UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____ to _____
Commission file number 1-8323
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CIGNA Corporation
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(Exact name of registrant as specified in its charter)
Delaware 06-1059331
------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Liberty Place, 1650 Market Street
Philadelphia, Pennsylvania 19192-1550
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(215) 761-1000
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Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No __
As of June 30, 1998, 212,280,085 shares of the issuer's Common Stock were
outstanding.
<PAGE>
CIGNA CORPORATION
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Income Statements 1
Consolidated Balance Sheets 2
Consolidated Statements of Comprehensive
Income and Changes in Shareholders'
Equity 3
Consolidated Statements of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
EXHIBIT INDEX 26
As used herein, "CIGNA" refers to one or more of CIGNA Corporation and its
consolidated subsidiaries.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIGNA CORPORATION
CONSOLIDATED INCOME STATEMENTS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
==============================================================================================================================
REVENUES
Premiums and fees $ 4,115 $ 3,482 $ 8,016 $ 6,870
Net investment income 942 1,062 1,879 2,115
Other revenues 217 163 731 323
Realized investment gains 47 12 106 56
--------- --------- -------- ---------
Total revenues 5,321 4,719 10,732 9,364
--------- --------- -------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,464 3,065 6,797 6,074
Policy acquisition expenses 239 270 467 534
Other operating expenses 1,147 973 2,229 1,908
--------- --------- -------- ---------
Total benefits, losses and expenses 4,850 4,308 9,493 8,516
--------- --------- -------- ---------
INCOME BEFORE INCOME TAXES 471 411 1,239 848
--------- --------- -------- ---------
Income taxes (benefits):
Current 176 124 608 234
Deferred (13) 8 (172) 47
--------- --------- -------- ---------
Total taxes 163 132 436 281
--------- --------- -------- ---------
NET INCOME $ 308 $ 279 $ 803 $ 567
- ----------------------------------------------------==========================================================================
BASIC EARNINGS PER SHARE $ 1.44 $ 1.26 $ 3.74 $ 2.57
- ----------------------------------------------------==========================================================================
DILUTED EARNINGS PER SHARE $ 1.42 $ 1.25 $ 3.70 $ 2.55
- ----------------------------------------------------==========================================================================
DIVIDENDS DECLARED PER SHARE $ 0.29 $ 0.28 $ 0.57 $ 0.55
- ----------------------------------------------------==========================================================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
1
<PAGE>
CIGNA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
As of As of
June 30, December 31,
1998 1997
==============================================================================================================================
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $30,931; $34,284) $ 32,920 $ 36,358
Equity securities, at fair value (cost, $765; $648) 1,089 854
Mortgage loans 9,503 10,859
Policy loans 6,579 7,253
Real estate 766 769
Other long-term investments 318 273
Short-term investments 232 212
----------- ------------
Total investments 51,407 56,578
Cash and cash equivalents 1,903 2,625
Accrued investment income 856 868
Premiums, accounts and notes receivable 4,528 4,265
Reinsurance recoverables 12,400 6,753
Deferred policy acquisition costs 951 1,542
Property and equipment 858 857
Deferred income taxes 1,924 1,788
Other assets 1,146 1,033
Goodwill and other intangibles 2,490 2,542
Separate account assets 32,464 29,348
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 110,927 $ 108,199
- ------------------------------------------------------------------------------------==========================================
LIABILITIES
Contractholder deposit funds $ 30,524 $ 30,682
Unpaid claims and claim expenses 17,841 17,906
Future policy benefits 12,093 11,976
Unearned premiums 1,839 1,774
----------- ------------
Total insurance and contractholder liabilities 62,297 62,338
Accounts payable, accrued expenses and other liabilities 6,216 6,562
Current income taxes 159 60
Short-term debt 254 690
Long-term debt 1,440 1,465
Separate account liabilities 32,221 29,152
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 102,587 100,267
- ------------------------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 9
SHAREHOLDERS' EQUITY
Common stock (par value, $.25; shares issued, 265; 264) 66 66
Additional paid-in capital 2,704 2,655
Net unrealized appreciation - fixed maturities $ 745 $ 752
Net unrealized appreciation - equity securities 212 132
Net translation of foreign currencies (122) (126)
------- -------
Accumulated other comprehensive income 835 758
Retained earnings 6,376 5,696
Less treasury stock, at cost (1,641) (1,243)
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,340 7,932
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 110,927 $ 108,199
- ------------------------------------------------------------------------------------==========================================
SHAREHOLDERS' EQUITY PER SHARE $ 39.29 $ 36.55
- ------------------------------------------------------------------------------------==========================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
2
<PAGE>
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND CHANGES IN
SHAREHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended June 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Compre- Share- Compre- Share-
hensive holders' hensive holders'
Income Equity Income Equity
===================================================================================================================================
Common stock $ 66 $ 66
---------- ----------
Additional paid-in capital - April 1 2,695 2,605
Issuance of common stock for employee benefits plans 9 27
---------- ----------
Additional paid-in capital - June 30 2,704 2,632
---------- ----------
Accumulated other comprehensive income - April 1 812 307
Net unrealized appreciation - fixed maturities $ 22 22 $ 174 174
Net unrealized appreciation (depreciation) - equity securities (2) (2) 35 35
---------- ----------
Net unrealized appreciation on securities 20 209
Net translation of foreign currencies 3 3 (20) (20)
---------- ----------
Other comprehensive income 23 189
---------- ----------
Accumulated other comprehensive income - June 30 835 496
---------- ----------
Retained earnings - April 1 6,129 5,082
Net income 308 308 279 279
Common dividends declared (61) (62)
---------- ----------
Retained earnings - June 30 6,376 5,299
---------- ----------
Treasury stock - April 1 (1,377) (943)
Repurchase of common stock (260) --
Other treasury stock transactions, net (4) (2)
---------- ----------
Treasury stock - June 30 (1,641) (945)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY $ 331 $ 8,340 $ 468 $ 7,548
- ------------------------------------------------------------------------------====================================================
Six Months Ended June 30,
- ----------------------------------------------------------------------------------------------------------------------------------
Common stock $ 66 $ 66
---------- ----------
Additional paid-in capital - January 1 2,655 2,594
Issuance of common stock for employee benefits plans 49 38
---------- ----------
Additional paid-in capital - June 30 2,704 2,632
---------- ----------
Accumulated other comprehensive income - January 1 758 582
Net unrealized depreciation - fixed maturities $ (7) (7) $ (106) (106)
Net unrealized appreciation - equity securities 80 80 48 48
---------- ----------
Net unrealized appreciation (depreciation) on securities 73 (58)
Net translation of foreign currencies 4 4 (28) (28)
---------- ----------
Other comprehensive income (loss) 77 (86)
---------- ----------
Accumulated other comprehensive income - June 30 835 496
---------- ----------
Retained earnings - January 1 5,696 4,855
Net income 803 803 567 567
Common dividends declared (123) (123)
---------- ----------
Retained earnings - June 30 6,376 5,299
---------- ----------
Treasury stock - January 1 (1,243) (889)
Repurchase of common stock (371) (49)
Other treasury stock transactions, net (27) (7)
---------- ----------
Treasury stock - June 30 (1,641) (945)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY $ 880 $ 8,340 $ 481 $ 7,548
- ------------------------------------------------------------------------------====================================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
3
<PAGE>
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended June 30,
1998 1997
===========================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 803 $ 567
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Insurance liabilities 324 (256)
Reinsurance recoverables 224 399
Deferred policy acquisition costs (70) (71)
Premiums, accounts and notes receivable (265) (36)
Accounts payable, accrued expenses, other liabilities and
current income taxes (357) (180)
Deferred income taxes (172) 47
Realized investment gains (106) (56)
Depreciation and goodwill amortization 156 99
Gain on sale of businesses (367) --
Other, net (273) (160)
---------- ----------
Net cash provided by (used in) operating activities (103) 353
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities 3,688 3,128
Equity securities 173 148
Mortgage loans 562 322
Other (primarily short-term investments) 1,169 2,279
Investment maturities and repayments:
Fixed maturities 1,928 1,974
Mortgage loans 348 241
Investments purchased:
Fixed maturities (5,277) (4,905)
Equity securities (353) (193)
Mortgage loans (920) (714)
Other (primarily short-term investments) (1,739) (1,689)
Net cash from acquisitions and dispositions 1,296 (1,288)
Other, net (179) (75)
---------- ----------
Net cash provided by (used in) investing activities 696 (772)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 4,430 3,656
Withdrawals and benefit payments from contractholder deposit funds (4,805) (3,576)
Net change in short-term debt (362) 146
Issuance of long-term debt -- 600
Repayment of long-term debt (99) (26)
Repurchase of common stock (366) (55)
Issuance of common stock 17 3
Common dividends paid (122) (122)
---------- ----------
Net cash provided by (used in) financing activities (1,307) 626
---------- ----------
Effect of foreign currency rate changes on cash and cash equivalents (8) (23)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (722) 184
Cash and cash equivalents, beginning of period 2,625 1,760
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,903 $ 1,944
- --------------------------------------------------------------------------------------======================================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 494 $ 311
Interest paid $ 66 $ 47
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
4
<PAGE>
CIGNA CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CIGNA Corporation
and all significant subsidiaries (CIGNA). These consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles. Certain reclassifications have been made to conform with the 1998
presentation.
The interim financial statements are unaudited but include all adjustments
(consisting of normal recurring adjustments) necessary, in the opinion of
management, for a fair statement of financial position and results of operations
for the periods reported.
The preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of
portions of the insurance business as well as competitive and other market
conditions, call for caution in drawing specific conclusions from interim
results.
On April 22, 1998, CIGNA's shareholders approved a three-for-one common stock
split, an increase in the number of common shares authorized for issuance from
200 million to 600 million and a decrease in the par value of common stock from
$1 per share to $0.25 per share. The additional shares were distributed on May
15, 1998, to shareholders of record as of May 4, 1998. The reduction in common
stock and corresponding increase in additional paid-in capital of $22 million
reflects these actions and all share data have been retroactively adjusted for
the stock split as though the split had occurred at the beginning of the periods
presented.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that derivatives be
reported on the balance sheet at fair value. Changes in fair value are
recognized in net income or, for derivatives which are hedging market risk
related to future cash flows, in the accumulated other comprehensive income
section of shareholders' equity. Implementation is required by the first quarter
of 2000, with the cumulative effect of adoption reflected in net income and
accumulated other comprehensive income, as appropriate. CIGNA has not determined
the effect or timing of implementation of this pronouncement.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which could change the way segments are
structured and require additional segment disclosure. CIGNA has not determined
the effect or timing of implementation of this pronouncement, which is required
by December 31, 1998.
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the
recognition and measurement of liabilities for guaranty fund and other
insurance-related assessments. Implementation is required by the first quarter
of 1999, with the cumulative effect of adopting the SOP reflected in net income
in the year of adoption. CIGNA has not determined the effect or timing of
implementation of this pronouncement.
In 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 specifies the types
of costs that must be capitalized and amortized over the software's expected
useful life and the types of costs which must be immediately recognized as
expense. Implementation is required by the first quarter of 1999. Although CIGNA
has not yet determined the timing of implementation, this pronouncement is not
expected to have a
5
<PAGE>
material effect on results of operations, liquidity or financial condition.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
As of January 1, 1998, CIGNA sold its individual life insurance and annuity
businesses for cash proceeds of $1.4 billion. The sale resulted in an after-tax
gain of $773 million of which $202 million was recognized upon closing of the
sale. Since the principal agreement to sell these businesses is in the form of
an indemnity reinsurance arrangement, the remaining $571 million of the gain was
deferred and is being recognized at the rate that earnings from the businesses
sold would have been expected to emerge, primarily over fifteen years on a
declining basis. Also, as part of the transaction, CIGNA recorded a reinsurance
recoverable from the purchaser of $5.8 billion for insurance liabilities
retained and transferred invested assets of $5.4 billion along with other assets
and liabilities associated with the businesses. The sales agreement provides for
post-closing adjustments, however, any future adjustments are not expected to be
material to results of operations, liquidity or financial condition.
