessary or advisable by the Committee acting in good faith, and subject to Section 10(k),
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 Company are listed or quoted, or compliance with any other obligation of the
Company, 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.

(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 Company or a
subsidiary or affiliate thereof), 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 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, subject to any terms and conditions which the Committee may impose
thereon (which may include limitations the Committee may deem appropriate in order that offers and
sales under the Plan will meet applicable requirements of registration forms under the Securities
Act of 1933 specified by the Securities and Exchange Commission). 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 document applicable to such Participant, except
as otherwise determined by the Committee, and to any additional terms and conditions deemed
necessary or appropriate by the Committee.

(c) Adjustments. In the event that any large, special and non-recurring dividend or other
distribution (whether in the form of cash or property other than Stock), recapitalization, forward
or reverse split, Stock dividend, 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
and, in the case of any outstanding Award, necessary in order to prevent dilution or enlargement of
the rights of the Participant,, then the Committee shall, in an equitable manner as determined by
the Committee, 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, including the share
limits applicable to non-employee director Awards under Section 5(c), (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 or, if deemed appropriate, the Committee
may make provision for a payment of cash or property to the holder of an outstanding Option
(subject to Section 10(l)). 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) 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 Company, any subsidiary or affiliate or other business unit, or the
financial statements of the Company or any subsidiary or affiliate, 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 Company, any subsidiary or

 

-14-

 

affiliate 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 the existence of such authority (i) would cause Options, SARs, or
Performance Awards granted under the Plan 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, or (ii) would cause the Committee to be deemed to have
authority to change the targets, within the meaning of Treasury Regulation 1.162-27(e)(4)(vi),
under the performance goals relating to Options or SARs granted to Covered Employees and intended
to qualify as “performance-based compensation” under Code Section 162(m) and regulations
thereunder. In furtherance of the foregoing, in the event of an equity restructuring, as defined
in FAS 123R, which affects the Stock, a Participant shall have a legal right to an adjustment to
the Participant’s Award which shall preserve without enlarging the value of the Award, with the
manner of such adjustment to be determined by the Committee in its discretion, and subject to any
limitation on this right set forth in the applicable Award agreement. Any fractional share
resulting from such adjustment may be eliminated.

(d) Tax Provisions.

	 	(i)	 	Withholding. The Company and any subsidiary or affiliate 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 Company 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 withholding obligations, either on a mandatory or elective basis in the
discretion of the Committee, or in satisfaction of other tax obligations. Other
provisions of the Plan notwithstanding, unless consented to by the Committee, only the
minimum amount of Stock deliverable in connection with an Award necessary to satisfy
statutory withholding requirements will be withheld, unless withholding of any
additional amount of Stock will not result in additional accounting expense to the
Company.

	 	(ii)	 	Required Consent to and Notification of Code Section 83(b) Election. No
election under Section 83(b) of the Code (to include in gross income in the year of
transfer the amounts specified in Code Section 83(b)) or under a similar provision of
the laws of a jurisdiction outside the United States may be made unless expressly
permitted by the terms of the Award document or by action of the Committee in writing
prior to the making of such election. In any case in which a Participant is permitted
to make such an election in connection with an Award, the Participant shall notify the
Company of such election within ten days of filing notice of the election with the
Internal Revenue Service or other governmental authority, in addition to any filing
and notification required pursuant to regulations issued under Code Section 83(b) or
other applicable provision.

	 	(iii)	 	Requirement of Notification Upon Disqualifying Disposition Under Code
Section 421(b). If any Participant shall make any disposition of shares of Stock
delivered pursuant to the exercise of an ISO under the circumstances described in Code
Section 421(b) (i.e., a disqualifying disposition), such Participant shall notify the
Company of such disposition within ten days thereof.

