<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the quarter ended MARCH 31, 1999. or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-11913
Aetna Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Connecticut 02-0488491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue 06156
Hartford, Connecticut (ZIP Code)
(Address of principal executive offices)
</TABLE>
(860) 273-0123
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
<TABLE>
<S> <C>
Yes [X] No [ ]
</TABLE>
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Common Capital Stock (par value $.01) 140,983,921
- ------------------------------------- --------------------------------------------------
(Class) Shares Outstanding at March 31, 1999
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements.
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Condensed Notes to Consolidated Financial Statements 7
Independent Auditors' Review Report 17
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 33
PART II OTHER INFORMATION
Item 1 Legal Proceedings. 33
Item 5 Other Information. 34
Item 6 Exhibits and Reports on Form 8-K. 37
Signatures 37
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
(Millions, except per common share data) 1999 1998
- ---------------------------------------- --------- ---------
<S> <C> <C>
Revenue:
Premiums $4,381.4 $3,238.6
Net investment income 740.7 812.7
Fees and other income 556.9 550.5
Net realized capital gains 17.1 31.7
--------- ---------
Total revenue 5,696.1 4,633.5
--------- ---------
Benefits and expenses:
Current and future benefits 4,135.0 3,270.6
Operating expenses 1,038.8 878.2
Interest expense 64.6 56.9
Amortization of goodwill and other acquired intangible assets 107.7 96.2
Amortization of deferred policy acquisition costs 50.0 52.4
--------- ---------
Total benefits and expenses 5,396.1 4,354.3
--------- ---------
Income before income taxes 300.0 279.2
Income taxes (benefits):
Current 110.5 131.5
Deferred 10.1 (19.8)
--------- ---------
Total income taxes 120.6 111.7
--------- ---------
Net income $ 179.4 $ 167.5
========= ==========
Net income applicable to common ownership $ 165.6 $ 153.6
========= ==========
Results per common share:
Basic $ 1.17 $ 1.05
Diluted 1.16 1.05
Dividends declared $ .20 $ .20
--------- ---------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
Page 3
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1999 1998
- ---------- ----------- -----------
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value (amortized cost $30,258.6 $ 31,117.9 $ 32,180.8
and $30,730.1)
Equity securities, at fair value (cost $778.8 and $762.6) 813.7 800.5
Short-term investments 790.6 942.2
Mortgage loans 3,517.3 3,553.0
Real estate 317.2 270.3
Policy loans 471.7 458.7
Other 1,315.9 1,264.5
----------- -----------
Total investments 38,344.3 39,470.0
----------- -----------
Cash and cash equivalents 2,008.1 1,951.5
Short-term investments under securities loan agreement 696.1 753.6
Accrued investment income 612.9 537.1
Premiums due and other receivables 1,638.1 1,478.1
Reinsurance recoverables 3,935.5 3,897.2
Deferred income taxes 253.6 53.0
Deferred policy acquisition costs 1,836.5 1,768.6
Goodwill and other acquired intangible assets 9,189.1 9,155.3
Other assets 927.5 1,111.9
Separate Accounts assets 46,744.8 44,971.8
----------- -----------
Total assets $106,186.5 $105,148.1
=========== ===========
Liabilities:
Future policy benefits $ 18,571.9 $ 18,541.1
Unpaid claims 4,008.4 3,953.9
Unearned premiums 227.8 428.9
Policyholders' funds left with the Company 17,239.9 17,632.5
----------- -----------
Total insurance liabilities 40,048.0 40,556.4
----------- -----------
Dividends payable to shareholders 35.1 35.2
Short-term debt 874.8 1,063.4
Long-term debt 2,526.1 2,521.2
Payables under securities loan agreement 696.1 753.6
Current income taxes 388.4 444.8
Other liabilities 3,162.5 3,025.2
Minority and participating policyholders' interests 160.3 148.4
Separate Accounts liabilities 46,717.0 44,936.0
----------- -----------
Total liabilities 94,608.3 93,484.2
----------- -----------
Aetna-obligated mandatorily redeemable preferred securities of subsidiary
limited liability company holding primarily debentures guaranteed by Aetna 275.0 275.0
----------- -----------
Commitments and Contingent Liabilities (Notes 3 and 10)
Shareholders' Equity:
Class C voting mandatorily convertible preferred stock ($.01 par value;
15,000,000 shares authorized; 11,613,084 in 1999 and 11,614,816 in 1998
issued and outstanding) 862.0 862.1
Common stock ($.01 par value; 500,000,000 shares authorized; 140,983,921 in
1999 and 141,272,628 in 1998 issued and outstanding) 3,267.9 3,292.4
Accumulated other comprehensive income (loss) (20.7) 177.8
Retained earnings 7,194.0 7,056.6
----------- -----------
Total shareholders' equity 11,303.2 11,388.9
----------- -----------
Total liabilities, redeemable preferred securities and shareholders' equity $106,186.5 $105,148.1
=========== ===========
Shareholders' equity per common share $ 74.06 $ 74.51
=========== ===========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
Page 4
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income (Loss)
----------------------------
Class C Voting
Mandatorily Unrealized
(Millions, except share data) Convertible Common Gains (Losses) Foreign Retained
Three Months Ended March 31, 1999 Total Preferred Stock Stock on Securities Currency Earnings
- --------------------------------- --------- --------------- --------- -------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $11,388.9 $862.1 $3,292.4 $ 387.2 $(209.4) $7,056.6
Comprehensive loss:
Net income 179.4 179.4
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(185.1) pretax) (1) (120.3) (120.3)
Foreign currency ($(120.3) pretax) (78.2) (78.2)
---------
Other comprehensive loss (198.5)
---------
Total comprehensive loss (19.1)
=========
Common stock issued for benefit
plans (204,875 shares) 15.4 15.4
Repurchase of common shares
(495,000 shares) (40.0) (40.0)
Conversion of preferred securities
(1,732 preferred shares converted
to 1,418 common shares) -- (.1) .1
Common stock dividends (28.2) (28.2)
Preferred stock dividends (13.8) (13.8)
--------- --------- --------- --------- --------- ---------
Balances at March 31, 1999 $11,303.2 $862.0 $3,267.9 $266.9 $(287.6) $7,194.0
- -------------------------- ========= ========= ========= ========= ========= =========
Three Months Ended March 31, 1998
Balances at December 31, 1997 $11,195.4 $865.4 $3,644.4 $504.1 $(197.0) $6,378.5
Comprehensive income:
Net income 167.5 167.5
Other comprehensive income, net of tax:
Unrealized gains on securities
($100.5 pretax) (1) 65.2 65.2
Foreign currency ($5.3 pretax) 3.4 3.4
---------
Other comprehensive income 68.6
---------
Total comprehensive income 236.1
=========
Common stock issued for benefit
plans (141,530 shares) 6.3 6.3
Repurchase of common shares
(461,700 shares) (36.9) (36.9)
Common stock dividends (28.9) (28.9)
Preferred stock dividends (13.9) (13.9)
--------- --------- --------- --------- --------- ---------
Balances at March 31, 1998 $11,358.1 $865.4 $3,613.8 $569.3 $(193.6) $6,503.2
========= ========= ========= ========= ========= =========
</TABLE>
- ----------
(1) Net of reclassification adjustments.
See Condensed Notes to Consolidated Financial Statements.
Page 5
<PAGE> 6
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
(Millions) 1999 1998
- --------- --------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 179.4 $ 167.5
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization (including investment discounts and premiums) 108.6 87.2
--------- --------
Cash flows provided by operating activities before net realized capital gains
and changes in assets and liabilities 288.0 254.7
Net realized capital gains (17.1) (31.7)
--------- --------
Cash flows provided by operating activities before changes in assets and liabilities 270.9 223.0
Changes in assets and liabilities:
Increase in accrued investment income (65.2) (21.3)
Increase in premiums due and other receivables (30.8) (166.5)
Increase in deferred policy acquisition costs (83.0) (70.2)
Decrease in income taxes (142.3) (58.6)
Net decrease in other assets and other liabilities 166.6 11.0
Increase (Decrease) in insurance liabilities 101.3 (84.2)
Other, net 4.6 (11.8)
--------- --------
Net cash provided by (used for) operating activities 222.1 (178.6)
--------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 4,230.5 5,332.4
Equity securities 87.5 174.3
Mortgage loans 20.0 11.2
Real estate 29.4 80.0
Other investments 304.4 18.3
Short-term investments 4,905.2 5,961.1
Investment maturities and repayments of:
Debt securities available for sale 688.8 965.0
Mortgage loans 51.6 285.8
Cost of investments in:
Debt securities available for sale (4,598.7) (6,286.1)
Equity securities (100.6) (177.6)
Mortgage loans (52.8) (60.1)
Real estate (63.6) (18.3)
Other investments (466.2) (82.9)
Short-term investments (4,730.3) (6,051.0)
(Increase) Decrease in property and equipment (14.8) 7.7
Net decrease in Separate Accounts 16.8 1.8
Other, net (53.0) 28.7
--------- --------
Net cash provided by investing activities 254.2 190.3
--------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 751.6 450.8
Withdrawals of investment contracts (903.2) (837.2)
Repayment of long-term debt (.1) (141.2)
Net increase in short-term debt (189.1) 229.9
Common stock issued under benefit plans 15.4 6.3
Common stock acquired (40.0) (36.9)
Dividends paid to shareholders (42.1) (43.0)
Other, net (11.0) --
--------- --------
Net cash used for financing activities (418.5) (371.3)
--------- --------
Effect of exchange rate changes on cash and cash equivalents (1.2) (1.0)
--------- --------
Net increase (decrease) in cash and cash equivalents 56.6 (360.6)
Cash and cash equivalents, beginning of period 1,951.5 1,805.8
--------- --------
Cash and cash equivalents, end of period $ 2,008.1 $1,445.2
========= ========
Supplemental Cash Flow Information:
Interest paid $ 95.5 $ 89.7
Income taxes paid 174.0 141.9
--------- --------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
Page 6
<PAGE> 7
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include Aetna Inc. and its majority-owned
subsidiaries (collectively, the "Company"), including Aetna Services, Inc.
("Aetna Services") and Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare").
Less than majority-owned entities, in which the Company has at least a 20%
interest, are reported on the equity basis. These consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and are unaudited. Certain reclassifications have been made to the
1998 financial information to conform to the 1999 presentation. These interim
statements necessarily rely heavily on estimates, including assumptions as to
annualized tax rates. In the opinion of management, all adjustments necessary
for a fair statement of results for the interim periods have been made. All such
adjustments are of a normal, recurring nature. The accompanying condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes as presented in Aetna Inc.'s
1998 Annual Report on Form 10-K. Certain financial information that is normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles, but that is not required for interim reporting
purposes, has been condensed or omitted.
New Accounting Standard
On January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments,
issued by the American Institute of Certified Public Accountants ("AICPA"). This
statement provides guidance for determining when an insurance or other
enterprise should recognize a liability for guaranty-fund and other
insurance-related assessments and guidance for measuring the liability. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations as the Company had previously
accounted for guaranty-fund and other insurance-related assessments in a manner
consistent with this statement.
Future Accounting Standards
In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which
provides guidance on how to account for all insurance and reinsurance contracts
that do not transfer insurance risk, except for long-duration life and health
insurance contracts. This statement is effective for the Company's financial
statements beginning January 1, 2000, with early adoption permitted. The Company
is currently evaluating the impact of the adoption of this standard and the
potential effect on its financial position and results of operations.
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities. This standard requires companies to record all derivatives on the
balance sheet as either assets or liabilities and measure those instruments at
fair value. The manner in which companies are to record gains or losses
resulting from changes in the values of those derivatives depends on the use of
the derivative and whether it qualifies for hedge accounting. This standard is
effective for the Company's financial statements beginning January 1, 2000, with
early adoption permitted. The Company is currently evaluating the impact of the
adoption of this standard and the potential effect on its financial position and
results of operations.
Page 7
<PAGE> 8
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") for the three months ended March 31 was as
follows:
<TABLE>
<CAPTION>
Income Shares Per Common
(Millions, except per common share data) (Numerator) (Denominator) Share Amount
- ---------------------------------------- ---------- ------------- ------------
<S> <C> <C> <C>
1999
Net income $ 179.4
Less: preferred stock dividends 13.8
--------
Basic EPS
Income applicable to common ownership $ 165.6 141.4 $ 1.17
======== ========
Effect of dilutive securities:
Stock options and other (1) 1.2
--------
Diluted EPS (2)
Income applicable to common ownership and assumed conversions $ 165.6 142.6 $ 1.16
======== ======== ========
1998
Net income $ 167.5
Less: preferred stock dividends 13.9
--------
Basic EPS
Income applicable to common ownership $ 153.6 145.6 $ 1.05
======== ========
Effect of dilutive securities:
Stock options and other (1) 1.2
--------
Diluted EPS (2)
Income applicable to common ownership and assumed conversions $ 153.6 146.8 $ 1.05
======== ======== ========
</TABLE>
- ----------
(1) Options to purchase shares of common stock in 1999 and 1998 of 5.1 million
and 1.6 million, respectively (with exercise prices ranging from $80.25 -
$112.63), were not included in the calculation of diluted earnings per
common share because the options' exercise price was greater than the
average market price of common shares.
(2) The issuable common stock related to Class C voting manditorily convertible
preferred stock (10.9 million and 11.3 million weighted average shares in
1999 and 1998, respectively) was not included in the computation of
diluted earnings per common share because to do so would be
antidilutive.
(3) ACQUISITIONS AND DISPOSITIONS
Aetna U.S. Healthcare
On December 9, 1998, the Company entered into definitive agreements with The
Prudential Insurance Company of America to acquire the Prudential health care
business ("PHC") for $1 billion. The acquisition is subject to approval by
federal antitrust and state regulators, and other customary closing conditions.
The Company received a second request for information from the Department of
Justice ("DOJ") in connection with the DOJ's federal antitrust review of the
transaction. The Company has complied with the second request, and continues to
hold discussions with the DOJ regarding issues they have raised in connection
with their review. The Company currently expects to complete the acquisition in
the second quarter of 1999.
Page 8
<PAGE> 9
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) ACQUISITIONS AND DISPOSITIONS (CONTINUED)
On July 15, 1998, the Company acquired New York Life Insurance Company's ("NYL")
NYLCare health business for a purchase price of $1.05 billion in cash, subject
to adjustment as provided in the transaction agreements. The acquisition was
accounted for as a purchase. Originally, in addition to the cash purchase price,
payments totaling up to $300 million (up to $150 million in each of two years)
were potentially payable to the extent that predetermined earnings and
membership targets in future periods were achieved (the "Earnout"). On January
29, 1999, the Company and NYL agreed to resolve all purchase price adjustments
and obligations under the Earnout. Under this agreement, the Company paid NYL an
additional $50 million to resolve such matters. As a result, the total purchase
price is approximately $1.1 billion. The excess of the purchase price over the
fair value of the net assets acquired resulted in approximately $1.15 billion,
net of related deferred taxes, being allocated to goodwill and other acquired
intangible assets, which is being amortized over a 40-year period for goodwill
and over a range of three to 20 years for other acquired intangible assets. The
Company's consolidated results of operations include the NYLCare health business
from July 15, 1998.
Aetna Retirement Services
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation ("Lincoln") for $1 billion in cash,
subject to adjustment as provided by the related agreements. The transaction was
generally in the form of an indemnity reinsurance arrangement, under which
Lincoln contractually assumed from the Company certain policyholder liabilities
and obligations, although the Company remains directly obligated to
policyholders. Assets related to and supporting the life policies were
transferred to Lincoln and the Company recorded a reinsurance receivable from
Lincoln. The transaction resulted in an after-tax gain on the sale of
approximately $152 million, of which $88 million was deferred and is being
recognized over approximately 15 years. Premiums ceded and reinsurance
recoveries made duiring 1999 totaled $135 million and $90 million,
respectively.
Aetna International
On April 18, 1999, Aetna International, Inc. entered into a definitive agreement
to sell its Canadian operations to John Hancock Canadian Holdings Limited, the
parent of The Maritime Life Assurance Company, for approximately $300 million in
cash. The sale is not expected to result in any material capital gain or loss.
The revenue and earnings of its Canadian operations are not material to the
Company. Completion of the sale, which is anticipated to occur in the fall of
1999, is subject to Canadian federal and other regulatory approvals and other
customary conditions. Proceeds from the sale are expected to be used for general
corporate purposes, including repayment of debt, internal growth, acquisitions
and share repurchases.
On February 16, 1999, the Company entered into a joint venture with Poland's
sixth-largest bank for a 40% ownership interest in a company that will sell
pension products throughout Poland following the reform and privatization of
Poland's pension sector, effective March 1, 1999.
On January 13, 1999, the Company acquired Asistencia Medica Social Argentina,
Argentina's largest health maintenance organization ("HMO"), for approximately
$100 million.
(4) INVESTMENTS
Net investment income includes amounts allocable to experience-rated
contractholders of $256 million and $315 million for the three months ended
March 31, 1999 and 1998, respectively. Interest credited to contractholders is
included in current and future benefits.
Page 9
<PAGE> 10
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) INVESTMENTS (CONTINUED)
Net realized capital gains allocable to experience-rated contractholders of $6
million and $8 million for the three months ended March 31, 1999 and 1998,
respectively, were deducted from net realized capital gains as reflected on the
Consolidated Statements of Income, and an offsetting amount is reflected on the
Consolidated Balance Sheets in policyholders' funds left with the Company.
The total recorded investment in mortgage loans that are considered to be
impaired (including problem loans, restructured loans and potential problem
loans) and related specific reserves are presented in the table below.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------------- --------------------------------
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
- --------- ---------- --------- ------------ --------
<S> <C> <C> <C> <C>
Supporting discontinued products $158.6 $ 22.2 $161.9 $ 22.9
Supporting experience-rated products 92.6 19.3 95.7 21.7
Supporting remaining products 43.9 2.2 43.6 3.2
------ ------ ------ ------
Total impaired loans $295.1(1) $ 43.7 $301.2(1) $ 47.8
====== ====== ====== ======
</TABLE>
- ----------
(1) Includes impaired loans of $99.8 million and $96.0 million, respectively,
for which no specific reserves are considered necessary.
The activity in the specific and general reserves for the three months ended
March 31, 1999 and 1998 is summarized below:
<TABLE>
<CAPTION>
Supporting
Supporting Experience- Supporting
Discontinued Rated Remaining
(Millions) Products Products Products Total
- ---------- ------------ ----------- ----------- ------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 29.5 $ 29.6 $ 7.8 $ 66.9
Credited to net realized capital loss -- -- -- --
Charged (credited) to other accounts -- -- .6 .6
Principal write-offs (.6) (2.4) (1.4) (4.4)
------ ------ ------ ------
Balance at March 31, 1999 $ 28.9 $ 27.2 $ 7.0 $ 63.1
====== ====== ====== ======
Balance at December 31, 1997 $ 68.7 $ 31.6 $ 14.2 $114.5
Credited to net realized capital loss -- -- (2.0) (2.0)
Charged (credited) to other accounts (30.0)(1) (2.0)(1) 4.8 (27.2)
Principal write-offs (.4) -- (1.1) (1.5)
------ ------ ------ ------
Balance at March 31, 1998 $ 38.3 $ 29.6 $ 15.9 $ 83.8
====== ====== ====== ======
</TABLE>
- ----------
(1) Reflects adjustments to reserves related to assets supporting discontinued
products and experience-rated products, which do not affect the Company's
results of operations.
(2) Total reserves at March 31, 1999 and 1998 include $43.7 million and $49.7
million of specific reserves, respectively, and $19.4 million and $34.1
million of general reserves, respectively.
Income earned (pretax) and cash received on the average recorded investment in
impaired loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------------------------- -------------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
- ---------- -------- ------ -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $160.1 $ 2.7 $ 2.7 $186.7 $ 3.3 $ 3.5
Supporting experience-rated products 95.7 1.9 1.8 108.9 3.0 2.9
Supporting remaining products 36.1 .8 .6 59.8 2.5 2.4
------ ------ ------ ------ ------ ------
Total $291.9 $ 5.4 $ 5.1 $355.4 $ 8.8 $ 8.8
------ ------ ------ ------ ------ ------
</TABLE>
Page 10
<PAGE> 11
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(5) SUPPLEMENTAL CASH FLOW INFORMATION
Significant noncash investing and financing activities included acquisition of
real estate through foreclosures of mortgage loans amounting to $8 million and
$4 million for the three months ended March 31, 1999 and 1998, respectively.
(6) ADDITIONAL INFORMATION - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) related to changes in
unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
(Millions) 1999 1998
- ---------- ------ -----
<S> <C> <C>
Unrealized holding gains (losses) arising during the period (1) $ (95.5) $127.4
Less: reclassification adjustment for gains and other items included in net income (2) 24.8 62.2
------ ------
Net unrealized gains (losses) on securities $(120.3) $ 65.2
======= ======
</TABLE>
- ----------
(1) Pretax unrealized holding gains (losses) arising during the period were
$(146.9) million and $196.0 million for 1999 and 1998, respectively.
(2) Pretax reclassification adjustments for gains and other items included
in net income were $38.2 million and $95.5 million for 1999 and 1998,
respectively.
(7) DISCONTINUED PRODUCTS
The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under the Company's accounting for these discontinued
products, a reserve for anticipated future losses from these products was
established and the reserve is reviewed by management quarterly. As long as the
reserve continues to represent management's then best estimate of expected
future losses, results of operations of the discontinued products, including net
realized capital gains and losses, are credited/charged to the reserve and do
not affect the Company's results of operations. The current reserve reflects
management's best estimate of anticipated future losses. The Company's results
of operations would be adversely affected to the extent that future losses on
the products are greater than anticipated and positively affected to the extent
that future losses are less than anticipated. (Refer to Aetna Inc.'s 1998 Annual
Report on Form 10-K for a more complete discussion of the reserve for
anticipated future losses on discontinued products.)
At the time of discontinuance, a receivable from Large Case Pensions' continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate which was used to calculate the loss
on discontinuance. The offsetting payable, on which interest is similarly
accrued, is reflected in continuing products. Interest on the payable generally
offsets the investment income on the assets available to fund the shortfall. At
March 31, 1999, the receivable from continuing products, net of related deferred
taxes payable of $58 million on the accrued interest income, was $498 million.
The receivable is eliminated in consolidation.
Page 11
<PAGE> 12
TEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) DISCONTINUED PRODUCTS (CONTINUED)
Results of discontinued products were as follows (pretax, in millions):
<TABLE>
<CAPTION>
Charged (Credited)
to Reserve for
Three months ended March 31, 1999 Results Future Losses Net (1)
- --------------------------------- ------- ------------- -------
<S> <C> <C> <C>
Net investment income $122.1 $ -- $122.1
Net realized capital gains 10.2 (10.2) --
Interest earned on receivable from continuing products 8.4 -- 8.4
Other income 10.4 -- 10.4
------ ------ ------
Total revenue 151.1 (10.2) 140.9
------ ------ ------
Current and future benefits 130.2 7.3 137.5
Operating expenses 3.4 -- 3.4
------ ------ ------
Total benefits and expenses 133.6 7.3 140.9
------ ------ ------
Results of discontinued products $ 17.5 $(17.5) $ --
====== ====== ======
Three months ended March 31, 1998
- ---------------------------------
Net investment income $137.7 $ -- $137.7
Net realized capital gains 65.1 (65.1) --
Interest earned on receivable from continuing products 8.6 -- 8.6
Other income 5.9 -- 5.9
------ ------ ------
Total revenue 217.3 (65.1) 152.2
------ ------ ------
Current and future benefits 147.5 1.6 149.1
Operating expenses 3.1 -- 3.1
------ ------ ------
Total benefits and expenses 150.6 1.6 152.2
------ ------ ------
Results of discontinued products $ 66.7 $(66.7) $ --
====== ====== ======
</TABLE>
- ----------
(1) Amounts are reflected in the March 31, 1999 and 1998 Consolidated
Statements of Income, except for interest earned on the receivable from
continuing products which is eliminated in consolidation.
Assets and liabilities of discontinued products at March 31, 1999 were as
follows (1):
<TABLE>
<CAPTION>
(Millions)
- ----------
<S> <C>
Debt securities available for sale $5,550.8
Mortgage loans 763.2
Real estate 103.4
Short-term and other investments 331.3
--------
Total investments 6,748.7
Current and deferred income taxes 190.4
Receivable from continuing products (2) 556.4
--------
Total assets $7,495.5
========
Future policy benefits $4,636.3
Policyholders' funds left with the Company 1,389.5
Reserve for anticipated future losses on
discontinued products 1,231.6
Other 238.1
--------
Total liabilities $7,495.5
========
</TABLE>
- ----------
(1) Assets supporting the discontinued products are distinguished from
other continuing operations assets.
(2) The receivable from continuing products is eliminated in consolidation.
Net unrealized capital gains on available-for-sale debt securities are included
above in other liabilities and are not reflected in consolidated shareholders'
equity. The reserve for anticipated future losses is included in future policy
benefits on the Consolidated Balance Sheets.
Page 12
<PAGE> 13
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) DISCONTINUED PRODUCTS (CONTINUED)
The activity in the reserve for anticipated future losses on discontinued
products for the three months ended March 31, 1999 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- ----------
<S> <C>
Reserve at December 31, 1998 $1,214.1
Results of discontinued products 17.5
--------
Reserve at March 31, 1999 $1,231.6
========
</TABLE>
(8) DEBT AND GUARANTEE OF DEBT SECURITIES
Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities of
Aetna Services, including the $348 million 9.5% Subordinated Debentures due 2024
(the "Subordinated Debentures") issued to Aetna Capital L.L.C. ("ACLLC"), a
wholly owned subsidiary of Aetna Services (collectively the "Aetna Services
Debt"). ACLLC has issued $275 million of redeemable preferred stock, and the
Subordinated Debentures represent substantially all of the assets of ACLLC.
Aetna Services has a revolving credit facility in an aggregate amount of $1.5
billion with a worldwide group of banks that terminates in June 2001. Various
interest rate options are available under the facility and any borrowings mature
on the expiration date of the applicable credit commitment. Aetna Services pays
facility fees ranging from .065% to .2% per annum, depending upon its long-term
senior unsecured debt rating. The facility fee at March 31, 1999 is at an annual
rate of .08%. The facility also supports Aetna Services' commercial paper
borrowing program. As a guarantor of any amounts outstanding under the credit
facility, Aetna Inc. is required to maintain shareholders' equity, excluding net
unrealized capital gains and losses (accumulated other comprehensive income), of
at least $7.5 billion.
On April 1, 1999 Aetna Services entered into an additional revolving credit
facility in an aggregate amount of $500 million with a worldwide group of banks
that terminates on March 26, 2000. Various interest rate options are available
under the facility and any borrowings mature on the expiration date of the
applicable credit commitment. Aetna Services pays facility fees ranging from
.065% to .25% per annum, depending upon its long-term senior unsecured debt
rating. The facility also supports Aetna Services' commercial paper borrowing
program. As a guarantor of any amounts outstanding under this credit facility,
Aetna Inc. is required to maintain shareholders' equity, excluding net
unrealized capital gains and losses (accumulated other comprehensive income), of
at least $7.5 billion.
Page 13
<PAGE> 14
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(8) DEBT AND GUARANTEE OF DEBT SECURITIES (CONTINUED)
Consolidated financial statements of Aetna Services have not been presented
herein or in any separate reports filed with the Securities and Exchange
Commission because management has determined that such financial statements
would not be material to holders of the Aetna Services Debt. Summarized
consolidated financial information for Aetna Services is as follows (in
millions):
Balance Sheets Information:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
<S> <C> <C>
Total investments (excluding Separate Accounts) $36,603.6 $38,313.9
Total assets 94,480.0 93,190.9
Total insurance liabilities 38,178.0 38,566.9
Total liabilities 92,299.5 90,770.3
Total redeemable preferred stock 275.0 275.0
Total shareholder's equity 1,905.5 2,145.6
--------- ---------
</TABLE>
Statements of Income Information:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Total revenue $2,653.2 $2,467.7
Total benefits and expenses 2,465.2 2,230.3
Income before income taxes 187.9 237.3
Net income 128.5 162.3
-------- --------
</TABLE>
The amount of dividends which may be paid to Aetna Services or Aetna U.S.