CIGNA acquired the outstanding common stock of Healthsource, Inc. (Healthsource)
on June 25, 1997. The cost of the acquisition was $1.7 billion, reflecting the
purchase of Healthsource common stock for $1.4 billion and the retirement of
Healthsource debt of $250 million. The acquisition was accounted for as a
purchase, and was financed through the issuance of long-term debt of $600
million and a combination of internally generated funds and short-term debt. The
results of operations of Healthsource are included in the accompanying
consolidated financial statements from the date of acquisition. Healthsource
revenues that are not included in CIGNA's results of operations were $489
million and $971 million for the second quarter and six months of 1997. The pro
forma effect on CIGNA's net income was not material.
Goodwill and other intangible assets associated with the Healthsource
acquisition were $1.5 billion, including $24 million recorded in the fourth
quarter of 1997 for severance of Healthsource employees, vacated Healthsource
lease space and adjustments to Healthsource net assets to conform to CIGNA's
accounting policies. As of June 30, 1998, approximately $6 million of severance
was paid to approximately 475 employees. Goodwill and other intangible assets
are being amortized on a straight-line basis over periods ranging from eight to
40 years.
CIGNA had other acquisitions and dispositions during the six months of 1998 and
1997, the effects of which were not material to the financial statements.
NOTE 4 - INVESTMENTS
Realized Investment Gains and Losses
Realized gains and losses on investments, excluding policyholder share, were as
follows:
- ---------------------------------------------------------------------
Three Months Six Months
Ended Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- ---------------------------------------------------------------------
Realized investment
gains (losses):
Fixed maturities $14 $3 $46 $29
Equity securities 16 9 20 14
Mortgage loans (7) (1) 5 (14)
Real estate 6 (1) 7 17
Other 18 2 28 10
--------------------------------------------
47 12 106 56
Less income taxes 15 3 36 19
- ---------------------------------------------------------------------
Net realized investment
gains $32 $9 $70 $37
- -------------------------============================================
Fixed Maturities and Equity Securities
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, were as follows:
- ---------------------------------------------------------------------
Three Months Six Months
Ended Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- ---------------------------------------------------------------------
Proceeds from sales $2,175 $1,689 $3,861 $3,276
Gross gains on sales 90 67 141 86
Gross losses on sales (35) (49) (59) (60)
- ---------------------------------------------------------------------
6
<PAGE>
The components of unrealized appreciation (depreciation) on securities for the
three and six months ended June 30 were as follows:
- ------------------------------------------------------------------
(In millions) 1998 1997
- ------------------------------------------------------------------
Three months ended June 30,
Unrealized appreciation on securities held,
net of taxes of $16 and $117, respectively. $40 $217
Less gains realized in net income, net of
taxes of $10 and $4, respectively. 20 8
---------------------
Net unrealized appreciation $20 $209
- ---------------------------------------------=====================
Six months ended June 30,
Unrealized appreciation (depreciation) on
securities held, net of taxes (benefits) of
$109 and $(14), respectively. $219 $(30)
Less gains realized in net income, net of
taxes of $78 and $15, respectively. 146 28
---------------------
Net unrealized appreciation (depreciation) $73 $(58)
- ---------------------------------------------=====================
NOTE 5 - INCOME TAXES
CIGNA's federal income tax returns are routinely audited by the Internal Revenue
Service (IRS), and provisions are made in the financial statements in
anticipation of the results of these audits. The IRS completed its audits for
the years 1982 through 1993, and challenged CIGNA on one issue related to years
prior to 1989. During the third quarter of 1997, the U.S. Tax Court ruled
against CIGNA on this issue. The decision did not have an effect on results of
operations, as liabilities had been previously established. In connection with
this matter, CIGNA made payments of approximately $250 million during 1997 and
$115 million in the first quarter of 1998. CIGNA has appealed the U.S. Tax Court
decision to the U.S. Court of Appeals.
In management's opinion, adequate tax liabilities have been established for all
years.
NOTE 6 - EARNINGS PER SHARE
- -------------------------------------------------------------------
Effect
(Dollars in millions, of
except per share amounts) Basic Dilution Diluted
- -------------------------------------------------------------------
Three Months Ended June 30,
- -------------------------------------------------------------------
1998
- -------------------------------------------------------------------
Net income $308 -- $308
- --------------------------------===================================
Shares (in thousands):
Weighted average 213,831 -- 213,831
Options and restricted
stock grants 2,715 2,715
- -------------------------------------------------------------------
Total shares 213,831 2,715 216,546
- --------------------------------===================================
Earnings per share $1.44 $(0.02) $1.42
- --------------------------------===================================
1997
- -------------------------------------------------------------------
Net income $279 -- $279
- --------------------------------===================================
Shares (in thousands):
Weighted average 220,930 -- 220,930
Options and restricted
stock grants 1,843 1,843
- -------------------------------------------------------------------
Total shares 220,930 1,843 222,773
- --------------------------------===================================
Earnings per share $1.26 $(0.01) $1.25
- --------------------------------===================================
Six Months Ended June 30,
- -------------------------------------------------------------------
1998
- -------------------------------------------------------------------
Net income $803 -- $803
- --------------------------------===================================
Shares (in thousands):
Weighted average 214,730 -- 214,730
Options and restricted
stock grants 2,415 2,415
- -------------------------------------------------------------------
Total shares 214,730 2,415 217,145
- --------------------------------===================================
Earnings per share $3.74 $(0.04) $3.70
- --------------------------------===================================
1997
- -------------------------------------------------------------------
Net income $567 -- $567
- --------------------------------===================================
Shares (in thousands):
Weighted average 220,690 -- 220,690
Options and restricted
stock grants 1,838 1,838
- -------------------------------------------------------------------
Total shares 220,690 1,838 222,528
- --------------------------------===================================
Earnings per share $2.57 $(0.02) $2.55
- --------------------------------===================================
Common shares held as Treasury shares were 52,561,178 and 41,172,189 as of June
30, 1998 and 1997, respectively.
7
<PAGE>
NOTE 7 - REINSURANCE
In the normal course of business, CIGNA's insurance subsidiaries enter into
agreements, primarily relating to short-duration contracts, to assume and cede
reinsurance with other insurance companies. Reinsurance is ceded primarily to
limit losses from large exposures and to permit recovery of a portion of direct
losses, although ceded reinsurance does not relieve the originating insurer of
liability. CIGNA 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.
Failure of reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies
and disputes, could result in losses. Allowances for uncollectible amounts were
$707 million and $720 million as of June 30, 1998 and December 31, 1997,
respectively.
Future charges for unrecoverable reinsurance may materially affect results of
operations in future periods, however, such amounts are not expected to have a
material adverse effect on CIGNA's liquidity or financial condition.
For the second quarter and six months of 1998, premiums and fees were net of
ceded premiums of $652 million and $1.1 billion, respectively. For the second
quarter and six months of 1997, premiums and fees were net of ceded premiums of
$589 million and $1.0 billion, respectively. In addition, benefits, losses and
settlement expenses for the second quarter and six months of 1998 were net of
reinsurance recoveries of $477 million and $862 million, respectively. Benefits,
losses and settlement expenses for the second quarter and six months of 1997
were net of reinsurance recoveries of $429 million and $687 million,
respectively.
NOTE 8 - COST REDUCTION INITIATIVES
In the fourth quarter of 1997, CIGNA adopted a cost reduction plan to
restructure its health care operations, which resulted in a pre-tax charge of
$32 million ($22 million after-tax) in the Employee Life and Health Benefits
segment. The charge consisted primarily of costs related to severance, real
estate and other costs for office closings. The cash outlays associated with
these initiatives will continue through 1999 with most occurring in 1998. CIGNA
has funded and will continue to fund the cash outlays through liquid assets, and
such funding has not and will not have a material adverse effect on its
liquidity. As of June 30, 1998, approximately $3 million of severance was paid
to approximately 535 employees.
NOTE 9 - CONTINGENCIES AND OTHER MATTERS
Financial Guarantees
CIGNA, through its subsidiaries, is contingently liable for various financial
guarantees provided in the ordinary course of business. These include guarantees
for the repayment of industrial revenue bonds as well as other debt instruments
and guarantees of a minimum level of benefits for certain separate account
contracts. Although the ultimate outcome of any loss contingencies arising from
CIGNA's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on
CIGNA's liquidity or financial condition.
8
<PAGE>
Regulatory and Industry Developments
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to:
o increase health care regulation;
o revise the system of funding cleanup of
environmental damages;
o reinterpret insurance contracts long after the
policies were written to provide coverage
unanticipated by CIGNA;
o restrict insurance pricing and the application of
underwriting standards; and
o revise federal tax laws.
Some of the more significant issues are discussed below.
Efforts at the federal and state level to increase regulation of the health care
industry could have an adverse effect on CIGNA's health care operations if they
reduce marketplace competition and innovation or result in increased medical or
administrative costs. Matters under consideration that could have an adverse
effect include mandated benefits or services that increase costs without
improving the quality of care, loss of the Employee Retirement Income Security
Act of 1974 (ERISA) preemption of state law and restrictions on the use of
prescription drug formularies. Due to the uncertainty associated with the timing
and content of any proposals ultimately adopted, the effect on CIGNA's results
of operations, liquidity or financial condition cannot be reasonably estimated
at this time.
Proposed legislation for Superfund reform remains under consideration by
Congress. Any changes in Superfund relating to 1) assigning responsibility, 2)
funding cleanup costs or 3) establishing cleanup standards could affect the
liabilities of policyholders and insurers. Due to uncertainties associated with
the timing and content of any future Superfund legislation, the effect on
CIGNA's results of operations, liquidity or financial condition cannot be
reasonably estimated at this time.
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate-owned
life insurance products. CIGNA does not expect this legislation to have a
material effect on its consolidated results of operations, liquidity or
financial condition.
The National Association of Insurance Commissioners (NAIC) is currently
addressing risk-based capital guidelines for health maintenance organizations
(HMOs). CIGNA does not expect such guidelines to have a material adverse effect
on its future results of operations, liquidity or financial condition.
In 1998, the NAIC adopted standardized statutory accounting principles. Since
these principles have not yet been adopted by the insurance departments of
various jurisdictions in which CIGNA's insurance subsidiaries are domiciled, the
timing or effects of implementation have not yet been determined.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain.
Property and Casualty Unpaid Claims and Claim Expense Reserves and Reinsurance
Recoverables
CIGNA's property and casualty loss reserves are an estimate of future payments
for reported and unreported claims for losses and related expenses with respect
to insured events that have occurred. The basic assumption underlying the many
traditional actuarial and other methods used in the estimation of property and
casualty loss reserves is that past experience is an appropriate basis for
predicting future events. However, current trends and other factors that would
modify past experience are also considered. The process of establishing loss
reserves is subject to uncertainties that are normal, recurring and inherent in
the property and casualty business.
9
<PAGE>
Reserving for property and casualty claims continues to be a complex and
uncertain process, requiring the use of informed estimates and judgments.
CIGNA's estimates and judgments may be revised as additional experience and
other data become available and are reviewed, as new or improved methodologies
are developed or as current law changes. Any such revisions could result in
future changes in estimates of losses or reinsurance recoverables, and would be
reflected in CIGNA's results of operations for the period in which the estimates
are changed. While the effect of any such changes in estimates of losses or
reinsurance recoverables could be material to future results of operations,
CIGNA does not expect such changes to have a material effect on its liquidity or
financial condition.
In management's judgment, information currently available has been appropriately
considered in estimating CIGNA's loss reserves and reinsurance recoverables.
Litigation
CIGNA is continuously involved in numerous lawsuits arising, for the most part,
in the ordinary course of business, either as a liability insurer defending
third-party claims brought against its insureds or as an insurer defending
coverage claims brought against it by its policyholders or other insurers. One
such area of litigation involves policy coverage and judicial interpretation of
legal liability for asbestos-related and environmental pollution (A&E) claims.