 

-15-

 

(e) Changes to the Plan. The Board may amend, suspend or terminate the Plan or the
Committee’s authority to grant Awards under the Plan without the consent of stockholders or
Participants; provided, however, that any amendment to the Plan shall be submitted to the Company’s
stockholders for approval not later than the earliest annual meeting for which the record date is
at or after the date of such Board action if such stockholder approval is required by any federal
or state law or regulation or the rules of the New York Stock Exchange or any other stock exchange
or automated quotation system on which the Stock may then be listed or quoted, or if such amendment
would materially increase the number of shares reserved for issuance and delivery under the Plan,
and the Board may otherwise, in its discretion, determine to submit other amendments to the Plan to
stockholders for approval; and provided further, that, without the consent of an affected
Participant, no such Board action may materially and adversely affect the rights of such
Participant under any outstanding Award (for this purpose, actions that alter the timing of federal
income taxation of a Participant will not be deemed material unless such action results in an
income tax penalty on the Participant). Without the approval of stockholders, the Committee will
not amend or replace previously granted Options or SARs in a transaction that constitutes a
“repricing,” as such term is used in Section 303A.08 of the Listed Company Manual of the New York
Stock Exchange. With regard to other terms of Awards, the Committee shall have no authority to
waive or modify any such Award term after the Award has been granted to the extent the waived or
modified term would be mandatory under the Plan for any Award newly granted at the date of the
waiver or modification.

(f) Right of Setoff. The Company or any subsidiary or affiliate may, to the extent permitted
by applicable law, deduct from and set off against any amounts the Company or a subsidiary or
affiliate may owe to the Participant from time to time, including amounts payable in connection
with any Award, owed as wages, fringe benefits, or other compensation owed to the Participant, such
amounts as may be owed by the Participant to the Company, including but not limited to amounts owed
under Section 8(d), although the Participant shall remain liable for any part of the Participant’s
payment obligation not satisfied through such deduction and setoff. By accepting any Award granted
hereunder, the Participant agrees to any deduction or setoff under this Section 10(f).

(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 Company; 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
Company’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.

(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its
submission to the stockholders of the Company for approval shall be construed as creating any
limitations on the power of the Board or a committee thereof to adopt such other incentive
arrangements, apart from the Plan, as it may deem desirable, including incentive arrangements
and awards which do not qualify under Code Section 162(m), and such other arrangements may be
either applicable generally or only in specific cases.

 

-16-

 

(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 consideration, the Participant shall be repaid the amount of such cash 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) Compliance with Code Section 162(m). It is the intent of the Company that Options and
SARs granted to Covered Employees and other Awards designated as Awards to Covered Employees
subject to Section 7 shall constitute qualified “performance-based compensation” within the meaning
of Code Section 162(m) and regulations thereunder, unless otherwise determined by the Committee at
the time of allocation of an Award. Accordingly, the terms of Sections 7(b) and (c), 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. The foregoing notwithstanding,
because the Committee cannot determine with certainty whether a given Participant will be a Covered
Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee
as used herein shall mean only a person designated by the Committee as likely to be a Covered
Employee with respect to a specified fiscal year. If any provision of the Plan or any Award
document relating to a Performance Award that is 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, and no provision shall be deemed to confer upon the Committee or
any other person discretion to increase the amount of compensation otherwise payable in connection
with any such Award upon attainment of the applicable performance objectives.

(k) Certain Limitations on Awards to Ensure Compliance with Code Section 409A. For purposes
of this Plan, references to an award term or event (including any authority or right of the Company
or a Participant) being “permitted” under Code Section 409A mean, for a Code Section 409A Award,
that the term or event will not cause the Participant to be liable for payment of interest or a tax
penalty under Code Section 409A and, for a Non-Code Section 409A Award, that the term or event will
not cause the Award to be treated as subject to Code Section 409A. Other provisions of the Plan
notwithstanding, the terms of any Code Section 409A Award and any Non-Code Section 409A Award,
including any authority of the Company and rights of the Participant with respect to the Award,
shall be limited to those terms permitted under Code Section 409A, and any terms not permitted
under Code Section 409A shall be automatically modified and limited to the extent necessary to
conform with Code Section 409A. For this purpose, other provisions of the Plan notwithstanding,
the Company shall have no authority to accelerate distributions relating to Code Section 409A
Awards in excess of the authority permitted under Code Section 409A, and any distribution subject
to Code Section 409A(a)(2)(A)(i) (separation from service) to a “key employee” as defined under
Code Section 409A(a)(2)(B)(i) shall not occur earlier than the earliest time permitted under Code
Section 409A(a)(2)(B)(i).

