SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Under Rule 14a-12
Aetna Inc.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share, of Aetna Inc.
(2) Aggregate number of securities to which transaction applies:
141,150,635 shares (represents shares outstanding as of
July 31, 2000)*
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
$35.58 per share (represents item (4) divided by item (2))*
(4) Proposed maximum aggregate value of transaction:
$5,022,000,000.00 (represents estimated maximum amount to be
paid to shareholders)
(5) Total fee paid:
$1,004,400.00
---------
* Provided for illustrative purposes only. Fee based on maximum aggregate
value of transaction as set forth in item (4).
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
[PRELIMINARY DRAFT DATED SEPTEMBER 1, 2000, SUBJECT TO COMPLETION]
[Aetna Logo]
[To be placed on Chairman's letterhead]
AETNA INC.
151 Farmington Avenue
Hartford, Connecticut 06156
TRANSACTION PROPOSED - YOUR VOTE IS VERY IMPORTANT
To Our Shareholders:
The Board of Directors of Aetna Inc. has approved an agreement and plan of
restructuring and merger and related agreements under which Aetna will spin off
its domestic health care businesses to its shareholders and sell its financial
services and international businesses to ING Groep N.V. The total value to be
paid by ING is $7.7 billion, consisting of the assumption of approximately
$2.678 billion of Aetna debt and the payment of approximately $5.022 billion in
cash to Aetna shareholders.
We believe the transaction represents an important step toward our stated
goal of delivering value to our shareholders, while also taking into account
the concerns of our customers, employees and other constituencies. In the
transaction, Aetna shareholders will receive what we believe is an attractive
cash payment for Aetna's financial services and international businesses and
will continue to own Aetna's domestic health care businesses.
The transaction will occur in two, effectively simultaneous, steps:
o Aetna will spin off its domestic health care businesses to its
shareholders, and
o Aetna's financial services and international businesses will be sold
to ING. The sale will be structured as a merger of Aetna (which will
then own only Aetna's financial services and international
businesses) with a subsidiary of ING.
The spin-off and the merger will each occur only if the other occurs
effectively at the same time. After completion of the transaction, the Aetna
Financial Services and Aetna International businesses will be owned 100% by
ING.
When the transaction is completed, you will receive the following for each
share of Aetna common stock you own:
o one share of common stock of the new health care company (which we
refer to as New Aetna), and
o approximately $35 in cash.
The exact amount of cash you will receive for each share of Aetna common
stock you own will depend on a number of factors, including the number of
shares of Aetna common stock that are outstanding at the closing, the amount of
unpaid interest that has accrued through the closing on the Aetna debt to be
assumed by ING and certain other matters.
We have scheduled a special meeting of our shareholders to vote on the
merger agreement and the transactions contemplated by the merger agreement and
to vote on the New Aetna Stock Incentive Plan
<PAGE>
and the New Aetna Annual Incentive Plan (which we refer to collectively as the
Benefit Plans), each of which is a benefit plan to be adopted by New Aetna in
connection with the spin-off.
The date, time and place of the special meeting are:
[____], 2000
[___] a.m. Eastern Time
Aetna Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
Your Board of Directors has determined that the merger agreement and the
transactions contemplated by the merger agreement are fair to you and in your
best interests. The Board of Directors of Aetna recommends that you vote "FOR"
approval of the merger agreement and the transactions contemplated by the
merger agreement and "FOR" approval of the adoption by New Aetna of the New
Aetna Stock Incentive Plan and the New Aetna Annual Incentive Plan.
The completion of the merger is not conditioned on approval of the Benefit
Plans, but the adoption of the Benefit Plans is contingent on completion of the
merger.
YOUR VOTE IS VERY IMPORTANT. The proposed transaction cannot be completed
unless Aetna's shareholders approve the merger agreement and the transactions
contemplated by the merger agreement. The merger agreement and the transactions
contemplated by the merger agreement require approval by holders of 66 2/3% of
the outstanding shares of Aetna common stock. If you fail to return your proxy
card and do not vote in person at the special meeting or by telephone or over
the internet, the effect will be a vote against the merger agreement and the
transactions contemplated by the merger agreement.
This booklet provides you with detailed information about the proposed
transaction and related matters and about the Benefit Plans. We have also
included as part of this booklet a preliminary Information Statement that
describes New Aetna and the spin-off. We will send shareholders a final
Information Statement at the time of the spin-off. We urge you to read these
documents carefully.
Thank you for your support.
Sincerely,
[SIGNATURE TO COME]
William H. Donaldson
Chairman, President and Chief Executive
Officer
Important: your proxy card is enclosed in the address window of the envelope
containing this material. If you plan to attend the special meeting in person
please follow the procedures set forth on page IV-3 to obtain an admission
ticket. Voting your proxy by telephone or through the internet is available for
this special meeting. See page I-1 or IV-2 for more information.
Proxy Statement dated [____], 2000, and first mailed to shareholders on or
about [____], 2000.
2
<PAGE>
[Aetna Logo]
AETNA INC.
151 Farmington Avenue
Hartford, Connecticut 06156
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF AETNA INC.
Time:
[____] a.m., Eastern Time
Date:
[____], 2000
Place:
Aetna Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
Purpose:
o To vote on a proposal to approve an Agreement and Plan of
Restructuring and Merger dated as of July 19, 2000 among Aetna Inc.,
ING America Insurance Holdings, Inc., ANB Acquisition Corp. and, for
limited purposes only, ING Groep N.V. and the transactions
contemplated by the merger agreement. The merger agreement and
related agreements provide for:
o the spin off of Aetna's domestic health care businesses to its
shareholders, and
o the sale of Aetna's financial services and international
businesses to ING. The sale is structured as a merger of Aetna
(which will then own only Aetna's financial services and
international businesses) with a subsidiary of ING.
The spin-off and the merger will occur in two, effectively
simultaneous, steps and will each occur only if the other occurs
effectively at the same time.
o To vote on a proposal to approve the adoption by New Aetna of a stock
incentive plan.
o To vote on a proposal to approve the adoption by New Aetna of an
annual incentive plan.
o To conduct other business if properly raised.
Only shareholders of record on [_____], 2000 may vote at the special
meeting. The special meeting is open to all shareholders or their
authorized representatives. In order to attend the special meeting, you
must present an admission ticket. You may request a ticket in advance by
following the instructions below. Shareholders who do not have admission
tickets will be admitted only following proof of share ownership. If you
hold shares of Aetna common stock in your own name, please signify your
intention to attend the special meeting when you vote by telephone or over
the internet or check the appropriate box on your proxy card. If you hold
your shares through the Aetna Incentive Savings Plan, please indicate your
intention to attend the special meeting when you access the telephone
voting system or check the appropriate box on your voting instruction
card. If you hold your shares through a broker, bank or other holder of
record and plan to attend, you must send a written request to attend along
with proof that you own the shares (such as a copy of your brokerage or
bank account statement) to our corporate secretary at the above address.
<PAGE>
Your vote is very important. Please complete, sign, date and return your
proxy card in the enclosed envelope promptly, or vote your shares by
calling the toll-free telephone number or using the internet as described
in the instructions included with your proxy card.
Sincerely,
[SIGNATURE TO COME]
William J. Casazza
Vice President and Corporate Secretary
Hartford, Connecticut
[____], 2000
2
<PAGE>
TABLE OF CONTENTS
CHAPTER ONE - SUMMARY AND TRANSACTION OVERVIEW
SUMMARY TERM SHEET..........................................................I-1
SUMMARY.....................................................................I-6
The Companies..........................................................I-6
Transaction Overview...................................................I-6
The Transaction........................................................I-8
HISTORICAL AND PRO FORMA FINANCIAL DATA....................................I-10
CERTAIN RISK FACTORS.......................................................I-11
TRANSACTION OVERVIEW.......................................................I-12
General...............................................................I-12
Background of the Transaction.........................................I-12
Aetna's Reasons for the Transaction; Recommendation
of the Aetna Board of Directors.....................................I-17
OPINIONS OF FINANCIAL ADVISORS.............................................I-19
INTERESTS OF OFFICERS AND DIRECTORS IN THE TRANSACTION.....................I-28
CHAPTER TWO - SPIN-OFF AND MERGER
THE MERGER AND DISTRIBUTION
AGREEMENTS............................................................II-1
General...............................................................II-1
Restructuring of Aetna's Businesses...................................II-1
Spin-Off..............................................................II-2
Conversion of Aetna Stock Options.....................................II-2
The Merger............................................................II-2
Completion of the Merger..............................................II-3
Merger Consideration..................................................II-3
Representation and Warranties.........................................II-4
Covenants.............................................................II-4
Conditions to the Spin-Off............................................II-8
Conditions to the Merger..............................................II-8
Termination..........................................................II-10
Termination Fees and Expenses........................................II-11
Amendments and Waivers ..............................................II-11
OTHER MATTERS.............................................................II-12
Regulatory Matters...................................................II-12
Shareholder Rights Plan..............................................II-13
Material United States Federal Income Tax Consequences
to Aetna Shareholders of the Spin-Off and the Merger...............II-13
Litigation...........................................................II-14
Dissenters' Rights...................................................II-15
RELATIONSHIP BETWEEN AETNA AND NEW AETNA AFTER THE SPIN-OFF AND MERGER....II-18
CHAPTER THREE - CERTAIN NEW AETNA BENEFIT PLANS
NEW AETNA STOCK INCENTIVE PLAN........................................III-1
NEW AETNA ANNUAL INCENTIVE PLAN.......................................III-5
CHAPTER FOUR - INFORMATION ABOUT THE SPECIAL MEETING AND VOTING
Matters Relating to the Special Meeting...............................IV-1
Vote Necessary to Approve Proposals...................................IV-1
Proxies...............................................................IV-2
Other Business; Adjournments..........................................IV-3
Security Ownership of Management......................................IV-4
Security Ownership of Certain Beneficial
Owners...........................................................IV-6
CHAPTER FIVE - ADDITIONAL INFORMATION FOR SHAREHOLDERS
FUTURE SHAREHOLDER PROPOSALS................................................V-1
WHERE YOU CAN FIND MORE INFORMATION.........................................V-1
ANNEXES
Annex A........ New Aetna Information Statement
Annex B........ Agreement and Plan of Restructuring and Merger
Annex C........ Form of Distribution Agreement
Annex D........ Opinion of Donaldson, Lufkin & Jenrette
Securities Corporation
Annex E........ Opinion of Goldman, Sachs & Co.
Annex F........ Sections 33-855 through 33-872 of the
Connecticut Business Corporation Act
(Dissenters' Rights)
Annex G........ New Aetna Stock Incentive Plan
Annex H........ New Aetna Annual Incentive Plan
<PAGE>
CHAPTER ONE
SUMMARY AND TRANSACTION OVERVIEW
SUMMARY TERM SHEET
Q: When is the shareholder meeting?
A: [_______], 2000 at [____] a.m. Eastern Time.
Q: What vote of shareholders is required to approve the merger agreement and
the transactions contemplated by the merger agreement?
A: The merger agreement and the transactions contemplated by the merger
agreement require approval by holders of 66 2/3% of the outstanding shares
of Aetna's common stock. Failure to vote will have the effect of a vote
against the merger agreement and the transactions contemplated by the
merger agreement.
Q. What vote of shareholders is required to approve the adoption by New Aetna
of each of the Benefit Plans?
A. The adoption by New Aetna of each Benefit Plan will be approved if the
votes cast in favor of such proposal exceed the votes cast against such
proposal, so long as a quorum exists.
The completion of the merger is not conditioned on approval of the Benefit
Plans, but the adoption of the Benefit Plans is contingent on completion
of the merger.
Q: What should shareholders do now?
A: After carefully reading the information provided in this booklet, you
should complete, sign, date and mail your proxy card in the enclosed
return envelope or vote by telephone or over the internet as soon as
possible so that your shares may be represented at the special meeting. In
order to assure that your shares are represented, please give your proxy
by following the instructions on your proxy card even if you currently
plan to attend the special meeting in person. The Board of Directors of
Aetna recommends that you vote "FOR" approval of the merger agreement and
the transactions contemplated by the merger agreement and "FOR" approval
of the adoption by New Aetna of each of the Benefit Plans.
Q: How do I vote by telephone or over the internet?
A: Telephone and internet voting are available as follows:
o by telephone, call toll-free on a touchtone telephone, [_______] in
the United States or [_______] outside the United States; or
o by internet, visit the website: http://www.[_________], which will be
available until 12:00 midnight, Eastern Standard Time, on [_______],
2000.
When you vote by telephone or over the internet, simply follow the
instructions provided. You will need to provide your personal
identification number from your proxy card in order to vote by either of
these methods. If your shares are held in the name of a bank or broker,
follow the voting instructions you receive on your proxy card. Telephone
and internet voting is offered to shareholders owning shares through most
banks and brokers.
Q: What do I do if I want to change my vote?
A: Just send in a later-dated, signed proxy card to our Corporate Secretary
at 151 Farmington Avenue, Hartford, Connecticut 06156 or vote again by
telephone or over the internet before the meeting. Or, you can attend the
special meeting in person and vote. You may also revoke your proxy by
sending a notice of revocation to our Corporate Secretary. If you have
instructed a broker to vote your shares, you must follow instructions from
your broker to change your instructions.
Q: If my shares are held in "street name" by my broker, will my broker vote
my shares for me?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be permitted to vote them on
the proposal with respect to the merger. You should therefore be sure to
provide your broker with instructions on how to vote your shares. If you
do not give voting instructions to your broker, you will, in effect, be
voting against the merger unless you appear in person at the
I-1
<PAGE>
meeting and vote in favor of the proposal.
Q: If I am a participant in the Aetna Incentive Savings Plan how will my
shares be voted?
A: If you are a participant in the Aetna Incentive Savings Plan and you
receive this booklet in your capacity as a participant in the plan, you
will receive a voting instruction card in lieu of a proxy card. The voting
instruction card directs the trustee of the plan on how to vote the
shares. Shares held in the plan may be voted by using a toll-free
telephone number or by marking, signing and dating the voting instruction
card and mailing it in the postage-paid envelope provided. Shares held in
the Aetna Incentive Savings Plan for which no directions are received are
voted by the trustee in the same percentage as the shares for which
directions are received.
Q: Should I send in my share certificates now?
A: No. A letter of transmittal for use in surrendering your share
certificates and obtaining payment for the shares will be sent to you
promptly after the sale is completed. Since New Aetna common stock will be
issued as uncertificated shares registered in book-entry form through the
direct registration system, no certificates representing your shares of
New Aetna common stock will be mailed to you. Your book-entry shares will
be held with the New Aetna transfer agent and registrar, First Chicago
Trust Company of New York, who serves as the official record keeper for
New Aetna common stock. Under the direct registration system, instead of
receiving stock certificates, you will receive an account statement
reflecting your ownership interest in shares of New Aetna common stock. If
at any time you want to receive a physical certificate evidencing your
shares of New Aetna common stock, you may do so by contacting the New
Aetna transfer agent and registrar.
Q: Do I have dissenters' rights?
A: If you so choose, you are entitled to exercise dissenters' rights in
connection with the merger. See "Chapter Two-Other Matters-Dissenters'
Rights".
Q: When will the transaction be completed?
A: We are working toward completing the transaction as quickly as possible.
In addition to shareholder approval, we must also obtain a number of
regulatory approvals and must satisfy various other conditions. We expect
to complete the transaction late in the fourth quarter of 2000.
Q. What information is being provided about the proposals?
A. This booklet describes the sale of Aetna's financial services and
international businesses to ING and describes the proposals to approve the
adoption by New Aetna of the Benefit Plans. This booklet also includes as
Annex A a preliminary information statement, called the "New Aetna
Information Statement," that describes New Aetna and the spin-off. You
should read both documents, including all other annexes to this booklet,
carefully before voting.
Q: Who do I call if I have questions about the proposals?
A: Georgeson Shareholder Communications Inc. at [ ].
I-2
<PAGE>
The following diagrams illustrate the proposed transaction in general terms and
are not comprehensive. For a more complete description of the proposed
transaction, see "Chapter One-Transaction Overview" and "Chapter Two".
CURRENT STRUCTURE
Existing Aetna
shareholders
|
|
|
Aetna Inc.
|
|
|
Health care, financial services
and international businesses
I-3
<PAGE>
SPIN-OFF OF NEW AETNA
(TO OCCUR EFFECTIVELY SIMULTANEOUSLY WITH THE SALE
OF THE FINANCIAL SERVICES AND INTERNATIONAL BUSINESSES TO ING)
Aetna
shareholders<------
| ^
| |
| |
Aetna Inc. | To be distributed to
ING America<------------------ (to be renamed | Aetna shareholders
To be sold to "Lion Connecticut | in the spin-off
ING in the Holdings Inc.") |
merger | |
-------------------- |
| | |
| | |
| | |
| | |
| Aetna U.S. Healthcare
| Inc. (to be renamed
| "Aetna Inc.")
| |
| |
Aetna's financial Aetna's domestic health care
services and businesses (including Aetna's
international large case pension and group
businesses insurance businesses)
I-4
<PAGE>
WHAT AETNA SHAREHOLDERS WILL HAVE UPON COMPLETION
OF THE SPIN-OFF AND MERGER
Existing Aetna
shareholders
|
|
|
|
|
|
----------------------------------------------
| |
| |
| |
Approximately $35 per share Aetna Inc.
in cash from the merger (formerly Aetna U.S.
Healthcare Inc.)
|
|
|
|
|
|
Aetna's domestic health care
businesses (including Aetna's
large case pension and group
insurance businesses)
I-5
<PAGE>
Chapter One - Summary and Transaction Overview
SUMMARY
This summary highlights selected information from this booklet and may not
contain all of the information that is important to you. Included in this
booklet as Annex A is a preliminary information statement, called the "New
Aetna Information Statement," that describes New Aetna and the spin-off. We
will send shareholders a final New Aetna Information Statement at the time of
the spin-off. To understand the proposed transaction fully and for a more
complete description of the legal terms of the transaction, you should
carefully read this booklet, including the New Aetna Information Statement, as
well as the other documents to which we have referred you. Additional
information about Aetna and the transactions described in this booklet has been
filed with the Securities and Exchange Commission and is available upon request
without charge; see "Chapter Five-Where You Can Find More Information" on page
V-1.
The Companies
Aetna Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
(860) 273-0123
Aetna Inc. and its subsidiaries constitute one of the nation's largest health
care benefits companies, based on membership, and one of the nation's largest
insurance and financial services organizations. Aetna Inc. has three principal
lines of business: health care, financial services and international
operations. We refer to Aetna Inc. as Aetna.
ING Groep N.V.
Strawinskylaan 2631
1077 ZZ Amsterdam
P.O. Box 810,
1000 AV Amsterdam
The Netherlands
31-20-541-54-11
ING Groep N.V. operates in more than 60 countries worldwide, and is one of the
world's largest integrated financial service providers, offering a
comprehensive range of life and non-life insurance, commercial and investment
banking, asset management and related products and services. We refer to ING
Groep N.V. as ING.
ING America Insurance Holdings, Inc.
5780 Powers Ferry Road, NW
Atlanta, Georgia 30327
(770) 980-3300
ING America Insurance Holdings, Inc. is the primary holding company for ING's
insurance interests in the United States and is a wholly owned subsidiary of
ING. We refer to ING America Insurance Holdings, Inc. as ING America.
ANB Acquisition Corp.
5780 Powers Ferry Road, NW
Atlanta, Georgia 30327
(770) 980-3300
ANB Acquisition Corp. is a corporation formed by ING America to effect the
merger. ANB Acquisition Corp. does not have any significant assets or
liabilities and will not engage in any activities other than those related to
completing the merger. We refer to ANB Acquisition Corp. as Merger Sub.
Transaction Overview
The merger agreement that we entered into with ING (which we refer to as the
Merger Agreement) and the form of distribution agreement that together provide
for the merger with ING and the spin-off are included in this booklet as
Annexes B and C, respectively. We encourage you to read these documents
carefully as they are the legal documents that govern the merger and the
spin-off.
Here is some additional detail about the proposed transaction.
Generally (See page I-12)
The transaction will occur in two, effectively simultaneous, steps:
o Aetna will spin off its domestic health care businesses to its
shareholders (which we refer to as the Spin-Off), and
o Aetna's financial services and international businesses will be sold to
ING (which we refer to as the Merger).
The total value to be paid by ING is $7.7 billion, consisting of the assumption
of approximately $2.678 billion of Aetna debt and the payment of approximately
$5.022 billion in cash to Aetna
I-6
<PAGE>
Chapter One - Summary and Transaction Overview
shareholders. Generally speaking, ING will be entitled to any earnings, and
will be responsible for any losses, of Aetna's financial services and
international businesses from April 1, 2000.
The sale to ING will be structured as a merger of Aetna (which will then own
only Aetna's financial services and international businesses) with a subsidiary
of ING. After completion of the transaction, Aetna's financial services and
international businesses will be owned 100% by ING.
The Spin-Off and the Merger will each occur only if the other occurs
effectively at the same time.
After completion of the transaction, New Aetna will be renamed "Aetna Inc." and
Aetna will be renamed "Lion Connecticut Holdings Inc."
New Aetna After Completion of the Transaction (See the New Aetna Information
Statement)
After completion of the transaction, New Aetna will be the nation's largest
health care benefits company. It will also own and operate Aetna's large case
pension and group insurance businesses.
The distribution agreement provides that, after the Spin-Off, generally
speaking, ING will be responsible for all liabilities to the extent relating to
the financial services and international businesses and New Aetna will be
responsible for all other liabilities of Aetna, including all liabilities
arising out of its health care businesses.
Aetna shareholders should review carefully the New Aetna Information Statement
that is included in this booklet as Annex A and describes New Aetna and the
Spin-Off in greater detail.
Reasons for the Transaction (See page I-17)
Your Board of Directors believes that the transaction is fair to and in the
best interests of Aetna shareholders. The Board believes that the transaction
represents an important step in our stated goal of delivering value to our
shareholders, while also taking into account the concerns of our customers,
employees and other constituencies. In the transaction, Aetna shareholders will
receive what we believe is an attractive cash payment for Aetna's financial
services and international businesses and will continue to own Aetna's health
care businesses in the United States.
Recommendation to Aetna Shareholders
The Board of Directors of Aetna has determined that the merger agreement and
the transactions contemplated by the merger agreement are fair to you and in
your best interests and recommends that you vote "FOR" approval of the merger
agreement and the transactions contemplated by the merger agreement.
Opinions of Financial Advisors (See page I-19)
In deciding to approve the Merger Agreement and the transactions contemplated
by the Merger Agreement, the Board of Directors of Aetna considered opinions
from Donaldson, Lufkin & Jenrette Securities Corporation (which we refer to as
DLJ) and Goldman, Sachs & Co. (which we refer to as Goldman Sachs), its
financial advisors, as to the fairness of the consideration to be received in
the Merger by its shareholders from a financial point of view. These opinions
are included in this booklet as Annexes D and E, respectively. We encourage you
to read these opinions.
Aetna Shareholder Vote Required
Aetna shareholders will be asked to approve the Merger Agreement and the
transactions contemplated by the Merger Agreement. The favorable vote of 66 2/3%
of the outstanding shares of Aetna common stock is required to approve the
Merger Agreement and the transactions contemplated by the Merger Agreement.
Failure to vote will have the effect of a vote against the Merger Agreement and
the transactions contemplated by the Merger Agreement.
Interests of Officers and Directors in the Transaction (See page I-28)
When you consider the Board of Directors' recommendation that Aetna
shareholders vote in favor of the proposals, you should be aware that a number
of Aetna officers and directors may have interests in the transaction that are
different from, or in addition to, yours (see page I-28).
I-7
<PAGE>
Chapter One - Summary and Transaction Overview
The Transaction
What Aetna Shareholders Will Receive in the Transaction (See page II-3)
If the transaction is completed, Aetna shareholders will receive, for each
share of Aetna common stock that they own:
o one share of common stock of New Aetna, and
o approximately $35 in cash.
The exact amount of cash Aetna shareholders will receive in the Merger for each
share of Aetna common stock that they own will depend on a number of factors,
including the number of shares of Aetna common stock that are outstanding as of
the completion of the transaction, the amount of unpaid interest that has
accrued as of the closing on the Aetna debt to be assumed by ING and certain
other matters.
Conditions to the Transaction (See page II-8)
The transaction will be completed only if certain conditions, including the
following, are satisfied (or waived in certain cases):
o approval by Aetna shareholders;
o absence of legal restrictions that prevent the completion of the
transaction;
o receipt of all material governmental consents and approvals required to
complete the transaction;
o completion of the Spin-Off on the terms and subject to the conditions set
forth in the distribution agreement;
o accuracy as of the completion of the transaction of representations and
warranties made by the other party to the extent specified in the Merger
Agreement;
o performance in all material respects by the other party of the obligations
required to be performed at or prior to completion of the transaction; and
o receipt by Aetna and ING of an opinion from an independent solvency firm
as to the solvency of Aetna and New Aetna, after giving effect to the
Spin-Off.
In addition, ING America's obligation to complete the transaction is subject to
the following conditions:
o Aetna will have obtained all material consents and approvals (other than
governmental consents and approvals) required to complete the transaction,
to the extent specified in the Merger Agreement;
o receipt of approvals from fund clients of Aetna representing at least 85%
of the assets under management of all fund clients of Aetna;
o receipt of an opinion of Aetna's counsel addressing specified legal
matters; and
o receipt by New Aetna, at the time of the Merger, of an investment debt
rating of at least BBB from Standard & Poor's Corporation or Baa2 from
Moody's Investor Services, Inc. as to long- term senior unsecured debt.
In addition, Aetna's obligation to complete the transaction is subject to the
following conditions:
o ING will have obtained all material consents and approvals (other than
governmental consents and approvals) required to complete the transaction,
to the extent specified in the Merger Agreement; and
o execution of certain guarantees by ING relating to Aetna's long term debt
obligations.
Termination of the Merger Agreement (See page II-10)
Aetna and ING America may agree at any time prior to completion of the
transaction to terminate the Merger Agreement. In addition, either Aetna or ING
America may terminate the Merger Agreement if:
(1) the Merger has not been completed by August 31, 2001, which date will
be extended automatically by two months if certain governmental
consents have not been obtained or waived and are being pursued, and
all other conditions to completion of the transaction are satisfied
(or are capable of being satisfied);
(2) Aetna's shareholders do not approve the Merger Agreement and the
transactions contemplated by the Merger Agreement; or
(3) there is a legal prohibition on completing the transaction.
ING America may terminate the Merger Agreement if:
(4) Aetna's Board of Directors withdraws or adversely modifies its
adoption or recommendation of the Merger Agreement or approves an
acquisition proposal from a
third party;
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Chapter One - Summary and Transaction Overview
(5) Aetna materially breaches any of its representations, warranties,
covenants or agreements and the breach cannot be cured by Aetna and
would give rise to a failure of certain of ING America's closing
conditions to be satisfied; or
(6) Aetna securities are issued or delivered pursuant to Aetna's
shareholder rights plan.
Aetna may terminate the Merger Agreement if:
(7) ING America materially breaches any of its representations,
warranties, covenants or agreements and the breach cannot be cured by
ING America and would give rise to a failure of certain of Aetna's
closing conditions to be satisfied; or
(8) Aetna's Board of Directors determines in good faith on the advice of
its financial advisors and outside counsel that another acquisition
proposal is a superior proposal (as compared to the Merger) and Aetna
enters into a written agreement concerning that superior proposal, so
long as Aetna has complied with the non-solicitation, notice,
negotiation and termination fee provisions of the Merger Agreement.
Termination Fees and Expenses (See page II-11)
Aetna must pay ING America a termination fee of $165 million and must reimburse
ING America up to $10 million for ING America's out-of-pocket documented
transaction-related expenses if:
o the Merger Agreement terminates as described in items (4) or (8)
above;
o the Merger Agreement terminates as described in item (2) above and a
bona fide acquisition proposal or an intention to make such a
proposal has been made public prior to the date of the shareholders'
meeting and, within 15 months of the termination, Aetna signs a
binding agreement for an acquisition proposal; or
o the Merger Agreement terminates as described in item (5) above as the
result of a deliberate breach by Aetna and a bona fide acquisition
proposal or an intention to make such a proposal has been made public
prior to the date of the termination and, within 15 months of the
termination, Aetna signs a binding agreement for an acquisition
proposal.
Aetna must pay ING America up to $10 million for ING's out-of-pocket documented
transaction-related expenses if the Merger Agreement terminates as described in
items (2) or (5) above and Aetna is not otherwise obligated to pay a
termination fee.
Regulatory Approvals (See page II-12)
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (which we refer
to as the HSR Act), the Merger may not be completed until Aetna and ING have
given certain information to the United States Federal Trade Commission and the
United States Department of Justice and a required waiting period has expired
or been terminated. Aetna and ING filed their respective notification reports
with the Federal Trade Commission and the Department of Justice on August 30,
2000. The applicable waiting period will expire on September 29, 2000 unless
earlier terminated or extended by a request for additional information or
documentary materials.
The completion of the Merger is subject to certain approvals of the insurance
departments of Connecticut and Florida. ING filed an application for approval
with the Connecticut insurance department on August 22, 2000 and anticipates
filing an application with the Florida insurance department shortly. Aetna and
ING must also provide "market share" related notices to the insurance
departments of certain other states in which they do business and applicable
waiting periods must expire in those states.
Aetna and ING conduct operations in a number of foreign countries where
regulatory filings or approvals may be required in connection with the
completion of the Merger.
Aetna operates a federal savings bank and a Connecticut chartered trust
company. Accordingly, the Office of Thrift Supervision and the Connecticut
Banking Department must each approve the Merger.
For information on additional required regulatory approvals, see "Chapter
Two-Other Matters-Regulatory Matters".
Material Federal Income Tax Consequences (See page II-13)
The receipt by an Aetna shareholder of cash and shares of New Aetna common
stock in exchange for shares of Aetna common stock will be a taxable
transaction for United States federal income tax purposes. An Aetna shareholder
generally will
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Chapter One - Summary and Transaction Overview
recognize gain or loss in an amount equal to the difference between (i) the sum
of the amount of cash and the fair market value, on the date of the Spin-Off
and the Merger, of the shares of New Aetna common stock received by the Aetna
shareholder and (ii) the Aetna shareholder's tax basis in the shares of Aetna
common stock surrendered. That gain or loss will be a capital gain or loss if
the shares of Aetna common stock are held as a capital asset by the Aetna
shareholder.
Dissenters' Rights (See page II-15)
Aetna shareholders will be entitled to dissenters' rights under Sections 33-855
to 33-872 of the Connecticut Business Corporation Act in connection with the
Merger. Dissenters' rights permit a shareholder to elect to have a fair value
assigned to its shares (after giving effect to the Spin-Off) and paid to the
shareholder in lieu of the consideration to be received by shareholders
generally in the Merger. Sections 33-855 to 33-872 are reprinted in their
entirety as Annex F to this booklet.
Annex F should be reviewed carefully by anyone who wishes to exercise statutory
dissenters' rights or wishes to preserve the right to do so, because failure to
comply strictly with the procedures set forth in Sections 33-855 to 33-872 of
the Connecticut Business Corporation Act may result in the loss of dissenters'
rights.
Approval of Benefit Plans (See page III-1).
Aetna shareholders are also being asked to separately approve the adoption by
New Aetna of each Benefit Plan. The adoption by New Aetna of each Benefit Plan
will be approved if the votes cast in favor of such proposal exceed the votes
cast against such proposal, so long as a quorum exists. Your Board of Directors
recommends that you vote "FOR" approval of the adoption by New Aetna of each
Benefit Plan.
The completion of the Merger is not conditioned on approval of the Benefit
Plans, but the adoption of the Benefit Plans is contingent on completion of the
Merger.
HISTORICAL AND PRO FORMA FINANCIAL DATA
You should review the historical and pro forma financial information
regarding New Aetna included in the New Aetna Information Statement attached as
Annex A to this booklet as well as the historical financial information of
Aetna prior to the Spin-Off and Merger included in the documents incorporated
by reference into this booklet.
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Chapter One - Summary and Transaction Overview
CERTAIN RISK FACTORS
In addition to the other information included in this booklet, you should
carefully consider the risk factors described under the heading "Risk Factors"
in the New Aetna Information Statement included in this booklet as Annex A in
determining whether to vote in favor of approval of the Merger Agreement and
the transactions contemplated by the Merger Agreement. These risk factors
outline the principal risks inherent in owning New Aetna common stock.
We have made forward-looking statements in this booklet, including the New
Aetna Information Statement, that are based on our management's beliefs and
assumptions and on information currently available to our management.
Forward-looking statements include the information concerning our possible or
assumed future results of operations, business strategies, financing plans,
competitive position, potential growth opportunities, potential operating
performance improvements, benefits resulting from the Spin-Off and the Merger,
the effects of competition and the effects of future legislation or
regulations. Forward-looking statements include all statements that are not
historical facts and can be identified by the use of forward-looking
terminology such as the words "believe," "expect," "plan," "intend,"
"anticipate," "estimate," "predict," "potential," "continue," "may," "will,"
"should" or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. You should not put undue reliance on any forward-
looking statements. We do not have any intention or obligation to update
forward-looking statements after we distribute this booklet.
The risk factors discussed under the heading "Risk Factors" in the New
Aetna Information Statement could cause our results to differ materially from
those expressed in forward-looking statements. There may also be other risks
that we are unable to predict at this time.
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Chapter One - Summary and Transaction Overview
TRANSACTION OVERVIEW
General
Aetna is using this booklet to solicit proxies from Aetna shareholders for
use at the special meeting. At the special meeting, Aetna shareholders will be
asked to vote upon a proposal to approve and adopt the Merger Agreement and the
transactions contemplated by the Merger Agreement.
The Aetna Board of Directors has approved, and recommends that Aetna
shareholders vote "FOR" approval of, the Merger Agreement and the transactions
contemplated by the Merger Agreement. Approval of the Merger Agreement and the
transactions contemplated by the Merger Agreement requires the affirmative vote
of 66 2/3% of the outstanding shares of Aetna common stock entitled to vote on
the proposal. Failure to vote will have the effect of a vote against the Merger
Agreement and the transactions contemplated by the Merger Agreement.
As more fully described in Chapter Two of this booklet, the transaction
will occur in two, effectively simultaneous, steps:
o Aetna will spin off its domestic health care businesses to its
shareholders, and
o Aetna's financial services and international businesses will be sold
to ING.
The total value to be paid by ING for the financial services and
international businesses is $7.7 billion, consisting of the assumption of
approximately $2.678 billion of Aetna debt and the payment of approximately
$5.022 billion in cash to Aetna shareholders. Generally speaking, ING will be
entitled to any earnings, and will be responsible for any losses, of Aetna's
financial services and international businesses from April 1, 2000.
The sale will be structured as a merger of Aetna (which will then own only
Aetna's financial services and international businesses) with a subsidiary of
ING. The Spin-Off and the Merger will each occur only if the other occurs
effectively at the same time.
Following the completion of the transaction, Aetna shareholders will:
o initially own 100% of the outstanding common stock of New Aetna, and
o receive approximately $35 in cash for each share of Aetna common
stock that they own.
The exact amount of cash Aetna shareholders will receive in the Merger for
each share of Aetna common stock that they own will depend on a number of
factors, including the number of shares of Aetna common stock that are
outstanding as of the closing, the amount of unpaid interest that has accrued
as of the closing on the Aetna debt to be assumed by ING and certain other
matters. See "Chapter Two-The Merger and Distribution Agreements-Merger
Consideration" for a more detailed explanation of the method for calculating
the exact amount of cash Aetna shareholders will receive for each share of
Aetna common stock they own.
Chapter One of this booklet provides an overview of the transaction which
is summarized on the cover page of this booklet, including the background of
and reasons for the transaction and the interests of officers and directors in
the transaction. Chapter Two discusses the Spin-Off and the Merger.
Background of the Transaction
In the fourth quarter of 1999, in light of the performance of Aetna's
businesses, Aetna began a review of its businesses and corporate strategy and
engaged Goldman Sachs to assist it in this review. These matters were reviewed
with the Aetna Board of Directors on October 7 and December 3, 1999. At the
December 3 Board meeting, management and Goldman Sachs made a presentation to
the Board concerning Aetna's businesses. On January 10, 2000, Aetna announced
that it had decided to realign its operations internally into two main business
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Chapter One - Summary and Transaction Overview
units: global health and global wealth. Shortly thereafter, Aetna began the
process of effecting this realignment, and continued its strategic review of
its businesses.
Aetna's Board of Directors held a special meeting on February 21, 2000 to
discuss the status of its on-going strategic review. The Board received
presentations from management and Goldman Sachs as to various matters,
including an overview of several strategic alternatives. The Board instructed
management and Goldman Sachs to continue to refine their analysis and to
present their further findings to the Board at its next meeting.
On February 24, Aetna received a letter from ING and WellPoint Health
Networks Inc. (which we refer to as WellPoint), in which those companies
expressed a "desire to begin discussions" concerning a potential acquisition of
Aetna. The letter indicated that, subject to a due diligence review of Aetna
and other conditions, ING and WellPoint would propose a transaction in which
Aetna shareholders "would receive approximately $70 per share in value
comprised of $44 in cash and $26 in WellPoint common stock." WellPoint and ING
stated in their letter that they intended to keep their proposal confidential.
The Board held a regularly scheduled meeting on February 25. At that
meeting, the Board elected William H. Donaldson as Chairman, President and
Chief Executive Officer, following Richard L. Huber's resignation from those
positions. The Board then turned to the ING/WellPoint letter and Aetna's
continuing review of strategic alternatives. Davis Polk & Wardwell, counsel to
Aetna, and Fried, Frank, Harris, Shriver & Jacobson, special counsel to the
independent Directors, led a discussion of the Directors' legal duties. Goldman
Sachs summarized the terms of the letter and presented information with respect
to ING and WellPoint. Management and Goldman Sachs also presented their further
analysis of Aetna's strategic alternatives. Following questions and discussion,
the Board then determined to meet again on March 10 and 11 to consider these
matters in greater detail. Shortly after the meeting, Aetna retained Robert S.
Miller as a consultant and DLJ as a co-financial advisor. Thereafter, Aetna
retained KPMG LLP to assist it in a review of certain financial aspects of its
health business.
On March 1, in response to a report on CNBC, Aetna issued a press release
confirming the receipt of the ING/WellPoint letter. The press release indicated
that Aetna's Board of Directors would consider the letter in due course and
confirmed that Aetna's previously announced comprehensive review of its
strategy and operations was underway.
From February 25 through March 9, Aetna's management and financial and
legal advisors continued their review of Aetna's strategic alternatives,
including the ING/WellPoint letter.
A special meeting of the Board of Directors was held on March 10 and 11.
Representatives of Davis Polk & Wardwell and Fried, Frank, Harris, Shriver &
Jacobson began the meeting with a presentation of the Directors' legal duties.
Following a discussion of these matters, the Board then undertook a lengthy
discussion, in which Mr. Miller, members of Aetna management, DLJ, Goldman
Sachs, Davis Polk & Wardwell and Fried, Frank, Harris, Shriver & Jacobson
participated, of Aetna's businesses and strategic alternatives, including the
ING/WellPoint letter. Following extensive discussion, and considering, among
other things, the advice of Mr. Miller, DLJ, Goldman Sachs, Davis Polk &
Wardwell and Fried, Frank, Harris, Shriver & Jacobson, the Board unanimously
determined to reject the invitation from ING and WellPoint to begin discussions
concerning a possible sale of Aetna, to separate Aetna's global health care and
global financial services businesses into two independent publicly traded
companies and to take certain other actions.
On March 12, Aetna issued a press release announcing the Board's decisions
with respect to the ING/WellPoint letter and the separation of the global
health care and global financial services businesses. The press release also
announced that Aetna had decided to:
o sell international assets that did not fit with the strategies of the
newly independent health care and financial services businesses or
provide an adequate return on capital,
o finalize plans to capture strategic health care internet
opportunities that leverage Aetna's health care information
technology assets,
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Chapter One - Summary and Transaction Overview
o continue its comprehensive review of Aetna's health care business
model and strategies with the goal of building on Aetna's
industry-leading franchise and improving financial performance and
relationships with physicians, hospitals and patients,
o undertake additional efforts to strengthen the financial services
business, and
o accelerate Aetna's existing cost reduction program and additional
reductions resulting from the restructuring and strategic review.
In the press release, Mr. Donaldson stated:
"Our goal is to enhance shareholder value, and to improve the quality
of our services and relationships with all our constituencies. We
believe this can best be accomplished by separating into two
businesses. As a result, each company can achieve a stronger focus on
its customers, improve performance, more closely align management
with shareholders and independently evaluate strategic options. Each
of our two core businesses has great potential, and each will be
better able to realize that potential as a separate company."
With respect to the ING/WellPoint letter, Mr. Donaldson explained that:
"The financial consideration mentioned in the ING/WellPoint letter,
even if taken at face value, significantly understates the value of
our company and does not reflect the current value or future
potential of our core businesses. In addition, the number of
contingencies, substantial execution risk and other considerations
also contributed to the decision."
During the following weeks, Aetna, with the assistance of its financial
and legal advisors, moved forward with its plans to separate its global health
and global financial services businesses. During the period, Mr. Donaldson and
other members of senior management, as well as representatives of DLJ and
Goldman Sachs, received inquiries from, and spoke with, a number of companies
which expressed their interest in acquiring some or all of Aetna's businesses.
On March 22, 2000, Davis Polk & Wardwell retained Deloitte & Touche Consulting
Group LLC to assist in reviewing certain aspects of Aetna's health business as
they related to litigation risk management.
Aetna's Board held a regularly scheduled meeting on March 31. At that
meeting, among other things, Mr. Donaldson updated the Board on developments
with respect to the separation and the contacts received from interested
parties.
On April 5, Mr. Donaldson met with R. Glenn Hilliard, Chairman and Chief
Executive Officer of ING America. At that meeting, which was requested by ING,
Mr. Hilliard expressed ING's continuing interest in a transaction with Aetna.
Mr. Donaldson indicated that Aetna's Board had determined that the separation
of Aetna's domestic health care businesses and financial services and
international businesses was superior to the possible proposal outlined in the
ING/WellPoint letter, although Mr. Hilliard was free to contact Mr. Donaldson
at any time.
During the first and second weeks of April, representatives of ING and its
financial advisors had discussions with DLJ and Goldman Sachs in which ING
indicated that WellPoint and ING were prepared to increase their proposed
purchase price for Aetna. Through its financial advisors, Aetna reiterated its
conclusion that the ING/WellPoint letter significantly understated the value of
Aetna's businesses and, indeed, any sale of Aetna's health care businesses at
that time was likely to deprive shareholders of the considerable value that
Aetna's Board believed was inherent in that business.
Over the following several weeks, representatives of ING and its financial
advisors had a number of discussions with DLJ and Goldman Sachs with respect to
a possible acquisition by ING of Aetna's financial services and international
businesses. On April 18, 2000, ING's financial advisors met with Aetna's
financial advisors to outline a proposal for ING to acquire Aetna's financial
services and international businesses. At that meeting, Aetna's bankers
expressed disappointment with the proposal. On April 20, 2000, Messrs.
Donaldson and Miller met
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Chapter One - Summary and Transaction Overview
with Mr. Hilliard and Fred S. Hubbell, Executive Board member of ING, to
further clarify ING's proposal. Mr. Donaldson indicated that he believed the
proposal was deficient in several respects, including the price proposed,
assurances regarding the certainty of closing of any transaction and the
indemnities expected by ING, and that each company's financial advisors should
continue to discuss the proposal. On April 25, 2000, Messrs. Hilliard and
Hubbell met with Messrs. Donaldson and Miller and indicated that before they
could consider submitting a revised proposal with respect to such a
transaction, ING would require access to certain non-public information
concerning those businesses.
On April 26, ING and Aetna entered into a confidentiality agreement, and
Aetna provided ING with certain non-public information concerning Aetna's
financial services and international businesses.
On April 28, Aetna's Board held a regularly scheduled meeting. At that
meeting, the Board was briefed by management, DLJ and Goldman Sachs on the
status of discussions with ING and received a presentation from the investment
banking firms addressing the financial aspects of several possible scenarios
involving the global financial services business.
On May 8, Messrs. Donaldson and Miller met with Messrs. Hilliard and
Hubbell. Thereafter, ING made a proposal to Aetna to purchase Aetna's financial
services and international businesses. The proposal was subject to the
satisfactory completion of a due diligence review of those businesses and
numerous other matters. Over the following weeks, representatives of Aetna, ING
and their respective financial advisors engaged in discussions concerning the
terms of ING's proposal, but no resolution was reached with regard to certain
basic terms. The parties nevertheless determined that it was appropriate to
permit ING to undertake a due diligence review and to continue to explore the
feasibility of a mutually satisfactory transaction.
Aetna's Board held a special meeting on May 25. At that meeting, the Board
was briefed by management, DLJ and Goldman Sachs on the status of discussions
with ING and the proposed entry into a short "exclusive dealing" period with
ING. After discussion, the Board agreed with the proposed approach.
On May 25, ING and Aetna entered into a further confidentiality agreement
providing that Aetna would work exclusively with ING with respect to a
potential acquisition by ING of the financial services and international
businesses until June 19, except that Aetna was entitled to terminate the
exclusivity period at any time after June 12 if Aetna then determined in good
faith that it would not be possible to reach a definitive agreement with ING
concerning the proposed transaction on or prior to June 19. ING also informed
Aetna that ING had advised WellPoint that it did not intend to proceed with the
ING/WellPoint proposal and had terminated its arrangements with WellPoint
relating to Aetna.
From May 30 to June 12, representatives of ING and its legal and financial
advisors conducted a due diligence review of Aetna. During this period, Aetna's
legal and financial advisors also continued to discuss the possible terms of
the proposed transaction with ING's legal and financial advisors.
On May 31, in response to a report on CNBC, Aetna issued a press release
announcing that it had begun talks that could lead to the sale of all or part
of its financial services and international businesses to ING. In the press
release, Mr. Donaldson stated:
"We have previously said that we intended to separate Aetna's Global
Financial Services business into an independent publicly traded
company, and this still remains a viable option. However, we also
said that we would review and consider other legitimate opportunities
presented to us."
On June 14, ING's financial advisors presented a proposal to Aetna's
financial advisors with respect to a possible transaction. The proposal was
significantly less favorable to shareholders, both as to price and terms, than
had been anticipated by Aetna based on prior discussions with ING.
Following discussions with Aetna management, Mr. Miller and the Company's
legal and financial advisors, Mr. Donaldson determined that, in light of ING's
revised proposal, Aetna should terminate its exclusivity arrangements
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Chapter One - Summary and Transaction Overview
with ING and Aetna's financial advisors should commence a targeted auction
process to determine whether a sale of Aetna's financial services and
international businesses, in whole or in part, to one or more other parties was
an attractive alternative. On June 15, Aetna notified ING that its had elected
to terminate its exclusivity arrangement with ING.
On June 16, Aetna issued a press release indicating that, while it was
continuing its discussions with ING, it had begun to evaluate the possibility
of pursuing one or more transactions with other parties.
Over the following weeks, Aetna's management and financial advisors
prepared summary confidential offering materials and contacted a number of
potentially interested parties. Ultimately, twenty-five parties executed
confidentiality agreements and received confidential offering materials.
On June 27, while Aetna was in the process of conducting its targeted
auction, Messrs. Ewald Kist, Chairman of the Executive Board of ING, and
Hubbell met with Messrs. Donaldson and Miller and submitted a significantly
improved proposal to Aetna. Although several significant issues remained
regarding terms and conditions, Aetna and ING determined that it would be
useful to meet to discuss the revised ING proposal in detail. Accordingly,
representatives of Aetna, ING and their respective legal and financial advisors
met on June 30 and July 1 to attempt to clarify a number of significant open
issues.
On June 30, Aetna's Board held a regularly scheduled meeting. At that
meeting, Mr. Donaldson briefed the Board on the status of discussions with ING
and other parties. Representatives of DLJ and Goldman Sachs also summarized
recent discussions with ING and the status of the targeted auction process.
On July 5, ING presented Aetna with another proposal which resolved a
number (but not all) of the open issues regarding terms and conditions. On July
6, Messrs. Hubbell, Hilliard and Keith Gubbay, Executive Vice President -
Corporate Development of ING America, met with Messrs. Donaldson and Miller and
Alan J. Weber, Chief Financial Officer of Aetna, to review ING's new proposal,
intended to reflect the June 30 and July 1 discussions. At that meeting, Aetna
representatives requested that ING consider increasing the purchase price for
the transaction. On July 6 and 7, 2000, Aetna negotiated a revised proposed
purchase price. Following further discussions, Aetna and ING determined that a
mutually satisfactory transaction might be feasible and that the parties,
together with their advisors, should work expeditiously to attempt to negotiate
such a transaction.
From July 6 through July 19, Aetna, ING and their financial and legal
advisors engaged in negotiations in an attempt to resolve open items and to
finalize definitive documentation for the transaction.
On July 15, Aetna's Board of Directors held a special meeting to consider,
among other things, the status of Aetna's negotiations with ING. The meeting
began with representatives of Davis Polk & Wardwell and Fried, Frank, Harris,
Shriver & Jacobson outlining the Directors' legal duties in considering the
transaction and the status of the negotiation. Representatives of DLJ and
Goldman Sachs then reviewed the financial aspects of the proposed transaction
(identifying the effect of unresolved items, as appropriate) and indicated that
their respective firms would be prepared to issue fairness opinions if a
transaction were to be agreed substantially on the terms discussed with the
Board. There was an extensive discussion of various aspects of the transaction
among members of the Board, management and Aetna's financial and legal
advisors. As a number of matters were not yet resolved, however, no vote was
taken.
By late on July 19, all open issues had been resolved and Aetna's Board of
Directors held a special telephonic meeting on the evening of July 19. At the
meeting, which was attended by Aetna's financial and legal advisors,
representatives of Davis Polk & Wardwell summarized the Board's legal duties as
well as the final terms and conditions of the transaction. Following a
discussion of the transaction by Aetna's management, each of DLJ and Goldman
Sachs then delivered its oral fairness opinion to the Aetna Board of Directors,
subsequently confirmed in writing, that as of such date and based upon and
subject to the matters stated in their respective opinions, the consideration
to be received in the Merger was fair from a financial point of view to Aetna's
shareholders. The Aetna Board did not request, and did not receive, a fairness
opinion from its financial advisors with respect to the Spin-Off. By unanimous
vote of all Directors present, the Aetna Board approved the Merger Agreement
and the
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Chapter One - Summary and Transaction Overview
transactions contemplated by the Merger Agreement. Aetna issued a press release
announcing the transaction early on July 20.
Aetna's Reasons for the Transaction; Recommendation of the Aetna Board of
Directors
The Aetna Board of Directors determined that the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of Aetna and its shareholders and approved the Merger Agreement and
the transactions contemplated by the Merger Agreement. In reaching its
conclusion, the Board also considered the interests of Aetna's employees,
customers, creditors and suppliers, as well as community and societal
considerations. The Board is required by Connecticut law to consider these
constituencies. Accordingly, the Aetna Board of Directors recommends that
Aetna's shareholders vote "FOR" approval of the Merger Agreement and the
transactions contemplated by the Merger Agreement.
In the course of reaching its decision to approve the Merger Agreement and
the transactions contemplated by the Merger Agreement, the Aetna Board of
Directors consulted with Aetna's management, as well as its financial and legal
advisors, and considered the following factors:
(1) the fact that the transaction allows Aetna's shareholders to
receive a significant amount of cash for their interest in Aetna's
financial services and international businesses (and thereby effects a
return of capital to shareholders) while retaining their interest in
Aetna's domestic health care businesses;
(2) the relative competitive position of Aetna's financial services
and international businesses, on the one hand, and its health care
business, on the other hand, as well as the likely capital requirements
and anticipated financial returns from potential operational improvements
in each such business;
(3) the fact that the separation would allow Aetna to focus on
improving its health care operations as a means of increasing shareholder
value;
(4) the opinions of DLJ and Goldman Sachs that, as of July 19, 2000
and based upon and subject to the matters stated in their opinions, the
consideration to be received in the Merger was fair, from a financial
point of view, to Aetna's shareholders;
(5) the fact that, although the targeted auction process was not
completed, representatives of Aetna and its financial advisors had
informal discussions with a significant number of parties potentially
interested in pursuing a transaction;
(6) the Board's conclusion, after consultation with Aetna's tax
advisors, that the proposed transaction would result in minimal corporate
level tax and that any transaction involving the sale of pieces of the
financial services and international businesses (as opposed to a sale of
those businesses in a single transaction in the form adopted) would result
in considerable corporate level tax liabilities;
(7) the Merger Agreement did not include a financing condition, and
the Board's conclusion, based on consultation with its financial advisors
and information provided by ING, that ING could reasonably finance the
consideration to be paid to Aetna shareholders;
(8) the lack of any required approval by ING's shareholders to
complete the transaction;
(9) the Board's conclusion, after consultation with Aetna's legal and
regulatory advisors, that all regulatory approvals appeared to be
obtainable within a reasonable period of time;
(10) ING's commitments to Aetna's employees and the Hartford
community; and
(11) the terms and conditions of the Merger Agreement, including the
provisions that permit Aetna to furnish information to and participate in
discussions or negotiations with a third party that has made an
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Chapter One - Summary and Transaction Overview
unsolicited superior proposal (as described in "Chapter Two-The Merger and
Distribution Agreements-Covenants-Acquisition Proposals") and to terminate
the Merger Agreement in order to accept such a superior proposal upon
prior notice to, and discussions with, ING and payment of a $165 million
termination fee and the reimbursement of ING's out-of-pocket documented
transaction-related expenses up to $10 million.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger Agreement and the transactions contemplated by the
Merger Agreement and the complexity of these matters, the Aetna Board of
Directors did not find it useful to and did not attempt to quantify, rank or
otherwise assign relative weights to the factors considered in connection with
each recommendation. The Aetna Board of Directors relied on the experience and
expertise of DLJ and Goldman Sachs, its financial advisors, for quantitative
analysis of the financial terms of the transactions contemplated by the Merger
Agreement (see "Chapter One-Opinions of Financial Advisors"). In addition, the
Aetna Board of Directors did not undertake to make any specific determination
as to whether any particular factor was essential to the Aetna Board of
Director's ultimate determination, but rather the Aetna Board of Directors
conducted an overall analysis of the factors described above, including through
discussions with and questioning of Aetna's management and legal and financial
advisors. In considering the factors described above, individual members of the
Aetna Board of Directors may have given different weight to different factors.
I-18
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Chapter One - Summary and Transaction Overview
OPINIONS OF FINANCIAL ADVISORS
Aetna retained DLJ and Goldman Sachs (which we refer to collectively as
the Financial Advisors) pursuant to letter agreements dated March 9, 2000 and
March 11, 2000, respectively, to act jointly as financial advisors in
connection with exploring strategic alternatives for Aetna, including the sale
of all or a portion of Aetna. The Financial Advisors are nationally recognized
investment banking firms and were selected by Aetna based on the firms'
reputation and experience in investment banking in general and their recognized
expertise in the valuation of businesses as well as, in the case of Goldman
Sachs, its prior investment banking relationship with Aetna.
On July 15, 2000, at the meeting of Aetna's Board of Directors, the
Financial Advisors separately advised Aetna's Board of Directors that, subject
to final negotiation of the Merger Agreement, each was prepared to render its
opinion that, as of that date and based upon and subject to the matters set
forth in their opinion and such matters as the Financial Advisors considered
relevant, the consideration to be received for the financial services and
international businesses of Aetna (which we refer to in this section as the
Financial Services Business) pursuant to the Merger Agreement was fair, from a
financial point of view, to the holders of Aetna common stock. On July 19,
2000, at the meeting of Aetna's Board of Directors, the Financial Advisors
separately orally delivered their opinions (subsequently confirmed in writing
as of that date) that, as of that date and subject to the matters set forth in
their opinions and such matters as the Financial Advisors considered relevant,
the consideration to be received for the Financial Services Business pursuant
to the Merger Agreement was fair, from a financial point of view, to the
holders of Aetna common stock.
You should consider the following when reading the discussion of the
opinions of the Financial Advisors in this booklet:
o We urge you to read carefully both opinions of the Financial Advisors
which are included in this booklet as Annexes D and E;
o DLJ's and Goldman Sachs' advisory services and opinions were provided
to Aetna's Board of Directors for the information and assistance of
Aetna's Board of Directors in connection with its consideration of
the transactions contemplated by the Merger Agreement and were
directed only to the fairness, from a financial point of view, to the
holders of Aetna common stock of the consideration to be received for
the Financial Services Business;
o The Financial Advisors' opinions were necessarily based on economic,
market, financial and other conditions as they existed on, and on the
information made available to the Financial Advisors as of, the date
of their respective opinions. Although subsequent developments may
affect the Financial Advisors' opinions, the Financial Advisors do
not have any obligation to update, revise or reaffirm their
respective opinions;
o The Financial Advisors' opinions do not constitute a recommendation
as to how holders of Aetna common stock should vote with respect to
the Merger Agreement and the transactions contemplated by the Merger
Agreement;
o The Financial Advisors' opinions do not address the relative merits
of the proposed transaction and the other business strategies
considered by Aetna's Board of Directors nor do they address the
Aetna Board of Directors' decision to proceed with the proposed
transaction;
o The Financial Advisors expressed no opinion as to the fairness of the
separation of Aetna's domestic health care businesses from the
Financial Services Business which will occur through the Spin-Off;
o The Financial Advisors expressed no opinion as to the prices at which
shares of New Aetna common stock may trade at any time; and
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Chapter One - Summary and Transaction Overview
o The Financial Advisors expressed no opinion with regard to the
business of New Aetna, including as to its solvency or its ability to
distribute cash to Aetna or pay dividends to its shareholders.
Although the Financial Advisors evaluated the fairness, from a financial
point of view, to the holders of Aetna common stock of the consideration to be
received for the Financial Services Business pursuant to the Merger Agreement,
the consideration itself was determined by Aetna and ING through arm's length
negotiations. Aetna did not provide specific instructions to, or place any
limitation on, the Financial Advisors with respect to the procedures to be
followed or factors to be considered by the Financial Advisors in performing
their analyses or providing their respective opinions.
In connection with their opinions, the Financial Advisors reviewed, among
other things, the following:
o The Merger Agreement;
o The distribution agreement;
o Annual reports to shareholders and annual reports on Form 10-K of
Aetna for the five fiscal years ended December 31, 1995, 1996, 1997,
1998 and 1999, respectively;
o Certain interim reports to shareholders and quarterly reports on Form
10-Q of Aetna;
o Certain other communications from Aetna to its shareholders; and
o Certain internal financial analyses and forecasts for the Financial
Services Business prepared by Aetna's management;
The Financial Advisors also had discussions with members of the management
of Aetna regarding their assessment of the strategic rationale for the
transaction contemplated by the Merger Agreement and the past and current
business operations, financial condition and future prospects of the Financial
Services Business. In addition, the Financial Advisors:
o reviewed the reported price and trading activity for the shares of
Aetna common stock;
o compared certain financial information for the Financial Services
Business and stock market information for Aetna with similar
information for certain other companies, the securities of which are
publicly traded;
o reviewed the financial terms of certain recent business combinations
in the insurance and financial services industries specifically and
in other industries generally; and
o performed such other studies and analyses as the Financial Advisors
considered appropriate.
The Financial Advisors relied upon the accuracy and completeness of all of
the financial and other information discussed with or reviewed by them and
assumed such accuracy and completeness for purposes of rendering their
opinions. The Financial Advisors relied on Aetna management's estimate as to
the magnitude of the purchase price adjustments and the potential cost of
satisfying certain closing conditions under the Merger Agreement. With respect
to the financial projections furnished to the Financial Advisors by Aetna's
management for the Financial Services Business, the Financial Advisors relied
on representations that they were reasonably prepared on a basis reflecting the
best currently available estimates and judgments of Aetna. The Financial
Advisors were instructed by Aetna to assume that the Spin-Off will not result
in significant taxes being paid by Aetna, that the Merger will not be taxable
to Aetna and that sale by Aetna of certain parts of the Financial Services
Business would result in significant tax to Aetna if undertaken separately. In
addition, the Financial Advisors did not make independent evaluations or
appraisals of the assets and liabilities of the Financial Services Business and
the Financial Advisors were not furnished with any such evaluations or
appraisals other than certain actuarial appraisals of selected international
operations.
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Chapter One - Summary and Transaction Overview
The Financial Advisors, as part of their investment banking businesses,
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
placements and valuations for estate, corporate and other purposes. The
Financial Advisors are familiar with Aetna, having acted as Aetna's financial
advisors in connection with, and having participated in certain of the
negotiations leading to, the Merger Agreement and having provided certain
investment banking services to Aetna from time to time. In the case of Goldman
Sachs, such services include having acted as lead underwriter of a public
offering of debt securities of Aetna in November 1998 and financial advisor on
the divestiture of several subsidiaries and businesses of Aetna, including its
property-casualty business, its U.S. individual life insurance business and
Aetna Canada Holdings in April 1996, October 1998 and October 1999,
respectively. Goldman Sachs also has acted as financial advisor on the
acquisition of the NYLCare health business of New York Life in July 1998. In
addition, Goldman Sachs has provided certain investment banking services to ING
from time to time, including having acted as co-lead underwriter of a public
offering of subordinated debt securities of ING Bank NV in June 1996 and
co-lead underwriter of a public offering of common stock of ING in June 1997.
DLJ is currently working with ING Groep N.V. on its proposed acquisition of
ReliaStar Financial Corp. announced in May 2000. In addition, DLJ advised ING
Groep N.V. on its December 1999 divestiture of its Medical Risk Solutions
business. The Financial Advisors may provide investment banking services to ING
and its subsidiaries in the future. The Financial Advisors provide a full range
of financial advisory and securities services and, in the course of their
normal trading activities, may from time to time affect transactions and hold
securities, including derivative securities, of Aetna or ING for their own
account and for the accounts of customers.
The following is a summary of the material financial analyses used by the
Financial Advisors in reaching their opinions and does not purport to be a
complete description of the analyses performed by the Financial Advisors. The
following quantitative information, to the extent it is based on market data,
is based on market data as it existed at or about July 19, 2000 and is not
necessarily indicative of current market conditions. You should understand that
the order of analyses and the results derived from these analyses described
below do not represent relative importance or weight given to these analyses by
the Financial Advisors. The summary of the financial analyses includes
information presented in tabular format. In order to understand fully the
financial analyses used by the Financial Advisors, these tables must be read
together with the text of each summary. The tables alone do not describe
completely the financial analyses.
Whole Company Analysis
Consideration Received Analysis Based on Comparable Public Company
Analysis. The Financial Advisors compared the consideration to be received to
the range of enterprise values of the Financial Services Business implied by
the relative valuations of selected publicly traded comparable financial
services companies: American General Corporation, AXA Financial, Inc., Lincoln
National Corporation, Jefferson-Pilot Corporation, John Hancock Financial
Services, Inc., Metropolitan Life Insurance Company and Nationwide Financial
Services, Inc. The Financial Advisors selected these companies because they
engage in businesses the Financial Advisors deemed reasonably comparable to
those of Aetna Financial Services.
For each of these companies, the Financial Advisors analyzed the ratio of
the per share trading price of the company's common stock on July 18, 2000,
divided by selected financial data, including 2000 and 2001 estimated earnings
per share and March 31, 2000 book value per share. The 2000 and 2001 estimated
earnings per share were based on median earnings per share estimates issued by
IBES. IBES is a data service that monitors and publishes compilations of
earnings estimates by selected research analysts regarding companies of
interest to institutional investors. Based on this analysis, the Financial
Advisors developed the following ranges of valuation ratios of common stock
price per share to the selected financial data:
o 9.6x - 14.2x for 2000 estimated earnings per share,
o 8.9x - 12.9x for 2001 estimated earnings per share, and
o 1.1x - 2.5x for 3/31/00 book value per share.
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Chapter One - Summary and Transaction Overview
These valuation ratios were then applied to the Financial Services
Business' adjusted estimated earnings and book values to determine the range of
implied equity values of the Financial Services Business. The Financial
Services Business' adjusted estimated earnings and book value were based on
management's operating estimates adjusted to reflect (i) a 20% debt to total
capital leverage or $652 million of debt; (ii) interest expense at a rate of
7.15%; and (iii) an allocation of corporate overhead. These adjustments were
made to indicate an allocation of corporate overhead and interest expense to
the Financial Services Business. The resulting implied range of equity values
of the Financial Services Business were adjusted to include the assumed $652
million of debt to arrive at a range of average enterprise values of $4.2
billion to $6.6 billion. The consideration to be received pursuant to the
Merger Agreement is above the resulting implied range of enterprise values of
the Financial Services Business.
Consideration Received Analysis Based on 3-Year Historical Comparable
Public Company Analysis. The Financial Advisors compared the consideration to
be received to the range of enterprise values of the Financial Services
Business implied by the relative 3-year historical valuations of the selected
publicly traded comparable financial services companies (excluding John Hancock
Financial Services, Inc. and Metropolitan Life Insurance Company, because they
were not publicly traded for the full three year period).
For each of the comparable companies, the Financial Advisors analyzed the
ratio of the price of the company's common stock per share, over the past three
years, divided by selected 3-year financial data, including: (A) estimated
earnings per share for the latest twelve months, and next twelve months, and
(B) book value per share. The latest twelve months and next twelve months
estimated earnings per share were based on median earnings per share estimates
issued by IBES. Based on this analysis, the Financial Advisors developed the
following ranges of valuation ratios of common stock price per share to the
selected financial data:
o 9.9x - 23.6x for latest twelve months earnings per share,
o 8.4x - 18.5x for next twelve months earnings per share, and
o 1.6x - 2.5x for book value per share.
These valuation ratios were then applied to the Financial Services
Business' adjusted estimated earnings and March 31, 2000 book value to
determine the range of implied equity values of the Financial Services
Business. The resulting implied range of equity values of the Financial
Services Business were adjusted to include the assumed $652 million of debt to
arrive at a range of average enterprise values of $4.0 billion to $7.5 billion.
The consideration to be received pursuant to the Merger Agreement is above the
resulting implied range of enterprise values of the Financial Services
Business.
Consideration Received Analysis Based on Comparable Acquisitions of
Financial Services Companies. The Financial Advisors compared the consideration
to be received to the range of enterprise values of the Financial Services
Business implied by the transaction valuations generated from the following 12
selected acquisitions of financial services companies announced since April 1,
1995 that the Financial Advisors deem to be comparable:
Date Announced Acquiror/Target
-------------- ---------------
06/01/00 ING Groep N.V./ReliaStar
08/26/99 Metropolitan Life Insurance Company/GenAmerica Corporation
07/09/99 Allstate/American Heritage
02/18/99 Aegon N.V./Transamerica
11/23/98 UNUM Corp./Provident Companies
05/21/98 Lincoln National/Aetna's Life Insurance Business
09/12/97 American General Corp./Western National Corp.
07/28/97 Lincoln National/Connecticut General Life Ins. Co. (CIGNA)
07/08/97 ING Groep N.V./Equitable of Iowa Cos.
02/14/97 American General Corp./USLIFE Corporation
12/27/96 Aegon N.V./Providian
04/10/95 Zurich/Kemper
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Chapter One - Summary and Transaction Overview
For each of the 12 transactions, the Financial Advisors analyzed the ratio
of transaction price per share divided by selected financial data of the
acquired companies, including latest 12 months earnings per share, next twelve
months estimated earnings per share and current tangible book value per share.
Based on this analysis, the Financial Advisors developed the following
ranges of acquisition ratios:
o 10.1x - 33.1x for latest twelve months earnings,
o 9.4x - 28.7x for next twelve months estimated earnings and
o 1.0x - 3.0x for current tangible book value.
These acquisition ratios were then applied to the Financial Services
Business' adjusted estimated earnings and book values to determine the range of
implied equity values of the Financial Services Business. The resulting implied
range of equity values of the Financial Services Business were adjusted to
include the assumed $652 million of debt to arrive at a range of average
enterprise values of $3.5 billion to $9.5 billion. The consideration to be
received pursuant to the Merger Agreement is within the resulting implied range
of enterprise values of the Financial Services Business.
Component Analysis
In addition to analyzing the Financial Services Business as a whole, the
Financial Advisors analyzed the three principal components of the Financial
Services Business: Aetna Financial Services (which we refer to as AFS), Aetna
Asia, which operates in nine Asian countries, and Aetna Latin America, which
operates in six countries. The Financial Advisors then analyzed the pre-tax and
after-tax ranges of estimated values for the three principal components.
Aetna Financial Services
Analysis at Various Prices. In analyzing the value of AFS, as instructed
by management, the Financial Advisors assumed adjusted management estimates of
earnings and book values of AFS to reflect (i) a 20% debt to total capital
leverage; (ii) interest expense at a rate of 7.15%; and (iii) allocated
corporate overhead. The Financial Advisors, based on these assumptions and on a
review of the selected public companies and selected transactions referred to
in the whole company analysis, determined to review a range of $3.6 billion to
$4.6 billion for the total enterprise value (without indebtedness) of AFS. The
Financial Advisors computed the following multiples for the range of equity
values for AFS implied by this range of total enterprise value for AFS:
<TABLE>
Implied Multiple
------------------
Low High
------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Total Consideration................................................ $ 3,600 $ 4,600
Equity Consideration (assuming debt of 20% of total capital)....... 3,301 4,301
AFS Metric
Adjusted Earnings ----------
Latest Twelve Months (3/31/2000)................................. $ 199 16.6x 21.6x
Next Twelve Months (3/31/2000)................................... 234 14.1 18.4
2000E............................................................ 227 14.6 19.0
2001E............................................................ 262 12.6 16.4
3/31/2000 Book Value............................................... 1,198 2.8 3.6
3/31/2000 Tangible Book Value...................................... 1,151 2.9 3.7
</TABLE>
The Financial Advisors calculated the following premiums represented by
these implied multiples to current median trading multiples and 3-year
historical median public multiples of the selected companies, and to the median
mergers and acquisitions multiples in the 12 selected comparable acquisitions:
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Chapter One - Summary and Transaction Overview
<TABLE>
Premium to Median
----------------------
Low High
--------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Total Consideration..................................................... $ 3,600 $ 4,600
Equity Consideration (assuming debt of 20% of total capital)............ 3,301 4,301
Median Multiple
Premium to Current Median Comparable Trading Multiples ---------------
2000E Earnings Multiple............................................... 12.1x 20.4% 56.8%
2001E Earnings Multiple............................................... 10.8 16.6 51.9
Current Price/Book Multiple........................................... 1.8 49.2 94.5
Premium to 3-Year Historical Median Public Multiples
Latest Twelve Months Earnings Multiple................................ 18.9x (12.5) 14.1
Next Twelve Months Earnings Multiple.................................. 15.0 (5.8) 22.8
Current Price/Book Multiple........................................... 2.1 30.0 69.3
Premium to Median Comparable M&A Transaction Multiples
Latest Twelve Months Earnings Multiple................................ 17.9x (7.5) 20.5
Next Twelve Months Earnings Multiple.................................. 16.0 (11.9) 14.8
Price/Tangible Book Multiple.......................................... 1.9 50.9 96.6
</TABLE>
In the Financial Advisors' view, these analyses indicated that $3.6 billion
to $4.6 billion was an appropriate range of total enterprise value for AFS.
Aetna Asia
Actuarial Appraisals. The Financial Advisors reviewed actuarial appraisals
for Malaysia, Japan, Taiwan and Hong Kong. These appraisals consisted of
valuations of the in-force business plus the value of future sales and were
conducted by Mercer Consulting Group, Inc. (12/31/96), Milliman & Robertson,
Inc. (2/10/00) and Tillinghast, a Towers Perrin company (12/31/98, 1/31/99),
respectively. Additionally, the management of Aetna International, Inc.
conducted a preliminary update of the value of the in-force business at
year-end 1999. The external appraisals ranged from a low valuation of $1.756
billion to a high valuation of $2.835 billion for Aetna's interests in
Malaysia, Japan, Taiwan and Hong Kong. The internal update valued Aetna's
interests in the in-force business of Malaysia, Japan, Taiwan and Hong Kong at
$1.134 billion. These actuarial appraisals exclude operations as of December
31, 2000 in New Zealand, Philippines, China, Thailand and Indonesia with a
total book value of $62 million.
Common Stock Comparison. The Financial Advisors reviewed and compared
certain financial information and ratios and public market multiples relating
to the Asian life insurance companies Cathay Life Insurance (Taiwan), Shin Kong
Life Insurance (Taiwan), China Life Insurance (Taiwan), Taiwan Life Insurance
(Taiwan) and John Hancock Life Insurance (Malaysia).
For each of these Asian life insurance companies, the Financial Advisors
analyzed the ratio of the per share trading price of the company's common stock
on July 18, 2000, divided by selected financial data, including 2000 and 2001
estimated earnings per share and March 31, 2000 book value per share. The
Financial Advisors calculated the following valuation ratios for these
companies:
Price/Earnings
----------------------------------
2000E(x) 2001E(x) Price/Book
-------- -------- ----------
High................................. 34.2 19.0 5.6
Median............................... 18.7 13.6 3.3
Mean................................. 21.1 14.7 3.4
Low.................................. 14.4 11.4 1.8
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Chapter One - Summary and Transaction Overview
Comparable Acquisition Analysis. The Financial Advisors also reviewed and
compared this transaction with the following seven acquisitions in the Asian
life insurance industry, measuring transaction value, transaction value / net
income and transaction value/book value since September 1, 1994:
Date Announced Acquiror (Parent) Target (Parent)
-------------- ----------------- ---------------
11/29/99 AXA Nippon Dantai Life Insurance
10/11/99 National Mutual Holdings (AXA) AXA China Region Ltd.
10/02/99 DBS Group Holdings Insurance Corp. of Singapore
05/04/99 Citigroup Fubon Insurance Company
10/13/95 Investor Group Phuket Island Co.
12/29/94 Prudential PLC Thai Sethakit Life Assurance
09/06/94 AXA SA Wing On Life Assurance Co. Ltd.
The Financial Advisors calculated the following high, median, mean and low
values for the group of transactions:
Transaction
Transaction Value/ Transaction
Value Net Income Value/Book
----------- ----------- -----------
(US$mm)
High................................... $1,954.4 76.2x 2.5x
Median................................. 110.0 21.4 1.5
Mean................................... 502.6 35.2 1.7
Low.................................... 34.3 2.4 1.0
Analysis At Various Prices. The Financial Advisors reviewed the implied
multiples of Aetna Asia based on a total enterprise value for Aetna Asia
(without any indebtedness) in the range of $1.0 billion to $3.5 billion. The
following earnings and book value multiples were computed:
<TABLE>
Premium to Median
Multiple
------------------
Low High
------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Total Consideration................................................. $ 1,000 $ 3,500
Asia Metric
Earnings -----------
Last Twelve Months................................................ $ 63 15.9x 55.6x
2000E............................................................. 76 13.2 46.2
2001E............................................................. 112 8.9 31.3
3/31/2000 Book Value................................................ 915 1.1 3.8
Premium to Median Comparable Trading Multiples
2000E Earnings Multiple........................................... 18.7x (29.4)% 187.2%
2001E Earnings Multiple........................................... 13.6 (34.3)% 129.8
Premium to Median Comparable M&A Transaction Multiples
Latest Twelve Months Earnings Multiple............................ 21.4 (25.8) 159.6
Price/Book Multiple.............................................. 1.5 (27.1) 155.1
</TABLE>
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Chapter One - Summary and Transaction Overview
Aetna Latin America
Summary of Implied Ranges. The Financial Advisors reviewed implied
valuation ranges based on comparable transaction multiples in Mexico and South
America. In particular, the Financial Advisors observed low, median and high
mergers and acquisitions transaction multiples in the Mexican pension
management industry based on 12 selected transactions since January 1997, of
$243, $303, and $863 per active affiliate or contributor, respectively. In
addition, the Financial Advisors computed low, median and high mergers and
acquisitions transaction multiples in the Mexican bancassurance industry based
on eight selected transactions since November 1996 of $15.6, $21.4 and $40.5
million per $1 billion of deposits acquired, respectively. Also, the Financial
Advisors assumed a comparable multiple range for South American health
insurance transactions of 0.8x book value to 1.2x book value. In addition, the
Financial Advisors observed low, median and high mergers and acquisitions
transaction multiples in the South American pension management industry based
on 16 selected transactions in Chile since June 1994, of $376, $675, and $1,094
per contributor, respectively. Finally, the Financial Advisors computed low,
median and high mergers and acquisitions transaction multiples for life and
property and casualty insurance transactions in Latin America based on nine
selected transactions since March 1994, of 0.9x, 2.1x and 2.6x book value,
respectively. Based on these implied multiples, the Financial Advisors reviewed
a total enterprise value (without any indebtedness) for Aetna Latin America in
the range of $1.0 to $3.0 billion.
Analysis at Various Prices of Components
The Financial Advisors reviewed the valuation of the Financial Services
Business at various combinations of prices for the three different components.
The Financial Advisors reviewed resulting values for the Financial Services
Business assuming ranges for AFS, Aetna Asia and Aetna Latin America of $3,800
- $4,400 million, $1,000 - $3,500 million and $1,000 - $3,000 million,
respectively. All resulting values include an adjustment for Aetna corporate
equity of $(262) million. The Financial Advisors also reviewed the total value
of the Financial Services Business if it were to be sold in components by
analyzing the after tax results of the sale of the Financial Services Business
in components assuming that (a) the sale of Aetna consisting only of AFS
(including corporate assets and liabilities) did not result in corporate level
taxes and (b) the sales of Asia and Latin America resulted in corporate level
taxes. The Financial Advisors derived a valuation range for the Financial
Services Business of $5,538 - $10,638 million on a pre-tax basis and $5,395 -
$8,619 million on an after-tax basis. The Financial Advisors also noted that
the consideration to be received for the Financial Services Business in its
entirety is within the resulting implied after-tax valuation range, if the
Financial Services Business were to be sold in pieces. The Financial Advisors
also noted that the sale of the Financial Services Business involves lower
execution risks than the sale in pieces and may potentially be executed in a
much shorter time period.
The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, is not necessarily susceptible to partial
analysis or summary description. Selecting portions of the analyses or of the
summary set forth above, without considering the analyses as a whole, could
create an incomplete view of the processes underlying the Financial Advisors'
opinions. In arriving at their fairness determination, the Financial Advisors
considered the results of all these analyses and did not attribute any
particular weight to any factor or analysis considered by it; rather, the
Financial Advisors made their determination as to fairness on the basis of
their experience and professional judgment after considering the results of all
these analyses. No company or transaction used in the above analyses is
directly comparable to Aetna's Financial Services Business or the contemplated
transaction. The analyses were prepared solely for purposes of the Financial
Advisors providing their opinion to Aetna's Board of Directors as to the
fairness, from a financial point of view, to the holders of Aetna common stock
of the consideration to be received for the Financial Services Business of
Aetna and do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Analyses based on
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties
or their respective advisors, none of Aetna, the Financial Advisors or any
other person assumes responsibility if future results are materially different
from those forecasts. As described above, the opinions of the Financial
Advisors to
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Chapter One - Summary and Transaction Overview
Aetna's Board of Directors were one of many factors taken into consideration by
Aetna's Board of Directors in making its determination to approve the Merger
Agreement.
Fee Arrangements
Pursuant to the terms of the engagement letters dated March 9, 2000 and
March 11, 2000, Aetna agreed to pay the Financial Advisors together (i) a
retainer fee of $1 million payable in cash on March 9, 2000 and (ii) a
transaction fee of $35 million. The Financial Advisors will share these fees
equally. Aetna also agreed to reimburse the Financial Advisors for reasonable
out-of-pocket expenses, including the reasonable fees and disbursements of
their legal counsel, and to indemnify the Financial Advisors and related
parties against certain liabilities arising out of or in connection with the
Financial Advisors' engagement.
I-27
<PAGE>
Chapter One - Summary and Transaction Overview
INTERESTS OF OFFICERS AND DIRECTORS IN THE TRANSACTION
In considering the recommendations of the Aetna Board of Directors with
respect to the transaction, you should be aware that a number of the officers
and directors of Aetna may have interests in the transaction that are different
from, or in addition to, their interests as shareholders of Aetna generally.
The Aetna Board of Directors was aware of these interests and considered them,
among other matters, in approving the Merger Agreement and the transactions
contemplated by the Merger Agreement.
Stock Options and Restricted Stock; Additional Compensation
Stock options and restricted stock outstanding under Aetna's 1996 and 1998
Stock Incentive Plans and held by Aetna's executive officers will vest as a
result of the transaction. Any Aetna option held by a current or former
employee that is not exercised before the completion of the transaction will be
equitably adjusted as follows: Aetna options held by former employees of Aetna
and New Aetna (or their respective subsidiaries) and by employees of New Aetna
(or its subsidiaries) at the time of the transaction (whom we refer to
collectively as New Aetna Holders) will be equitably converted into options of
New Aetna with adjustments made to both the number of options and the exercise
prices to maintain the intrinsic in-or-out-of-the-money value of the related
Aetna options (which we refer to as the New Aetna Holder Adjustment). Aetna
options held by individuals who will be transferred to ING America (or its
subsidiaries) at the time of the transaction (whom we refer to as Transferred
Holders) will also be equitably adjusted. Options held by Transferred Holders
that are in-the-money (which we refer to as In-the-Money Options) will be
cancelled in exchange for a cash payment equal to the aggregate in-the-money
amount (which we refer to as the Spread). Options held by Transferred Holders
that are not In-the-Money Options (which we refer to as Out-of- the-Money
Options) will be cancelled; provided, however, that if such Out-of-the-Money
Options were initially granted in exchange for the optionee foregoing a cash
bonus, such Options will be rescinded for the amount of the foregone bonus. In
addition, annual bonuses and long-term incentive awards held by Aetna's
executive officers will be paid out at target or, in the case of certain
long-term incentive awards, at the greater of target or actual performance, for
all or a pro rata portion of such award, as a result of the transaction.
The following table shows the number of unvested Aetna options and shares
of restricted stock held by Aetna's executive officers and directors whose
vesting will accelerate as a result of the transaction, the number of already
vested options and the annual and long-term bonus payments that will become
payable to Aetna's executive officers as a result of the transaction.
<TABLE>
Number of Unvested Number (and Value) of Estimated Value of Estimated Value of
Aetna Options that Shares of Aetna Annual Bonus Long-Term Incentive
Vest as a Restricted Stock that Awards Becoming Awards Becoming
Result of the Already Vested Vest as a Result of Payable as a Result of Payable as a Result
Name Transaction(1)(#) Aetna Options(#) the Transaction(1)($) the Transaction(2)($) of the Transaction($)
---- ------------------ ---------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
William H. Donaldson
Chairman, President
and Chief Executive 100,000
Officer................. 500,000 -0- ($6,000,000) $1,000,000 $200,000 (3)
Frederick C. Copeland, Jr.
President,
Aetna International
Inc................... 68,333 147,841 -0- $360,000 $1,065,000 (4)
Thomas J. McInerney
Executive Vice President,
Aetna Financial
Services.............. 116,666 241,497 -0- $560,000 $1,103,000 (4)
Alan J. Weber
Vice Chairman for 5,000
Strategy and Finance.... 176,666 233,586 ($300,000) $750,000 $1,403,000 (4)
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Chapter One - Summary and Transaction Overview
Number of Unvested Number (and Value) of Estimated Value of Estimated Value of
Aetna Options that Shares of Aetna Annual Bonus Long-Term Incentive
Vest as a Restricted Stock that Awards Becoming Awards Becoming
Result of the Already Vested Vest as a Result of Payable as a Result of Payable as a Result
Name Transaction(1)(#) Aetna Options(#) the Transaction(1)($) the Transaction(2)($) of the Transaction($)
---- ------------------ ---------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Huber
Former Chairman,
President and Chief
Executive Officer...... 100,000 729,726 -0- -0- $2,313,000 (4)
Michael J. Cardillo
Former Executive Vice
President, Aetna U.S.
Healthcare............. 119,999 205,392 -0- -0- $1,085,000 (4)
All other executive
officers as a group
(2 persons) ............. 119,164 143,922 -0- $700,000 $910,000 (4)
Non-Employee directors
as a group............... -0- -0- -0- -0- $4,011,000 (3)
</TABLE>
---------
(1) This represents the number estimated to be unvested as of December 1, 2000.
(2) Represents target annual bonus amounts.
(3) Represents estimated value of director stock units.
(4) These estimated amounts are based on target performance, prorated for
certain awards, with a transaction closing in 2000.
Non-Employee Director Stock Units and Deferred Compensation
The terms of the Aetna Non-Employee Director Deferred Stock and Deferred
Compensation Plan provide that, as a result of the transaction, outstanding
unvested stock units are to vest, and the value of all stock units held under
such plan are to be paid in cash as reflected in the table above; however, the
directors have not made any final decision as to how stock units will be
treated under the transaction. New Aetna will adopt a new Non-Employee Director
Deferred Stock and Deferred Compensation Plan (which we refer to as the New
Director Plan), the terms of which have not be determined. Shareholders of
Aetna will not vote on the approval of the New Director Plan.
Certain Change in Control Provisions
Aetna's Board of Directors previously approved provisions to protect
certain benefits of Aetna employees upon a change-in-control of Aetna, which
will include the transaction, and are reflected in the table above. The
provisions provide that the Aetna severance plan (discussed below) will become
noncancellable for a period of two years following a change-in-control. Also,
all previously granted stock options that have not yet vested will become
vested and immediately exercisable. Upon a change-in-control, bonuses payable
under Aetna's Annual Incentive Plan will become payable based on the target
award for participants. In addition, long-term incentive awards granted under
Aetna's 1996 Stock Incentive Plan will vest. If an award is in the final two
years of a performance cycle, the full award will be paid to active employees
at the greater of target or actual performance through the date of the
change-in-control. For vested inactive employees, and active employees holding
awards in the first two years of a performance cycle, a prorated award will be
paid equal to the greater of target or actual performance through the date of
the change-in-control. Generally, the aggregate value of benefits will remain
the same during the one- year period following the completion of the
transaction.
Certain Agreements
Aetna has agreed to provide Mr. Donaldson with a salary of $1,000,000,
annual bonus opportunity of up to $2,000,000 for calendar year 2000 under the
Aetna Annual Incentive Plan and an additional bonus as determined by the Board
Committee on Compensation and Organization. On February 29, 2000, Mr. Donaldson
was granted a stock option for 500,000 shares of Aetna common stock. The
exercise price per share is $41.125 for 300,000
I-29
<PAGE>
Chapter One - Summary and Transaction Overview
shares, $55.00 for 100,000 shares and $65.00 for 100,000 shares. The closing
price of Aetna common stock on August 30, 2000 was $5515/16. Mr. Donaldson was
also granted 100,000 shares of restricted Aetna common stock. The option and
restricted common stock will vest after one year, subject to earlier vesting
upon the completion of the transaction or certain terminations of employment.
If Mr. Donaldson ceases to be Chairman and Chief Executive Officer of New Aetna
following the completion of the transaction, he will be entitled to payment of
an annual bonus for 2000, if not previously paid, of at least $1,500,000, and,
if such termination occurs after December 31, 2000, a pro rata annual bonus for
the year of termination. New Aetna will assume, and be responsible for, any
such payments after the Spin-Off. Aetna has agreed generally to reimburse Mr.
Donaldson for applicable excise taxes (including tax gross-up) incurred as a
result of payments made under his employment arrangement.
Mr. Weber has entered into an agreement with Aetna that provides that if
his employment is terminated by Aetna without cause, in lieu of participation
in Aetna's severance plan he will be entitled to not less than 52 weeks of cash
compensation (calculated as annual base salary (currently $750,000) and target
annual bonus amount (currently $750,000)). Following a change-in-control of
Aetna prior to March 1, 2002, Mr. Weber will receive not less than 156 weeks of
cash compensation upon certain terminations of employment. Mr. Weber's pension
benefits are vested under Aetna's pension plan. Aetna has agreed to make
certain minimum contributions to Mr. Weber's cash balance pension account,
which Aetna believes are not greater than the value of the pension benefits
forgone by Mr. Weber as a result of his departure from his previous employer.
Aetna has agreed generally to reimburse Mr. Weber for applicable excise taxes
(including tax gross-up) incurred as a result of payments made under the
agreement. New Aetna will assume, and be responsible for, any such payments
after the Spin-Off.
Mr. McInerney has entered into an agreement with Aetna in lieu of
participation in Aetna's severance plan. The agreement provides that if Mr.
McInerney's employment is terminated for any reason not involving misconduct,
he will receive not less than 52 weeks of cash compensation (calculated as
annual base salary (currently $700,000). Upon a change-in-control of Aetna
prior to March 1, 2002, Mr. McInerney's severance benefit would increase to 156
weeks of cash compensation (calculated as annual base salary and target annual
bonus amount (currently $560,000)) in the event his employment is terminated
(i) by Aetna for any reason other than gross misconduct or (ii) by him
following a reduction in base salary or relocation. Aetna has agreed generally
to reimburse Mr. McInerney for applicable excise taxes (including tax gross-up)
incurred as a result of payments made under the agreement. Aetna/ING will
assume, and be responsible for, any such payments after the Spin-Off and
Merger.
Mr. Copeland has entered into an agreement with Aetna in lieu of
participation in Aetna's severance plan. The agreement provides that if Mr.
Copeland's employment is terminated under circumstances that would call for
severance pay benefits, he will receive payment for not less than 52 weeks of
annual base salary (currently $450,000). Upon a change-in-control of Aetna, Mr.
Copeland's severance benefit would increase to 156 weeks of annual base salary.
In the event of certain specified events related to Aetna's international
businesses, Mr. Copeland would instead receive 104 weeks of cash compensation
(calculated as annual base salary and target annual bonus amount (currently
$810,000)) if he were involuntarily terminated or his target cash compensation
(annual base salary and target annual bonus opportunity) were reduced.
Alternatively, Aetna has offered Mr. Copeland, upon a change-in-control of
Aetna prior to March 1, 2002, 104 weeks of cash compensation (calculated as
annual base salary and target annual bonus amount) in the event his employment
is terminated (i) by Aetna for any reason other than gross misconduct or (ii)
by him following a reduction in base salary or relocation, and generally to
reimburse Mr. Copeland for applicable excise taxes (including tax gross-up)
incurred as a result of payments made under the agreement. In addition, Aetna
has also offered Mr. Copeland certain enhanced pension benefits. New Aetna will
assume, and be responsible for, any such payments after the Spin-Off.
In connection with Mr. Huber's termination of employment with Aetna
effective as of February 25, 2000, he received a lump sum payment of $3,384,615
(based on 88 weeks of salary ($1,000,000 annually) and target annual bonus
($1,000,000)) in exchange for his agreement generally not to compete with
Aetna. Aetna will also provide Mr. Huber with an office and administrative
support until November 2, 2000 to accommodate his transition needs. Mr. Huber
is eligible for enhanced pension rights and certain other benefits offered to
employees who retire from Aetna. New Aetna will assume, and be responsible, for
any such payments after the Spin-Off.
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<PAGE>
Chapter One - Summary and Transaction Overview
In connection with Mr. Cardillo's retirement from Aetna on June 15, 2000,
he is entitled to a special payment of $3,780,000, (based on 3 times his annual
salary ($700,000) and his target annual bonus ($560,000), 50% of which amount
was paid on retirement and 50% will be paid to him on the first anniversary of
retirement, and a prorated 2000 target annual bonus ($257,000)). For 36 months
following the date of such retirement, he is eligible for continuation of
welfare and pension benefits. All outstanding equity-based awards will continue
to vest for one year (and all options will fully vest as a result of the
transaction) and will remain exercisable for a period of 90 days thereafter.
Mr. Cardillo is also entitled to be reimbursed by Aetna for applicable excise
taxes (including tax gross- up) incurred as a result of such payments made to
him. New Aetna will assume, and be responsible for, any such payments after the
Spin-Off.
Aetna administers a severance plan under which employees, including
Aetna's executive officers, terminated by Aetna without cause may receive up to
two weeks of continuing salary for every credited full year of employment to a
maximum of one year's salary. In addition, when an employee's job is eliminated
due to reengineering, reorganization or staff reduction efforts, an employee,
including Aetna's executive officers, are eligible for an additional 13 weeks
of salary continuation and outplacement assistance. Under certain
circumstances, determined on a case-by-case basis, additional severance pay
benefits may be granted for the purposes of inducing employment of senior
officers or rewarding past service. Certain benefits continue during the
severance pay and salary continuation periods.
I-31
<PAGE>
CHAPTER TWO
SPIN-OFF AND MERGER
The Aetna Board of Directors has approved, and recommends that Aetna
shareholders vote "FOR" approval of, the Merger Agreement and the transactions
contemplated by the Merger Agreement. The proposed transaction would occur
pursuant to the Merger Agreement, the distribution agreement and the related
agreements as described below.
THE MERGER AND DISTRIBUTION AGREEMENTS
The following summary of the Merger Agreement and the distribution
agreement is qualified by reference to the complete text of the Merger
Agreement and the distribution agreement, which are included in this booklet as
Annexes B and C, respectively. All shareholders are urged to read the Merger
Agreement and the distribution agreement carefully in their entirety.
General
The Merger Agreement contains the terms and conditions on which the Merger
will be completed.
The distribution agreement, as well as the schedules and exhibits to the
distribution agreement (which we collectively refer to as the Distribution
Agreement), contain the terms and conditions on which certain restructuring
transactions will be completed and on which Aetna will spin off to the Aetna
shareholders its domestic health care businesses. The Distribution Agreement
also contains the terms and conditions that will govern the ongoing
relationships of Aetna and New Aetna after the completion of the transaction.
See "Chapter Two-Relationship Between Aetna and New Aetna After the Spin-Off
and Merger".
Restructuring of Aetna's Businesses
Aetna will complete the following restructuring transactions prior to the
completion of the Spin-Off and the Merger:
o Aetna's financial services and international businesses and Aetna's
domestic health care, large case pension and group insurance
businesses will be separated into different groups of subsidiaries.
o New Aetna will transfer to Aetna certain assets identified in the
Distribution Agreement, including some assets reflected on certain
balance sheets of Aetna as of March 31, 2000. Aetna will transfer to
New Aetna certain assets identified in the Distribution Agreement.
Following the transfer, New Aetna will have all rights of Aetna to
the mark "Aetna," subject to Aetna's rights as licensee under a
trademark licensing agreement. See "Chapter Two-Relationship Between
Aetna and New Aetna After the Spin-Off and Merger". Aetna will retain
all of the rights to the mark "Aeltus" and certain Chinese marks
currently held by Aetna.
o With certain exceptions and subject to certain restrictions and
limitations, Aetna will assume and will undertake to be responsible
for all of the liabilities associated with Aetna's financial services
and international businesses and will indemnify New Aetna and the
health care subsidiaries with respect to such liabilities. New Aetna
will assume and will undertake to be responsible for all liabilities
not assumed by Aetna and the financial services and international
subsidiaries and will indemnify Aetna and the financial services and
international subsidiaries with respect to such liabilities. Aetna
will not assume and will not provide indemnities regarding:
(1) liabilities relating to health care litigation and litigation
regarding alleged securities law violations; and
II-1
<PAGE>
Chapter Two - Spin-Off and Merger
(2) liabilities arising under contracts relating to the sale of the
property and casualty insurance business and operations
conducted by Aetna or any of Aetna's former or existing
affiliates in the United States and certain other businesses
previously sold by Aetna.
o Debt of Aetna and its subsidiaries will be allocated as of the
completion of the Spin-Off between Aetna and New Aetna as follows:
(1) Aetna will remain responsible for approximately $2.678 billion
of long-term debt of Aetna and its subsidiaries, subject to
adjustment (see "Chapter Two-The Merger and Distribution
Agreements-Merger Consideration"). ING will guarantee Aetna's
obligations for this long-term debt;
(2) Except as set forth in the transaction agreements, New Aetna and
Aetna will settle or pay all intercompany indebtedness owed
between New Aetna and its subsidiaries, on the one hand, and
Aetna and the financial services and international subsidiaries,
on the other hand;
(3) Except as set forth in the transaction agreements, New Aetna and
Aetna will pay all intercompany accounts receivable and accounts
payable between New Aetna and the health care subsidiaries, on
the one hand, and Aetna and the financial services and
international subsidiaries, on the other hand; and
(4) Aetna will be responsible for funding the repayment of, subject
to certain exceptions, all of Aetna's and its post-Spin-Off
subsidiaries' obligations with respect to short-term debt.
Spin-Off
After completing the restructuring transactions and effectively
simultaneously with the completion of the Merger, Aetna will spin off to its
shareholders its domestic health care, large case pension and group insurance
businesses. The Spin-Off will be accomplished through a distribution by Aetna
to its shareholders of all of the outstanding shares of New Aetna common stock.
As a result of the restructuring transactions and the Spin-Off, Aetna and its
subsidiaries will own and operate only the financial services and international
businesses and New Aetna will be a separate, publicly traded company owned by
Aetna's shareholders that will own and operate Aetna's domestic health care
businesses. After the completion of the Spin-Off, New Aetna will be renamed
"Aetna Inc."
The record date for determining the shareholders who will be entitled to
receive shares of New Aetna common stock in the Spin-Off will be the same date
as the effective date of the Merger.
Conversion of Aetna Stock Options
Aetna options held by New Aetna Holders will be converted into New Aetna
options in accordance with the New Aetna Holder Adjustment. In-the-Money
Options held by Transferred Holders will be cancelled in exchange for a cash
payment equal to the Spread. Out-of-the-Money Options held by Transferred
Holders will be cancelled or rescinded.
The Merger
Effectively simultaneously with the completion of the Spin-Off, Aetna's
financial services and international businesses will be sold to ING. The sale
will be structured as a merger of Aetna with Merger Sub, a wholly-owned,
indirect subsidiary of ING. Aetna will be renamed "Lion Connecticut Holdings
Inc." after the completion of the Merger. The Spin-Off and the Merger will each
occur only if the other occurs effectively at the same time.
II-2
<PAGE>
Chapter Two - Spin-Off and Merger
Completion of the Merger
As soon as practicable after all of the conditions set forth in the Merger
Agreement have been satisfied or waived, the parties will file a certificate of
merger with the Secretary of State of the State of Connecticut. The Merger will
be completed at the time the certificate has been accepted for filing by the
Secretary of State or at any other time specified in the certificate.
Merger Consideration
The total value to be paid by ING for the financial services and
international businesses of Aetna is $7.7 billion, which consists of the
assumption of approximately $2.678 billion of Aetna debt and the payment of
approximately $5.022 billion in cash to Aetna shareholders. Generally speaking,
ING will be entitled to any earnings, and will be responsible for any losses,
of Aetna's financial services and international businesses from April 1, 2000.
As of the date of this booklet, Aetna expects that the amount of cash to be
paid to Aetna shareholders will be approximately $35 for each share of Aetna
common stock they own.
The exact amount of cash that will be paid to Aetna shareholders for each
share of Aetna common stock they own will be calculated as follows:
o $7.7 billion
(i) minus the greater of $2.678 billion (which amount will be reduced
if certain Aetna indebtedness is repaid on its maturity date) and the
aggregate principal amount of all debt of Aetna or its subsidiaries
with a maturity of one year or more (subject to certain exceptions)
(ii) plus the Net Capital Contribution Amount
(iii) plus the Net Interest Accrual Amount
(iv) minus the CityPlace Accrual Amount
o divided by the aggregate number of outstanding shares of Aetna common
stock as of the completion of the Merger. As of [_______], 2000, the
number of shares of Aetna common stock outstanding was approximately
[_______].
"Net Capital Contribution Amount" generally means an amount determined as
of the completion of the Merger for the period after March 31, 2000 until the
completion of the Merger that is equal to the aggregate cash capital
contributions (with certain exceptions) made by Aetna or Aetna Services, Inc.
to Aetna Retirement Services, Inc., Aetna International, Inc. or any of their
respective subsidiaries (which we refer to collectively as the Aetna NCC
Companies) minus the aggregate amount of any dividends or distributions made
from any Aetna NCC Company to Aetna Services, Inc. (excluding dividends of
proceeds from certain permitted sales).
"Net Interest Accrual Amount" generally means an amount equal to the
amount of interest that would accrue on $1 billion principal amount of
indebtedness bearing an annual interest rate of 7.1% from and including April
1, 2000 to the completion of the Merger minus the amount of interest accrued as
of the completion of the Merger on the debt that is assumed by ING.
"CityPlace Accrual Amount" means an amount equal to the next aggregate
semi-annual lease payment of Aetna payable in respect of the CityPlace building
to be made after the completion of the Merger multiplied by a fraction the
numerator of which is the total number of days elapsed since the immediately
preceding October 31 or March 30 until the completion of the Merger and the
denominator of which is 180.
II-3
<PAGE>
Chapter Two - Spin-Off and Merger
Representation and Warranties
Aetna made certain customary representations and warranties to ING America
as to the financial services and international businesses, including as to:
o organization, good standing and qualification;
o subsidiaries and joint ventures;
o capitalization;
o corporate authority;
o boards of directors' approvals;
o governmental and regulatory filings and approvals;
o non-contravention;
o insurance companies' statutory reports and financial statements;
o Securities and Exchange Commission filings;
o historical financial statements and unaudited pro forma financial
statements;
o absence of certain changes;
o litigation and absence of undisclosed liabilities;
o employee benefits matters;
o compliance with laws;
o possession of permits;
o inapplicability of takeover statutes and anti- takeover provisions;
o environmental matters;
o tax matters;
o labor matters;
o insurance coverage;
o intellectual property rights;
o amendment of Aetna rights agreement;
o fees of brokers and finders;
o insurance business matters;
o liabilities and reserves;
o separate accounts;
o material contracts;
o investment contracts, fund clients and advisory clients;
o broker/dealer operations;
o bank regulatory matters; and
o New Aetna's contracts and arrangements with Aetna.
ING America made certain customary representations and warranties to
Aetna, including as to:
o capitalization of Merger Sub;
o organization, good standing and qualification;
o corporate power and authority;
o governmental and regulatory filings and approvals;
o non-contravention;
o adequate funds; and
o fees of brokers and finders.
The representations and warranties contained in the Merger Agreement do
not survive the completion of the Merger or, generally speaking, the
termination of the Merger Agreement.
Covenants
Aetna and ING America have agreed to certain covenants in the Merger
Agreement. A description of the covenants follows:
Aetna's Interim Operations. Aetna has agreed that until the completion of
the Merger, Aetna will conduct its business in the ordinary course of business
consistent with past practices and will use all reasonable efforts to preserve
intact its business organizations and maintain existing relationships with
third parties and employees, maintain material properties and assets in good
repair and maintain all existing governmental permits. Aetna has also agreed,
with certain exceptions, that it will not, prior to the completion of the
Merger, do any of the following without the consent of ING America, which may
not be unreasonably withheld:
o issue, sell, pledge or dispose of or encumber any capital stock owned
by it in any of its subsidiaries or joint ventures;
o amend its governing instruments;
II-4
<PAGE>
Chapter Two - Spin-Off and Merger
o split, combine or reclassify its outstanding shares of capital stock;
o declare, set aside or pay any dividend other than with the proceeds
from the sale of certain subsidiaries and other than regular
quarterly cash dividends not in excess of $0.20 per share;
o repurchase, redeem or otherwise acquire, except in connection with
stock option plans, any shares of its capital stock or any securities
convertible into or exercisable for any shares of its capital stock;
o issue, sell, pledge, dispose of or encumber any shares of, or
securities convertible into or exercisable for, or any agreements to
acquire, any shares of its capital stock or any voting debt;
o transfer, sell, dispose of or encumber any property or assets other
than its capital stock or modify any material indebtedness;
o incur any indebtedness with a maturity of one year or more;
o make or authorize any commitment for any capital expenditures;
o make any acquisition of or investment in assets or stock of any other
entity;
o terminate, adopt or amend any employee plan or benefit arrangement;
o increase compensation of certain employees, except in the ordinary
course of business and provided that up to $3 million may be
allocated to retention payments in connection with the Merger;
o settle or compromise certain specified litigation or settle or
compromise any other claims or litigation for an amount greater than
$2 million individually;
o pay or discharge any material liabilities or obligations;
o enter into, modify or terminate any material contract or waive,
release or assign any material rights or claims;
o make any material tax election or permit any insurance policy naming
it as beneficiary to be terminated;
o agree to limit in any material respect the ability to sell any
product or service, engage in any line of business or to compete with
or to obtain products or services from any person;
o make any significant change in accounting methods or controls;
o intentionally and materially alter the mix of investment assets or
the duration or credit quality of the assets;
o intentionally and materially alter the profile of the insurance
liabilities or the pricing practices or policies of Aetna's insurance
companies;
o take any action that would cause Aetna's representations and
warranties to become untrue in any material respect;
o engage in transactions between Aetna and New Aetna; or
o agree or commit to do any of the foregoing.
II-5
<PAGE>
Chapter Two - Spin-Off and Merger
Subject to certain exceptions, the parties agreed that the provisions
concerning Aetna's interim operations do not apply to New Aetna and its
subsidiaries (after giving effect to the Spin-Off and the Merger) so long as no
action is taken by Aetna that would reasonably be expected to interfere with
the timely consummation of the Merger.
Acquisition Proposals. The Merger Agreement prohibits Aetna from
soliciting, initiating or encouraging a proposal for an alternative acquisition
transaction involving Aetna or its subsidiaries or New Aetna or its
subsidiaries, or negotiating or discussing with or providing non-public
information to, or facilitating any third party regarding such an acquisition
transaction except that Aetna shall not be prevented from complying with
certain SEC rules regarding tender offers and Aetna may:
o provide information in response to a request by a person who has made
an unsolicited bona fide written proposal for an acquisition
transaction if:
- the person requesting the information executes a confidentiality
agreement on terms substantially similar to those contained in
the confidentiality agreement between ING and Aetna, and
- Aetna's Board of Directors determines in good faith after
consultation with outside legal counsel that the action is
necessary in order for its Directors to comply with their
respective fiduciary duties;
o engage in any negotiations or discussions with any person who has
made an unsolicited bona fide written proposal for an acquisition
transaction and may recommend a proposal for an acquisition
transaction to Aetna's shareholders, if and only to the extent that:
- Aetna's Board of Directors determines in good faith after
consultation with outside legal counsel that the action is
necessary in order for its Directors to comply with their
respective fiduciary duties, and
- Aetna's Board of Directors determines in good faith after
consultation with its financial advisor that the acquisition
transaction is likely to be completed and, if completed, would
result in a transaction more favorable to Aetna's shareholders
from a financial point of view than the transactions
contemplated by the Merger Agreement (which we refer to as a
superior proposal).
Aetna will notify ING America immediately if any inquiries or offers are
received by, any information is requested from, or any discussions are sought
to be initiated or continued with, any of Aetna's representatives and will
continue to keep ING America informed, on a current basis, of the status of
proposals or offers and the status of discussions or negotiations.
Aetna and ING America agreed that Aetna will not be restricted in its
ability to take any action described above with respect to any transaction
relating to New Aetna, so long as that transaction would not reasonably be
expected to interfere with the timely consummation of the Merger, the Spin-Off
or the other transactions contemplated by the Merger Agreement.
As discussed below, Aetna may terminate the Merger Agreement if Aetna
receives and accepts a superior proposal.
Shareholders Meeting. Aetna will convene a meeting of its shareholders to
vote upon the approval of the Merger Agreement and the transactions
contemplated by the Merger Agreement as promptly as reasonably practicable
after the execution of the Merger Agreement. Subject to its fiduciary
obligations, the Board of Directors of Aetna will recommend and solicit the
approval of the Merger Agreement and the transactions contemplated by the
Merger Agreement.
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Chapter Two - Spin-Off and Merger
Other Actions. Aetna has agreed, subject to certain limitations, that it
will use reasonable efforts to assist ING America:
o to obtain all required consents to transfer the joint venture
interest held by Aetna Life Insurance Company in Pacific-Aetna Life
Insurance Company Limited to another subsidiary of Aetna, or
o to implement an alternative structure in order to transfer to a
subsidiary of Aetna, the assets and liabilities associated with the
joint venture interest held by Aetna Life Insurance Company in
Pacific-Aetna Life Insurance Company Limited.
ING and ING America agreed that, notwithstanding references to
governmental consents by the People's Republic of China and Hong Kong in the
closing conditions to the Merger Agreement, the transfer of the joint venture
interest in Pacific-Aetna Life Insurance Company Limited or the license held by
Pacific-Aetna Life Insurance Company Limited are not conditions to the
obligations of ING and ING America to complete the Merger.
Aetna has agreed that, subject to certain limitations, it will use its
best efforts to satisfy the conditions of the Distribution Agreement and will
effect the Spin-Off if those conditions are satisfied.
Expenses. Each of Aetna, ING and ING America will, except as otherwise
agreed in the Merger Agreement or in other related agreements, pay its own
costs and expenses, except that expenses incurred in connection with the
filing, printing and mailing of this booklet will be shared equally by Aetna
and ING.
Indemnification. ING will, after the completion of the Merger, indemnify
and hold harmless each present and former director, officer and employee of
Aetna against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, damages or liabilities incurred in connection with
any claim, or other action, arising out of matters existing or occurring at or
before the completion of the Merger, to the fullest extent that Aetna would
have been required or permitted to indemnify such person under Connecticut law
and Aetna's governing instruments.
Company Debt. ING will, as of the completion of the Merger, guarantee the
performance of the obligations of Aetna and of Aetna Services, Inc. with
respect to the long-term debt of Aetna and its subsidiaries.
Other Agreements. Aetna will use its reasonable best efforts to enter into
agreements for the sale of certain of its subsidiaries and will permit
representatives of ING to be involved in the sale process. The terms and
conditions of the sale agreements will be subject to ING's prior approval,
which will not be unreasonably withheld. Aetna and its subsidiaries will not be
required to take any action that would adversely affect New Aetna and its
subsidiaries.
Aetna will, in carrying out the transactions contemplated by the
Distribution Agreement, use reasonable best efforts to minimize the creation of
Aetna liabilities.
Aetna and New Aetna will enter into a trademark licensing agreement
granting to New Aetna a perpetual, exclusive, and royalty-free license to use
the Chinese name and characters associated with the name "Aetna" or related
logo, in connection with the New Aetna business in the United States.
ING America will use its reasonable best efforts, on or prior to the
completion of the Merger, to procure insurance coverage having certain terms
and conditions specified in the Merger Agreement. Aetna has agreed that it will
make a capital contribution to Aetna Retirement Services, Inc. in an amount
equal to ING America's actual cost of obtaining the insurance policies or a
portion of the cost, not to exceed, in either case, $30 million. If ING America
notifies Aetna that such policies are unavailable on commercially reasonable
terms and conditions, Aetna will contribute $30 million to Aetna Retirement
Services, Inc.
Prior to the completion of the Merger, Aetna will contribute to the
capital of Aetna Retirement Services, Inc. an amount equal to $3.97 million.
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Chapter Two - Spin-Off and Merger
Headquarters and Related Matters. ING America has agreed to cause the
surviving corporation to maintain the principal corporate offices of Aetna's
qualified plan operations in Hartford, Connecticut for at least three years
following the completion of the Merger and ING America intends to cause Aetna
and its subsidiaries to maintain employment levels in and around Hartford,
Connecticut at substantially current levels, less normal attrition.
Asia. ING America has agreed that for one year from the completion of the
Merger, except under certain circumstances, ING America will not permit Aetna
and its subsidiaries to sell the interests of Aetna International, Inc. in
Taiwan, Hong Kong and Malaysia, but ING America will not be limited in its
right to sell minority interests in those subsidiaries.
Conditions to the Spin-Off
The obligation of Aetna to complete the Spin-Off is subject to
satisfaction of the following conditions:
o Aetna's Form 10 must have become effective under the Securities
Exchange Act of 1934;
o the New Aetna common stock to be delivered in the Spin-Off must have
been approved for listing on the New York Stock Exchange, subject to
official notice of issuance;
o the restated certificate of incorporation of New Aetna must be in
effect;
o the Board of Directors of Aetna and the Board of Directors of New
Aetna:
- must have received an opinion, addressed and reasonably
satisfactory to each from an independent solvency firm selected
by those boards of directors; and
- must otherwise be reasonably satisfied, (i) that after giving
effect to the restructuring transactions completed prior to the
completion of the Spin-Off (x) neither Aetna nor New Aetna will
be insolvent or will have unreasonably small capital or assets
with which to engage in their respective businesses, (y) each of
Aetna and New Aetna will be able to pay its respective debts as
they become due in the usual course of business and (z) neither
Aetna nor New Aetna's total assets will be less than the sum of
its respective total liabilities and (ii) that the Spin-Off,
when effected in accordance with the terms of the Distribution
Agreement and the agreements executed in connection with the
execution of the Distribution Agreement (which we refer to as
the Ancillary Agreements), shall have been effected in
accordance with the provisions of the Connecticut Business
Corporation Act relating to distributions and applicable
fraudulent transfer and fraudulent conveyance laws;
o the contributions of specified subsidiaries to New Aetna by Aetna,
the transfers of assets, and the assumptions of liabilities, in each
case, as contemplated by the Distribution Agreement must have been
effected;
o each of the Ancillary Agreements must have been duly executed and
delivered by the parties thereto; and
o each condition to the Merger (other than with respect to the
completion of the Spin-Off) must have been satisfied or waived.
Conditions to the Merger
Mutual Closing Conditions. The obligations of Aetna and ING America to
complete the Merger are subject to satisfaction of the following conditions:
o Shareholders Approval. Aetna shareholders must have approved the
Merger Agreement and the transactions contemplated by the Merger
Agreement.
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<PAGE>
Chapter Two - Spin-Off and Merger
o Regulatory Consents.
- expiration or termination of waiting periods applicable to the
completion of the Merger under the HSR Act and applicable
insurance laws, and
- all notices or filings with, and all consents, permits and
authorizations from, any governmental entity must have been made
or obtained prior to the completion of the Merger, other than
(in the case of jurisdictions other than the United States, the
Netherlands, the People's Republic of China, Hong Kong, Mexico,
Poland, Malaysia and Taiwan) those which would be immaterial to
either Aetna or ING.
o Litigation.
- no court or governmental entity may have enacted or otherwise
issued any law or order that restrains, enjoins or prohibits the
completion of the Spin-Off or the Merger, and
- no governmental entity may have instituted or threatened to
institute any proceeding that requests such an order.
o Spin-Off. The Spin-Off must have been consummated in accordance with
the terms and subject to the conditions set forth in the Distribution
Agreement.
o Representations and Warranties. The representations and warranties
made by the other party, to the extent specified in the Merger
Agreement, must be accurate as of the date of the Merger Agreement
and the closing, subject to certain materiality exceptions.
o Covenants. The obligations of the other party required to be
performed prior to the completion of the Merger must have been
performed in all material respects.
Additional Closing Conditions for ING America's Benefit. The obligations
of ING America and Merger Sub to complete the Merger are subject to the
following additional conditions:
o Consents Under Agreements. Aetna will have obtained, subject to
certain exceptions, all material consents and approvals (other than
governmental consents and approvals) for the transactions
contemplated by the transaction agreements.
o Client Approvals. Fund clients' approvals representing at least 85%
of the total assets under management of fund clients by Aetna or its
subsidiaries must have been received.
o Legal Opinions. ING America must have received an opinion of Aetna's
counsel addressing specified legal matters.
o Solvency Opinion. ING America and Aetna must have received, as
addressees, copies of the solvency opinions delivered in connection
with the Spin-off.
o New Aetna's Debt Rating. At the time of the completion of the Merger,
New Aetna must have an investment grade debt rating of at least BBB
from Standard and Poor's Corporation or Baa2 from Moody's Investor
Services, Inc., in each case as to long-term senior unsecured debt.
Additional Closing Conditions for Aetna's Benefit. Aetna's obligation to
complete the Merger is subject to the following additional conditions:
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<PAGE>
Chapter Two - Spin-Off and Merger
o Consents Under Agreements. ING will have obtained, subject to certain
exceptions, all material consents and approvals (other than
governmental consents and approvals) for the transactions
contemplated by the Merger Agreement.
o Guarantee of Aetna's Debt. ING must have entered into the
supplemental indentures required by the Merger Agreement.
Termination
Aetna and ING America may agree, at any time prior to the completion of
the Merger, to terminate the Merger Agreement. In addition, either Aetna or ING
America may terminate the Merger Agreement if:
(1) the Merger has not been completed by August 31, 2001, which date will
be extended automatically by two months if certain governmental
consents have not been obtained or waived and are being pursued, and
all other conditions to the completion of the transaction are
satisfied (or are capable of being satisfied);
(2) Aetna's shareholders do not approve the Merger Agreement and the
transactions contemplated by the Merger Agreement; or
(3) there is a legal prohibition on completing the transaction.
ING America may terminate the Merger Agreement if:
(4) Aetna's Board of Directors withdraws or adversely modifies its
adoption or recommendation of the Merger Agreement or has approved an
acquisition transaction with a third party;
(5) Aetna materially breaches any of its representations, warranties,
covenants or agreements and the breach cannot be cured by Aetna and
would give rise to a failure of certain of ING America's closing
conditions to be satisfied; or
(6) Aetna's securities are issued or delivered pursuant to Aetna's
shareholder rights plan.
Aetna may terminate the Merger Agreement if:
(7) ING America materially breaches any of its representations,
warranties, covenants or agreements and the breach cannot be cured by
ING America and would give rise to a failure of certain of Aetna's
closing conditions to be satisfied;
(8) Aetna's Board of Directors determines in good faith on the advice of
its financial advisors and outside counsel that another acquisition
transaction is a superior proposal (as compared to the sale to ING
America) and Aetna enters into a written agreement concerning that
superior proposal, so long as Aetna has complied with the
non-solicitation, notice, negotiation and termination fee provisions
of the Merger Agreement.
If the Merger Agreement is validly terminated, it will become void without
liabilities on any party unless the breaching party is in deliberate breach.
However, the provisions relating to termination fees and expenses and certain
other provisions will continue in effect. If Aetna becomes obliged to pay a
termination fee, the right of ING America to receive the termination fee,
except for cases of deliberate breach, is the sole remedy available to ING
America.
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Chapter Two - Spin-Off and Merger
Termination Fees and Expenses
Aetna must pay ING America a termination fee of $165 million and must
reimburse ING America for up to $10 million of ING America's out-of-pocket
documented transaction-related expenses if:
o the Merger Agreement terminates as described in items (4) or (8)
above;
o the Merger Agreement terminates as described in item (2) above and a
bona fide acquisition proposal or an intention to make such a
proposal has been made public prior to the date of the shareholders'
meeting and, within 15 months of the termination, Aetna signs a
binding agreement for an acquisition proposal; or
o the Merger Agreement terminates as described in item (5) above as the
result of a deliberate breach by Aetna and a bona fide acquisition
proposal or an intention to make such a proposal has been made public
prior to the date of the termination and, within 15 months of the
termination, Aetna signs a binding agreement for an acquisition
proposal.
Aetna must pay ING America up to $10 million for ING's out-of-pocket
documented transaction-related expenses if the Merger Agreement terminates as
described in items (2) or (5) in the preceding section and Aetna is not
otherwise obligated to pay a termination fee.
Amendments and Waivers
The parties may amend the Merger Agreement or waive its terms before the
completion of the Merger. Aetna may modify or amend the Distribution Agreement
or any Ancillary Agreement only with the consent of ING America. ING America
will not withhold its consent if the modification or amendment is not
reasonably expected to adversely affect ING America, ING or Aetna and its
affiliates, or prevent or materially delay or impair the completion of the
transaction.
Aetna and New Aetna may amend or waive any provision of the Distribution
Agreement. Unless the Merger Agreement shall have been terminated, any
amendment or waiver that is adverse in interest to Aetna, its subsidiaries and
joint ventures shall be subject to the consent of ING America.
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<PAGE>
Chapter Two - Spin-Off and Merger
OTHER MATTERS
Regulatory Matters
Completion of the transaction is subject to a number of regulatory
approvals that are described below.
Antitrust. Transactions such as the Merger are reviewed by the United
States Department of Justice and the United States Federal Trade Commission to
determine whether they comply with applicable antitrust laws. Under the
provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder, the Merger may
not be completed until Aetna and ING have given certain information to the
United States Department of Justice and the United States Federal Trade
Commission and the required waiting period has expired or been terminated.
Aetna and ING filed their respective notification reports with the Department
of Justice and Federal Trade Commission on August 30, 2000. The applicable
waiting period will expire on September 29, 2000, unless earlier terminated or
extended by a request for additional information or documentary materials.
The Department of Justice and the Federal Trade Commission frequently
scrutinize the legality under the antitrust laws of transactions such as the
Merger. At any time before or after the Merger, the Department of Justice or
the Federal Trade Commission could take such action under the antitrust laws as
it deems necessary or desirable in the public interest, including seeking to
enjoin the Merger or seeking divestiture of substantial assets of Aetna or ING
or their subsidiaries. Private parties and state attorneys general may also
bring an action under the antitrust laws under certain circumstances. There can
be no assurance that a challenge to the sale on antitrust grounds will not be
made or, if such a challenge is made, of the result.
Insurance and Health Care. The insurance laws and regulations of U.S.
jurisdictions generally require that, prior to the acquisition of control of an
insurance company organized under the laws of a given jurisdiction through the
acquisition of or merger with an insurance holding company, the acquiror or
surviving company, as the case may be, must obtain the approval of, or file
notification with and meet waiting period requirements imposed by, such
jurisdiction.
The completion of the Merger is subject to certain approvals of state
insurance departments, including those of Connecticut and Florida. ING filed an
application for approval with the Connecticut insurance department on August
22, 2000 and anticipates filing an application with the Florida insurance
department shortly. A hearing on an application for approval of the Merger is
mandatory in Connecticut and Florida.
In addition, ING has made notice filings in certain other jurisdictions,
including insurance departments in a number of states where ING's subsidiaries
and Aetna's financial services subsidiaries together have sufficiently large
market shares in particular insurance lines to require a notification prior to
the sale of the financial services and international businesses to ING.
Approval of the Merger is not required in these states, but the insurance
departments could determine to take action to impose conditions on the Merger
that could prevent its consummation.
Certain subsidiaries of Aetna that are not currently subsidiaries of New
Aetna will be contributed to New Aetna prior to the completion of the
transaction. Contribution of these subsidiaries to New Aetna is subject to the
approval of the Connecticut insurance department, or to the granting of an
exemption from such requirement by the Connecticut insurance department. Aetna
has submitted a request to the Connecticut insurance department seeking an
exemption from such requirement. Aetna will also notify the Connecticut
insurance department 30 days prior to the actual contribution of the
subsidiaries.
Further, Aetna is currently subject to certain regulatory requirements of
state insurance or health care departments relating to the issuance of debt
obligations by Aetna because it is the parent corporation of Aetna's health
care businesses. The completion of the transaction is subject to resolution
with the health departments of California and Florida as to the application of
these requirements to New Aetna as the new parent corporation of Aetna's
domestic health care businesses.
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<PAGE>
Chapter Two - Spin-Off and Merger
Foreign Approvals. ING and Aetna conduct operations in a number of foreign
countries where regulatory filings or approvals may be required in connection
with the consummation of the Merger. Failure to obtain a foreign approval could
affect the parties' ability to complete the Merger.
Banking Regulation. Aetna operates a federal savings bank and a
Connecticut chartered trust company. Accordingly, the Office of Thrift
Supervision and the Connecticut Banking Department must each approve the
Merger.
Broker-Dealer Regulation. Aetna's financial services business operates a
number of broker-dealers. Accordingly, the National Association of Securities
Dealers, Inc. must approve the continued membership of those broker-dealers
following the Merger.
Employment Regulation. Aetna and ING are currently examining whether any
affiliates of ING would be considered "parties in interest" under the Employee
Retirement Income Security Act of 1974, as amended (which we refer to as
ERISA), for any benefit plan in which an Aetna company acts as a fiduciary. If
any affiliate of ING would be considered such a "party in interest," ING will
need to seek exemptive relief from the Department of Labor to complete the
Merger.
