-----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, D8n7L0AUFYRadO4gE2gPcBNnUZm3LtkVWZCSsaR4XsWOy6Ggc8I7iTHWhXZ9ezzl JVF1bPK2a82wdM7JHt+nDw== 0000002648-96-000022.txt : 19960429 0000002648-96-000022.hdr.sgml : 19960429 ACCESSION NUMBER: 0000002648-96-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960426 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA LIFE & CASUALTY CO CENTRAL INDEX KEY: 0000002648 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 060843808 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05704 FILM NUMBER: 96551246 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 8602730123 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVE STREET 2: FINANCIAL YF8H CITY PLACE CITY: HARTFORD STATE: CT ZIP: 06156 10-Q 1 LIVE FILING 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1996 ________________ Commission file number 1-5704 ________ Aetna Life and Casualty Company ___________________________________________________________________________ (Exact name of registrant as specified in its charter) Connecticut 06-0843808 ___________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156 ___________________________________________________________________________ (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code (860) 273-0123 ______________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Title of Class at March 31, 1996 ________________ __________________ Common Capital Stock 115,187,158 without par value 2 TABLE OF CONTENTS _________________ Page ____ PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Condensed Notes to Financial Statements 8 Independent Auditors' Review Report 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 48 Item 5. Other Information. 48 Item 6. Exhibits and Reports on Form 8-K. 49 Signatures 51 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, ______________________________ (Millions, except share and per share data) 1996 1995 ____ ____ Revenue: Premiums............................................. $ 1,843.9 $ 1,882.1 Net investment income................................ 886.3 870.0 Fees and other income................................ 518.2 453.4 Net realized capital gains (losses).................. 62.0 (13.2) ____________ _____________ Total revenue.................................... 3,310.4 3,192.3 ____________ _____________ Benefits and expenses: Current and future benefits.......................... 2,236.9 2,275.7 Operating expenses................................... 790.2 741.2 Amortization of deferred policy acquisition costs.... 37.0 32.0 ____________ _____________ Total benefits and expenses...................... 3,064.1 3,048.9 ____________ _____________ Income from continuing operations before income taxes................................................ 246.3 143.4 Federal and foreign income taxes (benefits): Current.............................................. 62.8 (22.2) Deferred............................................. 18.0 73.2 ____________ _____________ Total federal and foreign income taxes........... 80.8 51.0 ____________ _____________ Income from continuing operations...................... 165.5 92.4 Income from Discontinued Operations, net of tax........ 182.2 68.4 ____________ _____________ Net income....................................... $ 347.7 $ 160.8 ____________ _____________ ____________ _____________ Results per common share: Income from continuing operations................... $ 1.43 $ .82 Income from Discontinued Operations, net of tax..... 1.57 .60 ____________ _____________ Net income.......................................... $ 3.00 $ 1.42 ____________ _____________ ____________ _____________ Dividends declared.................................. $ .69 $ .69 ____________ _____________ ____________ _____________ Weighted average common shares outstanding.......... 115,765,475 112,949,522 ____________ _____________ ____________ _____________ See Condensed Notes to Financial Statements.
4 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, (Millions) 1996 1995 _____________ ____________ Assets: Investments: Debt securities: Available for sale, at fair value (amortized cost $29,687.7 and $29,962.5)...................... $ 30,344.9 $ 31,860.3 Equity securities, at fair value (cost $785.1 and $597.8)........... 929.1 659.7 Short-term investments................ 637.5 607.8 Mortgage loans........................ 7,947.8 8,327.2 Real estate........................... 1,301.9 1,277.3 Policy loans.......................... 639.2 629.4 Other................................. 689.4 688.6 _________ __________ Total investments............... 42,489.8 44,050.3 Cash and cash equivalents............. 1,558.5 1,712.7 Accrued investment income............. 586.7 618.3 Premiums due and other receivables.... 1,161.9 1,080.9 Deferred federal and foreign income taxes................................ 402.2 271.5 Deferred policy acquisition costs..... 2,006.7 1,953.1 Other assets.......................... 1,020.8 1,004.4 Separate Accounts assets.............. 31,128.9 29,699.7 Net assets of Discontinued Operations........................... 3,746.7 3,932.8 __________ __________ Total assets.................... $ 84,102.2 $ 84,323.7 __________ __________ __________ __________ See Condensed Notes to Financial Statements.
5 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
March 31, December 31, (Millions, except share and per share data) 1996 1995 _____________ ____________ Liabilities: Future policy benefits........................ $ 18,459.6 $ 18,372.9 Unpaid claims and claim expenses.............. 1,478.8 1,563.1 Unearned premiums............................. 159.0 142.4 Policyholders' funds left with the company.... 21,702.6 22,898.7 __________ __________ Total insurance liabilities............... 41,800.0 42,977.1 Dividends payable to shareholders............. 79.5 79.2 Short-term debt............................... 388.4 389.6 Long-term debt................................ 985.5 989.1 Current federal and foreign income taxes...... 150.6 154.0 Other liabilities............................. 2,134.1 2,344.2 Participating policyholders' interests........ 194.3 204.8 Separate Accounts liabilities................. 31,066.8 29,637.9 __________ __________ Total liabilities......................... 76,799.2 76,775.9 __________ __________ Minority interest in preferred securities of subsidiary..................... 275.0 275.0 __________ __________ Shareholders' Equity: Class A Voting Preferred Stock (no par value; 10,000,000 shares authorized; no shares issued or outstanding)............. - - Class B Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Class C Non-Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Common Capital Stock (no par value; 250,000,000 shares authorized; 115,473,773 and 115,013,675 issued, and 115,187,158 and 114,727,093 outstanding)..... 1,473.5 1,448.2 Net unrealized capital gains.................. 103.2 641.1 Retained earnings............................. 5,463.4 5,195.6 Treasury stock, at cost (286,615 and 286,582 shares).............................. (12.1) (12.1) __________ __________ Total shareholders' equity................ 7,028.0 7,272.8 __________ __________ Total liabilities, minority interest and shareholders' equity..................... $ 84,102.2 $ 84,323.7 __________ __________ __________ __________ Shareholders' equity per common share......... $ 61.01 $ 63.39 __________ __________ __________ __________ See Condensed Notes to Financial Statements.