 

-17-

 

(l) Certain Limitations Relating to Accounting Treatment of Awards. Other provisions of the
Plan notwithstanding, the Committee’s authority under the Plan (including under Sections 8(c),
10(c) and 10(d)) is limited to the extent necessary to ensure that any Option
or other Award of a type that the Committee has intended to be subject to fixed accounting
with a measurement date at the date of grant or the date performance conditions are satisfied under
APB 25 shall not become subject to “variable” accounting solely due to the existence of such
authority, unless the Committee specifically determines that the Award shall remain outstanding
despite such “variable” accounting. This provision shall cease to be effective if and at such time
as the Company elects to no longer account for equity compensation under APB 25.

(m) Governing Law. The validity, construction, and effect of the Plan and any rules and
regulations or document hereunder shall be determined in accordance with the laws of the State of
New York, without giving effect to principles of conflicts of laws, and applicable provisions of
the Delaware General Corporation Law and federal law.

(n) Awards to Participants Outside the United States. The Committee may modify the terms of
any Award under the Plan made to or held by a Participant who is then resident or primarily
employed outside of the United States in any manner deemed by the Committee to be necessary or
appropriate in order that such Award shall conform to laws, regulations, and customs of the country
in which the Participant is then resident or primarily employed, or so that the Award otherwise
will have appropriate terms that advance the purposes of the Plan. An Award may be modified under
this Section 10(n) in a manner that is inconsistent with the express terms of the Plan, so long as
such modifications will not contravene any applicable law or regulation or result in actual
liability under Section 16(b) for the Participant whose Award is modified.

(o) 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 Company or a subsidiary or
affiliate, (ii) interfering in any way with the right of the Company or a subsidiary or affiliate
to terminate any Eligible Person’s or Participant’s employment or service at any time (subject to
the terms and provisions of any separate written agreements), (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 stockholder
of the Company unless and until the Participant is duly issued or transferred shares of Stock in
accordance with the terms of an Award or an Option is duly exercised. Except as expressly provided
in the Plan and an Award document, neither the Plan nor any Award document shall confer on any
person other than the Company and the Participant any rights or remedies thereunder.

(p) Severability; Entire Agreement. If any of the provisions of this Plan or any Award
document is finally held to be invalid, illegal or unenforceable (whether in whole or in part),
such provision shall be deemed modified to the extent, but only to the extent, of such invalidity,
illegality or unenforceability, and the remaining provisions shall not be affected thereby;
provided, that, if any of such provisions is finally held to be invalid, illegal, or unenforceable
because it exceeds the maximum scope determined to be acceptable to permit such provision to be
enforceable, such provision shall be deemed to be modified to the minimum extent necessary to
modify such scope in order to make such provision enforceable hereunder. The Plan and any Award
documents contain the entire agreement of the parties with respect to the subject matter thereof
and supersede all prior agreements, promises, covenants, arrangements, communications,
representations and warranties between them, whether written or oral with respect to the subject
matter thereof.

 

-18-

 

(q) Plan Effective Date and Termination. The Plan shall become effective if, and at such time
as, the stockholders of the Company have approved it by the affirmative votes of the
holders of a majority of the voting securities of the Company present, or represented, and
entitled to vote on the subject matter at a duly held meeting of stockholders (provided that the
total vote cast on the proposal represents over 50% in interest of all securities entitled to vote
on the proposal). Upon such approval of the Plan by the stockholders of the Company, no further
awards shall be granted under the Preexisting Plan, but any outstanding awards under the
Preexisting Plan shall continue in accordance with their terms. Unless earlier terminated by
action of the Board of Directors, the authority of the Committee to make grants under the Plan
shall terminate on the date that is ten years after the latest date upon which stockholders of the
Company have approved the Plan, and the Plan will remain in effect until such time as no Stock
remains available for delivery under the Plan and the Company has no further rights or obligations
under the Plan with respect to outstanding Awards under the Plan.

 

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Exhibit A

Compliance with Code Section 409A

In furtherance of the provisions of Section 3, Section 10(k) and other applicable provisions
of the 2005 Stock Incentive Plan, the Committee has approved and adopted the following compliance
provisions intended to meet the requirements of Code Section 409A.