Shareholder Rights Plan
On July 27, 2000, Aetna amended its shareholder rights plan to exempt the
transactions contemplated by the Merger Agreement from the provisions of the
plan.
Material United States Federal Income Tax Consequences to Aetna Shareholders of
the Spin-Off and the Merger
In the opinion of Davis Polk & Wardwell, the following discussion
summarizes the material United States federal income tax consequences to Aetna
shareholders of the Spin-Off and the Merger. This discussion is for general
information and is based on the law as currently in effect. This discussion
does not address all of the tax consequences that may be relevant to an Aetna
shareholder in light of its particular circumstances or to Aetna shareholders
subject to special rules, such as financial institutions, broker-dealers,
tax-exempt organizations, shareholders that hold their shares of Aetna common
stock as part of a straddle or a hedging or conversion transaction and
shareholders who acquired their shares of Aetna common stock through the
exercise of an employee stock option or otherwise as compensation.
Aetna shareholders are urged to consult their own tax advisors as to the
particular tax consequences to them of the Spin-Off and the Merger, including
the effect of United States state and local tax laws or foreign tax laws.
A United States holder refers to:
o a citizen or resident of the United States,
o a corporation or other entity created or organized in the United
States or under the laws of the United States or of any political
subdivision of the United States, or
o an estate or trust, the income of which is includible in gross income
for federal income tax purposes regardless of its source.
A non-United States holder refers to an Aetna shareholder that is not a
United States holder.
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Chapter Two - Spin-Off and Merger
United States Holders
The receipt by a United States holder of cash and shares of New Aetna
common stock in exchange for shares of Aetna common stock will be a taxable
transaction for United States federal income tax purposes. An Aetna shareholder
that is a United States holder will recognize gain or loss in an amount equal
to the difference between (i) the sum of the amount of cash and the fair market
value, on the date of the Spin-Off and the Merger, of the shares of New Aetna
common stock received by the Aetna shareholder, and (ii) the Aetna
shareholder's tax basis in the shares of Aetna common stock surrendered. That
gain or loss will be a capital gain or loss if the shares of Aetna common stock
are held as a capital asset by the Aetna shareholder, and will be long term
capital gain or loss if the shares of Aetna common stock have been held for
more than one year.
An Aetna shareholder that is a United States holder may be subject to
backup withholding at a rate of 31% unless, at the time it surrenders shares of
Aetna common stock, it provides its taxpayer identification number and
certifies that the number is correct or properly certifies that it is awaiting
a taxpayer identification number, or unless an exemption is demonstrated to
apply. Backup withholding is not an additional tax. Amounts so withheld can be
refunded or credited against the federal income tax liability of the United
States holder, provided appropriate information is forwarded to the IRS.
Non-United States Holders
An Aetna shareholder that is a non-United States holder will not be
subject to United States federal income tax on any gain realized on the receipt
of cash and shares of New Aetna common stock unless:
o the gain is effectively connected with a trade or business in the
United States of that non-United States holder,
o that non-United States holder is a non-resident alien individual who
holds the shares of Aetna common stock as a capital asset and who is
present in the United States for 183 or more days during the calendar
year in which the transaction is completed, and certain other
conditions are met, or
o that non-United States holder is subject to tax under the provisions
of the Internal Revenue Code of 1986, as amended (which we refer to
as the Code), on the taxation of United States expatriates.
Information reporting and backup withholding imposed at a rate of 31% may
apply under specified circumstances unless, at the time the non-United States
holder surrenders shares of Aetna common stock, it certifies as to its foreign
status or otherwise establishes an exemption. Backup withholding is not an
additional tax. Amounts so withheld can be refunded or credited against the
federal income tax liability of the non-United States holder, provided
appropriate information is forwarded to the IRS.
Litigation
Four purported shareholder class action complaints were filed in the
Superior Court of Connecticut, Hartford County, alleging in substance that
Aetna and its directors breached fiduciary duties to shareholders in responding
to a February 24, 2000 letter from WellPoint and ING which had invited
discussions concerning a possible transaction. These actions were filed on
behalf of George Schore, Michael Demetrio and Gersh Korsinsky on March 3, 2000,
The Rainbow Fund on March 7, 2000, Eleanor Werbowsky on March 7, 2000, and
Catherine M. Friend on March 23, 2000. A fifth, substantially similar purported
class action complaint was filed on behalf of Barnett Stepak on March 28, 2000
in the Supreme Court of New York, New York County. Each action seeks various
forms of relief, including unspecified damages and equitable remedies. On July
26, 2000, the Connecticut court ordered consolidation of the four Connecticut
actions. This litigation is in the preliminary stages. Defendants intend to
defend these actions vigorously.
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<PAGE>
Chapter Two - Spin-Off and Merger
Dissenters' Rights
Under Sections 33-855 to 33-872 of the Connecticut Business Corporation
Act (which we refer to as the CBCA), if you do not vote your outstanding shares
of Aetna common stock in favor of adoption of the Merger, you will be entitled
to dissent and elect to have the "fair value" of your shares paid to you in the
event the Merger is completed. Under the CBCA, "fair value" means the value of
your shares immediately prior to the completion of the Merger and after giving
effect to the Spin-Off, excluding any appreciation in anticipation of the
Merger.
The following discussion is not a complete statement of the law pertaining
to dissenters' rights under the CBCA and is qualified in its entirety by the
full text of Sections 33-855 to 33-872, a copy of which is included in this
booklet as Annex F. If you have a beneficial interest in shares of Aetna common
stock held of record in the name of another person, such as a broker or
nominee, you must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect your appraisal
rights.
As provided in CBCA Section 33-861(a), any one of Aetna's shareholders
wishing to assert dissenters' rights must:
o deliver to Aetna, before the vote is taken on the proposal to approve
the Merger Agreement and the transactions contemplated by the Merger
Agreement, written notice of its intent to demand payment for its
shares of Aetna common stock if the Merger is completed; and
o not vote its shares of Aetna common stock for the proposal to approve
the Merger Agreement and the transactions contemplated by the Merger
Agreement.
The rights of an Aetna shareholder to receive the fair value of its shares
of Aetna common stock pursuant to Sections 33-855 to 33-872 of the CBCA is such
shareholder's exclusive remedy as an Aetna shareholder with respect to the
Merger, whether or not such shareholder proceeds as provided in those sections
of the CBCA.
As provided in CBCA Section 33-862, if the proposal to approve the Merger
Agreement and the transactions contemplated by the Merger Agreement is approved
and the Merger is consummated, no later than ten days after the consummation,
Aetna will deliver a written notice to each Aetna shareholder who has satisfied
the requirements of CBCA Section 33-861(a) described above (whom we refer to as
a Dissenter). The notice to Dissenters must:
o state where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
o inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
o supply a form for demanding payment that includes the date of the
first announcement to news media or to Aetna shareholders of the
terms of the Merger Agreement (i.e., July 20, 2000);
o require that each Aetna shareholder asserting dissenters' rights
certify whether or not it acquired beneficial ownership of the shares
of Aetna common stock before that date;
o set a date by which Aetna must receive the payment demand, which date
may not be fewer than 30 nor more than 60 days after the date that
the written notice is delivered by Aetna; and
o be accompanied by a copy of CBCA Sections 33-855 to 33-872.
As provided in CBCA Section 33-863(a), an Aetna shareholder who has
received the required notice to Dissenters must:
o demand payment,
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<PAGE>
Chapter Two - Spin-Off and Merger
o certify whether it acquired beneficial ownership of shares of Aetna
common stock before the date of the first announcement to news media
or to Aetna shareholders of the terms of the Merger Agreement (i.e.,
July 20, 2000), and
o deposit the certificate or certificates representing the Aetna
shareholder's shares of Aetna common stock in accordance with the
terms of the notice.
An Aetna shareholder who does not demand payment or deposit its share
certificates by the date set forth in the notice is not entitled to payment for
its shares of Aetna common stock under CBCA Sections 33-855 to 33-872.
Except as provided below, Aetna will pay each Aetna shareholder who makes
a proper demand for payment pursuant to CBCA Section 33-863(a) the amount Aetna
estimates to be the fair value of that shareholder's shares of Aetna common
stock (after giving effect to the Spin-Off), plus accrued interest from the
date of the completion of the Merger, as provided in CBCA Section 33-865(a).
The payment must be accompanied by:
o Aetna's balance sheet as of the end of a fiscal year ending not more
than sixteen months before the date of payment; an income statement
for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements;
o a statement of Aetna's estimate of the fair value of the shares of
Aetna common stock (after giving effect to the Spin-Off);
o an explanation of how the interest was calculated;
o a statement of the Aetna shareholder's right to demand payment under
CBCA Section 33-868; and
o a copy of CBCA Sections 33-855 to 33-872.
Aetna may withhold the payment required by Section 33-865 of the CBCA from
a Dissenter unless the Dissenter was the beneficial owner of Aetna's common
stock on July 20, 2000 (the date of the first public announcement of the terms
of the Merger Agreement). Under the CBCA, Aetna may treat holders of shares of
Aetna common stock acquired on or after the public announcement date
differently from persons who acquired their shares of Aetna common stock prior
to such date. Accordingly, to the extent Aetna elects to withhold payment to
the Dissenter at the time the corporate action is taken or the payment demand
is received, Aetna may condition its offer of payment on the Dissenter's
agreement to accept Aetna's estimate of the fair value of the shares of Aetna
common stock, plus accrued interest, in full payment of the Dissenter's demand.
If so, Aetna would pay this amount to each Dissenter who agrees to accept it in
full satisfaction of such Dissenter's demand. Aetna must send with its offer a
statement of its estimate of the fair value of the shares of Aetna common
stock, an explanation of how the interest was calculated and a statement of the
Dissenter's right to demand payment under Section 33-868 of the CBCA.
Pursuant to CBCA Section 33-868, a Dissenter may notify Aetna in writing
of its own estimate of the fair value of its shares of Aetna common stock
(after giving effect to the Spin-Off) and the amount of interest due, and
demand payment of its estimate, less any payment made by Aetna under CBCA
Section 33-865, if:
o the Dissenter believes that the amount paid under CBCA Section 33-865
is less than the fair value of the Dissenter's shares (after giving
effect to the Spin-Off) or that the interest due is incorrectly
calculated; or
o Aetna fails to make payment under CBCA Section 33-865 within 60 days
after the date set for the Dissenter's payment demand.
II-16
<PAGE>
Chapter Two - Spin-Off and Merger
A Dissenter waives its right to demand payment under CBCA Section 33-868
unless it notifies Aetna of its demand in writing within 30 days after Aetna
makes or offers payment for the Dissenter's shares.
Under CBCA Section 33-871(a) and (b), if a Dissenter's demand for payment
under CBCA Section 33-868 remains unsettled, Aetna must commence a proceeding
within 60 days after receipt of the Dissenter's demand for payment. The
petition to the superior court for the judicial district where Aetna's
principal office is located must request the court to determine the fair value
of the Dissenter's shares and accrued interest. If Aetna fails to commence the
proceedings within the prescribed time period, Aetna must pay each Dissenter
whose demand remains unsettled the amount demanded. All Dissenters making
demands for payment as described above, whose demands remain unsettled,
wherever residing, would be made parties to the proceeding and all parties must
be served with a copy of the petition. Dissenters not resident in Connecticut
may be served by registered or certified mail or by publication as provided by
law.
The jurisdiction of the court shall be plenary and exclusive. The court
may, if it so elects, appoint one or more persons as appraisers to receive
evidence and recommend a decision on the question of fair value.
The appraisers will have the powers described in the order appointing
them, or in any amendment to it. Each Dissenter made a party to the proceeding
is entitled to judgment for the amount, if any, by which the court finds that
the fair value of that Dissenter's shares, plus interest, exceeds the amount
paid by Aetna. The costs and expenses, including the reasonable compensation
and expenses of court-appointed appraisers, of the proceeding will be
determined by the court and will be assessed against Aetna, except that the
court may assess costs against all or some Dissenters, in amounts the court
finds equitable, to the extent the court finds that the Dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment under CBCA
Section 33-868.
The court may also assess the fees and expenses of counsel and experts
employed by any party, in amounts the court finds equitable:
o against Aetna in favor of any or all Dissenters if the court finds
that Aetna failed substantially to comply with the requirements of
CBCA Sections 33-860 to 33-868, inclusive, or
o against either Aetna or a Dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously or not in good faith with
respect to rights provided by CBCA Sections 33-855 to 33-872,
inclusive.
If the court finds that the services of the counsel for any Dissenter were
of substantial benefit to other Dissenters similarly situated, and that the
fees should not be assessed against Aetna, the court may award reasonable fees
to the counsel to be paid out of the amounts awarded to the Dissenters who were
benefitted.
Any holder of Aetna common stock that intends to exercise dissenters'
rights should carefully review the text of the applicable provisions of the
CBCA set forth in Annex F to this booklet and should also consult with its
attorney. The failure of a holder of Aetna common stock to follow precisely the
procedures summarized above and set forth in Annex F to this booklet may result
in a loss of dissenters' rights. No further notice of the events giving rise to
the dissenters' rights or any steps associated therewith will be furnished to
the holders of Aetna common stock, except as otherwise required by law.
II-17
<PAGE>
Chapter Two - Spin-Off and Merger
RELATIONSHIP BETWEEN AETNA AND NEW AETNA
AFTER THE SPIN-OFF AND MERGER
Aetna and New Aetna, or their respective subsidiaries, will enter into
various agreements in connection with the Spin-Off that will govern their
ongoing relationships and provide for an orderly transition after the
completion of the transaction. These agreements will cover matters such as the
allocation of obligations, including tax obligations, indemnities, employee
benefits, transitional services, leases, noncompetition and nonsolicitation and
the licensing of certain trademarks, tradenames and software. The material
provisions of those agreements are described under the heading "Relationship
Among Aetna, New Aetna and ING" in the New Aetna Information Statement included
in this booklet as Annex A. All shareholders are urged to read those
agreements, including the distribution agreement, which is included in this
booklet as Annex C, carefully in their entirety.
II-18
<PAGE>
CHAPTER THREE
CERTAIN NEW AETNA BENEFIT PLANS
It is recommended that Aetna shareholders vote "FOR" approval of the
adoption by New Aetna of each of the Benefit Plans, each of which will be
adopted in connection with the Spin-Off.
NEW AETNA STOCK INCENTIVE PLAN
Introduction. In connection with the completion of the transaction, New
Aetna will assume the Aetna 1996 Stock Incentive Plan (which we refer to as the
Existing Plan) and the Aetna 1998 Stock Incentive Plan. At the shareholders
meeting, Aetna shareholders will be asked to approve the adoption by New Aetna
of the New Aetna Stock Incentive Plan (which we refer to as the Stock Plan)
which is substantially similar to, and will replace, the Existing Plan. The
Stock Plan is included in this booklet as Annex G. Prior to the special
meeting, Aetna, as sole shareholder of New Aetna, will also approve such
adoption. As a result of the transaction, certain options outstanding under the
Existing Plan and the Aetna 1998 Stock Incentive Plan will be adjusted to
relate to New Aetna Common Stock (any options granted under the Stock Plan in
connection with the adjustment of Aetna Options under the Existing Plan to
reflect the transaction are referred to as Adjusted Options).
The purposes of the Stock Plan are to promote the interests of New Aetna
and its shareholders, and to further align the interests of employees of New
Aetna and its subsidiaries and affiliates (which we refer to collectively as
Eligible Employees) with New Aetna shareholders. In conjunction with the
adoption of the Stock Plan, New Aetna will continue to implement the stock
ownership guidelines for senior executives established by Aetna. These
guidelines will encourage and ensure that senior executives acquire and
maintain significant levels of stock ownership. Such stock ownership aligns
changes in shareholder value with meaningful changes in a senior executive's
financial situation.
The Stock Plan is closely modeled on the Existing Plan, which was adopted
by Aetna and approved by Aetna shareholders in 1996. The material differences
between the Stock Plan and the Existing Plan reflect the assumption of the
Existing Plan by New Aetna, and give effect to the transaction.
Principal Features of the Stock Plan. Awards which may be granted under
the Stock Plan include options, stock appreciation rights (which we refer to as
SARs), incentive stock and incentive units and other stock-based awards (which
we refer to collectively as Awards). In addition, Awards under the Stock Plan
may be granted as payment in lieu of other compensation payable by New Aetna to
an Eligible Employee.
Administration of Incentive Plan. A committee (which we refer to as the
New Aetna Compensation Committee) consisting of at least two directors of New
Aetna chosen by the New Aetna Board of Directors, each of whom is a
"disinterested person" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934 (which we refer to as the 1934 Act) and an "outside
director" within the meaning of Section 162 (m) of the Code will, among other
things, administer the Stock Plan, and will determine which Eligible Employees
will receive Awards and the terms and conditions of such Awards. Directors who
are not employees of New Aetna are not eligible to receive Awards under the
Stock Plan. The number of Eligible Employees who may receive Awards under the
Stock Plan will likely vary from year to year.
Shares Available for Issuance. Except as otherwise described in this
paragraph and under "Adjustments" below, the maximum number of shares of New
Aetna common stock that may be delivered under the Stock Plan is 7,000,000 plus
(i) the number of shares of New Aetna common stock to be delivered upon
exercise of the Adjusted Options and (ii) the number of shares required to
satisfy any outstanding incentive unit awards under the Existing Plan. In
addition, the number of shares of New Aetna common stock delivered under the
Stock Plan with respect to (i) incentive stock options (which we refer to as
ISOs) shall not exceed 5,000,000 shares, (ii) incentive stock or incentive
units shall not exceed 2,235,000 shares or (iii) other stock-based awards shall
not exceed 1,000,000 shares. It is expected that the shares delivered under the
Stock Plan will be authorized but unissued shares of New Aetna. Shares of New
Aetna common stock subject to Awards that are forfeited, terminated, canceled
or settled without the delivery of New Aetna common stock under the Stock Plan
will again be available for Awards under the Stock Plan. Also, (x) shares
tendered to New Aetna in satisfaction or partial satisfaction of the exercise
price of any Award
III-1
<PAGE>
Chapter Three - Certain New Aetna Benefit Plans
under the Stock Plan and (y) remittances from option exercises used to
repurchase shares of New Aetna common stock on the open market will increase
the number of shares available for delivery pursuant to Awards granted under
the Incentive Plan. In addition, any shares of New Aetna common stock
underlying Awards granted in assumption of, or in substitution for, outstanding
awards previously granted by a company acquired by New Aetna, or with which New
Aetna combines (which we refer to as Substitute Awards) shall not, except in
the case of shares with respect to which Substitute Awards are granted to
Section 16 insiders as defined by Section 16 of the 1934 Act, be counted
against the shares available for delivery under the Stock Plan.
Adjustments
If a fundamental corporate event occurs, the New Aetna Compensation
Committee may, as it deems appropriate, adjust the number and kind of shares
that may be delivered under the Stock Plan in the future and the number and
kind of shares and the grant, exercise or conversion price, if applicable,
under all outstanding Awards to preserve, or to prevent the enlargement of, the
benefits made available under the Stock Plan. Cash payments may also be made.
Grants Under the Stock Plan
Stock Options. The New Aetna Compensation Committee may grant nonstatutory
stock options (which we refer to as NSOs) and ISOs. These options may contain
any terms that the New Aetna Compensation Committee determines, except that no
Eligible Employee may be granted options for more than 800,000 shares of New
Aetna common stock in respect of any year in which the Stock Plan is in effect
(subject to adjustment as described above). Except in the case of Substitute
Awards or options granted in lieu of payment for compensation earned by an
Eligible Employee outside of the Stock Plan, the exercise price shall not be
less than 100% of the fair market value on the date of grant. The New Aetna
Compensation Committee shall have the discretion to determine the terms and
conditions upon which options shall be exercisable.
SARs. SARs may be granted to Eligible Employees in addition to, or in
tandem with, an option or unrelated to an option. A SAR permits an Eligible
Employee to receive cash, shares or a combination of cash and shares, generally
based on the excess of the fair market value at the time of exercise over the
exercise price, which exercise price shall equal the fair market value on the
date the SAR was granted, provided that if an SAR is granted retroactively in
tandem with or in substitution for an option, the exercise price may be the
exercise price of such option. The term of each SAR will be fixed by the New
Aetna Compensation Committee but may not exceed ten years from the date of the
grant. The New Aetna Compensation Committee will have the discretion to
determine all other terms and conditions applicable to SARs, including when
SARs shall be exercisable.
Incentive Units and Incentive Stock. The New Aetna Compensation Committee
may grant an Eligible Employee incentive units which provide a contractual
right to receive shares of New Aetna common stock or cash based on the fair
market value of the related shares at the end of a restricted period determined
by the New Aetna Compensation Committee, which restricted period is generally
expected to be three years or more. The New Aetna Compensation Committee also
may grant shares of incentive stock that are nontransferable and subject to
substantial risk of forfeiture during the applicable restricted period. The New
Aetna Compensation Committee shall have the discretion to provide that Awards
of incentive stock and incentive units will vest, if at all, upon the (i)
employee's continued employment during the relevant restricted period as
determined by the New Aetna Compensation Committee and/or (ii) attainment or
partial attainment of performance objectives determined by the New Aetna
Compensation Committee. In general, an employee who has been granted incentive
stock, the vesting restrictions of which relate solely to the passage of time
and continued employment, will from the date of grant have the benefits of
ownership in respect of such shares, including the right to receive dividends
and other distributions thereon, subject to the restrictions set forth in the
Stock Plan and in the instrument evidencing such Award. With respect to any
performance period, no executive officer may be granted Awards of incentive
stock or incentive units which vest upon the achievement of performance
objectives in respect of more than 500,000 shares of New Aetna common stock or,
if such Awards are settled in cash, the fair market value thereof determined at
the time of payment (each subject to adjustment as described above).
III-2
<PAGE>
Chapter Three - Certain New Aetna Benefit Plans
With respect to any award of incentive stock or incentive units made to an
executive officer of New Aetna that the New Aetna Compensation Committee
determines will vest based on the achievement of performance objectives, such
performance objectives shall relate to at least one of the following criteria,
which may be determined solely by reference to the performance of New Aetna, a
subsidiary or an affiliate (or any business unit thereof) or based on
comparative performance relative to other companies: (i) net income; (ii)
earnings before income taxes; (iii) earnings per share; (iv) return on
shareholders' equity; (v) expense management; (vi) profitability of an
identifiable business unit or product; (vii) ratio of claims to revenues;
(viii) revenue growth; (ix) earnings growth; (x) total shareholder return; (xi)
cash flow; (xii) return on assets; (xiii) pretax operating income; (xiv) net
economic profit (operating earnings minus a charge for capital); (xv) customer
satisfaction; (xvi) provider satisfaction; (xvii) employee satisfaction;
(xviii) quality of networks; (xix) strategic innovation; or (xx) any
combination of the foregoing.
Other Stock-Based Awards. The Stock Plan also authorizes the New Aetna
Compensation Committee to grant other stock-based awards to Eligible Employees
and to grant executive officers New Aetna common stock in lieu of cash payable
as salary or under any other bonus or incentive compensation plan of New Aetna.
Dividends and Dividend Equivalents. The New Aetna Compensation Committee
may provide that any Award shall include dividends or dividend equivalents,
payable in cash, New Aetna common stock, securities or other property on a
current or deferred basis.
Effect of Awards on Termination of Employment
The New Aetna Compensation Committee has broad discretion as to the
specific terms and conditions of each Award and any rules applicable thereto,
including but not limited to the effect thereon of the death, retirement or
other termination of employment of the Eligible Employee or the effect, if any,
of a change in control of New Aetna.
General
Award Agreement. The terms of each Award are to be evidenced by a written
instrument delivered to the Eligible Employee.
Withholding. The Awards are subject to applicable tax withholding by New
Aetna which may, to the extent permitted by the New Aetna Compensation
Committee, be satisfied by the withholding of shares deliverable under the
Stock Plan.
Transferability. Unless the New Aetna Compensation Committee expressly
permits transfers for the benefit of members of the Eligible Employee's
immediate family or trust or similar vehicle for their benefit, Awards under
the Stock Plan may not be assigned or transferred except by will, the laws of
descent and distribution.
Deferral. The New Aetna Compensation Committee will have the discretion to
determine whether, to what extent, and under what circumstances cash, New Aetna
common stock, other securities, other Awards, other property, and other amounts
payable with respect to an Award will be deferred either automatically or at
the election of the holder thereof or of the New Aetna Compensation Committee.
Amendment or Termination. The New Aetna Board of Directors or the New
Aetna Compensation Committee may terminate or suspend the Stock Plan at any
time, but the termination or suspension will not adversely affect any vested
Awards then outstanding under the Stock Plan. Unless terminated by action of
the Board or the New Aetna Compensation Committee, no Award may be granted
under the Stock Plan after December 31, 2010. The Stock Plan may be amended or
terminated at any time by the New Aetna Board of Directors, except that no
amendment may be made without shareholder approval if the New Aetna
Compensation Committee determines that such approval is necessary to comply
with any tax or regulatory requirement, including any approval requirement
which is a prerequisite for exemptive relief from Section 16 of the 1934 Act,
for which or with which the New Aetna Compensation Committee determines that it
is desirable to qualify or comply; and, provided further, that any amendment or
action to reduce the exercise price of options previously granted under the
Stock Plan shall be subject
III-3
<PAGE>
Chapter Three - Certain New Aetna Benefit Plans
to the approval of New Aetna's shareholders (other than any such increase,
modification or reduction that may result from adjustments in connection with a
fundamental corporate event). The New Aetna Compensation Committee may amend
the term of any Award granted, retroactively or prospectively, but no amendment
may adversely affect any vested Award without the holder's consent.
Effect on Other Compensation Programs
Nothing contained in the Stock Plan shall prevent New Aetna from adopting
or continuing in effect other compensation arrangements which may, but need
not, provide for the grant of options, incentive stock, and other types of
Awards provided for hereunder.
New Plan Benefits
In connection with the Spin-Off and the Merger, Aetna options held by New
Aetna Holders will be converted into New Aetna options in accordance with the
New Aetna Holder Adjustment. It is not possible to determine the number of
Adjusted Options prior to the transaction. Other awards to be granted under the
Stock Plan after the transaction have not yet been determined.
Certain Federal Income Tax Consequences
The options described above are intended to comply with the requirements
of the Code regarding the deductibility of certain performance based
compensation.
Under currently applicable federal income tax law, an Eligible Employee
will receive no taxable income upon the grant of an NSO or an ISO. When an
Eligible Employee exercises an NSO, the excess of the fair market value of the
shares on the date of exercise over the exercise price paid will be ordinary
income to the Eligible Employee and his or her employer will be allowed a
federal income tax deduction in the same amount. When an Eligible Employee
exercises an ISO while employed or within three months after termination of
employment (one year for disability), no income will be recognized upon
exercise of the ISO. If the Eligible Employee holds shares acquired for at
least one year after exercise and two years after the grant of the ISO, the
excess of the amount realized upon disposition of the shares over the exercise
price paid is treated as long-term capital gain for the Eligible Employee and
the Eligible Employee's employer is not allowed a federal income tax deduction.
A sale or other exchange of the underlying stock before the end of either of
the required holding periods will be a "disqualifying disposition" which will
generally result in the Eligible Employee being taxed on the gain derived from
an ISO as though it were an NSO and the Eligible Employee's employer will be
allowed a federal income tax deduction in the same amount. Special rules apply
if the exercise price is paid in shares.
Vote Necessary to Approve Stock Plan
The adoption by New Aetna of the Stock Plan will be approved if the votes
cast in favor of such proposal exceed the votes cast against such proposal, so
long as a quorum exists.
THE BOARD OF DIRECTORS OF AETNA RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF
THE ADOPTION BY NEW AETNA OF THE STOCK PLAN.
III-4
<PAGE>
Chapter Three - Certain New Aetna Benefit Plans
NEW AETNA ANNUAL INCENTIVE PLAN
At the shareholders meeting, the shareholders of Aetna will be asked to
adopt the New Aetna Annual Incentive Plan (which we refer to as the Annual
Plan), to be effective as of January 1, 2001, which has been approved by the
respective Boards of Directors of Aetna and New Aetna. The Annual Plan is
included in this booklet as Annex H.
Shareholder approval is required under Section 162(m) of the Code so that
compensation payable pursuant to the Annual Plan, together with other
compensation paid to the same "covered employee," exceeding $1 million is
considered "performance based" and, therefore, tax deductible by New Aetna.
Under Section 162(m), a covered employee is an executive officer named in the
summary compensation table in New Aetna's annual shareholders meeting booklet
who is acting in such capacity on the last day of the applicable tax year.
Summarized below are certain terms of the Annual Plan which is submitted
for shareholder approval.
Eligible Employees.
All executive officers as described in Rule 3b-7 of the 1934 Act are
eligible to be named by the New Aetna Board of Directors as participants for
any fiscal year. The New Aetna Board of Directors shall select the executive
officers (six people expected as of the transaction) who will participate in
the Annual Plan with respect to any fiscal year.
Performance Criteria.
On or before March 31 of each fiscal year, the New Aetna Compensation
Committee shall establish the performance objectives that must be attained in
order for New Aetna to pay bonuses under the Annual Plan. Unless the New Aetna
Compensation Committee determines at the time of grant not to qualify the award
as performance- based compensation under Section 162(m), the performance
objectives for awards made under the Annual Plan will be based upon one or more
of the following criteria, which may be determined solely by reference to the
performance of New Aetna, a subsidiary or an affiliate (or any business unit
thereof) or based on comparative performance relative to other companies: (i)
net income; (ii) earnings before income taxes; (iii) earnings per share; (iv)
return of shareholders equity; (v) expense management; (vi) profitability of an
identifiable business unit or product; (vii) ratio of claims to revenues;
(viii) revenue growth; (ix) earnings growth; (x) total shareholder return; (xi)
cash flow; (xii) return on assets; (xiii) pretax operating income; (xiv) net
economic profit (operating earnings minus a charge for capital); (xv) customer
satisfaction; (xvi) provider satisfaction; (xvii) employee satisfaction;
(xviii) quality of networks; (xix) strategic innovation; or (xx) any
combination of the foregoing.
Individual Limit.
The maximum amount that can be paid to any participant under the Annual
Plan with respect to any fiscal year is $3,000,000. The New Aetna Compensation
Committee has the discretion to pay amounts which are less than this maximum
amount based on individual performance or such other criteria as the New Aetna
Compensation Committee shall deem relevant.
Administration.
The New Aetna Compensation Committee, to the extent necessary to comply
with Section 162(m) of the Code and Section 16 of the 1934 Act, shall at all
times be comprised of at least two directors, each of whom is an "outside
director" for purposes of Section 162(m) and a "disinterested person" for
purposes of Section 16, and shall administer and interpret the Annual Plan.
Prior to making any payment under the Annual Plan, the New Aetna Compensation
Committee shall certify in writing that the performance objectives have been
attained.
III-5
<PAGE>
Chapter Three - Certain New Aetna Benefit Plans
Amendment and Termination.
The New Aetna Compensation Committee may at any time amend, terminate or
suspend the Annual Plan. No adverse changes will be made retroactively, but may
apply to subsequent performance periods. The Annual Plan will not be effective
with respect to the calendar years ending after December 31, 2010 (except as to
awards earned prior to such date which are subsequently paid), unless otherwise
extended by action of the New Aetna Compensation Committee.
Effect on Other Compensation Programs.
Nothing contained in the Annual Plan shall prevent New Aetna from adopting
or continuing in effect other compensation arrangements.
New Plan Award Table.
Because the Annual Plan will not be effective until January 1, 2001,
awards under the Annual Plan have not yet been determined.
Vote Necessary to Approve Annual Plan.
The adoption by New Aetna of the Annual Plan will be approved if the votes
cast in favor of such proposal exceed the votes cast against such proposal, so
long as a quorum exists.
THE BOARD OF DIRECTORS OF AETNA RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF
THE ADOPTION BY NEW AETNA OF THE ANNUAL PLAN.
III-6
<PAGE>
CHAPTER FOUR
INFORMATION ABOUT THE SPECIAL MEETING AND VOTING
Aetna's Board of Directors is using this booklet to solicit proxies from
the holders of Aetna common stock for use at the special meeting. We are first
mailing this booklet and the accompanying form of proxy to Aetna shareholders
on or about [____], 2000.
Matters Relating to the Special Meeting
Date, Time and [____], 2000
Place: [____] a.m., Eastern Time
Aetna Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
Purpose of Meeting A proposal to approve the Merger Agreement and the
is to Vote on the transactions contemplated by the Merger Agreement.
Following Items:
A proposal to approve the adoption by New Aetna of
a stock incentive plan.
A proposal to approve the adoption by New Aetna of
an annual incentive plan.
Record Date: The record date for shares of Aetna common stock
entitled to vote is [ ], 2000.
Outstanding Shares As of [ ], 2000, there were [____] shares of Aetna
Held on Record common stock outstanding.
Date:
Shares Entitled to Shares entitled to vote are shares of Aetna
Vote: common stock held at the close of business on the
record date, [____], 2000.
Each share of Aetna common stock that you own
entitles you to one vote.
Quorum A quorum of Aetna shareholders is necessary to
Requirement: hold a valid meeting.
The presence in person or by proxy at the meeting
of holders of shares of Aetna common stock
representing a majority of the votes of Aetna
common stock entitled to be cast at the meeting is
a quorum. Abstentions and broker "non-votes" count
as present for establishing a quorum.
A broker non-vote occurs on an item when a broker
is not permitted to vote on that item without
instruction from the beneficial owner of the
shares of Aetna common stock and no instruction is
given.
Shares Beneficially [ ] shares of Aetna common stock, including
Owned by Aetna exercisable options. These shares represent in
Directors and total approximately [ ]% of the voting power of
Executive Officers as Aetna common stock.
of [______], 2000:
These individuals have indicated that they will
vote in favor of the proposals recommended by the
Aetna Board of Directors.
Vote Necessary to Approve Proposals
Approval of the Merger Agreement and the transactions contemplated by the
Merger Agreement requires approval by holders of 66 2/3% of the outstanding
shares of Aetna's common stock.*
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<PAGE>
Chapter Four - Information About the Special Meeting and Voting
Your Board of Directors recommends that you vote "FOR" approval of the
Merger Agreement and the transactions contemplated by the Merger Agreement.
The adoption by New Aetna of each Benefit Plan will be approved if the
votes cast in favor of such proposal exceed the votes cast against such
proposal, so long as a quorum exists.
The completion of the Merger is not conditioned on approval of the Benefit
Plans, but the adoption of the Benefit Plans is contingent on completion of the
merger.
Your Board of Directors recommends that you vote "FOR" approval of the
adoption by New Aetna of each Benefit Plan.
---------
* Under New York Stock Exchange rules, if your broker holds your shares of
Aetna common stock in its name, your broker may not vote such shares on
the Merger absent instructions from you. Without your voting instructions,
a broker non-vote will occur on the proposal with respect to the Merger
and will have the effect of a vote against the proposal.
Proxies
Voting Your Proxy. You may vote in person at the special meeting or by
proxy. We recommend you vote by proxy even if you plan to attend the special
meeting in person. You can always change your vote at the special meeting.
Voting instructions are included on your proxy card. If you properly give
your proxy and submit it to us in time to vote, one of the individuals named as
your proxy will vote your shares as you have directed. You may vote for or
against the proposals or abstain from voting.
How to Vote by Proxy
By Telephone*: Call toll-free on a touchtone telephone, [_______]
in the United States or [_______] outside the
United States and follow the instructions. You
will need to give the personal identification
number contained on your proxy card.
By Internet*: Go to http://www.[_________] and follow the
instructions. You will need to give the personal
identification number contained on your proxy
card. This website will be available until 12:00
midnight, Eastern Standard Time, on [______],
2000.
In Writing: Complete, sign, date and return your proxy card in
the enclosed envelope.
---------
* If your shares of Aetna common stock are held in the name of a bank or
broker, follow the voting instructions you receive on your proxy card.
Telephone and internet voting are offered to Aetna shareholders owning
shares of Aetna common stock through most banks and brokers.
If you submit your proxy but do not make specific choices, your proxy will
follow the Board of Director's recommendations and vote your shares:
o "FOR" approval of the Merger Agreement and the transactions
contemplated by the Merger Agreement;
o "FOR" approval of the adoption by New Aetna of each Benefit Plan; and
o In its discretion as to any other business as may properly come
before the special meeting.
IV-2
<PAGE>
Chapter Four - Information About the Special Meeting and Voting
Revoking Your Proxy. You may revoke your proxy before it is voted by:
o submitting a new proxy with a later date, including a proxy given by
telephone or internet,
o notifying Aetna's Corporate Secretary in writing before the meeting
that you have revoked your proxy, or
o voting in person at the special meeting.
Attendance at the special meeting. The special meeting is open to all
shareholders or their authorized representatives. In order to attend the
special meeting, you must present an admission ticket. You may request a ticket
in advance by following the instructions below. Shareholders who do not have
admission tickets will be admitted only following proof of share ownership. If
you hold shares of Aetna common stock in your own name, please signify your
intention to attend the special meeting when you vote by telephone or over the
internet or check the appropriate box on your proxy card. If you hold your
shares through the Aetna Incentive Savings Plan, please indicate your intention
to attend the special meeting when you access the telephone voting system or
check the appropriate box on your voting instruction card. If you hold your
shares through a broker, bank or other holder of record and plan to attend, you
must send a written request to attend along with proof that you own the shares
(such as a copy of your brokerage or bank account statement) to our Corporate
Secretary at the above address.
Voting in person. If you plan to attend the special meeting and wish to
vote in person, we will give you a ballot at the special meeting.
Confidential voting. Independent inspectors count the votes. Your
individual vote is kept confidential from us unless special circumstances
exist.
Proxy solicitation. We will pay our own costs of soliciting proxies.
In addition to this mailing, Aetna employees and directors may solicit
proxies personally, electronically or by telephone. Aetna is paying Georgeson
Shareholder Communications Inc. a fee of $[___] plus expenses to help with the
solicitation.
The extent to which these proxy soliciting efforts will be necessary
depends entirely upon how promptly proxies are submitted. You should send in
your proxy by mail, telephone or internet without delay. We also reimburse
brokers and other nominees for their expenses in sending these materials to you
and getting your voting instructions.
Do not send in any stock certificates with your proxy cards. The exchange
agent will mail transmittal forms with instructions for the surrender of stock
certificates for Aetna common stock to former Aetna shareholders as soon as
practicable after the completion of the Merger.
Since New Aetna common stock will be issued as uncertificated shares
registered in book-entry form through the direct registration system, no
certificates representing your shares of New Aetna common stock will be mailed
to you. Your book-entry shares will be held with the New Aetna transfer agent
and registrar, First Chicago Trust Company of New York, who serves as the
official record keeper for New Aetna common stock. Under the direct
registration system, instead of receiving stock certificates, you will receive
an account statement reflecting your ownership interest in shares of New Aetna
common stock. If at any time you want to receive a physical certificate
evidencing your shares of New Aetna common stock, you may do so by contacting
the New Aetna transfer agent and registrar.
Other Business; Adjournments
We are not currently aware of any other business to be acted upon at the
special meeting. If, however, other matters are properly brought before the
special meeting, or any adjourned meeting, your proxies will have discretion to
vote or act on those matters according to their best judgment, including to
adjourn the special meeting.
IV-3
<PAGE>
Chapter Four - Information About the Special Meeting and Voting
Adjournments may be made for the purpose of, among other things,
soliciting additional proxies. Any adjournment may be made from time to time by
approval of the holders of shares of Aetna common stock representing a majority
of the votes present in person or by proxy at the meeting, whether or not a
quorum exists, without further notice other than by an announcement made at the
special meeting. We do not currently intend to seek an adjournment of the
special meeting.
Security Ownership of Management
The following table sets forth certain information, as of June 30, 2000,
regarding the beneficial ownership of Aetna common stock by each director of
Aetna, by each of the five most highly compensated executive officers of Aetna
(as required by SEC rules) and by all directors and executive officers of Aetna
as a group. Most of these individuals have the opportunity to become the
beneficial owners of additional shares of Aetna common stock as a result of
stock options vesting or becoming exercisable. See "Chapter One-Interests of
Officers and Directors in the Transaction." Otherwise, except as noted, the
persons named in the table below do not own, beneficially or of record, any
other securities of Aetna or its subsidiaries and have sole voting and
investment power over all securities for which they are shown as beneficial
owners.
Amount and Nature of
Beneficial Ownership
------------------------------------
Common Common Stock
Name of Beneficial Owner and Position Shares Percent Equivalents(1)
------------------------------------- ------ ------- -------------
Betsy Z. Cohen 1,571 * 3,730
(Director)
William H. Donaldson 100,750 (2) * 3,300
(Chairman, President, Chief Executive
Officer and Director)
Barbara Hackman Franklin 3,455 * 3,650
(Director)
Jeffrey E. Garten -0- * 1,850
(Director)
Jerome S. Goodman 23,708 (3) * 5,646
(Director)
Earl G. Graves 500 * 5,587
(Director)
Gerald Greenwald 3,000 (4) * 8,133
(Director)
Ellen M. Hancock 2,000 (5) * 6,735
(Director)
Michael H. Jordan 3,000 * 6,803
(Director)
Jack D. Kuehler 12,000 (6) * 9,054
(Director)
Judith Rodin 101 * 7,404
(Director)
IV-4
<PAGE>
Chapter Four - Information About the Special Meeting and Voting
Amount and Nature of
Beneficial Ownership
------------------------------------
Common Common Stock
Name of Beneficial Owner and Position Shares Percent Equivalents(1)
------------------------------------- ------ ------- -------------
Richard L. Huber
(former Chairman, President, Chief
Executive Officer and Director) 871,193 (7) * -0-
Michael J. Cardillo 259,371 (8) * -0-
(former Executive Vice President,
Aetna U.S. Healthcare)
Frederick C. Copeland, Jr. 145,761 (9) * 5,347 (10)
(President, Aetna International Inc.)
Thomas J. McInerney 248,704 (11) * 5,199 (10)
(Executive Vice President, Aetna
Financial Services)
Alan J. Weber 261,143 (12) * -0-
(Vice Chairman for Strategy and
Finance)
Directors and executive officers
as a group (18 persons) 2,091,360 (13) 1.48% 72,438
---------
* Less than 1%.
Notes to Beneficial Ownership Table
(1) Except as set forth in Note 10, represents stock units issued under the
Aetna Director Plan or its predecessor plan, accrued stock units resulting
from deferral of retainer and attendance fees and stock units credited to
certain Directors in 1996 in connection with the elimination of the
Director retirement plan. Stock units, which do not have voting rights,
track the value of Aetna's common stock and earn dividend equivalents that
may be reinvested.
(2) Includes 100,000 shares of restricted stock that vest on March 1, 2001.
(3) Includes 18,734 shares held by Wellington Limited Partnership, of which
Mr. Goodman is a general partner. Excludes 50 shares held by his spouse,
as to which Mr. Goodman disclaims beneficial ownership.
(4) Represents shares held by his spouse, as to which Mr. Greenwald has no
voting or investment power.
(5) Held jointly with her spouse, as to which Mrs. Hancock shares voting and
investment powers.
(6) Held jointly with his spouse, as to which Mr. Kuehler shares voting and
investment powers.
(7) Includes 1,000 shares held jointly with his spouse and 15,000 shares held
by a revocable living trust, of which Mr. Huber is trustee and
beneficiary. Also includes 42,218 shares held by Huber Associates Limited
Partnership, a family limited partnership (HALP). Mr. Huber and his spouse
are the sole general partners of HALP and hold a 1% limited partnership
interest, and each of three other family members is 33% limited partner.
Also includes 644,225 shares that Mr. Huber has the right to acquire upon
exercise of stock options and 85,501 shares that HALP has the right to
acquire upon exercise of stock options, in each case within 60 days of
June 30, 2000. Mr. Huber disclaims beneficial ownership of all shares and
stock options held by HALP, except as to his pecuniary interest in HALP.
(8) Also includes 205,392 shares that Mr. Cardillo has the right to acquire
within 60 days of June 30, 2000 upon exercise of stock options.
(9) Includes 141,175 shares that Mr. Copeland has the right to acquire within
60 days of June 30, 2000 upon exercise of stock options. Also includes 59
shares held by his spouse, as to which Mr. Copeland has no voting or
investment power.
IV-5
<PAGE>
Chapter Four - Information About the Special Meeting and Voting
(10) Represents stock units resulting from deferral of payment of Aetna's
Incentive Unit Awards under Aetna's 1996 Stock Incentive Plan. The stock
units are payable in shares of Aetna common stock at the expiration of the
applicable deferral period. Stock units, which do not have voting rights,
track the value of Aetna's common stock and earn dividend equivalents that
are reinvested.
(11) Includes 238,164 shares that Mr. McInerney has the right to acquire within
60 days of June 30, 2000 upon exercise of stock options.
(12) Includes 10,000 shares of restricted stock that vest in equal installments
on August 1, 2000 and August 1, 2001. Also includes 233,586 shares that
Mr. Weber has the right to acquire within 60 days of June 30, 2000 upon
exercise of stock options.
(13) Directors and executive officers as a group have sole voting and
investment powers over 334,368 shares and share voting and investment
powers with respect to 59,218 shares. Included in the number of shares
shown in the table are 4,083 shares held under Aetna's Incentive Savings
Plan (ISP) and beneficially owned by executive officers, and 1,690,632
shares that Directors and executive officers have the right to acquire
within 60 days of June 30, 2000 upon the exercise of stock options.
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information, as of June 30, 2000,
regarding the beneficial ownership of persons known to Aetna to be the
beneficial owners of more than five percent of any class of Aetna's voting
securities. The information was obtained from information supplied by the
shareholders on Schedules 13D and 13G. Except as otherwise noted, the persons
named in the table below have sole voting and investment power with respect to
all shares shown as beneficially owned by them.
Amount and Nature
of Beneficial
Name and Address of Beneficial Owner Ownership Percent
------------------------------------ ----------------- -------
Sanford C. Bernstein & Co., Inc. 12,523,694 (1) 8.87%
767 Fifth Avenue
New York, New York 10153
Southeastern Asset Management, Inc. 8,469,800 (2) 6.00%
6410 Poplar Avenue, Suite 900
Memphis, Tennessee 38119
---------
(1) Of the reported shares, Sanford C. Bernstein & Co., Inc. reports that it
has sole voting power with respect to 6,554,526 shares, that it shares
voting power with respect to 1,394,863 shares and that it has sole
dispositive power with respect to all of the reported shares.
(2) Of the reported shares, Southeastern Asset Management, Inc. reports that
it has sole voting power with respect to 5,577,100 shares, that it shares
voting power with respect to 1,768,400 shares, that it has sole
dispositive power with respect to 6,701,400 shares and that it shares
dispositive power with respect to 1,768,400 shares.
IV-6
<PAGE>
CHAPTER FIVE
ADDITIONAL INFORMATION FOR SHAREHOLDERS
FUTURE SHAREHOLDER PROPOSALS
Aetna will hold an annual meeting in the year 2001 only if the transaction
described in this booklet has not already been completed. If such meeting is
held, proposals of Aetna shareholders intended to be included in Aetna's 2001
Annual Meeting Proxy Statement must be received by Aetna's Corporate Secretary
no later than [ ], 2000 at Aetna's principal executive offices: 151 Farmington
Avenue, Hartford, Connecticut 06156. Other shareholder proposals intended to be
presented at Aetna's 2001 Annual Meeting but not in the Annual Meeting Proxy
Statement, must be received in writing at the same address, together with other
required information as set forth in Aetna's By-Laws, between [ ], 2001 and
[ ], 2001.
Article I of the New Aetna Bylaws sets forth advance notice requirements
applicable to shareholders desiring to nominate candidates for election as
directors or to present a proposal or bring other business before an annual
meeting of shareholders of New Aetna. In each case, the notice must be given to
the Secretary of New Aetna, whose address is 151 Farmington Avenue, Hartford,
Connecticut 06156. If the transaction is completed, the New Aetna 2001 Annual
Meeting of shareholders is expected to be held in April 2001. Notice of any
such nomination or proposal must be received [__] days prior to the meeting
(i.e., by [_________, ___] assuming the meeting were to be held) to be
considered at that meeting. In addition, to be included in New Aetna's proxy
statement and form of proxy for that meeting, any such nomination or proposal
must also comply in all respects with the rules and regulations of the SEC and
must be received by the Secretary of New Aetna within the time period specified
therein.
WHERE YOU CAN FIND MORE INFORMATION
Aetna files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements
or other information Aetna files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.
Aetna's SEC filings are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov."
Aetna has filed the New Aetna Registration Statement on Form 10 with the
SEC to register the New Aetna common stock to be distributed to Aetna's
shareholders in the Spin-Off. The New Aetna Information Statement is part of
the New Aetna Registration Statement. The New Aetna Information Statement is
being furnished to Aetna shareholders as part of this booklet.
This booklet, including the New Aetna Information Statement, is available
on Aetna's internet site at http://www.[_______]. This text is not an active
link and our website and the information contained on that site, or connected
to that site, are not incorporated into this booklet.
As allowed by SEC rules, this booklet does not contain all the information
you can find in the New Aetna Registration Statement or the exhibits to the New
Aetna Registration Statement.
The SEC allows Aetna to "incorporate by reference" information into this
booklet, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this booklet,
except for any information superseded by information in, or incorporated by
reference in, this booklet. This booklet incorporates by reference the
documents set forth below that Aetna has previously filed with the SEC. These
documents contain important information about Aetna and its finances.
V-1
<PAGE>
Chapter Five - Additional Information For Shareholders
Aetna SEC Filings (File No. 001-11913) Period
................................................................................
Annual Report on Form 10-K Fiscal Year ended December 31, 1999
Quarterly Report on Form 10-Q Fiscal Quarters ended March 31, 2000 and
June 30, 2000
Current Report on Form 8-K Filed on June 16, 2000
Current Report on Form 8-K Filed on July 20, 2000
We are also incorporating by reference additional documents that we file
with the SEC between the date of this booklet and the date of the special
meeting.
ING has supplied all information contained or incorporated by reference in
this booklet relating to ING and Aetna has supplied all such information
relating to Aetna and New Aetna.
If you are an Aetna shareholder, we may have sent you some of the
documents incorporated by reference, but you can obtain any of them through us
or the SEC. Documents incorporated by reference are available from us without
charge, excluding all exhibits unless we have specifically incorporated by
reference an exhibit in this booklet. Aetna shareholders may obtain documents
incorporated by reference in this booklet by requesting them in writing or by
telephone from Aetna at the following address:
Aetna Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: Corporate Secretary
Telephone: 1-800-237-4273
If you would like to request documents from us, please do so by [____],
2000 to receive them before the special meeting.
You should rely only on the information contained, or incorporated by
reference, in or included with this booklet to vote on the proposals. We have
not authorized anyone to provide you with information that is different from
what is contained in this booklet. This booklet is dated [____], 2000. You
should not assume that the information contained in the booklet is accurate as
of any date other than such date, and the mailing of this booklet to
shareholders shall not create any implication to the contrary.
V-2
<PAGE>
ANNEXES
<PAGE>
ANNEX A
Preliminary Information Statement
(Subject to Completion, Dated September 1, 2000)
AETNA U.S. HEALTHCARE INC. (to be renamed AETNA INC.)
COMMON SHARES
(par value $.01 per share)
The board of directors of Aetna Inc., or Aetna, has approved an agreement
and plan of restructuring and merger and related agreements under which Aetna
will spin off its domestic health care and large case pensions businesses in
the form of Aetna U.S. Healthcare Inc., or New Aetna, to its shareholders and
sell its financial services and international businesses to ING Groep N.V.
At this time, New Aetna is wholly-owned by Aetna. Aetna intends to
distribute, in a spin-off, all of its shares of New Aetna common stock on a pro
rata basis to the holders of Aetna common stock. Each of you, as a holder of
Aetna common stock, will receive one share of New Aetna common stock for each
share of Aetna common stock that you hold at the close of business on the
record date for the spin-off, which is expected to be on or about , 2000.
The transaction will occur in two, effectively simultaneous, steps:
o Aetna will spin off its domestic health care and large case pensions
businesses to its shareholders, and
o Aetna's financial services and international businesses will be sold
to ING. The sale, which we refer to as the merger, will be structured
as a merger of Aetna (which will then own only Aetna's financial
services and international businesses) with a subsidiary of ING.
The spin-off and the merger will each occur only if the other occurs
effectively at the same time. After completion of the spin-off and the merger,
the Aetna Financial Services and Aetna International businesses will be owned
100% by ING.
The record date and the distribution date for the spin-off, as well as the
closing date for the merger, will all be the same day. Immediately after the
spin-off is completed, we will be an independent public company.
This information statement relates to the shares of New Aetna that will be
issued to you in the spin-off if the merger is approved by shareholders of
Aetna. It provides important information about New Aetna. You should read this
information statement carefully. If the merger is approved by Aetna's
shareholders, we expect the spin-off to occur on or about , 2000. On that
date, holders of record of Aetna common stock on the record date will have
credited to a book-entry account established for them by, and maintained at,
First Chicago Trust Company of New York (the registrar and transfer agent for
New Aetna common stock) one share of New Aetna common stock for every share of
Aetna common stock they own on the record date.
If the merger is approved by Aetna's shareholders, no further action on
your part is necessary for you to receive the shares of New Aetna common stock
to which you are entitled in the spin-off. This means that you do not need to
pay any consideration to Aetna or to New Aetna and you do not need to surrender
any shares of Aetna common stock to receive your shares of New Aetna common
stock. However, you are required to surrender your shares of Aetna common stock
to receive the cash consideration to be paid in the merger.
Because Aetna owns all of the New Aetna common stock, there has been no
trading market for New Aetna common stock. We expect that New Aetna common
stock will trade on the New York Stock Exchange under the ticker symbol "AET."
As you review this information statement, you should carefully consider
the matters described in "Risk Factors" beginning on page 9.
-----------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
information statement is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this information statement is , 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
Summary........................................................................1
Risk Factors...................................................................9
The Spin-Off..................................................................17
Capitalization of New Aetna...................................................19
Dividend Policy...............................................................19
Selected Consolidated Financial Data..........................................20
Unaudited Pro Forma Condensed Consolidated Financial Statements...............22
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................29
Business of New Aetna.........................................................59
Relationship Among Aetna, New Aetna and ING...................................76
Management....................................................................85
Certain Relationships and Related Transactions................................98
Security Ownership of Aetna and New Aetna.....................................99
Description of New Aetna Capital Stock.......................................100
Liability and Indemnification of Directors and Officers......................107
Where You Can Find More Information..........................................108
Index to the Consolidated Financial Statements ..............................F-1
i
<PAGE>
SUMMARY
This summary highlights information relating to New Aetna and the New
Aetna common stock being distributed in the spin-off. More detailed discussions
of this information are contained in this information statement. In some places
in this information statement, we have presented pro forma information,
adjusted to reflect the terms of our spin-off from Aetna and the merger. You
should read the entire information statement, including the risk factors and
our consolidated historical and pro forma financial statements and notes to
those statements appearing elsewhere in this information statement.
NEW AETNA
Our Company
New Aetna is the nation's largest health care benefits company, with
approximately 19.4 million health members, 14.6 million dental members and 11.4
million group life and disability insurance members at June 30, 2000. We are
also the nation's second largest provider of dental coverage, based on
membership. At June 30, 2000, we also had approximately 448,000 health care
providers participating in our networks nationwide, including more than 283,000
physicians and more than 3,100 hospitals. We provide a full spectrum of health
and dental products (ranging from managed care to indemnity products), group
insurance products (including life, disability and long-term care insurance
products) and certain specialty health products. These products are offered on
both an insured and employer-funded basis. We do business in all 50 states, and
focus on the commercial customer (ranging from small employer groups to large,
multi-site national accounts). We also have a large case pensions business that
manages a variety of retirement products for qualified defined benefit and
defined contribution plans of large customers.
Our goal is to provide our members with access to quality health care
through an array of health plan options, as well as group insurance products,
designed to meet the changing needs of today's marketplace. We are taking a
number of significant actions to better serve our various constituents, improve
our near-term financial performance and strategically reposition our business
for the future. We believe that our competitive strengths -- broad geographic
reach, strong market positions, large membership base, extensive provider
networks, extensive product offerings, information technology expertise, a
dedicated corps of employees and the quality and recognizability of our Aetna
brand -- position us to fulfill these important objectives.
Recent Developments; Strategic Repositioning of Our Business
Although our businesses are profitable and generate significant cash flow,
our recent financial performance has been disappointing. For the year ended
December 31, 1999, our total revenue was $22,109.7 million, our EBITDA was
$1,403.8 million and our income from continuing operations was $399.4 million.
For the six months ended June 30, 2000, our total revenue was $13,444 million,
our EBITDA was $605.8 million and our income from continuing operations was
$181.1 million. We have experienced a significant increase in medical costs in
the first half of 2000.
We are undertaking a comprehensive review of our health care business
model. We have already implemented a number of strategic and operational
initiatives and are considering a number of additional actions. These
initiatives include, among other things, strengthening management of the
business, improving relations with health care providers, exiting certain
product markets, addressing rising medical costs and improving the efficiency
of our operations.
Strengthening Management. We have made significant changes to our senior
management team since year end 1999 to help lead the strategic repositioning of
our business and the implementation of our other important initiatives. We have
also retained an executive recruiting firm to assist us in the search for a
chief executive officer. We have also taken steps to better empower local,
regional management, to address more quickly and effectively medical cost and
other issues that arise locally, where health care services are ultimately
furnished by providers to our members.
1
<PAGE>
Improving Relations with Health Care Providers. We intend to improve our
relationships with health care providers, as we believe we must have
constructive, mutually beneficial relations with providers to be successful in
our business. We believe that these relations can coexist with cost-effective
health care for our members and with improved financial performance. For
example, we believe that certain policies and procedures that may be costly to
administer and that may put a strain on provider relations can be eliminated or
simplified without negatively impacting our ability to monitor the quality of
services rendered to our members or to manage health care costs. Toward this
end, in 2000, we announced that we were making changes in certain states to
provide physicians in those states with additional choices in product
participation and financial compensation and to clarify how medical necessity
and coverage decisions are made. We are continuing a state-by-state review of
all of our provider arrangements and may implement additional changes in other
areas.
Exiting Certain Product Markets. We are evaluating the markets for our
products with the goal of either improving their performance to meet
management's strategic and financial goals or exiting those product markets
which do not meet these goals. As a result of this review, on June 29, 2000, we
notified the Health Care Financing Administration of our intent to exit a
number of Medicare service areas affecting approximately 340,000 Medicare
members, or approximately 50 percent of our total current Medicare membership.
The termination of these Medicare+Choice contracts will become effective on
December 31, 2000. We may elect to continue to provide Medicare benefits to
members in these service areas, in accordance with HCFA regulations and
guidelines, if legislative or regulatory changes are made that would increase
payments from HCFA to us within six months following this notification date.
During the remainder of 2000, we will continue to monitor any legislative or
regulatory changes that might increase payments under applicable
Medicare+Choice contracts and then make a final determination, as permitted
under HCFA regulations, depending on the level of any such reimbursement
increase. We are also in the process of evaluating region-by-region the markets
for our commercial HMO products to determine whether we should exit or modify
our products in any of these markets.
Addressing Rising Medical Costs. We are taking a number of steps to
address the significant increase in medical costs that we experienced in the
first half of 2000. Among other things, we are:
o implementing premium increases for contracts renewing in the fourth
quarter of 2000 and beyond that more appropriately reflect the rise
in medical costs;
o redesigning product benefit offerings to offer more appropriate
consumer choice and incent appropriate, necessary use of medical
services (i.e., by expanding features such as tiered copays);
o moving patient management responsibility to our regional operations
so that we can improve our focus on geographic developments, which
can vary sharply from one region to another, and more quickly develop
and implement detailed action plans for each region; and
o enhancing our utilization management on-site review program in order
to resolve coverage issues with hospitals and other providers
concurrently with, rather than after, treatment.
Improving the Efficiency of Our Operations. We are reviewing our business
and operational processes with the goal of increasing efficiencies and reducing
operational costs. Our goal is to better leverage our information technology
assets to meet current consumer trends and achieve additional efficiencies. We
intend to use technology to deliver speed, efficiency and accuracy to the
traditionally time-and paper-intensive process of administering employee
benefits for plan sponsors, brokers and members.
Responding to Recent Industry Trends; Anticipating Future Changes
In recent years, we have viewed the traditional gatekeeper HMO model as
our primary health care product. However, as a result of current socio-economic
trends in the United States, consumers are demanding a broader array of health
care products from which to choose. There is an increasing emphasis away from
traditional gatekeeper HMO products toward more open access, flexible products.
2
<PAGE>
We also believe that in the future members will become more involved in
and informed about health care matters, and will increasingly use the Internet
to access health care information. This could result in increased use of the
Internet and other technology for transmitting health care information among
the member, provider and health care benefits company.
Employers may also move toward a defined contribution model of benefits
whereby employers would contribute a fixed amount of money toward employee
benefits, allowing the employee to choose among a broad array of benefits,
products and companies. Employees would add personal contributions, if
necessary, to help pay for their choices.
Our goal is to transform our business model to one emphasizing more
flexibility and choice to respond to these current and future changes in the
health care marketplace. Among other things, we intend to (i) introduce new
open-access products in early 2001, (ii) emphasize PPO products and
self-insured programs, in addition to our HMO and POS plans, to achieve greater
product portfolio balance, and (iii) expand the use of technology to enhance
the customer relationship. We have also developed a suite of Internet-enabled
utilities which we intend to introduce with the roll-out of our new open-access
products. Combined with our InteliHealth resources, an award-winning health
care website with medical content provided by Harvard Medical School and dental
content provided by The University of Pennsylvania, these Internet-enabled
utilities should empower our members to access a wide variety of health plan
and medical information on-line and perform certain related functions on-line,
such as choosing a primary care physician, checking claims status, and
accessing benefit plan information.
History of Our Company
Prior to 1996, Aetna was one of the nation's largest multiline
insurance/financial services organizations, with operations domestically and
abroad. In 1995, Aetna made the strategic decision to focus its resources on
pursuing growth opportunities in its health care business and to exit other
businesses which were not believed to present the same growth opportunities. As
a result, Aetna sold its property-casualty business in 1996, its domestic
individual life insurance business in 1998, and agreed to sell its domestic
financial services and international businesses in 2000.
During the same period, we grew our health care business, acquiring U.S.
Healthcare in 1996, the health care business of New York Life Insurance Company
in 1998, and the health care business of The Prudential Insurance Company of
America in 1999. We do not currently intend to make additional significant
health care acquisitions. Instead we intend to focus our resources on
integrating our prior acquisitions and improving our underlying operations and
financial results.
-----------------------
We were incorporated in Pennsylvania in December 1982, as United States
Health Care Systems, Inc., and we changed our name to U.S. Healthcare, Inc. in
April 1986. We were acquired by Aetna in July 1996, and we changed our name to
Aetna U.S. Healthcare Inc. in March 1997. In connection with the spin-off, we
will be changing our name to Aetna Inc. References in this information
statement to "New Aetna," "we," "our" and "us" collectively refer to Aetna U.S.
Healthcare Inc. (to be renamed Aetna Inc.) and its consolidated subsidiaries.
Our principal executive offices are located at 151 Farmington Avenue, Hartford,
Connecticut 06156, and our telephone number is (860) 273-0123. We maintain an
Internet site at http://www. . This text is not an active link
and our website and the information contained on that site, or connected to
that site, are not incorporated into this information statement.
3
<PAGE>
THE SPIN-OFF
The following is a brief summary of the terms of the spin-off.
<TABLE>
<S> <C>
Distributing Company................................. Aetna Inc. After the spin-off, Aetna will not own any
shares of our stock.
Spun-Off Company..................................... Aetna U.S. Healthcare Inc., or New Aetna, currently a
wholly-owned subsidiary of Aetna. After the spin-off,
New Aetna will be an independent public company and
will be named "Aetna Inc." We will have two principal
lines of business: health care and large case pensions.
Consideration to Be Received by Aetna
Shareholders in the Spin-Off
and the Merger.................................. The spin-off and the merger will occur effectively
simultaneously. Aetna shareholders will receive
approximately $35 in cash in the merger and one share of
New Aetna common stock in the spin-off for each share of
Aetna common stock they hold at the close of business on
the record date for the spin-off, which is expected to be on
or about , 2000. Aetna shareholders will be
required to surrender their shares of Aetna common stock
to receive the cash consideration in the merger, but no
additional action will be required to receive shares of New
Aetna common stock in the spin-off.
New Aetna Common Stock............................... shares of New Aetna common stock, which is all
of the outstanding shares of New Aetna common stock,
will be distributed in the spin-off. Immediately after the
spin-off, we estimate that about shareholders of
record will hold shares of New Aetna common stock,
although some of the shares may be registered in the name
of a single shareholder who represents a number of
shareholders.
Distribution Ratio................................... One share of New Aetna common stock for each share of
Aetna common stock that you hold at the close of business
on or about , 2000, the record date for the
spin-off.
Book-Entry Shareholding.............................. We will not be mailing New Aetna share certificates to
holders of Aetna common stock. Instead, on the record
date, holders of record of Aetna common stock at that
time will have credited to a book-entry account
established for them by, and maintained at, First Chicago
Trust Company of New York (the registrar and transfer
agent for New Aetna common stock) their proportionate
number of shares of New Aetna common stock.
Record Date/Spin-Off Date............................ On or about , 2000 (close of business).
4
<PAGE>
Distribution Agent................................... First Chicago Trust Company of New York, which is the
registrar and transfer agent for Aetna common stock and
New Aetna common stock.
New York Stock Exchange Symbol....................... AET
Trading Market....................................... Because Aetna owns all of New Aetna common stock,
there has been no trading market for New Aetna common
stock.
Tax Consequences..................................... The receipt by an Aetna shareholder of cash and shares of
New Aetna common stock will be a taxable transaction for
United States federal income tax purposes. An Aetna
shareholder generally will recognize gain or loss in an
amount equal to the difference between (i) the sum of the
amount of cash and the fair market value, on the date of
the spin-off and the merger, of the shares of New Aetna
common stock received by the Aetna shareholder and (ii)
the Aetna shareholder's tax basis in the shares of Aetna
common stock surrendered. That gain or loss will be a
capital gain or loss if the shares of Aetna common stock
are held as a capital asset by the Aetna shareholder. See
"The Spin-Off-- Material United States Federal Income
Tax Consequences to Aetna Shareholders of the Spin-Off
and the Merger" for a more detailed description of the
federal income tax consequences of the spin-off and the
merger.
Relationship Among Aetna,
New Aetna and ING
After the Spin-Off.............................. We and Aetna will enter into a distribution agreement and
other agreements described in the section entitled
"Relationship Among Aetna, New Aetna and ING." We
and Aetna or ING may enter into additional or modified
agreements, arrangements and transactions, all of which
will be negotiated at arm's length.
Our Management and Management
Compensation.................................... A search for a new chief executive officer is underway.
The compensation, awards and other benefits payable to
selected members of management are described in
"Management."
-----------------------
You should carefully read the "Risk Factors" beginning on page 9.
-----------------------
</TABLE>
5
<PAGE>
If you have any questions relating to the spin-off, you should contact
Georgeson Shareholder Communications Inc. at:
Tel: ( )
E-mail:
After the spin-off, if you are a shareholder of New Aetna and have
questions relating to the spin-off, you can contact us directly. Our contact
information will be:
Aetna Inc.
151 Farmington Avenue
Hartford, Connecticut 06156
Tel: ( )
Fax: ( )
Attention: Corporate Secretary
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data reflect the historical
results of operations and financial position for and as of the end of each
respective period of New Aetna and are derived from the historical consolidated
financial statements included elsewhere in this information statement. Our
results for 1999 and for the six months ended June 30, 2000 also are presented
on a pro forma basis to give effect to the assets and liabilities to be
retained by Aetna in the merger. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements" for additional discussion of these pro forma
amounts. Pro forma as adjusted amounts reflect the projected issuance of short-
and long-term debt to refinance all of the short-term debt expected to be
outstanding at the time of the spin-off and to fund transaction-related
expenses and to be used for general corporate purposes. These pro forma and pro
forma as adjusted amounts may not be indicative of our actual results. You
should not construe this pro forma and pro forma as adjusted information to be
indicative of our results of operations or financial position at the time of
the spin-off and the merger. This pro forma and pro forma as adjusted
information also does not project the results of operations or financial
position for any future period or date.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
----------------------------------------------- -------------------------------------------------------
Pro Forma Pro Forma
As Adjusted Pro Forma As Adjusted Pro Forma
2000 (1) 2000 2000 1999 1999(1) 1999 1999 1998 1997
----------- --------- --------- -------- ----------- --------- --------- --------- ---------
(Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenue......... $13,444.0 $13,444.0 $9,522.5 $22,109.7 $22,109.7 $16,589.0 $14,674.4
--------- --------- -------- --------- --------- --------- ---------
Health care costs..... 9,432.9 9,432.9 6,091.6 14,641.0 14,641.0 10,012.9 8,215.5
Current and future
benefits............. 1,101.9 1,101.9 1,160.6 2,231.0 2,231.0 2,296.0 2,396.1
Operating expenses.... 2,376.7 2,383.7 1,642.7 3,903.0 3,917.0 2,918.6 2,723.9
Interest expense...... 53.4 125.1 107.1 62.2 232.7 206.2 213.9
Amortization of
goodwill and other
acquired intangible
assets............... 218.4 218.4 203.8 420.4 420.4 381.3 362.9
Reductions of loss on
discontinued
products............. (146.0) (146.0) (77.2) (77.2) (77.2) (68.0) (172.5)
Severance and
facilities reserve
reductions........... -- -- -- -- -- -- (45.0)
--------- --------- -------- --------- --------- --------- ---------
Total benefits and
expenses............ 13,037.3 13,116.0 9,128.6 21,180.4 21,364.9 15,747.0 13,694.8
--------- --------- -------- --------- --------- --------- ---------
Income from continuing
operations before
income taxes......... 406.7 328.0 393.9 929.3 744.8 842.0 979.6
Income taxes.......... 174.4 146.9 182.5 410.0 345.4 391.6 453.9
--------- --------- -------- --------- --------- --------- ---------
Income from continuing
operations.......... $ 232.3 $ 181.1 $ 211.4 $ 519.3 $399.4 $450.4 $525.7
========= ========= ======== ========= ====== ====== ======
Other Data:
EBITDA (2)............ $ 612.8 $ 605.8 $ 664.7 $ 1,417.8 $1,403.8 $1,484.7 $1,454.3
== ========= ========= ======== ========= ======== ======== ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------------------------------- ----------------------------------------
Pro Forma
As Adjusted Pro Forma
2000 (1) 2000 2000 1999 1998 1997
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Millions)
Balance Sheet Data:
Total assets........... $48,106.7 $51,051.2 $51,981.4 $53,228.1 $48,544.2
========= ========= ========= ========= =========
Debt:
Short-term............. $ 1,468.5 $ 1,342.6 $ 1,725.0 $ 1,370.1 $ 163.3
Long-term.............. 1.6 2,094.2 2,093.9 1,593.3 1,892.1
--------- --------- --------- --------- ---------
Total debt........ $ 1,470.1 $ 3,436.8 $ 3,818.9 $ 2,963.4 $ 2,055.4
========= ========= ========= ========= =========
Shareholder's equity... $10,286.0 $10,960.1 $10,703.2 $11,429.5 $11,082.0
========= ========= ========= ========= =========
</TABLE>
-------------------
(1) We have assumed a pro forma as adjusted total debt level of approximately
$ billion immediately following the spin-off and the merger. The actual
amount of debt outstanding following the consummation of the spin-off and
the merger may differ from this projected amount and such difference may
be material. We have assumed an annual interest rate of % on the total
debt projected to be outstanding; we cannot assure you, however, that our
actual interest rate will not be higher or lower than this projected rate.
A 1/2% change to the annual interest rate would change interest expense by
about $ million for the six months ended June 30, 2000 and $ million
for the year ended December 31, 1999. Pro forma as adjusted shareholder's
equity has been reduced for the after-tax impact of the
transaction-related expenses funded by increased borrowing referred to
above.
(2) "EBITDA" is defined as income from continuing operations (excluding
reductions of loss on discontinued products and severance and facilities
reserve reductions) before interest expense, taxes, depreciation and
amortization. EBITDA is not presented as an alternative measure of
operating results or cash flow from operations, as determined in
accordance with generally accepted accounting principles, but is presented
because we believe it is a generally accepted indicator of a company's
ability to incur and service debt. EBITDA does not give effect to cash
used for debt service requirements and thus does not reflect funds
available for dividends, reinvestment or other discretionary uses. In
addition, EBITDA as presented in this information statement may not be
comparable to similarly titled measures reported by other companies.
8
<PAGE>
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information set forth in this information statement. Some of the
following risks relate principally to our business. Other risks relate
principally to the securities markets and ownership of our stock. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual
events, this could have a material adverse effect on our business, financial
condition or results of operations. In that case, the trading price of New
Aetna common stock could decline materially.
Risk Factors Relating to Our Business
We are seeking to improve the performance of our health care business by
implementing a number of initiatives; if these initiatives do not achieve their
objectives, our results could continue to be materially adversely affected
Substantially increasing medical costs have caused our financial results
in 2000 to decline significantly. Due to the disappointing performance of our
health care business, we have initiated a comprehensive review of our health
care business model. We are in the process of implementing a number of
strategic initiatives with the goal of improving the performance of our
business. These initiatives include, among other things, strengthening the
management team of the business, improving relations with health care
providers, exiting certain product markets, addressing rising medical costs and
improving the efficiency of our operations. The future performance of our
business will depend in large part on our ability to design and implement these
strategic initiatives. If these initiatives do not achieve their objectives or
result in increased medical costs, our results could continue to be adversely
affected. Also, we have recently experienced significant changes in our senior
management, and we are currently searching for a new chief executive officer.
Our success will also be dependent, in part, upon attracting and retaining a
chief executive officer and other members of management. See "Business of New
Aetna -- Health Care" for more information.
Our premiums are generally set in one-year contracts and unforeseen increases
in medical costs during the contract term (such as those experienced in the
first half of 2000) may adversely impact our profitability under these
contracts; we have targeted premium increases and cost savings in our health
risk business to improve profitability; however, we cannot assure you that
these increases and savings will be sufficient to offset increases in medical
and other operating costs, or that they will not adversely affect our
membership levels
We experienced significantly higher Medicare and commercial HMO medical
costs in the first half of 2000. We are taking several actions to address this
situation. With respect to our Medicare HMO business, unless legislative or
regulatory changes are made prior to the end of the year to increase payments
under Medicare+Choice contracts, we will exit a significant number of our
Medicare service areas. During the remainder of 2000, we will continue to
monitor any legislative or regulatory changes that might increase payments
under applicable Medicare+Choice contracts and then make a final determination,
as permitted under HCFA regulations, depending on the level of any such
reimbursement increase. With respect to our commercial HMO business, we are
increasing premiums for business renewing in the fourth quarter of 2000 and
beyond. However, premiums in the Health Risk business are generally fixed for
one-year periods and, accordingly, cost levels in excess of those reflected in
pricing, such as those being experienced during 2000, cannot be recovered in
the same year through higher premiums. As a result, earnings in the Health Risk
business for the remainder of 2000 and, to a lesser extent, the first half of
2001 are expected to continue to be materially adversely affected if medical
costs continue to be higher than the cost levels reflected in our pricing.
These anticipated premium increases may reduce membership, or at least moderate
membership growth. If membership declines more than expected or we lose
accounts with favorable medical cost experience while retaining accounts with
unfavorable medical cost experience, our business and results of operations
9
<PAGE>
may be materially adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Six Months Ended June 30,
2000 and 1999 -- Health Care -- Outlook" for more information.
Our Prudential health care, or PHC, business is currently less profitable than
the rest of our business; we are working to integrate and improve this
business, but if we are unsuccessful, our results may be materially adversely
affected
In connection with our acquisition of the PHC business from Prudential on
August 6, 1999, Prudential agreed to indemnify us from certain health insurance
risks. This agreement will not cover us after December 31, 2000. Medical loss
ratios for the PHC business are higher than for the rest of our health risk
business; the effect of these higher ratios is currently offset, in part, by
the indemnification agreement with Prudential. We are seeking to improve the
medical loss ratios of the PHC business through underwriting and pricing
discipline and medical cost management initiatives. If we are unable to make
sufficient improvements to the medical loss ratios for the PHC business, our
results of operations for periods following termination of the reinsurance
arrangement may be materially adversely affected.
The administrative costs related to the PHC business and the
administrative services only, or ASO, business (which we are servicing on
behalf of Prudential) are higher than the administrative costs of our other
health business and we expect continued significant declines in the membership
of the acquired PHC business and the Prudential ASO business. We are seeking to
reduce the level of administrative costs related to these businesses. If we are
unable to reduce the level of administrative costs on a timely basis to
correspond with lower membership levels, our results could be materially
adversely affected.
Since the PHC closing, we have been working on integrating that business
into our health care business. Factors that can affect the success of our
integration of this business include, but are not limited to:
o integrating management, products, legal entities, networks and
information systems on a timely basis,
o applying managed care expertise and techniques throughout a broader
membership base, and
o eliminating duplicative administrative and customer service
functions.
Due to the timing of the closing of the PHC acquisition, only a limited number
of PHC members have been migrated to our products to date. Migration and
integration of substantial numbers of PHC members to our products is scheduled
to occur effective January 1, 2001 and January 1, 2002. Our ability to profit
from the PHC acquisition is dependent upon the successful migration and
integration of these members on these dates. If we are unsuccessful in
integrating the PHC business, our results of operations may be materially
adversely affected.
We are party to a substantial amount of litigation; these cases and future
cases may have a material adverse effect on us
We are party to a number of purported class action lawsuits and other
litigation. The majority of these cases relate to the conduct of our health
care business and allege various violations of law. Many of these cases seek
substantial damages (including punitive damages) and far-ranging changes in our
practices. We may also be subject to additional litigation in the future. This
litigation could materially adversely affect us, because of the costs of
defending these cases, costs of settlement or judgments against us, or because
of changes in our operations that could result from this litigation. See
"Business of New Aetna -- Legal Proceedings."
We hold reserves for expected claims and these estimates are highly judgmental;
if actual claims exceed reserve estimates (as they have in prior periods), our
results could be materially adversely affected
For the health risk business, the liability for the health care costs
payable reflects estimates of the ultimate cost of claims that have been
incurred but not yet reported or reported but not yet paid. Consistent with
industry practice,
10
<PAGE>
health care costs payable are estimated periodically, and any resulting
adjustments are reflected in the current-period operating results within health
care costs. Health care costs payable are based on a number of factors,
including those derived from historical claims experience. An extensive degree
of judgment is used in this estimation process, considerable variability is
inherent in such estimates and the adequacy of the estimate is highly sensitive
to changes in medical claims payment patterns and changes in medical cost
trends. A worsening of medical cost trend or changes in claim payment patterns
from those assumed in estimating health care costs payable would cause these
estimates to change, and such changes could be material.
Our business activities are highly regulated and there are a number of current
and planned initiatives being considered by federal and state governments;
government regulation limits us in the conduct of our business and also
subjects us to additional costs in complying with the requirements of
governmental authorities; further regulation could also materially adversely
affect our business
Our business is subject to extensive regulation by state and federal
governmental authorities. For example, there are a number of federal and state
requirements restricting operations of health care plans (particularly HMOs).
The federal and many state governments have enacted or are actively considering
legislative and regulatory changes related to health products. At this time, we
are unable to predict the impact of future changes, although we anticipate that
some of these measures, if enacted, could adversely affect health operations
through:
o affecting premium rates,
o reducing our ability to manage medical costs,
o increasing medical costs and operating expenses,
o increasing our exposure to lawsuits,
o regulating levels and permitted lines of business,
o imposing financial assessments, and
o regulating business practices.
Recently, there has been heightened review by these regulators of the
managed health care industry's business practices, including utilization
management and claim payment practices. As the largest national managed care
organization, we are regularly the subject of such reviews and several such
reviews currently are pending, some of which may be resolved during the
remainder of 2000. These regulatory reviews could result in changes to or
clarifications of our business practices, and could also result in material
fines, penalties or other sanctions. Also, our business may be adversely
impacted by court and regulatory decisions that expand the interpretations of
existing statutes and regulations, impose medical or bad faith liability,
increase our responsibilities under ERISA, or reduce the scope of ERISA
pre-emption of state law claims.
It is uncertain whether we can recoup, through higher premiums or other
measures, the increased costs of mandated benefits or the other increased costs
that may be caused by this legislation or regulation, or by court and
regulatory decisions.
Also, new federal regulations were recently proposed under the Health
Insurance Portability and Accountability Act relating to the privacy of health
information and certain other matters affecting our administration of health
and related benefit plans. We are currently reviewing the potential impact of
the proposed regulations on our operations, including our information
technology systems. It is reasonably possible that we will incur additional
expenses in connection with, and that our business could otherwise be adversely
affected by, compliance with any final regulations that are adopted.
11
<PAGE>
For more information, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Six Months Ended June 30, 2000
and 1999 -- Health Care -- Outlook" and "Business of New Aetna -- Regulation."
We may need to establish material liabilities related to our strategic
initiatives or the exiting of some of our Medicare service areas and may need
to write down related assets, which could materially adversely affect our
financial results.
We are conducting a comprehensive review of our health care business model
and are in the process of implementing a number of strategic initiatives. We
are also considering various other initiatives. At the time these initiatives
are finally adopted and implemented, we will evaluate the need to establish
liabilities related to these strategic changes and we will evaluate whether any
impairment related to our assets has occurred. It is reasonably possible that,
as a result of the above actions, we will need to establish such liabilities or
write down related assets and that such liabilities and write downs could be
material.
In addition, as described above, unless legislative or regulatory changes
are made prior to the end of the year to increase payments under
Medicare+Choice contracts, we will exit a significant number of our Medicare
service areas. We will evaluate the need to establish liabilities related to
this exit. Also, we will evaluate whether any impairment related to goodwill
still separately identifiable with such Medicare service areas has occurred.
Goodwill associated with these Medicare service areas was approximately $275
million at June 30, 2000. If any of these events occurs, our business and
results of operations may be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Six
Months Ended June 30, 2000 and 1999 -- Health Care -- Health Risk and PHC --
Exiting Medicare Markets" for more information.
In connection with the spin-off and the merger, we have agreed to be liable
for, and to indemnify ING for, certain Aetna liabilities, including liabilities
not related to our health care business
In connection with the spin-off and the merger, we generally will assume
all liabilities related to Aetna's health care and large case pensions
businesses. In addition, we generally will be responsible for Aetna's
liabilities other than those arising out of Aetna's financial services or
international businesses. These liabilities generally include the
post-retirement pension and other benefits payable to all former Aetna
employees, liabilities arising out of significant litigation to which Aetna is
a party, all liabilities arising out of certain divestiture transactions
consummated by Aetna before the spin-off and tax liabilities relating to, or
resulting from the treatment of, the spin-off. We have agreed to indemnify ING
for all of these liabilities. Although management believes that it has
established reserves and/or obtained insurance sufficient to cover such
liabilities as we consider appropriate, we cannot assure you that these
liabilities will not be materially in excess of these reserves and insurance.
In that case, these liabilities may be materially adverse to our business and
results of operations.
Our business is subject to a variety of other risks
In addition to the risks described above, our business is subject to a
number of other risks, including, but not limited to, those described below:
Adverse publicity regarding managed care can hurt our sales. Adverse
publicity of the kind currently occurring regarding managed care may negatively
influence members' or employers' decisions to select managed care plans
generally or our health plans specifically. This may cause membership to
decline, which could materially adversely affect our business or results of
operations.
Government payors can determine premiums. Although we may withdraw from
certain Medicare markets, as discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Six Months Ended June 30,
2000 and 1999 -- Health Care -- Health Risk and PHC -- Exiting Medicare
Markets," we will still have operations in a number of Medicare markets. In
government-funded health programs such as Medicare and Medicaid, the government
payor determines the premium levels. If the government payor reduces the
premium levels or increases premiums by less than our cost increases and we
cannot offset these with supplemental premiums
12
<PAGE>
and changes in benefit plans, then we could be materially adversely affected.
In addition, premiums for certain federal government employee groups are
subject to retroactive adjustments by the federal government. These adjustments
could materially adversely affect us.
Changes in accreditation of our health plans could affect our
competitiveness. Accreditation by independent quality accrediting agencies,
such as the National Committee for Quality Assurance, is an important
competitive factor for certain of our HMO plans. If our plans were to lose or
be denied accreditation, it could adversely affect customer selection of our
health products, and, in some jurisdictions, could affect our licensure status.
Success of our Internet initiatives depends on developing and implementing
new and enhanced systems and processes. Development and implementation of our
Internet initiatives will require significant investments over the next several
years. In addition, we may not achieve the new product development, increases
in sales and reductions in expenses that we expect from these initiatives
unless we are able to efficiently and cost effectively develop and implement
new and enhanced information systems and redesigned business processes.
Decreases in ratings could adversely impact our business. Certain of our
businesses would experience some run off of existing business or have the level
of new business negatively impacted if the major ratings agencies do not give a
financial strength rating at the relevant subsidiary in the "A" rating
category.
Significant changes in financial markets could affect our earnings.
Significant changes in financial markets could impact the level of assets under
management and administration in our Large Case Pensions business and, in turn,
our level of asset-based fees in that business. For example, significant
increases in interest rates or decreases in equity markets would directly
affect the level of assets under management and administration and, in
addition, may increase the level of withdrawals and decrease the level of
deposits by customers. Customers under those circumstances may seek to
diversify among asset managers or seek investment alternatives that we do not
offer. Significant declines in the value of investments also may affect our
ability to pass through investment losses to certain experience-rated
customers, whether due to triggering minimum guarantees or other business
reasons.
Risk Factors Relating to Securities Markets and Ownership of New Aetna
Common Stock
After the spin-off, there will be outstanding a large number of employee
options to purchase shares of New Aetna common stock; the existence of these
options could adversely affect the price of New Aetna common stock.
Aetna had approximately 19.3 million employee stock options outstanding at
July 31, 2000 with exercise prices ranging from $14.83 to $112.63 per share. At
August 30, 2000, the closing price per share of Aetna common stock on the NYSE
was $55 15/16. These stock options will become immediately vested upon the
consummation of the spin- off and the merger. Approximately 15.9 million of
these stock options will be converted into options of New Aetna with
adjustments made to both the number of options and the exercise prices to
maintain the intrinsic in-or-out-of- the-money value of the related Aetna
options. The number of New Aetna options issued upon this conversion, the
exercise prices of those New Aetna options, and the resultant initial dilution
to earnings per share of New Aetna depends, among other things, on the initial
price of New Aetna common stock. For example, at an initial New Aetna stock
price of $20 per share, there would be approximately 43.8 million New Aetna
stock options outstanding with exercise prices ranging from $5.39 to $40.96. As
a result, fully diluted earnings per share (calculated using the treasury stock
method of accounting under which all in-the-money stock options are assumed to
be exercised and all proceeds from those exercises are assumed to be used to
purchase New Aetna common stock in the open market) would initially be below
basic earnings per share by approximately 2.0%. At an initial New Aetna stock
price of $50 per share (calculated using the treasury stock method described
above), there would be approximately 27.1 million New Aetna options outstanding
with exercise prices ranging from $8.72 to $66.25. As a result, at this stock
price fully diluted earnings per share would initially be below basic earnings
per share by approximately 3.5%. Although a significant number of these options
are expected to be out-of-the-money at the time of the spin-off, if New Aetna's
stock price increases after the spin-off and the merger are consummated, the
dilution from these options will increase as more of these options become in
the money. These examples are for illustrative purposes only and are not
intended to be projections of the price at which New Aetna common stock will
trade. Moreover, we may issue
13
<PAGE>
additional stock options in the future. We expect to use the net proceeds from
option exercises to repurchase shares in the open market to seek to mitigate
dilution. See "Relationship Among Aetna, New Aetna and ING -- Employee Benefits
Agreement" and "Management" for more information.
Neither our historical financial information nor our pro forma financial
information may be representative of our results as a separate company
The financial information included in this information statement may not
be representative of our results of operations, financial position and cash
flows had we operated as a separate, stand-alone entity during the periods
presented or of our results of operations, financial position and cash flows in
the future. We cannot assure you that the adjustments, allocations and
estimates we have made in preparing our historical and pro forma condensed
consolidated financial statements appropriately reflect our operations during
those periods as if we had in fact operated as a stand-alone entity or what the
actual effect of our spin-off from Aetna will be.
New Aetna's stock price may fluctuate significantly following the spin-off;
shareholders who buy or sell New Aetna common stock may lose all or part of the
value of their New Aetna common stock, depending on the price of New Aetna
common stock from time to time
Before , 2000, there was no public market for New Aetna common stock.
We expect that New Aetna common stock will trade on the New York Stock Exchange
under the symbol "AET".
After the spin-off, trading prices for New Aetna common stock will be
established by the public markets -- we have not established a price for New
Aetna common stock. An active trading market may not develop or be sustained in
the future.
We cannot predict the prices at which our common stock may trade after the
spin-off. The market price of New Aetna common stock may fluctuate
significantly due to a number of factors, some of which may be beyond our
control, including:
o actual or anticipated fluctuations in our operating results;
o changes in earnings estimated by securities analysts or our ability
to meet those estimates;
o the operating and stock price performance of other comparable
companies;
o overall market fluctuations;
o developments in the health care industry; and
o general economic conditions.
In particular, the realization of any of the risks described in these
"Risk Factors" could have a significant and adverse impact on the market price
of New Aetna common stock. In addition, the stock market in general has
experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the trading price of New Aetna common stock, regardless of our
actual performance.
14
<PAGE>
Provisions in our charter documents and our rights plan and of Pennsylvania law
may delay or prevent an unsolicited takeover effort to acquire us, which could
inhibit your ability to receive an acquisition premium for your shares of New
Aetna common stock
Provisions of our articles of incorporation, bylaws and rights plan and of
Pennsylvania law may delay or prevent an unsolicited takeover effort to acquire
us on terms that holders of New Aetna common stock may consider to be
favorable. For more detail on these provisions, see "Description of New Aetna
Common Stock -- Certain Antitakeover Provisions."
15
<PAGE>
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this information statement,
including in the sections entitled "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," that are based on our management's beliefs and assumptions and on
information currently available to our management. Forward-looking statements
include the information concerning our possible or assumed future results of
operations, business strategies, financing plans, competitive position,
potential growth opportunities, potential operating performance improvements,
benefits resulting from the spin-off and the merger, the effects of competition
and the effects of future legislation or regulations. Forward-looking
statements include all statements that are not historical facts and can be
identified by the use of forward-looking terminology such as the words
"believe," "expect," "plan," "intend," "anticipate," "estimate," "predict,"
"potential," "continue," "may," "will," "should" or the negative of these terms
or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. You should not put undue reliance on any forward-
looking statements. We do not have any intention or obligation to update
forward-looking statements after we distribute this information statement.
The risk factors discussed in "Risk Factors" could cause our results to
differ materially from those expressed in forward-looking statements. There may
also be other risks that we are unable to predict at this time.
16
<PAGE>
THE SPIN-OFF
General
Aetna will effect the spin-off on or about , 2000 by distributing on
a pro basis all the shares ( shares) of New Aetna common stock to holders
of record of Aetna common stock at the close of business on that date. The
record date and the distribution date for the spin-off will be the same date;
that date will also be the closing date for the merger. The shares of New Aetna
common stock will be validly issued, fully paid and nonassessable, and the
holders of these shares will not be entitled to preemptive rights. See
"Description of New Aetna Capital Stock." Each record holder of Aetna common
stock will receive one share of New Aetna common stock for each share of Aetna
common stock held at the close of business on the record date.
Concurrently with the spin-off, New Aetna will be named "Aetna Inc."
Since New Aetna common stock will be issued as uncertificated shares
registered in book-entry form through the direct registration system, no
certificates representing your shares of New Aetna will be mailed to you in the
ordinary course. Your book-entry shares will be held with the New Aetna
transfer agent and registrar, First Chicago Trust Company of New York, which
serves as the official record keeper for New Aetna common stock. Under the
direct registration system, instead of receiving stock certificates, you will
receive an account statement reflecting your ownership interest in shares of
New Aetna common stock. If at any time you want to receive a physical
certificate evidencing your shares of New Aetna common stock, you may do so by
contacting the New Aetna transfer agent and registrar.
For those holders of Aetna common stock who hold their shares through a
broker, bank or other nominee, First Chicago Trust Company of New York will
credit the shares of New Aetna common stock to the accounts of those nominees
who are registered holders, who, in turn, will credit their customers' accounts
with their proportionate number of the shares of New Aetna common stock. We and
Aetna anticipate that brokers, banks and other nominees will generally credit
their customers' accounts with New Aetna common stock on or shortly after ,
2000.
Material United States Federal Income Tax Consequences to Aetna Shareholders of
the Spin-off and the Merger
In the opinion of Davis Polk & Wardwell, the following discussion
summarizes the material United States federal income tax consequences to Aetna
shareholders of the spin-off and the merger. This discussion is based on the
law as currently in effect. This discussion does not address all of the tax
consequences that may be relevant to an Aetna shareholder in light of its
particular circumstances or to Aetna shareholders subject to special rules,
such as financial institutions, broker-dealers, tax-exempt organizations,
shareholders that hold their shares of Aetna common stock as part of a straddle
or a hedging or conversion transaction and shareholders who acquired their
shares of Aetna common stock through the exercise of an employee stock option
or otherwise as compensation.
Aetna shareholders are urged to consult their own tax advisors as to the
particular tax consequences to them of the spin-off and the merger, including
the effect of United States state and local tax laws or foreign tax laws.
A United States holder refers to:
o a citizen or resident of the United States,
o a corporation or other entity created or organized in the United
States or under the laws of the United States or of any political
subdivision of the United States, or
o an estate or trust, the income of which is includible in gross income
for federal income tax purposes regardless of its source.
17
<PAGE>
A non-United States holder refers to an Aetna shareholder that is not a
United States holder.
United States Holders
The receipt by a United States holder of cash and shares of New Aetna
common stock will be a taxable transaction for United States federal income tax
purposes. An Aetna shareholder that is a United States holder will recognize
gain or loss in an amount equal to the difference between (i) the sum of the
amount of cash and the fair market value, on the date of the spin-off and the
merger, of the shares of New Aetna common stock received by the Aetna
shareholder, and (ii) the Aetna shareholder's tax basis in the shares of Aetna
common stock surrendered. That gain or loss will be a capital gain or loss if
the shares of Aetna common stock are held as a capital asset by the Aetna
shareholder, and will be long-term capital gain or loss if the shares of Aetna
common stock have been held for more than one year.
An Aetna shareholder that is a United States holder may be subject to
backup withholding at a rate of 31% unless, at the time it surrenders shares of
Aetna common stock, it provides its taxpayer identification number and
certifies that the number is correct or properly certifies that it is awaiting
a taxpayer identification number, or unless an exemption is demonstrated to
apply. Backup withholding is not an additional tax. Amounts so withheld can be
refunded or credited against the federal income tax liability of the United
States holder, provided appropriate information is forwarded to the IRS.
Non-United States Holders
An Aetna shareholder that is a non-United States holder will not be
subject to United States federal income tax on any gain realized on the receipt
of cash and shares of New Aetna common stock unless:
o the gain is effectively connected with a trade or business in the
United States of that non-United States holder,
o that non-United States holder is a non-resident alien individual who
holds the shares of Aetna common stock as a capital asset and who is
present in the United States for 183 or more days during the calendar
year in which the transaction is completed, and certain other
conditions are met, or
o that non-United States holder is subject to tax under the provisions
of the Internal Revenue Code of 1986, as amended (which we refer to
as the "Code"), on the taxation of United States expatriates.
Information reporting and backup withholding imposed at a rate of 31% may
apply under specified circumstances unless, at the time the non-United States
holder surrenders shares of Aetna common stock, it certifies as to its foreign
status or otherwise establishes an exemption. Backup withholding is not an
additional tax. Amounts so withheld can be refunded or credited against the
federal income tax liability of the non-United States holder, provided
appropriate information is forwarded to the IRS.
For a description of the agreement under which we and Aetna have provided
for tax sharing and other tax matters, see "Relationship Among Aetna, New Aetna
and ING -- Tax Sharing Agreement."
18
<PAGE>
CAPITALIZATION OF NEW AETNA
The following table sets forth the consolidated debt and capitalization of
New Aetna at June 30, 2000 (1) on a historical basis, (2) on a pro forma basis
to give effect to the spin-off and the merger and (3) on a pro forma as
adjusted basis to reflect the projected issuance of short- and long-term debt
to refinance all of the short-term debt expected to be outstanding at the time
of the spin-off and to fund transaction-related expenses and to be used for
general corporate purposes. You should read this table in conjunction with the
information located under the heading "Unaudited Pro Forma Condensed
Consolidated Financial Statements" and the consolidated condensed financial
statements of New Aetna and related notes, included elsewhere in this
information statement. These pro forma and pro forma as adjusted amounts may
not be indicative of our actual results. You should not construe this pro forma
and pro forma as adjusted information to be indicative of our results of
operations or financial position at the time of the spin-off and the merger.
This pro forma and pro forma as adjusted information also does not project the
results of operations or financial position for any future period or date.
<TABLE>
<CAPTION>
At June 30, 2000
-----------------------------------------
Pro Forma
Historical Pro Forma As Adjusted(1)
---------- --------- --------------
(Millions)
<S> <C> <C> <C>
Short-term debt................................... $ 1,342.6 $ 1,468.5
========= =========
Long-term debt.................................... $ 2,094.2 $ 1.6
--------- ---------
Shareholder's equity:
Common stock and additional paid-in capital. 3,735.2 3,852.1
Retained earnings........................... 7,709.1 6,491.2
Accumulated other comprehensive loss........ (484.2) (57.3)
--------- ---------
Total shareholder's equity.................. 10,960.1 10,286.0
--------- ---------
Total capitalization........................ $13,054.3 $10,287.6
========= =========
</TABLE>
-------------------
(1) We have assumed a pro forma as adjusted total debt level of approximately
$ billion immediately following the spin-off and the merger. The actual
amount of debt outstanding following the consummation of the spin-off and
the merger may differ from this projected amount and such difference may
be material. We have assumed an annual interest rate of % on the total
debt projected to be outstanding; we cannot assure you, however, that our
actual interest rate will not be higher or lower than this projected rate.
A 1/2% change to the annual interest rate would change interest expense by
about $ million for the six months ended June 30, 2000 and $ million
for the year ended December 31, 1999. Pro forma as adjusted shareholder's
equity has been reduced for the after-tax impact of the
transaction-related expenses funded by increased borrowing referred to
above.
DIVIDEND POLICY
Our board of directors has not yet determined whether to declare and pay
dividends on New Aetna common stock, but expects to determine a policy before
the spin-off. Our board will be free to change our dividend practices at any
time. The board will base its decisions on, among other things, general
business conditions, our financial results, contractual, legal and regulatory
restrictions regarding dividend payments by our subsidiaries, practices of peer
companies and any other factors the board may consider to be relevant.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been prepared
using the historical basis in the assets and liabilities and historical results
of operations of the businesses that will comprise New Aetna for and as of the
end of each respective period. The historical consolidated statement of income
data set forth below do not reflect many significant changes that will occur in
the operations and capitalization of our company as a result of the spin- off
and the merger. Before the spin-off, we operated as part of Aetna. Because the
data reflect periods during which we did not operate as an independent company,
the data may not reflect the results of operations or the financial condition
which would have resulted if we had operated as a separate, independent company
during the periods shown. In addition, the data may not necessarily be
indicative of our future results of operations or financial position.
The selected consolidated financial data should be read in conjunction
with, and are qualified by reference to, "Summary," "Capitalization,"
"Unaudited Pro Forma Condensed Consolidated Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and accompanying notes
included elsewhere in this information statement. The consolidated statement of
income data for each of the years in the three-year period ended December 31,
1999, and the consolidated balance sheet data as of December 31, 1999 and 1998,
are derived from the audited consolidated financial statements included
elsewhere in this information statement, and should be read in conjunction with
those consolidated financial statements and the accompanying notes. The
consolidated statement of income data for the years ended December 31, 1996 and
1995 and the consolidated balance sheet data as of December 31, 1997, 1996 and
1995 are derived from, and qualified by reference to, audited consolidated
financial statements which are not included in this information statement. The
consolidated statement of income data for the six months ended June 30, 2000
and 1999, and the consolidated balance sheet data as of June 30, 2000 and 1999,
are derived from the unaudited consolidated financial statements included
elsewhere in this information statement and should be read in conjunction with
those consolidated financial statements and the accompanying condensed notes,
which, in our opinion, have been prepared on the same basis as the audited
consolidated financial statements and reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of our
financial position and results of operations during those periods and as of
those dates. Results for the six months ended June 30, 2000 are not necessarily
indicative of results that may be expected for the year ended December 31,
2000.
The financial information presented below may not reflect what our results
of operations, financial position and cash flows would have been had we
operated as a separate, stand-alone entity during the periods presented or what
our results of operations, financial position and cash flows will be in the
future.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- ------------------------------------------------------------------
2000 1999 1999 1998 1997 1996(2) 1995
--------- -------- --------- --------- --------- --------- --------
(Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenue......... $13,444.0 $9,522.5 $22,109.7 $16,589.0 $14,674.4 $11,820.8 $9,888.8
========= ======== ========= ========= ========= ========= ========
Income (loss) from
continuing
operations(1)....... $ 181.1 $ 211.4 $ 399.4 $ 450.4 $ 525.7 $ (44.7) $ 225.3
========= ======== ========= ========= ========= ========= ========
</TABLE>
20
<PAGE>
<TABLE>
At June 30, At December 31,
------------------------- ------------------------------------------------------------------
2000 1999 1999 1998 1997 1996(2) 1995
--------- --------- --------- --------- --------- --------- --------
(Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............. $51,051.2 $47,046.1 $51,981.4 $53,228.1 $48,544.2 $53,412.3 $51,162.6
========= ========= ========= ========= ========= ========= =========
Debt:
Short-term............ $ 1,342.6 $ 1,139.3 $ 1,725.0 $ 1,370.1 $ 163.3 $ 244.2 $ 266.8
Long-term............. 2,094.2 1,594.0 2,093.9 1,593.3 1,892.1 1,991.1 794.6
--------- --------- --------- --------- --------- --------- ---------
Total debt......... $ 3,436.8 $ 2,732.9 $ 3,818.9 $ 2,963.4 $ 2,055.4 $ 2,235.3 $ 1,061.4
========= ========= ========= ========= ========= ========= =========
Shareholder's equity..... $10,960.1 $11,312.2 $10,703.2 $11,429.5 $11,082.0 $10,901.6 $ 7,272.8
========= ========= ========= ========= ========= ========= =========
</TABLE>
-------------------
(1) Income (loss) from continuing operations includes an after-tax benefit
from the reduction of loss on discontinued products as follows: six months
ended June 30, 2000 and 1999 ($94.9 million and $50.2 million,
respectively); year ended December 31, 1999, 1998, 1997, 1996 ($50.2
million, $44.2 million, $108.4 million, $131.5 million, respectively) and
a severance and facilities reserve reduction for the year ended December
31, 1997 ($29.3 million).
(2) Loss from continuing operations for the year ended December 31, 1996
includes an after-tax severance and facilities charge of $530.2 million.
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated statements of
income of New Aetna for the six months ended June 30, 2000 and June 30, 1999
and the twelve months ended December 31, 1999 present results for New Aetna as
if each of the following events (as contemplated by the merger agreement with
ING (the "Agreement")) had occurred as of January 1, 1999. The accompanying
unaudited pro forma condensed consolidated balance sheet for New Aetna as of
June 30, 2000 gives effect to the following events as if they occurred on June
30, 2000.
o The sale of Aetna's financial services and international businesses
(discontinued operations) to ING as set forth in the Agreement.
o The retention of certain long-term debt by Aetna upon the sale of
Aetna to ING;
o Adjustments for the transfers of certain assets and liabilities as
set forth in the Agreement; and
o The retention of the master lease agreement related to the CityPlace
office facility (Hartford, Connecticut) by Aetna upon the sale of
Aetna to ING.
Management believes that the assumptions used provide a reasonable basis
on which to present the pro forma condensed consolidated financial statements.
New Aetna is providing the unaudited pro forma condensed consolidated financial
statements to you for informational purposes only. You should not construe them
to be indicative of New Aetna's results of operations or financial position had
the transactions and events described above been consummated on the dates
assumed. These pro forma condensed consolidated financial statements also do
not project the results of operations or financial position for any future
period or date.
Except as indicated in the notes thereto, the pro forma condensed
consolidated financial statements do not reflect any nonrecurring or unusual
charges that may be incurred as a result of the merger. New Aetna expects that
it will incur certain costs associated with the Agreement and the transactions
contemplated by the Agreement directly related to the consummation of the
spin-off and the merger, including fees for outside financial and legal
advisers and expenses related to the change-in-control of Aetna. The amount of
such costs cannot be reasonably determined at this time; however, such costs
may be material.
These unaudited pro forma condensed consolidated financial statements
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited historical
financial statements and the related notes included elsewhere in this
information statement.
22
<PAGE>
New Aetna
Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
New Aetna Sale Related New Aetna
Historical Adjustments Pro Forma
---------- ------------ -----------
<S> <C> <C> <C>
(Millions, except per share data)
Revenue:
Health care premiums................................$10,909.0 $ -- $ 10,909.0
Other premiums...................................... 738.3 -- 738.3
Administrative service only fees.................... 980.4 -- 980.4
Net investment income............................... 811.3 -- 811.3
Other income........................................ 46.2 -- 46.2
Net realized capital losses......................... (41.2) -- (41.2)
--------- --------- -----------
Total revenue.......................................... 13,444.0 -- 13,444.0
--------- --------- -----------
Benefits and expenses:
Health care costs................................... 9,432.9 -- 9,432.9
Current and future benefits......................... 1,101.9 -- 1,101.9
Operating expenses:
Salaries and related benefits.................... 1,160.6 -- 1,160.6
Other............................................ 1,223.1 (7.0)(a) 1,216.1
Interest expense.................................... 125.1 (71.7)(b) 53.4
Amortization of goodwill and other acquired
intangible assets................................ 218.4 -- 218.4
Reductions of loss on discontinued products......... (146.0) -- (146.0)
--------- --------- -----------
Total benefits and expenses............................ 13,116.0 (78.7) 13,037.3
--------- --------- -----------
Income from continuing operations before income
taxes............................................... 328.0 78.7 406.7
Income taxes........................................... 146.9 27.5 (c) 174.4
--------- --------- -----------
Income from continuing operations......................$ 181.1 $ 51.2 $ 232.3
========= ========= ===========
Basic income per share from continuing operations...... $ 1.65 (d)
===========
Diluted income per share from continuing operations.... $ 1.63 (d)
===========
Adjusted weighted average number of shares of
common stock outstanding-diluted.................... 142,672,630(d)
===========
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.
</TABLE>
23
<PAGE>
New Aetna
Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
New Aetna Sale Related New Aetna
Historical Adjustments Pro Forma
---------- ------------ -----------
<S> <C> <C> <C>
(Millions, except per share data)
Revenue:
Health care premiums...............................$ 7,158.9 $ -- $ 7,158.9
Other premiums..................................... 760.2 -- 760.2
Administrative service only fees................... 728.2 -- 728.2
Net investment income.............................. 796.7 -- 796.7
Other income....................................... 60.3 -- 60.3
Net realized capital gains......................... 18.2 -- 18.2
---------- --------- -----------
Total revenue......................................... 9,522.5 -- 9,522.5
---------- --------- -----------
Benefits and expenses:
Health care costs.................................. 6,091.6 -- 6,091.6
Current and future benefits........................ 1,160.6 -- 1,160.6
Operating expenses:
Salaries and related benefits................... 793.6 -- 793.6
Other........................................... 849.1 (7.6)(a) 841.5
Interest expense................................... 107.1 (82.4)(b) 24.7
Amortization of goodwill and other acquired
intangible assets............................... 203.8 -- 203.8
Reductions of loss on discontinued products........ (77.2) -- (77.2)
---------- --------- -----------
Total benefits and expenses........................... 9,128.6 (90.0) 9,038.6
---------- --------- -----------
Income from continuing operations before income
taxes.............................................. 393.9 90.0 483.9
Income taxes.......................................... 182.5 31.5 (c) 214.0
---------- --------- -----------
Income from continuing operations.....................$ 211.4 $ 58.5 $ 269.9
========== ========= ===========
Basic income per share from continuing operations..... $ 1.91 (d)
===========
Diluted income per share from continuing
operations......................................... $ 1.90 (d)
===========
Adjusted weighted average number of shares of
common stock outstanding-diluted................... 142,318,019 (d)
===========
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.
</TABLE>
24
<PAGE>
New Aetna
Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Year Ended December 31, 1999
(Unaudited)
<TABLE>
New Aetna Sale Related New Aetna
Historical Adjustments Pro Forma
---------- ------------ -----------
(Millions, except per share data)
<S> <C> <C> <C>
Revenue:
Health care premiums................................$17,145.7 $ -- $ 17,145.7
Other premiums...................................... 1,495.8 -- 1,495.8
Administrative service only fees.................... 1,674.5 -- 1,674.5
Net investment income............................... 1,601.8 -- 1,601.8
Other income........................................ 129.4 -- 129.4
Net realized capital gains.......................... 62.5 -- 62.5
--------- --------- -----------
Total revenue.......................................... 22,109.7 -- 22,109.7
--------- --------- -----------
Benefits and expenses:
Health care costs................................... 14,641.0 -- 14,641.0
Current and future benefits......................... 2,231.0 -- 2,231.0
Operating expenses:
Salaries and related benefits.................... 1,866.2 -- 1,866.2
Other............................................ 2,050.8 (14.0)(a) 2,036.8
Interest expense.................................... 232.7 (170.5)(b) 62.2
Amortization of goodwill and other acquired
intangible assets................................ 420.4 -- 420.4
Reductions of loss on discontinued products......... (77.2) -- (77.2)
--------- --------- -----------
Total benefits and expenses............................ 21,364.9 (184.5) 21,180.4
--------- --------- -----------
Income from continuing operations before income taxes.. 744.8 184.5 929.3
Income taxes........................................... 345.4 64.6 (c) 410.0
--------- --------- -----------
Income from continuing operations......................$ 399.4 $ 119.9 $ 519.3
========= ========= ===========
Basic income per share from continuing operations...... $ 3.60(d)
============
Diluted income per share from continuing operations.... $ 3.57(d)
============
Adjusted weighted average number of shares of common
stock outstanding-diluted........................... 145,328,519(d)
============
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.
</TABLE>
25
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
1. The following is a summary of the adjustments reflected in the unaudited
pro forma condensed consolidated statements of income:
a. A decrease in operating expenses to exclude expenses related to the
master lease agreement on the CityPlace office facility which is
being retained by Aetna upon the sale of Aetna to ING;
b. A reduction of interest expense related to long-term debt outstanding
for the period, given the retention of
certain long-term debt by Aetna upon the sale of Aetna to ING; and
c. The recognition of income tax impacts on the pro forma adjustments at
the U.S. statutory rate of 35%.
d. Pro forma net income per share is based on pro forma income and an
assumed weighted average number of shares outstanding as a result of
the Agreement, including the spin-off. The number of weighted average
shares outstanding is as follows:
<TABLE>
Six Months Ended June 30,
---------------------------- Year Ended
2000 1999 December 31, 1999
----------- ----------- -----------------
<S> <C> <C> <C>
Weighted average common shares - basic (1)..... 141,128,421 141,140,347 144,118,961
=========== =========== ===========
Weighted average common shares - diluted (2)... 142,672,630 142,318,019 145,328,519
=========== =========== ===========
</TABLE>
-----------------
(1) Based on one share of New Aetna common stock issued for each share of
Aetna common stock.
(2) Excludes adjustments related to the settlement or rollover of stock
options and common stock equivalents for incentive units, as they would
not have materially affected weighted average shares outstanding in any
period.
2. The unaudited pro forma condensed consolidated statements of income do not
give effect to:
o Any one time costs to be incurred to complete the Agreement;
o Any severance costs to be incurred;
o Any other nonrecurring or unusual charges that may be incurred as a
result of the merger;
o Any reduction in operating expenses related to corporate overhead
that may be reduced in the future as a result of the spin-off and the
merger; or
o Any adjustments to interest expense to reflect that, subsequent to
the spin-off and the merger, New Aetna is expected to have a capital
structure different from the capital structure shown in the unaudited
pro forma condensed consolidated balance sheet and accordingly,
interest expense reflected in the unaudited pro forma condensed
consolidated statements of income is not necessarily indicative of
the interest expense that New Aetna would have incurred as a
separate, independent company. Subsequent to the spin-off, it is
anticipated that indebtedness will increase. See "Summary" for more
information.
26
<PAGE>
<TABLE>
New Aetna Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 2000
(Unaudited)
New Aetna Less: Sold Sale Related New Aetna
Historical Businesses Adjustments Pro Forma
---------- ---------- ------------ ----------
(Millions, except per share data)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................... $ 1,812.8 $ -- $ (4.1)(a) $ 1,808.7
Investment securities........................ 15,342.1 -- (3.6)(a) 15,338.5
Other investments............................ 410.5 -- -- 410.5
Premium receivables.......................... 855.9 -- -- 855.9
Other receivables, net....................... 777.8 -- -- 777.8
Accrued investment income.................... 269.8 -- (0.1)(a) 269.7
Investments under securities loan agreement.. 701.5 -- -- 701.5
Deferred income taxes........................ 118.0 -- 6.7 (a/d) 124.7
Other assets................................. 377.0 -- -- 377.0
--------- ---------- --------- ---------
Total current assets............................ 20,665.4 -- (1.1) 20,664.3
--------- ---------- --------- ---------
Long-term investments........................... 377.6 -- -- 377.6
Mortgage loans.................................. 2,040.3 -- -- 2,040.3
Investment real estate.......................... 295.5 -- -- 295.5
Reinsurance recoverables........................ 803.5 -- -- 803.5
Goodwill and other acquired intangible assets, net 8,188.1 -- -- 8,188.1
Property and equipment, net..................... 450.5 -- -- 450.5
Deferred income taxes........................... 295.2 -- -- 295.2
Other assets.................................... 227.1 -- (20.2)(a) 206.9
Separate accounts assets........................ 14,784.8 -- -- 14,784.8
Net assets of discontinued operations........... 2,923.2 (2,923.2) -- --
--------- ---------- --------- ---------
Total assets.................................... $51,051.2 $ (2,923.2) (21.3) $48,106.7
========= ========== ========= =========
Liabilities and shareholder's equity
Current liabilities:
Health care costs payable.................... $ 3,142.8 $ -- $ -- $ 3,142.8
Future policy benefits....................... 997.6 -- -- 997.6
Unpaid claims................................ 455.9 -- -- 455.9
Unearned premiums............................ 397.7 -- -- 397.7
Policyholders' funds......................... 937.4 -- -- 937.4
Payable under securities loan agreement...... 701.5 -- -- 701.5
Short-term debt.............................. 1,342.6 -- 125.9 (b) 1,468.5
Income taxes payable......................... 223.4 -- -- 223.4
Other liabilities............................ 1,627.4 -- -- 1,627.4
--------- ---------- --------- ---------
Total current liabilities....................... 9,826.3 -- 125.9 9,952.2
--------- ---------- --------- ---------
Future policy benefits.......................... 8,238.7 -- -- 8,238.7
Unpaid claims................................... 1,262.4 -- -- 1,262.4
Policyholders' funds............................ 2,993.8 -- -- 2,993.8
Long-term debt.................................. 2,094.2 -- (2,092.6)(b) 1.6
Accrued expenses and other liabilities.......... 890.9 -- (303.7)(a/c/d) 587.2
Separate accounts liabilities................... 14,784.8 -- -- 14,784.8
--------- ---------- --------- ---------
Total liabilities............................... 40,091.1 -- (2,270.4) 37,820.7
--------- ---------- --------- ---------
Shareholder's equity:
Common stock and additional paid-in capital.. 3,735.2 (2,132.2) 2,249.1 (e) 3,852.1
Accumulated other comprehensive loss......... (484.2) 426.9 -- (57.3)
Retained earnings............................ 7,709.1 (1,217.9) 6,491.2
--------- ---------- --------- ---------
Total shareholder's equity...................... 10,960.1 (2,923.2) 2,249.1 10,286.0
--------- ---------- --------- ---------
Total liabilities and shareholder's equity ..... $51,051.2 $ (2,923.2) $ (21.3) $48,106.7
========= ========== ========= =========
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.
</TABLE>
27
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
1. The following is a summary of the adjustments reflected in the unaudited
pro forma balance sheets to give effect to:
a. Adjustment for certain assets and liabilities pursuant to the
Agreement as follows:
- Decrease investment securities by $3.6 million for amounts to be
retained by Aetna upon the sale of Aetna to ING;
- Decrease cash and cash equivalents by $4.1 million for funding
of certain employee benefit related plans;
- Decrease accrued investment income by $0.1 million for amounts
related to investment securities to be retained by Aetna upon
the sale of Aetna to ING;
- Decrease deferred income taxes by $11.7 million related to
liabilities to be retained by Aetna upon the sale of Aetna to
ING;
- Decrease other liabilities by $96.0 million for liabilities to
be retained by Aetna upon the sale of Aetna to ING (primarily
accrued interest payable on long-term debt); and
- Decrease other assets by $20.2 million for deferred debt
issuance costs related to the long-term debt to be retained by
Aetna upon the sale of Aetna to ING.
b. A decrease in long-term debt, given the retention of certain
long-term debt by Aetna upon the sale of Aetna to ING, and an
increase in short-term debt, to reflect the retention of
substantially all such debt by New Aetna;
c. A decrease in other liabilities of $260.4 million related to the
master lease agreement on the CityPlace office facility which is
being retained by Aetna upon the sale of Aetna to ING;
d. An increase in other liabilities by $52.7 million (and a related
deferred tax asset of $18.4 million) relating to postretirement
employee benefit liabilities retained by New Aetna pursuant to the
Agreement; and
e. Corresponding adjustments to the net equity of New Aetna.
2. The unaudited pro forma condensed consolidated balance sheet does not give
effect to liabilities that may result due to:
o Any one time costs to be incurred to consummate the Agreement;
o Any severance costs to be incurred;
o Any other nonrecurring or unusual charges that may be incurred as a
result of the merger; or
o Any adjustments to debt outstanding to reflect that, subsequent to
the spin-off and the merger, New Aetna is expected to have a capital
structure different from the capital structure shown in the unaudited
pro forma condensed consolidated balance sheet and accordingly,
interest expense reflected in the unaudited pro forma condensed
consolidated statements of income is not necessarily indicative of
the interest expense that New Aetna would have incurred as a
separate, independent company. As a result of the spin-off, it is
anticipated that indebtedness will increase. See "Summary" for more
information.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with the consolidated financial
statements and other data presented herein, as well as the section entitled
"Risk Factors."
Overview
The consolidated financial information presented herein includes the
accounts of Aetna U.S. Healthcare Inc. and the other operations that will
comprise New Aetna. New Aetna is currently a wholly-owned subsidiary of Aetna.
On July 20, 2000, Aetna announced that it had reached a definitive
agreement to sell its financial services and international businesses to ING
and, in an integrated transaction, that it planned to spin-off New Aetna, a
standalone health company comprised of the Health Care (including the group
life and disability insurance businesses) and the Large Case Pensions
businesses, to its shareholders.
The businesses to be sold to ING are reflected as discontinued operations,
since New Aetna will be the successor of Aetna for accounting purposes. Refer
to Note 11 of Condensed Notes to Interim Consolidated Financial Statements and
Note 17 of Notes to Consolidated Financial Statements for further discussion of
discontinued operations.
New Aetna and ING have entered into a number of agreements in connection
with the spin-off. These agreements effect the spin-off and the merger and also
provide a framework for the ongoing relationship with ING, including some
transitional arrangements. See "Relationship Among Aetna, New Aetna and ING."
Health Care provides a full spectrum of health and dental products
(managed care and indemnity) and group insurance products (life, disability and
long-term care) in the United States on both an insured and an employer- funded
basis. Under insured plans, New Aetna assumes all or a majority of health care
cost, utilization, mortality, morbidity or other risk depending on the product.
Under employer-funded plans, the plan sponsor, and not New Aetna, assumes all
or a majority of these risks. Health Care consists of (i) Health Risk and PHC
and (ii) Group Insurance and Other Health. New Aetna acquired the Prudential
health care business on August 6, 1999. Refer to "-- Acquisitions and
Dispositions" for further information on this acquisition. Health Risk and PHC
include health and dental plans offered on an employer-funded basis and the
results of servicing Prudential's administrative services only ("ASO")
business. Health plans include health maintenance organization ("HMO"),
point-of-service ("POS"), preferred provider organization ("PPO") and indemnity
products. 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 plans offered on an employer-funded basis
(excluding the Prudential ASO business).
Large Case Pensions manages a variety of retirement products, including
pension and annuity products, offered to IRC Section 401 qualified defined
benefit and defined contribution plans. Contracts provide nonguaranteed,
partially guaranteed (experience-rated) and fully guaranteed investment
options. The majority of Large Case Pensions' products provide contractholders
with a vehicle for investments under which the contractholders assume the
investment risk as well as the benefit of favorable performance. Large Case
Pensions earns a management fee on these accounts. In 1993, Large Case Pensions
discontinued its fully guaranteed large case pension products.
The consolidated financial statements reflect the results of operations,
financial position, changes in shareholder's equity and cash flows of the
Health Care and Large Case Pensions businesses that will be spun-off from Aetna
to New Aetna (refer to Note 11 of Condensed Notes to Interim Consolidated
Financial Statements and Note 17 of Notes to Consolidated Financial Statements)
as if New Aetna were a separate entity for all periods presented. The
consolidated financial statements have been prepared using the historical basis
in the assets and liabilities and historical results of operations related to
the Health Care and Large Case Pensions businesses. Changes in shareholder's
equity represent net income of New Aetna plus net cash transfers to or from
Aetna. Additionally, the consolidated financial statements include allocations
of certain Aetna corporate assets and liabilities (including prepaid pension
assets, debt and benefit obligations, pension and post-retirement benefits) and
29
<PAGE>
expenses relating to both the Health Care and Large Case Pensions businesses
that will be transferred to New Aetna as well as to those businesses presented
as discontinued operations. Management believes these allocations are
reasonable. Refer to Note 2 of Notes to Consolidated Financial Statements for
additional discussion of assumptions used by management and allocations made
for New Aetna consolidated financial statements.
The liabilities of New Aetna include outstanding third party indebtedness.
The amount of the outstanding third party indebtedness and related interest
expense associated with such debt have been allocated to New Aetna as well as
to those businesses presented as discontinued operations based on allocations
which management believes are reasonable.
The costs of services allocated to New Aetna are not necessarily
indicative of the costs that would have been incurred if New Aetna had
performed these functions as a stand-alone entity. Subsequent to the spin-off,
New Aetna will perform these functions using its own resources or purchased
services and will be responsible for the costs and expenses associated with the
management of a public company. Furthermore, New Aetna is expected to have a
capital structure different from the capital structure reflected in the
consolidated financial statements and accordingly, interest expense is not
necessarily indicative of the interest expense that New Aetna would have
incurred as a separate, independent company.
Income tax expense was calculated as if New Aetna filed separate income
tax returns. As Aetna manages its tax position on a consolidated basis, which
takes into account the results of all its businesses, New Aetna's effective tax
rate in the future could vary from its historical effective tax rate. New
Aetna's future effective tax rate will largely depend on its structure and
strategies as a separate, independent company.