Healthcare by their domestic insurance and HMO subsidiaries at March 31, 1999
without prior approval by state regulatory authorities is limited to
approximately $516 million in the aggregate. There are no such restrictions on
distributions from Aetna Services or Aetna U.S. Healthcare to Aetna Inc. or on
distributions from Aetna Inc. to its shareholders.
Page 14
<PAGE> 15
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) SEGMENT INFORMATION
Summarized financial information for the Company's principal operations for the
three months ended March 31 was as follows:
<TABLE>
<CAPTION>
Aetna
Aetna U.S. Retirement Aetna Large Case Corporate Total
(Millions) Healthcare Services International Pensions and Other (1) Company
- ---------- ---------- ---------- -------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues from external customers $4,304.4 $ 155.3 $ 445.2 $ 33.1 $ .3 $4,938.3
Net investment income 140.7 215.4 94.5 256.6 3.0 710.2
Equity in subsidiaries -- -- 30.5 -- -- 30.5
-------- -------- -------- -------- -------- --------
Total revenue excluding realized
capital gains (losses) $4,445.1 $ 370.7 $ 570.2 $ 289.7 $ 3.3 $5,679.0
======== ======== ======== ======== ======== ========
Operating earnings (2) $ 133.5 $ 53.0 $ 45.6 $ 22.5 $ (59.5) $ 195.1
Unusual item (3) (17.5) (5.7) (2.6) (.2) (.9) (26.9)
Realized capital gains (losses),
net of tax 4.7 1.9 (1.4) 6.0 -- 11.2
-------- -------- -------- -------- -------- --------
Net income $ 120.7 $ 49.2 $ 41.6 $ 28.3 $ (60.4) $ 179.4
======== ======== ======== ======== ======== ========
1998
Revenues from external customers $3,190.0 $ 203.0 $ 351.2 $ 44.6 $ .3 $3,789.1
Net investment income 121.7 267.6 90.2 303.7 1.4 784.6
Equity in subsidiaries -- -- 28.1 -- -- 28.1
-------- -------- -------- -------- -------- --------
Total revenue excluding realized
capital gains (losses) $3,311.7 $ 470.6 $ 469.5 $ 348.3 $ 1.7 $4,601.8
======== ======== ======== ======== ======== ========
Operating earnings (losses) (2) $ 100.5 $ 63.8 $ 37.5 $ 22.6 $ (61.5) $ 162.9
Unusual item (3) (8.8) (4.1) (1.7) (.1) (1.6) (16.3)
Realized capital gains (losses),
net of tax 7.1 (1.4) (7.8) 24.7 (1.7) 20.9
-------- -------- -------- -------- -------- --------
Net income (loss) $ 98.8 $ 58.3 $ 28.0 $ 47.2 $ (64.8) $ 167.5
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Corporate and Other includes interest, staff area expenses, advertising,
contributions, net investment income and other general expenses, as well as
consolidating adjustments.
(2) Operating earnings are comprised of net income (loss) excluding net
realized capital gains and losses and unusual item.
(3) Unusual item includes Year 2000 costs for all segments.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In connection with the sale of its property-casualty operations in 1996, the
Company vacated, and the purchaser subleased, at market rates for a period of
eight years, the space that the Company occupied in the CityPlace office
facility in Hartford. In 1996, the Company recorded a charge of $292 million
pretax ($190 million after tax) which represented the present value of the
difference between rent required to be paid by the Company under the lease and
future rentals expected to be received by the Company. At March 31, 1999 and
December 31, 1998, the balance in this facilities reserve was $283 million and
$288 million, respectively.
Page 15
<PAGE> 16
ITEM 1. FINANCIAL STATEMENTS.
AETNA INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Litigation
Purported Class Action Complaints were filed in the United States District Court
for the Eastern District of Pennsylvania on November 5, 1997 by Eileen
Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and
Michael J. Oring. Other purported Class Action Complaints were filed in the
United States District Court for the District of Connecticut on November 25,
1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on
December 24, 1997 by Terry B. Cohen. The Connecticut actions were transferred
to the United States District Court for the Eastern District of Pennsylvania
(the "Court") for consolidated pretrial proceedings with the cases pending
there. The plaintiffs filed a Consolidated and Amended Complaint (the
"Complaint") seeking, among other remedies, unspecified damages resulting from
defendants' alleged violations of federal securities laws. The Complaint
alleged that the Company and three of its current or former officers or
directors, Ronald E. Compton, Richard L. Huber, and Leonard Abramson, are
liable for certain misrepresentations and omissions regarding, among other
matters, the integration of the merger with U.S. Healthcare and the Company's
medical claim reserves. The Company and the individual defendants filed a
motion to dismiss the Complaint on July 31, 1998. On February 2, 1999, the
Court dismissed the Complaint, but granted the plaintiffs leave to file a
second amended complaint. On February 22, 1999, the plaintiffs filed a second
amended complaint against the Company, Ronald E. Compton and Richard L. Huber.
The Company and the remaining individual defendants filed a motion to dismiss
the second amended complaint, and the Court denied that motion in March, 1999.
Defendants are pursuing an interlocutory appeal of that denial. Trial currently
is scheduled to begin in December, 1999. The Company is defending the actions
vigorously.
The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including bad faith,
medical malpractice, marketing and other litigation in its health business.
Some of these other lawsuits are purported to be class actions. Aetna U.S.
Healthcare of California Inc., an indirect subsidiary of the Company, is
currently a party to a bad faith and medical malpractice action brought by
Teresa Goodrich, individually and as successor in interest of David Goodrich.
The action was originally filed in March, 1996 in Superior Court for the state
of California, county of San Bernardino. The action alleges damages for unpaid
medical bills, punitive damages and compensatory damages for wrongful death
based upon, among other things, alleged denial of claims for services provided
to David Goodrich by out of network providers without prior authorization. On
January 20, 1999 a jury rendered a verdict in favor of the plaintiff for
$750,000 for unpaid medical bills, $3.7 million for wrongful death and $116
million for punitive damages. On April 12, 1999 the trial court amended the
judgement to include Aetna Services, Inc., a direct subsidiary of the Company,
as a defendant. On April 27, 1999 Aetna Services, Inc. and Aetna U.S.
Healthcare of California Inc. filed appeals with the California Court of
Appeal and will continue to defend this matter vigorously. While the ultimate
outcome of these other lawsuits cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, they are not expected to result in liability for amounts material
to the financial condition of the Company, although they may adversely affect
results of operations in future periods.
Page 16
<PAGE> 17
ITEM 1. FINANCIAL STATEMENTS.
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Aetna Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Inc. and Subsidiaries as of March 31, 1999, and the related condensed
consolidated statements of income, shareholders' equity and cash flows for the
three-month periods ended March 31, 1999 and 1998. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Inc. and Subsidiaries as of
December 31, 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 3, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Hartford, Connecticut
April 27, 1999
Page 17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents a review of Aetna Inc. and its
subsidiaries (collectively, the "Company") for the three months ended March 31,
1999 and 1998. This review should be read in conjunction with the consolidated
financial statements and other data presented herein as well as the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Aetna Inc.'s 1998 Annual Report on Form 10-K.
OVERVIEW
General
The Company's current operations include three core businesses - Aetna U.S.
Healthcare, Aetna Retirement Services and Aetna International. Aetna U.S.
Healthcare provides a full spectrum of managed care, indemnity, and group life
and disability insurance products. Aetna Retirement Services offers a range of
financial services products including annuity contracts, investment advisory
services, financial planning and pension plan administration services. Aetna
International, through subsidiaries and joint venture operations, sells
primarily life insurance, health insurance and financial services products in
markets outside the United States. The Company also has a Large Case Pensions
business that manages a variety of retirement products for defined benefit and
defined contribution plans.
Consolidated Results
The Company reported net income of $179 million for the three months ended March
31, 1999 compared to $168 million for the same period in 1998. Net income per
diluted common share for the three months ended March 31, 1999 was $1.16,
compared with $1.05 a year ago.
Net income reflects Year 2000 costs of $27 million for the first three months of
1999 and $16 million for the first three months of 1998. Results also included
net realized capital gains of $11 million for the three months ended March 31,
1999 and $21 million for the three months ended March 31, 1998. Excluding these
items, earnings were $195 million for the three months ended March 31, 1999
compared to $163 million for the same period in 1998.
Acquisitions and Dispositions
Aetna U.S. Healthcare
On December 9, 1998, the Company entered into definitive agreements with The
Prudential Insurance Company of America to acquire the Prudential health care
business ("PHC") for $1 billion. The acquisition is subject to approval by
federal antitrust and state regulators, and other customary closing conditions.
The Company received a second request for information from the Department of
Justice ("DOJ") in connection with the DOJ's federal antitrust review of the
transaction. The Company has complied with the second request, and continues to
hold discussions with the DOJ and state regulators regarding issues they have
raised in connection with their review. The Company currently expects to
complete the acquisition in the second quarter of 1999.
The Company expects to finance the transaction by issuing $500 million of
three-year senior notes to the seller and by using cash the Company expects to
receive as a result of issuing additional debt securities prior to the closing.
The Company currently expects ultimately to finance the acquisition by the
issuance of medium- or long-term fixed income securities.
After the closing, the Company's results will be affected by, among other
things, the operating results of PHC, the costs of financing the transaction and
the amortization of intangible assets (primarily goodwill) expected to be
created as a result of the transaction. Refer to "Aetna U.S. Healthcare" and
"Liquidity and Capital Resources" for further discussion.
Page 18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW (CONTINUED)
In July 1998, the Company acquired New York Life Insurance Company's ("NYL")
NYLCare health business ("NYLCare"). The total purchase price was approximately
$1.1 billion. Since the closing, the Company's results have been affected by,
among other things, the operating results of NYLCare, the costs of financing the
transaction and the amortization of intangible assets (primarily goodwill)
created by the transaction. The operations of NYLCare are reflected in the Aetna
U.S. Healthcare segment while the financing costs are reflected in the Corporate
segment. Refer to "Aetna U.S. Healthcare" and "Corporate," as well as Note 3 of
Condensed Notes to Consolidated Financial Statements, for further discussion.
Aetna Retirement Services
In October 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation for approximately $1 billion. The
principal agreement to sell this business was generally in the form of an
indemnity reinsurance arrangement. For more details about the transaction and
the indemnity reinsurance arrangement, refer to "Aetna Retirement Services" and
Note 3 of Condensed Notes to Consolidated Financial Statements.
Aetna International
On April 18, 1999, Aetna International, Inc. entered into a definitive agreement
to sell its Canadian operations to John Hancock Canadian Holdings Limited, the
parent of The Maritime Life Assurance Company, for approximately $300 million in
cash. The sale is not expected to result in any material capital gain or loss.
The revenue and earnings of Aetna International's Canadian operations are not
material to the Company. Completion of the sale, which is anticipated to occur
in the fall of 1999, is subject to Canadian federal and other regulatory
approvals and other customary conditions. Proceeds from the sale are expected to
be used for general corporate purposes, including repayment of debt, internal
growth, acquisitions and share repurchases.
AETNA U.S. HEALTHCARE
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
(Millions) 1999 (1) 1998 % Change
- ---------- -------- -------- --------
<S> <C> <C> <C>
Premiums $3,912.6 $2,839.0 37.8%
Net investment income 140.7 121.7 15.6
Fees and other income 391.8 351.0 11.6
Net realized capital gains 7.4 11.0 (32.7)
-------- -------- ----
Total revenue 4,452.5 3,322.7 34.0
-------- -------- ----
Current and future benefits 3,358.3 2,436.6 37.8
Operating expenses 770.9 610.7 26.2
Amortization of goodwill and other acquired intangible assets 101.9 90.7 12.3
-------- -------- ----
Total benefits and expenses 4,231.1 3,138.0 34.8
-------- -------- ----
Income before income taxes 221.4 184.7 19.9
Income taxes 100.7 85.9 17.2
-------- -------- ----
Net income $ 120.7 $ 98.8 22.2%
======== ======== ====
Net realized capital gains, net of tax (included above) $ 4.7 $ 7.1 (33.8)%
======== ======== ====
</TABLE>
- ----------
(1) Results include the acquired NYLCare health business.
Aetna U.S. Healthcare's net income for the three months ended March 31, 1999
increased $22 million compared to the same period for 1998. Net income includes
Year 2000 costs of $18 million for the three months ended March 31, 1999 and $9
million for the three months ended March 31, 1998. Excluding Year 2000 costs and
net realized capital gains, results for the three months ended March 31, 1999
increased $33 million, or 33%, compared to the same period in 1998. The 1999
results reflect the inclusion of NYLCare.
Page 19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AETNA U.S. HEALTHCARE (CONTINUED)
Business Results
In order to provide a comparison that management believes better reflects the
underlying performance of Aetna U.S. Healthcare, the operating earnings
discussion that follows excludes amortization of goodwill and other acquired
intangible assets (including the goodwill associated with the U.S. Healthcare
and NYLCare acquisitions), Year 2000 costs and net realized capital gains in
both periods.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
(Millions) 1999(1) 1998
- ---------- ------- -------
<S> <C> <C>
Operating earnings:
Health Risk $ 135.9 $ 93.7
Group Insurance and Other Health 80.1 81.6
------- -------
Total Aetna U.S. Healthcare $ 216.0 $ 175.3
======= =======
Commercial HMO Premium PMPM $138.70 $135.07
------- -------
Commercial HMO Medical Cost PMPM $113.73 $111.66
------- -------
Commercial HMO Medical Loss Ratio 82.0% 82.7%
------- -------
Medicare HMO Premium PMPM $485.32 $469.10
------- -------
Medicare HMO Medical Cost PMPM $437.26 $435.13
------- -------
Medicare HMO Medical Loss Ratio 90.1% 92.8%
------- -------
</TABLE>
- ----------
(1) Operating results include the acquired NYLCare health business.
Health Risk
Health Risk (which includes all health products for which Aetna U.S. Healthcare
assumes all or a majority of health care cost and utilization risk) earnings
increased $42 million for the three months ended March 31, 1999 compared to the
corresponding period of 1998. This increase reflects favorable Commercial and
Medicare HMO results due to membership growth, premium rate increases, the
benefit of medical cost initiatives, the impact of exiting several Medicare
markets as of January 1, 1999 and the acquisition of NYLCare. These increases
were partially offset by increased operating expenses. Indemnity and preferred
provider organization ("PPO") results for the three months ended March 31, 1999
declined slightly compared to the corresponding period of 1998.
For the Health Risk business, medical claims payable reflect estimates of the
ultimate cost of claims that have been incurred but not yet reported or paid.
Medical claims payable are based on a number of factors including those derived
from historical claim experience. Medical claims payable are estimated
periodically, and any resulting adjustments are reflected in current period
results in current and future benefits.
Commercial HMO
- --------------
Commercial HMO premium per member per month ("PMPM") increased 3% for the three
months ended March 31, 1999 compared to the corresponding period of 1998. This
increase was primarily due to premium rate increases, offset in part by
customers selecting lower premium plans, a shift in the geographic mix of
membership growth as well as the addition of NYLCare members. Commercial HMO
medical cost PMPM increased by 2% for the three months ended March 31, 1999
compared to the corresponding period of 1998. The 1999 increase was primarily
due to medical and pharmacy cost inflation as well as the addition of NYLCare
members. These increases were partially offset by medical cost initiatives. The
Commercial HMO medical loss ratio improved .7% for the three months ended March
31, 1999 compared to the corresponding period of 1998 reflecting the benefit of
rate increases and medical cost initiatives, partially offset by the addition of
NYLCare members.
Page 20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AETNA U.S. HEALTHCARE (CONTINUED)
Medicare HMO
- ------------
Medicare HMO premiums PMPM increased 3% for the three months ended March 31,
1999 compared to the corresponding period of 1998 due to Health Care Financing
Administration rate increases and increases in supplemental premiums, partially
offset by a shift in the geographic mix of membership growth. Medicare HMO
medical costs PMPM increased by .5% for the three months ended March 31, 1999
compared to the corresponding period of 1998. The higher medical costs in 1999
were primarily due to medical cost inflation, partially offset by the favorable
impact of exiting several markets as of January 1, 1999. The Medicare HMO
medical loss ratio improved 2.7% for the three months ended March 31, 1999
compared to the corresponding period of 1998 primarily due to the favorable
impact of exiting several markets.
Group Insurance and Other Health
Group Insurance and Other Health includes group life and disability insurance
and long-term care insurance, offered on both an insured and employer-funded
basis, and all health products offered on an employer-funded basis. Group
Insurance and Other Health results for the three months ended March 31, 1999
decreased $2 million compared to the corresponding period of 1998. This reflects
less favorable developments in claim benefit reserve estimates for life and
disability products offset by higher investment income and improved Group Life
and Disability results.
Membership
Aetna U.S. Healthcare's membership was as follows:
<TABLE>
<CAPTION>
March 31, 1999 (1) March 31, 1998
-------------------------------------- -------------------------------------
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
- ----------- ------ ------- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (2) 5,344 705 6,049 3,851 523 4,374
Medicare 546 -- 546 399 16 415
Medicaid 140 25 165 94 -- 94
------ ------ ------ ------ ------ ------
Total HMO 6,030 730 6,760 4,344 539 4,883
POS 225 2,455 2,680 274 2,527 2,801
PPO 945 2,942 3,887 598 2,867 3,465
Indemnity 167 2,071 2,238 269 2,237 2,506
------ ------ ------ ------ ------ ------
Total Health Membership 7,367 8,198 15,565 5,485 8,170 13,655
====== ====== ====== ====== ====== ======
Group Insurance:
Group Life 9,740 9,554
Disability 2,630 2,699
Long-Term Care 92 99
------ ------ ------ ------ ------ ------
</TABLE>
- ----------
(1) Health membership for NYLCare at the date of acquisition (July 15, 1998) in
thousands was 2,117 members, including 1,186 Commercial HMO risk, 111
Medicare HMO risk, 56 Medicaid HMO risk, 135 HMO nonrisk, 452 PPO risk and
177 PPO nonrisk. Group Insurance NYLCare membership at the date of
acquisition was 791 thousand members.
(2) Includes 1,455 thousand POS members who access primary care physicians and
referred care through an HMO network at March 31, 1999 and 976 thousand at
March 31, 1998.
Total Health membership as of March 31, 1999 increased by 1.9 million members,
or 14%, when compared to March 31, 1998 primarily due to the acquisition of
NYLCare. Excluding the impact of the NYLCare members at the date of acquisition,
HMO membership increases were more than offset by declines in point-of-service
("POS"), PPO and Indemnity enrollment.
Page 21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AETNA U.S. HEALTHCARE (CONTINUED)
Total Revenue and Expense
Revenue for Aetna U.S. Healthcare, excluding net realized capital gains,
increased by $1.1 billion, or 34%, for the three months ended March 31, 1999
when compared to the same period in 1998. This growth was primarily due to the
acquisition of NYLCare as well as to premium rate increases and Commercial HMO
membership growth.
Operating expenses for Aetna U.S. Healthcare, increased by $160 million, or 26%,
for the three months ended March 31, 1999 when compared to the same period in
1998. The increase in 1999 reflects the acquisition of NYLCare as well as costs
to support HMO membership increases. However, operating expenses as a percentage
of revenue decreased to 17% for the three months ended March 31, 1999 from 18%
for the corresponding period of 1998.
Acquisition of the NYLCare Health Business
On July 15, 1998, the Company acquired NYLCare for a purchase price of $1.05
billion in cash, subject to adjustment as provided in the transaction
agreements. Originally, in addition to the cash purchase price, payments
totaling up to $300 million (up to $150 million in each of two years) were
potentially payable to the extent that predetermined earnings and membership
targets in future periods were achieved (the "Earnout").
On January 29, 1999, the Company and NYL agreed to resolve all purchase price
adjustments and obligations under the Earnout. Under this agreement, the Company
paid NYL an additional $50 million to resolve such matters. As a result, the
total purchase price is approximately $1.1 billion.
Agreement to Acquire Prudential Health Care Business
On December 9, 1998, the Company entered into an agreement to acquire PHC.
Included in the acquisition are PHC's HMO, POS, PPO and Indemnity health lines,
as well as its dental business. At December 31, 1998, PHC had approximately 6.2
million health members and 8 million dental members. Refer to "Overview" for a
further discussion of the pending purchase.
Page 22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AETNA RETIREMENT SERVICES
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------
(Millions) 1999 1998 (1) % Change
- ---------- --------- --------- ---------
<S> <C> <C> <C>
Premiums (2) $ 23.6 $ 40.3 (41.4)%
Net investment income 215.4 267.6 (19.5)
Fees and other income 131.7 162.7 (19.1)
Net realized capital gains (losses) 2.9 (2.2) --
--------- --------- ---------
Total revenue 373.6 468.4 (20.2)
--------- --------- ---------
Current and future benefits (2) 183.0 250.3 (26.9)
Operating expenses 92.5 101.7 (9.0)
Amortization of deferred policy acquisition costs 24.9 34.0 (26.8)
--------- --------- ---------
Total benefits and expenses 300.4 386.0 (22.2)
--------- --------- ---------
Income before income taxes 73.2 82.4 (11.2)
Income taxes 24.0 24.1 (.4)
--------- --------- ---------
Net income $ 49.2 $ 58.3 (15.6)%
========= ========= =========
Net realized capital gains (losses), net of tax (included above) $ 1.9 $ (1.4) --%
========= ========= =========
Deposits not included in premiums above:
Annuities -- fixed options $ 545.2 $ 333.1 63.7%
Annuities -- variable options 1,484.1 907.1 63.6
Individual life insurance -- 131.1 (100.0)
--------- --------- ---------
Total $ 2,029.3 $ 1,371.3 48.0%
========= ========= =========
Assets under management: (3)
Annuities -- fixed options $12,305.8 $12,069.9 2.0%
Annuities -- variable options (4) 27,238.7 22,852.1 19.2
Other investment advisory 15,615.9 10,784.8 44.8
--------- --------- ---------
Financial services 55,160.4 45,706.8 20.7
Individual life insurance -- 2,769.3 (100.0)
--------- --------- ---------
Total assets under management 55,160.4 48,476.1 13.8
--------- --------- ---------
Assets under administration (5) 4,000.9 3,405.6 17.5
--------- --------- ---------
Total assets under management and administration $59,161.3 $51,881.7 14.0%
========= ========= =========
</TABLE>
- ----------
(1) Operating results reflect the operations of the individual life
business which was sold October 1, 1998.
(2) Includes $17.7 million for the three months ended March 31, 1999 and
$14.3 million for the three months ended March 31, 1998 for annuity
premiums on contracts converting from the accumulation phase to payout
options with life contingencies.
(3) Excludes net unrealized capital gains of approximately $305.7 million
at March 31, 1999 and $565.3 million at March 31, 1998.
(4) Includes $8,404.7 million at March 31, 1999 and $6,029.3 million at
March 31, 1998 of assets held and managed by unaffiliated mutual funds.
(5) Represents assets for which ARS only provides administrative services.
Aetna Retirement Services' ("ARS") net income for the three months ended March
31, 1999 decreased $9 million compared to the same period in 1998. Net income
includes Year 2000 costs of $6 million for the three months ended March 31, 1999
and $4 million for the three months ended March 31, 1998. The 1998 net income
included $23 million related to the individual life insurance business.
Excluding Year 2000 costs and net realized capital gains or losses, as well as
the 1998 individual life earnings, earnings results for the three months ended
March 31, 1999 increased $12 million, or 30%, compared to the first quarter of
1998.
Page 23
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AETNA RETIREMENT SERVICES (CONTINUED)
ARS' earnings, excluding Year 2000 costs and net realized capital gains or
losses, were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
(Millions) 1999 1998
- ---------- ----- -----
<S> <C> <C>
Financial services $53.0 $40.8
Individual life insurance (1) -- 23.0
----- -----
Total $53.0 $63.8
===== =====
</TABLE>
(1) The individual life business was sold on October 1, 1998.
The increase in earnings for financial services products primarily reflect
increased fee income from increased assets under management. Assets under
management increased by 21% primarily due to appreciation in the stock market as
well as additional net deposits (deposits less surrenders), including deposits
from one large case. Partially offsetting the increases in fee income were
increased operating expenses. However, operating expenses as a percentage of
assets under management declined in both periods.
Of the $12.3 billion and $12.1 billion of fixed annuity assets under management
at March 31, 1999 and 1998, respectively, 25% were fully guaranteed and 75% were
experience-rated in each period. The average annualized earned rates on
investments supporting fully guaranteed investment contracts were 7.4% and 7.5%
and the average annualized earned rates on investments supporting
experience-rated investment contracts were 7.6% and 8.0% for the three months
ended March 31, 1999 and 1998, respectively. The average annualized credited
rates on fully guaranteed investment contracts were 6.3% and 6.5% and the
average annualized credited rates on experience-rated investment contracts were
5.6% and 5.9% for the three months ended March 31, 1999 and 1998, respectively.
The resulting annualized interest margins on fully guaranteed investment
contracts were 1.1% and 1.0% and on experience-rated investment contracts were
2.0% and 2.1% for the three months ended March 31, 1999 and 1998, respectively.
Sale of Individual Life Insurance Business
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation ("Lincoln") for $1 billion in cash. The
sale resulted in an after-tax gain of approximately $152 million. Since the
principal agreement to sell this business was generally in the form of an
indemnity reinsurance arrangement, the Company deferred approximately $88
million of the gain and is recognizing it over approximately 15 years.
Approximately $2 million of the gain was recognized during the first three
months of 1999. Revenues from the business sold were $135 million for the three
months ended March 31, 1998. For more details about the transaction and the
indemnity reinsurance arrangement, refer to Note 3 of Condensed Notes to
Consolidated Financial Statements.
Page 24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AETNA INTERNATIONAL
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------
(Millions) 1999 1998 % Change
- ---------- ------ ------ --------
<S> <C> <C> <C>
Premiums $416.6 $319.3 30.5%
Net investment income 125.0 118.3 5.7
Fees and other income 28.6 31.9 (10.3)
Net realized capital losses (2.5) (12.3) 79.7
------ ------ ------
Total revenue 567.7 457.2 24.2
------ ------ ------
Current and future benefits 342.2 277.7 23.2
Operating expenses 140.2 114.6 22.3
Interest expenses 2.3 2.7 (14.8)
Amortization of goodwill and other acquired intangible assets 5.1 5.1 --
Amortization of deferred policy acquisition costs 25.0 18.3 36.6
------ ------ ------
Total benefits and expenses 514.8 418.4 23.0
------ ------ ------
Income before income taxes 52.9 38.8 36.3
Income taxes 11.3 10.8 4.6
------ ------ ------
Net income $ 41.6 $ 28.0 48.6%
====== ====== ======
Net realized capital losses, net of tax (included above) $ (1.4) $ (7.8) 82.1%
====== ====== ======
</TABLE>
Aetna International's net income for the three months ended March 31, 1999
increased by $14 million compared to the same period in 1998. Net income
includes Year 2000 costs of $3 million for the three months ended March 31, 1999
and $2 million for the three months ended March 31, 1998. Excluding Year 2000
costs and net realized capital losses, results for the three months ended March
31, 1999 increased $8 million, or 22%, compared to the same period in 1998. The
increase in 1999 results primarily reflects earnings growth, on a local currency
basis, in the Company's Mexican insurance businesses and earnings growth in
Brazil, Canada, Chile and Taiwan. The weakening of foreign currencies
substantially offset the growth in local currency earnings in Brazil and
partially offset local currency earnings in Mexico and Chile. Refer to
"Overview" for a discussion related to the pending sale of the Canadian
operations.