(i) Code Section 409A Awards and Deferrals. Other provisions of the Plan notwithstanding, the
terms of any Code Section 409A Award, including any authority of the Company and rights of the
Participant with respect to the Code Section 409A Award, shall be limited to those terms permitted
under Section 409A, and any terms not permitted under Section 409A shall be automatically modified
and limited to the extent necessary to conform with Section 409A but only to the extent that such
modification or limitation is permitted under Code Section 409A and the regulations and guidance
issued thereunder. The following rules will apply to Code Section 409A Awards (which are also
called “409A Awards” herein, with Non-Code Section 409A Awards referred to as “Non-409A Awards”):

	 	(A)	 	Elections. If a Participant is permitted to elect to defer
compensation and in lieu thereof receive an Award, or is permitted to elect to
defer any payment under an Award, such election will be permitted only at
times in compliance with Section 409A (including transition rules thereunder).
Such election shall be made in accordance with Exhibit B hereto;

	 	(B)	 	Changes in Distribution Terms. The Committee may, in its
discretion, require or permit on an elective basis a change in the
distribution terms applicable to 409A Awards (and Non-409A Awards that qualify
for the short-term deferral exemption under Section 409A) in accordance with,
and to the fullest extent permitted by, applicable guidance of the Internal
Revenue Service (including Proposed Treasury Regulation § 1.409A, Preamble §
XI.C and IRS Notice 2005-1), and otherwise in accordance with Section 409A and
regulations thereunder. The General Counsel of the Company is authorized to
modify any such outstanding Awards to permit election of different deferral
periods provided that any such modifications may not otherwise increase the
benefits to Participants or the costs of such Awards to the Company. Other
provisions of this Plan notwithstanding, changes to distribution timing
resulting from amendments to this Plan or changes in Participant elections in
2008 shall not have the affect of accelerating distributions into 2008 or
causing distributions that otherwise would have occurred in 2008 to be
deferred until a year after 2008;

	 	(C)	 	Exercise and Distribution. Except as provided in this
Exhibit A, Section (i)(D) hereof, no 409A Award shall be exercisable (if the
exercise would result in a distribution) or otherwise distributable to a
Participant (or his or her beneficiary) except upon the occurrence of one of
the following (or a date related to the occurrence of one of the following),
which must be specified in a written document governing such 409A Award and
otherwise meet the requirements of Treasury Regulation § 1.409A-3:

	 	(1)	 	Specified Time. A specified time or a
fixed schedule;

 

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	 	(2)	 	Separation from Service. The Participant’s
separation from service (within the meaning of Treasury Regulation
§ 1.409A-1(h) and other applicable rules under Code Section 409A);
provided, however, that if the Participant is a “specified employee”
under Treasury Regulation § 1.409A-1(i), settlement under this
Exhibit A, Section (i)(C)(2) shall instead occur at the expiration of
the six-month period following separation from service under Section
409A(a)(2)(B)(i). During such six-month delay period, no
acceleration of settlement may occur, except (1) acceleration shall
occur in the event of death of the Participant, (2) if the
distribution date was specified as the earlier of separation from
service or a fixed date and the fixed date falls within the delay
period, the distribution shall be triggered by the fixed date, and
(3) acceleration may be permitted otherwise if and to the extent
permitted under Section 409A. In the case of installments, this
delay shall not affect the timing of any installment otherwise
payable after the six-month delay period. With respect to any 409A
Award, a reference in any agreement or other governing document to a
“termination of employment” which triggers a distribution shall be
deemed to mean a “separation from service” within the meaning of
Treasury Regulation § 1.409A-1(h);

	 	(3)	 	Death. Unless a specific time otherwise is
stated for payment of a 409A Award upon death, such payment shall
occur in the calendar year in which falls the 30th day
after death;

	 	(4)	 	Disability. The date the Participant has
experienced a 409A Disability (as defined below); and

	 	(5)	 	409A Change in Control. The occurrence of
a 409A Change in Control (as defined below).