Accordingly, the financial information included herein may not necessarily
reflect the consolidated results of operations, financial position, changes in
shareholder's equity and cash flows of New Aetna in the future or what they
would have been had it been a separate, stand-alone entity during the periods
presented.
Acquisitions and Dispositions
Acquisition of Prudential Health Care Business
On August 6, 1999, New Aetna acquired from The Prudential Insurance
Company of America ("Prudential") the Prudential health care business ("PHC")
for approximately $1 billion. Included in the acquisition were PHC's risk HMO,
POS, PPO and Indemnity health lines, as well as its dental risk business. The
transaction was financed by issuing $500 million of three-year senior notes to
Prudential and by using funds made available from the issuance of commercial
paper. Refer to "-- Liquidity and Capital Resources" and Note 2 of Notes to
Consolidated Financial Statements for further discussion regarding the
allocation of Aetna debt to New Aetna. New Aetna also agreed to service
Prudential's ASO business. Since the closing, New Aetna's results have been
affected by, among other things, the operating results of PHC, the costs of
financing the transaction and the amortization of goodwill and other acquired
intangible assets created as a result of the transaction. Refer to Note 3 of
Notes to Consolidated Financial Statements for further discussion.
Sale of NYLCare Texas
In connection with the PHC acquisition, New Aetna agreed with the U.S.
Department of Justice and the State of Texas to divest certain Texas HMO/POS
and other related businesses ("NYLCare Texas") acquired by New Aetna as part of
a 1998 acquisition of New York Life Insurance Company's health care business
("NYLCare"). Pursuant to this agreement, on March 31, 2000, New Aetna completed
the sale of NYLCare Texas to Blue Cross and Blue Shield of Texas ("Blue
Cross"), a division of Health Care Service Corporation ("HCSC"), for
approximately $420 million in cash. The sale included approximately 463,000
Commercial HMO risk members, 52,000 Commercial HMO non-risk members and 5,000
PPO members in the Houston, Austin, San Antonio, Corpus Christi, Beaumont,
Dallas-Fort Worth, San Angelo, Texarkana and Amarillo areas. New Aetna retained
approximately 127,000 NYLCare Medicare members in Texas through a reinsurance
and administrative services agreement. The sale
30
<PAGE>
resulted in a capital loss of approximately $35 million after tax, which was
recognized in the fourth quarter of 1999. The results of operations of NYLCare
Texas were not material to New Aetna's consolidated results of operations.
Acquisition of NYLCare Health Care Business
In July 1998, New Aetna acquired NYLCare. The total purchase price was
approximately $1.1 billion. Since the closing, New Aetna'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 as a result of the transaction. Refer to Note 3 of Notes to
Consolidated Financial Statements for further discussion.
Six Months Ended June 30, 2000 and 1999
Consolidated Results of Continuing Operations
New Aetna reported income from continuing operations of $181 million for
the six months ended June 30, 2000 and $211 million for the six months ended
June 30, 1999. Income from continuing operations includes Year 2000 costs of
$40 million for the six months ended June 30, 1999. Income from continuing
operations also includes a reduction of the reserve for loss on discontinued
products for Large Case Pensions of $95 million for the six months ended June
30, 2000 and $50 million for the corresponding period in 1999. Net realized
capital losses were $18 million for the six months ended June 30, 2000 and net
realized capital gains were $12 million for the corresponding period in 1999.
Excluding the reduction of the reserve for loss on discontinued products and
net realized capital gains and losses, results from continuing operations would
have been $104 million for the six months ended June 30, 2000 and $149 million
for the corresponding period in 1999.
Health Care
Operating Summary
Six Months Ended
June 30,
-----------------------
2000(1) 1999
--------- --------
(Millions)
Health care premiums........................... $10,909.0 $7,158.9
Other premiums................................. 660.7 702.8
Administrative services only fees.............. 980.4 728.2
Net investment income.......................... 344.8 279.2
Other income................................... 33.6 41.0
Net realized capital losses.................... (45.2) (5.5)
--------- --------
Total revenue............................ 12,883.3 8,904.6
--------- --------
Health care costs.............................. 9,432.9 6,091.6
Current and future benefits.................... 614.3 655.1
Salaries and related benefits.................. 1,122.4 748.4
Other operating expenses....................... 1,187.1 821.6
Amortization of goodwill and other acquired
intangible assets......................... 218.4 203.8
--------- --------
Total benefits and expenses.............. 12,575.1 8,520.5
--------- --------
Income before income taxes..................... 308.2 384.1
Income taxes................................... 138.0 177.5
--------- --------
Net income..................................... $ 170.2 $ 206.6
========= ========
Net realized capital losses, net of tax
(including above)........................ $ (21.0) $ (3.7)
========= ========
-------------------
(1) Results include PHC since August 6, 1999.
31
<PAGE>
Results
Health Care's net income decreased $36 million for the six months ended
June 30, 2000 compared to the corresponding period in 1999. Net income includes
Year 2000 costs of $38 million for the six months ended June 30, 1999. Net
realized capital losses for the six months ended June 30, 2000 primarily
reflect New Aetna's rebalancing of its investment portfolio in a rising
interest rate environment. Excluding net realized capital losses, results for
the six months ended June 30, 2000 decreased $19 million, or 9%, compared to
the corresponding period in 1999.
On April 6, 2000, the State of New Jersey enacted the New Jersey Insolvent
Health Maintenance Organization Assistance Fund Act of 2000 (the "Act"). The
Act is designed to reimburse individuals who were covered by and providers that
had contracts with two New Jersey HMOs prior to their insolvency. The total
amount to be assessed to all HMOs in New Jersey is $50 million. The Act
requires that HMOs in the New Jersey market be assessed a charge based on each
HMO's proportionate share of premiums written in New Jersey relative to all HMO
premiums written in New Jersey. New Aetna recorded an estimate of its share of
this assessment, based on its HMO market share in New Jersey, of $23 million
pretax ($15 million after-tax) in the second quarter of 2000.
In order to provide a comparison that management believes better reflects
the performance of Health Care, the operating earnings discussion that follows
excludes amortization of goodwill and other acquired intangible assets and net
realized capital losses in all periods.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000(1) 1999
--------- --------
(Millions, except PMPM and
Medical Loss Ratio
information)
<S> <C> <C>
Operating earnings:
Health Risk and PHC................. $ 206.6 $ 233.0
Group Insurance and Other Health.... 161.8 142.4
======== ========
Total Health Care......................... $ 368.4 $ 375.4
======== ========
Commercial HMO Premium PMPM............... $ 148.04 $ 139.19
Commercial HMO Medical Cost PMPM.......... 126.27 (2) 114.66
Commercial HMO Medical Loss Ratio......... 85.3%(2) 82.4%
Medicare HMO Premium PMPM................. $ 532.95 $ 487.16
Medicare HMO Medical Cost PMPM............ 510.50 (2) 439.69
Medicare HMO Medical Loss Ratio........... 95.8%(2) 90.3%
</TABLE>
----------
(1) Results include PHC since August 6, 1999.
(2) Does not include net recoveries under a reinsurance agreement with
Prudential, net amortization of the reinsurance premiums paid, or net
amortization of certain fair value amounts established as part of the PHC
purchase accounting. Refer to "PHC Agreement" below.
Health Risk and PHC
Health Risk and PHC operating earnings decreased $26 million for the six
months ended June 30, 2000 compared to the corresponding period of 1999. The
decrease primarily reflects significantly higher medical costs in both
Commercial and Medicare HMO products. Also contributing to the decrease in
results were severance costs, primarily related to PHC, and the New Jersey
assessment discussed above. The decrease in results was partially offset by the
addition of PHC's results, including the benefit of supplemental fees for
servicing Prudential's ASO members and net recoveries under the reinsurance
agreement with Prudential.
32
<PAGE>
Health Care Costs Payable. For Health Risk and PHC, the liability for the
health care costs payable reflects estimates of the ultimate cost of claims
that have been incurred but not yet reported or reported but not yet paid.
Health care costs payable are estimated periodically, and any resulting
adjustments are reflected in the current-period operating results within health
care costs. Health care costs payable are based on a number of factors,
including those derived from historical claim experience. An extensive degree
of judgment is used in this estimation process, considerable variability is
inherent in such estimates and the adequacy of the estimate is highly sensitive
to changes in medical claims payment patterns and changes in medical cost
trends. A worsening (or improvement) of medical cost trend or changes in claim
payment patterns from those that were assumed in estimating health care costs
payable at June 30, 2000 would cause these estimates to change in the near
term, and such changes could be material.
Commercial HMO. Commercial HMO premium per member per month ("PMPM")
increased 6.4% for the six months ended June 30, 2000 compared to the
corresponding period of 1999. Excluding PHC, the increase would have been 7.3%
for the six months ended June 30, 2000 compared to the corresponding period of
1999. These increases were primarily due to premium rate increases, partially
offset by employers selecting lower premium plans.
Commercial HMO medical cost PMPM increased 10.1% for the six months ended
June 30, 2000 compared to the corresponding period of 1999. Excluding PHC, the
increase would have been 10.0% for the six months ended June 30, 2000 compared
to the corresponding period of 1999. These increases reflect higher medical
costs primarily due to higher than anticipated utilization specific to second
quarter dates of service, as well as additional medical costs related to the
first quarter 2000. While the specific factors vary in importance by local
market, the major drivers of the increase in utilization included a significant
increase in inpatient utilization, a higher number of emergency room visits,
increased outpatient surgery procedures, and, to a lesser extent, longer
maternity lengths of stay, more specialist office visits and increased costs
for physician-administered injectables.
The Commercial HMO medical loss ratio was 85.3% for the six months ended
June 30, 2000 compared to 82.4% for the corresponding period of 1999. This
increase was primarily due to the increase in medical costs discussed above as
well as the addition of PHC at a medical loss ratio of 87.2% for the six months
ended June 30, 2000. Excluding PHC, the medical loss ratio would have been
84.5% for the six months ended June 30, 2000.
Medicare HMO. Medicare HMO premium PMPM increased 9.4% for the six months
ended June 30, 2000 compared to the corresponding period of 1999. Excluding
PHC, the increase would have been 9.2% for the six months ended June 30, 2000
compared to the corresponding period of 1999. These increases were primarily
due to increases in supplemental premiums and Health Care Financing
Administration ("HCFA") rate increases.
Medicare HMO medical cost PMPM increased 16.1% for the six months ended
June 30, 2000 compared to the corresponding period of 1999. Excluding PHC, the
increase would have been 15.6% for the six months ended June 30, 2000 compared
to the corresponding period of 1999. These increases primarily reflect higher
medical costs resulting from increased inpatient utilization, as well as
additional medical costs related to the first quarter of 2000.
The Medicare HMO medical loss ratio was 95.8% for the six months ended
June 30, 2000 compared to 90.3% for the corresponding period of 1999. Excluding
PHC, the medical loss ratio would have been 95.6% for the six months ended June
30, 2000. These increases were due to the increased medical costs discussed
above outpacing supplemental premiums and HCFA rate increases.
Exiting Medicare Markets. New Aetna's Medicare+Choice contracts with the
federal government are renewed for a one-year period each January 1. On June
29, 2000, New Aetna notified HCFA of its intent to exit a number of Medicare
service areas affecting approximately 340,000 members, or approximately 50
percent of New Aetna's total current Medicare membership. The termination of
these Medicare+Choice contracts will become effective on December 31, 2000. New
Aetna may elect to continue to provide Medicare benefits to members in these
service areas, in accordance with HCFA regulations and guidelines, if
legislative or regulatory changes are made that would increase payments from
HCFA to New Aetna within six months following this notification date.
During the remainder of 2000, New Aetna will continue to monitor any
legislative or regulatory changes that might increase payments under applicable
Medicare+Choice contracts and then make a final determination, as
33
<PAGE>
permitted under HCFA regulations, depending on the level of any such
reimbursement increase. New Aetna will also, at such time, evaluate the need
for the establishment of liabilities related to the withdrawal from applicable
Medicare service areas, including employee termination benefits and related
costs, as well as evaluate any impairment related to goodwill still separately
identifiable with such service areas, which is considered recoverable pending a
final decision to exit. Goodwill associated with such Medicare service areas
was approximately $275 million at June 30, 2000.
PHC Agreement. Effective August 6, 1999, New Aetna and Prudential entered
into a reinsurance agreement for which New Aetna paid a premium. Under the
agreement, Prudential has agreed to indemnify New Aetna from certain health
insurance risks that arise following the closing by reimbursing New Aetna for
75% of medical costs (as calculated under the agreement) of PHC in excess of
certain threshold medical loss ratio levels through 2000 for substantially all
the acquired medical and dental risk business. The medical loss ratio threshold
was 83.5% for August 6, 1999 through December 31, 1999 and is 84% for January
1, 2000 through December 31, 2000. During the six months ended June 30, 2000,
reinsurance recoveries under this agreement were $46 million pretax. Results
were positively impacted by $1 million pretax for the six months ended June 30,
2000 related to the net amortization of: the reinsurance premium paid as part
of the acquisition, the fair value adjustment of the reinsurance agreement and
the fair value adjustment of the unfavorable component of the contracts
underlying the acquired medical risk business recorded as part of the
acquisition. Such reinsurance recoveries and net amortization were reflected in
health care costs. Refer to Note 3 of Condensed Notes to Interim Consolidated
Financial Statements.
New Aetna also agreed to service Prudential's ASO contracts following the
closing. Prudential is terminating its ASO business and has retained New Aetna
to service these contracts during the run off period, generally no later than
June 30, 2001. Prudential ASO members will remain Prudential members as long as
the contracts remain in force. New Aetna is maintaining personnel, systems and
other resources necessary to service the ASO business during the run off
period, as it was not feasible to segregate these operating assets from those
purchased in the PHC transaction. In exchange for servicing the ASO business,
Prudential is remitting fees received from its ASO members to New Aetna, as
well as paying certain supplemental fees. The supplemental fees are fixed in
amount and decline over a period ending 18 months following the closing. During
the six months ended June 30, 2000, New Aetna recorded total fees for servicing
the Prudential ASO business of approximately $204 million pretax, including
supplemental fees of approximately $84 million pretax for the six month period
ended June 30, 2000. Included in these supplemental fees is amortization for
the six month period ended June 30, 2000 of $11 million pretax, in connection
with the above-market compensation component related to the supplemental fees
under the ASO contracts. The results of servicing this business during the run
off period will depend on, among other things, rate increases that are obtained
from renewing members (most of such rate increases were implemented by
Prudential prior to New Aetna's servicing of these contracts), the timing and
extent of ASO contract terminations, and the cost structure for servicing these
contracts. Refer to Note 3 of Condensed Notes to Interim Consolidated Financial
Statements.
Group Insurance and Other Health
Group Insurance and Other Health operating earnings increased $19 million
for the six months ended June 30, 2000 compared to the corresponding period of
1999. This increase is primarily due to rate increases and higher nonrisk
health membership levels, partially offset by increased operating expenses.
34
<PAGE>
Membership
Health Care's membership at June 30, 2000 and June 30, 1999 was as
follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------------------- -------------------------
Risk Nonrisk Total Risk Nonrisk Total
------ ------- ------ ------ ------- ------
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (1)............. 7,865 855 8,720 5,434 716 6,150
Medicare................... 648 -- 648 566 -- 566
Medicaid................... 142 77 219 141 39 180
------ ----- ------ ----- ----- ------
Total HMO.................. 8,655 932 9,587 6,141 755 6,896
POS............................ 352 3,435 3,787 212 2,451 2,663
PPO............................ 807 3,031 3,838 884 2,945 3,829
Indemnity...................... 251 1,963 2,214 162 2,058 2,220
------ ----- ------ ----- ----- ------
Total Health Membership.... 10,065 9,361 19,426 7,399 8,209 15,608
====== ===== ====== ===== ===== ======
Dental......................... 14,628 7,861
------ ------
Group Insurance:
Group Life................. 9,155 9,732
Disability................. 2,241 2,522
Long-Term Care............. 112 107
------ ------
</TABLE>
-------------------
(1) Includes 1,958 thousand POS members at June 30, 2000 and 1,507 thousand
POS members at June 30, 1999 who access primary care physicians and
referred care through an HMO network.
Total Health membership as of June 30, 2000 increased by 3.8 million
members, or 25%, when compared to June 30, 1999, due to the acquisition of PHC,
including ASO members that Health Care has agreed to service, partially offset
by the loss of NYLCare Texas members. Excluding the impact of the PHC members,
growth in total HMO membership was offset by declines in Other Health
membership. Total Health membership decreased by approximately 1.6 million
members from year end 1999 primarily due to losses in PHC membership, which
reflects the impact of price increases, as well as the loss of NYLCare Texas
members.
As discussed above, on June 29, 2000, New Aetna notified HCFA of its
intent to exit certain Medicare service areas as of December 31, 2000, which
would affect approximately 340,000 Medicare members, or approximately 50
percent of New Aetna's total current Medicare membership.
Total Revenue and Expense
Revenue, excluding net realized capital losses, increased by $4.0 billion,
or 45%, for the six months ended June 30, 2000 compared to the corresponding
period of 1999. This increase is primarily due to the acquisition of PHC,
increases in premium rates and growth in Commercial HMO membership.
Operating expenses, including salaries and related benefits, increased by
$740 million, or 47%, for the six months ended June 30, 2000 compared to the
corresponding period of 1999. This increase is primarily due to the acquisition
of PHC. Operating expenses also reflect severance costs (primarily related to
PHC) of $42 million for the six months ended June 30, 2000 and increased costs
to support Commercial HMO membership growth. Operating expenses as a percentage
of revenue was 18% for both periods.
35
<PAGE>
Outlook
Medical Costs/Pricing and Other Actions. In the latter half of 1999, New
Aetna's medical costs, particularly in the Medicare business, increased
significantly. Going forward for 2000, New Aetna targeted commercial premium
increases that sought to maintain or enhance margins, and also attempted to
improve commercial profitability by increasing premiums and by addressing cost
increases in its contracting with providers and through other cost management
efforts. At the same time, New Aetna increased supplemental premiums and
instituted changes in benefit plans for its Medicare products which, in
addition to premium rate increases set by the federal government for Medicare
risk products, were designed to keep pace with the higher medical cost trend.
Despite these actions, New Aetna experienced significantly higher Medicare
and Commercial HMO medical costs in the first half of 2000. New Aetna is taking
several actions to address this situation. With respect to its Medicare HMO
business, as discussed above, unless legislative or regulatory changes are made
prior to the end of the year to increase payments under Medicare+Choice
contracts, New Aetna will exit a significant number of its Medicare service
areas. During the remainder of 2000, New Aetna will continue to monitor any
legislative or regulatory changes that might increase payments under applicable
Medicare+Choice contracts and then make a final determination, as permitted
under HCFA regulations, depending on the level of any such reimbursement
increase. With respect to its Commercial HMO business, New Aetna is increasing
premiums for business renewing in the fourth quarter of 2000 and beyond.
However, premiums for insured health plans are generally fixed for one-year
periods and, accordingly, cost levels in excess of those reflected in pricing,
such as those being experienced during 2000, cannot be recovered in the year
through higher premiums. As a result, earnings for the remainder of 2000 and,
to a lesser extent, the first half of 2001 are expected to continue to be
materially adversely affected if medical costs continue to be higher than the
cost levels reflected in New Aetna's pricing. New Aetna is also reviewing
whether to exit certain Commercial HMO markets.
New Aetna also attempts to improve profitability by addressing cost
increases in its contracting with providers and through other cost management
techniques. There can be no assurances, however, that premium increases and
cost savings achieved through recontracting and other cost management
techniques will be sufficient to offset the increases in medical costs as well
as any increases in other operating costs, as governmental action (including
rate decreases or reduction of rate increases), business conditions (including
intensification of competition) and other factors may adversely affect New
Aetna's ability to realize such premium increases and cost savings. These
premium increases may also adversely affect membership levels.
Prudential Acquisition. Medical loss ratios for the PHC business are
higher than for New Aetna's other health risk business. The effect of these
higher ratios is offset, in part, by the reinsurance agreement between
Prudential and New Aetna, which terminates December 31, 2000. New Aetna is
seeking to improve the medical loss ratios of the acquired business through
underwriting and pricing discipline and medical cost management initiatives. If
New Aetna is unable to achieve sufficient improvement in the medical loss
ratios for the acquired business, its results of operations for periods
following termination of the reinsurance agreement could be materially
adversely affected. The administrative costs related to the PHC business and
the ASO business of Prudential that New Aetna agreed to service are higher than
the administrative costs of New Aetna's other health business. New Aetna is
seeking to reduce the level of administrative costs related to this business.
In addition, New Aetna expects a significant decline in the membership of the
acquired PHC business and the ASO business it agreed to service. If New Aetna
is unable to reduce the level of administrative costs to correspond with
expected levels of membership decline, its results could be materially
adversely affected.
Technology/Compliance Expenses. In 2000, New Aetna also expects to
increase its expenditures on Internet (electronic commerce) initiatives. Also,
new federal regulations were recently proposed under the Health Insurance
Portability and Accountability Act relating to the privacy of health
information and certain other matters affecting New Aetna's administration of
health and related benefit plans. New Aetna is currently reviewing the
potential impact of the proposed regulations on its operations, including its
information technology systems. It is reasonably possible that New Aetna will
incur additional expenses in connection with, and that our business could
otherwise be adversely affected by, compliance with any final regulations that
are adopted.
36
<PAGE>
Potential Charges. As discussed above, New Aetna is conducting a
comprehensive review of Health Care's business model and is in the process of
considering and implementing a number of strategic initiatives in this
business. At such time as these initiatives are finally decided and
implemented, New Aetna will evaluate the need to establish liabilities related
to these strategic changes and New Aetna will evaluate whether any impairment
related to assets of New Aetna has occurred. It is reasonably possible that, as
a result of the above actions, New Aetna will need to establish such
liabilities or write down related assets and that such liabilities and write
downs could be material. At such time as New Aetna decides to exit Medicare
markets, it will evaluate the need to establish liabilities related to this
exit. Also, New Aetna will evaluate whether any impairment related to goodwill
still separately identifiable with such Medicare service areas has occurred.
Group Insurance Business. Results for the Group Insurance and Other Health
businesses in 2000 are expected to be level or to decrease relative to 1999
results, as favorable reserve developments that occurred in 1999 and prior
years are not expected to recur.
Large Case Pensions
Operating Summary
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
2000 1999
--------- ----------
(Millions)
<S> <C> <C>
Other premiums............................................ $ 77.6 $ 57.4
Net investment income..................................... 460.7 514.9
Other income.............................................. 12.6 18.9
Net realized capital gains................................ 7.2 29.5
--------- ---------
Total revenue.................................... 558.1 620.7
--------- ---------
Current and future benefits............................... 487.6 505.5
Salaries and related benefits............................. 8.8 10.0
Other operating expenses.................................. 4.0 6.3
Reductions of loss on discontinued products............... (146.0) (77.2)
--------- ---------
Total benefits and expenses...................... 354.4 444.6
--------- ---------
Income before income taxes................................ 203.7 176.1
Income taxes.............................................. 72.6 62.8
--------- ---------
Net income................................................ $ 131.1 $ 113.3
========= =========
Net realized capital gains, net of tax (included above)... $ 5.2 $ 19.2
========= =========
Deposits (not included in other premiums above):
Fully guaranteed discontinued products................... $ 3.8 $ 7.6
Experience-rated.................................... 40.2 130.6
Nonguaranteed....................................... 283.3 323.1
--------- ---------
Total deposits................................... $ 327.3 $ 461.3
========= =========
Assets under management:(1)
Fully guaranteed discontinued
products.................................................. $ 5,787.4 $ 6,390.1
Experience-rated.................................... 7,419.0 9,079.6
Nonguaranteed....................................... 12,037.4 11,896.0
--------- ---------
Total assets under management.................... $25,243.8 $27,365.7
========= =========
</TABLE>
-------------------
(1) Excludes net unrealized capital losses of $223.1 million at June 30, 2000
and $35.5 million at June 30, 1999.
37
<PAGE>
Results
Large Case Pensions' net income for the six months ended June 30, 2000
increased by $18 million compared with the corresponding period in 1999.
Results include a reduction of the reserve for loss on discontinued products
for Large Case Pensions of $95 million for the six months ended June 30, 2000
primarily as a result of favorable investment performance and favorable
mortality and retirement experience and $50 million for the corresponding
period in 1999 as a result of favorable investment performance. Excluding the
discontinued products reserve releases and net realized capital gains, results
for the six months ended June 30, 2000 decreased $13 million, or 29%, compared
to the corresponding period in 1999, which reflects lower investment income due
to the redeployment of capital supporting this business. Assets under
management at June 30, 2000 were 8% lower than a year earlier. This decrease
primarily resulted from the continuing run off of liabilities underlying the
Large Case Pensions business.
General account assets supporting experience-rated products (where the
contractholder, not New Aetna, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals and transfers were as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------
2000 1999
------- -------
(Millions)
<S> <C> <C>
Scheduled contract maturities and benefit payments (1)...... $ 451.9 $ 478.5
Contractholder withdrawals other than scheduled contract
maturities and benefit payments............................. 103.4 201.0
Participant directed withdrawals............................ 25.7 43.9
</TABLE>
-------------------
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
Outlook
Large Case Pensions' earnings are expected to significantly decline in
2000 as a result of continuing run off of underlying liabilities.
Discontinued Products
Large Case Pensions discontinued the sale of its fully guaranteed large
case pension products (single-premium annuities ("SPAs") and guaranteed
investment contracts ("GICs")) in 1993. Large Case Pensions established a
reserve for anticipated future losses on these products based on the present
value of the difference between the expected cash flows from the assets
supporting these products and the cash flows expected to be required to meet
the product obligations.
Results of operations of discontinued products, including net realized
capital gains or losses, are credited or charged to the reserve for anticipated
losses. New Aetna'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 future losses are less than anticipated.
The factors contributing to changes in the reserve for anticipated future
losses are: operating income or loss, realized capital gains or losses and
mortality gains or losses. Operating income or loss is equal to revenue less
expenses. Realized capital gains or losses reflect the excess (deficit) of
sales price over (below) the carrying value of assets sold. Mortality gains or
losses reflect the mortality and retirement experience related to SPAs. A
mortality gain (loss) occurs when an annuitant or a beneficiary dies sooner
(later) than expected. A retirement gain will occur on some contracts if an
annuitant retires later than expected (a loss if an annuitant retires earlier
than expected).
38
<PAGE>
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------
2000 1999
------ ------
(Millions)
<S> <C> <C>
Interest deficit (1).......................................... $ (3.8) $(8.6)
Net realized capital gains.................................... 1.9 11.9
Interest earned on receivable from continuing products........ 10.6 11.0
Other, net.................................................... 7.5 5.9
------ -----
Results of discontinued products, after tax................... $ 16.2 $20.2
====== =====
Results of discontinued products, pretax...................... $ 22.0 $30.7
====== =====
Net realized capital gains (losses) from sales of bonds,
after tax (included above).................................. $(35.5) $ 7.8
====== =====
</TABLE>
-------------------
(1) The interest deficit is the difference between earnings on invested assets
and interest credited to contractholders.
Net realized capital gains for the six months ended June 30, 2000
decreased compared to the corresponding period in 1999. This decrease primarily
resulted from realized capital losses on bonds, due to the rising interest rate
environment, offset by capital gains from the sale of equities.
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 that was used to calculate the
reserve. Total assets supporting discontinued products and the reserve include
a receivable from continuing products of $380 million at June 30, 2000 and $464
million at December 31, 1999, net of related deferred taxes payable.
The reserve for anticipated future losses on discontinued products
represents the present value (at the risk-free rate at the time of
discontinuance, consistent with the duration of the liabilities) of the
difference between the expected cash flows from the assets supporting
discontinued products and the cash flows expected to be required to meet the
obligations of the outstanding contracts. Calculation of the reserve for
anticipated future losses requires projection of both the amount and the timing
of cash flows over approximately the next 30 years, including consideration of,
among other things, future investment results, participant withdrawal and
mortality rates, as well as the cost of asset management and customer service.
Since 1993, there have been no significant changes to the assumptions
underlying the calculation of the reserve related to the projection of the
amount and timing of cash flows.
The projection of future investment results considers assumptions for
interest rates, bond discount rates and performance of mortgage loans and real
estate. Mortgage loan assumptions represent management's best estimate of
current and future levels of rent growth, vacancy and expenses based upon
market conditions at each reporting date. The performance of real estate assets
has been consistently estimated using the most recent forecasts available.
During 1997, a bond default assumption was included to reflect historical
default experience, since the bond portfolio increased as a percentage of the
overall investment portfolio and reflected more bond credit risk, concurrent
with the decline in the commercial mortgage loan and real estate portfolios.
The previous years' actual participant withdrawal experience is used for
the current year assumption. Prior to 1995, New Aetna used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the
"Society"). In 1995, the Society published the 1994 Uninsured Pensioner's
Mortality table, which has been used since then.
New Aetna's assumptions about the cost of asset management and customer
service reflect actual investment and general expenses allocated over invested
assets. Since inception, the expense assumption has increased as the level of
fixed expenses has not declined as rapidly as the liability run off.
39
<PAGE>
The activity in the reserve for anticipated future losses on discontinued
products was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
----------
<S> <C>
Reserve at December 31, 1999................. $ 1,147.6
Operating income............................. 9.9
Net realized capital gains................... 0.1
Mortality and other.......................... 12.0
Reserve reduction............................ (146.0)
---------
Reserve at June 30, 2000..................... $ 1,023.6
=========
</TABLE>
Management reviews the adequacy of the discontinued products reserve
quarterly and, as a result, $95 million ($146 million pretax) of the reserve
was released in the second quarter of 2000, primarily due to favorable
performance related to certain equity investments, favorable mortality and
retirement experience and the decrease in size of the overall bond portfolio
which decreased default risk. The current reserve reflects management's best
estimate of anticipated future losses.
The discontinued products investment portfolio is as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------ ------------------
Class Amount Percent Amount Percent
----- -------- ------- -------- -------
(Millions)
<S> <C> <C> <C> <C>
Debt securities available for sale... $4,319.2 76.0% $4,533.0 77.2%
Mortgage loans....................... 806.9 14.2 768.8 13.1
Investment real estate............... 116.9 2.0 112.7 1.9
Equity securities.................... 200.2 3.5 239.7 4.1
Other................................ 242.3 4.3 214.2 3.7
-------- ------- -------- -------
Total................................ $5,685.5 100.0% $5,868.4 100.0%
======== ===== ======== =====
</TABLE>
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------------
2000 1999
------ ------
(Millions)
<S> <C> <C>
Scheduled contract maturities, settlements and
benefit payments................................... $499.3 $666.7
Participant directed withdrawals........................ 5.0 8.6
</TABLE>
Cash required to fund these distributions was provided by earnings and
scheduled payments on, and sales of, invested assets.
Refer to Note 7 of Condensed Notes to Interim Consolidated Financial
Statements and "-- Six Months Ended June 30, 2000 and 1999 -- Total
Investments" for additional information.
40
<PAGE>
Corporate
Operating Summary
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
------ ------
(Millions, after tax)
<S> <C> <C>
Interest expense.................. $ 81.3 $ 69.6
====== ======
Salaries and related benefits..... $ 19.1 $ 22.9
Other operating expenses, net..... 17.7 12.3
Net realized capital losses....... 2.1 3.7
------ ------
Total other expense............... $ 38.9 $ 38.9
====== ======
</TABLE>
Corporate represents the allocation of a portion of Aetna's corporate
overhead costs, including interest expense and other expenses that are not
directly related to New Aetna's business segments. "Other operating expense,
net" includes corporate expenses such as staff expenses and advertising and
contributions partially offset by net investment income.
Results
The 2000 increase in interest expense primarily results from additional
debt incurred in connection with the PHC acquisition in August 1999. Net
realized capital losses in the six months ended June 30, 2000 include losses of
$2.8 million on the sale of certain Corporate real estate. Other operating
expenses include Year 2000 costs of $1 million for the six months ended June
30, 1999. Other operating expenses increased $5 million for the six months
ended June 30, 2000, primarily resulting from costs related to Aetna's prior
plan to separate into two independent publicly traded companies.
As discussed above, Aetna has agreed to sell its financial services and
international businesses to ING, and Aetna's goal is to close this transaction
by year end 2000. In connection with closing this transaction, New Aetna will
be incurring various costs, including fees for outside financial and legal
advisors and expenses related to the change-in-control of Aetna. New Aetna will
evaluate the need to establish liabilities related to this transaction. It is
reasonably possible that New Aetna will need to establish such liabilities and
that such liabilities and costs could be material.
Outlook
See "-- Liquidity and Capital Resources" for a discussion of debt to be
incurred in connection with the spin-off and the merger and changes in interest
expense.
Total Investments
Investments disclosed in this section relate to New Aetna's total
portfolio and consist only of assets supporting continuing operations
(including assets supporting discontinued products and experience-rated
products).
New Aetna's investment objective is to fund policyholder and other
liabilities in a manner that enhances shareholder and contractholder value,
subject to appropriate risk constraints. New Aetna seeks to meet this
investment objective through a mix of investments that reflect the
characteristics of the liabilities they support; diversify the types of
investment risks by interest rate, liquidity, credit and equity price risk; and
achieve asset diversification by investment type, industry, issuer and
geographic location. New Aetna regularly projects duration and cash flow
characteristics of its liabilities and makes appropriate adjustments in its
investment portfolios.
41
<PAGE>
Total investments were as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Millions)
<S> <C> <C>
Debt securities available for sale. $15,123.7 $15,811.5
Equity securities.................. 236.1 286.4
Other investment securities........ 94.8 216.4
Mortgage loans..................... 2,207.3 2,377.0
Investment real estate............. 296.3 269.5
Other.............................. 507.8 383.1
--------- ---------
Total investments.................. $18,466.0 $19,343.9
========= =========
</TABLE>
Debt Securities Available for Sale
Debt securities represented 82% of New Aetna's total invested assets at
June 30, 2000 and December 31, 1999 and supported the following types of
products:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Millions)
<S> <C> <C>
Supporting discontinued products..... $ 4,319.2 $ 4,533.0
Supporting experience-rated products. 2,825.3 3,001.3
Supporting remaining products........ 7,979.2 8,277.2
--------- ---------
Total debt securities (1)............ $15,123.7 $15,811.5
========= =========
</TABLE>
-------------------
(1) Total debt securities include "Below Investment Grade" Securities of $1.3
billion at June 30, 2000 and $1.4 billion at December 31, 1999, of which
21% at June 30, 2000 and 27% at December 31, 1999 supported discontinued
and experience-rated products.
Debt securities reflect net unrealized capital losses of $459 million at
June 30, 2000 and $516 million at December 31, 1999. Of the net unrealized
capital losses at June 30, 2000, $102 million relate to assets supporting
discontinued products and $93 million relate to experience-rated pension
contractholders.
Residential Collateralized Mortgage Obligations
Included in New Aetna's debt securities are residential collateralized
mortgage obligations ("CMOs") of $43 million at June 30, 2000 and $59 million
at December 31, 1999. 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 June 30, 2000
and December 31, 1999, New Aetna did not have any CMO holdings that were
invested in CMOs subject to more prepayment and extension risk than traditional
CMOs (such as interest- or principal-only strips).
42
<PAGE>
Mortgage Loans
New Aetna's mortgage loan investments, net of impairment reserves,
supported the following types of products:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Millions)
<S> <C> <C>
Supporting discontinued products..... $ 806.9 $ 768.9
Supporting experience-rated products. 720.6 923.4
Supporting remaining products........ 679.8 684.7
--------- ---------
Total mortgage loans................. $ 2,207.3 $ 2,377.0
========= =========
</TABLE>
During the first six months of 2000, New Aetna managed its mortgage loan
portfolio to maintain the balance, relative to invested assets, by selectively
pursuing refinance and new loan opportunities. The mortgage loan portfolio
balance represented 12% at June 30, 2000 and December 31, 1999 of New Aetna's
total invested assets.
Problem, restructured and potential problem loans included in mortgage
loans were $276 million at June 30, 2000 and $274 million at December 31, 1999,
of which 81% at June 30, 2000 and 82% at December 31, 1999 supported
discontinued and experience-rated products. Specific impairment reserves on
these loans were $32 million at June 30, 2000 and December 31, 1999. Refer to
Note 4 of Condensed Notes to Interim Consolidated Financial Statements for
additional information.
Risk Management and Market-Sensitive Instruments
New Aetna manages interest rate risk by seeking to maintain a tight
duration band, while credit risk is managed by seeking to maintain high average
quality ratings and diversified sector exposure within the debt securities
portfolio. In connection with its investment and risk management objectives,
New Aetna also uses financial instruments whose market value is at least
partially determined by, among other things, levels of or changes in interest
rates (short-term or long-term), duration, prepayment rates, equity markets or
credit ratings/spreads. New Aetna's use of derivatives is generally limited to
hedging purposes and has principally consisted of using interest rate swap
agreements, futures contracts and options to hedge interest rate and equity
price risks. These instruments, viewed separately, subject New Aetna to varying
degrees of interest rate, equity price, and credit risk. However, when used for
hedging, the expectation is that these instruments would reduce overall risk.
Refer to Note 5 of Notes to Consolidated Financial Statements for additional
information.
New Aetna regularly evaluates the risk of market-sensitive instruments by
examining, among other things, levels of or changes in interest rates
(short-term or long-term), duration, prepayment rates, equity markets or credit
ratings/spreads. New Aetna also regularly evaluates the appropriateness of
investments relative to its management- approved investment guidelines (and
operates within those guidelines) and the business objective of the portfolios.
The risks associated with investments supporting experience-rated pension,
annuity and life products are assumed by those contractholders and not by New
Aetna (subject to, among other things, certain minimum guarantees). Anticipated
future losses associated with investments supporting discontinued fully
guaranteed large case pension products are provided for in the reserve for
anticipated future losses (refer to "-- Large Case Pensions -- Discontinued
Products").
Management also reviews, on a quarterly basis, hypothetical net losses in
New Aetna's consolidated near-term financial position, results of operations
and cash flows under certain assumed market rate changes. The potential effect
of interest rate risk on near-term net income, cash flow and fair value was
determined based on commonly used models. The models project the impact of
interest rate changes on a wide range of factors, including duration,
prepayment, put options and call options. Fair value was estimated based on the
net present value of cash flows or duration estimates using a representative
set of likely future interest rate scenarios. The assumptions used were as
follows: an immediate increase of 100 basis points in interest rates which New
Aetna believes represents a moderately adverse scenario and is approximately
equal to the historical annual volatility of interest rate movements
43
<PAGE>
for New Aetna's intermediate-term available-for-sale debt securities and an
immediate decrease of 10% in prices for domestic equity securities.
Based on New Aetna's overall exposure to interest rate risk and equity
price risk, New Aetna believes that these changes in market rates and prices
would not materially affect the consolidated near-term financial position,
results of operations or cash flows of New Aetna.
1999, 1998 and 1997
Consolidated Results of Continuing Operations
New Aetna reported income from continuing operations of $399 million in
1999, $450 million in 1998 and $526 million in 1997. Income from continuing
operations includes a reduction of the reserve for loss on discontinued
products for Large Case Pensions of $50 million in 1999, $44 million in 1998
and $108 million in 1997. Income from continuing operations also includes Year
2000 costs of $59 million in 1999 and $75 million in 1998. A benefit of $29
million primarily related to the reduction of the severance and facilities
reserve is included in 1997 income from continuing operations. Excluding the
reduction of the reserve for loss on discontinued products, net realized
capital gains or losses and the severance and facilities benefit in 1997,
results from continuing operations would have been $328 million in 1999, $217
million in 1998 and $228 million in 1997.
Health Care
Operating Summary
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1999(1) 1998(2) 1997
--------- --------- ---------
(Millions)
<S> <C> <C> <C>
Health care premiums............................................. $17,145.7 $11,691.1 $ 9,648.7
Other premiums................................................... 1,376.9 1,315.1 1,195.9
Administrative services only fees................................ 1,674.5 1,270.7 1,322.0
Net investment income............................................ 612.8 537.2 451.2
Other income..................................................... 82.8 170.4 141.9
Net realized capital gains (losses).............................. (4.7) 134.9 141.7
--------- --------- ---------
Total revenue.............................................. 20,888.0 15,119.4 12,901.4
--------- --------- ---------
Health care costs................................................ 14,641.0 10,012.9 8,215.5
Current and future benefits...................................... 1,249.7 1,173.6 1,023.7
Salaries and related benefits.................................... 1,796.8 1,251.5 1,245.8
Other operating expenses......................................... 1,977.7 1,501.1 1,253.7
Amortization of goodwill and other acquired intangible assets.... 420.4 381.3 362.9
Severance and facilities reserve reductions...................... -- -- (45.0)
--------- --------- ---------
Total benefits and expenses................................ 20,085.6 14,320.4 12,056.6
--------- --------- ---------
Income before income taxes....................................... 802.4 799.0 844.8
Income taxes..................................................... 365.1 368.0 391.0
--------- --------- ---------
Net income....................................................... $ 437.3 $ 431.0 $ 453.8
========= ========= =========
Net realized capital gains (losses), net of tax (included above). $ (22.4) $ 88.2 $ 69.9
========= ========= =========
</TABLE>
-------------------
(1) Results include PHC since August 6, 1999.
(2) Results include NYLCare since July 15, 1998, including NYLCare Texas which
New Aetna sold on March 31, 2000.
44
<PAGE>
Results
Health Care's net income increased $6 million in 1999 and decreased $23
million in 1998. Net income includes Year 2000 costs of $56 million in 1999 and
$64 million in 1998. Net income also includes a benefit of $29 million in 1997
resulting from a reduction in the severance and facilities reserve due to
higher attrition than was contemplated in the establishment of the reserve.
Excluding the benefit related to the reduction in the severance and facilities
reserve in 1997 and net realized capital gains or losses in all years, results
increased $117 million in 1999 and decreased $12 million in 1998. These
earnings reflect the inclusion of PHC since August 6, 1999, including results
from servicing Prudential's ASO contracts following the acquisition, and the
inclusion of NYLCare since July 15, 1998.
Net realized capital losses in 1999 and net realized capital gains in 1998
each include $39 million after tax of contingent consideration following New
Aetna's 1997 sale of its behavioral health subsidiary, Human Affairs
International, Incorporated ("HAI"). (Refer to Note 3 of Notes to Consolidated
Financial Statements for further discussion.) The 1999 amount was more than
offset by the recording of the estimated loss on the sale of NYLCare Texas of
$35 million and net realized capital losses from New Aetna's rebalancing of its
investment portfolio in a rising interest rate environment. Refer to "--
Overview" for further discussion of NYLCare Texas. Net realized capital gains
for 1997 include a $31 million gain from the sale of three subsidiaries,
including HAI. These businesses were sold primarily to more effectively focus
health care business resources. The earnings of these subsidiaries were not
material to the results of Health Care.
In order to provide a comparison that management believes better reflects
the performance of Health Care, the operating earnings discussion that follows
excludes amortization of goodwill and other acquired intangible assets, the
reduction of the severance and facilities reserve in 1997 and net realized
capital gains and losses in all periods.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1999(1) 1998(2) 1997
---------- ---------- ---------
(Millions, except PMPM and Medical
Loss Ratio information)
<S> <C> <C> <C>
Operating earnings:
Health Risk and PHC............. $ 505.0 $ 334.2 $ 312.9
Group Insurance and Other Health 294.2 320.5 340.7
---------- ---------- ----------
Total Health Care..................... $ 799.2 $ 654.7 $ 653.6
========== ========== ==========
Commercial HMO Premium PMPM........... $ 138.58 $ 134.68 $ 132.57
Commercial HMO Medical Cost PMPM...... 115.77 (3) 111.08 111.69
Commercial HMO Medical Loss Ratio..... 83.5%(3) 82.5% 84.2%
Medicare HMO Premium PMPM............. $ 491.21 $ 474.67 $ 459.69
Medicare HMO Medical Cost PMPM........ 453.30 (3) 441.63 429.31
Medicare HMO Medical Loss Ratio....... 92.3%(3) 93.0% 93.4%
</TABLE>
-------------------
(1) Results include PHC since August 6, 1999.
(2) Results include NYLCare since July 15, 1998, including NYLCare Texas which
New Aetna sold on March 31, 2000.
(3) Does not include net recoveries under a reinsurance agreement with
Prudential, net amortization of the reinsurance premiums paid, or net
amortization of certain fair value amounts established as part of the PHC
purchase accounting. Refer to "PHC Agreement" below.
45
<PAGE>
Health Risk and PHC
Health Risk and PHC operating earnings increased $171 million in 1999 and
$21 million in 1998. The increase in 1999 earnings primarily reflects HMO
membership growth, improved Medicare HMO results due to the exiting of several
Medicare markets as of January 1, 1999, and the addition of PHC since August 6,
1999, including the benefit of supplemental fees for servicing Prudential's ASO
members and net recoveries under the reinsurance agreement with Prudential,
partially offset by increased medical costs. The 1999 results also include a
full year of NYLCare results.
The 1998 increase reflects favorable HMO results due to membership growth,
premium rate increases, the impact of medical cost initiatives, higher net
investment income and the acquisition of NYLCare. These increases were
partially offset by lower Indemnity and PPO results and increased operating
expenses related to customer service enhancements.
Health Care Costs Payable. For Health Risk and PHC, the liability for the
health care costs payable reflects estimates of the ultimate cost of claims
that have been incurred but not yet reported or reported but not yet paid.
Health care costs payable are estimated periodically, and any resulting
adjustments are reflected in the current-period operating results within health
care costs. Health care costs payable are based on a number of factors,
including those derived from historical claim experience. An extensive degree
of judgment is used in this estimation process, considerable variability is
inherent in such estimates and the adequacy of the estimate is highly sensitive
to changes in medical claims payment patterns and changes in medical cost
trends. A worsening (or improvement) of medical cost trend or changes in claim
payment patterns from those that were assumed in estimating health care costs
payable at December 31, 1999 would cause these estimates to change in the near
term, and such changes could be material.
Commercial HMO. Commercial HMO premium PMPM increased 3% in 1999, when
compared to 1998, and 2% in 1998, when compared to 1997. Excluding PHC, the
1999 increase would have been 4%. These increases were due to premium rate
increases, offset in part by employers selecting lower premium plans and a
shift in the geographic mix of membership growth.
Commercial HMO medical costs PMPM increased 4% in 1999, when compared to
1998, and decreased 1% in 1998, when compared to 1997. Excluding PHC, the 1999
increase also would have been 4%. The increase in 1999 reflects higher medical
costs, primarily pharmacy, due to medical cost inflation and increased
utilization, partially offset by medical cost initiatives. The decrease in 1998
was due primarily to favorable results of medical cost initiatives, geographic
mix and customer changes in benefit plans partially offset by higher pharmacy,
physician and outpatient utilization.
The Commercial HMO medical loss ratio was 83.5% for 1999, compared to
82.5% for 1998 and 84.2% for 1997. The increase in 1999, when compared to 1998,
was due to the addition of PHC which had a medical loss ratio of 87.6%.
Excluding PHC, the medical loss ratio was 82.6% in 1999, as price increases
generally kept pace with medical cost inflation during 1999. The decrease in
1998, when compared to 1997, was due to growth in premiums due to rate
increases, which exceeded increases in medical costs, reflecting the benefit of
medical cost initiatives.
Medicare HMO. Medicare HMO premiums PMPM increased 3% in 1999 and 1998.
Excluding PHC, the 1999 increase also would have been 3%. These increases were
due to HCFA rate increases and increases in supplemental premiums partially
offset, in 1999, by a shift in the geographic mix of membership.
Medicare HMO medical costs PMPM increased 3% in 1999, when compared to
1998, and 3% in 1998, when compared to 1997. Excluding PHC, the 1999 increase
would have been 2%. The increase in 1999 reflects higher medical costs
partially offset by the favorable impact of exiting several markets as of
January 1, 1999. The higher medical costs in 1999 and 1998 primarily were due
to higher pharmacy, physician and outpatient utilization and medical cost
inflation. The 1998 higher medical costs were partially offset by the impact of
the lower NYLCare medical cost PMPM, geographic mix and benefit changes.
46
<PAGE>
The Medicare HMO medical loss ratio was 92.3% for 1999, compared to 93.0%
for 1998, and 93.4% for 1997. Excluding PHC, the 1999 medical loss ratio would
have been 91.8%. The decrease in 1999, when compared to 1998, reflects the
favorable impact of exiting several markets as of January 1, 1999. The decrease
in 1998 and part of the decrease in 1999 resulted from the growth in premiums
due to rate increases and supplemental premiums which exceeded increases in
medical costs.
PHC Agreement. Effective August 6, 1999, New Aetna and Prudential entered
into a reinsurance agreement for which New Aetna paid a premium. See "-- Six
Months Ended June 30, 2000 and 1999 -- Health Care -- Health Risk and PHC --
PHC Agreement" for more information. During the period August 6, 1999 through
December 31, 1999, reinsurance recoveries under this agreement were $74 million
pretax. This was offset by $10 million pretax for the year ended December 31,
1999 related to the net amortization of: the reinsurance premium paid as part
of the acquisition, the fair value adjustment of the reinsurance agreement and
the fair value adjustment of the unfavorable component of the contracts
underlying the acquired medical risk business recorded as part of the
acquisition. Such reinsurance recoveries and net amortization were reflected in
health care costs. Refer to Note 3 of Notes to Consolidated Financial
Statements.
New Aetna also agreed to service Prudential's ASO contracts following the
closing. See "-- Six Months Ended June 30, 2000 and 1999 -- Health Care --
Health Risk and PHC -- PHC Agreement" for more information. New Aetna recorded
total fees for servicing the Prudential ASO business of approximately $230
million pretax for the period August 6, 1999 through December 31, 1999,
including supplemental fees of approximately $106 million pretax for the period
August 6, 1999 through December 31, 1999. Refer to Note 3 of Notes to
Consolidated Financial Statements for further discussion.
Group Insurance and Other Health
Results for 1999, compared to 1998, reflect higher operating expenses and
unfavorable life mortality, partially offset by a full year of NYLCare results
and higher net investment income. Results for 1998, compared to 1997, reflect
higher net investment income and the acquisition of NYLCare partially offset by
less favorable developments in claim benefit reserve estimates. Both 1999 and,
to a lesser extent, 1998 results include favorable reserve developments for
life and disability products, including NYLCare.
Membership
Health Care's membership at December 31, 1999 and December 31, 1998 was as
follows:
<TABLE>
<CAPTION>
December 31, 1999 (1) December 31, 1998
--------------------------------- --------------------------------
Risk Nonrisk Total Risk Nonrisk Total
------- ------- ------- ------- ------- -------
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (2)(3)........ 8,716 727 9,443 5,104 640 5,744
Medicare................. 703 -- 703 535 -- 535
Medicaid................. 172 75 247 132 -- 132
------ ------ ------ ----- ----- ------
Total HMO.............. 9,591 802 10,393 5,771 640 6,411
POS (2)..................... 319 3,606 3,925 261 2,509 2,770
PPO (3)..................... 870 3,112 3,982 1,089 2,943 4,032
Indemnity................... 259 2,496 2,755 182 2,270 2,452
------ ------ ------ ----- ----- ------
Total Health Membership. 11,039 10,016 21,055 7,303 8,362 15,665
====== ====== ====== ===== ===== ======
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 (1) December 31, 1998
--------------------------------- --------------------------------
Risk Nonrisk Total Risk Nonrisk Total
------- ------- ------- ------- ------- -------
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
Dental......................... 15,750 8,365
------ ------
Group Insurance:
Group Life................... 9,415 9,769
Disability................... 2,258 2,592
Long-Term Care............... 108 91
------ ------
</TABLE>
-------------------
(1) Health membership in thousands includes 5,093 PHC members (2,993
Commercial HMO risk, 111 Medicare HMO risk, 24 Medicaid HMO risk, 117 POS
risk, 51 PPO risk, 109 Indemnity risk and 1,688 Administrative Services
Only members that Health Care has agreed to service (1,129 POS nonrisk, 76
PPO nonrisk and 483 Indemnity nonrisk)) and 8,000 Dental members. There
were no group insurance PHC members.
(2) Commercial HMO membership in thousands includes POS members who access
primary care physicians and referred care through an HMO network of 2,323
at December 31, 1999 and 1,329 at December 31, 1998.
(3) Membership in thousands includes 553 Commercial HMO members and 12 PPO
members of the NYLCare Texas operations sold on March 31, 2000.
Total Health membership as of December 31, 1999 increased by approximately
5 million members when compared to December 31, 1998, due to the acquisition of
PHC, including the ASO members that Health Care has agreed to service.
Excluding the impact of the PHC members, the 1999 membership increases in
Commercial HMO (including POS members who access primary care physicians and
referred care through an HMO network), Medicare HMO and Medicaid HMO were
partially offset by declines in Indemnity, PPO and POS enrollment. As expected,
New Aetna experienced significant declines in PHC membership during the January
2000 enrollment cycle.
Total Revenue and Expense
Revenue, excluding net realized capital gains or losses, increased $5.9
billion, or 39%, in 1999 and $2.2 billion, or 17%, in 1998. The 1999 revenue
growth primarily was due to the acquisition of PHC on August 6, 1999 and the
acquisition of NYLCare on July 15, 1998. Revenue in 1999 also grew because of
Commercial HMO membership growth and premium rate increases. The 1998 revenue
growth primarily was due to the acquisition of NYLCare, as well as premium rate
increases and membership growth in Commercial and Medicare HMO and POS
products, partially offset by lower Indemnity and PPO membership. Also during
1998, Health Care recorded higher investment income due to a higher investment
portfolio balance (including the acquired assets of NYLCare), a shift in
strategy to higher yielding investments and an increase in equity partnership
income.
Operating expenses, including salaries and related benefits, increased
$1.0 billion, or 37%, in 1999 and $253 million, or 10%, in 1998. The 1999
increase reflects the acquisition of PHC and NYLCare and increased costs to
support the Commercial HMO membership growth. The increase in 1998 reflects the
acquisition of NYLCare, as well as HMO membership increases, customer service
enhancements and costs related to Year 2000. Operating expenses, including
salaries and related benefits, as a percentage of revenue, excluding net
realized capital gains, was 18% in 1999 and 1998, and 20% in 1997.
48
<PAGE>
Large Case Pensions
Operating Summary
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(Millions)
<S> <C> <C> <C>
Other premiums................................................. $ 118.9 $122.7 $155.0
Net investment income.......................................... 982.5 1,152.5 1,408.7
Other income................................................... 46.2 31.2 40.6
Net realized capital gains..................................... 24.2 57.5 30.7
--------- --------- ---------
Total revenue............................................ 1,171.8 1,363.9 1,635.0
--------- --------- ---------
Current and future benefits.................................... 981.3 1,122.4 1,372.4
Salaries and related benefits.................................. 19.8 19.6 30.5
Other operating expenses....................................... 11.5 17.5 16.8
Reductions of loss on discontinued products.................... (77.2) (68.0) (172.5)
--------- --------- ---------
Total benefits and expenses.............................. 935.4 1,091.5 1,247.2
--------- --------- ---------
Income before income taxes..................................... 236.4 272.4 387.8
Income taxes................................................... 85.4 102.5 153.6
--------- --------- ---------
Net income..................................................... $ 151.0 $ 169.9 $ 234.2
========= ========= =========
Net realized capital gains, net of tax (included above)........ $ 15.8 $ 37.4 $ 20.8
========= ========= =========
Deposits (not included in other premiums above):
Fully guaranteed discontinued products................... $ 12.5 $ 17.7 $ 14.0
Experience-rated......................................... 191.9 251.3 735.4
Nonguaranteed............................................ 579.2 950.2 849.2
--------- --------- ---------
Total deposits........................................... $ 783.6 $ 1,219.2 $ 1,598.6
========= ========= =========
Assets under management:(1)
Fully guaranteed discontinued
products............................................... $ 5,990.8 $ 6,737.9 $ 7,548.9
Experience-rated......................................... 7,932.1 9,546.9 11,114.7
Nonguaranteed............................................ 12,028.7 12,120.0 11,070.2
--------- --------- ---------
Total assets under management............................ $25,951.6 $28,404.8 $29,733.8
========= ========= =========
</TABLE>
-------------------
(1) Excludes net unrealized capital losses of $254.4 million at December 31,
1999 and net unrealized capital gains of $621.0 million at December 31,
1998 and $645.4 million at December 31, 1997.
Results
Large Case Pensions' net income decreased $19 million in 1999 and $64
million in 1998. As further discussed under "Discontinued Products" below,
results include discontinued products reserve releases of $50 million in 1999,
$44 million in 1998 and $108 million in 1997 due to favorable investment
performance. Net income also includes Year 2000 costs of approximately $1
million in 1999 and 1998. Excluding the discontinued products reserve releases
and net realized capital gains, results decreased $3 million in 1999 and $17
million in 1998. The 1999 and 1998 decreases continue to reflect the
redeployment of capital supporting this business. Assets under management
decreased during 1999 and 1998. These decreases primarily resulted from the
continuing run off of liabilities underlying the business.
49
<PAGE>
General account assets supporting experience-rated products (where the
contractholder, not New Aetna, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals and transfers were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
------ ------ ------
(Millions)
<S> <C> <C> <C>
Scheduled contract maturities and benefit payments (1)..... $961.7 $935.5 $905.0
Contractholder withdrawals other than scheduled contract
maturities and benefit payments (2)........................ 489.2 431.8 358.1
Participant directed withdrawals (2)....................... 78.1 98.3 130.0
</TABLE>
-------------------
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
(2) At December 31, 1999, approximately $870 million of experience-rated
pension contracts allowed for unscheduled contractholder withdrawals,
subject to timing restrictions and formula-based market value adjustments.
Further, approximately $2.0 billion of such contracts supported by general
account assets could be withdrawn or transferred to other plan investment
options at the direction of plan participants, without market value
adjustment.
Discontinued Products
See "-- Six Months Ended June 30, 2000 and 1999 -- Large Case Pensions --
Discontinued Products" for more information.
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
------- ------- -------
(Millions)
<S> <C> <C> <C>
Interest margin (deficit) (1)........................... $ (18.3) $ (22.7) $ 15.1
Net realized capital gains (losses)..................... (7.8) 75.8 175.4
Interest earned on receivable from continuing products.. 21.3 22.4 21.5
Other, net.............................................. 12.4 3.6 2.8
------- ------- ------
Results of discontinued products, after tax............. $ 7.6 $ 79.1 $214.8
======= ======= ======
Results of discontinued products, pretax................ $ 10.7 $ 130.4 $337.4
======= ======= ======
Net realized capital gains (losses) from sales of
bonds, after tax (included above).................. $ (21.5) $ 52.5 $ 36.6
======= ======= ======
</TABLE>
-------------------
(1) The interest margin (deficit) is the difference between earnings on
invested assets and interest credited to contractholders.
The interest deficit for 1999 remained relatively level compared to 1998.
The decrease in 1998 as compared to 1997 primarily is due to lower investment
income, reflecting the decline in assets used to fund contractual liability run
off, as well as lower yields due to the shift in the investment portfolio to
fixed-income bonds. The 1999 net realized capital losses primarily are due to
losses on bonds resulting from higher interest rates offset by gains on the
sale of equities. The 1998 net realized capital gains reflect gains of $28
million related to continued favorable developments in real estate markets, as
well as gains of $53 million from the sale of bonds. The 1997 net realized
capital gains primarily reflect $100 million of gains related to continued
favorable developments in real estate markets (including gains of $24 million
related to the securitization of commercial mortgage loans), gains of $37
million from the sale of bonds and gains of $37 million resulting from the sale
of other investments in order to meet liquidity needs.
50
<PAGE>
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 that was used to calculate the
reserve. Total assets supporting discontinued products and the reserve include
a receivable from continuing products of $464 million at December 31, 1999 and
$493 million at December 31, 1998, net of related deferred taxes payable.
See "-- Six Months Ended June 30, 2000 and 1999 -- Large Case Pensions --
Discontinued Products" for more information.
The activity in the reserve for anticipated future losses on discontinued
products was as follows (pretax):
(Millions)
-----------
Reserve at December 31, 1996................................ $ 986.8
Operating income............................................ 58.7
Net realized capital gains.................................. 269.9
Mortality and other......................................... 8.8
Reserve reduction........................................... (172.5)
-----------
Reserve at December 31, 1997................................ 1,151.7
Operating loss.............................................. (6.6)
Net realized capital gains.................................. 116.6
Mortality and other......................................... 20.4
Reserve reduction........................................... (68.0)
-----------
Reserve at December 31, 1998................................ 1,214.1
Operating income............................................ 10.1
Net realized capital losses................................. (11.9)
Mortality and other......................................... 12.5
Reserve reduction........................................... (77.2)
-----------
Reserve at December 31, 1999................................ $ 1,147.6
===========
Management reviews the adequacy of the discontinued products reserve
quarterly and, as a result, primarily due to favorable investment performance,
$77 million ($50 million after tax) of the reserve was released in 1999 and $68
million ($44 million after tax) of the reserve was released in 1998. In 1997,
$173 million ($108 million after tax) of the reserve was released due to
continued favorable developments in real estate markets. The current reserve
reflects management's best estimate of anticipated future losses.
The anticipated run off of the December 31, 1999 reserve balance is as
follows:
(Millions)
-----------
2000........................................................ $ 30.0
2001........................................................ 30.4
2002........................................................ 30.9
2003........................................................ 31.7
2004-2008................................................... 172.6
2009-2013................................................... 188.4
2014-2018................................................... 180.0
Thereafter.................................................. 483.6
The above table assumes that assets are held until maturity and that the
reserve run off is proportional to the liability run off.
51
<PAGE>
The expected liability (as of December 31, 1993) and actual balances for
the GIC and SPA liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
Expected Actual
------------------------- ------------------------
GIC SPA GIC SPA
---------- ---------- ---------- ----------
(Millions)
<S> <C> <C> <C> <C>
1997...................................................... $ 3,173.9 $ 4,685.8 $ 2,321.4 $ 4,763.0
1998...................................................... 2,029.6 4,581.3 1,546.0 4,653.5
1999...................................................... 1,214.5 4,472.1 902.1 4,566.0
</TABLE>
The GIC balances were lower than expected in each period, as several
contractholders redeemed their contracts prior to contract maturity. The SPA
balances in each period were higher than expected because of additional amounts
received under existing contracts.
The discontinued products investment portfolio is as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------- ---------------------
Class Amount Percent Amount Percent
----- ----------- ------- ----------- -------
(Millions)
<S> <C> <C> <C> <C>
Debt securities available for sale........................ $ 4,533.0 77.2% $ 5,890.5 83.0%
Mortgage loans............................................ 768.8 13.1 754.2 10.6
Investment real estate.................................... 112.7 1.9 104.2 1.5
Equity securities......................................... 239.7 4.1 98.5 1.4
Other..................................................... 214.2 3.7 252.2 3.5
----------- ------- ----------- -------
Total..................................................... $ 5,868.4 100.0% $ 7,099.6 100.0%
=========== ======= =========== =======
</TABLE>
The investment portfolio has declined from 1998, as assets were used to
pay off contractual liabilities. As mentioned above, the investment portfolio
has changed since inception. Mortgage loans have decreased from $5.4 billion
(37% of the investment portfolio) at December 31, 1993 to their current level.
This was a result of maturities, prepayments and the securitization and sale of
commercial mortgages. Also, real estate decreased from $.5 billion (4% of the
investment portfolio) at December 31, 1993 to its current level, primarily as a
result of sales. The resulting proceeds were reinvested in debt securities and
equities.
The change in the composition of the overall investment portfolio resulted
in a change in the quality of the portfolio since 1993. As New Aetna's exposure
to commercial mortgage loans and real estate has diminished, additional
investment return has been achieved by increasing the risk in the bond
portfolio. At December 31, 1993, 60% of the debt securities had a quality
rating of AAA or AA, and at December 31, 1999, 31% of the debt securities had a
quality rating of AAA or AA. However, management believes the level of risk in
the total portfolio of assets supporting discontinued products was lower at
December 31, 1999 when compared to December 31, 1993.
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998 1997
-------- -------- --------
(Millions)
<S> <C> <C> <C>
Scheduled contract maturities, settlements and benefit
payments................................................. $1,246.9 $1,433.5 $1,683.1
Participant directed withdrawals............................... 14.9 21.4 36.4
</TABLE>
Cash required to fund these distributions was provided by earnings and
scheduled payments on, and sales of, invested assets.
52
<PAGE>
At December 31, 1999, scheduled maturities, future benefit payments and
other expected payments, including future interest, were as follows:
(Millions)
---------
2000................................. $ 919.4
2001................................. 837.3
2002................................. 695.1
2003................................. 551.9
2004................................. 496.7
2005-2009............................ 2,332.2
2010-2014............................ 2,034.0
2015-2019............................ 1,653.4
2020-2024............................ 1,251.6
Thereafter........................... 2,144.5
Refer to Note 8 of Notes to Consolidated Financial Statements and "--
1999, 1998 and 1997 -- Total Investments" for additional information.
Corporate
Operating Summary
Years Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(Millions, after tax)
Interest expense................. $151.3 $134.1 $138.7
======== ======== ========
Salaries and related benefits.... $28.2 $31.8 $43.6
Other operating expenses, net.... 37.4 48.0 49.8
Net realized capital gains....... (28.0) (63.4) (69.8)
-------- -------- --------
Total other expense.............. $37.6 $16.4 $23.6
======== ======== ========
Corporate represents the allocation of a portion of Aetna's corporate
overhead costs, including interest expense and other expenses that are not
directly related to New Aetna's business segments. "Other operating expense,
net" includes corporate expenses such as staff expenses and advertising and
contributions partially offset by net investment income.
Results
The 1999 increase in interest expense primarily reflects a full year of
interest on the debt incurred in connection with the NYLCare acquisition in
July 1998 as well as the additional debt incurred in connection with the PHC
acquisition. The 1998 increase primarily reflects the additional debt incurred
in connection with the NYLCare acquisition. Included in other operating
expenses are Year 2000 costs of $3 million and $9 million in 1999 and 1998,
respectively. Salaries and related benefits and other operating expenses
decreased during 1999 due to continued cost reduction initiatives.
After-tax net realized capital gains in 1999 include various gains on
common stock sales and $14 million from the recognition of a deferred hedge
gain. Refer to "-- Liquidity and Capital Resources" for further discussion.
After-tax net realized capital gains in 1998 include gains of $74 million
related to the sale of New Aetna's remaining investment in Traveler's Property
Casualty Corporation ("TPCC"). After-tax net realized capital gains in 1997
include gains of $98 million related to sales of portions of New Aetna's
investment in TPCC offset by an after-tax realized capital loss of $29 million
related to the write-down of certain properties that New Aetna had classified
as held for sale.
53
<PAGE>
Total Investments
Investments disclosed in this section relate to New Aetna's total
portfolio and consist only of assets supporting continuing operations
(including assets supporting discontinued products and experience-rated
products).
Total investments were as follows:
December 31,
------------------------
1999 1998
--------- ---------
(Millions)
Debt securities available for sale....... $15,811.5 $17,584.7
Equity securities........................ 286.4 196.6
Other investment securities.............. 216.4 278.8
Mortgage loans........................... 2,377.0 2,719.7
Investment real estate................... 269.5 192.3
Other.................................... 383.1 327.5
--------- ---------
Total investments........................ $19,343.9 $21,299.6
========= =========
Debt Securities Available for Sale
Debt securities represented 82% of New Aetna's total invested assets at
December 31, 1999 and 83% at December 31, 1998 and supported the following
types of products:
December 31,
------------------------
1999 1998
--------- ---------
(Millions)
Supporting discontinued products.......... $4,533.0 $5,890.5
Supporting experience-rated products...... 3,001.3 4,069.2
Supporting remaining products............. 8,277.2 7,625.0
--------- ---------
Total debt securities..................... $15,811.5 $17,584.7
========= =========
Debt securities reflect net unrealized capital losses of $516 million at
December 31, 1999 compared with net unrealized capital gains of $724 million at
December 31, 1998. Of the net unrealized capital losses at December 31, 1999,
$122 million relate to assets supporting discontinued products and $104 million
relate to experience-rated pension contractholders. Of the net unrealized
capital gains at December 31, 1998, $362 million relate to assets supporting
discontinued products and $220 million relate to experience-rated pension
contractholders.
The debt securities in New Aetna's portfolio are generally rated by
external rating agencies and, if not externally rated, are rated by New Aetna
on a basis believed to be similar to that used by the rating agencies. New
Aetna's investments in debt securities had an average quality rating of A+ at
December 31, 1999 and 1998 (33% were AAA at December 31, 1999 and 26% were AAA
at December 31, 1998). "Below investment grade" debt securities carry a rating
of below BBB-/Baa3 and represented 9% of the portfolio at December 31, 1999 and
7% of the portfolio at December 31, 1998, of which 27% at December 31, 1999 and
33% at December 31, 1998 support discontinued and experience-rated products.
Refer to Note 4 of Notes to Consolidated Financial Statements for disclosures
related to debt securities by market sector.
Residential Collateralized Mortgage Obligations
Included in New Aetna's debt securities are residential collateralized
mortgage obligations ("CMOs") of $59 million at December 31, 1999 and $52
million 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. Approximately 59% of New Aetna's
residential CMO holdings were backed by government agencies, such
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<PAGE>
as GNMA, FNMA and FHLMC at December 31, 1999 and 95% at December 31, 1998. 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 December 31, 1999 and December 31, 1998, New
Aetna did not have any CMO holdings that were invested in CMOs subject to more
prepayment and extension risk than traditional CMOs (such as interest- or
principal-only strips).
Mortgage Loans
New Aetna's mortgage loan investments, net of impairment reserves,
supported the following types of products:
December 31,
------------------------
1999 1998
--------- ---------
(Millions)
Supporting discontinued products........... $768.9 $754.2
Supporting experience-rated products....... 923.4 1,183.3
Supporting remaining products.............. 684.7 782.2
--------- ---------
Total mortgage loans....................... $2,377.0 $2,719.7
========= =========
During 1999 and 1998, New Aetna managed its mortgage loan portfolio to
maintain the balance, relative to invested assets, by selectively pursuing
refinance and new loan opportunities. The mortgage loan portfolio balance
represented 12% at December 31, 1999 and 13% at December 31, 1998 of New
Aetna's total invested assets.
Problem, restructured and potential problem loans included in mortgage
loans were $274 million at December 31, 1999 and $289 million at December 31,
1998, of which 82% at December 31, 1999 and 89% at December 31, 1998 supported
discontinued and experience-rated products. Specific impairment reserves on
these loans were $32 million at December 31, 1999 and $46 million at December
31, 1998. Refer to Note 4 of Notes to Consolidated Financial Statements for
additional information.
At December 31, 1999 scheduled mortgage loan principal repayments were as
follows:
(Millions)
---------
2000................................. $ 514.4
2001................................. 35.0
2002................................. 126.5
2003................................. 560.7
2004................................. 173.4
Thereafter........................... 1,012.8
Risk Management and Market-Sensitive Instruments
See "-- Six Months Ended June 30, 2000 and 1999 -- Total Investments --
Risk Management and Market- Sensitive Investments" for more information.
Management reviews, on a quarterly basis, hypothetical net losses in New
Aetna's consolidated near-term financial position, results of operations and
cash flows under certain assumed market rate changes. The potential effect of
interest rate risk on near-term net income, cash flow and fair value was
determined based on commonly used models. The models project the impact of
interest rate changes on a wide range of factors, including duration,
prepayment, put options and call options. Fair value was estimated based on the
net present value of cash flows or duration estimates using a representative
set of likely future interest rate scenarios. The assumptions used were as
follows: an immediate increase of 100 basis points in interest rates which New
Aetna believes represents a moderately adverse scenario and is approximately
equal to the historical annual volatility of interest rate movements
55
<PAGE>
for New Aetna's intermediate-term available-for-sale debt securities and an
immediate decrease of 10% in prices for domestic equity securities.
Based on New Aetna's overall exposure to interest rate risk and equity
price risk, New Aetna believes that these changes in market rates and prices
would not materially affect the consolidated near-term financial position,
results of operations or cash flows of New Aetna.
Liquidity and Capital Resources
Cash Flows
Generally, New Aetna 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.
During the first six months of 2000 and 1999, New Aetna used net cash
generated from investing, financing and operating activities to pay
approximately $157 million and $155 million, respectively, of dividends to
Aetna, its sole shareholder.
In 1999, net cash generated from investing, financing and operating
activities was used to make approximately $561 million of investments in core
businesses and acquisitions and pay approximately $635 million of dividends to
Aetna. In 1998, net cash generated by investing, financing and operating
activities was used to make approximately $1.1 billion of investments in core
businesses and pay approximately $520 million of dividends to Aetna.
New Aetna monitors the duration of its debt securities portfolio (which is
highly marketable) and mortgage loans, and executes its purchases and sales of
these investments with the objective of having adequate funds available to
satisfy New Aetna's maturing liabilities.
Refer to the "Consolidated Statements of Cash Flows" for additional
information.
Financings and Financing Capacity
New Aetna has significant short-term liquidity supporting its businesses.
New Aetna will use short-term borrowings from time to time to address timing
differences between cash receipts and disbursements. Also, in 1999 and 1998,
New Aetna used these borrowings to finance an increased amount of disbursements
since an increased amount of its other funds were used in connection with
acquisitions. Prior to the spin-off, New Aetna had revolving credit facilities
in an aggregate amount of $2.0 billion. These facilities will not continue
following the spin-off and New Aetna intends to enter into a new revolving
credit facility, providing for an aggregate borrowing capacity of approximately
$2.5 billion. Refer to Note 8 of Condensed Notes to Interim Consolidated
Financial Statements and Note 11 of Notes to Consolidated Financial Statements
for additional information. New Aetna anticipates borrowing under the credit
facility or issuing short-term debt in connection with the spin-off. Refer to
"Summary" for more information.
The acquisition of PHC was financed by issuing $500 million of three-year
senior notes to Prudential and by using funds made available from issuing
commercial paper. The acquisition of NYLCare was financed with funds made
available from issuing commercial paper. New Aetna issued $300 million of debt
in the fourth quarter of 1998. At the time of the acquisition, New Aetna hedged
a portion of the anticipated issuance of fixed-income securities against
interest rate risk using futures contracts, with unrealized gains or losses on
these contracts deferred under hedge accounting. While New Aetna expected to
issue fixed-income securities, continued unfavorable market conditions delayed
this issuance from the original probable expected time frame. Accordingly, New
Aetna ceased hedge accounting under its policies and recognized the deferred
hedge gain of $14 million in the third quarter of 1999 as a realized capital
gain, included in Corporate.
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<PAGE>
New Aetna continually monitors existing and alternative financing sources
to support its capital and liquidity needs, including, but not limited to, debt
issuance, preferred or common stock issuance, intercompany borrowings and
pledging or selling of assets.
New Aetna is currently expected to have a total debt level at the time of
the closing of the ING transaction that exceeds total debt level at June 30,
2000. It also is a condition to closing the ING transaction that New Aetna have
an investment grade debt rating of either at least BBB from Standard & Poor's
or Baa2 from Moody's Investors Service.
New Aetna's capitalization and liquidity will undergo a number of changes
in connection with the spin-off and the merger. See "Summary" and "Unaudited
Pro Forma Condensed Consolidated Financial Statements."
Dividend Policy
Our board of directors has not yet determined whether to declare and pay
dividends on New Aetna common stock, but expects to determine a policy before
the spin-off. Our board will be free to change our dividend practices at any
time. The board will base its decisions on, among other things, general
business conditions, our financial results, contractual, legal and regulatory
restrictions regarding dividend payments by our subsidiaries, practices of peer
companies and any other factors the board may consider to be relevant.
Restrictions on Certain Payments by New Aetna
In addition to general state law restrictions on payments of dividends and
other distributions to shareholders applicable to all corporations, HMOs and
insurance companies are subject to further state regulations that, among other
things, may require those companies to maintain certain levels of equity, and
restrict the amount of dividends and other distributions that may be paid to
their parent corporations. These regulations are not directly applicable to New
Aetna as it is not an HMO or insurance company. The additional regulations
applicable to New Aetna's indirect HMO and insurance company subsidiaries are
not expected to affect the ability of New Aetna to pay dividends, or to service
outstanding debt.
Solvency Regulation
State insurance regulators have adopted changes in statutory accounting
practices and other initiatives to strengthen solvency regulation. The National
Association of Insurance Commissioners ("NAIC") adopted risk-based capital
("RBC") standards for life insurers that are designed to identify weakly
capitalized companies by comparing each of New Aetna's life insurance
subsidiaries' adjusted surplus to its required surplus ("RBC ratio"). The RBC
ratio is designed to reflect the risk profile of the life insurance
subsidiaries. Within certain ratio ranges, regulators have increasing authority
to take action as the RBC ratio decreases. There are four levels of regulatory
action, ranging from requiring insurers to submit a comprehensive plan to the
state insurance commissioner to requiring the state insurance commissioner to
place the insurer under regulatory control. The RBC ratio for each of New
Aetna's primary life insurance subsidiaries, as measured at December 31, 1999,
was above the levels that would require regulatory action. External rating
agencies use their own RBC standards as part of determining a company's rating.
The RBC framework described above for life insurers was recently extended by
the NAIC to health organizations, including HMOs. Although not all states have
adopted these rules at December 31, 1999, each of New Aetna's active HMOs has a
surplus that exceeded either the applicable state net worth requirements or,
where adopted, the levels that would require regulatory action under the NAIC's
RBC rules.
Goodwill and Other Acquired Intangible Assets
Goodwill and other acquired intangible assets were $8.2 billion at June
30, 2000 and $8.7 billion at December 31, 1999, or approximately 75% and 81% of
consolidated shareholder's equity, respectively. The amortization of goodwill
and other acquired intangible assets was $218 million for the six months ended
June 30, 2000 and $420 million for the year ended December 31, 1999, or
approximately 67% and 56% of pretax income from continuing operations. The
amortization of other acquired intangible assets reflects management's estimate
of
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<PAGE>
the useful life of acquired intangible assets (primarily customer lists, health
provider networks, workforce and computer systems), generally over various
periods not exceeding 25 years. Management's estimate of the useful life of
goodwill, which represents the excess of cost over the fair value of net assets
acquired, is 40 years. The risk associated with the carrying value of goodwill
and other acquired intangible assets is whether future operating income (before
amortization of goodwill and other acquired intangible assets) will be
sufficient on an undiscounted basis to recover the carrying value. New Aetna
regularly evaluates the recoverability of goodwill and other acquired
intangible assets and believes such amounts are currently recoverable. However,
any significant change in the useful lives of goodwill or other acquired
intangible assets, as estimated by management, could have a material adverse
effect on results of operations and financial condition.
Refer to " -- Six Months Ended June 30, 2000 and 1999 -- Health Care --
Health Risk and PHC -- Exiting Medicare Markets" for discussion relating to
goodwill associated with certain Medicare service areas, which New Aetna has
notified HCFA of its intent to exit.
New Accounting Standards
Refer to Note 1 of Condensed Notes to Interim Consolidated Financial
Statements and Note 2 of Notes to Consolidated Financial Statements for a
discussion of recently issued accounting standards.
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<PAGE>
BUSINESS OF NEW AETNA
The following is a summary of New Aetna's two operating businesses, Health
Care and Large Case Pensions.
Health Care
Products and Services
Our Health Care business provides a full spectrum of health and dental
products (managed care and indemnity) and group insurance products (life,
disability and long-term care) on both an insured and an employer-funded basis.
Under insured plans, we assume all or a majority of health care cost,
utilization, mortality, morbidity or other risk depending on the product. Under
employer-funded plans, the plan sponsor assumes all or a majority of these
risks.
Health Care consists of Health Risk and PHC and Group Insurance and Other
Health.
Health Risk and PHC includes health and dental plans offered on an insured
basis and the results of servicing Prudential's administrative services only,
or ASO, business.
Group Insurance and Other Health includes group life and disability
insurance, long-term care insurance and all health plans (other than the
Prudential ASO business), offered on an employer-funded basis.
The following table summarizes premiums and fees and other income for
Health Risk and PHC and Group Insurance and Other Health:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
-------------- -------------------------------------------
2000 (1) 1999(1) 1998(2) 1997
-------------- ---------- ---------- ----------
(Millions)
<S> <C> <C> <C> <C>
Health Risk and PHC..................... $11,128.5 $17,467.2 $11,780.8 $9,735.0
Group Insurance and Other Health........ 1,455.2 2,812.7 2,666.5 2,573.5
-------------- ---------- ---------- ----------
Total Health Care....................... $12,583.7 $20,279.9 $14,447.3 $12,308.5
============== ========== ========== ==========
</TABLE>
_________________
(1) Includes results of PHC since August 6, 1999.
(2) Includes results of NYLCare since July 15, 1998.
Under insured plans, we charge a premium and under employer-funded plans,
we charge a fee for administrative and claim services.
The principal commercial health products, offered both on an insured and
employer-funded basis, are described below:
o Health Maintenance Organization ("HMO") plans offer comprehensive
managed care benefits generally through participating network
physicians, hospitals and other providers. When an individual enrolls
in one of our HMOs, he or she selects a primary care physician
("PCP") from among the physicians participating in our network. PCPs
generally are family practitioners, internists, general practitioners
or pediatricians who provide necessary preventive and primary medical
care, and are generally responsible for coordinating other necessary
health care, including making referrals to participating network
specialists. Preventive care and quality improvement are emphasized
in these plans. We offer HMO plans with varying levels of copayments
which result in different levels of premium rates.
o Point-of-Service ("POS") plans blend the characteristics of HMO and
indemnity plans. Members can have comprehensive HMO-style benefits
through participating network providers with minimum out-of-pocket
expense (copayments) and also can go directly, without a referral, to
any provider they choose, subject to,
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<PAGE>
among other things, certain deductibles and coinsurance, with member
cost sharing limited by out-of-pocket maximums.
o Preferred Provider Organization ("PPO") plans offer the member the
ability to select any health care provider, with benefits paid at a
higher level when care is received from a participating network
provider. Coverage is subject to copayments or deductibles and
coinsurance, with member cost sharing limited by out-of-pocket
maximums.
o Indemnity plans offer the member the ability to select any health
care provider for covered services. Some managed care and medical
cost containment features may be included in these plans, such as
inpatient precertification, limiting payments to reasonable and
customary charges and benefits for preventive services. Coverage is
subject to deductibles and coinsurance, with member cost sharing
limited by out-of-pocket maximums.
In addition to commercial health products, in select markets, we also
offer coverage for Medicare beneficiaries and individuals eligible for Medicaid
benefits and subsidized children's health insurance programs. Coverages include
the following:
o Through annual contracts with HCFA, our HMOs offer coverage for
Medicare-eligible individuals in certain geographic areas. Generally,
services must be obtained through participating network providers,
with the exception of emergency and urgent care. Members have
historically received enhanced benefits over standard Medicare
fee-for-service coverage, including vision, hearing and pharmacy
coverage. These Medicare plans are offered on an insured basis.
o In June 2000, we announced our intention to exit additional
unprofitable Medicare markets effective December 31, 2000. Such
markets constitute approximately 50% of our Medicare membership at
June 30, 2000. During the remainder of 2000, we will continue to
monitor any legislative or regulatory changes that might increase
reimbursement under applicable Medicare contracts and then make a
final determination whether to exit these Medicare markets, as
permitted under HCFA regulations, depending on the level of the
reimbursement increase.
o We have contracts with some state and local agencies to offer
coverage for individuals eligible for Medicaid and subsidized
children's health insurance programs. Benefits are determined by the
contracting agencies. This coverage is offered on an insured basis.
We offer a variety of other health care coverages offered as either
supplements to health products or as stand-alone products. Coverages, which are
offered on an insured or employer-funded basis, include indemnity and managed
dental plans, and prescription drug, vision and behavioral health programs. We
are the nation's second largest provider of dental coverage, based on
membership.
Group Insurance consists primarily of the following:
o Group Life Insurance consists principally of renewable term coverage,
the amounts of which may be fixed or linked to individual employee
wage levels. Basic and supplemental term coverage and spouse and
dependent coverages are available. Group universal life and
accidental death benefit coverages are also available. Group life
insurance is offered on an insured basis.
o Group Disability Insurance provides coverage for disabled employees'
income replacement benefits for both short-term disability and
long-term disability. We also offer a managed disability product with
additional case management features. Group disability insurance
coverages are offered on both an insured and employer-funded basis.
o Long-Term Care Insurance provides coverage for long-term care
expenses in a nursing home, adult day care or home setting. Long-term
care insurance is offered on an insured basis.
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Provider Networks
General
We provide members of our managed care plans with access to health care
services through networks of independent health care providers. We contract
with providers to participate in our provider networks in order to provide
members with broad access to high quality, cost effective medical care. The
participating providers in our networks are independent contractors and are
neither employees nor agents of New Aetna.
We use a variety of practices to help contain the rate of increase in the
cost of medical services. In addition to contracts with health care providers,
procedures include the development and implementation of standards for the
appropriate utilization of health care resources and working with health care
providers to review data in order to help them improve consistency and quality.
We also have a variety of disease management programs related to specific
chronic diseases such as asthma, diabetes and congestive heart failure.
At June 30, 2000, we had approximately 448,000 health care providers
participating in our networks nationwide, including more than 283,000
physicians and more than 3,100 hospitals.
Contracting
Primary Care Physicians
Current compensation by our HMOs to directly contracted PCPs is
principally on a capitated basis, although we also use fee-for-service
contracts and have eliminated or partially eliminated capitation in some areas.
Under a capitation arrangement, physicians receive a monthly fixed fee for each
HMO member, regardless of the medical services provided to the member. In a
fee-for-service arrangement, network physicians are paid for health care
services provided to the member based upon a fee schedule.
Hospitals
We typically enter into contracts that provide for all-inclusive rates per
diem and per case (including certain hospital-based physician services, such as
radiology, anesthesiology and pathology), with fixed rates for ambulatory
surgery and emergency room services. We have some hospital contracts that pay a
percentage of billed charges.
Our HMOs generally require precertification of elective admissions and
monitoring of the length of hospital stays. Participating physicians generally
admit their HMO patients to participating hospitals using referral procedures
that direct the hospital to contact our patient management unit, which confirms
the patient's membership status while obtaining pertinent data. This unit also
coordinates related activities, including the subsequent transition to the home
environment and home care, if necessary. Case management assistance for complex
or "catastrophic" cases is provided by a special case unit.
Specialist and Ancillary Services
Specialist physicians participating in our networks are generally
reimbursed at contracted rates per visit or procedure.
Our HMOs have capitated payment arrangements for most mental health,
substance abuse, laboratory, radiology, diagnostic imaging, podiatric and
physical therapy services.
Integrated Delivery Systems
In some locations, we have developed contractual relationships with
integrated delivery systems ("IDSs") to provide comprehensive medical and
hospital services. Under these arrangements, our HMOs contract with an IDS
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for a fixed, per member fee or a percentage of premium. These arrangements
cover most or all of the care required by the member which is generally
delivered by the IDS and its affiliated PCPs, hospitals and specialists.
Quality Assessment
Quality assessment programs begin with the initial selection of providers.
Physicians wanting to participate in our networks must satisfy an extensive set
of criteria, including licensing, hospital admission privileges, demonstrated
proficiency, written references, patient access, office standards, after-hours
coverage and many other factors. Hospitals also have an extensive set of
criteria, including HCFA and the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO") accreditation.
Participating physicians are recredentialed regularly. Recredentialing of
PCPs covers many aspects of patient care, which may include an analysis of
member grievances filed with us, on-site interviews, member surveys and
analysis of drug prescription patterns, and, for HMOs, analysis of utilization
patterns. Committees, composed of a peer group of participating private
physicians, review participating PCPs being considered for recredentialing.
We also offer quality and outcome measurement and improvement programs,
and health care data analysis systems for providers and purchasers of health
care.
We seek accreditation for some of our HMO plans from the National
Committee for Quality Assurance ("NCQA"), a national organization established
to review the quality and medical management systems of HMOs and other managed
care plans. Accreditation by NCQA is a nationally recognized standard. As of
June 30, 2000 approximately 82% of our HMO members participated in HMOs that
had received accreditation by the NCQA.
Principal Markets and Sales
Total Commercial, Medicare and Medicaid HMO, POS, PPO and Indemnity
membership ("Health membership") is widely dispersed throughout the United
States. We offer a wide array of benefit plans, many of which are available in
all 50 states.
Products offered by Group Insurance and Other Health are available in all
50 states. Depending on the product, we market to a range of customers from
small employer groups to large, multi-site national accounts.
The following table presents Health Care's membership by region and
funding arrangement, at the following dates:
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------------------- -------------------------------------------------------------------
2000 (1) 1999 (2) 1998 (3) 1997
--------------------------- --------------------------- --------------------------- -------
Risk Nonrisk Total Risk Nonrisk Total Risk Nonrisk Total Total
------ ------- ------- ------ ------- ------- ------ ------- ------- -------
(Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northeast........ 1,515 807 2,322 1,535 858 2,393 1,347 708 2,055 1,824
Mid-Atlantic..... 1,992 1,442 3,434 2,140 1,462 3,602 1,759 1,268 3,027 3,023
Capitol.......... 779 996 1,775 900 1,107 2,007 791 984 1,775 1,265
Southeast........ 1,385 1,132 2,517 1,518 1,263 2,781 613 1,009 1,622 1,554
Mid-West......... 1,036 1,904 2,940 1,091 1,995 3,086 710 1,817 2,527 2,311
West Central..... 773 967 1,740 711 998 1,709 208 785 993 1,192
Southwest........ 1,241 1,161 2,402 1,785 1,286 3,071 997 910 1,907 1,126
Pacific Coast.... 1,344 952 2,296 1,359 1,047 2,406 878 881 1,759 1,439
------ ------- ------- ------ ------- ------- ------ ------- ------- -------
Total Health
Membership.... 10,065 9,361 19,426 11,039 10,016 21,055 7,303 8,362 15,665 13,734
====== ======= ======= ====== ======= ======= ====== ======= ======= =======
</TABLE>
__________________
(1) Excludes approximately 520 members of the NYLCare Texas operations that
were sold in the first half of 2000.
(2) Includes 5,093 PHC health care members, of which 1,688 represent ASO
members that we have agreed to service for Prudential.
(3) Includes 1,975 NYLCare members.
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For membership composition of our products by funding arrangement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Six Months Ended June 30, 2000 and 1999 -- Health Care --
Membership" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- 1999, 1998 and 1997 -- Health Care -- Membership."
For both Health Risk and PHC and Group Insurance and Other Health,
products and services are marketed primarily to employers for the benefit of
employees and their dependents. Frequently, employers offer employees a choice
of coverages, from which the employee makes his or her selection during a
designated annual open enrollment period. Employers pay all or a portion of the
monthly premiums, and employees, through payroll deductions, pay any premium
not provided as an employee benefit.
Within Health Risk and PHC, Medicare coverage is sold on an individual
basis as well as through employer groups to their retirees. Medicaid and
subsidized children's health insurance programs are marketed to individuals
rather than employer groups.
Our products are sold primarily through our sales personnel, who
frequently work with independent consultants and brokers who assist in the
production and servicing of business. Sales representatives also sell to
employers on a direct basis.
For large plan sponsors, independent consultants and brokers are
frequently involved in employer health plan selection decisions and sales.
Marketing and sales efforts are promoted by an advertising program which
includes television, radio, billboards and print media, supported by market
research and direct marketing efforts.
Health Pricing
For insured commercial plans, customer contracts are generally established
in advance of the policy period, for a duration of one year. In determining the
premium rates to be charged to the customer, prospective and retrospective
rating methodologies are used.
Under prospective rating, a fixed premium rate is determined at the
beginning of the policy period. Unanticipated increases in medical costs cannot
be recovered in the current policy year; however, prior experience for a
product in the aggregate is considered, among other factors, in determining
premium rates for future periods. Federally qualified HMOs are required to set
premiums in this manner.
For federally qualified HMOs and for other plans where required by law, we
establish premium rates prior to contract inception, without regard to actual
utilization of services incurred by individual members, using one of three
approved community rating methods. These rates may vary from account to account
to reflect projected family size and contract mix, benefit levels, renewal
date, and other factors. Under the "traditional community rating" method, a
plan establishes premium rates based on its revenue requirements for its entire
enrollment in a given community. Under the "community rating by class" method,
a plan establishes premium rates based on its revenue requirements for broad
classes of membership distinguished by factors such as age and sex. Under the
"group specific community rating" method, a plan establishes premium rates
based in part on its revenue requirements for providing services to the group.
State laws in some of the states in which we operate plans require the filing
with and approval by the state of plan premium rates, and some states may
prohibit the use of one or more of these rating methods. In addition to
reviewing anticipated medical costs, some states also review anticipated
administrative costs as part of the approval process. Our future results could
be affected if the premium rates we request are not approved or are adjusted
downward by state regulators. For non-federally qualified HMOs, "experience"
rating methods are utilized. Premium rates for "experience rated" plans give
consideration to the plan sponsors' historical and anticipated claim
experience.
Under retrospective rating, a premium rate is determined at the beginning
of the policy period. Once the policy period has ended, the actual experience
is reviewed. If the experience is positive (i.e., actual claim costs and other
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expenses are less than those expected) then a refund may be credited to the
policy. If the experience is negative, then the resulting deficit may, in
certain instances, be recovered through contractual provisions; otherwise the
deficit is considered in setting future premium levels. If a customer elects to
terminate coverage, these deficits generally cannot be recovered. Retrospective
rating is often used for non-HMO, employer-funded plans which cover more than
300 lives.
We have contracts with HCFA to provide HMO Medicare+Choice coverage to
Medicare beneficiaries who choose health care coverage through an HMO. Under
these annual contracts, HCFA pays the HMO at a capitated rate based on
membership and adjusted for demographic factors and a user fee. Inflation,
changes in utilization patterns and benefit plans, demographic factors such as
age and sex, and both local county and national fee for service average per
capita Medicare costs are considered in the rate calculation process. Amounts
payable under Medicare risk arrangements are subject to annual unilateral
revision by HCFA. In addition to premiums received from HCFA, most of the
Medicare products offered by us require a supplemental premium to be paid by
the member. Under Medicare risk arrangements, we assume the risk of higher than
expected medical expenses. Medicare contracts generate higher per member per
month revenues, but also generate higher per member per month medical expenses,
than commercial plans.
We also have HMO contracts with a variety of federal government employee
groups under the Federal Employees Health Benefit Program. Premium rates are
subject to federal government review and audit.
We have contracts with some states and local agencies in Maine, New
Jersey, Pennsylvania and Washington to provide fully insured health benefits to
persons eligible for Medicaid and/or subsidized children's health insurance
program benefits. These contracts are generally for a period of one to three
years. We receive a fixed monthly payment based on membership in return for the
coverage of health care services. The rates are subject to periodic unilateral
revision by the contracting agencies. We assume the risk of higher than
expected medical expenses.
Contracts with plan sponsors to provide administrative services for
employer-funded plans are generally for a period of one year. Some of our
contracts include certain guarantees with respect to certain functions such as
customer service response time, claim processing accuracy and claim processing
turnaround time, as well as certain guarantees that claim expenses to be
incurred by plan sponsors will fall within a certain range. With any of these
guarantees, we are financially at risk if the conditions of the arrangements
are not met, though the maximum at risk is typically 10% - 30% of fees for the
customer involved.
Competition
Competition in the health care industry has intensified in recent years,
primarily due to more aggressive marketing and pricing, a proliferation of
competing products, including new products developed in an effort to contain
health care costs, and increased quality and price sensitivity. New entrants
into the marketplace as well as significant consolidation within the industry
have also contributed to the more intense competitive environment.
We believe that the most significant factors that distinguish competing
health plans are quality of service, comprehensiveness of coverage, cost
(including both premium and member out-of-pocket costs), product design,
financial stability and the geographic scope of provider networks and the
providers available in such networks and managed care programs (including NCQA
accreditation status). We believe that we are competitive in each of these
areas. The ability to increase the number of persons covered by our benefits or
to increase revenues is affected by competition in any particular area. In
addition, the ability to increase the number of persons enrolled in Health Risk
products is affected by the desire and ability of employers to self fund their
health coverage. Competition may also affect the availability of services from
health care providers, including primary care physicians, specialists and
hospitals.
Within Health Risk and PHC, we compete with local and regional managed
care plans, in addition to managed care plans sponsored by large health
insurance companies and Blue Cross/Blue Shield plans. Additional competitors
include other types of medical and dental provider organizations, various
specialty service providers, integrated health care delivery organizations, and
in certain plans, programs sponsored by the federal or state governments.
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Within the Other Health component of Group Insurance and Other Health, we
compete primarily with other commercial insurance companies and third party
administrators.
For the Group Insurance industry, we believe that the most significant
factors which distinguish competing companies are price, quality of service,
comprehensiveness of coverage, and product array and design. Specialty carriers
have increased market penetration in the life and disability business. The
deeply penetrated group life market remains highly competitive.
Reserves
For Health Risk and PHC, the liability for health care costs payable
reflects estimates of the ultimate cost of claims that have been incurred but
not yet reported or reported but not yet paid. Health care costs payable are
estimated periodically, and any resulting adjustments are reflected in
current-period operating results within health care costs. Health care costs
payable are based on a number of factors, including those derived from
historical claim experience. An extensive degree of judgment is used in this
estimation process, considerable variability is inherent in such estimates, and
the adequacy of the estimate is highly sensitive to changes in medical claims
payment patterns and changes in medical cost trends. A worsening (or
improvement) of medical cost trend or changes in claim payment patterns from
those assumed in estimating health care costs payable would cause these
estimates to change and such change could be material.
For Group Insurance products, reserves are established as premiums become
due to reflect the present value of expected future obligations net of the
present value of expected future premiums. Policy reserves for group paid-up
life insurance generally reflect long-term fixed obligations and are computed
on the basis of assumed or guaranteed yield and benefit payments. Assumptions
are based on our historical claim experience. For long-term disability
products, reserves are established for (i) lives currently in payment status
(using both standard industry, as well as our own morbidity and interest rate
assumptions), (ii) lives who have not yet satisfied the waiting period, but are
expected to do so and (iii) claims that have been incurred but not yet
reported. Long-term care reserves are a long-term obligation calculated using
industry data for morbidity and mortality assumptions. Reserves for unpaid
claims for other group health products (including short duration contracts) are
estimated periodically and any resulting adjustments are reflected in current
earnings.
Group health and group insurance premiums are generally recorded as
premium revenue over the term of the coverage. Some group contracts allow for
premiums to be adjusted to reflect emerging experience. Such premiums are
recognized as the related experience emerges.
Reinsurance
We use reinsurance agreements with nonaffiliated insurers for Group
Insurance products to control our exposure to large losses and certain other
risks. We maintain catastrophic life reinsurance which provides protection
against accidents involving five or more covered lives. For disability
products, certain reinsurance arrangements have been established to reflect the
circumstances of the specific disability risks. These include an excess
individual amount arrangement for a particular market segment of disability
products, a quota share treaty for another market segment of disability
products, and facultative treaties on a case by case basis. In addition, we
carry excess medical malpractice professional liability insurance.
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Group Life Insurance In Force and Other Statistical Data
The following table summarizes changes in group life insurance in force
before deductions for reinsurance ceded to other companies for the years
indicated:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(Millions)
<S> <C> <C> <C>
In force, end of year........................................... $355,014 $378,727 $316,478
Terminations (lapses and all other)............................. $ 77,648 $ 14,018 $ 10,678
Number of policies and contracts in force, end of year:
Group Life Contracts(1)................................... 14,519 14,044 13,849
Group Conversion Policies(2).............................. 28,767 31,024 32,660
</TABLE>
________________
(1) Due to the diversity of coverages and size of covered groups, statistics
are not provided for average size of policies in force.
(2) Reflects conversion privileges exercised by insureds under group life
policies to replace those policies with individual life policies.
Large Case Pensions
Large Case Pensions manages a variety of retirement products (including
pension and annuity products) offered to IRC Section 401 qualified defined
benefit and defined contribution plans. Contracts provide nonguaranteed,
partially guaranteed (experience-rated) and fully guaranteed investment options
through general and separate account products. The majority of Large Case
Pensions' products that use separate accounts provide contractholders with a
vehicle for investments under which the contractholders assume the investment
risk as well as the benefit of favorable performance. Large Case Pensions earns
a management fee on these separate accounts.
In 1993, we discontinued our fully guaranteed Large Case Pensions
products. For additional information, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Six Months Ended June 30,
2000 and 1999 -- Large Case Pensions -- Discontinued Products."
Customers
Premiums and fees from the federal government accounted for 21% of the
Health Care segment's revenue in 1999. Contracts with HCFA accounted for 81% of
these premiums and fees, with the balance from federal employee related benefit
programs. Our Large Case Pensions business is not dependent upon a single
customer or a few customers, the loss of which would have a significant effect
on the earnings of the segment. Refer to Note 15 of Notes to Consolidated
Financial Statements regarding segment information.
Trademarks
The trademarks Aetna(R), Aetna U.S. Healthcare(R), and U.S. Healthcare(R),
together with the corresponding design logos, are owned by us. We consider
these trademarks and our other trademarks and trade names important in the
operation of our business. However, our business is not dependent on any
individual trademark or trade name.
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Ratings
Many of our group insurance and large case pensions products are
written out of Aetna Life Insurance Company ("ALIC"), one of our subsidiaries.
Many of our customers may consider ALIC's claims-paying ratings to be
important. ALIC has the following claims-paying ratings:
Claims-Paying Claims-Paying
Rating Rating
Rating Agency (April 26, 2000) (August 3, 2000) (1)
------------- ---------------- --------------------
A.M. Best....................... A A
Fitch (formerly Duff & Phelps).. AA- AA-
Moody's Investors Service....... A1 A1
Standard & Poor's............... A+ A+
_________________
(1) A.M. Best has the ALIC rating under review with developing implications.
Moody's has placed the ALIC rating on review. Standard and Poor's has
placed the ALIC rating on CreditWatch negative. Fitch has placed the ALIC
rating on watch, evolving.
New Aetna has received the following ratings for its senior debt:
Senior Debt
Rating Agency Rating
------------- -----------
Moody's Investors Service....................
Standard & Poor's............................
Employees
We had about 40,000 domestic employees at June 30, 2000.
Properties
Our home office is a building complex located at 151 Farmington Avenue,
Hartford, Connecticut. We and some of our subsidiaries also own or lease other
space in the greater Hartford area; Blue Bell, Pennsylvania; Fairfield, New
Jersey and Roseland, New Jersey; as well as various field locations throughout
the country. We believe our properties are adequate and suitable for our
business as presently conducted.
The foregoing does not include numerous investment properties held by us
in our general and separate accounts.
Regulation
General
Our operations are subject to comprehensive regulation throughout the
United States. Supervisory agencies, including (depending on the state) state
health, insurance, corporation and securities departments, have broad authority
to grant licenses to transact business and regulate many aspects of the
products and services offered by us, as well as solvency and reserve adequacy.
Many agencies also regulate investment activities on the basis of quality,
diversification, and other quantitative criteria. Our operations and accounts
are subject to examination at regular intervals by certain of these regulators.
Health Care
The federal government and the states in which we conduct our HMO and
other health operations have adopted laws and regulations that govern our
business activities to varying degrees. These laws and regulations may restrict
how we conduct our businesses and may result in additional burdens and costs to
us. Areas of governmental regulation include licensure, premium rates,
benefits, service areas, quality assurance procedures, plan design and
disclosures, eligibility requirements, provider rates of payment, surcharges on
provider payments, provider contract
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forms, underwriting, financial arrangements, financial condition (including
reserves) and corporate governance. These laws and regulations are subject to
amendments and changing interpretations in each jurisdiction.
States generally require HMOs to obtain a certificate of authority prior
to commencing operations. To establish an HMO in any state where we do not
presently operate an HMO, we generally have to obtain such a certificate. The
time necessary to obtain such a certificate varies from state to state. Each
HMO must file periodic financial and operating reports with the states in which
it does business. In addition, the HMOs are subject to state examination and
periodic license renewal.
Recent Medicare Changes
In 1997, the federal government passed legislation related to Medicare
that changed the method for determining premiums that the government pays to
HMOs for Medicare members. In general, the new method has and will reduce the
premiums payable to us compared to the old method, although the level and
extent of the reductions varies by geographic market and depends on other
factors. The legislation also requires us to pay a "user fee." The changes
began to be phased in on January 1, 1998 and will continue over five years. The
federal government also announced in 1999 that it planned to begin to phase in
risk adjustments to its premium payments over a five-year period commencing
January 1, 2000. It is anticipated that the net impact of these risk
adjustments will be to reduce the premiums payable to us. While the phase-in
provisions provide us with an opportunity to offset some of the premium
reductions, the risk adjustments and the user fee by adjusting the supplemental
premiums that members pay to us and by adjusting the benefits included in our
products, because of competition and other factors, the adjustments we can make
may not fully offset the reductions in premiums from the government. Because of
these reduced premiums and the user fee, as well as other factors including new
Medicare+Choice regulations issued by HCFA, we decided not to renew our
Medicare HMO contracts in certain areas effective January 1, 1999 and January
1, 2000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Six Months Ended June 30, 2000 and 1999 -- Health Care
-- Health Risk and PHC -- Exiting Medicare Markets" and "Business of New
Aetna."
HIPAA
The federal government enacted the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") in 1997. The legislation has three main
effects:
o it limits pre-existing condition exclusions that apply to individuals
changing jobs or moving to individual coverage;
o it guarantees that employees in the small group market have available
health coverage; and
o it prevents exclusion of individuals from coverage under group plans
based on health status.
In addition, regulations were recently proposed under HIPAA relating to
the privacy of health information and certain other matters affecting the
administration of health and related plan benefits. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Six
Months Ended June 30, 2000 and 1999 -- Health Care -- Outlook" for more
information.
ERISA
The provision of services to certain employee health benefit plans is
subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), a
complex set of laws and regulations subject to interpretation and enforcement
by the Internal Revenue Service and the Department of Labor ("DOL"). ERISA
regulates certain aspects of the relationships between New Aetna and employers
who maintain employee benefit plans subject to ERISA. Some of our
administrative services and other activities may also be subject to regulation
under ERISA. In addition, some states require licensure or registration of
companies providing third party claims administration services for benefit
plans.
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Other Recent Matters
The federal government and many states, including states in which we have
substantial managed care membership, have enacted or are seriously considering
additional legislation or regulation related to managed care. Other federal
legislation, effective January 1, 1998, mandates minimum hospital stays after
childbirth and that health plans apply lifetime limits to mental health
benefits with parity.
This legislation or regulation includes, among other things, the
following:
o Assessments, surcharges or taxes on premiums or provider payments to
fund uncompensated care, graduate medical education, high-risk pools,
guaranty funds, or government programs
o Changes to licensure or certification requirements
o Eliminating or reducing the scope of ERISA pre-emption of state
medical and bad faith claims under state law, exposing health plans
to expanded liability to punitive and other extra-contractual damages
o Extension of malpractice and other liability for medical and other
decisions from providers to health plans
o Hearings and limitations on the ability to terminate providers from
networks
o Increased reserve and capital requirements
o Liability for negligent denials or delays in coverage
o Mandatory coverage of experimental procedures and drugs
o Mandatory direct access to specialists for patients with chronic
conditions
o Mandatory direct access to specialists (including OB/GYNs) and
chiropractors
o Mandated expanded consumer disclosures and notices
o Mandatory expanded coverage for emergency services
o Mandated liberalized definitions of medical necessity
o Mandated liberalized internal and external grievance and appeal
procedures (including expedited decision making)
o Mandatory maternity and other lengths of hospital inpatient stay
o Mandatory point-of-service benefits for HMO plans
o Prohibition of so-called "gag" and similar clauses in physician
agreements
o Prohibitions on incentives based on utilization
o Prohibition or limitation of arrangements designed to manage medical
costs and improve quality of care, such as capitated arrangements
with providers or provider financial incentives
o Regulation of and restrictions on utilization management and review
o Regulation of the composition of provider networks, such as any
willing provider and pharmacy laws
o Required payment levels for out-of-network care
o Exempting physicians from the antitrust laws that prohibit price
fixing, group boycotts and other horizontal restraints on competition
o Third-party review of denials of benefits (including denials based on
a lack of medical necessity)
o Restricting or eliminating the use of formularies for prescription
drugs
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For example, the House of Representatives recently passed the
Norwood-Dingell bill which would (if it became law), among other things, place
limits on health care plans' methods of operations, limit employers' and health
care plans' ability to define medical necessity and permit employers and health
care plans to be sued in state courts for coverage determinations.
It is uncertain whether we can recoup, through higher premiums or other
measures, the increased costs of mandated benefits or the other increased costs
caused by such legislation or regulation.
The Health Care business also may be adversely impacted by court and
regulatory decisions that expand the interpretations of existing statutes and
regulations, impose medical or bad faith liability, increase our
responsibilities under ERISA, or reduce the scope of ERISA pre-emption of state
law claims.
Texas Agreement
On April 11, 2000, our Texas HMOs entered into an assurance of voluntary
compliance with the Office of the Attorney General of Texas to settle, with
prejudice and without admission, litigation commenced by the Office of the
Attorney General of Texas in December 1998 regarding certain alleged business
practices and to make additional commitments. The agreement provides for, among
other things, allowing directly contracted Texas physicians in small group or
individual practice to choose whether to participate in either or both of our
HMO/HMO-based and PPO/PPO-based product lines; paying directly contracted
capitated primary care physicians with fewer than 100 HMO members on a
fee-for-service basis rather than a capitated basis; expanding independent
external review of coverage denials to include disputes regarding experimental
and investigational coverage, emergency coverage, prescription drug coverage
and standing referrals to specialists; and the creation of an Office of the
Ombudsman that will act as an advocate for members and assist them with appeals
or complaints. The agreement does not include any finding of fault nor does it
include any fines or penalties. We do not expect the agreement to have a
material adverse effect on our financial condition or results of operations,
and the agreement provides for potential relief should such unexpected impact
occur. For information regarding regulation of pricing by our HMOs, refer to
"-- Health Care -- Health Pricing."
Investment and Retirement Products and Services
Operations conducted by large case pensions are subject to regulation by
various government agencies where we conduct business, in particular the
insurance departments of Connecticut and New York. Among other matters, these
agencies may regulate premium rates, trade practices, agent licensing, policy
forms, underwriting and claims practices, the maximum interest rates that can
be charged on life insurance policy loans, and the minimum rates that must be
provided for accumulation of surrender value.
Federal Employee Benefit Regulation
Large case pensions also provides a variety of products and services to
employee benefit plans that are covered by ERISA.
In December 1993, in a case involving an employee benefit plan and an
insurance company, the United States Supreme Court ruled that assets in the
insurance company's general account that were attributable to a portion of a
group pension contract issued to the plan that was not a "guaranteed benefit
policy" were "plan assets" for purposes of ERISA and that the insurance company
had fiduciary responsibility with respect to those assets. In reaching its
decision, the Supreme Court declined to follow a 1975 DOL interpretive bulletin
that had suggested that insurance company general account assets were not plan
assets.
The Small Business Job Protection Act (the "Act") was signed into law in
1996. The Act created a framework for resolving potential issues raised by the
Supreme Court decision. The Act provides that, absent criminal conduct,
insurers generally will not have liability with respect to general account
assets held under contracts that are not guaranteed benefit policies based on
claims that those assets are plan assets. The relief afforded extends to
conduct that occurs before the date that is 18 months after the DOL issues
final regulations required by the Act, except as
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provided in the anti-avoidance portion of the regulations. The regulations,
which were issued on January 5, 2000 address ERISA's application to the general
account assets of insurers attributable to contracts issued on or before
December 31, 1998 that are not guaranteed benefit policies. The conference
report relating to the Act states that policies issued after December 31, 1998
that are not guaranteed benefit policies will be subject to ERISA's fiduciary
obligations. We are not currently able to predict how these matters may
ultimately affect our businesses.
HMO and Insurance Holding Company Laws
A number of states, including Pennsylvania and Connecticut, regulate
affiliated groups of HMOs and insurers such as New Aetna under holding company
statutes. These laws may require these companies to maintain certain levels of
equity. For information regarding restrictions on certain payments of dividends
or other distributions by HMO and insurance company subsidiaries of New Aetna,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Some of these laws also
regulate changes in control (as do Pennsylvania corporate laws), and other
matters such as transactions with affiliates. See Note 15 of Notes to
Consolidated Financial Statements.
Guaranty Fund Assessments
Under guaranty fund laws existing in all states, insurers doing business
in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies to policyholders and claimants.
While we historically have recovered more than half of guaranty fund
assessments through statutorily permitted premium tax offsets, significant
increases in assessments could jeopardize future efforts to recover these
assessments. Some states have similar laws relating to HMOs. There were no
material charges to earnings for guaranty fund obligations during 1999, 1998,
or 1997. On April 6, 2000, the State of New Jersey enacted the New Jersey
Insolvent Health Maintenance Organization Assistance Fund Act of 2000. The act
is designed to reimburse individuals who were covered by and providers that had
contracts with two New Jersey HMOs prior to their insolvency. The total amount
to be assessed to all HMOs in New Jersey is $50 million. The act requires that
HMOs in the New Jersey market be assessed a charge calculated based on each
HMO's proportionate share of premiums written in New Jersey relative to all HMO
premiums written in New Jersey. We recorded an estimate of our share of this
assessment, based on our HMO market share in New Jersey, of $23 million pre-tax
($15 million after-tax) in the second quarter of 2000.
See Note 1 of Notes to Consolidated Financial Statements for further
discussion of accounting standards related to guaranty fund assessments.
Legal Proceedings
Shareholder Litigation
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 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 for consolidated
pretrial proceedings with the cases pending there. The plaintiffs filed a
consolidated and amended complaint seeking, among other remedies, unspecified
damages resulting from defendants' alleged violations of federal securities
laws. The complaint alleged that Aetna 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
Aetna's medical claim reserves. Aetna 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 Aetna, Ronald E. Compton and Richard L. Huber. Aetna
and the remaining individual defendants filed a motion to dismiss the second
amended complaint, and the court denied that motion in March 1999. On August 9,
1999, the court entered an order certifying as plaintiffs those persons who
purchased Aetna common stock on the market from
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March 6, 1997 through 7:00 a.m. on September 29, 1997. Merits discovery was
completed in early 2000. On January 31, 200, plaintiffs filed expert reports.
On February 3, 2000, defendants filed motions for summary judgment. Also on
February 3, 2000, plaintiffs moved for permission to file a third amended
complaint. On March 20, 2000, the court granted plaintiffs leave to file a
third amended complaint and adopted a revised schedule. Pursuant to the revised
schedule, defendants filed new summary judgment motions in May 2000 and the
parties conducted expert discovery which is scheduled to be completed in the
third quarter of 2000. Trial is scheduled to begin in the fourth quarter of
2000. Defendants are defending the actions vigorously.
Four purported shareholder class action complaints were filed in the
Superior Court of Connecticut, Hartford County, alleging in substance that
Aetna and its directors breached fiduciary duties to shareholders in responding
to a February 24, 2000 letter from WellPoint Health Networks, Inc. and ING
America Insurance Holdings, Inc. which had invited discussions concerning a
possible transaction. These actions were filed on behalf of George Schore,
Michael Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on
March 7, 2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on
March 23, 2000. A fifth, substantially similar purported class action complaint
was filed on behalf of Barnett Stepak on March 28, 2000 in the Supreme Court of
New York, New York County. Each action seeks various forms of relief, including
unspecified damages and equitable remedies. On July 26, 2000 the Connecticut
court ordered consolidation of the four Connecticut actions. This litigation is
in the preliminary stages. Defendants intend to defend these actions
vigorously.
Health Care Litigation
We are involved in several purported class action lawsuits that are part
of a wave of similar actions targeting the health care industry and, in
particular, the conduct of business by managed care companies.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on April 19, 1999 by Joseph
Maio, Jo Ann Maio and Gary Bender seeking various forms of relief, including
unspecified damages and treble damages, from Aetna and a number of its
subsidiaries for alleged violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), the Pennsylvania Unfair Trade Practices and
Consumer Protection Law, and state common law. On September 29, 1999, the court
dismissed the RICO claims with prejudice and dismissed the state law claims for
lack of subject matter jurisdiction. The court held, among other things, that
the plaintiffs lacked standing to pursue the federal RICO claims because they
had not alleged an injury in fact. Plaintiffs have appealed the dismissal to
the United States Court of Appeals for the Third Circuit. On August 11, 2000,
the Third Circuit rendered its decision upholding the dismissal of the case.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on October 4, 1999 by Anthony
Conte. The complaint seeks various forms of relief, including unspecified
damages, from us for alleged violations of the Employee Retirement Income
Security Act of 1974 ("ERISA"). The complaint alleges that we do not make
adequate disclosure of provider compensation arrangements in the literature
that we make available to actual or prospective members. We intend to defend
the action vigorously and on November 1, 1999, filed a motion to dismiss the
litigation for failure to state a claim upon which relief can be granted. On
December 15, 1999, the court suspended further proceedings pending the
resolution of the Maio appeal by the United States Court of Appeals for the
Third Circuit.
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on October 7, 1999 by Jo Ann
O'Neill. An amended complaint was filed on November 9, 1999 by Jo Ann O'Neill,
Lydia K. Rouse and Danny E. Waldrop. The complaint seeks various forms of
relief, including unspecified damages and treble damages and restitution of
alleged improper profits, from Aetna, us, Richard L. Huber and unnamed members
of the Board of Directors of Aetna for alleged violations of ERISA and RICO.
The complaint alleges that defendants are liable for alleged misrepresentations
and omissions relating to advertising, marketing and member materials directed
to Aetna HMO members. On November 22, 1999, defendants moved to stay, dismiss
or transfer the action to the United States District Court for the Eastern
District of Pennsylvania based on the Conte and Maio complaints filed in that
court. On January 25, 2000, the court suspended further proceedings pending
resolution of a motion in cases involving other defendants to consolidate those
actions in a single court. This litigation is in the preliminary stages.
Defendants intend to defend the action vigorously.
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A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright
in her individual capacity and on behalf of the general public of the State of
California. The complaint seeks various forms of relief, including injunctive
relief, restitution and disgorgement of amounts allegedly wrongfully acquired,
from Aetna, us, Aetna U.S. Healthcare of California Inc. and unnamed "John Doe"
defendants for alleged violations of California Business and Professions Code
Sections 17200 and 17500, California Civil Code Section 17500 and state common
law in connection with the sale and marketing of health plans in California.
The complaint alleges that defendants are liable for alleged misrepresentations
and omissions relating to advertising, marketing and member materials directed
to Aetna HMO, POS and PPO members and members of the general public. On
December 16, 1999, defendants removed the action to the United States District
Court for the Northern District of California. Plaintiff has moved to remand
the action to state court. Aetna has moved to dismiss the complaint for failure
to state a claim upon which relief can be granted and moved for a stay of the
action pending resolution of the Maio and Conte matters. In August 2000, the
court stayed further proceedings pending decision on Aetna's MDL Application
(as described below). This litigation is in the preliminary stages. Defendants
intend to defend the action vigorously.
A complaint was filed in the Superior Court of the State of California,
County of San Diego on November 5, 1999 by Linda Ross and The Stephen Andrew
Olsen Coalition for Patients Rights, purportedly on behalf of the general
public of the State of California. The complaint seeks various forms of relief,
including injunctive relief, restitution and disgorgement of amounts allegedly
wrongfully acquired, from Aetna, us, Aetna U.S. Healthcare of California, Inc.
and additional unnamed "John Doe" defendants for alleged violations of
California Business and Professions Code Sections 17200 and 17500. The
complaint alleges that defendants are liable for alleged misrepresentations and
omissions relating to advertising, marketing and member materials directed to
Aetna HMO, POS and PPO members and the general public and for alleged unfair
practices relating to contracting of doctors. On May 5, 2000, the court denied
defendants' demurrer but granted in part their motion to strike portions of the
complaint and ordered plaintiffs to file an amended complaint. An amended
complaint was filed on May 15, 2000 and a second amended complaint on June 28,
2000. On August 15, the court denied defendants' demurrer but granted, in part,
their motion to strike portions of the second amended complaint and ordered the
plaintiffs to file a third amended complaint. The third amended complaint was
filed on August 25, 2000. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on November 22, 1999 by Raymond
D. Williamson, III. The complaint names as defendant The Prudential Insurance
Company of America, and also names as defendants Aetna and us solely to the
extent that we have assumed liability for the actions of Prudential in
connection with our acquisition of the Prudential health care business. The
complaint seeks various forms of relief from defendants, including unspecified
damages, treble damages and imposition of a constructive trust, for alleged
violations of RICO and ERISA. The complaint alleges that the Prudential Health
Plans engaged in a nationwide fraudulent scheme of misrepresentation by stating
that coverage and treatment decisions were made on the basis of medical
necessity when Prudential allegedly implemented undisclosed policies designed
to deny or limit claims and medical services. On December 30, 1999, we moved to
stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the fact that the Maio and Conte
Complaints were filed in that court. On January 25, 2000, the court suspended
further proceedings pending resolution of a motion in cases involving other
defendants to consolidate those actions in a single court. This litigation is
in the preliminary stages. We intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on December 3, 1999 by Michael V. Amorosi.
The complaint seeks various forms of relief, including unspecified damages,
treble damages and restitutionary relief for unjust enrichment, from Aetna and
us for alleged violations of RICO and ERISA. The complaint alleges that
defendants told subscribers that coverage and treatment decisions would be
based on medical necessity but instead took into account undisclosed cost-based
criteria that were unrelated to members' medical needs. On January 7, 2000, we
moved to stay, dismiss or transfer the action to the United States District
Court for the Eastern District of Pennsylvania based on the fact that the Maio
and Conte complaints were filed in that court. On August 25, 2000 we moved to
dismiss the action for failure to state a claim. This litigation is in the
preliminary stages. We intend to defend the action vigorously.
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A purported amended class action complaint was filed in the United States
District Court for the Northern District of Alabama on January 19, 2000 by
Eugene Mangieri, M.D. The complaint seeks various forms of relief, including
unspecified damages, treble damages and punitive damages, from Aetna, us and
Richard L. Huber for alleged violations of RICO. The complaint claims that
physicians suffer actual and potential harm from allegedly coercive terms
contained in their contracts with us. On May 15, 2000, the Judicial Panel on
Multidistrict Litigation issued a conditional order transferring this action to
the United States District Court for the Southern District of Florida for
consolidated pretrial proceedings in the matter known as In re Humana, Inc.
Managed Care Litigation. On May 30, 2000, we filed with the Panel an objection
to that conditional transfer order, but on July 14, 2000, we requested
consolidation of that action with others pending against us (see the discussion
regarding the MDL Application below). This litigation is in the preliminary
stages. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on April 11, 2000 by Jennifer McCarron and
Ira S. Schwartz. The complaint names as defendants The Prudential Insurance
Company of America and health maintenance organizations that we acquired from
Prudential on August 6, 1999. The complaint seeks various forms of relief from
defendants, including return of certain premiums, disgorgement of allegedly
improper profits and injunctive relief, for alleged contractual breaches and
violations of ERISA. Plaintiffs purport to represent a class including persons
who were Prudential Health Plans subscribers before and/or after our
acquisition of those operations. The complaint alleges that Prudential Health
Plans' administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
Ms. McCarron additionally alleges that she was wrongfully denied coverage for
certain medical treatments. On August 30, 2000 we joined in Prudential's motion
to dismiss the complaint for failure to state a claim. This litigation is in
the preliminary stages. We intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on May 22, 2000 by John Romero
and Catherine Romero. The complaint names as defendants The Prudential
Insurance Company of America and health maintenance organizations that we
acquired from Prudential on August 6, 1999. The complaint seeks various forms
of relief from defendants, including return of certain premiums, disgorgement
of allegedly improper profits and injunctive relief, for alleged contractual
breaches and violations of ERISA. Plaintiffs purport to represent a class
including persons who were Prudential Health Plan subscribers before and/or
after our acquisition of those operations. The complaint alleges that
Prudential Health Plans' administration and disclosure of policies concerning
medical necessity determinations violated contractual and fiduciary duties owed
to subscribers. On July 24, 2000 the court stayed the action. This litigation
is in the preliminary states. We intend to defend the action vigorously.
