-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S7KnEa48ybwaT+Oc7rWM0uWigjPjFXuuUY5D4VoY52LzEG/EeH+YHE/LEeB2iokb +uRkive6OqFL8z+ZuazjlQ== 0000950159-98-000200.txt : 19980807 0000950159-98-000200.hdr.sgml : 19980807 ACCESSION NUMBER: 0000950159-98-000200 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980806 SROS: NYSE SROS: PHLX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIGNA CORP CENTRAL INDEX KEY: 0000701221 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 061059331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08323 FILM NUMBER: 98678758 BUSINESS ADDRESS: STREET 1: ONE LIBERTY PLACE 1650 MARKET ST STREET 2: PO BOX 7716 CITY: PHILADELPHIA STATE: PA ZIP: 19192-1550 BUSINESS PHONE: 2157616211 MAIL ADDRESS: STREET 1: TWO LIBERTY PLACE 48TH FLOOR STREET 2: 1601 CHESTNUT STREET CITY: PHILADELPHIA STATE: PA ZIP: 19192 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 ------------- 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 ------ CIGNA Corporation --------------------------------------- (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 --------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 761-1000 -------------- Not Applicable --------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by 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. 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. Part I. FINANCIAL INFORMATION Item 1. Financial Statements CIGNA CORPORATION CONSOLIDATED INCOME STATEMENTS (In millions, except per share amounts)
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 - ----------------------------------------------------==========================================================================
The Notes to Financial Statements are an integral part of these statements. 1 CIGNA CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except per share amounts)
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 - ------------------------------------------------------------------------------------==========================================
The Notes to Financial Statements are an integral part of these statements. 2 CIGNA CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND CHANGES IN SHAREHOLDERS' EQUITY (In millions)
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 - ------------------------------------------------------------------------------====================================================
The Notes to Financial Statements are an integral part of these statements. 3 CIGNA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
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 - ----------------------------------------------------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements. 4 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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:
- ---------------------------------------------------------------------------------------------------------------------- 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 ======================================================================================================================
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 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.
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
-------------------------------
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 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.
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 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 Exhibit Index
Method of Number Description Filing - ------ ----------- --------- 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
EX-3 2 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 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- 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- 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- (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- 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- 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- 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- 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- (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- 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- 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- 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- EX-10 3 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 - 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 - 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 - 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 - EX-12 4 CIGNA CORPORATION EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Six Months Ended June 30, 1998 1997 =========================================================================================== 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 - -----------------------------------------------------------================================
EX-27 5 ARTICLE 7 FINANCIAL DATA SCHEDULE
7 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. 1,000,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 32,920 0 0 1,089 9,503 766 51,407 1,903 12,400 951 110,927 12,093 1,839 17,841 30,524 1,694 0 0 66 8,274 110,927 8,016 1,879 106 731 6,797 467 2,229 1,239 436 803 0 0 0 803 3.74 3.70 0 0 0 0 0 0 0 AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES. AMOUNT REPRESENTS BASIC EARNINGS PER SHARE BASED ON SFAS NO. 128. AMOUNT REPRESENTS DILUTED EARNINGS PER SHARE BASED ON SFAS NO. 128.
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