While the outcome of all litigation involving CIGNA, including insurance-related
litigation, cannot be determined, litigation (including that related to A&E
claims) is not expected to result in losses that differ from recorded reserves
by amounts that would be material to results of operations, liquidity or
financial condition. Also, reinsurance recoveries related to claims in
litigation, net of the allowance for uncollectible reinsurance, are not expected
to result in recoveries that differ from recorded recoverables by amounts that
would be material to results of operations, liquidity or financial condition.
Property and Casualty Restructuring
Effective December 31, 1995, CIGNA restructured its domestic property and
casualty businesses into two separate operations, ongoing and run-off. Certain
competitors and policyholders of CIGNA are challenging the restructuring in
court. Although CIGNA expects the matter to be in litigation for some time, it
expects to ultimately prevail.
10
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION
The following discussion addresses the financial condition of CIGNA Corporation
(CIGNA) as of June 30, 1998, compared with December 31, 1997, and its results of
operations for the quarter and six months ended June 30, 1998, compared with the
same periods last year. This discussion should be read in conjunction with
Management's Discussion and Analysis included in CIGNA's 1997 Annual Report to
Shareholders (pages 10 through 23) and in CIGNA's report on Form 10-Q for the
first quarter of 1998, to which the reader is directed for additional
information. Due to the seasonality of certain aspects of CIGNA's business,
caution should be used in estimating results for the full year based on interim
results of operations.
Acquisitions and Dispositions
As of January 1, 1998, CIGNA sold its individual life insurance and annuity
businesses for cash proceeds of $1.4 billion. The sale resulted in an after-tax
gain of $773 million, of which $202 million was recognized upon closing of the
sale. Since the principal agreement to sell these businesses is in the form of
an indemnity reinsurance arrangement, the remaining $571 million of the gain was
deferred and is being recognized at the rate that earnings from the businesses
sold would have been expected to emerge, primarily over fifteen years on a
declining basis. CIGNA recognized approximately $16 million and $33 million of
the deferred gain in the second quarter and six months of 1998, respectively.
The sales agreement provides for post-closing adjustments, however, any future
adjustments are not expected to be material to results of operations, liquidity
or financial condition.
CIGNA's priorities for the use of capital, including proceeds from the sale, are
internal growth, acquisitions and share repurchases. Absent higher internal
growth or attractive acquisition opportunities, proceeds from the sale are
expected to be used for share repurchases, depending on market conditions.
CIGNA acquired the outstanding common stock of Healthsource, Inc. (Healthsource)
on June 25, 1997. The cost of the acquisition was $1.7 billion, reflecting the
purchase of Healthsource common stock for $1.4 billion and the retirement of
Healthsource debt of $250 million. The acquisition was accounted for as a
purchase, and was financed through the issuance of long-term debt of $600
million and a combination of internally generated funds and short-term debt.
Goodwill and other intangible assets associated with the Healthsource
acquisition were $1.5 billion, including $24 million recorded in the fourth
quarter of 1997 for severance of Healthsource employees, vacated Healthsource
lease space and adjustments to Healthsource net assets to conform to CIGNA's
accounting policies. Annual expense savings of $35 million after-tax are
expected from the severance actions and vacated lease space, with approximately
two-thirds emerging in 1998 and the full amount in 1999. Goodwill and other
intangible assets are being amortized on a straight-line basis over periods
ranging from eight to 40 years.
In addition, in the fourth quarter of 1997, CIGNA recorded a pre-tax integration
charge of $87 million ($58 million after-tax) in connection with its review of
Healthsource operations. The charge primarily resulted from an analysis of
Healthsource HMO medical reserves, receivable balances and contractual
obligations.
CIGNA continues to conduct strategic and financial reviews of its businesses in
order to deploy its capital most effectively. In connection with these efforts,
CIGNA has invested in various growth initiatives including approximately $210
million for recent international life and health expansion, mainly in Brazil.
Certain risks are inherent in expanding operations in foreign countries. These
investments are routinely monitored for potential impairment. However,
management currently believes that such investments are recoverable.
In July 1998, CIGNA entered into an agreement, subject to certain conditions to
closing, to make additional investments of approximately $200 million in certain
Brazilian health care companies, resulting in total investments in these
companies of approximately $325 million. CIGNA expects to make additional
investments in these companies.
11
<PAGE>
Combined revenues of these companies during 1997 were approximately $1 billion.
See Note 3 to the Financial Statements for additional information on
acquisitions and dispositions.
Cost Reduction Initiatives
In the fourth quarter of 1997, CIGNA adopted a cost reduction plan to
restructure its health care operations, which resulted in a pre-tax charge of
$32 million ($22 million after-tax) in the Employee Life and Health Benefits
segment. The charge consisted primarily of costs related to severance, real
estate and other costs for office closings. The cash outlays associated with
these initiatives will continue through 1999 with most occurring in 1998. CIGNA
has funded and will continue to fund the cash outlays through liquid assets, and
such funding has not and will not have a material adverse effect on its
liquidity. These initiatives are expected to result in annual after-tax expense
savings of $50 million with approximately two-thirds of the savings emerging in
1998 and the full amount in 1999. As of June 30, 1998, there were no material
changes to the costs associated with or the anticipated annual savings related
to these initiatives. As of June 30, 1998, approximately $3 million of severance
was paid to approximately 535 employees.
Other Matters
CIGNA is highly dependent on automated systems and systems applications in
conducting its ongoing operations. Such systems are utilized for, among other
things, processing claims, billing and collecting premiums from customers and
managing investment activities. If these systems were unable to process data
accurately because of failing to be Year 2000 ready, these activities would be
interrupted and could have a material adverse effect on CIGNA's results of
operations.
By the beginning of 1999, CIGNA expects to substantially complete modifications
or replacement of its systems to ensure Year 2000 readiness and, during 1999,
expects to complete testing of its systems and verify that its systems properly
interface with external parties, including customers and third-party
administrators. CIGNA is utilizing both internal and external resources to meet
this timetable. The after-tax costs of these efforts are expected to be
approximately $100 million in 1998 and $50 million in 1999. Approximately 60% of
total Year 2000 costs are attributable to existing systems resources which have
been redirected to the Year 2000 efforts. The remaining amounts represent
incremental costs for Year 2000 efforts. Due to the complexities of estimating
remediation costs, estimates are subject to change as Year 2000 efforts
progress. Year 2000 costs for the second quarter and six months of 1998 were $28
million and $42 million after-tax, respectively.
As noted above, CIGNA has relationships with various third-party entities in its
ordinary course of business. CIGNA is assessing and attempting to mitigate its
risks with respect to the failure of these entities to be Year 2000 ready. The
effect, if any, on CIGNA's results of operations from the failure of these
entities to be Year 2000 ready is not reasonably estimable. Property and
casualty indemnity losses for Year 2000 claims and litigation costs to defend or
deny such claims are not reasonably estimable at this time.
Certain European countries plan to begin implementing a common currency (euro)
in January 1999. CIGNA expects that it will have procedures and systems in place
as of January 1999 to support the implementation of the euro and that the costs
of these efforts as well as the overall effect on CIGNA's international
operations will not be material.
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to:
o increase health care regulation;
o revise the system of funding cleanup of
environmental damages;
o reinterpret insurance contracts long after the
policies were written to provide coverage
unanticipated by CIGNA;
o restrict insurance pricing and the application of
underwriting standards; and
o revise federal tax laws.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain. For additional information, see Note 9 to the Financial
Statements.
12
<PAGE>
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that derivatives be
reported on the balance sheet at fair value. Changes in fair value are
recognized in net income or, for derivatives which are hedging market risk
related to future cash flows, in the accumulated other comprehensive income
section of shareholders' equity. Implementation is required by the first quarter
of 2000, with the cumulative effect of adoption reflected in net income and
accumulated other comprehensive income, as appropriate. CIGNA has not determined
the effect or timing of implementation of this pronouncement.
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the
recognition and measurement of liabilities for guaranty fund and other
insurance-related assessments. Implementation is required by the first quarter
of 1999, with the cumulative effect of adopting the SOP reflected in net income
in the year of adoption. CIGNA has not determined the effect or timing of
implementation of this pronouncement.
In 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 specifies the types
of costs that must be capitalized and amortized over the software's expected
useful life and the types of costs which must be immediately recognized as
expense. Implementation is required by the first quarter of 1999. Although CIGNA
has not yet determined the timing of implementation, this pronouncement is not
expected to have a material effect on results of operations, liquidity or
financial condition.
CONSOLIDATED RESULTS OF OPERATIONS
=================================================================
FINANCIAL SUMMARY Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------
Premiums and fees $4,115 $3,482 $8,016 $6,870
Net investment income 942 1,062 1,879 2,115
Other revenues 217 163 731 323
Realized investment gains 47 12 106 56
----------------------------------------
Total revenues 5,321 4,719 10,732 9,364
Benefits and expenses 4,850 4,308 9,493 8,516
----------------------------------------
Income before taxes 471 411 1,239 848
Income taxes 163 132 436 281
----------------------------------------
Net income $308 $279 $803 $567
- -------------------------========================================
Realized investment gains,
net of taxes $32 $9 $70 $37
- -------------------------========================================
CIGNA's consolidated net income increased 10% for the second quarter and 42% for
the six months of 1998 from the same periods last year. These increases reflect
higher operating income* in the Employee Life and Health Benefits and Employee
Retirement and Savings Benefits segments, improved realized investment results
and, for the six months of 1998, the $202 million after-tax gain recognized upon
closing of the sale of CIGNA's individual life insurance and annuity businesses.
After-tax realized investment results increased significantly in the second
quarter and six months of 1998 from the same periods last year. These increases
primarily reflect gains on sales of fixed maturities, real estate partnerships
and, for the six months, mortgage loans. For additional information see Note 4
to the Financial Statements.
Full year operating income for 1998 is expected to be comparable to 1997,
excluding the $202 million gain on sale of businesses discussed above and the
1997 Healthsource integration and health care cost reduction charge of $80
million. Results for 1998 could be adversely affected by the factors noted in
the cautionary statements on page 22.
- --------
*Operating income (loss) is defined as net income (loss) excluding after-tax
realized investment results.
13
<PAGE>
EMPLOYEE LIFE AND HEALTH BENEFITS
=================================================================
FINANCIAL SUMMARY Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------
Premiums and fees $2,827 $2,117 $5,557 $4,220
Net investment income 141 138 284 273
Other revenues 137 117 266 224
Realized investment gains 29 1 56 7
----------------------------------------
Total revenues 3,134 2,373 6,163 4,724
Benefits and expenses 2,881 2,186 5,675 4,352
----------------------------------------
Income before taxes 253 187 488 372
Income taxes 93 59 179 123
----------------------------------------
Net income $160 $128 $309 $249
- -------------------------========================================
Realized investment gains,
net of taxes $18 $2 $36 $6
- -------------------------========================================
Net income for the Employee Life and Health Benefits segment increased 25% and
24% for the second quarter and six months of 1998, compared with the same
periods last year. Operating income for the second quarter and six months of
1998 increased 13% and 12%, respectively, compared with the same periods last
year. Operating income for the Indemnity and HMO operations was as follows:
==================================================================
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- ------------------------------------------------------------------
Indemnity operations $72 $68 $141 $126
HMO operations 70 58 132 117
- ------------------------------------------------------------------
Total $142 $126 $273 $243
==================================================================
Indemnity operating income increased 6% and 12% for the second quarter and six
months of 1998, respectively, compared with the same periods last year. These
increases primarily reflect improved claim experience.
HMO results for the second quarter and six months of 1998 include net
unfavorable after-tax adjustments of $6 million primarily for uncollectible
receivables for a health care service business. HMO results for the second
quarter and six months of 1997 include net favorable after-tax adjustments of $9
million and $11 million, respectively. Excluding the adjustments, HMO earnings
were $76 million and $138 million for the second quarter and six months of 1998,
respectively, compared with $49 million and $106 million for the same periods
last year. These improvements reflect medical membership growth primarily from
the Healthsource acquisition and rate increases, improved results in dental and
mental health operations and lower operating expenses per member due to expense
savings initiatives. These improvements were partially offset by increased HMO
medical costs reflecting higher pharmacy and outpatient costs, and Healthsource
goodwill and other intangibles amortization of $9 million and $18 million for
the second quarter and six months of 1998, respectively.