On July 14, 2000, Aetna filed with the Judicial Panel on Multidistrict
Litigation a motion to consolidate and transfer six of the above matters for
pretrial proceedings in the United States District Court for the Eastern
District of Pennsylvania (the "MDL Application"). That motion seeks transfer
and consolidation of the Amorosi, Conte, Curtright, and Mangieri complaints, as
well as both the Mississippi O'Neill complaint and the Florida O'Neill
complaint. Hearing on the MDL Application is scheduled to take place on
September 22, 2000.
A purported class action was filed in the United States District Court for
the Southern District of Florida under the caption In re Humana, Inc. Managed
Care Litigation, on June 23, 2000 by Jo Ann O'Neill, Lydia K. Rouse and Danny
E. Waldrop. The complaint names as defendants Aetna and us. The complaint seeks
various forms of relief, including unspecified damages and treble damages and
restitution of alleged improper profits, from Aetna and us for alleged
violations of ERISA and RICO. The complaint alleges that defendants are liable
for alleged misrepresentations and omissions relating to advertising and
marketing materials directed to Aetna HMO members, and alleges that defendants
conspired with other managed care companies not to disclose alleged
industry-wide practices. We sought from the Florida federal court a stay of
further proceedings on the complaint pending a decision on the MDL Application.
On July 27, 2000, the Florida federal court denied that motion. On August 11,
2000, we filed a motion to dismiss the complaint. Briefing on that motion is
scheduled to be completed in early September 2000. Additionally, the court has
scheduled briefing on plaintiffs' class certification motion to be completed by
November 2000. This litigation is in the preliminary stages. Defendants intend
to defend the action vigorously.
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A purported class action complaint was filed in the United States District
Court for the District of Connecticut on August 7, 2000 by Glenn O'Brien and
Christopher Gallagher. The complaint seeks various forms of relief, including
unspecified damages, from us for alleged violations of ERISA. The complaint
alleges that we do not make adequate disclosure of the operation of our managed
care plans to actual or prospective members. We intend to defend the action
vigorously. We have notified the Judicial Panel on Multidistrict Litigation of
the complaint for consolidation with the other matters referred to in the MDL
Application.
Other Litigation and Regulatory Proceedings
We are also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of our business operations, including claims of
bad faith, medical malpractice, non-compliance with state regulatory regimes,
marketing misconduct, failure to timely pay medical claims and other litigation
in our health care business. Some of these other lawsuits are purported to be
class actions. Aetna U.S. Healthcare of California Inc., an indirect subsidiary
of ours, 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
Aetna, 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.
In addition, New Aetna's business practices are subject to review by
various state insurance and health care regulatory authorities and federal
regulatory authorities. Recently, there has been heightened review by these
regulators of the managed health care industry's business practices, including
utilization management and claim payment practices. As the largest national
managed care organization, New Aetna regularly is the subject of such reviews
and several such reviews currently are pending, some of which may be resolved
during the remainder of 2000. These reviews may result in changes to or
clarifications of New Aetna's business practices, and may result in fines,
penalties or other sanctions.
While the ultimate outcome of these other lawsuits and regulatory reviews
cannot be determined at this time, after consideration of the defenses
available to us, applicable insurance coverage and any related reserves
established, they are not expected to result in liability for amounts material
to our financial condition, although they may adversely affect results of
operations in future periods.
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RELATIONSHIP AMONG AETNA, NEW AETNA AND ING
Aetna and New Aetna, or their respective subsidiaries, will enter into
various agreements in connection with the spin-off that will govern their
ongoing relationships and provide for an orderly transition after completion of
the spin-off and the merger. This section describes the material provisions of
those agreements. This description does not purport to be complete and is
qualified in its entirety by reference to the forms of and term sheets for such
agreements, which are filed as exhibits to the registration statement on Form
10 of which this information statement is a part. Some of these agreements are
also attached as Annexes to the proxy statement. All shareholders are urged to
read these agreements carefully in their entirety.
References in this section to "Aetna" should be read as a reference to
Aetna and its subsidiaries after giving effect to the spin-off and the merger
and references to "New Aetna" should be read as a reference to New Aetna and
its subsidiaries after giving effect to the spin-off.
Distribution Agreement
The Distribution Agreement is the principal document governing the terms
of the spin-off. The material terms and conditions of the Distribution
Agreement that will govern the ongoing relationships of Aetna and New Aetna are
summarized below.
Allocation of Liabilities; Indemnification
Aetna is generally to be responsible for the following liabilities,
whether arising before, at or after the spin-off:
o all liabilities of or relating to Aetna, New Aetna or any subsidiary
of either to the extent arising from the conduct of, in connection
with or relating to Aetna's business (after giving effect to the
spin-off) or to the ownership or use of assets or property in
connection with such business;
o all liabilities of or relating to any Aetna subsidiary (after giving
effect to the spin-off) except to the extent arising from the conduct
of, in connection with or relating to the business or assets of New
Aetna or any of its subsidiaries (after giving effect to the
spin-off);
o certain specified corporate-level and other liabilities;
o the debt to be retained by Aetna in the merger; and
o the tax- and employee benefits-related liabilities allocated to Aetna
in the tax sharing and employee benefits agreements referred to
below.
Except for the liabilities allocated to Aetna and subject to certain other
limited exceptions, New Aetna will be generally responsible for all
liabilities, whether arising before, at or after the spin-off, of or relating
to:
o Aetna, New Aetna or any subsidiary of New Aetna (after giving effect
to the spin-off), including, for example, the legal proceedings
referred to under "Business of New Aetna -- Legal Proceedings";
o Aetna or any subsidiary of Aetna to the extent arising from the
conduct of, in connection with or relating to any of New Aetna's
assets or business or the ownership or use thereof;
o Aetna's former domestic property-casualty operations;
o certain specified contracts, including contracts governing the
disposition by Aetna of its individual life insurance business; and
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o the tax- and employee benefits-related liabilities allocated to New
Aetna in the tax sharing and employee benefits agreements referred to
below.
Aetna and New Aetna will indemnify each other with respect to the
liabilities for which the relevant entity is responsible.
Non-Competition and Non-Solicitation
For a period of three years following the date on which the merger is
completed, and subject to certain exceptions, neither New Aetna nor any of its
affiliates (after giving effect to the spin-off), will engage in the United
States in the following businesses conducted by Aetna immediately prior to the
completion of the merger:
o underwriting and/or issuance of defined contribution group annuities
for pension plans maintained by employer or similar groups pursuant
to Section 401(k), 403(b) or 457 of the Internal Revenue Code;
o underwriting and/or issuance of individual annuities, providing
investment advisory or broker-dealer services; or
o the management of mutual funds.
In addition, New Aetna has agreed that neither it nor any of its affiliates
(after giving effect to the spin-off) will engage in certain specified
businesses in foreign jurisdictions.
For an additional period of 12 months after the three year period, and
subject to certain exceptions, to the extent that New Aetna or any of its
affiliates (after giving effect to the spin-off) engages directly or indirectly
in any of the prohibited businesses described above, it will do so using a
brand other than "Aetna."
Among other activities that are not prohibited by the restrictions
outlined above, New Aetna and its affiliates (after giving effect to the
spin-off) are not prohibited from:
o conducting any of the following activities:
- continuing the existing businesses of New Aetna and its
affiliates (after giving effect to the spin-off) as of the date
of the merger, including:
- providing or administering in the United States individual
or group life insurance coverage or benefit plans and
certain other specified businesses; provided that, to the
extent such activities incorporate a prohibited business,
the prohibited business must be provided by a third party
using a brand other than "Aetna";
- continuing the existing investment advisory activities and
investment management activities of the Aetna Investment
Management Group;
- continuing to serve New Aetna's existing large case
pensions clients;
- continuing the existing activities of Aetna Global
Benefits, provided that to the extent such support or
services incorporate a prohibited business, such prohibited
business must be provided by a third party using a brand
other than "Aetna"; and
- providing certain technical support, consulting,
administration, insurance or reinsurance services for
health insurance, life insurance or other insurance
coverage underwritten by third parties, provided that to
the extent such support or services incorporate a
prohibited business, such prohibited business must be
provided by a third party using a brand other than "Aetna";
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- general financial planning not requiring New Aetna or any
of its affiliates to act as a registered broker-dealer;
- offering financial products of, or services underwritten or
managed by, unaffiliated third parties (which products or
services use a brand other than "Aetna") to customers of,
or in conjunction with the products or services of, New
Aetna; and
- providing information, advice, consulting or other
counseling services to groups or individuals regarding
health, life insurance, retirement savings or other
financial or benefits matters, provided that if such
activities incorporate a prohibited business, such
prohibited business must be provided by a third party using
a brand other than "Aetna";
o engaging in any prohibited business in any jurisdiction if Aetna
ceases to engage in such business in such jurisdiction; or
o owning, acquiring or investing in any entity, provided that if
that entity derives in excess of 10% of its consolidated gross
revenue in the most recently completed four fiscal quarters from
business activities which would be prohibited businesses under
the Distribution Agreement, New Aetna will divest a portion of
that business representing the excess within 12 months of the
acquisition date.
Notwithstanding the limitations noted above, beginning 18 months after the
merger is completed, New Aetna and its affiliates (after giving effect to the
spin-off) may engage in any prohibited business (under the Aetna brand or
otherwise) when, and only when, (x) the engagement in the prohibited business
is in combination with and incidental to engagement in a business which is not
a prohibited business and (y) failure to engage in such prohibited business
would reasonably result in a significant competitive advantage in connection
with the business of New Aetna or its affiliates (after giving effect to the
spin-off) or result in a failure of any such entity to reasonably accommodate
its existing customers.
Aetna and New Aetna have also agreed to restrictions on the solicitation
or employment of employees of the other party.
Trademarks; Tradenames
The Distribution Agreement provides in general that, when the spin-off is
completed, Aetna and its affiliates will not use the name "Aetna," marks or
names derived therefrom or specified other marks and names, except as
specifically permitted by the trademark license agreement referred to below.
New Aetna will not, and will not permit any of its affiliates to, use the
"Aeltus" name or its derivatives, or the Aetna Chinese name rights retained by
Aetna, except as permitted in an agreement relating to the Chinese trademark to
be entered into by Aetna and New Aetna.
Tax Sharing Agreement
The tax sharing agreement describes, among other things, Aetna's and New
Aetna's rights and obligations relating to tax payments and refunds for periods
before completion of the spin-off and related matters such as the filing of tax
returns and the handling of audits and other tax proceedings. The tax sharing
agreement also describes the tax indemnification arrangements among Aetna and
its subsidiaries (which we refer to as the "Aetna tax group"), on the one hand,
and New Aetna and its subsidiaries (which we refer to as the "New Aetna tax
group"), on the other hand.
Return Filing, Tax Payment and Conduct of Tax Proceedings
In general, Aetna will be responsible for filing consolidated federal and
consolidated, combined or unitary state tax returns that include members of the
New Aetna tax group for periods through the completion of the spin-off, and
paying the related taxes to the IRS or other relevant taxing authority. New
Aetna will pay Aetna the portion of those taxes that is allocable to the New
Aetna tax group. In general, the tax sharing agreement allocates U.S.
consolidated
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tax liabilities of a tax group with members from both the Aetna tax group and
the New Aetna tax group (which we refer to as a combined tax group) so that the
New Aetna tax group would be responsible for taxes as though the relevant
members of the New Aetna tax group had filed, in accordance with rules provided
in the tax sharing agreement, their own separate group return, while having
been limited in the use of that separate group's tax assets in a manner that
equitably reflected the combined tax group's actual utilization of those tax
assets.
When the returns of a combined tax group for periods through the
completion of the transaction are prepared, Aetna will decide how tax matters
that predominantly affect the Aetna tax group are handled and New Aetna will
decide how tax matters that predominantly affect the New Aetna tax group are
handled. Aetna and New Aetna will together decide how remaining tax matters are
handled. The tax sharing agreement generally provides comparable rules for
determining which of Aetna and New Aetna controls the conduct of an audit or
other tax proceeding relating to a tax matter of a combined tax group. However,
the tax sharing agreement allows Aetna or New Aetna to control the settlement
of a tax matter, in an audit or other tax proceeding, that could give rise
under the agreement to an indemnification obligation on the part of the Aetna
tax group or the New Aetna tax group, respectively.
Indemnification Arrangements
The tax sharing agreement describes the tax liabilities against which each
of the Aetna tax group and the New Aetna tax group will indemnify the other tax
group. In general, the New Aetna tax group will indemnify the Aetna tax group
against, without duplication:
o tax liabilities attributable to members of the New Aetna tax group
relating to any period,
o specified federal income tax liabilities of members of the Aetna tax
group relating to periods ending on or before 1994 and certain other
described tax liabilities of members of the Aetna tax group,
o any tax indemnity payments required under, or any tax liabilities
relating to or resulting from the treatment of, specified historical
transactions that were undertaken to acquire or dispose of
subsidiaries and/or businesses,
o any tax liabilities relating to, or resulting from the treatment of,
the spin-off, and
o any tax liabilities resulting from a breach by the New Aetna tax
group of the provisions of the tax sharing agreement.
In general, the Aetna tax group will indemnify the New Aetna tax group
against, without duplication:
o tax liabilities attributable to members of the Aetna tax group
relating to any period, except for those liabilities against which
the New Aetna tax group has agreed under the tax sharing agreement to
indemnify the Aetna tax group,
o any tax indemnity payments required under, or any tax liabilities
relating to or resulting from the treatment of, specified historical
transactions that were undertaken to acquire or dispose of
subsidiaries and/or businesses associated with the businesses
conducted by the Aetna tax group, and
o any tax liabilities resulting from a breach by the Aetna tax group of
the provisions of the tax sharing agreement.
Employee Benefits Agreement
Below is a summary of the terms and conditions of the employee benefits
agreement to be entered into between Aetna and New Aetna.
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Treatment of Employees and Plans in General
Under the employee benefits agreement, Aetna will generally retain
responsibility for individuals actively employed by Aetna in connection with
the domestic financial services business at the time of completion of the spin-
off and for all current and former International Business employees (which we
refer to as the "Aetna Employees"). New Aetna will generally be responsible for
individuals actively employed by New Aetna in the United States at the time of
the completion of the spin-off and for all former and retired United States
employees of Aetna or New Aetna (which we refer to as the "New Aetna
Employees").
As of the completion of the spin-off, New Aetna will assume sponsorship
of, and Aetna shall cease to be the sponsor of or a participating employer in,
those employee benefit plans that, prior to the spin-off, covered both Aetna
Employees and New Aetna Employees. During the year following the completion of
the spin-off, Aetna will generally maintain certain benefit plans for the
benefit of the U.S. Aetna Employees that, in the aggregate, are comparable to
the plans provided to such employees before the spin-off.
In connection with the spin-off, New Aetna will cause liabilities and
related assets in respect of Aetna Employees to be transferred from its
tax-qualified savings and retirement plans to similar plans to be adopted by
Aetna.
In addition, Aetna will hire, or be responsible for severance benefits
for, up to 235 information technology, headquarters-related management
services, tax, audit or financial controls employees who, prior to completion
of the spin-off, provided services to the financial services and international
businesses of Aetna.
Equity-Based Compensation
In connection with the spin-off and effective as of the completion of the
spin-off, New Aetna will equitably adjust options granted under the Aetna 1998
and 1996 Stock Incentive Plans as follows: Aetna options held by former
employees of Aetna and New Aetna (or their respective subsidiaries) and by
employees of New Aetna (or its subsidiaries) at the time of the spin-off and
the merger (collectively, "New Aetna Holders") will be equitably converted into
options of New Aetna with adjustments made both to the number of options and
the exercise prices to maintain the intrinsic in-or-out-of-the-money value of
the related Aetna options (the "New Aetna Holder Adjustment"). Aetna options
held by individuals who will be transferred to ING America (or its
subsidiaries) at the time of the spin-off and the merger ("Transferred
Holders") will also be equitably adjusted. Options held by Transferred Holders
that are in-the-money (which we refer to as In-the-Money Options) will be
cancelled in exchange for a cash payment equal to the aggregate in-the-money
amount (which we refer to as the Spread). Options held by Transferred Holders
that are not In the Money Options ("Out-of-the-Money Options") will be
cancelled; provided, however, that if such Out-of-the-Money Options were
initially granted in exchange for the optionee foregoing a cash bonus, such
options will be rescinded for the amount of the foregone bonus.
Aetna will retain responsibility for any accrued liabilities to Aetna
Employees for incentive units granted under the Aetna 1998 and 1996 Stock
Incentive Plans and under the Aetna Performance Excellence Unit Plan.
Transition Services Agreement
The transition services agreement relates to certain transitional services
to be provided by Aetna and New Aetna to each other after completion of the
spin-off. The purpose of the transition services agreement is to ensure that
both Aetna and New Aetna continue to provide each other services that are
required for a limited time to conduct their respective operations.
Terms and Conditions
The services that New Aetna will provide to Aetna include:
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o certain information technology, computing and telecommunications
services, such as production control, application availability,
desktop engineering and support, access control, server management,
network operations and switchboard as well as certain business
applications;
o other transition services, such as employee reimbursement processing
for business, accounts payable, payroll processing, general ledger
support, benefits and field office lease administration, purchasing;
and
o any other services that
- Aetna received in whole or part from New Aetna in the ordinary
course prior to the completion of the spin-off;
- are identified in writing by Aetna to New Aetna within 45
calendar days following the completion of the spin-off; and
- are reasonably needed in order to conduct the operations of
Aetna, as conducted in the ordinary course prior to the
completion of the spin-off, and the reasonable growth thereof;
and
o reasonable additional incidental services as Aetna needs to conduct
its business.
The services that Aetna will provide to New Aetna include:
o services with respect to information technology business applications
and systems;
o any other services that
- the business of New Aetna received in whole or part from Aetna
or its affiliates in the ordinary course prior to the completion
of the spin-off;
- are identified in writing by New Aetna to Aetna within 45
calendar days following the completion of the spin-off; and
- are reasonably needed in order to conduct the operations of the
business of New Aetna, as conducted in the ordinary course prior
to the completion of the spin-off, and the reasonable growth
thereof; and
o reasonable additional incidental services as New Aetna needs to
conduct its business.
Term
Each service will be provided for an initial period not to exceed 12
months after the completion of the spin-off, subject to certain exceptions.
However, the transition period for any service may be modified by mutual
consent of New Aetna and Aetna and may be extended under certain circumstances.
The transition services agreement provides that:
o the service recipient, may, without cause, upon 60 calendar days
written notice terminate the purchase of any or all services;
o New Aetna and Aetna will work in good faith and in a commercially
reasonable fashion to eliminate the service recipient's need to
receive the services from the service provider; and
o the parties will employ reasonable best efforts so that, by the
completion of the spin-off, and in any event not later than 45
calendar days thereafter, New Aetna and Aetna will jointly submit to
an operating committee one or more plans for eliminating the need for
each service.
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Pricing for Services
For each period in which it receives a service, the service recipient will
pay the service provider:
o its actual out-of-pocket cost for such service, including a
proportionate share of its overhead (if applicable), computed in
accordance with internal charge-back methodologies historically used
by the service provider (but excluding profit); or
o to the extent the pricing for such service is specified on a schedule
to the transition services agreement, the amount specified in or
calculated in accordance with the method applicable to such service
in the applicable schedule.
Service Levels; Cures; Remedies Upon Default
Except to the extent otherwise expressly provided in any schedule to the
transition services agreement:
o the service levels for any services will be equivalent to those
provided to the service provider's ongoing operations, or
o if the service provider and service recipient do not have comparable
operations with respect to a service, then the service level shall be
equivalent to the standards provided to the service recipient for the
12 months prior to the completion of the spin-off.
For any service that a schedule to the transition services agreement
identifies as critical to the service recipient's operations, if a breach is
not remedied within a reasonable period of time, then the service recipient may
outsource the provision of such service to a third party and the service
provider shall reimburse the service recipient for any increase in the cost of
such service.
Operating Committee
New Aetna and Aetna each will appoint three employees, at least one of
whom shall be a senior executive, to the "Operating Committee". The Operating
Committee will oversee the implementation and ongoing operation of the
transition services agreement and shall attempt in good faith to resolve
disputes between the parties.
Other Transitional Arrangements and Payments
Additionally, the transition services agreement provides that,
o upon its execution, Aetna shall reimburse New Aetna for all amounts
it has paid for goods or services ordered or received after March 31,
2000 for:
- purchase of information technology equipment, or licensing of
information technology software, primarily for use in the
financial services and international businesses; and
- tenant improvements on properties leased primarily for use in
the financial services and international businesses.
o New Aetna and Aetna will each pay 50% of the costs of physically
separating the premises at 151 Farmington Avenue, Hartford,
Connecticut.
o Upon execution of the transition services agreement, Aetna shall pay
New Aetna the net book value as of completion of the spin-off of the
building improvements in the Tower Building and the tenant
improvements on State House Square and field office properties
primarily used in the financial services and international businesses
of Aetna.
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o Aetna will bear the entire expense (other than New Aetna's internal
costs or any out of pocket expenses or other charges paid to New
Aetna's advisors or representatives, if any) of
- transferring, or obtaining new licenses with respect to,
software used primarily in the financial services and
international businesses of Aetna;
- additional licensing or similar fees paid by New Aetna to third
party vendors by reason of New Aetna providing any transition
service pursuant to the transition services agreement; and
- any other fees or costs associated with terminating, assigning
or transferring to the Aetna business any contract made use of
by the financial services and international businesses of Aetna.
Trademark Assignment
In general, Aetna will assign to New Aetna, effective on the date of the
spin-off, all marks (other than Aetna's Aeltus marks, certain of Aetna's
Chinese marks and certain other marks) as specified in the Distribution
Agreement.
Trademark Licensing Agreement
Grant of License
The trademark licensing agreement will provide that:
o New Aetna will grant to Aetna a non-exclusive, royalty-free right to
use those marks which Aetna uses in its financial services and
international businesses;
o during the three-year term of the trademark licensing agreement,
Aetna and its affiliates will generally be permitted to use the marks
only in connection with the financial services and international
businesses of Aetna;
o during the initial 18 months of the three-year term, ING may use the
marks also in connection with the offering, sale and distribution of
products of the financial services and international businesses of
Aetna together with products of ING and its other affiliates;
o during the remaining 18 months of the three-year term, and with
specified exceptions, Aetna and its affiliates will be permitted to
use the marks solely in association with certain specified ING
trademarks in a combined format;
o except as provided above, no mark can be used
- in connection with any other business of ING or any of its
affiliates, or
- as a composite with another trademark;
o New Aetna will retain the right to use the marks during the term in
connection with any action or activity, subject to restrictions on
competition set forth in the Distribution Agreement and described
above under "Non-Competition and Non-Solicitation"; and
o during the term, New Aetna will not license the marks in a manner
which would conflict with the business of Aetna as such business is
conducted at the time of the completion of the spin-off.
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Use, Ownership and Protection of the Marks
Under the trademark licensing agreement:
o Aetna and its affiliates will use the marks in accordance with all
applicable laws and regulations and in accordance with sound
trademark and trade name usage principles;
o Aetna will not challenge the validity of New Aetna's ownership of the
marks or contest the fact that its rights are only those of a
non-exclusive licensee of the marks;
o Aetna and its affiliates will, after expiration of the three-year
term, not use the marks in any jurisdiction in connection with health
care, financial services or otherwise; and
o Aetna will, during the three-year term, notify New Aetna immediately
of any conflicting uses, infringement or unfair competition arising
in connection with the use of the marks in the financial services and
international businesses of Aetna of which Aetna has actual
knowledge.
Indemnification
Aetna and New Aetna will indemnify one another against specified
liabilities arising in connection with the use and license of the licensed
marks.
Software Licensing Agreement
Pursuant to the software licensing agreement, New Aetna will grant to
Aetna a perpetual, royalty-free, non- exclusive, non-transferable, irrevocable
license to use, reproduce, display, perform, modify and create derivative works
of certain computer software, solely in connection with the business of Aetna.
Aetna will own all modifications created by or for Aetna, subject to New
Aetna's underlying rights.
Lease Agreement
Aetna and New Aetna will enter into a lease agreement, pursuant to which
New Aetna will lease the Tower Building and additional conference and training
annex office space at 151 Farmington Avenue, Hartford, Connecticut, to Aetna.
The lease provides for an initial annual rental payment of approximately $11.1
million, subject to annual escalation under certain circumstances. The initial
term of the lease is seven years with an option to renew the term for a period
expiring not later than June 30, 2009. If Aetna exercises this renewal, then it
will have two consecutive five year renewal options for all of the premises.
However, New Aetna will have the right to terminate each five year renewal
option provided it does so for the purposes of occupying the premises for its
own employees or the employees of its affiliates and subsidiaries.
City Place Agreement
Aetna will enter into a lease with New Aetna that will provide for New
Aetna to lease space in the CityPlace building (located at 185 Asylum Avenue,
Hartford, Connecticut 06103), with a term beginning on April 1, 2004 and ending
on October 31, 2008. The lease provides for an initial annual rental payment of
approximately $5.8 million (adjusted based on annual expense escalations since
1997). New Aetna will have the right to sublet any of these premises with the
consent, not to be unreasonably withheld, of Aetna.
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MANAGEMENT
Directors and Executive Officers of New Aetna
The following table shows information about the executive officers and
proposed directors of New Aetna. With the exception of Mr. Donaldson, who is,
and will continue to be, a director of New Aetna, the proposed directors listed
below are expected to begin serving as directors at the time of the spin-off
and the merger, assuming approval of the merger and related transactions by
Aetna's shareholders. The Chairman is elected and all other executive officers
listed below are appointed by the board of directors and hold office until the
next annual meeting of the board or until their successors are elected or
appointed. None of these officers and proposed directors have family
relationships with any other executive officer or proposed director. All ages
are as of August 31, 2000:
<TABLE>
<CAPTION>
Name Principal Position Age
---- ------------------ ---
<S> <C> <C>
William H. Donaldson..................... Chairman, President and Chief Executive Officer 69
Betsy Z. Cohen........................... Proposed Director 58
Barbara Hackman Franklin................. Proposed Director 60
Jeffrey E. Garten........................ Proposed Director 53
Jerome S. Goodman........................ Proposed Director 66
Earl G. Graves........................... Proposed Director 65
Gerald Greenwald......................... Proposed Director 64
Ellen M. Hancock......................... Proposed Director 57
Michael H. Jordan........................ Proposed Director 64
Jack D. Kuehler.......................... Proposed Director 68
Judith Rodin............................. Proposed Director 55
Frolly M. Boyd........................... Head of Group Insurance 49
John W. Coyle............................ Head of Business Operations 48
Arthur N. Leibowitz...................... Chief Medical Officer 53
L. Edward Shaw, Jr....................... General Counsel 56
Alan J. Weber............................ Chief Financial Officer 51
</TABLE>
William H. Donaldson. Mr. Donaldson became Chairman, President and Chief
Executive Officer of Aetna on February 25, 2000 and became Chairman, President
and Chief Executive Officer of our company on May 30, 2000. Mr. Donaldson has
been a director of Aetna or its affiliates since 1977. He will resign as
Chairman, President, Chief Executive Officer and Director of Aetna upon
completion of the merger and related transactions. In 1959, Mr. Donaldson
co-founded Donaldson, Lufkin & Jenrette, Inc. (investment banking) and more
recently served as Co- Founder and Senior Advisor of that firm from September
1995 until he joined Aetna. He served as Chairman and Chief Executive Officer
and a director of the New York Stock Exchange, Inc. from 1991 to 1995, was
formerly Chairman and Chief Executive Officer of Donaldson, Lufkin & Jenrette,
Inc. and is a co-founder of its former subsidiary, Alliance Capital Management
Corp. (investment management). Mr. Donaldson is Chairman of the Carnegie
Endowment for International Peace and a director of Bright Horizons Family
Solutions, Inc. (family support services) and Mail.com, Inc. (Internet service
provider). The founding Dean and Professor of Management at the Yale School of
Management, he also served as U.S. Under Secretary of State and Counsel to the
Vice President of the United States. Mr. Donaldson is a director of the Lincoln
Center for the Performing Arts and the Foreign Policy Association, is a trustee
of the Aspen Institute, the Marine Corps University Foundation and The New York
City Police Foundation, Inc., and is the Chairman of the Yale School of
Management Advisory Board.
Betsy Z. Cohen. Mrs. Cohen has been a director of Aetna or its affiliates
since 1994 and will resign as a director of Aetna upon completion of the merger
and related transactions. Mrs. Cohen has served as Chairman, Chief Executive
Officer and trustee of Resource Asset Investment Trust (real estate investment
trust) since August 1997. Mrs. Cohen also had served as a director of Hudson
United Bancorp (holding company), the successor to JeffBanks, Inc. where she
had been Chairman and Chief Executive Officer since its inception in 1981 and
also served as Chairman and Chief Executive Officer of its subsidiaries
Jefferson Bank (which she founded in 1974) and Jefferson Bank New Jersey (which
she founded in 1987) prior to JeffBanks merger with Hudson United Bancorp in
December 1999. From 1985 until 1993, Mrs. Cohen was a director of First Union
Corp. of Virginia (bank holding
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company) and its predecessor, Dominion Bankshares, Inc. In 1969, Mrs. Cohen
co-founded a commercial law firm and served as a Senior Partner until 1984.
Mrs. Cohen also is a director of The Maine Merchant Bank, LLC and is a trustee
of Corporate Office Properties Trust.
Barbara Hackman Franklin. Ms. Franklin served as a director of Aetna or
its affiliates from 1979 to February 1992 and since February 1993. She will
resign as a director of Aetna upon completion of the merger and related
transactions. Ms. Franklin is President and Chief Executive Officer of Barbara
Franklin Enterprises (private investment and international trade consulting
firm). From 1992 to 1993, she served as the 29th U.S. Secretary of Commerce.
Before her appointment, Ms. Franklin was President and Chief Executive Officer
of Franklin Associates (management consulting firm), which she founded in 1984.
Ms. Franklin also served four terms on the Advisory Committee for Trade Policy
and Negotiations, as Alternate Representative to the 44th Session of the United
Nations General Assembly, and as a public member of the Board of the American
Institute of Certified Public Accountants and of the Auditing Standards Board
and is the only non-CPA to receive the John J. McCloy award for contributions
to audit excellence. Ms. Franklin has also been a Senior Fellow of The Wharton
School of the University of Pennsylvania, an original Commissioner of the U.S.
Consumer Product Safety Commission and a Staff Assistant to the President of
the United States. Ms. Franklin is a Distinguished Visiting Fellow at the
Heritage Foundation; is active in numerous international organizations; and is
a trustee of the Economic Club of New York. She is a director of The Dow
Chemical Company (chemicals, plastics and agricultural products), MedImmune,
Inc. (biotechnology company), Milacron Inc. (plastics processing technologies
and industrial products for metalworking) and Watson Wyatt & Company (global
human capital consulting firm).
Jeffrey E. Garten. Mr. Garten has been a director of Aetna or its
affiliates since January 2000 and will resign as a director of Aetna upon
completion of the merger and related transactions. Mr. Garten is the Dean of
the Yale School of Management, a position he assumed in 1995. Mr. Garten held
senior posts on the White House Staff and at the U.S. State Department from
1973 to 1979. He joined Shearson Lehman Brothers (investment banking) in 1979
and served as Managing Director from 1984 to 1987. In 1987, Mr. Garten founded
Eliot Group, Inc. (investment banking) and served as President until 1990, when
he became Managing Director of The Blackstone Group (private merchant bank).
From 1992 to 1993, Mr. Garten was Professor of Finance and Economics at
Columbia University's Graduate School of Business. He was appointed U.S. Under
Secretary of Commerce for International Trade in 1993 and served in that
position until 1995. Mr. Garten is a director of Calpine Corporation (power
company) and a director of 37 Warburg Pincus mutual funds. He is the author of
A Cold Peace: America, Japan, Germany and the Struggle for Supremacy and The
Big Ten: Big Emerging Markets and How They Will Change Our Lives, and he writes
a monthly column for Business Week magazine. He also serves on the Board of
Directors of Aetna Foundation, Inc.
Jerome S. Goodman. Mr. Goodman has been a director of Aetna or its
affiliates since 1988 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mr. Goodman retired as Chairman of Travel
One (the nation's eighth-largest travel management company) upon the sale of
that firm to American Express Company on November 15, 1998. He had served as
Chairman of Travel One since 1971 and was the sole shareholder from 1971 to
1994. Mr. Goodman was a member of the New Jersey Sports and Exposition
Authority from 1991 to 1994 and its Chairman from 1992 to 1994. He also served
as Chairman, President and Chief Executive Officer of First Peoples Financial
Corporation (bank holding company) from 1987 to 1992 and President and Chief
Executive Officer of First Peoples Bank of NJ from 1983 to 1987. He was a
member of the Board of Directors of GBC Technologies, Inc. from 1992 to 1995
and a trustee of Resource Asset Investment Trust (real estate investment trust)
from 1997 to 1999. Mr. Goodman is a director of The Maine Merchant Bank, LLC,
and he also is a member of the Board of Trustees of the University of Science
at Philadelphia and served as its Chairman from 1988 to 1991.
Earl G. Graves. Mr. Graves has been a director of Aetna or its affiliates
since 1994 and will resign as a director of Aetna upon completion of the merger
and related transactions. Mr. Graves is Chairman and Chief Executive Officer of
Earl G. Graves, Ltd. (a multifaceted communications company) and is the
Publisher of Black Enterprise magazine, which he founded in 1970. Additionally,
since 1998, Mr. Graves is Managing Director of Black Enterprise/Greenwich
Street Corporate Growth Partners, L.P. Mr. Graves is a director of AMR
Corporation and its subsidiary, American Airlines, Inc., Federated Department
Stores Inc. (retailer) and Rohm and Haas Company (specialty chemicals and
plastics) and serves as a member of the Shareholders' Committee of
DaimlerChrysler AG
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(transportation products and financial and other services). Mr. Graves also is
a trustee of Howard University and is a member of the Executive Board and
Executive Committee of the National Office of the Boy Scouts of America,
serving as Vice President of Relationships and Marketing. He also serves on the
Board of Directors of Aetna Foundation, Inc.
Gerald Greenwald. Mr. Greenwald has been a director of Aetna or its
affiliates since 1993 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mr. Greenwald retired in July 1999 as
Chairman and Chief Executive Officer of UAL Corporation, the parent company of
United Airlines (UAL), having served in that position since July 1994. From
1979 to 1990, Mr. Greenwald held various executive positions with Chrysler
Corporation (automotive manufacturer), serving as Vice Chairman of the Board
from 1989 to May 1990 and as Chairman of Chrysler Motors from 1985 to 1988. In
1990, Mr. Greenwald was selected to serve as Chief Executive Officer of United
Employee Acquisition Corporation in connection with the proposed 1990 employee
acquisition of UAL. From 1991 to 1992, he was a Managing Director of Dillon
Read & Co., Inc. (investment banking) and, from 1992 to 1993, he was President
and Deputy Chief Executive Officer of Olympia & York Developments Ltd.
(Canadian real estate company). Mr. Greenwald then served as Chairman and
Managing Director of Tatra Truck Company (truck manufacturer in the Czech
Republic) from 1993 to 1994. Mr. Greenwald is a director of Time Warner Inc.
(media company). He also is a trustee of the Aspen Institute.
Ellen M. Hancock. Mrs. Hancock has been a director of Aetna or its
affiliates since 1995 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mrs. Hancock is Chairman of the Board and
Chief Executive Officer of Exodus Communications, Inc. (Internet system and
network management services). Mrs. Hancock joined Exodus on March 10, 1998 as
President and served in that position until June 7, 2000 when she was appointed
Chairman of the Board. She has served as Chief Executive Officer of Exodus
since September 10, 1998. Mrs. Hancock held various staff, managerial and
executive positions at International Business Machines Corporation
(information-handling systems, equipment and services) from 1966 to 1995. She
became a Vice President of IBM in 1985 and served as President, Communication
Products Division, from 1986 to 1988, when she was named General Manager,
Networking Systems. Mrs. Hancock was elected an IBM Senior Vice President in
November 1992, and in 1993 was appointed Senior Vice President and Group
Executive, which position she held until February 1995. Mrs. Hancock served as
an Executive Vice President and Chief Operating Officer of National
Semiconductor Corporation (semiconductors) from September 1995 to May 1996 and
served as Executive Vice President for Research and Development and Chief
Technology Officer of Apple Computer, Inc. (personal computers) from July 1996
to July 1997. Mrs. Hancock is a director of Colgate-Palmolive Company (consumer
products).
Michael H. Jordan. Mr. Jordan has been a director of Aetna or its
affiliates since 1992 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mr. Jordan retired on December 31, 1998 as
Chairman and Chief Executive Officer of CBS Corporation (media company), having
assumed that position with CBS (then Westinghouse Electric Corporation) in
1993. Currently, Mr. Jordan is serving as Co-Vice Chairman of Clariti
Telecommunications International Ltd. (international telecommunications), as
Chairman of Luminant Worldwide Corporation (Internet and electronic commerce
services) and as Chairman of the Board and Chief Executive Officer of
eOriginal, Inc. (electronic document services). From 1992 to 1993, he was a
partner with Clayton, Dubilier & Rice, Inc. (private investing firm). Mr.
Jordan retired in July 1992 as Chairman and Chief Executive Officer of the
PepsiCo International Foods and Beverages Division of PepsiCo, Inc. (snack
foods and beverages), having held various positions with PepsiCo since 1974.
Mr. Jordan also is a director of Dell Computer Corporation (personal
computers), MarketWatch.com, Inc. (Web-based provider of business news,
financial programming and analytical tools) and Young & Rubicam Inc. (global
marketing and communications).
Jack D. Kuehler. Mr. Kuehler has been a director of Aetna or its
affiliates since 1990 and will resign as a director of Aetna upon completion of
the merger and related transactions. Mr. Kuehler retired in August 1993 as Vice
Chairman and a director of International Business Machines Corporation
(information-handling systems, equipment and services), having held various
positions with IBM since joining that company in 1958. Prior to his appointment
as Vice Chairman of IBM in January 1993, Mr. Kuehler served as President from
1989 to 1993, as Vice Chairman from 1988 to 1989 and as Executive Vice
President from 1987 to 1988. Mr. Kuehler is a director of Arch Chemicals Inc.
(specialty chemicals), Mail.com, Inc. (Internet service provider) and The
Parsons Corporation (heavy
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construction and engineering services). He also is a member of the National
Academy of Engineering and a fellow of the Institute of Electrical and
Electronics Engineers, Inc.
Judith Rodin. Dr. Rodin has been a director of Aetna or its affiliates
since 1995 and will resign as a director of Aetna upon completion of the merger
and related transactions. Dr. Rodin became President of the University of
Pennsylvania in July 1994. Prior to assuming her current position, Dr. Rodin
had served as Provost of Yale University since 1992. Dr. Rodin joined the Yale
faculty in 1972, and held teaching and research positions of increasing
responsibility in the Department of Psychology. She became a Professor of
Psychology in 1979 and a Professor of Medicine and Psychiatry in 1985, and
served as Chair of the Department of Psychology from 1989 to 1991 and Dean of
the Graduate School of Arts and Sciences from 1991 to 1992 when she became
Provost. Dr. Rodin is a director of AMR Corporation and its subsidiary,
American Airlines, Inc., Electronic Data Systems Corporation (information
technology services) and Young & Rubicam Inc. (global marketing and
communications). She also is a trustee of the Brookings Institution.
Frolly M. Boyd. Ms. Boyd assumed her current position in April 1996. From
1993 to 1996, she served as Vice President, Group Products, for Aetna Health
Plans, and from 1993 to 1994, as Vice President, Small Business Markets and
Insurance Products, for Aetna Health Plans. Prior to moving to the health care
business, Ms. Boyd served as Vice President in the Investment and Financial
Services area from 1987 to 1993.
John W. Coyle. Mr. Coyle assumed his current position in June 2000, having
served as Vice President, International Health, from January to June 2000. From
1994 through the end of 1999, he served as Region Manager for, first, the West
Central Region of Aetna Health Plans and then the West Central Region and
Mid-Atlantic Region of New Aetna. Mr. Coyle joined Aetna in 1990 as Head of
International Health.
Arthur N. Leibowitz. Dr. Leibowitz has served in his current position with
New Aetna and, previously, with U.S. Healthcare, Inc., since 1986.
L. Edward Shaw, Jr. Mr. Shaw assumed his current position with New Aetna
in May 2000, having served Aetna as General Counsel since May 1999. From
January 1998 to May 1999, he served as Chief Corporate Officer for North
America of NatWest Group, from August 1997 to January 1998 as president of
NatWest Markets Group Inc. and from May 1996 to August 1997, he served as its
General Counsel. From 1985 to 1996, Mr. Shaw served as Executive Vice President
and General Counsel of The Chase Manhattan Corporation.
Alan J. Weber. Mr. Weber assumed his current position with New Aetna in
August, 2000, having served Aetna as Chief Financial Officer and head of
Strategy and Finance since August 1998. From July 1994 to July 1998, Mr. Weber
served as Chairman of Citibank International and from October 1988 to July
1994, he served as Executive Vice President, Financial Institutions and
Transaction Services, of Citibank, N.A.
Board of Directors
The New Aetna board of directors currently has four members. Prior to the
spin-off, Aetna will change the size and composition of the New Aetna board of
directors, and committees of the New Aetna board of directors will be
established. At the time of the spin-off, it is expected that all of the
current directors of New Aetna except Mr. Donaldson will resign from the New
Aetna board of directors. At that time, it is also expected that the 10
proposed directors listed above will join the New Aetna board and we will have
11 directors, one of whom, Mr. Donaldson, will be an executive officer and
director of Aetna and an executive officer of New Aetna.
Our board intends to hold six regularly scheduled meetings each year.
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Committees of the Board of Directors
Our board of directors is expected to establish audit, compensation and
organization, executive, investment and nominating and corporate governance
committees. In addition, our board of directors is expected to establish an
executive committee.
The functions and responsibilities of the standing Committees of our board
of directors are expected to be as described below.
o Audit Committee. This committee will be composed entirely of
non-employee directors. The committee will recommend the independent
auditors that the full board nominates for shareholder approval at
the annual meeting, review with the internal and independent auditors
the scope and results of their audits, review the company's financial
statements and other financial disclosures, and monitor developments
in accounting principles and methods used in presenting financial
results. The committee will also regularly meet privately with the
director of the company's internal audit staff and with the company's
independent accountants, and regularly discuss with management the
company's internal accounting control procedures and other internal
compliance programs.
o Committee on Compensation and Organization. This committee will be
composed entirely of non- employee directors. The committee will
administer the company's stock incentive plans and the annual
incentive plan, and review and make recommendations to the board with
respect to the compensation of certain senior executives. The
committee will also review the company's overall compensation policy
and make recommendations with respect thereto. Periodically, the
committee will review senior management succession plans and related
matters.
o Executive Committee. This committee will be authorized to act on
behalf of the full board between regular Board meetings, usually when
timing is critical.
o Investment Committee. This committee will be composed entirely of
non-employee directors and will oversee the management of the
company's investment portfolios and review investment policy and
strategy.
o Nominating and Corporate Governance Committee. The nominating
committee will be composed entirely of non-employee directors. The
nominating committee will review the qualifications of all candidates
for membership on the board and board committees. It will make
recommendations to the full board on director nominees, on the
structure, composition and function of board committees, on director
compensation, on the independence of non-employee directors and on
director retirement policy. It will review conflicts of interest that
may affect directors, as well as substantial changes in any
director's circumstances (e.g., change of employment), and advise the
board on procedures for assessing the performance of the board. The
nominating committee will also advise the board on all other matters
concerning corporate governance to the extent specific matters are
not the responsibility of other committees.
In recommending director nominees to the board, the nominating
committee is expected to solicit candidate recommendations from its
own members, other directors of the company and management. Although
the nominating committee will not specifically solicit suggestions
for possible candidates from shareholders, the nominating committee
is expected to consider candidates meeting the criteria described
below. (Suggestions, together with a description of the proposed
nominee's qualifications, other relevant biographical information and
an indication of the willingness of the proposed nominee to serve,
should be sent to the nominating committee in care of the Corporate
Secretary, Aetna U.S. Healthcare, Inc., 151 Farmington Avenue,
Hartford, Connecticut 06156.)
Nominees will be selected through a process based on criteria set
with the concurrence of the full board and reevaluated periodically.
The criteria include: the relevance of the candidate's experience to
the
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business of the company and its affiliates, enhancing diversity,
independence from conflict or direct economic relationship with the
company, and the ability of the candidate to attend meetings
regularly and devote an appropriate amount of effort in preparation
for those meetings.
Our board of directors may, from time to time, establish other committees
to facilitate the management of New Aetna.
It is anticipated that our audit committee will hold four regularly
scheduled meetings each year. Our board will establish meeting schedules for
other committees of the board.
Compensation of Directors
The cash and equity-based compensation of our non-employee directors has
not yet been determined.
Each non-employee director is expected to be eligible to participate in
our Director Charitable Award Program. The program will be funded by life
insurance on the lives of participating directors. Upon completing the spin-off
and the merger, each nominee will be fully vested in the program and each new
participating director will be fully vested in the program upon completion of
five years of service as a director (including years of service prior to
adoption of the program) or upon death or disability. Under the program, we
intend to make a charitable contribution of $1 million in ten equal annual
installments, with the first installment made following each participating
director's retirement from the board, allocated among up to five charitable
organizations recommended by the director. Beneficiary organizations
recommended by directors must be, among other things, tax exempt under Section
501(c)(3) of the Internal Revenue Code of 1986, as amended. Donations we
ultimately make are expected to be deductible from taxable income for purposes
of U.S. federal and other income taxes payable by us. Directors derive no
personal financial or tax benefit from the program since all insurance proceeds
and charitable deductions accrue solely to us. The program will not result in a
material cost to us.
We expect to provide $150,000 of group life insurance for our non-employee
directors. Optional medical, dental and long-term care coverage for
non-employee directors and their eligible dependents is expected to be
available to directors at a cost similar to that charged to our employees.
Stock Ownership of Directors and Executive Officers
All of the New Aetna stock is currently owned by Aetna and thus none of
our executive officers, directors or director nominees will own any New Aetna
common stock prior to the spin-off. To the extent directors, executive officers
or director nominees of New Aetna own shares of Aetna common stock at the time
of the spin-off, they will participate in the spin-off on the same terms as
other holders of Aetna common stock, receiving one share of stock in New Aetna
for each share of stock they own in Aetna. Options held by New Aetna Holders
under the Aetna 1998 and 1996 Stock Incentive Plans will be equitably converted
into options of New Aetna with adjustments made both to the number of options
and the exercise prices to maintain the intrinsic in-or-out-of-the-money value
of the related Aetna options ("Adjusted Options").
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The following table shows how much stock of Aetna each director, director
nominee and named executive officer of New Aetna beneficially owned as of June
30, 2000. No director, director nominee or executive officer of New Aetna
beneficially owned 1% or more of Aetna's total outstanding common stock, nor do
the directors, director nominees and executive officers as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
---------------------------------------------
Common
Common Stock
Name of Beneficial Owner Shares Percent Equivalents (1)
------------------------ -------- ------- --------------
<S> <C> <C> <C> <C>
William H. Donaldson........................................ 100,750 (2) * 3,300
Betsy Z. Cohen.............................................. 1,571 * 3,730
Barbara Hackman Franklin.................................... 3,455 * 3,650
Jeffrey E. Garten........................................... * 1,850
Jerome S. Goodman........................................... 23,708 (3) * 5,646
Earl G. Graves.............................................. 500 * 5,587
Gerald Greenwald............................................ 3,000 (4) * 8,133
Ellen M. Hancock............................................ 2,000 (5) * 6,735
Michael H. Jordan........................................... 3,000 * 6,803
Jack D. Kuehler............................................. 12,000 (6) * 9,054
Judith Rodin................................................ 101 * 7,404
John W. Coyle............................................... 29,002 (7) * --
Arthur N. Leibowitz......................................... 28,042 (8) * --
L. Edward Shaw, Jr.......................................... 59,482 (9) * --
Alan J. Weber............................................... 261,143 (10) * --
Directors and executive officers as a group (16 persons).... 586,804 (11) * 61,892
</TABLE>
________________
* Less than 1%.
Unless otherwise noted in the footnotes, each person currently has sole voting
and investment powers over the shares set forth above.
Notes to Beneficial Ownership Table
(1) Represents stock units issued under the Aetna Director Plan or its
predecessor plan, accrued stock units resulting from deferral of retainer
and attendance fees and stock units credited to certain directors in 1996
in connection with the elimination of the director retirement plan. Stock
units, which do not have voting rights, track the value of Aetna's common
stock and earn dividend equivalents that may be reinvested.
(2) Includes 100,000 shares of restricted stock that vest on March 1, 2001.
(3) Includes 18,734 shares held by Wellington Limited Partnership, of which
Mr. Goodman is a general partner. Excludes 50 shares held by his spouse,
as to which Mr. Goodman disclaims beneficial ownership.
(4) Represents shares held by his spouse, as to which Mr. Greenwald has no
voting or investment power.
(5) Held jointly with her spouse, as to which Mrs. Hancock shares voting and
investment powers.
(6) Held jointly with his spouse, as to which Mr. Kuehler shares voting and
investment powers.
(7) Include 25,708 shares that Mr. Coyle has the right to acquire within 60
days of June 30, 2000 upon exercise of stock options.
(8) Includes 27,252 shares that Dr. Leibowitz has the right to acquire within
60 days of June 30, 2000 upon exercise of stock options.
(9) Includes 57,482 shares that Mr. Shaw has the right to acquire within 60
days of June 30, 2000 upon exercise of stock options. Also includes 2,000
shares that Mr. Shaw held jointly with his spouse, as to which Mr. Shaw
shares voting and investment power.
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(10) Includes 10,000 shares of restricted stock that vest in equal installments
on August 1, 2000 and August 1, 2001. Also includes 233,586 shares that
Mr. Weber has the right to acquire within 60 days of June 30, 2000 upon
exercise of stock options.
(11) Directors and executive officers as a group have sole voting and
investment powers over 164,931 shares and share voting and investment
powers with respect to 16,000 shares. Included in the number of shares
shown in the table are 3,641 shares held under Aetna's Incentive Savings
Plan and beneficially owned by executive officers, and 399,232 shares that
directors and executive officers have the right to acquire within 60 days
of June 30, 2000 upon the exercise of stock options.
Executive Compensation
The following table shows projected annual salary and target bonus
information for our five most highly compensated executive officers as of
August 31, 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------
Year Salary($) Target Bonus($)(1)
---- ----------- ------------------
<S> <C> <C> <C>
William H. Donaldson, Chairman, President and Chief
Executive Officer......................................... 2000 $1,000,000 $1,000,000
Alan J. Weber, Chief Financial Officer..................... 2000 750,000 750,000
L. Edward Shaw, Jr., General Counsel....................... 2000 525,000 420,000
Arthur N. Leibowitz, Chief Medical Officer................. 2000 453,443 362,754
John W. Coyle, Head of Business Operations................. 2000 450,000 360,000
</TABLE>
_________________
(1) Upon consummation of the merger and transactions, it is anticipated that
bonus payments to the named executive officers will be paid at least at
target levels.
Stock Incentive Plan
We intend to implement the New Aetna Stock Incentive Plan (which we refer
to as the "Stock Plan"), the purposes of which are to promote the interests of
New Aetna and its shareholders, and to further align the interests of employees
of New Aetna and its subsidiaries and affiliates (which we refer to
collectively as "Eligible Employees") with New Aetna shareholders. In
conjunction with the adoption of the Stock Plan, New Aetna will continue to
implement the stock ownership guidelines for senior executives established by
Aetna. These guidelines will encourage and ensure that senior executives
acquire and maintain significant levels of stock ownership. Such stock
ownership aligns changes in shareholder value with meaningful changes in a
senior executive's financial situation. Options held by New Aetna Holders under
the Aetna 1998 and 1996 Stock Incentive Plans will be equitably converted into
options of New Aetna with adjustments made both to the number of options and
the exercise prices to maintain the intrinsic in-or-out-of-the-money value of
the related Aetna options.
Principal Features of the Stock Plan
Awards which may be granted under the Stock Plan include options, stock
appreciation rights (which we refer to as "SARs"), incentive stock and
incentive units and other stock-based awards (which we refer to collectively as
"Awards"). In addition, Awards under the Stock Plan may be granted as payment
in lieu of other compensation payable by New Aetna to an eligible employee.
Administration of Incentive Plan
A committee (which we refer to as the "Compensation Committee") consisting
of at least two directors of New Aetna chosen by the New Aetna Board of
Directors, each of whom is a "disinterested person" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934 (which we refer to in this
booklet as the "1934 Act") and an
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"outside director" within the meaning of Section 162 (m) of the Code will,
among other things, administer the Stock Plan, and will determine which
eligible employees will receive Awards and the terms and conditions of such
Awards. Directors who are not employees of New Aetna are not eligible to
receive Awards under the Stock Plan. The number of eligible employees who may
receive Awards under the Stock Plan will likely vary from year to year.
Shares Available for Issuance
Except as otherwise described in this paragraph and under "Adjustments"
below, the maximum number of shares of New Aetna common stock that may be
delivered under the Stock Plan is 7,000,000 plus (i) the number of shares of
New Aetna common stock to be delivered upon exercise of the Adjusted Options
and (ii) the number of shares required to satisfy any outstanding incentive
unit awards under the Existing Plan. In addition, the number of shares of New
Aetna common stock delivered under the Stock Plan with respect to (i) incentive
stock options (which we refer to in this booklet as "ISOs") shall not exceed
5,000,000 shares, (ii) incentive stock or incentive units shall not exceed
2,235,000 shares or (iii) other stock-based awards shall not exceed 1,000,000
shares. It is expected that the shares delivered under the Stock Plan will be
authorized but unissued shares of New Aetna. Shares of New Aetna common stock
subject to Awards that are forfeited, terminated, canceled or settled without
the delivery of New Aetna common stock under the Stock Plan will again be
available for Awards under the Stock Plan. Also, (x) shares tendered to New
Aetna in satisfaction or partial satisfaction of the exercise price of any
Award under either the Stock Plan and (y) remittances from option exercises
used to repurchase shares of New Aetna common stock on the open market will
increase the number of shares available for delivery pursuant to Awards granted
under the Incentive Plan. In addition, any shares of New Aetna common stock
underlying Awards granted in assumption of, or in substitution for, outstanding
awards previously granted by a company acquired by New Aetna, or with which New
Aetna combines (which we refer to in this booklet as "Substitute Awards") shall
not, except in the case of shares with respect to which Substitute Awards are
granted to Section 16 insiders as defined by Section 16 of the 1934 Act, be
counted against the shares available for delivery under the Stock Plan.
Adjustments
If a fundamental corporate event occurs, the Compensation Committee may,
as it deems appropriate, adjust the number and kind of shares that may be
delivered under the Stock Plan in the future and the number and kind of shares
and the grant, exercise or conversion price, if applicable, under all
outstanding Awards to preserve, or to prevent the enlargement of, the benefits
made available under the Stock Plan. Cash payments may also be made.
Grants Under the Stock Plan
Stock Options. The Compensation Committee may grant nonstatutory stock
options (which we refer to in this booklet as "NSOs") and ISOs. These options
may contain any terms that the Compensation Committee determines, except that
no eligible employee may be granted options for more than 800,000 shares of New
Aetna common stock in respect of any year in which the Stock Plan is in effect
(subject to adjustment as described above). Except in the case of Substitute
Awards or options granted in lieu of payment for compensation earned by an
eligible employee of New Aetna outside of the Stock Plan, the exercise price
shall not be less than 100% of the fair market value on the date of grant. The
Compensation Committee shall have the discretion to determine the terms and
conditions upon which options shall be exercisable.
SARs. SARs may be granted to eligible employees in addition to, or in
tandem with, an option or unrelated to an option. A SAR permits an eligible
employee to receive cash, shares or a combination of cash and shares, generally
based on the excess of the fair market value at the time of exercise over the
exercise price, which exercise price shall equal the fair market value on the
date the SAR was granted, provided that if an SAR is granted retroactively in
tandem with or in substitution for an option, the exercise price may be the
exercise price of such option. The term of each SAR will be fixed by the
Compensation Committee but may not exceed ten years from the date of the grant.
The Compensation Committee will have the discretion to determine all other
terms and conditions applicable to SARs, including when SARs shall be
exercisable.
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Incentive Units and Incentive Stock. The Compensation Committee may grant
an eligible employee incentive units which provide a contractual right to
receive shares of common stock or cash based on the fair market value of the
related shares at the end of a restricted period determined by the Compensation
Committee, which restricted period is generally expected to be three years or
more. The Compensation Committee also may grant shares of incentive stock that
are nontransferable and subject to substantial risk of forfeiture during the
applicable restricted period. The Compensation Committee shall have the
discretion to provide that Awards of incentive stock and incentive units will
vest, if at all, upon the (i) employee's continued employment during the
relevant restricted period as determined by the Compensation Committee and/or
(ii) attainment or partial attainment of performance objectives determined by
the Compensation Committee. In general, an employee who has been granted
incentive stock, the vesting restrictions of which relate solely to the passage
of time and continued employment, will from the date of grant have the benefits
of ownership in respect of such shares, including the right to receive
dividends and other distributions thereon, subject to the restrictions set
forth in the Stock Plan and in the instrument evidencing such Award. With
respect to any performance period, no executive officer may be granted Awards
of incentive stock or incentive units which vest upon the achievement of
performance objectives in respect of more than 500,000 shares of New Aetna
common stock or, if such Awards are settled in cash, the fair market value
thereof determined at the time of payment (each subject to adjustment as
described above).
With respect to any award of incentive stock or incentive units made to an
executive officer of New Aetna that the Compensation Committee determines will
vest based on the achievement of performance objectives, such performance
objectives shall relate to at least one of the following criteria, which may be
determined solely by reference to the performance of New Aetna, a subsidiary or
an affiliate (or any business unit thereof) or based on comparative performance
relative to other companies: (i) net income; (ii) earnings before income taxes;
(iii) earnings per share; (iv) return on shareholders' equity; (v) expense
management; (vi) profitability of an identifiable business unit or product;
(vii) ratio of claims to revenues; (viii) revenue growth; (ix) earnings growth;
(x) total shareholder return; (xi) cash flow; (xii) return on assets; (xiii)
pretax operating income; (xiv) net economic profit (operating earnings minus a
charge for capital); (xv) customer satisfaction; (xvi) provider satisfaction;
(xvii) employee satisfaction; (xviii) quality of networks; (xix) strategic
innovation; or (xx) any combination of the foregoing.
Other Stock-Based Awards. The Stock Plan also authorizes the Compensation
Committee to grant other stock- based awards to eligible employees and to grant
executive officers New Aetna common stock in lieu of cash payable as salary or
under any other bonus or incentive compensation plan of New Aetna.
Dividends and Dividend Equivalents. The Compensation Committee may provide
that any Award shall include dividends or dividend equivalents, payable in
cash, New Aetna common stock, securities or other property on a current or
deferred basis.
Effect on Awards of Termination of Employment
The Compensation Committee has broad discretion as to the specific terms
and conditions of each Award and any rules applicable thereto, including but
not limited to the effect thereon of the death, retirement or other termination
of employment of the eligible employee or the effect, if any, of a change in
control of New Aetna.
General
Award Agreement. The terms of each Award are to be evidenced by a written
instrument delivered to the eligible employee.
Withholding. The Awards are subject to applicable tax withholding by New
Aetna which may, to the extent permitted by the Compensation Committee, be
satisfied by the withholding of shares deliverable under the Stock Plan.
Transferability. Unless the Compensation Committee expressly permits
transfers for the benefit of members of the eligible employee's immediate
family or trust or similar vehicle for their benefit, Awards under the Stock
Plan may not be assigned or transferred except by will, the laws of descent and
distribution.
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Deferral. The Compensation Committee will have the discretion to determine
whether, to what extent, and under what circumstances cash, New Aetna common
stock, other securities, other Awards, other property, and other amounts
payable with respect to an Award will be deferred either automatically or at
the election of the holder thereof or of the Compensation Committee.
Amendment or Termination. The Board of Directors or the Compensation
Committee may terminate or suspend the Stock Plan at any time, but the
termination or suspension will not adversely affect any vested Awards then
outstanding under the Stock Plan. Unless terminated by action of the Board or
the Compensation Committee, no Award may be granted under the Stock Plan after
December 31, 2010. The Stock Plan may be amended or terminated at any time by
the Board of Directors, except that no amendment may be made without
shareholder approval if the Compensation Committee determines that such
approval is necessary to comply with any tax or regulatory requirement,
including any approval requirement which is a prerequisite for exemptive relief
from Section 16 of the 1934 Act, for which or with which the Compensation
Committee determines that it is desirable to qualify or comply; and, provided
further, that any amendment or action to reduce the exercise price of options
previously granted under the Stock Plan shall be subject to the approval of New
Aetna's shareholders (other than any such increase, modification or reduction
that may result from adjustments in connection with a fundamental corporate
event). The Compensation Committee may amend the term of any Award granted,
retroactively or prospectively, but no amendment may adversely affect any
vested Award without the holder's consent.
Effect on Other Compensation Programs
Nothing contained in the Stock Plan shall prevent New Aetna from adopting
or continuing in effect other compensation arrangements which may, but need
not, provide for the grant of options, incentive stock, and other types of
Awards provided for hereunder.
New Plan Benefits
In connection with the spin-off and the merger, Aetna options held by New
Aetna Holders will be converted into New Aetna options in accordance with the
New Aetna Holder Adjustment. It is not possible to determine the number of
Adjusted Options prior to the spin-off and the merger. Other Awards to be
granted under the Stock Plan have not yet been determined.
Certain Federal Income Tax Consequences
The options described above are intended to comply with the requirements
of the Code regarding the deductibility of certain performance based
compensation.
Under currently applicable federal income tax law, an eligible employee
will receive no taxable income upon the grant of an NSO or an ISO. When an
eligible employee exercises an NSO, the excess of the fair market value of the
shares on the date of exercise over the exercise price paid will be ordinary
income to the eligible employee and his or her employer will be allowed a
federal income tax deduction in the same amount. When an eligible employee
exercises an ISO while employed or within three months after termination of
employment (one year for disability), no income will be recognized upon
exercise of the ISO. If the eligible employee holds shares acquired for at
least one year after exercise and two years after the grant of the ISO, the
excess of the amount realized upon disposition of the shares over the exercise
price paid is treated as long-term capital gain for the eligible employee and
the eligible employee's employer is not allowed a federal income tax deduction.
A sale or other exchange of the underlying stock before the end of either of
the required holding periods will be a "disqualifying disposition" which will
generally result in the eligible employee being taxed on the gain derived from
an ISO as though it were an NSO and the eligible employee's employer will be
allowed a federal income tax deduction in the same amount. Special rules apply
if the exercise price is paid in shares.
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Annual Incentive Plan
We intend to implement the New Aetna Annual Incentive Plan (which we refer
to as the "Annual Plan"), the terms of which are summarized below.
Eligible Employees
All executive officers as described in Rule 3b-7 of the 1934 Act are
eligible to be named by the Board of Directors as participants for any fiscal
year. The Board of Directors shall select the executive officers (six people
expected as of the spin-off and the merger) who will participate in the Annual
Plan with respect to any fiscal year.
Performance Criteria
On or before March 31 of each fiscal year, the Compensation Committee
shall establish the performance objectives that must be attained in order for
the New Aetna to pay bonuses under the Annual Plan. Unless the Compensation
Committee determines at the time of grant not to qualify the award as
performance-based compensation under Section 162(m), the performance objectives
for awards made under the Annual Plan will be based upon one or more of the
following criteria, which may be determined solely by reference to the
performance of New Aetna, a subsidiary or an affiliate (or any business unit
thereof) or based on comparative performance relative to other companies: (i)
net income; (ii) earnings before income taxes; (iii) earnings per share; (iv)
return on shareholders equity; (v) expense management; (vi) profitability of an
identifiable business unit or product; (vii) ratio of claims to revenues;
(viii) revenue growth; (ix) earnings growth; (x) total shareholder return; (xi)
cash flow; (xii) return on assets; (xiii) pretax operating income, (xiv) net
economic profit (operating earnings minus a charge for capital); (xv) customer
satisfaction; (xvi) provider satisfaction; (xvii) employee satisfaction;
(xviii) quality of networks; (xix) strategic innovation; or (xx) any
combination of the foregoing.
Individual Limit
The maximum amount that can be paid to any participant under the Annual
Plan with respect to any fiscal year is $3,000,000. The Compensation Committee
has the discretion to pay amounts which are less than this maximum amount based
on individual performance or such other criteria as the Compensation Committee
shall deem relevant.
Administration
The Compensation Committee, to the extent necessary to comply with Section
162(m) of the Code and Section 16 of the 1934 Act, shall at all times be
comprised of at least two directors, each of whom is an "outside director" for
purposes of Section 162(m) and a "disinterested person" for purposes of Section
16, and shall administer and interpret the Annual Plan. Prior to making any
payment under the Annual Plan, the Compensation Committee shall certify in
writing that the performance objectives have been attained.
Amendment and Termination
The Compensation Committee may at any time amend, terminate or suspend the
Annual Plan. No adverse changes will be made retroactively, but may apply to
subsequent performance periods. The Annual Plan will not be effective with
respect to the calendar years ending after December 31, 2010 (except as to
awards earned prior to such date which are subsequently paid), unless otherwise
extended by action of the Compensation Committee.
Effect on Other Compensation Programs
Nothing contained in the Annual Plan shall prevent New Aetna from adopting
or continuing in effect other compensation arrangements.
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New Plan Award Table
Because the Annual Plan will not be effective until January 1, 2001,
awards under the Annual Plan have not yet been determined.
Certain Agreements
The obligations of Aetna under the agreements described below will be
assumed by New Aetna upon the completion of the spin-off and the merger.
Aetna has agreed to provide Mr. Donaldson with a salary of $1,000,000,
annual bonus opportunity of up to $2,000,000 for calendar year 2000 under the
Aetna Annual Incentive Plan and an additional bonus as determined by the Board
Committee on Compensation and Organization. On February 29, 2000, Mr. Donaldson
was granted a stock option for 500,000 shares of Aetna common stock. The
exercise price per share is $41.125 for 300,000 shares, $55.00 for 100,000
shares and $65.00 for 100,000 shares. Mr. Donaldson was also granted 100,000
shares of restricted Aetna common stock. The option and restricted common stock
will vest on March 1, 2001, subject to earlier vesting upon completion of the
spin-off and the merger or certain terminations of employment. If Mr. Donaldson
ceases to be Chairman and Chief Executive Officer of New Aetna following
completion of the spin-off and the merger, he will be entitled to payment of an
annual bonus for 2000, if not previously paid, of at least $1,500,000, and, if
such termination occurs after December 31, 2000, a pro rata annual bonus for
the year of termination. Aetna has agreed generally to reimburse Mr. Donaldson
for applicable excise taxes (including tax gross-up) incurred as a result of
payments made under his employment arrangement.
Mr. Weber has entered into an agreement with Aetna that provides that if
his employment is terminated by Aetna without cause, in lieu of participation
in Aetna's severance plan, he will be entitled to not less than 52 weeks of
cash compensation (calculated as annual base salary (currently $750,000) and
target annual bonus amount (currently $750,000)). Following a change-in-control
of Aetna prior to March 1, 2002, Mr. Weber will receive not less than 156 weeks
of cash compensation in the event of certain terminations of employment. Mr.
Weber's pension benefits are vested under Aetna's pension plan. Aetna has
agreed to make certain minimum contributions to Mr. Weber's cash balance
pension account, which Aetna believes are not greater than the value of the
pension benefits forgone by Mr. Weber as a result of his departure from his
previous employer. Aetna has agreed generally to reimburse Mr. Weber for
applicable excise taxes (including tax gross-up) incurred as a result of
payments made under the agreement.
Mr. Leibowitz has entered into an agreement with Aetna that provides that
if his employment is terminated by Aetna other than for "cause" or "disability"
or by him for "good reason," he will be entitled to receive the following
payments and benefits: (i) a payment in cash equal to three times the sum of
(A) the higher of his base salary as in effect immediately prior to the event
or circumstance upon which termination of employment is based and his annual
base salary (including amounts deferred for the applicable year and any
interest accrued thereon) in effect immediately prior to a specified date, and
(B) the then-current annual target bonus, 50% of such payment to be paid in a
lump sum on the date of termination and, subject to compliance with the
noncompetition provisions of the agreement, the remaining 50% to be paid in a
lump sum on the first anniversary of the date of termination of employment;
(ii) a pro rata portion, to the date of termination, of the higher of the
actual or target value of any contingent annual bonus award made to him for any
then uncompleted fiscal year under any bonus plan; (iii) for 36 months
immediately following the date of such termination, the continuation of
substantially the same welfare and pension benefits as he is receiving
immediately prior to termination of employment, subject to offset by any such
benefits received without cost during such 36-month period; and (iv) if he
would have become entitled to benefits under Aetna's postretirement health care
or life insurance plans during the 36-month period following the date of
termination of employment, the provision of such postretirement benefits
beginning on the later of (A) the date he would have become eligible for such
benefits and (B) the date on which the welfare benefits described in the
immediately preceding clause will terminate. The agreement also provides that,
in the event of such a termination, all outstanding equity-based awards granted
under Aetna's incentive plans will continue to vest for one year following the
date of termination of his employment and will remain exercisable through the
90-day period following such one-year period. In the event that his employment
under the agreement is terminated by reason of death or
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"disability," the agreement provides that he (or his estate or legal
representative) will continue to receive his base salary and annual bonus for
the one-year period following such termination. Aetna has agreed generally to
reimburse Mr. Leibowitz for applicable excise taxes (including tax gross-up)
incurred as a result of payments made under the agreement.
Mr. Coyle has entered into an agreement with Aetna that provides that if
his employment is terminated under circumstances that would call for benefits
under Aetna's severance plan, in lieu of participation in the severance plan,
he will be entitled to not less than 52 weeks of severance (calculated based on
annual base salary).
Mr. Shaw has entered into an agreement with Aetna that provides that if
his employment is terminated under circumstances that would call for benefits
under Aetna's severance plan, in lieu of participation in the severance plan,
he will be entitled to not less than 52 weeks of severance (calculated based on
annual base salary). In the event that Mr. Shaw's employment is terminated
under circumstances that would call for severance pay after a change-in-
control of Aetna, he is eligible to receive 156 weeks of salary continuation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through June 30, 2000, Aetna and its subsidiaries had paid approximately
$220 million for physician hospital services in the ordinary course of business
and a total of approximately $374,000 under four grants to the University of
Pennsylvania Health System, which includes the University of Pennsylvania
Medical Center and other hospitals and affiliates. Dr. Judith Rodin, a director
of Aetna and a proposed director of New Aetna, is the President of the
University of Pennsylvania, the owner and operator of the University of
Pennsylvania Health System.
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SECURITY OWNERSHIP OF AETNA AND NEW AETNA
Aetna beneficially and of record holds, and will hold before the spin-off,
all of the outstanding shares of New Aetna common stock. Holders of Aetna
common stock, including our directors and executive officers (see "Management
-- Stock Ownership of Directors and Executive Officers"), will receive one
share of New Aetna common stock for each share of Aetna common stock they hold
as of the close of business on or about , 2000. Except as otherwise noted,
the persons named in the table below has sole voting and investment power with
respect to all shares shown as beneficially owned by them. After giving effect
to the spin-off, to our knowledge, no person is expected to beneficially own 5%
or more of New Aetna common stock, except as set forth below:
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name and Address of Beneficial Owner Ownership (1) Percent (1)
------------------------------------ ----------------- -----------
<S> <C> <C> <C>
Sanford C. Bernstein & Co., Inc. 12,523,694 (2) 8.87%
767 Fifth Avenue
New York, New York 10153
Southeastern Asset Management, Inc. 8,469,800 (3) 6.00%
6410 Poplar Avenue, Suite 900
Memphis, Tennessee 38119
</TABLE>
__________________
(1) Based on the number of shares of Aetna common stock held by such person as
of June 30, 2000. The information was obtained from information supplied
by the shareholders on Schedules 13D and 13G.
(2) Of the reported shares, Sanford C. Bernstein & Co., Inc. reports that it
has sole voting power with respect to 6,554,526 shares, that it shares
voting power with respect to 1,394,863 shares and that it has sole
dispositive power with respect to all of the reported shares.
(3) Of the reported shares, Southeastern Asset Management, Inc. reports that
it has sole voting power with respect to 5,577,100 shares, that it shares
voting power with respect to 1,768,400 shares, that it has sole
dispositive power with respect to 6,701,400 shares and that it shares
dispositive power with respect to 1,768,400 shares.
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DESCRIPTION OF NEW AETNA CAPITAL STOCK
The following description of New Aetna capital stock is a summary of the
material terms thereof and is qualified in its entirety by reference to the
provisions of the New Aetna Amended and Restated Articles of Incorporation (the
"New Aetna Articles"), the New Aetna bylaws and the New Aetna rights agreement,
copies of which are filed as exhibits to the registration statement of which
this information statement is a part.
Authorized Capital Stock
Under the New Aetna Articles, the total number of shares of all classes of
shares that New Aetna has authority to issue is 825,000,000, having a par value
of $.01 each. The Articles establish 7,500,000 shares as Class A voting
preferred shares (the "Class A voting preferred stock") and 750,000,000 shares
as common shares ("New Aetna common stock"). The New Aetna Articles provide
that the New Aetna board of directors has the power to divide the remaining
67,500,000 shares into such classes and series, with such voting rights,
designations, preferences, limitations and special rights as the board shall
then fix and determine. No shares of New Aetna preferred stock are being issued
in connection with the spin-off. Approximately shares of New Aetna common
stock are expected to be distributed in the spin-off, based on the number of
shares of Aetna common stock outstanding on , 2000. All New Aetna common
stock received in the spin-off will be fully paid and non-assessable.
New Aetna Common Stock
The holders of New Aetna common stock are entitled to one vote per share
on all matters voted on by shareholders, including elections of directors.
Except as otherwise required by law, or by the provisions of the Class A voting
preferred stock, or provided in any resolution adopted by the New Aetna board
with respect to any subsequently created class or series of New Aetna shares,
the holders of the New Aetna common stock exclusively possess all voting power.
The Articles preclude cumulative voting in the election of directors. Subject
to any rights of any outstanding series of New Aetna preferred stock, the
holders of New Aetna common stock (i) are entitled to such dividends as may be
declared from time to time by the New Aetna board from funds available therefor
and (ii) upon liquidation are entitled to receive pro rata all assets of New
Aetna available for distribution to such holders.
The transfer agent and registrar for the New Aetna common stock will be
First Chicago Trust Company of New York.
Additional New Aetna Stock, including Preferred Stock
The New Aetna board is authorized to provide for the issuance of New Aetna
shares in one or more classes and series, including shares of preferred stock,
to establish the number of shares in each class and series, and to fix the
designations, powers, preferences and rights of each such class and series and
the qualifications, limitations or restrictions thereof. The Articles
authorize, and the New Aetna board has reserved for issuance, 7,500,000 shares
of the Class A voting preferred stock for issuance upon exercise of the
preferred share purchase rights of New Aetna (the "New Aetna Rights"). See "--
New Aetna Rights."
New Aetna Rights
The New Aetna board has determined that a dividend of one New Aetna Right
will be paid in respect of each share of New Aetna common stock to the holder
of record thereof at the time of the spin-off. Pursuant to the rights agreement
relating thereto, upon the occurrence of certain events, each New Aetna Right
entitles the registered holder to purchase from New Aetna one one-hundredth of
a share of Class A voting preferred stock at a price of $ per share (the
"Purchase Price"), subject to adjustment.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 15% or more of the then
outstanding shares of New Aetna common stock or (ii) 10 business days (or such
later date as may be determined by action of the New Aetna board prior to such
time as any person or group becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation
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of which would result in the beneficial ownership by a person or group of 15%
or more of the outstanding shares of New Aetna common stock (the earlier of
such dates being called the "Distribution Date"), the New Aetna Rights will be
evidenced by the Ownership Statement with respect to book-entry New Aetna
common stock, or if a certificate representing New Aetna common stock has been
requested and issued, then such certificate. The rights agreement provides
that, until the Distribution Date (or the earlier redemption or expiration of
the New Aetna Rights), (i) the New Aetna Rights will be transferred with and
only with the shares of New Aetna common stock, (ii) Ownership Statements and
certificates representing shares of New Aetna common stock will contain a
notation incorporating the terms of the New Aetna Rights by reference, and
(iii) transfer of any shares of New Aetna common stock will also constitute the
transfer of the New Aetna Rights associated with the shares of New Aetna common
stock so transferred. As soon as practicable following the Distribution Date,
separate certificates evidencing the New Aetna Rights ("Rights certificates")
will be mailed to holders of record of the New Aetna common stock as of the
close of business on the Distribution Date and such separate Rights
certificates alone will evidence the New Aetna Rights.
The Purchase Price payable, and the number of shares of Class A voting
preferred stock or other securities or property issuable, upon exercise of the
New Aetna Rights are subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision, combination
or reclassification of, the Class A voting preferred stock, (ii) upon the grant
to holders of the Class A voting preferred stock of certain rights or warrants
to subscribe for or purchase shares of Class A voting preferred stock at a
price, or securities convertible into Class A voting preferred stock with a
conversion price, less than the then-current market price of the shares of
Class A voting preferred stock, or (iii) upon the distribution to holders of
the shares of Class A voting preferred stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in shares of Class A voting preferred
stock) or of subscription rights or warrants (other than those referred to
above). The number of outstanding New Aetna Rights and the number of hundredths
of a share of Class A voting preferred stock issuable upon exercise of each New
Aetna Right are also subject to adjustment in the event of a split of the New
Aetna common stock or a dividend on the New Aetna common stock payable in
shares of New Aetna common stock, or subdivisions, consolidations or
combinations of the New Aetna common stock occurring, in any such case, prior
to the Distribution Date.
Shares of Class A voting preferred stock that may be purchased upon
exercise of the New Aetna Rights will not be redeemable. Each share of Class A
voting preferred stock will be entitled to a minimum preferential cumulative
quarterly dividend payment of 100 times the dividend declared per share of New
Aetna common stock whenever such dividend is declared. In the event of
liquidation, the holders of the Class A voting preferred stock will be entitled
to a minimum preferential liquidation payment equal to 100 times the payment
made per share of New Aetna common stock plus an amount equal to all accrued
and unpaid dividends and distributions thereon. Each share of Class A voting
preferred stock will have 100 votes, voting together with the New Aetna common
stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of New Aetna common stock are exchanged, each share of Class A
voting preferred stock will be entitled to receive an amount equal to 100 times
the amount received per share of New Aetna common stock.
Because of the nature of the dividend, liquidation and voting rights of
the Class A voting preferred stock, the value of the one one-hundredth interest
in a share of Class A voting preferred stock that may be purchased upon
exercise of each New Aetna Right should approximate the value of one share of
New Aetna common stock.
If any person or group of affiliated or associated persons becomes an
Acquiring Person, proper provision will be made so that each holder of a New
Aetna Right, other than New Aetna Rights beneficially owned by the Acquiring
Person (which will become void after such person becomes an Acquiring Person),
will, after such person becomes an Acquiring Person, have the right to receive
upon exercise, in lieu of Class A voting preferred stock, that number of shares
of New Aetna common stock having a market value of two times the exercise price
of the New Aetna Right (such right being referred to as a "Flip-in Right"). In
the event that, at any time on or after the date that any person has become an
Acquiring Person, New Aetna is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power is sold, proper provision will be made so that each holder of a New Aetna
Right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the New Aetna Right, that number of shares
of common stock of the acquiring company
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which at the time of such transaction has a market value of two times the
exercise price of the New Aetna Right (such right being referred to as
"Flip-over Right").
At any time after any person or group of affiliated or associated persons
becomes an Acquiring Person, and prior to the acquisition by such person or
group of 50% or more of the then outstanding shares of New Aetna common stock,
the New Aetna board may exchange the New Aetna Rights (other than New Aetna
Rights owned by such person or group, which will have become void after such
person became an Acquiring Person) for New Aetna common stock or Class A voting
preferred stock, in whole or in part, at an exchange ratio of one share of New
Aetna common stock, or one one-hundredth of a share of Class A voting preferred
stock (or of a share of another series of New Aetna preferred stock having
equivalent rights, preferences and privileges), per New Aetna Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1%. No
fractional shares of Class A voting preferred stock will be issued (other than
fractions which are integral multiples of one one-hundredth of a share of Class
A voting preferred stock, which may, at the election of New Aetna, be evidenced
by depositary receipts) and, in lieu thereof, an adjustment in cash will be
made based on the market price of the Class A voting preferred stock on the
last trading day prior to the date of exercise.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the then
outstanding shares of New Aetna common stock (the "Relevant Date"), the New
Aetna board may redeem the New Aetna Rights in whole, but not in part, at a
price of $.01 per New Aetna Right (the "Redemption Price"). The redemption of
the New Aetna Rights may be made effective at such time, on such basis and with
such conditions as the New Aetna board may determine, in its sole discretion.
Immediately upon any redemption of the New Aetna Rights, the right to exercise
the New Aetna Rights will terminate and the only right of the holders of New
Aetna Rights will be to receive the Redemption Price. After the Relevant Date,
the New Aetna Rights will no longer be redeemable.
For so long as the New Aetna Rights are redeemable, the Rights Agreement
between New Aetna and First Chicago Trust Company of New York, as Rights Agent
(the "Rights Agreement"), which is the agreement pursuant to which the New
Aetna Rights are to be issued, may be amended by the New Aetna board without
the consent of the holders of the New Aetna Rights, including an amendment to
lower (i) the threshold at which a person becomes an Acquiring Person, and (ii)
the percentage of shares of New Aetna common stock proposed to be acquired in a
tender or exchange offer that would cause the Distribution Date to occur. At
any time when the New Aetna Rights are no longer redeemable, the Rights
Agreement may be amended by the New Aetna board without the consent of the
holders of the New Aetna Rights except that no such amendment may (i) adversely
affect New Aetna Rights holders (other than the Acquiring Person and certain
affiliated persons), (ii) cause the Rights Agreement to become amendable other
than in accordance with this sentence or (iii) cause the New Aetna Rights again
to become redeemable.
The New Aetna Rights will not be exercisable until the Distribution Date.
The New Aetna Rights will expire on the close of business on the 10th
anniversary of the time of the spin-off unless extended or unless the New Aetna
Rights are earlier redeemed or exchanged by New Aetna. The Rights Agreement
provides that at least once every three years a committee of the board composed
of non-management directors will consider whether a continuation of the New
Aetna Rights remains in the best interests of New Aetna, its shareholders and
other relevant constituencies and, thereafter, report its conclusions to the
full board of New Aetna.
Until a New Aetna Right is exercised, the holder thereof, as such, will
have no rights as a shareholder of New Aetna, including, without limitation,
the right to vote or to receive dividends.
The distribution of the New Aetna Rights should not be taxable under the
Internal Revenue Code of 1986, as amended (the "Code") to New Aetna or its
shareholders. However, depending upon the circumstances, shareholders of New
Aetna may recognize taxable income under the Code in the event that the New
Aetna Rights become exercisable.
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Preemptive Rights
No holder of any shares of New Aetna of any class authorized at the time
of the spin-off will have any preemptive right to subscribe to any securities
of New Aetna of any kind or class.
Book Entry Shareholding
Certificates representing the New Aetna common stock will not be issued
unless requested in writing as set forth below. Holders of record of New Aetna
common stock will have credited to a book-entry account established for them
by, and maintained at, First Chicago Trust Company of New York (the registrar
and transfer agent for New Aetna common stock) the number of shares of New
Aetna common stock owned by them. Each holder of record will receive an
Ownership Statement from the registrar reflecting the opening balance in his or
her account promptly following the spin-off and, thereafter, promptly following
each transfer to or from such account. Shareholders may request the issuance of
a certificate representing the shares of New Aetna common stock owned of record
by them by writing to the New Aetna registrar and transfer agent.
Certain Antitakeover Provisions
The New Aetna Articles, the New Aetna bylaws and the rights agreement
contain certain provisions that could delay or make more difficult the
acquisition of New Aetna by means of a tender offer, a proxy contest or
otherwise. These provisions have been implemented to enable New Aetna to
develop its business in a manner that will foster its long-term growth without
disruption caused by the threat of a takeover not deemed by the New Aetna board
to be in the best interests of New Aetna and its shareholders.
New Aetna Rights
As described above, the New Aetna Rights will have certain anti-takeover
effects. The New Aetna Rights will cause substantial dilution to a person or
group that attempts to acquire New Aetna on terms not approved by the New Aetna
board, except pursuant to an offer conditioned on a substantial number of New
Aetna Rights being acquired. The New Aetna Rights should not interfere with any
merger or business combination approved by the New Aetna board, since the New
Aetna Rights may be redeemed by New Aetna at the Redemption Price prior to the
time that a person or group has become an Acquiring Person.
No Shareholder Action by Written Consent; Special Meetings
The New Aetna Articles provide that shareholder action may only be taken
at an annual or special meeting of shareholders and may not be taken by written
consent in lieu of a meeting. Under the Pennsylvania Business Corporation Law,
shareholders of New Aetna are not permitted to call, or to require that the
Chairman, the President or the New Aetna board or any other person call, a
special meeting of shareholders. The New Aetna bylaws provide that, subject to
the rights of holders of any series of New Aetna preferred stock to elect
additional directors under specified circumstances, special meetings of
shareholders can be called only by the Chairman or the President or by the New
Aetna board. Moreover, the business permitted to be conducted at any special
meeting of shareholders is limited to the business brought before the meeting
pursuant to the notice of meeting given by New Aetna.
The inability of the New Aetna shareholders to act by written consent,
together with provisions prohibiting shareholders from calling shareholder
meetings, may have the effect of delaying consideration of a shareholder
proposal until the next annual meeting. These provisions would also prevent the
holders of a majority of the voting power of the voting shares from
unilaterally using the written consent procedure to take shareholder action.
Moreover, a shareholder could not force shareholder consideration of a proposal
over the opposition of the Chairman, the President and the New Aetna board by
calling a special meeting of shareholders prior to the time the Chairman, the
President or a majority of the board believes such consideration to be
appropriate.
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Advance Notice Provisions for Shareholder Nominations and Shareholder
Proposals
The New Aetna bylaws establish an advance notice procedure for
shareholders to nominate candidates for election as directors or to bring other
business before annual meetings of shareholders of New Aetna (the "Shareholder
Notice Procedure").
Nominations for election to the New Aetna board may be made at an annual
meeting, or at a special meeting at which directors are to be elected, only by
or at the New Aetna board's direction or by a shareholder who has complied with
the Shareholder Notice Procedure. The New Aetna bylaws require that notice of a
shareholder nomination set forth certain information with respect to each
proposed nominee and the shareholder giving notice.
The New Aetna bylaws provide that at an annual meeting only such business
may be conducted as has been brought before the meeting by, or at the direction
of, the Chairman, the President or the New Aetna board or by a shareholder who
has given timely written notice to the Corporate Secretary of New Aetna of such
shareholder's intention to bring such business before such meeting in
compliance with the Shareholder Notice Procedure. The New Aetna bylaws provide
that only such business may be conducted at a special meeting as is specified
in the notice of meeting. Under the Shareholder Notice Procedure, a
shareholder's notice relating to the conduct of business at an annual meeting
must contain specified information about such business and about the proposing
shareholder.
The Shareholder Notice Procedure requires that notice of nominations or
proposals for substantive business must be received by New Aetna not later than
the 90th day before such meeting is to be held, or if later, the 10th day after
public announcement of the date of such meeting is made.
If the Chairman or other officer presiding at a meeting determines that an
individual was not nominated, or other business was not brought before the
meeting, in accordance with the Shareholder Notice Procedure, such individual
will not be eligible for election as a director, or such business will not be
conducted at such meeting, as the case may be.
By requiring advance notice of nominations by shareholders, the
Shareholder Notice Procedure will afford the New Aetna board an opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the New Aetna board, to inform shareholders about
such qualifications. By requiring advance notice of other proposed business,
the Shareholder Notice Procedure will provide a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the New Aetna board, will provide the New Aetna board with an
opportunity to inform shareholders, prior to such meetings, of any business
proposed to be conducted at such meetings, together with the New Aetna board's
position regarding action to be taken with respect to such business, so that
shareholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the New Aetna bylaws do not give the New Aetna board any power to
approve or disapprove shareholder nominations for the election of directors or
proposals for action, they may have the effect of precluding a contest for the
election of directors or the consideration of shareholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
New Aetna and its shareholders.
Potential Issuances of New Aetna Preferred Stock
The New Aetna Articles authorize the New Aetna board to establish, from
the 67,500,000 shares undesignated as to class or series, one or more classes
and series of New Aetna stock, including preferred stock, and to determine,
with respect to any class or series of New Aetna stock, the terms and rights of
such class or series, including, for example, (i) the designation of the class
or series; (ii) the number of shares of the class or series, which number the
New Aetna board may thereafter (except where otherwise provided in the
designation of any subsequently authorized class or series) increase or
decrease (but not below the number of shares thereof then outstanding); (iii)
whether
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dividends, if any, will be cumulative or noncumulative and the dividend rate of
the class or series; (iv) the dates on which dividends, if any, will be
payable; (v) the redemption rights and price or prices, if any, for shares of
the class or series; (vi) the terms and amounts of any sinking fund provided
for the purchase or redemption of shares of the class or series; (vii) the
amounts payable on shares of the class or series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of New
Aetna; (viii) whether the shares of the class or series will be convertible
into shares of any other class or series, or any other security, of New Aetna
or any other corporation, and, if so, the specification of such other class or
series or such other security, the conversion price or prices or rate or rates,
any adjustments thereof, the date or dates as of which such shares shall be
convertible and all other terms and conditions upon which such conversion may
be made; (ix) restrictions on the issuance of shares of the same class or
series or of any other class or series; and (x) the voting rights, if any, of
the holders of such class or series.
The authorized shares of New Aetna, including shares of preferred stock
and common stock, will be available for issuance without further action by New
Aetna's shareholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which New Aetna's
securities may be listed or traded. If the approval of New Aetna's shareholders
is not so required, the New Aetna board does not intend to seek shareholder
approval.
Although the New Aetna board has no intention at the present time of doing
so, it could issue a class or series of New Aetna preferred stock that could,
depending on the terms of such class or series, impede the completion of a
merger, tender offer or other takeover attempt that some, or a majority, of New
Aetna's shareholders might believe to be in their best interests or in which
shareholders might receive a premium for their Shares over the then-current
market price of such shares.
Potential Issuances of Rights to Purchase Securities
The New Aetna Articles grant the New Aetna board exclusive authority to
create and issue rights entitling the holders thereof to purchase from New
Aetna shares of capital stock or other securities and to elect to repurchase,
redeem, terminate or amend any such rights. The times at which and terms upon
which such rights are to be issued, repurchased, redeemed, terminated or
amended are to be determined exclusively by the New Aetna board and set forth
in the contracts or instruments that evidence such rights. The authority of the
New Aetna board with respect to such rights includes, but is not limited to,
determining (i) the purchase price of the capital stock or other securities or
property to be purchased upon exercise of such rights; (ii) provisions relating
to the times at which and the circumstances under which such rights may be
exercised or sold or otherwise transferred, either together with or separately
from any other shares or other securities of New Aetna; (iii) provisions which
adjust the number or exercise price of such rights or the amount or nature of
the shares, other securities or other property receivable upon exercise of such
rights in the event of a combination, split or recapitalization of any shares
of New Aetna, a change in ownership of New Aetna's shares or other securities
or a reorganization, merger, consolidation, sale of assets or other occurrence
relating to New Aetna or any shares of New Aetna, and provisions restricting
the ability of New Aetna to enter into any such transaction absent an
assumption by the other party or parties thereto of the obligations of New
Aetna under such rights; (iv) provisions which deny the holder of a specified
percentage of the outstanding securities of New Aetna the right to exercise
such rights and/or cause such rights held by such holder to become void; (v)
provisions which permit New Aetna to redeem or exchange such rights; and (vi)
the appointment of the rights agent with respect to such rights. This provision
is intended to confirm the New Aetna board's exclusive authority to issue,
repurchase, redeem, terminate or amend share purchase rights or other rights to
purchase shares or securities of New Aetna or any other corporation. See "--
New Aetna Rights."
Provisions Relating to Amendments to the New Aetna Articles and the New Aetna
Bylaws
Under the Pennsylvania Business Corporation Law, shareholders have the
right to adopt, amend or repeal the articles of incorporation and bylaws of a
corporation. However, the Business Corporation Law requires that any amendment
to the Articles also be approved by the board of directors. In addition, the
bylaws may be amended by the board of directors with respect to all matters not
exclusively reserved by law to the shareholders. Certain provisions of the New
Aetna bylaws, including the provision relating to the calling of special
meetings of shareholders and the advance notice provision for shareholder
nominations and shareholder proposals, may be
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amended or repealed by shareholders only with the approval of at least 80% of
the outstanding voting power of New Aetna.
Pennsylvania Anti-Takeover Statutes
Under Section 1715 of the Pennsylvania Business Corporation Law, which is
applicable to New Aetna, directors stand in a fiduciary relation to their
corporation and, as such, are required to perform their duties in good faith,
in a manner they reasonably believe to be in the best interests of the
corporation and with such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances. In discharging their duties, directors may, in considering the
best interests of their corporation, consider, among other things, to the
extent they deem appropriate: (a) the effects of any action upon any or all
groups affected by the action, including shareholders, employees, suppliers,
customers and creditors of the corporation, and upon communities in which
offices or other establishments of the corporation are located; (b) the
short-term and long-term interests of the corporation; (c) the resources,
intent and conduct (past, stated and potential) of any person seeking to
acquire control of the corporation; and (d) all other pertinent factors. In
considering the best interests of the corporation or the effects of any action,
directors are not required to regard the interests of the shareholders, or any
other group affected by the action, as dominant or controlling. Absent a breach
of fiduciary duty, a lack of good faith or self-dealing, any act of the board
of directors, a committee thereof or an individual director is presumed to be
in the best interests of the corporation. The Pennsylvania Business Corporation
Law expressly provides that the fiduciary duty of directors does not require
them to (i) redeem or otherwise render inapplicable outstanding rights such as
the New Aetna Rights; (ii) render inapplicable specified statutory
anti-takeover provisions, including Subchapter F of Chapter 25, which is
applicable to New Aetna; or (iii) take any action solely because of the effect
it may have on a proposed acquisition or the consideration to be received by
shareholders in such a transaction.
Commentary associated with Section 1715, and accepted by courts applying
the provisions of that Section to the facts of specific takeover attempts,
makes it clear that a purpose of Section 1715 is to legislatively overrule
certain judicial decisions in other jurisdictions named in the commentary which
have had the effect of limiting the flexibility of incumbent management in
contested takeovers. The provisions of Section 1715, and its construction by
the courts, could aid the New Aetna board in resisting a proposed acquisition
transaction which it believed not to be in the best interests of any one of the
corporate constituencies identified in the statute or otherwise not in the best
interests of New Aetna under any of the criteria identified in the statute that
the board believes are appropriate to consider.
New Aetna is subject to Subchapter F of Chapter 25 of the Pennsylvania
Business Corporation Law. Subchapter F applies to a transaction between a
publicly traded corporation and an interested shareholder (defined generally to
be any beneficial owner of 20% or more of the corporation's voting stock).
Subchapter F of Chapter 25 prohibits such a corporation from engaging in a
"business combination" (as defined in the Business Corporation Law) with an
interested shareholder unless (i) the board of directors of such corporation
gives approval to the proposed transaction or gives approval to the interested
shareholder's acquisition of 20% of the shares entitled to vote in an election
of directors of such corporation, in either case prior to the date on which the
shareholder first becomes an interested shareholder (the "Share Acquisition
Date"), (ii) the interested shareholder owns at least 80% of the stock of such
corporation entitled to vote in an election of directors and, no earlier than
three months after such interested shareholder reaches such 80% level, the
majority of the remaining shareholders approve the proposed transaction and
shareholders receive a minimum "fair price" for their shares (as set forth in
the Business Corporation Law) in the transaction and the other conditions of
Subchapter F of Chapter 25 of the Business Corporation Law are met, (iii)
holders of all outstanding shares of common stock approve the transaction, (iv)
no earlier than five years after the Share Acquisition Date, a majority of the
remaining shares entitled to vote in an election of directors approve the
transaction, or (v) no earlier than five years after the Share Acquisition
Date, a majority of all the shares approve the transaction, all shareholders
receive a minimum "fair price" for their shares (as set forth in the Business
Corporation Law) and the other conditions of Subchapter F of Chapter 25 of the
Business Corporation Law are met.
Under certain circumstances, Subchapter F of the Business Corporation Law
makes it more difficult for an interested shareholder to effect various
business combinations with a corporation for a five-year period following a
Share Acquisition Date. The provisions of Subchapter F should encourage persons
interested in acquiring New
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Aetna to negotiate in advance with the New Aetna board, since the higher
shareholder voting requirements would not be invoked if such person, prior to
acquiring 20% of New Aetna's Voting Shares, obtains the approval of the New
Aetna board for such acquisition or for the proposed business combination
transaction (unless such person acquires 80% or more of New Aetna's voting
shares in such transaction, excluding certain shares as described above).
Subchapter F of the Business Corporation Law will not prevent a hostile
takeover of New Aetna. It may, however, make more difficult or discourage a
takeover of New Aetna or the acquisition of control of New Aetna by a
significant shareholder and thus the removal of incumbent management. Any such
effect will be enhanced by the issuance of the New Aetna Rights. Some
shareholders may find this disadvantageous in that they may not be afforded the
opportunity to participate in takeovers that are not approved as required by
Subchapter F of the Business Corporation Law but in which shareholders might
receive, for at least some of their shares, a substantial premium above the
market price at the time of a tender offer or other acquisition transaction.
Section 2538 of Subchapter D of the Business Corporation Law imposes a
higher vote on certain transactions between an "interested shareholder" (as
defined in Section 2538(d) of the Business Corporation Law) and a publicly
traded corporation unless certain procedural requirements are satisfied.
Subchapter E of Chapter 25 of the Business Corporation Law requires a person
who acquires 20% or more of the shares of a publicly traded corporation to
offer to purchase the shares of any other shareholder at "fair value"
(determined as provided in Section 2547). Subchapter G of Chapter 25 of the
Business Corporation Law also contains certain provisions applicable to a
registered corporation which, under certain circumstances, permit such a
corporation to redeem "control shares" (as defined in the Business Corporation
Law) and remove the voting rights of control shares. Additionally, Subchapter H
of Chapter 25 of the Business Corporation Law requires the disgorgement of
profits by a "controlling person" (as defined in the Business Corporation Law).
The New Aetna Articles provide that Section 2538 of Subchapter D of the
Business Corporation Law, and Subchapters E, G and H of Chapter 25 of the
Business Corporation Law are not applicable to New Aetna.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Limitations on Liability
The New Aetna Articles provide that a director will not be personally
liable for monetary damages except to the extent such liability may not by law
be so limited. The Pennsylvania Business Corporation Law precludes a limitation
on liability (i) for any breach or failure to perform such director's duties
under law, which breach constituted self-dealing, willful misconduct or
recklessness; (ii) for responsibility or liability of a director under any
criminal statute; or (iii) for a director's liability for the payment of taxes
under any federal, state or local law. The New Aetna Articles contain a
limitation on an officer's liability to the same effect.
While the New Aetna Articles provide directors and officers with
protection against awards for monetary damages for breaches of their statutory
obligations, they do not eliminate such obligations. Accordingly, the New Aetna
Articles will have no effect on the availability of equitable remedies such as
an injunction or rescission based on a director's or officers' breach of his or
her statutory obligations.
Indemnification of Directors and Officers
The Pennsylvania Business Corporation Law provides, in general, that a
corporation may indemnify any person, including its directors, officers and
employees, who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than actions by or in the right of the
corporation) by reason of the fact that he or she is or was a representative
of, or was serving at the request of the corporation as a director, officer,
employee, agent or fiduciary of another corporation, partnership, employee
benefit plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with the action or proceeding unless the
court determines that the act or failure to act giving rise to the claim for
indemnification constituted willful misconduct or recklessness. The Business
Corporation Law permits similar
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indemnification in the case of actions by or in the right of the corporation.
In any case, to the extent that a representative of the corporation has been
successful on the merits or otherwise in defense of any claim, issue or matter,
he or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith. The
Business Corporation Law also provides that the indemnification permitted or
required by the law is not exclusive of any other rights to which a person
seeking indemnification may be entitled, provided that indemnification may not
be made in any case where the act is determined by a court to have constituted
willful misconduct or recklessness. The Business Corporation Law also provides
that a corporation may pay expenses (including attorneys' fees), incurred by a
party in an action subject to indemnification in advance of the final
disposition of the action upon receipt of an undertaking by the party on whose
behalf such expenses are paid to repay all amounts to the corporation in the
event it is ultimately determined that the party is not entitled to be
indemnified. New Aetna's Articles require indemnification of its directors and
officers, and the advancement of expenses, to the fullest extent permitted by
the Business Corporation Law (except with respect to the claims against the
corporation commenced by such a party) and permit, by action of the Board,
indemnification of, and advancement of expenses to, employees and agents of New
Aetna as determined by the Board of Directors in a particular case.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form 10 with the SEC with
respect to the shares of our common stock that Aetna shareholders will receive
in the spin-off. This information statement is a part of that registration
statement and, as allowed by SEC rules, does not include all of the information
you can find in the registration statement or the exhibits to the registration
statement. For additional information relating to us and the spin-off,
reference is made to the registration statement and the exhibits to the
registration statement. Statements contained in this information statement as
to the contents of any contract or document referred to are not necessarily
complete and in each instance, if the contract or document is filed as an
exhibit to the registration statement, reference is made to the copy of the
contract or other document filed as an exhibit to the registration statement.
Each statement is qualified in all respects by the relevant reference. We have
also filed a proxy statement on Schedule 14A with the SEC. The proxy statement
describes the transaction that is to voted on by Aetna's shareholders. We urge
you to read that proxy statement.
After the spin-off, we will file annual, quarterly and special reports,
proxy statements and other information with the SEC. We intend to furnish our
shareholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. The registration statement
is, and any of these future filings with the SEC will be, available to the
public over the Internet at the SEC's website at http://www.sec.gov. You may
read and copy any filed document at the SEC's public reference rooms in
Washington, D.C. at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, and at the SEC's regional offices in New York at 7 World Trade Center,
13th Floor, New York, NY 10048, and in Chicago at Suite 1400, Northwestern
Atrium Center, 14th Floor, 500 W. Madison Street, Chicago, IL 60661. Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms.
We maintain an Internet site at http://www. . This text is not
an active link and our website and the information contained on that site, or
connected to that site, is not incorporated into this information statement or
the registration statement.
108
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
------
Interim Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income -- Six Months Ended June 30, 2000 and 1999............................... F-2
Consolidated Balance Sheets -- June 30, 2000 and December 31, 1999......................................... F-3
Consolidated Statements of Shareholder's Equity -- Six Months Ended June 30, 2000 and 1999................. F-4
Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2000 and 1999........................... F-5
Condensed Notes to Interim Consolidated Financial Statements............................................... F-6
Audited Consolidated Financial Statements
Independent Auditors' Report............................................................................... F-24
Consolidated Statements of Income -- Years Ended December 31, 1999, 1998 and 1997.......................... F-25
Consolidated Balance Sheets -- December 31, 1999 and 1998.................................................. F-26
Consolidated Statements of Shareholder's Equity -- Years Ended December 31, 1999, 1998
and 1997............................................................................................... F-27
Consolidated Statements of Cash Flows -- Years Ended December 31, 1999, 1998 and 1997...................... F-28
Notes to Consolidated Financial Statements................................................................. F-29
Quarterly Data (Unaudited)................................................................................. F-77
</TABLE>
F-1
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
---------- ---------
(Millions)
<S> <C> <C>
Revenue:
Health care premiums.......................................... $10,909.0 $7,158.9
Other premiums................................................ 738.3 760.2
Administrative services only fees............................. 980.4 728.2
Net investment income......................................... 811.3 796.7
Other income.................................................. 46.2 60.3
Net realized capital gains (losses)........................... (41.2) 18.2
--------- --------
Total revenue.................................................. 13,444.0 9,522.5
--------- --------
Benefits and expenses:
Health care costs............................................. 9,432.9 6,091.6
Current and future benefits................................... 1,101.9 1,160.6
Operating expenses:
Salaries and related benefits............................... 1,160.6 793.6
Other....................................................... 1,223.1 849.1
Interest expense.............................................. 125.1 107.1
Amortization of goodwill and other acquired intangible assets. 218.4 203.8
Reductions of loss on discontinued products................... (146.0) (77.2)
--------- --------
Total benefits and expenses.................................... 13,116.0 9,128.6
--------- --------
Income from continuing operations before income taxes ......... 328.0 393.9
Income taxes:
Current....................................................... 125.7 163.5
Deferred...................................................... 21.2 19.0
--------- --------
Total income taxes............................................. 146.9 182.5
--------- --------
Income from continuing operations.............................. 181.1 211.4
Income from discontinued operations, net of tax................ 175.5 175.2
--------- --------
Net income..................................................... $ 356.6 $ 386.6
========= ========
</TABLE>
See Condensed Notes to Interim Consolidated Financial Statements.
F-2
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
(Millions)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................... $ 1,812.8 $ 1,628.7
Investment securities......................................... 15,342.1 16,179.1
Other investments............................................. 410.5 509.0
Premiums receivable, net...................................... 855.9 916.3
Other receivables, net........................................ 777.8 746.4
Accrued investment income..................................... 269.8 267.4
Investments under securities loan agreement................... 701.5 805.0
Deferred income taxes......................................... 118.0 157.6
Other assets.................................................. 377.0 284.4
--------- ---------
Total current assets........................................... 20,665.4 21,493.9
--------- ---------
Long-term investments ......................................... 377.6 513.9
Mortgage loans................................................. 2,040.3 1,877.2
Investment real estate......................................... 295.5 264.7
Reinsurance recoverables....................................... 803.5 788.2
Goodwill and other acquired intangible assets, net............. 8,188.1 8,655.0
Property and equipment, net.................................... 450.5 473.0
Deferred income taxes.......................................... 295.2 268.6
Other assets................................................... 227.1 217.9
Separate accounts assets....................................... 14,784.8 14,639.5
Net assets of discontinued operations.......................... 2,923.2 2,789.5
--------- ---------
Total assets................................................... $51,051.2 $51,981.4
========= =========
Liabilities and shareholder's equity
Current liabilities:
Health care costs payable..................................... $3,142.8 $3,238.7
Future policy benefits........................................ 997.6 1,106.0
Unpaid claims................................................. 455.9 442.0
Unearned premiums............................................. 397.7 473.6
Policyholders' funds.......................................... 937.4 963.7
Payable under securities loan agreement....................... 701.5 805.0
Short-term debt............................................... 1,342.6 1,725.0
Income taxes payable.......................................... 223.4 200.6
Accrued expenses and other liabilities........................ 1,627.4 1,489.1
--------- ---------
Total current liabilities...................................... 9,826.3 10,443.7
--------- ---------
Future policy benefits......................................... 8,238.7 8,447.1
Unpaid claims.................................................. 1,262.4 1,268.6
Policyholders' funds........................................... 2,993.8 3,467.4
Long-term debt................................................. 2,094.2 2,093.9
Other liabilities.............................................. 890.9 918.0
Separate accounts liabilities.................................. 14,784.8 14,639.5
--------- ---------
Total liabilities.............................................. 40,091.1 41,278.2
--------- ---------
Commitments and contingent liabilities (Notes 3 and 10)
Shareholder's equity:
Common stock and additional paid-in capital................... 3,735.2 3,719.3
Accumulated other comprehensive loss.......................... (484.2) (655.6)
Retained earnings............................................. 7,709.1 7,639.5
--------- ---------
Total shareholder's equity..................................... 10,960.1 10,703.2
--------- ---------
Total liabilities and shareholder's equity..................... $51,051.2 $51,981.4
========= =========
See Condensed Notes to Interim Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Loss
----------------------------
Common Stock
and Additional
Paid-in Gains (Losses) Foreign Retained
Six Months Ended June 30, 2000 Total Capital (1) on Securities Currency Earnings
------------------------------------- --------- -------------- -------------- -------- --------
(Millions)
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1999......... $10,703.2 $3,719.3 $(206.1) $(449.5) $7,639.5
Comprehensive income:
Net income........................... 356.6 356.6
Other comprehensive income,
net of tax:
Unrealized gains on securities
($81.4 pretax) (2)............... 52.9 52.9
Foreign currency
($136.8 pretax).................. 118.5 118.5
---------
Other comprehensive income........... 171.4
---------
Total comprehensive income............ 528.0
=========
Capital contributions from Aetna...... 15.9 15.9
Dividends to Aetna.................... (287.0) (287.0)
--------- -------- ------- ------- --------
Balances at June 30, 2000............. $10,960.1 $3,735.2 $(153.2) $(331.0) $7,709.1
========= ======== ======= ======= ========
Six Months Ended June 30, 1999
--------------------------------------
Balances at December 31, 1998......... $11,429.5 $3,674.0 $ 382.5 $(204.7) $7,577.7
Comprehensive loss:
Net income........................... 386.6 386.6
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(503.4) pretax) (2)............ (327.2) (327.2)
Foreign currency
($(121.0) pretax)................ (78.8) (78.8)
---------
Other comprehensive loss............. (406.0)
---------
Total comprehensive loss.............. (19.4)
---------
Capital contributions from Aetna...... 7.1 7.1
Dividends to Aetna.................... (105.0) (105.0)
--------- -------- ------- ------- --------
Balances at June 30, 1999............. $11,312.2 $3,681.1 $ 55.3 $(283.5) $7,859.3
========= ======== ======= ======= ========
</TABLE>
----------
(1) There were 250 million shares of Aetna Services, Inc. common stock, par
value $.01, and 275 million shares of Aetna U.S. Healthcare Inc. common
stock, par value $.005, authorized at June 30, 2000. All outstanding
common stock of Aetna Services, Inc. and Aetna U.S. Healthcare Inc. was
owned by Aetna Inc. at June 30, 2000 and December 31, 1999.
(2) Net of reclassification adjustments.
See Condensed Notes to Interim Consolidated Financial Statements.
F-4
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
-------- --------
(Millions)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 356.6 $ 386.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from discontinued operations......................... (175.5) (175.2)
Depreciation and amortization (including investment
discounts and premiums)................................... 279.9 217.4
Net realized capital (gains) losses......................... 41.2 (18.2)
Changes in assets and liabilities:
(Increase) decrease in accrued investment income.......... (3.6) 57.3
(Increase) decrease in premiums due and other
receivables.......................................... (38.8) 16.9
Increase (decrease) in income taxes....................... (8.9) 0.7
Net (increase) decrease in other assets and other
liabilities.......................................... (211.7) 248.6
Decrease in health care and insurance liabilities ........ (454.8) (651.9)
Other, net................................................ 35.2 8.9
Discontinued operations, net................................... 665.3 200.6
-------- --------
Net cash provided by operating activities...................... 484.9 291.7
-------- --------
Cash flows from investing activities:
Proceeds from sales and investment maturities of:
Debt securities available for sale.......................... 6,952.1 6,995.7
Equity securities........................................... 264.3 71.9
Mortgage loans.............................................. 392.1 189.5
Investment real estate...................................... 12.0 31.2
Other investments........................................... 8,680.5 5,232.9
NYLCare Texas............................................... 420.0 --
Cost of investments in:
Debt securities available for sale.......................... (6,459.6) (6,220.1)
Equity securities........................................... (110.1) (64.7)
Mortgage loans.............................................. (211.1) (29.2)
Investment real estate...................................... (7.9) (29.4)
Other investments........................................... (8,498.0) (4,997.5)
Acquisition of NYLCare health care business................... -- (48.8)
Increase in property and equipment............................ (38.3) 17.7
Other, net.................................................... (109.0) (42.7)
Discontinued operations, net................................... 719.5 (495.9)
-------- --------
Net cash provided by investing activities...................... 2,006.5 610.6
-------- --------
Cash flows from financing activities:
Deposits and interest credited for investment contracts....... 134.1 199.3
Withdrawals of investment contracts........................... (525.5) (845.6)
Repayment of long-term debt................................... -- (29.7)
Net decrease in short-term debt............................... (403.5) (195.6)
Capital contributions from Aetna.............................. 15.9 7.1
Dividends paid to Aetna....................................... (157.0) (155.0)
Other, net.................................................... 13.5 (312.7)
Discontinued operations, net................................... (366.2) 554.1
-------- --------
Net cash used for financing activities......................... (1,288.7) (778.1)
-------- --------
Net increase in cash and cash equivalents of discontinued
operations................................................ (1,018.6) (258.8)
-------- --------
Net increase (decrease) in cash and cash equivalents........... 184.1 (134.6)
Cash and cash equivalents, beginning of period................. 1,628.7 1,101.0
-------- --------
Cash and cash equivalents, end of period....................... $1,812.8 $ 966.4
======== ========
Supplemental cash flow information:
Interest paid................................................. $ 136.9 $ 96.2
Income taxes paid............................................. 140.3 374.5
</TABLE>
See Condensed Notes to Interim Consolidated Financial Statements.
F-5
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
The accompanying consolidated financial statements included the accounts of
Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare") and its subsidiaries as of
, 2000 ("New Aetna"). New Aetna is a wholly-owned subsidiary
of Aetna Inc. ("Aetna").
On July 20, 2000, Aetna announced that it had reached a definitive
agreement to sell its Aetna Financial Services and Aetna International
businesses to ING Groep N.V. ("ING") and, in an integrated transaction, that it
planned to spin-off New Aetna, a standalone health company comprised of the
Health Care (including its group life and disability insurance business) and
Large Case Pensions businesses, to its shareholders. On ,
2000, Aetna's shareholders are expected to approve the sale of Aetna's
Financial Services and International businesses to ING. Following the sale, New
Aetna will be named Aetna Inc. (Refer to Note 11.)
The businesses to be sold to ING are reflected as discontinued operations,
since New Aetna will be the successor of Aetna for accounting purposes. The
accompanying disclosures have been updated to reflect the transactions
described above.
Basis of Presentation
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are unaudited. All
significant intercompany balances have been eliminated. Certain
reclassifications have been made to the 1999 financial information to conform
to the 2000 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 consolidated financial statements should be read in
conjunction with our audited historical financial statements and the related
notes included elsewhere in this information statement. 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.
The accompanying consolidated financial statements reflect the accounts of
New Aetna as a subsidiary of Aetna (refer to Note 11), subject to corporate
general and administrative expense allocations as described in Note 2 to the
1999 Consolidated Financial Statements contained elsewhere in this document.
Such information does not necessarily reflect the financial position or results
of operations of New Aetna as a separate, standalone entity.
New Accounting Standard
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk
On January 1, 2000, New Aetna adopted Statement of Position 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk, issued by the American Institute of Certified Public
Accountants. This statement 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. The adoption of this
standard did not have a material effect on New Aetna's financial position or
results of operations.
F-6
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Future Accounting Standard
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, further guidance related to
accounting for derivative instruments and hedging activities was provided when
the FASB issued FAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133. This
standard, as amended, 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. As amended by FAS
No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, these standards are
effective for New Aetna's financial statements beginning January 1, 2001, with
early adoption permitted. The impact of FAS No. 133, as amended, on New Aetna's
financial statements will vary based on certain factors including future
interpretive guidance from the FASB, the extent of New Aetna's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments. New Aetna is evaluating the impact of the adoption of this
standard and currently does not believe that this standard will have a material
effect on New Aetna's financial position or results of operations.
2. Recent Developments
New Aetna's Medicare+Choice contracts with the federal government are
renewed for a one-year period each January 1. On June 29, 2000, New Aetna
notified the Health Care Financing Administration ("HCFA") of its intent to
exit a number of Medicare service areas affecting approximately 340,000
members, or approximately 50 percent of New Aetna's total current Medicare
membership. The termination of these Medicare+Choice contracts will become
effective on December 31, 2000. New Aetna may elect to continue to provide
Medicare benefits to members in these service areas, in accordance with HCFA
regulations and guidelines, if legislative or regulatory changes are made that
would increase payments from HCFA to New Aetna within six months following this
notification date.
During the remainder of 2000, New Aetna will continue to monitor any
legislative or regulatory changes that might increase payments under applicable
Medicare+Choice contracts and then make a final determination, as permitted
under HCFA regulations, depending on the level of any such reimbursement
increase. New Aetna will also, at such time, evaluate the need for the
establishment of liabilities related to the withdrawal from applicable Medicare
service areas, including employee termination benefits and related costs, as
well as evaluate any impairment related to goodwill still separately
identifiable with such service areas, which is considered recoverable pending a
final decision to exit. Goodwill associated with such Medicare service areas
was approximately $275 million at June 30, 2000.
F-7
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions
On August 6, 1999, New Aetna acquired from The Prudential Insurance
Company of America ("Prudential") the Prudential health care business ("PHC")
for approximately $1 billion. The acquisition was accounted for as a purchase.
In addition to recording the assets and liabilities acquired at fair value, the
purchase price allocation at the acquisition date included: (1) an asset of
$130 million, representing the fair value adjustment of a reinsurance agreement
(discussed below), primarily reflecting the net benefits to be received from
Prudential over the life of the agreement; (2) a liability of $129 million,
representing a fair value adjustment for the unfavorable component of the
contracts underlying the acquired medical risk business and (3) an asset of $21
million, representing the above- market compensation component related to
supplemental fees to be received under New Aetna's agreement to service
Prudential's administrative services only ("ASO") contracts (discussed below).
During the first quarter 2000, a liability of $15 million was recorded as
part of the purchase price allocation related to New Aetna's plan to exit
certain leased facilities of the acquired PHC businesses, currently expected to
be completed by March 31, 2001. The purchase price does not reflect any
employee termination benefits for positions that may be eliminated. Such
amounts, which currently are not reasonably estimable, will be expensed as
incurred.
For the six months ended June 30, 2000, New Aetna recorded asset
amortization of $13 million pretax, related to the fair value adjustment of the
reinsurance agreement; liability amortization of $22 million pretax, related to
the fair value adjustment of the unfavorable component of the contracts
underlying the acquired medical risk business and asset amortization of $11
million pretax, related to the above-market compensation component related to
the supplemental fees under the ASO contracts.
New Aetna and Prudential entered into a reinsurance agreement for which
New Aetna paid a premium. Premium expense recognized for the six months ended
June 30, 2000 was $7 million pretax. Under the agreement, Prudential has agreed
to indemnify New Aetna from certain health insurance risks that arise following
the closing by reimbursing New Aetna for 75% of medical costs (as calculated
under the agreement) of PHC in excess of certain threshold medical loss ratio
levels through 2000 for substantially all the acquired medical and dental risk
business. The medical loss ratio threshold was 83.5% for August 6, 1999 through
December 31, 1999 and is 84% for January 1, 2000 through December 31, 2000.
During the six months ended June 30, 2000, reinsurance recoveries under this
agreement (reflected as a reduction of current and future benefits) were $46
million pretax. The premium is subject to adjustment if medical costs of PHC
are below these threshold medical loss ratio levels. Prudential has also agreed
to indemnify New Aetna for unanticipated increases in medical claims payable
existing at the acquisition date for a period of up to nine months following
the closing.
New Aetna also agreed to service Prudential's ASO contracts following the
closing. Prudential is terminating its ASO business and has retained New Aetna
to service these contracts during the run off period, but generally no later
than June 30, 2001. In exchange for servicing the ASO business, Prudential is
remitting fees received from its ASO members to New Aetna, as well as paying
certain supplemental fees. The supplemental fees are fixed in amount and
decline over a period ending 18 months following the closing. During the six
months ended June 30, 2000, New Aetna recorded total fees for servicing the
Prudential ASO business of approximately $204 million pretax, including
supplemental fees of approximately $84 million pretax, which was net of the
asset amortization related to the above-market compensation component related
to the supplemental fees under the ASO contracts described above.
In connection with the PHC acquisition, New Aetna agreed with the U.S.
Department of Justice and the State of Texas to divest certain Texas HMO/POS
and other related businesses ("NYLCare Texas") acquired by New Aetna as part of
the 1998 acquisition of New York Life Insurance Company's health care business.
Pursuant to this agreement, on March 31, 2000, New Aetna completed the sale of
NYLCare Texas to Blue Cross and Blue Shield of Texas, a division of Health Care
Service Corporation, for approximately $420 million in cash. The sale resulted
in an after-tax capital loss of $35 million which was previously recognized in
the fourth quarter of 1999. The after-tax loss included operating losses from
October 1, 1999 through closing. The results of operations of NYLCare Texas
were not material to the Health Care segment or to New Aetna's consolidated
results of operations.
F-8
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions (Continued)
During the first quarter 2000, New Aetna acquired the remaining minority
ownership interest in InteliHealth Inc., which distributes health care
information principally through its Internet web site and sells health products
to consumers. The aggregate purchase price was not material.
4. Investments
Investment securities at June 30, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
(Millions)
<S> <C> <C>
Debt securities available for sale (amortized
cost $15,582.5 and $16,327.2)........................... $15,123.7 $15,811.5
Equity securities (cost $171.1 and $216.4)................... 123.6 151.2
Other investment securities.................................. 94.8 216.4
--------- ---------
Total investment securities.................................. $15,342.1 $16,179.1
========= =========
</TABLE>
Net investment income includes amounts allocable to experience-rated
contractholders of $154 and $185 million for the six months ended June 30, 2000
and 1999, respectively. Interest credited to contractholders is included in
current and future benefits.
Net realized capital gains (losses) allocable to experience-rated
contractholders of $(29) million and $14 million for the six months ended June
30, 2000 and 1999, respectively, were deducted from net realized capital gains
(losses) as reflected on the Consolidated Statements of Income, and an
offsetting amount is reflected on the Consolidated Balance Sheets in
policyholders' funds.
As of June 30, 2000 and December 31, 1999, 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
were as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------- --------------------------
Total Recorded Specific Total Recorded Specific
Investment Reserves Investment Reserves
-------------- -------- --------------- --------
(Millions)
<S> <C> <C> <C> <C>
Supporting discontinued products..... $157.5 $22.2 $158.9 $22.2
Supporting experience-rated products. 66.1 8.5 66.9 8.8
Supporting remaining products........ 52.1 1.1 48.4 1.1
------ ----- ------ ------
Total impaired loans................. $275.7(1) $31.8 $274.2(1) $32.1
====== ===== ====== =====
</TABLE>
----------
(1) Includes impaired loans of $113.5 million and $109.0 million at June 30,
2000 and December 31, 1999, respectively, for which no specific reserves
are considered necessary.
F-9
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
The activity in the specific and general reserves for the six months ended
June 30, 2000 and 1999 is summarized below:
<TABLE>
<CAPTION>
Supporting Supporting Supporting
Discontinued Experience- Remaining
Products Rated Products Products Total
------------ -------------- ---------- -----
(Millions)
<S> <C> <C> <C> <C>
Balance at December 31, 1999.............. $28.9 $15.6 $1.4 $45.9
Credited to net realized capital losses... -- (0.3) (0.1) (0.4)
----- ----- ---- -----
Balance at June 30, 2000.................. $28.9 $15.3 $1.3 $45.5 (1)
===== ===== ==== =====
Balance at December 31, 1998.............. $29.5 $29.6 $4.5 $63.6
Principal write-offs ..................... (0.6) (4.4) 0.4 (4.6)
----- ----- ---- -----
Balance at June 30, 1999.................. $28.9 $25.2 $4.9 $59.0 (1)
===== ===== ==== =====
</TABLE>
----------
(1) Total reserves at June 30, 2000 and 1999 include $31.8 million and $41.5
million of specific reserves, respectively, and $13.7 million and $17.5
million of general reserves, respectively.