6 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Millions, except share data) Net Common Unrealized Capital Capital Retained Treasury Three Months Ended March 31, 1996 Total Stock Gains (Losses) Earnings Stock __________________________________________________________________________________________________________ Balances at December 31, 1995 $7,272.8 $1,448.2 $ 641.1 $5,195.6 $ (12.1) __________________________________________________________________________________________________________ Net income............................ 347.7 347.7 Change in net unrealized capital gains and losses.......................... (537.9) (537.9) Common stock issued for benefit plans (460,098 shares).................... 25.3 25.3 Common stock dividends declared....... (79.9) (79.9) __________________________________________________________________ Balances at March 31, 1996 $7,028.0 $1,473.5 $ 103.2 $5,463.4 $ (12.1) __________________________________________________________________________________________________________ __________________________________________________________________ Three Months Ended March 31, 1995 __________________________________________________________________________________________________________ Balances at December 31, 1994 $5,503.0 $1,419.2 $(1,071.5) $5,259.6 $ (104.3) __________________________________________________________________________________________________________ Net income............................ 160.8 160.8 Change in net unrealized capital gains and losses.......................... 633.3 633.3 Common stock issued for benefit plans (102,053 shares).................... 5.1 5.1 Loss on issuance of treasury stock.... (1.1) (1.1) Common stock dividends declared....... (77.8) (77.8) __________________________________________________________________ Balances at March 31, 1995 $6,223.3 $1,418.1 $ (438.2) $5,342.6 $ (99.2) __________________________________________________________________________________________________________ __________________________________________________________________ See Condensed Notes to Financial Statements.
7 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, ________________________ (Millions) 1996 1995 ____ ____ Cash Flows from Operating Activities: Net income........................................................ $ 347.7 $ 160.8 Adjustments to reconcile net income to net cash used for operating activities: Income from Discontinued Operations............................ (182.2) (68.4) Decrease in accrued investment income.......................... 31.7 30.4 Increase in premiums due and other receivables................. (37.3) (210.7) Increase in deferred policy acquisition costs.................. (51.7) (43.4) Depreciation and amortization.................................. 49.5 44.1 Decrease in federal and foreign income taxes................... (135.2) (89.6) Net (decrease) increase in other assets and other liabilities.. (264.3) 229.5 Decrease in insurance reserve liabilities...................... (199.8) (47.5) Net realized capital (gains) losses............................ (62.0) 13.2 Amortization of net investment discounts....................... (26.5) (33.7) Other, net..................................................... (8.9) (52.1) Discontinued Operations, net...................................... (369.0) 66.1 __________ _________ Net cash used for operating activities....................... (908.0) (1.3) __________ _________ Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale............................. 3,407.9 2,544.4 Equity securities.............................................. 108.5 336.7 Mortgage loans................................................. 8.7 4.3 Real estate.................................................... 47.7 32.2 Short-term investments......................................... 6,757.2 11,225.7 Investment maturities and repayments of: Debt securities available for sale............................. 700.1 423.1 Debt securities held for investment............................ - 128.5 Mortgage loans................................................. 407.6 495.6 Cost of investments in: Debt securities available for sale............................. (3,749.0) (3,123.1) Debt securities held for investment............................ - (8.2) Equity securities.............................................. (352.4) (29.2) Mortgage loans................................................. (53.8) (45.9) Real estate.................................................... (34.1) (25.1) Short-term investments......................................... (6,736.8) (11,272.5) Increase in property and equipment................................ (4.1) (37.1) Net increase in Separate Accounts................................. (0.4) (14.5) Other, net........................................................ 206.7 (193.8) Discontinued Operations, net...................................... (261.8) 224.8 __________ _________ Net cash provided by investing activities.................... 452.0 665.9 __________ _________ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts........... 618.9 209.6 Withdrawals of investment contracts............................... (901.3) (706.2) Issuance of long-term debt........................................ 24.9 - Stock issued under benefit plans.................................. 25.3 4.0 Repayment of long-term debt....................................... (28.8) (1.4) Net (decrease) increase in short-term debt........................ (1.3) 83.1 Dividends paid to shareholders.................................... (79.9) (77.8) Corporate expenses paid by Discontinued Operations................ 12.5 14.8 Discontinued Operations, net...................................... - (.2) __________ ________ Net cash used for financing activities....................... (329.7) (474.1) __________ ________ Effect of exchange rate changes on cash and cash equivalents....................................................... 0.4 (.1) Net decrease (increase) in cash and cash equivalents of Discontinued Operations............................................. 631.1 (290.4) __________ _________ Net decrease in cash and cash equivalents............................ (154.2) (100.0) Cash and cash equivalents, beginning of period....................... 1,712.7 2,277.2 __________ _________ Cash and cash equivalents, end of period............................. $ 1,558.5 $ 2,177.2 __________ _________ __________ _________ Supplemental Cash Flow Information - continuing operations: Interest paid..................................................... $ 44.6 $ 42.8 __________ _________ __________ _________ Income taxes paid ................................................ $ 59.0 $ 4.0 __________ _________ __________ _________ See Condensed Notes to Financial Statements.