Premiums and fees increased 34% and 32% for the second quarter and six months of
1998, respectively, compared to the same periods last year. These increases
primarily reflect Healthsource premiums and fees of approximately $525 million
and $1.0 billion, respectively, rate increases and non-Healthsource membership
growth. Growth in premiums is expected to continue to be constrained by
competitive pressures in both the medical indemnity and HMO markets.
Net investment income increased 2% and 4% for the second quarter and six months
of 1998, respectively, compared to the same periods in 1997 primarily due to the
addition of assets related to Healthsource, partially offset by lower yields.
As of June 30, 1998, total HMO membership was approximately 6.4 million,
representing an increase of 41% since June 30, 1997 and 9% since December 31,
1997. Approximately 65% of the increase from June 30, 1997 is a result of the
Healthsource acquisition while the remaining 35% reflects membership growth in
CIGNA's HMO alternative funding programs and traditional HMO business. Under
alternative funding programs, the customer assumes all or a portion of the
responsibility for funding claims. CIGNA generally earns a lower margin on these
programs than under traditional HMO plans.
Management believes that adding premium equivalents to premiums and fees
(adjusted premiums and fees) produces a more meaningful measure of business
volume. Premium equivalents for the second quarter and six months of 1998 were
approximately $3.2 billion and $6.4 billion, respectively. These amounts
represent an increase of 34% compared with the same periods last year. This
increase primarily reflects the Healthsource acquisition, and to a lesser
extent, higher medical
14
<PAGE>
costs. Premium equivalents are expected to continue to be constrained by
competitive pressures in both the medical indemnity and HMO markets. Premium
equivalents were 54% and 53% of total adjusted premiums and fees for the six
months of 1998 and 1997, respectively. Administrative Services Only (ASO) plans
accounted for 49% of total adjusted premiums and fees for the six months of 1998
and 1997.
EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
=================================================================
FINANCIAL SUMMARY Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------
Premiums and fees $59 $52 $113 $98
Net investment income 388 397 775 799
Realized investment gains 12 2 16 14
----------------------------------------
Total revenues 459 451 904 911
Benefits and expenses 364 372 723 740
----------------------------------------
Income before taxes 95 79 181 171
Income taxes 31 25 58 55
----------------------------------------
Net income $64 $54 $123 $116
- -------------------------========================================
Realized investment gains,
net of taxes $8 $1 $11 $9
- -------------------------========================================
Net income for the Employee Retirement and Savings Benefits segment increased
19% and 6% for the second quarter and six months of 1998, compared with the same
periods of 1997. Operating income for the second quarter and six months of 1998
was $56 million and $112 million, compared with $53 million and $107 million for
the same periods last year. These increases reflect higher earnings from an
increased asset base, partially offset by customers' shift to lower margin
products (separate account equity funds).
Premiums and fees increased 13% and 15% for the second quarter and six months of
1998, respectively, compared with the same periods last year, reflecting higher
annuity sales and higher fees from separate accounts.
Net investment income decreased 2% and 3% for the second quarter and six months
of 1998, respectively. These decreases primarily reflect lower investment yields
and customers' continued redirection of a portion of their investments from the
general account to separate accounts.
Assets under management is generally a key determinant of earnings for this
segment. For the six months ended June 30, assets under management and related
activity, including amounts attributable to separate accounts, were as follows:
==================================================================
(In millions) 1998 1997
- ------------------------------------------------------------------
Balance -- January 1 $46,074 $40,605
Premiums and deposits 3,851 3,607
Investment results 1,475 1,201
Increase in fair value of assets 1,983 1,711
Customer withdrawals (2,258) (1,220)
Other, including participant
withdrawals and benefit payments (2,852) (1,993)
- ------------------------------------------------------------------
Balance -- June 30 $48,273 $43,911
==================================================================
Premiums and deposits increased 7% in the six months of 1998, compared with the
same period in 1997, primarily reflecting higher recurring deposits from
existing customers. For the six months of 1998 and 1997, approximately 53% and
48%, respectively, of premiums and deposits reflect recurring deposits from
existing customers while the remaining amounts represent sales to new customers
and new plan sales to existing customers. Investment results increased 23% in
the six months of 1998, compared with the same period in 1997. This increase
reflects higher capital gains and growth in assets, partially offset by lower
investment yields. The increase for 1998 in the fair value of assets is due to
market value appreciation of equity securities in separate accounts and, to a
lesser extent, market value appreciation of fixed maturities in the general
account. The increase in customer withdrawals is primarily due to the effect of
one customer withdrawal in the second quarter of 1998. The increase in Other
reflects larger participant withdrawals and benefit payments due to a higher
level of assets under management.
Management expects asset growth to continue to be constrained due to the lack of
growth in the defined benefit market. In addition, assets under management will
continue to be affected by market value fluctuations for fixed maturities and
equity securities.
15
<PAGE>
INDIVIDUAL FINANCIAL SERVICES
=================================================================
FINANCIAL SUMMARY Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------
Premiums and fees $159 $249 $314 $483
Net investment income 166 271 336 531
Other revenues 25 15 367 29
Realized investment gains
(losses) (1) (2) 7 11
----------------------------------------
Total revenues 349 533 1,024 1,054
Benefits and expenses 296 461 584 897
----------------------------------------
Income before taxes 53 72 440 157
Income taxes 16 25 155 55
----------------------------------------
Net income $37 $47 $285 $102
- -------------------------========================================
Realized investment gains
(losses), net of taxes $-- ($1) $5 $7
- -------------------------========================================
Net income for the Individual Financial Services segment decreased for the
second quarter of 1998 and increased substantially for the six months of 1998,
compared with the same periods of 1997. Results for the six months of 1998
include an after-tax gain of $202 million recognized upon the closing of the
sale of the individual life insurance and annuity businesses and results for the
second quarter and six months include $16 million and $33 million after-tax,
respectively, from recognition of a portion of the deferred gain associated with
the sale (as discussed on page 11). Excluding these amounts, operating income
for the second quarter and six months of 1998 was $21 million and $45 million,
respectively. These amounts, compared with operating income of $25 million and
$51 million for the same periods in 1997 (excluding results from the businesses
sold), primarily reflect unfavorable claim experience in the reinsurance
operation, partially offset by growth in interest-sensitive and specialty life
reinsurance products.
For the second quarter and six months of 1998, premiums and fees decreased 36%
and 35%, respectively, compared with the same periods of 1997. Excluding 1997
premiums and fees related to the businesses sold, the increase for the second
quarter and six months of 1998 was 11% and 14%, respectively. These increases
reflect growth in reinsurance and higher renewal premiums for interest-sensitive
products.
Net investment income decreased 39% and 37% for the second quarter and six
months of 1998, respectively, compared with the same periods of 1997. Excluding
1997 net investment income related to the businesses sold, the increase for the
second quarter and six months of 1998 was 9% and 11%, respectively. These
increases primarily reflect growth in interest-sensitive products.
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate-owned
life insurance (COLI) products. For the second quarter and six months of 1998,
revenues of $139 million and $284 million and operating income of $11 million
and $21 million, respectively, were from leveraged COLI products that are
affected by this legislation. The effect of this legislation on customers'
decisions to maintain these policies after the phase-out period is unknown.
However, all or a portion of these policies could lapse.
PROPERTY AND CASUALTY
=================================================================
FINANCIAL SUMMARY Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------
Premiums and fees $1,070 $1,064 $2,032 $2,069
Net investment income 180 189 353 384
Other revenues 67 65 136 137
Realized investment gains 3 11 22 24
-----------------------------------------
Total revenues 1,320 1,329 2,543 2,614
Benefits and expenses 1,237 1,238 2,368 2,428
-----------------------------------------
Income before taxes 83 91 175 186
Income taxes 27 25 57 55
-----------------------------------------
Net income $56 $66 $118 $131
- ------------------------=========================================
Realized investment
gains, net of taxes $1 $7 $13 $15
- ------------------------=========================================
Net income for the Property and Casualty segment decreased 15% and 10% for the
second quarter and six months of 1998, respectively, compared with the same
periods last year.
16
<PAGE>
Operating income decreased 7% and 9% for the second quarter and six months of
1998, respectively, compared with the same periods in 1997. Operating income for
the ongoing and run-off operations was as follows:
=================================================================
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------
Ongoing operations:
International $28 $36 $59 $69
Domestic 27 23 46 46
-----------------------------------------
Total ongoing
operations 55 59 105 115
Run-off operations -- -- -- 1
- -----------------------------------------------------------------
Total $55 $59 $105 $116
=================================================================
The decline in the international operations for the second quarter and six
months of 1998 primarily reflects lower property and casualty earnings due to
unfavorable claim experience and the competitive environment, and lower net
investment income. Partially offsetting the decline were improvements in the
international life and health operations (primarily in Japan) and the absence of
a $6 million after-tax charge for cost reduction initiatives, primarily
severance, recorded in the second quarter of 1997.
The increase in the domestic operations in the second quarter of 1998 reflects
improved claim experience in the commercial package and property lines of
business partially offset by unfavorable claim experience in workers'
compensation and lower net investment income. For the six months, operating
income was level with the prior year reflecting overall improved claim
experience, offset by lower net investment income.
Results for the run-off operations primarily reflect prior year development on
claim and claim adjustment expense reserves and investment activity.
Premiums and fees increased 1% for the second quarter and declined 2% for the
six months of 1998. These modest changes reflect continued price competition
and, for international, the unfavorable effect of foreign exchange.
Net investment income decreased 5% and 8% for the second quarter and six months
of 1998, respectively, compared with the same periods of 1997. The declines
reflect lower average assets, the unfavorable effect of foreign exchange and a
shift in the investment portfolio mix from fixed maturities to equity
securities.
The ongoing operations had pre-tax catastrophe losses of $10 million and $30
million for the second quarter and six months of 1998, respectively, compared
with $2 million and $14 million for the same periods of 1997. The effects of
reinsurance on catastrophe losses for the periods presented were not material.
Effective July 1, 1998, CIGNA revised its reinsurance programs. CIGNA's domestic
reinsurance programs provide for approximately 60% recovery for property
catastrophe losses between $45 million and $260 million. Other reinsurance
programs are in place which could provide for the recovery of up to an
additional $300 million on certain losses, including property catastrophes,
depending on the aggregate annual level of losses incurred. CIGNA's
international catastrophe program provides approximately 95% recovery of losses
between $100 million and $400 million. CIGNA's future results of operations
could be volatile, depending on the frequency and severity of future
catastrophes.
Certain competitors and policyholders of CIGNA are challenging in court the
restructuring of its domestic property and casualty business into two separate
operations, ongoing and run-off. Although CIGNA expects the matter to be in
litigation for some time, it expects to ultimately prevail.
17
<PAGE>
LOSS RESERVES AND REINSURANCE RECOVERABLES
CIGNA's reserving methodology and significant issues affecting the estimation of
loss reserves and reinsurance recoverables are described in its 1997 Form 10-K.
CIGNA's property and casualty loss reserves of $15.0 billion and $15.1 billion
as of June 30, 1998 and December 31, 1997, respectively, are an estimate of
future payments for reported and unreported claims for losses and related
expenses with respect to insured events that have occurred. The basic assumption
underlying the many traditional actuarial and other methods used in the
estimation of property and casualty loss reserves is that past experience is an
appropriate basis for predicting future events. However, current trends and
other factors that would modify past experience are also considered. The process
of establishing loss reserves is subject to uncertainties that are normal,
recurring and inherent in the property and casualty business.
CIGNA continually attempts to improve its loss estimation process by refining
its analysis of loss development patterns, claims payments and other
information, but there remain many reasons for adverse development of estimated
ultimate liabilities. For example, unanticipated changes in workers'
compensation and product liability laws have at times significantly affected the
ability of insurers to estimate liabilities for unpaid losses and related
expenses.