Further currency devaluations in Brazil, or in other countries where the Company
has established operations, could adversely affect future operating earnings
when translated into U.S. dollars. Refer to "Aetna International" and
"Forward-Looking Information/Risk Factors" in Aetna Inc.'s 1998 Annual Report on
Form 10-K for additional information.
Earnings by major geographic location, excluding Year 2000 costs and net
realized capital losses, were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------
(Millions) 1999 1998
- ---------- ----- -----
<S> <C> <C>
Asia Pacific (1) $ 9.0 $12.3
Americas (2) 44.1 28.6
Other (3) (7.5) (3.4)
----- -----
Total $45.6 $37.5
===== =====
</TABLE>
- ----------
(1) Includes China, Hong Kong, Indonesia, Malaysia, New Zealand,
Philippines, Taiwan and Thailand.
(2) Includes Argentina, Brazil, Canada, Chile, Mexico, Peru, Poland and
Venezuela.
(3) Includes general and other miscellaneous expenses.
Page 25
<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LARGE CASE PENSIONS
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------
(Millions) 1999 1998 % Change
- ---------- --------- --------- ---------
<S> <C> <C> <C>
Premiums $ 28.6 $ 40.0 (28.5)%
Net investment income 256.6 303.7 (15.5)
Fees and other income 4.5 4.6 (2.2)
Net realized capital gains 9.2 37.9 (75.7)
--------- --------- ---------
Total revenue 298.9 386.2 (22.6)
--------- --------- ---------
Current and future benefits 251.5 306.0 (17.8)
Operating expenses 3.1 6.0 (48.3)
--------- --------- ---------
Total benefits and expenses 254.6 312.0 (18.4)
--------- --------- ---------
Income before income taxes 44.3 74.2 (40.3)
Income taxes 16.0 27.0 (40.7)
--------- --------- ---------
Net income $ 28.3 $ 47.2 (40.0)%
========= ========= =========
Net realized capital gains, net of tax (included above) $ 6.0 $ 24.7 (75.7)%
========= ========= =========
Deposits not included in premiums above $ 265.4 $ 267.4 (.7)%
========= ========= =========
Assets under management (1) (2) $27,793.3 $30,008.9 (7.4)%
========= ========= =========
</TABLE>
- ----------
(1) Excludes net unrealized capital gains of approximately $331.0 million
at March 31, 1999 and $590.7 million at March 31, 1998.
(2) Includes assets under management of $6,546.7 million at March 31, 1999
and $7,265.6 million at March 31, 1998 related to discontinued
products.
Large Case Pensions' net income for the three months ended March 31, 1999
decreased by $19 million compared with the same period in 1998. The decrease in
net income primarily relates to the decrease in net realized capital gains,
which reflects the redeployment of capital supporting this business. This
decrease also reflects the consolidation into the ARS segment of certain
products and services, partially offset by lower expenses. Net income includes
Year 2000 costs of $.2 million for the three months ended March 31, 1999 and $.1
million for the three months ended March 31, 1998. Excluding Year 2000 costs and
net realized capital gains in both periods, results for the three months ended
March 31, 1999 were consistent with the same period in 1998.
Assets under management at March 31, 1999 were 7% lower than a year earlier.
This decrease primarily resulted from the continuing runoff of underlying
liabilities and consolidation into the ARS segment of the Company's investment
advisory services and certain other products which complement ARS' business
strategy.
General account assets supporting experience-rated products (where the
contractholder, not the Company, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals and transfers were as follows
(excluding contractholder transfers to other Company products):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
(Millions) 1999 1998
- --------- ------------ ----------
<S> <C> <C>
Scheduled contract maturities and benefit payments (1) $241.2 $237.1
Contractholder withdrawals other than scheduled contract
maturities and benefit payments 75.3 72.7
Participant directed withdrawals 22.4 27.8
------------ ----------
</TABLE>
- ----------
(1) Includes payments made upon contract maturity and other amounts distributed
in accordance with contract schedules.
Page 26
<PAGE> 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LARGE CASE PENSIONS (CONTINUED)
Discontinued Products
Results of operations of discontinued products, including net realized capital
gains or losses, are credited or charged to the reserve for anticipated losses.
The Company's results of operations would be adversely affected to the extent
that aggregate future losses on the products are greater than anticipated and
positively affected to the extent future losses are less than anticipated.
Management reviews the adequacy of the discontinued products reserve quarterly.
The current reserve reflects management's best estimate of anticipated future
losses.
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
(Millions) 1999 1998
- ---------- ----- -----
<S> <C> <C>
Interest margin (1) $(5.3) $(6.4)
Net realized capital gains (2) 6.6 42.3
Interest earned on receivable from continuing products 5.5 5.6
Other, net 4.6 (.3)
----- -----
Results of discontinued products, after tax $11.4 $41.2
===== =====
Results of discontinued products, pretax $17.5 $66.7
===== =====
Net realized capital gains from sales of bonds, after tax (included above) $ 5.5 $23.1
===== =====
</TABLE>
- ----------
(1) The interest margin is the difference between earnings on invested
assets and interest credited to contractholders.
(2) Realized capital gains for the three months ended March 31, 1998
include $21.2 million related to continued favorable developments in
real estate markets.
Total assets supporting discontinued products and the reserve include a
receivable from continuing products of $498 million (after tax) at March 31,
1999. Interest income accrues on this receivable at the discount rate used to
calculate the reserve.
The activity in the reserve for anticipated future losses on discontinued
products for the three months ended March 31, 1999 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- ---------
<S> <C>
Reserve at December 31, 1998 $1,214.1
Results of discontinued products 17.5
--------
Reserve at March 31, 1999 $1,231.6
========
</TABLE>
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
(Millions) 1999 1998
- ---------- ------ ------
<S> <C> <C>
Scheduled contract maturities, settlements and benefit payments $310.5 $467.5
Participant directed withdrawals 4.3 6.4
------ -----
</TABLE>
Refer to Note 7 of Condensed Notes to Consolidated Financial Statements for
additional information.
Page 27
<PAGE> 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CORPORATE
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------
(Millions, after tax) 1999 1998 % Change
- --------------------- ----- ----- -------
<S> <C> <C> <C>
Interest expense $40.6 $35.2 15.3%
===== ===== =====
Other operating expenses, net $19.8 $27.9 (29.0)%
Net realized capital losses -- 1.7 (100.0)
----- ----- -----
Total other expense $19.8 $29.6 (33.1)%
===== ===== =====
</TABLE>
The Corporate segment includes interest expense and other expenses that are not
directly related to the Company's business segments. "Other Operating Expenses"
include corporate expenses such as staff area expenses, advertising and
contributions, which are partially offset by net investment income.
The 1999 increase in interest expense primarily results from additional debt
incurred in connection with the NYLCare acquisition.
Other operating expenses include Year 2000 costs of $1 million for the three
months ended March 31, 1999 and $2 million for the three months ended March 31,
1998. Other operating expenses, excluding Year 2000 costs, decreased $7 million
primarily due to system implementation costs in 1998 not present in 1999 as well
as continued cost reduction initiatives.
GENERAL ACCOUNT INVESTMENTS
Investments disclosed in this section relate to the Company's total general
account portfolio (including assets supporting discontinued products and
experience-rated products).
Total Investments
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1999 1998
- ---------- --------- ------------
<S> <C> <C>
Debt securities $31,117.9 $32,180.8
Equity securities 813.7 800.5
Short-term investments 790.6 942.2
Mortgage loans 3,517.3 3,553.0
Real estate 317.2 270.3
Policy loans 471.7 458.7
Other 1,315.9 1,264.5
--------- ---------
Total investments $38,344.3 $39,470.0
========= =========
</TABLE>
Debt Securities
Debt securities represented 81% of the Company's total general account invested
assets at March 31, 1999 and 82% at December 31, 1998. Debt securities were as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1999 1998
- ---------- -------- -----------
<S> <C> <C>
Supporting discontinued products $ 5,550.8 $ 5,890.5
Supporting experience-rated products 12,759.3 13,197.3
Supporting remaining products 12,807.8 13,093.0
--------- ---------
Total debt securities (1) $31,117.9 $32,180.8
========= =========
</TABLE>
- ----------
(1) Total debt securities include "Below Investment Grade" securities of $2.0
billion at March 31, 1999 and December 31, 1998 of which 46.5% at March 31,
1999 and 50.8% at December 31, 1998 support discontinued and
experience-rated products. Refer to Aetna Inc.'s 1998 Annual Report on Form
10-K for a discussion of "Below Investment Grade" securities.
Page 28
<PAGE> 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL ACCOUNT INVESTMENTS (CONTINUED)
Debt securities reflected net unrealized capital gains of $.9 billion at March
31, 1999 compared to $1.5 billion at December 31, 1998. Of the net unrealized
capital gains at March 31, 1999, $202 million related to assets supporting
discontinued products and $330 million related to assets supporting
experience-rated contracts.
Residential Collateralized Mortgage Obligations
Included in the Company's debt securities are residential collateralized
mortgage obligations ("CMOs") of $1.9 billion at March 31, 1999 and $2.0 billion
at December 31, 1998. There are various categories of CMOs that are subject to
different degrees of risk from changes in interest rates and, for CMOs that are
not agency backed, defaults. The principal risks inherent in holding CMOs are
prepayment and extension risks related to dramatic decreases and increases in
interest rates resulting in the repayment of principal from the underlying
mortgages either earlier or later than originally anticipated. At March 31, 1999
and December 31, 1998, approximately 2% of the Company's CMO holdings were
invested in CMOs that are subject to more prepayment and extension risk than
traditional CMOs (such as interest- or principal-only strips).
Mortgage Loans
At March 31, 1999 and December 31, 1998, the Company's mortgage loan
investments, net of impairment reserves, were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1999 1998
- ---------- -------- -----------
<S> <C> <C>
Supporting discontinued products $ 763.2 $ 754.2
Supporting experience-rated products 1,150.1 1,183.3
Supporting remaining products 1,604.0 1,615.5
-------- --------
Total mortgage loan investments $3,517.3 $3,553.0
======== ========
</TABLE>
During the first three months of 1999, the Company began to manage its mortgage
loan portfolio to maintain the balance in absolute terms, relative to invested
assets, by selectively pursuing refinance opportunities. The mortgage loan
portfolio balance at March 31, 1999 remained essentially the same as December
31, 1998 at $3.5 billion.
Problem, restructured, and potential problem loans included in mortgage loans
were $295 million at March 31, 1999 and $301 million at December 31, 1998 of
which 85% at March 31, 1999 and 86% at December 31, 1998 support discontinued
and experience-rated products. Refer to Aetna Inc.'s 1998 Annual Report on Form
10-K for a discussion of problem, restructured and potential problem loans.
Specific impairment reserves on these loans were $44 million at March 31, 1999
and $48 million at December 31, 1998. (Refer to Note 4 of Condensed Notes to
Consolidated Financial Statements).
Risk Management and Market Sensitive Instruments
Interest rate risk is managed within a tight duration band, and credit risk is
managed by maintaining high average quality ratings and diversified sector
exposure within the debt securities portfolio. The Company's use of derivatives
is generally limited to hedging purposes and has principally consisted of using
interest rate swap agreements, futures contracts, warrants, foreign exchange
forward contracts, currency swap agreements and written options to hedge certain
market risks such as interest rate, equity price and foreign exchange risk.
The Company regularly evaluates market risk sensitive instruments by examining,
among other things, levels of or changes in domestic and/or foreign interest
rates (short-term or long-term), duration, exchange rates, prepayment rates,
equity markets or credit ratings/spreads.
Page 29
<PAGE> 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL ACCOUNT INVESTMENTS (CONTINUED)
Management also reviews, on a quarterly basis, hypothetical net losses in the
Company's consolidated near-term financial position, results of operations and
cash flows under certain assumed market rate changes.
Based on the Company's overall exposure to interest rate, equity price and
foreign exchange risks, the Company believes that these hypothetical changes in
market rates and prices would not materially affect the consolidated near-term
financial position, results of operations or cash flows of the Company as of
March 31, 1999. Refer to Aetna Inc.'s 1998 Annual Report on Form 10-K for a more
complete discussion of "Risk Management and Market Sensitive Instruments".
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Generally, the Company meets its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and using overall
cash flows from premiums, deposits and income received on investments. Overall
cash flows are used primarily for claim and benefit payments, contract
withdrawals and operating expenses. In addition, the Company uses cash to invest
in core businesses, make acquisitions, repurchase common stock and pay
shareholder dividends.
During the first three months of 1999, net cash generated from investing,
financing and operating activities was used to make approximately $165 million
of investments in core businesses and acquisitions, pay approximately $40
million for common stock repurchases and pay approximately $42 million of
dividends to shareholders.
During the corresponding period of 1998, net cash generated from investing,
financing and operating activities was used to make approximately $8 million of
investments in core businesses and acquisitions, pay approximately $37 million
for common stock repurchases and pay approximately $43 million of dividends to
shareholders. Refer to the "Consolidated Statements of Cash Flows" for
additional information.
Dividends
On February 26, 1999, the Company's Board of Directors declared a quarterly
dividend of $.20 per share of common stock and $1.18945 per share of 6.25% Class
C Voting Mandatorily Convertible Preferred Stock to shareholders of record at
the close of business on April 30, 1999, payable May 15, 1999.
Financings and Financing Capacity
Substantially all of the Company's borrowings and financings are conducted
through Aetna Services, Inc. and are fully and unconditionally guaranteed by
Aetna Inc. Refer to Note 8 of Condensed Notes to Consolidated Financial
Statements for additional information.
The Company has significant short-term liquidity supporting its businesses. The
Company uses short-term borrowings from time to time to address timing
differences between receipts and disbursements. The maximum amount of domestic
short-term borrowings outstanding was $1.1 billion during the first three months
of 1999 and $.7 billion during the first three months of 1998.
The Company funded the acquisition of NYLCare with cash made available from
issuing additional commercial paper. The Company issued $300 million of debt in
the fourth quarter of 1998 and expects to issue additional medium- or long-term
fixed income securities in 1999, subject to market conditions, to replace some
of the commercial paper.
Page 30
<PAGE> 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The acquisition of PHC, which is anticipated to be completed in the second
quarter of 1999, is currently expected to be ultimately financed by the issuance
of medium- or long-term fixed income securities.
Common Stock Transactions
In January 1999, the Board authorized the repurchase of 5.0 million shares of
common stock. As of March 31, 1999, 495,000 shares of common stock had been
repurchased under this authorization at a cost of $40 million.
NEW ACCOUNTING STANDARDS
Refer to Note 1 of Condensed Notes to Consolidated Financial Statements for a
discussion of recently issued accounting standards.
YEAR 2000
The Company relies heavily on information technology ("IT") systems and other
systems and facilities, such as telephones, building access control systems and
heating and ventilation equipment ("embedded systems") to conduct its business.
The Company also has business relationships with health care providers,
financial institutions, financial intermediaries, public utilities and other
critical vendors, as well as regulators and customers who are themselves reliant
on IT and embedded systems to conduct their businesses.
State of Readiness
In 1997, the Company organized a multidisciplinary Year 2000 Project Team that
includes outside consultants. The Year 2000 Project Team and the Company's
businesses have developed and are currently executing a comprehensive plan
designed to make the Company's mission-critical IT systems and embedded systems
Year 2000 ready. Outside consultants have reviewed the Company's overall
process, plan and progress to date. The Company's plan for IT systems consists
of several phases: (i) inventory -- identifying all IT systems and risk rating
each according to its potential business impact; (ii) assessment -- identifying
IT systems that use date functions and assessing them for Year 2000
functionality; (iii) remediation -- reprogramming, or replacing where necessary,
inventoried items to make them Year 2000 ready; and (iv) testing and
certification -- testing the code modifications and new inventory with other
associated systems, including extensive date testing, and performing quality
assurance testing to determine if they will successfully operate in the
post-1999 environment.
The Company completed the inventory and assessment phases for substantially all
of its IT systems by year-end 1997. The Company's IT systems are currently in
the remediation and testing and certification phases. The Company has completed
the remediation of substantially all of its IT systems and is scheduled to
complete the testing and certification of substantially all of its IT systems by
June 30, 1999.
The Company has inventoried and risk rated substantially all of its embedded
systems. The results of these processes indicate that embedded systems should
not present a material Year 2000 risk to the Company. The Company's remaining
steps include testing selected embedded systems and remediating and certifying
systems that exhibit Year 2000 issues. The Company is focusing its testing and
remediation efforts on select embedded systems of its mission-critical
facilities, such as data centers, service centers, communications centers and
select office locations. The Company plans to complete the testing of these
systems by mid-1999, and the remediation and certification of these systems by
year-end 1999.
The Company believes that its Year 2000 project is on schedule.
Page 31
<PAGE> 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR 2000 (CONTINUED)
External Relationships
The Company also faces the risk that one or more of its critical suppliers or
customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 issues,
including those associated with its own external relationships. The Company has
completed its inventory of external relationships and risk rated each external
relationship based upon the potential business impact, available alternatives
and cost of substitution. In the case of mission-critical suppliers, such as
banks, financial intermediaries, telecommunications providers and other
utilities, mutual fund companies, IT vendors, financial market data providers,
national pharmacy chains, electronic claims clearinghouses, major physician
groups and major hospitals, the Company is engaged in discussions with the third
parties and is attempting to obtain detailed information as to those parties'
Year 2000 plans and state of readiness. The Company, however, does not have
sufficient information at the current time to predict whether its external
relationships will be Year 2000 ready.
Year 2000 Costs
Total Year 2000 project costs are currently estimated to be at least $85 million
(after tax) in 1999. A large majority of these costs are expected to be
incremental expenses that will not recur in 2000 or thereafter. Year 2000 costs
were $27 million (after tax) for the first three months of 1999 and $16 million
(after tax) for the first three months of 1998. The Company expects that Year
2000 costs in 2000 will be immaterial. The Company expenses these costs as
incurred and funds these costs through operating cash flows.
Year 2000 readiness is critical to the Company. The Company has redeployed some
resources from noncritical system enhancements to address Year 2000 issues. Due
to the importance of IT systems to the Company's business, management has not
deferred mission-critical systems enhancements to become Year 2000 ready. The
Company does not expect these redeployments to have a material impact on the
Company's financial condition or results of operations.
Risks and Contingency/Recovery Planning
If the Company's Year 2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to accurately and timely
process benefits claims; update customers' accounts; process financial
transactions; bill customers; assess exposure to risks; determine liquidity
requirements or report accurate data to management, shareholders, customers,
regulators and others; as well as business interruptions or shutdowns; financial
losses; reputational harm; increased scrutiny by regulators; and litigation
related to Year 2000 issues. The Company's international affiliates face
additional Year 2000 risk due to the diverse environments in which they operate.
The Company is attempting to limit the potential impact of the Year 2000 by
monitoring the progress of its own Year 2000 project and those of its critical
external relationships and by developing contingency/recovery plans. The Company
cannot guarantee that it will be able to resolve all of its Year 2000 issues.
Any critical unresolved Year 2000 issues at the Company or its external
relationships, however, could have a material adverse effect on the Company's
results of operations, liquidity or financial condition.
The Company has begun to develop contingency/recovery plans aimed at sustaining
the continuity of critical business functions before and after December 31,
1999. As part of that process, the Company has begun to identify reasonably
possible Year 2000 failure scenarios and is developing contingency plans for
those failure scenarios it believes could have a significant impact on the
Company's operations. The Company is developing these contingency plans in an
effort to reduce the impact on the Company, and provide methods of returning to
normal operations, if one or more of those failure scenarios occur. The Company
expects contingency/recovery planning to be substantially complete by September
1999.
Page 32
<PAGE> 33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION/RISK FACTORS
Refer to "Forward-Looking Information/Risk Factors" in Aetna Inc.'s 1998 Annual
Report on Form 10-K for factors that could cause actual Year 2000 results to
differ from the Company's expectations. The "Forward-Looking Information/Risk
Factors" and "Regulatory Environment" portions of that Annual Report also
contain a general discussion of other important risks related to the Company's
businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Refer to the information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - General Account Investments".
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Purported Class Action Complaints were filed in the United States District Court
for the Eastern District of Pennsylvania on November 5, 1997 by Eileen
Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and
Michael J. Oring. Other purported Class Action Complaints were filed in the
United States District Court for the District of Connecticut on November 25,
1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on
December 24, 1997 by Terry B. Cohen. The Connecticut actions were transferred to
the United States District Court for the Eastern District of Pennsylvania (the
"Court") for consolidated pretrial proceedings with the cases pending there. The
plaintiffs filed a Consolidated and Amended Complaint (the "Complaint") seeking,
among other remedies, unspecified damages resulting from defendants' alleged
violations of federal securities laws. The Complaint alleged that the Company
and three of its current or former officers or directors, Ronald E. Compton,
Richard L. Huber, and Leonard Abramson, are liable for certain
misrepresentations and omissions regarding, among other matters, the integration
of the merger with U.S. Healthcare and the Company's medical claim reserves. The
Company and the individual defendants filed a motion to dismiss the Complaint on
July 31, 1998. On February 2, 1999, the Court dismissed the Complaint, but
granted the plaintiffs leave to file a second amended complaint. On February 22,
1999, the plaintiffs filed a second amended complaint against the Company,
Ronald E. Compton and Richard L. Huber. The Company and the remaining
individual defendants filed a motion to dismiss the second amended complaint,
and the Court denied that motion in March, 1999. Defendants are pursuing an
interlocutory appeal of that denial. Trial currently is scheduled to begin in
December, 1999. The Company is defending the actions vigorously.
The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including bad faith,
medical malpractice, marketing and other litigation in its health business.
Some of these other lawsuits are purported to be class actions. Aetna U.S.
Healthcare of California Inc., an indirect subsidiary of the Company, is
currently a party to a bad faith and medical malpractice action brought by
Teresa Goodrich, individually and as successor in interest of David Goodrich.
The action was originally filed in March, 1996 in Superior Court for the state
of California, county of San Bernardino. The action alleges damages for unpaid
medical bills, punitive damages and compensatory damages for wrongful death
based upon, among other things, alleged denial of claims for services provided
to David Goodrich by out of network providers without prior authorization. On
January 20, 1999 a jury rendered a verdict in favor of the plaintiff for
$750,000 for unpaid medical bills, $3.7 million for wrongful death and $116
million for punitive damages. On April 12, 1999 the trial court amended the
judgment to include Aetna Services, Inc., a direct subsidiary of the Company,
as a defendant. On April 27, 1999 Aetna Services, Inc. and Aetna U.S.
Healthcare of California Inc. filed appeals with the California Court of Appeal
and will continue to defend this matter vigorously. While the ultimate outcome
of these other lawsuits cannot be determined at this time, after consideration
of the defenses available to the Company and any related reserves established,
they are not expected to result in liability for amounts material to the
financial condition of the Company, although they may adversely affect results
of operations in future periods.
Page 33
<PAGE> 34
ITEM 5. OTHER INFORMATION.
(a) NAIC IRIS Ratios
The National Association of Insurance Commissioners ("NAIC") Insurance
Regulatory Information Systems ("IRIS") ratios cover 12 categories of financial
data with defined usual ranges for each category. The ratios are intended to
provide insurance regulators "early warnings" as to when a given company might
warrant special attention. An insurance company may fall out of the usual range
for one or more ratios and such variances may result from specific transactions
that are in themselves immaterial or eliminated at the consolidated level. None
of Aetna Inc.'s significant subsidiaries had more than two IRIS ratios that were
outside of the NAIC usual ranges for 1998.
(b) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges
and Preferred Stock Dividends
The following table sets forth the Company's and Aetna Services' ratio of
earnings to fixed charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------ -----------------------------------------------------
Aetna Inc. 1999 1998 1997 1996 1995 1994
- ---------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 4.21 4.96 5.74 2.45 4.97 4.74
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 3.39 3.94 4.46 2.10 4.97 4.74
---- ---- ---- ---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
----------------------- ----------------------------
Aetna Services, Inc. 1999 1998 1997 1996
- -------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 3.04 4.31 5.78 2.44
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 3.04 4.31 5.78 2.44
---- ---- ---- ----
</TABLE>
For purposes of computing both the ratio of earnings to fixed charges and the
ratio of earnings to combined fixed charges and preferred stock dividends,
"earnings" represent consolidated earnings from continuing operations before
income taxes, cumulative effect adjustments and extraordinary items plus fixed
charges and minority interest. "Fixed charges" consist of interest (and the
portion of rental expense deemed representative of the interest factor) and
include the dividends paid to preferred shareholders of a subsidiary. (Refer to
Note 15 of Notes to Consolidated Financial Statements in Aetna Inc.'s 1998
Annual Report on Form 10-K.) During 1995 and 1994 there was no preferred stock
outstanding, and as a result, the ratios of earnings to combined fixed charges
and preferred stock dividends were the same as the ratios of earnings to fixed
charges.
Page 34
<PAGE> 35
ITEM 5. OTHER INFORMATION. (CONTINUED)
(c) Ratings
The ratings of certain Aetna Inc.'s subsidiaries follow:
<TABLE>
<CAPTION>
Rating Agencies
----------------------------------------------------
Moody's
Duff & Investors Standard
A.M. Best Phelps Service & Poor's
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Aetna Services, Inc. (senior debt)**
February 1, 1999 (1) * A A3 A
April 27, 1999 (1) * A A3 A
Aetna Services, Inc. (commercial paper)**
February 1, 1999 (1) * D-1 P-2 A-1
April 27, 1999 (1) * D-1 P-2 A-1
Aetna Life Insurance Company (claims paying/financial strength)
February 1, 1999 (1) A AA- A1 A+
April 27, 1999 (1) A AA- A1 A+
Aetna Life Insurance and Annuity Company
(claims paying/financial strength)
February 1, 1999 (1) A AA Aa3 AA-
April 27, 1999 (1) A AA Aa3 AA-
-------- ------- --------- --------
</TABLE>
- ----------
* Nonrated by the agency.
** Fully and unconditionally guaranteed by Aetna Inc.
(1) These ratings are currently under review by certain rating agencies pending
completion of their analysis of the pending Prudential health care
acquisition. Duff and Phelps Credit Rating Company has the debt ratings of
Aetna Services on credit watch negative. Standard and Poor's has the debt
and financial strength ratings on credit watch negative. Moody's Investors
Service has the debt and financial strength ratings on outlook negative.
Page 35
<PAGE> 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
(10) Material Contracts.
10.1 1999 Director Charitable Award Program.*
10.2 Employment Agreement, dated as of June 11, 1998, by and
between the Company and Alan J. Weber.*
10.3 $500,000,000 Credit Agreement dated as of April 1, 1999
among Aetna Services, Inc. as Borrower, Aetna Inc. as
Guarantor, the banks listed on the signature pages
thereof, Morgan Guaranty Trust Company of New York as
Administrative Agent, J.P. Morgan Securities Inc. as
Arranger, Deutsche Bank AG, New York Branch, as
Co-Administrative Agent, The Chase Manhattan Bank, as
Senior Managing Agent and Citibank, N.A. as Syndication
Agent.
(12) Statement Re: Computation of Ratios.
Statement re: computation of ratio of earnings to fixed
charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the three months ended March
31, 1999 and for the years ended December 31, 1998, 1997,
1996, 1995 and 1994 for Aetna Inc. and for the three months
ended March 31, 1999 and for the years ended December 31,
1998, 1997 and 1996 for Aetna Services, Inc.
(15) Letter Re: Unaudited Interim Financial Information.
Letter from KPMG LLP acknowledging awareness of the use of
a report on unaudited interim financial information, dated
April 27, 1999.
(27) Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
</TABLE>
- ----------
(b) Reports on Form 8-K.
None.
Page 36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aetna Inc.
---------------------------------
Registrant
Date April 28, 1999 By /s/ Alan M. Bennett
--------------------
Alan M. Bennett
Vice President
and Corporate Controller
(Chief Accounting Officer)
Page 37
<PAGE> 38
AETNA INC.