Income earned (pretax) and cash received on the average recorded
investment in impaired loans was as follows:
<TABLE>
Six Months Ended June 30, 2000 Six Months Ended June 30, 1999
-------------------------------------- --------------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
Loans Earned Received Loans Earned Received
-------- ------ -------- -------- ------ --------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products...... $157.9 $ 5.2 $ 5.2 $159.4 $ 6.0 $ 6.0
Supporting experience-rated products.. 71.9 3.3 3.3 93.9 4.3 4.2
Supporting remaining products......... 42.6 5.1 5.6 29.8 2.8 2.8
------ ----- ----- ------ ----- -----
Total................................. $272.4 $13.6 $14.1 $283.1 $13.1 $13.0
====== ===== ===== ====== ===== =====
</TABLE>
5. Supplemental Cash Flow Information
Significant noncash investing and financing activities included
acquisition of real estate through foreclosures of mortgage loans amounting to
$4 million for the six months ended June 30, 1999. There were no foreclosures
of mortgage loans for the six months ended June 30, 2000.
F-10
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Additional Information -- Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss related to changes in
unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders and discontinued products) were as follows:
<TABLE>
Six Months Ended June 30,
-------------------------
2000 1999
------ -------
(Millions)
<S> <C> <C>
Unrealized holding gains (losses) arising during the period (1)... $48.5 $(270.1)
Less: reclassification adjustment for gains (losses) and other
items included in net income (2)............................. (4.4) 57.1
----- -------
Net unrealized gains (losses) on securities....................... $52.9 $(327.2)
===== =======
</TABLE>
----------
(1) Pretax unrealized holding gains (losses) arising during the period were
$74.6 million and $(415.6) million for 2000 and 1999, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $(6.8) million and $87.8 million for 2000 and 1999,
respectively.
7. Discontinued Products
New Aetna discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under New Aetna's accounting for these discontinued
products, a reserve for anticipated future losses from these products was
established and 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 New Aetna's results of operations. New Aetna'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. The current reserve reflects management's
best estimate of anticipated future losses.
The factors contributing to changes in the reserve for anticipated future
losses are: operating income or loss, realized capital gains or losses and
mortality gains or losses. Operating income or loss is equal to revenue less
expenses. Realized capital gains or losses reflect the excess (deficit) of
sales price over (below) the carrying value of assets sold. Mortality gains or
losses reflect the mortality and retirement experience related to SPAs. A
mortality gain (loss) occurs when an annuitant or a beneficiary dies sooner
(later) than expected. A retirement gain will occur on some contracts if an
annuitant retires later than expected (a loss if an annuitant retires earlier
than expected).
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 that was used to calculate the
reserve. 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 June 30,
2000, the receivable from continuing products, net of related deferred taxes
payable of $72 million on the accrued interest income, was $380 million. At
December 31, 1999, the receivable from continuing products, net of related
deferred taxes payable of $67 million on accrued interest income, was $464
million. These amounts were eliminated in consolidation.
F-11
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Discontinued Products (Continued)
Results of discontinued products were as follows (pretax, in millions):
Charged
(Credited) to
Reserve for
Six months ended June 30, 2000 Results Future Losses Net(1)
------------------------------------------ ------- ------------- ------
Net investment income..................... $223.9 $ -- $223.9
Net realized capital gains................ 0.1 (0.1) --
Interest earned on receivable from
continuing products.................. 16.3 -- 16.3
Other income.............................. 18.3 -- 18.3
------ ------- ------
Total revenue............................ 258.6 (0.1) 258.5
------ ------- ------
Current and future benefits............... 229.7 21.9 251.6
Operating expenses........................ 6.9 -- 6.9
------ ------- ------
Total benefits and expenses.............. 236.6 21.9 258.5
------ ------- ------
Results of discontinued products.......... $ 22.0 $ (22.0) $ --
====== ======= ======
Charged
(Credited) to
Reserve for
Six months ended June 30, 1999 Results Future Losses Net(1)
------------------------------------------ ------- ------------- ------
Net investment income..................... $ 243.8 $ -- $243.8
Net realized capital gains................ 18.3 (18.3) --
Interest earned on receivable from
continuing products.................. 16.9 -- 16.9
Other income.............................. 15.3 -- 15.3
------- ------- ------
Total revenue............................ 294.3 (18.3) 276.0
------- ------- ------
Current and future benefits............... 257.1 12.4 269.5
Operating expenses........................ 6.5 -- 6.5
------- ------- ------
Total benefits and expenses.............. 263.6 12.4 276.0
------- ------- ------
Results of discontinued products.......... $ 30.7 $ (30.7) $ --
======= ======= ======
---------------
(1) Amounts are reflected in the June 30, 2000 and 1999 Consolidated
Statements of Income, except for interest earned on the receivable from
continuing products which was eliminated in consolidation.
F-12
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Discontinued Products (Continued)
Assets and liabilities supporting discontinued products at June 30, 2000
and December 31, 1999 were as follows (1):
June 30, 2000 December 31, 1999
------------- -----------------
(Millions)
Assets:
Debt securities available for sale........... $4,319.2 $4,533.0
Mortgage loans............................... 806.9 768.8
Investment real estate ...................... 116.9 112.7
Other investment securities.................. 442.5 453.9
-------- --------
Total investments............................. 5,685.5 5,868.4
Investments under securities loan agreement.. 131.0 243.8
Current and deferred income taxes............ 69.6 134.1
Receivable from continuing products (2)...... 452.0 530.6
Other........................................ 20.8 82.6
-------- --------
Total assets.................................. $6,358.9 $6,859.5
======== ========
Liabilities:
Future policy benefits....................... $4,517.1 $4,566.0
Policyholders' funds......................... 687.2 902.1
Reserve for anticipated future losses on
discontinued products.................... 1,023.6 1,147.6
Payable under securities loan agreement...... 131.0 243.8
-------- --------
Total liabilities............................. $6,358.9 $6,859.5
======== ========
---------------
(1) Assets supporting the discontinued products are distinguished from other
continuing operations assets.
(2) The receivable from continuing products was eliminated in consolidation.
At June 30, 2000 and December 31, 1999, net unrealized capital losses on
available-for-sale debt securities are included above in other assets and are
not reflected in consolidated shareholder's equity. The reserve for anticipated
future losses is included in future policy benefits on the Consolidated Balance
Sheets.
The reserve for anticipated future losses on discontinued products
represents the present value (at the risk-free rate at the time of
discontinuance, consistent with the duration of the liabilities) of the
difference between the expected cash flows from the assets supporting
discontinued products and the cash flows expected to be required to meet the
obligations of the outstanding contracts. Calculation of the reserve for
anticipated future losses requires projection of both the amount and the timing
of cash flows over approximately the next 30 years, including consideration of,
among other things, future investment results, participant withdrawal and
mortality rates and the cost of asset management and customer service. Since
1993, there have been no significant changes to the assumptions underlying the
calculation of the reserve related to the projection of the amount and timing
of cash flows.
The projection of future investment results considers assumptions for
interest rates, bond discount rates and performance of mortgage loans and real
estate. Mortgage loan assumptions represent management's best estimate of
current and future levels of rent growth, vacancy and expenses based upon
market conditions at each reporting date. The performance of real estate assets
has been consistently estimated using the most recent forecasts available.
During 1997, a bond default assumption was included to reflect historical
default experience, since the bond portfolio increased as a percentage of the
overall investment portfolio and reflected more bond credit risk, concurrent
with the decline in the commercial mortgage loan and real estate portfolios.
F-13
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Discontinued Products (Continued)
The previous years' actual participant withdrawal experience is used for
the current year assumption. Prior to 1995, New Aetna used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the
"Society"). In 1995, the Society published the 1994 Uninsured Pensioner's
Mortality table which has been used since then.
New Aetna's assumptions about the cost of asset management and customer
service reflect actual investment and general expenses allocated over invested
assets. Since inception, the expense assumption has increased as the level of
fixed expenses has not declined as rapidly as the liabilities have run off.
The activity in the reserve for anticipated future losses on discontinued
products for the six months ended June 30, 2000 was as follows (pretax):
(Millions)
----------
Reserve at December 31, 1999.............. $1,147.6
Operating income.......................... 9.9
Net realized capital gains................ 0.1
Mortality and other....................... 12.0
Reserve reduction......................... (146.0)
--------
Reserve at June 30, 2000.................. $1,023.6
========
Management reviews the adequacy of the discontinued products reserve
quarterly and, as a result, $95 million ($146 million pretax) of the reserve
was released in the second quarter of 2000 primarily due to favorable
performance related to certain equity investments, favorable mortality and
retirement experience and the decrease in size of the overall bond portfolio
which decreased default risk. A similar review in the second quarter of 1999
resulted in New Aetna's release of $50 million ($77 million pretax) of the
discontinued products reserve. The current reserve reflects management's best
estimate of anticipated future losses.
8. Debt and Guarantee of Debt Securities
During the periods presented, New Aetna had a revolving credit facility in
an aggregate amount of $1.5 billion with a worldwide group of banks. This
facility will not continue following the spin-off. Various interest rate
options were available under this facility and any borrowings matured on the
expiration date of the applicable credit commitment. New Aetna paid facility
fees ranging from 0.065% to 0.2% per annum, depending upon its long-term senior
unsecured debt rating. The facility fee at June 30, 2000 was at an annual rate
of 0.08%. There were no borrowings under this facility as of June 30, 2000.
This facility also supported New Aetna's commercial paper borrowing program.
Under this credit facility, New Aetna was required to maintain shareholder's
equity, excluding net unrealized capital gains and losses (accumulated other
comprehensive income (loss)), of at least $7.5 billion.
During the periods presented, New Aetna also had an additional revolving
credit facility in an aggregate amount of $500 million with a worldwide group
of banks. This facility will not continue following the spin-off. Various
interest rate options were available under this facility and any borrowings
matured on the expiration date of the applicable credit commitment. New Aetna
paid facility fees ranging from 0.07% to 0.25% per annum, depending upon its
long-term senior unsecured debt rating. The facility fee at June 30, 2000 was
at an annual rate of 0.08%. There were no borrowings under this facility as of
June 30, 2000. This facility also supported New Aetna's commercial paper
borrowing program. Under this credit facility, New Aetna was required to
maintain shareholder's equity, excluding net unrealized capital gains and
losses (accumulated other comprehensive income (loss)), of at least $7.5
billion.
The amount of dividends paid to New Aetna by its domestic insurance and
HMO subsidiaries at June 30, 2000 without prior approval by state regulatory
authorities was limited to approximately $452 million in the aggregate.
F-14
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Segment Information
Summarized financial information for New Aetna's principal operations for
the six months ended June 30, was as follows:
<TABLE>
Large Case Corporate Discontinued
Six Months Ended June 30, 2000 Health Care Pensions and Other (1) Operations Total
---------------------------------------------- ----------- ---------- ------------- ------------ ---------
(Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers.............. $12,583.7 $ 90.2 $ -- $ -- $12,673.9
Net investment income......................... 344.8 460.7 5.8 -- 811.3
--------- ------ ------- ------ ---------
Total revenue excluding realized capital gains
(losses)................................... $12,928.5 $550.9 $5.8 $ -- $13,485.2
========= ====== ======= ====== =========
Operating earnings (losses) (2)............... $ 205.8 $ 31.0 $(118.1) $ -- $ 118.7
Other items (3)............................... (14.6) 94.9 -- -- 80.3
Realized capital gains (losses), net of tax... (21.0) 5.2 (2.1) -- (17.9)
--------- ------ ------- ------ ---------
Income (loss) from continuing operations...... 170.2 131.1 (120.2) -- 181.1
Income from discontinued operations, net of
tax........................................ -- -- -- 175.5 175.5
--------- ------ ------- ------ ---------
Net income (loss)............................. $ 170.2 $131.1 $(120.2) $175.5 $ 356.6
========= ====== ======= ====== =========
</TABLE>
<TABLE>
Large Case Corporate Discontinued
Six Months Ended June 30, 1999 Health Care Pensions and Other (1) Operations Total
---------------------------------------------- ----------- ---------- ------------- ------------ -----
(Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers.............. $8,630.9 $ 76.3 $ 0.4 $ -- $ 8,707.6
Net investment income......................... 279.2 514.9 2.6 -- 796.7
--------- ------ ------- ------ ---------
Total revenue excluding realized capital gains
(losses)................................... $8,910.1 $591.2 $ 3.0 $ -- $ 9,504.3
========= ====== ======= ====== =========
Operating earnings (losses) (2)............... $ 210.3 $ 43.9 $(104.8) $ -- $ 149.4
Other item (3)................................ -- 50.2 -- -- 50.2
Realized capital gains (losses), net of tax... (3.7) 19.2 (3.7) -- 11.8
--------- ------ ------- ------ ---------
Income (loss) from continuing operations...... 206.6 113.3 (108.5) -- 211.4
Income from discontinued operations, net of
tax........................................ -- -- -- 175.2 175.2
--------- ------ ------- ------ ---------
Net income (loss)............................. $ 206.6 $113.3 $(108.5) $175.2 $ 386.6
========= ====== ======= ====== =========
</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 is comprised of net income (loss) excluding realized
capital gains and losses and any other items. While operating earnings is
the measure of profit or loss used by New Aetna's management when
assessing performance or making operating decisions, it does not replace
operating income or net income as a measure of profitability.
(3) Other items include an after-tax charge of $14.6 million related to the
New Jersey insolvency assessment in the Health Care segment in 2000 and an
after-tax benefit of $94.9 million and $50.2 million from reductions of
the reserve for anticipated future losses on discontinued products in the
Large Case Pensions segment in 2000 and 1999, respectively.
F-15
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities
Commitments
In connection with the sale of its property-casualty operations in 1996,
New Aetna vacated, and the purchaser subleased, at market rates for a period of
eight years, the space that New Aetna occupied in the CityPlace office facility
in Hartford. In 1996, New Aetna 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 New Aetna under the lease and future
rentals expected to be received by New Aetna. Lease payments are charged to
this facilities reserve as they are made and will continue to be charged to
this reserve over the remaining lease term. At June 30, 2000 and December 31,
1999, the balance in this facilities reserve was $260 million and $269 million,
respectively.
Litigation
Shareholder Litigation
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 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 Aetna 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 Aetna's medical claim
reserves. Aetna 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
Aetna, Ronald E. Compton and Richard L. Huber. Aetna and the remaining
individual defendants filed a motion to dismiss the second amended complaint,
and the Court denied that motion in March 1999. On August 9, 1999, the Court
entered an order certifying as plaintiffs those persons who purchased Aetna
common stock on the market from March 6, 1997 through 7:00 a.m. on September
29, 1997. Merits discovery was completed in early 2000. On January 31, 2000
plaintiffs filed expert reports. On February 3, 2000, defendants filed motions
for summary judgment. Also on February 3, 2000, plaintiffs moved for permission
to file a third amended complaint. On March 20, 2000, the Court granted
plaintiffs leave to file a third amended complaint and adopted a revised
schedule. Pursuant to the revised schedule, defendants filed new summary
judgment motions in May 2000 and the parties conducted expert discovery which
is scheduled to be completed in the third quarter of 2000. Trial is scheduled
to begin in the fourth quarter of 2000. Defendants are defending the actions
vigorously.
Four purported shareholder class action complaints were filed in the
Superior Court of Connecticut, Hartford County, alleging in substance that
Aetna and its directors breached fiduciary duties to shareholders in responding
to a February 24, 2000 letter from WellPoint Health Networks, Inc. and ING
America Insurance Holdings, Inc. which had invited discussions concerning a
possible transaction. These actions were filed on behalf of George Schore,
Michael Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on
March 7, 2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on
March 23, 2000. A fifth, substantially similar purported class action complaint
was filed on behalf of Barnett Stepak on March 28, 2000 in the Supreme Court of
New York, New York County. Each action seeks various forms of relief, including
unspecified damages and equitable remedies. On July 26, 2000 the Connecticut
Court ordered consolidation of the four Connecticut actions. This litigation is
in the preliminary stages. Defendants intend to defend these actions
vigorously.
F-16
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation
New Aetna is involved in several purported class action lawsuits that are
part of a wave of similar actions targeting the health care industry and, in
particular, the conduct of business by managed care companies.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on April 19, 1999 by Joseph
Maio, Jo Ann Maio and Gary Bender seeking various forms of relief, including
unspecified damages and treble damages, from Aetna and a number of its
subsidiaries for alleged violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), the Pennsylvania Unfair Trade Practices and
Consumer Protection Law, and state common law. On September 29, 1999, the Court
dismissed the RICO claims with prejudice and dismissed the state law claims for
lack of subject matter jurisdiction. The Court held, among other things, that
the plaintiffs lacked standing to pursue the federal RICO claims because they
had not alleged an injury in fact. Plaintiffs have appealed the dismissal to
the United States Court of Appeals for the Third Circuit. On August 11, 2000,
the Third Circuit rendered its decision upholding the dismissal of the case.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on October 4, 1999 by Anthony
Conte (the "Conte Complaint"). The Conte Complaint seeks various forms of
relief, including unspecified damages, from New Aetna for alleged violations of
the Employee Retirement Income Security Act of 1974 ("ERISA"). The Conte
Complaint alleges that New Aetna does not make adequate disclosure of provider
compensation arrangements in the literature that it makes available to actual
or prospective members. New Aetna intends to defend the action vigorously and
on November 1, 1999, filed a motion to dismiss the litigation for failure to
state a claim upon which relief can be granted. On December 15, 1999, the Court
suspended further proceedings pending the resolution of the Maio appeal by the
United States Court of Appeals for the Third Circuit.
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on October 7, 1999 by Jo Ann
O'Neill (the "Mississippi O'Neill Complaint"). An Amended Complaint was filed
on November 9, 1999 by Jo Ann O'Neill, Lydia K. Rouse and Danny E. Waldrop. The
Mississippi O'Neill Complaint seeks various forms of relief, including
unspecified damages and treble damages and restitution of alleged improper
profits, from Aetna, New Aetna, Richard L. Huber and unnamed members of the
Board of Directors of Aetna for alleged violations of ERISA and RICO. The
Mississippi O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO members. On November 22, 1999, defendants moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the Conte and Maio Complaints
filed in that court. On January 25, 2000, the Court suspended further
proceedings pending resolution of a motion in cases involving other defendants
to consolidate those actions in a single court. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
F-17
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright
in her individual capacity and on behalf of the general public of the State of
California (the "Curtright Complaint"). The Curtright Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from Aetna, New Aetna, Aetna U.S.
Healthcare of California Inc. and unnamed "John Doe" defendants for alleged
violations of California Business and Professions Code Sections 17200 and
17500, California Civil Code Section 17500 and state common law in connection
with the sale and marketing of health plans in California. The Curtright
Complaint alleges that defendants are liable for alleged misrepresentations and
omissions relating to advertising, marketing and member materials directed to
Aetna HMO, POS and PPO members and members of the general public. On December
16, 1999, defendants removed the action to the United States District Court for
the Northern District of California. Plaintiff has moved to remand the action
to state court. Aetna has moved to dismiss the Curtright Complaint for failure
to state a claim upon which relief can be granted and moved for a stay of the
action pending resolution of the Maio and Conte matters. In August 2000, the
Court stayed further proceedings pending decision on Aetna's MDL Application
(as described below). This litigation is in the preliminary stages. Defendants
intend to defend the action vigorously.
A complaint was filed in the Superior Court of the State of California,
County of San Diego on November 5, 1999 by Linda Ross and The Stephen Andrew
Olsen Coalition for Patients Rights, purportedly on behalf of the general
public of the State of California (the "Ross Complaint"). The Ross Complaint
seeks various forms of relief, including injunctive relief, restitution and
disgorgement of amounts allegedly wrongfully acquired, from Aetna, New Aetna,
Aetna U.S. Healthcare of California Inc. and additional unnamed "John Doe"
defendants for alleged violations of California Business and Professions Code
Sections 17200 and 17500. The Ross Complaint alleges that defendants are liable
for alleged misrepresentations and omissions relating to advertising, marketing
and member materials directed to Aetna HMO, POS and PPO members and the general
public and for alleged unfair practices relating to contracting of doctors. On
May 5, 2000 the Court denied defendants' demurer but granted in part their
motion to strike portions of the Ross Complaint and ordered plaintiffs to file
an amended complaint. The amended complaint was filed on May 15, 2000 and a
second amended complaint on June 28, 2000. On August 15, the Court denied
defendants' demurrer but granted, in part, their motion to strike portions of
the second amended complaint and ordered the plaintiffs to file a third amended
complaint. The third amended complaint was filed on August 25, 2000. Defendants
intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on November 22, 1999 by Raymond
D. Williamson, III (the "Williamson Complaint"). The Williamson Complaint names
as defendant The Prudential Insurance Company of America, and also names as
defendants Aetna and New Aetna solely to the extent that New Aetna has assumed
liability for the actions of Prudential in connection with New Aetna's
acquisition of the Prudential health care business. The Williamson Complaint
seeks various forms of relief from defendants, including unspecified damages,
treble damages and imposition of a constructive trust, for alleged violations
of RICO and ERISA. The Williamson Complaint alleges that the Prudential Health
Plans engaged in a nationwide fraudulent scheme of misrepresentation by stating
that coverage and treatment decisions were made on the basis of medical
necessity when Prudential allegedly implemented undisclosed policies designed
to deny or limit claims and medical services. On December 30, 1999, New Aetna
moved to stay, dismiss or transfer the action to the United States District
Court for the Eastern District of Pennsylvania based on the fact that the Maio
and Conte Complaints were filed in that court. On January 25, 2000, the Court
suspended further proceedings pending resolution of a motion in cases involving
other defendants to consolidate those actions in a single court. This
litigation is in the preliminary stages. New Aetna intends to defend the action
vigorously.
F-18
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on December 3, 1999 by Michael V. Amorosi
(the "Amorosi Complaint"). The Amorosi Complaint seeks various forms of relief,
including unspecified damages, treble damages and restitutionary relief for
unjust enrichment, from Aetna and New Aetna for alleged violations of RICO and
ERISA. The Amorosi Complaint alleges that defendants told subscribers that
coverage and treatment decisions would be based on medical necessity but
instead took into account undisclosed cost-based criteria that were unrelated
to members' medical needs. On January 7, 2000, New Aetna moved to stay, dismiss
or transfer the action to the United States District Court for the Eastern
District of Pennsylvania based on the fact that the Maio and Conte Complaints
were filed in that court. On August 25, 2000 New Aetna moved to dismiss the
action for failure to state a claim. This litigation is in the preliminary
stages. New Aetna intends to defend the action vigorously.
A purported amended class action complaint was filed in the United States
District Court for the Northern District of Alabama on January 19, 2000 by
Eugene Mangieri, M.D. (the "Mangieri Complaint"). The Mangieri Complaint seeks
various forms of relief, including unspecified damages, treble damages and
punitive damages, from Aetna, New Aetna and Richard L. Huber for alleged
violations of RICO. The Mangieri Complaint claims that physicians suffer actual
and potential harm from allegedly coercive terms contained in their contracts
with New Aetna. On May 15, 2000 the Judicial Panel on Multidistrict Litigation
issued a conditional order transferring the Mangieri Complaint to the United
States District Court for the Southern District of Florida for consolidated
pretrial proceedings in the matter known as In re Humana, Inc. Managed Care
Litigation. On May 30, 2000 New Aetna filed with the Panel an objection to that
conditional transfer order, but on July 14, 2000, New Aetna requested
consolidation of that action with others pending against New Aetna (see the
discussion regarding the MDL Application below). This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on April 11, 2000 by Jennifer McCarron and
Ira S. Schwartz (the "McCarron Complaint"). The McCarron Complaint names as
defendants The Prudential Insurance Company of America and health maintenance
organizations that New Aetna acquired from Prudential on August 6, 1999. The
McCarron Complaint seeks various forms of relief from defendants, including
return of certain premiums, disgorgement of allegedly improper profits and
injunctive relief, for alleged contractual breaches and violations of ERISA.
Plaintiffs purport to represent a class including persons who were Prudential
Health Plans subscribers before and/or after New Aetna's acquisition of those
operations. The McCarron Complaint alleges that Prudential Health Plans'
administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
Ms. McCarron additionally alleges that she was wrongfully denied coverage for
certain medical treatments. On August 30, 2000 New Aetna joined in Prudential's
motion to dismiss the complaint for failure to state a claim. This litigation
is in the preliminary stages. New Aetna intends to defend the action
vigorously.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on May 22, 2000 by John Romero
and Catherine Romero (the "Romero Complaint"). The Romero Complaint names as
defendants The Prudential Insurance Company of America and health maintenance
organizations that New Aetna acquired from Prudential on August 6, 1999. The
Romero Complaint seeks various forms of relief from defendants, including
return of certain premiums, disgorgement of allegedly improper profits and
injunctive relief, for alleged contractual breaches and violations of ERISA.
Plaintiffs purport to represent a class including persons who were Prudential
Health Plan subscribers before and/or after New Aetna's acquisition of those
operations. The Romero Complaint alleges that Prudential Health Plans'
administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
On July 24, 2000 the Court stayed the action. This litigation is in the
preliminary stages. New Aetna intends to defend the action vigorously.
F-19
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
On July 14, 2000, Aetna filed with the Judicial Panel on Multidistrict
Litigation a motion to consolidate and transfer six of the above matters for
pretrial proceedings in the United States District Court for the Eastern
District of Pennsylvania (the "MDL Application"). That motion seeks transfer
and consolidation of the Amorosi, Conte, Curtright, and Mangieri Complaints as
well as both the Mississippi O'Neill Complaint and the Florida O'Neill
Complaint (as defined below). Hearing on the MDL Application is scheduled to
take place on September 22, 2000.
A purported class action was filed in the United States District Court for
the Southern District of Florida under the caption In re Humana, Inc. Managed
Care Litigation, on June 23, 2000 by Jo Ann O'Neill, Lydia K. Rouse and Danny
E. Waldrop (the "Florida O'Neill Complaint"). The Florida O'Neill Complaint
names as defendants Aetna and Aetna U.S. Healthcare The Florida O'Neill
Complaint seeks various forms of relief, including unspecified damages and
treble damages and restitution of alleged improper profits, from Aetna and
Aetna U.S. Healthcare for alleged violations of ERISA and RICO. The Florida
O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising and marketing
materials directed to Aetna HMO members, and alleges that defendants conspired
with other managed care companies not to disclose alleged industry-wide
practices. New Aetna sought from the Florida federal court a stay of further
proceedings on the Florida O'Neill Complaint pending a decision on the MDL
Application. On July 27, 2000, the Florida federal court denied that motion. On
August 11, 2000, New Aetna filed a motion to dismiss the Florida O'Neill
Complaint. Briefing on that motion is scheduled to be completed in early
September 2000. Additionally, the Court has scheduled briefing on plaintiffs'
class certification motion to be completed by November 2000. This litigation is
in the preliminary stages. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the United States District
Court for the District of Connecticut on August 7, 2000 by Glenn O'Brien and
Christopher Gallagher (the "O'Brien Complaint"). The O'Brien Complaint seeks
various forms of relief, including unspecified damages, from New Aetna for
alleged violations of ERISA. The O'Brien Complaint alleges that New Aetna does
not make adequate disclosure of the operation of its managed care plans to
actual or prospective members. New Aetna intends to defend the action
vigorously. New Aetna has notified the Judicial Panel on Multidistrict
Litigation of the O'Brien Complaint for consolidation with the other matters
referred to in the MDL Application.
Other Litigation and Regulatory Proceedings
New Aetna is involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including claims of
bad faith, medical malpractice, non-compliance with state regulatory regimes,
marketing misconduct, failure to timely pay medical claims and other litigation
in its health care business. Some of these other lawsuits are purported to be
class actions. Aetna U.S. Healthcare of California Inc., an indirect subsidiary
of New Aetna, 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
Aetna, 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.
F-20
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Other Litigation and Regulatory Proceedings (Continued)
In addition, New Aetna's business practices are subject to review by
various state insurance and health care regulatory authorities and federal
regulatory authorities. Recently, there has been heightened review by these
regulators of the managed health care industry's business practices, including
utilization management and claim payment practices. As the largest national
managed care organization, New Aetna regularly is the subject of such reviews
and several such reviews currently are pending, some of which may be resolved
during the remainder of 2000. These reviews may result in changes to or
clarifications of New Aetna's business practices, and may result in fines,
penalties or other sanctions.
While the ultimate outcome of these other lawsuits and regulatory reviews
cannot be determined at this time, after consideration of the defenses
available to New Aetna, applicable insurance coverage and any related reserves
established, they are not expected to result in liability for amounts material
to the financial condition of New Aetna, although they may adversely affect
results of operations in future periods.
11. Agreement and Plan of Restructuring and Merger
On July 20, 2000, Aetna announced that it reached a definitive agreement
to sell its Aetna Financial Services and Aetna International businesses to ING
in a transaction valued at approximately $7.7 billion. Under the terms of the
agreement and in an integrated transaction, Aetna will spin off to its
shareholders the shares of a standalone health company that will be comprised
primarily of the Health Care and Large Case Pensions businesses.
Simultaneously, Aetna, which then will be comprised of Aetna Financial Services
and Aetna International, will merge with a newly formed subsidiary of ING. In
exchange for each Aetna share, Aetna shareholders will receive one share in the
standalone health company, which will be named Aetna Inc., and approximately
$35 per share in cash. When ING acquires Aetna, that entity is expected to have
approximately $2.7 billion in long-term debt.
Aetna's goal is to close the transaction, which is subject to receipt of
required shareholder, regulatory and other consents and approvals, as well as
other closing conditions, by year end 2000. Aetna expects that it will incur
certain costs associated with the definitive agreement with ING related to the
consummation of the transaction (including fees for outside financial and legal
advisors and expenses related to the change-in-control of Aetna) and such costs
may be material.
In connection with its spin-off from Aetna, New Aetna generally will
assume all liabilities related to the Health Care and Large Case Pensions
businesses. In addition, New Aetna generally will be responsible for Aetna's
liabilities other than those arising out of the Aetna Financial Services and
Aetna International businesses being sold to ING. These liabilities include the
post-retirement pension and other benefits payable to all former employees of
Aetna, liabilities arising out of health litigation and certain corporate-level
litigation to which Aetna is a party, and generally all liabilities arising out
of certain past divestiture transactions which have been consummated by Aetna
prior to the closing of New Aetna's spin-off from Aetna.
F-21
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Agreement and Plan of Restructuring and Merger (Continued)
The account balances and activities of Aetna Financial Services and Aetna
International have been segregated and reported as discontinued operations.
Operating results of the discontinued operations were as follows:
<TABLE>
Six Months Ended June 30,
-------------------------
2000 1999
-------- --------
(Millions)
<S> <C> <C>
Revenue:
Premiums........................................... $1,505.7 $1,104.1
Total net investment income........................ 714.4 686.6
Fees and other income.............................. 386.5 315.3
Net realized capital gains (losses)................ (12.4) 8.7
-------- --------
Total revenue....................................... 2,594.2 2,114.7
-------- --------
Benefits and expenses:
Current and future benefits........................ 1,625.7 1,248.2
Operating expenses:
Salaries and related benefits.................... 216.4 178.8
Other............................................ 322.3 308.0
Interest expense................................... 25.6 21.6
Amortization of goodwill and other acquired
intangible assets.............................. 15.5 9.6
Amortization of deferred policy acquisition costs.. 116.8 101.5
-------- --------
Total benefits and expenses......................... 2,322.3 1,867.7
-------- --------
Income before taxes (benefits)...................... 271.9 247.0
Income taxes (benefits):
Current............................................ 65.1 (10.7)
Deferred........................................... 31.3 82.5
-------- --------
Total income taxes.................................. 96.4 71.8
-------- --------
Net income.......................................... $ 175.5 $ 175.2
======== ========
</TABLE>
F-22
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Agreement and Plan of Restructuring and Merger (Continued)
Assets, liabilities and shareholder's equity of the discontinued
operations were as follows:
June 30, December 31,
2000 1999
--------- ------------
(Millions)
Assets:
Investments:
Debt securities available for sale, at fair value.. $15,610.4 $12,854.0
Debt securities held to maturity, at
amortized cost................................. 149.9 --
Equity securities, at fair value................... 475.0 504.7
Short-term investments............................. 518.7 565.1
Commercial loans................................... 1,104.2 --
Mortgage loans..................................... 961.3 861.2
Real Estate........................................ 200.3 92.3
Policy loans....................................... 831.2 533.0
Other.............................................. 1,202.9 1,020.2
--------- ---------
Total investments................................... 21,053.9 16,430.5
--------- ---------
Cash and cash equivalents.......................... 1,889.5 870.9
Short-term investments under securities loan
agreement...................................... 644.9 232.5
Accrued investment income.......................... 251.9 199.1
Premiums due and other receivables................. 701.7 739.7
Reinsurance recoverables........................... 3,030.6 3,012.3
Deferred policy acquisition costs.................. 2,454.7 2,056.2
Goodwill and other acquired intangible assets...... 771.1 680.4
Other assets....................................... 996.9 388.2
Separate accounts assets........................... 40,361.0 38,692.7
--------- ---------
Total assets........................................ $72,156.2 $63,302.5
========= =========
Liabilities:
Insurance liabilities:
Future policy benefits............................. $14,123.5 $7,828.1
Unpaid claims...................................... 240.0 129.2
Unearned premiums.................................. 52.7 49.6
Policyholders' funds............................... 11,003.5 11,123.0
--------- ---------
Total insurance liabilities......................... 25,419.7 19,129.9
--------- ---------
Short-term debt.................................... 130.8 162.7
Long-term debt..................................... 579.7 613.0
Payables under securities loan agreement........... 644.9 232.5
Current income taxes............................... 42.8 114.2
Deferred income taxes.............................. 98.4 77.3
Other liabilities.................................. 1,799.9 1,381.7
Minority and participating policyholder's interest. 155.8 109.0
Separate accounts liabilities...................... 40,361.0 38,692.7
--------- ---------
Total liabilities................................... 69,233.0 60,513.0
--------- ---------
Total shareholder's equity (including accumulated
other comprehensive loss of
$429.2 and $503.0)............................. 2,923.2 2,789.5
--------- ---------
Total liabilities and shareholder's equity.......... $72,156.2 $63,302.5
========= =========
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Aetna Inc.:
When the transactions referred to in Note 17 of the Notes to Consolidated
Financial Statements have received shareholder approval, New Aetna will have
reached a measurement date as contemplated under Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. At that time, we will be in a
position to render the following report:
/s/ KPMG LLP
We have audited the accompanying consolidated balance sheets of Aetna U.S.
Healthcare Inc. and Subsidiaries ("New Aetna") as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholder's equity,
and cash flows for each of the years in the three-year period ended December
31, 1999. These consolidated financial statements are the responsibility of
New Aetna's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of New Aetna and
Subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Hartford, Connecticut
, 2000
F-24
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
For the Years Ended December 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
(Millions)
Revenue:
Health care premiums............................... $17,145.7 $11,691.1 $ 9,648.7
Other premiums..................................... 1,495.8 1,437.8 1,350.9
Administrative services only fees.................. 1,674.5 1,270.7 1,322.0
Net investment income.............................. 1,601.8 1,696.6 1,878.1
Other income....................................... 129.4 202.9 194.8
Net realized capital gains......................... 62.5 289.9 279.9
--------- --------- ---------
Total revenue....................................... 22,109.7 16,589.0 14,674.4
--------- --------- ---------
Benefits and expenses:
Health care costs.................................. 14,641.0 10,012.9 8,215.5
Current and future benefits........................ 2,231.0 2,296.0 2,396.1
Operating expenses:
Salaries and related benefits.................... 1,866.2 1,320.0 1,343.5
Other............................................ 2,050.8 1,598.6 1,380.4
Interest expense................................... 232.7 206.2 213.9
Amortization of goodwill and other acquired
intangible assets.............................. 420.4 381.3 362.9
Reductions of loss on discontinued products........ (77.2) (68.0) (172.5)
Severance and facilities reserve reductions........ -- -- (45.0)
--------- --------- ---------
Total benefits and expenses......................... 21,364.9 15,747.0 13,694.8
--------- --------- ---------
Income from continuing operations before income
taxes.......................................... 744.8 842.0 979.6
Income taxes:
Current............................................ 268.5 379.2 327.2
Deferred........................................... 76.9 12.4 126.7
--------- --------- ---------
Total income taxes.................................. 345.4 391.6 453.9
--------- --------- ---------
Income from continuing operations................... 399.4 450.4 525.7
Income from discontinued operations, net of tax..... 317.1 396.4 373.8
--------- --------- ---------
Net income.......................................... $ 716.5 $ 846.8 $ 899.5
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-25
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
(Millions)
Assets
Current assets:
Cash and cash equivalents.......................... $ 1,628.7 $ 1,101.0
Investment securities.............................. 16,179.1 17,994.3
Other investments.................................. 509.0 314.6
Premiums receivable, net........................... 916.3 729.6
Other receivables, net............................. 746.4 602.1
Accrued investment income.......................... 267.4 339.4
Investments under securities loan agreement........ 805.0 476.3
Deferred income taxes.............................. 157.6 5.0
Other assets....................................... 284.4 151.7
--------- ---------
Total current assets................................ 21,493.9 21,714.0
--------- ---------
Long-term investments .............................. 513.9 384.4
Mortgage loans...................................... 1,877.2 2,414.0
Investment real estate.............................. 264.7 192.3
Reinsurance recoverables............................ 788.2 577.1
Goodwill and other acquired intangible assets, net.. 8,655.0 8,593.5
Property and equipment, net......................... 473.0 413.1
Deferred income taxes............................... 268.6 302.4
Other assets........................................ 217.9 207.7
Separate accounts assets............................ 14,639.5 15,492.4
Net assets of discontinued operations.............. 2,789.5 2,937.2
--------- ---------
Total assets........................................ $51,981.4 $53,228.1
========= =========
Liabilities, redeemable preferred securities and
shareholder's equity
Current liabilities:
Health care costs payable.......................... $ 3,238.7 $ 2,269.2
Future policy benefits............................. 1,106.0 1,063.0
Unpaid claims...................................... 442.0 385.8
Unearned premiums.................................. 473.6 312.3
Policyholders' funds............................... 963.7 1,626.9
Payable under securities loan agreement............ 805.0 476.3
Short-term debt.................................... 1,725.0 1,370.1
Income taxes payable............................... 200.6 162.3
Deferred income taxes.............................. -- 17.9
Accrued expenses and other liabilities............. 1,489.1 1,044.1
--------- ---------
Total current liabilities........................... 10,443.7 8,727.9
--------- ---------
Future policy benefits.............................. 8,447.1 9,069.2
Unpaid claims....................................... 1,268.6 1,293.7
Policyholders' funds................................ 3,467.4 4,462.7
Long-term debt...................................... 2,093.9 1,593.3
Other liabilities................................... 918.0 884.4
Separate accounts liabilities....................... 14,639.5 15,492.4
--------- ---------
Total liabilities................................... 41,278.2 41,523.6
--------- ---------
Aetna-obligated mandatorily redeemable preferred
securities of subsidiary company holding
primarily debentures........................... -- 275.0
--------- ---------
Commitments and contingent liabilities
(Notes 3, 5 and 16)
Shareholder's equity:
Common stock and additional paid-in capital........ 3,719.3 3,674.0
Accumulated other comprehensive income (loss)...... (655.6) 177.8
Retained earnings.................................. 7,639.5 7,577.7
--------- ---------
Total shareholder's equity.......................... 10,703.2 11,429.5
--------- ---------
Total liabilities, redeemable preferred securities
and shareholder's equity....................... $51,981.4 $53,228.1
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-26
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------------
Accumulated Other
Comprehensive Income (Loss)
Common Stock ----------------------------
and Additional Unrealized
Paid-in Gains (Losses) Foreign
Total Capital(1) on Securities Currency Retained Earnings
--------- -------------- -------------- -------- -----------------
(Millions)
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996.......... $10,901.6 $3,253.0 $ 440.7 $(100.7) $7,308.6
Comprehensive income:
Net income............................ 899.5 899.5
Other comprehensive loss, net of tax:
Unrealized gains on securities
($66.5 pretax) (2)................ 43.2 43.2
Foreign currency ($(117.1) pretax).. (76.1) (76.1)
---------
Other comprehensive loss.............. (32.9)
---------
Total comprehensive income............. 866.6
=========
Capital contributions from Aetna....... 421.0 421.0
Dividends to Aetna..................... (1,107.2) (1,107.2)
--------- -------- ------- ------- --------
Balances at December 31, 1997.......... 11,082.0 3,674.0 483.9 (176.8) 7,100.9
--------- -------- ------- ------- --------
Comprehensive income:
Net income............................ 846.8 846.8
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(156.0) pretax) (2)............. (101.4) (101.4)
Foreign currency ($(43.3) pretax)... (27.9) (27.9)
---------
Other comprehensive loss.............. (129.3)
---------
Total comprehensive income............. 717.5
=========
Dividends to Aetna..................... (370.0) (370.0)
--------- -------- ------- ------- --------
Balances at December 31, 1998.......... 11,429.5 3,674.0 382.5 (204.7) 7,577.7
--------- -------- ------- ------- --------
Comprehensive loss:
Net income............................ 716.5 716.5
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(905.6) pretax) (2)............. (588.6) (588.6)
Foreign currency ($(132.5) pretax).. (244.8) (244.8)
---------
Other comprehensive loss.............. (833.4)
---------
Total comprehensive loss............... (116.9)
=========
Capital contributions from Aetna ...... 45.3 45.3
Dividends to Aetna..................... (654.7) (654.7)
--------- -------- ------- ------- --------
Balances at December 31, 1999.......... $10,703.2 $3,719.3 $(206.1) $(449.5) $7,639.5
========= ======== ======= ======= ========
</TABLE>
----------
(1) There were 250 million shares of Aetna Services, Inc. common stock, par
value $.01, and 275 million shares of Aetna U.S. Healthcare Inc. common
stock, par value, $.005 authorized at December 31, 1999. All outstanding
common stock of Aetna Services, Inc. and Aetna U.S. Healthcare Inc. was
owned by Aetna Inc. at December 31, 1999 and 1998.
(2) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements.
F-27
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
--------- --------- ----------
(Millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 716.5 $ 846.8 $ 899.5
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations............................................ (317.1) (396.4) (373.8)
Depreciation and amortization (including investment discounts and premiums).... 474.8 466.9 400.6
Net realized capital gains..................................................... (62.5) (289.9) (279.9)
Changes in assets and liabilities:
(Increase) decrease in accrued investment income............................. 79.7 (9.3) (59.6)
(Increase) decrease in premiums due and other receivables.................... (49.1) 11.9 (126.1)
Increase (decrease) in income taxes.......................................... 101.7 (167.8) 331.4
Net (increase) decrease in other assets and other liabilities................ 520.1 (214.7) 388.8
Increase (decrease) in health care and insurance liabilities................. (250.1) (226.8) 655.1
Other, net................................................................... 9.2 (8.9) 85.8
Discontinued operations, net...................................................... 442.8 795.6 (647.7)
--------- --------- ---------
Net cash provided by operating activities......................................... 1,666.0 807.4 1,274.1
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of:
Debt securities available for sale............................................. 11,707.8 12,455.5 10,299.9
Equity securities.............................................................. 177.2 444.3 473.8
Mortgage loans................................................................. 20.9 1.4 913.2
Investment real estate......................................................... 33.7 116.4 564.2
Other investments.............................................................. 18,701.5 17,084.5 17,004.1
Investment maturities and repayments of:
Debt securities available for sale............................................. 2,429.0 1,867.1 2,615.9
Mortgage loans................................................................. 459.9 883.1 1,636.8
Cost of investments in:
Debt securities available for sale............................................. (13,360.4) (14,010.0) (13,636.5)
Equity securities.............................................................. (145.5) (90.2) (89.5)
Mortgage loans................................................................. (157.1) (2.6) (110.4)
Investment real estate......................................................... (33.5) (25.5) (27.6)
Other investments.............................................................. (17,981.9) (17,012.5) (17,356.8)
Acquisitions:
NYLCare health care business................................................... (48.8) (1,080.6) --
Prudential health care business................................................ (512.5) -- --
Increase in property and equipment............................................... (58.1) (85.9) (51.7)
Other, net....................................................................... (147.5) (307.9) 62.2
Discontinued operations, net...................................................... (1,239.8) (367.3) (936.9)
--------- --------- ---------
Net cash (used for) provided by investing activities.............................. (155.1) (130.2) 1,360.7
--------- --------- ---------
Cash flows from financing activities:
Deposits and interest credited for investment contracts.......................... 332.4 474.8 237.8
Withdrawals of investment contracts.............................................. (1,607.2) (1,720.2) (3,082.2)
Repayment of long-term debt...................................................... (26.7) (128.7) (32.0)
Net increase (decrease) in short-term debt....................................... 528.4 1,119.5 (32.0)
Redemption of mandatorily redeemable preferred securities........................ (275.0) -- --
Capital contributions from Aetna................................................. 45.3 -- 421.0
Dividends paid to Aetna.......................................................... (634.7) (520.0) (907.2)
Other, net....................................................................... (404.3) 498.1 (616.8)
Discontinued operations, net...................................................... 831.9 (350.5) 1,729.3
--------- --------- ---------
Net cash used for financing activities............................................ (1,209.9) (627.0) (2,282.1)
--------- --------- ---------
Net increase in cash and cash equivalents of discontinued operations.............. (34.9) (77.8) (144.7)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 266.1 (27.6) 208.0
Cash acquired from the NYLCare health care business............................... -- 108.8 --
Cash acquired from the Prudential health care business............................ 261.6 -- --
Cash and cash equivalents, beginning of year...................................... 1,101.0 1,019.8 811.8
--------- --------- ---------
Cash and cash equivalents, end of year............................................ $ 1,628.7 $ 1,101.0 $ 1,019.8
========= ========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
F-28
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
The accompanying consolidated financial statements included the accounts
of Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare") and its subsidiaries as
of , 2000 ("New Aetna"). New Aetna is a wholly-owned
subsidiary of Aetna Inc. ("Aetna").
On July 20, 2000, Aetna announced that it had reached a definitive
agreement to sell its Aetna Financial Services and Aetna International
businesses to ING Groep N.V. ("ING") and, in an integrated transaction, that it
planned to spin-off New Aetna, a standalone health company comprised of the
Health Care (including its group life and disability insurance business) and
Large Case Pensions businesses, to its shareholders. On ,
2000, Aetna's shareholders are expected to approve the sale of Aetna's
Financial Services and Aetna International businesses to ING. Following the
sale, New Aetna will be named Aetna Inc. (Refer to Note 17.)
The businesses to be sold to ING are reflected as discontinued operations,
since New Aetna will be the successor of Aetna for accounting purposes. The
accompanying disclosures have been updated to reflect the transactions
described above.
New Aetna, through its subsidiaries, provides health care benefits and
related services, group life and disability insurance and retirement benefits.
As of December 31, 1999, New Aetna had two reportable segments: Health Care
(formerly Aetna U.S. Healthcare) and Large Case Pensions. Health Care provides
a full spectrum of health plans which include health maintenance organizations
("HMOs"), point-of-service ("POS") plans, preferred provider organizations
("PPOs") and traditional indemnity plans. Such plans are generally offered on
both an insured and an employer-funded basis. Health Care also provides group
life and disability insurance, long-term care insurance and dental products, as
well as various specialty products and services including pharmacy, vision and
behavioral health. Large Case Pensions manages a variety of retirement products
for defined benefit and defined contribution plans. The Large Case Pensions
business includes certain discontinued products. (Refer to Note 8.)
The two segments are distinct businesses that offer different products and
services. During the reporting period, they were managed separately as each
business required different market strategies, technology and capital
allocation. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. New Aetna
evaluates performance of these business segments based on operating earnings
(net income excluding net realized capital gains and losses and any other items
such as Year 2000 costs, severance and facilities actions and reduction of the
reserve for anticipated future losses on discontinued products).
2. Summary of Significant Accounting Policies
Principles of Consolidation
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. All significant intercompany
balances have been eliminated. Certain reclassifications have been made to 1998
and 1997 financial information to conform to the 1999 presentation.
The consolidated financial statements reflect the results of operations,
financial position, changes in shareholder's equity and cash flows of the
continuing New Aetna businesses that will be spun-off from Aetna to New Aetna
(refer to Note 17), as if New Aetna were a separate entity for all periods
presented. The consolidated financial statements have been prepared using the
historical basis in the assets and liabilities and historical results of
operations related to the Health Care and Large Case Pensions businesses.
Changes in shareholder's equity represent net income of New Aetna plus net cash
transfers to or from Aetna. Additionally, the consolidated financial statements
include allocations of certain Aetna assets and liabilities (including prepaid
pension assets, debt and benefit obligations, pension and post-retirement
benefits) and expenses relating to the Health Care and Large Case Pensions
businesses of New Aetna, as well as to those businesses presented as
discontinued operations. Management believes these allocations are reasonable.
F-29
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Principles of Consolidation (Continued)
The liabilities of the New Aetna include outstanding third party
indebtedness. The amount of the outstanding third party indebtedness and
related interest expense has been allocated to New Aetna, as well as to those
businesses presented as discontinued operations, based on allocations which
management believes are reasonable.
Also, the costs of services allocated to New Aetna are not necessarily
indicative of the costs that would have been incurred if New Aetna had
performed these functions as a standalone entity. Subsequent to the spin-off,
New Aetna will perform these functions using its own resources or purchased
services and will be responsible for the costs and expenses associated with the
management of a public company. Further, New Aetna is expected to have a
capital structure different from the capital structure in the consolidated
financial statements and accordingly, interest expense is not necessarily
indicative of the interest expense that New Aetna would have incurred during
the periods presented or in the future had it been a separate, independent
company.
Income tax expense was calculated as if New Aetna filed separate income
tax returns. As Aetna manages its tax position on a consolidated basis, which
takes into account the results of all its businesses, New Aetna's effective tax
rate in the future could vary from its historical effective tax rate. New
Aetna's future effective tax rate will depend largely on its structure and
strategies as a separate, independent company.
Accordingly, the financial information included herein may not necessarily
reflect the consolidated results of operations, financial position, changes in
shareholder's equity and cash flows of New Aetna in the future or what they
would have been had it been a separate, standalone entity during the periods
presented.
New Accounting Standard
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments
As of January 1, 1999, New Aetna 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"). SOP 97-3 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 New Aetna's
financial position or results of operations, as New Aetna had previously
accounted for guaranty-fund and other insurance-related assessments in a manner
consistent with this standard.
Future Application of Accounting Standards
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer
Insurance Risk
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 New Aetna's
financial statements beginning January 1, 2000, with early adoption permitted.
New Aetna does not expect the adoption of this standard to have a material
effect on New Aetna's financial position or results of operations.
F-30
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Future Application of Accounting Standards (Continued)
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") 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. As amended by FAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, this standard is effective for New Aetna's financial
statements beginning January 1, 2001, with early adoption permitted. The impact
of FAS No. 133 on New Aetna's financial statements will vary based on certain
factors including future interpretative guidance from the FASB, the extent of
New Aetna's hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. New Aetna is evaluating the impact of the
adoption of this standard and currently does not believe that it will have a
material effect on its financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from reported results using
those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased. The
carrying value of cash and cash equivalents approximates fair value due to the
short-term maturity of these instruments.
Investments
Investment Securities
Investment securities consist primarily of U.S. Treasury and agency
securities, mortgage-backed securities, corporate and foreign bonds, restricted
assets and other debt and equity securities. Restricted assets, which consist
of debt securities on deposit as required by various regulatory authorities,
were $629 million and $577 million at December 31, 1999 and 1998, respectively.
New Aetna has determined that its investment securities, other than restricted
assets, are marketable and available for use in current operations and
accordingly, has classified such securities as current without regard to
contractual maturity dates.
Long-Term Investments
Long-term investments consist primarily of equity securities subject to
restrictions on disposition and limited partnerships. Limited partnerships are
carried on an equity basis.
F-31
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
Fair Value of Investments
New Aetna classifies its investments as available for sale and carries
them at fair value. Fair values for such securities are based on quoted market
prices or dealer quotes. Where quoted market prices or dealer quotes are not
available, fair values are measured utilizing quoted market prices for similar
securities or by using discounted cash flow methods. Cost for mortgage-backed
securities is adjusted for unamortized premiums and discounts, which are
amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments. New Aetna does not accrue
interest on problem debt securities when management believes the collection of
interest is unlikely.
Securities Lending
New Aetna engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the market
value of a loaned domestic security and 105% of the market value of a loaned
foreign security. The collateral is deposited by the borrower with an
independent lending agent, and retained and invested by the lending agent
according to New Aetna's guidelines to generate additional income. The market
value of the loaned securities is monitored on a daily basis, with additional
collateral obtained or refunded as the market value of the loaned securities
fluctuates.
Mortgage Loans
Mortgage loans are carried at unpaid principal balances, net of impairment
reserves. A mortgage loan is considered impaired when it is probable that New
Aetna will be unable to collect amounts due according to the contractual terms
of the loan agreement (delays of up to 60 days may not result in a loan being
considered impaired). New Aetna accrues interest income on impaired loans to
the extent it is deemed collectible and the loan continues to perform under its
original or restructured terms. Interest income on problem loans is generally
recognized on a cash basis. Cash payments on loans in the process of
foreclosure are generally treated as a return of principal. For impaired loans,
a specific impairment reserve is established for the difference between the
recorded investment in the loan and the estimated fair value of the collateral.
New Aetna applies this loan impairment policy individually to all loans in the
portfolio and does not aggregate loans for the purpose of applying such
provisions. New Aetna records full or partial charge-offs of loans at the time
an event occurs affecting the legal status of the loan, typically at the time
of foreclosure (actual or in-substance) or upon a loan modification giving rise
to forgiveness of debt. A general reserve is established for losses management
believes are likely to arise from loans in the portfolio, other than for those
losses that have been specifically reserved. New Aetna does not accrue interest
on impaired loans when management believes the collection of interest is
unlikely. The portion of mortgage loans with a maturity date of less than 12
months is reported in other investments in the Consolidated Balance Sheets.
F-32
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
Investment Real Estate
Investment real estate, which New Aetna has the intent to hold for the
production of income, is carried at depreciated cost, including capital
additions, net of write-downs for other than temporary declines in fair value.
Depreciation is generally calculated using the straight-line method based on
the estimated useful life of each asset. Properties held for sale (primarily
acquired through foreclosure) are carried at the lower of cost or fair value
less estimated selling costs. Adjustments to the carrying value of properties
held for sale are recorded in a valuation reserve when the fair value less
estimated selling costs is below cost. Fair value is generally estimated using
a discounted future cash flow analysis in conjunction with comparable sales
information. Property valuations are reviewed by New Aetna's investment
management group. At the time of the sale, the difference between the sales
price and the carrying value is recorded as a realized capital gain or loss.
Investment real estate not under agreement to sell is classified as non-current
in the Consolidated Balance Sheets.
Net Investment Income and Realized Capital Gains and Losses
Net investment income and realized capital gains and losses on investments
supporting Health Care's liabilities and Large Case Pensions
non-experience-rated products are reflected in New Aetna's results of
operations. Realized capital gains and losses are determined on a specific
identification basis. Unrealized capital gains and losses related to
investments supporting health care liabilities are computed on the basis of
specific identification and are reflected in shareholder's equity, net of
related income taxes. Purchases and sales of debt and equity securities are
recorded on the trade date. Sales of mortgage loans and investment real estate
are recorded on the closing date.
Realized and unrealized capital gains and losses on investments supporting
experience-rated products in New Aetna's Large Case Pensions business are
reflected in policyholders' funds and are determined on a specific
identification basis. Experience-rated products are products in New Aetna's
Large Case Pensions business where the customer, not New Aetna, assumes
investment (including realized capital gains and losses) and other risks,
subject to, among other things, minimum guarantees provided by New Aetna in
some instances. The effect of investment performance (as long as minimum
guarantees are not triggered) is allocated to the customer account daily, based
on the underlying investment's experience and, therefore, does not impact New
Aetna's results of operations.
When New Aetna discontinued the sale of its fully guaranteed Large Case
Pensions products (refer to Note 8), it established a reserve for anticipated
future losses from these products and segregated the related investments. These
investments are managed as a separate portfolio. Investment income and net
realized capital gains and losses on this separate portfolio are
credited/charged to the reserve and, therefore, do not impact New Aetna's
results of operations. Unrealized capital gains or losses on this separate
portfolio are reflected in other current assets or other current liabilities in
the Consolidated Balance Sheets.
Derivative Instruments
New Aetna utilizes futures contracts, interest rate swap agreements and
options for other than trading purposes in order to hedge interest rate and
price risk (collectively, market risk). (Refer to Note 5.)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that qualify as
hedges are deferred and recognized as an adjustment to the hedged asset or
liability. Deferred gains or losses on such futures contracts are amortized
over the life of the acquired asset or liability as a yield adjustment or
through net realized capital gains or losses upon disposal of an asset. Changes
in the fair value of futures contracts that do not qualify as hedges are
recorded in net realized capital gains or losses.
F-33
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Derivative Instruments (Continued)
Interest rate swap agreements, which are designated as risk management
instruments at inception, are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such
agreements is reported in net investment income. There is no recognition in the
Consolidated Balance Sheets of changes in the fair value of these agreements.
Options are contracts that grant the purchaser, for a fee, the right but
not the obligation, to buy or sell a financial instrument at a contracted price
within a specified period of time. Changes in the fair value of the option are
reported in net realized capital gains or losses.
Hedge designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying the
hedge, and that such high correlation be maintained throughout the hedge
period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and excess
gains and losses on the hedging instrument are reflected in net realized
capital gains or losses. New Aetna may enter into contracts to hedge
anticipated transactions. If it is subsequently determined that an anticipated
transaction will not occur, any gain or loss related to the hedge instrument
will be recognized as a net realized capital gain or loss.
Goodwill and Other Acquired Intangible Assets
Goodwill (which represents the excess of cost over the fair value of net
assets acquired) and other acquired intangibles are amortized using the
straight-line method over the estimated useful life of the related asset. New
Aetna regularly evaluates the recoverability of goodwill and other acquired
intangible assets and the related amortization periods. If it is probable that
undiscounted projected operating income (before amortization of goodwill and
other acquired intangible assets) will not be sufficient to recover the
carrying value of the asset, the carrying value is written down through results
of operations and, if necessary, the amortization period is adjusted. Operating
income considered in such an analysis is either that of the entity acquired, if
separately identifiable, or the business segment that acquired the entity.
Goodwill and other acquired intangible assets at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Accumulated Amortization
Cost Amortization Net Balance Period
-------- ------------ ----------- ------------
(Millions) (Years)
<S> <C> <C> <C> <C>
Goodwill.................................... $8,231.7 $ 751.5 $7,480.2 40
======== ======= ========
Other acquired intangible assets:
Customer lists............................. $ 933.0 $ 474.7 $ 458.3 5-7
Provider networks.......................... 683.0 86.2 596.8 20-25
Workforce.................................. 92.0 34.7 57.3 3-6
Computer systems........................... 79.1 43.8 35.3 3-5
Other...................................... 57.3 30.2 27.1 4-5
-------- ------- --------
Total other acquired intangible assets...... $1,844.4 $ 669.6 $1,174.8
======== ======= ========
</TABLE>
F-34
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Goodwill and Other Acquired Intangible Assets (Continued)
Goodwill and other acquired intangible assets at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Accumulated Amortization
Cost Amortization Net Balance Period
-------- ------------ ----------- ------------
(Millions) (Years)
<S> <C> <C> <C> <C>
Goodwill.................................... $7,975.0 $ 552.3 $7,422.7 40
======== ======= ========
Other acquired intangible assets:
Customer lists............................. $ 835.0 $ 329.2 $ 505.8 6-7
Provider networks.......................... 625.0 59.4 565.6 20-25
Workforce.................................. 50.0 21.1 28.9 3-5
Computer systems........................... 60.0 29.4 30.6 3-5
Other...................................... 56.2 16.3 39.9 4-5
-------- ------- --------
Total other acquired intangible assets...... $1,626.2 $ 455.4 $1,170.8
======== ======= ========
</TABLE>
Reinsurance
New Aetna utilizes reinsurance agreements primarily to reduce exposure to
large losses in certain aspects of its business. These reinsurance contracts
permit recovery of a portion of losses from reinsurers, although they do not
discharge the primary liability of New Aetna as direct insurer of the risks
reinsured. Only those reinsurance recoverables deemed probable of recovery are
reflected as assets. In the normal course of business, New Aetna enters into
agreements with other insurance companies to assume reinsurance, primarily
related to its health and group life businesses. (Refer to Notes 3 and 14.)
Property and Equipment
Property and equipment are reported at historical cost net of accumulated
depreciation. At December 31, 1999 and 1998, historical cost was $1.3 billion
and $1.1 billion, respectively, and the related accumulated depreciation was
$840 million and $689 million, respectively. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets ranging from three to 40 years.
New Aetna regularly evaluates whether events or changes in circumstances
indicate that the carrying amount of property and equipment may not be
recoverable. If it is determined that an asset may not be recovered, New Aetna
estimates the future undiscounted cash flows (grouped at the company-wide
level) expected to result from future use of the asset and its eventual
disposition. If the sum of the expected undiscounted future cash flows is less
than the carrying amount of the asset, an impairment loss will be recognized
for the amount by which the carrying amount of the asset exceeds its fair
value.
Separate Accounts
Separate accounts assets and liabilities in the Large Case Pensions
business generally represent funds maintained to meet specific investment
objectives of contractholders who bear the investment risk. Investment income
and investment gains and losses generally accrue directly to such
contractholders. The assets of each account are legally segregated and are not
subject to claims that arise out of any other business of New Aetna. The assets
and liabilities are carried at market value. Deposits, net investment income
and realized capital gains and losses on separate accounts assets are not
reflected in the Consolidated Statements of Income. Management fees charged to
contractholders are included in other income.
F-35
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Health Care and Insurance Liabilities
Health care costs payable consist principally of unpaid health care claims
and other amounts due to health care providers pursuant to risk-sharing
arrangements related to Health Care's HMO, POS, PPO and indemnity plans. Unpaid
health care claims include estimates of payments to be made on claims reported
but not yet paid and health care services rendered but not yet reported to New
Aetna as of the balance sheet date. Also included in these estimates is the
cost of services that will continue to be rendered after the balance sheet date
if New Aetna is obligated to pay for such services in accordance with
contractual or regulatory requirements. Such estimates are developed using
actuarial principles and assumptions which consider, among other things,
contractual requirements, historical utilization trends and payment patterns,
medical inflation, product mix, seasonality and other relevant factors. Changes
in estimates are recorded in health care costs in the Consolidated Statements
of Income in the period they are determined. Capitation costs represent
contractual monthly fees paid to participating physicians and other medical
providers for providing medical care. Amounts due under risk-sharing
arrangements are based on the terms of the underlying contracts with the
providers which consider experience under the contracts through the balance
sheet date.
Unpaid claims consist primarily of reserves associated with certain
short-duration group disability and term life insurance contracts, including an
estimate for claims incurred but not reported as of the balance sheet date.
Such reserves are based upon the present value of future benefits which is
based on assumed investment yields and assumptions regarding mortality,
morbidity and recoveries from government programs. Reserves for claims incurred
but not reported are developed using actuarial principles and assumptions which
consider, among other things, contractual requirements, historical payment
patterns, seasonality and other relevant factors. New Aetna discounts certain
claim liabilities related to group long-term disability and premium waiver
contracts. Generally, the discount rates reflect the expected investment
returns for the asset portfolios that support these liabilities and ranged from
2.5% to 6.8% as of December 31, 1999 (except for experience-rated contracts
where the discount rates are set at contractually specified levels). The
estimates of unpaid claims are subject to change due to changes in the
underlying experience of the contracts, changes in investment yields or other
factors and these changes are recorded in current and future benefits in the
Consolidated Statements of Income in the period they are determined.
Future policy benefits consist primarily of reserves for limited payment
pension and annuity contracts in the Large Case Pensions business and
long-duration group paid-up and supplemental life and long-term care insurance
contracts in the Health Care business. Reserves for limited payment contracts
are computed on the basis of assumed investment yield, mortality and expenses.
Such assumptions generally vary by plan, year of issue and policy duration.
Reserve interest rates averaged 6.25% in 1999. Investment yield is based on New
Aetna's experience. Mortality assumptions are based on New Aetna's experience
and are periodically reviewed against both industry standards and experience.
Reserves for group paid-up and supplemental life and long-term care contracts
represent the present value of future benefits to be paid to or on behalf of
policyholders less the present value of future net premiums. The present value
of future benefits is based upon mortality, morbidity and interest assumptions.
Policyholders' funds consist primarily of reserves for pension and annuity
investment contracts in the Large Case Pensions business and customer funds
associated with group life and health contracts in Health Care business.
Reserves on such contracts are equal to cumulative deposits less charges plus
credited interest thereon (rates averaged 11.76% in 1999), net of adjustments
for investment experience that New Aetna is entitled to reflect in future
credited interest. Reserves on contracts subject to experience rating reflect
the rights of policyholders, plan participants and New Aetna.
F-36
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Health Care and Insurance Liabilities (Continued)
The methods used in developing the above estimates and establishing the
related liabilities are continually reviewed with any necessary adjustments
reflected during the current period in results of operations. While the
ultimate amount of claims and related expenses are dependent on future
developments, it is management's opinion that the liabilities that have been
established are adequate to cover such costs. The health care and insurance
liabilities that are expected to be paid within one year are classified as
current liabilities in the Consolidated Balance Sheets.
Premium Deficiency
New Aetna evaluates its health and insurance contracts to determine if it
is probable that a loss will be incurred. A premium deficiency loss is
recognized when it is probable that expected future claims, including
maintenance costs, will exceed anticipated future premiums and reinsurance
recoveries on existing contracts. Anticipated investment income is considered
in the calculation of premium deficiency losses. For purposes of determining
premium deficiency losses, contracts are grouped in a manner consistent with
New Aetna's method of acquiring, servicing and measuring the profitability of
such contracts.
Revenue Recognition
Health care premiums associated with New Aetna's prepaid and other health
care plans are recognized as income in the month in which the enrollee is
entitled to receive health care services. Health care premiums are reported net
of an allowance for expected terminations and uncollectible amounts. Other
premium revenue for group life and disability products is recognized as income,
net of allowances for uncollectible accounts, over the term of the coverage.
Premiums related to unexpired contractual coverage periods are reported as
unearned premiums in the Consolidated Balance Sheets.
Some group contracts allow for premiums to be adjusted to reflect actual
experience. Such premium adjustments are reasonably estimable (based on actual
experience of the customer emerging under the contract and the terms of the
underlying contract) and are recognized as claim costs as the experience
emerges.
Administrative services only ("ASO") fees in the Health Care business are
received in exchange for performing certain claims processing and member
services for self-insured health and disability members and are recognized as
revenue over the period the service is provided.
Other income includes charges assessed against policyholders' funds for
contract fees, participant fees and asset charges, related to pension and
annuity products in the Large Case Pensions business. Other amounts received
for these contracts are reflected as deposits and are not recorded as revenue.
When annuities with life contingencies are purchased under contracts that were
initially investment contracts, the accumulated balance related to the purchase
is treated as a single premium and reflected as an offsetting amount in both
other premiums and current and future benefits in the Consolidated Statements
of Income.
The balance of the allowance for expected terminations and uncollectible
accounts was $216 million and $71 million at December 31, 1999 and 1998,
respectively, and is included in premiums receivable in the Consolidated
Balance Sheets.
F-37
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Allocation of Expenses
Aetna allocates centrally incurred costs associated with specific internal
goods or services provided to New Aetna, such as employee services, technology
services and rent, to the business segments based on a reasonable method for
each specific cost (such as usage, headcount, compensation or square footage
occupied). Interest expense on third-party borrowings is not allocated to the
reporting segments since it is not used as a basis for measuring the operating
performance of the segment.
Income Taxes
New Aetna is taxed at regular corporate rates after adjusting income
reported for financial statement purposes for certain items. New Aetna will be
included in the consolidated federal income tax return of Aetna until the date
of the spin-off on or about , 2000. The consolidated group is
segregated into subgroups of life insurance companies and non-life insurance and
other companies. Consolidation of these subgroups for tax purposes is subject to
statutory restrictions on the percentage of eligible non-life insurance and
other companies' tax losses that can be applied to offset life insurance company
taxable income.
Deferred income tax assets and liabilities are recognized for the
differences between the financial and income tax reporting basis of assets and
liabilities based on enacted tax rates and laws. Deferred income tax expense or
benefit reflects the net change in deferred income tax assets and liabilities
during the year. The current income tax provision reflects the tax results of
revenues and expenses currently taxable or deductible.
3. Acquisitions and Dispositions
On August 6, 1999, New Aetna acquired from The Prudential Insurance
Company of America ("Prudential") the Prudential health care business ("PHC")
for approximately $1 billion, subject to adjustment as provided in the
transaction agreements. As part of the purchase price, Aetna issued one million
stock appreciation rights ("SARs") for Aetna's common stock, valued at
approximately $32 million. Included in the acquisition are PHC's risk HMO, POS,
PPO and Indemnity health lines, as well as its dental risk business. The
acquisition was accounted for as a purchase.
In addition to recording the assets and liabilities acquired at fair
value, the purchase price allocation at the acquisition date included the
following:
o An asset of $130 million, representing the fair value adjustment of a
reinsurance agreement (discussed below), primarily reflecting the net
benefits to be received from Prudential over the life of the
agreement. Significant assumptions utilized in the determination of
the value of this asset primarily included, for expected amounts
recoverable under the agreement, various probability outcomes above
and below the medical loss thresholds (83.5% in 1999 and 84.0% in
2000). The probability outcomes considered the estimated medical loss
ratios of the business at the acquisition date as well as expected
medical loss ratios for 2000, with variability in relation to the
thresholds, up to plus or minus three standard deviations. A risk
premium (an amount typically charged by a third party for accepting
risk under a reinsurance contract) based on an approximate 12%
after-tax return, which considers the cost of capital to the
reinsurer, was also assumed. This asset is being amortized to expense
in proportion to the benefits expected to be recognized under the
reinsurance agreement over its term;
F-38
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions (Continued)
o A liability of $129 million, representing a fair value adjustment for
the unfavorable component of the contracts underlying the acquired
medical risk business. Significant assumptions utilized in the
determination of this fair value adjustment included an assumed
market rate medical loss ratio for the acquired contracts (83.5% for
Commercial HMO and 92.0% for Medicare HMO) as compared to the medical
loss ratios of the acquired business at the acquisition date. The
fair value adjustment considered the period from the acquisition date
to the underlying contracts' renewal dates. This liability is being
amortized over the period from the acquisition date to the renewal
dates of the underlying contracts;
o An asset of $21 million, representing the above-market compensation
component related to supplemental fees to be received under New
Aetna's agreement to service Prudential's administrative services
only contracts (discussed below). This asset is being amortized over
the period of the above-market compensation component, beginning in
January 2000.
The period August 6, 1999 through December 31, 1999, reflected asset
amortization of $104 million related to the fair value adjustment of the
reinsurance agreement and liability amortization of $94 million related to the
fair value adjustment of the unfavorable component of the contracts underlying
the acquired medical risk business.
The excess of the purchase price over the fair value of the net assets
acquired resulted in approximately $64 million being primarily allocated to
goodwill and approximately $218 million to 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. Other acquired
intangible assets consist primarily of customer lists, health provider
networks, work force and computer systems. New Aetna's consolidated results of
operations include PHC from August 6, 1999. The purchase price does not reflect
New Aetna's plan to exit certain activities of the acquired PHC business and
provide employee termination benefits for positions that will be eliminated.
New Aetna's management is in the process of finalizing this plan, expected to
be completed in the first quarter of 2000. Accordingly, the goodwill associated
with the acquisition of PHC will increase once this plan is finalized.
New Aetna and Prudential entered into a reinsurance agreement for which
New Aetna paid a premium. Under the agreement, Prudential has agreed to
indemnify New Aetna from certain health insurance risks that arise following
the closing by reimbursing New Aetna for 75% of medical costs (as calculated
under the agreement) of PHC in excess of certain threshold medical loss ratio
levels through 2000 for substantially all the acquired medical and dental risk
business. The medical loss ratio threshold is 83.5% for August 6, 1999 through
December 31, 1999 and 84% for January 1, 2000 through December 31, 2000. During
the period August 6, 1999 through December 31, 1999, reinsurance recoveries
under this agreement (reflected as a reduction of current and future benefits)
were $74 million pretax. The premium is subject to adjustment if medical costs
of PHC are below these threshold medical loss ratio levels. Prudential has also
agreed to indemnify New Aetna for unanticipated increases in medical claims
payable existing at the acquisition date for a period of up to nine months
following the close.
New Aetna also agreed to service Prudential's ASO contracts. Prudential is
terminating its ASO business and has retained New Aetna to service these
contracts during the run off period, but generally no later than June 30, 2001.
Prudential ASO members will remain Prudential members as long as the contracts
remain in force. New Aetna is maintaining personnel, systems and other
resources necessary to service the ASO business during the run off period, as
it was not feasible to segregate these operating assets from those purchased in
the PHC transaction. In exchange for servicing the ASO business, Prudential is
remitting fees received from its ASO members to New Aetna, as well as paying
certain supplemental fees. The supplemental fees are fixed in amount and
decline over a period ending 18 months following the closing. During the period
August 6, 1999 through December 31, 1999, New Aetna recorded total fees for
servicing the Prudential ASO business of approximately $230 million pretax,
including supplemental fees of approximately $106 million pretax.
F-39
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions (Continued)
In connection with the PHC acquisition, New Aetna agreed with the U.S.
Department of Justice and the State of Texas to divest certain Texas HMO/POS
and other related businesses ("NYLCare Texas") acquired by New Aetna as part of
the 1998 acquisition of New York Life Insurance Company's ("NYL") health care
business ("NYLCare"). Pursuant to this agreement, on September 14, 1999, New
Aetna and Health Care Service Corporation ("HCSC") entered into an agreement
for Blue Cross and Blue Shield of Texas ("Blue Cross"), a division of HCSC, to
acquire the NYLCare Texas operations for approximately $500 million in cash,
subject to certain adjustments, including an adjustment based on the level of
membership at the closing date. At December 31, 1999, the Blue Cross agreement
affected approximately 497,000 Commercial HMO risk members, 56,000 Commercial
HMO non-risk members and 12,000 PPO members in the Houston, Austin, San
Antonio, Corpus Christi, Beaumont, Dallas-Fort Worth, San Angelo, Texarkana and
Amarillo areas. New Aetna expects to retain approximately 112,000 NYLCare
Medicare members in Texas through a reinsurance and administrative services
agreement.
Pursuant to this agreement, on March 31, 2000, New Aetna completed the
sale of NYLCare Texas to Blue Cross and Blue Shield of Texas, a division of
Health Care Service Corporation, for approximately $420 million in cash. The
sale resulted in an after-tax capital loss of $35 million which was recognized
in the fourth quarter of 1999. The after-tax loss included operating losses
from October 1, 1999 through closing. The results of NYLCare Texas were not
material to the Health Care segment or to New Aetna's consolidated results of
operations.
On July 15, 1998, New Aetna acquired NYLCare for a purchase price of
approximately $1.1 billion in cash. 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, New Aetna
and NYL agreed to resolve all purchase price adjustments and obligations under
the Earnout, and New Aetna paid NYL an additional $50 million to resolve such
matters, resulting in an increase to goodwill of approximately $200 million. As
a result, the total purchase price was approximately $1.1 billion.
In addition to recording the assets and liabilities acquired at fair
value, the purchase price allocation included approximately $35 million pretax
related to an unfavorable contract with an affiliate of NYL for providing
pharmaceutical benefits services (the "pharmacy contract"). As a condition of
closing the transaction, the pharmacy contract was extended from January 1,
2000 through December 31, 2003 (the "extension period"). The terms of the
extension period were believed to reflect an appropriate market price, however,
the terms of the pharmacy contract prior to January 1, 2000 were determined to
be unfavorable. The purchase price allocation related to the pharmacy contract
is being amortized over the period from closing to December 31, 1999. For 1999
and the period from July 16, 1998 through December 31, 1998, approximately $19
million and $16 million pretax, respectively, was amortized as a reduction of
pharmacy costs. Also, a $64 million liability related to the expected costs
associated with involuntarily terminating certain NYLCare employees and the
costs related to the exiting of leased NYLCare facilities was established as
part of the purchase price allocation. These costs are charged to this
liability as actions are taken and were not significant to New Aetna's combined
revenues or operating results.
The excess of the purchase price over the fair value of the net assets
acquired resulted in approximately $1.1 billion, net of related deferred taxes,
being primarily 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. New Aetna's
consolidated results of operations include NYLCare from July 15, 1998.
F-40
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Dispositions (Continued)
Presented below is certain unaudited pro forma information as if NYLCare
and PHC had been acquired on January 1, 1998. These results combine the
historical results of NYLCare and PHC into New Aetna's Consolidated Statements
of Income and reflect adjustments which include interest expense related to the
assumed financing of the consideration paid, amortization of goodwill and
intangible assets, amortization of a fixed asset fair market value adjustment
for NYLCare and amortization of a fair value adjustment related to an
unfavorable pharmacy contract for NYLCare. However, no adjustments have been
made to give effect to the following: (1) the Prudential reinsurance agreement;
(2) supplemental fees related to the servicing of Prudential's ASO contracts
following the acquisition; (3) the amortization of fair value adjustments
related to the reinsurance agreement; (4) the unfavorable component of the
contracts underlying the acquired medical risk business, or (5) any synergies
which may be realized as a result of the acquisitions.
The following unaudited pro forma information is not necessarily
indicative of the consolidated results of operations of the combined company
had the acquisitions occurred at the beginning of 1998, or is it necessarily
indicative of future results.
Pro Forma
For the Years Ended December 31,
(Unaudited)
--------------------------------
1999 1998
--------- ---------
(Millions)
Revenue................................ $26,426.5 $25,061.8
Income from continuing operations...... 245.7 141.0
During 1997, New Aetna's health care business sold subsidiaries that were
involved in physician practice management, health electronic data interchange
services and behavioral health management. The sale of these entities resulted
in a net after-tax realized capital gain of $31 million ($82 million pretax).
At the time of the sale of the behavioral health management business, Human
Affairs International Incorporated ("HAI"), New Aetna entered into a long-term
strategic provider relationship that will provide its health members continued
access to HAI's, as well as the purchaser's participating behavioral health
professionals at a fixed rate over the life of the agreement. Also, New Aetna
may earn contingent consideration of up to $300 million ($60 million maximum
per year) during the period from the closing date through 2002 for any
increases in targeted New Aetna members (on an equivalent member basis) served
by HAI subsequent to the sale.
The calculation of the contingent consideration is based on an increase in
equivalent membership served by HAI for any contract year (member months, or
each member served for a given month, divided by 12), subject to certain
adjustments, and a maximum of $60 million per year. The contingent
consideration is recognized as realized capital gains when realizable. During
1999 and 1998, $60 million ($39 million after tax) of contingent consideration
was earned and recognized as a capital gain in the third and fourth quarter,
respectively. The contingent consideration does not affect the fixed rates
under the long-term strategic provider agreement.
F-41
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments
Investment securities at December 31 were as follows:
1999 1998
--------- ---------
(Millions)
Debt securities available for sale....... $15,811.5 $17,584.7
Equity securities........................ 151.2 130.8
Other investment securities.............. 216.4 278.8
--------- ---------
Total investment securities.............. $16,179.1 $17,994.3
========= =========
Debt securities available for sale at December 31 were as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(Millions)
<S> <C> <C> <C> <C>
1999
Bonds:
U.S. government and government agencies and
authorities..................................... $ 1,262.6 $ 9.2 $ 33.3 $ 1,238.5
States, municipalities and political subdivisions. 778.0 3.5 12.8 768.7
U.S. corporate securities:........................
Utilities....................................... 1,796.8 19.5 69.3 1,747.0
Financial....................................... 2,299.7 8.5 114.4 2,193.8
Transportation/capital goods.................... 1,470.7 42.8 51.8 1,461.7
Health care/consumer products .................. 1,860.5 14.8 95.6 1,779.7
Other corporate securities...................... 680.5 5.0 43.1 642.4
--------- ------ ------ ---------
Total U.S. corporate securities............... 8,108.2 90.6 374.2 7,824.6
--------- ------ ------ ---------
Foreign:
Government, including political
subdivisions.................................. 941.3 26.4 29.2 938.5
Utilities....................................... 189.1 3.4 10.0 182.5
Other........................................... 1,120.3 24.6 42.6 1,102.3
--------- ------ ------ ---------
Total foreign securities...................... 2,250.7 54.4 81.8 2,223.3
--------- ------ ------ ---------
Residential mortgage-backed securities:
Pass-throughs................................... 1,891.1 1.0 66.8 1,825.3
Collateralized mortgage obligations ............ 54.0 0.5 0.6 53.9
--------- ------ ------ ---------
Total residential mortgage-backed securities.. 1,945.1 1.5 67.4 1,879.2
--------- ------ ------ ---------
Commercial/multifamily mortgage-backed
securities (1)................................ 1,589.6 1.3 94.9 1,496.0
Other asset-backed securities (2)............... 253.7 0.8 3.6 250.9
--------- ------ ------ ---------
Total bonds......................................... 16,187.9 161.3 668.0 15,681.2
Redeemable preferred stocks......................... 139.3 -- 9.0 130.3
--------- ------ ------ ---------
Total debt securities............................... $16,327.2 $161.3 $677.0 $15,811.5
========= ====== ====== =========
</TABLE>
F-42
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
<TABLE>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(Millions)
<S> <C> <C> <C> <C>
1998
Bonds:
U.S. government and government agencies and
authorities.................................... $ 1,135.2 $ 75.9 $1.5 $ 1,209.6
States, municipalities and political subdivisions 531.5 18.6 0.3 549.8
U.S. corporate securities:
Utilities...................................... 1,838.6 105.8 8.2 1,936.2
Financial...................................... 2,452.4 119.2 3.2 2,568.4
Transportation/capital goods................... 1,732.8 160.8 4.4 1,889.2
Health care/consumer products ................. 1,167.0 97.7 1.7 1,263.0
Natural resources.............................. 1,239.8 66.0 14.1 1,291.7
Other corporate securities..................... 1,017.5 78.8 37.3 1,059.0
--------- ------ ------ ---------
Total U.S. corporate securities.............. 9,448.1 628.3 68.9 10,007.5
--------- ------ ------ ---------
Foreign:
Government, including political subdivisions... 1,001.0 49.5 23.9 1,026.6
Utilities...................................... 216.4 15.9 5.1 227.2
Other.......................................... 1,508.4 54.2 46.6 1,516.0
--------- ------ ------ ---------
Total foreign securities..................... 2,725.8 119.6 75.6 2,769.8
--------- ------ ------ ---------
Residential mortgage-backed securities:
Pass-throughs.................................. 1,576.6 40.3 2.0 1,614.9
Collateralized mortgage obligations ........... 49.6 2.7 -- 52.3
--------- ------ ------ ---------
Total residential mortgage-backed securities. 1,626.2 43.0 2.0 1,667.2
--------- ------ ------ ---------
Commercial/multifamily mortgage-backed
securities (1)................................. 1,006.3 13.5 33.1 986.7
Other asset-backed securities (2)................ 235.6 3.5 0.5 238.6
--------- ------ ------ ---------
Total bonds........................................ 16,708.7 902.4 181.9 17,429.2
Redeemable preferred stocks............................ 152.0 4.4 0.9 155.5
--------- ------ ------ ---------
Total debt securities.................................. $16,860.7 $906.8 $182.8 $17,584.7
========= ====== ====== =========
</TABLE>
---------
(1) Includes approximately $158.7 million and $178.1 million of subordinate
and residual certificates at December 31, 1999 and 1998, respectively,
from a securitization of approximately $802.7 million of commercial
mortgage loans in 1997 which were retained by New Aetna.
(2) Includes approximately $81.1 million and $89.2 million of subordinate and
residual certificates at December 31, 1999 and 1998, respectively, from a
1995 mortgage loan securitization which were retained by New Aetna.
At December 31, 1999 and 1998, net unrealized appreciation (depreciation)
on available-for-sale debt securities included $(122) million and $362 million,
respectively, related to discontinued products (refer to Note 8) and $(104)
million and $220 million, respectively, related to experience-rated contracts,
which were not reflected in shareholder's equity.
F-43
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
The carrying and fair value of debt securities are shown below by
contractual maturity. Actual maturities may differ from contractual maturities
because securities may be restructured, called or prepaid.
1999 Amortized Cost Fair Value
-------------- ----------
(Millions)
Due to mature:
One year or less ............................ $ 1,225.5 $ 1,251.2
After one year through five years ........... 3,241.8 3,222.1
After five years through ten years .......... 3,820.1 3,689.7
After ten years ............................. 4,251.4 4,022.4
Mortgage-backed securities .................. 3,534.7 3,375.2
Other asset-backed securities ............... 253.7 250.9
----------- -----------
Total ......................................... $ 16,327.2 $ 15,811.5
=========== ===========
Investments in equity securities at December 31 were as follows:
1999 1998
----------- -----------
(Millions)
Cost .......................................... $ 216.4 $ 141.9
Gross unrealized capital gains ................ 83.9 60.0
Gross unrealized capital losses ............... (13.9) (5.3)
----------- -----------
Fair value .................................... 286.4 196.6
Less: amounts included in long-term investments 135.2 65.8
----------- -----------
Equity securities (included in investment
securities) ................................. $ 151.2 $ 130.8
=========== ===========
Investment real estate holdings at December 31 were as follows:
1999 1998
----------- -----------
(Millions)
Properties held for sale....................... $ 200.7 $ 174.0
Investment real estate......................... 161.9 107.4
----------- -----------
362.6 281.4
Valuation reserve.............................. (93.1) (89.1)
----------- -----------
Net carrying value of real estate.............. 269.5 192.3
Less: amounts included in other investments.... 4.8 --
----------- -----------
Investment real estate......................... $ 264.7 $ 192.3
=========== ===========
Accumulated depreciation for investment real estate was $58 million and
$57 million at December 31, 1999 and 1998, respectively.
Total real estate write-downs included in the net carrying value of New
Aetna's real estate holdings at December 31, 1999 and 1998 were $127 million
and $122 million, respectively (including $106 million and $104 million,
respectively, attributable to assets supporting discontinued products).
F-44
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
At December 31, 1999 and 1998, 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 were as
follows:
<TABLE>
1999 1998
------------------------ ------------------------
Total Recorded Specific Total Recorded Specific
Investment Reserves Investment Reserves
-------------- -------- -------------- --------
(Millions)
<S> <C> <C> <C> <C>
Supporting discontinued products ...... $ 158.9 $ 22.2 $ 161.9 $ 22.9
Supporting experience-rated products .. 66.9 8.8 95.7 21.7
Supporting remaining products ......... 48.4 1.1 31.7 1.7
-------- ------- -------- -------
Total impaired loans .................. $ 274.2 (1) $ 32.1 $ 289.3 (1) $ 46.3
======== ======= ======== =======
</TABLE>
---------
(1) Includes impaired loans at December 31, 1999 and 1998 of $109.0 million
and $96.0 million, respectively, for which no specific reserves are
considered necessary.
The activity in the specific and general mortgage loan impairment reserves
for the periods indicated is summarized below:
<TABLE>
Supporting Supporting Supporting
Discontinued Experience- Remaining
Products Rated Products Products Total
------------ -------------- ---------- -------
(Millions)
<S> <C> <C> <C> <C>
Balance at December 31, 1997........... $ 68.7 $ 31.6 $ 14.2 $114.5
Credited to net realized capital gains. -- -- (8.0) (8.0)
(Credited) charged to other accounts... (37.0) (1) (2.0) (1) -- (39.0)
Principal write-offs................... (2.2) -- (1.7) (3.9)
------ ------ ------ ------
Balance at December 31, 1998 (2)....... 29.5 29.6 4.5 63.6
Principal write-offs................... (0.6) (14.0) (3.1) (17.7)
------ ------ ------ ------
Balance at December 31, 1999 (2)....... $ 28.9 $ 15.6 $ 1.4 $ 45.9
====== ====== ====== ======
</TABLE>
---------
(1) Reflects adjustments to reserves related to assets supporting
experience-rated products and discontinued products, which do not affect
New Aetna's results of operations.
(2) Total reserves at December 31, 1999 and 1998 include $32.1 million and
$46.3 million, respectively, of specific reserves and $13.8 million and
$17.3 million, respectively, of general reserves.
F-45
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments (Continued)
Income earned (pretax) and cash received on the average recorded
investment in impaired loans for the 12 months ended December 31 were as
follows:
<TABLE>
1999 1998
------------------------------ ------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
Loans Earned Received Loans Earned Received
-------- ------ -------- -------- ------ --------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products...... $159.3 $12.0 $11.8 $172.8 $13.5 $13.8
Supporting experience-rated products.. 87.2 8.1 8.1 104.1 9.9 10.1
Supporting remaining products ........ 34.5 7.6 7.5 43.1 2.7 3.0
------ ----- ----- ------ ----- -----
Total................................. $281.0 $27.7 $27.4 $320.0 $26.1 $26.9
====== ===== ===== ====== ===== =====
</TABLE>
Significant noncash investing and financing activities include the
acquisition of real estate through foreclosures of mortgage loans amounting to
$24 million in 1999 and none in 1998.
At December 31, 1999 and 1998, New Aetna's mortgage loan balances net of
specific impairment reserves by geographic region and property type were as
follows:
<TABLE>
1999 1998 1999 1998
--------- --------- --------- ---------
(Millions) (Millions)
<S> <C> <C> <C> <C>
South Atlantic.................. $ 468.2 $ 551.9 Office.......................... $ 1,301.6 $ 1,441.0
Middle Atlantic................. 786.7 759.0 Retail.......................... 492.7 572.4
New England..................... 280.0 294.3 Apartment....................... 91.6 113.3
South Central................... 32.0 92.5 Hotel/Motel..................... 137.7 182.6
North Central................... 253.6 410.3 Industrial...................... 202.8 227.4
Pacific and Mountain............ 569.6 628.3 Mixed Use....................... 158.8 187.7
Non-U.S......................... 0.7 0.7 Other........................... 5.6 12.6
--------- --------- --------- ---------
Total........................... 2,390.8 2,737.0 Total........................... 2,390.8 2,737.0
Less: general impairment Less: general impairment
reserve......................... 13.8 17.3 reserve......................... 13.8 17.3
--------- --------- --------- ---------
Net mortgage loan balance....... 2,377.0 2,719.7 Net mortgage loan balance....... 2,377.0 2,719.7
Less: amount included in other Less: amount included in other
investments................... 499.8 305.7 investments................... 499.8 305.7
--------- --------- --------- ---------
Mortgage loans.................. $ 1,877.2 $ 2,414.0 Mortgage loans.................. $ 1,877.2 $ 2,414.0
========= ========= ========= =========
</TABLE>
F-46
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of New Aetna's
financial instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
1999 1998
------------------------------- -------------------------------
Estimated Fair Estimated Fair
Carrying Value Value Carrying Value Value
-------------- -------------- -------------- --------------
(Millions)
Assets:
<S> <C> <C> <C> <C>
Mortgage loans................ $2,377.0 $2,391.0 $2,719.7 $2,738.8
Liabilities:
Investment contract liabilities:
With a fixed maturity........ 2,579.0 2,596.8 3,461.7 3,587.2
Without a fixed maturity..... 986.2 853.0 1,503.5 1,445.4
Long-term debt................ 2,093.9 2,012.7 1,593.3 1,643.5
</TABLE>
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial instrument, such
as estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time New Aetna's entire holdings of a particular financial instrument, nor do
they consider the tax impact of the realization of unrealized capital gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument. In evaluating New Aetna's management of
interest rate, equity price and liquidity risks, the fair values of all assets
and liabilities should be taken into consideration, not only those presented
above.
The following valuation methods and assumptions were used by New Aetna in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage
loan cash flows at market rates that reflect the rates at which similar loans
would be made to similar borrowers. The rates reflect management's assessment
of the credit quality and the remaining duration of the loans. The fair value
estimates of mortgage loans of lower credit quality, including problem and
restructured loans, are based on the estimated fair value of the underlying
collateral.
Estimated Fair Value
Investment contract liabilities (included in policyholders' funds):
o With a fixed maturity: Fair value is estimated by discounting cash
flows at interest rates currently being offered by, or available to,
New Aetna for similar contracts.
o Without a fixed maturity: Fair value is estimated as the amount
payable to the contractholder upon demand. However, New Aetna has the
right under such contracts to delay payment of withdrawals that may
ultimately result in paying an amount different than that determined
to be payable on demand.
Long-term debt: Fair value is based on quoted market prices for the same
or similar issued debt or, if no quoted market prices are available, on the
current rates estimated to be available to New Aetna for debt of similar terms
and remaining maturities.
F-47
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments
The notional amounts, carrying values and estimated fair values of New
Aetna's off-balance-sheet and other financial instruments at December 31 were
as follows:
<TABLE>
1999 1998
------------------------------------- -------------------------------------
Carrying Carrying
Notional Value Asset Estimated Notional Value Asset Estimated
Amount (Liability) Fair Value Amount (Liability) Fair Value
-------- ----------- ---------- -------- ----------- ----------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Futures contracts to purchase securities. $ 95.3 $(3.1) $(3.1) $233.1 $(4.7) $(4.7)
Futures contracts to sell securities..... 220.2 3.6 3.6 652.0 11.3 11.3
Interest rate swaps...................... 43.0 -- 3.7 43.0 -- 8.5
Warrants to purchase securities.......... 30.0 0.1 0.1 25.0 0.1 0.1
Written options.......................... -- -- -- 50.0 0.1 0.1
</TABLE>
The notional amounts of these instruments do not represent New Aetna's
risk of loss. The fair value of these instruments was estimated based on quoted
market prices, dealer quotations or internal price estimates believed to be
comparable to dealer quotations. These fair value amounts reflect the estimated
amounts that New Aetna would have to pay or would receive if the contracts were
terminated.
New Aetna engages in hedging activities to manage interest rate and equity
price risks. Such hedging activities have principally consisted of using
off-balance-sheet instruments that involve, to varying degrees, elements of
market risk and credit risk in excess of the amounts recognized in the
Consolidated Balance Sheets. New Aetna evaluates the risks associated with
these instruments in a manner similar to that used to evaluate the risks
associated with on-balance-sheet financial instruments. Unlike on-balance-sheet
financial instruments, where credit risk is generally represented by the
notional or principal amount, the off-balance-sheet financial instruments' risk
of credit loss generally is significantly less than the notional value of the
instrument and is represented by the positive fair value of the instrument. New
Aetna generally does not require collateral or other security to support the
financial instruments discussed below. However, New Aetna controls its credit
risk exposure through credit approvals, credit limits and regular monitoring
procedures. There were no material concentrations of off-balance-sheet
financial instruments at December 31, 1999 or December 31, 1998.
Futures Contracts
Futures contracts represent commitments to either purchase or sell
securities at a specified future date and at a specified price or yield.
Futures contracts trade on organized exchanges and, therefore, have minimal
credit risk.
Interest Rate Swaps
New Aetna utilizes interest rate swaps to manage certain exposures related
to changes in interest rates primarily by exchanging variable-rate returns for
fixed-rate returns.
Warrants
Warrants are instruments giving New Aetna the right, but not the
obligation, to buy a security at a given price during a specified period.
F-48
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Net Investment Income
Sources of net investment income were as follows:
1999 1998 1997
---------- ---------- ----------
(Millions)
Debt securities ..................... $ 1,253.1 $ 1,253.0 $ 1,170.9
Equity securities ................... 4.0 5.2 8.6
Other investment securities ......... 33.1 50.6 38.3
Mortgage loans ...................... 242.9 292.4 538.7
Investment real estate .............. 63.2 69.5 159.4
Other ............................... 121.7 194.4 80.4
Cash equivalents .................... 13.7 18.3 34.5
---------- ---------- ----------
Gross investment income ............. 1,731.7 1,883.4 2,030.8
Less: investment expenses ........... 129.9 186.8 152.7
---------- ---------- ----------
Net investment income (1)(2) ........ $ 1,601.8 $ 1,696.6 $ 1,878.1
========== ========== ==========
---------
(1) Includes $11.8 million, $10.1 million and $15.6 million from real estate
held for sale during 1999, 1998 and 1997, respectively.
(2) Includes amounts allocable to experience-rated contractholders of $350.4
million, $418.5 million and $516.4 million during 1999, 1998 and 1997,
respectively. Interest credited to contractholders is included in current
and future benefits.
7. Capital Gains and Losses on Investment Operations and Other
Net realized capital gains (losses), excluding amounts allocable to
experience-rated contractholders and discontinued products, on investments were
as follows:
1999 1998 1997
---------- ---------- ----------
(Millions)
Debt securities........................... $(43.7) $ 46.8 $ 25.7
Equity securities (1)..................... 32.5 191.4 204.0
Mortgage loans............................ 0.4 19.8 16.4
Investment real estate.................... 3.0 1.5 13.2
Sales of subsidiaries (2)................. 36.0 60.0 82.3
Other (3)................................. 34.3 (29.6) (61.7)
------ ------ ------
Pretax realized capital gains............. $ 62.5 $289.9 $279.9
====== ====== ======
After-tax realized capital gains (losses). $ 21.4 $189.0 $160.5
====== ====== ======
---------
(1) Includes pretax realized capital gains of $114.6 million and $151.0
million in 1998 and 1997, respectively, related to sale of New Aetna's
investment in Travelers Property Casualty Corporation.
(2) Includes a pretax realized capital gain in both 1999 and 1998 of $60.0
million related to contingent payments following the sale of HAI in 1997
and a pretax loss in 1999 of $35.0 million related to the anticipated sale
of NYLCare Texas. Net realized capital gains in 1997 include pretax gains
associated with the sale of HAI and certain other health subsidiaries.
(Refer to Note 3.)
(3) Includes realized capital gains in 1999 related to sales of common stock
and $21.1 million of previously deferred hedge gains related to an
anticipated debt issuance. Includes pretax realized capital losses of $44.0
million in 1997 related to the write-down of certain properties that New
Aetna had classified as held for sale.
F-49
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Capital Gains and Losses on Investment Operations and Other (Continued)
Net realized capital gains (losses) of $(11) million, $122 million and
$125 million for 1999, 1998 and 1997, respectively, allocable to
experience-rated contractholders were deducted from net realized capital gains
and an offsetting amount was reflected in policyholders' funds.
Proceeds from the sale of available-for-sale debt securities and the
related gross gains and losses were as follows:
1999 1998 1997
----------- ----------- -----------
(Millions)
Proceeds on sales ............. $ 11,707.8 $ 12,455.5 $ 10,299.9
Gross gains ................... 97.6 120.4 62.4
Gross losses .................. 141.3 73.6 36.7
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (loss) (unrealized capital gains and losses on securities
and foreign currency) (excluding those related to experience-rated
contractholders and discontinued products) were as follows:
1999 1998 1997
----------- --------- ----------
(Millions)
Debt securities ......................... $ (845.4) $ 27.6 $ 194.5
Equity securities and other ............. (60.2) (183.6) (128.0)
Foreign exchange ........................ (132.5) (43.3) (117.1)
---------- -------- --------
Subtotal ................................ (1,038.1) (199.3) (50.6)
Decrease in deferred income taxes ....... (204.7) (70.0) (17.7)
---------- -------- --------
Net changes in accumulated other
comprehensive income (loss) ........... $ (833.4) $ (129.3) $ (32.9)
========== ======== ========
Shareholder's equity included the following accumulated other
comprehensive income (loss) which is net of amounts allocable to
experience-rated contractholders and discontinued products at December 31:
1999 1998
-------- --------
(Millions)
Debt securities available for sale:
Gross unrealized capital gains ....................... $ 205.6 $ 678.5
Gross unrealized capital losses ...................... (537.4) (164.9)
-------- --------
(331.8) 513.6
-------- --------
Equity securities and other:
Gross unrealized capital gains ....................... 71.8 135.0
Gross unrealized capital losses ...................... (56.5) (59.5)
-------- --------
15.3 75.5
-------- --------
Foreign exchange ...................................... (448.0) (315.5)
Deferred income taxes ................................. 108.9 (95.8)
-------- --------
Net accumulated other comprehensive income (loss) .... $ (655.6) $ 177.8
======== ========
F-50
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Capital Gains and Losses on Investment Operations and Other (Continued)
Additional Information -- Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) related to
changes in unrealized gains on securities (excluding those related to
experience-rated contractholders and discontinued products) were as follows:
1999 1998 1997
-------- -------- --------
(Millions)
Unrealized holding gains (losses)
arising during the period (1) ......... $ (560.8) $ 123.1 $ 378.6
Less: reclassification adjustment
for gains and other items
included in net income (2)............. 27.8 224.5 335.4
-------- -------- --------
Net unrealized gains (losses) on
securities ............................ $ (588.6) $ (101.4) $ 43.2
======== ======== ========
---------
(1) Pretax unrealized holding gains (losses) arising during the period were
$(862.8) million, $189.4 million and $582.5 million for 1999, 1998 and
1997, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $42.8 million, $345.4 million and $516.0 million for 1999,
1998 and 1997, respectively.
8. Discontinued Products
New Aetna discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under New Aetna's accounting for these discontinued
products, a reserve for anticipated future losses from these products was
established and 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 New Aetna's results of operations. New Aetna'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 future
losses are less than anticipated. The current reserve reflects management's
best estimate of anticipated future losses.
The factors contributing to changes in the reserve for anticipated future
losses are: operating income or loss, realized capital gains or losses and
mortality gains or losses. Operating income or loss is equal to revenue less
expenses. Realized capital gains or losses reflect the excess (deficit) of
sales price over (below) the carrying value of assets sold. Mortality gains or
losses reflect the mortality and retirement experience related to SPAs. A
mortality gain (loss) occurs when an annuitant or a beneficiary dies sooner
(later) than expected. A retirement gain will occur on some contracts if an
annuitant retires later than expected (a loss if an annuitant retires earlier
than expected).
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 that was used to calculate the
reserve. 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 December
31, 1999, the receivable from continuing products, net of related deferred
taxes payable of $67 million on the accrued interest income, was $464 million.
At December 31, 1998, the receivable from continuing products, net of the
related deferred taxes payable of $55 million on the accrued interest income,
was $493 million. These amounts were eliminated in consolidation.
F-51
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Discontinued Products (Continued)
Results of discontinued products were as follows (pretax):
<TABLE>
Charged
(Credited) to
Reserve for
Results Future Losses Net (1)
--------- ------------- ------
(Millions)
<S> <C> <C> <C>
1999
Net investment income......................... $ 471.5 $ -- $ 471.5
Net realized capital losses................... (11.9) 11.9 --
Interest earned on receivable from
continuing products.......................... 32.8 -- 32.8
Other income.................................. 32.9 -- 32.9
--------- ------- -------
Total revenue............................ 525.3 11.9 537.2
--------- ------- -------
Current and future benefits................... 499.6 22.6 522.2
Operating expenses............................ 15.0 -- 15.0
--------- ------- -------
Total benefits and expenses.............. 514.6 22.6 537.2
--------- ------- -------
Results of discontinued products.............. $ 10.7 $ (10.7) $ --
========= ======= =======
1998
Net investment income......................... $ 530.9 $ -- $ 530.9
Net realized capital gains.................... 116.6 (116.6) --
Interest earned on receivable from
continuing products.......................... 34.4 -- 34.4
Other income.................................. 28.5 -- 28.5
--------- ------- -------
Total revenue............................ 710.4 (116.6) 593.8
--------- ------- -------
Current and future benefits................... 565.8 13.8 579.6
Operating expenses............................ 14.2 -- 14.2
--------- ------- -------
Total benefits and expenses.............. 580.0 13.8 593.8
--------- ------- -------
Results of discontinued products.............. $ 130.4 $(130.4) $ --
========= ======= =======
1997
Net investment income......................... $ 675.5 $ -- $ 675.5
Net realized capital gains (2)................ 269.9 (269.9) --
Interest earned on receivable from
continuing products...... ................... 33.1 -- 33.1
Other income.................................. 25.3 -- 25.3
--------- ------- -------
Total revenue............................ 1,003.8 (269.9) 733.9
--------- ------- -------
Current and future benefits................... 652.3 67.5 719.8
Operating expenses............................ 14.1 -- 14.1
--------- ------- -------
Total benefits and expenses.............. 666.4 67.5 733.9
--------- ------- -------
Results of discontinued products.............. $ 337.4 $(337.4) $ --
========= ======= =======
</TABLE>
---------
(1) Amounts are reflected in the 1999, 1998 and 1997 Consolidated Statements
of Income, except for interest earned on the receivable from continuing
products, which was eliminated in consolidation.
(2) Includes net realized capital gains of $154.4 million (pretax) related to
continued favorable developments in real estate markets (including gains of
$37.4 million (pretax) related to the securitization of commercial mortgage
loans), as well as $57.4 million (pretax) resulting from the sale of
investments in order to meet liquidity needs.
F-52
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Discontinued Products (Continued)
Net realized capital gains (losses) from the sale of bonds supporting
discontinued products were $(33) million, $81 million and $56 million (pretax)
for 1999, 1998 and 1997, respectively.
Assets and liabilities supporting discontinued products at December 31
were as follows: (1)
1999 1998
---------- ----------
(Millions)
Assets:
Debt securities available for sale ................. $ 4,533.0 $ 5,890.5
Mortgage loans ..................................... 768.8 754.2
Investment real estate ............................. 112.7 104.2
Other investment securities ........................ 453.9 350.7
---------- ----------
Total investments ................................... 5,868.4 7,099.6
Investments under securities loan agreement ........ 243.8 143.9
Current and deferred income taxes .................. 134.1 187.5
Receivable from continuing products (2) ............ 530.6 548.0
Other .............................................. 82.6 --
---------- ----------
Total assets ........................................ $ 6,859.5 $ 7,979.0
========== ==========
Liabilities:
Future policy benefits ............................. $ 4,566.0 $ 4,653.5
Policyholders' funds ............................... 902.1 1,546.0
Reserve for anticipated future losses on
discontinued products ............................. 1,147.6 1,214.1
Payable under securities loan agreement ............ 243.8 143.9
Other .............................................. -- 421.5
---------- ----------
Total liabilities ................................... $ 6,859.5 $ 7,979.0
========== ==========
---------
(1) Assets supporting the discontinued products are distinguished from other
continuing operations assets.
(2) The receivable from continuing products is eliminated in consolidation.
At December 31, 1999, net unrealized capital losses on available-for-sale
debt securities are included above in other assets. At December 31, 1998, net
unrealized capital gains on available-for-sale debt securities are included
above in other liabilities. These net unrealized capital gains and losses are
not reflected in consolidated shareholder's equity. The reserve for anticipated
future losses is included in future policy benefits on the Consolidated Balance
Sheets.
The reserve for anticipated future losses on discontinued products
represents the present value (at the risk-free rate at the time of
discontinuance, consistent with the duration of the liabilities) of the
difference between the expected cash flows from the assets supporting
discontinued products and the cash flows expected to be required to meet the
obligations of the outstanding contracts. Calculation of the reserve for
anticipated future losses requires projection of both the amount and the timing
of cash flows over approximately the next 30 years, including consideration of,
among other things, future investment results, participant withdrawal and
mortality rates and the cost of asset management and customer service. Since
1993, there have been no significant changes to the assumptions underlying the
calculation of the reserve related to the projection of the amount and timing
of cash flows.
F-53
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Discontinued Products (Continued)
The projection of future investment results considers assumptions for
interest rates, bond discount rates and performance of mortgage loans and real
estate. Mortgage loan assumptions represent management's best estimate of
current and future levels of rent growth, vacancy and expenses based upon
market conditions at each reporting date. The performance of real estate assets
has been consistently estimated using the most recent forecasts available.
During 1997, a bond default assumption was included to reflect historical
default experience, since the bond portfolio increased as a percentage of the
overall investment portfolio and reflected more bond credit risk, concurrent
with the decline in the commercial mortgage loan and real estate portfolios.
The previous years' actual participant withdrawal experience is used for
the current year assumption. Prior to 1995, New Aetna used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the
"Society"). In 1995, the Society published the 1994 Uninsured Pensioner's
Mortality table which has been used since then.
New Aetna's assumptions about the cost of asset management and customer
service reflect actual investment and general expenses allocated over invested
assets. Since inception, the expense assumption has increased as the level of
fixed expenses has not declined as rapidly as the liabilities have run off.
The activity in the reserve for anticipated future losses on discontinued
products was as follows (pretax):
(Millions)
----------
Reserve at December 31, 1996................. $ 986.8
Operating income............................. 58.7
Net realized capital gains................... 269.9
Mortality and other.......................... 8.8
Reserve reduction............................ (172.5)
--------
Reserve at December 31, 1997................. 1,151.7
Operating loss............................... (6.6)
Net realized capital gains................... 116.6
Mortality and other.......................... 20.4
Reserve reduction............................ (68.0)
--------
Reserve at December 31, 1998................. 1,214.1
Operating income............................. 10.1
Net realized capital losses.................. (11.9)
Mortality and other.......................... 12.5
Reserve reduction............................ (77.2)
--------
Reserve at December 31, 1999................. $1,147.6
========
Management reviews the adequacy of the discontinued products reserve
quarterly and, as a result, primarily due to favorable investment performance,
$77 million ($50 million after tax) of the reserve was released in 1999 and $68
million ($44 million after tax) of the reserve was released in 1998. A similar
review resulted in New Aetna's release of $173 million ($108 million after tax)
in 1997 of the reserve due to continued favorable developments in real estate
markets. The current reserve reflects management's best estimate of anticipated
future losses.
F-54
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Discontinued Products (Continued)
The anticipated run off of the December 31, 1999 reserve balance was as
follows:
(Millions)
----------
2000................................. $ 30.0
2001................................. 30.4
2002................................. 30.9
2003................................. 31.7
2004 - 2008.......................... 172.6
2009 - 2013.......................... 188.4
2014 - 2018.......................... 180.0
Thereafter........................... 483.6
The above table assumes that assets are held until maturity and that the
reserve run off is proportional to the liability run off.
The expected (as of December 31, 1993) and actual liability balances for
the GIC and SPA liabilities at December 31 were as follows:
Expected Actual
------------------------- -------------------------
GIC SPA GIC SPA
---------- ---------- ---------- ----------
(Millions)
1997 ............. $ 3,173.9 $ 4,685.8 $ 2,321.4 $ 4,763.0
1998 ............. 2,029.6 4,581.3 1,546.0 4,653.5
1999 ............. 1,214.5 4,472.1 902.1 4,566.0
The GIC balances were lower than expected in each period as several
contractholders redeemed their contracts prior to contract maturity. The SPA
balances in each period were higher than expected because of additional amounts
received under existing contracts.
F-55
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes
Income taxes (benefits) consist of the following:
1999 1998 1997
------ ------ ------
(Millions)
Current taxes:
Federal......................... $238.9 $340.6 $292.0
State........................... 29.6 38.6 35.2
------ ------ ------
268.5 379.2 327.2
------ ------ ------
Deferred taxes (benefits):
Federal......................... 79.6 12.6 122.3
State........................... (2.7) (0.2) 4.4
------ ------ ------
76.9 12.4 126.7
------ ------ ------
Total................................ $345.4 $391.6 $453.9
====== ====== ======
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes as follows:
1999 1998 1997
------ ------ ------
(Millions)
Income from continuing operations
before income taxes................. $744.8 $842.0 $979.6
Tax rate............................. 35% 35% 35%
------ ------ ------
Application of the tax rate.......... 260.7 294.7 342.9
Tax effect of:
Tax-exempt interest................. (6.7) (4.0) (2.5)
Goodwill amortization............... 66.3 64.1 62.6
State income taxes.................. 17.4 25.0 25.8
Sale of subsidiaries................ 19.5 -- 13.7
Other, net.......................... (11.8) 11.8 11.4
------ ------ ------
Income taxes......................... $345.4 $391.6 $453.9
====== ====== ======
F-56
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are as follows:
1999 1998
-------- ---------
(Millions)
Deferred tax assets:
Reserve for anticipated future losses on
discontinued products ........................... $401.7 $407.0
Other postretirement benefits .................... 155.1 169.5
Reserve for severance and facilities charges ..... 109.0 123.9
Deferred compensation and other .................. 77.5 67.1
Insurance reserves ............................... 44.0 --
Deferred policy acquisition costs ................ 39.4 48.5
Impairment reserves .............................. 16.4 27.5
Net operating loss carryforward .................. 16.4 21.2
Accumulated other comprehensive loss ............. 15.9 --
Other ............................................ 20.7 15.0
------ ------
Total gross assets ................................ 896.1 879.7
Less: valuation allowance ......................... 15.6 17.3
------ ------
Assets, net of valuation allowance ................ 880.5 862.4
------ ------
Deferred tax liabilities:
Acquired intangibles other than goodwill ......... 313.5 389.1
Market discount .................................. 43.4 43.6
Insurance reserves ............................... -- 85.8
Accumulated other comprehensive income ........... -- 0.9
Other ............................................ 97.4 53.5
------ ------
Total gross liabilities ........................... 454.3 572.9
------ ------
Net deferred tax asset............................. $426.2 (1) $289.5 (2)
====== ======
---------
(1) Includes $157.6 million classified as a current asset and $268.6 million
classified as a noncurrent asset.
(2) Includes $5.0 million classified as a current asset, $302.4 million
classified as a noncurrent asset and $17.9 million classified as a current
liability.
Valuation allowances are provided when it is considered unlikely that
deferred tax assets will be realized. The valuation allowance relates to future
tax benefits on certain purchased net operating losses.
Management believes that it is more likely than not that New Aetna will
realize the benefit of the net deferred tax asset of $426 million. New Aetna
expects sufficient taxable income in the future to realize the net deferred tax
asset because of New Aetna's long-term history of having taxable income, which
is projected to continue.
F-57
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes (Continued)
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that has
not been subject to taxation. As of December 31, 1983, no further additions
could be made to the Policyholders' Surplus Account for tax return purposes
under the Deficit Reduction Act of 1984. The balance in such account was $918
million at December 31, 1999, adjusted for Internal Revenue Service (the
"Service") audits finalized to date. This amount would be taxed only under
certain conditions. No income taxes have been provided on this amount, since
management believes under current tax law the conditions under which such taxes
would become payable are remote.
The Service has completed its examination of the consolidated federal
income tax returns of Aetna Services and affiliated companies, as well as U.S.
Healthcare through 1994. Discussions are being held with the Service with
respect to proposed adjustments. Management believes there are adequate
defenses against, or sufficient reserves to provide for, any such adjustments.
The Service is continuing its examination for the years 1995 for Aetna Services
and 1996 and 1997 for Aetna.
New Aetna paid net income taxes of $218 million, $482 million and $213
million in 1999, 1998 and 1997, respectively.
10. Benefit Plans
At the effective date of the Restructuring and Merger (refer to Note 17),
New Aetna will generally be responsible for pension and post-retirement
benefits for individuals actively employed by New Aetna in the United States
and all former United States employees of New Aetna or Aetna. Aetna's accrued
pension cost has been allocated to its subsidiaries, including New Aetna, under
an allocation based on eligible salaries. Data on a separate company basis
regarding the proportionate share of the projected benefit obligation and plan
assets for pension and post-retirement plans is not available.
Aetna's noncontributory defined benefit pension plans cover substantially
all employees. Effective January 1, 1999, New Aetna, in conjunction with Aetna,
changed the formula from the previous final average pay formula to a cash
balance formula, which will credit employees annually with an amount equal to a
percentage of eligible pay based on age and years of service as well as an
interest credit based on individual account balances. The formula also provides
for a transition period until December 1, 2006, which allows certain employees
to receive vested benefits at the higher of the final average pay or cash
balance formula. The changing of this formula did not have a material effect on
New Aetna's results of operations, liquidity or financial condition.
Components of the net periodic benefit cost of the
noncontributory defined benefit pension plan of Aetna were as follows:
1999 1998 1997
------ ------ ------
(Millions)
Actual return on plan assets........ $582.4 $ 70.2 $731.4
Service cost........................ (83.2) (76.0) (74.9)
Interest cost....................... (251.6) (239.0) (231.4)
Net amortization and deferral....... (273.4) 255.6 (476.1)
------ ------ ------
Net periodic benefit income (cost).. $(25.8) $ 10.8 $(51.0)
====== ====== ======
F-58
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Benefit Plans (Continued)
Allocated pretax (charges) benefit to operations for the pension plan
(based on New Aetna's total salary cost as a percentage of Aetna's total salary
cost) were approximately $(14) million, $15 million and $(39) million for the
years ended December 31, 1999, 1998 and 1997, respectively.
As of the measurement date (September 30), the status of the Aetna defined
benefit pension plans was as follows:
1999 1998
----------- ------------
(Millions)
Projected benefit obligation, beginning of year ... $ 3,672.2 $ 3,273.7
Service cost ...................................... 83.2 76.0
Interest cost ..................................... 251.6 239.0
Actuarial loss (gain) ............................. (249.5) 254.6
Sale of business .................................. (40.7) --
Benefits paid ..................................... (210.4) (171.1)
----------- -----------
Projected benefit obligation, end of year ......... $ 3,506.4 $ 3,672.2
----------- -----------
Fair value of plan assets, beginning of year....... $ 3,566.3 $ 3,587.5
Actual return on plan assets ...................... 582.4 70.2
Employer contribution ............................. 62.2 79.7
Sale of business .................................. (46.7) --
Benefits paid ..................................... (210.4) (171.1)
----------- -----------
Fair value of plan assets, end of year ............ $ 3,953.8 $ 3,566.3
----------- -----------
Fair value of plan assets in excess of
(less than) projected benefit obligation ......... $ 447.4 $ (105.9)
Unrecognized net loss (gain) ...................... (470.9) 97.9
Unrecognized prior service cost/other ............. 53.1 3.7
Unrecognized net asset at date of adoption
of FAS No. 87 .................................... 3.1 (0.2)
----------- -----------
Prepaid (accrued) pension cost .................... $ 32.7 $ (4.5)
=========== ===========
Weighted average discount rate .................... 7.75% 7.00%
Expected return on plan assets .................... 9.25% 9.00%
Rate of compensation increase ..................... 4.75% 4.00%
The defined benefit plans included above with benefit obligations in
excess of assets (unfunded plans) had projected benefit obligations of
approximately $224 million and $206 million for 1999 and 1998, respectively.
The 1999 and 1998 accumulated benefit obligations for these plans were
approximately $203 million and $173 million, respectively.
Aetna previously had a defined contribution pension plan which covered
substantially all of its former U.S. Healthcare employees, subject to certain
age and service requirements. Effective January 1, 1999, this plan was
terminated, as former U.S. Healthcare employees were eligible to participate in
the Aetna plan. Pretax charges for this defined contribution pension plan were
$16 million in 1998 and 1997.
F-59
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Benefit Plans (Continued)
In addition to providing pension benefits, Aetna currently provides
certain health care and life insurance benefits for retired employees. A
comprehensive medical and dental plan is offered to all full-time employees
retiring at age 45 with 10 years of service. New Aetna provides subsidized
benefits to employees whose sum of age and service is at least equal to 65.
There is a cap on the portion of the cost paid by New Aetna relating to medical
and dental benefits. The plan assets are held in trust and administered by
Aetna Life Insurance Company.
Components of the net periodic postretirement benefit cost of the
postretirement benefit plans of Aetna were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(Millions)
<S> <C> <C> <C>
Actual return on plan assets.... $ 3.8 $ 2.6 $ 2.4
Service cost.................... (7.1) (5.7) (5.9)
Interest cost................... (30.9) (30.7) (30.2)
Net amortization................ 22.9 24.1 24.9
-------- -------- --------
Net periodic benefit cost....... $ (11.3) $ (9.7) $ (8.8)
======== ======== ========
</TABLE>
The costs to New Aetna associated with the Aetna postretirement plans for
1999, 1998 and 1997 were approximately $(8) million, $(7) million and $(7)
million, respectively.
As of the measurement date (September 30), the status of the Aetna
postretirement benefit plans (other than pensions) was as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Millions)
<S> <C> <C>
Accumulated benefit obligation, beginning of year................................. $ 464.1 $ 426.5
Service cost...................................................................... 7.1 5.7
Interest cost..................................................................... 30.9 30.7
Actuarial (gain) loss............................................................. (15.1) 36.4
Sale of business.................................................................. (5.7) --
Benefits paid..................................................................... (34.6) (35.2)
-------- --------
Accumulated benefit obligation, end of year....................................... $ 446.7 $ 464.1
-------- --------
Fair value of plan assets, beginning of year...................................... $ 57.0 $ 55.7
Actual return on plan assets...................................................... 3.8 2.6
Employer contribution............................................................. 46.5 33.9
Benefits paid..................................................................... (34.6) (35.2)
-------- --------
Fair value of plan assets, end of year............................................ $ 72.7 $ 57.0
-------- --------
Accumulated benefit obligation in excess of fair value of plan assets............. $ 374.0 $ 407.1
Unrecognized net gain............................................................. 59.9 39.3
Prior service cost................................................................ 42.9 57.2
-------- --------
Accrued postretirement benefit costs.............................................. $ 476.8 $ 503.6
======== ========
Weighted average discount rate.................................................... 7.75% 7.00%
Expected return on plan assets.................................................... 7.00% 7.00%
</TABLE>
F-60
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Benefit Plans (Continued)
The health care cost trend rate for the 1999 valuation decreased gradually
from 8.0% for 2000 to 5.5% by the year 2005. For the 1998 valuation, the rates
decreased gradually from 8.5% for 1999 to 5.5% by the year 2005.
A one-percentage-point change (increase or decrease) in assumed health
care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
Increase Decrease
-------- --------
(Millions)
<S> <C> <C>
Effect on total of service and interest cost components............... $ 1.8 $ (1.5)
Effect on postretirement benefit obligation........................... 19.8 (17.6)
</TABLE>
It is Aetna's practice to fund amounts for postretirement life insurance
benefits to the extent the contribution is deductible for federal income taxes.
The plan assets are held in trust and administered by Aetna Life Insurance
Company. The assets are in the general account of Aetna Life Insurance Company,
and the expected rate of return on the plan assets was 7% for 1999, 1998 and
1997.
Incentive Savings Plans -- Substantially all of New Aetna's employees are
eligible to participate in a savings plan under which designated contributions,
which may be invested in common stock of Aetna or certain other investments,
are matched, up to 5% of compensation, by Aetna. The U.S. Healthcare savings
plan provided for a match of up to 2% of compensation in common stock of Aetna.
Effective January 1, 1999, contributions to the U.S. Healthcare plan ceased and
such employees became eligible to participate in Aetna's Incentive Savings
Plan. The costs to New Aetna associated with these plans were $53 million, $34
million and $33 million for 1999, 1998 and 1997, respectively.
Stock Plans -- Aetna has a stock incentive plan that provides for stock
options, deferred contingent common stock or equivalent cash awards or
restricted stock to employees. Executive, middle management and non-management
employees may be granted options to purchase common stock of Aetna at or above
the market price on the date of grant. Options generally become 100% vested
three years after the grant is made, with one-third of the options vesting each
year. Aetna does not recognize compensation expense for stock options granted
at or above the market price on the date of grant under its stock incentive
plans. In addition, executives may, from time to time, be granted incentive
units which are rights to receive common stock or an equivalent value in cash.