8 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (1) Basis of Presentation The consolidated financial statements include Aetna Life and Casualty Company and its majority-owned subsidiaries (collectively, the "company"). The company's property-casualty operations are reflected as Discontinued Operations. The company completed the sale of its property-casualty operations to an affiliate of the Travelers Insurance Group Inc. ("Travelers") on April 2, 1996 (please refer to Note 4). Less than majority-owned entities in which the company has at least a 20% interest are reported on the equity basis. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are unaudited. Certain reclassifications have been made to 1995 financial information to conform to the 1996 presentation. These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. (2) Agreement to Merge with U.S. Healthcare The company and U.S. Healthcare, Inc. ("U.S. Healthcare") entered into an agreement, dated as of March 30, 1996, pursuant to which they agreed to merge in a transaction, valued at that time, at approximately $8.9 billion. The merger agreement, which has been approved by the board of directors of each company, calls for the formation of a new holding company, Aetna Inc. U.S. Healthcare shareholders will receive $34.20 in cash, 0.2246 shares of Aetna Inc. common stock and 0.0749 shares of Aetna Inc. mandatorily convertible preferred stock for each share of U.S. Healthcare common stock and each share of U.S. Healthcare Class B Stock outstanding. Each outstanding share of the company's common stock will become a share of common stock of Aetna Inc. Immediately after the transaction, the company and U.S. Healthcare will each be wholly-owned subsidiaries of Aetna Inc., and Aetna Inc. will be owned approximately 78% by the company's shareholders and approximately 22% by U.S. Healthcare shareholders (approximately 72% and approximately 28%, respectively, on a fully diluted basis). The company expects to finance the transaction with a combination of $5.3 billion in cash ($3.9 billion from the net proceeds received from the sale of its property-casualty operations and $1.4 billion of additional bank debt, which may initially be financed with commercial paper) and the issuance of $2.7 billion of new Aetna Inc. common stock and $0.9 billion of Aetna Inc. mandatorily convertible preferred stock. The agreement is subject to approval by the shareholders of both companies, expiration of the waiting period under the Hart- Scott-Rodino Antitrust Improvements Act of 1976, receipt of required insurance, healthcare and other regulatory approvals, and other customary conditions. It is expected to close in the third quarter of 1996. 9 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (3) Accounting Changes Financial Accounting Standard ("FAS") No. 123, Accounting for Stock-Based Compensation, is effective for 1996 reporting. This statement addresses the accounting for the cost of stock-based compensation, such as stock options. FAS No. 123 permits either expensing the cost of stock-based compensation over the vesting period or disclosing in the financial statement footnotes what this expense would have been. This cost would be measured at the grant date based upon estimated fair values, using option pricing models. The company has selected the disclosure alternative which requires that such disclosures be included in full year financial statements only. (4) Sales of Subsidiaries On April 2, 1996, the company completed the sale of its property- casualty operations to Travelers for approximately $4.1 billion in cash. The sale resulted in a gain of approximately $265 million (after tax) which will be reflected in the second quarter of 1996. The operating results of the property-casualty operations are presented as Discontinued Operations for the three months ended March 31, 1996 and 1995. Results of Discontinued Operations for the three months ended March 31, were:
(Millions) 1996 1995 _____________________________________________________________________________________________ Revenue: Premiums $ 1,038.4 $ 1,046.9 Net investment income 242.9 215.9 Fees and other income 18.3 22.6 Net realized capital gains 239.7 6.8 __________________________ Total revenue 1,539.3 1,292.2 _____________________________________________________________________________________________ Claims and expenses: Claims and claim adjustment expenses 964.0 842.1 Operating expenses 151.9 198.5 Amortization of deferred policy acquisition costs 160.7 155.1 __________________________ Total claims and expenses 1,276.6 1,195.7 _____________________________________________________________________________________________ Income before income taxes 262.7 96.5 Federal and foreign income taxes 80.5 28.1 __________________________ Net income $ 182.2 $ 68.4 __________________________ __________________________
10 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Sales of Subsidiaries (Continued) The Balance Sheets of the Discontinued Operations were:
March 31, December 31, (Millions) 1996 1995 ________________________________________________________________________________ Assets: Investments: Debt securities: Available for sale, at fair value (amortized cost $12,854.5 and $11,293.8) $12,836.8 $11,705.6 Equity securities, at fair value (cost $53.3 and $313.8) 60.1 525.5 Short-term investments .2 137.2 Mortgage loans 1,012.8 1,061.7 Real estate 255.9 264.7 Other 140.9 291.8 __________________________ Total investments 14,306.7 13,986.5 Cash and cash equivalents 522.5 1,153.6 Reinsurance recoverables and receivables 5,067.5 5,144.0 Accrued investment income 210.2 188.3 Premiums due and other receivables 1,079.1 1,057.4 Federal and foreign income taxes: Current - 13.6 Deferred 777.2 642.3 Deferred policy acquisition costs 296.1 305.8 Other assets 1,033.5 1,010.9 __________________________ Total assets $23,292.8 $23,502.4 ________________________________________________________________________________ __________________________ Liabilities: Unpaid claims and claim expenses $16,726.2 $16,569.3 Unearned premiums 1,386.2 1,400.3 Policyholders' funds left with the companies 40.5 39.1 ___________________________ Total insurance liabilities 18,152.9 18,008.7 Long-term debt 35.2 35.2 Current federal income taxes 1.8 - Other liabilities 1,356.2 1,525.7 __________________________ Total liabilities 19,546.1 19,569.6 Total shareholder's equity (including net unrealized capital (losses) gains of $(65.2) and $303.1) 3,746.7 3,932.8 ________________________________________________________________________________ Total liabilities and shareholder's equity $23,292.8 $23,502.4 ________________________________________________________________________________ __________________________
In conjunction with the sale, Travelers subleased the space currently occupied by the company in the CityPlace office facility in Hartford for eight years at current market rates. The company will reflect a charge of approximately $190 million (after tax) in the second quarter of 1996 representing the present value of the difference between rent required to be paid by the company under the lease and future rentals expected to be received by the company. The company also expects to reflect additional severance and facilities charges in the second quarter of 1996 of approximately $45 million (after tax) due to actions expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by the property-casualty operations. 