	 	(D)	 	No Acceleration. The exercise or distribution of a 409A
Award may not be accelerated prior to the time specified in accordance with
this Exhibit A, Section (i)(C) hereof, except in the case of one of the
following events:

	 	(1)	 	Unforeseeable Emergency. The occurrence of
an Unforeseeable Emergency, as defined below, but only if the net
amount payable upon such settlement does not exceed the amounts
necessary to relieve such emergency plus amounts necessary to pay
taxes reasonably anticipated as a result of the settlement, after
taking into account the extent to which the emergency is or may be
relieved through reimbursement or compensation from insurance or
otherwise or by liquidation of the Participant’s other assets (to the
extent such liquidation would not itself cause severe financial
hardship), or by cessation of deferrals under the Plan. Upon a
finding that an Unforeseeable Emergency has occurred with respect to
a Participant, any election of the Participant to defer compensation
that will be earned in whole or part by services in
the year in which the emergency occurred or is found to continue
will be immediately cancelled.

 

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	 	(2)	 	Domestic Relations Order. The 409A Award
may permit the acceleration of the exercise or distribution time or
schedule to an individual other than the Participant as may be
necessary to comply with the terms of a domestic relations order (as
defined in Section 414(p)(1)(B) of the Code).

	 	(3)	 	Conflicts of Interest. Such 409A Award may
permit the acceleration of the settlement time or schedule as may be
necessary to comply with an ethics agreement with the Federal
government or to comply with a Federal, state, local or foreign
ethics law or conflict of interest law in compliance with Treasury
Regulation § 1.409A-3(j)(4)(iii).

	 	(4)	 	Change. The Committee may exercise the
discretionary right to accelerate the lapse of the substantial risk
of forfeiture of any unvested compensation deemed to be a 409A Award
upon a 409A Change in Control or to terminate the Plan upon or within
12 months after a 409A Change in Control, or otherwise to the extent
permitted under Treasury Regulation § 1.409A-3(j)(4)(ix), or
accelerate settlement of such 409A Award in any other circumstance
permitted under Treasury Regulation § 1.409A-3(j)(4).

	 	(E)	 	Definitions. For purposes of this Exhibit A, the following
terms shall be defined as set forth below:

	 	(1)	 	“409A Change in Control” shall be deemed to
have occurred if, in connection with a Change in Control (or any
other event defined as a change in control relating to a 409A Award
under any applicable Company document), there occurs a change in the
ownership of the Company, a change in effective control of the
Company, or a change in the ownership of a substantial portion of the
assets of the Company, as defined in Treasury Regulation
§ 1.409A-3(i)(5).

	 	(2)	 	“409A Disability” means an event which
results in the Participant being (i) unable to engage in any
substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death
or can be expected to last for a continuous period of not less than
12 months, or (ii), by reason of any medically determinable physical
or mental impairment that can be expected to result in death or can
be expected to last for a continuous period of not less than 12
months, receiving income replacement benefits for a period of not
less than three months under an accident and health plan covering
employees of the Company or its subsidiaries.

 

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	 	(3)	 	“Unforeseeable Emergency” means a severe
financial hardship to the Participant resulting from an illness or
accident of the Participant, the Participant’s spouse, or a dependent
(as defined in Code Section 152, without regard to Code Sections 152(b)(1),
(b)(2), and (d)(1)(B)) of the Participant, loss of the
Participant’s property due to casualty, or similar extraordinary
and unforeseeable circumstances arising as a result of events
beyond the control of the Participant, and otherwise meeting the
definition set forth in Treasury Regulation § 1.409A-3(i)(3).

	 	(F)	 	Time of Distribution. In the case of any distribution of a
409A Award, if the timing of such distribution is not otherwise specified in
the Plan or an Award agreement or other governing document, the distribution
shall be made within 60 days after the date at which the settlement of the
Award is specified to occur. In the case of any distribution of a 409A Award
during a specified period following a settlement date, the maximum period
shall be 90 days, and the Participant shall have no influence (other than
permitted deferral elections) on any determination as to the tax year in which
the distribution will be made during any period in which a distribution may be
made;

	 	(G)	 	Determination of “Specified Employee.” For purposes of a
distributions under this Exhibit A, Section (i)(C)(2), status of a
Participant as a “specified employee” shall be determined annually under the
Company’s administrative procedure for such determination for purposes of all
plans subject to Code Section 409A.

	 	(H)	 	Non-Transferability. The provisions of Section 10(b)
notwithstanding, no 409A Award or right relating thereto shall be subject to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors of the Participant or creditors of
the Participant’s Beneficiary.