The incentive units may vest within a range from 0% to 175% at the end of a
four year period based on the attainment of performance goals. The costs to New
Aetna associated with the Aetna stock plans for 1999, 1998 and 1997, were $5
million, $13 million and $14 million, respectively.
F-61
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Debt and Guarantee of Debt Securities
As discussed in Note 2, New Aetna's consolidated financial statements
include an allocation of Aetna's consolidated debt and the related interest
expense. The allocation was based on a capital allocation methodology in
support of New Aetna's businesses.
1999 1998
-------- --------
(Millions)
Long-term debt:
Notes, 6.75% due 2001............................. $299.8 $299.8
Note, 7.5% due 2002............................... 500.0 --
Notes, 6.375% due 2003............................ 199.5 199.4
Notes, 7.125% due 2006............................ 348.3 348.0
Debentures, 7.625% due 2026....................... 446.3 446.1
Debentures, 6.97% due 2036 (puttable at par in 2004).. 300.0 300.0
-------- --------
Total................................................... $2,093.9 $1,593.3
======== ========
Aggregate maturities of long-term debt and sinking fund requirements for
2001 through 2004 are approximately $300 million, $500 million, $200 million
and $300 million, respectively, and $794 million, thereafter.
On November 18, 1998, New Aetna issued $300 million of 5.66% Puttable
Reset Securities ("PURS"). The PURS were structured such that, on November 29,
1999 the remarketing agents were able to elect to remarket the PURS, whereby
the annual interest rate on the securities would have been reset to a specified
base rate (10-year Treasury rate plus a defined spread). However, the
remarketing agents elected not to remarket the securities, and New Aetna was
required to repurchase the PURS in full on November 29, 1999. In 1998, the PURS
were included in short-term debt on New Aetna's Consolidated Balance Sheets.
At December 31, 1999, $1.7 billion of short-term borrowings were
outstanding. The weighted average interest rate on short-term borrowings was
6.13% and 5.49% at December 31, 1999 and 1998, respectively. In addition, New
Aetna had 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 were available under the facility and any borrowings matured on
the expiration date of the applicable credit commitment. New Aetna paid
facility fees ranging from 0.065% to 0.2% per annum, depending upon its
long-term senior unsecured debt rating. The facility fee at December 31, 1999
was at an annual rate of 0.08%. The facility also supported New Aetna's
commercial paper borrowing program. Under this credit facility, New Aetna was
required to maintain shareholder's equity, excluding net unrealized capital
gains and losses (accumulated other comprehensive income (loss)), of at least
$7.5 billion. Aetna had fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt.
On April 1, 1999, New Aetna entered into an additional revolving credit
facility in an aggregate amount of $500 million with a worldwide group of
banks. This credit facility terminated on March 26, 2000. Various interest rate
options were available under this facility and any borrowings matured on the
expiration date of the applicable credit commitment. New Aetna paid facility
fees ranging from 0.065% to 0.25% per annum, depending upon its long-term
senior unsecured debt rating. The facility fee at December 31, 1999 was at an
annual rate of 0.08%. This facility also supported New Aetna's commercial paper
borrowing program. Under this credit facility, New Aetna was required to
maintain shareholder's equity, excluding net unrealized capital gains and
losses (accumulated other comprehensive income (loss)), of at least $7.5
billion.
Total interest paid by New Aetna was $178 million, $167 million and $217
million in 1999, 1998 and 1997, respectively.
F-62
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Aetna-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Limited Liability Company Holding Primarily Debentures Guaranteed by Aetna
On November 22, 1994, Aetna Capital L.L.C. ("ACLLC"), a wholly-owned
subsidiary of New Aetna, issued $275 million (11,000,000 shares) of 9.5%
Cumulative Monthly Income Preferred Securities, Series A. The securities were
redeemable, at the option of ACLLC with New Aetna's consent, in whole or in
part, on or after November 30, 1999, or at any time under certain limited
circumstances related to tax events, at a redemption price of $25 per security
plus accumulated and unpaid dividends to the redemption date. These securities
were redeemed in December 1999 at par value.
13. Dividend Restrictions and Shareholder's Equity
New Aetna's business operations are conducted through subsidiaries that
principally consist of HMOs and insurance companies. In addition to general
state law restrictions on payments of dividends and other distributions to
shareholders applicable to all corporations, HMOs and insurance companies are
subject to further state regulations that, among other things, may require such
companies to maintain certain levels of equity, and restrict the amount of
dividends and other distributions that may be paid to their parent
corporations. These regulations are not directly applicable to New Aetna. The
additional regulations applicable to New Aetna's indirect HMO and insurance
company subsidiaries are not expected to affect the ability of New Aetna to pay
dividends, or the ability of any of New Aetna's subsidiaries to service their
outstanding debt.
The amount of dividends paid to New Aetna by its domestic insurance and
HMO subsidiaries at December 31, 1999 without prior approval by state
regulatory authorities was limited to approximately $560 million in the
aggregate. There were no such restrictions on distributions from New Aetna to
Aetna.
The combined statutory net income for the years ended and statutory
surplus as of December 31 for the domestic insurance and HMO subsidiaries of
New Aetna, reflecting intercompany eliminations, were as follows:
1999 1998
---- ----
(Millions)
Statutory net income............. $492.4 $477.2
Statutory surplus................ 2,658.6 2,224.5
As of December 31, 1999, New Aetna does not utilize any statutory
accounting practices that are not prescribed or permitted by state regulatory
authorities which, individually or in the aggregate, materially affect
statutory surplus.
F-63
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Reinsurance
New Aetna utilizes reinsurance agreements primarily to reduce its exposure
to large losses in certain aspects of its business. These reinsurance
agreements permit recovery of a portion of losses from reinsurers, although
they do not discharge the primary liability of New Aetna as direct insurer of
the risks reinsured. New Aetna evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities or economic characteristics of its reinsurers.
Earned premiums for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Direct Other from Other Assumed
Amount Companies Companies Net Amount to Net
---------- --------- ---------- ---------- ----------
(Millions)
<S> <C> <C> <C> <C> <C>
1999 (1)
Life insurance.................... $1,128.6 $8.5 $74.4 $1,194.5 6.2%
Accident and health insurance..... 16,260.7 39.1 1,225.4 17,447.0 7.0%
---------- --------- ---------- ----------
Total premiums.............. $17,389.3 $47.6 $1,299.8 $18,641.5 7.0%
========== ========= ========== ==========
1998 (1)
Life insurance.................... $1,082.6 $13.5 $64.1 $1,133.2 5.7%
Accident and health insurance..... 11,746.1 25.2 274.8 11,995.7 2.3%
---------- --------- ---------- ----------
Total premiums.............. $12,828.7 $38.7 $338.9 $13,128.9 2.6%
========== ========= ========== ==========
1997 (1)
Life insurance.................... $993.7 $15.7 $21.1 $999.1 2.1%
Accident and health insurance..... 10,008.5 9.4 1.4 10,000.5 --%
---------- --------- ---------- ----------
Total premiums.............. $11,002.2 $25.1 $22.5 $10,999.6 0.2%
========== ========= ========== ==========
</TABLE>
________________
(1) Excludes intercompany transactions.
There is not a material difference between premiums on a written basis
versus an earned basis. Reinsurance recoveries were approximately $52 million,
$48 million and $47 million in 1999, 1998 and 1997, respectively.
Effective November 1, 1999, Health Care reinsured certain policyholder
liabilities and obligations related to paid-up group life insurance. The
transaction was in the form of an indemnity reinsurance arrangement, whereby
the assuming company contractually assumed certain policyholder liabilities and
obligations, although Health Care remains directly obligated to policyholders.
Assets related to and supporting these policies were transferred to the
assuming company and Health Care recorded a reinsurance recoverable. The
transaction resulted in an after tax gain of approximately $29 million, which
is being deferred and amortized over approximately 15 years.
F-64
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Segment Information
Summarized financial information for New Aetna's principal
operations was as follows:
<TABLE>
<CAPTION>
Large Case Corporate and Discontinued
Health Care Pensions Other (1) Operations Total
----------- ---------- ------------- ------------ ---------
1999 (Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers (2)........ $20,279.9 $165.1 $0.4 $-- $20,445.4
Net investment income....................... 612.8 982.5 6.5 -- 1,601.8
----------- ---------- ------------- ------------ ---------
Total revenue excluding realized capital
gains (losses)............................ $20,892.7 $1,147.6 $6.9 $-- $22,047.2
=========== ========== ============= ============ =========
Interest expense............................ $-- $-- $232.7 $-- $232.7
----------- ---------- ------------- ------------ ---------
Amortization................................ $420.4 $-- $-- $-- $420.4
----------- ---------- ------------- ------------ ---------
Income taxes (benefits)..................... $365.1 $85.4 $(105.1) $-- $345.4
----------- ---------- ------------- ------------ ---------
Operating earnings (losses) (3)............. $459.7 $85.0 $(216.9) $-- $327.8
Other item (4).............................. -- 50.2 -- -- 50.2
Realized capital gains (losses), net of tax. (22.4) 15.8 28.0 -- 21.4
----------- ---------- ------------- ------------ ---------
Income from continuing operations........... 437.3 151.0 (188.9) -- 399.4
Income from discontinued operations,
net of tax................................ -- -- -- 317.1 317.1
----------- ---------- ------------- ------------ ---------
Net income (loss)........................... $437.3 $151.0 $(188.9) $317.1 $716.5
=========== ========== ============= ============ =========
Segment assets (5).......................... $21,284.7 $27,362.3 $544.9 $2,789.5 $51,981.4
Expenditures for long-lived assets.......... $16.0 $-- $-- $-- $16.0
</TABLE>
______________
(1) Corporate and Other includes interest, staff area expenses, advertising,
contributions, net investment income and other general expenses, as well
as consolidating adjustments. Realized capital gains (losses) reflect
$13.7 million of previously deferred hedge gains related to an anticipated
debt issuance.
(2) Revenues from external customers include revenues earned from one major
customer amounting to 18.9% of total revenue.
(3) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any other items. While operating
earnings is the measure of profit or loss used by New Aetna's management
when assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
(4) Other item excluded from operating earnings is comprised of a $50.2
million after-tax benefit from reductions of the reserve for anticipated
future losses on discontinued products in the Large Case Pensions segment.
(5) Large Case Pensions assets include $6.1 billion attributable to
discontinued products.
F-65
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Segment Information (Continued)
<TABLE>
<CAPTION>
Large Case Corporate and Discontinued
Health Care Pensions Other (1) Operations Total
----------- ---------- ------------- ------------ ---------
1998 (Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers (2)........ $14,447.3 $153.9 $1.3 $-- $14,602.5
Net investment income....................... 537.2 1,152.5 6.9 -- 1,696.6
----------- ---------- ------------- ------------ ---------
Total revenue excluding realized capital
gains (losses)............................ $14,984.5 $1,306.4 $8.2 $-- $16,299.1
=========== ========== ============= ============ =========
Interest expense............................ $-- $-- $206.2 $-- $206.2
----------- ---------- ------------- ------------ ---------
Amortization................................ $381.3 $-- $-- $-- $381.3
----------- ---------- ------------- ------------ ---------
Income taxes (benefits)..................... $368.0 $102.5 $(78.9) $-- $391.6
----------- ---------- ------------- ------------ ---------
Operating earnings (losses) (3)............. $342.8 $88.3 $(213.9) $-- $217.2
Other item (4).............................. -- 44.2 -- -- 44.2
Realized capital gains (losses), net of tax. 88.2 37.4 63.4 -- 189.0
----------- ---------- ------------- ------------ ---------
Income from continuing operations........... 431.0 169.9 (150.5) -- 450.4
Income from discontinued operations,
net of tax................................ -- -- -- 396.4 396.4
----------- ---------- ------------- ------------ ---------
Net income (loss)........................... $431.0 $169.9 $(150.5) $396.4 $846.8
=========== ========== ============= ============ =========
Segment assets (5).......................... $18,749.0 $30,774.9 $767.0 $2,937.2 $53,228.1
Expenditures for long-lived assets.......... $9.6 $0.2 $-- $-- $9.8
</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) Revenues from external customers include revenues earned from one major
customer amounting to 18.7% of total revenue.
(3) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any other items. While operating
earnings is the measure of profit or loss used by New Aetna's management
when assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
(4) Other item excluded from operating earnings is comprised of a $44.2
million after-tax benefit from reductions of the reserve for anticipated
future losses on discontinued products in the Large Case Pensions segment.
(5) Large Case Pensions assets include $7.2 billion attributable to
discontinued products.
F-66
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Segment Information (Continued)
<TABLE>
<CAPTION>
Large Case Corporate and Discontinued
Health Care Pensions Other (1) Operations Total
----------- ---------- ------------- ------------ ---------
1997 (Millions)
<S> <C> <C> <C> <C> <C>
Revenues from external customers (2)........ $12,308.5 $195.6 $12.3 $-- $12,516.4
Net investment income....................... 451.2 1,408.7 18.2 -- 1,878.1
----------- ---------- ------------- ------------ ---------
Total revenue excluding realized capital
gains (losses)............................ $12,759.7 $1,604.3 $30.5 $-- $14,394.5
=========== ========== ============= ============ =========
Interest expense............................ $0.6 $-- $213.3 $-- $213.9
----------- ---------- ------------- ------------ ---------
Amortization................................ $362.9 $-- $-- $-- $362.9
----------- ---------- ------------- ------------ ---------
Income taxes (benefits)..................... $391.0 $153.6 $(90.7) $-- $453.9
----------- ---------- ------------- ------------ ---------
Operating earnings (losses) (3)............. $354.6 $105.0 $(232.1) $-- $227.5
Other item (4).............................. 29.3 108.4 -- -- 137.7
Realized capital gains (losses), net of tax. 69.9 20.8 69.8 -- 160.5
----------- ---------- ------------- ------------ ---------
Income from continuing operations........... 453.8 234.2 (162.3) -- 525.7
Income from discontinued operations,
net of tax................................ -- -- -- 373.8 373.8
----------- ---------- ------------- ------------ ---------
Net income (loss)........................... $453.8 $234.2 $(162.3) $373.8 $899.5
=========== ========== ============= ============ =========
</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) Revenues from external customers include revenues earned from one major
customer amounting to 16.6% of total revenue.
(3) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any other items. While operating
earnings is the measure of profit or loss used by New Aetna's management
when assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
(4) Other items excluded from operating earnings are comprised of a $29.3
million after-tax benefit from the reduction of the severance and
facilities reserve in the Health Care segment and a $108.4 million
after-tax benefit from reductions of the reserve for anticipated future
losses on discontinued products in the Large Case Pensions segment.
Revenues from external customers (all within the United States) by product
were as follows:
1999 1998 1997
--------- --------- ---------
(Millions)
Health risk........................... $17,467.2 $11,780.8 $9,735.0
Group insurance and other health...... 2,812.7 2,666.5 2,573.5
Large case pensions................... 165.1 153.9 195.6
Other................................. 0.4 1.3 12.3
--------- --------- ---------
Total revenue from external customers. $20,445.4 $14,602.5 $12,516.4
========= ======== =========
Long-lived assets, all within the United States, were $841 million and
$810 million at December 31, 1999 and 1998, respectively.
F-67
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities
Leases
New Aetna has entered into operating leases for office space and certain
computer and other equipment. Rental expenses for these items were $220
million, $211 million and $181 million for 1999, 1998 and 1997, respectively.
The future net minimum payments under noncancelable leases for 2000 through
2004 are estimated to be $245 million, $184 million, $142 million, $108 million
and $96 million, respectively, and $330 million, thereafter.
In connection with the property-casualty sale, New Aetna vacated, and the
purchaser subleased, at market rates for a period of eight years, the space
that New Aetna occupied in the CityPlace office facility in Hartford. In 1996,
New Aetna 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 New Aetna under the lease and future rentals expected to be received
by New Aetna. Lease payments are charged to this reserve as they are made and
will continue to be charged to this reserve over the remaining lease term. At
December 31, 1999 and 1998, the balance in this facilities reserve was $269
million and $288 million, respectively. Future payments under the lease, net of
expected subrentals (which are to be applied against the reserve and are not
included in the future net minimum payments above), are approximately $36
million in each of the next five years and $153 million attributable to the
subsequent four years.
Litigation
Shareholder Litigation
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 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 Aetna 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 Aetna's medical claim
reserves. Aetna 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
Aetna, Ronald E. Compton and Richard L. Huber. Aetna and the remaining
individual defendants filed a motion to dismiss the second amended complaint,
and the Court denied that motion in March 1999. On August 9, 1999, the Court
entered an order certifying as plaintiffs those persons who purchased Aetna
common stock on the market from March 6, 1997 through 7:00 a.m. on September
29, 1997. Merits discovery was completed in early 2000. On January 31, 2000
plaintiffs filed expert reports. On February 3, 2000, defendants filed motions
for summary judgment. Also on February 3, 2000, plaintiffs moved for permission
to file a third amended complaint. On March 20, 2000, the Court granted
plaintiffs leave to file a third amended complaint and adopted a revised
schedule. Pursuant to the revised schedule, defendants filed new summary
judgment motions in May 2000 and the parties conducted expert discovery which
is scheduled to be completed in the third quarter of 2000. Trial is scheduled
to begin in the fourth quarter of 2000. Defendants are defending the actions
vigorously.
F-68
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Shareholder Litigation (Continued)
Four purported shareholder class action complaints were filed in the
Superior Court of Connecticut, Hartford County, alleging in substance that
Aetna and its directors breached fiduciary duties to shareholders in responding
to a February 24, 2000 letter from WellPoint Health Networks, Inc. and ING
America Insurance Holdings, Inc. which had invited discussions concerning a
possible transaction. These actions were filed on behalf of George Schore,
Michael Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on
March 7, 2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on
March 23, 2000. A fifth, substantially similar purported class action complaint
was filed on behalf of Barnett Stepak on March 28, 2000 in the Supreme Court of
New York, New York County. Each action seeks various forms of relief, including
unspecified damages and equitable remedies. On July 26, 2000 the Connecticut
Court ordered consolidation of the four Connecticut actions. This litigation is
in the preliminary stages. Defendants intend to defend these actions
vigorously.
Health Care Litigation
New Aetna is involved in several purported class action lawsuits that are
part of a wave of similar actions targeting the health care industry and, in
particular, the conduct of business by managed care companies.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on April 19, 1999 by Joseph
Maio, Jo Ann Maio and Gary Bender seeking various forms of relief, including
unspecified damages and treble damages, from Aetna and a number of its
subsidiaries for alleged violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), the Pennsylvania Unfair Trade Practices and
Consumer Protection Law, and state common law. On September 29, 1999, the Court
dismissed the RICO claims with prejudice and dismissed the state law claims for
lack of subject matter jurisdiction. The Court held, among other things, that
the plaintiffs lacked standing to pursue the federal RICO claims because they
had not alleged an injury in fact. Plaintiffs have appealed the dismissal to
the United States Court of Appeals for the Third Circuit. On August 11, 2000,
the Third Circuit rendered its decision upholding the dismissal of the case.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on October 4, 1999 by Anthony
Conte (the "Conte Complaint"). The Conte Complaint seeks various forms of
relief, including unspecified damages, from New Aetna for alleged violations of
the Employee Retirement Income Security Act of 1974 ("ERISA"). The Conte
Complaint alleges that New Aetna does not make adequate disclosure of provider
compensation arrangements in the literature that it makes available to actual
or prospective members. New Aetna intends to defend the action vigorously and
on November 1, 1999, filed a motion to dismiss the litigation for failure to
state a claim upon which relief can be granted. On December 15, 1999, the Court
suspended further proceedings pending the resolution of the Maio appeal by the
United States Court of Appeals for the Third Circuit.
F-69
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on October 7, 1999 by Jo Ann
O'Neill (the "Mississippi O'Neill Complaint"). An Amended Complaint was filed
on November 9, 1999 by Jo Ann O'Neill, Lydia K. Rouse and Danny E. Waldrop. The
Mississippi O'Neill Complaint seeks various forms of relief, including
unspecified damages and treble damages and restitution of alleged improper
profits, from Aetna, New Aetna, Richard L. Huber and unnamed members of the
Board of Directors of Aetna for alleged violations of ERISA and RICO. The
Mississippi O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to Aetna HMO members. On November 22, 1999, defendants moved
to stay, dismiss or transfer the action to the United States District Court for
the Eastern District of Pennsylvania based on the Conte and Maio Complaints
filed in that court. On January 25, 2000, the Court suspended further
proceedings pending resolution of a motion in cases involving other defendants
to consolidate those actions in a single court. This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright
in her individual capacity and on behalf of the general public of the State of
California (the "Curtright Complaint"). The Curtright Complaint seeks various
forms of relief, including injunctive relief, restitution and disgorgement of
amounts allegedly wrongfully acquired, from Aetna, New Aetna, Aetna U.S.
Healthcare of California Inc. and unnamed "John Doe" defendants for alleged
violations of California Business and Professions Code Sections 17200 and
17500, California Civil Code Section 17500 and state common law in connection
with the sale and marketing of health plans in California. The Curtright
Complaint alleges that defendants are liable for alleged misrepresentations and
omissions relating to advertising, marketing and member materials directed to
Aetna HMO, POS and PPO members and members of the general public. On December
16, 1999, defendants removed the action to the United States District Court for
the Northern District of California. Plaintiff has moved to remand the action
to state court. Aetna has moved to dismiss the Curtright Complaint for failure
to state a claim upon which relief can be granted and moved for a stay of the
action pending resolution of the Maio and Conte matters. In August 2000, the
Court stayed further proceedings pending decision on Aetna's MDL Application
(as described below). This litigation is in the preliminary stages. Defendants
intend to defend the action vigorously.
A complaint was filed in the Superior Court of the State of California,
County of San Diego on November 5, 1999 by Linda Ross and The Stephen Andrew
Olsen Coalition for Patients Rights, purportedly on behalf of the general
public of the State of California (the "Ross Complaint"). The Ross Complaint
seeks various forms of relief, including injunctive relief, restitution and
disgorgement of amounts allegedly wrongfully acquired, from Aetna, New Aetna,
Aetna U.S. Healthcare of California Inc. and additional unnamed "John Doe"
defendants for alleged violations of California Business and Professions Code
Sections 17200 and 17500. The Ross Complaint alleges that defendants are liable
for alleged misrepresentations and omissions relating to advertising, marketing
and member materials directed to Aetna HMO, POS and PPO members and the general
public and for alleged unfair practices relating to contracting of doctors. On
May 5, 2000 the Court denied defendants' demurer but granted in part their
motion to strike portions of the Ross Complaint and ordered plaintiffs to file
an amended complaint. The amended complaint was filed on May 15, 2000 and a
second amended complaint on June 28, 2000. On August 15, the Court denied
defendants' demurrer but granted, in part, their motion to strike portions of
the second amended complaint and ordered the plaintiffs to file a third amended
complaint. The third amended complaint was filed on August 25, 2000. Defendants
intend to defend the action vigorously.
F-70
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the United States District
Court for the Southern District of Mississippi on November 22, 1999 by Raymond
D. Williamson, III (the "Williamson Complaint"). The Williamson Complaint names
as defendant The Prudential Insurance Company of America, and also names as
defendants Aetna and New Aetna solely to the extent that New Aetna has assumed
liability for the actions of Prudential in connection with New Aetna's
acquisition of the Prudential health care business. The Williamson Complaint
seeks various forms of relief from defendants, including unspecified damages,
treble damages and imposition of a constructive trust, for alleged violations
of RICO and ERISA. The Williamson Complaint alleges that the Prudential Health
Plans engaged in a nationwide fraudulent scheme of misrepresentation by stating
that coverage and treatment decisions were made on the basis of medical
necessity when Prudential allegedly implemented undisclosed policies designed
to deny or limit claims and medical services. On December 30, 1999, New Aetna
moved to stay, dismiss or transfer the action to the United States District
Court for the Eastern District of Pennsylvania based on the fact that the Maio
and Conte Complaints were filed in that court. On January 25, 2000, the Court
suspended further proceedings pending resolution of a motion in cases involving
other defendants to consolidate those actions in a single court. This
litigation is in the preliminary stages. New Aetna intends to defend the action
vigorously.
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on December 3, 1999 by Michael V. Amorosi
(the "Amorosi Complaint"). The Amorosi Complaint seeks various forms of relief,
including unspecified damages, treble damages and restitutionary relief for
unjust enrichment, from Aetna and New Aetna for alleged violations of RICO and
ERISA. The Amorosi Complaint alleges that defendants told subscribers that
coverage and treatment decisions would be based on medical necessity but
instead took into account undisclosed cost-based criteria that were unrelated
to members' medical needs. On January 7, 2000, New Aetna moved to stay, dismiss
or transfer the action to the United States District Court for the Eastern
District of Pennsylvania based on the fact that the Maio and Conte Complaints
were filed in that court. On August 25, 2000 New Aetna moved to dismiss the
action for failure to state a claim. This litigation is in the preliminary
stages. New Aetna intends to defend the action vigorously.
A purported amended class action complaint was filed in the United States
District Court for the Northern District of Alabama on January 19, 2000 by
Eugene Mangieri, M.D. (the "Mangieri Complaint"). The Mangieri Complaint seeks
various forms of relief, including unspecified damages, treble damages and
punitive damages, from Aetna, New Aetna and Richard L. Huber for alleged
violations of RICO. The Mangieri Complaint claims that physicians suffer actual
and potential harm from allegedly coercive terms contained in their contracts
with New Aetna. On May 15, 2000 the Judicial Panel on Multidistrict Litigation
issued a conditional order transferring the Mangieri Complaint to the United
States District Court for the Southern District of Florida for consolidated
pretrial proceedings in the matter known as In re Humana, Inc. Managed Care
Litigation. On May 30, 2000 New Aetna filed with the Panel an objection to that
conditional transfer order, but on July 14, 2000, New Aetna requested
consolidation of that action with others pending against New Aetna (see the
discussion regarding the MDL Application below). This litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
F-71
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the United States District
Court for the District of New Jersey on April 11, 2000 by Jennifer McCarron and
Ira S. Schwartz (the "McCarron Complaint"). The McCarron Complaint names as
defendants The Prudential Insurance Company of America and health maintenance
organizations that New Aetna acquired from Prudential on August 6, 1999. The
McCarron Complaint seeks various forms of relief from defendants, including
return of certain premiums, disgorgement of allegedly improper profits and
injunctive relief, for alleged contractual breaches and violations of ERISA.
Plaintiffs purport to represent a class including persons who were Prudential
Health Plans subscribers before and/or after New Aetna's acquisition of those
operations. The McCarron Complaint alleges that Prudential Health Plans'
administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
Ms. McCarron additionally alleges that she was wrongfully denied coverage for
certain medical treatments. On August 30, 2000 New Aetna joined in Prudential's
motion to dismiss the complaint for failure to state a claim. This litigation
is in the preliminary stages. New Aetna intends to defend the action
vigorously.
A purported class action complaint was filed in the United States District
Court for the Eastern District of Pennsylvania on May 22, 2000 by John Romero
and Catherine Romero (the "Romero Complaint"). The Romero Complaint names as
defendants The Prudential Insurance Company of America and health maintenance
organizations that New Aetna acquired from Prudential on August 6, 1999. The
Romero Complaint seeks various forms of relief from defendants, including
return of certain premiums, disgorgement of allegedly improper profits and
injunctive relief, for alleged contractual breaches and violations of ERISA.
Plaintiffs purport to represent a class including persons who were Prudential
Health Plan subscribers before and/or after New Aetna's acquisition of those
operations. The Romero Complaint alleges that Prudential Health Plans'
administration and disclosure of policies concerning medical necessity
determinations violated contractual and fiduciary duties owed to subscribers.
On July 24, 2000 the Court stayed the action. This litigation is in the
preliminary stages. New Aetna intends to defend the action vigorously.
On July 14, 2000, Aetna filed with the Judicial Panel on Multidistrict
Litigation a motion to consolidate and transfer six of the above matters for
pretrial proceedings in the United States District Court for the Eastern
District of Pennsylvania (the "MDL Application"). That motion seeks transfer
and consolidation of the Amorosi, Conte, Curtright, and Mangieri Complaints as
well as both the Mississippi O'Neill Complaint and the Florida O'Neill
Complaint (as defined below). Hearing on the MDL Application is scheduled to
take place on September 22, 2000.
A purported class action was filed in the United States District Court for
the Southern District of Florida under the caption In re Humana, Inc. Managed
Care Litigation, on June 23, 2000 by Jo Ann O'Neill, Lydia K. Rouse and Danny
E. Waldrop (the "Florida O'Neill Complaint"). The Florida O'Neill Complaint
names as defendants Aetna and Aetna U.S. Healthcare The Florida O'Neill
Complaint seeks various forms of relief, including unspecified damages and
treble damages and restitution of alleged improper profits, from Aetna and
Aetna U.S. Healthcare for alleged violations of ERISA and RICO. The Florida
O'Neill Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising and marketing
materials directed to Aetna HMO members, and alleges that defendants conspired
with other managed care companies not to disclose alleged industry-wide
practices. New Aetna sought from the Florida federal court a stay of further
proceedings on the Florida O'Neill Complaint pending a decision on the MDL
Application. On July 27, 2000, the Florida federal court denied that motion. On
August 11, 2000, New Aetna filed a motion to dismiss the Florida O'Neill
Complaint. Briefing on that motion is scheduled to be completed in early
September 2000. Additionally, the Court has scheduled briefing on plaintiffs'
class certification motion to be completed by November 2000. This litigation is
in the preliminary stages. Defendants intend to defend the action vigorously.
F-72
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and Contingent Liabilities (Continued)
Litigation (Continued)
Health Care Litigation (Continued)
A purported class action complaint was filed in the United States District
Court for the District of Connecticut on August 7, 2000 by Glenn O'Brien and
Christopher Gallagher (the "O'Brien Complaint"). The O'Brien Complaint seeks
various forms of relief, including unspecified damages, from New Aetna for
alleged violations of ERISA. The O'Brien Complaint alleges that New Aetna does
not make adequate disclosure of the operation of its managed care plans to
actual or prospective members. New Aetna intends to defend the action
vigorously. New Aetna has notified the Judicial Panel on Multidistrict
Litigation of the O'Brien Complaint for consolidation with the other matters
referred to in the MDL Application.
Other Litigation and Regulatory Proceedings
New Aetna is involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including claims of
bad faith, medical malpractice, non-compliance with state regulatory regimes,
marketing misconduct, failure to timely pay medical claims and other litigation
in its health care business. Some of these other lawsuits are purported to be
class actions. Aetna U.S. Healthcare of California Inc., an indirect subsidiary
of New Aetna, 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
Aetna, 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.
In addition, New Aetna's business practices are subject to review by
various state insurance and health care regulatory authorities and federal
regulatory authorities. Recently, there has been heightened review by these
regulators of the managed health care industry's business practices, including
utilization management and claim payment practices. As the largest national
managed care organization, New Aetna regularly is the subject of such reviews
and several such reviews currently are pending, some of which may be resolved
during the remainder of 2000. These reviews may result in changes to or
clarifications of New Aetna's business practices, and may result in fines,
penalties or other sanctions.
While the ultimate outcome of these other lawsuits and regulatory reviews
cannot be determined at this time, after consideration of the defenses
available to New Aetna, applicable insurance coverage and any related reserves
established, they are not expected to result in liability for amounts material
to the financial condition of New Aetna, although they may adversely affect
results of operations in future periods.
F-73
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Agreement and Plan of Restructuring and Merger
On July 20, 2000, Aetna announced that it reached a definitive agreement
to sell its Aetna Financial Services and Aetna International businesses to ING
in a transaction valued at approximately $7.7 billion. Under the terms of the
agreement and in an integrated transaction, Aetna will spin off to its
shareholders the shares of a standalone health company that will be comprised
primarily of the Health Care and Large Case Pensions businesses.
Simultaneously, Aetna, which then will be comprised of Aetna Financial Services
and Aetna International, will merge with a newly formed subsidiary of ING. In
exchange for each Aetna share, Aetna shareholders will receive one share in the
standalone health company, which will be named Aetna Inc., and approximately
$35 per share in cash. When ING acquires Aetna, that entity is expected to have
approximately $2.7 billion in long-term debt.
Aetna's goal is to close the transaction, which is subject to receipt of
required shareholder, regulatory and other consents and approvals, as well as
other closing conditions, by year end 2000. Aetna expects that it will incur
certain costs associated with the definitive agreement with ING related to the
consummation of the transaction (including fees for outside financial and legal
advisors and expenses related to the change-in-control of Aetna) and such costs
may be material.
In connection with its spin-off from Aetna, New Aetna generally will
assume all liabilities related to the Health Care and Large Case Pensions
businesses. In addition, New Aetna generally will be responsible for Aetna's
liabilities other than those arising out of the Aetna Financial Services and
Aetna International businesses being sold to ING. These liabilities include the
post-retirement pension and other benefits payable to all former employees of
Aetna, liabilities arising out of health litigation and certain corporate-level
litigation to which Aetna is a party, and generally all liabilities arising out
of certain past divestiture transactions which have been consummated by Aetna
prior to the closing of New Aetna's spin-off from Aetna.
F-74
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Agreement and Plan of Restructuring and Merger (Continued)
The account balances and activities of Aetna Financial Services and Aetna
International have been segregated and reported as discontinued operations.
Operating results of the discontinued operations were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1999 1998 1997
-------- -------- --------
(Millions)
<S> <C> <C> <C>
Revenue:
Premiums................................................... $2,259.8 $1,710.4 $1,592.6
Total net investment income................................ 1,362.2 1,522.0 1,514.3
Fees and other income...................................... 709.7 836.6 716.8
Net realized capital gains (losses)........................ 9.4 (18.1) 54.3
-------- -------- --------
Total revenue.................................................... 4,341.1 4,050.9 3,878.0
-------- -------- --------
Benefits and expenses:
Current and future benefits................................ 2,596.7 2,254.8 2,240.4
Operating expenses:
Salaries and related benefits............................ 395.8 387.3 356.1
Other.................................................... 603.7 564.7 516.1
Interest expense........................................... 46.6 44.7 21.9
Amortization of goodwill & other acquired intangible assets 17.0 18.8 17.1
Amortization of deferred policy acquisition costs.......... 204.0 214.7 197.2
Severance and facilities charge............................ -- 1.5 --
-------- -------- --------
Total benefits and expenses...................................... 3,863.8 3,486.5 3,348.8
-------- -------- --------
Income before taxes (benefits)................................... 477.3 564.4 529.2
Income taxes (benefits):
Current.................................................... 46.8 282.3 141.7
Deferred................................................... 113.4 (114.3) 13.7
-------- -------- --------
Total income taxes............................................... 160.2 168.0 155.4
-------- -------- --------
Net income....................................................... $317.1 $396.4 $373.8
======== ======== ========
</TABLE>
F-75
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Agreement and Plan of Restructuring and Merger (Continued)
Assets, liabilities and shareholder's equity of the discontinued
businesses were as follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1999 1998
--------- ---------
(Millions)
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale, at fair value................................... $12,854.0 $14,594.6
Equity securities, at fair value.................................................... 504.7 603.9
Short-term investments.............................................................. 565.1 660.4
Mortgage loans...................................................................... 861.2 833.4
Real Estate......................................................................... 92.3 78.0
Policy loans........................................................................ 533.0 449.9
Other............................................................................... 1,020.2 981.6
--------- ---------
Total investments.................................................................... 16,430.5 18,201.8
--------- ---------
Cash and cash equivalents........................................................... 870.9 836.0
Short-term investments under securities loan agreement.............................. 232.5 277.3
Accrued investment income........................................................... 199.1 208.4
Premiums due and other receivables.................................................. 739.7 165.4
Reinsurance recoverables............................................................ 3,012.3 3,300.0
Deferred policy acquisition costs................................................... 2,056.2 1,765.0
Goodwill and other acquired intangible assets....................................... 680.4 550.0
Other assets........................................................................ 388.2 227.1
Separate Account assets............................................................. 38,692.7 29,443.6
--------- ---------
Total assets......................................................................... $63,302.5 $54,974.6
========= =========
Liabilities:
Insurance liabilities:
Future policy benefits.............................................................. $7,828.1 $8,242.1
Unpaid claims....................................................................... 129.2 128.5
Unearned premiums................................................................... 49.6 123.7
Policyholders' funds................................................................ 11,123.0 11,613.9
--------- ---------
Total insurance liabilities.......................................................... 19,129.9 20,108.2
--------- ---------
Short-term debt..................................................................... 162.7 --
Long-term debt...................................................................... 613.0 654.2
Payables under securities loan agreement............................................ 232.5 277.3
Current income taxes................................................................ 114.2 245.8
Deferred income taxes............................................................... 77.3 245.0
Other liabilities................................................................... 1,381.7 923.6
Minority and participating policyholder's interest.................................. 109.0 139.7
Separate Accounts liabilities....................................................... 38,692.7 29,443.6
--------- ---------
Total liabilities.................................................................... 60,513.0 52,037.4
--------- ---------
Total shareholder's equity (including accumulated other comprehensive loss of
$503.0 and $130.0).................................................................. 2,789.5 2,937.2
--------- ---------
Total liabilities and shareholder's equity........................................... $63,302.5 $54,974.6
========= =========
</TABLE>
F-76
<PAGE>
NEW AETNA (TO BE NAMED AETNA INC. UPON COMPLETION OF THE SPIN-OFF)
QUARTERLY DATA
(Unaudited)
<TABLE>
<CAPTION>
First Second(1) Third Fourth
--------- --------- --------- ---------
1999 (Millions)
<S> <C> <C> <C> <C>
Total revenue................................... $4,747.9 $4,774.6 $5,920.8 $6,666.4
--------- --------- --------- ---------
Income before income taxes...................... 167.4 226.5 242.0 108.9
Income taxes.................................... 83.0 99.5 104.8 58.1
--------- --------- --------- ---------
Net income from continuing operations........... $84.4 $127.0 $137.2 $50.8
========= ========= ========= =========
Net income from discontinued operations......... $85.0 $90.2 $58.3 $83.6
========= ========= ========= =========
</TABLE>
_____________
(1) Second quarter includes a benefit of $50.2 million after tax ($77.2
million pretax) from a reduction of the reserve for loss on discontinued
products.
<TABLE>
<CAPTION>
First Second Third(1) Fourth
--------- --------- --------- ---------
1998 (Millions)
<S> <C> <C> <C> <C>
Total revenue................................... $3,702.1 $3,818.0 $4,431.1 $4,637.8
--------- --------- --------- ---------
Income before income taxes...................... 160.1 265.0 209.8 207.1
Income taxes.................................... 77.5 117.6 101.0 95.5
--------- --------- --------- ---------
Net income from continuing operations........... $82.6 $147.4 $108.8 $111.6
========= ========= ========= =========
Net income from discontinued operations......... $76.9 $106.2 $93.5 $119.8
========= ========= ========= =========
</TABLE>
_____________
(1) Third quarter includes a benefit of $44.2 million after tax ($68.0 million
pretax) from a reduction of the reserve for loss on discontinued products.
F-77
<PAGE>
ANNEX B
AGREEMENT AND PLAN OF RESTRUCTURING AND MERGER
Among
ING AMERICA INSURANCE HOLDINGS, INC.,
ANB ACQUISITION CORP.,
AETNA INC.
and, for limited purposes only, ING GROEP N.V.
Dated as of July 19, 2000
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
The Transaction; Closing; Effective Time
1.1 The Spin-Off........................................................2
1.2 The Merger..........................................................2
1.3 Closing.............................................................2
1.4 Effective Time......................................................3
ARTICLE II
Certificate of Incorporation and By-Laws
of the Surviving Corporation
2.1 The Certificate of Incorporation....................................3
2.2 The By-Laws.........................................................3
ARTICLE III
Officers and Directors
of the Surviving Corporation
3.1 Directors...........................................................3
3.2 Officers............................................................3
ARTICLE IV
Effect of the Merger on Capital Stock;
Exchange of Certificates
4.1 Effect on Capital Stock.............................................4
4.2 Exchange of Cash for Shares.........................................6
4.3 Dissenters' Rights..................................................8
ARTICLE V
Representations and Warranties
5.1 Representations and Warranties of the Company.......................9
(a) Organization, Good Standing and Qualification..............9
(b) Capital Structure.........................................12
(c) Corporate Authority; Approval and Fairness................13
(d) Governmental Filings; No Violations.......................14
-i-
<PAGE>
(e) Statutory Reports; Company Reports; Financial Statements..15
(f) Absence of Certain Changes................................18
(g) Litigation and Liabilities................................20
(h) Employee Benefits.........................................21
(i) Compliance with Laws; Permits.............................24
(j) Takeover Statutes.........................................26
(k) Environmental Matters.....................................26
(l) Taxes.....................................................27
(m) Labor Matters.............................................29
(n) Insurance.................................................30
(o) Intellectual Property.....................................30
(p) Rights Plan...............................................31
(q) Brokers and Finders.......................................31
(r) Insurance Business........................................31
(s) Liabilities and Reserves..................................33
(t) Separate Accounts.........................................33
(u) Material Contracts........................................34
(v) Investment Contracts, Fund Clients and Advisory Clients...35
(w) Company Broker/Dealers....................................37
(x) Bank Regulatory Matters...................................38
(y) No Contracts, Etc.........................................38
5.2 Representations and Warranties of ING, Parent and Merger Sub.......39
ARTICLE VI
Covenants
6.1 Interim Operations; Operation of Businesses........................41
6.2 Acquisition Proposals..............................................45
6.3 Accuracy of Proxy Statement and Form 10............................47
6.4 Shareholders Meeting...............................................48
6.5 Filings; Other Actions; Notification...............................48
6.6 Access.............................................................51
6.7 Stock Exchange.....................................................51
6.8 Publicity..........................................................51
6.9 Benefits; Company Options..........................................52
6.10 ERISA Client Lists.................................................53
6.11 Expenses...........................................................53
6.12 Indemnification; Directors' and Officers' Insurance................53
6.13 Compliance with 1940 Act Section 15................................55
6.14 Fund Client Contracts, Distribution Plans and Boards...............56
6.15 Non-Fund Advisory Contracts........................................56
6.16 Qualification of the Fund Clients; Fund Client Boards..............57
-ii-
<PAGE>
6.17 Rights.............................................................57
6.18 Takeover Statute...................................................57
6.19 Company Debt.......................................................57
6.20 Voting of Shares...................................................57
6.21 Other Agreements...................................................57
6.22 Headquarters and Related Matters...................................59
6.23 Asia...............................................................59
6.24 Confidentiality....................................................59
ARTICLE VII
Conditions
7.1 Conditions to Each Party's Obligation to Effect the Merger.........60
7.2 Conditions to Obligations of Parent and Merger Sub.................61
7.3 Conditions to Obligation of the Company............................63
ARTICLE VIII
Termination
8.1 Termination by Mutual Consent......................................64
8.2 Termination by Either Parent or the Company........................64
8.3 Termination by the Company.........................................65
8.4 Termination by Parent..............................................65
8.5 Effect of Termination and Abandonment..............................65
ARTICLE IX
Miscellaneous and General
9.1 Survival...........................................................67
9.2 Modification or Amendment..........................................67
9.3 Waiver of Conditions...............................................67
9.4 Counterparts.......................................................68
9.5 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL......................68
9.6 Notices............................................................69
9.7 Entire Agreement; No Other Representations.........................71
9.8 No Third Party Beneficiaries.......................................71
9.9 Obligations of Parent and of the Company...........................71
9.10 Transfer Taxes.....................................................72
9.11 Severability.......................................................72
9.12 Interpretation.....................................................72
9.13 Assignment.........................................................72
9.14 Specific Performance...............................................73
-iii-
<PAGE>
INDEX OF DEFINED TERMS
1940 Act ....................................................................14
1999 10-K ....................................................................9
Account Client ..............................................................34
Acquisition Proposal.........................................................45
Advisers Act ................................................................14
Advisory Client .............................................................35
Advisory Entities ...........................................................35
Advisory Entity .............................................................35
Aetna China Name Rights......................................................58
Affiliate ...................................................................10
Agent .......................................................................32
Agreement ....................................................................1
ALICA .......................................................................15
Assumed Long-Term Debt Obligations............................................4
Balance Sheet Date...........................................................18
Banking Authorities..........................................................14
Bankruptcy and Equity Exception..............................................13
By-Laws ......................................................................3
CBCA .........................................................................2
Certificate ..................................................................5
Certificate of Merger.........................................................3
Charter ......................................................................3
Chinese Mark ................................................................58
Chinese Mark Agreement.......................................................58
CityPlace Accrual Amount......................................................5
Class B Voting Preferred Stock................................................4
Client ......................................................................35
Closing ......................................................................2
Closing Date .................................................................2
Closing Date Interest Accrual.................................................6
Code .........................................................................8
Common Stock .................................................................4
Company ......................................................................1
Company Actuarial Analyses...................................................32
Company Broker/Dealers.......................................................37
Company Disclosure Letter.....................................................9
Company Intellectual Property Rights.........................................30
Company Material Adverse Effect..............................................10
Company Option ..............................................................12
Company Reports .............................................................16
-iv-
<PAGE>
Company Requisite Vote.......................................................13
Company SAP Statements.......................................................15
Company Separate Accounts....................................................33
Compensation and Benefit Plans...............................................21
Confidentiality Agreement....................................................71
Constituent Corporations......................................................1
Contracts ...................................................................15
Costs .......................................................................54
Coverage Policies ...........................................................59
Current Premium .............................................................55
D&O Insurance ...............................................................55
Designated Person ...........................................................19
Designated Persons...........................................................19
Dissenting Shareholders.......................................................4
Dissenting Shares ............................................................4
Distribution Agreement........................................................1
Effective Time ...............................................................3
Employee Benefits Agreement..................................................52
ERISA .......................................................................21
ERISA Affiliate .............................................................22
ERISA Affiliate Plan.........................................................22
ERISA Client ................................................................34
Excluded Capital Contribution.................................................5
Excluded Dividends............................................................5
Excluded Employee ...........................................................20
Excluded Share ...............................................................4
Excluded Shares ..............................................................4
Extended Date ...............................................................64
First 2000 10-Q ..............................................................9
Foreign Company Statements...................................................15
Form 10 .....................................................................47
Fund Client .................................................................35
GAAP ........................................................................17
Governmental Approvals.......................................................48
Governmental Consents........................................................60
Governmental Entity..........................................................14
HSR Act .....................................................................14
Indemnified Parties..........................................................53
ING ..........................................................................1
ING Companies ................................................................4
Insurance and Healthcare Authorities.........................................14
Insurance Laws ..............................................................24
-v-
<PAGE>
Intellectual Property........................................................30
International Entities.......................................................20
International Retained Insurance.............................................10
Investment Contract..........................................................35
IRS .........................................................................22
Joint Venture ...............................................................12
knowledge of the Company.....................................................21
Laws ........................................................................25
Long-Term Debt ...............................................................5
MEC .........................................................................28
Merger .......................................................................1
Merger Consideration..........................................................5
Merger Sub ...................................................................1
NASD ........................................................................14
Net Capital Contribution Amount...............................................5
Net Interest Accrual Amount...................................................5
Notice of Superior Proposal..................................................47
NYSE ........................................................................51
of which the Company has knowledge...........................................21
open Taxable years...........................................................29
Order .......................................................................61
Out-of-Pocket Expenses.......................................................66
Parent .......................................................................1
Parent Disclosure Letter.....................................................39
Parent ERISA List ...........................................................53
Parent Interest Portion.......................................................5
Parent Material Adverse Effect...............................................39
Paying Agent .................................................................6
Payment Fund .................................................................6
PBGC ........................................................................14
Pension Plan ................................................................22
Permitted Sales ..............................................................5
Permitted Sales Proceeds......................................................5
Person .......................................................................7
Preferred Stock .............................................................12
Proxy Statement .............................................................47
Qualified Plan ..............................................................22
Representatives .............................................................51
Retained Insurance Companies.................................................10
Retained Insurance Contracts.................................................32
Right ........................................................................4
Rights Agreement .............................................................4
-vi-
<PAGE>
SEC ..........................................................................9
Section 6.21 Subsidiaries....................................................57
Securities Act ..............................................................16
Share ........................................................................4
Shareholders Meeting.........................................................48
Shares .......................................................................4
shares ......................................................................36
Spin-Off .....................................................................1
Spinco .......................................................................1
Stock Plans .................................................................12
Subsidiary ..................................................................10
Superior Proposal ...........................................................46
Surviving Corporation.........................................................2
Takeover Statute ............................................................26
Tax .........................................................................27
Tax Allocation Agreement.....................................................28
Tax Authority ...............................................................28
Tax Return ..................................................................28
Tax Sharing Agreement........................................................43
Taxable .....................................................................27
Taxes .......................................................................27
Termination Date ............................................................64
Termination Fee .............................................................66
the Company has no knowledge.................................................21
Total assets under management................................................62
Transaction ..................................................................1
Transaction Agreements........................................................2
Transaction Expenses.........................................................53
U.S. Retained Insurance Companies............................................10
Voting Debt .................................................................13
-vii-
<PAGE>
AGREEMENT AND PLAN OF RESTRUCTURING AND MERGER
AGREEMENT AND PLAN OF RESTRUCTURING AND MERGER (hereinafter called this
"Agreement"), dated as of July 19, 2000, among AETNA INC., a Connecticut
corporation (the "Company"), ING AMERICA INSURANCE HOLDINGS, INC., a Delaware
corporation ("Parent"), and ANB ACQUISITION CORP., a Connecticut corporation
and a newly formed, wholly owned subsidiary of Parent ("Merger Sub", the
Company and Merger Sub sometimes being hereinafter collectively referred to as
the "Constituent Corporations") and, for the sole purpose of Sections 4.2, 4.3,
5.2, 6.3, 6.5, 6.8, 6.12, 6.18, 6.19, 6.20 and Article IX, ING GROEP N.V., a
corporation organized under the laws of the Netherlands ("ING").
RECITALS
WHEREAS, provided that all conditions precedent to the Distribution (as
defined below) have been satisfied, immediately prior to the Effective Time (as
defined below), the Company and Aetna U.S. Healthcare Inc., a Pennsylvania
corporation and a wholly owned subsidiary of the Company ("Spinco"), intend to
enter into a distribution agreement in the form of Annex A hereto, with such
changes as may be approved by Parent in accordance with Section 9.2(b) of this
Agreement (the "Distribution Agreement"), and to effect the various
transactions contemplated thereby and, with the exception of this Agreement, by
the other Transaction Agreements (as defined below) (all such transactions
being referred to collectively as the "Spin-Off");
WHEREAS, the respective boards of directors of each of Parent, Merger Sub
and the Company have determined that it is in the best interests of their
respective entities and shareholders to enter into this Agreement and have
approved and adopted this Agreement and the merger of Merger Sub with and into
the Company (the "Merger", the Spin-Off, the Merger and the other transactions
contemplated by the Transaction Agreements sometimes being hereinafter
collectively referred to as the "Transaction") upon the terms and subject to
the conditions set forth in this Agreement;
WHEREAS, in making the foregoing determinations, the board of directors of
the Company considered, among other things, the interests of the Company's
employees, customers, creditors and suppliers, as well as community and
societal considerations;
WHEREAS, the Company, ING, Parent and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement and the Distribution Agreement (this Agreement, the Distribution
Agreement
<PAGE>
and the other agreements and term sheets attached hereto or thereto sometimes
being hereinafter collectively referred to as the "Transaction Agreements");
and
WHEREAS, for federal income Tax (as defined below) purposes, it is
intended that the Transaction will be treated at the shareholder level as an
integrated transaction in redemption and disposition of the Company's
outstanding capital stock.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
The Transaction; Closing; Effective Time
1.1 The Spin-Off. Provided that all conditions precedent to the Spin- Off
have been satisfied, prior to the Effective Time, the Company shall enter into
the Distribution Agreement with Spinco, each other Person that will be a party
to any Transaction Agreement (other than the Merger Agreement) shall enter into
each such Transaction Agreement, and, on the terms and subject to the
conditions of the Transaction Agreements, immediately prior to the Effective
Time, the Company shall effect, and cause Spinco to effect, the Spin-Off.
1.2 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time Merger Sub shall be merged with and into
the Company and the separate corporate existence of Merger Sub shall thereupon
cease. The Company shall be the surviving corporation in the Merger (sometimes
hereinafter referred to as the "Surviving Corporation"), and the separate
corporate existence of the Company with all its rights, privileges, powers and
franchises shall continue unaffected by the Merger, except as set forth in
Article II of this Agreement. The Merger shall have the effects specified in
the Connecticut Business Corporation Act, as amended (the "CBCA").
1.3 Closing. The closing of the Merger (the "Closing") shall take place
(i) at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York
at 9:00 A.M. on the second business day on which the last to be fulfilled or
waived of the conditions set forth in Article VII (other than those conditions
that by their nature are to be fulfilled at the Closing, but subject to the
fulfillment or waiver of those conditions and subject to compliance with the
provisions of Section 4.2(b) of this Agreement) shall be fulfilled or waived in
accordance with this Agreement or (ii) at such other place and time and/or on
such other date as the Company and Parent may agree in writing (the "Closing
Date").
-2-
<PAGE>
1.4 Effective Time. As soon as practicable following the Closing, the
Company, Parent and Merger Sub will cause a Certificate of Merger (the
"Certificate of Merger") to be executed, acknowledged and delivered for filing
to the Secretary of State of Connecticut as provided in Section 33-819 of the
CBCA. The Merger shall become effective at the time when the Certificate of
Merger has been accepted for filing by the Secretary of State of Connecticut or
such other time as the parties hereto may agree to specify in the Certificate
of Merger (the "Effective Time").
ARTICLE II
Certificate of Incorporation and By-Laws
of the Surviving Corporation
2.1 The Certificate of Incorporation. The certificate of incorporation of
Merger Sub as in effect immediately prior to the Effective Time shall be the
certificate of incorporation of the Surviving Corporation (the "Charter");
provided, however, that the Charter shall be amended to change the name of the
Surviving Corporation to the name of: "Lion Connecticut Holdings Inc.", and as
so amended, shall be the certificate of incorporation of the Surviving
Corporation until duly amended as provided therein or by applicable law.
2.2 The By-Laws. The by-laws of Merger Sub as in effect at the Effective
Time shall be the by-laws of the Surviving Corporation (the "By-Laws");
provided, however, that the By-Laws shall be amended to change the name of the
Surviving Corporation to the name of: "Lion Connecticut Holdings Inc.", and as
so amended, shall be the by-laws of the Surviving Corporation until thereafter
amended as provided therein or by applicable law.
ARTICLE III
Officers and Directors
of the Surviving Corporation
3.1 Directors. The directors of Merger Sub at the Effective Time shall,
from and after the Effective Time, be the directors of the Surviving
Corporation until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Charter and the By-Laws.
3.2 Officers. The officers of the Company at the Effective Time shall,
from and after the Effective Time, be the officers of the Surviving Corporation
until their
-3-
<PAGE>
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Charter and the
By-Laws. Prior to the Effective Time, the Company shall cause, by transfer or
otherwise, all officers of the Company and its Subsidiaries (as defined below)
and Affiliates (as defined below) who will be employees of Spinco or any of its
Subsidiaries after the Spin-Off (as contemplated by the Transaction Agreements)
to cease their employment with the Company and each of its Subsidiaries and
Affiliates, as the case may be, and no replacements shall be elected, appointed
or hired for such employees without the approval of Parent.
ARTICLE IV
Effect of the Merger on Capital Stock;
Exchange of Certificates
4.1 Effect on Capital Stock. At the Effective Time, as a result of the
Merger and without any action on the part of the holder of any capital stock of
the Company:
(a) Merger Consideration. Each share of Common Stock, par value $0.01 per
share, of the Company ("Common Stock"), including the associated right to
purchase one one-hundredth of a share of Class B Voting Preferred Stock, par
value $0.01 per share ("Class B Voting Preferred Stock"), of the Company (each
a "Right" and, together with Common Stock, a "Share" or, collectively, the
"Shares") issued pursuant to the Rights Agreement, dated as of September 24,
1999, between the Company and First Chicago Trust Company of New York, as
Rights Agent (the "Rights Agreement"), issued and outstanding immediately prior
to the Effective Time (other than (i) Shares owned by or on behalf of ING,
Parent, Merger Sub or any other Subsidiary of ING (collectively, the "ING
Companies") or Shares that are owned by or on behalf of the Company or any
Subsidiary of the Company and in each case not held on behalf of third parties
or (ii) Shares ("Dissenting Shares") that are owned by shareholders
("Dissenting Shareholders") exercising dissenter's rights pursuant to Sections
33-855 through 33-872 of the CBCA (each such Share owned by or on behalf of the
ING Companies, the Company and any Subsidiary of the Company and each
Dissenting Share, an "Excluded Share" and collectively, the "Excluded Shares"))
shall be converted into the right to receive an amount in cash per Share equal
to (x) $7.70 billion (i) minus the greater of (A) $2.678 billion (which amount
shall be reduced by $300 million if the $300 million outstanding principal
amount of the 6.75% Notes of Aetna Services, Inc. due 2001 due and payable on
August 15, 2001 is repaid in full on such maturity date) and (B) the aggregate
principal amount of all Long-Term Debt (as defined below) outstanding as of the
Effective Time to any Person (other than obligations for indebtedness set forth
in Section 4.1(a)(i) of the Company Disclosure Letter) (such amount being the
"Assumed Long-Term Debt
-4-
<PAGE>
Obligations"), (ii) plus the Net Capital Contribution Amount (positive or
negative), (iii) plus the Net Interest Accrual Amount (positive or negative)
and (iv) minus the CityPlace Accrual Amount divided by (y) the aggregate number
of outstanding Shares as of the Effective Time (the "Merger Consideration"). At
the Effective Time, all Shares issued and outstanding immediately prior to the
Effective Time shall no longer be outstanding and shall be canceled and retired
and shall cease to exist, and each certificate or other similar evidence of
ownership of uncertificated Shares (such certificate or similar evidence of
ownership of uncertificated Shares being referred to herein as a "Certificate")
formerly representing any of such Shares (other than Excluded Shares) shall
thereafter represent only the right to the Merger Consideration. "Net Capital
Contribution Amount" means an amount determined as of the Effective Time for
the period after March 31, 2000 until the Effective Time that is equal to the
aggregate cash capital contributions (other than Excluded Capital Contributions
(as defined below)) made (without duplication) after March 31, 2000 by the
Company or Aetna Services, Inc. to Aetna Retirement Services, Inc., Aetna
International, Inc. or any of their respective Subsidiaries from among the
permitted capital contributions included in Section 4.1(a) of the Company
Disclosure Letter minus the amount of any dividends or distributions (other
than Excluded Dividends) paid (without duplication) after March 31, 2000 from
Aetna Retirement Services, Inc., or Aetna International, Inc. or any of their
respective Subsidiaries to Aetna Services, Inc. (other than any such dividends
and distributions paid in respect of the proceeds (after Taxes and transaction
expenses incurred in connection therewith) (the "Permitted Sales Proceeds")
received from the sale or disposition of (i) Inversiones Mercantile-Aetna C.A.
and (ii) the Company's direct or indirect interest in Kwang Hua Securities
Investment & Trust Co. and Kwang Hua Securities Investment Consultant Co. Ltd.
(the items referred to in clauses (i) and (ii) collectively, the "Permitted
Sales")). The term "Long-Term Debt" means indebtedness for borrowed money, the
term of which, when incurred, had a maturity date of one year or more, of the
Company or any of its Subsidiaries. The term "Excluded Capital Contribution"
means any portion of any capital contribution made, directly or indirectly, to
Spinco or any of its Subsidiaries. The term "Excluded Dividends" means cash
dividends or other cash distributions, funds for which were originally provided
by Subsidiaries of Aetna Retirement Services, Inc. or Aetna International, Inc.
that are also Subsidiaries of Spinco, net of any Tax cost to any of the Company
or its Subsidiaries. The term "Net Interest Accrual Amount" means the amount
(positive or negative) equal to the Parent Interest Portion minus the Closing
Date Interest Accrual. The term "CityPlace Accrual Amount" means an amount
equal to the next aggregate semi-annual lease payment of the Company and its
Subsidiaries payable in respect of the the CityPlace building to be made after
the Effective Time multiplied by a fraction the numerator of which is the total
number of days elapsed since the immediately preceding October 31 or March 30
until the Effective Time and the denominator of which is 180. "Parent Interest
Portion" shall mean an amount equal to the amount of interest that would accrue
(in a manner consistent with accruals on the Assumed Long-Term Debt
Obligations) on $1 billion (one billion dollars) principal amount of
indebtedness bearing an annual interest rate of 7.1% from and
-5-
<PAGE>
including April 1, 2000 to the Effective Time. "Closing Date Interest Accrual"
shall mean the amount of interest accrued as of the Effective Time in respect
of the Assumed Long- Term Debt Obligations.
(b) The Merger and the Spin-Off shall be effected such that the shares of
Spinco to be distributed in the Spin-Off and the Merger Consideration are
distributed or paid, as the case may be, only to the same holder of a share of
Common Stock.
(c) Cancellation of Shares. Each Share issued and outstanding immediately
prior to the Effective Time and owned by or on behalf of any of the ING
Companies or owned by the Company or any Subsidiary of the Company (in each
case other than Shares that are held on behalf of third parties) shall, by
virtue of the Merger and without any action on the part of the holder thereof,
no longer be outstanding and shall be canceled and retired without payment of
any consideration therefor and shall cease to exist.
(d) Merger Sub. At the Effective Time, each share of common stock, par
value $0.01 per share, of Merger Sub issued and outstanding immediately prior
to the Effective Time shall be converted into one share of common stock of the
Surviving Corporation.
4.2 Exchange of Cash for Shares.
(a) Paying Agent. At or prior to the Effective Time, ING shall cause
Parent or an Affiliate of Parent to deposit with First Chicago Trust Company of
New York (the "Paying Agent"), for the benefit of the holders of Shares, cash
sufficient to pay the aggregate Merger Consideration in exchange for Shares
outstanding immediately prior to the Effective Time (other than Excluded
Shares) upon due surrender of the Certificates (or affidavits of loss in lieu
thereof) pursuant to the provisions of this Article IV (such cash being
hereinafter referred to as the "Payment Fund").
The funds deposited with the Paying Agent shall be invested by the Paying
Agent as Parent shall reasonably direct, and any net profit resulting from, or
interest or income produced by, such investments will be payable to the
Surviving Corporation or Parent, as Parent directs.
(b) Payment Procedures. Promptly after the Effective Time, the Surviving
Corporation shall cause the Paying Agent to mail to each holder of record of
Shares (other than holders of Excluded Shares) (i) a letter of transmittal
specifying that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates (or affidavits
of loss in lieu thereof) to the Paying Agent, such letter of transmittal to be
in such form and have such other provisions as Parent and the
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Company may reasonably agree, and (ii) instructions for use in effecting the
surrender of the Certificates (and affidavits of loss in lieu thereof) in
exchange for the Merger Consideration. Upon surrender of a Certificate for
cancellation (or due submission of an affidavit of loss in lieu thereof) to the
Paying Agent together with such letter of transmittal, duly executed, the
holder of such Certificate (or submitter of such affidavit, as the case may be)
shall be entitled to receive in exchange therefor, a check in the amount (after
giving effect to any required Tax withholdings) of the number of Shares
represented by such Certificate (or affidavit of loss in lieu thereof)
multiplied by the Merger Consideration, and the Certificate so surrendered
shall forthwith be canceled. No interest will be paid or accrued on any amount
payable upon due surrender (after giving effect to any required Tax
withholding) of the Certificates. In the event of a transfer of ownership of
Shares that is not registered in the transfer records of the Company, a check
for any cash to be paid upon due surrender of the Certificate may be paid to
such a transferee if the Certificate formerly representing such Shares is
presented to the Paying Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer Taxes have been paid or are not applicable.
For the purposes of this Agreement, the term "Person" shall mean any
individual, corporation (including not-for-profit corporations), general or
limited partnership, limited liability company, joint venture, estate, trust,
association, organization, Governmental Entity (as defined below) or other
entity of any kind or nature.
(c) Transfers. After the Effective Time, there shall be no transfers on
the stock transfer books of the Company of the Shares that were outstanding
immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation or Parent for transfer, they shall be canceled and, provided the
Merger Consideration provided thereon has not escheated to the relevant
Governmental Entity (as defined below), exchanged for a check (after giving
effect to any required Tax withholding) in the proper amount pursuant to this
Article IV.
(d) Termination of Payment Fund. Any portion of the Payment Fund
(including the profit, interest or income from any investments thereof) that
remains unclaimed by the holders of Shares (other than Excluded Shares) for one
year after the Effective Time shall be returned to Parent or as directed by
Parent. Any holders of Shares (other than Excluded Shares) who have not
theretofore complied with this Article IV shall thereafter look only to Parent
for payment of (after giving effect to any required Tax withholdings) the
Merger Consideration upon due surrender of their Certificates (or affidavits of
loss in lieu thereof), without any interest thereon. Notwithstanding the
foregoing, none of Parent, the Surviving Corporation, the Paying Agent or any
other
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Person shall be liable to any former holder of Shares for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(e) Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such Certificate to be lost, stolen or
destroyed and, if required by Parent, the posting by such Person of a bond in
customary amount as indemnity against any claim that may be made against it
with respect to such Certificate, the Paying Agent will issue in exchange for
such lost, stolen or destroyed Certificate a check in the amount (after giving
effect to any required Tax withholdings) of the number of Shares represented by
such lost, stolen or destroyed Certificate multiplied by the Merger
Consideration upon due surrender of, and deliverable in respect of the Shares
represented by, such Certificate pursuant to this Agreement.
(f) Withholding of Tax. Parent shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to this Agreement to any
former holder of Shares such amounts as Parent (or any affiliate thereof) is
required to deduct and withhold with respect to the making of such payment
under the U.S. Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder (the "Code") or any provision of state,
local or foreign Tax Law (as defined below). Such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the former
holders of Shares in respect of which such deduction and withholding was made.
4.3 Dissenters' Rights. Any Person who otherwise would be deemed a
Dissenting Shareholder shall not be entitled to receive the Merger
Consideration with respect to the Shares owned by such Person unless and until
such Person shall have failed to perfect or shall have effectively withdrawn or
lost such holder's right to dissent from the Merger under the CBCA. Each
Dissenting Shareholder shall be entitled to receive only the payment determined
pursuant to Sections 33-855 through 33-872 of the CBCA with respect to Shares
owned by such Dissenting Shareholder. The Company shall give Parent (i) prompt
notice of any written dissenters' demands, attempted withdrawals of such
demands, and any other instruments served pursuant to applicable Law received
by the Company relating to dissenters' rights and (ii) the opportunity to
direct all negotiations and proceedings with respect to dissenters' demands
under the CBCA. The Company shall not, except with the prior written consent of
Parent, voluntarily make any payment with respect to any dissenters' demands
for payment for Shares, offer to settle or settle any such demands or approve
any withdrawal of any such demands. If, after the Effective Time, such
Dissenting Shareholder fails to perfect, withdraws or loses its right to demand
the payment of fair value for its Shares under the CBCA, such Shares shall be
treated as if they had been converted as of the Effective Time into a right to
receive the Merger Consideration and ING shall cause Parent to promptly
thereafter deposit, or cause to be
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deposited, with the Paying Agent, for the benefit of such Dissenting
Stockholder, cash sufficient to pay the aggregate Merger Consideration in
exchange for all such Shares.
ARTICLE V
Representations and Warranties
5.1 Representations and Warranties of the Company. Except as disclosed in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999,
filed with the Securities and Exchange Commission (the "SEC") on February 29,
2000 (the "1999 10-K"), the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000, filed with the SEC on April 27, 2000 (the "First
2000 10-Q"), the Company's Annual Proxy Statement on Schedule 14A, filed with
the SEC on March 22, 2000, or as set forth in the corresponding sections or
subsections of the disclosure letter, dated the date hereof, delivered to
Parent by the Company on or prior to entering into this Agreement (the "Company
Disclosure Letter"), the Company hereby represents and warrants to Parent and
Merger Sub as set forth in this Section 5.1. All representations and warranties
contained in this Agreement which are made as to Joint Ventures (as defined
below) or any other joint ventures shall be made only as to the actual
knowledge of those people set forth on Section 5.1 of the Company Disclosure
Letter.
(a) Organization, Good Standing and Qualification. (i) Each of the Company
and its Subsidiaries (as defined below) and Joint Ventures and Spinco is an
entity duly organized, validly existing and in good standing (or relevant state
or foreign law equivalent) under the Laws of its respective jurisdiction of
organization and has all requisite corporate or similar power and authority to
own and operate its properties and assets and to carry on its business as
presently conducted and is qualified to do business and is in good standing in
each jurisdiction where the ownership or operation of its assets or properties
or conduct of its business requires such qualification, except (A) to the
extent such qualifications to do business include the possession of insurance,
reinsurance or healthcare licenses, which are addressed in Section 5.1(a)(ii)
below and (B) where the failure to be so organized, qualified or in good
standing (or relevant state or foreign law equivalent), or to have such power
or authority is not, individually or in the aggregate, reasonably likely to
have a Company Material Adverse Effect (as defined below). The Company has made
available to Parent complete and correct copies of the certificate of
incorporation and by-laws or other comparable governing instruments of the
Company and each of the Subsidiaries and Joint Ventures of the Company set
forth in Section 5.1(a)(i)(A) of the Company Disclosure Letter. Such
certificates of incorporation and by-laws or other comparable governing
instruments of the Company, Spinco, each of the Joint Ventures and each of the
Subsidiaries listed in Section 5.1(a)(i)(A) of the Company Disclosure Letter so
delivered are in full force and effect. Section 5.1(a)(i)(B) of the
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Company Disclosure Letter contains, as of the date of this Agreement, a correct
and complete list of (x) each Subsidiary and Joint Venture of the Company and
(y) each jurisdiction where the Company and each of such Subsidiaries and Joint
Ventures is organized.
As used in this Agreement, the term (x) "Subsidiary" means, with respect
to any Person, any entity, whether incorporated or unincorporated, of which at
least a majority of the securities or ownership interests having by their terms
ordinary voting power to elect a majority of the board of directors or other
persons performing similar functions is directly or indirectly owned or
controlled by such Person or by one or more of its respective Subsidiaries or
by such Person and any one or more of its respective Subsidiaries; provided,
however, that except in the context of references in Section 5.1(e)(iii) to
consolidated financial statements of the Company and its Subsidiaries, (A) no
member of the Spinco Group (as defined in the Distribution Agreement) shall be
deemed to be a Subsidiary, Joint Venture or "Affiliate" (as defined in Rule
12b-2 under the Exchange Act) of the Company, (B) each member of the Spinco
Group (other than Spinco) shall be deemed to be a Subsidiary only of Spinco and
not a member of the Aetna Group (as defined in the Distribution Agreement), (C)
no member of the Aetna Group shall be deemed to be a Subsidiary, Joint Venture
or Affiliate of Spinco or member of the Spinco Group and (D) each member of the
Aetna Group (other than the Company) shall be deemed to be a Subsidiary only of
the Company and not a member of the Spinco Group, and (y) "Company Material
Adverse Effect" means a material adverse effect on the financial condition,
properties, business or annual results of operations of the Company and its
Subsidiaries and Joint Ventures taken as a whole, except to the extent that
such adverse effect results from (A) general economic conditions or changes
therein in any one or more countries, (B) financial market fluctuations or
conditions in any one or more countries, (C) adverse economic, currency or
regulatory changes or effects in or affecting the financial services industry,
insurance industry or asset management industry in any one or more countries or
(D) the announcement of the transactions contemplated herein. Notwithstanding
the foregoing, the parties hereto acknowledge and agree that in no event shall
any matter that is or would be a Spinco Group Liability (as such term is
defined in the Distribution Agreement) constitute or give rise to, in whole or
in part, a Company Material Adverse Effect.
(ii) The Company and its Subsidiaries (i) conducts its domestic insurance
and reinsurance operations exclusively through Aetna Life Insurance and Annuity
Company and Aetna Insurance Company of America (the "U.S. Retained Insurance
Companies") and (ii) conducts its international insurance, reinsurance and
health care operations through those Subsidiaries, Joint Ventures and joint
ventures set forth in Section 5.1(a)(ii)(A) of the Company Disclosure Letter
(the "International Retained Insurance Companies" and, together with the U.S.
Retained Insurance Companies, the "Retained Insurance Companies"). Section
5.1(a)(ii)(B) of the Company Disclosure Letter
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sets forth the jurisdictions where the Retained Insurance Companies are
domiciled or "commercially domiciled" and licensed to do an insurance or
reinsurance or healthcare business for insurance regulatory purposes. Each of
the Retained Insurance Companies is (A) duly licensed or authorized to engage
in the business conducted by it (including, without limitation, as a healthcare
company, an insurance company or, where applicable, a reinsurer) in its
jurisdiction of organization, (B) duly licensed or authorized as a healthcare
company, an insurance company or, where applicable, a reinsurer in each other
jurisdiction where it is required to be so licensed or authorized, and (C) duly
authorized in its jurisdiction of organization and each other applicable
jurisdiction to engage in or write each line of business reported as being
written in the Company SAP Statements (as defined below) (in the case of U.S.
Retained Insurance Companies) or (in the case of International Retained
Insurance Companies) comparable report, except, in the case of each of clauses
(A) through (C), where the failure to be so licensed or authorized is not
reasonably likely to have a Company Material Adverse Effect. The Company and
each of the Retained Insurance Companies have made all required filings under
applicable Insurance Laws (as defined below) except where the failure to file
is not, individually or in the aggregate, reasonably likely to have a Company
Material Adverse Effect.
(iii) Joint Ventures. Section 5.1(a)(iii)(A) of the Company Disclosure
Letter sets forth a list of each of the Company's and its Subsidiaries' Joint
Ventures. With respect to each of those Joint Ventures so indicated in Section
5.1(a)(iii) of the Company Disclosure Letter, the Company has made available to
Parent correct and complete copies of all agreements among Joint Venture
parties with respect to the Joint Venture and all governing instruments and
amendments thereto with respect to each Joint Venture. With respect to each of
the Joint Ventures, the Company has made available to Parent correct and
complete copies of all agreements to which the Company or any of its
Subsidiaries or Joint Ventures is a party which (i) have affected or are
reasonably likely to affect the ability, if any, of Parent to direct and
control such entity's business operations after consummation of the Merger and
the other transactions contemplated in the Transaction Agreements or (ii)
evidence any commitment (whether or not contingent) for future investment of
capital or otherwise to be directly or indirectly made by ING, the Company or
any of their respective Subsidiaries therein, or any other future material
liabilities or obligations in respect thereof of ING, the Company or any of
their respective Subsidiaries. With respect to the joint ventures of the
Company and its Subsidiaries that are not Joint Ventures: (A) neither the
Company nor any of its Subsidiaries or Joint Ventures is liable for any
material obligations or material liabilities of any such joint ventures, (B)
neither the Company nor any of its Subsidiaries or Joint Ventures is obligated
to make any loans or capital contributions to, or to undertake any guarantees
or obligations with respect to, such joint ventures, (C) none of such joint
ventures own any assets that are material to the continued conduct of the
business of the Company and its Subsidiaries and Joint Ventures, taken as a
whole, substantially as it is presently conducted, (D) neither the Company nor
any of its Subsidiaries or Joint Ventures is subject to any limitation on its
right to compete
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or any material limitation on its right to otherwise conduct its business by
reason of any agreement relating to such joint venture and (E) each joint
venture is in material compliance with all Laws of all Governmental Entities.
As used herein, "Joint Venture" shall mean those direct or indirect joint
ventures of the Company or any of its Subsidiaries (i) that are not otherwise
direct or indirect Subsidiaries of the Company and (ii) in which the Company or
any of its Subsidiaries as of the date of this Agreement have invested, or made
commitments to invest, $25 million or more, but "Joint Venture" and "joint
venture" shall not include any entities whose securities are held solely for
passive investment purposes by the Company or any of its Subsidiaries. Section
5.1(a)(iii)(B) of the Company Disclosure Letter contains, as of the date of
this Agreement, a correct and complete list of each joint venture of the
Company and its Subsidiaries that is not a Joint Venture.
(b) Capital Structure. The authorized capital stock of the Company
consists of 500,000,000 shares of Common Stock, of which 141,149,275 shares of
Common Stock were outstanding as of the close of business on June 30, 2000,
15,000,000 shares of Class A Voting Preferred Stock, par value $0.01 per share,
of which no shares are outstanding, 15,000,000 shares of Class B Voting
Preferred Stock, of which no shares are outstanding, 15,000,000 shares of Class
C Voting Preferred Stock, par value $0.01 per share, of which no shares are
outstanding, and 15,000,000 shares of Class D Non-Voting Preferred Stock, par
value $0.01 per share, of which no shares are outstanding (the Class A Voting
Preferred Stock, the Class B Voting Preferred Stock, the Class C Voting
Preferred Stock and the Class D Non-Voting Preferred Stock sometimes being
referred to herein as the "Preferred Stock"). Since June 30, 2000 to the date
hereof, no Shares have been issued except in the ordinary course of business,
including, without limitation, pursuant to stock option exercises. All of the
outstanding shares of Common Stock have been duly authorized and are validly
issued, fully paid and nonassessable. The Company has no shares of Common Stock
or Preferred Shares reserved for or otherwise subject to issuance, except that,
as of the date hereof, there were (i) 22,179,682 shares of Common Stock
reserved for issuance pursuant to those plans identified as Stock Plans in
Section 5.1(b) of the Company Disclosure Letter (collectively, the "Stock
Plans"), (ii) 1,673,145 shares of Class B Voting Preferred Stock reserved for
issuance pursuant to the Rights Agreement, (iii) 3,200,000 shares of Common
Stock reserved for issuance pursuant to the Share Exchange and Registration
Rights Agreement dated as of December 17, 1999, between the Company and
Citibank, N.A. and (iv) 1,000,000 shares of Common Stock reserved for issuance
pursuant to the Certificate dated August 6, 1999 representing Stock
Appreciation Rights to purchase shares of Common Stock of the Company, issued
to The Prudential Insurance Company of America. The Company has provided to
Parent a correct and complete list of the aggregate outstanding options, as of
the date of this Agreement, to purchase Shares under the Stock Plans (each a
"Company Option"), including the date of grant, exercise price and number of
Shares subject thereto. Each of the outstanding shares of capital stock or
other securities of each of the Company's Subsidiaries is duly authorized,
validly issued, fully paid and nonassessable and owned by the Company or a
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direct or indirect wholly owned subsidiary of the Company, free and clear of
any lien, pledge, security interest, claim or other encumbrance. Except as set
forth above, there are no preemptive or other outstanding rights, options,
warrants, conversion rights, stock appreciation rights, redemption rights,
repurchase rights, agreements, arrangements, calls, commitments or rights of
any kind that obligate the Company or any of its Subsidiaries to issue or sell
any shares of capital stock or other securities of the Company or any of its
Subsidiaries or any securities or obligations convertible or exchangeable into
or exercisable for, or giving any Person a right to subscribe for or acquire,
any securities of the Company or any of its Subsidiaries, and no securities or
obligations evidencing such rights are authorized, issued or outstanding. The
Company does not have outstanding any bonds, debentures, notes or other
obligations the holders of which have the right to vote (or convertible into or
exercisable for securities having the right to vote) with the shareholders of
the Company on any matter ("Voting Debt").
(c) Corporate Authority; Approval and Fairness. (i) The Company has, and
Spinco will have prior to the Effective Time, all requisite corporate power and
authority and the Company has, and Spinco will have prior to the Effective
Time, taken all corporate action necessary in order to execute, deliver and
perform its obligations under the Transaction Agreements to which it is or will
be a party and to consummate, on the terms and subject to the conditions of the
Transaction Agreements, the transactions contemplated hereby and thereby,
subject only to approval of this Agreement and the transactions contemplated
hereby by the holders of at least two-thirds of the outstanding shares of
Common Stock (the "Company Requisite Vote"). Each Transaction Agreement to
which the Company or Spinco is or will be a party, when executed by such party,
will be a valid and binding agreement of such party enforceable against such
party in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to the rights of
creditors of insurance companies generally and to general equity principles
(the "Bankruptcy and Equity Exception").
(ii) The board of directors of the Company (A) has, and, in the case of
Spinco, the Board of Directors of Spinco will have prior to the Effective Time,
unanimously approved the Transaction Agreements and the transactions
contemplated hereby and (B) has declared that this Agreement and the
transactions contemplated hereby, taken as a whole, are fair to, advisable and
in the best interests of the holders of shares of Common Stock. In taking such
action, the Board of Directors of the Company considered, among other things,
the interests of the Company's employees, customers, creditors and suppliers as
well as community and societal considerations. The board of directors of the
Company has also has received the opinions of its financial advisors, Donaldson
Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co., to the
effect that the consideration to be received by the holders of shares of Common
Stock in the Merger is fair from a financial point of view to the holders of
shares of Common Stock.
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(d) Governmental Filings; No Violations. (i) Other than the reports,
filings, registrations, consents, approvals, permits, authorizations,
applications, expiry of waiting periods and/or notices (A) pursuant to Section
1.4, (B) under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (C) under any foreign competition laws, (D) under the
Exchange Act, the Securities Act (in each case as defined below) and other
securities laws, (E) under the Investment Company Act of 1940, as amended (the
"1940 Act"), (F) under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), (G) with the NYSE (as defined below), (H) with the National
Association of Securities Dealers, Inc. (the "NASD"), (I) with applicable
foreign, federal and state regulatory authorities governing insurance and
healthcare (including, but not limited to, the Commissioners or
Superintendents, as the case may be, of Insurance of Connecticut and Florida)
(the "Insurance and Healthcare Authorities"), (J) in respect of certain
undertakings made by the Company to the Insurance and Healthcare Authorities of
the States of Florida and California, (K) with federal and state regulatory
authorities governing banking (including, but not limited to, the Office of
Thrift Supervision, the Federal Deposit Insurance Corporation, the Connecticut
Banking Department, and the Office of the Comptroller of the Currency),
insurance premium finance, commercial collections, leasing, consumer finance,
financial services, investment services, commercial finance and mortgage
lending or servicing (the "Banking Authorities"), (L) with the Department of
Labor, (M) with applicable foreign and federal regulatory authorities governing
foreign investments, (N) with applicable foreign regulatory authorities
governing the management of pension plans, (O) with applicable state regulatory
authorities governing investments advisors, (P) with the Pension Benefit
Guaranty Corporation (the "PBGC") (Q) required to be obtained from any
Governmental Entity (as defined below) in its capacity as a customer of the
Company, Spinco or any of their Subsidiaries or any Joint Ventures and (R) with
the IRS in connection with certain transfers contemplated by the Employee
Benefits Agreement (as defined below), no notices, reports or other filings are
required to be made by the Company, Spinco or any of their Subsidiaries or any
Joint Ventures with, nor are any consents, registrations, approvals, permits,
applications, expiry of waiting periods or authorizations required to be
obtained by the Company, Spinco or any of their Subsidiaries or any Joint
Ventures from, any U.S. or non-U.S. governmental or regulatory authority,
agency, commission, tribunal, body or other governmental, quasi-governmental or
self-regulatory entity (each, a "Governmental Entity"), in connection with the
execution and delivery of the Transaction Agreements by the Company and Spinco
and the consummation by the Company and Spinco of the Merger, the Spin-Off and
the other transactions contemplated hereby and thereby, except those that the
failure to make or obtain are not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect or prevent, materially delay
or materially impair the ability of the Company or Spinco to consummate the
Merger and the other transactions contemplated by the Transaction Agreements.
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(ii) The execution, delivery and performance of each Transaction Agreement
by the Company (and in the case of the Distribution Agreement, Spinco) does
not, and the consummation by the Company (and in the case of the Distribution
Agreement, Spinco) of the Merger and the other transactions contemplated hereby
and thereby will not, constitute or result in (A) a breach or violation of, or
a default under, the certificate or by-laws of Spinco or the Company or the
comparable governing instruments of any of the Company's or Spinco's
Subsidiaries or any Joint Ventures, (B) a breach or violation of, or a default
under, the acceleration of any rights or obligations or the creation of a lien,
pledge, security interest, claim or other encumbrance on the assets of Spinco,
the Company or any of the Company's or Spinco's Subsidiaries or any Joint
Ventures (with or without notice, lapse of time or both) pursuant to, any
agreement, lease, non-governmental license, contract, treaty, note, mortgage,
indenture, non-governmental franchise, non- governmental permit, concession,
arrangement or other non-governmental obligation ("Contracts") binding upon
Spinco, the Company or any of the Company's or Spinco's Subsidiaries or any
Joint Ventures or, assuming compliance with the matters referred to in Section
5.1(d)(i), any Law (as defined below), or any governmental or non-governmental
permit, franchise or license to which Spinco, the Company or any of the
Company's or Spinco's Subsidiaries or any Joint Ventures is subject or (C) any
change in the rights or obligations of any party under any of the Contracts,
except, in the case of clause (B) or (C) above, for any breach, violation,
default, acceleration, creation or change that is not, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect or
prevent, materially delay or materially impair the ability of the Company or
Spinco to consummate the transactions contemplated by the Transaction
Agreements. The payment of the Merger Consideration in the Merger and
distribution of the shares of Spinco to be distributed in the Spin-Off only to
the same holder of a share of Common Stock (as described in Section 4.1(b) of
this Agreement) is capable of being effected in accordance with Law.
(e) Statutory Reports; Company Reports; Financial Statements. (i) Since
January 1, 1997, each of the Retained Insurance Companies has filed all annual
or quarterly statements, together with all exhibits, interrogatories, notes,
actuarial opinions, affirmations, certifications, schedules or other supporting
documents in connection therewith, required to be filed with or submitted to
the appropriate regulatory authorities of the jurisdiction in which it is, or
was for the period of time covered by the filing, domiciled or "commercially
domiciled" on forms prescribed or permitted by such authority (in the case of
U.S. Retained Insurance Companies and Aetna Life Insurance Company of America
("ALICA"), collectively, the "Company SAP Statements", and in the case of
International Retained Insurance Companies, other than immaterial International
Retained Insurance Companies, collectively the "Foreign Company Statements").
The Company has delivered or made available to Parent all Company SAP
Statements and all Foreign Company Statements, in each case for the year ended
December 31, 1999 each in the form (including exhibits, annexes and any
amendments
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thereto) filed with the applicable insurance regulatory agency. Since January
1, 1997, the financial statements included in the Company SAP Statements and
Foreign Company Statements for the periods from and after January 1, 1997,
including the notes thereto, have been prepared in accordance with statutory or
other applicable accounting practices prescribed or permitted by applicable
regulatory authorities in effect as of the date of the respective statements,
and such accounting practices have been applied on a substantially consistent
basis throughout the periods involved, except as expressly set forth in the
notes or schedules thereto. Such financial statements present fairly in all
material respects the respective statutory financial positions and results of
operations of each of the Retained Insurance Companies as of their respective
dates and for the respective periods presented therein. The Company SAP
Statements and Foreign Company Statements complied in all material respects
with all applicable Laws when filed, and no material deficiency has been
asserted with respect to any Company SAP Statements or Foreign Company
Statements by the applicable insurance regulatory body or other Governmental
Entity. Except as indicated therein, all assets that are reflected as admitted
assets on the Company SAP Statements and Foreign Company Statements , to the
extent applicable, comply in all material respects with all applicable
Insurance Laws (as defined below) with respect to admitted assets and are in an
amount at least equal to the minimum amounts required by applicable Insurance
Laws. The statutory balance sheets and statements of income, changes in
financial position and cash flow included in the Company SAP Statements for
1999 have been audited by KPMG LLP and the Company has delivered or made
available to Parent true and complete copies of all audit opinions related
thereto. To the extent the balance sheets and statements of income, changes in
financial position and cash flow included in the Foreign Company Statements for
1999 have been audited, the Company has delivered or made available to Parent
true and complete copies of all audit opinions related thereto. The Company has
delivered to Parent true and complete copies of all examinations and market
conduct reports or other comparable examinations or reports of insurance
departments and any insurance regulatory agencies since January 1, 1998
relating to the Retained Insurance Companies.
(ii) The Company has filed with the SEC each registration statement,
report, proxy statement or information statement required to be filed by it
since January 1, 1997, including the 1999 10-K and the First 2000 10-Q, each in
the form, when filed (or if amended, as of the date of such amendment)
(including exhibits, annexes and any amendments thereto), promulgated by the
SEC under the Securities Act of 1933, as amended (the "Securities Act") or the
Exchange Act (collectively, with any other filings made with the SEC since
January 1, 1997, and including any such registration statements, reports, proxy
statements and information statements filed subsequent to the date hereof and
as amended, the "Company Reports"). As of their respective dates (or, if
amended, as of the date of such amendment), the Company Reports did not, and
any Company Reports filed with the SEC subsequent to the date hereof will not,
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to
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make the statements made therein, in the light of the circumstances in which
they were made, not misleading.
(iii) Each of the consolidated balance sheets included in the Company
Reports (including the related notes and schedules) fairly presents in all
material respects, or will fairly present in all material respects, the
consolidated financial position of the Company and its Subsidiaries as of its
date and each of the consolidated statements of income, shareholders' equity
and cash flows included in the Company Reports (including any related notes and
schedules) fairly presents in all material respects, or will fairly present in
all material respects, the results of operations, retained earnings and cash
flows, as the case may be, of the Company and its Subsidiaries for the periods
set forth therein (subject, in the case of unaudited statements, to notes and
normal year-end audit adjustments that will not be material in amount or
effect), in each case in accordance with U.S. generally accepted accounting
principles ("GAAP") consistently applied during the periods involved, except as
may be noted therein.
(iv) Section 5.1(e)(iv) of the Company Disclosure Letter contains the
unaudited pro forma consolidated balance sheet of Spinco and its Subsidiaries
as of March 31, 2000, together with the related unaudited consolidated
statement of income for the three-month period then ended, and the unaudited
pro forma consolidated statement of income of Spinco and its Subsidiaries for
the year ended December 31, 1999. Such statements present information as if the
Spin-Off had occurred (on the terms and subject to the conditions set forth in
the Transaction Agreements) as of the Balance Sheet Date or, with respect to
the income statements, as if the Spin-Off had occurred (on the terms and
subject to the conditions set forth in the Transaction Agreements) as of the
beginning of the period presented. Such statements are based on, and should be
read in conjunction with, the historical consolidated financial statements
included in the Company Reports. Such balance sheet fairly presents in all
material respects the consolidated financial position of Spinco and its
Subsidiaries as of its date, as if the Spin-Off had occurred (on the terms and
subject to the conditions set forth in the Transaction Agreements) on such
date, and each such consolidated statement of income, fairly presents in all
material respects the results of operations of Spinco and its Subsidiaries for
the periods set forth therein, as if the Spin-Off had occurred (on the terms
and subject to the conditions set forth in the Transaction Agreements) as of
the beginning of such period (subject to notes and normal year-end audit
adjustments that will not be material in amount or effect). The accounts
reflected in the unaudited pro forma consolidated financial statements referred
to in this subsection have been prepared in accordance with GAAP on a basis
consistent with the historical audited consolidated financial statements of the
Company and its Subsidiaries (including Spinco and its Subsidiaries) and were
prepared in accordance with the requirements of SEC Regulation S-X as it
relates to pro forma financial statements.
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<PAGE>
(v) Section 5.1(e)(v) of the Company Disclosure Letter contains the
unaudited pro forma consolidated balance sheet of the Company and its
Subsidiaries as of March 31, 2000, together with the related unaudited
consolidated statement of income, for the three-month period then ended, and
the unaudited pro forma consolidated statement of income of the Company and its
Subsidiaries for the year ended December 31, 1999. Such statements present
information as if the Spin-Off had occurred (on the terms and subject to the
conditions set forth in the Transaction Agreements) as of the Balance Sheet
Date or, with respect to the income statements, as if the Spin-Off had occurred
(on the terms and subject to the conditions set forth in the Transaction
Agreements) as of the beginning of the period presented. Such statements are
based on, and should be read in conjunction with, the historical consolidated
financial statements included in the Company Reports. Such balance sheet fairly
presents in all material respects the consolidated financial position of the
Company and its Subsidiaries as of its date, as if the Spin-Off had occurred
(on the terms and subject to the conditions set forth in the Transaction
Agreements) on such date, and each such consolidated statement of income fairly
presents in all material respects the results of operations of the Company and
its Subsidiaries for the periods set forth therein, as if the Spin-Off had
occurred (on the terms and subject to the conditions set forth in the
Transaction Agreements) as of the beginning of such period (subject to notes
and normal year-end audit adjustments that will not be material in amount or
effect). The accounts reflected in the unaudited pro forma financial statements
referred to in this subsection have been prepared in accordance with GAAP on a
basis consistent with the historical audited consolidated financial statements
of the Company and its Subsidiaries (including Spinco and its Subsidiaries) and
were prepared in accordance with the requirements of SEC Regulation S-X as it
relates to pro forma financial statements.
(f) Absence of Certain Changes. Except as disclosed in the Company Reports
filed prior to the date hereof or as expressly contemplated by the Transaction
Agreements or Section 6.1 hereof, since March 31, 2000 (the "Balance Sheet
Date"), the Company and its Subsidiaries and Joint Ventures have conducted
their respective businesses only in, and have not engaged in any material
transaction other than according to, the ordinary course of such businesses
consistent with prior practice and since the Balance Sheet Date there has not
been (i) any Company Material Adverse Effect or any development or combination
of developments of which the Company has knowledge (as such phrase is defined
below) that has had or is reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect; (ii) any damage, destruction or
other casualty loss with respect to any material asset or property owned,
leased or otherwise used by the Company or any of its Subsidiaries or Joint
Ventures, whether or not covered by insurance, which is reasonably likely to
have a Company Material Adverse Effect; (iii) any change by the Company or any
of its Subsidiaries in accounting principles, practices or methods, except as
may be appropriate to conform to changes in statutory or regulatory accounting
rules or generally accepted accounting principles or regulatory requirements
with respect thereto; (iv) any declaration, setting aside or payment of any
dividend or other
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distribution in respect of the capital stock of the Company or Aetna Retirement
Services, Inc. or Aetna International, Inc., except for dividends or other
distributions on the capital stock of the Company publicly announced prior to
the date hereof and except for regularly scheduled quarterly cash dividends on
the Company's capital stock; (v) any material addition, or any development
involving a prospective material addition, to the Company and its Subsidiaries'
consolidated reserves for future insurance policy benefits or other insurance
policy claims and benefits other than as a result of new business produced in
the ordinary course of business since the Balance Sheet Date and except to the
extent relating solely to any member of the Spinco Group; (vi) any material
change in the actuarial, investment, reserving, underwriting or claims
administration policies, practices or principles of any Retained Insurance
Company, except as may be appropriate to conform to changes in statutory or
regulatory accounting or actuarial rules or generally accepted accounting or
actuarial principles or regulatory requirements with respect thereto; (vii) any
amendment of any of the Compensation and Benefit Plans (as defined below) other
than amendments in the ordinary course of business consistent with prior
practice; (viii) any granting by the Company or any of its Subsidiaries to any
of the 20 highest paid employees (by base salary) of the Company (each a
"Designated Person" and collectively, the "Designated Persons") of any increase
in compensation, except (A) for increases in the ordinary course of business
consistent with prior practice, (B) as was required under employment agreements
in effect as of the Balance Sheet Date or (C) in connection with a promotion;
(ix) any granting by the Company or any of its Subsidiaries to any Designated
Person of any increase in severance or termination pay, except (A) for
obligations which have been satisfied prior to the date hereof, (B) for
increases in the ordinary course of business consistent with prior practice in
any one case not in excess of $100,000, (C) as was required under any
employment, severance or termination agreement in effect as of the Balance
Sheet Date or (D) in connection with a promotion; (x) any entry by the Company
or any of its Subsidiaries into any new severance or termination agreement with
any Designated Person, except (A) for obligations which have been satisfied
prior to the date hereof, (B) new severance or termination obligations in the
ordinary course of business consistent with prior practice in any one case not
in excess of $100,000, (C) in connection with a promotion or (D) any new
severance or termination agreement entered into at Parent's request or with
Parent's consent; (xi) except in the ordinary course of business consistent
with past practices, any material Tax election made by the Company or any of
its Subsidiaries or any material changes of the Company or any of its
Subsidiaries' methods of accounting for federal income Tax purposes or (xii)
any transfer or transaction that would have been prohibited by Section 6.1(l)
had it been in effect since March 31, 2000; provided, however, that the
limitations of clauses (vii) through (x) of this Section 5.1(f) shall not apply
to any actions taken in respect of any individual who, after giving effect to
the Spin-Off, will be an executive officer, director or employee of Spinco or
any of its Subsidiaries (an "Excluded Employee") if such actions do not
adversely affect the Company and its Subsidiaries and such limitations shall
not apply to any actions taken in respect of any other individual so long as
any liabilities resulting from such actions are the
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<PAGE>
responsibility of Spinco or any of its Subsidiaries (after giving effect to the
Transaction Agreements). For purposes of the proviso to this Section 5.1(f), an
action will not be considered to adversely affect the Company and its
Subsidiaries if (i) the action is taken with respect to an Excluded Employee
whose employment arrangements expressly provide that, upon consummation of the
Spin-Off, any and all claims of such Excluded Employee with respect to
employment shall be brought only against Spinco or any of its Subsidiaries and
shall not be brought against the Company or any of its Subsidiaries or (ii) if
the aggregate liability for the action (other than an action described in the
foregoing clause (i)), together with the aggregate liability for all actions
other than those described in the foregoing clause (i), determined in each case
without regard to the Transaction Agreements, is less than $10 million.
(g) Litigation and Liabilities. (i) Except as disclosed in the Company
Reports filed prior to the date hereof, there are no civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of the Company, threatened against Spinco, the
Company, their respective Subsidiaries, any of the Joint Ventures or any of
their respective properties or assets except for those that are not,
individually or in the aggregate, reasonably likely to have a Company Material
Adverse Effect or prevent, materially delay or materially impair the ability of
the Company or Spinco to consummate the transactions contemplated by the
Transaction Agreements.
(ii) Set forth in Section 5.1(g)(ii) of the Company Disclosure Letter is a
complete list, as of the date hereof, of all civil, criminal or administrative
actions, suits, claims (other than individual customer complaints which are
received in the ordinary course of business, consistent with past practices,
and as to which no suit, action or arbitration has been commenced), hearings,
investigations or proceedings pending, or, to the actual knowledge of the
people set forth in Section 5.1(g)(ii) of the Company Disclosure Letter,
threatened, against the Company and its Subsidiaries (other than Aetna
International, Inc. and its Subsidiaries, the "International Entities"), any
Joint Ventures and any joint ventures of the Company or their properties or
assets.
(iii) Set forth in Section 5.1(g)(iii) of the Company Disclosure Letter is
a complete list, as of the date hereof, of each civil, criminal or
administrative actions, suits, claims (other than individual customer
complaints which are received in the ordinary course of business, consistent
with past practices, and as to which no suit, action or arbitration has been
commenced), hearings, investigations or proceedings pending, or, to the actual
knowledge of the people set forth in Section 5.1(g)(iii) of the Company
Disclosure Letter, threatened, against the International Entities and the Joint
Ventures or their properties or assets, as to which, in each case, it is
reasonably likely to expect potential damages resulting therefrom to exceed
$500,000, net of applicable insurance and reserves.
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(iv) As of the date hereof, there is no litigation against any member of
the Spinco Group which, net of applicable insurance and reserves with respect
thereto, is reasonably likely to result in liability for amounts which would be
material to the financial condition of Spinco.
(v) Except for those obligations and liabilities that are fully reflected
or reserved against on the consolidated balance sheet of the Company included
in the 1999 10-K or the First 2000 10-Q and for obligations and liabilities
incurred in the ordinary course of business consistent with prior practice
since March 31, 2000, neither the Company nor any of its Subsidiaries has
incurred any obligations or liabilities of any nature whatsoever, whether
absolute, accrued, contingent, known, unknown or otherwise and none of the
Joint Ventures has incurred any obligation or liabilities of any nature
whatsoever, whether absolute, accrued, contingent or otherwise and, in each
case, whether or not required to be disclosed on a balance sheet prepared in
accordance with GAAP or statutory or other applicable accounting principles,
including those relating to matters involving any Environmental Law (as defined
below), or any other facts or circumstances of which the Company has knowledge
that could result in any claims against, or obligations or liabilities of, the
Company or any of its Affiliates or Joint Ventures, except for those that are
not, individually or in the aggregate, reasonably likely to have a Company
Material Adverse Effect or prevent, materially delay or materially impair the
ability of the Company or Spinco to consummate the transactions contemplated by
the Transaction Agreements. As used in the Agreement, each of the phrases (i)
"of which the Company has knowledge", (ii) "knowledge of the Company" and (iii)
"the Company has no knowledge" means the actual knowledge of those people set
forth on Section 5.1(g)(v) of the Company Disclosure Letter.
(h) Employee Benefits. (i) A true and complete copy of each material
employment benefit and compensation plan, Contract, policy or arrangement,
including each "employee benefit plan" within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
bonus, incentive, deferred compensation, employee stock ownership, stock bonus,
stock purchase, restricted stock, stock option, stock appreciation rights,
stock based, termination and severance plan, Contract, policy or arrangement
that covers employees, directors, agents, consultants, former employees or
former directors of the Company and its Subsidiaries (the "Compensation and
Benefit Plans") and any trust agreement or insurance contract forming a part of
such Compensation and Benefit Plans has been made available to Parent prior to
the date hereof. The Compensation and Benefit Plans are listed in Section
5.1(h) of the Company Disclosure Letter and any "change of control" or similar
provisions therein are specifically identified in Section 5.1(h) of the Company
Disclosure Letter. Except as provided in the Transaction Agreements, neither
the Company nor any of its Subsidiaries has any commitment, oral or written, to
create any additional material Compensation and
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<PAGE>
Benefit Plan or to modify or change any existing Compensation and Benefit Plan
in a material respect.
(ii) All Compensation and Benefit Plans are in substantial compliance with
all applicable Law, including the Code and ERISA, and all required filings and
disclosures with respect to any Compensation and Benefit Plan have been timely
made. More specifically, the Company and the Compensation and Benefit Plans
have at all times complied with Section 407 of ERISA with respect to the
holding and acquiring of "employer securities" and "qualifying employer
securities" as defined under ERISA. Each Compensation and Benefit Plan that is
an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA
(a "Pension Plan") and that is intended to be qualified under Section 401(a) of
the Code (each, a "Qualified Plan"), has received a favorable determination
letter (including a determination that the related trust under such
Compensation and Benefit Plan is exempt from Tax under Section 501(a) of the
Code) from the Internal Revenue Service (the "IRS") with respect to "TRA" (as
defined in Section 1 of Revenue Procedure 93-39), and the Company is not aware
of any circumstances reasonably likely to result in revocation of any such
favorable determination letter. There is no material pending or, to the
knowledge of the Company, threatened legal action, suit, claim or governmental
investigation relating to any of the Compensation and Benefit Plans, other than
routine claims for benefits. Neither the Company nor any of its Subsidiaries
nor Spinco nor any of its Subsidiaries has engaged in a transaction, or omitted
to take any action, with respect to any Compensation and Benefit Plan that,
assuming the Taxable period of such transaction expired as of the date hereof,
could subject the Company or any of its Subsidiaries to a material Tax or
penalty imposed by either Section 4975 of the Code or Section 502 of ERISA.
(iii) There is no material liability under Subtitle C or D of Title IV of
ERISA that has been incurred which has not been satisfied and no such material
liability is expected to be incurred by the Company or any Subsidiary with
respect to any ongoing, frozen or terminated "single-employer plan", within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by
any of them, or the single-employer plan of any entity which is considered one
employer with the Company under Section 4001 of ERISA or Section 414 of the
Code (such entity an "ERISA Affiliate" and such plan an "ERISA Affiliate
Plan"). The Company and its Subsidiaries have not incurred any material
withdrawal liability that has not been satisfied and the Company does not
expect that they will incur any such material withdrawal liability with respect
to any multiemployer plan under Subtitle E to Title IV of ERISA. Neither the
Company, its Subsidiaries nor any ERISA Affiliate has contributed, or been
obligated to contribute, to a "multiemployer plan" within the meaning of
Section 3(37) of ERISA within the last six calendar years. No notice of a
"reportable event", within the meaning of Section 4043 of ERISA for which the
30-day reporting requirement has not been waived, has been required to be filed
for any Pension Plan or any ERISA Affiliate Plan within the 12-month period
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<PAGE>
ending on the date hereof or, except in respect of the transactions
contemplated by the Transactions Agreements, will be required to be filed in
connection with the transactions contemplated by the Transaction Agreements.
The PBGC has not instituted proceedings to terminate any Pension Plan or ERISA
Affiliate Plan, and, to the knowledge of the Company, no condition exists that
presents a material risk that such proceedings will be instituted.
(iv) All material contributions required to be made under the terms of any
Compensation and Benefit Plan or ERISA Affiliate Plan as of the date hereof
have been timely made in accordance with such terms and applicable Law and/or
have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Company Reports prior to the date hereof.
Neither any Pension Plan nor any ERISA Affiliate Plan has an "accumulated
funding deficiency" (whether or not waived) within the meaning of Section 412
of the Code or Section 302 of ERISA, and no ERISA Affiliate has an outstanding
funding waiver. Neither the Company nor its Subsidiaries or ERISA Affiliates
nor Spinco nor its Subsidiaries or ERISA Affiliates (x) has provided, or is
required to provide, security to any Pension Plan or to any ERISA Affiliate
Plan pursuant to Section 401(a)(29) of the Code or (y) has taken any action, or
omitted to take any action, that has resulted, or is reasonably likely to
result, in the imposition of a lien under Section 412(a) of the Code or
pursuant to ERISA.
(v) Under each Pension Plan which is a single-employer plan and ERISA
Affiliate Plan, as of the last day of the most recent plan year ended prior to
the date hereof, the actuarially determined present value of all "benefit
liabilities", within the meaning of Section 4001(a)(16) of ERISA (as determined
on the basis of the actuarial assumptions contained in the Pension Plan's most
recent actuarial valuation), did not exceed the then current value of the
assets of such Plan, and as of the date hereof, there has been no material
adverse change in the financial condition of such Plan nor any amendment or
other change to such Plan that would materially increase the amount of benefits
thereunder which reasonably could be expected to change such result.
(vi) Except as required by applicable Law, by the Transaction Agreements
or pursuant to individual agreements, neither the Company nor any of its
Subsidiaries or ERISA Affiliates have any obligations for retiree health and
life benefits under any Compensation and Benefit Plan. No action taken by the
Company or its Subsidiaries or Spinco or its Subsidiaries alters the Company's
or its Subsidiaries' ability to amend or terminate any retiree health or life
plan in accordance with the written terms of such plan.
(vii) The consummation of the Merger and the other transactions
contemplated by the Transaction Agreements will not, without any other action
(w) entitle any employee, consultant or director of the Company or any of its
Subsidiaries to any
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payment (including severance pay or similar compensation) or any increase in
compensation, (x) accelerate the time of payment or vesting or trigger any
payment of compensation or benefits or the funding of any trust under, increase
the amount payable or trigger any other material obligation pursuant to, any of
the Compensation and Benefit Plans or (y) result in any breach or violation of,
or a default under, any of the Compensation and Benefit Plans.
(viii) With respect to each Compensation and Benefit Plan, if applicable,
the Company has provided or made available to Parent true and complete copies
of (i) the most recent Form 5500 filed with the IRS; (ii) the most recent
actuarial report and financial statement; (iii) the most recent summary plan
description; (iv) the forms filed with the PBGC (other than for premium
payments) since January 1, 1998; (v) the most recent determination letter
issued by the IRS; (vi) any Form 5310 or Form 5330 filed with the IRS; and
(vii) the most recent nondiscrimination tests performed under ERISA and the
Code (including 401(k) and 401(m) tests).
(ix) From March 31, 2000 through the date hereof, no (i) Designated
Persons or (ii) other employees of Aetna Retirement Services, Inc. or Aetna
International, Inc. or any of their Subsidiaries (that are also Subsidiaries of
the Company), Joint Ventures or joint ventures have been transferred to or from
the Company, Spinco, any of their respective Subsidiaries or joint ventures or
Aetna Services, Inc., other than transfers of such other employees identified
in clause (ii) in the ordinary course of business consistent with past
practices.
(i) Compliance with Laws; Permits. (i) The business and operations of the
Company and its Subsidiaries and Joint Ventures have been conducted in
compliance with all applicable foreign, federal, state and local Laws
regulating the business and products of insurance, reinsurance and healthcare
and all applicable orders and directives of Insurance and Healthcare
Authorities (including federal authorities with respect to health maintenance
organization and other health and workmen's compensation products and variable
insurance and annuity products) and market conduct recommendations resulting
from market conduct examinations conducted by or on behalf of Insurance and
Healthcare Authorities (including federal authorities with respect to health
maintenance organization and other health and workmen's compensation products
and variable insurance and annuity products) (collectively, "Insurance Laws"),
except where the failure to so conduct such business and operations is not,
individually or in the aggregate, reasonably likely to have a Company Material
Adverse Effect. Without limiting the generality of the preceding sentence,
except where the failure to do so is not, individually or in the aggregate,
reasonably likely to have a Company Material Adverse Effect, each of the
Company and its Subsidiaries and Joint Ventures and, to the knowledge of the
Company as of the date hereof, its Agents (as defined below), have marketed,
administered, sold and issued insurance, reinsurance, healthcare and annuity
products and
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guaranteed investment contracts in compliance with all applicable Insurance
Laws, including (A) all applicable prohibitions against withdrawal of business
lines and "redlining", (B) all applicable requirements relating to the
disclosure of the nature of insurance and/or annuity products as policies of
insurance or annuities, as the case may be, (C) all applicable requirements
relating to insurance and/or annuity product projections and illustrations and
(D) all applicable requirements relating to the advertising, sales and
marketing of insurance and annuity products, healthcare products and guaranteed
investment contracts. In addition, (X) there is no pending or, to the knowledge
of the Company, threatened charge by any Insurance and Healthcare Authority
that the Company or any of its Subsidiaries or Joint Ventures has violated, nor
any pending or, to the knowledge of the Company, threatened investigation by
any Insurance and Healthcare Authority with respect to possible violations of
any applicable Insurance Laws where such violations are, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect; (Y)
none of the Company or any of its Subsidiaries or Joint Ventures is subject to
any order or decree of any Insurance and Healthcare Authority relating
specifically to such Person (as opposed to insurance companies generally) which
is, individually or in the aggregate, reasonably likely to have a Company
Material Adverse Effect; and (Z) the Company and its Subsidiaries and Joint
Ventures have filed all reports required to be filed with any Insurance and
Healthcare Authority as to which the failure to file such reports is,
individually or in the aggregate, reasonably likely to have a Company Material
Adverse Effect.
(ii) In addition to Insurance Laws, except as set forth in the Company
Reports filed prior to the date hereof, the businesses of each of Spinco, the
Company and the Company's Subsidiaries and Joint Ventures have not been, and
are not being, conducted in violation of any applicable federal, state, local
or foreign law, statute, ordinance, directive, rule, regulation, judgment,
order, injunction, decree, arbitration award, agency requirement, license or
permit of any Governmental Entity (collectively, "Laws"), except for violations
or possible violations that are not, individually or in the aggregate,
reasonably likely to have a Company Material Adverse Effect or prevent,
materially delay or materially impair the ability of the Company or Spinco to
consummate the Merger and the other transactions contemplated by the
Transaction Agreements. No investigation or review by any Governmental Entity
with respect to the Company or any of its Subsidiaries or Joint Ventures which
would be reasonably likely to have a Company Material Adverse Effect is pending
or, to the knowledge of the Company, threatened, nor has any Governmental
Entity indicated an intention to conduct the same. To the knowledge of the
Company, no change is required in the Company's or any of its Subsidiaries' or
Joint Ventures' processes, properties or procedures in connection with any such
Laws, and the Company has not received any notice or communication of any
noncompliance with any such Laws that has not been cured as of the date hereof
other than any such failure to make changes or non-compliance which is not,
individually or in the aggregate, reasonably likely to have a Company Material
Adverse Effect. Spinco, the
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Company and the Company's Subsidiaries and Joint Ventures each has all permits,
licenses, franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct its business as
presently conducted except those the absence of which are not, individually or
in the aggregate, reasonably likely to have a Company Material Adverse Effect
or prevent, materially delay or materially impair the ability of the Company or
Spinco to consummate the Merger and the other transactions contemplated by the
Transaction Agreements. None of the Company's Subsidiaries which is a
registered broker-dealer has entered into or is subject to a restrictions
letter agreement or similar agreement or decree with the NASD as of the date
hereof.
(j) Takeover Statutes. No restrictive provision of any "fair price,"
"moratorium", "control share acquisition", "interested shareholder" or other
similar anti-takeover statute or regulation (each a "Takeover Statute") or any
restrictive provision of any anti-takeover provision in the Company's
certificate of incorporation and by-laws is, or at or following the Effective
Time will be, applicable to the Company, the Shares, the Merger or the other
transactions contemplated by the Transaction Agreements.
(k) Environmental Matters. Except as would not be reasonably likely to
have, individually or in the aggregate, a Company Material Adverse Effect:
(i) the Company and its Subsidiaries and Joint Ventures have at all times
been in compliance with all Orders (as defined below) of any Governmental
Entity and all Laws, in each case related to any Environmental Law (as defined
in the Distribution Agreement);
(ii) there are not any past or present conditions or circumstances at, or
arising out of, any current or former business, assets or properties of the
Company or any of its Subsidiaries or Joint Ventures, including but not limited
to the on-site or off-site disposal, presence or release of or exposure to any
chemical substance, product or waste or any other condition or circumstance
which has resulted in or could reasonably be expected to give rise to: (a)
liabilities, fines, penalties, costs, capital expenditures or obligations for
any violation, noncompliance, cleanup, remediation, disposal or corrective
action under any Environmental Law or (b) claims arising for personal injury,
property damage, or damage to natural resources; and
(iii) neither the Company nor any of its Subsidiaries or Joint Ventures
has (a) received any notice of noncompliance with, violation of, or liability
or potential liability relating to any Environmental Law or (b) entered into
any consent decree, agreement or order or is subject to any order of any court
or governmental authority or tribunal or any indemnity with any third party
relating to any Environmental Law or relating to the cleanup of any hazardous
materials contamination.
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(l) Taxes. (i) Except as would not, individually or in the aggregate, be
reasonably likely to have a Company Material Adverse Effect, the Company and
each of its Subsidiaries (A) have duly and timely filed (taking into account
any extension of time (to the extent validly received) within which to file)
all Tax Returns (as defined below) required to be filed by any of them and all
such filed Tax Returns are complete and accurate; (B) all Taxes (as defined
below) owed (whether or not shown on any Tax Return) have been paid when due,
including any Taxes that the Company or any of its Subsidiaries are obligated
to withhold from amounts owing to any employee, creditor or third party, except
with respect to matters contested in good faith; and (C) have not waived any
statute of limitations with respect to Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency, which waiver or extension has
covered a Tax period that has not yet expired. Except as are not reasonably
likely to have a Company Material Adverse Effect, (A) there are not any pending
or threatened audits, examinations, investigations or other proceedings in
respect of Taxes or Tax matters, (B) there are not any unresolved questions or
claims concerning the Company's or any of its Subsidiaries' Tax liability and
(C) there are no Tax liens against the Company or any of its Subsidiaries
except for liens for Taxes not yet due or Taxes being contested in good faith.
The Company has made available to Parent true and correct copies of the United
States federal income Tax Returns filed by the Company and its Subsidiaries for
each of the fiscal years ended December 31, 1995, 1996, 1997 and 1998. Neither
the Company nor any of its Subsidiaries is a party to any Tax Allocation
Agreement that is material to the determination of a Tax of the (i) Company and
its Subsidiaries, or (ii) Spinco and its Subsidiaries.
As used in this Agreement, (y) "Tax" (including, with correlative meaning,
the terms "Taxes", and "Taxable") means (i) all federal, state, local and
foreign income, profits, franchise, premium, gross receipts, environmental,
customs duty, capital stock, severances, stamp, payroll, sales, employment,
unemployment, disability, use, property, withholding, excise, production, value
added, occupancy and other taxes, duties or assessments of any nature
whatsoever, together with all interest, penalties and additions imposed with
respect to such amounts and any interest in respect of such penalties and
additions, (ii) any liability for the payment of any amount of the type
described in clause (i) as a result of being or having been before the Closing
Date a member of an affiliated, consolidated, combined or unitary group, or a
party to any agreement or arrangement, as a result of which liability of the
Company and each of its subsidiaries to a Tax Authority is determined or taken
into account with reference to the liability of any other Person (including,
e.g., liability under Treasury Regulation 1.1502-6 or similar liability under
any other Law), and (iii) any liability for the payment of any amount as a
result of being party to any Tax Allocation Agreement or with respect to the
payment of any amount of the type described in (i) or (ii) as a result of any
existing express or implied obligation (including, but not limited to, an
indemnification obligation). "Tax Return" means all returns and reports
(including elections, declarations, disclosures, schedules,
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estimates and information returns) required to be supplied to a Tax Authority
relating to Taxes.
"Tax Allocation Agreement" means all existing agreements or arrangements
(whether or not written) binding the Company or any of its Subsidiaries that
provide for the allocation, apportionment, sharing or assignment of any Tax
liability or benefit, or the transfer or assignment of income, revenues,
receipts, or gains for the principal purpose of determining any Person's Tax
liability.
"Tax Authority" means the Internal Revenue Service and any other domestic
or foreign Governmental Entity or Person responsible for the administration of
any Tax Laws.
(ii) Except for situations which would not, individually or in the
aggregate, be reasonably likely to have a Company Material Adverse Effect, (A)
the Tax treatment under the Code of all Retained Insurance Contracts (as
defined below) is and at all times has been in all material respects the same
or more favorable to the purchaser, policyholder or intended beneficiaries
thereof as the Tax treatment under the Code for which such Retained Insurance
Contracts qualified or purported to qualify at the time of their issuance or
purchase, except for changes resulting from changes to the Code which do not
affect such Retained Insurance Contracts due to the effective date thereof, (B)
each hardware, software and firmware product used by the Retained Insurance
Companies to maintain such Retained Insurance Contracts' qualification for the
Tax treatment under the Code for which such Retained Insurance Contracts
qualified or purported to qualify at the time of their issuance or purchase is
and at all relevant times has been properly designed and implemented to
maintain such qualification, (C) each annuity contract issued by the Retained
Insurance Companies qualifies as an annuity contract under Section 72 of the
Code, (D) each life insurance policy which is a Retained Insurance Contract
qualifies as a life insurance contract for federal income Tax purposes and any
such policy which is a modified endowment contract under Section 7702A of the
Code (each, a "MEC") has been marketed as such at all relevant times or the
policyholder otherwise has consented to such MEC status and (E) each of the
Retained Insurance Companies is and at all times has been the owner for federal
income Tax purposes of the assets in any segregated asset account underlying or
supporting each variable annuity contract and each variable insurance policy
issued by it; provided, however, that for purposes of this sentence and Section
5.1(l)(iv), (A) the term Retained Insurance Companies shall include only Aetna
Life Insurance & Annuity Company and Aetna Insurance Company of America and (B)
the term Retained Insurance Contracts shall not include any contracts issued by
any Person other than the Retained Insurance Companies, as modified by clause
(A) of this proviso.
(iii) Except for situations which would not, individually or in the
aggregate, be reasonably likely to have a Company Material Adverse Effect, each
Fund
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Client (as defined below) has elected to qualify and, for all Taxable years
that an Advisory Entity (as defined below) served as investment adviser and
with respect to which the applicable statute of limitations (including any
extensions) has not expired ("open Taxable years"), has continuously qualified
to be treated as a "regulated investment company" under Subchapter M of Chapter
1 of Subtitle A of the Code and has continuously been eligible to compute, and
has for each such Taxable year computed, its federal income Tax under Section
852 of the Code and has no earnings and profits accumulated in any Taxable
year. Except as would not be, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect, each Fund Client that is
intended to be a Tax-exempt municipal bond fund has satisfied the requirements
of Section 852(b)(5) of the Code and is qualified to pay exempt interest
dividends as defined therein. At the Closing Date, all Tax Returns with respect
to any Taxable period for which the applicable statute of limitations
(including any extensions) has not expired and during which an Advisory Entity
has served as investment adviser that were or are required to be filed on or
before such date by or on behalf of a Fund Client were or shall have been filed
and were or shall be complete and correct and all federal and other Taxes,
shown or required to be shown as due on such returns, shall have been paid or
provided for. No such Tax Return or other filing is currently under audit, no
assessment has been asserted with respect to such Tax Returns or other filings,
and no requests for waivers of the time to make any such assessment are
pending. None of the Fund Clients is delinquent in the payment of any material
Tax assessment or governmental charge.
(iv) In providing recordkeeping and administrative services in the
ordinary course of business consistent with prior practice with respect to
customers' insurance products, whether individual or group retirement or
deferred compensation plans or arrangements, and with respect to any Retained
Insurance Contracts issued, assumed, modified, exchanged or sold by a Retained
Insurance Company as of the Closing Date, each Retained Insurance Company is in
compliance with the applicable administrative requirements of the Code and the
rules and regulations thereunder, and, to the extent applicable, the
requirements of Parts 2, 3 and 4 of Title I of ERISA, except in each case for
those failures to comply that are not, individually or in the aggregate,
reasonably likely to have a Company Material Adverse Effect.
(m) Labor Matters. Neither the Company nor any of its Subsidiaries or
Joint Ventures is a party to or otherwise bound by any collective bargaining
agreement, Contract or other agreement or understanding with a labor union or
labor organization, nor is the Company or any of its Subsidiaries or Joint
Ventures the subject of any material proceeding asserting that the Company or
any of its Subsidiaries or Joint Ventures has committed an unfair labor
practice or seeking to compel it to bargain with any labor union or labor
organization nor is there pending or, to the knowledge of the Company,
threatened, nor has there been for the past five years, any labor strike,
dispute, walk-out, work stoppage, slow-down or lockout involving the Company or
any of its Subsidiaries or
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Joint Ventures. The parties acknowledge and agree that this representation and
warranty is made only with respect to employees of the Company and its
Subsidiaries and Joint Ventures who are not Excluded Employees.
(n) Insurance. All material fire and casualty, general liability,
directors' and officers', errors and omissions and product liability insurance
policies maintained by or on behalf of the Company or any of its Subsidiaries
or Joint Ventures are with reputable insurance carriers and provide insurance
coverage reasonably customary or adequate for the operation of their respective
businesses, except for any such failures to maintain insurance policies that
are not, individually or in the aggregate, reasonably likely to have a Company
Material Adverse Effect. The Company and its Subsidiaries and Joint Ventures
have given notice to insurance carriers of all material claims that may be
covered, and, with respect to claims in excess of $1,000,000, the Company and
its Subsidiaries and Joint Ventures have not received any refusal of coverage
or any notice that a defense will be afforded with reservation of rights or any
notice of cancellation or any other indication that any insurance policy is no
longer in full force or effect or will not be renewed or that the issuer of any
policy is not willing or able to perform its obligations thereunder.
(o) Intellectual Property. (i) After giving effect to the Spin-Off and the
related transactions, the Company and each of its Subsidiaries and Joint
Ventures will own, or will be licensed or will otherwise possess legally
enforceable rights to use, all material patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, technology, know-how,
trade secrets, computer software programs or applications, and tangible or
intangible proprietary information or materials ("Intellectual Property") that
is used in the business of the Company and its Subsidiaries and Joint Ventures
as currently conducted ("Company Intellectual Property Rights"), except for any
such failures to own, be licensed or possess that are not, individually or in
the aggregate, reasonably likely to have a Company Material Adverse Effect, and
to the knowledge of the Company all material patents, trademarks, trade names,
service marks and copyrights held by the Company and its Subsidiaries and Joint
Ventures are valid and subsisting.