Reserving for property and casualty claims continues to be a complex and
uncertain process, requiring the use of informed estimates and judgments.
CIGNA's estimates and judgments may be revised as additional experience and
other data become available and are reviewed, as new or improved methodologies
are developed or as current law changes. Any such revisions could result in
future changes in estimates of losses or reinsurance recoverables, and would be
reflected in CIGNA's results of operations for the period in which the estimates
are changed. While the effect of any such changes in estimates of losses or
reinsurance recoverables could be material to future results of operations,
CIGNA does not expect such changes to have a material effect on its liquidity or
financial condition.
CIGNA manages its loss exposure through the use of reinsurance. While
reinsurance arrangements are designed to limit losses from large exposures and
to permit recovery of a portion of direct losses, reinsurance does not relieve
CIGNA of liability to its insureds. Accordingly, CIGNA's loss reserves represent
total gross losses, and reinsurance recoverables represent anticipated
recoveries of a portion of those losses.
CIGNA's reinsurance recoverables were approximately $5.9 billion and $6.2
billion as of June 30, 1998 and December 31, 1997, net of allowances for
unrecoverable reinsurance of $707 million and $720 million, respectively.
In management's judgment, information currently available has been appropriately
considered in estimating CIGNA's loss reserves and reinsurance recoverables.
The following table shows the adverse (favorable) pre-tax effects on the
Property and Casualty segment's results of operations from prior year
development, net of reinsurance, for the quarter and six months ended June 30:
=================================================================
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------
By business operation:
Ongoing operations $3 $(7) $5 $14
Run-off operations 47 47 93 100
- -----------------------------------------------------------------
Total $50 $40 $98 $114
=================================================================
By type of loss:
Asbestos-related $19 $27 $37 $48
Environmental pollution 8 8 15 14
Unrecoverable
reinsurance 5 3 14 9
Workers' compensation 14 6 24 18
Other 4 (4) 8 25
- -----------------------------------------------------------------
Total $50 $40 $98 $114
=================================================================
OTHER OPERATIONS
Other Operations primarily includes unallocated investment income, expenses
(including debt service) and taxes. Also included are the results of CIGNA's
settlement annuity business and non-insurance operations engaged primarily in
investment and real estate activities and certain new business initiatives.
18
<PAGE>
Excluding realized investment results, Other Operations had operating losses of
$14 million and $37 million for the second quarter and six months of 1998,
respectively, compared with losses of $16 million and $31 million for the same
periods in 1997. The improvement for the second quarter of 1998 primarily
reflects lower operating expenses while the increase in operating losses for the
six months primarily reflects financing costs associated with the Healthsource
acquisition and increased expenses related to new business initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for CIGNA and its insurance subsidiaries has remained strong as
evidenced by significant amounts of short-term investments and cash and cash
equivalents in the aggregate. Generally, CIGNA has met its operating
requirements by maintaining appropriate levels of liquidity in its investment
portfolio and through utilization of overall positive cash flows.
For the six months of 1998, cash and cash equivalents decreased $722 million
from $2.6 billion as of December 31, 1997. This decrease primarily reflects
payments of dividends on and repurchases of CIGNA common stock ($488 million),
repayment of debt ($461 million), net withdrawals from contractholder deposit
funds ($375 million), and cash used in operating activities ($103 million),
reflecting the timing of operating cash receipts and disbursements. These
decreases were partially offset by cash provided by investing activities ($696
million), which includes net proceeds on the sale of the individual life
insurance and annuity businesses of approximately $1.3 billion, partially offset
by net investment purchases.
CIGNA's capital resources represent funds available for long-term business
commitments. They primarily consist of retained earnings and proceeds from the
issuance of long-term debt and equity securities. CIGNA's financial strength
provides the capacity and flexibility to enable it to raise funds in the capital
markets through the issuance of such securities. CIGNA continues to be well
capitalized, with sufficient borrowing capacity to meet the anticipated needs of
its businesses.
CIGNA had $1.4 billion and $1.5 billion of long-term debt outstanding at June
30, 1998 and December 31, 1997. As of June 30, 1998, CIGNA had $1 billion
remaining under effective shelf registration statements filed with the
Securities and Exchange Commission that may be issued as debt securities, equity
securities or both, depending upon market conditions and CIGNA's capital
requirements.
In July 1998, CIGNA completed an offer to exchange its 8.3% Step Down Notes due
2033 (New Notes) for 8.3% Notes due 2023 (Old Notes). Old Notes with principal
amounts aggregating approximately $83 million were tendered in connection with
the exchange offer. The New Notes bear interest at 8.3% through January 14, 2023
and 8.08% to January 15, 2033. The New Notes may be redeemed at CIGNA's option,
at any time, at par plus a possible additional redemption payment. Expenses
incurred in connection with the exchange were not material.
At June 30, 1998, CIGNA's short-term debt amounted to $254 million, a decrease
of $436 million from December 31, 1997.
In April 1998, CIGNA's Board of Directors increased CIGNA's authorization to
repurchase its common stock by $750 million. Stock repurchases will depend on
prevailing market conditions and alternative uses of capital. From January 1
through July 30, 1998, CIGNA has repurchased approximately 6,343,500 shares for
$432 million, including 835,000 shares repurchased for $61 million during July.
The remaining authorization as of July 30, 1998 was $679 million.
19
<PAGE>
INVESTMENT ASSETS
==================================================================
June 30, December 31,
(In millions) 1998 1997
- ------------------------------------------------------------------
Fixed maturities $32,920 $36,358
Equity securities 1,089 854
Mortgage loans 9,503 10,859
Real estate 766 769
Other, primarily policy loans 7,129 7,738
- ------------------------------------------------------------------
Total investment assets $51,407 $56,578
==================================================================
Additional information regarding CIGNA's investment assets is included in Note 4
to the second quarter 1998 Financial Statements and Notes 2, 4 and 5 to the 1997
Financial Statements as well as the 1997 Form 10-K.
Investment assets as of June 30, 1998 decreased 9% from December 31, 1997. This
decrease primarily relates to investments which were included in the sale of the
individual life insurance and annuity businesses.
Significant amounts of CIGNA's investment assets are attributable to
experience-rated contracts with policyholders (policyholder contracts).
Approximate percentages of investments attributable to policyholder contracts
were as follows:
==================================================================
June 30, December 31,
1998 1997
- ------------------------------------------------------------------
Fixed maturities 31% 29%
Mortgage loans 58% 53%
Real estate 63% 64%
==================================================================
Fixed Maturities
Investments in fixed maturities (bonds) include publicly traded and private
placement debt securities; asset-backed securities, including collateralized
mortgage obligations (CMOs); and redeemable preferred stocks.
As of June 30, 1998, the fair value of fixed maturities, including policyholder
share, was greater than amortized cost by $2.0 billion, compared with $2.1
billion as of December 31, 1997. The decrease in unrealized appreciation
primarily relates to bonds which were included in the sale of the individual
life insurance and annuity businesses.
Potential Problem and Problem Bonds
Potential problem bonds are fully current but judged by management to have
certain characteristics that increase the likelihood of problem classification.
CIGNA had $44 million of potential problem bonds, including amounts attributable
to policyholder contracts, as of June 30, 1998, compared with $63 million as of
December 31, 1997. These amounts are net of $2 million and $10 million of
cumulative write-downs, respectively.
CIGNA considers bonds that are delinquent or restructured as to terms, typically
interest rate and, in certain cases, maturity date, problem bonds. As of June
30, 1998 and December 31, 1997, CIGNA had problem bonds, including amounts
attributable to policyholder contracts, of $131 million and $137 million, net of
related cumulative write-downs of $22 million and $30 million, respectively.
CIGNA recognizes interest income on problem bonds only when payment is received.
See the Summary on page 22 for the effect of non-accruals and write-downs for
bonds on policyholder contracts and on CIGNA's net income.
20
<PAGE>
Mortgage Loans
==================================================================
June 30, December 31,
1998 1997
- ------------------------------------------------------------------
Mortgage loans (in millions) $9,503 $10,859
Property type:
Retail facilities 38% 40%
Office buildings 35 34
Apartment buildings 15 13
Industrial 6 5
Hotels 4 5
Other 2 3
Total 100% 100%
==================================================================
CIGNA's investment strategy requires diversification of the mortgage loan
portfolio. This strategy includes guidelines relative to property type, location
and borrower to reduce its exposure to potential losses.
Potential Problem and Problem Mortgage Loans
Potential problem mortgage loans include:
o fully current loans that are judged by
management to have certain characteristics that
increase the likelihood of problem classification;
o fully current loans for which the borrower has
requested restructuring; and
o loans that are 30 to 59 days delinquent with
respect to interest or principal payments.
CIGNA had potential problem mortgage loans, including amounts attributable to
policyholder contracts, of $140 million as of June 30, 1998, and $191 million as
of December 31, 1997, net of related valuation reserves of $5 million and $41
million, respectively.
CIGNA's problem mortgage loans include delinquent and restructured mortgage
loans. Delinquent mortgage loans include those on which payment is overdue
generally 60 days or more. Restructured mortgage loans are those whose basic
financial terms have been modified, typically to reduce the interest rate or
extend the maturity date.
CIGNA had problem mortgage loans, including amounts attributable to policyholder
contracts, of $133 million and $152 million, net of valuation reserves of $9
million as of June 30, 1998 and December 31, 1997.
CIGNA recognizes interest income on problem mortgage loans only when payment is
received. See the Summary on page 22 for the effect of non-accruals and
valuation reserves for mortgage loans on policyholder contracts and on CIGNA's
net income.
Real Estate
As of June 30, 1998 and December 31, 1997, investment real estate, net of
reserves and write-downs, included: 1) $393 million and $414 million,
respectively, of real estate held for the production of income, and 2) $373
million and $355 million, respectively, of real estate held for sale, primarily
properties acquired as a result of foreclosure of mortgage loans.
See the Summary on page 22 for the effect of write-downs and valuation reserves
for real estate on policyholder contracts and on CIGNA's net income.
21
<PAGE>
Summary
The adverse (favorable) effects of write-downs and changes in valuation reserves
as well as of non-accruals on policyholder contracts and on CIGNA's net income
were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------- --------------------------------------------
1998 1997 1998 1997
---------------- ------------- ---------------- -------------
Policy- Policy- Policy- Policy-
holder holder holder holder
(In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA
- ----------------------------------------------------------------------------------------------------------------------
Write-downs and
valuation
reserves:
Bonds $-- $1 $1 $7 $1 $1 $7 $8
Mortgage loans -- -- 4 4 (3) (1) 6 5
Real estate 1 -- -- 1 (1) -- 1 2
- ----------------------------------------------------------------------------------------------------------------------
Total $1 $1 $5 $12 $(3) $-- $14 $15
======================================================================================================================
Non-accruals:
Bonds $1 $1 $1 $-- $2 $3 $3 $5
Mortgage loans (1) -- -- -- (1) -- (1) --
- ----------------------------------------------------------------------------------------------------------------------
Total $-- $1 $1 $-- $1 $3 $2 $5
======================================================================================================================
</TABLE>
Additional losses from problem investments are expected to occur for specific
investments in the normal course of business. Assuming no significant
deterioration in economic conditions, including further significant
deterioration in Asian economies, CIGNA does not expect additional non-accruals,
write-downs and reserves to materially affect future results of operations,
liquidity or financial condition, or to result in a significant decline in the
aggregate carrying value of its assets.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information provided in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, statements made
throughout this document are forward-looking and contain information about
financial results, economic conditions, trends and known uncertainties. CIGNA
cautions the reader that actual results could differ materially from those
expected by CIGNA, depending on the outcome of certain factors (some of which
are described with the forward-looking statements) including: 1) adverse
catastrophe experience in CIGNA's property and casualty businesses; 2) adverse
property and casualty loss development for events that CIGNA insured in prior
years; 3) an increase in medical costs in CIGNA's health care operations,
including increases in utilization and costs of medical services; 4) heightened
competition, particularly price competition, reducing product margins and
constraining growth in CIGNA's businesses; 5) significant changes in interest
rates; and 6) the effect on CIGNA's international operations and investments
from further significant deterioration in Asian economies.