11 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Sales of Subsidiaries (Continued) As a result of the sale, the company retained no property- casualty liabilities other than those associated with indemnifying Travelers for a portion of certain potential liability exposures. While there can be no assurances, management currently does not believe that the aggregate ultimate loss arising from these indemnifications, if any, will be material to the annual net income, liquidity or financial condition of the company, although it is reasonably possible. (5) Discontinued Products Results of discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs")) for the three months ended March 31, 1996 and 1995 were credited/charged to the reserve for anticipated future losses and did not affect the company's results of operations. Future net losses (including capital losses) for each product will be charged to the respective reserve at the time such losses are realized. Management believes the reserve for anticipated losses at March 31, 1996 is adequate to provide for future net losses associated with the guaranteed product liabilities. To the extent that actual future losses are greater than anticipated future net losses, the company's results of operations would be adversely affected. Conversely, if actual future losses are less than anticipated future losses, the company's results of operations would be favorably affected. (Please refer to the company's 1995 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) 12 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Discontinued Products (Continued) Results of discontinued products were as follows (pretax, in millions):
Charged (Credited) to Guaranteed Single- Reserve for Investment Premium Future Three months ended March 31, 1996 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 106.1 $ 116.9 $ 223.0 $ - $ 223.0 Net realized capital gains 10.8 11.1 21.9 (21.9) - Interest earned on receivable from continuing business 5.3 7.8 13.1 - 13.1 Other income 7.2 6.0 13.2 - 13.2 _____________________________________________________________ Total revenue 129.4 141.8 271.2 (21.9) 249.3 _____________________________________________________________ Current and future benefits 102.4 107.3 209.7 37.2 246.9 Operating expenses 1.7 0.7 2.4 - 2.4 _____________________________________________________________ Total benefits and expenses 104.1 108.0 212.1 37.2 249.3 _____________________________________________________________ Results of discontinued products $ 25.3 $ 33.8 $ 59.1 $ (59.1) $ - _____________________________________________________________________________________________________ _____________________________________________________________ Charged (Credited) to Guaranteed Single- Reserve for Investment Premium Future Three months ended March 31, 1995 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 132.3 $ 110.1 $ 242.4 $ - $ 242.4 Net realized capital gains (losses) (18.5) 8.0 (10.5) 10.5 - Interest earned on receivable from continuing business 5.1 7.6 12.7 - 12.7 Other income 2.5 3.0 5.5 - 5.5 _____________________________________________________________ Total revenue 121.4 128.7 250.1 10.5 260.6 _____________________________________________________________ Current and future benefits 155.2 114.4 269.6 (10.2) 259.4 Operating expenses (.3) 1.5 1.2 - 1.2 _____________________________________________________________ Total benefits and expenses 154.9 115.9 270.8 (10.2) 260.6 _____________________________________________________________ Results of discontinued products $ (33.5) $ 12.8 $ (20.7) $ 20.7 $ - _____________________________________________________________________________________________________ _____________________________________________________________ * Amounts are reflected in the 1996 and 1995 Consolidated Statements of Income, except for interest of $13.1 million and $12.7 million for the three months ended March 31, 1996 and 1995, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
13 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Discontinued Products (Continued) Assets and liabilities of discontinued products were as follows (in millions):
March 31, 1996 _______________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _______________________________________ Debt securities available for sale $ 2,012.2 $ 3,440.3 $ 5,452.5 Mortgage loans 1,762.8 1,485.3 3,248.1 Real estate 477.8 194.6 672.4 Short-term and other investments 183.3 86.7 270.0 _______________________________________ Total investments 4,436.1 5,206.9 9,643.0 Current and deferred income taxes 153.3 132.6 285.9 Receivable from continuing business 435.0 501.4 936.4 _______________________________________ Total assets $ 5,024.4 $ 5,840.9 $10,865.3 ______________________________________________________________________________ _______________________________________ Future policy benefits $ - $ 4,896.3 $ 4,896.3 Policyholders' funds left with the company 4,646.8 - 4,646.8 Reserve for future losses on discontinued products 246.7 771.2 1,017.9 Other 130.9 173.4 304.3 _______________________________________ Total liabilities $ 5,024.4 $ 5,840.9 $10,865.3 ______________________________________________________________________________ _______________________________________
Net unrealized capital gains as of March 31, 1996 on available for sale debt securities are included above in other liabilities and are not reflected in consolidated shareholders' equity. The reserve for anticipated future losses on GICs is included in policyholders' funds left with the company and the reserve for anticipated future losses on SPAs is included in future policy benefits on the Consolidated Balance Sheets. 14 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Discontinued Products (Continued) The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
Three Months Ended March 31, 1996 ___________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _________________________________________________________________________ Reserve at beginning of period $ 221.4 $ 737.4 $ 958.8 Results of discontinued products 25.3 33.8 59.1 ___________________________________ Reserve at end of period $ 246.7 $ 771.2 $ 1,017.9 _________________________________________________________________________ ___________________________________
At the time of discontinuance, a receivable from continuing business was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables, on which interest is accrued at the discount rates used to calculate the loss on discontinuance, will be funded, net of taxes on the accrued interest, from invested assets supporting Large Case Pensions. The offsetting payable, on which interest is similarly accrued, was established in the continuing business. The interest on such payable generally offsets the investment income on the assets available to fund the shortfall. At March 31, 1996, for GICs and SPAs, the receivables from continuing business, net of the related deferred taxes payable of $15.8 million and $23.2 million, respectively, on the accrued interest income were $419.2 million and $478.2 million, respectively. As of March 31, 1996, no funding had taken place. These amounts are eliminated in consolidation and are therefore not reflected on the Consolidated Balance Sheets. (6) Investments Net investment income includes amounts allocable to experience rated contractholders of $353.1 million and $360.8 million for the three months ended March 31, 1996 and 1995, respectively. Interest credited to contractholders is included in current and future benefits. Net realized capital gains (losses) allocable to experience rated contractholders of $38.1 million and ($35.0) million for the three months ended March 31, 1996 and 1995, respectively, were deducted from net realized capital gains (losses) as reflected on the Consolidated Statements of Income, and an offsetting amount is reflected on the Consolidated Balance Sheets in policyholders' funds left with the company. 15 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Investments (Continued) At March 31, 1996, the total recorded investment in mortgage loans that are considered to be impaired (which include problem loans, restructured loans and potential problem loans) under FAS No. 114 and related specific reserves are presented in the table below. Included in such total recorded investment are impaired loans of $355 million for which no specific reserves are considered necessary.