(ii) Except as is not reasonably likely to have a Company Material Adverse
Effect:
(A) neither the Company nor Spinco nor their respective Subsidiaries is,
nor will any of them be as a result of the execution and delivery of the
Transaction Agreements or the performance of its obligations hereunder and
thereunder, in violation of any licenses, sublicenses and other agreements as
to which it is a party and pursuant to which the Company and its Subsidiaries
and Joint Ventures is authorized to use any third-party Intellectual Property;
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(B) the Company and its Subsidiaries have not received any notice of any
bona fide claims (I) to the effect that the Company or any of its Subsidiaries
or Joint Ventures is infringing on any copyright, patent, trademark, trade
name, service mark or trade secret, (II) against the use by the Company or any
of its Subsidiaries or Joint Ventures of any Intellectual Property used in the
business of the Company or any of its Subsidiaries or Joint Ventures as
currently conducted or as proposed to be conducted or (III) challenging the
ownership, validity or effectiveness of any of the Company Intellectual
Property Rights or other trade secret material to the Company; and
(C) to the knowledge of the Company, the Company Intellectual Property
does not infringe the intellectual property rights of any third party and there
is no infringement of any of the Company Intellectual Property Rights by any
third party, including any employee or former employee of the Company or any of
its Subsidiaries or Joint Ventures.
(p) Rights Plan. (i) The board of directors of the Company and the Company
have taken all necessary action to render the Rights Agreement inapplicable to
the Merger, the Spin-Off and the other transactions contemplated by the
Transaction Agreements.
(ii) The Company has, or prior to the Effective Time will have, taken all
necessary action with respect to all of the outstanding Rights so that, as of
immediately prior to the Effective Time, (A) neither the Company nor Parent
will have any obligations under the Rights or the Rights Agreement and (B) the
holders of the Rights will have no rights under the Rights or the Rights
Agreement.
(q) Brokers and Finders. Neither the Company, nor any of its Subsidiaries,
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in
connection with the Merger, the Spin-Off or the other transactions contemplated
by the Transaction Agreements, except that the Company has employed Donaldson
Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co. as its
financial advisors. The fees and expenses of Goldman, Sachs & Co. and Donaldson
Lufkin & Jenrette Securities Corporation shall be paid by Spinco and after the
Spin-Off, the Company will have no liability or obligation to such firms
arising out of their engagement with the Company.
(r) Insurance Business. (i) Except as otherwise is not, individually or in
the aggregate, reasonably likely to have a Company Material Adverse Effect, all
policies, binders, slips, certificates, guaranteed investment contracts,
annuity contracts and participation agreements and other agreements of
insurance and reinsurance and healthcare products, whether individual or group,
in effect as of the date hereof (including all applications, supplements,
endorsements, riders and ancillary agreements in connection
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therewith) that are issued by the Retained Insurance Companies (the "Retained
Insurance Contracts") and any and all marketing materials, are, to the extent
required under applicable Law, on forms approved by applicable insurance
regulatory authorities or which have been filed and not objected to by such
authorities within the period provided for objection, and such forms comply in
all material respects with the Insurance Laws applicable thereto. Premium rates
established by the Retained Insurance Companies that are required to be filed
with or approved by insurance regulatory authorities have been so filed or
approved, the premiums charged conform thereto in all material respects, and
such premiums comply in all material respects with the Insurance Laws
applicable thereto, except where the failure to be so filed or approved, or to
so conform or comply, is not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect.
(ii) To the knowledge of the Company as of the date hereof, each insurance
agent, third party administrator, manager, marketer, underwriter, broker,
reinsurance intermediary and distributor (each an "Agent"), at the time such
Agent wrote, sold, produced or managed business for any Retained Insurance
Company was duly licensed (for the type of business written, sold, produced or
managed) and no such Agent violated (or with or without notice or lapse of time
or both, would have violated) any term or provision of any Law applicable to
the writing, sale, production or management of business for any Retained
Insurance Company, except for such failures to be licensed or such violations
which have been cured, which have been resolved or settled through agreements
with applicable Governmental Entities or which are barred by an applicable
statute of limitations, or that have not had or are not, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect.
(iii) Prior to the date hereof, the Company has made available to Parent a
true and correct copy of each material Contract between any Retained Insurance
Company and any reinsurance intermediary and of each material pooling agreement
to which a Retained Insurance Company is a party.
(iv) Prior to the date hereof, the Company has made available to Parent a
true and complete copy of any actuarial reports prepared by independent
actuaries with respect to reserve adequacy of any Retained Insurance Company or
any of its Subsidiaries since December 31, 1997, and all attachments, addenda,
supplements and modifications thereto (the "Company Actuarial Analyses"). To
the knowledge of the Company, the information and data furnished by the Company
or any Retained Insurance Company to its independent actuaries in connection
with the preparation of the Company Actuarial Analyses were accurate in all
material respects.
(v) To the knowledge of the Company as of the date hereof, all material
amounts recoverable under reinsurance, coinsurance or other similar Contracts
to which
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any Retained Insurance Company is a party (including, but not limited to,
amounts based on paid and unpaid losses) are fully collectible.
(s) Liabilities and Reserves. (i) The reserves carried on the Company SAP
Statements or Foreign Company Statements, as the case may be, of each Retained
Insurance Company for the year ended December 31, 1999 for future annuity
contracts, insurance and healthcare policy benefits, losses, claims,
reinsurance and similar purposes are in compliance in all material respects
with the applicable requirements for reserves, if any, established by the
insurance departments or applicable Governmental Entity of the jurisdiction of
domicile of such Retained Insurance Company, were determined in all material
respects in accordance with generally accepted actuarial standards consistently
applied and are fairly stated in all material respects in accordance with sound
actuarial principles utilizing actuarial assumptions in accordance with or more
conservative than called for in relevant policy and Contract provisions. The
Company has delivered to Parent true, correct and complete copies of the
actuarial valuation reports delivered to the insurance department of the
domiciliary jurisdiction of each U.S. Retained Insurance Company for the years
ended December 31, 1999 and 1998.
(ii) Except for regular periodic assessments in the ordinary course of
business consistent with prior practice or assessments based on developments
which are publicly known within the insurance industry, to the knowledge of the
Company, no claim or assessment is pending or threatened against any U.S.
Retained Insurance Company which is peculiar or unique to such Retained
Insurance Company by any state insurance guaranty association in connection
with such association's fund relating to insolvent insurers which if determined
adversely, is, individually or in the aggregate, reasonably likely to have a
Company Material Adverse Effect.
(t) Separate Accounts. (i) Except as otherwise is not, individually or in
the aggregate, reasonably likely to have a Company Material Adverse Effect,
each separate account maintained by a Retained Insurance Company (collectively,
the "Company Separate Accounts") is duly and validly established and maintained
under the laws of its jurisdiction of formation and, to the extent subject to
the 1940 Act, is either excluded from the definition of an investment company
pursuant to Sections 3(c)(1), 3(c)(7) or 3(c)(11) of the 1940 Act or is duly
registered as an investment company under the 1940 Act. Except as otherwise is
not, individually or in the aggregate, reasonably likely to have a Company
Material Adverse Effect, each such Company Separate Account, if registered
under the 1940 Act, is operated in compliance with the 1940 Act, has filed all
reports and amendments of its registration statement required to be filed, and
has been granted all exemptive relief necessary for its operations as presently
conducted, and is in compliance with all conditions to any such relief. Except
as otherwise is not, individually or in the aggregate, reasonably likely to
have a Company Material Adverse Effect, the Retained Insurance Contracts under
which the Company Separate Accounts assets are held
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are duly and validly issued and are binding obligations of the issuing Retained
Insurance Company and are either exempt from registration under the Securities
Act or were sold pursuant to an effective registration statement under the
Securities Act, and any such registration statement is currently in effect to
the extent necessary to allow the appropriate Retained Insurance Company to
receive contributions under such Retained Insurance Contracts.
(ii) The assets of each Company Separate Account that are subject to the
Code are adequately diversified within the meaning of, and to the extent
required by, Section 817(h) of the Code.
(iii) Each of the Retained Insurance Companies that is subject to the Code
is treated for federal Tax purposes as the owner of the assets underlying the
respective life insurance policies and annuity contracts issued, entered into
or sold by it.
(iv) Each account through which the Company or any of its Subsidiaries
provides services to any client (an "Account Client") that is (A) an employee
benefit plan, as defined in Section 3(3) of ERISA, that is subject to Title I
of ERISA; (B) a person acting on behalf of such a plan; or (C) an entity whose
assets include the assets of such a plan, within the meaning of ERISA and
applicable regulations (hereinafter referred to as an "ERISA Client"), in each
case have been managed by the Company and its Subsidiaries such that each of
the Company and its Subsidiaries in the exercise of such management is in
compliance in all respects with the applicable requirements of ERISA, except to
the extent the failure to comply is not, individually or in the aggregate,
reasonably likely to have a Company Material Adverse Effect.
(u) Material Contracts. All of the material Contracts of the Company and
its Subsidiaries and Joint Ventures that are required to be described in the
Company Reports or listed or filed as Exhibits to the 1999 10-K, the First 2000
10-Q or any Company Reports filed subsequent to the date hereof thereto are
described in such Company Reports or listed or filed as exhibits thereto,
respectively, and are in full force and effect. True and complete copies of all
such material Contracts have been delivered or made available by the Company to
Parent. Neither the Company nor any of its Subsidiaries or Joint Ventures nor,
to the knowledge of the Company, any other party is in breach of or in default
under any such Contract except for such breaches and defaults as are not,
individually or in the aggregate, reasonably likely to have a Company Material
Adverse Effect. Neither the Company nor any of its Subsidiaries or Joint
Ventures is party to any Contract containing any provision or covenant limiting
in any material respect the ability of the Company or any of its Subsidiaries
or Joint Ventures or, assuming the consummation of the transactions
contemplated by the Transaction Agreements, ING or any of its subsidiaries or
joint ventures, to (i) sell any products or services of or to any other Person,
(ii) engage in any line of business or (iii) compete with or to obtain products
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or services from any Person or limiting the ability of any Person to provide
products or services to the Company or any of its Affiliates or Joint Ventures
or, assuming the consummation of the transactions contemplated by the
Transaction Agreements, ING or any of its subsidiaries or joint ventures.
(v) Investment Contracts, Fund Clients and Advisory Clients. (i) Certain
of the Company's Subsidiaries provide investment advisory, sub-advisory,
administration, distribution or certain other services (each Contract for such
services being referred to as an "Investment Contract", each other party
thereto being referred to as a "Client", and each Client which is registered as
an investment company under the 1940 Act being referred to as a "Fund Client")
to the Clients. A complete list of Fund Clients is set forth in Section 5.1(v)
of the Company Disclosure Letter. Each of the Fund Clients (or the company or
trust of which it is a series) is duly organized, validly existing and in good
standing under the Laws of its jurisdiction of organization, except as would
not, individually or in the aggregate, be reasonably likely to have a Company
Material Adverse Effect. The Boards of Trustees or Directors of the Fund
Clients operate in all material respects in conformity with the applicable
requirements and restrictions of Sections 9, 10 and 16 of the 1940 Act.
(ii) Except as would not, individually or in the aggregate, be reasonably
likely to have a Company Material Adverse Effect, each of the Fund Clients is
in compliance with all applicable Laws of the SEC, the NASD, the IRS and any
other governmental agency or self-regulatory body having jurisdiction over such
Fund Client or its distributor or investment adviser and of any jurisdiction in
which such Fund Client is registered, qualified or sold and with its prospectus
and statement of additional information.
(iii) Each of the Company's Subsidiaries that provides investment advisory
or sub-advisory services (each an "Advisory Entity" and, collectively "Advisory
Entities"), a complete list of which has previously been made available by the
Company to Parent, to any Fund Client or any other Person (each such other
Person, an "Advisory Client") is duly registered with the SEC as an investment
adviser or is not required to do so because it does not engage in business in
the United States and does not provide investment advisory or sub-advisory
services to an investment company registered under the 1940 Act. No Advisory
Entity is required to register as an investment advisor with any state. Any
Advisory Entity doing business outside the United States is duly licensed to
provide investment advisory services in the jurisdictions in which it does
business. The Company is not an Advisory Entity. Each pooled Advisory Client is
either registered as an investment company under the 1940 Act or relies upon an
appropriate exemption from the definition of an investment company under the
1940 Act.
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(iv) Each Fund Client and Advisory Entity has operated and is currently
operating in compliance with all Laws, and with the investment objectives,
policies and restrictions, that are applicable to it or its business except for
such noncompliance as would not, individually or in the aggregate, be
reasonably likely to have a Company Material Adverse Effect. Each Advisory
Entity has been and is in compliance with each Investment Contract to which it
is a party, except as would not, individually or in the aggregate, be
reasonably likely to have a Company Material Adverse Effect.
(v) The accounts of each Advisory Client subject to ERISA have been
managed by the applicable Company Subsidiary in compliance in all material
respects with the applicable requirements of ERISA.
(vi) All issued and outstanding shares of common stock and shares or units
of beneficial interest of each Fund Client (collectively, "shares") are, and at
the Effective Time will be, and all of the authorized but unissued shares of
each Fund Client when issued for the consideration described in the current
registration statement relating to that Fund Client will be duly and legally
issued and outstanding, fully paid, and non-assessable by the Fund Client. No
Fund Client has outstanding any options, warrants, or other rights to subscribe
for or purchase any of its shares, nor is there outstanding any security
convertible into shares of any Fund Client.
(vii) The current prospectus and related registration statement, including
the current statement of additional information, for each of the Fund Clients
(copies of which have been made available to Parent) conform in all material
respects to the applicable requirements of the Securities Act, the 1940 Act,
and the rules and regulations of the SEC thereunder, as well as the applicable
requirements of the various state securities Laws, and do not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(viii) Each Fund Client has filed with the SEC all material Contracts,
including all agreements and arrangements for the distribution of shares, to
which a Fund Client is a party or by which a Fund Client or its property is
bound, other than Contracts for the purchase or sale of portfolio securities
entered into in the ordinary course of business consistent with prior practice,
that are required to be filed with the SEC. Each Contract subject to Section
12(b) or 15 of the 1940 Act has been duly approved at all times in compliance
in all material respects with Section 12(b) or 15 of the 1940 Act and all other
applicable Laws. Each such Contract is currently in full force and effect and
has been performed by the relevant entity in accordance with the 1940 Act and
all other applicable Laws. No material default or condition or event that,
after notice or lapse of time or both, would constitute a material default on
the part of the Company or any of its
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Subsidiaries or, to the knowledge of the Company, on the part of the other
parties to such advisory and sub-advisory agreements, exists under any of those
material Contracts.
(ix) All proxy statements to be prepared for use by the Fund Clients in
connection with the transactions contemplated by the Transaction Agreements
will, with respect to information provided by the Company, any of its
Subsidiaries, or a Fund Client, not contain any untrue statement of a material
fact, or omit to state any material fact required to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(w) Company Broker/Dealers. (i) The Company and its Subsidiaries operate
its broker/dealer operations exclusively through Aetna Life Insurance and
Annuity Company, Aeltus Capital, Inc., Aetna Investment Services, Inc.,
Systematized Benefits Administrators, Inc., Financial Network Investment
Corporation and Aetna Financial Services, Inc. (collectively, the "Company
Broker/Dealers"). Each Company Broker/Dealer that is required to be registered
as a broker-dealer with the SEC or under applicable state Laws is so registered
and is registered with each other Governmental Entity with which it is required
to register in order to conduct its business as now conducted, and is and has
been since January 1, 1997 in full compliance with all applicable Laws
thereunder, except for any failures to register or comply which are not,
individually or in the aggregate, reasonably likely to have a Company Material
Adverse Effect. Each Company Broker/Dealer is a member organization in good
standing of the NASD and such other organizations in which its membership is
required in order to conduct its business as now conducted, except such
failures to be in good standing or such memberships the failure to have or
maintain which are not, individually or in the aggregate, reasonably likely to
have a Company Material Adverse Effect.
(ii) Except as are not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect, no Company Broker/Dealer is,
nor is any "associated person" of it, subject to a "statutory disqualification"
(as such terms are defined in the Exchange Act) or subject to a
disqualification that would be a basis for censure, limitations on the
activities, functions or operations of, or suspension or revocation of the
registration of any of the Company Broker/Dealers as broker-dealer, municipal
securities dealer, government securities broker or government securities dealer
under Section 15, Section 15B or Section 15C of the Exchange Act and, to the
knowledge of the Company, there are no proceedings or investigations pending by
any Governmental Entity or self-regulatory organization that is reasonably
likely to result in any such censure, limitations, suspension or revocation.
(iii) Except as are not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect, since its inception, each
Company Broker/Dealer has had net capital (as such term is defined in Rule
15c3-1 under the
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Exchange Act) that satisfies the minimum net capital requirements of the
Exchange Act and of the laws of any jurisdiction in which such company conducts
business.
(x) Bank Regulatory Matters. (i) Neither the Company nor any of its
Subsidiaries or Joint Ventures or their respective properties is a party to or
is subject to any order, decree, agreement, memorandum of understanding or
similar agreement with, or extraordinary supervisory letter from, any Banking
Authority.
(ii) Neither the Company nor any of its Subsidiaries or Joint Ventures has
been advised by any Banking Authority that such Banking Authority is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, decree, agreement, memorandum of
understanding, supervisory letter or similar submission.
(y) No Contracts, Etc. Except for assets or properties to be transferred
to Spinco or its Subsidiaries pursuant to the Transaction Agreements, none of
Spinco or any of its Subsidiaries presently uses in the conduct of its business
any material assets or properties, whether tangible, intangible or mixed, which
are also utilized in the conduct of the business of the Company and its
Subsidiaries and Joint Ventures, and, other than ordinary course commercial
arrangements on arms length terms, none of Spinco or any of its Subsidiaries is
presently directly or indirectly a party to any Contract, arrangement or
understanding with the Company or any of its Subsidiaries or Joint Ventures
(other than the Transaction Agreements). After giving effect to the Spin-Off
and to all supplies and services to be provided pursuant to the Transaction
Agreements, the Company and its Subsidiaries and Joint Ventures, will include
all the Company's direct or indirect right, title and interest (including
minority interests) in and to all of (i) the assets and services that are
necessary to permit the operation of the Company and its Subsidiaries and Joint
Ventures in substantially the same manner as such operations have been
conducted prior to the date hereof and (ii) all assets reflected on the
unaudited pro forma consolidated balance sheet of the Company and its
Subsidiaries as of March 31, 2000 referred to in Section 5.1(e)(iv) of this
Agreement, except those assets disposed of in the ordinary course of business
since such date. The termination of all Contracts, arrangements and
understandings between the Company and its Subsidiaries and Joint Ventures on
the one hand and Spinco and its Subsidiaries on the other hand, to the extent
contemplated by the Distribution Agreement, is not, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect. The
unaudited pro forma consolidated balance sheet of the Company and its
Subsidiaries as of March 31, 2000 referred to in Section 5.1(e)(v) of this
Agreement reflects all assets of the Company and its Subsidiaries and Joint
Ventures principally used in the business or operations of the Company and its
Subsidiaries and Joint Ventures as of March 31, 2000, other than assets or
properties of the Company or Aetna Services, Inc. or any of their Subsidiaries
that will be transferred to
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Spinco or its Subsidiaries and made available as necessary to provide services
to the Company and its Subsidiaries pursuant to the Transaction Agreements.
5.2 Representations and Warranties of ING, Parent and Merger Sub. Except
as set forth in the corresponding sections or subsections of the disclosure
letter, dated the date hereof, delivered to the Company by Parent on or prior
to entering into this Agreement (the "Parent Disclosure Letter"), ING, Parent
and Merger Sub each hereby represent and warrant to the Company that:
(a) Capitalization of Merger Sub. The authorized capital stock of Merger
Sub consists of 1,000 shares of common stock, par value $0.01 per share, all of
which are validly issued and outstanding. All of the issued and outstanding
capital stock of Merger Sub is, and at the Effective Time will be, owned by
Parent, and there are (i) no other shares of capital stock or voting securities
of Merger Sub, (ii) no securities of Merger Sub convertible into or
exchangeable for shares of capital stock or voting securities of Merger Sub and
(iii) no options or other rights to acquire from Merger Sub, and no obligations
of Merger Sub to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of
Merger Sub. Merger Sub has not conducted any business prior to the date hereof
and has no, and prior to the Effective Time will have no, assets, liabilities
or obligations of any nature other than those incident to its formation and
pursuant to the Transaction Agreements and the transactions contemplated
thereunder.
(b) Organization, Good Standing and Qualification. Each of ING, Parent and
Merger Sub is a corporation duly organized, validly existing and in good
standing under the Laws of its respective jurisdiction of organization and has
all requisite corporate or similar power and authority to own and operate its
properties and assets and to carry on its business as presently conducted and
is qualified to do business and is in good standing in each jurisdiction where
the ownership or operation of its assets or properties or conduct of its
business requires such qualification, except where the failure to be so
organized, qualified or in such good standing, or to have such power or
authority, is not reasonably likely to have a Parent Material Adverse Effect.
As used herein, the term "Parent Material Adverse Effect" means a material
adverse effect on the financial condition, properties, business or annual
results of operations of Parent and its Subsidiaries and joint ventures taken
as a whole, except to the extent that such adverse effect results from (i)
general economic conditions or changes in any one or more countries, (ii)
financial market fluctuations or conditions in any one or more countries, (iii)
adverse economic, currency or regulatory changes or effects in or affecting the
financial services industry, insurance industry, banking industry, or asset
management industry generally in any one or more countries, (iv) the
announcement of the transactions contemplated herein, or any effect which would
prevent, materially delay or materially impair the ability of Parent to
consummate the transactions contemplated hereby.
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(c) Corporate Authority. (i) Each of ING, Parent and Merger Sub has all
requisite corporate power and authority and has taken all corporate action
necessary in order to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby on the terms
and subject to the conditions of this Agreement. This Agreement is a valid and
binding agreement of ING, Parent and Merger Sub, enforceable against each of
ING, Parent and Merger Sub in accordance with its terms, subject to the
Bankruptcy and Equity Exception.
(ii) No approval by the shareholders of either of ING or Parent is
required in order for ING and Parent to execute, deliver and perform its
respective obligations under this Agreement and to consummate the transactions
contemplated hereby on the terms and subject to the conditions of this
Agreement.
(d) Governmental Filings; No Violations. (i) Other than the reports,
filings, registrations, consents, approvals, permits, authorizations,
applications and/or notices (A) pursuant to Section 1.4, (B) under the HSR Act,
(C) under any foreign competition laws, (D) under the Exchange Act, the
Securities Act and other securities laws, (E) under the 1940 Act, (F) under the
Advisers Act, (G) with the NYSE, (H) with the NASD, (I) with the applicable
Insurance and Healthcare Authorities, (J) with the Banking Authorities, (K)
with the PBGC, (L) with the Department of Labor, (M) with applicable foreign
and federal regulatory authorities governing foreign investments, (N) with
applicable foreign regulatory authorities governing the management of pension
plans, (O) with the IRS in connection with certain transfers contemplated by
the Employee Benefits Agreement, and (P) with applicable Dutch regulatory
authorities (notice filings), no notices, reports or other filings are required
to be made by ING, Parent or Merger Sub with, nor are any consents,
registrations, approvals, permits or authorizations required to be obtained by
ING, Parent or Merger Sub from, any Governmental Entity, in connection with the
execution and delivery of this Agreement by ING, Parent and Merger Sub and the
consummation by ING, Parent and Merger Sub of the Merger and the other
transactions contemplated hereby, except those that the failure to make or
obtain are not, individually or in the aggregate, reasonably likely to have a
Parent Material Adverse Effect.
(ii) The execution, delivery and performance of this Agreement by ING,
Parent and Merger Sub do not, and the consummation by ING, Parent and Merger
Sub of the Merger and the other transactions contemplated hereby will not,
constitute or result in (A) a breach or violation of, or a default under, the
governing instruments of ING, Parent and Merger Sub, (B) a breach or violation
of, or a default under, the acceleration of any rights or obligations or the
creation of a lien, pledge, security interest, claim or other encumbrance on
the assets of ING or any of its Subsidiaries (with or without notice, lapse of
time or both) pursuant to, any Contracts binding upon ING or any of its
Subsidiaries or any Law or governmental or non-governmental franchise, permit,
license or obligation to which ING or any of its Subsidiaries is subject or (C)
any change in the rights or
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obligations of any party under any of the Contracts, except, in the case of
clause (B) or (C) above, for breach, violation, default, acceleration, creation
or change that, individually or in the aggregate, is not reasonably likely to
have a Parent Material Adverse Effect.
(iii) Neither the Company nor any of its Subsidiaries is a party to any
Contracts requiring consents or approvals, the failure to obtain which,
individually or in the aggregate, would cause a failure of the condition set
forth in Section 7.2(c) to be satisfied. The representation set forth in the
immediately preceding sentence shall be limited to the actual knowledge as of
the date hereof of any of the people set forth on Section 5.2(d)(iii) of the
Parent Disclosure Letter.
(e) Adequate Funds. Parent has and will have at the Effective Time
sufficient funds for the payment of the aggregate Merger Consideration and to
perform its obligations under this Agreement.
(f) Brokers and Finders. Neither ING, nor Parent, Merger Sub or any of
their respective Subsidiaries, officers, directors or employees has employed
any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the Merger or the other
transactions contemplated hereby, except that the Parent has employed Merrill,
Lynch & Co. as its financial advisors. The fees and expenses of Merrill, Lynch
& Co. shall be paid by Parent and the Company will have no liability or
obligation with respect thereto.
ARTICLE VI
Covenants
6.1 Interim Operations; Operation of Businesses. The Company covenants and
agrees as to itself and its Subsidiaries and, subject to the provisions of
Section 9.9, its Joint Ventures, that after the date hereof and prior to the
Effective Time (unless Parent shall otherwise approve in writing, which
approval shall not be unreasonably withheld or delayed, and except as set forth
in Section 6.1 of the Company Disclosure Letter or as otherwise expressly
contemplated to occur prior to the Effective Time by any of the Transaction
Agreements and except as would otherwise be permitted by Section 5.1(f) of this
Agreement):
(a) its and its Subsidiaries' and Joint Ventures' businesses shall be
conducted in the ordinary course of business consistent with prior practice
and, to the extent consistent therewith, each shall use all reasonable efforts
to (i) preserve its business organization intact and maintain its existing
relations and goodwill with customers, suppliers, distributors, agents,
regulators, creditors, lessors, employees and business
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associates, (ii) maintain and keep material properties and assets in good
repair and condition, ordinary wear and tear excepted and (iii) maintain in
effect all existing governmental permits that are required for the continued
operation of the business of the Company and its Subsidiaries and Joint
Ventures in all material respects as they are currently conducted;
(b) it and its Subsidiaries and Joint Ventures shall not (i) issue, sell,
pledge, dispose of or encumber any capital stock owned by it in any of its
Subsidiaries or Joint Ventures; (ii) amend its certificate of incorporation or
by-laws or comparable governing instruments; (iii) split, combine or reclassify
its outstanding shares of capital stock; (iv) declare, set aside or pay any
dividend, other than dividends of the Permitted Sales Proceeds, payable in
cash, stock or property in respect of any capital stock other than dividends
from direct or indirect wholly-owned Subsidiaries of Aetna Retirement Services,
Inc. and Aetna International, Inc. that are also Subsidiaries of the Company
and other than regular quarterly cash dividends by the Company not in excess of
$0.20 per share of Common Stock; or (v) repurchase, redeem or otherwise
acquire, except in connection with the Stock Plans, or permit any of its
Subsidiaries or Joint Ventures to purchase or otherwise acquire, any shares of
any of its or its Subsidiaries or Joint Ventures' capital stock or any
securities convertible into or exchangeable or exercisable for any such shares
of capital stock;
(c) neither it nor its Subsidiaries or Joint Ventures shall (i) issue,
sell, pledge, dispose of or encumber any shares of, or securities convertible
into or exchangeable or exercisable for, or options, warrants, calls,
commitments, rights or any agreements of any kind to acquire, any shares of its
capital stock of any class or any Voting Debt (other than (A) options or (B)
shares of Common Stock issuable pursuant to options, in either case under the
Stock Plans); (ii) other than in the ordinary course of business consistent
with prior practice or pursuant to existing Contracts described in Section
6.1(c) of the Company Disclosure Letter or as would otherwise be permitted by
Section 6.21 of this Agreement and other than the Permitted Sales, transfer,
lease, license, guarantee, sell, mortgage, pledge, dispose of or encumber any
other property or assets (including capital stock of or ownership interests in
any of its Subsidiaries or Joint Ventures) or modify any material indebtedness;
(iii) incur any indebtedness with a maturity of one year or more; (iv) make or
authorize or commit for any capital expenditures (x) in the case of
Subsidiaries of the Company and Joint Ventures, taken together, in excess of
five million dollars ($5,000,000) in the aggregate in excess of those set forth
in or expressly contemplated by the applicable financial plans furnished to
Parent prior to the date hereof and (y) in the case of the Company and Aetna
Services, Inc., taken together, in excess of twenty-five million dollars
($25,000,000) in the aggregate; or (v) by any means, make any acquisition of,
or investment in, assets or stock of or other interest in, any other Person or
entity other than portfolio investments made in the ordinary course of business
consistent with past practice;
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(d) neither it nor its Subsidiaries or Joint Ventures shall terminate,
establish, adopt, enter into, make any new, or accelerate the vesting or
payment of any existing, grants or awards under, amend or otherwise modify, any
Compensation and Benefit Plans, except as may be required by law or contractual
obligations in effect as of the date of this Agreement, or increase the salary,
wage, bonus or other compensation of any employees except increases occurring
in the ordinary course of business consistent with prior practice (which shall
include normal periodic performance reviews and related compensation and
benefit increases); provided, however, that up to $3,000,000 may be allocated
to retention payments to be made to employees conditioned on their remaining
with the Company or any of its Subsidiaries after the Merger and such
additional amounts as may be agreed to by Parent;
(e) except for any Tax Claims as to which Spinco and its Subsidiaries
would be required, under the Tax Sharing Agreement that is appended as Exhibit
C to the Distribution Agreement (the "Tax Sharing Agreement") (assuming its
effectiveness), to indemnify the Company and its Subsidiaries and Joint
Ventures, neither it nor its Subsidiaries or Joint Ventures shall (i) (x)
settle or compromise the litigation specified in Section 6.1(e) of the Company
Disclosure Letter or (y) settle or compromise any other claims or litigation
for an amount in excess of two million dollars ($2,000,000) individually with
respect to each such other claim or litigation, (ii) pay, discharge, settle or
satisfy any material liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction of liabilities and obligations in the ordinary course of business
consistent with prior practice and within the amounts reflected or reserved on
the most recent consolidated financial statements contained in the Company
Reports prior to the date hereof or (iii) except in the ordinary course of
business consistent with prior practice, enter into, modify, amend or terminate
any of its material Contracts (other than any Contracts providing for any
Permitted Sale) or waive, release or assign any material rights or claims (it
being agreed that the provisions of clause (iii) shall not apply to any matter
referred to therein to the extent relating to Spinco or any of its
Subsidiaries);
(f) neither it nor any of its Subsidiaries or Joint Ventures shall make
any material Tax election or permit any insurance policy naming it as a
beneficiary or loss-payable payee to be cancelled or terminated, except in each
case in the ordinary course of business consistent with prior practice and
except for elections under Section 338 of the Code;
(g) neither it nor any of its Subsidiaries or Joint Ventures shall enter
into any agreement containing any provision or covenant limiting in any
material respect the ability of the Company or any Affiliate or Joint Venture
or, assuming the consummation of the transactions contemplated by the
Transaction Agreements, ING or any of its subsidiaries or joint ventures, to
(i) sell any products or services of or to any
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other Person, (ii) engage in any line of business or (iii) compete with or to
obtain products or services from any Person or limiting the ability of any
Person to provide products or services to the Company or any of its Affiliates
or Joint Ventures or, assuming the consummation of the transactions
contemplated by the Transaction Agreements, ING or any of its Subsidiaries or
Joint Ventures;
(h) neither it nor its Subsidiaries or Joint Ventures shall make any
significant change in any accounting methods or systems of internal accounting
controls, except as may be appropriate to conform to changes in statutory or
regulatory accounting rules or generally accepted accounting principles or
regulatory requirements with respect thereto;
(i) neither it nor its Subsidiaries or Joint Ventures shall, other than as
would not be inconsistent with the Company's or its Subsidiaries' or Joint
Ventures' respective investment guidelines as in effect in the first quarter of
2000 (or, following consultation with Parent, consistent with industry
standards), intentionally and materially alter the mix of investment assets of
the Company, Subsidiary or Joint Venture or the duration or credit quality of
such assets;
(j) neither it nor its Subsidiaries or Joint Ventures shall, other than
consistent with past practices (or following consultation with Parent,
consistent with industry standards), intentionally and materially alter the
profile of the insurance liabilities of the Retained Insurance Companies or
materially alter the pricing practices or policies of the Retained Insurance
Companies;
(k) neither it nor any of its Subsidiaries or Joint Ventures shall take
any action that would cause or omit to take any action for the purpose of
causing any of the Company's representations and warranties herein to become
untrue in any material respect;
(l) neither it nor any of its Subsidiaries and Joint Ventures will engage
in or allow any transfer of assets or liabilities or other transactions between
(A) the Company and its Subsidiaries and Joint Ventures or joint ventures, on
the one hand, and Spinco and any of its Subsidiaries and joint ventures, on the
other hand, or (B) the Company or Aetna Services, Inc., on the one hand, and
any Subsidiary of Aetna Services, Inc. that is also a Subsidiary of the
Company, on the other hand, except, in either case, (i) payments in return for
services rendered in the ordinary course of its business consistent with past
practice, (ii) as expressly contemplated by the Transaction Agreements to occur
prior to the Effective Time or (iii) transfers of Permitted Sales Proceeds; and
(m) neither it nor any of its Subsidiaries nor Joint Ventures shall
authorize or enter into an agreement to do any of the foregoing.
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The parties agree that the provisions of Section 6.1, other than Section
6.1(l) and as contemplated by Section 6.1(e), shall be inapplicable to Spinco
and its Subsidiaries and the Company may permit Spinco and its Subsidiaries to
conduct their businesses in their discretion; provided, however, that the
Company agrees that no action will be taken or permitted in furtherance of the
interests of Spinco and its Subsidiaries, or the Transaction, by the Company or
any of its Subsidiaries or Joint Ventures or Spinco or its Subsidiaries that
would (i) reasonably be expected to interfere with the timely consummation of
the Merger or (ii) have any of the effects set forth in Section 6.1(l).
Notwithstanding the limitations in this Section 6.1, other than Section 6.1(l),
which shall apply, the Company and Aetna Services, Inc. shall be free to take
any of the actions set forth in Section 6.1 of the Company Disclosure Letter.
No such actions shall result in any loss or liability to any Subsidiary of
Aetna Services, Inc. that is also a Subsidiary of the Company except to the
extent expressly contemplated by the Transaction Agreements to occur prior to
the Effective Time or expressly contemplated by Section 6.1 of the Company
Disclosure Letter. Except as expressly permitted by this Agreement, the Company
agrees to use its best efforts to operate the business of Spinco and its
Subsidiaries independently of the Company and Aetna Services, Inc. in a manner
that minimizes the liabilities incurred within the Company and Aetna Services,
Inc.
6.2 Acquisition Proposals. (a) The Company agrees that neither it nor any
of its Subsidiaries, nor Spinco nor any of its Subsidiaries nor any of the
officers and directors of any of them shall, and that it shall direct and use
its best efforts to cause Spinco's, its and their Subsidiaries' employees,
agents and representatives (including any investment banker, attorney or
accountant retained by them or any of their Subsidiaries) not to, directly or
indirectly, initiate, solicit or encourage any inquiries or the making of any
proposal or offer with respect to a merger, reorganization, share exchange,
consolidation or similar transaction, or any purchase of all or 10% or more of
the assets or any equity securities of the Company or any of its Subsidiaries
or Spinco or any of its Subsidiaries (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal"), it being understood that
any such activities engaged in prior to the date of this Agreement do not
violate this Section 6.2. The Company further agrees that from and after the
date hereof neither it nor any of its Subsidiaries nor Spinco nor any of its
Subsidiaries nor any of the officers and directors of any of them shall, and
that it shall direct and use its best efforts to cause Spinco's, its and their
Subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by them or any of their Subsidiaries)
not to, directly or indirectly, engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any Person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; provided,
however, that nothing contained in this Agreement shall prevent the Company or
its board of directors from (A) complying with Rules 14d-9 and 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal; (B)
providing information in
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response to a request therefor by a Person who has made a bona fide written
Acquisition Proposal that was not solicited in violation of this Section 6.2(a)
if the board of directors receives from the Person so requesting such
information an executed confidentiality agreement on terms substantially
similar to those contained in the Confidentiality Agreement (as defined below);
(C) engaging in any negotiations or discussions with any Person who has made an
unsolicited bona fide written Acquisition Proposal that was not solicited in
violation of this Section 6.2(a); or (D) recommending such an Acquisition
Proposal to the shareholders of the Company, if and only to the extent that,
(i) in each such case referred to in clause (B), (C) or (D) above, the board of
directors of the Company determines in good faith after consultation with
outside legal counsel that such action is necessary in order for its directors
to comply with their respective fiduciary duties under applicable law and (ii)
in each case referred to in clause (C) or (D) above, the board of directors of
the Company determines in good faith (after consultation with its financial
advisor) that such Acquisition Proposal, if accepted, is reasonably likely to
be consummated, taking into account all legal, financial and regulatory aspects
of the proposal and the Person making the proposal and would, if consummated,
result in a transaction or a combination of transactions more favorable to the
Company's shareholders from a financial point of view than the transactions
contemplated by this Agreement (any such more favorable Acquisition Proposal
being referred to in this Agreement as a "Superior Proposal"). The Company
agrees that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any Acquisition Proposal. The Company agrees that it will take
the necessary steps to promptly inform the individuals or entities referred to
in the first sentence hereof of the obligations undertaken in this Section 6.2.
The Company agrees that it will notify Parent immediately if any such
inquiries, proposals or offers relating to an Acquisition Proposal are received
by, any such information is requested from, or any such discussions or
negotiations are sought to be initiated or continued with, any of its
representatives indicating, in connection with such notice, the name of such
Person and the material terms and conditions of any proposals or offers and
thereafter shall keep Parent informed, on a current basis, on the status and
terms of any such proposals or offers and the status of any such discussions or
negotiations. The Company also agrees that it will promptly request each Person
that has heretofore executed a confidentiality agreement in connection with its
consideration of acquiring it or any of its Subsidiaries or Spinco or any of
its Subsidiaries to return or destroy all confidential information heretofore
furnished to such Person by or on behalf of it or any of its Subsidiaries or
Spinco or any of its Subsidiaries. Notwithstanding the foregoing, the parties
hereto acknowledge and agree that the provisions of this Section 6.2(a) shall
not restrict in any respect the right of the Company, Spinco, Spinco's
Subsidiaries or any of the officers, directors, employees, agents and
representatives of any of them to, directly or indirectly, initiate, solicit,
encourage or take any other action with respect to (including without
limitation entering into an agreement for) any transaction relating to any
assets or equity securities of Spinco or any of its Subsidiaries, so long as
such transaction would not
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reasonably be expected to interfere with the timely consummation of the Merger,
the Spin- Off or the other transactions contemplated by the Transaction
Agreements.
(b) Notwithstanding anything in this Section 6.2 to the contrary, if, at
any time prior to obtaining the Company Requisite Vote, the Company's board of
directors determines in good faith, on the basis of the advice of its financial
advisors and outside counsel, in response to an Acquisition Proposal that did
not result from a breach of Section 6.2(a), that such proposal is a Superior
Proposal, the Company or its board of directors may terminate this Agreement
if, and only if, the Company shall substantially concurrently with such
termination enter into a definitive agreement containing the terms of a
Superior Proposal; provided, however, that the Company shall not terminate this
Agreement pursuant to this sentence, and any purported termination pursuant to
this sentence shall be void and of no force or effect, unless the Company shall
have complied with (i) all the provisions of this Section 6.2, including the
notification provisions in this Section 6.2, (ii) the following proviso, and
(iii) all applicable requirements of Section 8.3, including the payment of the
termination fee described in Section 8.5(b) prior to or concurrently with such
termination; and provided further, however, that the Company shall not exercise
its right to terminate this Agreement pursuant to this Section 6.2 until after
five business days following Parent's receipt of written notice (a "Notice of
Superior Proposal") advising Parent that the Company's board of directors has
received such a Superior Proposal and that such board of directors will,
subject to any action taken by Parent pursuant to this sentence, cause the
Company to accept such Superior Proposal, specifying the material terms and
conditions of such Superior Proposal and identifying the Person making such
Superior Proposal (it being understood and agreed that any amendment to the
price or any other material term of such a Superior Proposal shall require an
additional Notice of Superior Proposal and a new five business day period).
6.3 Accuracy of Proxy Statement and Form 10. Each of the Company, ING and
Parent agrees that none of the information supplied or to be supplied by it or
its Affiliates, Subsidiaries or Joint Ventures (and in the case of the Company,
including Spinco and its Affiliates) for inclusion or incorporation by
reference in the proxy statement of the Company seeking approval of the Merger
(the "Proxy Statement") and the registration statement on Form 10 relating to
the Spin-Off (the "Form 10") and any amendment or supplement thereto will, in
the case of the Proxy Statement, at the date of mailing to holders of Shares
and at the time of the meeting of holders of Shares of the Company to be held
in connection with the Transaction and, in the case of the Form 10, at the
effective date of the Form 10 and at the date of mailing of the Form 10 to
holders of record of the Shares, in any such case, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company agrees
that the Proxy Statement and the Form 10 and any
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amendment or supplement thereto will comply in all material respects with the
applicable provisions of the Exchange Act and the rules and regulations
thereunder.
6.4 Shareholders Meeting. The Company will take, in accordance with
applicable law and its certificate of incorporation and by-laws, all action
necessary to convene a meeting of holders of shares of Common Stock (the
"Shareholders Meeting") as promptly as reasonably practicable after the
execution of this Agreement to consider and vote upon the approval of this
Agreement and the transactions contemplated hereby. Subject to fiduciary
obligations and the requirements of applicable Law, the Company's board of
directors shall recommend such approval and shall take all lawful action to
solicit such approval.
6.5 Filings; Other Actions; Notification. (a) ING, Parent and the Company
shall use their respective best efforts to prepare and file with the SEC the
Proxy Statement and the Form 10 as promptly as is practicable after the date
hereof. The Company shall use its reasonable best efforts to (i) have the Proxy
Statement and the Form 10 approved by the SEC as promptly as practicable after
each such filing and (ii) promptly after each such approval thereafter mail the
Proxy Statement and the Form 10 to the holders of Shares of the Company. The
Company shall promptly notify Parent and ING of any request by the SEC for any
amendment or supplement to the Proxy Statement or the Form 10 and shall provide
Parent and ING copies of all correspondence between the Company and/or any of
its representatives and the SEC with respect to the Proxy Statement.
(b) The Company, ING and Parent shall cooperate with each other and use
(and shall cause their respective Subsidiaries, Joint Ventures and joint
ventures, including Spinco and its Subsidiaries, to use) their respective best
reasonable efforts to take or cause to be taken all actions, and do or cause to
be done all things necessary, proper or advisable on its part under the
Transaction Agreements and applicable Laws to consummate and make effective the
Merger, the Spin-Off and the other transactions contemplated by the Transaction
Agreements as soon as practicable, including preparing and filing as promptly
as practicable all documentation to effect all necessary notices, applications,
petitions, reports and other filings and to obtain as promptly as practicable
all consents, registrations, approvals, waivers, licenses, permits,
qualifications, orders, ratings and authorizations necessary or advisable to be
obtained from any Governmental Entity ("Governmental Approvals") and/or any
third party and make all transfers or assignments contemplated by the
Transaction Agreements, in each case in order to consummate the Merger, the
Spin-Off or any of the other transactions contemplated by the Transaction
Agreements, in each case on the terms and subject to the conditions set forth
in the Transaction Agreements; provided, however, that nothing in this Section
6.5 shall require, or be construed to require, ING or Parent, in connection
with the receipt of any regulatory approval, to proffer to, or agree to (i)
sell or hold separate and agree to sell, divest or to
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discontinue to or limit, before or after the Effective Time, any assets,
businesses, or interest in any assets or businesses of ING, Parent, the Company
or any of their respective Affiliates or Joint Ventures (or to consent to any
sale, or agreement to sell, or discontinuance or limitation by ING or Parent or
the Company, as the case may be, of any of its assets or businesses) or (ii)
agree to any conditions relating to, or changes or restriction in, the
operations of any such asset or businesses which, in the case of clause (i) or
clause (ii), is reasonably likely, individually or in the aggregate, to have a
material adverse effect on the financial condition, properties, business or
annual results of operations of the Company and its Subsidiaries, taken as a
whole, or a material adverse effect on the financial condition, properties,
business or annual results of operations of ING and its Subsidiaries, taken as
a whole. Subject to applicable Laws relating to the exchange of information
(including any obligations pursuant to any listing agreement with or rules of
any securities exchange), each of ING, Parent and the Company shall have the
right to review and approve (such approval not to be unreasonably withheld or
delayed) in advance, and to the extent practicable each will consult the other
on, all the information relating to it, and any of its Affiliates and Joint
Ventures, that appear in any filing made with, or written materials submitted
to, any third party and/or any Governmental Entity (including any securities
exchange) in connection with the Merger and the other transactions contemplated
by the Transaction Agreements.
(c) The Company, ING and Parent each shall, upon request by the other,
furnish the other with all true and accurate information concerning itself, its
Subsidiaries, Joint Ventures and joint ventures (including in the case of the
Company, Spinco and its Subsidiaries), directors, officers and shareholders and
such other matters as may be reasonably necessary or advisable in connection
with the Proxy Statement or the Form 10 or any other statement, filing, notice
or application made by or on behalf of ING, Parent or the Company or any of
their respective Subsidiaries, Joint Ventures or joint ventures to any third
party and/or any Governmental Entity in connection with the Merger and the
transactions contemplated by the Transaction Agreements.
(d) The Company, ING and Parent each shall promptly provide the other
party with copies of all filings made by either the Company, Spinco, ING or
Parent with any Governmental Entity in connection with the Transaction
Agreements and the transactions contemplated hereby and thereby. The Company,
ING and Parent each shall keep the other apprised of the status of matters
relating to completion of the transactions contemplated hereby and thereby,
including promptly furnishing the other with copies of any notices or other
communications received by Spinco, ING, Parent or the Company, as the case may
be, or any of its Subsidiaries, Joint Ventures or joint ventures, from any
third party and/or any Governmental Entity with respect to the Merger and the
other transactions contemplated by the Transaction Agreements. Notwithstanding
the foregoing, Spinco shall only be required with respect to the Spin-Off to
provide ING and Parent copies of material filings, notices and communications
relating to the Spin-Off. The Company shall
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keep Parent informed on a prompt basis concerning the status of rating agency
communications regarding Spinco and provide Parent with copies of all
presentations to and correspondence with rating agencies relating to the Spinco
rating. The Company shall give prompt notice to Parent of any change that is
reasonably likely to result in a Company Material Adverse Effect.
(e) In the event any claim, action, suit, investigation or other
proceeding by any Governmental Entity or other Person or other legal or
administrative proceeding is commenced that questions the validity or legality
of any of the Transaction Agreements, the Merger, the Spin-Off or the other
transactions contemplated by the Transaction Agreements or claims damages in
connection therewith, the Company, ING and Parent each agree to cooperate and
use their best reasonable efforts to defend against and respond thereto.
(f) The Company shall use its reasonable efforts to assist Parent in
obtaining all required consents, including the consent of the People's Republic
of China, prior to the Effective Time, to either (i) the transfer of the joint
venture interest held by Aetna Life Insurance Company in Pacific-Aetna Life
Insurance Company Limited to a Subsidiary of the Company or (ii) if consent to
such transfer cannot be obtained on terms and conditions reasonably acceptable
to Parent on an alternative structure agreed upon with Parent whereby the
benefits (as well as the liabilities) associated with the joint venture
interest held by Aetna Life Insurance Company in Pacific-Aetna Life Insurance
Company Limited are transferred to a Subsidiary of the Company; provided,
however, that the foregoing shall not require the Company, its Subsidiaries,
Joint Ventures or joint ventures to (x) take or fail to take any action that
could reasonably be expected to adversely affect in any respect any of Spinco
or any of its Subsidiaries or prevent or materially delay or impair the
consummation of the transactions contemplated hereby or (y) pay any money,
other than reasonable advisors' fees and expenses, to any third party in
connection with carrying out its obligations under this sentence.
Notwithstanding the references to Governmental Consents of the Peoples Republic
of China and Hong Kong in Section 7.1(b) of this Agreement, the parties hereto
acknowledge and agree that the transfer of the joint venture interest held by
Aetna Life Insurance Company in Pacific- Aetna Life Insurance Company Limited
or the license held by Pacific-Aetna Life Insurance Company Limited are not to
be a condition to either party's obligation to effect the Merger.
(g) The Company shall use its best efforts to satisfy the conditions to
the Spin-Off set forth in Section 3.02 of the Distribution Agreement and shall
effect the Spin-Off if such conditions have been satisfied. Notwithstanding
anything in this Section 6.5 to the contrary, the parties acknowledge and agree
that this Section 6.5 shall not require the Company or Spinco, in connection
with the receipt of any Governmental Approval in connection with the
consummation of the Spin-Off, to proffer or agree to
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conditions relating to, or changes or restrictions in, the operations or assets
of Spinco and its Subsidiaries that are reasonably likely, individually or in
the aggregate, to have a material adverse effect on the financial condition,
properties, business or annual results of operations of Spinco and its
Subsidiaries, taken as a whole, or waive any condition to the Spin-Off set
forth in Section 3.02 of the Distribution Agreement. At or prior to the Spin-
Off, the Company shall take those actions required by Section 7.01 of the
Distribution Agreement to be taken at or prior to the Spin-Off.
(h) The Company and its Subsidiaries shall use their reasonable best
efforts to keep Parent informed concerning material developments, including
with respect to matters addressed in Section 6.1 of this Agreement, in the
businesses of the Company and its Subsidiaries and to consult periodically with
representatives of Parent concerning such developments.
6.6 Access. Upon reasonable notice, and subject to applicable law, the
Company shall (and shall cause its Subsidiaries and Joint Ventures to and use
reasonable efforts to cause its Fund Clients to) afford Parent's officers,
employees, counsel, accountants and other authorized representatives
("Representatives") reasonable access, during normal business hours throughout
the period prior to the Effective Time, to its officers, employees, properties,
books, Contracts and records and, during such period, shall (and shall cause
its Subsidiaries and Joint Ventures and Spinco and its Subsidiaries to) furnish
promptly to the other all information concerning its business, properties and
personnel as may reasonably be requested; provided, however, that no
investigation pursuant to this Section shall affect or be deemed to modify any
representation or warranty made by the Company; and provided further, however,
that the foregoing shall not require the Company to permit any inspection, or
to disclose any information, that in the reasonable judgment of the Company
would result in the disclosure of any trade secrets of third parties or violate
any of its obligations with respect to confidentiality if the Company shall
have used best reasonable efforts to obtain the consent of such third party to
such inspection or disclosure. All requests for information made pursuant to
this Section shall be directed to an executive officer of the Company or such
Person as may be designated by its officers, as the case may be.
6.7 Stock Exchange. The Surviving Corporation shall use its best efforts
to cause the Shares to be de-listed from the New York Stock Exchange (the
"NYSE") and de-registered under the Exchange Act as soon as practicable
following the Effective Time.
6.8 Publicity. The initial press release with respect to the Merger and
the other transactions contemplated by this Agreement shall be a joint press
release. Thereafter, neither the Company, Spinco, ING nor Parent shall (i)
issue any press release or otherwise make any public announcements with respect
to the Merger and the other
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transactions contemplated by this Agreement (other than the Spin-Off) or (ii)
make any material filings with any third party and/or any Governmental Entity
(including any securities exchange) for the purpose of furthering consummation
of the Transactions, in each case without consulting with, and obtaining the
prior consent of, the other party (which consent shall not be unreasonably
withheld or delayed). The Company shall use its best reasonable efforts to
consult in advance with Parent concerning any public announcement concerning
the Spin-Off. Notwithstanding the foregoing two sentences, a party may, without
consulting with or obtaining the consent of the other party, issue a press
release or otherwise make a public announcement as may be required by Law or
under the applicable rules of any securities exchange if it has used its best
reasonable efforts to consult with the other party and to obtain such party's
consent but has been unable to do so in a timely manner.
6.9 Benefits; Company Options; Company Employees.
(a) Exhibit A (the "Employee Benefits Agreement") to the Distribution
Agreement, which sets forth the covenants of the Company relating to employee
benefits matters, shall have the same force and effect, and shall be subject to
the provisions hereof until the Effective Time, as if set forth herein.
(b) The Company and Spinco agree to, and to cause each of their
Subsidiaries to, (x) consult with Parent in advance of (and in a manner which
provides Parent reasonable time to comment) issuing or making any
communications to the employees of the Company and its Subsidiaries regarding
the Transaction or any other employee benefit matter and (y) develop with
Parent a communications program relating to the post Spin-Off period, which
shall be implemented prior to the Spin-Off (it being understood such
implementation will be made in a timely manner so as to effectuate enrollment
in the new benefit plans the Company will offer after the Spin-Off).
(c) Except as expressly contemplated by the Employee Benefits Agreement,
the Company agrees not to and to cause its Subsidiaries not to (x) transfer
employees from any of Aetna Retirement Services, Inc. or Aetna International,
Inc. or any of their Subsidiaries (that are also Subsidiaries of the Company)
or Joint Ventures to the Company, Aetna Services, Inc., Spinco or any of its
Subsidiaries or Joint Ventures without Parent's consent (which consent shall
not be unreasonably withheld) or (y) transfer employees to Aetna Retirement
Services, Inc. or Aetna International, Inc. or any of their Subsidiaries (that
are also Subsidiaries of the Company) or Joint Ventures from the Company, Aetna
Services, Inc., Spinco or any of its Subsidiaries without Parent's consent
(which consent shall not be unreasonably withheld).
(d) The Company, Spinco and Parent agree to cooperate in the preparation
of, and mutually agree with Parent on the final versions of the schedules to
the
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Employee Benefits Agreement. Without limiting the generality of the foregoing,
in this regard the Company and Spinco agree to provide to Parent all relevant
information available to them in respect of the Company and its Subsidiaries'
employees and the Compensation and Benefit Plans for the purposes of creating
such schedules.
6.10 ERISA Client Lists. Within 30 days following the date hereof, Parent
shall deliver to the Company a written list of the entities that are affiliated
with or related to Parent (the "Parent ERISA List"). As soon as practicable
after the date the Parent ERISA List is delivered to the Company, but in no
event later than 30 days before the Closing Date, the Company shall deliver to
Parent a written statement which identifies each Account Client that is an
ERISA Client and lists each contract or agreement, if any, and all amendments
thereto, in effect on the date hereof, entered into by the Company or any of
its Subsidiaries with respect to or on behalf of any such ERISA Client,
pursuant to which any of the entities identified in the Parent ERISA List has
agreed to (i) execute securities transactions, (ii) provide any other goods or
services or (iii) purchase, sell, exchange or swap securities or any other
economic interests therein or derivative thereof, including but not limited to
rights to receive or obligations to pay interest or principal denominated in a
particular currency.
6.11 Expenses. Except as otherwise provided in Section 8.5(b), Section
9.10 or any Transaction Agreement, whether or not the Merger is consummated,
all costs and expenses incurred in connection with the Transaction Agreements
and the Merger and the other transactions contemplated by the Transaction
Agreements shall be paid by the party incurring such expense, except that (a)
expenses incurred in connection with the filing fee and printing and mailing
the Proxy Statement shall be shared equally by Parent and the Company and (b)
all Transaction Expenses (as defined below), unless otherwise specifically
provided for in any Transaction Agreement, shall be paid by Spinco.
"Transaction Expenses" shall mean all fees, costs and expenses incurred by (i)
the Company, its Subsidiaries and Joint Ventures, in each case at or prior to
the Effective Time, and (ii) Spinco and its Subsidiaries, in the case of each
of clause (i) and (ii), in connection with the Merger, the Spin-Off or any of
the other transactions contemplated by the Transaction Agreements, including
the fees and expenses of the Company's and Spinco's legal and financial
advisors and the other fees and expenses set forth on Section 6.11 of the
Company Disclosure Letter.
6.12 Indemnification; Directors' and Officers' Insurance. (a) From and
after the Effective Time, ING agrees that it will cause the Company to
indemnify and hold harmless each present and former director, officer and
employee of the Company (when acting in such capacity), determined as of
immediately prior to the Effective Time (the "Indemnified Parties"), against
any costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
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civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent that
the Company would have been permitted or required under Connecticut law and its
certificate of incorporation or by-laws or pursuant to other agreements in
effect on the date hereof to indemnify such Person (and ING shall also cause
the Company to advance expenses as incurred to the fullest extent permitted
under applicable law; provided, however, that the Person to whom expenses are
advanced provides an undertaking to repay such advances if it is ultimately
determined that such Person is not entitled to indemnification); and provided
further, however, that any determination required to be made with respect to
whether an officer's or director's conduct complies with the standards set
forth under Connecticut law and the Company's certificate of incorporation and
by-laws shall be made by independent counsel selected by the Surviving
Corporation.
(b) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 6.12, upon learning of any such claim, action, suit,
proceeding or investigation, shall promptly notify the Surviving Corporation
and ING thereof. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) ING or
the Surviving Corporation shall have the right to assume the defense thereof
and ING or the Surviving Corporation shall not be liable to such Indemnified
Parties for any legal expenses of other counsel or any other expenses
subsequently incurred by such Indemnified Parties in connection with the
defense thereof, except that if ING or the Surviving Corporation elects not to
assume such defense or counsel for the Indemnified Parties advises that there
are issues which raise conflicts of interest between ING or the Surviving
Corporation and the Indemnified Parties, the Indemnified Parties may retain
counsel satisfactory to them, and ING or the Surviving Corporation shall pay
all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided, however, that the
Surviving Corporation or ING shall be obligated pursuant to this paragraph (b)
to pay for only one firm of counsel for all Indemnified Parties in any
jurisdiction, (ii) the Indemnified Parties will cooperate in the defense of any
such matter and (iii) ING or the Surviving Corporation shall not be liable for
any settlement effected without its prior written consent; and provided further
that neither ING nor the Surviving Corporation shall have any obligation
hereunder to any Indemnified Party if and when a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final, that the indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law.
(c) ING shall cause the Surviving Corporation to either (i) maintain the
Company's existing officers' and directors' liability insurance for a period of
six years after the Effective Time or (ii) maintain a run-off or tail policy or
endorsement with respect to covering claims asserted within six years after the
Effective Time arising from
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facts or events that occurred at or before the Effective Time (either, "D&O
Insurance"), in each case so long as the annual premium therefor is not in
excess of 175% of the last annual premium paid prior to the date hereof (the
"Current Premium"); provided, however, that if the existing D&O Insurance
expires, is terminated or cancelled during such six-year period, the Surviving
Corporation will use its reasonable efforts to obtain as much D&O Insurance as
can be obtained for the remainder of such period for a premium not in excess
(on an annualized basis) of 175% of the Current Premium.
(d) If the Surviving Corporation or any of its successors or assigns (i)
shall consolidate with or merge into any other corporation or entity and shall
not be the continuing or surviving corporation or entity of such consolidation
or merger or (ii) shall transfer all or substantially all of its properties and
assets to any individual, corporation or other entity, then, and in each such
case, proper provisions shall be made so that the successors and assigns of the
Surviving Corporation shall assume all of the obligations set forth in this
Section.
(e) The provisions of this Section are intended to be for the benefit of,
and shall be enforceable by, each of the Indemnified Parties, their heirs and
their representatives.
(f) Notwithstanding any provision of this Section 6.12 to the contrary, to
the extent a Cost is also a Spinco Group Liability (as defined in the
Distribution Agreement) such matter shall be addressed as a Spinco Group
Liability pursuant to the Distribution Agreement rather than this Section 6.12.
6.13 Compliance with 1940 Act Section 15. (a) Prior to the Closing, the
Company shall use reasonable best efforts to ensure compliance with Section
15(f) of the 1940 Act, so that the transactions contemplated by the Transaction
Agreements will be in compliance immediately after the Closing with Section
15(f) of the 1940 Act, including assuring that at the time of the Closing at
least 75% of the Board of Directors or Trustees of each Fund Client are not
"interested persons" (as such term is defined in the 1940 Act) of the Surviving
Corporation or the Company.
(b) Parent will use reasonable best efforts to assure compliance with the
conditions of Section 15(f) of the 1940 Act as it applies to the transactions
contemplated by the Agreement. From and after the Closing, Parent shall conduct
the business of the Surviving Corporation so as to assure that, insofar as
within the control of Parent: (i) for a period of three (3) years after the
Closing Date, at least 75% of the members of the Board of Directors or Trustees
of each Fund Client which enters into a replacement Investment Contract with an
Advisory Entity that constitutes an investment advisory agreement are not (A)
"interested persons" of the Surviving Corporation or (B) "interested persons"
of the Company; and (ii) there is not imposed on any Fund Client an "unfair
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burden" (within the meaning of Section 15(f) of the 1940 Act) as a result of
the transactions contemplated by the Transaction Agreements, or any express or
implied terms, conditions or understandings applicable thereto.
(c) For a period of three years (3) after the Closing, none of Parent,
Surviving Corporation, nor any of their respective Affiliates will voluntarily
engage in any transaction which would constitute an assignment of any
investment advisory contract with any Fund Client that is registered under the
1940 Act and is currently managed by the Company or its Affiliates to which
Parent, Surviving Corporation or any of their respective Affiliates or the
Company or any of its Affiliates is a party without first obtaining a covenant
in all material respects the same as that contained in this Section 6.13.
6.14 Fund Client Contracts, Distribution Plans and Boards. The Company
shall use its reasonable best efforts to cause (a) the consideration and due
approval by the Board of Directors of each Fund Client and (b) to the extent
required by the 1940 Act, the consideration and due approval by such Fund
Client's securityholders, of (X) a new Investment Contract (or, where
permitted, approval of continuation of the existing Investment Contract) with
the same Advisory Entity to become effective upon the Closing, in each case, on
the same material terms as in effect on the date hereof under such Investment
Contract for the performance by the relevant Advisory Entity of investment
management, investment advisory, investment subadvisory or distribution
services and (Y) an amended Rule 12b-1 distribution plan, in each case, on the
same material terms as in effect on the date hereof. In addition, the Company
shall use its reasonable best efforts to encourage the Board of Directors of
each Fund Client (or, to the extent required by the 1940 Act, the independent
Directors thereof) (X) to select and nominate, so as to constitute a majority
of the independent Directors of such Board, individuals who are currently
serving as independent directors of investment companies that are advised by an
Affiliate of Parent and (Y) to nominate one director (who shall not be an
independent director) that is selected by Parent in each case so long as the
Company does not reasonably conclude, after consultation with Parent, such
encouragement would adversely affect the ability of the Company to obtain any
consent required pursuant to Section 7.2(d).
6.15 Non-Fund Advisory Contracts. The Company or relevant Advisory Entity
shall notify each Advisory Client of the transactions contemplated by the
Transaction Agreements and use its reasonable best efforts to obtain, prior to
the Closing, any necessary consent of each Advisory Client to the "assignment"
(as such term is used in the Advisers Act) of its Investment Contract involving
investment advisory services as a result of the transactions contemplated by
the Transaction Agreements in a form reasonably satisfactory to Parent. The
Company and Advisory Entity shall consult with Parent regarding all written
communications with Advisory Clients concerning the obtaining of such
assignments.
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6.16 Qualification of the Fund Clients; Fund Client Boards. Subject to
applicable fiduciary duties to the Fund Clients, the Company will use its
reasonable best efforts to cause the Fund Clients to take no action (i) that
would prevent any Fund Client from qualifying as a "regulated investment
company" under Subchapter M of Chapter 1 of Subtitle A of the Code, (ii) that
would prevent any Fund Client that is intended to be a Tax-exempt municipal
bond fund from satisfying the requirements of Section 852(b)(5) of the Code or
from qualifying to pay exempt interest dividends as defined therein or (iii)
that would be inconsistent with any Fund Client's prospectus and other
offering, advertising and marketing materials.
6.17 Rights. Prior to the Effective Time, the board of directors of the
Company shall take all necessary action to amend the definition of Final
Expiration Date (as defined in the Rights Agreement) to be the Distribution
Time (as defined in the Distribution Agreement).
6.18 Takeover Statute. If any Takeover Statute is or may become applicable
to the Merger or the other transactions contemplated by the Transaction
Agreements, ING, Parent and their respective boards of directors and the
Company and its board of directors shall each grant such approvals and take
such actions as are necessary so that such transactions may be consummated as
promptly as practicable on the terms contemplated by the Transaction Agreements
and otherwise act to eliminate or minimize the effects of such statute or
regulation on such transactions.
6.19 Company Debt. Effective as of the Closing and, in each case (to the
extent necessary), pursuant to supplemental indentures (reasonably satisfactory
in form and substance to the Company), ING shall guarantee the performance of
the obligations of Aetna Services, Inc. and the Company with respect to the
Long-Term Debt, each such guarantee to take substantially the same form as the
Company's current guarantees of the obligations of Aetna Services, Inc. under
the Long-Term Debt.
6.20 Voting of Shares. Each of ING and Parent agrees to vote, or cause to
be voted, all Shares beneficially owned by it or any of its Affiliates in favor
of adoption of this Agreement and the transactions contemplated hereby at the
Shareholders Meeting.
6.21 Other Agreements. (a) The Company agrees that it shall use its
reasonable best efforts promptly to enter into agreements for the sale of those
Persons set forth on Section 6.21 of the Company Disclosure Letter (the
"Section 6.21 Subsidiaries") on terms and conditions as favorable to the
Company and its Subsidiaries as can be obtained and in accordance with the
procedures agreed between the parties. The Company shall permit representatives
of Parent to be fully involved in every aspect of such sales process and the
Company shall retain such financial and legal advisors to effect such sales as
Parent shall reasonably request. Except as may otherwise be agreed, the terms
and
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conditions of all agreements for sale or other agreements in connection with
the sales process shall be subject to Parent's prior approval, which will not
be unreasonably withheld or delayed. The Company and its Subsidiaries shall not
be required in connection with effecting these sales to take any action that
would adversely affect Spinco and its Subsidiaries. Transaction expenses
incurred in connection with such sales shall not be deemed to be "Transaction
Expenses" for purposes of this Agreement and shall not be required to be paid
by Spinco pursuant to Section 7.03 of the Distribution Agreement. Parent and
the Company each agree that it shall use its reasonable best efforts to obtain
waivers of regulatory requirements in the jurisdictions of the Section 6.21
Subsidiaries that otherwise could delay or prevent satisfaction of the
conditions set forth in Section 7.1(b).
(b) The Company agrees that in carrying out the transactions contemplated
by the Distribution Agreement it shall use its reasonable best efforts
(consistent with and subject to the terms and conditions of the Transaction
Agreements) to minimize the creation of liabilities of the Company and its
Subsidiaries. The Company shall keep Parent informed on a regular basis
concerning the developments in the transactions contemplated by the Transaction
Agreements and the means by which such transactions are effected and, subject
to any existing agreements as to the means of effecting the transactions that
are reflected in the Distribution Agreement, the Company shall give reasonable
consideration to Parent's views on the means by which such transactions are
effected.
(c) In connection with the Spin-Off, the Company and Spinco shall enter
into a trademark licensing agreement (the "Chinese Mark Agreement") pursuant to
which the Company shall grant to Spinco a perpetual, exclusive, and
royalty-free license to use the Chinese name and/or characters associated with
the name "Aetna" or related logo, identified on Schedules D or I of the
Distribution Agreement (including, to the extent held by the Company or any of
its Subsidiaries or Spinco or any of its Subsidiaries, all forms and
transliterations thereof, the "Chinese Mark") in connection with the Spinco
Business (as that term is defined in the Distribution Agreement) in the United
States. The Company acknowledges that the rights, title to and interest in the
Chinese Mark and the associated Intellectual Property Rights (as defined in the
Distribution Agreement) (the "Aetna China Name Rights") shall be owned by a
member of the Aetna Group following the Spin-Off. The Chinese Mark Agreement
shall contain such other terms and conditions as the parties may agree, which
terms and conditions shall be no less favorable to Spinco than the terms and
conditions of the Trademark Licensing Agreement are to the Company (taking into
account those issues which may arise by virtue of the fact that the Chinese
Mark is a translation of an Intellectual Property Right which will, following
the Spin-Off, be owned by Spinco).
(d) On or prior to the Effective Time, Parent or its Affiliates shall use
its reasonable best efforts to procure insurance coverage having the terms and
conditions
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set forth in Section 6.21 of the Parent Disclosure Letter or insurance policies
procured by Parent or its Affiliates to cover similar risks (the "Coverage
Policies"). The Company agrees that, in connection with any such Coverage
Policies, the Company shall contribute or cause to be contributed as a capital
contribution to Aetna Retirement Services, Inc., cash in an amount equal to
Parent's actual cost of obtaining such Coverage Policies, or a portion of such
cost not to exceed $30 million, or in the event Parent notifies the Company
that such Coverage Policies are unavailable on commercially reasonable terms
and conditions, $30 million, and the amount of any such contribution shall not
increase the Net Capital Contribution Amount.
(e) Prior to the Effective Time, the Company shall contribute, or cause to
be contributed, to the capital of Aetna Retirement Services, Inc. an amount
equal to $3.97 million.
6.22 Headquarters and Related Matters. Parent agrees to cause the
Surviving Corporation to maintain the principal corporate offices of the
Company's qualified plan operations in the city of Hartford, in the State of
Connecticut for at least three (3) years following the Effective Time and
Parent intends to cause the Company and its Subsidiaries to maintain employment
levels in and around the city of Hartford at substantially current levels, less
normal attrition.
6.23 Asia. Parent agrees that for one year from the Effective Time, unless
there is a material change in circumstances at ING and its Subsidiaries, Parent
shall not permit the Company and its Subsidiaries to sell the interests of
Aetna International, Inc. in Taiwan, Hong Kong and Malaysia; provided that the
foregoing shall not limit the right of Parent to sell minority interests in
such Subsidiaries.
6.24 Confidentiality. The parties hereby acknowledge and agree that the
provisions of the Confidentiality Agreement (as defined below) shall apply with
respect to all information provided hereunder to Parent or any of its
Affiliates or Representatives (as such term is defined in the Confidentiality
Agreement).
ARTICLE VII
Conditions
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
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(a) Shareholder Approval. This Agreement and the transactions contemplated
hereby shall have been duly approved by holders of shares of Common Stock
constituting the Company Requisite Vote in accordance with applicable law and
the certificate and by-laws of the Company.
(b) Regulatory Consents. (i) The waiting period applicable to the
consummation of the Merger under the HSR Act and applicable Insurance Laws
shall have expired or been terminated and (ii) other than the filing provided
for in Section 1.4 and filings, if any, required under the environmental
transfer acts of the states of New Jersey and Connecticut, all notices, reports
and other filings required to be made prior to the Effective Time by Spinco,
the Company or Parent or any of their respective Subsidiaries or Joint Ventures
with, and all consents, registrations, approvals, permits and authorizations
required to be obtained prior to the Effective Time by Spinco, the Company or
Parent or any of their respective Subsidiaries or Joint Ventures from, any
Governmental Entity in connection with the execution and delivery of the
Transaction Agreements and the consummation of the Merger and the other
transactions contemplated hereby and thereby by Spinco, the Company, Parent and
Merger Sub shall have been made or obtained (as the case may be), other than
(in the case of jurisdictions other than the United States, the Netherlands,
the People's Republic of China, Hong Kong, Mexico, Poland, Malaysia and Taiwan)
those the failure of which to make or obtain are not, individually or in the
aggregate, reasonably likely (as compared to the situation in which they are
made or obtained and taking into account all possible consequences to Parent
and its Subsidiaries, Spinco and its Subsidiaries and the Company and its
Subsidiaries and Joint Ventures of consummating the transactions contemplated
by the Transaction Agreements without making or obtaining them) (A) to be
material to the Company and its Subsidiaries and Joint Ventures, taken as a
whole, (B) to be material to Parent and its Subsidiaries, taken as a whole, (C)
to materially and adversely impact the reasonably anticipated economic and
business benefits to Parent and its Subsidiaries of the transactions
contemplated hereby, (D) to result in criminal liability or a more than de
minimis civil fine or other penalty against Parent or any of its Affiliates,
joint ventures or employees or against the Company or any of its Affiliates,
Joint Ventures or employees or (E) to result in Parent and its Subsidiaries and
joint ventures being prohibited from conducting, or materially limited in their
ability to conduct, business in any jurisdiction (collectively, "Governmental
Consents").
(c) Litigation. (i) No court or Governmental Entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
Law (including any Insurance Law) (whether temporary, preliminary or permanent)
(collectively, an "Order") that is in effect and restrains, enjoins or
otherwise prohibits consummation of the Spin-Off or the Merger.
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(ii) No Governmental Entity shall have instituted or threatened to
institute any proceeding that seeks such an Order.
(d) Spin-Off. The Spin-Off shall have been consummated in accordance with
the terms and subject to the conditions set forth in Section 3.02 of the
Distribution Agreement.
7.2 Conditions to Obligations of Parent and Merger Sub. The obligations of
Parent and Merger Sub to effect the Merger are also subject to the satisfaction
or waiver by Parent at or prior to the Effective Time of the following
conditions:
(a) Representations and Warranties. (i) The representations and warranties
of the Company set forth in this Agreement which are qualified by "Company
Material Adverse Effect" shall each be true and correct as so qualified as of
the date of this Agreement and as of the Closing Date as though made on and as
of the Closing Date (except to the extent any such representation or warranty
expressly speaks as of an earlier date), (ii) the representations and
warranties of the Company set forth in Sections 5.1(a)(i) or (ii), 5.1(b),
5.1(c), 5.1(j), 5.1(p) and 5.1(q) of this Agreement which are not qualified by
"Company Material Adverse Effect" shall each be true and correct in all
material respects as of the date of this Agreement and as of the Closing Date
as though made on and as of the Closing Date (except to the extent any such
representation or warranty expressly speaks as of an earlier date) and (iii)
the representations and warranties of the Company set forth in this Agreement
other than those contemplated by clauses (i) and (ii) hereof (without giving
effect to any qualifications as to "materiality" or other similar
qualifications) shall be true and correct as of the date of this Agreement and
as of the Closing Date as though made on and as of the Closing Date (except to
the extent any such representation or warranty expressly speaks as of an
earlier date), except where the failure of such representations and warranties
to be true and correct (without giving effect to any qualifications as to
"materiality" or other similar qualifications) would not be, individually or in
the aggregate, reasonably likely to have a Company Material Adverse Effect.
Parent shall have received a certificate signed on behalf of the Company by an
executive officer of the Company to the foregoing effect.
(b) Performance of Obligations of the Company. Each of Spinco and the
Company shall have performed in all material respects all obligations required
to be performed by it under the Transaction Agreements at or prior to the
Closing Date, and Parent shall have received a certificate signed on behalf of
the Company by an executive officer of the Company to such effect.
(c) Consents Under Agreements. The Company shall have obtained the consent
or approval of each Person whose consent or approval shall be required in order
to
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consummate the transactions contemplated by the Transaction Agreements under
any Contract to which Spinco or any of its Subsidiaries or the Company or any
of its Subsidiaries, Joint Ventures or joint ventures is a party and conduct
the businesses of the Company and its Subsidiaries, Joint Ventures and joint
ventures substantially as presently conducted, except those for which the
failure to obtain such consent or approval is not, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect or is
not reasonably likely to prevent, materially delay or materially impair the
ability of Spinco or the Company to consummate the transactions contemplated by
the Transaction Agreements and no such consent or approval, and, except as
otherwise agreed in writing pursuant to this Agreement, no Governmental Consent
shall require ING to (i) sell or hold separate and agree to sell, divest or to
discontinue to or limit, before or after the Effective Time, any assets,
businesses, or interest in any assets or businesses of Parent, the Company or
any of their respective Affiliates, Joint Ventures or joint ventures (or to
consent to any sale, or agreement to sell, or discontinuance or limitation by
Parent or the Company, as the case may be, of any of its assets or businesses)
or (ii) agree to any conditions relating to, or changes or restriction in, the
operations of any such asset or businesses which, in either the case of clause
(i) or (ii), is reasonably likely to have a material adverse effect on the
financial condition, properties, business or annual results of operations of
the Company and its Subsidiaries, Joint Ventures and joint ventures, taken as a
whole, or a material adverse effect on the financial condition, properties,
business or annual results of operations of ING and its Subsidiaries, taken as
a whole. Notwithstanding the foregoing, Parent and Merger Sub agree that the
failure to obtain any required consents or approvals as to which the Parent has
actual knowledge (as determined at the time and as set forth in Section
5.2(d)(iii)) shall not give rise to a failure of the condition set forth in
this Section 7.2(c) to be satisfied.
(d) Client Approvals. The approvals contemplated in Section 6.14 shall
have been obtained for Fund Clients representing at least 85% of the total
assets under management of Fund Clients as of the date hereof. "Total assets
under management" means the aggregate of the net assets of the open-end and
closed-end Fund Clients, as adjusted to eliminate increases or decreases
attributable exclusively to positive or negative changes in the market value of
portfolio assets as of the date hereof.
(e) Legal Opinions. Parent shall have received an opinion or opinions of
counsel to the Company dated the Closing Date, addressing the legal matters set
forth in Section 7.2(e) of the Company Disclosure Letter.
(f) Solvency Opinions. The Parent and the Company shall have received,
each as an addressee thereof, copies of the "solvency opinions" delivered in
connection with the Spin-Off.
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(g) Spinco Debt Ratings. (i) At the Effective Time, Spinco shall have a
post-Spin-Off investment grade debt rating of at least BBB from Standard &
Poor's Corporation or Baa2 from Moody's Investors Services, Inc. as to
long-term senior unsecured debt (or the equivalent for issuers which do not
have long-term senior unsecured debt outstanding) and (ii) the Company shall
have delivered written evidence, dated as of the Closing Date, from such rating
agency evidencing such rating. For the avoidance of doubt, the parties hereto
acknowledge and agree that possession of one such rating shall satisfy this
condition.
7.3 Conditions to Obligation of the Company. The obligation of the Company
to effect the Merger is also subject to the satisfaction or waiver by the
Company at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. (i) The representations and warranties
of ING, Parent and Merger Sub set forth in this Agreement which are qualified
by "Parent Material Adverse Effect" shall each be true and correct as so
qualified as of the date of this Agreement and as of the Closing Date as though
made on and as of the Closing Date (except to the extent any such
representation or warranty expressly speaks as of an earlier date), (ii) the
representations and warranties of ING, Parent and Merger Sub set forth in
Section 5.2(a), 5.2(b), 5.2(c) and 5.2(f) of this Agreement which are not
qualified by "Parent Material Adverse Effect" shall each be true and correct in
all material respects as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date (except to the extent any
such representation or warranty expressly speaks as of an earlier date), and
(iii) the representations and warranties of ING, Parent and Merger Sub set
forth in this Agreement other than those contemplated by clauses (i) and (ii)
hereof (without giving effect to any qualifications as to "materiality" or
other similar qualifications) shall be true and correct as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date (except to the extent any such representation or warranty expressly speaks
as of an earlier date), except where the failure of such representations and
warranties to be true and correct (without giving effect to any qualifications
as to "materiality" or other similar qualifications) would not be, individually
or in the aggregate, reasonably likely to have a Parent Material Adverse
Effect.
(b) Performance of Obligations of ING, Parent and Merger Sub. Each of ING,
Parent and Merger Sub shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date, and the Company shall have received a certificate signed on
behalf of ING, Parent and Merger Sub by authorized officers of ING and Parent
to such effect.
(c) Consents Under Agreements. ING shall have obtained the consent or
approval of each Person whose consent or approval shall be required in order to
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consummate the transactions contemplated by this Agreement under any Contract
to which ING or any of its Subsidiaries is a party, except those for which
failure to obtain such consents and approvals, individually or in the
aggregate, is not reasonably likely to have a Parent Material Adverse Effect
and no Governmental Approvals required to be obtained from any Governmental
Entity by the Company or Spinco or any of Spinco's Subsidiaries in connection
with the consummation of the Spin-Off shall be subject to terms or conditions
reasonably likely to have, individually or in the aggregate, a material adverse
effect on the financial condition, properties, business or annual results of
operations of Spinco and its Subsidiaries, taken as a whole.
(d) Guarantee of Company Debt. ING shall have entered into the
supplemental indentures required by Section 6.19 of this Agreement.
ARTICLE VIII
Termination
8.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval by holders of shares of Common Stock of the
Company referred to in Section 7.1(a), by mutual written consent of the Company
and Parent by action of their respective boards of directors.
8.2 Termination by Either Parent or the Company. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the board of directors of either the Company or Parent (and
written notice to the other party) if (a) the Merger shall not have been
consummated by August 31, 2001 whether such date is before or after the date of
approval by the holders of Shares of the Company (the "Termination Date");
provided, however, that the Termination Date shall be automatically extended
for two (2) months (the "Extended Date"), if, on August 31, 2001: (i) any of
the Governmental Consents described in 7.1(b) have not been obtained or waived,
(ii) each of the other conditions to the consummation of the Merger set forth
in Article VII has been satisfied or waived or remains capable of satisfaction,
and (iii) any Governmental Consent that has not yet been obtained is being
pursued diligently and in good faith; (b) the approval of the holders of shares
of Common Stock required by Section 7.1(a) shall not have been obtained at a
meeting duly convened therefor or at any adjournment or postponement thereof;
(c) any Order permanently restraining, enjoining or otherwise prohibiting
consummation of the Merger shall become final and non-appealable (whether
before or after the approval by the shareholders of the Company); or (d) any
Law is in effect or is adopted or issued which has the effect of prohibiting
the Spin-Off or the Merger; provided further, however, that the right to
terminate this Agreement pursuant to
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clause (a) above shall not be available to any party that has breached in any
material respect its obligations under this Agreement in any manner that shall
have proximately contributed to the occurrence of the failure of the Merger to
be consummated.
8.3 Termination by the Company. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time if: (a) whether
before or after the approval of the holders of shares of Common Stock referred
to in Section 7.1(a), by action of the board of directors of the Company and
written notice to Parent, there has been a material breach by Parent or Merger
Sub of any representation, warranty, covenant or agreement contained in this
Agreement that is not curable and such breach would give rise to a failure of
the condition set forth in Section 7.3(a) or Section 7.3(b); or (b) in
accordance with, and subject to the terms and conditions of, Section 6.2(b).
8.4 Termination by Parent. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time by action of the board
of directors of Parent and written notice to the Company if: (a) the board of
directors of the Company shall have withdrawn or adversely modified its
adoption or recommendation of this Agreement or the transactions contemplated
hereby or shall have approved or recommended an Acquisition Proposal; or (b)
there has been a material breach by the Company of any representation,
warranty, covenant or agreement contained in this Agreement that is not curable
and such breach would give rise to a failure of the condition set forth in
Section 7.2(a) or Section 7.2(b); or (c) Shares or other securities or assets
are issued or delivered pursuant to the terms of the Rights Agreement upon or
following the occurrence of a Section 13 Event (as defined in the Rights
Agreement) or an Acquiring Person (as defined in the Rights Agreement) becoming
such.
8.5 Effect of Termination and Abandonment. (a) In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article
VIII, this Agreement (other than as set forth in Section 9.1) shall become void
and of no effect with no liability on the part of any party hereto (or of any
of its directors, officers, employees, agents, legal and financial advisors or
other representatives); provided, however, that no such termination shall
relieve any party hereto of any liability or damages resulting from any
deliberate breach of this Agreement occurring prior to such termination. The
parties further agree that if the Company is or becomes obligated to pay a
termination fee pursuant to Section 8.5(b), the right of Parent to receive such
termination fee shall be the sole remedy for damages of Parent with respect to
the facts and circumstances giving rise to such payment obligation except for
any deliberate breach of this Agreement. No party may assert a claim for
damages for any inaccuracy of any representation or warranty contained in this
Agreement (whether by direct claim or counterclaim) except in connection with
the termination of this Agreement.
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(b) In the event that (i) this Agreement is terminated by Parent pursuant
to Section 8.4(a), or (ii) this Agreement is terminated by the Company pursuant
to Section 8.3(b), then the Company shall, promptly, but in no event later than
one business day after the date of such termination, pay Parent a termination
fee of one hundred sixty-five million dollars ($165,000,000) (the "Termination
Fee") and shall promptly, but in no event later than one business day after
being notified of the amount of all documented out-of-pocket charges and
expenses incurred by Parent or Merger Sub in connection with this Agreement and
the transactions contemplated by this Agreement up to a maximum of ten million
dollars ($10,000,000) ("Out-of-Pocket Expenses"), pay to Parent an amount equal
to the Out-of-Pocket Expenses, in each case payable by wire transfer of same
day funds. In the event that (i) this Agreement is terminated by Parent or the
Company pursuant to Section 8.2(b) or (ii) this Agreement is terminated by
Parent pursuant to Section 8.4(b), then (A) the Company shall promptly, but in
no event later than one business day after being notified of the Out-of-Pocket
Expenses by Parent, pay to Parent an amount equal to the Out-of-Pocket
Expenses, payable by wire transfer of same day funds and (B) if, in the case of
clause (i), a bona fide Acquisition Proposal shall have become public or any
Person shall have publicly announced an intention (whether or not conditional)
to make a proposal or offer relating to an Acquisition Proposal prior to the
date of the Shareholders Meeting or if, in the case of clause (ii), this
Agreement is terminated by Parent pursuant to Section 8.4(b) as a result of a
deliberate breach by the Company and a bona fide Acquisition Proposal shall
have been made to the Company or become public or any Person shall have
announced to the Company or publicly announced an intention (whether or not
conditional) to make a proposal or offer relating to an Acquisition Proposal
prior to the date of termination, and in the case of each of clause (i) and
clause (ii), within fifteen (15) months from the date of termination, the
Company executes and delivers a definitive agreement with respect to any
Acquisition Proposal or an Acquisition Proposal is consummated (it being
understood that in the event the board of directors of the Company recommends
the acceptance by the shareholders of the Company of a third-party tender offer
or exchange offer for at least a majority of the outstanding Shares, such
recommendation shall be treated as though an agreement with respect to an
Acquisition Proposal had been executed), the Company shall promptly, but in no
event later than one business day after the date of such execution and
delivery, or consummation, as the case may be, pay Parent the Termination Fee.
The Company acknowledges that the agreements contained in this Section 8.5(b)
are an integral part of the transactions contemplated by this Agreement, and
that, without these agreements, Parent and Merger Sub would not enter into this
Agreement; accordingly, if the Company fails to promptly pay the amount due
pursuant to this Section 8.5(b), and, in order to obtain such payment, Parent
or Merger Sub commences a suit which results in a judgment against the Company
for the fee set forth in this paragraph (b), the Company shall pay to Parent or
Merger Sub its costs and expenses (including attorneys' fees) in connection
with such suit, together with interest on the amount of the fee at the prime
rate of Citibank N.A. in effect on the date such payment was required to be
made.
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ARTICLE IX
Miscellaneous and General
9.1 Survival. This Article IX and the agreements of the Company, ING,
Parent and Merger Sub contained in Article IV, Sections 6.7 (Stock Exchange),
6.11 (Expenses), 6.12 (Indemnification; Directors' and Officers' Insurance),
6.13(b) and (c) (Compliance with 1940 Act Section 15), 6.19 (Company Debt),
6.22 (Headquarters and Related Matters), 6.23 (Asia) and 6.24 (Confidentiality)
shall survive the consummation of the Merger. This Article IX, the agreements
of the Company, Parent and Merger Sub contained in Section 6.11 (Expenses) and
Section 8.5 (Effect of Termination and Abandonment) shall survive the
termination of this Agreement. All other representations, warranties, covenants
and agreements in this Agreement shall not survive the consummation of the
Merger or the termination of this Agreement (it being understood that this
sentence shall not limit the rights of any party hereto under Section 8.5 of
this Agreement).
9.2 Modification or Amendment. (a) Subject to the provisions of the
applicable law, at any time prior to the Effective Time, the parties hereto may
modify or amend this Agreement, by written agreement executed and delivered by
duly authorized officers of the respective parties.
(b) Each of the parties hereto acknowledges and agrees that, except as
otherwise contemplated by the relevant agreement, the Company may amend or
modify any Transaction Agreement (other than this Agreement) only with the
written consent of Parent. Parent agrees that it will not withhold any such
consent if such proposed amendment or modification would not reasonably be
expected to adversely affect in any respect any of ING, Parent, the Company and
its Subsidiaries and their respective Affiliates, or prevent or materially
delay or impair the consummation of the transactions hereby.
9.3 Waiver of Conditions. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law. No failure or delay by any party in exercising any right, power
or privilege hereunder 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 cumulative and not exclusive of any rights or remedies
provided by law.
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9.4 Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
9.5 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT
SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED,
CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW
YORK, EXCEPT WITH RESPECT TO PROVISIONS RELATING TO THE IMPLEMENTATION OF THE
MERGER THAT ARE REQUIRED BY CONNECTICUT LAW TO BE GOVERNED BY THE LAW OF THE
STATE OF CONNECTICUT, WHICH PROVISIONS SHALL BE GOVERNED BY CONNECTICUT LAW, IN
EACH CASE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The parties
hereby irrevocably submit to the jurisdiction of the United States District
Court for the Southern District of New York or any other New York State court
sitting in New York City, Borough of Manhattan, solely in respect of the
interpretation and enforcement of the provisions of the Transaction Agreements
and of any documents referred to in the Transaction Agreements, and in respect
of the transactions contemplated hereby and thereby, and hereby waive, and
agree not to assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document, that it is not
subject thereto or that such action, suit or proceeding may not be brought or
is not maintainable in said courts or that the venue thereof may not be
appropriate or that any Transaction Agreement or any such document may not be
enforced in or by such courts, and the parties hereto irrevocably agree that
all claims with respect to such action or proceeding shall be heard and
determined in such court. The parties hereby consent to and grant any such
court jurisdiction over the person of such parties and over the subject matter
of such dispute and agree that mailing of process or other papers in connection
with any such action or proceeding in the manner provided in Section 9.6 or in
such other manner as may be permitted by law shall be valid and sufficient
service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
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FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE
IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY,
AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.5.
9.6 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
if to ING, Parent or Merger Sub
ING America Insurance Holdings, Inc.
in c/o ING North America Insurance Corp.
5780 Powers Ferry Road, NW
Atlanta, Georgia 30327-4390
Attention: Michael W. Cunningham
Executive Vice President &
Chief Financial Officer
Fax: 770-980-3303
B. Scott Burton
Senior Vice President &
Chief Counsel
Fax: 770-850-7660
with copies to:
ING Groep N.V.
Strawinskylaan 2631, 1077 ZZ Amsterdam,
P.O. Box 810,
1000 Av. Amsterdam, the Netherlands
Attention: Fred Hubbell
Executive Board Member
Fax: +31-20-541-5402
Diederik van Wassenaer
General Counsel
Fax: +31-20-541-8723
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and
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: Joseph B. Frumkin, Esq.,
William D. Torchiana, Esq.
Fax: 212-558-3588
if to the Company
Aetna Inc.
151 Farmington Avenue
Hartford, CT 06156-7505
Attention: L. Edward Shaw, Jr.
General Counsel
William J. Casazza
Corporate Secretary
Fax: 860-273-8340
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Lewis B. Kaden, Esq.
David L. Caplan, Esq.
Fax: 212-450-4800
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
9.7 Entire Agreement; No Other Representations. This Agreement (including,
any annexes, exhibits or schedules hereto or thereto and other documents
executed in connection herewith), the Company Disclosure Letter and the
Confidentiality Agreement, dated May 25, 2000 (the "Confidentiality
Agreement"), between Parent and the Company constitute the entire agreement,
and supersede all other prior agreements, understandings, representations and
warranties, both written and oral, among the parties, with respect to the
subject matter hereof and thereof.
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9.8 No Third Party Beneficiaries. Except as provided in Section 6.12
(Indemnification; Directors' and Officers' Insurance), this Agreement is not
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder.
9.9 Obligations of Parent and of the Company. Whenever this Agreement
requires a Subsidiary of Parent to take any action, such requirement shall be
deemed to include an undertaking on the part of Parent to cause such Subsidiary
to take such action. Whenever this Agreement requires a Subsidiary of the
Company or Spinco to take any action, such requirement shall be deemed to
include an undertaking on the part of the Company to cause Spinco or such
Subsidiary to take such action and, after the Effective Time, on the part of
the Surviving Corporation to cause such Subsidiary to take such action. Parent
acknowledges that neither the Company nor any of its Subsidiaries possesses the
power to control the Joint Ventures. Accordingly, whenever this Agreement
requires, or limits or restricts the ability of, the Company or any of its
Subsidiaries to take any action with respect to a Joint Venture or joint
venture, the Company and its Subsidiaries shall be deemed to have fully
satisfied all of such obligations under this Agreement with respect to such
Joint Venture or joint venture if it has used its reasonable best efforts to
cause the Joint Venture or joint venture, as the case may be, to comply with
such obligations under this Agreement; provided, however, that the foregoing
shall not require the Company, its Subsidiaries, Joint Ventures or joint
ventures to (i) take or fail to take any action that would reasonably be
expected to adversely affect in any respect any of Spinco or any of its
Subsidiaries or prevent or materially delay or impair the consummation of the
Transactions or (ii) pay any money to any third party in connection with
carrying out its obligations under this sentence.
9.10 Transfer Taxes. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including penalties and interest)
incurred in connection with the Merger and the Spin-Off shall be paid in
accordance with the Distribution Agreement.
9.11 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
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9.12 Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Annex, such
reference shall be to a Section of or Annex to this Agreement unless otherwise
indicated. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". Unless the context otherwise requires, the use of the singular
shall include the plural, the use of the masculine shall include the feminine,
and vice versa. As used in this Agreement, the antecedent of any personal
pronoun shall be deemed to be only the next preceding proper noun or nouns, as
appropriate for such pronoun. As used in this Agreement, any reference to any
law, rule or regulation shall be deemed to include a reference to any
amendments, revisions or successor provisions to such law, rule or regulation.
Except as otherwise explicitly provided herein, all references in this
Agreement to (i) the "Company," "ING" or "Parent" shall be deemed to be a
reference only to such company and not to any direct or indirect subsidiaries
of such company or (ii) to documents or other materials having been "made
available" to Parent shall be deemed to be a reference to a document or other
materials made available to Parent in the Company's data room in Hartford,
Connecticut before June 9, 2000 or was actually delivered to an employee or
Representative of Parent.
9.13 Assignment. This Agreement shall not be assignable by operation of
law or otherwise; provided, however, that Parent may designate, by written
notice to the Company, another wholly owned direct or indirect subsidiary to be
a Constituent Corporation in lieu of Merger Sub, in which event all references
herein to Merger Sub shall be deemed references to such other subsidiary,
except that all representations and warranties made herein with respect to
Merger Sub as of the date of this Agreement shall be deemed representations and
warranties made with respect to such other subsidiary as of the date of such
designation.
9.14 Specific Performance. The parties hereto agree that irreparable
damage would occur if any provision of this Agreement were not performed in
accordance with the terms hereof and that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement or to enforce
specifically the performance of the terms and provisions hereof in any federal
court located in the State of New York, in addition to any other remedy to
which they are entitled at law or in equity.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written
above.
AETNA INC.
By: /s/ Alfred P. Quirk, Jr.
---------------------------------
Name: Alfred P. Quirk, Jr.
Title: Vice President-Finance and
Treasurer
ING AMERICA INSURANCE HOLDINGS, INC.
By: /s/ Michael W. Cunningham
---------------------------------
Name: Michael W. Cunningham
Title: Executive Vice President and
Chief Financial Officer
ANB ACQUISITION CORP.
By: /s/ Michael W. Cunningham
---------------------------------
Name: Michael W. Cunningham
Title: President
ING GROEP N.V.
(solely for the purpose of Sections 4.2,
4.3, 5.2, 6.3, 6.5, 6.8, 6.12, 6.18,
6.19, 6.20 and Article IX)
By: /s/ Michael W. Cunningham
---------------------------------
Name: Michael W. Cunningham
Title: Attorney-in-Fact
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<PAGE>
ANNEX C
FORM OF
DISTRIBUTION AGREEMENT
between
Aetna Inc.
and
Aetna U.S. Healthcare Inc.
------------------------------------
Dated as of [ ], 2000
<PAGE>
TABLE OF CONTENTS
----------------------
PAGE
----
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions....................................................2
ARTICLE 2
CONTRIBUTIONS AND ASSUMPTION OF LIABILITIES
SECTION 2.01. Contribution of Contributed Subsidiaries......................15
SECTION 2.02. Transfers of Certain Assets to Spinco Group...................15
SECTION 2.03. Transfers of Certain Assets to Aetna Group....................15
SECTION 2.04. Assumption of Certain Liabilities.............................16
SECTION 2.05. Agreement Relating to Consents Necessary to Transfer
Assets........................................................16
ARTICLE 3
THE DISTRIBUTION
SECTION 3.01. Cooperation Prior to the Distribution.........................17
SECTION 3.02. Aetna Board Action; Conditions Precedent to the
Distribution..................................................18
SECTION 3.03. The Distribution..............................................19
SECTION 3.04. Stock Dividend................................................19
SECTION 3.05. Fractional Shares.............................................19
ARTICLE 4
INDEMNIFICATION AND OTHER MATTERS
SECTION 4.01. Spinco Indemnification of Aetna Group.........................20
SECTION 4.02. Aetna Indemnification of Spinco Group.........................20
SECTION 4.03. Insurance and Third Party Obligations; Limitation on
Liability.....................................................21
SECTION 4.04. Notice and Payment of Claims..................................22
SECTION 4.05. Notice and Defense of Third-Party Claims......................22
SECTION 4.06. Non-Exclusivity of Remedies...................................25
<PAGE>
PAGE
----
ARTICLE 5
EMPLOYEE MATTERS AND TRANSITION SERVICES
SECTION 5.01. Employee Matters Generally....................................25
SECTION 5.02. Transition Services Matters Generally.........................25
ARTICLE 6
ACCESS TO INFORMATION
SECTION 6.01. Provision of Corporate Records................................25
SECTION 6.02. Access to Information.........................................26
SECTION 6.03. Litigation Cooperation........................................26
SECTION 6.04. Reimbursement.................................................27
SECTION 6.05. Retention of Records..........................................27
SECTION 6.06. Confidentiality...............................................27
SECTION 6.07. Preservation of Privilege.....................................28
SECTION 6.08. Inapplicability of Article 6 to Tax Matters...................29
ARTICLE 7
CERTAIN OTHER AGREEMENTS
SECTION 7.01. Intercompany Accounts.........................................29
SECTION 7.02. Trademarks; Trade Names.......................................30
SECTION 7.03. Further Assurances and Consents...............................31
SECTION 7.04. Noncompetition and Non-Solicitation...........................31
SECTION 7.05. Third Party Beneficiaries.....................................32
SECTION 7.06. Intellectual Property Rights and Licenses.....................32
SECTION 7.07. Insurance.....................................................32
SECTION 7.08. Prohibition on Certain Sales..................................34
SECTION 7.09. Brazilian Certificate of Foreign Capital Registration.........34
ARTICLE 8
MISCELLANEOUS
SECTION 8.01. Notices.......................................................34
SECTION 8.02. Amendments; No Waivers........................................36
SECTION 8.03. Expenses......................................................36
SECTION 8.04. Successors and Assigns........................................37
SECTION 8.05. Governing Law.................................................37
SECTION 8.06. Counterparts; Effectiveness...................................37
SECTION 8.07. Entire Agreement..............................................37
ii
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PAGE
----
SECTION 8.08. Tax Sharing Agreement; Set-Off; Payment of After-Tax
Amounts; Certain Transfer Taxes...............................37
SECTION 8.09. Jurisdiction..................................................38
SECTION 8.10. Pre-Litigation Dispute Resolution.............................39
SECTION 8.11. Severability..................................................39
SECTION 8.12. Survival......................................................39
SECTION 8.13. Captions......................................................39
SECTION 8.14. Specific Performance..........................................39
Schedule A -- Spinco Assets - Contracts
Schedule B -- Spinco Assets - Other Assets, Properties and
Business
Schedule C -- Spinco Group Liabilities
Schedule D -- Spinco Intellectual Property Rights
Schedule E -- Spinco Litigation
Schedule F -- Aetna Assets - Contracts
Schedule G -- Aetna Assets - Other Assets, Properties and
Business
Schedule H -- Aetna Group Liabilities
Schedule I -- Aetna Intellectual Property Rights
Schedule 2.01 -- Contribution of Contributed Subsidiaries
Schedule 7.01 -- Existing Arrangements
Schedule 7.04(a) -- Noncompetition
Schedule 7.07 -- Group Policies
Exhibit A -- Employee Benefits Agreement
Exhibit B -- Term Sheet for Software Licensing Agreement
Exhibit C -- Tax Sharing Agreement
Exhibit D -- Term Sheet for Trademark Assignment Agreement
Exhibit E -- Term Sheet for Trademark Licensing Agreement
Exhibit F -- Term Sheet for Transition Services Agreement
Exhibit G -- Term Sheet for Lease Agreement
Exhibit H -- Term Sheet for CityPlace Agreement
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FORM OF DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT dated as of [ ], 2000 (this "Agreement")
between Aetna Inc., a Connecticut corporation ("Aetna"), and U.S. Healthcare
Inc., a Pennsylvania corporation ("Spinco").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Spinco is presently a wholly-owned subsidiary of Aetna;
WHEREAS, the Board of Directors of Aetna has determined that it is in the
best interests of Aetna, its shareholders and Spinco that all outstanding
shares of Spinco Common Stock (as defined below) be distributed pro rata to
Aetna's shareholders (provided that all conditions precedent to the
Distribution have been satisfied) and that, pursuant to an agreement and plan
of restructuring and merger dated as of July 19, 2000 ("Merger Agreement")
among Aetna, ING Groep N.V., a corporation organized under the laws of the
Netherlands ("Acquiror"), ING America Insurance Holdings, Inc., a Delaware
corporation and an indirect wholly- owned subsidiary of Acquiror ("Parent"),
and ANB Acquisition Corp., a Connecticut corporation and a wholly-owned
subsidiary of Parent ("Merger Subsidiary"), Merger Subsidiary be merged with
and into Aetna, as a result of which Aetna will become a wholly-owned
subsidiary of Parent (the "Merger");
WHEREAS, for United States federal income Tax (as defined below) purposes,
it is intended that the holders of common stock of Aetna be treated as having
received cash consideration from Parent and the Spinco Common Stock in
redemption and disposition of the outstanding Aetna Common Stock (as defined
below);
WHEREAS, Aetna is concurrently herewith entering into, or proposes to
enter into prior to or on the Distribution Date (as defined below), the
Ancillary Agreements (as defined below); and
WHEREAS, the parties hereto desire to set forth herein the principal
corporate transactions to be effected in connection with the Distribution and
certain other matters relating to the relationship and the respective rights
and obligations of the parties following the Distribution.
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have the
following meanings:
"Acquiror" has the meaning set forth in the recitals.
"Action" means any claim, suit, action, arbitration, inquiry,
investigation or other proceeding of any nature (whether criminal, civil,
legislative, administrative, regulatory, prosecutorial or otherwise) by or
before any arbitrator or Governmental Entity or similar Person or body.
"Aeltus Name Rights" means all of Aetna's right, title and interest in and
use of the "Aeltus" name and any derivative thereof including, without
limitation, all trademarks, service marks, trade dress, logos, domain names,
trade names and corporate names (whether or not registered) in the United
States and all other nations throughout the world, including all variations,
derivations, combinations, registrations and applications for registration of
the foregoing and all goodwill associated therewith.
"Aetna" has the meaning set forth in the recitals.
"Aetna Assets" means all assets as reflected in the unaudited pro forma
consolidated balance sheet as of March 31, 2000 of Aetna and its Subsidiaries
set forth in Section 5.1(e)(iv) of the Company Disclosure Schedule accompanying
the Merger Agreement (except for those assets disposed of in accordance with or
expressly permitted by the Merger Agreement) together with all other assets,
leases, properties and businesses, of every kind and description, wherever
located, real, personal or mixed, tangible or intangible, owned, held or used
by (i) Aetna, Aetna Services or any member of the Spinco Group that relate
primarily to the Aetna Business or (ii) any Aetna Subsidiary. Without
limitation and for the avoidance of doubt, the following items are, and shall
be, "Aetna Assets" (and are not, and shall not be, Spinco Assets):
(a) all rights of the Aetna Group (but excluding any and all rights of the
Spinco Group) under the Merger Agreement, the Confidentiality Agreement and the
Distribution Documents;
(b) all Aetna Intellectual Property Rights;
(c) all rights under the Contracts listed on Schedule F hereto;
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(d) the other assets, properties and business listed on Schedule G hereto;
and
(e) all goodwill associated with the Aetna Business or the Aetna Assets,
together with the right to represent to third parties that Aetna Group is the
successor to the Aetna Business.
"Aetna Benefits Liabilities" means the AI Assumed Liabilities as defined
in the Employee Benefits Agreement.
"Aetna Business" means the businesses and operations of the Aetna
Subsidiaries as conducted as of the date hereof.
"Aetna China Name Rights" shall have the meaning assigned to such term in
the Merger Agreement.
"Aetna Common Stock" means the common stock, par value $.01 per share, of
Aetna.
"Aetna Environmental Liabilities" means any and all Liabilities of or
relating to (i) Aetna, Aetna Services or any member of the Spinco Group to the
extent arising from the conduct of, in connection with or relating to, the
Aetna Business (as currently or previously conducted), or the ownership or use
of assets or property in connection therewith (including, without limitation,
offsite disposal), or (ii) any Aetna Subsidiary; which, in either case, arise
under or relate to Environmental Laws, but shall exclude any such Liabilities
to the extent arising from the conduct of, in connection with or relating to
the Spinco Assets or the Spinco Business.
"Aetna Group" means Aetna, Aetna Services, the Aetna Subsidiaries and all
successors to each of those Persons.
"Aetna Group Liabilities" means, except as otherwise specifically provided
in the Merger Agreement or any Distribution Document, all of the following
Liabilities (including Liabilities arising out of any litigation), whether
arising before, at or after the Distribution Time: (i) all Liabilities of or
relating to Aetna, Aetna Services or any member of the Spinco Group to the
extent arising from the conduct of, in connection with or relating to, the
Aetna Business, or the ownership or use of assets or property in connection
therewith, (ii) all Liabilities of or relating to any Aetna Subsidiary except
to the extent arising from the conduct of, in connection with or relating to
the Spinco Assets or the Spinco Business or ownership or use thereof, (iii) the
Liabilities set forth on Schedule H hereto, (iv) the Company Debt, and (v) the
Aetna Benefits Liabilities. Without
3
<PAGE>
limiting the generality of the foregoing, and except as specified in the next
sentence, "Aetna Group Liabilities" shall include, without limitation, the
following Liabilities whether arising before, at or after the Distribution
Time: (a) any Liabilities arising in connection with the Aetna Assets, (b) the
Aetna Environmental Liabilities, (c) all Liabilities arising under Contracts
entered into by any of the Aetna Subsidiaries, including, without limitation,
any such Contract relating to the acquisition or disposition of assets,
securities or businesses (other than any such Contracts relating to the
Domestic P&C Business) and (d) all other Liabilities of the Aetna Group under
the Merger Agreement or any Ancillary Agreement. However, notwithstanding the
foregoing, "Aetna Group Liabilities" shall exclude any and all: (1) Liabilities
for Taxes (since such Liabilities shall be governed by the Tax Sharing
Agreement), and (2) other Liabilities to the extent specifically retained or
assumed by the Spinco Group.
"Aetna Indemnitee" has the meaning set forth in Section 4.01(a).
"Aetna Intellectual Property Rights" means all Intellectual Property
Rights (i) owned by a member of the Aetna Group or the Spinco Group or (ii)
owned by a third party and licensed or sublicensed to a member of the Aetna
Group or the Spinco Group, in either case held for use or used primarily in the
conduct of the Aetna Business including, without limitation, the Aetna China
Name Rights, the Aeltus Name Rights and the Intellectual Property Rights listed
on Schedule I hereto, but excluding the Aetna Name Rights.
"Aetna Name Rights" has the meaning set forth in this Section 1.01 in the
definition of "Spinco Intellectual Property Rights".
"Aetna Services" means Aetna Services, Inc., a Connecticut corporation.
"Aetna Shareholders" means the holders of the Aetna Common Stock.
"Aetna Subsidiaries" means (i) the direct and indirect Subsidiaries of
Aetna Services other than the Contributed Subsidiaries (and, subject to
obtaining all required approvals, shall include Pacific Aetna Life Insurance
Ltd., if and from such time as the joint venture interest in such company held
by Aetna Life Insurance Company is transferred to another Aetna Subsidiary),
(ii) the respective direct and indirect Subsidiaries of the Persons referred to
in clause (i) and (iii) the respective minority ownership interests of the
Persons referred to in clauses (i) and (ii).
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of
the Exchange Act (as defined herein) as of the date hereof, provided however,
that except when referred to as an "Existing Affiliate," for purposes of this
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Agreement, no member of one Group shall be treated as an Affiliate of any
member of the other Group.
"Agreement" has the meaning set forth in the recitals.
"Ancillary Agreements" means each of the Chinese Mark Agreement, Employee
Benefits Agreement, the Lease Agreement, the CityPlace Agreement, the Software
Licensing Agreement, the Tax Sharing Agreement, the Trademark Assignment
Agreement, the Trademark Licensing Agreement and the Transition Services
Agreement.
"Business Day" means any day other than a Saturday, Sunday or one on which
banks are authorized or required by law to close in New York, New York or
Hartford, Connecticut.
"Chinese Mark Agreement" shall have the meaning assigned to such term in
the Merger Agreement.
"CityPlace Agreement" means the agreement to be entered into on or before
the Distribution Date between Aetna (or Aetna Services) and Spinco (or one of
its Affiliates, in which case Spinco shall guarantee the obligations of such
Affiliate) in respect of the CityPlace property, reflecting the terms set forth
on Exhibit H hereto.
"Commission" means the Securities and Exchange Commission.
"Company Debt" shall have the meaning assigned to the term "Long Term
Debt" in the Merger Agreement.
"Confidentiality Agreement" means the Confidentiality Agreement dated as
of May 25, 2000 between Parent and Aetna.
"Contracts" means any agreements, lease, license, contract, treaty, note,
mortgage, indenture, franchise, permit, concession, arrangement or other
obligation.
"Contributed Subsidiaries" means (i) Aetna Life Insurance Company, a
Connecticut corporation, Aetna Health and Life Insurance Company, a Connecticut
corporation, Aetna Risk Indemnity Company Limited, a Bermuda corporation, Aetna
Realty Investments I, Inc., a Connecticut corporation, AE Housing Corp, a
Connecticut corporation, Aetna Business Resources, Inc., a Connecticut
corporation, AE Fifteen, Incorporated, a Connecticut corporation, Luettgens
Limited, a Connecticut corporation, AUSHC Holdings, Inc., a
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Connecticut corporation, ASI Wings, L.L.C., a Delaware limited liability
company, Aetna Life & Casualty Bermuda Limited, a Bermuda corporation, Aetna
Foundation, Inc., a Connecticut non-stock corporation, Aelan Inc., a
Connecticut corporation, (ii) any subsidiaries formed for the purpose of
effecting the Restructuring, (iii) the respective direct and indirect
Subsidiaries of the Persons referred to in clauses (i) and (ii) and (iv) the
respective minority ownership interests of the Persons referred to in clauses
(i), (ii) and (iii).
"control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing;
"Damages" means, with respect to any Person, any and all damages
(including punitive and consequential damages), losses, Liabilities and
expenses incurred or suffered by such Person (including, but not limited to,
all expenses of investigation, all attorneys' and expert witnesses' fees and
all other out-of-pocket expenses incurred in connection with any Action or
threatened Action).
"Distribution" means the distribution by Aetna, pursuant to the terms and
subject to the conditions hereof, of all of the outstanding shares of Spinco
Common Stock to the Aetna Shareholders of record as of the Record Date.
"Distribution Agent" means First Chicago Trust Company of New York.
"Distribution Date" means the Business Day on which the Distribution is
effected.
"Distribution Documents" means this Agreement and the Ancillary Agreements
and any other agreements or documents entered into to effect the transactions
contemplated hereby or by the Ancillary Agreements (but excluding the
Confidentiality Agreement and the Merger Agreement).
"Distribution Time" means the time immediately before the Merger Effective
Time (as defined below).
"Domestic P&C Business" means the property and casualty insurance business
and operations formerly conducted by Aetna or any of its Former or Existing
Affiliates in the United States.
"Employee Benefits Agreement" means the Employee Benefits Agreement
substantially in the form attached as Exhibit A hereto to be entered into on or
before the Distribution Date between Aetna and Spinco.
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"Environmental Law" means any federal, state, local or foreign law
(including, without limitation, common law), treaty, judicial decision,
regulation, rule, judgment, order, decree, injunction, permit or governmental
restriction or requirement or any agreement with any Governmental Entity or
other third party, relating to human health and safety, the environment or to
pollutants, contaminants, wastes or chemicals or any toxic, radioactive,
ignitable, corrosive, reactive or otherwise hazardous substances, wastes or
materials.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Existing Affiliate" means any Affiliate of Aetna as of the date hereof
and not giving effect to this Agreement, the Restructuring or the Merger.
"Finally Determined" means, with respect to any Action, threatened Action
or other matter, that the outcome or resolution of that Action, threatened
Action or other matter either (i) has been decided through binding arbitration
or by a Governmental Entity of competent jurisdiction by judgment, order,
award, or other ruling or (ii) has been settled or voluntarily dismissed by the
parties pursuant to the dispute resolution procedure set forth in Section 8.10
or otherwise and, in the case of each of clauses (i) and (ii), the claimants'
rights to maintain that Action, threatened Action or other matter have been
finally adjudicated, waived, discharged or extinguished, and that judgment,
order, ruling, award, settlement or dismissal (whether mandatory or voluntary,
but if voluntary that dismissal must be final, binding and with prejudice as to
all claims specifically pleaded in that Action) is subject to no further
appeal, vacatur proceeding or discretionary review.
"Form 10" means the registration statement on Form 10 to be filed by
Spinco with the Commission to effect the registration of Spinco Common Stock
(as defined below) pursuant to the Exchange Act in connection with the
Distribution, as such registration statement may be amended from time to time.
"Former Affiliate" means any Person (as defined below) that, at any time
prior to the date hereof and without giving effect to this Agreement was, but
has ceased to be, an Affiliate of Aetna and/or Aetna Services.
"Governmental Entity" means any U.S. or non-U.S. governmental or
regulatory authority, agency, commission, tribunal, body or other governmental,
quasi-governmental or self-regulatory entity.
"Group" means, as the context requires, the Spinco Group (as defined
below) or the Aetna Group (as defined below).
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"Group Policies" means all Policies, current or past, which prior to the
Distribution Time are or at any time were maintained by or on behalf of or for
the benefit or protection of Aetna, any Existing Affiliate or any Former
Affiliate (or any of their predecessors) and/or one or more of the current or
past directors, officers, employees or agents of any of the foregoing
including, without limitation, the Policies identified on Schedule 7.07 hereto
but excluding any Policies under which any Aetna Subsidiary is the named
insured.
"Incentive Amount" shall have the meaning assigned to such term in writing
by Parent and Aetna.
"Indemnified Party" has the meaning set forth in Section 4.04.
"Indemnifying Party" has the meaning set forth in Section 4.04.
"Information Statement" means the information statement to be sent to each
Aetna Shareholder of record as of the Record Date in connection with the
Distribution.
"Insurance Proceeds" shall mean those monies (i) received by an insured
from an insurance carrier or (ii) paid by an insurance carrier on behalf of an
insured, in either case net of any applicable premium adjustment,
retrospectively-rated premium, deductible, retention, or cost of reserve paid
or held by or for the benefit of such insured.
"Insured Claims" shall mean those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Group
Policies, whether or not subject to premium adjustments, deductibles,
retentions, co-insurance, cost of reserve paid or held by or for the benefit of
the applicable insured(s), uncollectability or retrospectively-rated premiums,
but only to the extent that such Liabilities are within applicable Group Policy
limits, including aggregates.
"Intellectual Property Rights" means (i) inventions, whether or not
patentable, reduced to practice or made the subject of one or more pending
patent applications, (ii) national and multinational statutory invention
registrations, patents and patent applications (including all reissues,
divisions, continuations, continuations-in-part, extensions and reexaminations
thereof) registered or applied for in the United States and all other nations
throughout the world, and all improvements to the inventions disclosed in each
such registration, patent or patent application, (iii) trademarks, service
marks, trade dress, logos, domain names, trade names and corporate names
(whether or not registered) in the United States and all other nations
throughout the world, including all variations,
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derivations, combinations, registrations and applications for registration of
the foregoing and all goodwill associated therewith, (iv) copyrights (whether
or not registered) and registrations and applications for registration thereof
in the United States and all other nations throughout the world, including all
derivative works, moral rights, renewals, extensions, reversions or
restorations associated with such copyrights, now or hereafter provided by law,
regardless of the medium of fixation or means of expression, (v) computer
software (including source code, object code, firmware, operating systems and
specifications), (vi) trade secrets and, whether or not confidential, business
information (including pricing and cost information, business and marketing
plans and customer and supplier lists) and know-how (including manufacturing
and production processes and techniques and research and development
information), (vii) industrial designs (whether or not registered), (viii)
databases and data collections, (ix) copies and tangible embodiments of any of
the foregoing, in whatever form or medium, (x) all rights to obtain and rights
to apply for patents, and to register trademarks and copyrights, (xi) all
rights in all of the foregoing provided by treaties, conventions and common law
and (xii) all rights to sue or recover and retain damages and costs and
attorneys' fees for past, present and future infringement or misappropriation
of any of the foregoing.
"Law" means any applicable federal, state, local or foreign law, statute,
ordinance, directive, rule, regulation, judgment, order, injunction, decree,
arbitration award, agency requirement, license or permit of any Governmental
Entity.
"Lease Agreement" means the Lease Agreement to be entered into prior to or
as of the Distribution Date between Aetna (or an Affiliate of Aetna, in which
case the obligations of such Affiliate shall be guaranteed by Aetna) and Aetna
Life Insurance Company in respect of the property (the "Tower") situated at 151
Farmington Avenue, Hartford, Connecticut 06156 reflecting the terms set forth
on Exhibit G hereto.
"Liability" or "Liabilities" means any and all claims, debts, liabilities,
assessments, costs (including, with respect to matters under Environmental
Laws, removal costs, remediation costs, closure costs and expenses of
investigation and ongoing monitoring), deficiencies, charges, demands, fines,
penalties, damages, losses, disgorgements and obligations, of any kind,
character or description (whether absolute, contingent, matured, not matured,
liquidated, unliquidated, accrued, known, unknown, direct, indirect, derivative
or otherwise) whenever arising, including, but not limited to, all costs,
interest and expenses relating thereto (including, but not limited to, all
expenses of investigation, all attorneys' and expert witnesses' fees and all
other out-of-pocket expenses in connection with
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any Action or threatened Action) and expressly including those relating to an
Indemnified Party's own negligence or other misconduct.
"Licensed Marks and Names" has the meaning set forth in Section 7.02.
"Merger" has the meaning set forth in the recitals.
"Merger Agreement" has the meaning set forth in the recitals.
"Merger Effective Time" shall have the meaning assigned to the term
Effective Time in the Merger Agreement.
"Merger Subsidiary" has the meaning set forth in the recitals.
"NYSE" has the meaning set forth in Section 3.01(d).
"Parent" has the meaning set forth in the recitals.
"Permitted Trademark Period" means the three year period commencing on the
Distribution Date, subject to any limitations set forth in the Trademark
Licensing Agreement.
"Permitted Sales Proceeds" and "Permitted Sales" shall have the meanings
assigned to such terms in the Merger Agreement.
"Person" means any individual, corporation (including not-for-profit
corporations), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, Governmental Entity or other
entity of any kind or nature.
"Policies" means insurance policies and insurance contracts of any kind,
including, without limitation, primary, excess and umbrella policies, directors
and officers', errors and omissions, commercial general liability policies,
life and benefits policies and contracts, fiduciary liability, automobile,
aircraft, property and casualty, workers' compensation and employee dishonesty
insurance policies, bonds and self-insurance and captive insurance company
arrangements, together with the rights, benefits and privileges thereunder.
"Proxy Statement" means the proxy statement of Aetna to be filed with the
Commission pursuant to the Exchange Act in connection with the Merger.
"Record Date" means the date determined by Aetna's Board of Directors (or
by a committee of that board or any other Person acting under authority duly
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delegated to that committee or Person by Aetna's Board of Directors or a
committee of that Board) as the record date for determining the Aetna
Shareholders of record entitled to receive the Distribution.
"Representatives" has the meaning set forth in Section 6.06.
"Restated Spinco Charter" means the restated certificate of incorporation
of Spinco, which shall be in such form as the Board of Directors of Spinco
reasonably determines.
"Restructuring" means the contributions pursuant to Section 2.01 hereof,
the settlement of intercompany accounts and repayment of Short Term Debt (as
defined below) in accordance with Section 7.01 hereof, the Distribution and the
other transactions contemplated by this Agreement and the Ancillary Agreements.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Short Term Debt" means any indebtedness for borrowed money with a
maturity of less than one year at the time of issuance.
"Software Licensing Agreement" means the Software Licensing Agreement to
be entered into prior to or as of the Distribution Date between Aetna and
Spinco, reflecting the terms set forth on Exhibit B hereto.
"Spinco" has the meaning set forth in the recitals.
"Spinco Assets" means all assets, leases, properties and businesses, of
every kind and description, wherever located, real, personal or mixed, tangible
or intangible, owned, held or used by Aetna, Aetna Services or any member of
the Spinco Group, excluding the Aetna Assets. Without limitation and for the
avoidance of doubt, the following items are, and shall be, "Spinco Assets" (and
are not, and shall not be, Aetna Assets):
(a) all right, title and interest in the real property situated at
151 Farmington Avenue, Hartford, Connecticut 06156 (subject to the rights
of the Aetna Group under the Lease Agreement), together with all
buildings, fixtures, and improvements erected thereon;
(b) all rights of the Spinco Group (but excluding any and all rights
of the Aetna Group) under the Distribution Documents;
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(c) to the extent relating to the business, assets or employees of
any member of the Spinco Group, all rights of Aetna under the
Confidentiality Agreement and the confidentiality agreements entered into
by Aetna with potential purchasers of Aetna or certain of Aetna's
businesses during June and July 2000;
(d) all cash and cash equivalents, including all bank account
balances and petty cash, of Aetna and Aetna Services (provided, however,
that the cash positions of Aetna and Aetna Services cannot be increased or
decreased in a manner that violates the Merger Agreement);
(e) all Spinco Intellectual Property Rights;
(f) all rights under the Contracts listed on Schedule A hereto;
(g) the other assets, properties and business listed on Schedule B
hereto;
(h) the Permitted Sales Proceeds from the Permitted Sales and the
Incentive Amount; and
(i) all goodwill associated with the Spinco Group, the Aetna Group or
the Spinco Assets prior to the Distribution Time (excluding goodwill
associated with the Aetna Business or the Aetna Assets), together with the
right to represent to third parties that the Spinco Group is the successor
to all businesses and operations of the Spinco Group or the Aetna Group
other than the Aetna Business (it being agreed and understood between the
parties that this will preclude the Spinco Group from representing to
third parties that it is the successor to Aetna Group's financial services
and international businesses).