EXHIBIT INDEX
----------------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
(10) Material Contracts.
10.1 1999 Director Charitable Award Program.*
10.2 Employment Agreement, dated as of June 11, 1998, by and between
the Company and Alan J. Weber.*
10.3 $500,000,000 Credit Agreement dated as of April 1, 1999 among
Aetna Services, Inc. as Borrower, Aetna Inc. as Guarantor, the
banks listed on the signature pages thereof, Morgan Guaranty
Trust Company of New York as Administrative Agent, J.P. Morgan
Securities Inc. as Arranger, Deutsche Bank AG, New York Branch, as
Co-Administrative Agent, The Chase Manhattan Bank, as Senior
Managing Agent and Citibank, N.A. as Syndication Agent.
(12) Statement Re: Computation of Ratios.
Statement re: computation of ratio of earnings to fixed charges
and ratio of earnings to combined fixed charges and preferred
stock dividends for the three months ended March 31, 1999 and for
the years ended December 31, 1998, 1997, 1996, 1995 and 1994 for
Aetna Inc. and for the three months ended March 31, 1999 and for
the years ended December 31, 1998, 1997 and 1996 for Aetna
Services, Inc.
(15) Letter Re: Unaudited Interim Financial Information.
Letter from KPMG LLP acknowledging awareness of the use of a
report on unaudited interim financial information, dated
April 27, 1999.
(27) Financial Data Schedule.
</TABLE>
* Management contract or compensatory plan or arrangement.
Page 38
<PAGE> 1
FINAL
as of 3/2/99
AETNA INC.
1999 DIRECTOR CHARITABLE AWARD PROGRAM
1. PURPOSE OF THE PROGRAM
The Aetna Inc. Director Charitable Award Program (the "Program") allows
each eligible Director ("Director") of Aetna Inc. (the "Corporation") to
recommend that the Corporation make a donation of $1,000,000 to the
eligible tax-exempt organization(s) (the "Donee(s)") selected by the
Director, with the donation to be made, in the Director's name, in ten
equal annual installments, with the first installment to be made
following the Director's retirement. The purpose of the Program is to
recognize the interest of the Corporation and its outside Directors in
supporting worthy educational institutions and other charitable
organizations.
2. ELIGIBILITY
All persons serving as outside Directors of the Corporation as of
February 1, 1999, shall be eligible to participate in the Program. All
outside Directors who join the Corporation's Board of Directors after
that date shall be immediately eligible to participate in the Program
upon election to the Board.
3. RECOMMENDATION OF DONATION
When a Director becomes eligible to participate in the Program, he or she
may make a written recommendation to the Corporation, on a form approved
by the Corporation for this purpose, designating the Donee(s) which he or
she intends to be the recipient(s) of the corporate donation to be made
on his or her behalf. A participating Director may revise or revoke any
such recommendation by signing a new recommendation form and submitting
it to the Corporation.
4. AMOUNT AND TIMING OF DONATION
Each eligible Director may choose one organization to receive a donation
of $1,000,000, or up to five organizations to receive donations
aggregating $1,000,000. Each recommended organization must be recommended
to receive a donation of at least $100,000. The donation will be made by
the Corporation in ten equal annual installments, with the first
installment to be made shortly after the Director's termination of
service as a Director on account of the Corporation's mandatory director
retirement policy in effect on the date of such termination of service
("Retirement"). In the event of a Director's earlier termination of
service, provided he or she has satisfied the vesting requirements, the
first installment of the donation will be made when the Director
otherwise would have reached his or her Retirement date. If a Director
recommends more than one organization to receive a donation, each will
receive a prorated portion of each annual installment. Each annual
installment payment will be divided among the recommended organizations
in the same proportions as the total donation amount has been allocated
among the organizations by the Director.
<PAGE> 2
5. DONEES
In order to be eligible to receive a donation, a recommended organization
must initially, and at the time each donation installment is to be made,
(a) qualify to receive tax-deductible donations by the Corporation under
the Internal Revenue Code and (b) meet the then current criteria
established by the Aetna Foundation, Inc. for its matching grant program;
provided, however, that United Way, the Combined Health Appeal and any
other organization conducting a workplace campaign at Aetna not eligible
for the Aetna Foundation, Inc. matching grant program will be permitted
Donees if otherwise eligible. Upon the request of the Corporation's Chief
Executive Officer, or in the event Aetna Foundation, Inc. or a successor
foundation is dormant or not in existence, a recommended organization
must be reviewed and approved by the Nominating and Corporate Governance
Committee. A recommendation will be approved unless it is determined that
a donation to the organization would not be in the best interests of the
Corporation. A Director's private foundation will not be an eligible
Donee. If an organization recommended by a participating Director ceases
to qualify as a Donee, and if the Director does not submit a form to
change the recommendation, the amount recommended to be donated to the
organization will instead be donated to the Director's remaining
recommended qualified Donee(s) on a prorated basis. If none of the
recommended organizations qualify, the donation will be made to the
organization(s) selected by the Corporation.
6. VESTING
A participating Director will be vested in the Program: (a) when he or
she completes five years of Board service as an outside Director, or (b)
in the event he or she terminates service prior to the completion of five
years of service as a Director, by reason of death or disability, or (c)
if there is a Change of Control of the Corporation while he or she is
actively serving on the Board. The term "Change of Control" shall have
the same meaning as is defined for that term in the Aetna Inc.
Non-Employee Director Deferred Stock and Deferred Compensation Plan. For
persons serving as outside Directors on February 1, 1999, Board service
as an outside Director prior to that date will count as vesting service
(including service on the Boards of Aetna Life and Casualty Company and
U. S. Healthcare, Inc.). If a participating Director terminates Board
service (other than due to death or disability) before becoming vested,
no donation will be made on his or her behalf, provided, however, that in
the event a participating Director terminates service prior to the
completion of five years of service as a Director by reason of acceptance
of a position in government service or any other reason, all years of
service will be counted towards the vesting requirement in the event of
such Director's return to the Board.
7. FUNDING AND PROGRAM ASSETS
The Corporation may fund the Program or it may choose not to fund the
Program. If the Corporation elects to fund the Program in any manner,
neither the participating Directors nor their recommended Donee(s) shall
have any rights or interests in any assets of the Corporation identified
for such purpose. Nothing contained in the Program shall create, or be
deemed to create, a trust, actual or constructive, for the benefit of a
Director or any Donee recommended by a Director to receive a donation, or
shall give, or be deemed to give, any Director or recommended Donee any
interest in any assets of the Program or the Corporation. If the
Corporation elects to fund the
2
<PAGE> 3
Program through life insurance policies, a participating Director must
cooperate and fulfill the enrollment requirements necessary to obtain
insurance on his or her life in order to be eligible to participate or
continue to participate in the Program. In the event a Director has
cooperated and fulfilled such requirements, but is considered to be
uninsurable, such Director shall still be permitted to participate in the
Program.
8. AMENDMENT OR TERMINATION
The Board of Directors of the Corporation may, at any time, without the
consent of the Directors participating in the Program, amend, suspend, or
terminate the Program. However, once a participating Director becomes
vested in the Program, the Program may not be amended, suspended or
terminated with respect to such Director by lengthening such Director's
vesting period or by reducing the amount or timing of a donation to be
made in the name of such Director without his or her consent, unless
there has been an adverse change in laws or regulations affecting the
Program (e.g., reduction or elimination of the tax deductibility of the
donation by the Corporation).
9. ADMINISTRATION
The Program shall be administered by the Nominating and Corporate
Governance Committee. The Committee shall have plenary authority in its
discretion, but subject to the provisions of the Program, to prescribe,
amend, and rescind rules, regulations and procedures relating to the
Program. The determinations of the Committee on the foregoing matters
shall be conclusive and binding on all interested parties.
10. NON-ASSIGNMENT
A Director's rights and interests under the Program may not be assigned
or transferred.
11. GOVERNING LAW
The Program shall be construed and enforced according to the laws of the
State of Connecticut, and all provisions thereof shall be administered
according to the laws of said state.
12. EFFECTIVE DATE
The Program effective date is February 1, 1999. The recommendation of an
eligible Director will not be effective until he or she completes the
Program enrollment requirements.
3
<PAGE> 1
151 Farmington Avenue
Hartford, CT 06156
AETNA RICHARD L. HUBER
Chairman, President & CEO
June 11, 1998
Mr. Alan J. Weber
17939 Lake Estates Drive
Boca Raton, FL 33496
Dear Alan:
On behalf of Aetna, Inc., subject to the following terms and conditions, I am
pleased to offer you the position of Vice Chairman for Strategy and Finance.
Your job responsibilities will include serving as Chief Financial Officer of the
Company.
1. Starting Date: August 1, 1998.
2. Base Salary: Your base salary will be $750,000 per annum payable
biweekly. This will be reviewed on the basis of your performance during
our annual salary review process in April, 1999 and annually thereafter.
The Company may also from time to time review and adjust salaries to
reflect appropriate compensation for each position.
3. Annual Incentive Program: You will be eligible for consideration for an
award under the Company's annual incentive program beginning with the
1998 performance year (payable in 1999) as long as the plan is in effect.
Your target bonus is 100% with a 200% payout for maximum performance. For
performance year 1998, you will be guaranteed at least a target bonus
award. Each year thereafter, while you are employed by the Company, you
will be eligible for consideration for additional awards under the annual
incentive program while the plan remains in effect.
4. Long-Term Incentive Program: You will be awarded 15,000 ACEShares for a
performance cycle commencing on your start date and ending December 31,
2000. This award will vest, if at all, only upon attainment of
performance objectives determined by the Company's Board Committee on
Compensation and Organization. You will be eligible for consideration of
additional awards under the Company's long-term incentive program while
that program remains in effect.
5. Stock Options: You will be awarded two stock option grants: (i) an option
to purchase 100,000 shares of Aetna common stock based on the closing
price of a share on the day you commence employment, and (ii) an option
to purchase 100,000 shares of Aetna common stock based on 110% of such
price. These options are not exercisable for the first year after the
date of grant and will vest in three annual installments thereafter.
Beginning in 1999 and thereafter while employed by Aetna, you will be
eligible for consideration for periodic stock option grants while the
plan remains in effect.
<PAGE> 2
Mr. Alan J. Weber
June 11, 1998
Page 2
6. Restricted Stock: You will be awarded 15,000 shares of Aetna common
stock. These shares will be issued as restricted stock and shall vest in
three annual installments from the day you commence employment.
7. Retirement Benefits: You will be eligible to participate in the Aetna
401(k) plan after you complete one year of service. However, during your
first year of service you will be eligible to defer up to ten percent of
your base salary under a non-qualified supplemental plan. Under the
supplemental plan now in effect, the Company will match 100% of the first
5% of base salary you defer.
8. Pension Credit: You will be vested in the Company's supplemental defined
benefit pension plan (cash balance formula) after completing two years of
service. Your cash balance account at that time will be a minimum of
$300,000. In addition, at the end of each of the second through sixth
years of employment inclusive, the cash balance account will be credited
with another $150,000.
9. Other Benefit Plans: You will be eligible to participate in our
contributory flexible welfare plan. Coverage for medical, dental, life,
dependent life, spending accounts and accident benefits will become
effective on the first of the month following your date of employment
(that day if the first of the month).
10. Financial Planning: You will be eligible to participate in our executive
financial planning program, including tax preparation, through one of two
recognized vendors, up to the limit of the program ($7,500 first year,
$5,000 thereafter).
11. Severance Pay: Your job responsibilities will undoubtedly change as our
businesses evolve. However, in the event your employment is
involuntarily terminated by the Company without cause, you will receive
payment for not less than 52 weeks of salary continuation (calculated
as base salary and target annual bonus amount) in lieu of amounts
otherwise payable under the Company's applicable severance and salary
continuation plan or program, upon delivery of a release of any
employment-related claims and customary covenants in form and substance
satisfactory to the Company. In addition, all sign-on stock options and
restricted stock will vest effective on the date of termination.
12. Change in Control: In the event your employment is terminated under
circumstances that would call for severance pay benefits after the
occurrence of a change in control of the Company (as described in the
Company's incentive award agreement), then you will receive a total of
156 weeks of severance pay in lieu of the amount specified in paragraph
11. In addition, all sign-on stock options and restricted stock will vest
effective on the date of termination.
13. Vacation: For the purpose of vacation day accrual only, you will be
treated like a ten-year employee. This means you will accrue two days per
month to a maximum of 20 days per year. You will also have 2
discretionary days in 1998.
<PAGE> 3
Mr. Alan J. Weber
June 11, 1998
Page 3
14. Relocation: The Company will assist you with relocation expenses
associated with your move from Florida to Connecticut. Let me know when
you are ready and a counselor from Cendant Mobility will be in touch with
you directly. In the event of your voluntary departure (or your
termination for misconduct) within 12 months of your employment date, you
will be responsible to repay a portion of the relocation expenses related
to your move prorated to reflect less than one year of employment.
15. Contingencies: The offer is dependent upon (1) successful completion of a
drug test prior to your start date (we will follow up with instructions);
(2) completion of the job application form and successful reference
check; (3) receipt of documents which show you are legally entitled to
work in the United States; and (4) execution and delivery to the Company
of the enclosed Restrictive Covenant Agreement on or about your start
date.
16. Arbitration: Except for disputes involving or arising out of the enclosed
Restrictive Covenant Agreement or otherwise related to the enforcement of
covenants in favor of the Company, disputes involving or arising out of
this agreement shall be subject to binding arbitration conducted by the
American Arbitration Association.
Your employment can be terminated by you or by the Company without cause or
notice and reflects our expectation that this employment relationship will be
mutually beneficial. The enclosed "Benefits Handbook" describes the Company
benefit programs including those referred to earlier in this offer letter.
As we discussed, this offer is subject to the approval of Aetna's Board of
Directors and its Committee on Compensation and Organization. Please acknowledge
your acceptance of the terms of this offer by signing the enclosed copy of this
letter and returning it to me. I will advise you as soon as our Board has met.
Sincerely,
/s/ Dick Huber
Enclosures
Accepted:
/s/ Alan J. Weber 6/13/98
- ---------------------------------- ----------------
Alan J. Weber Date
<PAGE> 1
$500,000,000
CREDIT AGREEMENT
dated as of
April 1, 1999
among
Aetna Services, Inc.,
as Borrower
Aetna Inc.,
as Guarantor
The Banks Listed Herein
and
Morgan Guaranty Trust Company of New York,
as Administrative Agent
J.P. Morgan Securities Inc., Arranger
Deutsche Bank AG, New York Branch, Co-Administrative Agent
The Chase Manhattan Bank, Senior Managing Agent
Citibank, N.A., Syndication Agent
<PAGE> 2
<TABLE>
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ARTICLE I
DEFINITIONS
SECTION 1.01 Definitions............................................................... 1
1.02 Accounting Terms and Determinations....................................... 11
1.03 Classifications of Borrowings............................................. 12
ARTICLE II
THE CREDITS
SECTION 2.01 Commitments to Lend....................................................... 12
2.02 Notice of Committed Borrowings............................................ 12
2.03 Money Market Borrowings................................................... 13
2.04 Notice to Banks; Funding of Loans......................................... 16
2.05 Evidence of Debt.......................................................... 17
2.06 Maturity of Loans......................................................... 17
2.07 Termination or Reduction of Commitments................................... 18
2.08 Interest Rates............................................................ 18
2.09 Fees...................................................................... 24
2.10 Method of Electing Interest Rates......................................... 24
2.11 Optional Prepayments...................................................... 26
2.12 General Provisions as to Payments......................................... 26
2.13 Funding Losses............................................................ 27
2.14 Computation of Interest and Fees.......................................... 27
2.15 Regulation D Compensation................................................. 28
ARTICLE III
CONDITIONS
SECTION 3.01 Effectiveness............................................................. 28
3.02 Borrowings................................................................ 29
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
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SECTION 4.01 Corporate Existence and Power............................................. 30
4.02 Corporate and Governmental Authorization; No Contravention................ 30
4.03 Binding Effect............................................................ 30
4.04 Financial Information..................................................... 30
4.05 Litigation................................................................ 31
4.06 Compliance with ERISA..................................................... 31
4.07 Principal Subsidiaries.................................................... 31
4.08 Compliance with Laws ..................................................... 31
</TABLE>
*/ The Table of Contents is not part of this agreement.
<PAGE> 3
<TABLE>
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4.09 Year 2000 Matters......................................................... 32
ARTICLE V
COVENANTS
SECTION 5.01 Information............................................................... 32
5.02 Conduct of Business and Maintenance of Existence.......................... 33
5.03 Minimum Adjusted Consolidated Net Worth................................... 33
5.04 Equal and Ratable Lien Protection......................................... 33
5.05 Consolidations, Mergers and Sales of Assets............................... 34
5.06 Use of Proceeds........................................................... 34
5.07 Cross Default Provisions.................................................. 34
5.08 Compliance with Laws...................................................... 34
ARTICLE VI
DEFAULTS
SECTION 6.01 Events of Default......................................................... 35
6.02 Notice of Default......................................................... 36
ARTICLE VII
THE AGENT
SECTION 7.01 Appointment and Authorization............................................. 37
7.02 Agent and Affiliates...................................................... 37
7.03 Action by Agent........................................................... 37
7.04 Consultation with Experts................................................. 37
7.05 Liability of Agent........................................................ 37
7.06 Indemnification........................................................... 38
7.07 Credit Decision........................................................... 38
7.08 Successor Agent........................................................... 38
7.09 Agent's Fees.............................................................. 38
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.01 Basis for Determining Interest Rate Inadequate or Unfair.................. 38
8.02 Illegality................................................................ 39
8.03 Increased Cost and Reduced Return......................................... 40
8.04 Taxes..................................................................... 41
8.05 Base Rate Loans Substituted for Affected Euro-Dollar Loans................ 43
8.06 Substitution of Bank...................................................... 44
8.07 Election to Terminate..................................................... 44
Article IX Guaranty.................................................................. 44
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ARTICLE X
MISCELLANEOUS
SECTION 10.01 Notices.................................................................. 46
10.02 No Waivers............................................................... 46
10.03 Expenses; Indemnification................................................ 47
10.04 Amendments and Waivers................................................... 47
10.05 Successors and Assigns................................................... 47
10.06 New York Law............................................................. 49
10.07 Counterparts; Integration................................................ 49
10.08 WAIVER OF JURY TRIAL..................................................... 49
</TABLE>
Exhibit A - Form of Note
Exhibit B - Form of Money Market Quote Request
Exhibit C - Form of Invitation for Money Market Quotes
Exhibit D - Form of Money Market Quote
Exhibit E-1 - Opinion of William C. Baskin III, Esq.
Exhibit E-2 - Opinion of Davis Polk & Wardwell
Exhibit F - Opinion of Cravath, Swaine & Moore
-3-
<PAGE> 5
CREDIT AGREEMENT
AGREEMENT dated as of April 1, 1999 among AETNA SERVICES, INC., AETNA
INC., the BANKS listed on the signature pages hereof, and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Administrative Agent.
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have
the following meanings:
"Absolute Rate Auction" means a solicitation of Money Market Quotes
setting forth Money Market Absolute Rates pursuant to Section 2.03.
"Adjusted CD Rate" has the meaning set forth in Section 2.08(b).
"Adjusted Consolidated Net Worth" means at any date the total
shareholders' equity of the Guarantor and its Consolidated Subsidiaries
determined as of such date, adjusted to exclude net unrealized capital gains and
losses.
"Administrative Questionnaire" means, with respect to each Bank, the
administrative questionnaire in the form submitted to such Bank by the Agent and
submitted to the Agent (with a copy to the Borrower) duly completed by such
Bank.
"Affiliate" means any bank which (i) directly or indirectly, wholly
owns, is wholly owned by or shares common one hundred percent ownership with the
transferor Bank and (ii) is of credit rating better than or equal to that of the
transferor Bank on the Effective Date, as determined by Moody's and S&P.
"Agent" means Morgan Guaranty Trust Company of New York in its capacity
as Administrative Agent for the Banks hereunder, and its successors in such
capacity.
"Applicable Lending Office" means, with respect to any Bank, (i) in the
case of its Base Rate Loans and CD Loans, its Domestic Lending Office, (ii) in
the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in
the case of its Money Market Loans, its Money Market Lending Office.
"Assessment Rate" has the meaning set forth in Section 2.08(b).
"Assignee" has the meaning set forth in Section 10.05(c).
<PAGE> 6
2
"AUSHC" means Aetna U.S. Healthcare Inc., a Pennsylvania corporation,
and its successors.
"Bank" means each bank listed on the signature pages hereof and its
successors and Assignees.
"Base Rate" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"Base Rate Loan" means (i) a Committed Loan which bears interest at the
Base Rate pursuant to the applicable Notice of Committed Borrowing or a Notice
of Interest Rate Election or the provisions of Article VIII or (ii) an overdue
amount which was a Base Rate Loan immediately before it became overdue.
"Borrower" means Aetna Services, Inc., a Connecticut corporation, and
its successors.
"Borrowing" means a borrowing hereunder consisting of Loans made to the
Borrower at the same time by the Banks pursuant to Article II. A Borrowing is a
"Base Rate Borrowing" if such Loans are Base Rate Loans, a "CD Borrowing" if
such Loans are CD Loans, a "Euro-Dollar Borrowing" if such Loans are Euro-Dollar
Loans and a "Money Market Borrowing" if such Loans are Money Market Loans.
"CD Base Rate" has the meaning set forth in Section 2.08(b).
"CD Loan" means (i) a Committed Loan which bears interest at the Fixed
CD Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of
Interest Rate Election or (ii) an overdue amount which was a CD Loan immediately
before it became overdue.
"CD Margin" has the meaning set forth in Section 2.08(b).
"Commitment" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the signature pages hereof, as such amount may
be reduced from time to time pursuant to Section 2.07, terminated pursuant to
Section 8.07 or changed pursuant to 10.05(c).
"Committed Loan" means a loan made by a Bank pursuant to Section 2.01;
provided that, if any such loan or loans (or portions thereof) are combined or
subdivided pursuant to a Notice of Interest Rate Election, the term "Committed
Loan" shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision, as the case may be.
"Consolidated Subsidiary" means, at any date, any Subsidiary or other
entity the accounts of which would be consolidated with those of the Guarantor
in its consolidated
<PAGE> 7
3
financial statements if such statements were prepared as of such date.
"Continuing Director" means, at any time, a director who (i) was a
director of the Guarantor 24 months prior to such time of determination or (ii)
was nominated or elected as a director by vote of a majority of the persons who
were Continuing Directors at the time of such nomination or election.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Domestic Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in New York City are authorized by law to
close.
"Domestic Lending Office" means, as to each Bank, its office located at
its address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Agent; provided that any Bank may so designate
separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and
its CD Loans, on the other hand, in which case all references herein to the
Domestic Lending Office of such Bank shall be deemed to refer to either or both
of such offices, as the context may require.
"Domestic Loans" means CD Loans or Base Rate Loans or both.
"Domestic Reserve Percentage" has the meaning set forth in Section
2.08(b).
"Duff" means Duff & Phelps Inc.
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 3.01.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment including, without limitation, ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
<PAGE> 8
4
"ERISA Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Guarantor, are treated as a single employer under
Section 414 of the Internal Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch
or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or affiliate of such
Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice
to the Borrower and the Agent.
"Euro-Dollar Loan" means (i) a Committed Loan which bears interest at a
Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or a
Notice of Interest Rate Election or (ii) an overdue amount which was a
Euro-Dollar Loan immediately before it became overdue.
"Euro-Dollar Margin" has the meaning set forth in Section 2.08(c).
"Euro-Dollar Rate" means a rate of interest determined pursuant to
Section 2.08(c) on the basis of the London Interbank Offered Rate.
"Euro-Dollar Reserve Percentage" means, for any day, that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor), for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents).
"Event of Default" has the meaning set forth in Section 6.01.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic
<PAGE> 9
5
Business Day, and (ii) if no such rate is so published on such next succeeding
Domestic Business Day, the Federal Funds Rate for such day shall be the average
rate quoted to Morgan Guaranty Trust Company of New York on such day on such
transactions as calculated by the Agent, such calculation to be supplied to the
Borrower upon the Borrower's request.
"Fixed CD Rate" has the meaning set forth in Section 2.08(b).
"Fixed Rate Borrowing" means a CD Borrowing, a Euro-Dollar Borrowing or
a Money Market Borrowing.
"Fixed Rate Loans" means Euro-Dollar Loans, CD Loans or Money Market
Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate for
the reason stated in Section 8.01) or any combination of the foregoing.
"Group of Loans" or "Group" means at any time a group of Loans
consisting of (i) all Committed Loans which are Base Rate Loans at such time,
(ii) all Committed Loans which are CD Loans having the same Interest Period at
such time or (iii) all Committed Loans which are Euro-Dollar Loans having the
same Interest Period at such time; provided that, if Committed Loans of any
particular Bank are converted to or made as Base Rate Loans pursuant to Article
VIII, such Loans shall be included in the same Group or Groups of Loans from
time to time as they would have been in if they had not been so converted or
made.
"Guarantor" means Aetna Inc., a Connecticut corporation, and its
successors.
"Guarantor's 1998 Form 10-K" means the Guarantor's annual report on
Form 10-K for 1998 as filed with the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934, as amended.
"Hazardous Substances" means any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives, by-products
and other hydrocarbons, or any substances having any constituent elements
displaying any of the foregoing characteristics.
"Interest Period" means:
(1) with respect to each Base Rate Borrowing, the period commencing on the date
of such Borrowing and ending on the next succeeding Quarterly Date; provided
that any Interest Period which would otherwise end after the Termination Date
shall end on the Termination Date.
(2) with respect to each CD Borrowing, the period commencing on the date of such
Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower may
elect in the applicable Notice of
<PAGE> 10
6
Borrowing or such longer period as mutually agreed to by the Borrower and all of
the Banks; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day;
(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(3) with respect to each Euro-Dollar Loan, a period commencing on the date of
Borrowing specified in the applicable Notice of Committed Borrowing or on the
date specified in the applicable Notice of Interest Rate Election and ending
one, two, three or six months thereafter, as the Borrower may elect in the
applicable Notice or such longer period as mutually agreed to by the Borrower
and all of the Banks; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(4) with respect to each LIBOR Loan, the period commencing on the date of
Borrowing and ending such whole number of months thereafter, as the Borrower may
elect in accordance with Section 2.03; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
<PAGE> 11
7
(5) with respect to each Money Market Absolute Rate Loan, the period commencing
on the date of Borrowing and ending such number of days thereafter (but not less
than 7 days) as the Borrower may elect in accordance with Section 2.03; provided
that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day; and
(b) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"Invitation for Money Market Quotes" means an invitation from the Agent
to the Banks to submit Money Market Quotes pursuant to Section 2.03(c).
"Level I Period" means any period during which any long-term Senior
Unsecured Debt of the Borrower has ratings that are better than or equal to at
least two of the following three ratings: (i) AA- by S&P and/or (ii) Aa3 by
Moody's and/or (iii) AA- by Duff; provided that if S&P or Moody's or Duff
changes its rating system after the date hereof, the new rating of such rating
agency that most closely corresponds to the level specified above for such
rating agency shall be substituted for such level.
"Level II Period" means any period (other than a Level I Period) during
which any long-term Senior Unsecured Debt of the Borrower has ratings that are
better than or equal to at least two of the following three ratings: (i) A+ by
S&P and/or (ii) A1 by Moody's and/or (iii) A+ by Duff; provided that if S&P or
Moody's or Duff changes its rating system after the date hereof, the new rating
of such rating agency that most closely corresponds to the level specified above
for such rating agency shall be substituted for such level.
"Level III Period" means any period (other than a Level I Period or a
Level II Period) during which any long-term Senior Unsecured Debt of the
Borrower has ratings which are better than or equal to at least two of the
following three ratings: (i) A by S&P and/or (ii) A2 by Moody's and/or (iii) A
by Duff; provided that if S&P or Moody's or Duff changes its rating system after
the date hereof, the new rating of such agency that most closely corresponds to
the level specified above for such rating agency shall be substituted for such
level.