	 	(I)	 	Limitation on Setoffs. If the Company has a right of setoff
that could apply to a 409A Award, such right may only be exercised at the time
the 409A Award would have been distributed to the Participant or his or her
Beneficiary.

	 	(J)	 	409A Rules Do Not Constitute Waiver of Other Restrictions.
The rules applicable to 409A Awards under this Exhibit A, Section (i)
constitute further restrictions on terms of Awards set forth elsewhere in this
Plan.

(ii) Separate Payments. Unless otherwise specified in the applicable Award agreement,
each vesting tranche of an Award shall be deemed to be a separate payment for purposes of
Code Section 409A, and any portion of a vesting tranche that would vest on a pro rata basis
in the event of a separation from service on December 31 of a given year, and the remaining
portion of such vesting tranche that would not so vest, each shall be deemed to be a
separate payment for purposes of Code Section 409A.

(iii) Distributions Upon Vesting. In the case of any Non-409A Award providing for a
distribution upon the lapse of a substantial risk of forfeiture, if the timing of such
distribution (compliant with Section 409A) is not otherwise specified in the Plan or an
Award agreement or other governing document, the distribution shall be made not later than
March 15 of the year following the year in which the substantial risk of forfeiture lapsed,
and if a determination is to be made promptly following the end of a calendar-year
performance year then the determination of the level of achievement of
performance and the distribution shall be made between January 1 and March 15 of the
year following the performance year. In all cases, the Participant shall have no influence
(aside from any permitted deferral election) on any determination as to the tax year in
which the distribution will be made.

 

-23-

 

(iv) Limitation on Adjustments. Any adjustment under Section 10(c) shall be
implemented in a way that complies with applicable requirements under Section 409A so that
Non- 409A Option/SARs do not, due to the adjustment, become 409A Awards, and otherwise so
that no adverse consequences under Section 409A result to Participants.

(v) Release or Other Termination Agreement. If the Company requires a Participant to
execute a release, non-competition, or other agreement as a condition to receipt of a
payment upon or following a termination of employment, the Company will supply to the
Participant a form of such release or other document not later than the date of the
Participant’s termination of employment, which must be returned within the minimum time
period required by law and must not be revoked by the Participant within the applicable
time period for revocation in order for the Participant to satisfy any such condition. If
any amount payable during a fixed period following termination of employment is subject to
such a requirement and the fixed period would begin in one tax year and end in the next tax
year, the Company, in determining the time of payment of any such amount, will not be
influenced by the timing of any action of the Participant including execution of such a
release or other document and expiration of any revocation period. In particular, the
Company will be entitled in its discretion to deposit any such payment in escrow during
either year comprising such fixed period, so that such deposited amount is constructively
received and taxable income to the Participant upon deposit but with distribution from such
escrow remaining subject to the Participant’s execution and non-revocation of such release
or other document.

(vi) Limit on Authority to Amend. The authority to adopt amendments under Section
10(e) does not include authority to take action by amendment that would have the effect of
causing Awards to fail to meet applicable requirements of Section 409A.

(vii) Scope and Application of this Provision. For purposes of this Exhibit A,
references to a term or event (including any authority or right of the Company or a
Participant) being “permitted” under Section 409A mean that the term or event will not
cause the Participant to be deemed to be in constructive receipt of compensation relating
to the 409A Award prior to the distribution of cash, Shares or other property or to be
liable for payment of interest or a tax penalty under Section 409A.

 

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Exhibit B

Deferral Election Rules

If a participant in a plan, program or other compensatory arrangement (a “plan”) of Marvel
Enterprises, Inc. (the “Company”) is permitted to elect to defer awards or other compensation, any
such election relating to compensation deferred under the applicable plan must be received by the
Company prior to the date specified by or at the direction of the administrator of such plan (the
“Administrator,” which in most instances will be the Human Resources Department). For purposes of
compliance with Section 409A of the Internal Revenue Code (the “Code”), any such election to defer
shall be subject to the rules set forth below, subject to any additional restrictions as may be
specified by the Administrator. Under no circumstances may a participant elect to defer
compensation to which he or she has attained, at the time of deferral, a legally enforceable right
to current receipt of such compensation.