22
<PAGE>
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Annual Meeting of Shareholders of CIGNA Corporation was
held on April 22, 1998. At the meeting, 63,531,309 shares of
Common Stock were represented and entitled to vote, and
72,129,426 shares of Common Stock were outstanding and
entitled to vote. CIGNA shareholders elected nominees to the
Board of Directors, ratified the appointment of Price
Waterhouse LLP (now known as PricewaterhouseCoopers LLP) as
independent accountants for 1998, and approved an amendment to
the Certificate of Incorporation.
<TABLE>
<CAPTION>
<S> <C> <C>
Votes
Votes For Withheld
--------- --------
Election of nominee to
Board of Directors for
term expiring in April, 1999:
Peter N. Larson 59,554,507 3,976,802
Election of nominees to
Board of Directors for
terms expiring in April, 2001:
Robert P. Bauman 59,535,124 3,996,185
Robert H. Campbell 59,554,462 3,976,847
Charles R. Shoemate 59,555,690 3,975,619
Louis W. Sullivan, M.D 59,530,631 4,000,678
</TABLE>
-------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Votes For Votes Against Abstentions
--------- ------------- -----------
Ratification of 63,406,873 74,421 50,015
Price Waterhouse LLP
(now known as
PricewaterhouseCoopers
LLP) as Independent
Accountants
-------------------------------
23
<PAGE>
Votes For Votes Against Abstentions
--------- ------------- -----------
Approval of Amendment 61,733,978 1,717,211 80,120
to Article Fourth of the
Certificate of Incorporation
to increase the authorized
Common Stock from
200,000,000 shares, par
value $1.00 per share, to
600,000,000 shares, par
value $.25 per share, and
to effect a three-for-one
Common Stock split.
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) During the quarterly period ended June 30, 1998, and
as of the filing date, CIGNA filed the following
Reports on Form 8-K:
o dated July 30, 1998, Item 5 - containing a
news release regarding its second quarter
1998 results.
o dated April 30, 1998, Item 5 - containing a
news release regarding its first quarter
1998 results.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the undersigned duly
authorized officer, on its behalf and in the capacity indicated.
CIGNA CORPORATION
By: /s/ Gary A. Swords
-------------------
Gary A. Swords
Vice President and
Chief Accounting Officer
Date: August 6, 1998
25
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Method of
Number Description Filing
- ------ ----------- ---------
<S> <C> <C>
3 Restated Certificate of Incorporation Filed herewith.
of the registrant effective as of
July 22, 1998
4 Description of Preferred Stock Purchase Filed as Item 1 and
Rights, including the Amended and Exhibit 1 to the registrant's
Restated Rights Agreement dated as Form 8-A/A, Amendment
of July 22, 1998 between CIGNA No. 1, dated July 22, 1998
Corporation and First Chicago Trust and incorporated herein
Company of New York by reference.
10 Restated Restricted Stock Plan for Filed herewith.
Non-Employee Directors of CIGNA
Corporation dated as of April 22, 1998
12 Computation of Ratio of Filed herewith.
Earnings to Fixed Charges
27 Financial Data Schedule Included only in
the EDGAR version
of the Form 10-Q.
26
</TABLE>
EXHIBIT 3
RESTATED CERTIFICATE OF INCORPORATION
OF
CIGNA CORPORATION
(Originally incorporated on November 3, 1981 under the name
North American General Corporation)
First: The name of the Corporation is CIGNA Corporation.
-----
Second: The address of the Corporation's registered office in the State
------
of Delaware is 1209 Orange Street in the City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
Third: The nature of the business or purposes to be conducted or
-----
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
Fourth: The total number of shares of all classes of capital stock
------
which the Corporation shall have the authority to issue is 625,000,000 shares
divided into two classes as follows: 600,000,000 shares of Common Stock of the
par value of $.25 per share and 25,000,000 shares of Preferred Stock of the par
value of $1.00 per share.
A. PREFERRED STOCK
The Board of Directors is expressly authorized to provide for
the issue of all or any shares of the Preferred Stock, in one or more series,
and to fix for each such series such voting powers, full or limited, or no
voting powers, and such designations, preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
thereof, as shall be stated and expressed in the resolution or
resolutions adopted by the Board of Directors providing for the issue of such
series and as may be permitted by the General Corporation Law of the State of
Delaware, including, without limitation, the authority to provide that any such
series may be (i) subject to redemption at such time or times and at such price
or prices; (ii) entitled to receive dividends (which may be cumulative or
non-cumulative) at such rates, on such conditions, and at such times, and
payable in preference to, or in such relation to, the dividends payable on any
other class or classes or any other series; (iii) entitled to such rights upon
the dissolution of, or upon any distribution of the assets of, the Corporation;
or (iv) convertible into, or exchangeable for, shares of any other class or
classes of stock, or of any other series of the same or any other class or
classes of stock, of the Corporation at such price or prices or at such rates of
exchange and with such adjustments; all as may be stated in such resolution or
resolutions.
1. Junior Participating Preferred Stock, Series D.
-----------------------------------------------
Section 1. Designation and Amount. There shall be a series of
----------------------
the Preferred Stock of the Corporation which shall be designated as the "Junior
Participating Preferred Stock, Series D," $1.00 par value, and the number of
shares constituting such series shall be 6,000,000. Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided, that
no decrease shall reduce the number
<PAGE>
of shares of Junior Participating Preferred Stock, Series D, to a number less
than that of the shares then outstanding plus the number of shares issuable upon
exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Corporation.
Section 2. Dividends and Distributions.
----------------------------
(A) Subject to the prior and superior rights of the holders of
any shares of any series of Preferred Stock ranking prior and superior to the
shares of Junior Participating Preferred Stock, Series D, with respect to
dividends, the holders of shares of Junior Participating Preferred Stock, Series
D, in preference to the holders of shares of Common Stock, par value $0.25 per
share (the "Common Stock"), of the Corporation and any other junior stock, shall
be entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for that purpose, quarterly dividends payable in cash
on the 10th day of January, April, July and October in each year (or, in each
case, if not a date on which the Corporation is open for business, the next date
on which the Corporation is so open) (each such date being referred to herein as
a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Junior Participating Preferred Stock, Series D, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $100.00, or (b) 1000 times the
aggregate per share amount of all cash dividends, and 1000 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Junior Participating Preferred Stock, Series D.
(B) The Corporation shall declare a dividend or distribution
on the Junior Participating Preferred Stock, Series D, as provided in paragraph
(A) above immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $100.00 per share on
the Junior Participating Preferred Stock, Series D, shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Junior Participating Preferred Stock, Series D, from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares
of Junior Participating Preferred Stock, Series D, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Junior Participating Preferred Stock, Series D, entitled to receive
a quarterly dividend and before such Quarterly Dividend Payment Date in either
of which events such dividends shall begin to accrue and be cumulative from
-2-
<PAGE>
such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not
bear interest. Dividends paid on the shares of Junior Participating Preferred
Stock, Series D, in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Junior Participating Preferred Stock, Series D, entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Junior
---------------
Participating Preferred Stock, Series D shall have the following voting rights:
(A) Each share of Junior Participating Preferred Stock, Series
D, shall entitle the holder thereof to 1000 votes on all matters submitted to a
vote of the stockholders of the Corporation.
(B) Except as otherwise provided herein or by law, the holders
of shares of Junior Participating Preferred Stock, Series D, and the holders of
shares of Common Stock shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Junior Participating
Preferred Stock, Series D, shall be in arrears in an amount equal to six (6)
quarterly dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which shall extend
until such time when all accrued and unpaid dividends for all previous quarterly
dividend periods and for the current quarterly dividend period on all shares of
Junior Participating Preferred Stock, Series D, then outstanding shall have been
declared and paid or set apart for payment. During each default period, all
holders of Preferred Stock (including holders of the Junior Participating
Preferred Stock, Series D) with dividends in arrears in an amount equal to six
(6) quarterly dividends thereon, voting as a class, irrespective of series,
shall have the right to elect two (2) directors.
(ii) During any default period, such voting right of the
holders of Junior Participating Preferred Stock, Series D, may be exercised
initially at a special meeting called pursuant to subparagraph (iii) of this
Section 3(C) or at any annual meeting of stockholders, and thereafter at annual
meetings of stockholders, provided that neither such voting right nor the right
of the holders of any other series of Preferred Stock, if any, to increase, in
certain cases, the authorized number of directors shall be exercised unless the
holders of ten percent (10%) in number of shares of Preferred Stock outstanding
shall be present in person or by proxy. The absence of a quorum of the holders
of Common Stock shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of Preferred Stock
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
directors, or if such right is exercised at an annual meeting, to elect two (2)
directors. If the number which may be so elected at any special meeting does not
amount to the required number, the holders of the Preferred Stock shall have the
right to make such increase in the number of directors as shall be
-3-
<PAGE>
necessary to permit the election by them of the required number. After the
holders of the Preferred Stock shall have exercised their right to elect
directors in any default period and during the continuance of such period, the
number of directors shall not be increased or decreased except by vote of the
holders of Preferred Stock as herein provided or pursuant to the rights of any
equity securities ranking senior to or pari passu with the Junior Participating
Preferred Stock, Series D.
(iii) Unless the holders of Preferred Stock shall, during
an existing default period, have previously exercised their right to elect
directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series, may request, the
calling of a special meeting of the holders of Preferred Stock, which meeting
shall thereupon be called by the Chairman, President, a Vice-President or the
Corporate Secretary of the Corporation. Notice of such meeting and of any annual
meeting at which holders of Preferred Stock are entitled to vote pursuant to
this paragraph (C)(iii) shall be given to each holder of record of Preferred
Stock by mailing a copy of such notice to him at his last address as the same
appears on the books of the Corporation. Such meeting shall be called for a time
not earlier than 10 days and not later than 60 days after such order or request
or in default of the calling of such meeting within 60 days after such order or
request, such meeting may be called on similar notice by any stockholder or
stockholders owning in the aggregate not less than ten percent (10%) of the
total number of shares of Preferred Stock outstanding. Notwithstanding the
provisions of this paragraph (C)(iii), no such special meeting shall be called
during the period within 60 days immediately preceding the date fixed for the
next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock,
and other classes of stock of the Corporation if applicable, shall continue to
be entitled to elect the whole number of directors until the holders of
Preferred Stock shall have exercised their right to elect two (2) directors
voting as a class, after the exercise of which right (x) the directors so
elected by the holders of Preferred Stock shall continue in office until their
successors shall have been elected by such holders or until the expiration of
the default period, and (y) any vacancy in the Board of Directors may (except as
provided in paragraph (C)(ii) of this Section 3) be filled by vote of a majority
of the remaining directors theretofore elected by the holders of the class of
stock which elected the director whose office shall have become vacant.
References in this paragraph (C) to directors elected by the holders of a
particular class of stock shall include directors elected by such directors to
fill vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period,
(x) the right of the holders of Preferred Stock, as a class to elect directors
shall cease, (y) the term of any directors elected by the holders of Preferred
Stock as a class shall terminate, and (z) the number of directors shall be such
number as may be provided for in, or pursuant to, the Restated Certificate of
Incorporation or Bylaws irrespective of any increase made pursuant to the
provisions of paragraph (C) (ii) of this Section 3 (such number being subject,
however to change thereafter in any manner provided by law or in the Restated
Certificate of Incorporation or Bylaws). Any vacancies in the Board of Directors
effected by the provisions of clauses (y) and (z) in the preceding sentence may
be filled by a majority of the remaining directors, even though less than a
quorum.