"Level IV Period" means any period (other than a Level I Period, Level
II Period or Level III Period) during which any long-term Senior Unsecured Debt
of the Borrower has ratings which are better than or equal to at least two of
the following three ratings: (i) A- by S&P and/or (ii) A3 by Moody's and/or
(iii) A- by Duff; provided that if S&P or Moody's or Duff changes its rating
system after the date hereof, the new rating of such
<PAGE> 12
8
agency that most closely corresponds to the level specified above for such
rating agency shall be substituted for such level.
"Level V Period" means any period (other than a Level I Period, Level
II Period, Level III Period or Level IV Period) during which any long-term
Senior Unsecured Debt of the Borrower has ratings which are better than or equal
to at least two of the following three ratings: (i) BBB+ by S&P and/or (ii) Baa1
by Moody's and/or (iii) BBB+ by Duff; provided that if S&P or Moody's or Duff
changes its rating system after the date hereof, the new rating of such agency
that most closely corresponds to the level specified above for such rating
agency shall be substituted for such level.
"Level VI Period" means any period (other than a Level I Period, Level
II Period, Level III Period, Level IV Period or Level V Period) during which any
long-term Senior Unsecured Debt of the Borrower has ratings which are better
than or equal to at least two of the following three ratings: (i) BBB by S&P
and/or (ii) Baa2 by Moody's and/or (iii) BBB by Duff; provided that if S&P or
Moody's or Duff changes its rating system after the date hereof, the new rating
of such agency that most closely corresponds to the level specified above for
such rating agency shall be substituted for such level.
"Level VII Period" means any period (other than a Level I Period, Level
II Period, Level III Period, Level IV Period, Level V Period or Level VI Period)
during which any long-term Senior Unsecured Debt of the Borrower has ratings
which are better than or equal to at least two of the following three ratings:
(i) BBB-by S&P and/or (ii) Baa3 by Moody's and/or (iii) BBB- by Duff; provided
that if S&P or Moody's or Duff changes its rating system after the date hereof,
the new rating of such agency that most closely corresponds to the level
specified above for such rating agency shall be substituted for such level.
"Level VIII Period" means any period other than a Level I Period, Level
II Period, Level III Period, Level IV Period, Level V Period, Level VI Period or
Level VII Period.
"LIBOR Auction" means a solicitation of Money Market Quotes setting
forth Money Market Margins based on the London Interbank Offered Rate pursuant
to Section 2.03.
"Loan" means a Base Rate Loan, a Euro-Dollar Loan, a CD Loan or a Money
Market Loan and "Loans" means any combination of the foregoing.
"London Interbank Offered Rate" has the meaning set forth in Section
2.08(c).
"Money Market Absolute Rate" has the meaning set forth in Section
2.03(d).
"Money Market Absolute Rate Loan" means a loan made or to be made by a
Bank pursuant to an Absolute Rate Auction.
<PAGE> 13
9
"Money Market Lending Office" means, as to each Bank, its Domestic
Lending Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the Borrower
and the Agent; provided that any Bank may from time to time by notice to the
Borrower and the Agent designate separate Money Market Lending Offices for its
Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate
Loans, on the other hand, in which case all references herein to the Money
Market Lending Office of such Bank shall be deemed to refer to either or both of
such offices, as the context may require.
"Money Market LIBOR Loan" means a loan made or to be made by a Bank
pursuant to a LIBOR Auction (including such a loan bearing interest at the Base
Rate for the reason stated in Section 8.01).
"Money Market Loan" means a Money Market LIBOR Loan or a Money Market
Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in Section 2.03(d).
"Money Market Quote" means an offer by a Bank to make a Money Market
Loan in accordance with Section 2.03.
"Money Market Quote Request" means a request by the Borrower to the
Banks to make Money Market Loans in accordance with Section 2.03(b).
"Moody's" means Moody's Investors Service, Inc.
"Non-Recourse Indebtedness" means indebtedness for borrowed money as to
which the liability of the Borrower, the Guarantor or the Principal
Subsidiaries, as the case may be, is limited solely to specific assets.
"Notes" means promissory notes of the Borrower, substantially in the
form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the
Loans, and "Note" means any one of such promissory notes issued hereunder.
"Notice of Borrowing" means a Notice of Committed Borrowing (as defined
in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section
2.03(f)).
"Notice of Interest Rate Election" has the meaning set forth in Section
2.10.
"Obligations" has the meaning set forth in Article IX.
"Other Taxes" has the meaning set forth in Section 8.04(a).
"Participant" has the meaning set forth in Section 10.05(d).
<PAGE> 14
10
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Internal Revenue Code and is either (i) maintained by a
member of the ERISA Group for employees of a member of the ERISA Group or (ii)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
a member of the ERISA Group is then making or accruing an obligation to make
contributions or has within the preceding five plan years made contributions.
"Prime Rate" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
"Principal Subsidiary" means (i) Aetna Life Insurance Company, (ii)
Aetna Life Insurance and Annuity Company, (iii) AUSHC, or (iv) any other
Subsidiary of the Guarantor, including Subsidiaries of Subsidiaries of the
Guarantor, which shall succeed by merger or otherwise to a major part of the
business of one or more of the Principal Subsidiaries identified in clause (i),
(ii) or (iii) of this definition. For the purposes of this definition the
decision as to whether a Subsidiary shall have succeeded to a major part of the
business of one or more Principal Subsidiaries shall be made in good faith by
the Guarantor's Board of Directors by the adoption of a resolution so stating.
"Quarterly Date" means the last Domestic Business Day of each March,
June, September and December.
"Reference Banks" means The Chase Manhattan Bank, Citibank, N.A.,
Deutsche Bank AG, New York Branch, and Morgan Guaranty Trust Company of New
York, and "Reference Bank" means any one of such Reference Banks.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"Required Banks" means at any time Banks having at least 66 2/3% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding at least 66 2/3% of the aggregate unpaid principal amount of
the Loans.
"Required Capital" has the meaning set forth in Section 8.03(b).
<PAGE> 15
11
"Responsible Financial Officer" means chief financial officer,
treasurer, chief accounting officer or senior corporate finance officer.
"Revolving Credit Period" means the period from the date hereof to and
including the Termination Date.
"S&P" means Standard & Poor's, a division of The McGraw Hill Companies.
"Senior Unsecured Debt" means indebtedness for borrowed money that is
not subordinated to any other indebtedness for borrowed money and is not secured
or supported by a guarantee (other than a guarantee by the Guarantor), letter of
credit or other form of credit enhancement.
"Subsidiary" means any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by the Guarantor.
"Taxes" has the meaning set forth in Section 8.04(a).
"Termination Date" means March 28, 2000, or, if such day is not a
Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.
"Trigger Event" has the meaning set forth in Section 8.03(c).
"Utilization Percentage" means, with respect to any calendar quarter, a
fraction, expressed as a percentage, of which (i) the numerator is the daily
average aggregate principal amount of Loans outstanding during such calendar
quarter and (ii) the denominator is the daily average aggregate amount of
Commitments in effect during such calendar quarter; provided that if it is
necessary to determine the Utilization Percentage with respect to a portion of a
calendar quarter then the Utilization Percentage shall be determined based upon
the daily average aggregate principal amount of (x) the Loans outstanding and
(y) the Commitments in effect during the elapsed portion of such calendar
quarter.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with United
States generally accepted accounting principles as in effect from time to time,
applied on a basis consistent (except for changes concurred in by the
Guarantor's independent public accountants) with the most recent audited
consolidated financial statements of the Guarantor and its Consolidated
Subsidiaries delivered to the Banks.
<PAGE> 16
12
SECTION 1.03. Classifications of Borrowings. Borrowings are classified
for purposes of this Agreement either by reference to the pricing of Loans
comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
comprised of Euro-Dollar Loans) or by reference to the provisions of Article II
under which participation therein is determined (i.e., a "Committed Borrowing"
is a Borrowing under Section 2.01 in which all Banks participate in proportion
to their Commitments, while a "Money Market Borrowing" is a Borrowing under
Section 2.03 in which the Bank participants are determined on the basis of their
bids).
ARTICLE II
THE CREDITS
SECTION 2.01. Commitments to Lend. On the terms and conditions set
forth in this Agreement, each Bank severally agrees to lend to the Borrower,
from time to time during the Revolving Credit Period, amounts not to exceed in
the aggregate at any one time outstanding the amount of such Bank's Commitment.
Each Borrowing under this Section 2.01 shall be in an aggregate principal amount
of $25,000,000 or any larger multiple of $1,000,000 (except that any such
Borrowing may be in the aggregate amount of the unused Commitments) and shall be
made from the several Banks ratably in proportion to their respective
Commitments. Within the foregoing limits, the Borrower may borrow under this
Section, repay, or to the extent permitted by Section 2.11, prepay Loans and
reborrow at any time during the Revolving Credit Period under this Section.
Failure by any Bank to make Loans as required under the terms of this Agreement
will not relieve any other Bank of its obligations hereunder.
SECTION 2.02. Notice of Committed Borrowings. The Borrower shall give
the Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M.
(New York City time) on (x) the date of each Base Rate Borrowing, (y) the second
Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar
Business Day before each Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic
Business Day in the case of a Base Rate Borrowing or a CD Borrowing and
a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing,
(b) the aggregate amount of such Borrowing,
(c) whether the Loans comprising such Borrowing are to be CD
Loans, Base Rate Loans or Euro-Dollar Loans, and
(d) in the case of a CD Borrowing or Euro-Dollar Borrowing,
the duration of the initial Interest Period applicable thereto, subject
to the provisions of the definition of Interest Period.
<PAGE> 17
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SECTION 2.03. Money Market Borrowings.
(a) The Money Market Option. In addition to Committed Loans pursuant to
Section 2.01, the Borrower may, as set forth in this Section, request the Banks
from time to time during the Revolving Credit Period to make offers to make
Money Market Loans to the Borrower. The Banks may, but shall have no obligation
to, make such offers and the Borrower may, but shall have no obligation to,
accept any such offers in the manner set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to request
offers to make Money Market Loans under this Section, it shall transmit to the
Agent by telex or facsimile transmission a Money Market Quote Request
substantially in the form of Exhibit B hereto so as to be received no later than
10:00 A.M. (New York City time) on (x) the fourth Euro-Dollar Business Day prior
to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y)
the Domestic Business Day next preceding the date of Borrowing proposed therein,
in the case of an Absolute Rate Auction (or, in either case, such other time or
date as the Borrower and the Agent shall have mutually agreed upon and shall
have notified to the Banks not later than the date of the Money Market Quote
Request for the first LIBOR Auction or Absolute Rate Auction for which such
change is to be effective) specifying:
(i) the proposed date of Borrowing, which shall be a
Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic
Business Day in the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$25,000,000 or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set
forth a Money Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five Euro-Dollar Business Days (or following
notice to each of the Banks, such other number of days as the Borrower and the
Agent may agree upon) of any other Money Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
Money Market Quote Request, the Agent shall send to the Banks by telex or
facsimile transmission an Invitation for Money Market Quotes substantially in
the form of Exhibit C hereto, which shall constitute an invitation by the
Borrower to each Bank to submit Money Market Quotes offering to make the Money
Market
<PAGE> 18
14
Loans to which such Money Market Quote Request relates in accordance with this
Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank may
submit a Money Market Quote containing an offer or offers to make Money Market
Loans in response to any Invitation for Money Market Quotes. Each Money Market
Quote must comply with the requirements of this subsection (d) and must be
submitted to the Agent by telex or facsimile transmission at its offices
specified in or pursuant to Section 10.01 not later than (x) 9:30 A.M. (New York
City time) on the third Euro-Dollar Business Day prior to the proposed date of
Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time)
on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or,
in either case, such other time or date as the Borrower and the Agent shall have
mutually agreed and shall have notified to the Banks not later than the date of
the Money Market Quote Request for the first LIBOR Auction or Absolute Rate
Auction for which such change is to be effective); provided that Money Market
Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of
a Bank may be submitted, and may only be submitted, if the Agent or such
affiliate notifies the Borrower of the terms of the offer or offers contained
therein not later than (x) 9:15 A.M. (New York City time) on the third
Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of
a LIBOR Auction or (y) 9:15 A.M. (New York City time) on the proposed date of
Borrowing, in the case of an Absolute Rate Auction. Subject to Articles III and
VI, any Money Market Quote so made shall be irrevocable except with the written
consent of the Agent given on the instructions of the Borrower.
(ii) Each Money Market Quote shall be in substantially the
form of Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan for which
each such offer is being made, which principal amount (x) may be
greater than or less than the Commitment of the quoting Bank, (y) must
be $25,000,000 or a larger multiple of $1,000,000 and (z) may not
exceed the principal amount of Money Market Loans for which offers were
requested,
(C) in the case of a LIBOR Auction, the margin above or below
the applicable London Interbank Offered Rate (the "Money Market
Margin") offered for each such Money Market Loan, expressed as a
percentage (rounded to the nearest 1/10,000th of 1%) to be added to or
subtracted from such base rate,
(D) in the case of an Absolute Rate Auction, the rate of
interest per annum (rounded to the nearest 1/10,000th of 1%) (the
"Money Market Absolute Rate") offered for each such Money Market Loan,
and
(E) the identity of the quoting Bank.
<PAGE> 19
15
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D hereto
or does not specify all of the information required by subsection
(d)(ii);
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set
forth in the applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower. The Agent shall promptly notify the Borrower of
the terms (x) of any Money Market Quote submitted by a Bank that is in
accordance with subsection (d) and (y) of any Money Market Quote that amends,
modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market Quote Request. Any
such subsequent Money Market Quote shall be disregarded by the Agent unless such
subsequent Money Market Quote is submitted solely to correct a manifest error in
such former Money Market Quote. The Agent's notice to the Borrower shall specify
(A) the aggregate principal amount of Money Market Loans for which offers have
been received for each Interest Period specified in the related Money Market
Quote Request, (B) the respective principal amounts and Money Market Margins or
Money Market Absolute Rates, as the case may be, so offered (including the names
of the Banks) and (C) if applicable, limitations on the aggregate principal
amount of Money Market Loans for which offers in any single Money Market Quote
for any Interest Period may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New
York City time) on (x) the third Euro-Dollar Business Day prior to the proposed
date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of
Borrowing, in the case of an Absolute Rate Auction (or, in either case, such
other time or date as the Borrower and the Agent shall have mutually agreed upon
and shall have notified to the Banks not later than the date of the Money Market
Quote Request for the first LIBOR Auction or Absolute Rate Auction for which
such change is to be effective), the Borrower shall notify the Agent of its
acceptance or non-acceptance of the offers so notified to it pursuant to
subsection (e). In the case of acceptance, such notice (a "Notice of Money
Market Borrowing") shall specify the aggregate principal amount of offers for
each Interest Period that are accepted. The
<PAGE> 20
16
Borrower may accept any Money Market Quote for any Interest Period in whole or
in part; provided that:
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in the related
Money Market Quote Request,
(ii) the principal amount of each Money Market Borrowing must
be $25,000,000 or a larger multiple of $1,000,000,
(iii) acceptance of offers may only be made on the basis of
ascending Money Market Margins or Money Market Absolute Rates, as the
case may be, and
(iv) the Borrower may not accept any offer that is described
in subsection (d)(iii) or that otherwise fails to comply with the
requirements of this Agreement.
(g) Allocation by Agent. If offers are made by two or more Banks with
the same Money Market Margins or Money Market Absolute Rates, as the case may
be, for a greater aggregate principal amount than the amount in respect of which
such offers are accepted for the related Interest Period, the principal amount
of Money Market Loans in respect of which such offers are accepted shall be
allocated by the Agent among such Banks as nearly as possible (in multiples of
such number, not greater than $1,000,000 as the Agent may deem appropriate) in
proportion to the aggregate principal amounts of such offers. Determinations by
the Agent of the pro rata amounts of Money Market Loans shall be conclusive in
the absence of manifest error.
SECTION 2.04. Notice to Banks; Funding of Loans. (a) Upon receipt of a
Notice of Borrowing, the Agent shall promptly notify each Bank of the contents
thereof and of such Bank's share (if any) of such Borrowing and such Notice of
Borrowing shall not thereafter be revocable by the Borrower.
(b) Not later than 12:00 Noon (New York City time) on the date of each
Borrowing, each Bank participating therein shall make available its share of
such Borrowing, in Federal or other funds immediately available in New York
City, to the Agent at its address specified in or pursuant to Section 10.01.
Unless the Agent determines that any applicable condition specified in Article
III has not been satisfied, the Agent will make the funds so received from the
Banks available to the Borrower at the Agent's aforesaid address.
(c) Unless the Agent shall have received notice from a Bank prior to
the date of any Borrowing that such Bank will not make available to the Agent
such Bank's share of such Borrowing, the Agent may assume that such Bank has
made such share available to the Agent on the date of such Borrowing in
accordance with subsection (b) of this Section 2.04 and the Agent may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall
<PAGE> 21
17
not have so made such share available to the Agent, such Bank and the Borrower
severally agree to repay to the Agent forthwith on demand such corresponding
amount together with interest thereon, for each day from the date such amount is
made available to the Borrower until the date such amount is repaid to the
Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher
of the Federal Funds Rate and the interest rate applicable thereto pursuant to
Section 2.08 and (ii) in the case of such Bank, the Federal Funds Rate. If such
Bank shall repay to the Agent such corresponding amount, such amount so repaid
shall constitute such Bank's Loan included in such Borrowing for purposes of
this Agreement.
SECTION 2.05. Evidence of Debt. (a) Each Bank shall maintain in
accordance with its usual practice an account or accounts evidencing the
indebtedness of the Borrower to such Bank resulting from each Loan made by such
Bank, including the amounts of principal and interest payable and paid to such
Bank from time to time hereunder.
(b) The Agent shall maintain accounts in which it shall record (i) the
Commitment of each Bank and the amount of each Loan made hereunder by such Bank,
(ii) the amount of any principal or interest due and payable or to become due
and payable from the Borrower to each Bank hereunder and (iii) the amount of any
sum received by the Agent hereunder for the accounts of the Banks and each
Bank's share thereof.
(c) The entries made in the accounts maintained pursuant to paragraph
(b) of this Section shall be evidence of the existence and amounts of the
obligations recorded therein and shall be presumptively correct absent
demonstrable error; provided that the failure of the Agent to maintain such
accounts or any error therein shall not in any manner affect the obligation of
the Borrower to repay the Loans in accordance with the terms of this Agreement.
(d) Any Bank may request in writing that Loans made by it be evidenced
by a Note. In such event, the Borrower shall prepare, execute and deliver to
such Bank a Note payable to the order of such Bank in the form of Exhibit A.
Thereafter, the Loans evidenced by such Note and interest thereon shall at all
times (including after assignment pursuant to Section 10.05) be represented by
one or more Notes in such form payable to the order of the payee named therein.
(e) Each Bank agrees that it will cancel and return to the Borrower all
Notes then held by it upon the earlier of (i) the Termination Date provided no
Default shall have then occurred and be continuing or (ii) the date such Bank's
Commitment has been terminated and there are no Loans outstanding to or accrued
interest owing to such Bank.
SECTION 2.06. Maturity of Loans. (a) The Committed Loans of each Bank
shall mature, and the principal amount thereof shall be due and payable,
together with accrued interest thereon, on the Termination Date.
<PAGE> 22
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(b) Each Money Market Loan shall mature, and the principal amount
thereof shall be due and payable, together with accrued interest thereon, on the
last day of the Interest Period applicable to such Money Market Loan.
SECTION 2.07. Termination or Reduction of Commitments. (a) The
Commitments of each Bank shall terminate at the end of the Revolving Credit
Period.
(b) During the Revolving Credit Period the Borrower may, upon at least
three Domestic Business Days' notice to the Agent, terminate the Commitments at
any time, if no Loans are outstanding at such time.
(c) During the Revolving Credit Period the Borrower may, upon at least
three Domestic Business Days' notice to the Agent, ratably reduce the
Commitments from time to time by an aggregate amount of $25,000,000 or any
larger multiple of $1,000,000, but only to the extent that the aggregate amount
of the Commitments exceeds the aggregate outstanding principal amount of the
Loans.
SECTION 2.08. Interest Rates. (a) Each Base Rate Loan shall bear
interest on the outstanding principal amount thereof, for each day from the date
such Loan is made until it becomes due, at a rate per annum equal to the Base
Rate for such day. Such interest shall be payable for each Interest Period on
the earlier of (i) the last day of the Interest Period applicable thereto or
(ii) the Termination Date. Any overdue principal of and, to the extent permitted
by law, overdue interest on any Base Rate Loan shall bear interest, payable on
demand, for each day until paid at a rate per annum equal to the sum of 1% plus
the Base Rate for such day.
(b) Each CD Loan shall bear interest on the outstanding principal
amount thereof, for each Interest Period applicable thereto, at a rate per annum
equal to the applicable Fixed CD Rate. Such interest shall be payable for each
Interest Period on the earlier of (i) the last day of the Interest Period
applicable thereto, (ii) 90 days after the initial date thereof and, if such
Interest Period is longer than 90 days, at intervals of 90 days thereafter or
(iii) the Termination Date. Any overdue principal of and, to the extent
permitted by law, overdue interest on any CD Loan shall bear interest, payable
on demand, for each day until paid at a rate per annum equal to the sum of 1%
plus the higher of (i) the Fixed CD Rate applicable to such Loan and (ii) the
rate applicable to Base Rate Loans for such day.
The "Fixed CD Rate" applicable to any CD Loan for any Interest Period
means a rate per annum equal to the sum of the CD Margin plus the applicable
Adjusted CD Rate.
"CD Margin" applicable to any CD Loan outstanding on any day means:
(i) if such day falls within a Level I Period, then (A) .260%,
if such day falls within any calendar quarter with
<PAGE> 23
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respect to which the Utilization Percentage is less than or equal to
25%, (B) .360%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is greater than 25% and
less than or equal to 50% and (C) .460%, if such day falls within any
calendar quarter with respect to which the Utilization Percentage is
greater than 50%;
(ii) if such day falls within a Level II Period, then (A)
.305%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.405%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) .505%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%;
(iii) if such day falls within a Level III Period, then (A)
.345%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.445%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) .545%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%;
(iv) if such day falls within a Level IV Period, then (A)
.385%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.485%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) .585%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%;
(v) if such day falls within a Level V Period, then (A) .425%,
if such day falls within any calendar quarter with respect to which the
Utilization Percentage is less than or equal to 25%, (B) .525%, if such
day falls within any calendar quarter with respect to which the
Utilization Percentage is greater than 25% and less than or equal to
50% and (C) .625%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is greater than 50%;
(vi) if such day falls within a Level VI Period, then (A)
.500%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.625%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) .750%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%;
<PAGE> 24
20
(vii) if such day falls within a Level VII Period, then (A)
.725%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.975%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) 1.225%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%; and
(viii) if such day falls within a Level VIII Period, then (A)
1.375%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
1.375%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) 1.375%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%.
The "Adjusted CD Rate" applicable to any Interest Period means a rate
per annum determined pursuant to the following formula:
[ CDBR ]*
ACDR = [ ---------- ] + AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
* The amount in brackets being rounded upwards, if necessary, to the next higher
1/100 of 1%.
The "CD Base Rate" applicable to any Interest Period is the rate of
interest determined by the Agent to be the arithmetic average (rounded upward,
if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum
bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on
the first day of such Interest Period by two or more New York certificate of
deposit dealers of recognized standing for the purchase at face value from each
Reference Bank of its certificates of deposit in an amount comparable to the
unpaid principal amount of the CD Loan of such Reference Bank to which such
Interest Period applies and having a maturity comparable to such Interest
Period.
"Domestic Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including without limitation any
basic, supplemental or emergency reserves) for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of new non-personal time deposits in dollars in New York City having a
maturity comparable to the
<PAGE> 25
21
related Interest Period and in an amount of $100,000 or more. The Fixed CD Rate
shall be adjusted automatically on and as of the effective date of any change in
the Domestic Reserve Percentage.
"Assessment Rate" means for any Interest Period the net annual
assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%)
actually incurred by Morgan Guaranty Trust Company of New York to the Federal
Deposit Insurance Corporation (or any successor) for such Corporation's (or such
successor's) insuring time deposits at offices of Morgan Guaranty Trust Company
of New York in the United States during the most recent period for which such
rate has been determined prior to the commencement of such Interest Period.
(c) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each Interest Period applicable thereto, at a rate
per annum equal to the sum of the Euro-Dollar Margin plus the applicable London
Interbank Offered Rate. Such interest shall be payable for each Interest Period
on the earlier of (i) the last day thereof, (ii) three months after the initial
date thereof and, if such Interest Period is longer than three months, at
intervals of three months thereafter or (iii) the Termination Date.
"Euro-Dollar Margin" applicable to any Euro-Dollar Loan outstanding on
any day means:
(i) if such day falls within a Level I Period, then (A) .135%,
if such day falls within any calendar quarter with respect to which the
Utilization Percentage is less than or equal to 25%, (B) .235%, if such
day falls within any calendar quarter with respect to which the
Utilization Percentage is greater than 25% and less than or equal to
50% and (C) .335%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is greater than 50%;
(ii) if such day falls within a Level II Period, then (A)
.180%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.280%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) .380%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%;
(iii) if such day falls within a Level III Period, then (A)
.220%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.320%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) .420%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%;
<PAGE> 26
22
(iv) if such day falls within a Level IV Period, then (A)
.260%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.360%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) .460%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%;
(v) if such day falls within a Level V Period, then (A) .300%,
if such day falls within any calendar quarter with respect to which the
Utilization Percentage is less than or equal to 25%, (B) .400%, if such
day falls within any calendar quarter with respect to which the
Utilization Percentage is greater than 25% and less than or equal to
50% and (C) .500%, if such day falls within any calendar quarter with
respect to which the Utilization Percentage is greater than 50%;
(vi) if such day falls within a Level VI Period, then (A)
.375%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.500%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) .625%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%;
(vii) if such day falls within a Level VII Period, then (A)
.600%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
.850%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) 1.100%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%; and
(viii) if such day falls within a Level VIII Period, then (A)
1.250%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is less than or equal to 25%, (B)
1.250%, if such day falls within any calendar quarter with respect to
which the Utilization Percentage is greater than 25% and less than or
equal to 50% and (C) 1.250%, if such day falls within any calendar
quarter with respect to which the Utilization Percentage is greater
than 50%.
The "London Interbank Offered Rate" applicable to any Interest Period
means the rate per annum (rounded upwards, if necessary, to the nearest 1/32 of
1%) appearing on Dow Jones Markets page 3750 (or any successor page) as the
London interbank offered rate for deposits in U.S. dollars at 11:00 A.M. (London
time) two Euro-Dollar Business Days before the first day of such Interest Period
for a period equal to such Interest Period;
<PAGE> 27
23
provided that, if for any reason such rate is not available, the term "London
Interbank Offered Rate" applicable to any Interest Period shall mean, the rate
per annum (rounded upwards, if necessary, to the nearest 1/32 of 1%) appearing
on Reuters Screen LIBO Page (or any successor page) as the London interbank
offered rate for deposits in U.S. dollars at approximately 11:00 A.M. (London
time) two Euro-Dollar Business Days before the first day of such Interest Period
for a period equal to such Interest Period, provided, however, if more than one
rate is specified on Reuters Screen LIBO Page (or any successor page), the
applicable rate shall be the arithmetic mean of all such rates.