	 	(1)	 	Initial Deferral Elections. Any initial election to defer
compensation (including the election as to the type and amount of compensation to be
deferred and the time and manner of settlement of the deferral) must be made (and
shall be irrevocable) no later than December 31 of the year before the participant’s
services are performed which will result in the earning of the compensation, except as
follows:

	 	•	 	Initial deferral elections with respect to compensation that,
absent the election, constitutes a short-term deferral may be made in
accordance with Treasury Regulation § 1.409A-2(a)(4) and (b);

	 	•	 	Initial deferral elections with respect to compensation that
remains subject to a requirement that the participant provide services for at
least 12 months (a “forfeitable right” under Treasury Regulation
§ 1.409A-2(a)(5)) may be made on or before the 30th day after the
participant obtains the legally binding right to the compensation, provided
that the election is made at least 12 months before the earliest date at which
the forfeiture condition could lapse and otherwise in compliance with Treasury
Regulation § 1.409A-2(a)(5);

	 	•	 	Initial deferral elections by a participant in his or her
first year of eligibility may be made within 30 days after the date the
participant becomes eligible to participate in the applicable plan, with
respect to compensation paid for services to be performed after the election
and in compliance with Treasury Regulation § 1.409A-2(a)((7);

	 	•	 	Initial deferral elections by a participant with respect to
performance-based compensation (as defined under Treasury Regulation
§ 1.409A-1(e)) may be made on or before the date that is six months before the
end of the performance period, provided that (i) the participant was employed
continuously from either the beginning of the performance period or the later
date on which the performance goal was established, (ii) the election to defer
is made before such compensation has become readily ascertainable (i.e.,
substantially certain to be paid), (iii) the performance period is at least 12
months in length and the performance goal was established no later than 90
days after the commencement of the service period to which the performance
goal relates, (iv) the performance-based compensation is not payable in the
absence of performance except due to death, disability, a 409A Change in
Control (as defined in Section 11(a)(v)(A) of the 2004 Stock Award and
Incentive Plan) or as otherwise permitted under Treasury Regulation
§ 1.409A-1(e), and (v) this initial deferral election must in any event comply
with Treasury Regulation § 1.409A-2(a)(8);

 

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	 	•	 	Initial deferral elections resulting in Company matching
contributions may be made in compliance with Treasury Regulation
§ 1.409A-2(a)(9);

	 	•	 	Initial deferral elections may be made to the fullest
permitted under other applicable provisions of Treasury Regulation
§ 1.409A-2(a); and

	 	(2)	 	Further Deferral Elections. The foregoing notwithstanding, for any election
to further defer an amount that is deemed to be a deferral of compensation subject to
Code Section 409A (to the extent permitted under Company plans, programs and
arrangements), any further deferral election made under the Plan shall be subject to
the following, provided that deferral elections in 2005 — 2008 may be made under
applicable transition rules under Section 409A:

	 	•	 	The further deferral election will not take effect until at
least 12 months after the date on which the election is made;

	 	•	 	If the election relates to a distribution event other than a
Disability (as defined in Treasury Regulation § 1.409A-3(i)(4)), death, or
Unforeseeable Emergency (as defined in Treasury Regulation § 1.409A-3(i)(3)),
the payment with respect to which such election is made must be deferred for a
period of not less than five years from the date such payment would otherwise
have been paid (or in the case of a life annuity or installment payments
treated as a single payment, five years from the date the first amount was
scheduled to be paid), to the extent required under Treasury Regulation
§ 1.409A-2(b);

	 	•	 	The requirement that the further deferral election be made at
least 12 months before the original deferral amount would be first payable may
not be waived by the Administrator, and shall apply to a payment at a
specified time or pursuant to a fixed schedule (and in the case of a life
annuity or installment payments treated as a single payment, 12 months before
the date that the first amount was scheduled to be paid);

	 	•	 	The further deferral election shall be irrevocable when filed
with the Company; and

	 	•	 	The further deferral election otherwise shall comply with the
applicable requirements of Treasury Regulation § 1.409A-2(b).

	 	(3)	 	Transition Rules. Initial deferral elections and elections to change any
existing deferred date for distribution of compensation in any transition period
designated under Department of the Treasury and IRS regulations may be permitted by
the Company to the fullest extent authorized under transition rules and other
applicable guidance under Code Section 409A (including transition rules in effect in
the period 2005 — 2008).

 

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