Total Recorded Specific (Millions) Investment Reserves ________________________________________________________________________ Supporting discontinued products $ 642.5 $ 102.3 Supporting experience rated products 394.7 94.0 Supporting remaining products 362.5 44.0 _________________________ Total Impaired Loans - continuing operations $ 1,399.7 $ 240.3 _______________________________________________________________________ _________________________
The activity in the specific and general reserves as of March 31, 1996 is summarized below:
Charged Balance Balance at to net Charged at December 31, realized to other Principal March 31, (Millions) 1995 loss accounts(1) Write-offs 1996(2) _______________________________________________________________________________________________ Supporting discontinued products $ 287.5 $ - $ - $ (111.2) $ 176.3 Supporting experienced rated products 228.3 - .6 (17.9) 211.0 Supporting remaining products 89.1 (.6) - (2.2) 86.3 ________________________________________________________________ Total - continuing operations $ 604.9 $ (.6) $ .6 $ (131.3) $ 473.6 ______________________________________________________________________________________________ ________________________________________________________________ (1) Reflects additions to reserves related to assets supporting experience rated products and discontinued products which do not affect the company's results of operations. (2) Total reserves for continuing operations at March 31, 1996 include $240.3 million of specific reserves and $233.3 million of general reserves.
The company accrues interest income on impaired loans to the extent it is deemed collectible and the loan continues to perform under its original or restructured contractual terms. Interest income on problem loans is generally recognized on a cash basis. Cash payments on loans in the process of foreclosure are generally treated as a return of principal. 16 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Investments (Continued) Income earned (pretax) and received on the average recorded investment in impaired loans for the three months ended March 31, 1996 was as follows:
Three Months Ended March 31, 1996 ______________________________ Average Impaired Income Income (Millions) Loans Earned Received ________________________________________________________________________ Supporting discontinued products $ 695.4 $ 15.0 $ 15.5 Supporting experience rated products 501.3 9.5 9.8 Supporting remaining products 218.5 5.5 4.8 _____________________________ Total continuing operations $ 1,415.2 $ 30.0 $ 30.1 _______________________________________________________________________ _____________________________
As of January 1, 1996, the company adopted FAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. This statement requires long-lived assets to be held and used to be written down to fair value when they are considered impaired. Long-lived assets to be disposed of (e.g., real estate held for sale) are to be carried at the lower of cost or fair value less estimated selling costs. In addition, this statement does not allow long-lived assets to be disposed of to be depreciated. As a result of the adoption of FAS No. 121 on January 1, 1996, valuation reserves were increased by $52.9 million in connection with the reversal of previously recorded accumulated depreciation related to properties held for sale. The adoption of FAS No. 121 did not have a material effect on results of operations. (7) Debt The company has credit facilities aggregating $1 billion with a group of worldwide banks. One $500 million facility terminates in July 1996. Another $500 million facility terminates in July 1999. Various interest rate options are available under each facility and any borrowings mature on the expiration date of the applicable credit commitment. The company pays facility fees ranging from .08% to .375% per annum under the short-term credit agreement and from .1% to .5% per annum under the medium-term credit agreement, depending upon the company's long-term senior unsecured debt rating. The commitments require the company to maintain shareholders' equity, excluding net unrealized capital gains and losses, of at least $5.0 billion. These facilities also support the company's commercial paper borrowing program. (Please refer to Note 2 for discussion of additional debt expected to be incurred in connection with the merger with U.S. Healthcare.) Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission ("SEC"), the company may offer and sell up to $550 million of various types of securities. 17 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (7) Debt (Continued) A subsidiary of the company may offer and sell up to an additional $225 million of preferred securities under a shelf registration statement declared effective by the SEC. (8) Off-Balance-Sheet Financial Instruments (including Derivative Financial Instruments) The company engages in hedging activities to manage foreign exchange and interest rate risk. Such hedging activities have principally consisted of using off-balance-sheet instruments including foreign exchange forward contracts, futures and forward contracts, and interest rate swap agreements. (Please see General Account Investments - Use of Derivatives and Other Investments on page 44 of the Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 16 of the company's 1995 Annual Report to Shareholders for a description of the company's hedging activities). The notional amounts, carrying values and estimated fair values of the company's off-balance- sheet financial instruments from continuing operations are as follows (in millions):
Carrying Value Notional Asset Fair March 31, 1996 Amount (Liability) Value ______________________________________________________________________________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $ 174.3 $ (1.2) $ (2.8) Related to investments in nondollar denominated assets 90.7 (0.2) - Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 2.7 0.1 0.3 Related to investments in nondollar denominated assets 31.7 0.2 0.2 Interest rate swaps: Unrecognized gains 43.0 - 6.7 Futures contracts to purchase investments 51.4 (1.4) (1.4) Forward swap agreement 60.0 - 0.3
At March 31, 1996, continuing operations had commitments to purchase investments for $142.1 million, the fair market value of which was $142.2 million. (9) Supplemental Cash Flow Information Significant noncash investing and financing activities of continuing operations include acquisition of real estate through foreclosures (including in-substance foreclosures) of mortgage loans amounting to $36.5 million and $9.7 million for the three months ended March 31, 1996 and 1995, respectively. 18 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (10) Earnings Per Share Earnings per share are computed using net income divided by the weighted average number of common shares outstanding (including common share equivalents). There is no difference between primary and fully diluted earnings per share. (11) Litigation The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations as an insurer. While the ultimate outcome of such litigation cannot be determined at this time, such litigation, net of reserves established therefor, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. 19 Independent Auditors' Review Report The Board of Directors Aetna Life and Casualty Company: We have reviewed the accompanying condensed consolidated balance sheet of Aetna Life and Casualty Company and Subsidiaries as of March 31, 1996, and the related condensed consolidated statements of income for the three-month periods ended March 31, 1996 and 1995, and the related condensed consolidated statements of shareholders' equity and cash flows for the three-month periods ended March 31, 1996 and 1995. These condensed consolidated financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 6, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1995, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG PEAT MARWICK LLP Hartford, Connecticut April 25, 1996 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations __________________________________