(d) Any overdue principal of and, to the extent permitted by law,
overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand,
for each day from and including the date payment thereof was due to but
excluding the date of actual payment, at a rate per annum equal to the sum of 1%
plus the Euro-Dollar Margin plus the higher of (i) the London Interbank Offered
Rate applicable to such Loan and (ii) the average (rounded upward, if necessary,
to the next higher 1/100 of 1%) of the respective rates per annum at which one
day (or, if such amount due remains unpaid more than three Euro-Dollar Business
Days, then for such other period of time not longer than three months as the
Agent may select) deposits in dollars in an amount approximately equal to such
overdue payment due to the Agent are offered to the Agent in the London
interbank market for the applicable period determined as provided above (or, if
the circumstances described in Section 8.01 shall exist, at a rate per annum
equal to the sum of 1% plus the Base Rate for such day).
(e) Subject to clause (y) of Section 8.01, each Money Market LIBOR Loan
shall bear interest on the outstanding principal amount thereof, for the
Interest Period applicable thereto, at a rate per annum equal to the sum of the
London Interbank Offered Rate for such Interest Period plus (or minus) the Money
Market Margin quoted by the Bank making such Loan in accordance with Section
2.03. Each Money Market Absolute Rate Loan shall bear interest on the
outstanding principal amount thereof, for the Interest Period applicable
thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by
the Bank making such Loan in accordance with Section 2.03. Such interest shall
be payable for each Interest Period on the earlier of (i) the last day thereof,
(ii) three months after the initial date thereof and, if such Interest Period is
longer than three months, at intervals of three months thereafter or (iii) the
Termination Date. Any overdue principal of and, to the extent permitted by law,
overdue interest on any Money Market Loan shall bear interest, payable on
demand, for each day until paid at a rate per annum equal to the sum of 1% plus
the Base Rate for such day.
(f) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower by telecopy
and the participating Banks by telex, cable or telecopy of each rate of interest
so determined, and its determination thereof shall be conclusive in the absence
of manifest error.
<PAGE> 28
24
(g) Each Reference Bank agrees to use its best efforts to furnish
quotations to the Agent as contemplated by this Section. If any Reference Bank
does not furnish a timely quotation, the Agent shall determine the relevant
interest rate on the basis of the quotation or quotations furnished by the
remaining Reference Bank or Banks or, if none of such quotations is available on
a timely basis, the provisions of Section 8.01 shall apply.
SECTION 2.09. Fees.
(a) Facility Fee. The Borrower shall pay to the Agent for the account
of the Banks ratably in proportion to their Commitments, a facility fee at the
rate of (i) 0.065% per annum during each Level I Period, (ii) 0.070% per annum
during each Level II Period, (iii) 0.080% per annum during each Level III
Period, (iv) 0.090% per annum during each Level IV Period, (v) 0.100% per annum
during each Level V Period, (vi) 0.125% during each Level VI Period, (vii)
0.150% during each Level VII Period and (viii) 0.250% during each Level VIII
Period. Such facility fee shall accrue (i) from and including the date on which
the conditions set forth in Section 3.01(a) and (d) have been satisfied to but
excluding the last day of the Revolving Credit Period, in each case, on the
daily average aggregate amount of the Commitments (whether used or unused) and
(ii) if any Loans remain outstanding after the Revolving Credit Period, from and
including the last day of the Revolving Credit Period to but excluding the date
such Loans shall be repaid in full, on the daily average aggregate outstanding
principal amount of such Loans.
(b) Payments. Except as otherwise indicated, accrued fees under this
Section shall be payable quarterly in arrears on (i) each Quarterly Date, (ii)
the Termination Date and (iii) if any Loans remain outstanding after the
Revolving Credit Period, the date such Loans shall be repaid in full.
SECTION 2.10. Method of Electing Interest Rates. (a) The Loans included
in each Committed Borrowing shall bear interest initially at the type of rate
specified by the Borrower in the applicable Notice of Committed Borrowing.
Thereafter, the Borrower may from time to time elect to change or continue the
type of interest rate borne by each Group of Loans (subject in each case to the
provisions of Article VIII), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect
to convert such Loans to CD Loans as of any Domestic Business Day or
Euro- Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are CD Loans, the Borrower may (x) elect to
convert such Loans to Base Rate Loans as of any Domestic Business Day,
(y) elect to convert such Loans to Euro-Dollar Loans or to CD Loans
with an Interest Period different from the then current Interest Period
applicable to such Loans, as of any Euro-Dollar Business Day or
Domestic Business Day, respectively, or (z) elect to continue such
Loans as CD
<PAGE> 29
25
Loans for an additional Interest Period beginning on the last day of
the then current Interest Period applicable to such Loans; and
(iii) if such Loans are Euro-Dollar Loans, the Borrower may
(x) elect to convert such Loans to Base Rate Loans or CD Loans as of
any Domestic Business Day, (y) elect to convert such Loans to CD Loans
or Euro-Dollar Loans with an Interest Period different from the then
current Interest Period applicable to such Loans, as of any Domestic
Business Day or Euro-Dollar Business Day, respectively, or (z) elect to
continue such Loans as Euro-Dollar Loans for an additional Interest
Period beginning on the last day of the then current Interest Period
applicable to such Loans;
provided that, if the Borrower elects to convert any CD Loans or Euro-Dollar
Loans, as the case may be, to Base Rate Loans or to CD Loans or Euro-Dollar
Loans, as the case may be, with a different Interest Period, as of any day other
than the last day of the then current Interest Period applicable to such Loans,
the Borrower shall reimburse each Bank in accordance with Section 2.13.
Each such election shall be made by delivering a notice (a "Notice of
Interest Rate Election") to the Agent (i) at least one Domestic Business Day
before such notice is to be effective if the relevant Loans are to be converted
into Base Rate Loans, (ii) at least two Domestic Business Days before such
conversion or continuation is to be effective if such Loans are to be converted
into, or continued as, CD Rate Loans or (iii) at least three Euro-Dollar
Business Days before such conversion or continuation is to be effective if such
Loans are to be converted into, or continued as, Euro-Dollar Loans.
A Notice of Interest Rate Election may, if it so specifies, apply to
only a portion of the aggregate principal amount of the relevant Group of Loans;
provided that (i) such portion is allocated ratably among the Loans comprising
such Group and (ii) the portion to which such Notice applies, and the remaining
portion to which it does not apply, are each $25,000,000 or any larger multiple
of $1,000,000.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such
notice applies;
(ii) the date on which the conversion or continuation selected
in such notice is to be effective, which shall comply with the
applicable clause of subsection (a) above;
(iii) whether such Group of Loans (or portion thereof) is to
be converted to Base Rate Loans, CD Loans or Euro-Dollar Loans or
continued as CD Loans or
<PAGE> 30
26
Euro-Dollar Loans for an additional Interest Period; and
(iv) if such Loans (or portions thereof) are to be converted
to or continued as CD Loans or Euro-Dollar Loans, as the case may be,
the duration of the Interest Period to be applicable thereto
immediately after such conversion or continuation.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to subsection (a) above, the Agent shall promptly notify each
Bank of the contents thereof and such notice shall not thereafter be revocable
by the Borrower. If the Borrower fails to deliver a timely Notice of Interest
Rate Election to the Agent for any Group of Fixed Rate Loans, such Loans shall
be converted into Base Rate Loans on the last day of the then current Interest
Period applicable thereto.
SECTION 2.11. Optional Prepayments. (a) The Borrower may (i) upon at
least one Domestic Business Day's notice to the Agent, prepay the Base Rate
Loans (or any Money Market LIBOR Loans which bear interest at the Base Rate at
such time for the reason stated in Section 8.01), in whole or in part, on any
Domestic Business Day and (ii) upon at least two Euro-Dollar Business Days'
notice to the Agent, prepay any Fixed Rate Loan, in whole or in part, in amounts
aggregating $25,000,000 or any larger multiple of $1,000,000, by paying the
principal amount to be prepaid together with accrued interest thereon to the
date of prepayment; provided that Money Market Loans may not be prepaid other
than as contemplated by clause (i) above. Each such optional prepayment shall be
applied to prepay ratably the relevant Loans of the several Banks. Prepayment of
a Fixed Rate Loan on any day other than the last day of an Interest Period
applicable thereto shall be subject to Section 2.13.
(b) Upon receipt of a notice of prepayment pursuant to this Section,
the Agent shall promptly notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment and such notice shall not
thereafter be revocable by the Borrower.
SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall
make each payment of principal of, and interest on, the Loans and of fees
hereunder, not later than 12:00 Noon (New York City time) on the date when due,
in Federal or other funds immediately available in New York City, to the Agent
at its address referred to in its Administrative Questionnaire. The Agent will
promptly distribute to each Bank its ratable share of each such payment received
by the Agent for the account of the Banks. Whenever any payment of principal of,
or interest on, any Base Rate Loans, CD Loans or fees shall be due on a day
which is not a Domestic Business Day, the date for payment thereof shall be
extended to the next succeeding Domestic
<PAGE> 31
27
Business Day. Whenever any payment of principal of, or interest on, the
Euro-Dollar Loans and Money Market LIBOR Loans shall be due on a day which is
not a Euro-Dollar Business Day, the date for payment thereof shall be extended
to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business
Day falls in another calendar month, in which case the date for payment thereof
shall be the next preceding Euro-Dollar Business Day. Whenever any payment of
principal of, or interest on, the Money Market Absolute Loans shall be due on a
day which is not a Euro-Dollar Business Day, the date for payment thereof shall
be extended to the next succeeding Euro-Dollar Business Day. If the date for any
payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower prior
to the date on which any payment is due to the Banks hereunder that the Borrower
will not make such payment in full, the Agent may assume that the Borrower has
made such payment in full to the Agent on such date and the Agent may, in
reliance upon such assumption, cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent that
the Borrower shall not have so made such payment, each Bank shall repay to the
Agent forthwith on demand such amount distributed to such Bank together with
interest thereon, for each day from the date such amount is distributed to such
Bank until the date such Bank repays such amount to the Agent, at the Federal
Funds Rate.
SECTION 2.13. Funding Losses. If the Borrower makes any payment of
principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is
converted to another Loan (pursuant to Section 2.10, Section 2.11, Article VI or
Article VIII) on any day other than the last day of an Interest Period
applicable thereto or the end of an applicable period fixed pursuant to Section
2.08(d), or if any Bank assigns any Fixed Rate Loan as required by Section 8.06
on any day other than the last day of an Interest Period applicable thereto, or
if the Borrower fails to borrow or prepay any Fixed Rate Loan after notice has
been given to any Bank in accordance with Section 2.04(a) or Section 2.11, the
Borrower shall reimburse each Bank within 15 days after demand for any resulting
loss or expense incurred by it (or by an existing or prospective Participant in
the related Loan), including (without limitation) any loss reasonably incurred
in obtaining, liquidating or employing deposits from third parties, but
excluding loss of margin for the period after such payment or conversion or
assignment or failure to borrow or prepay, provided that such Bank shall have
delivered to the Borrower a certificate as to the amount of such loss or expense
with an explanation of the calculation of such loss or expense, which
certificate shall be conclusive if made reasonably and in good faith.
SECTION 2.14. Computation of Interest and Fees. Interest based on the
Prime Rate hereunder shall be computed on the basis of a year of 365 days (or
366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
facility fees hereunder shall be computed on the basis of a year of 360
<PAGE> 32
28
days and paid for the actual number of days elapsed (including the first day but
excluding the last day).
SECTION 2.15. Regulation D Compensation. For each day for which a Bank
is required to maintain reserves in respect of either (x) "Eurocurrency
Liabilities" (as defined in all regulations of the Board of Governors of the
Federal Reserve System) or (y) any other category of liabilities which includes
deposits by reference to which the interest rate in Euro-Dollar Loans is
determined or any category of extensions of credit or other assets which
includes loans by a non-United States office of any Bank to United States
residents, such Bank may require the Borrower to pay, contemporaneously with
each payment of interest on the Euro-Dollar Loans, additional interest on the
related Euro-Dollar Loan of such Bank at a rate per annum determined by such
Bank up to but not exceeding the excess of (i) (A) the applicable London
Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve
Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank
wishing to require payment of such additional interest (x) shall so notify the
Borrower and the Agent, in which case such additional interest on the
Euro-Dollar Loans of such Bank shall be payable to such Bank at the place
indicated in such notice with respect to each Interest Period commencing at
least five Euro-Dollar Business Days after the giving of such notice and (y)
shall notify the Borrower at least five Euro-Dollar Business Days prior to each
date on which interest is payable on the Euro-Dollar Loans of the amount then
due to such Bank under this Section. Such Bank's notice to the Borrower shall
set forth its calculation of such additional interest and such calculation shall
be conclusive if made reasonably and in good faith.
ARTICLE III
CONDITIONS
SECTION 3.01. Effectiveness. This Agreement shall become effective on
the date that all of the following conditions shall have been satisfied (or
waived in accordance with Section 10.04):
(a) receipt by the Agent from each of the parties hereto of
either (i) a counterpart hereof signed by such party or (ii)
telegraphic, telex or other written confirmation, in form satisfactory
to the Agent, confirming that a counterpart hereof has been signed by
such party;
(b) receipt by the Agent of a certificate signed by the Vice
Chairman for Strategy and Finance or the Vice President, Finance of
each of the Borrower and the Guarantor, dated the Effective Date, to
the effect that (i) no Default has occurred and is continuing as of the
Effective Date and (ii) the representations and warranties of the
Borrower and the Guarantor set forth in Article IV hereof are true in
all material respects on, and as of, the Effective Date;
<PAGE> 33
29
(c) receipt by the Agent of an opinion of William C. Baskin
III, Esq., counsel to the Borrower and the Guarantor and given upon the
Borrower's and the Guarantor's express instructions, and of Davis Polk
& Wardwell, special counsel to the Borrower and the Guarantor, and
given upon the Borrower's and the Guarantor's express instructions
substantially in the forms of Exhibits E-1 and E-2 hereto,
respectively;
(d) receipt by the Agent of an opinion of Cravath, Swaine &
Moore, special counsel to the Agent, substantially in the form of
Exhibit F hereto; and
(e) receipt by the Agent of all documents it may reasonably
request relating to the existence of the Borrower and the Guarantor,
the corporate authority for and the validity of this Agreement, and any
other matters relevant hereto, all in form and substance satisfactory
to the Agent;
provided that this Agreement shall not become effective or be binding on any
party hereto unless all of the foregoing conditions are satisfied not later than
May 3, 1999. The Agent shall promptly notify the Borrower and the Banks of the
Effective Date, and such notice shall be conclusive and binding on all parties
hereto.
SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan on
the occasion of any Borrowing is subject to the satisfaction of the following
conditions:
(a) receipt by the Agent of a Notice of Borrowing as required
by Section 2.02 or 2.03, as the case may be;
(b) the fact that, immediately before and immediately after
such Borrowing, no Default shall have occurred and be continuing;
(c) the fact that immediately after such Borrowing, the
aggregate outstanding principal amount of the Loans will not exceed the
aggregate amount of the Commitments;
(d) the fact that the representations and warranties of the
Borrower and the Guarantor set forth in Sections 4.01(i), 4.02 and
4.07(i) shall be true on and as of the date of such Borrowing;
(e) the fact that the most recent financial statements
provided by the Guarantor in compliance with Section 5.01, as
supplemented prior to such Borrowing, shall be, to the best knowledge
of the Borrower and the Guarantor, accurate and complete in all
material respects; and
(f) the fact that the Borrowing shall have been approved in
writing by the Chief Executive Officer of the Borrower or his designee.
<PAGE> 34
30
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower and the Guarantor on the date of such Borrowing as to the facts
specified in clauses (b), (c), (d), (e) and (f) of this Section.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Each of the Borrower and the Guarantor represents and warrants that:
SECTION 4.01. Corporate Existence and Power. Each of the Borrower and
the Guarantor (i) is a Connecticut corporation duly incorporated, validly
existing and in good standing under the laws of the State of Connecticut, (ii)
has all corporate powers required to carry on its business as now conducted and
(iii) has all governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted, the failure to obtain which
would, individually or in the aggregate, have a material adverse effect on its
ability to perform its obligations hereunder or on the financial condition of
the Guarantor and its Consolidated Subsidiaries taken as a whole.
SECTION 4.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by each of the Borrower
and the Guarantor of this Agreement are within its corporate powers, have been
duly authorized by all necessary corporate action, require no action by or in
respect of, or advance filing with, any governmental body, agency or official
and do not contravene, or constitute a default under, (i) any provision of the
certificate of incorporation or by-laws of the Borrower or the Guarantor, (ii)
any applicable law or regulation or any judgment, injunction, order or decree
binding upon the Borrower or the Guarantor, or (iii) any material financial
agreement or instrument (excluding insurance obligations) of the Borrower or the
Guarantor.
SECTION 4.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of each of the Borrower and the Guarantor and each Note, when
executed and delivered in accordance with this Agreement, will constitute a
valid and binding obligation of the Borrower, in each case enforceable in
accordance with its terms except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally, by insolvency laws affecting the rights of
creditors of insurance companies generally (in the case of the Borrower) and by
general principles of equity.
SECTION 4.04. Financial Information.
(a) The consolidated balance sheet of the Guarantor and its
Consolidated Subsidiaries as of December 31, 1998, the related consolidated
statements of cash flows for the year then ended and consolidated statement of
income and retained earnings for the year then ended, reported on by KPMG LLP
and
<PAGE> 35
31
set forth in the Guarantor's 1998 Annual Report to Shareholders, copies
of which have been delivered to the Agent for distribution to each of
the Banks, fairly present, in conformity with United States generally
accepted accounting principles, the consolidated financial position of
the Guarantor and its Consolidated Subsidiaries as of such date and
their consolidated results of operations and cash flows for such year.
(b) Except as disclosed in the Guarantor's 1998 Form 10-K,
since December 31, 1998, there has been no material adverse change in
the business, financial position or results of operations of the
Guarantor and its Consolidated Subsidiaries, taken as a whole.
SECTION 4.05. Litigation. Except as disclosed in the Guarantor's 1998
Form 10-K, there is no action, suit or proceeding pending against, or to the
knowledge of the Borrower or the Guarantor threatened against or affecting, the
Borrower, its consolidated subsidiaries, the Guarantor or the Principal
Subsidiaries before any court or arbitrator or any governmental body, agency or
official in which there is a reasonable possibility of an adverse decision which
could materially adversely affect the business, consolidated financial position
or consolidated results of operations of the Guarantor and its Consolidated
Subsidiaries taken as a whole or which in any manner draws into question the
validity of this Agreement.
SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is not in violation of the
presently applicable provisions of ERISA and the Internal Revenue Code where
such violation would have a material adverse effect on the financial condition
of the Guarantor and its Consolidated Subsidiaries taken as a whole, and has not
incurred any liability to the PBGC or a Plan under Title IV of ERISA; provided
that this Section 4.06 applies to the members of the ERISA Group only in their
capacity as employers and not in any other capacity (such as fiduciaries or
service providers to Plans for the benefit of employers of others).
SECTION 4.07. Principal Subsidiaries. Each of the Principal
Subsidiaries (i) is a corporation duly incorporated, validly existing and in
good standing under the laws of the jurisdiction in which it is organized, (ii)
has all corporate powers required to carry on its business as now conducted and
(iii) has all governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted, the failure to obtain which
would, individually or in the aggregate, have a material adverse effect on the
ability of the Borrower or the Guarantor to perform its obligations hereunder or
on the financial condition of such Principal Subsidiary and its consolidated
subsidiaries taken as a whole.
SECTION 4.08. Compliance with Laws. To the best knowledge of the
Borrower and the Guarantor, each of the Borrower
<PAGE> 36
32
and the Guarantor has complied in all material respects with all applicable
laws, except where any single failure to comply therewith would not individually
have a material adverse effect on its ability to perform its obligations
hereunder, and except where necessity of compliance therewith is being contested
in good faith by appropriate proceedings; provided, however, that the sole
representation and warranty with respect to compliance with ERISA is limited to
Section 4.06; and provided further that the reference to applicable laws in this
Section 4.08 shall not include Environmental Laws.
SECTION 4.09. Year 2000 Matters. To the best of the Borrower's and the
Guarantor's knowledge, the disclosures relating to Year 2000 matters contained
in the Guarantor's 1998 Form 10-K materially accurately reflect, as of the date
such statements are purported to be made, the Guarantor's efforts to address
issues associated with the Year 2000.
ARTICLE V
COVENANTS
The Borrower and the Guarantor agree that, so long as any Bank has any
Commitment hereunder and so long as any Loan is outstanding hereunder:
SECTION 5.01. Information. The Borrower and the Guarantor will deliver
to the Agent, for delivery by the Agent to each of the Banks:
(a) as soon as available and in any event within 120 days
after the end of each fiscal year of the Guarantor, the consolidated
balance sheet of the Guarantor and its Consolidated Subsidiaries as of
the end of such fiscal year and the related consolidated statements of
earnings and of cash flows for such fiscal year, setting forth in each
case in comparative form the figures for the previous fiscal year, all
reported on in a manner acceptable to the Securities and Exchange
Commission by KPMG LLP or other independent public accountants of
nationally recognized standing;
(b) as soon as available and in any event within 60 days after
the end of each of the first three quarters of each fiscal year of the
Guarantor, its Form 10-Q as of the end of such quarter;
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of a
Responsible Financial Officer of the Guarantor (i) stating whether any
Default exists on the date of such certificate and, if any Default then
exists, setting forth the details thereof and the action which the
Borrower or the Guarantor, as applicable, is taking or proposes to take
with respect thereto, and (ii) setting forth calculations demonstrating
compliance, as of the date of the most recent balance sheet included in
the financial
<PAGE> 37
33
statements being furnished at such time, with the covenant set forth in
Section 5.03;
(d) within five days after any officer of the Borrower or the
Guarantor obtains knowledge of any Default, if such Default is then
continuing, a certificate of a Responsible Financial Officer of the
Borrower or the Guarantor setting forth the details thereof and the
action which the Borrower or the Guarantor is taking or proposes to
take with respect thereto;
(e) promptly upon the mailing thereof to the shareholders of
the Guarantor generally, copies of all financial statements and
reports, and proxy statements so mailed; and
(f) from time to time such additional publicly available
information regarding the financial position or business of the
Borrower, the Guarantor and the Principal Subsidiaries as the Agent, at
the request of any Bank, may reasonably request.
SECTION 5.02. Conduct of Business and Maintenance of Existence. Each of
the Borrower and the Guarantor will preserve, renew and keep in full force and
effect, and will cause each Principal Subsidiary to preserve, renew and keep in
full force and effect their respective corporate existence; provided that the
foregoing shall not prohibit (i) the termination of the existence of any
Principal Subsidiary if the surviving entity (in the case of any such
termination resulting from a merger or consolidation) or the entity to which
substantially all such Principal Subsidiary's assets are transferred (in the
case of any other such termination) is or becomes a Principal Subsidiary, or
(ii) any transaction involving the Borrower or the Guarantor in accordance with
Section 5.05.
SECTION 5.03. Minimum Adjusted Consolidated Net Worth. Adjusted
Consolidated Net Worth will not be less than $7,500,000,000 at any time.
SECTION 5.04. Equal and Ratable Lien Protection. Neither the Borrower
nor the Guarantor will, nor will they permit any Principal Subsidiary to, issue,
assume, incur or guarantee any indebtedness for borrowed money secured by a
mortgage, pledge, lien or other encumbrance, directly or indirectly on any of
the common stock of a Principal Subsidiary or of the Borrower, which common
stock is owned by the Guarantor, the Borrower or any Principal Subsidiary,
unless the obligations of the Borrower under this Agreement and any Notes and,
if the Borrower or the Guarantor so elects, any other indebtedness of the
Borrower or the Guarantor ranking on a parity with the Borrower's obligations
under this Agreement, any Notes or the Guarantor's obligations under Article IX,
as applicable, shall be secured equally and ratably with, or prior to, such
secured indebtedness for borrowed money so long as it is outstanding and is so
secured.
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34
SECTION 5.05. Consolidations, Mergers and Sales of Assets. Neither the
Borrower nor the Guarantor will consolidate or merge with or into any other
corporation or convey or transfer its properties and assets substantially as an
entirety to any other Person unless (i) the surviving or acquiring entity is a
corporation organized under the laws of one of the United States, (ii) the
surviving or acquiring corporation, if other than the Borrower or the Guarantor,
as applicable, expressly assumes the performance of the obligations of the
Borrower or the Guarantor, as applicable, under this Agreement and all Notes,
and (iii) immediately after giving effect to such transaction, no Default shall
exist; provided that the foregoing shall not be construed to prevent a merger of
the Borrower with the Guarantor, in which case the survivor shall be or become
both the Borrower hereunder and the Guarantor.
SECTION 5.06. Use of Proceeds. The proceeds of the Loans made under
this Agreement will be used by the Borrower for general corporate purposes. None
of such proceeds will be used, directly or indirectly, for the purpose, whether
immediate, incidental or ultimate, of buying or carrying any "margin stock"
within the meaning of Regulation U.
SECTION 5.07. Cross Default Provisions. If a cross default provision is
included in any future instrument or agreement of the Borrower or the Guarantor
evidencing or relating to indebtedness for borrowed money in a principal amount
in excess of $50,000,000 (or its equivalent in any other currency), the Borrower
and the Guarantor will promptly notify the Banks thereof and will, if requested
to do so by the Required Banks, sign an amendment to this Agreement to include a
similar cross default provision herein.
SECTION 5.08. Compliance with Laws. Each of the Borrower and the
Guarantor will comply in all material respects with all applicable laws, except
where any single failure to comply therewith would not individually have a
material adverse effect on its ability to perform its obligations hereunder, and
except where necessity of compliance therewith is being contested in good faith
by appropriate proceedings; provided, however, that with respect to its
compliance with ERISA, this Section 5.08 applies to each of the Borrower and the
Guarantor only in its capacity as an employer and not in any other capacity
(such as a fiduciary or service provider to Plans for the benefit of employers
of others); and provided further that the reference to applicable laws in this
Section 5.08 shall not include Environmental Laws.
<PAGE> 39
35
ARTICLE VI
DEFAULTS
SECTION 6.01. Events of Default. If one or more of the following events
("Events of Default") shall have occurred and be continuing:
(a) the Borrower shall fail to pay when due any principal on
any Loan;
(b) the Borrower shall fail to pay within five Domestic
Business Days of when due any fees or interest on any Loan;
(c) the Borrower or the Guarantor shall fail to observe or
perform any covenant contained in Sections 5.03 and 5.05;
(d) the Borrower or the Guarantor shall fail to observe or
perform, in any material respect, any covenant or agreement contained
in this Agreement (other than those covered by clause (a), (b) or (c)
above) and such failure shall have continued for a period of 45 days
after written notice thereof has been given to the Borrower and the
Guarantor by the Agent at the request of any Bank;
(e) any representation, warranty, certification or statement
made by the Borrower or the Guarantor in this Agreement or in any
certificate, financial statement or other document delivered pursuant
to this Agreement shall prove to have been incorrect in any material
respect when made (or deemed made);
(f) an event of default, as defined in any indenture or
instrument evidencing or under which the Borrower, the Guarantor or any
Principal Subsidiary has at the date of this Agreement or shall
hereafter have outstanding indebtedness for borrowed money in a
principal amount in excess of $50,000,000 (or its equivalent in any
other currency), shall occur and be continuing and such indebtedness
shall have been accelerated so that the same shall be or become due and
payable prior to the date on which the same would otherwise have become
due and payable (other than acceleration of Non-Recourse Indebtedness
which does not exceed in the aggregate 4% of the Guarantor's total
shareholders' equity, as set forth in the most recently published
audited consolidated balance sheet of the Guarantor), and such
acceleration shall not have been waived, rescinded or annulled;
provided, however, that if such acceleration under such indenture or
instrument shall be remedied or cured by the Borrower, Guarantor or
Principal Subsidiary, or waived, rescinded or annulled by the requisite
holders of such indebtedness, then the Event of Default shall be deemed
likewise to have been thereupon remedied, cured or waived without
further action upon the part of the Banks;
(g) the Borrower, the Guarantor or any Principal Subsidiary
shall commence a voluntary case or other
<PAGE> 40
36
proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment
of a trustee, receiver, liquidator, custodian or other similar official
of it or all or substantially all of its property, or shall consent to
any such relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding commenced
against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due,
or shall take any corporate action to authorize any of the foregoing;
(h) an involuntary case or other proceeding shall be commenced
against the Borrower, the Guarantor or any Principal Subsidiary seeking
liquidation, reorganization or other relief with respect to it or its
debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or all or
substantially all of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of 60
days; or an order for relief shall be entered against the Borrower, the
Guarantor or any Principal Subsidiary under the federal bankruptcy laws
as now or hereafter in effect; or
(i) any person or group of persons (within the meaning of
Section 13 or 14 of the Securities Exchange Act of 1934, as amended)
shall have acquired beneficial ownership (within the meaning of Rule
13d-3 promulgated by the Securities and Exchange Commission under said
Act) of more than 35% of the outstanding shares of common stock of the
Guarantor; or at any time Continuing Directors shall not constitute a
majority of the board of directors of the Guarantor;
then, and in every such event, the Agent shall (i) if requested by Banks having
more than 50% in aggregate amount of the Commitments, by notice to the Borrower
terminate the Commitments and they shall thereupon terminate, and (ii) if
requested by Banks holding more than 50% in aggregate principal amount of the
Loans, by notice to the Borrower declare the Loans (together with accrued
interest thereon) to be, and the Loans (together with accrued interest thereon)
shall thereupon become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower; provided that in the case of any of the Events of Default specified in
clause (g) or (h) above with respect to the Borrower or the Guarantor, without
any notice to the Borrower or any other act by the Agent or the Banks, the
Commitments shall thereupon terminate and the Loans (together with accrued
interest thereon) shall become immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower.