"Spinco Benefits Liabilities" means the AUSHC Retained Liabilities as
defined in the Employee Benefits Agreement.
"Spinco Business" means the businesses and operations of Spinco, its
Subsidiaries and the Contributed Subsidiaries, as conducted on the date hereof,
but taking into account the Restructuring.
"Spinco Common Stock" means the common stock, par value $.005 per share,
of Spinco.
"Spinco Environmental Liabilities" means any and all Liabilities of or
relating to (i) Aetna, Aetna Services or any member of the Spinco Group or (ii)
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the Spinco Business or the Spinco Assets (including, without limitation,
offsite disposal), which, in either case, arise under or relate to
Environmental Laws, excluding the Aetna Environmental Liabilities.
"Spinco Group" means Spinco, its direct and indirect Subsidiaries and the
Contributed Subsidiaries (including all successors to each of those Persons).
"Spinco Group Liabilities" means, except as otherwise specifically
provided in the Merger Agreement or any Distribution Document, all Liabilities
(including Liabilities arising out of any litigation), whether arising before,
at or after the Distribution Time, of or relating to (a) Aetna, Aetna Services
or any member of the Spinco Group, (b) any member of Aetna Group to the extent
arising from the conduct of, in connection with or relating to the Spinco
Assets or the Spinco Business or the ownership or use thereof, (c) or arising
out of the Domestic P&C Business or (d) the Contracts (x) filed as Exhibits
4.22 and 10.6 to the Aetna Annual Report on Form 10-K for the year ended
December 31, 1999 or (y) identified on Schedule F to which Aetna Life Insurance
and Annuity Company and one or more Affiliates of Lincoln National Corporation
are parties; in each case excluding the Aetna Group Liabilities. Without
limiting the generality of the foregoing, and except as specified in the next
sentence, "Spinco Group Liabilities" shall include, without limitation, the
following Liabilities whether arising before, at or after the Distribution
Time: (i) any Liabilities arising in connection with the Spinco Assets or the
Spinco Business, (ii) the Spinco Environmental Liabilities, (iii) the
Liabilities set forth on Schedule C hereto, (iv) the Spinco Litigation
Liabilities, (v) the Spinco Benefits Liabilities, (vi) all other Liabilities of
the Spinco Group under any Distribution Document, and (vii) except to the
extent otherwise provided in this Agreement, the Merger Agreement or in any of
the Ancillary Agreements, all Liabilities of the Spinco Group or the Aetna
Group arising (prior to the Merger Effective Time) out of the Distribution and
any of the other transactions contemplated by this Agreement or any of the
Ancillary Agreements. Notwithstanding the foregoing, "Spinco Group Liabilities"
shall exclude any and all: (1) Liabilities for Taxes (which Liabilities shall
be governed by the Tax Sharing Agreement) and (2) other Liabilities to the
extent specifically retained or assumed by the Aetna Group.
"Spinco Indemnitee" has the meaning set forth in Section 4.02(a).
"Spinco Intellectual Property Rights" means all Intellectual Property
Rights (i) owned by a member of the Spinco Group or the Aetna Group or (ii)
owned by a third party and licensed or sublicensed to a member of the Spinco
Group or the Aetna Group, in each case excluding the Aetna Intellectual
Property Rights but including without limitation:
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(a) all right, title and interest in and use of the "Aetna" name and any
derivative thereof including, without limitation, all trademarks, service
marks, trade dress, logos, domain names, trade names and corporate names
(whether or not registered) in the United States and all other nations
throughout the world, including all variations, derivations, combinations,
registrations and applications for registration of the foregoing and all
goodwill associated therewith, but excluding the Aetna China Name Rights and
the Aeltus Name Rights (collectively, the "Aetna Name Rights"); and
(b) the Intellectual Property Rights listed on Schedule D hereto.
"Spinco Litigation" means (i) the litigation pending as of the date hereof
in which Aetna or Aetna Services or one or more of their respective officers,
directors or employees is named a defendant (x) relating to, involving or
arising out of the Spinco Business and any new such cases which may be
commenced after the date hereof, (y) alleging violations of federal or state
securities laws by Aetna or (z) alleging breaches of fiduciary duties of the
Aetna directors under state law (in the case of clauses (y) and (z), the cases
set forth on Schedule E) but excluding, in each case, any such litigation which
relates primarily to the Aetna Business; and (ii) any litigation in which Aetna
or Aetna Services (or one or more of their respective officers, directors or
employees) is named a defendant on or after the date hereof alleging violations
of federal or state securities laws or breaches of fiduciary duties of the
Aetna directors at the Merger Effective Time under state law, in each case (x)
relating to or arising out of the Merger or the Restructuring and (y) arising
out of matters occurring before the Merger Effective Time. For the avoidance of
doubt, "Spinco Litigation" shall not include any Actions relating to or in
connection with Taxes, as such litigation is governed by the Tax Sharing
Agreement.
"Spinco Litigation Liabilities" means all Liabilities arising before, at
or after the Distribution Time, in connection with, relating to, or resulting
from the Spinco Litigation.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which at least a majority of the securities or other ownership
interests having by their terms 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 or controlled by such Person or by one or
more of its respective Subsidiaries or by such Person and any one or more of
its respective Subsidiaries.
"Tax" means Tax as such term is defined in the Tax Sharing Agreement.
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"Tax Sharing Agreement" means the Tax Sharing Agreement substantially in
the form attached as Exhibit C hereto to be entered into as of the Distribution
Date among Aetna, Parent and Spinco.
"Third-Party Claim" has the meaning set forth in Section 4.05.
"Trademark Assignment Agreement" means the Trademark Assignment Agreement
to be entered into as of the Distribution Date between Aetna and Spinco,
reflecting the terms set forth on Exhibit D hereto.
"Trademark Licensing Agreement" means the Trademark Licensing Agreement to
be entered into as of the Distribution Date between Aetna and Spinco,
reflecting the terms set forth on Exhibit E hereto.
"Transfer" has the meaning set forth in Section 2.02.
"Transition Services Agreement" means the Transition Services Agreement to
be entered into as of the Distribution Date between Aetna and Spinco,
reflecting the terms set forth on Exhibit F hereto.
ARTICLE 2
CONTRIBUTIONS AND ASSUMPTION OF LIABILITIES
SECTION 2.01. Contribution of Contributed Subsidiaries. Upon the terms and
subject to the conditions set forth in the Merger Agreement and the
Distribution Documents, effective prior to the Distribution Time, Aetna shall
contribute to Spinco all of the outstanding shares of capital stock of, or
other ownership interests in, each of the Subsidiaries in clause (i) and clause
(ii) of the definition of Contributed Subsidiaries in the manner described on
Schedule 2.01, subject to receipt of any necessary consents or approvals of
third parties or of Governmental Entities and subject to Section 7.03.
SECTION 2.02. Transfers of Certain Assets to Spinco Group. Upon the terms
and subject to the conditions set forth in the Merger Agreement or any
Distribution Document, except as otherwise expressly set forth therein,
effective prior to or as of the Distribution Time or as soon as practicable
after the Distribution Time, subject to receipt of any necessary consents or
approvals of third parties or of Governmental Entities and subject to Section
7.03, Aetna shall, or, if requested, shall cause the relevant member of Aetna
Group to, assign, contribute, convey, transfer and deliver ("Transfer") to
Spinco or to one or more of Spinco's wholly-owned Subsidiaries all of the
right, title and interest of Aetna
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or such member of the Aetna Group in and to all Spinco Assets that are not
owned, held or used by a Contributed Subsidiary, if any, as the same shall
exist on the Distribution Date or on such later date as a particular Transfer
may occur.
SECTION 2.03. Transfers of Certain Assets to Aetna Group. Upon the terms
and subject to the conditions set forth in the Merger Agreement or any
Distribution Document, except as otherwise expressly set forth therein,
effective prior to or as of the Distribution Time or as soon as practicable
after the Distribution Time, subject to receipt of any necessary consents or
approvals of third parties or of Governmental Entities and subject to Section
7.03, prior to the Distribution Time Aetna, and following the Distribution Time
Spinco, shall, or if requested, shall cause the relevant member of the Spinco
Group to, Transfer to Aetna or to one or more members of Aetna Group all of the
right, title and interest of Spinco or such member of the Spinco Group in and
to all Aetna Assets, if any, as the same shall exist on the Distribution Date
or on such later date as a particular Transfer may occur.
SECTION 2.04. Assumption of Certain Liabilities. (a) Upon the terms and
subject to the conditions set forth in the Merger Agreement or any Distribution
Document, except as otherwise expressly set forth therein, effective as of the
Distribution Time (or of the time of Transfer, if earlier, of the assets to
which such Liabilities are attributable), in partial consideration for the
Transfers pursuant to Section 2.02, Spinco hereby unconditionally (i) assumes
all Spinco Group Liabilities (it being understood that the Spinco Benefits
Liabilities are allocated and assumed pursuant to the Employee Benefits
Agreement) to the extent not then an existing obligation of the Spinco Group
and (ii) undertakes to pay, satisfy and discharge when due in accordance with
their terms all Spinco Group Liabilities.
(b) Upon the terms and subject to the conditions set forth in the Merger
Agreement or any Distribution Document, except as otherwise expressly set forth
therein, effective as of the Distribution Time (or of the time of Transfer, if
earlier, of the assets to which such Liabilities are attributable), in partial
consideration for the Transfers pursuant to Section 2.03, Aetna hereby
unconditionally (i) assumes all Aetna Group Liabilities (it being understood
that the Aetna Benefits Liabilities are allocated and assumed pursuant to the
Employee Benefits Agreement) to the extent not then an existing obligation of
the Aetna Group and (ii) undertakes to pay, satisfy and discharge when due in
accordance with their terms all Aetna Group Liabilities.
SECTION 2.05. Agreement Relating to Consents Necessary to Transfer Assets.
Notwithstanding anything in this Agreement to the contrary, this Agreement
shall not constitute an agreement to transfer or assign any asset or any claim
or right or any benefit arising thereunder or resulting therefrom if an
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attempted assignment thereof, without the necessary consent of a third party,
would constitute a breach or other contravention thereof or in any way
adversely affect the rights of Spinco, or any member of the Spinco Group, or
Aetna, or any member of the Aetna Group, thereunder. Spinco and Aetna shall
cooperate with each other, keep each other informed and will, subject to
Section 7.03, use their reasonable best efforts to obtain the consent of any
third party or any Governmental Entity, if any, required in connection with the
transfer or assignment pursuant to Sections 2.02 or 2.03 of any such asset or
any claim or right or any benefit arising thereunder. Until such required
consent is obtained, or if such consent cannot be obtained or an attempted
assignment thereof would be ineffective or would adversely affect the rights of
the transferor thereunder so that the intended transferee would not in fact
receive substantially all such rights, Spinco and Aetna will cooperate in a
mutually agreeable arrangement under which the intended transferee would obtain
the benefits and assume the obligations thereunder in accordance with this
Agreement, including (but not limited to) sub-contracting, sub-licensing or
sub-leasing to such transferee, or under which the transferor would enforce for
the benefit of the transferee and (except as otherwise provided herein or in
any Ancillary Agreement) at the transferee's expense any and all rights of the
transferor against, with the transferee assuming the transferor's obligations
to, each third party thereto. In the case of any Transfer involving a third
party consent, the transferor shall not agree to any terms of transfer (without
the prior written consent of the transferee) which have the effect of
materially altering the rights or benefits arising under any of the particular
Spinco Assets or the Aetna Assets, as the case may be subject to the Transfer.
ARTICLE 3
THE DISTRIBUTION
SECTION 3.01. Cooperation Prior to the Distribution. (a) As promptly as
practicable after the date of this Agreement, Aetna and Spinco shall prepare,
and Spinco shall file with the Commission, the Form 10, which shall include or
incorporate by reference the Information Statement. Aetna and Spinco shall use
their reasonable best efforts to cause the Form 10 to become effective under
the Exchange Act as soon as practicable. After the Form 10 has become
effective, Aetna shall mail the Information Statement as promptly as
practicable to the Aetna Shareholders of record as of the Record Date.
(b) Aetna and Spinco shall cooperate in preparing, filing with the
Commission and causing to become effective any registration statements or
amendments thereto that are appropriate to reflect the establishment of or
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amendments to any employee benefit and other plans contemplated by the
Ancillary Agreements.
(c) Aetna and Spinco shall take all such action as may be necessary or
appropriate under the securities or blue sky laws of states or other political
subdivisions of the United States and shall take reasonable best efforts to
comply with all applicable foreign securities laws in connection with the
transactions contemplated hereby or by the Ancillary Agreements.
(d) Spinco shall prepare, file and pursue an application to permit the
listing of the Spinco Common Stock on the New York Stock Exchange ("NYSE").
SECTION 3.02. Aetna Board Action; Conditions Precedent to the
Distribution. Aetna's Board of Directors shall establish (or delegate authority
to establish) the Record Date and the Distribution Date and any appropriate
procedures in connection with the Distribution. In no event shall the
Distribution occur unless the following conditions shall have been satisfied:
(a) the Form 10 shall have become effective under the Exchange Act;
(b) the Spinco Common Stock to be delivered in the Distribution shall have
been approved for listing on the NYSE, subject to official notice of issuance;
(c) the Restated Spinco Charter shall be in effect;
(d) each of the Aetna Board of Directors and the Spinco Board of Directors
(i) shall have received an opinion, addressed and reasonably satisfactory to
each of them from an independent solvency firm selected by those boards of
directors, and (ii) shall otherwise be reasonably satisfied, (A) that after
giving effect to the Restructuring (x) neither Aetna nor Spinco will be
insolvent or will have unreasonably small capital or assets with which to
engage in their respective businesses, (y) each of Aetna and Spinco will be
able to pay its respective debts as they become due in the usual course of
business and (z) neither Aetna's nor Spinco's total assets will be less than
the sum of its respective total liabilities and (B) that the Distribution, when
effected in accordance with the terms of this Agreement and the Ancillary
Agreements, shall have been effected in accordance with the provisions of the
Connecticut Business Corporation Act relating to distributions and applicable
fraudulent transfer and fraudulent conveyance laws;
(e) the contributions referred to in Section 2.01, the transfers referred
to in Sections 2.02 and 2.03, and the assumptions of Liabilities referred to in
Section 2.04 of this Agreement shall have been effected;
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(f) each of the Ancillary Agreements shall have been duly executed and
delivered by the parties thereto; and
(g) each condition to the Merger set forth in Sections 7.1(a), (b) and
(c), 7.2 and 7.3 of the Merger Agreement shall have been satisfied or waived.
SECTION 3.03. The Distribution. Subject to the terms and conditions set
forth in this Agreement, (i) immediately prior to the Distribution Time, Aetna
shall deliver to the Distribution Agent, for the benefit of the Aetna
Shareholders of record on the Record Date, a stock certificate or certificates,
endorsed by Aetna in blank, representing all of the then-outstanding shares of
Spinco Common Stock owned by Aetna, (ii) the Distribution shall be effective as
of the Distribution Time and (iii) Aetna shall instruct the Distribution Agent
to distribute, on or as soon as practicable after the Distribution Date, to
each Aetna Shareholder of record as of the Record Date one share of Spinco
Common Stock (together with the associated preferred share purchase rights) for
every one share of Aetna Common Stock so held. Spinco agrees to provide all
certificates for shares of Spinco Common Stock that Aetna shall require (after
giving effect to Sections 3.04 and 3.05) in order to effect the Distribution.
The Merger and Distribution shall be effected such that the Merger
Consideration (as defined in the Merger Agreement) and the shares of Spinco
Common Stock to be distributed in the Distribution are payable and
distributable, as applicable, only to the same Aetna Shareholders.
SECTION 3.04. Stock Dividend. On or before the Distribution Date, Spinco
shall issue to Aetna as a stock dividend the number of shares of Spinco Common
Stock (together with the associated preferred share purchase rights) that are
required to effect the Distribution, as certified by the Distribution Agent. In
connection with the Distribution, Aetna shall deliver to Spinco for
cancellation all of the share certificates currently held by it representing
Spinco Common Stock.
SECTION 3.05. Fractional Shares. No certificates representing fractional
shares of Spinco Common Stock will be distributed in the Distribution. The
Distribution Agent will be directed to determine the number of whole shares and
fractional shares of Spinco Common Stock allocable to each Aetna Shareholder of
record as of the Record Date. Upon the determination by the Distribution Agent
of such number of fractional shares, as soon as practicable after the
Distribution Date, the Distribution Agent, acting on behalf of the holders
thereof, shall sell such fractional shares for cash on the open market in each
case at the then prevailing market prices and shall disburse to each holder
entitled thereto, in lieu of any fractional share, without interest, that
holder's ratable share of the proceeds of that sale, after making appropriate
deductions of the amount required, if any, to be withheld for United States
federal income Tax purposes.
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ARTICLE 4
INDEMNIFICATION AND OTHER MATTERS
SECTION 4.01. Spinco Indemnification of Aetna Group. (a) Subject to
Section 4.03, from and after the Distribution Date, Spinco shall indemnify,
defend and hold harmless each member of the Aetna Group, their Affiliates
(including, for the avoidance of doubt, Parent) and their respective officers,
directors and employees (each, a "Aetna Indemnitee") from and against any and
all Damages incurred or suffered by any Aetna Indemnitee arising out of (i) any
and all Spinco Group Liabilities and (ii) the breach by any member of the
Spinco Group of any obligation under any Distribution Document (subject to any
limitation set forth therein), other than the Tax Sharing Agreement (all
indemnities thereunder being governed by the specific terms of the Tax Sharing
Agreement).
(b) Subject to Section 4.03, from and after the Distribution Date, Spinco
shall indemnify, defend and hold harmless each Aetna Indemnitee and each
Person, if any, who controls any Aetna Indemnitee within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all Damages caused by any untrue statement or alleged untrue
statement of a material fact contained in the Form 10 or any amendment thereof
or the Information Statement or Proxy Statement (in each case as amended or
supplemented if Spinco shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except to the extent
that those Damages are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information that is furnished
to Spinco by Parent or any of its Affiliates (other than any member of the
Aetna Group) specifically for use therein.
SECTION 4.02. Aetna Indemnification of Spinco Group. (a) Subject to
Section 4.03, from and after the Distribution Date, Aetna shall indemnify,
defend and hold harmless each member of the Spinco Group, their Affiliates and
their respective officers, directors and employees (each, a "Spinco
Indemnitee") from and against any and all Damages incurred or suffered by any
Spinco Indemnitee arising out of (i) any and all Aetna Group Liabilities and
(ii) the breach by any member of the Aetna Group of any obligation under any
Distribution Document (subject to any limitation set forth therein), other than
the Tax Sharing Agreement (all indemnities thereunder being governed by the
specific terms of the Tax Sharing Agreement).
(b) Subject to Section 4.03, from and after the Distribution Date, Aetna
shall indemnify, defend and hold harmless each Spinco Indemnitee and each
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Person, if any, who controls any Spinco Indemnitee within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all Damages caused by any untrue statement or alleged untrue
statement of a material fact contained in the Form 10 or any amendment thereof
or the Information Statement or Proxy Statement (in each case as amended or
supplemented if Spinco shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in each case to the
extent, but only to the extent, that those Damages are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information that is furnished to Spinco by Parent or any of its Affiliates
(other than any member of the Aetna Group) specifically for use therein.
SECTION 4.03. Insurance and Third Party Obligations; Limitation on
Liability. (a) Upon indemnification of the Indemnified Party (as defined
below), the Indemnifying Party shall be subrogated to the rights of the
Indemnified Party against the insurer or other third party with respect to such
indemnified amount. It is expressly agreed that no insurer or any other third
party shall be (i) entitled to a benefit it would not be entitled to receive in
the absence of the foregoing indemnification provisions, (ii) relieved of the
responsibility to pay any Insured Claims or any other claims to which it is
obligated or (iii) entitled to any subrogation rights with respect to any
obligation hereunder.
(b) Each party shall use its reasonable best efforts to mitigate its
Damages and not to cause or worsen any Liability which would be a Liability of
the other party. If an Indemnified Party shall receive any amount of Insurance
Proceeds or any other amount from a third party in connection with a specific
Liability giving rise to indemnification hereunder (i) at any time subsequent
to the actual receipt of a payment in full indemnification of such Liability
hereunder, then such Indemnified Party shall reimburse the Indemnifying Party
for any such indemnification payment made up to the amount of such Insurance
Proceeds or other amounts actually received or (ii) at any time prior to the
receipt of any indemnification payment in respect of such Liability hereunder,
then the indemnification to be paid under Section 4.01 or 4.02 shall be paid
net of the amount of any such Insurance Proceeds or other amounts actually
received. Notwithstanding this Section 4.03, (x) in no event shall any
Indemnified Party be required (i) to take any action, or forebear from
exercising any right, under the Merger Agreement or any Distribution Document
or (ii) to take any action with respect to, make any demand under or claim any
coverage in connection with, any Policy, and (y) nothing herein shall permit
any Indemnifying Party to delay or refrain from making any payment to any
Indemnified Party because of the availability or alleged availability of any
Policy or Insurance Proceeds (provided
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that the foregoing shall not limit the subrogation rights of an Indemnifying
Party under Section 4.03(a)).
SECTION 4.04. Notice and Payment of Claims. If any Aetna Indemnitee or
Spinco Indemnitee (the "Indemnified Party") determines that it is or may be
entitled to indemnification by any party (the "Indemnifying Party") under this
Article 4 (other than in connection with any Action subject to Section 4.05),
the Indemnified Party shall deliver to the Indemnifying Party a written notice
specifying, to the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnified Party reasonably
believes it is entitled to be indemnified. Within 30 calendar days after
receipt of such notice, the Indemnifying Party shall pay the Indemnified Party
such amount in cash or other immediately available funds unless the
Indemnifying Party objects in writing to the claim for indemnification or the
amount thereof. In the event of such an objection or failure to pay by the
Indemnifying Party, the amount, if any, that is Finally Determined to be
required to be paid by the Indemnifying Party in respect of such indemnity
claim shall be paid by the Indemnifying Party to the Indemnified Party in cash
within 15 calendar days after such indemnity claim has been so Finally
Determined, with interest thereon at the prime rate of Citibank N.A. in effect
from time to time for the period commencing on the 30th day following receipt
of the initial notice of the claim from the Indemnified Party until the date of
actual payment (inclusive).
SECTION 4.05. Notice and Defense of Third-Party Claims. (a) Promptly (and
in any event within 10 Business Days) following the earlier of (i) receipt of
notice, whether by service of process or otherwise, of the commencement by a
third party of any Action against or otherwise involving any Indemnified Party
or (ii) receipt of information from a third party alleging the existence of a
claim against an Indemnified Party, in either case, with respect to which
indemnification may be sought pursuant to this Agreement (a "Third-Party
Claim"), the Indemnified Party shall give the Indemnifying Party written notice
thereof. The failure of the Indemnified Party to give notice as provided in
this Section 4.05 shall not relieve the Indemnifying Party of its obligations
under this Agreement, except to the extent that the Indemnifying Party is
actually and materially prejudiced by such failure to give notice.
(b) Within 30 calendar days after receipt of notice from the Indemnified
Party pursuant to Section 4.05(a), the Indemnifying Party may (by giving
written notice thereof to the Indemnified Party) elect at its option to, and
shall at the request of the Indemnified Party, assume the defense of such
Third-Party Claim at the Indemnifying Party's sole cost and expense unless the
Indemnifying Party objects in writing to such indemnification claim (in which
case the Indemnified Party may not require the Indemnifying Party to assume the
defense and the
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Indemnifying Party shall only assume the defense with the consent of the
Indemnified Party). During such 30-calendar day period, unless and until the
Indemnifying Party assumes the defense of a Third-Party Claim or objects in
writing, the Indemnified Party shall take such action as it deems appropriate,
acting in good faith, in connection with the Third-Party Claim; provided,
however, that the Indemnified Party shall not settle or compromise, or make any
offer to settle or compromise, the Third-Party Claim without the prior written
consent of the Indemnifying Party (which shall not be unreasonably withheld).
(c) If the Indemnifying Party assumes the defense of a Third-Party Claim,
(w) it shall keep the Indemnified Party timely informed of all significant
developments in connection therewith, (x) the defense shall be conducted by
counsel retained by the Indemnifying Party, provided that the Indemnified Party
shall have the right to participate in such proceedings and to be represented
by counsel of its own choosing at the Indemnified Party's sole cost and
expense; and (y) the Indemnifying Party may settle or compromise the
Third-Party Claim without the prior written consent of the Indemnified Party so
long as such settlement or compromise includes an unconditional release of the
Indemnified Party from all claims that are the subject of such Third-Party
Claim, provided that the Indemnifying Party may not agree to any such
settlement or compromise pursuant to which there is any finding or admission of
any violation of Law or pursuant to which any remedy or relief (including but
not limited to the imposition of a consent order, injunction or decree which
would restrict the future activity or conduct of the Indemnified Party or any
Subsidiary or Affiliate thereof), other than monetary damages for which the
Indemnifying Party shall be responsible hereunder, shall be applied to or
against the Indemnified Party, without the prior written consent of the
Indemnified Party (which shall not be unreasonably withheld).
(d) If the Indemnifying Party has not objected in writing to such
indemnification claim, and, if at the end of the 30-calendar day period
referred to in Section 4.05(b) the Indemnifying Party has not assumed the
defense of such claim, or, if earlier, beginning at such time as the
Indemnifying Party has declined in writing to assume the defense of a
Third-Party Claim, (x) the Indemnified Party will take such steps as it deems
appropriate to defend that Third-Party Claim and the defense shall be conducted
by counsel retained by the Indemnified Party, provided that the Indemnifying
Party shall have the right to participate in such proceedings and to be
represented by counsel of its own choosing at the Indemnifying Party's sole
cost and expense; and (y) the Indemnifying Party shall reimburse the
Indemnified Party on a current basis (and in any event within 30- calendar days
after the submission of invoices and bills by an Indemnified Party) for its
expenses of investigation, attorneys' and expert witnesses' fees and other
out-of-pocket expenses incurred in defending against such Third-Party Claim and
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the Indemnifying Party shall be bound by the result obtained with respect
thereto by the Indemnified Party; provided further, that the Indemnified Party
shall not settle or compromise, or make any offer to settle or compromise, the
Third-Party Claim without the prior written consent of the Indemnifying Party
(which shall not be unreasonably withheld).
(e) The Indemnifying Party shall pay to (or at the direction of) the
Indemnified Party in cash the amount, if any, for which the Indemnified Party
is entitled to be indemnified hereunder within 15 calendar days after such
Third Party Claim has been Finally Determined, in the case of an indemnity
claim as to which the Indemnifying Party has acknowledged liability or, in the
case of any indemnity claim as to which the Indemnifying Party has not
acknowledged liability, within 15 calendar days after such Indemnifying Party's
liability, if any, hereunder has been Finally Determined.
(f) Notwithstanding any other provision of this Agreement, Aetna
acknowledges and agrees that Spinco shall (solely at its own cost and expense)
assume and continue the defense of all the Spinco Litigation and that, as long
as such settlement or compromise includes an unconditional release of all Aetna
Indemnitees, Spinco shall be permitted to settle or compromise such Actions
without the consent of Aetna or any of its Affiliates provided that Spinco may
not agree to any such settlement or compromise pursuant to which there is any
finding or admission of any violation of Law or pursuant to which any remedy or
relief (including but not limited to the imposition of a consent order,
injunction or decree which would restrict the future activity or conduct of the
Aetna Indemnitees), other than monetary damages for which the Spinco shall be
responsible hereunder, shall be applied to or against the such Aetna
Indemnitee, without the prior written consent of such Aetna Indemnitee (which
shall not be unreasonably withheld); provided, further, that Spinco shall use
its reasonable best efforts to defend any Aetna Indemnitee and to cause any
Aetna Indemnitee to be dismissed with prejudice as a party to any pending or
future Spinco Litigation and, to the extent any Aetna Indemnitee believes, in
its reasonable judgment, that Spinco has failed to diligently pursue such
defense or dismissal, the Aetna Indemnitee shall be entitled (at its own cost
and expense) to independently move for or otherwise pursue such defense or
dismissal and to take such related actions as it may deem necessary or
appropriate in connection therewith. Spinco shall keep Aetna timely informed of
all significant developments with respect to the Spinco Litigation to which any
Aetna Indemnitee is a party.
(g) Subject to Article 6, each party shall cooperate, and cause their
respective Representatives to cooperate, in the defense or prosecution of any
Third-Party Claim and shall furnish or cause to be furnished such records,
information and testimony, and attend such conferences, discovery proceedings,
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hearings, trials or appeals, as may be reasonably requested in connection
therewith.
SECTION 4.06. Non-Exclusivity of Remedies. The remedies provided for in
this Article 4 are not exclusive and shall not limit any rights or remedies
which may otherwise be available to any Indemnified Party at law or in equity.
If the indemnification provided for in this Article 4 is unavailable to any
Indemnified Party (x) that is a member of the Aetna Group on the grounds that
such Indemnified Party was a former Affiliate of Spinco or (y) on other public
policy grounds, then the Indemnifying Party shall pay to the Indemnified
Party's parent such amount that represents the diminution in value to such
parent as a result of the Indemnifying Party's inability to so indemnify such
Indemnified Party (provided that such amount shall not exceed the amount that
would otherwise have been payable by the Indemnifying Party to such Indemnified
Party in respect of such claim pursuant to this Article 4).
ARTICLE 5
EMPLOYEE MATTERS AND TRANSITION SERVICES
SECTION 5.01. Employee Matters Generally. With respect to employee matters
and employee benefits arrangements, the parties hereto agree as set forth
herein and in the Employee Benefits Agreement and in the Tax Sharing Agreement.
SECTION 5.02. Transition Services Matters Generally. With respect to the
provision of certain transition services by either Group to the other Group
after the Distribution Time, the parties hereto agree as set forth herein and
in the Transition Services Agreement, the Lease Agreement and the Software
Licensing Agreement.
ARTICLE 6
ACCESS TO INFORMATION
SECTION 6.01. Provision of Corporate Records. Except as otherwise
specifically set forth in this Agreement or any Ancillary Agreement,
immediately prior to or as soon as practicable following the Distribution Date,
each Group shall provide to the other Group all documents, Contracts, books,
records and data (including but not limited to minute books, stock registers,
stock certificates and documents of title) in its possession relating primarily
to the other Group or its
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business, assets and affairs (after giving effect to the transactions
contemplated hereby); provided that if any such documents, Contracts, books,
records or data relate to both Groups or the business and operations of both
Groups, each such Group shall provide to the other Group true and complete
copies of such documents, Contracts, books, records or data. Data stored in
electronic form shall be provided in the format in which it existed at the
Distribution Date, except as otherwise specifically set forth in this Agreement
or any Ancillary Agreement.
SECTION 6.02. Access to Information. From and after the Distribution Date,
each Group shall, for a reasonable period of time, afford promptly to the other
Group and its accountants, counsel and other designated Representatives
reasonable access during normal business hours to all documents, Contracts,
books, records, computer data and other data in such Group's possession
relating to such other Group or the business and affairs of such other Group
(after giving effect to the transactions contemplated hereby) (other than data
and information subject to (i) an attorney/client or other privilege that is
not specifically subject to the provisions of this Article 6 or (ii) in the
case of access provisions in any joint defense arrangements between a member or
members of one Group and a member or members of the other Group, the terms of
the relevant joint defense agreement), insofar as such access is reasonably
required by such other Group, including, without limitation, for audit,
accounting, litigation, regulatory compliance and disclosure and reporting
purposes.
SECTION 6.03. Litigation Cooperation. From and after the Distribution
Date: (a) Each Group shall use all reasonable best efforts to make available to
the other Group and its accountants, counsel, and other designated
representatives, upon written request, its current and former directors,
officers, employees and representatives as witnesses, and shall otherwise
cooperate with the other Group, to the extent reasonably required in connection
with any Action or threatened Action arising out of either Group's business and
operations in which the requesting party may from time to time be involved.
(b) Each party hereto shall promptly notify the other party hereto, upon
its receipt or the receipt by any of its Affiliates, of a request or
requirement (by oral questions, interrogatories, requests for information or
documents, subpoenas, civil investigative demands or other similar processes)
which relates to the business and operations of the other party (a "Request")
reasonably regarded as calling for the inspection or production of any
documents or other information in its possession, custody or control, as
received from any Person that is a party in any Action, or in the event the
Person delivering the Request is not a party to such Action, as received from
such Person. In addition to complying with the applicable provisions of Section
6.06, each party shall assert and maintain, or cause its Affiliates to assert
and maintain, any applicable claim to privilege,
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immunity, confidentiality or protection in order to protect such documents and
other information from disclosure, and shall seek to condition any disclosure
which may be required on such protective terms as may be appropriate. No party
may waive, undermine or fail to take any action necessary to preserve an
applicable privilege without the prior written consent of the affected party
hereto (or any affected Affiliate or Affiliates of any such party) except, in
the opinion of such party's counsel, as required by law.
(c) Aetna, on its own behalf and on behalf of all of its Affiliates,
hereby waives any conflict which might preclude counsel currently representing
Aetna, Spinco or any of their respective Affiliates from representing Spinco
and/or any of its Affiliates following the Distribution Date in connection with
the Spinco Litigation existing at the Merger Effective Time.
(d) Aetna and Spinco shall enter into such joint defense agreements, in
customary form, as Aetna and Spinco shall determine are advisable.
SECTION 6.04. Reimbursement. Except to the extent that any member of one
Group is obligated to indemnify any member of the other Group under Article 4
for that cost or expense, each Group providing information or witnesses to the
other Group, or otherwise incurring any expense in connection with cooperating,
under Sections 6.01, 6.02 or 6.03 shall be entitled to receive from the
recipient thereof, upon the presentation of invoices therefor, payment for all
out-of-pocket costs and expenses that may be incurred in providing such
information, witnesses or cooperation.
SECTION 6.05. Retention of Records. From and after the Distribution Date,
except as otherwise required by law or agreed to in writing, each party shall,
and shall cause the members of its respective Group to, retain all information
relating to the other Group's business and operations in accordance with the
then general practice of such party with respect to information relating to its
own business and operations. Notwithstanding the foregoing, any party may
destroy or otherwise dispose of any such information at any time, provided
that, prior to such destruction or disposal, (i) such party shall provide not
less than 90 calendar days' prior written notice to the other party, specifying
the information proposed to be destroyed or disposed of and the scheduled date
for such destruction or disposal, and (ii) if the recipient of such notice
shall request in writing prior to the scheduled date for such destruction or
disposal that any of the information proposed to be destroyed or disposed of be
delivered to such requesting party, the party proposing the destruction or
disposal shall promptly arrange for the delivery of such of the information as
was requested at the expense of the requesting party.
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SECTION 6.06. Confidentiality. From and after the Distribution Date, each
party shall hold and shall cause its Affiliates and their respective directors,
officers, employees, counsel, accountants, agents, consultants, advisors and
other authorized representatives ("Representatives") to hold in strict
confidence all documents and other information (other than any such documents
and other information relating solely to the business or affairs of such party)
concerning the other party and/or its Affiliates ("Confidential Information")
unless such party is compelled to disclose such documents and/or other
information by judicial or administrative process or, in the opinion of its
counsel, by other requirements of law or the rules of any applicable stock
exchange. Confidential Information shall not include such documents and/or
other information which can be shown to have been (A) in the public domain
through no fault of such party, (B) lawfully acquired after the Distribution
Date on a non-confidential basis from other sources or (C) acquired or
developed independently by such party without violating this Section 6.06 or
the Confidentiality Agreement. Notwithstanding the foregoing, such party may
disclose such Confidential Information to its Representatives so long as such
Persons are informed by such party of the confidential nature of such
Confidential Information and are directed by such party to treat such documents
and/or other information confidentially. In the event that such party or any of
its Representatives is requested or required (by oral questions,
interrogatories, requests for information or documents, subpoenas, civil
investigative demands or other similar processes) to disclose any of the
Confidential Information, such party will promptly notify the other party so
that the other party may seek a protective order or other remedy or waive such
party's compliance with this Section 6.06. Such party shall exercise reasonable
best efforts to preserve the confidentiality of the Confidential Information,
including, but not limited to, by cooperating with the other party to obtain an
appropriate protective order or other reliable assurance that confidential
treatment will be accorded the Confidential Information. If, in the absence of
a protective order or other remedy or the absence of receipt of a waiver of the
other party, such party or any of its Representatives is nonetheless legally
compelled to disclose any of the Confidential Information, such party or such
Representative may disclose only that portion of the Confidential Information
which is legally required to be disclosed. Such party agrees to be responsible
for any breach of this Section 6.06 by it and/or its Representatives.
SECTION 6.07. Preservation of Privilege. The parties hereto recognize that
as a consequence of the transactions contemplated by this Agreement or the
Merger Agreement or the Ancillary Agreements, the parties may have common
interests in the defense of certain pending or threatened litigation which may
necessitate the exchange between the parties or their counsel of documents or
other information that is subject to the attorney-client privilege, the work
product doctrine or other legally recognized privileges, protections or
immunities from
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discovery. Each party agrees to take in addition to, and not in limitation of,
its obligations under Section 6.03(b) all reasonable best and necessary efforts
to protect and maintain, and to cause its Affiliates to protect and maintain,
any applicable claim to privilege, immunity, protection or confidentiality in
order to protect such documents and other information from improper disclosure
or use. In addition to, and not in limitation of, its obligations under Section
6.03(b) and without limiting the generality of the foregoing, and to the
maximum extent permitted by law, none of the parties or their respective
Affiliates may waive or undermine, or fail to defend in a commercially
reasonable manner, any privilege or protection or take or fail to take any
other commercially reasonable action (a) that could result in the disclosure of
any common-interest or joint-defense materials to any Person that is neither a
party to this Agreement nor an Affiliate of any such party or (b) that would
have the effect of waiving or undermining such privilege or protection, in
either case, without the prior written consent of the affected party and any
affected Affiliate of such affected party.
SECTION 6.08. Inapplicability of Article 6 to Tax Matters. Notwithstanding
anything to the contrary in this Article 6, this Article 6 shall not apply with
respect to documents, other information and/or other matters relating to Taxes,
all of which shall be governed by the Tax Sharing Agreement.
ARTICLE 7
CERTAIN OTHER AGREEMENTS
SECTION 7.01. Intercompany Accounts. (a) Except as otherwise specifically
set forth herein or in any of the Ancillary Agreements or in the Merger
Agreement, (i) all intercompany loan balances in existence as of the
Distribution Time between any member of the Aetna Group and any member of the
Spinco Group will be settled or paid in cash or other immediately available
funds prior to or as of the Distribution Time and (ii) all intercompany
accounts receivable and accounts payable between any member of one Group and
any member of another Group in existence at the Distribution Time shall be paid
in full, in cash or other immediately available funds, by the party or parties
owing such obligations as soon as practicable (but in no event more than 30
calendar days after the Distribution Time). It is understood and agreed that
all or a portion of the intercompany loan balances owed by Spinco to Aetna
Services will be paid in cash by Spinco.
(b) At or prior to the Distribution Time, Aetna shall repay or cause to be
repaid all Short Term Debt of any member of the Aetna Group, other than (i) not
more than $17.4 million aggregate principal amount (together with accrued and
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unpaid interest thereon) of Short Term Debt issued by Cruz Blanca S.A., AFP
Santa Maria S.A., Aetna Credito Hipotecario S.A., and Aetna Life Insurance
Company of America, Taiwan Branch, and (ii) any Short Term Debt of any
Person that is not a Subsidiary of Aetna.
(c) Except as otherwise contemplated hereby or as set forth on Schedule
7.01 or in any of the other Ancillary Agreements or in the Merger Agreement,
all prior agreements and arrangements, including those relating to goods,
rights or services provided or licensed, between any member of the Spinco Group
and any member of the Aetna Group shall be terminated effective as of the
Distribution Time, if not previously terminated. No such agreements or
arrangements shall be in effect after the Distribution Time unless embodied in
this Agreement, the Ancillary Agreements or set forth on Schedule 7.01.
SECTION 7.02. Trademarks; Trade Names. (a) Prior to the Distribution Time,
Aetna and Spinco will enter into the Trademark Assignment Agreement, the
Chinese Mark Agreement and the Trademark Licensing Agreement.
(b) From and after the Distribution Date, (i) Aetna will not, and will not
permit any of its Affiliates to, use any of (A) the Licensed Marks and Names,
except as specifically permitted by the Trademark License Agreement, and (B)
the Spinco Group's logos, marks or names (other than the Licensed Marks and
Names), and (ii) Spinco will not, and will not permit any of its Affiliates to,
use the Aetna China Name Rights except as specifically permitted by the Chinese
Mark Agreement.
(c) From and after the Distribution Date, Spinco will not, and will not
permit any of its Affiliates to, infringe upon the Aeltus Name Rights.
(d) As promptly as practicable following the Distribution Time, Aetna
will, and will cause Aetna Services to, file with the applicable Governmental
Entity amendments to their articles or certificate of incorporation or
otherwise take all action necessary to delete from their names the word "Aetna"
or any marks and names derived therefrom and shall do or cause to be done all
other acts, including the payment of any fees required in connection therewith,
to cause such amendments or other actions to become effective. Aetna will cause
all other members of the Aetna Group to take the foregoing actions with respect
to the names of the Aetna Subsidiaries as promptly as practicable prior to the
end of the Permitted Trademark Period.
(e) From and after the Distribution Date, each party agrees to cooperate
with the other party in connection with any regulatory matters relating to the
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Trademark Licensing Agreement, the Chinese Mark Agreement and the Trademark
Assignment Agreement.
(f) Aetna acknowledges that from and after the Distribution Date,
notwithstanding the use of the marks and names (the "Licensed Marks and Names")
licensed by Spinco as licensor pursuant to the Trademark Licensing Agreement,
the Aetna Name Rights will remain an asset of the Spinco Group and shall
include any goodwill associated with the use of the "Aetna" name, and any
derivative thereof, in combination with one or more of the Acquiror's existing
names or marks as permitted by the Trademark Licensing Agreement.
SECTION 7.03. Further Assurances and Consents. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto shall use its reasonable best efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by
this Agreement, including, without limitation, using its reasonable best
efforts to obtain any consents and approvals and to make any filings and
applications necessary or desirable in order to consummate the transactions
contemplated by this Agreement; provided that no party hereto shall be
obligated to pay any consideration therefor (except for filing fees and other
similar charges) to any third party from whom such consents or approvals are
requested or to take any action or omit to take any action if the taking of or
the omission to take such action would be unreasonably burdensome to the party,
its Group or its Group's business. The parties agree to enter into and execute
such additional Distribution Documents as may be reasonably necessary, proper
or advisable to effect the transactions contemplated by this Agreement or the
Ancillary Agreements, provided, however that such additional Distribution
Documents shall not diminish any of the rights granted or increase any of the
Liabilities assumed under this Agreement or the Ancillary Agreements.
SECTION 7.04. Noncompetition and Non-Solicitation. (a)(i) For a period of
three (3) years following the Merger Effective Time, neither Spinco nor any of
its Affiliates (after giving effect to the Distribution), will engage in the
following businesses conducted by the Aetna Group immediately prior to the
Merger Effective Time: (A) in the United States, underwriting and/or issuance
of defined contribution group annuities for pension plans maintained by
employer or similar groups pursuant to Section 401(k), 403(b) or 457 of the
U.S. Internal Revenue Code of 1986, as amended (or any successor law),
underwriting and/or issuance of individual annuities, providing investment
advisory or broker-dealer services, or the management of mutual funds, and (B)
in those jurisdictions outside of the United States listed in Schedule
7.04(a)(I), those businesses specified with respect
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to each such jurisdiction ((A) and (B) collectively, the "Prohibited
Businesses"), and (ii) for an additional period of 12 months, to the extent
that Spinco or any of its Affiliates (after giving effect to the Distribution)
engages directly or indirectly in any Prohibited Business, it will do so using
a brand other than "Aetna" (except and only to such extent as may be required
by Law); provided that the foregoing shall not prohibit Spinco or any of its
Affiliates from (x) conducting any of the activities set forth in Schedule
7.04(a)(II), (y) engaging in any Prohibited Business in any jurisdiction
specified in Schedule 7.04(a) if the Aetna Group ceases to engage in such
business in such jurisdiction, or (z) owning, acquiring or investing in any
Person, provided that if such Person derives in excess of 10% of its
consolidated gross revenue in the most recently completed four fiscal quarters
from business activities which would be restricted hereunder, Spinco will, or
will cause such Affiliate to, divest a portion of such business representing
such excess within 12 months of the acquisition date (unless, in the case of
the restriction specified in (i) above, such 12-month period would terminate
subsequent to the termination of the 3-year restriction period). It is
understood that the restrictions set forth in the immediately preceding
sentence will not apply to any Person that acquires (by acquisition, merger or
otherwise) an interest in Spinco or any of its Affiliates so long as such
Person was not an Affiliate of Spinco that was subject to such restrictions
prior to the aforementioned acquisition, merger or other acquisitive
transaction (it being further understood that, following the aforementioned
acquisition, merger or other acquisitive transaction, such restrictions will
continue to apply to Spinco and its Affiliates that were subject to such
restrictions prior to such acquisition, merger or other transaction).
(b) Except as otherwise permitted by any Ancillary Agreement, for a period
of two years from the Merger Effective Date, neither Group nor any of its
Affiliates shall, directly or indirectly, solicit or attempt to employ or
employ any employee of the other Group. Notwithstanding the foregoing, the
restriction set forth in the immediately preceding sentence shall not apply to
(i) with respect to all employees other than officers and other senior
management of any member of a Group, any Person who contacts such Group or any
of its Affiliates in response to general advertisements or searches or other
broad-based hiring methods or (ii) individuals who choose to leave for Good
Reason the employment of, or are terminated by, a Group without the other Group
having taken any action otherwise prohibited by this Section 7.04(b) . "Good
Reason" for the purposes of this Section 7.04(b) shall mean a significant or
long-term reduction in compensation, a relocation of more than 50 miles from
the employee's current place of employment or a material diminution of the
employee's duties and responsibilities.
(c) If any provision contained in this Section 7.04 shall for any reason
be held invalid, illegal or unenforceable in any respect, such invalidity,
illegality or
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unenforceability shall not affect any other provisions of this Section, but
this Section shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein. It is the intention of the parties
that if any of the restrictions or covenants contained herein is held to cover
a geographic area or to be for a length of time which is not permitted by
applicable law, or in any way construed to be too broad or to any extent
invalid, such provision shall not be construed to be null, void and of no
effect, but to the extent such provision would be valid or enforceable under
applicable law, a court of competent jurisdiction shall construe and interpret
or reform this Section to provide for a covenant having the maximum enforceable
geographic area, time period and other provisions (not greater than those
contained herein) as shall be valid and enforceable under such applicable law.
In addition to and not in limitation of the parties' obligations under Section
8.14, each of the parties hereto acknowledges that the other party would be
irreparably harmed by any breach of this Section and that there would be no
adequate remedy at law or in damages to compensate such party for any such
breach. Each of the parties hereto agrees that the other party shall be
entitled to injunctive relief requiring specific performance by such party of
this Section, and consents to the entry thereof.
SECTION 7.05. Third Party Beneficiaries. Acquiror and Parent shall be
third party beneficiaries of this Agreement. Except as contemplated in the
preceding sentence, nothing contained in this Agreement is intended to confer
upon any Person or entity other than the parties hereto and their respective
successors and permitted assigns and Acquiror and Parent, any benefit, right or
remedies under or by reason of this Agreement, except that the provisions of
Article 4 shall inure to the benefit of the Spinco Indemnitees and the Aetna
Indemnitees.
SECTION 7.06. Intellectual Property Rights and Licenses. Except as
otherwise specifically set forth in this Agreement or in any of the other
Ancillary Agreements, neither Group shall have any right or license in or to
any technology, software, Intellectual Property Right or other proprietary
right owned, licensed or held for use by the other Group.
SECTION 7.07. Insurance. (a) The Spinco Assets shall include any and all
rights of an insured party under each of the Group Policies, subject to the
terms of such Group Policies and any limitations or obligations of Spinco
contemplated by this Section 7.07 or Schedule 7.07, specifically including
rights of indemnity and the right to be defended by or at the expense of the
insurer, with respect to all Actions and Liabilities incurred or claimed to
have been incurred prior to the Distribution Date by any party in or in
connection with the conduct of any of the Spinco Group or the Aetna Group or
their respective businesses and operations, and which Actions and Liabilities
may arise out of an insured or insurable
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occurrence under one or more of such Group Policies. With respect to all of the
applicable Group Policies, Spinco shall use its reasonable best efforts, at its
option, either (x) to cause Aetna and its Affiliates to be named or maintained
as additional insured parties thereunder to the extent of, or (y) to obtain a
run-off or tail coverage policy with respect to, in each case, their respective
insurable interests in respect of the Aetna Group Liabilities incurred or
claimed to have been incurred prior to the Distribution Date and insured
thereunder, and the Aetna Assets shall include such rights, to the extent they
relate to the Aetna Group Liabilities, of an additional insured party under
each such Group Policy or under such run-off or tail policy, as applicable,
subject to the terms of such Policy.
(b) Spinco shall administer all Group Policies. Where Aetna Group
Liabilities are covered under the Group Policies for periods prior to the
Distribution Date, or under any Group Policy covering claims made after the
Distribution Date with respect to an action, error, omission or occurrence
prior to the Distribution Date, then from and after the Distribution Date, upon
request from Aetna, Spinco shall claim coverage for Insured Claims under such
Group Policy as and to the extent that such insurance is available (subject to
Section 7.07(c)) up to the full extent of the applicable limits of liability of
such Group Policy.
(c) Spinco shall use its reasonable best efforts to cause Insurance
Proceeds received with respect to claims, costs and expenses under the Group
Policies (i) relating to Aetna Group Liabilities, to be paid directly to Aetna
(or the applicable member of the Aetna Group) and (ii) relating to the Spinco
Group Liabilities to be paid directly to Spinco (or the applicable member of
the Spinco Group). In the event Spinco has been unable to cause Insurance
Proceeds to be paid directly to a Aetna Group member in accordance with the
preceding sentence, or to cause Aetna and its Affiliates to be named or
maintained as additional insureds or to obtain run-off or tail policies in
accordance with the last sentence of Section 7.07(a), Spinco shall inform Aetna
of the reasons therefor and Aetna shall be entitled, at its own cost and
expense, to take such actions as may be necessary to achieve such payment or
such additional insured status or to obtain such run-off or tail policy (so
long as such actions are not materially adverse to Spinco). Payment of the
allocable portions of indemnity costs out of Insurance Proceeds resulting from
such Group Policies will be made by Spinco to the appropriate party upon
receipt from the insurance carrier (to the extent not paid directly to a Aetna
Group member pursuant to the first sentence of this Section 7.01(c)). In the
event that the aggregate limits on any Group Policies are exceeded by the
aggregate of outstanding Insured Claims by the parties hereto, the parties
shall agree on an equitable allocation of Insurance Proceeds based upon their
respective bona fide claims. Each party agrees to use reasonable best efforts
to maximize available coverage under those Group Policies applicable to such
34
<PAGE>
party, and to take all reasonable steps to recover from all other responsible
parties in respect of an Insured Claim to the extent coverage limits under a
Group Policy have been exceeded or would be exceeded as a result of such
Insured Claim. Notwithstanding any other provision of this Agreement, Spinco
shall not be required to renew, extend or expand the coverage available under
any of the Group Policies provided, that prior to any termination (or failure
to reinstate) such Group Policies with respect to coverage of any Aetna Group
Liabilities insured thereunder, Spinco shall afford Aetna the opportunity of
taking such commercially reasonable steps as may be necessary to maintain such
coverage in place.
SECTION 7.08. Prohibition on Certain Sales. Aetna agrees that for one year
from the Merger Effective Time, unless there is a material change at Acquiror
and its Subsidiaries, Aetna will not sell or permit to be sold the interests of
Aetna International, Inc. in Taiwan, Hong Kong and Malaysia; provided, that the
foregoing shall not limit the right of Aetna to sell minority interests in such
Subsidiaries.
SECTION 7.09. Brazilian Certificate of Foreign Capital Registration. Prior
to the Distribution Date, Aetna shall use its reasonable best efforts to
provide to Parent a copy of the Certificate of Foreign Capital Registration for
Sul America Aetna Seguros e Previdencia S.A., and if not prior to the
Distribution Date, Spinco shall provide such certificate to Parent within one
year from the Distribution Date.
ARTICLE 8
MISCELLANEOUS
SECTION 8.01. Notices. All notices and other communications to any party
hereunder shall be in writing (including telecopy or similar writing) and shall
be deemed given when received addressed as follows:
If to Aetna to:
Aetna Inc.
[ ]
[ ]
Telecopy: [ ]
Attention: [ ]
With copies to:
35
<PAGE>
Parent
in c/o IVY North American Insurance Corp.
5780 Powers Ferry Road, NW
Atlanta, Georgia 30327-4390
Attention: Michael W. Cunningham,
Executive Vice President &
Chief Financial Officer
Fax: 770-980-3303
B. Scott Burton
Senior Vice President &
Chief Counsel
Fax: 770-850-7660
and
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: Joseph B. Frumkin, Esq.
William D. Torchiana, Esq.
Fax: 212-558-3588
If to Spinco, to:
Spinco
[ ]
[ ]
Telecopy: [ ]
Attention: [ ]
With a copy to:
[counsel to come]
and
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: (212) 450-4800
Attention: Lewis B. Kaden
Any party may, by written notice so delivered to the other parties, change
the address to which delivery of any notice shall thereafter be made.
36
<PAGE>
SECTION 8.02. Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived if, and only if, such amendment or waiver is in
writing and signed, in the case of an amendment, by Aetna and Spinco, or in the
case of a waiver, by the party against whom the waiver is to be effective. In
addition, unless the Merger Agreement shall have been terminated in accordance
with its terms, any such amendment or waiver that is adverse in interest to any
member of the Aetna Group shall be subject to the written consent of Parent.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder 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 cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 8.03. Expenses. (a) All costs and expenses incurred by Aetna or
Spinco in connection with the preparation, execution and delivery of the
Ancillary Agreements and the consummation of the Distribution and the other
transactions contemplated hereby and therein (including the fees and expenses
of all counsel, accountants and financial and other advisors of both Groups in
connection therewith, and all expenses in connection with preparation, filing
and printing of the Form 10, the Information Statement and the Proxy Statement)
shall be paid by Spinco; provided that the Parent and its Affiliates shall pay
their own expenses, if any, incurred in connection with the Distribution and
Spinco shall pay all Transaction Expenses (as defined in the Merger Agreement),
in each case except as specifically provided otherwise herein, in the Merger
Agreement or any Ancillary Agreement.
(b) Each reference in this Agreement to expenses, fees and out-of-pocket
costs shall mean such expenses, fees and out-of-pocket costs as the party
incurring such expenses, fees or out-of-pocket costs would reasonably incur in
connection with its own business under circumstances where such expenses, fees
and out-of- pocket costs are not subject to reimbursement.
SECTION 8.04. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that neither party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of Parent and the other party
hereto. If any party or any of its successors or assigns (i) shall consolidate
with or merge into any other Person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger or (ii) shall
transfer all or substantially all of its properties and assets to any Person,
then, and in each such case, proper provisions shall be
37
<PAGE>
made so that the successors and assigns of such party shall assume all of the
obligations of such party under the Distribution Documents.
SECTION 8.05. Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware, without
regard to the conflict of laws rules thereof.
SECTION 8.06. Counterparts; Effectiveness. 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 shall become effective when each party hereto shall have
received a counterpart hereof signed by the other party hereto.
SECTION 8.07. Entire Agreement. This Agreement, the Merger Agreement, the
Confidentiality Agreement and the other Distribution Documents constitute the
entire understanding of the parties with respect to the subject matter hereof
and thereof and supersede all prior agreements, understandings and
negotiations, both written and oral, between the parties with respect to the
subject matter hereof and thereof. No representation, inducement, promise,
understanding, condition or warranty not set forth herein or in the
Confidentiality Agreement, the Merger Agreement or the other Distribution
Documents has been made or relied upon by any party hereto. To the extent that
the provisions of this Agreement are inconsistent with the provisions of any
other Ancillary Agreement, the provisions of such other Ancillary Agreement
shall prevail.
SECTION 8.08. Tax Sharing Agreement; Set-Off; Payment of After-Tax
Amounts; Certain Transfer Taxes. (a) Except as otherwise specifically provided
herein and not inconsistent with the Tax Sharing Agreement, this Agreement
shall not govern any Tax, and any and all claims, losses, damages, demands,
costs, expenses or liabilities relating to Taxes shall be exclusively governed
by the Tax Sharing Agreement.
(b) If, at the time Spinco is required to make any payment to Aetna or any
of its Affiliates under this Agreement, Aetna or any of its Affiliates owes
Spinco or any of its Affiliates any amount under this Agreement or any
Ancillary Agreement, then such amounts shall be offset and the excess shall be
paid by the party liable for such excess. Similarly, if at the time Aetna is
required to make any payment to Spinco or any of its Affiliates under this
Agreement, and Spinco or any of its Affiliates owes Aetna or any of its
Affiliates any amount under this Agreement or any Ancillary Agreement, then
such amounts shall be offset and the excess shall be paid by the party liable
for such excess.
38
<PAGE>
(c) If Aetna, Spinco or any of their respective post-Distribution
Affiliates makes a payment pursuant to Section 4.01 or 4.02 of this Agreement,
then such Person shall also pay the recipient of such payment the related
After- Tax Amount (as defined in the Tax Sharing Agreement). This Section
8.08(c) shall be interpreted in accordance with the principles set forth in the
Tax Sharing Agreement and shall be subject to the dispute resolution provisions
contained in Section 10.09 of the Tax Sharing Agreement.
(d) Except as otherwise provided in the Ancillary Agreements, all
transfer, documentary, sales, use, stamp and registration taxes and fees
(including any penalties and interest) incurred in connection with any of the
transactions described in Article 2 of this Agreement shall be borne and paid
equally by Spinco and Aetna. The party that is required by applicable law to
file any Return (as defined in the Tax Sharing Agreement) or make any payment
with respect to any of those taxes shall do so, and the other party shall
cooperate with respect to that filing or payment as necessary. The non-paying
party shall reimburse the paying party in accordance with this Section 8.08, as
appropriate, within 5 Business Days after it receives notice of the payment of
those taxes. This Section 8.08(d) shall be interpreted in accordance with the
principles set forth in the Tax Sharing Agreement and shall be subject to the
dispute resolution provisions contained in Section 10.09 of the Tax Sharing
Agreement.
SECTION 8.09. Jurisdiction. Except as otherwise expressly provided in this
Agreement, any Action seeking to enforce any provision of, or based on any
matter arising out of or in connection with, this Agreement or the transactions
contemplated hereby may be brought in the United States District Court for the
District of Delaware, and each of the parties hereby consents to the
jurisdiction of such court (and of the appropriate appellate courts therefrom)
in any such Action and irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to the laying of the
venue of any such Action in any such court or that any such Action which is
brought in any such court has been brought in an inconvenient forum. Process in
any such Action may be served on any party anywhere in the world, whether
within or without the jurisdiction of any such court. Without limiting the
foregoing, each party agrees that service of process on such party as provided
in Section 8.01 shall be deemed effective service of process on such party.
SECTION 8.10. Pre-Litigation Dispute Resolution. Prior to the bringing of
any Action against the other, senior officers of Aetna and Spinco shall confer,
consult and in good faith attempt for a period of 30 calendar days to resolve
any dispute between such parties relating to this Agreement or any of the
Ancillary Agreements (other than the Tax Sharing Agreement) without resort to
legal remedies.
39
<PAGE>
SECTION 8.11. Severability. If any one or more of the provisions contained
in this Agreement should be declared invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained in this Agreement shall not in any way be affected or impaired
thereby so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such a declaration, the parties shall modify this Agreement so as
to effect the original intent of the parties as closely as possible in an
acceptable manner so that the transactions contemplated hereby are consummated
as originally contemplated to the fullest extent possible.
SECTION 8.12. Survival. All covenants and agreements of the parties
contained in this Agreement and the Confidentiality Agreement shall survive the
Distribution Date indefinitely, unless a specific survival or other applicable
period is expressly set forth therein.
SECTION 8.13. Captions. The captions herein are included for convenience
of reference only and shall be ignored in the construction or interpretation
hereof.
SECTION 8.14. Specific Performance. Each party to this Agreement
acknowledges and agrees that damages for a breach or threatened breach of any
of the provisions of this Agreement would be inadequate and irreparable harm
would occur. In recognition of this fact, each party agrees that, if there is a
breach or threatened breach, in addition to any damages, the other nonbreaching
party to this Agreement, without posting any bond, shall be entitled to seek
and obtain equitable relief in the form of specific performance, temporary
restraining order, temporary or permanent injunction, attachment, or any other
equitable remedy which may then be available to obligate the breaching party
(i) to perform its obligations under this Agreement or (ii) if the breaching
party is unable, for whatever reason, to perform those obligations, to take any
other actions as are necessary, advisable or appropriate to give the other
party to this Agreement the economic effect which comes as close as possible to
the performance of those obligations (including, but not limited to,
transferring, or granting liens on, the assets of the breaching party to secure
the performance by the breaching party of those obligations).
40
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Distribution
Agreement to be duly executed by their respective authorized officers as of the
date first above written.
AETNA INC.
By:
------------------------------------
Name: [ ]
Title: [ ]
AETNA U.S. HEALTHCARE INC.
By:
------------------------------------
Name: [ ]
Title: [ ]
<PAGE>
ANNEX D
Donaldson, Lufkin & Jenrette
277 Park Avenue, New York, New York 10172
July 19, 2000
Board of Directors
Aetna Inc.
151 Farmington Avenue
Hartford, CT 06156
Dear Sirs and Madames:
You have requested our opinion as to the fairness from a financial point
of view to the holders of the outstanding shares of Common Stock (the
"Shares"), par value, $0.01 per share of Aetna Inc. (the "Company") of the
consideration to be received for the Shares in the merger of ANB Acquisition
Corp. ("Merger Subsidiary") into the Company (the "Merger") pursuant to the
terms of the Agreement and Plan of Restructuring and Merger, dated as of July
19, 2000 (the "Agreement"), by and among ING America Insurance Holdings, Inc.
("ING"), the Company, the Merger Subsidiary, a wholly owned subsidiary of ING
and, for limited purposes only, ING Groep N.V. Under the Agreement, following
the completion of: (i) the distribution of Spinco to holders of Shares, after
which the Company's principal assets will be its ownership of its domestic and
international financial services businesses (the "Financial Services
Businesses"), (ii) the distribution of any cash dividends to the Company from
Spinco and from the Company to the holders of Shares and (iii) the other
reorganization transactions contemplated by the Distribution Agreement (such
distribution, dividends and other reorganization transactions together, the
"Distribution"), Merger Subsidiary will merge into the Company and each Share
(other than Shares owned by ING, Merger Subsidiary or any other subsidiary of
ING, the Company or any subsidiary of the Company or owned by shareholders
exercising dissenters' rights) shall be converted into the right to receive an
amount in cash per Share equal to (x) $7.70 billion (i) minus the greater of
(A) $2.678 billion (subject to adjustment as stated in the Agreement) and (B)
the aggregate principal amount of all Long-Term Debt outstanding as of the
Effective Time to any Person (other than obligations for indebtedness set forth
in Section 4.1(a)(i) of the Company Disclosure Letter), (ii) plus the Net
Capital Contribution Amount, (iii) plus the Net Interest Accrual Amount and
(iv) minus the CitiPlace Accrual Amount divided by (y) the aggregate number of
outstanding Shares as of the Effective Time (the "Merger Consideration"). The
terms and conditions of the Merger are more fully set forth in the Agreement
and related documents. Capitalized terms used in this opinion without
definition are as defined in the Agreement.
In arriving at our opinion, we have reviewed the Agreement and the
exhibits thereto. We also have reviewed financial and other information that
was publicly available or furnished to us by the
<PAGE>
Aetna Inc.
Page 2 July 19, 2000
Company including information provided during discussions with management.
Included in the information provided during discussions with management were
certain financial projections of the Financial Services Businesses for the
period beginning January 1, 2000 and ending December 31, 2001 prepared by the
management of the Company. In addition, we have compared certain financial data
of the Company with similar data of various other companies whose securities
are traded in public markets, reviewed the historical stock prices and trading
volumes of the common stock of the Company, reviewed prices in certain other
business combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion. We have
commenced but have not completed the solicitation from other parties of
proposals to acquire the Financial Services Businesses or components thereof.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company, or that was
otherwise reviewed by us and have assumed that the Company is not aware of any
information prepared by it or its advisors that might be material to our
opinion that has not been made available to us. With respect to the financial
projections supplied to us, we have relied on representations that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Financial Services Businesses. We
have not assumed any responsibility for making an independent evaluation of any
assets or liabilities or for making any independent verification of any of the
information reviewed by us. We have relied on the tax advice the Company has
received from its tax advisers as to the tax treatment of the Distribution and
the Merger, and have accordingly assumed that (i) the Distribution will not
result in any obligation of the Company for taxes, (ii) the Merger will not be
taxable to the Company, and (iii) that sales by the Company of the Financial
Services Businesses or components thereof would create significant tax
liabilities for the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect the conclusion reached in this opinion, we do not have
any obligation to update, revise or reaffirm this opinion. We are expressing no
opinion herein as to the Distribution, as to Spinco or as to the prices at
which the common stock of Spinco will actually trade at any time, nor are we
expressing any opinion as to solvency. Our advisory services and opinion were
provided to the Company's Board of Directors for the information and assistance
of the Company's Board of Directors in connection with its consideration of the
Merger and was directed only to the fairness, from a financial point of view,
to the holders of Shares of the consideration to be received for the Shares in
the Merger. Our opinion does not address the relative merits of the
transactions contemplated by the Agreement and other possible business
strategies, nor does it address the Board's decision to proceed with the
Distribution or the Merger. Our opinion does not constitute a recommendation to
any stockholder as to how such stockholder should vote on the proposed
Distribution or Merger.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with
<PAGE>
Aetna Inc.
Page 3 July 19, 2000
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. DLJ is currently working with ING Groep N.V. on its proposed
acquisition of ReliaStar Financial Corp. In addition, DLJ advised ING Groep
N.V. on its December 1999 divestiture of its Risk Medical Solutions business.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that, as of the date of this opinion, the Merger
Consideration to be received for the Shares in the Merger by the stockholders
of the Company pursuant to the Agreement is fair to such stockholders from a
financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ John A. Sipp
------------------------
John A. Sipp
Managing Director
<PAGE>
ANNEX E
Goldman Sachs & Co.
85 Broad Street
New York, NY 10004
PERSONAL AND CONFIDENTIAL
July 19, 2000
Board of Directors
Aetna Inc.
151 Farmington Avenue
Hartford, CT 06156
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $0.01
per share (the "Shares"), of Aetna Inc. (the "Company") of the Merger
Consideration (as defined below) to be received for the Shares in the merger of
ANB Acquisition Corp. ("Merger Sub") into the Company (the "Merger") pursuant
to the Agreement and Plan of Restructuring and Merger (the "Agreement") dated
as of July 19, 2000, among the Company, ING America Insurance Holdings, Inc.
("Parent"), Merger Sub and, for limited purposes only, ING Groep N.V. ("ING").
Under the Agreement, after the distribution of Aetna U.S. Healthcare, Inc.
("Spinco") to holders of Shares, possible cash dividends to the Company from
Spinco and from the Company to the holders of Shares and the other
reorganization transactions contemplated by the distribution agreement attached
as Annex A to the Agreement (such distribution, dividends and other
reorganization transactions together, the "Distribution"), Merger Sub will
merge into the Company and each Share (other than Shares owned by or on behalf
of ING, Parent, Merger Sub or any other Subsidiary of ING, the Company or any
Subsidiary of the Company or owned by shareholders exercising dissenters'
rights) shall be converted into the right to receive an amount in cash per
Share (the "Merger Consideration") equal to (x) $7.70 billion, (i) minus the
greater of (A) $2.678 billion (which amount shall be reduced by $300 million if
the $300 million outstanding principal amount of the 6.75% Notes of Aetna
Services, Inc. due and payable on August 15, 2001 is repaid in full on such
maturity date) and (B) the aggregate principal amount of all Long-Term Debt
outstanding as of the Effective Time to any Person (other than the obligations
for indebtedness set forth on Section 4.1(a)(i) of the Company Disclosure
Letter), (ii) plus the Net Capital Contribution Amount (positive or negative),
(iii) plus the Net Interest Accrual Amount (positive or negative) and (iv)
minus the CityPlace Accrual Amount divided by (y) the aggregate number of
outstanding Shares as of the Effective Time (the "Merger Consideration"). After
the Distribution the business of the
<PAGE>
Board of Directors
Aetna Inc.
July 19, 2000
Page Two
Company will essentially consist of Aetna Financial Services, Aetna
International, Inc. and certain related businesses, representing the
international operations of Aetna Inc., and certain assets and liabilities held
at the parent company Aetna Inc. (together the "Financial Services
Businesses"). The terms and conditions of the Merger are more fully set forth
in the Agreement and related documents. Capitalized terms used in this opinion
without definition are as defined in the Agreement.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company, having provided certain investment banking services
to the Company from time to time, including having acted as lead underwriter of
a public offering of debt securities of the Company in November 1998 and
financial advisor on the divestiture of several subsidiaries and businesses of
the Company, including its property and casualty business, its U.S. individual
life insurance business and Aetna Canada Holdings in April 1996, October 1998
and October 1999, respectively, and having acted as the Company's financial
advisor in connection with, and having participated in certain of the
negotiations leading to, the Agreement. We also have provided certain
investment banking services to ING from time to time, including having acted as
co-lead underwriter of a public offering of subordinated debt securities of ING
Bank NV in June 1996 and co-lead underwriter of a public offering of common
stock of ING in June 1997. Goldman, Sachs & Co. may provide investment banking
services to ING and its subsidiaries in the future. Goldman, Sachs & Co.
provides a full range of financial advisory and securities services and, in the
course of its normal trading activities, may from time to time effect
transactions and hold securities, including derivative securities, of the
Company or ING for its own account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of
the Company for the five years ended December 31, 1999; certain interim reports
to stockholders and Quarterly Reports on Form 10-Q of the Company; certain
other communications from the Company to its respective stockholders; and
certain internal financial analyses and forecasts for the Financial Services
Businesses and the Company prepared by its management. We also have held
discussions with members of the senior management of the Company regarding
their assessment of the strategic rationale for the transaction and the past
and current business operations, financial condition and future prospects of
the Financial Services Businesses. In addition, we have reviewed the reported
price and trading activity for the Shares, compared certain financial
information for the Financial Services Businesses and stock market information
for the Company with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of
certain
<PAGE>
Board of Directors
Aetna Inc.
July 19, 2000
Page Three
recent business combinations in the insurance industry specifically and in
other industries generally and performed such other studies and analyses as we
considered appropriate.
We have relied upon the accuracy and completeness of all of the financial and
other information discussed with or reviewed by us and have assumed such
accuracy and completeness for purposes of rendering this opinion. In that
regard, we have assumed with your consent that the forecasts prepared by the
management of the Company for the Financial Services Businesses have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the Company. We have relied on the estimate of the
management of Company as to the magnitude of the purchase price adjustments and
the potential cost of satisfying certain closing conditions under the
Agreement. We have relied on the tax advice the Company has received from its
tax advisers as to the tax treatment of the Merger, and have accordingly been
instructed by the Company to assume that the Distribution will not result in
taxes being paid by the Company, that the Merger will not be taxable to the
Company and that sales by the Company of certain parts of the Financial
Services Businesses would be taxable to the Company if undertaken separately.
In addition, we have not made an independent evaluation or appraisal of the
assets and liabilities of the Company or any of its subsidiaries and we have
not been furnished with any such evaluation or appraisal other than certain
actuarial appraisals of selected international operations. We previously
commenced the solicitation of interest from other parties with respect to an
acquisition of the Financial Services Businesses or its component businesses,
but, in light of the decision of the Board of Directors to consider the
Agreement at this time, the solicitation process has not been concluded. Our
opinion does not address the relative merits of the transactions contemplated
pursuant to the Agreement as compared to any alternative business transaction
that might be available to the Company.
We express no opinion as to the Distribution, SpinCo or as to the prices at
which shares of SpinCo will trade at any time. We express no opinion with
regards to SpinCo's ability to distribute cash to the Company or pay dividends
to its shareholders. You have informed us that the Company intends to obtain
from another firm an opinion as to solvency, and we express no opinion related
to solvency.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with its consideration of the Merger, and such opinion does not
constitute a recommendation as to how any holder of Shares should vote with
respect to the Merger or any other transactions contemplated in the Agreement.
<PAGE>
Board of Directors
Aetna Inc.
July 19, 2000
Page Four
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Merger
Consideration to be received by the holders of Shares in the Merger is fair
from a financial point of view to such holders.
Very truly yours,
/s/ Goldman Sachs & Co.
<PAGE>
ANNEX F
SECTIONS 33-855 THROUGH 33-872 OF THE
CONNECTICUT BUSINESS CORPORATION ACT
Right to Dissent and Obtain Payment for Shares
SECTION 33-855. DEFINITIONS. As used in Sections 33-855 to 33-872,
inclusive:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 33-856 and who exercises that right when and in
the manner required by sections 33-860 to 33-868, inclusive.
(3) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SECTION 33-856. RIGHT TO DISSENT. (a) A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any
of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a party
(A) if shareholder approval is required for the merger by section 33-817 or the
certificate of incorporation and the shareholder is entitled to vote on the
merger or (B) if the corporation is a subsidiary that is merged with its parent
under section 33-818;
(2) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
<PAGE>
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all
of the net proceeds of the sale will be distributed to the shareholders within
one year after the date of sale;
(4) An amendment of the certificate of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it: (A)
Alters or abolishes a preferential right of the shares; (B) creates, alters or
abolishes a right in respect of redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of the shares; (C) alters or
abolishes a preemptive right of the holder of the shares to acquire shares or
other securities; (D) excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights; or (E)
reduces the number of shares owned by the shareholder to a fraction of a share
if the fractional share so created is to be acquired for cash under section
33-668; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the certificate of incorporation, bylaws or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) Where the right to be paid the value of shares is made available to a
shareholder by this section, such remedy shall be his exclusive remedy as
holder of such shares against the corporate transactions described in this
section, whether or not he proceeds as provided in sections 33-855 to 33-872,
inclusive.
SECTION 33-857. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.(a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered
in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if: (1) He submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and (2) he does so with
respect to all shares of which he is the beneficial shareholder or over which
he has power to direct the vote.
SECTIONS 33-858 AND 33-859. RESERVED FOR FUTURE USE.
Procedure for Exercise of Dissenters' Rights
<PAGE>
SECTION 33-860. NOTICE OF DISSENTERS' RIGHTS. (a) If proposed corporate
action creating dissenters' rights under section 33-856 is submitted to a vote
at a shareholders' meeting, the meeting notice shall state that shareholders
are or may be entitled to assert dissenters' rights under sections 33-855 to
33-872, inclusive, and be accompanied by a copy of said sections.
(b) If corporate action creating dissenters' rights under section 33-856
is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in section 33-862.
SECTION 33-861. NOTICE OF INTENT TO DEMAND PAYMENT. (a) If proposed
corporate action creating dissenters' rights under section 33-856 is submitted
to a vote at a shareholders' meeting, a shareholder who wishes to assert
dissenters' rights (1) shall deliver to the corporation before the vote is
taken written notice of his intent to demand payment for his shares if the
proposed action is effectuated and (2) shall not vote his shares in favor of
the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
of this section is not entitled to payment for his shares under sections 33-855
to 33-872, inclusive.
SECTION 33-862. DISSENTERS' NOTICE. (a) If proposed corporate action
creating dissenters' rights under section 33-856 is authorized at a
shareholders' meeting, the corporation shall deliver a written dissenters'
notice to all shareholders who satisfied the requirements of section 33-861.
(b) The dissenters' notice shall be sent no later than ten days after the
corporate action was taken and shall:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not he acquired beneficial ownership of the shares
before that date;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the date
the subsection (a) of this section notice is delivered; and
(5) Be accompanied by a copy of sections 33-855 to 33-872, inclusive.
<PAGE>
SECTION 33-863. DUTY TO DEMAND PAYMENT. (a) A shareholder sent a
dissenters' notice described in section 33-862 must demand payment, certify
whether he acquired beneficial ownership of the shares before the date required
to be set forth in the dissenters' notice pursuant to subdivision (3) of
subsection (b) of said section and deposit his certificates in accordance with
the terms of the notice.
(b) The shareholder who demands payment and deposits his share
certificates under subsection (a) of this section retains all other rights of a
shareholder until these rights are cancelled or modified by the taking of the
proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under sections 33-855 to 33-872,
inclusive.
SECTION 33-864. SHARE RESTRICTIONS. (a) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is taken or the restrictions
released under section 33-866.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate
action.
SECTION 33-865. PAYMENT. (a) Except as provided in section 33-867, as soon
as the proposed corporate action is taken, or upon receipt of a payment demand,
the corporation shall pay each dissenter who complied with section 33-863 the
amount the corporation estimates to be the fair value of his shares, plus
accrued interest.
(b) The payment shall be accompanied by: (1) The corporation's balance
sheet as of the end of a fiscal year ending not more than sixteen months before
the date of payment, an income statement for that year, a statement of changes
in shareholders' equity for that year and the latest available interim
financial statements, if any; (2) a statement of the corporation's estimate of
the fair value of the shares; (3) an explanation of how the interest was
calculated; (4) a statement of the dissenter's right to demand payment under
section 33-868; and (5) a copy of sections 33-855 to 33-872, inclusive.
SECTION 33-866. FAILURE TO TAKE ACTION. (a) If the corporation does not
take the proposed action within sixty days after the date set for demanding
payment and depositing share certificates, the corporation shall return the
deposited certificates and release the transfer restrictions imposed on
uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 33-862 and repeat the payment demand
procedure.
SECTION 33-867. AFTER-ACQUIRED SHARES. (a) A corporation may elect to
withhold payment required by section 33-865 from a dissenter unless he was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date
<PAGE>
of the first announcement to news media or to shareholders of the terms of the
proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest
was calculated and a statement of the dissenter's right to demand payment under
section 33-868.
SECTION 33-868. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER. (a) A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate, less any payment under section 33-865, or reject the
corporation's offer under section 33-867 and demand payment of the fair value
of his shares and interest due, if:
(1) The dissenter believes that the amount paid under section 33-865 or
offered under section 33-867 is less than the fair value of his shares or that
the interest due is incorrectly calculated;
(2) The corporation fails to make payment under section 33-865 within
sixty days after the date set for demanding payment; or
(3) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within sixty days after the date set for demanding
payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection
(a) of this section within thirty days after the corporation made or offered
payment for his shares.
Judicial Appraisal of Shares
SECTION 33-871. COURT ACTION. (a) If a demand for payment under section
33-868 remains unsettled, the corporation shall commence a proceeding within
sixty days after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the superior court
for the judicial district where a corporation's principal office or, if none in
this state, its registered office is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence the
proceeding in the superior court for the judicial district where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
<PAGE>
(c) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment
(1) for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation, or (2) for
the fair value, plus accrued interest, of his after-acquired shares for which
the corporation elected to withhold payment under section 33-867.
SECTION 33-872. COURT COSTS AND COUNSEL FEES. (a) The court in an
appraisal proceeding commenced under section 33-871 shall determine all costs
of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously or not in good faith in demanding
payment under section 33-868.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable: (1) Against
the corporation and in favor of any or all dissenters if the court finds the
corporation did not substantially comply with the requirements of sections
33-860 to 33-868, inclusive; or (2) against either the corporation or a
dissenter, in favor of any other party, if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously
or not in good faith with respect to the rights provided by sections 33-855 to
33-872, inclusive.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefitted.
<PAGE>
ANNEX G
AETNA, INC.
STOCK INCENTIVE PLAN
SECTION 1. PURPOSE.
The purposes of this Plan are to promote the interests of the Company
and its shareholders, and further align the interests of shareholders and
Participants by:
(i) motivating Participants through Awards tied to total return
to shareholders (i.e., stock price appreciation and dividends);
(ii) attracting and retaining outstanding individuals as
Participants;
(iii) enabling Participants to acquire additional equity
interests in the Company;
(iv) providing compensation opportunities dependent upon the
Company's performance relative to its competitors and changes in its
own performance over time; and
(v) providing for the grant of Adjusted Options in connection
with the transactions under the Merger Agreement pursuant to which the
Company ceased to be a wholly-owned subsidiary of Aetna, Inc., a
Connecticut corporation (the "Former Parent").
SECTION 2. DEFINITIONS.
"ADJUSTED OPTION" shall mean an Option which is granted under Section
10 in substitution for an outstanding option previously granted by the Former
Parent.
"AFFILIATE" shall mean any corporation or other entity (other than
the Company or one of its Subsidiaries) in which the Company directly or
indirectly owns at least twenty percent (20%) of the combined voting power of
all classes of stock of such entity or at least twenty percent (20%) of the
ownership interests in such entity.
"AWARD" shall mean a Adjusted Option and any other grant or award
under the Plan, as evidenced in a written document delivered to a Participant as
provided in Section 13(b).
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean (i) the willful failure by the Participant to
perform substantially the Participant's duties as an employee of the Company
(other than due to physical or mental illness) after reasonable notice to the
Participant, (ii) the Participant's engaging in serious misconduct that is
injurious to the Company, any Subsidiary or any Affiliate, (iii) the
Participant's having been convicted of, or entered a plea of nolo contendere to,
a crime that constitutes a felony, (iv) the breach by the Participant of any
written covenant or agreement not to compete with the Company, any Subsidiary or
any Affiliate or (v) the breach by the Participant of his or her duty of loyalty
to the Company which shall include, without limitation, (A) the disclosure by
the Participant of any confidential information pertaining to the Company, any
Subsidiary or any Affiliate, (B) the harmful interference by the Participant in
the business or operations of the Company, any Subsidiary or any Affiliate, (C)
any attempt by the Participant directly or indirectly to induce any employee,
insurance agent, insurance broker or broker-dealer of the Company, any
Subsidiary or any Affiliate to be employed or perform services elsewhere, (D)
any attempt by the Participant directly or
<PAGE>
indirectly to solicit the trade of any customer or supplier, or prospective
customer or supplier, of the Company or (E) any breach or violation of the
Company's Code of Conduct.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"COMMITTEE" shall mean a committee of the Board as may be designated
by the Board to administer the Plan, which, to the extent necessary to comply
with Section 16 of the Exchange Act and Section 162 (m) of the Code, shall
consist of at least two directors of the Company chosen by the Board each of
whom is a "disinterested person" within the meaning of Rule 16b-3 under the
Exchange Act and an "outside director" within the meaning of Section 162(m).
"COMMON STOCK" shall mean the common stock, $.005 par value, of the
Company.
"COMPANY" shall mean Aetna Inc., a Pennsylvania corporation.
"ELIGIBLE EMPLOYEE" shall mean each employee of the Company, its
Subsidiaries or its Affiliates, but shall not include directors who are not
employees of such entities; provided that, in the case of the Adjusted Options,
the term Eligible Employee shall mean each person who is eligible to receive an
Adjusted Option. Any individual the Company designates as, or otherwise
determines to be, an independent contractor shall not be considered an Eligible
Employee, and such designation or determination shall govern regardless of
whether such individual is ultimately determined to be an employee pursuant to
the Code or any other applicable law; and that Section 3 is hereby amended to
add the following additional language at the end of the second paragraph:
(including authorizing the Chief Executive Officer of the Company to designate
Participants or make Awards under the Plan within limits prescribed by the
Committee).
"EMPLOYMENT" shall mean, for purposes of determining whether a
termination of employment has occurred under the Plan, continuous and regular
salaried employment with the Company, a Subsidiary or an Affiliate, which shall
include (unless the Committee shall otherwise determine) any period of vacation,
any approved leave of absence or any salary continuation or severance pay period
and, at the discretion of the Committee, may include service with any former
Subsidiary or Affiliate of the Company.
For this purpose, regular salaried employment means scheduled employment of at
least 20 hours per week.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"EXECUTIVE OFFICER" shall mean those persons who are officers of the
Company within the meaning of Rule 16a-l(f) of the Exchange Act.
"FAIR MARKET VALUE" shall mean on any date, with respect to a share
of Common Stock, the closing price of a share of Common Stock as reported by the
Consolidated Tape of New York Stock Exchange Listed Shares on such date, or, if
no shares were traded on such Exchange on such date, on the next date on which
the Common Stock is traded.
"FUNDAMENTAL CORPORATE EVENT" shall mean any stock dividend,
extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination, exchange of shares, offering to
purchase Common Stock at a price substantially below fair market value, or
other similar event.
2
<PAGE>
"INCENTIVE STOCK" shall mean an Award of Common Stock granted under
Section 7 which may become vested and nonforfeitable upon the passage of time
and/or the attainment, in whole or in part, of performance objectives determined
by the Committee.
"INCENTIVE STOCK OPTION" shall mean an option which is intended to
meet the requirements of Section 422 of the Code.
"INCENTIVE UNIT" shall mean an Award of a contractual right granted
under Section 7 to receive Common Stock (or, at the discretion of the Committee,
cash based on the Fair Market Value of the Common Stock) which may become vested
and nonforfeitable upon either the passage of time and/or the attainment, in
whole or in part, of performance objectives determined by the Committee.
"MERGER AGREEMENT" shall mean the Agreement and Plan of Restructuring
and Merger among ING America Insurance Holdings, Inc., ANB Acquisition Corp.,
the Former Parent and for limited purposes only, ING Groep N.V., dated as of
July 19, 2000.
"MERGER DATE" shall mean the date of the closing of the transactions
contemplated by the Merger Agreement.
"NONSTATUTORY STOCK OPTION" shall mean an Option which is not
intended to be an Incentive Stock Option.
"OPTION" shall mean the right granted under Section 5 to purchase the
number of shares of Common Stock specified by the Committee, at a price and for
the term fixed by the Committee in accordance with the Plan and subject to any
other limitations and restrictions as this Plan and the Committee shall impose,
and shall include both Incentive Stock Options and Nonstatutory Stock Options.
"OTHER STOCK-BASED AWARD" shall mean any right granted under Section
8.
"PARTICIPANT" shall mean an Eligible Employee who is selected by the
Committee to receive an Award under the Plan and any recipient of an (i)
Adjusted Option granted under Section 10 or (ii) Substitute Award as
contemplated under Section 4(c).
"PLAN" shall mean the Aetna Inc. Stock Incentive Plan, described
herein, and as may be amended from time to time.
"PRIOR PLAN" shall mean, collectively, the Aetna Inc. 1996 Stock
Incentive Plan and the Aetna Inc. 1998 Stock Incentive Plan.
"RESTRICTED PERIOD" shall mean the period during which a grant of
Incentive Stock or Incentive Units is subject to forfeiture.
"STOCK APPRECIATION RIGHT" shall mean a right granted under Section
6.
"SUBSIDIARY" shall mean any entity of which the Company possesses
directly or indirectly fifty percent (50%) or more of the total combined voting
power of all classes of stock of such entity.
"SUBSTITUTE AWARDS" shall mean Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by a company acquired by
the Company or with which the Company combines.
3
<PAGE>
SECTION 3. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee shall
have the responsibility of construing and interpreting the Plan and of
establishing and amending such rules and regulations as it deems necessary or
desirable for the proper administration of the Plan. Any decision or action
taken or to be taken by the Committee, arising out of or in connection with the
construction, administration, interpretation and effect of the Plan and of its
rules and regulations, shall, to the maximum extent permitted by applicable law,
be within its absolute discretion (except as otherwise specifically provided
herein) and shall be conclusive and binding upon all Participants and any person
claiming under or through any Participant.
Subject to the terms of the Plan and applicable law, and in addition
to other express powers and authorizations conferred on the Committee by the
Plan, the Committee shall have full power and authority to: (i) designate
Participants; (ii) determine the type or types of Awards, if any, to be granted
to an Eligible Employee: (iii) determine the number of shares of Common Stock to
be covered by, or with respect to which payments, rights, or other matters are
to be calculated in connection with, Awards: (iv) determine the terms and
conditions of any Award: (v) determine whether, to what extent, and under what
circumstances Awards may be settled or exercised in cash, Common Stock, other
securities, other Awards or other property, or canceled, forfeited, or suspended
and the method or methods by which Awards may be settled, exercised, canceled,
forfeited, or suspended; (vi) determine whether, to what extent, and under what
circumstances, cash, Common Stock, other securities, other Awards, other
property, and other amounts payable with respect to an Award shall be deferred
either automatically or at the election of the holder thereof or of the
Committee: (vii) interpret and administer the Plan and any instrument or
agreement relating to, or Award made under, the Plan; (viii) establish, amend,
suspend, or waive such rules and regulations and appoint such agents as it shall
deem appropriate for the proper administration of the Plan: and (ix) make any
other determination and take any other action that the Committee deems necessary
or desirable for the administration of the Plan.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) Shares Available for Issuance. The maximum number of shares of
Common Stock in respect of which Awards may be made under the Plan shall be a
total of 7,000,000 shares of Common Stock plus (i) the number of shares of
Common Stock to be delivered upon exercise of the Adjusted Options and (ii) the
number of shares required to satisfy any outstanding incentive unit awards under
the Prior Plan. Notwithstanding the foregoing, but subject to the provisions of
Section 4(b), in no event shall the number of shares of Common Stock issued
under the Plan with respect to (x) Incentive Stock Options exceed 5,000,000, (y)
Incentive Stock or Incentive Units exceed 2,235,000 or (z) Other Stock-Based
Awards exceed 1,000,000. Shares of Common Stock may be made available from the
authorized but unissued shares of the Company or from shares held in the
Company's treasury and not reserved for some other purpose. In the event that
any Award is paid solely in cash, no shares shall be deducted from the number of
shares available for issuance by reason of such Award. Shares of Common Stock
subject to Awards that are forfeited, terminated, canceled or settled without
the delivery of Common Stock under the Plan will again be available for Awards
under the Plan, as will (A) shares of Common Stock tendered (either actually or
by attestation) to the Company in satisfaction or partial satisfaction of the
exercise price of any Award under either the Plan and (B) shares of Common Stock
repurchased on the open market with remittances from the exercise of options
granted under the Plan.
(b) Adjustment for Corporate Transactions. In the event that the
Committee shall determine that any Fundamental Corporate Event affects the
Common Stock such that an adjustment is required to preserve, or to prevent
enlargement of, the benefits or potential benefits made available under this
Plan, then the Committee may, in such manner as the Committee may deem
equitable, adjust any or all of (i) the number and kind of shares which
thereafter may be awarded or optioned and sold or made the subject of Awards
under the Plan, (ii) the number and kinds of shares subject to outstanding
Awards and (iii) the
4
<PAGE>
grant, exercise or conversion price with respect to any of the foregoing.
Additionally, the Committee may make provisions for a cash payment to a
Participant or a person who has an outstanding Award. However, the number of
shares subject to any Award shall always be a whole number.
(c) Substitute Awards. Any shares of Common Stock underlying
Substitute Awards shall not, except in the case of shares with respect to which
Substitute Awards are granted to Participants who are officers or directors of
the Company for purposes of Section 16 of the Exchange Act or any successor
section thereto, be counted against the Shares available for Awards under the
Plan.
SECTION 5. STOCK OPTIONS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall
have the authority to grant Options to an Eligible Employee and to determine (i)
the number of shares to be covered by each Option, (ii) subject to Section 5(b),
the exercise price of the Option and (iii) the conditions and limitations
applicable to the exercise of the Option. Notwithstanding the foregoing, in no
event shall the Committee grant any Participant Options (i) for more than
800,000 shares of Common Stock in respect of any year in which the Plan is in
effect, as such number may be adjusted pursuant to Section 4(b). In the case of
Incentive Stock options, the terms and conditions of such grants shall be
subject to and comply with Section 422 of the Code and the regulations
thereunder.
(b) Exercise Price. Except in the case of Adjusted Options,
Substitute Awards or Options granted in lieu of payment for compensation earned
by an Eligible Employee of the Company, the exercise price of an Option shall
not be less than 100% of the Fair Market Value on the date of grant.
(c) Exercise. Each Option shall be exercised at such times and
subject to such-terms and conditions as the Committee may specify at the time of
the applicable Award or thereafter. No shares shall be delivered pursuant to any
exercise of an Option unless arrangements satisfactory to the Committee have
been made to assure full payment of the exercise price therefor. Without
limiting the generality of the foregoing, payment of the exercise price may be
made in cash or its equivalent or, if and to the extent permitted by the
Committee, by exchanging shares of Common Stock owned by the optionee (which are
not the subject of any pledge or other security interest or which, in the case
of Incentive Stock, are fully vested) either actually or by attestation, or by a
combination of the foregoing, provided that the combined value of all cash and
cash equivalents and the Fair Market Value of any such Common Stock so tendered
to the Company, valued as of the date of such tender, is at least equal to such
exercise price.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) Grant of Stock Appreciation Rights. The Committee shall have the
authority to grant Stock Appreciation Rights in tandem with an Option, in
addition to an Option, or freestanding and unrelated to an Option.
Notwithstanding the foregoing, in no event shall the Committee grant any
Participant Stock Appreciation Rights (i) for more than 500,000 shares of Common
Stock in respect of any year in which the Plan is in effect, as such number may
be adjusted pursuant to Section 4(b) and (ii) with a term exceeding 10 years.
Stock Appreciation Rights granted in tandem with an option may be granted either
at the same time as the Option or at a later time.
(b) Exercise Price. The exercise price of an SAR shall not be less
than 100% of the Fair Market Value of a share of Common Stock on the date the
SAR was granted; provided that if an SAR is granted retroactively in tandem with
or in substitution for an Option, the exercise price may be the exercise price
of the Option to which it is related.
(c) Exercise of Stock Appreciation Rights. A Stock Appreciation Right
shall entitle the Participant to receive from the Company an amount equal to the
excess of the Fair Market Value of a share of Common
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<PAGE>
Stock on the date of exercise of the Stock Appreciation Right over the base
price thereof. The Committee shall determine the time or times at which or the
event or events (including, without limitation, a change of control) upon which
a Stock Appreciation Right may be exercised in whole or in part, the method of
exercise and whether such Stock Appreciation Right shall be settled in cash,
shares of Common Stock or a combination of cash and shares of Common Stock;
provided, however, that unless otherwise specified by the Committee at or after
grant, a Stock Appreciation Right granted in tandem with an Option shall be
exercisable at the same time or times as the related option is exercisable.
SECTION 7. INCENTIVE AWARDS.
(a) Incentive Stock and Incentive Units. Subject to the provisions of
the Plan, the Committee shall have the authority to grant time vesting and/or
performance vesting Incentive Stock or Incentive Units to any Eligible Employee
and to determine (i) the number of shares of Incentive Stock and the number of
Incentive Units to be granted to each Participant and (ii) the other terms and
conditions of such Awards; provided that, to the extent necessary to comply with
applicable law, Incentive Stock shall only be awarded to an Eligible Employee
who has been employed for such minimum period of time as shall be determined by
the Committee. The Restricted Period related to Incentive Stock or Incentive
Units shall lapse upon the passage of time and/or the determination by the
Committee that the performance objectives established by the Committee have been
attained, in whole or in part. The maximum number of shares of Common Stock that
may be subject to any performance-based Awards of Incentive Stock and Incentive
Units (whether payable in cash or shares) granted to an Executive Officer with
respect to a Restricted Period shall not exceed 500,000 shares, as such number
may be adjusted pursuant to Section 4(b). The performance objectives with
respect to an Award made to an Executive officer shall be related to at least
one of the following criteria, which may be determined solely by reference to
the performance of the Company, a Subsidiary or an Affiliate (or any business
unit thereof) or based on comparative performance relative to other companies:
(i) net income, (ii) earnings before income taxes, (iii) earnings per share,
(iv) return on shareholders equity, (v) expense management, (vi) profitability
of an identifiable business unit or product, (vii) ratio of claims to revenues,
(viii) revenue growth, (ix) earnings growth, (x) total shareholder return, (xi)
cash flow, (xii) return on assets, (xiii) pretax operating income, (xiv) net
economic profit (operating earnings minus a charge for capital), (xv) customer
satisfaction, (xvi) provider satisfaction, (xvii) employee satisfaction,
(xviii) quality of networks, (xix) strategic innovation or (xx) any combination
of the foregoing.
(b) Certificates. Any certificates issued in respect of Incentive
Stock shall be registered in the name of the Participant and deposited by such
Participant, together with a stock power endorsed in blank, with the Company. At
the expiration of the Restricted Period with respect to any award of Incentive
Stock, unless otherwise forfeited, the Company shall deliver such certificates
to the Participant or to the Participant's legal representative. Payment for
Incentive Stock Units shall be made by the Company in shares of Common Stock,
cash or in any combination thereof, as determined by the Committee.
SECTION 8. OTHER STOCK-BASED AWARDS.
The Committee shall have authority to grant to eligible Employees an
"Other Stock-Based Award", which shall consist of any right which is (i) not an
Award described in Sections 5 through 7 above and (ii) an Award of Common Stock
or an Award denominated or payable in, valued in whole or in part by reference
to, or otherwise based on or related to, Common Stock (including, without
limitation, securities convertible into Common Stock), as deemed by the
Committee to be consistent with the purposes of the Plan; provided that any such
rights must comply, to the extent deemed desirable by the Committee, with Rule
16b-3 and applicable law. Subject to the terms of the Plan and any applicable
award agreement, the Committee shall determine the terms and conditions of any
such Other Stock-Based Award.
SECTION 9. DIVIDENDS AND DIVIDEND EQUIVALENTS.
The Committee may provide that any Award shall include dividends or
dividend equivalents, payable in cash, Common Stock, securities or other
property on a current or deferred basis, including payment contingencies.
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SECTION 10. ADJUSTED OPTIONS.
Effective as of the Merger Date, holders of options to purchase
shares of common stock of the Former Parent may in substitution thereof, to the
extent determined by the committee administering the Prior Plan and the
Committee, be granted an option to purchase Common Stock in accordance with the
provisions of the Merger Agreement and the Exhibits thereto. Except as modified
by the Merger Agreement, such options shall be governed by the terms of the
incentive plans and award agreements under which they were originally granted,
which terms are incorporated herein by reference.
SECTION 11. STOCK IN LIEU OF CASH.
The Committee may grant Awards in lieu of all or a portion of
compensation or an Award otherwise payable in cash to an Executive officer
pursuant to any bonus or incentive compensation plan of the Company.
If shares are issued in lieu of cash, the number of shares of Common
Stock to be issued shall be the greatest number of whole shares which has an
aggregate Fair Market Value on the date the cash would otherwise have been
payable pursuant to the terms of such other plan equal to or less than the
amount of such cash.
SECTION 12. DEFERRAL.
The Committee shall have the discretion to determine whether, to what
extent, and under what circumstances cash, shares of Common Stock, other
securities, other Awards, other property, and other amounts payable with respect
to an Award shall be deferred either automatically or at the election of the
holder thereof or of the Committee.
SECTION 13. GENERAL PROVISIONS.
(a) Withholding. The Company shall have the right to deduct from all
amounts paid to a Participant in cash (whether under this Plan or otherwise) any
taxes required by law to be withheld in respect of Awards under this Plan. In
the case of any Award satisfied in the form of Common Stock, no shares shall be
issued unless and until arrangements satisfactory to the Company shall have been
made to satisfy any withholding tax obligations applicable with respect to such
Award. Without limiting the generality of the foregoing and subject to such
terms and conditions as the Committee may impose, the Company shall have the
right to retain, or the Committee may, subject to such terms and conditions as
it may establish from time to time, permit Participants to elect to use shares
of Common Stock (including Common Stock issuable in respect of an Award) to
satisfy, in whole or in part, the amount required to be withheld.
(b) Award Agreement. Each Award hereunder shall be evidenced in
writing. The written agreement shall be delivered to the Participant and shall
incorporate the terms of the Plan by reference and specify the terms and
conditions thereof and any rules applicable thereto.
(c) Nontransferability. Unless the Committee shall permit (on such
terms and conditions as it shall establish) an Award to be transferred to a
member of the Participant's immediate family or to a trust or similar vehicle
for the benefit of such immediate family members (collectively, the "Permitted
Transferees"), no Award shall be assignable or transferable except by will or
the laws of descent and distribution, and except to the extent required by law,
no right or interest of any Participant shall be subject to any lien, obligation
or liability of the Participant. All rights with respect to Awards granted to a
Participant under the Plan shall be exercisable during the Participant's
lifetime only by such Participant or, if applicable, the Permitted Transferees
or the Participant's legal representative.
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(d) No Right to Employment. No person shall have any claim or right
to be granted an Award, and the grant of an Award shall not be construed as
giving a Participant the right to be retained in the employ of the Company, any
Subsidiary or any Affiliate. Further, the Company and each Subsidiary and
Affiliate expressly reserves the right at any time to dismiss a Participant free
from any liability, or any claim under the Plan, except as provided herein or in
any agreement entered into with respect to an Award.
(e) No Rights to Awards, No Shareholder Rights. No Participant or
Eligible Employee shall have any claim to be granted any Award under the Plan,
and there is no obligation of uniformity of treatment of Participants and
Eligible Employees. Subject to the provisions of the Plan and the applicable
Award, no person shall have any rights as a shareholder with respect to any
shares of Common Stock to be issued under the Plan prior to the issuance
thereof.
(f) Construction of the Plan. The validity, construction,
interpretation, administration and effect of the Plan and of its rules and
regulations, and rights relating to the Plan, shall be determined solely in
accordance with the laws of the State of Connecticut.
(g) Effective Date. Subject to the approval of the Company's
shareholders and the shareholders of the Former Parent, the Plan shall be
effective on the Merger Date.
(h) Amendment or Termination of Plan. The Board or the Committee may
terminate or suspend the Plan at any time, but the termination or suspension
will not adversely affect any vested Awards then outstanding under the Plan. No
Award may be granted under the Plan after December 31, 2010 or such earlier
date as the Plan is terminated by action of the Board or the Committee, The Plan
may be amended or terminated at any time by the Board, except that no amendment
may be made without shareholder approval if the Committee determines that such
approval is necessary to comply with any tax or regulatory requirement,
including any approval requirement which is a prerequisite for exemptive relief
from Section 16 of the 1934 Act, for which or with which the Committee
determines that it is desirable to qualify or comply; and, provided further,
that, except with respect to any action or adjustment taken in connection with a
Fundamental Corporate Event, any amendment or action to reduce the exercise
price of any option previously granted under the Plan shall be subject to the
approval of the Company's shareholders. The Committee may amend the term of any
Award or Option granted, retroactively or prospectively, but no amendment may
adversely affect any vested Award or Option without the holder's consent.
(i) Compliance with Legal and Exchange Requirements. The Plan, the
granting and exercising of Awards thereunder, and the other obligations of the
Company under the Plan, shall be subject to all applicable federal and state
laws, rules, and regulations, and to such approvals by any regulatory or
governmental agency as may be required. The Company, in its discretion, may
postpone the granting and exercising of Awards, the issuance or delivery of
Common Stock under any Award or any other action permitted under the Plan to
permit the Company, with reasonable diligence, to complete such stock exchange
listing or registration or qualification of such Common Stock or other required
action under any federal or state law, rule, or regulation and may require any
Participant to make such representations and furnish such information as it may
consider appropriate in connection with the issuance or delivery of Common Stock
in compliance with applicable laws, rules, and regulations. The Company shall
not be obligated by virtue of any provision of the Plan to recognize the
exercise of any Award or to otherwise sell or issue Common Stock in violation of
any such laws, rules, or regulations; and any postponement of the exercise or
settlement of any Award under this provision shall not extend the term of such
Awards, and neither the Company nor its directors or officers shall have any
obligations or liability to the Participant with respect to any Award (or stock
issuable thereunder) that shall lapse because of such postponement.
(j) Severability of Provisions. If any provision of this Plan shall
be held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and this Plan shall be construed and
enforced as if such provision had not been included.
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(k) Incapacity. Any benefit payable to or for the benefit of a minor,
an incompetent person or other person incapable of receipting therefor shall be
deemed paid when paid to such person's guardian or to the party providing or
reasonably appearing to provide for the care of such person, and such payment
shall fully discharge any liability or obligation of the Committee, the Board,
the Company and all other parties with respect thereto.
(1) Headings and Captions. The headings and captions herein are
provided for reference and convenience only, shall not be considered part of
this Plan, and shall not be employed in the construction of this Plan.
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ANNEX H
AETNA INC.
ANNUAL INCENTIVE PLAN
(EFFECTIVE AS OF JANUARY 1, 2001)
SECTION 1. PURPOSE.
The purpose of this Plan is to provide a general incentive for designated
key executive employees of the Companies in order to improve operating results
of the Companies and to reward such employees for the accomplishment of
financial and strategic objectives of the Companies.
SECTION 2. DEFINITIONS.
Unless the context requires otherwise, the following words as used in the
Plan shall have the meanings ascribed to each below, it being understood that
masculine, feminine and neuter pronouns are used interchangeably and that each
comprehends the others.
(a) "Aetna" means Aetna Inc., a Pennsylvania corporation.
(b) "Board" means the Board of Directors of Aetna.
(c) "Change in Control" means the happening of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act") and as used in Sections 13(d) and 14 (d) thereof,
including a "group" as defined in Section 13 (d) of the
Exchange Act but excluding Aetna and any subsidiary thereof
and any employee benefit plan sponsored or maintained by Aetna
or any subsidiary (including any trustee of such plan acting
as trustee), directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act, as
amended from time to time), of securities of Aetna
representing 20 percent or more of the combined voting power
of Aetna's then outstanding securities;
(ii) When, during any period of 24 consecutive months, the
individuals who, at the beginning of such period, constitute
the Board (the "Incumbent Directors") cease for any reason
other than death to constitute at least a majority thereof,
provided that a director who was not a director at the
beginning of such 24-month period shall be deemed to have
satisfied such 24-month requirement (and be an Incumbent
Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds
of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning
of such 24-month period) or by prior operation of this
paragraph (ii); or
(iii) The occurrence of a transaction requiring stockholder approval
for the acquisition of Aetna by an entity other than Aetna or
a Subsidiary through purchase of assets, or by merger, or
otherwise.
(d) "Committee" means the Committee on Compensation and Organization of
the Board (or such other committee of the Board that the Board shall
designate from time to time) or any subcommittee thereof consisting
of two or more directors each of whom is an "outside director"
within the meaning of Section 162 (m) and a "disinterested person"
within the meaning of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended.
(e) "Common Stock" means the common stock, $.01 par value, of Aetna.
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(f) "Companies" means one or more of Aetna, any of Aetna's affiliated
companies, and any other entity as to which (i) Aetna or any of
Aetna's affiliated companies holds or is seeking to acquire an
ownership interest, and (ii) has been included in the Plan by the
Committee.
(g) "Covered Employee" shall have the meaning set forth in Section
162(m).
(h) "Deferral Period" means the period of time during which payment of
any amount otherwise payable under the Plan is deferred (i) at the
direction of the Committee pursuant to Section 6(b) or (ii) at the
election of a Participant pursuant to Section 6(c), but in either
case subject to the right of the Committee to terminate the Deferral
Period as provided in Section 6(g).
(i) "Disability" means the occurrence of an event that would entitle a
Participant to the payment of disability income under a specific
long-term disability income plan approved by the Companies and under
which the Participant is enrolled, as such plan may be amended from
time to time, or if such Participant is not enrolled in a specific
plan, as defined in a plan covering similarly situated executive
officers of Aetna.
(j) "Fair Market Value" means on any date, with respect to a share of
Common Stock, the closing price of a share of Common Stock as
reported by the Consolidated Tape of New York Stock Exchange Listed
Shares on such date, or, if no shares were traded on such Exchange
on such date, on the next date on which the Common Stock is traded.
(k) "Participant" means (i) each Covered Employee and (ii) each other
executive officer of Aetna as defined in Rule 3b-7 of the Securities
Exchange Act of 1934 whom Aetna designates as a participant under
the Plan.
(1) "Performance Period" means the calendar year or such other period as
may be designated by the Committee.
(m) "Plan" means the Aetna Inc. Annual Incentive Plan, as set forth
herein and as may be amended from time to time.
(n) "Retirement" means the retirement of a Participant from active
service with the Companies at or after the age at which full pension
benefits are provided under a specific retirement plan maintained or
contributed to by any of the Companies and under which the
Participant has an accrued benefit, as such plan may be amended from
time to time, or if such Participant does not have an accrued
benefit under any such plan, the age at which full pension benefits
are provided under a retirement plan covering similarly situated
executive officers of Aetna.
(o) "Section 162(m)" means Section 162 (m) of the Internal Revenue Code
of 1986, as amended, and any regulations promulgated thereunder.
(p) "Share" means a share of Common Stock.
(q) "Stock Unit" means a unit representing the contractual right to
receive the value of one Share.
(r) "Stock Unit Account" means, with respect to any Participant who has
elected to have deferred amounts deemed invested in Stock Units, a
bookkeeping account established to record such Participant's
interest under the Plan related to such Stock Units.
(s) "Subsidiary" means any entity of which the Company possesses
directly or indirectly fifty percent (50%) or more of the total
combined voting power of all classes of stock of such entity.
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SECTION 3. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee shall have
the responsibility of construing and interpreting the Plan, provided that, in no
event, shall the Plan be interpreted in a manner which would cause any award to
a Covered Employee to fail to qualify as performance-based compensation under
Section 162(m). The Committee shall establish the performance objectives for any
Performance Period in accordance with Section 4 and certify whether such
performance objectives have been obtained. Any determination made or decision or
action taken or to be taken by the Committee, arising out of or in connection
with the construction, administration, interpretation and effect of the Plan and
of its rules and regulations, shall, to the fullest extent permitted by law (but
subject to the limitations on the discretion of the Committee applicable to
awards intended to be qualified as performance-based compensation under Section
162(m)), be within the Committee's absolute discretion and shall be conclusive
and binding on any and all Participants, any person claiming under or through a
Participant and each of the Companies. The Committee may employ such legal
counsel, consultants and agents (including counsel or agents who are employees
of any Company) as it may deem desirable for the administration of the Plan and
may rely upon any opinion received from any such counsel or consultant or agent
and any computation received from such consultant or agent. All expenses
incurred in the administration of the Plan, including, without limitation, for
the engagement of any counsel, consultant or agent, shall be paid by the
Companies. No member or former member of the Board or the Committee shall be
liable for any act, omission, interpretation, construction or determination made
in connection with the Plan other than as a result of such individual's willful
misconduct.
SECTION 4. DETERMINATION OF PARTICIPANTS.
In addition to the Covered Employees, the Committee may designate as a
Participant in the Plan any executive officer of Aetna as defined in Rule 3b-7
of the Securities Exchange Act of 1934. Members of the Board who are not
employees of any of the Companies shall not be eligible to participate in the
Plan.
SECTION 5. BONUSES.
(a) Performance Criteria. On or before the end of the first three months
of each Performance Period (or such other date as may be required or permitted
under Section 162(m)), the Committee shall establish the performance objective
or objectives that must be satisfied in order for a Participant to receive a
bonus for such Performance Period. Any such performance objectives will be based
upon the relative or comparative achievement of one or more of the following
criteria, as determined by the Committee: (i) net income, (ii) earnings before
income taxes, (iii) earnings per share, (iv) return on shareholders equity, (v)
expense management, (vi) profitability of an identifiable business unit or
product, (vii) ratio of claims to revenues, (viii) revenue growth, (ix) earnings
growth, (x) total shareholder return, (xi) cash flow, (xii) return on assets,
(xiii) pretax operating income, (xiv) net economic profit (operating earnings
minus a charge for capital), (xv) customer satisfaction, (xvi) provider
satisfaction, (xvii) employee satisfaction, (xviii) quality of networks, (xix)
strategic innovation or (xx) any combination of the foregoing.
(b) Maximum Amount Payable. If the Committee certifies in writing that any
one of the performance objectives established for the relevant Performance
Period under Section 5(a) has been satisfied, each Participant who is employed
by the Companies on the last day of the Performance Period for which the bonus
is payable shall be entitled to receive a bonus in an amount not to exceed
$3,000,000.
(c) Negative Discretion. Notwithstanding anything else contained in
Section 5(b) to the contrary, the Committee shall have the right, in its
discretion, (i) to reduce or eliminate the amount otherwise payable to any
Participant under Section 5(b) and (ii) to establish rules or procedures that
have the effect of limiting the amount payable to each Participant to an amount
that is less than the maximum amount otherwise authorized under Section 5(b).
(d) Affirmative Discretion. Notwithstanding any other provision in the
Plan to the contrary, (i) the Committee shall have the right, in its discretion,
to pay to any Participant who is not a Covered Employee a bonus for a
Performance Period in an amount up to the maximum bonus payable under Section
5(b), based on individual performance or any other criteria that the Committee,
in its discretion, deems to warrant the payment of such a
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bonus, and (ii) in connection with the hiring of any person who is or becomes a
Covered Employee, the Committee may provide for a minimum bonus amount for such
Covered Employee with respect to the Performance Period in which such Covered
Employee is hired and/or for the next following Performance Period, which would
be payable to such Covered Employee regardless of whether the relevant
performance objectives are attained with respect to the relevant Performance
Period.
(e) Methodology for Determinations. In making any determination under
Section 5(c) or 5(d), the Committee shall give consideration to such factors as
it deems appropriate, including, without limitation, the degree to which the
established performance objectives have been obtained and whether the
Participant has materially contributed to the overall results of the Companies.
To assist it in making its determination under such Sections, the Chairman of
Aetna will furnish the Committee with specific recommendations (except with
respect to the Chairman's own award) and the Committee may request such other
advice and recommendations as it deems appropriate.
SECTION 6. PAYMENT OF AWARDS.
(a) General Rule. Except as otherwise expressly provided hereunder,
payment of any bonus amount determined under Section 4 shall be made to each
Participant as soon as practicable after the Committee certifies that one or
more of the applicable performance objectives have been attained (or, in the
case of any bonus payable under the provisions of Section 5(d), after the
Committee determines the amount of any such bonus). Any such payments shall be
made in cash or, at the discretion of the Committee in awards under the Aetna
Inc. 1996 Stock Incentive Plan.
(b) Mandatory Deferral. Notwithstanding Section 6(a), the Committee may
specify that a percentage of the bonus payable with respect to any Participant,
all Participants or any class of Participants for any Performance Period be
mandatorily deferred for a Deferral Period specified by the Committee. The
percentage to be so deferred shall be determined by the Committee in its
discretion. Unless otherwise determined by the Committee at or after the date of
such deferral, any amount payable in respect of an amount mandatorily deferred
pursuant to this Section 6(b) shall be forfeited by the Participant if
(i) the Participant's employment with each of the Companies is
terminated for cause (as determined in the discretion of the
Committee under the generally applicable practices and
policies of whichever of the Companies employs the
Participant);
(ii) the Participant voluntarily terminates employment, other than
by reason of death, Disability or Retirement, prior to the end
of the Deferral Period specified by the Committee with respect
to such mandatorily deferred amount; or
(iii) the Participant engages in any activity or conduct which, in
the reasonable opinion of the Committee, is inimical to the
best interest of the Companies.
(c) Voluntary Deferral. Notwithstanding Section 6(a), the Committee may
permit a Participant to defer payment of any portion of an award that is not
mandatorily deferred pursuant to Section 6(b) or to defer payment of an amount
mandatorily deferred to a date or event later than that specified by the
Committee. Any such election shall be made at such time or times, and subject to
such terms and conditions, as the Committee shall determine.
(d) Accounting for Deferrals. Any amount deferred under this Section 6
shall be credited to one or more bookkeeping accounts for the benefit of such
Participant on the books and records of whichever of the Companies employees the
Participant. Unless a Participant otherwise elects to have such amounts deemed
invested in Stock Units in accordance with Section 6(e), such amounts shall be
deemed held in cash and shall be credited with such rate of interest or such
deemed rate of earnings as the Committee shall specify from time to time;
provided that, unless the Committee otherwise determines, no interest or
earnings shall be credited during the Deferral Period specified by the Committee
in respect of amounts mandatorily deferred.
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(e) Stock Units. The Committee may permit any Participant, all
Participants or any class of Participants to elect that any or all amounts
deferred under the Plan (including amounts mandatorily deferred pursuant to
Section 6(b)) be deemed invested, in whole or in part, in a number of whole or
fractional Stock Units. Any such Stock Units shall be credited to a Stock Unit
Account for the benefit of such Participant. The number of whole and fractional
Stock Units credited to a Stock Unit Account in respect of any amount deferred
under this Section 6 shall be equal to the quotient of (i) the amount deferred
divided by (ii) the Fair Market Value of a Share on the date such amount would
have been paid under the Plan but for such deferral. Whenever a dividend other
than a dividend payable in the form of Shares is declared with respect to the
Shares, the number of Stock Units in the Participant's Stock Unit Account shall
be increased by the number of Stock Units determined by dividing (i) the product
of (A) the number of Stock Units in the Participant's Stock Unit Account on the
related dividend record date and (B) the amount of any cash dividend declared by
the Company on a Share (or, in the case of any dividend distributable in
property other than Shares, the per share value of such dividend, as determined
by the Company for purposes of income tax reporting) by (ii) the Fair Market
Value on the related dividend payment date. In the case of any dividend declared
on Shares which is payable in Shares, each Participant's Stock Unit Account
shall be increased by the number of Stock Units equal to the product of (i) the
number of Units credited to the Participant's Stock Unit Account on the related
dividend record date and (ii) the number of Shares (including any fraction
thereof) distributable as a dividend on a Share. In the event of any stock
split, recapitalization, reorganization or other corporate transaction affecting
the capital structure of Aetna, the Committee shall make such adjustments to the
number of Stock Units credited to each Participant's Stock Unit Account as the
Committee shall deem necessary or appropriate to prevent the dilution or
enlargement of such Participant's rights.
(f) Payment of Deferred Amounts. Amounts attributable to any amount
deferred under the Plan, regardless of whether deferred pursuant to Section 6(b)
or 6(c), shall be paid or commence to be paid, at the election of the
Participant, at the end of the applicable Deferral Period or as of the first
business day of the calendar year next following the end of the Deferral Period.
Payment of such amounts shall be made, at the Participant's election, in a lump
sum or in five, ten or such other number of annual installments as shall be
permitted by the Committee. If a Participant does not timely elect the time at
which or the form in which such amounts shall be paid, such amounts shall be
paid immediately following the end of the Deferral Period and in a lump sum,
unless the Committee shall specify a different time or method of payment. The
Committee may, in its discretion, accelerate the payment of all or any portion
of any Participant's deferred amounts (regardless of whether the applicable
Deferral Period or period have terminated) in order to alleviate a financial
hardship incurred by the Participant due to an unforeseeable emergency beyond
the Participant's control.
Any payment to be made in respect of deferred amounts shall be made in
cash. For purposes of any cash distribution in respect of a Participant's Stock
Units, the cash payable shall equal the product of (i) the number of whole and
fractional Stock Units being distributed and (ii) the Fair Market Value of a
Share on the date as of which the distribution is to be made.
(g) Termination of Deferral Period. Notwithstanding anything else
contained in the Plan to the contrary, the Committee may, in its discretion,
terminate any Deferral Period in respect of any Participant. Such elective
termination will be deemed to be the end of the Deferral Period for purposes of
determining when payment of the Participant's interest is to commence under
Section 6(f).
(h) Change in Control. Upon the occurrence of a Change in Control, all
performance objectives for the then current Performance Period shall be deemed
to have been achieved at target levels of performance and the Committee shall
cause each Participant to be paid an amount in cash based on such assumed
performance for the entire Performance Period as soon as practicable but in no
event later than 10 business days following the occurrence of such Change in
Control.
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SECTION 7. AMENDMENT AND TERMINATION.
Notwithstanding Section 8(a), the Board or the Committee may at any time
amend, suspend, discontinue or terminate the Plan; provided, however, that no
such action shall be effective without approval by the shareholders of Aetna to
the extent necessary to continue to qualify the amounts payable to Covered
Employees as performance- based compensation under Section 162(m).
Notwithstanding the foregoing, no amendment, suspension, discontinuance or
termination of the Plan shall adversely affect the rights of any Participant or
beneficiary in respect of any award that the Committee has determined to be
payable to a Participant in accordance with the terms hereof or as to any
amounts awarded, but payment of which has been deferred, in accordance with
Section 6.
SECTION 8. GENERAL PROVISIONS.
(a) Effectiveness of the P1an. Subject to the approval of Aetna's
shareholders and the shareholders of Aetna Inc., a Connecticut corporation, the
Plan shall be effective with respect to calendar years beginning on or after
January 1, 2001 and ending on or before December 31, 2010, unless the term
hereof is extended by action of the Board or the Committee.
(b) Designation of Beneficiary. Each Participant may designate a
beneficiary or beneficiaries (which beneficiary may be an entity other than a
natural person) to receive any payments which may be made following the
Participant's death. Such designation may be changed or canceled at any time
without the consent of any such beneficiary. Any such designation, change or
cancellation must be made in a form approved by the Committee and shall not be
effective until received by the Committee. If no beneficiary has been named, or
the designated beneficiary or beneficiaries shall have predeceased the
Participant, the beneficiary shall be the Participant's spouse or, if no spouse
survives the Participant, the Participant's estate. If a Participant designates
more than one beneficiary, the rights of such beneficiaries shall be payable in
equal shares, unless the Participant has designated otherwise.
(c) No Right of Continued Employment. Nothing contained in this Plan shall
create any rights of employment in any Participant or in any way affect the
right and power of any of the Companies to discharge any Participant or
otherwise terminate the Participant's employment at any time with or without
cause or to change the terms of employment in any way.
(d) No Limitation on Corporate Actions. Nothing contained in the Plan
shall be construed to prevent any of the Companies from taking any corporate
action (including, without limitation, making provision for the payment of other
incentive compensation, whether payable in cash or otherwise, or whether
pursuant to a plan or otherwise) which is deemed by it to be appropriate or in
its best interest, whether or not such action would have an adverse effect on
any awards made under the Plan. No employee, beneficiary or other person shall
have any claim against any of the Companies as a result of any such action.
(e) No Right to Specific Assets. Nothing contained in the Plan (including,
without limitation, the provisions of Section 6 hereof) shall be construed to
create in any Participant or beneficiary any claim against, right to or lien on
any particular assets of any of the Companies or to require any of the Companies
to segregate or otherwise set aside any assets or create any fund to meet any of
its obligations hereunder.
(f) No Contractual Right to Bonus. Nothing in this Plan shall be construed
to give any Participant any right, whether contractual or otherwise, to receive
any bonus with respect to any Performance Period unless and until the Committee
shall have expressly determined that such a Participant is entitled to receive
such an award pursuant to the terms of the Plan.
(g) Nonalienation of Benefits. Except as expressly provided herein, no
Participant or beneficiary shall have the power or right to transfer,
anticipate, or otherwise encumber the Participant's interest under the Plan.
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(h) Withholding. Any amount payable to a Participant or a beneficiary
under this Plan shall be subject to any applicable Federal, state and local
income and employment taxes and any other amounts that any of the Companies is
required at law to deduct and withhold from such payment.
(i) Severability. If any provision of this Plan is held unenforceable, the
remainder of the Plan shall continue in full force and effect without regard to
such unenforceable provision and shall be applied as though the unenforceable
provision were not contained in the Plan.
(j) Governing Law. The Plan shall be construed in accordance with and
governed by the laws of the State of Pennsylvania, without reference to the
principles of conflict of laws.
(k) Headings. Headings are inserted in this Plan for convenience of
reference only and are to be ignored in a construction of the provisions of the
Plan.
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