Operating Summary (Millions, except per share data) Three Months Ended March 31 ___________________________________ 1996 1995 % Change ____ ____ ________ Premiums............................. $ 1,843.9 $ 1,882.1 (2.0)% Net investment income................ 886.3 870.0 1.9 Fees and other income................ 518.2 453.4 14.3 Net realized capital gains (losses).. 62.0 (13.2) - _________ __________ Total revenue.................... 3,310.4 3,192.3 3.7 Current and future benefits.......... 2,236.9 2,275.7 (1.7) Operating expenses................... 790.2 741.2 6.6 Amortization of deferred policy acquisition costs................... 37.0 32.0 15.6 _________ __________ Total benefits and expenses...... 3,064.1 3,048.9 .5 _________ __________ Income from continuing operations before income taxes................. 246.3 143.4 71.8 Income taxes......................... 80.8 51.0 58.4 _________ __________ Income from continuing operations.... 165.5 92.4 79.1 Income from Discontinued Operations, net of tax.......................... 182.2 68.4 166.4 _________ __________ Net income....................... $ 347.7 $ 160.8 116.2 _________ __________ _________ __________ Net realized capital gains (losses) from continuing operations, net of tax (included above)................ $ 41.4 $ (10.6) - _________ __________ _________ __________ Income from continuing operations per common share.................... $ 1.43 $ .82 74.4 Income from Discontinued Operations, net of tax.......................... 1.57 .60 161.7 _________ __________ Net income per common share.......... $ 3.00 $ 1.42 111.3 _________ __________ _________ __________
Overview ________ Agreement to Merge with U.S. Healthcare The company and U.S. Healthcare, Inc. ("U.S. Healthcare") entered into an agreement, dated as of March 30, 1996, pursuant to which they agreed to merge in a transaction, valued at that time, at approximately $8.9 billion. The merger agreement, which has been approved by the board of directors of each company, calls for the formation of a new holding company, Aetna Inc. U.S. Healthcare shareholders will receive $34.20 in cash, 0.2246 shares of Aetna Inc. common stock and 0.0749 shares of Aetna Inc. mandatorily convertible preferred stock for each share of U.S. Healthcare common stock and each share of U.S. Healthcare Class B Stock outstanding. Each outstanding share of the company's common stock will become a share of common stock of Aetna Inc. Immediately after the transaction, the company and U.S. Healthcare will each be wholly-owned subsidiaries of Aetna Inc., and Aetna Inc. will be owned approximately 78% by the company's shareholders and approximately 22% by U.S. Healthcare shareholders (approximately 72% and approximately 28%, respectively, on a fully diluted basis). 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ In addition, subsidiaries of the company and Leonard Abramson (the "Shareholder") entered into a voting agreement, dated as of March 30, 1996, pursuant to which the Shareholder agreed, among other things, to vote all of his Class B Stock of U.S. Healthcare, representing approximately 83.7% of the aggregate voting power of the capital stock of U.S. Healthcare, in favor of the merger. The company expects to finance the transaction with a combination of $5.3 billion in cash ($3.9 billion from the net proceeds received from the sale of its property-casualty operations (see below) and $1.4 billion of additional bank debt, which may initially be financed with commercial paper) and the issuance of $2.7 billion of new Aetna Inc. common stock and $0.9 billion of Aetna Inc. mandatorily convertible preferred stock. The agreement is subject to approval by the shareholders of both companies, expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, receipt of required insurance, healthcare and other regulatory approvals, and other customary conditions. It is expected to close in the third quarter of 1996. See "Overview - Income from Continuing Operations" on page 22 and "Liquidity and Capital Resources" on page 45 for a discussion of certain factors that are expected to impact the company after the consummation of the merger with U.S. Healthcare. For financial and business information regarding U.S. Healthcare, see its Form 10-K and other reports filed with the Securities and Exchange Commission ("SEC"). Sale of Property-Casualty Operations On April 2, 1996, the company completed the sale of its property- casualty operations to an affiliate of The Travelers Insurance Group Inc. (Travelers) for approximately $4.1 billion in cash. The sale resulted in a gain of approximately $265 million (after tax) which will be reflected in the second quarter of 1996. In conjunction with the sale, Travelers subleased the space currently occupied by the company in the CityPlace office facility in Hartford for eight years at current market rates. The company will reflect a charge of approximately $190 million (after tax) in the second quarter of 1996 representing the present value of the difference between rent required to be paid by the company under the lease and future rentals expected to be received by the company. The company also expects to reflect additional severance and facilities charges in the second quarter of 1996 of approximately $45 million (after tax) due to actions expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by the property-casualty operations. See "Discontinued Operations - Property-Casualty Operations" on page 35. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Strategic Outlook The agreement to merge with U.S. Healthcare, which follows the recently completed sale of the company's property-casualty operations, represents the second step of the company's previously announced strategic decision to focus its resources on pursuing growth opportunities in its health care business, and evaluating opportunities for growth and development of its financial services and international operations. The company currently anticipates recording severance charges related to Aetna Health Plans in the second quarter. (See "Aetna Health Plans" on page 25.) Further, the company continues to conduct strategic and financial reviews of all of its continuing operations in order to make such operations more competitive. Such reviews may result in restructuring actions in 1996 which would be in addition to the severance and facilities charges anticipated in connection with the sale of the company's property- casualty operations, as well as the Aetna Health Plans' severance charge, although the amount of any such charges cannot be estimated at this time. Income from Continuing Operations The company reported income from continuing operations of $166 million for the three months ended March 31, 1996 compared with $92 million for the same period a year ago. Excluding net realized capital gains and losses, results for the three months ended March 31, 1996 increased $21 million from the prior year reflecting improved earnings in all of the company's continuing businesses. Earnings from continuing operations for the balance of 1996 will be impacted by the earnings from the investment of the net proceeds received from the property-casualty sale until the U.S. Healthcare merger closes. It will then be affected, among other things, by the earnings of U.S. Healthcare, the costs of financing the merger and the amortization of approximately $8 billion of intangible assets (primarily goodwill) expected to be created as a result of the merger. The company also anticipates that the merger will yield increased operating income for its new combined health businesses resulting from expense savings and increased revenues (the "estimated synergies"). The annual increase in operating income is expected to be approximately $300 million (after tax) per year, and is expected to be achieved within 18 months of the closing of the transaction. The estimated synergies set forth above are forward-looking information. For discussion of factors regarding such forward-looking information, see "Forward-Looking Information" on page 47. 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Net Realized Capital Gains and Losses Net realized after-tax capital gains and losses from continuing operations included in net income, allocable to experience rated pension contractholders, and supporting discontinued products were as follows (in millions):