SECTION 6.02. Notice of Default. The Agent shall give notice to the
Borrower and the Guarantor under Section 6.01(d)
<PAGE> 41
37
promptly upon being requested to do so by any Bank and shall thereupon notify
all the Banks thereof.
ARTICLE VII
THE AGENT
SECTION 7.01. Appointment and Authorization. Each Bank irrevocably
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under this Agreement as are delegated to the Agent by
the terms hereof, together with all such powers as are reasonably incidental
thereto.
SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of
New York shall have the same rights and powers under this Agreement as any other
Bank and may exercise or refrain from exercising the same as though it were not
the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may
accept deposits from, lend money to, and generally engage in any kind of
business with the Borrower or any Subsidiary or affiliate of the Borrower as if
it were not the Agent hereunder.
SECTION 7.03. Action by Agent. The obligations of the Agent hereunder
are only those expressly set forth herein. Without limiting the generality of
the foregoing, the Agent shall not be required to take any action with respect
to any Default, except as expressly provided in Article VI.
SECTION 7.04. Consultation with Experts. The Agent may consult with
legal counsel (who may be counsel for the Borrower or the Guarantor),
independent public accountants and other experts selected by it and shall not be
liable for any action taken or omitted to be taken by it in good faith in
accordance with the advice of such counsel, accountants or experts.
SECTION 7.05. Liability of Agent. Neither the Agent nor any of its
directors, officers, agents, or employees shall be liable for any action taken
or not taken by it in connection herewith (i) with the consent or at the request
of the Required Banks or (ii) in the absence of its own gross negligence or
willful misconduct. Neither the Agent nor any of its directors, officers, agents
or employees shall be responsible for or have any duty to ascertain, inquire
into or verify (i) any statement, warranty or representation made in connection
with this Agreement or any borrowing hereunder; (ii) the performance or
observance of any of the covenants or agreements of the Borrower or the
Guarantor; (iii) the satisfaction of any condition specified in Article III,
except receipt of items required to be delivered to the Agent; or (iv) the
validity, effectiveness or genuineness of this Agreement or any other instrument
or writing furnished in connection herewith. The Agent shall not incur any
liability by acting in reliance upon any notice, consent, certificate,
statement, or other writing (which may be a bank wire, telex or
<PAGE> 42
38
similar writing) reasonably believed by it to be genuine or to be signed by the
proper party or parties.
SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance
with its Commitment, indemnify the Agent (to the extent not reimbursed by the
Borrower) against any cost, expense (including counsel fees and disbursements),
claim, demand, action, loss or liability (except such as result from the Agent's
gross negligence or willful misconduct) that the Agent may suffer or incur in
connection with this Agreement or any action taken or omitted by the Agent
hereunder.
SECTION 7.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
SECTION 7.08. Successor Agent. The Agent may resign at any time by
giving written notice thereof to the Banks and the Borrower. Upon any such
resignation, the Required Banks shall have the right to appoint a successor
Agent approved by the Borrower (which approval shall not be unreasonably
withheld). If no successor Agent shall have been so appointed by the Required
Banks, and approved by the Borrower and shall have accepted such appointment
within 30 days after the retiring Agent gives notice of resignation, then the
retiring Agent may, on behalf of the Banks, appoint a successor Agent, which
shall be a commercial bank organized or licensed under the laws of the United
States of America or of any State thereof and having a combined capital and
surplus of at least two billion dollars. Upon the acceptance of its appointment
as Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights and duties of the retiring
Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder. After any retiring Agent's resignation hereunder as
Agent, the provisions of this Article shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent.
SECTION 7.09. Agent's Fees. The Borrower shall pay to the Agent, for
its own account, fees in the amounts and at the times previously agreed upon
between the Borrower and the Agent.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.
If (i) on or prior to the first day of any Interest Period for any Euro-Dollar
Loan or Money Market LIBOR
<PAGE> 43
39
Loan the Agent determines (which determination shall be conclusive absent
manifest error) that deposits in dollars (in the applicable amounts) are not
generally available in the London interbank market for such period or that the
London Interbank Offered Rate cannot be determined in accordance with the
definition thereof, or (ii) on or prior to the first day of any Interest Period
for any CD Loan the Agent is advised by each of the Reference Banks that
deposits in dollars (in the applicable amounts) are not being offered to each of
the Reference Banks in the relevant market for such Interest Period, the Agent
shall forthwith give notice thereof to the Borrower and the Banks, whereupon
until the Agent notifies the Borrower that the circumstances giving rise to such
suspension no longer exist, (i) the obligations of the Banks to make CD Loans or
Euro-Dollar Loans, as the case may be, or to convert outstanding Base Rate Loans
into CD Loans or Euro-Dollar Loans, as the case may be, or to convert
outstanding CD Loans or Euro-Dollar Loans into CD Loans or Euro-Dollar Loans, as
the case may be, with a different Interest Period shall be suspended, (ii) each
outstanding CD Loan, Euro-Dollar Loan or Money Market LIBOR Loan, as the case
may be, shall be converted into a Base Rate Loan on the last day of the then
current Interest Period applicable thereto, and (iii) unless the Borrower
notifies the Agent at least two Domestic Business Days before the date of any CD
Borrowing, Euro-Dollar Borrowing or Money Market LIBOR Borrowing, as the case
may be, for which a Notice of Borrowing has previously been given that it elects
not to borrow on such date, (x) if such Borrowing is a CD Borrowing or a
Euro-Dollar Borrowing, as the case may be, such Borrowing shall instead be made
as a Base Rate Borrowing and (y) if such Borrowing is a Money Market LIBOR
Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear
interest for each day from and including the first day to but excluding the last
day of the Interest Period applicable thereto at the Base Rate for such day.
SECTION 8.02. Illegality. If, on or after the date of this Agreement,
the adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank (or its Applicable Lending Office) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency shall make it unlawful or impossible for any Bank (or its
Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and
such Bank shall so notify the Agent, the Agent shall forthwith give notice
thereof to the other Banks and the Borrower, whereupon until such Bank notifies
the Borrower and the Agent that the circumstances giving rise to such suspension
no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to
convert outstanding Base Rate Loans or CD Loans into Euro-Dollar Loans, or to
convert outstanding Euro-Dollar Loans into Euro-Dollar Loans with a different
Interest Period shall be suspended. Before giving any notice to the Agent
pursuant to this Section, such Bank shall designate a different Applicable
Lending Office if such designation will avoid the need for giving such notice
and will not, in the judgment of such Bank, be otherwise disadvantageous to
<PAGE> 44
40
such Bank. If such notice is given, all Euro-Dollar Loans of such Bank then
outstanding shall be converted to Base Rate Loans either (a) on the last day of
the then current Interest Period applicable to such Euro-Dollar Loans if such
Bank may lawfully continue to maintain and fund such Loans to such day or (b)
immediately if such Bank may not lawfully continue to maintain and fund such
Loans to such day.
SECTION 8.03. Increased Cost and Reduced Return. (a) If any applicable
law, rule or regulation, or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Applicable Lending Office) with any request or directive (whether or not having
the force of law) of any such governmental authority, central bank or comparable
agency, made or adopted after the date hereof (other than a change currently
provided for in any existing law, rule or regulation) shall impose, modify or
deem applicable any reserve, special deposit, insurance assessment or similar
requirement (including, without limitation, any such requirement imposed by the
Board of Governors of the Federal Reserve System, but excluding (i) with respect
to any Euro-Dollar Loan, any such requirement with respect to which such Bank is
entitled to compensation during the relevant Interest Period under Section 2.15
and (ii) with respect to any CD Loan, any such requirement reflected in the
applicable Domestic Reserve Percentage or Assessment Rate) against assets of,
deposits with or for the account of, or credit extended by, any Bank (or its
Applicable Lending Office) or shall impose on any Bank (or its Applicable
Lending Office) or on the United States market for certificates of deposit or
the London interbank market any other condition affecting its Fixed Rate Loans
(other than Money Market Absolute Rate Loans), its Note (in respect of such
Fixed Rate Loans) or its obligation to make such Fixed Rate Loans; and the
result of any of the foregoing is to increase the cost to such Bank (or its
Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to
reduce the amount of any sum received or receivable by such Bank (or its
Applicable Lending Office) under this Agreement or under its Note with respect
thereto, by an amount reasonably deemed by such Bank to be material, then,
within 15 days after demand by such Bank (with a copy to the Agent), the
Borrower shall pay to such Bank such additional amount or amounts as will
compensate such Bank for such increased cost or reduction.
(b) If any Bank shall have determined that any applicable law, rule or
regulation regarding capital adequacy, or any change in any such law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or any request or directive regarding
capital adequacy (whether or not having the force of law) of any such
governmental authority, central bank or comparable agency, made or adopted after
the date hereof (other than a change currently provided for in any existing law,
rule or regulation), has or would have the effect of increasing the amount of
capital of such Bank (or its parent) required to be maintained
<PAGE> 45
41
in respect of, or otherwise allocated to, such Bank's obligations hereunder (its
"Required Capital") by an amount reasonably deemed by such Bank to be material,
then such Bank may, by notice to the Borrower and the Agent, increase the
facility fee payable to such Bank hereunder to the extent required so that the
ratio of (w) the sum of the increased facility fee applicable to such Bank's
Commitment hereunder to (x) the prior facility fee applicable to such Bank's
Commitment hereunder is the same as the ratio of (y) such Bank's increased
Required Capital to (z) its prior Required Capital. Such Bank's notice to the
Borrower and the Agent shall set forth its calculation of the foregoing ratios
and the increased facility fee to which it is entitled under this Section.
(c) Each Bank will promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date hereof, which will
entitle such Bank to compensation pursuant to this Section 8.03 (each, a
"Trigger Event") and will designate a different Applicable Lending Office if
such designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the judgment of such Bank, be otherwise
disadvantageous to such Bank. Notwithstanding any other provision of this
Section, no Bank shall be entitled to any compensation pursuant to this Section
in respect of any Trigger Event (i) for any period of time in excess of 120 days
prior to such notice or (ii) for any period of time prior to such notice if such
Bank shall not have given such notice within 120 days of the date on which such
Trigger Event shall have been enacted, promulgated, adopted or issued in
definitive or final form unless such Trigger Event is retroactive. A certificate
of any Bank claiming compensation under Section 8.03(a) or (b) and setting forth
the additional amount or amounts to be paid to it hereunder and describing the
method of calculation thereof shall be conclusive if made reasonably and in good
faith. In determining such amount, such Bank may use any reasonable averaging
and attribution methods.
SECTION 8.04. Taxes. (a) For purposes of this Section 8.04, the
following terms have the following meanings:
"Taxes" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings with respect to any payment by the
Borrower pursuant to this Agreement or under any Note, and all liabilities with
respect thereto, excluding (i) in the case of each Bank and the Agent, taxes
imposed on its income, and franchise or similar taxes imposed on it, by a
jurisdiction under the laws of which such Bank or the Agent (as the case may be)
is organized or in which its principal executive office is located or, in the
case of each Bank, in which its Applicable Lending Office is located and (ii) in
the case of each Bank, any United States withholding tax imposed on such
payments but only to the extent that such Bank is subject to United States
withholding tax at the time such Bank first becomes a party to this Agreement.
"Other Taxes" means any present or future stamp or documentary taxes
and any other excise or property taxes, or
<PAGE> 46
42
similar charges or levies, which arise from any payment made pursuant to this
Agreement or under any Note or from the execution or delivery of, or otherwise
with respect to, this Agreement or any Note.
(b) Any and all payments by the Borrower to or for the account of any
Bank or the Agent hereunder or under any Note shall be made without deduction
for any Taxes or Other Taxes; provided that, if the Borrower shall be required
by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum
payable shall be increased as necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 8.04) such Bank or the Agent (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been made,
(ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the
full amount deducted to the relevant taxation authority or other authority in
accordance with applicable law and (iv) the Borrower shall furnish to the Agent,
at its address referred to in Section 10.01, the original or a certified copy of
a receipt evidencing payment thereof.
(c) The Borrower agrees to indemnify each Bank and the Agent for the
full amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 8.04) paid by such Bank or the Agent (as the case may be) and any
liability (including penalties, interest and expenses, except to the extent
attributable to the negligence or misconduct of such Bank or the Agent, as the
case may be) arising therefrom or with respect thereto. This indemnification
shall be made within 15 days from the date such Bank or the Agent (as the case
may be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and on
or prior to the date on which it becomes a Bank in the case of each other Bank,
shall provide the Borrower with (i) two Internal Revenue Service ("IRS") forms
1001 or any successor form prescribed by the IRS, certifying that such Bank is
entitled to benefits under an income tax treaty to which the United States is a
party which exempts such Bank from United States withholding tax or reduces the
rate of withholding tax on payments of interest and eliminates withholding tax
on any fees, or (ii) two IRS forms 4224 certifying that the income receivable
pursuant to this Agreement is effectively connected with the conduct of a trade
or business in the United States. If the form provided by a Bank indicates a
United States interest withholding tax rate in excess of zero, withholding tax
at such rate shall be considered excluded from "Taxes" as defined in Section
8.04(a). Each such Bank undertakes to deliver to each of the Borrower and the
Agent (A) a replacement form (or successor form) on or before the date that such
form expires or becomes obsolete or after the occurrence of any event requiring
a change in the most recent form so delivered by it, and (B) such amendments
thereto or extensions or renewals thereof as
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43
may reasonably be required (but only so long as such Bank remains lawfully able
to do so).
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such
failure is due to a change in treaty, law or regulation occurring subsequent to
the date on which a form originally was required to be provided), such Bank
shall not be entitled to indemnification under Section 8.04(b) or Section
8.04(c) with respect to Taxes imposed by the United States; provided that if a
Bank, which is otherwise exempt from or subject to a reduced rate of withholding
tax, becomes subject to Taxes because of its failure to deliver a form required
hereunder, the Borrower shall take such steps as such Bank shall reasonably
request to assist such Bank to recover such Taxes.
(f) Each Bank will promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date hereof, which will
entitle such Bank to make any claim for indemnification in respect of Taxes or
Other Taxes pursuant to this Section 8.04 (each, a "Tax Event") and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such claim or any other amounts payable
by the Borrower under this Section 8.04 and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. Notwithstanding any other
provisions of this Section, no Bank shall be entitled to any indemnification
pursuant to this Section in respect of any Tax Event (i) for any period of time
in excess of 180 days prior to such notice or (ii) for any period of time prior
to such notice if such Bank shall not have given such notice within 120 days of
the date on which such Bank became aware of such Tax Event unless such Tax Event
is retroactive.
SECTION 8.05. Base Rate Loans Substituted for Affected Euro-Dollar
Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans
has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded
compensation under Section 8.03(a) and the Borrower shall, by at least five
Euro-Dollar Business Days prior notice to such Bank through the Agent, have
elected that the provisions of this Section shall apply to such Bank, then,
unless and until such Bank notifies the Borrower that the circumstances giving
rise to such suspension or demand for compensation no longer apply:
(a) all Loans which would otherwise be made by such Bank as
(or continued as or converted into) Euro-Dollar Loans shall instead be
Base Rate Loans, and
(b) after each of its outstanding Euro-Dollar Loans has been
repaid (or converted to a Base Rate Loan), all payments of principal
which would otherwise be applied to repay such Euro-Dollar Loans shall
be applied to repay its Base Rate Loans instead.
If such Bank notifies the Borrower that the circumstances giving rise to such
notice no longer apply, the Borrower shall elect that the principal amount of
each such Base Rate Loan shall be
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44
converted into a Euro-Dollar Loan on the first day of the next succeeding
Interest Period applicable to the related Euro-Dollar Loans of the other Banks.
SECTION 8.06. Substitution of Bank. If (i) the obligation of any Bank
to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii)
any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower
shall have the right to seek a substitute bank or banks ("Substitute Banks")
(which may be one or more of the Banks) to purchase the Loans and assume the
Commitment of such Bank (the "Affected Bank") under this Agreement and, if the
Borrower locates a Substitute Bank, the Affected Bank shall, upon payment to it
of the purchase price agreed between it and the Substitute Bank (or, failing
such agreement, a purchase price in the amount of the outstanding principal
amount of its Loans and accrued interest thereon to the date of payment) plus
any amount (other than principal and interest) then due to it or accrued for its
account hereunder, assign all its rights and obligations under this Agreement
and all of its Notes to the Substitute Bank, and the Substitute Bank shall
assume such rights and obligations, whereupon the Substitute Bank shall be a
Bank party to this Agreement and shall have all the rights and obligations of a
Bank.
SECTION 8.07. Election to Terminate. If during any Level I Period,
Level II Period or Level III Period (i) the obligation of any Bank to make
Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank
has demanded compensation under Section 8.03 or 8.04, the Borrower may elect to
terminate this Agreement as to such Bank, and in connection therewith not to
borrow any Loan hereunder from such Bank or to prepay any Base Rate Loan made
pursuant to Section 8.02 or 8.05 (without altering the Commitments or Loans of
the remaining Banks), provided that the Borrower (i) notifies such Bank through
the Agent of such election at least two Euro-Dollar Business Days before any
date fixed for such borrowing or such a prepayment, as the case may be, and (ii)
repays all of such Bank's outstanding Loans, accrued interest thereon and any
other amounts then due to such Bank or accrued for its account hereunder
concurrently with such termination. Upon receipt by the Agent of such notice,
the Commitment of such Bank shall terminate.
ARTICLE IX
GUARANTY
The Guarantor unconditionally guarantees, as a primary obligor and not
merely as a surety, the due and punctual payment of principal of and interest on
the Loans, when and as due, whether at maturity, by acceleration, by notice of
prepayment or otherwise, and all other monetary obligations of the Borrower to
the Agent and the Banks under this Agreement and any Notes (collectively, the
"Obligations"). Subject to Section 10.04, the Guarantor further agrees that the
Obligations may be extended or renewed, in whole or in part, without notice or
further assent
<PAGE> 49
45
from it, and that it will remain bound upon its guarantee notwithstanding any
extension or renewal of any Obligation.
The Guarantor waives presentment to, demand of payment from and protest
to the Borrower of any of the Obligations, and also waives notice of acceptance
of its guarantee and notice of protest for nonpayment. The obligations of the
Guarantor under this Article IX shall not be affected by (a) the failure of the
Agent or any Bank to assert any claim or demand or to enforce any right or
remedy against the Borrower under the provisions of this Agreement or otherwise;
(b) any rescission, waiver, amendment or modification of any of the terms or
provisions of this Agreement, any Note or any other agreement (other than an
amendment to this Agreement in accordance with this Agreement, but then only to
the extent expressly affected by such amendment); (c) the release of any
security held by the Agent or any Bank for the Obligations; or (d) the failure
of the Agent or any Bank to exercise any right or remedy against any other
guarantor of the Obligations.
The Guarantor further agrees that its guarantee constitutes a guarantee
of payment when due and not of collection, and waives any right to require that
any resort be had by the Agent or any Bank to any security held for payment of
the Obligations or to any balance of any deposit account or credit on the books
of the Agent or any Bank in favor of the Borrower or any other Person.
The obligations of the Guarantor under this Article IX shall not be
subject to any reduction, limitation, impairment or termination for any reason,
including, without limitation, any claim of waiver, release, surrender,
alteration or compromise of the Obligations, and shall not be subject to any
defense or setoff, counterclaim, recoupment or termination whatsoever by reason
of the invalidity, illegality or unenforceability of the Obligations or
otherwise. Without limiting the generality of the foregoing, the obligations of
the Guarantor under this Article IX shall not be discharged or impaired or
otherwise affected by the failure of the Agent or any Bank to assert any claim
or demand or to enforce any remedy under any guarantee or any other agreement,
by any waiver or modification of any thereof, by any default, failure or delay,
wilful or otherwise, in the performance of the Obligations, or by any other act
or omission which may or might in any manner or to any extent vary the risk of
the Guarantor or otherwise operate as a discharge of the Guarantor as a matter
of law or equity (other than the indefeasible payment in full of all the
Obligations).
The Guarantor further agrees that its guarantee shall continue to be
effective or be reinstated, as the case may be, if at any time payment, or any
part hereof, of principal of or interest on any Obligation (including, without
limitation, any payment pursuant to this Article IX) is rescinded or must
otherwise be restored by the Agent or any Bank upon the bankruptcy or
reorganization of the Borrower or otherwise.
In furtherance of the foregoing and not in limitation of any other
right which the Agent or any Bank may have at law or
<PAGE> 50
46
in equity against the Guarantor by virtue hereof, upon the failure of the
Borrower to pay any Obligation when and as the same shall become due, whether at
maturity, by acceleration, after notice of prepayment or otherwise, the
Guarantor hereby promises to and will, upon receipt of written demand by the
Agent, forthwith pay, or cause to be paid, to the Agent for distribution to the
Banks, if and as appropriate, in cash the amount of such unpaid Obligation. The
Guarantor agrees that any claim or right that the Guarantor may have against the
Borrower by way of subrogation or otherwise in respect of any payment that the
Guarantor may be required to make hereunder shall be subject and subordinated to
the claims of the Agent and the Banks against the Borrower in respect of the
Obligations.
The guarantee made hereunder shall survive and be in full force and
effect so long as any Obligation is outstanding and has not been indefeasibly
paid and so long as the Banks have any further commitment to lend and shall be
reinstated to the extent provided above.
ARTICLE X
MISCELLANEOUS
SECTION 10.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including bank wire, telex,
facsimile transmission or similar writing) and shall be given to such party: (x)
in the case of the Borrower, the Guarantor or the Agent, at its address or telex
or telecopy number set forth on the signature pages hereof, (y) in the case of
any Bank, at its address, telex or telecopy number set forth in its
Administrative Questionnaire or (z) in the case of any party, such other address
or telex or telecopy number as such party may hereafter specify for the purpose
by notice to the Agent, the Borrower and the Guarantor. All notices from outside
the United States to the Borrower or the Guarantor shall only be given by
telecopy and all other notices to the Borrower or the Guarantor given by telex
shall also be given by telecopy or non-telex method. Each such notice, request
or other communication shall be effective (i) if given by telex or telecopy,
when such telex or telecopy is transmitted to the number determined pursuant to
this Section and the appropriate answerback is received, (ii) if given by
registered or certified mail, return receipt requested, when such return receipt
is signed by the recipient or (iii) if given by any other means, when delivered
at the address specified in this Section, or, if such date is not a business day
in the location where received, on the next business day in such location;
provided that notices to the Agent under Article II or Article VIII shall not be
effective until received.
SECTION 10.02. No Waivers. No failure or delay by the Agent or any Bank
in exercising any right, power or privilege hereunder or under any Note shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
<PAGE> 51
47
cumulative and not exclusive of any rights or remedies provided by law.
SECTION 10.03. Expenses; Indemnification. (a) The Borrower shall pay
(i) all out-of-pocket expenses of the Agent, including reasonable fees and
disbursements of special counsel for the Agent (subject to the limitations
previously agreed with such counsel, in the case of fees payable in connection
with the preparation of this Agreement), in connection with the preparation of
this Agreement, any waiver or consent hereunder or any amendment hereof or any
Default or alleged Default hereunder and (ii) if an Event of Default occurs, all
out-of-pocket expenses incurred by the Agent or any Bank, including fees and
disbursements of counsel, in connection with such Event of Default and
collection and other enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify each Bank and hold each Bank
harmless from and against any and all liabilities, claims, losses, damages,
costs and expenses of any kind, including, without limitation, the reasonable
fees and disbursements of counsel, which may be incurred by any Bank (or by the
Agent in connection with its actions as Agent hereunder) in connection with any
investigative, administrative or judicial proceeding (whether or not such Bank
shall be designated a party thereto) relating to or arising out of (i) any
actual or proposed use of proceeds of Loans hereunder to acquire equity
securities of any other Person or (ii) any transaction which violates the change
in control provisions set forth in Section 6.01(i); provided that no Bank shall
have the right to be indemnified hereunder for its own gross negligence or
willful misconduct as determined by a court of competent jurisdiction.
SECTION 10.04. Amendments and Waivers. Any provision of this Agreement
or the Notes may be amended or waived if, but only if, such amendment or waiver
is in writing and is signed by the Borrower, the Guarantor and the Required
Banks (and, if the rights or duties of the Agent are affected thereby, by the
Agent); provided that no such amendment or waiver shall, unless signed by all
the Banks, (i) increase or decrease the Commitment of any Bank or subject any
Bank to any additional obligation, (ii) reduce or forgive the principal of or
rate of interest on any Loan or any fees hereunder, (iii) postpone the date
fixed for any payment of principal of or interest on any Loan or any fees
hereunder or for any reduction or termination of any Commitment, (iv) release
the Guarantor generally from, or limit or reduce, its liability under Article IX
or (v) amend this Section or otherwise change the percentage of the Commitments
or of the aggregate unpaid principal amount of the Loans, or the number of
Banks, which shall be required for the Banks or any of them to take any action
under this Section or any other provision of this Agreement.
SECTION 10.05. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrower may not
assign, delegate, or otherwise transfer any of its rights or obligations under
this
<PAGE> 52
48
Agreement (other than as contemplated by Section 5.05) without the prior written
consent of all Banks.
(b) Except for (i) any assignment made with the Borrower's consent,
which consent shall be at the Borrower's sole discretion unless the Assignee is
an Affiliate of the transferor Bank, in which case, such consent shall not be
unreasonably withheld, (ii) any grant of participating interests permitted by
subsection (d) below and (iii) any designation of a different Applicable Lending
Office required by Section 8.02, Section 8.03 or Section 8.04, no Bank may at
any time assign or otherwise transfer any of its rights and obligations under
this Agreement or any Note. An assignment or other transfer which is not
permitted by this subsection (b) shall be given effect for purposes of this
Agreement only to the extent of a participating interest granted in accordance
with subsection (d) below.