-4-
<PAGE>
(D) Except as set forth herein, holders of Junior
Participating Preferred Stock, Series D, shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
---------------------
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Junior Participating Preferred Stock, Series D, as
provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of Junior
Participating Preferred Stock, Series D, outstanding shall have been paid in
full, the Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Junior
Participating Preferred Stock, Series D;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up), with the
Junior Participating Preferred Stock, Series D, except dividends paid
ratably on the Junior Participating Preferred Stock, Series D, and all
such parity stock on which dividends are payable or in arrears in
proportion to the total amounts of which the holders of all such shares
are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Junior Participating Preferred Stock, Series D, provided that the
Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Junior Participating
Preferred Stock, Series D; or
(iv) purchase or otherwise acquire for consideration
any shares of Junior Participating Preferred Stock, Series D, or any
shares of stock ranking on a parity with the Junior Participating
Preferred Stock, Series D, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series of classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
-5-
<PAGE>
Section 5. Reacquired Shares. Any shares of Junior
--------------------
Participating Preferred Stock, Series D, purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and cancelled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be reissued as
part of a new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon
-----------------------------------------
any liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Junior Participating Preferred Stock, Series D, unless, prior
thereto, the holders of shares of Junior Participating Preferred Stock, Series
D, shall have received $1000 per share plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the date
of such payment (the "Series D Liquidation Preference"). Following the payment
of the full amount of the Series D Liquidation Preference, no additional
distributions shall be made to the holders of shares of Junior Participating
Preferred Stock, Series D, unless, prior thereto, the holders of shares of
Common Stock shall have received an amount per share (the "Common Adjustment")
equal to the quotient obtained by dividing (i) the Series D Liquidation
Preference by (ii) 1000 (such number in clause (ii), the "Adjustment Number").
Following the payment of the full amount of the Series D Liquidation Preference
and the Common Adjustment in respect of all outstanding shares of Junior
Participating Preferred Stock, Series D, and holders of shares of Common Stock
shall receive their ratable and proportionate share of the remaining assets to
be distributed in the ratio of the Adjustment Number to 1 with respect to such
Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event there are not sufficient assets available to
permit payment in full of the Series D Liquidation Preference and the
liquidation preferences of all other series of Preferred Stock, if any, which
rank on a parity with the Junior Participating Preferred Stock, Series D, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event
there are not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
Section 7. Consolidation, Merger, etc. In case the Corporation
---------------------------
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case the shares
of Junior Participating Preferred Stock, Series D, shall at the same time be
similarly exchanged or changed in an amount per share equal to 1000 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common Stock
is changed or exchanged.
Section 8. Redemption. The shares of Junior Participating
-----------
Preferred Stock, Series D, shall not be redeemable.
-6-
<PAGE>
Section 9. Ranking. The Junior Participating Preferred Stock,
--------
Series D, shall rank junior to all other series of the Corporation's Preferred
Stock as to the payment of dividends and the distribution of assets, unless the
terms of any such series shall provide otherwise.
Section 10. Amendment. The Restated Certificate of
---------
Incorporation of the Corporation shall not be further amended in any manner
which would materially alter or change the powers, preferences or special rights
of the Junior Participating Preferred Stock, Series D, so as to affect them
adversely without the affirmative vote of the holders of at least two-thirds (66
2/3%) of the outstanding shares of Junior Participating Preferred Stock, Series
D, voting separately as a class.
Section 11. Fractional Shares. Junior Participating Preferred
------------------
Stock, Series D, may be issued in fractions of a share, which are one
one-thousandths or integral multiples of one one-thousandths of a share, which
shall entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Junior Participating
Preferred Stock, Series D.
B. COMMON STOCK
1. Voting Rights. Except as provided by law or this
----------------
Certificate of Incorporation, each holder of Common Stock shall have one vote in
respect of each share of stock held by him of record on the books of the
Corporation for the election of directors and on all matters submitted to a vote
of stockholders of the Corporation.
2. Dividends. Subject to the preferential rights of the
----------
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of capital stock.
3. Dissolution, Liquidation or Winding Up. In the event of any
---------------------------------------
dissolution, liquidation or winding up of the affairs of the Corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of Preferred Stock, holders of Common Stock shall be
entitled to receive all of the remaining assets of the Corporation of whatever
kind available for distribution to stockholders ratably in proportion to the
number of shares of Common Stock held by them respectively. The Board of
Directors may distribute in kind to the holders of Common Stock such remaining
assets of the Corporation or may sell, transfer or otherwise dispose of all or
any part of such remaining assets to any other corporation, trust or other
entity and receive payment therefor in cash, stock or obligations of such other
corporation, trust or entity, or any combination thereof, and may sell all or
any part of the consideration so received and distribute any balance thereof in
kind to holders of Common Stock. Neither the merger or consolidation of the
Corporation into or with any other corporation, nor the merger of any other
corporation into it, nor any purchase or redemption of shares of stock of the
Corporation of any class, shall be deemed to be a dissolution, liquidation or
winding up of the Corporation for the purpose of this paragraph.
-7-
<PAGE>
Fifth: The By-Laws of the Corporation may be adopted, amended or
-----
repealed (a) by action of the holders of at least eighty percent (80%) of the
voting power of all outstanding Voting Stock (as defined in Article Tenth) of
the Corporation entitled to vote generally at any annual or special meeting of
stockholders or (b) by action of the Board of Directors at a regular or special
meeting thereof. Any By-Laws made by the Board of Directors may be amended or
repealed by action of the stockholders by the vote required by (a) above at any
annual or special meeting of stockholders.
Sixth: Elections of directors need not be by written ballot unless the
-----
by-laws of the Corporation shall otherwise provide.
Seventh: Notwithstanding any provision of the General Corporation Law
--------
of the State of Delaware, no action may be taken by stockholders without a
meeting, without prior notice and without a vote, unless a consent in writing
setting forth the action so taken shall be signed by the holders of all the
outstanding stock who would be entitled to vote thereon.
Eighth: Whenever a compromise or arrangement is proposed between this
-------
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all of the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
Ninth: The Corporation reserves the right to amend, alter, change or
-----
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
Tenth: 1. Higher Vote for Certain Business Combinations. In addition to
------ ----------------------------------------------
any affirmative vote of holders of a class or series of capital stock of the
Corporation required by law or this Certificate, a Business Combination (as
hereinafter defined) with or upon a proposal by a Related Person (as hereinafter
defined) shall require the affirmative vote of the holders of at least eighty
percent (80%) of the voting power of all outstanding Voting Stock (as
hereinafter defined) of the Corporation, voting together as a single class. Such
affirmative votes shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or the Board.
-8-
<PAGE>
2. When Higher Vote Is Not Required. The provisions of this
----------------------------------
Article shall not be applicable to a particular Business Combination, and such
Business Combination shall require only such affirmative vote as is required by
law and any other provision of this Certificate or the By-Laws of the
Corporation, if all of the conditions specified in any one of the following
Paragraphs (A), (B) or (C) are met:
(A) Approval by Directors. The Business Combination has
----------------------
been approved by a vote of a majority of all the Continuing Directors (as
hereinafter defined); or
(B) Combination with Subsidiary. The Business Combination
---------------------------
is solely between the Corporation and a subsidiary of the Corporation and such
Business Combination does not have the direct or indirect effect set forth in
Paragraph 3(B)(v) of this Article Tenth; or
(C) Price and Procedural Conditions. The proposed Business
--------------------------------
Combination will be consummated within three years after the date the Related
Person became a Related Person (the "Determination Date") and all of the
following conditions have been met:
(i) The aggregate amount of (x) cash and (y) fair
market value (as of the date of the consummation of the Business Combination) of
consideration other than cash, to be received per share of Common or Preferred
Stock of the Corporation in such Business Combination by holders thereof shall
be at least equal to the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the Related
Person for any shares of such class or series of stock acquired by it; provided,
that if either (a) the highest preferential amount per share of a series of
Preferred Stock to which the holders thereof would be entitled in the event of
any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Corporation (regardless of whether the Business Combination to be
consummated constitutes such an event) or (b) the highest reported sales price
per share for any shares of such series of Preferred Stock on any national
securities exchange on which such series is traded and if not traded on any such
exchange, the highest reported closing bid quotation per share with respect to
shares of such series on the National Association of Securities Dealers, Inc.
Automated Quotation System or on any system then in use, at any time after the
Related Person became a holder of any shares of Common Stock, is greater than
such aggregate amount, holders of such series of Preferred Stock shall receive
an amount for each such share at least equal to the greater of (a) or (b).
(ii) The consideration to be received by holders of a
particular class or series of outstanding Common or Preferred Stock shall be in
cash or in the same form as the Related Person has previously paid for shares of
such class or series of stock. If the Related Person has paid for shares of any
class or series of stock with varying forms of consideration, the form of
consideration given for such class or series of stock in the Business
Combination shall be either cash or the form used to acquire the largest number
of shares of such class or series of stock previously acquired by it.
(iii) No Extraordinary Event (as hereinafter defined)
occurs after the Determination Date and prior to the consummation of the
Business Combination.
-9-
<PAGE>
(iv) A proxy or information statement describing the
proposed Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) is mailed to public stockholders of the Corporation at least 30
days prior to the consummation of such Business Combination (whether or not such
proxy or information statement is required pursuant to such Act or subsequent
provisions).
3. Certain Definitions. For purposes of this Article Tenth:
--------------------
(A) A "person" shall mean any individual, firm,
corporation or other entity, or a group of "persons" acting or agreeing to act
together in the manner set forth in Rule 13d-5 under the Securities Exchange Act
of 1934, as in effect on April 24, 1985.
(B) The term "Business Combination" shall mean any of the
following transactions, when entered into by the Corporation or a subsidiary of
the Corporation with, or upon a proposal by, a Related Person:
(i) the merger or consolidation of the Corporation or
any subsidiary of the Corporation; or
(ii) the sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one or a series of transactions) of any assets
of the Corporation or any subsidiary of the Corporation having an aggregate fair
market value of $100 million or more; or
(iii) the issuance or transfer by the Corporation or
any subsidiary of the Corporation (in one or a series of transactions) of
securities of the Corporation or any subsidiary having an aggregate fair market
value of $50 million or more; or
(iv) the adoption of a plan or proposal for the
liquidation or dissolution of the Corporation; or
(v) the reclassification of securities (including a
reverse stock split), recapitalization, consolidation or any other transaction
(whether or not involving a Related Person) which has the direct or indirect
effect of increasing the voting power, whether or not then exercisable, of a
Related Person in any class or series of capital stock of the Corporation or any
subsidiary of the Corporation; or
(vi) any agreement, contract or other arrangement
providing directly or indirectly for any of the foregoing.
(C) The term "Related Person" shall mean any person (other
than the Corporation, a subsidiary of the Corporation or any profit sharing,
employee stock ownership or other employee benefit plan of the Corporation or of
a subsidiary of the Corporation or any trustee of or fiduciary with respect to
any such plan acting in such capacity) that is the direct or indirect beneficial
owner (as defined in Rule 13d-3 and Rule
-10-
<PAGE>
13d-5 under the Securities Exchange Act of 1934, as in effect on April 24, 1985)
of more than ten percent (10%) of the outstanding Voting Stock of the
Corporation, and any Affiliate or Associate of any such person.
(D) The term "Continuing Director" shall mean any member
of the Board of Directors who is not affiliated with a Related Person and who
was a member of the Board of Directors immediately prior to the time that the
Related Person became a Related Person, and any successor to a Continuing
Director who is not affiliated with the Related Person and is recommended to
succeed a Continuing Director by a majority of Continuing Directors who are then
members of the Board of Directors.
(E) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act
of 1934, as in effect on April 24, 1985.
(F) The term "Extraordinary Event" shall mean, as to any
Business Combination and Related Person, any of the following events that is not
approved by a majority of all Continuing Directors:
(i) any failure to declare and pay at the regular date
therefor any full quarterly dividend (whether or not cumulative) on outstanding
Preferred Stock; or
(ii) any reduction in the annual rate of dividends paid
on the Common Stock (except as necessary to reflect any subdivision of the
Common Stock); or
(iii) any failure to increase the annual rate of
dividends paid on the Common Stock as necessary to reflect any reclassification
(including any reverse stock split), recapitalization, reorganization or any
similar transaction that has the effect of reducing the number of outstanding
shares of the Common Stock; or
(iv) the receipt by the Related Person, after the
Determination Date, of a direct or indirect benefit (except proportionately as a
stockholder) from any loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages provided by the
Corporation or any subsidiary of the Corporation, whether in anticipation of or
in connection with the Business Combination or otherwise.