Three Months Ended March 31 ___________________________ 1996 1995 ____ ____ Net realized capital gains (losses) from sales................................. $ 41.0 $ (8.6) Net realized capital gains (losses) from changes in reserves for mortgage loans and real estate............................ .4 (2.0) _______ _______ Net realized capital gains (losses) from continuing operations...................... $ 41.4 $ (10.6) _______ _______ _______ _______ Net realized capital gains (losses) allocable to experience rated pension contractholders (excluded above)........................... $ 24.8 $ (22.8) _______ _______ _______ _______ Net realized capital gains (losses) on assets supporting discontinued products (excluded above)........................... $ 14.2 $ (6.8) _______ _______ _______ _______
Net realized capital gains from sales in the first quarter of 1996 include a $15 million gain from the sale of an HMO subsidiary. For information about net realized after-tax capital gains on assets related to Discontinued Operations, see "Discontinued Operations - Property-Casualty Operations" on page 35. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans __________________
Operating Summary (Millions) Three Months Ended March 31 __________________________________ 1996 1995 % Change ____ ____ ________ Premiums............................ $ 1,552.1 $ 1,494.7 3.8% Net investment income............... 93.8 84.7 10.7 Fees and other income............... 355.6 307.5 15.6 Net realized capital gains (losses). 31.2 (4.2) - _________ _________ Total revenue.................... 2,032.7 1,882.7 8.0 Current and future benefits......... 1,344.9 1,273.3 5.6 Operating expenses.................. 529.9 485.0 9.3 Amortization of deferred policy acquisition costs.................. 2.8 6.8 (58.8) _________ _________ Total benefits and expenses...... 1,877.6 1,765.1 6.4 _________ _________ Income before income taxes.......... 155.1 117.6 31.9 Income taxes........................ 53.7 44.0 22.0 _________ _________ Net income.......................... $ 101.4 $ 73.6 37.8 _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ 21.5 $ (2.8) - _________ _________ _________ _________
Aetna Health Plans' net income for the three months ended March 31, 1996 increased by $28 million compared with the same period a year ago. Excluding net realized capital gains and losses, results for the three months ended March 31, 1996 increased $4 million from the prior year. Results for the first quarter of 1996 reflect increased earnings in the Group Insurance business resulting from growth in membership. Earnings in the first quarter of 1996 related to the Health and Specialty Health businesses were, in the aggregate, level compared to the same period a year ago. HMO earnings were $10 million and $11 million for the quarters ended March 31, 1996 and 1995, respectively, reflecting an increase in the medical loss ratio which was substantially offset by increased membership. The HMO medical loss ratios were 87.0% and 84.5% for the three months ended March 31, 1996 and 1995, respectively. The increase in the loss ratio is primarily attributable to lower premiums per member due to competitive pricing. Revenue, excluding net realized capital gains and losses, for the Health and Specialty Health businesses increased approximately $82 million or 5% in the first quarter of 1996 compared with the same period in 1995, primarily due to the shift in membership to managed care products. Membership in managed care products for the quarter ended March 31, 1996 increased .7 million members from the same period a year ago. Revenue, excluding net realized capital gains and losses, for the Group Insurance business increased approximately $32 million or 9% in the first quarter of 1996 compared with the same period in 1995 resulting from increased membership. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans (Continued) ______________________________ Operating expenses in the Health business increased in the first quarter of 1996 compared with the same period in 1995 due to the continued migration of members from the indemnity to the more resource-intensive POS product. AHP is continuing to refine its systems and processes in order to slow the growth of the administrative costs associated with its managed care products as the migration to those products from indemnity products continues. Severance charges of approximately $20 million (after tax) are currently anticipated for the second quarter related to actions expected to be taken to reduce costs. Such actions are primarily related to reducing information technology costs. Net realized capital gains in the first quarter of 1996 were primarily attributable to the sale of an HMO subsidiary. The earnings of this subsidiary were not material to AHP's results. The number of Health members participating in risk versus nonrisk plans was as follows:
March 31, 1996 March 31, 1995 __________________________ ___________________________ (Millions) Risk Nonrisk Total Risk Nonrisk Total ___________________________________________________________ __________________________ Health HMO 1.3 .3 1.6 1.2 .3 1.5 POS .5 2.1 2.6 .3 1.7 2.0 __________________________ _________________________ Total Gated Managed Care 1.8 2.4 4.2 1.5 2.0 3.5 PPO 1.3 2.8 4.1 1.3 2.8 4.1 __________________________ __________________________ Total Managed Care 3.1 5.2 8.3 2.8 4.8 7.6 Traditional Indemnity .6 3.0 3.6 1.0 3.4 4.4 __________________________ __________________________ Total Health 3.7 8.2 11.9 3.8 8.2 12.0 __________________________ __________________________ __________________________ __________________________
Membership attributable to a risk contract with the Civilian Health and Military Program of the Uniformed Services ("Champus") of .7 million members at March 31, 1996 and 1995 is included in total managed care membership. Champus has awarded renewal of the contract to another provider effective April 1, 1996. The company expects that there will not be a material adverse impact to earnings of the segment as a result of the loss of this contract. The number of members covered by Specialty Health products was as follows:
March 31 __________________ (Millions) 1996(1) 1995(1) ___________________________________________________ Behavioral Health (2) 14.8 15.1 ____ ____ ____ ____ Dental (2) 7.9 8.4 ____ ____ ____ ____ Managed Pharmacy 4.6 3.8 ____ ____ ____ ____ (1) Many Specialty Health members participate in more than one type of AHP coverage and are therefore counted in each. (2) The decline in membership was primarily due to increased competition related to the pricing of such products. Such decline was not material to AHP's earnings.
26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans (Continued) ______________________________ The number of members covered by Group Insurance products was as follows:
March 31 __________________ (Millions) 1996(1) 1995(1) ___________________________________________________ Group Life (2) 8.4 7.9 ____ ____ ____ ____ Disability 2.4 2.2 ____ ____ ____ ____ Long-Term Care .1 .1 ____ ____ ____ ____ (1) Many Group Insurance members participate in more than one type of AHP coverage and are therefore counted in each. (2) Group life includes members with accident coverages.