(c) Subject to the requirements of subsection (b) above, any Bank may
assign to one or more banks or other institutions (each an "Assignee") all, or a
proportionate part of all, of its rights and obligations under this Agreement
and any Notes, and such Assignee shall assume such rights and obligations,
pursuant to an instrument executed by such Assignee and such transferor Bank,
with (and subject to) the subscribed consent of the Borrower and the Agent. Upon
execution and delivery of such an instrument and payment by such Assignee to
such transferor Bank of an amount equal to the purchase price agreed between
such transferor Bank and such Assignee, such Assignee shall be a Bank party to
this Agreement and shall have all the rights and obligations of a Bank with a
Commitment as set forth in such instrument of assumption, and the transferor
Bank shall be released from its obligations hereunder to a corresponding extent,
and no further consent or action by any party shall be required. In connection
with any such assignment, except an assignment made pursuant to Section 8.06,
the transferor Bank shall pay to the Agent an administrative fee for processing
such assignment in the amount of $2,000. Upon the consummation of any assignment
pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower
shall make appropriate arrangements so that, if required, a new Note is issued
to the Assignee. If the Assignee is not incorporated under the laws of the
United States of America or a state thereof, it shall, prior to the first date
on which interest or fees are payable hereunder for its account, deliver to the
Borrower and the Agent certification as to exemption from deduction or
withholding of any United States federal income taxes in accordance with Section
8.04.
(d) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in any or all of its
Loans. In the event of any such grant by a Bank of a participating interest to a
Participant, whether or not upon notice to the Borrower and the Agent, such Bank
shall remain responsible for the performance of its obligations hereunder, and
the Borrower and the Agent shall continue to deal solely and directly with such
Bank in connection with such Bank's rights and obligations under this Agreement.
Any agreement pursuant to which any Bank may grant such a
<PAGE> 53
49
participating interest shall provide that such Bank shall retain the sole right
and responsibility to enforce the obligations of the Borrower hereunder
including, without limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement; provided that such participation
agreement may provide that such Bank will not agree to any modification,
amendment or waiver of this Agreement described in clause (ii), (iii) or (iv) of
Section 10.04 without the consent of the Participant. The Borrower agrees that
each Participant shall, to the extent provided in its participation agreement,
be entitled to the benefits of Article VIII with respect to its participating
interest.
(e) No Participant or other transferee of any Bank's rights shall be
entitled to receive any greater payment under Section 8.03 or 8.04 than such
Bank would have been entitled to receive with respect to the rights transferred,
unless such transfer is made with the Borrower's prior written consent or by
reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to
designate a different Applicable Lending Office under certain circumstances.
(f) Any Bank may at any time assign all or any portion of its rights
under this Agreement to a Federal Reserve Bank. No such assignment shall release
the transferor Bank from its obligations hereunder.
SECTION 10.06. New York Law. This Agreement shall be construed in
accordance with and governed by the law of the State of New York.
SECTION 10.07. Counterparts; Integration. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement constitutes the entire agreement and understanding among the
parties hereto and supersedes any and all prior agreements and understandings,
oral or written, relating to the subject matter hereof.
SECTION 10.08. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE
GUARANTOR, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT
TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
<PAGE> 54
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
AETNA SERVICES, INC.
by
/s/ Alan J. Weber
-------------------------------------------
Name: Alan J. Weber
Title: Vice Chairman for Strategy and
Finance and Chief Financial Officer
Aetna Services, Inc.
151 Farmington Avenue, RE6A
Hartford, Connecticut 06156
Attention: Vice President, Finance,
Telecopier: (860) 273-1314
Telex: 99 241
With a copy to:
Aetna Inc.
151 Farmington Avenue, RC4A
Hartford, Connecticut 06156
Attention: General Counsel
Telecopier: (860) 273-8340
Telex: 99 241
<PAGE> 55
AETNA INC.,
by
/s/ Alan J. Weber
-------------------------------------------
Name: Alan J. Weber
Title: Vice Chairman for Strategy and Finance
and Chief Financial Officer
Aetna Inc.
151 Farmington Avenue, RE6A
Hartford, Connecticut 06156
Attention: Vice President, Finance,
Telecopier: (860) 273-1314
Telex: 99 241
With a copy to:
Aetna Inc.
151 Farmington Avenue, RC4A
Hartford, Connecticut 06156
Attention: General Counsel
Telecopier: (860) 273-8340
Telex: 99 241
<PAGE> 56
Commitment
$37,500,000.00 MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
individually and as Administrative Agent,
by
/s/ Maria H. Dell'Aquila
-------------------------------------------
Title: Vice President
Domestic Lending Office
Morgan Guaranty Trust Company
of New York
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
P.O. Box 6070
Newark, DE 19713-2107
Attention: Kevin M. McCann
Associate
Telecopier: (302) 992-1852/1872
Telex: 177425 MBDEL UT
Euro-Dollar Lending Office
Morgan Guaranty Trust Company
of New York
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
P.O. Box 6070
Newark, DE 19713-2107
Attention: Kevin M. McCann
Associate
Telecopier: (302) 992-1852/1872
Telex: 177425 MBDEL UT
Money Market Lending Office
Morgan Guaranty Trust Company
of New York
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
P.O. Box 6070
Newark, DE 19713-2107
Attention: Kevin M. McCann
Associate
Telecopier: (302) 992-1852/1872
Telex: 177425 MBDEL UT
<PAGE> 57
Commitment
$37,500,000.00 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS
BRANCHES,
by
/s/ John S. McGill
-------------------------------------------
Title: Vice President
by
/s/ Clinton M. Johnson
-------------------------------------------
Title: Director
Domestic Lending Office
Deutsche Bank AG, New York
Branch
31 West 52nd Street
New York, New York 10019
Attention: Cheryl Mandelbaum
Telecopier: (212) 449-7880
Telex: 429 166/DEUT BK NY
Euro-Dollar Lending Office
Deutsche Bank AG, Cayman
Islands Branch
31 West 52nd Street
c/o Deutsche Bank AG, New York
Branch,
New York, New York 10019
Attention: Cheryl Mandelbaum
Telecopier: (212) 474-8108
Telex: 429 166/DEUT BK NY
Money Market Lending Office
Deutsche Bank AG, New York
Branch
31 West 52nd Street
New York, New York 10019
Attention: Cheryl Mandelbaum
Telecopier: (212) 474-8108
Telex: 429 166/DEUT BK NY
<PAGE> 58
Commitment
$37,500,000.00 THE CHASE MANHATTAN BANK
by
/s/ Heather Lindstrom
-------------------------------------------
Title: Vice President
Domestic Lending Office
The Chase Manhattan Bank
270 Park Avenue; 20th Floor
New York, NY 10017
Attention: Heather Lindstrom
Telecopier: (212) 270-0670
Telex: N/A
Euro-Dollar Lending Office
The Chase Manhattan Bank
270 Park Avenue; 20th Floor
New York, NY 10017
Attention: Heather Lindstrom
Telecopier: (212)270-0670
Telex: N/A
Money Market Lending Office
The Chase Manhattan Bank
270 Park Avenue; 6th Floor
New York, NY 10017
Attention: Frank Angelico
Telecopier: (212) 834-6160
Telex: N/A
<PAGE> 59
Commitment
$37,500,000.00 CITIBANK, N.A.,
by
/s/ Stephen P. Zwick
-------------------------------------------
Title: Vice President
Domestic Lending Office
Citibank N.A.
399 Park Avenue
12th Floor - Zone 8
New York, New York 10043
Attention:
Telecopier: (212) 935-4285
Telex: N/A
Euro-Dollar Lending Office
Citibank N.A.
399 Park Avenue
12th Floor - Zone 8
New York, New York 10043
Attention:
Telecopier: (212) 935-4285
Telex: N/A
Money Market Lending Office
Citibank N.A.
399 Park Avenue
12th Floor - Zone 8
New York, New York 10043
Attention:
Telecopier: (212) 935-4285
Telex: N/A
<PAGE> 60
Commitment
$20,000,000.00 NATIONSBANK, N.A.
by
/s/ Philip Durand
-------------------------------------------
Title: Vice President
Domestic Lending Office
NationsBank, N.A.
901 Main Street; 14th Floor
Dallas, TX 75202
Attention: Geri Evans
Telecopier: (214) 290-8377
Telex: N/A
Euro-Dollar Lending Office
NationsBank, N.A.
901 Main Street; 14th Floor
Dallas, TX 75202
Attention: Geri Evans
Telecopier: (214) 290-8377
Telex: N/A
Money Market Lending Office
NationsBank, N.A.
901 Main Street; 14th Floor
Dallas, TX 75202
Attention: Geri Evans
Telecopier: (214) 290-8377
Telex: N/A
<PAGE> 61
Commitment
$25,000,000.00 CREDIT SUISSE FIRST BOSTON,
by
/s/ Andrea E. Shkane
-------------------------------------------
Title: Vice President
by
/s/ Robert N. Finney
-------------------------------------------
Title: Managing Director
Domestic Lending Office
Credit Suisse
Eleven Madison Avenue
New York, New York 10010-3629
Attention: Andrea E. Shkane
Telecopier: (212) 325-8320
Telex: N/A
Euro-Dollar Lending Office
Credit Suisse
Eleven Madison Avenue
New York, New York 10010-3629
Attention: Andrea E. Shkane
Telecopier: (212) 325-8320
Telex: N/A
Money Market Lending Office
Credit Suisse
Eleven Madison Avenue
New York, New York 10010-3629
Attention: Andrea E. Shkane
Telecopier: (212) 325-8320
Telex: N/A
<PAGE> 62
Commitment
$35,000,000.00 THE FIRST NATIONAL BANK OF CHICAGO
by
/s/ Timothy J. Stambaugh
-------------------------------------------
Title: Senior Vice President
Domestic Lending Office
The First National Bank of Chicago
One First National Plaza
Chicago, IL 60670
Attention: Lillian Arroyo
Telecopier: (312) 732-3246
Telex: N/A
Euro-Dollar Lending Office
The First National Bank of Chicago
One First National Plaza
Chicago, IL 60670
Attention: Lillian Arroyo
Telecopier: (312) 732-3246
Telex: N/A
Money Market Lending Office
The First National Bank of Chicago
One First National Plaza
Chicago, IL 60670
Attention: Lillian Arroyo
Telecopier: (312) 732-3264
Telex: N/A
<PAGE> 63
Commitment
$25,000,000.00 FIRST UNION NATIONAL BANK
by
/s/ Gail M. Golightly
-------------------------------------------
Title:
by
Senior Vice President
-------------------------------------------
Title:
Domestic Lending Office
First Union National Bank
1339 Chestnut St., 3rd Floor
Philadelphia, PA 19107
Telecopier: (215) 786-4114
Telex: N/A
Euro-Dollar Lending Office
First Union National Bank
1339 Chestnut St., 3rd Floor
Philadelphia, PA 19107
Telecopier: (215) 786-4114
Telex: N/A
Money Market Lending Office
First Union National Bank
1339 Chestnut Street., 3rd Floor
Philadelphia, PA 19107
Telecopier: (215) 786-4114
Telex: N/A
<PAGE> 64
Commitment
$35,000,000.00 FLEET NATIONAL BANK
by
-------------------------------------------
/s/ Leonard Lapolice
Title: Vice President
Domestic Lending Office
Fleet National Bank
777 Main Street
Hartford, CT 06115
Attention:
Telecopier: (806) 986-1264
Telex: N/A
Euro-Dollar Lending Office
Fleet National Bank
777 Main Street
Hartford, CT 06115
Attention:
Telecopier: (806) 986-1264
Telex: N/A
Money Market Lending Office
Fleet National Bank
777 Main Street
Hartford, CT 06115
Attention:
Telecopier: (806) 986-1264
Telex: N/A
<PAGE> 65
Commitment
$35,000,000.00 MELLON BANK, N.A.
by
/s/ Colleen McCullum
-------------------------------------------
Title: Assistant Vice President
Domestic Lending Office
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Attention:
Telecopier: N/A
Telex: N/A
Euro-Dollar Lending Office
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Attention:
Telecopier: N/A
Telex: N/A
Money Market Lending Office
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Attention:
Telecopier: N/A
Telex: N/A
<PAGE> 66
Commitment
$15,000,000.00 THE DAI-ICHI KANGYO BANK, LTD.,
NEW YORK BRANCH
by
/s/ Masaaki Ishikura
-------------------------------------------
Title: Vice President
Domestic Lending Office
The Dai-Ichi Kangyo Bank, Ltd.,
New York Branch
One World Trade Center
Suite 4911
New York, NY 10048
Attention: Masaaki Ishikura
Telecopier: (212) 524-0579;
Telex: 232988 DKB UR; 422581 DKB UI;
824613 DKB NYUF
Euro-Dollar Lending Office
The Dai-Ichi Kangyo Bank, Ltd.,
New York Branch
One World Trade Center
Suite 4911
New York, NY 10048
Attention: Wendy Yuen
Telecopier: (212) 524-0597;
Telex: 232988 DKB UR; 422581 DKB UI;
824613 DKB NYUF
Money Market Lending Office
The Dai-Ichi Kangyo Bank, Ltd.,
New York Branch
One World Trade Center
Suite 4911
New York, NY 10048
Attention: Wendy Yuen
Telecopier: (212) 524-0597;
Telex: 232988 DKB UR; 422581 DKB UI;
824613 DKB NYUF
<PAGE> 67
Commitment
$20,000,000.00 NORTHERN TRUST COMPANY
by
/s/ Marcia R. Saper
-------------------------------------------
Title: Vice President
Domestic Lending Office
Norther Trust Company
50 South LaSalle
Chicago, IL 60675
Attention: Evelyn Jackson/
Commercial Banking
Telecopier: (312) 444-3432
Telex: N/A
Euro-Dollar Lending Office
Northern Trust Company
50 South LaSalle
Chicago, IL 60675
Attention: Evelyn Jackson/
Commercial Banking
Telecopier: (312) 444-3432
Telex: N/A
Money Market Lending Office
Northern Trust Company
50 South LaSalle
Chicago, IL 60675
Attention: Evelyn Jackson/
Commercial Banking
Telecopier: (312) 557-8337
Telex: N/A
<PAGE> 68
Commitment
$35,000,000.00 CREDIT LYONNAIS NEW YORK BRANCH
by
/s/ Sebastian Rocco
-------------------------------------------
Title: Senior Vice President
Domestic Lending Office
Credit Lyonnais New York
1301 Avenue of the Americas
New York, NY 10019
Attention: William McIlwain
Financial Institutions
Telecopier: (212) 261-3401
Telex: 62410 YLRC
Euro-Dollar Lending Office
Credit Lyonnais New York
1301 Avenue of the Americas
New York, NY 10019
Attention: William McIlwain
Financial Institutions
Telecopier: (212) 261-3401
Telex: 62410 YLRC
Money Market Lending Office
Credit Lyonnais New York
1301 Avenue of the Americas
New York, NY 10019
Attention: William McIlwain
Financial Institutions
Telecopier: (212) 261-3401
Telex: 62410 YLRC
<PAGE> 69
Commitment
$35,000,000.00 THE BANK OF NEW YORK
by
/s/ Robert V. Masi
-------------------------------------------
Title: Vice President
Domestic Lending Office
The Bank of New York
101 Barclay Street
New York, NY 10288
ABA #: 021000018
Commercial Loan Servicing Department
GLA #: 111556
Attention:
Telecopier:
Telex:
Euro-Dollar Lending Office
The Bank of New York
101 Barclay Street
New York, NY 10288
ABA #: 021000018
Commercial Loan Servicing Department
GLA #: 111556
Attention:
Telecopier:
Telex:
Money Market Lending Office
The Bank of New York
One Wall Street
New York, NY
ABA #: 021000018
Special Financial Products Department
GLA #: 111556
Attention:
Telecopier:
Telex:
<PAGE> 70
Commitment
$20,000,000.00 STATE STREET BANK AND TRUST COMPANY
by
/s/ Edward M. Anderson
-------------------------------------------
Title: Vice President
Domestic Lending Office
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Attention: Paula St. Amand
Telecopier: (781) 302-8015
Telex: 200139/ STATE UR
Euro-Dollar Lending Office
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Attention: Paula St. Amand
Telecopier: (781) 302-8015
Telex: 200139/ STATE UR
Money Market Lending Office
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Attention: Paula St. Amand
Telecopier: (781) 302-8015
Telex: 200139/ STATE UR
<PAGE> 71
Commitment
$25,000,000.00 WACHOVIA BANK, N.A.
by
/s/ Kathleen H. Reedy
-------------------------------------------
Title: Senior Vice President
Domestic Lending Office
Wachovia Bank, N.A.
191 Peachtree Street NE
Atlanta, GA 30303
Telecopier: (404) 332-6898
Telex: 4611015/ WACH INT GA
Euro-Dollar Lending Office
Wachovia Bank, N.A.
191 Peachtree Street NE
Atlanta, GA 30303
Telecopier: (404) 332-6898
Telex: 4611015/ WACH INT GA
Money Market Lending Office
Wachovia Bank, N.A.
191 Peachtree Street NE
Atlanta, GA 30303
Telecopier: (404) 332-6898
Telex: 4611015/ WACH INT GA
<PAGE> 72
Commitment
$25,000,000.00 BARCLAYS BANK PLC,
by
/s/ Eric Yaeger
-------------------------------------------
Title: Director
Domestic Lending Office
Barclays Bank PLC
222 Broadway
New York, NY 10038
Attention: Karen M. Wagner
Telecopier: (212) 412-5610
Telex: N/A
Euro-Dollar Lending Office
Barclays Bank PLC
222 Broadway
New York, NY 10038
Attention: Karen M. Wagner
Telecopier: (212) 412-5610
Telex: N/A
Money Market Lending Office
Barclays Bank PLC
222 Broadway
New York, NY 10038
Attention: Noreen Dowers
Telecopier: (212) 412-5306
Telex: N/A
<PAGE> 73
EXHIBIT A
NOTE
New York, New York
[ ], 1999
For value received, Aetna Services, Inc., a Connecticut corporation
(the "Borrower"), promises to pay to the order of _______________ (the "Bank"),
for the account of its Applicable Lending Office, the aggregate unpaid principal
amount of the Bank's Loans then outstanding under the Credit Agreement referred
to below on the date or dates provided for in the Credit Agreement. The Borrower
promises to pay interest on the unpaid principal amount of each such Loan on the
dates and at the rate or rates provided for in the Credit Agreement. All such
payments of principal and interest shall be made in lawful money of the United
States in Federal or other immediately available funds at the office of Morgan
Guaranty Trust Company of New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective maturities thereof and all
repayments of the principal thereof shall be recorded by the Bank and, prior to
any transfer hereof, appropriate notations to evidence the foregoing information
with respect to each such Loan then outstanding shall be endorsed by the Bank on
the schedule attached hereto, or on a continuation of such schedule attached to
and made a part hereof; provided that the failure of the Bank to make any such
recordation or endorsement shall not affect the obligations of the Borrower
hereunder or under the Credit Agreement.
This note is one of the Notes referred to in the Credit Agreement dated
as of [ ], 1999 among the Borrower, Aetna Inc., the banks listed on the
signature pages thereof and Morgan Guaranty Trust Company of New York, as
Administrative Agent (as the same may be amended from time to time, the "Credit
Agreement"). Terms defined in the Credit Agreement are used herein with the same
meanings.
<PAGE> 74
2
Reference is made to the Credit Agreement for provisions for the prepayment
hereof and the acceleration of the maturity hereof.
AETNA SERVICES, INC.
by
--------------------------
Title:
<PAGE> 75
3
LOANS AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Amount of
Amount of Principal Maturity Notation
Date Loan Repaid Date Made By
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 76
EXHIBIT B
Form of Money Market Quote Request
[Date]
To: Morgan Guaranty Trust Company of New York (the "Agent")
From: Aetna Services, Inc. (the "Borrower")
Re: Credit Agreement (the
"Credit Agreement") dated as of [ ], 1999 among the Borrower,
Aetna Inc., the Banks listed on the signature pages thereof
and the Agent
We hereby give notice pursuant to Section 2.03 of the Credit Agreement
that we request Money Market Quotes for the following proposed Money Market
Borrowing(s):
Date of Borrowing: ________________________
Principal Amount */ Interest Period **/
$
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
*/ Amount must be $25,000,000 or a larger multiple of $1,000,000.
**/ Not less than one month (LIBOR Auction) or not less than 7 days
(Absolute Rate Auction), subject to the provisions of the definition of Interest
Period.
<PAGE> 77
EXHIBIT C
Terms used herein have the meanings assigned to them in the Credit
Agreement.
AETNA SERVICES, INC.,
by
-------------------------------
Title:
<PAGE> 78
EXHIBIT C
Form of Invitation for Money Market Quotes
To: [Name of Bank]
Re: Invitation for Money Market Quotes
to Aetna Services, Inc. (the
"Borrower")
Pursuant to Section 2.03 of the Credit Agreement dated as of [ ], 1999
among the Borrower, Aetna Inc., the Banks parties thereto and the undersigned,
as Administrative Agent, we are pleased on behalf of the Borrower to invite you
to submit Money Market Quotes to the Borrower for the following proposed Money
Market Borrowing(s):
Date of Borrowing: ________________________________
Principal Amount Interest Period
$
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Please respond to this invitation by no later than 9:30 A.M. (New York
City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By ________________________
Authorized Officer
<PAGE> 79
EXHIBIT D
Form of Money Market Quote
Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Attention:
Re: Money Market Quote to
Aetna Services, Inc. (the "Borrower")
In response to your invitation on behalf of the Borrower dated
____________, _____, we hereby make the following Money Market Quote on the
following terms:
1. Quoting Bank: _________________________________
2. Person to contact at Quoting Bank: _________________________________
3. Date of Borrowing: _________________________________*/
*/ As specified in the related Invitation.
<PAGE> 80
2
4. We hereby offer to make Money Market Loan(s) in the following
principal amounts, for the following Interest Periods and at the following
rates:
Principal Interest Money Market [Absolute
Amount **/ Period ***/ [Margin ****/ ] Rate *****/ ]
$
$
[Provided, that the aggregate principal amount of Money Market Loans for which
the above offers may be accepted shall not exceed $______________.] **/
We understand and agree that the offer(s) set forth above, subject to
the satisfaction of the applicable conditions set forth in the Credit Agreement
dated as of [ ], 1999 among the Borrower, Aetna Inc., the Banks listed on
**/ Principal amount bid for each Interest Period may not exceed
principal amount requested. Specify aggregate limitation if the sum of the
individual offers exceeds the amount the Bank is willing to lend. Bids must be
made for $25,000,000 or a larger multiple of $1,000,000.
***/ Not less than one month (LIBOR Auction) or not less than 7 days
(Absolute Rate Auction), specified in the related Invitation. No more than five
bids are permitted for each Interest Period.
****/ Margin over or under the London Interbank Offered Rate determined
for the applicable Interest Period. Specify percentage (rounded to the nearest
1/10,000 of 1%) and specify whether "PLUS" or "MINUS".
*****/ Specify rate of interest per annum (rounded to the nearest
1/10,000 of 1%).
<PAGE> 81
3
the signature pages thereof and yourselves, as Administrative Agent, irrevocably
obligates us to make the Money Market Loan(s) for which any offer(s) are
accepted, in whole or in part.
Very truly yours,
[NAME OF BANK]
By ______________________________________
Authorized Officer
<PAGE> 1
Exhibit 12
AETNA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31, December 31,
------------------ -----------------------------------------------------------
(Millions) 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pretax income from
continuing operations $ 300.3 $ 1,408.3 $ 1,511.2 $ 338.7 $ 726.2 $ 627.5
Add back fixed charges 95.3 358.5 321.9 245.1 187.0 170.8
Minority interest 5.5 10.7 14.7 16.4 16.1 11.4
- ------------------------------------------------------------------------------------------------------------------------
Income as adjusted $ 401.1 $ 1,777.5 $ 1,847.8 $ 600.2 $ 929.3 $ 809.7
========================================================================================================================
Fixed charges:
Interest on indebtedness (1) $ 64.6 $ 250.9 $ 235.8 $ 168.3 $ 115.9 $ 98.6
Portion of rents representative
of interest factor 30.7 107.6 86.1 76.8 71.1 72.2
- ------------------------------------------------------------------------------------------------------------------------
Total fixed charges $ 95.3 $ 358.5 $ 321.9 $ 245.1 $ 187.0 $ 170.8
========================================================================================================================
Preferred stock dividend
requirements 23.1 92.2 92.4 41.1 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total combined fixed charges
and preferred stock dividend
requirements $ 118.4 $ 450.7 $ 414.3 $ 286.2 $ 187.0 $ 170.8
========================================================================================================================
Ratio of earnings to fixed
charges 4.21 4.96 5.74 2.45 4.97 4.74
========================================================================================================================
Ratio of earnings to combined
fixed charges and preferred
stock dividends 3.39 3.94 4.46 2.10 4.97 4.74
========================================================================================================================
</TABLE>
(1) Includes the dividends paid to preferred shareholders of a subsidiary. (See
Note 15 of Notes to Consolidated Financial Statements in the Company's 1998
Annual Report.)
Page 1
<PAGE> 2
Exhibit 12 (Continued)
AETNA SERVICES, INC. (1)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31, December 31,
------------------ ------------------------------------------
(Millions) 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pretax income from continuing operations $187.9 $ 1,162.7 $ 1,505.2 $ 335.0
Add back fixed charges 94.3 354.3 318.1 243.8
Minority interest 4.9 10.8 15.7 16.4
--------------------------------------------------------------------------------------------------------------------
Income as adjusted $287.1 $ 1,527.8 $ 1,839.0 $ 595.2
====================================================================================================================
Fixed charges:
Interest on indebtedness (2) $64.6 $ 250.9 $ 234.0 $ 168.3
Portion of rents representative
of interest factor 29.7 103.4 84.1 75.5
--------------------------------------------------------------------------------------------------------------------
Total fixed charges $94.3 $ 354.3 $ 318.1 $ 243.8
====================================================================================================================
Preferred stock dividend requirements -- -- -- --
--------------------------------------------------------------------------------------------------------------------
Total combined fixed charges and preferred
stock dividend requirements $94.3 $ 354.3 $ 318.1 $ 243.8
====================================================================================================================
Ratio of earnings to fixed charges 3.04 4.31 5.78 2.44
====================================================================================================================
Ratio of earnings to combined fixed charges
and preferred stock dividends 3.04 4.31 5.78 2.44
====================================================================================================================
</TABLE>
(1) Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities
of Aetna Services, Inc. (See Note 14 of Notes to Financial Statements in
the Company's 1998 Annual Report.)
(2) Includes the dividends paid to preferred shareholders of a subsidiary.(See
Note 15 of Notes to Consolidated Financial Statements in the Company's 1998
Annual Report.)
Page 2
<PAGE> 1
Exhibit 15
Letter Re: Unaudited Interim Financial Information
Aetna Inc.
Hartford, Connecticut
Ladies and Gentlemen:
Re: Registration Statements No. 333-07169, 333-08427, 333-08429, 333-08431,
333-52321, 333-68881, 333-52321-01, 333-52321-02, 333-52321-03, 333-52321-04,
and 333-52321-05.
With respect to the subject Registration Statements filed by Aetna Inc. or its
Subsidiaries, we acknowledge our awareness of the use therein of our report
dated April 27, 1999 related to our review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
/s/ KPMG LLP
Hartford, Connecticut
April 27, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the three months ended March
31, 1999 for Aetna Inc. and is qualified in its entirety by reference to such
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 31,118
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 814
<MORTGAGE> 3,517
<REAL-ESTATE> 317
<TOTAL-INVEST> 38,344
<CASH> 2,008
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,837
<TOTAL-ASSETS> 106,187
<POLICY-LOSSES> 18,572
<UNEARNED-PREMIUMS> 228
<POLICY-OTHER> 4,008
<POLICY-HOLDER-FUNDS> 17,240
<NOTES-PAYABLE> 2,526
862
0
<COMMON> 3,268
<OTHER-SE> 7,173
<TOTAL-LIABILITY-AND-EQUITY> 106,187
4,381
<INVESTMENT-INCOME> 741
<INVESTMENT-GAINS> 17
<OTHER-INCOME> 557
<BENEFITS> 4,135
<UNDERWRITING-AMORTIZATION> 50
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 300
<INCOME-TAX> 121
<INCOME-CONTINUING> 179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.16
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