(G) A majority of all Continuing Directors shall have the
power to make all determinations with respect to this Article Tenth, including,
without limitation, the transactions that are Business Combinations, the persons
who are Related Persons, the time at which a Related Person became a Related
Person, and the fair market value of any assets, securities or other property,
and any such determinations of such directors shall be conclusive and binding.
(H) The term "Voting Stock" shall mean all outstanding
shares of the Common or Preferred Stock of the Corporation entitled to vote
generally and each reference to a proportion of Voting Stock shall refer to
shares having such proportion of the number of shares entitled to be cast.
-11-
<PAGE>
4. No Effect on Fiduciary Obligations of Related Persons.
-----------------------------------------------------------
Nothing contained in this Article Tenth shall be construed to relieve any
Related Person from any fiduciary obligation imposed by law.
5. Amendment, Repeal, etc. The affirmative vote of the holders
-----------------------
of at least eighty percent (80%) of the voting power of all outstanding Voting
Stock of the Corporation, voting together as a single class, shall be required
in order to amend, repeal or adopt any provision inconsistent with this Article
Tenth.
Eleventh: To the fullest extent permitted by the General Corporation
--------
Law of the State of Delaware as the same exists or may hereafter be amended, no
director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Any repeal or modification of the preceding sentence shall not adversely affect
any right or protection of a director existing at the time of such repeal or
modification.
-12-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation which only restates and integrates and does not
further amend the provisions of the Restated Certificate of Incorporation of
this Corporation as heretofore amended or supplemented, and which has been duly
adopted by the Corporation's Board of Directors in accordance with Section 245
of the Delaware General Corporation Law to be signed in its name by its Chairman
of the Board and Chief Executive Officer and attested to by its Corporate
Secretary this 22nd day of July, 1998.
/s/ Wilson H. Taylor
-------------------------
Wilson H. Taylor
Chairman of the Board and
Chief Executive Officer
Attest:
/s/ Carol J. Ward
- -----------------
Carol J. Ward
Corporate Secretary
-13-
EXHIBIT 10
RESTATED RESTRICTED STOCK PLAN FOR NON-EMPLOYEE
DIRECTORS OF CIGNA CORPORATION
April 22, 1998
1. PURPOSE.
The Restricted Stock Plan for Non-Employee Directors of CIGNA
Corporation (the "Plan") is intended to provide directors of CIGNA Corporation
(the "Company") with a proprietary interest in the Company's success and
progress by granting them shares of the Company's Common Stock ("Common Stock")
which are restricted in accordance with the terms and conditions set forth below
("Restricted Shares"). The Plan is intended to increase the alignment of
personal economic interest between directors and shareholders generally and to
strengthen the Company's ability to continue attracting and retaining highly
qualified directors.
2. ADMINISTRATION.
The Plan is to be administered by the Corporate Governance Committee
(the "Committee") of the Company's Board of Directors (the "Board") or any
successor committee with responsibility for compensation of directors.
3. ELIGIBILITY AND GRANTS.
All current and subsequently elected members of the Company's Board of
Directors who have served as directors for at least six months and at the time
such service began were not, and for the preceding ten years had not been,
officers or employees of the Company or any of its subsidiaries ("Eligible
Directors") shall be eligible to participate in the Plan.
Each director who is an Eligible Director on the effective date of the
Plan (the "Effective Date") shall be granted 4,500 Restricted Shares, effective
as of the Effective Date. Each director who becomes an Eligible Director after
the Effective Date shall be granted 4,500 Restricted Shares, effective as of the
date such director becomes an Eligible Director.
4. TERMS AND CONDITIONS OF RESTRICTED SHARES.
(a) GENERAL. Subject to the provisions of Section 4(c) below, the
restrictions set forth in Section 4(b) shall apply to each grant of Restricted
Shares for a period (the "Restricted Period") from the date of grant until the
later of the expiration of the six-month period immediately following the date
of grant or the date on which the Eligible Director's service as a director of
the Company
-1 -
<PAGE>
terminates.
(b) RESTRICTIONS. A stock certificate representing the number of
Restricted Shares granted shall be registered in each Eligible Director's name
but shall be held in custody by the Company for the Eligible Director's account.
The Eligible Director shall have all rights and privileges of a shareholder as
to such Restricted Shares, including the right to receive dividends and the
right to vote such Restricted Shares, except that the following restrictions
shall apply: (i) the Eligible Director shall not be entitled to delivery of the
certificate until the expiration of the Restricted Period, (ii) none of the
Restricted Shares may be sold, transferred, assigned, pledged, or otherwise
encumbered or disposed of during the Restricted Period and (iii) except as
provided in Section 4(c), all of the Restricted Shares shall be forfeited and
all rights of the Eligible Director to such Restricted Shares shall terminate
without further obligation on the part of the Company upon the Eligible
Director's ceasing to be a director of the Company.
(c) TERMINATION OF DIRECTORSHIP.
(i) VESTING OF SHARES. If an Eligible Director ceases to be a
director of the Company by reason of Disability, Death, Retirement or Change of
Control, the Restricted Shares granted to such Eligible Director shall
immediately vest. If an Eligible Director ceases to be a director of the Company
for any other reason, the Eligible Director shall immediately forfeit all
Restricted Shares, except to the extent that a majority of the Board other than
the Eligible Director approves the vesting of such Restricted Shares. Upon
vesting, except as provided in Section 5, all restrictions applicable to such
Restricted Shares shall lapse and a certificate for such shares shall be
delivered to the Eligible Director, or the Eligible Director's beneficiary or
estate, in accordance with Section 4(d).
(ii) DISABILITY. For purposes of this Section 4(c),
"Disability" shall mean a permanent and total disability as defined in Section
22(e) (3) of the Internal Revenue Code.
(iii) RETIREMENT. For purposes of this Section 4(c),
"Retirement" shall mean ceasing to be a director of the Company (i) on or after
age 70, or (ii) on or after age 65 with the consent of a majority of the members
of the Board other than the Eligible Director.
(iv) CHANGE OF CONTROL. For purposes of this Section 4(c),
"Change of Control" shall mean:
(A) a corporation, person or group acting in concert
as described in Section 14(d) (2) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), holds or acquires
beneficial ownership within the meaning of Rule 13d-3
promulgated under the Exchange Act of a number of preferred or
common shares of the Company having voting power which is
either (i) more than 50% of the voting power of the
-2 -
<PAGE>
shares which voted in the election of directors of the Company
at the shareholder's meeting immediately preceding such
determination, or (ii) more than 25% of the voting power of
the Company's outstanding common shares; or
(B) as a result of a merger or consolidation to which
the Company is a party, either (i) the Company is not the
surviving corporation or (ii) Directors of the Company
immediately prior to the merger or consolidation constitute
less than a majority of the Board of Directors of the
surviving corporation; or
(C) a change occurs in the composition of the Board
at any time during any consecutive 24-month period such that
the "Continuity Directors" cease for any reason to constitute
a majority of the Board. For purposes of the preceding
sentence "Continuity Directors" shall mean those members of
the Board who either: (i) were directors at the beginning of
such consecutive 24-month period; or (ii) were elected by, or
on nomination or recommendation of, at least a majority
(consisting of at least nine directors) of the Board.
(d) DELIVERY OF RESTRICTED SHARES. At the end of the Restricted Period
a stock certificate for the number of Restricted Shares which have vested shall
be delivered free of all such restrictions to the Eligible Director or the
eligible director's beneficiary or estate, as the case may be.
5. REGULATORY COMPLIANCE
No Common Stock granted pursuant to this Plan shall be sold or
distributed by an Eligible Director or an Eligible Director's beneficiary or
estate until all appropriate listing, registration and qualification
requirements and consents and approvals have been satisfied or obtained, free of
any condition unacceptable to the Board of Directors.
6. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION.
In the event of a recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation, rights offering,
separation, reorganization or liquidation, or any other change in the corporate
structure or shares of the Company, the Committee may make such equitable
adjustments, to prevent dilution or enlargement of rights, as it may deem
appropriate in the number and class of shares authorized to be granted as
Restricted Shares. Shares issued as a consequence of any such change in the
corporate structure or shares of the Company shall be issued subject to the same
restrictions and provisions applicable to the Restricted Shares with respect to
which they are issued.
-3 -
<PAGE>
7. TERMINATION OR AMENDMENT OF THE PLAN.
The Board may at any time terminate the Plan and may from time to time
alter or amend the Plan or any part hereof (including any amendment deemed
necessary to ensure that the Company may comply with any regulatory requirement
referred to in Section 5) without shareholder approval, unless otherwise
required by law or by the rules of the Securities and Exchange Commission or New
York Stock Exchange. No termination or amendment of the Plan may, without the
consent of an Eligible Director, impair the rights of such director with respect
to shares of common Stock granted under the Plan. Notwithstanding the foregoing
provisions of Section 7, the provisions of the Plan governing eligibility of a
director and the amount, timing and pricing of an award hereunder shall not be
amended more than once every six months, other than to comport with changes in
the Internal Revenue Code, the Employee Retirement Income Security Act, or the
rules thereunder.
8. MISCELLANEOUS.
(a) Nothing in the Plan shall be deemed to create any obligation on the
part of the Board to nominate any director for re-election by the Company's
shareholders.
(b) The Company shall have the right to require, prior to the issuance
or delivery of any Restricted Shares, payment by an Eligible Director of any
taxes required by law with respect to the issuance or delivery of such shares,
or the lapse of restrictions thereon.
(c) The shares of Common Stock granted as Restricted Shares under the
Plan may be either authorized but unissued shares or shares which have been or
may be reacquired by the Company, as determined from time to time by the Board.
9. EFFECTIVE DATE.
Provided that the Company's shareholders shall have approved the Plan
at the Company's 1989 Annual Meeting of Shareholders, the Plan shall become
effective as of September 30, 1989, or such later date as may be fixed by the
Board.
-4 -
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
===========================================================================================
<S> <C> <C>
Income before income taxes $ 1,239 $ 848
------------- ------------
Fixed charges included in income:
Interest expense 65 52
Interest portion of rental expense 40 38
------------- ------------
Total fixed charges included in income 105 90
------------- ------------
Income available for fixed charges $ 1,344 $ 938
- -----------------------------------------------------------================================
RATIO OF EARNINGS TO FIXED CHARGES 12.8 10.4
- -----------------------------------------------------------================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF PART I TO CIGNA'S REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 32,920
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,089
<MORTGAGE> 9,503
<REAL-ESTATE> 766
<TOTAL-INVEST> 51,407
<CASH> 1,903
<RECOVER-REINSURE> 12,400<F1>
<DEFERRED-ACQUISITION> 951
<TOTAL-ASSETS> 110,927
<POLICY-LOSSES> 12,093
<UNEARNED-PREMIUMS> 1,839
<POLICY-OTHER> 17,841
<POLICY-HOLDER-FUNDS> 30,524
<NOTES-PAYABLE> 1,694
0
0
<COMMON> 66
<OTHER-SE> 8,274
<TOTAL-LIABILITY-AND-EQUITY> 110,927
8,016
<INVESTMENT-INCOME> 1,879
<INVESTMENT-GAINS> 106
<OTHER-INCOME> 731
<BENEFITS> 6,797
<UNDERWRITING-AMORTIZATION> 467
<UNDERWRITING-OTHER> 2,229
<INCOME-PRETAX> 1,239
<INCOME-TAX> 436
<INCOME-CONTINUING> 803
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 803
<EPS-PRIMARY> 3.74<F2>
<EPS-DILUTED> 3.70<F3>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES.
<F2>AMOUNT REPRESENTS BASIC EARNINGS PER SHARE BASED ON SFAS NO. 128.
<F3>AMOUNT REPRESENTS DILUTED EARNINGS PER SHARE BASED ON SFAS NO. 128.
</FN>
</TABLE>