Please see "Overview" on page 20 for a discussion related to the merger of the company and U.S. Healthcare. 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Retirement Services (formerly named Aetna Life Insurance & _________________________ Annuity)
Operating Summary (Millions) Three Months Ended March 31 ___________________________________ 1996 1995 % Change ____ ____ ________ Premiums............................ $ 26.0 $ 42.4 (38.7)% Net investment income............... 267.3 245.5 8.9 Fees and other income............... 103.3 84.0 23.0 Net realized capital gains.......... 15.7 3.0 - _________ _________ Total revenue.................... 412.3 374.9 10.0 Current and future benefits......... 232.1 224.5 3.4 Operating expenses.................. 82.8 74.8 10.7 Amortization of deferred policy acquisition costs.................. 17.3 11.4 51.8 _________ _________ Total benefits and expenses...... 332.2 310.7 6.9 _________ _________ Income before income taxes.......... 80.1 64.2 24.8 Income taxes........................ 23.6 20.7 14.0 _________ _________ Net income.......................... $ 56.5 $ 43.5 29.9 _________ _________ _________ _________ Net realized capital gains, net of tax (included above)............ $ 10.2 $ 1.9 - _________ _________ _________ _________ Deposits not included in premiums above ............................. $ 1,091.9 $ 784.4 39.2 _________ _________ _________ _________ Assets under management (1)(2)...... $26,430.0 $21,214.4 24.6 _________ _________ _________ _________ (1) Excludes net unrealized capital gains (losses) of approximately $302 million and $(70) million at March 31, 1996 and 1995, respectively. (2) Includes $3.2 billion and $1.1 billion at March 31, 1996 and 1995, respectively, related to assets held and managed by unaffiliated mutual funds.
Aetna Retirement Services' net income for the three months ended March 31, 1996 increased $13 million from the same period a year ago. Excluding net realized capital gains, results for the three months ended March 31, 1996 increased $5 million from the same period a year ago. Results in the first quarter of 1996 benefited from increased fees assessed against policyholders related to the growth in assets under management, partially offset by an increase in operating expenses. The increase in operating expenses primarily reflects continued business growth and investment in nontraditional distribution channels (e.g., banks and broker/dealers). Assets under management at March 31, 1996 were 25% higher than a year earlier primarily as a result of continued business growth and overall improvement in the stock market. 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Retirement Services _________________________ Premiums decreased 39% in the first quarter of 1996 compared to the first quarter of 1995 primarily because Aetna Retirement Services ceased writing structured settlements of certain liabilities in the fourth quarter of 1995. Such decrease did not and is not expected to have a material effect on results of the segment. Current and future benefits increased 3% in the first quarter of 1996 compared to the same period a year ago reflecting continued business growth, substantially offset by a decrease in current and future benefits related to the cessation of the structured settlement product discussed above. 29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) International _____________
Operating Summary (Millions) Three Months Ended March 31 _____________________________________ 1996 1995 % Change ____ ____ ________ Premiums............................ $ 239.6 $ 220.6 8.6% Net investment income............... 83.0 68.3 21.5 Fees and other income............... 29.4 26.3 11.8 Net realized capital gains (losses). 1.1 (3.8) - _________ _________ Total revenue.................... 353.1 311.4 13.4 Current and future benefits......... 213.2 196.8 8.3 Operating expenses.................. 86.3 83.3 3.6 Amortization of deferred policy acquisition costs.................. 16.9 13.8 22.5 _________ _________ Total benefits and expenses...... 316.4 293.9 7.7 _________ _________ Income before income taxes.......... 36.7 17.5 109.7 Income taxes ....................... 12.0 3.4 - _________ _________ Net income.......................... $ 24.7 $ 14.1 75.2 _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ .6 $ (2.8) - _________ _________ _________ _________
International's net income for the three months ended March 31, 1996 increased by $11 million compared with the same period a year ago. Excluding net realized capital gains and losses, results for the three months ended March 31, 1996 increased $7 million from the same period a year ago. The improvement in the first quarter reflected increased earnings in the Pacific Rim and Latin America, primarily reflecting continued revenue growth, as well as lower growth in operating expenses due to tighter controls over such costs. Improved earnings in Latin America also reflect higher net investment income because of the sustained high interest rate environment in Mexico. 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions ___________________
Operating Summary (Millions) Three Months Ended March 31 ___________________________________ 1996 1995 % Change ____ ____ ________ Premiums........................... $ 26.2 $ 124.4 (78.9)% Net investment income.............. 442.9 468.2 (5.4) Fees and other income.............. 29.3 35.1 (16.5) Net realized capital gains (losses) 10.2 (7.7) - _________ _________ Total revenue................... 508.6 620.0 (18.0) Current and future benefits........ 446.7 581.1 (23.1) Operating expenses................. 20.3 20.6 (1.5) _________ _________ Total benefits and expenses..... 467.0 601.7 (22.4) _________ _________ Income before income taxes......... 41.6 18.3 127.3 Income taxes....................... 14.8 7.0 111.4 _________ _________ Net income......................... $ 26.8 $ 11.3 137.2 _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)...... $ 6.6 $ (5.0) - _________ _________ _________ _________ Deposits not included in premiums above ........................... $ 394.4 $ 422.8 (6.7) _________ _________ _________ _________ Assets under management (1)(2)..... $37,300.0 $46,291.0 (19.4) _________ _________ _________ _________ (1) Excludes net unrealized capital gains (losses) of approximately $266 million and $(165) million at March 31, 1996 and 1995, respectively. (2) Includes assets under management related to discontinued products.
Large Case Pensions' net income for the three months ended March 31, 1996 increased by $16 million compared with the same period a year ago. Excluding net realized capital gains and losses, results for the three months ended March 31, 1996 increased $4 million from the prior year primarily reflecting an increase in net interest margins. 1995 premiums reflected additional premiums from existing contractholders which did not have a material effect on results. Assets under management at March 31, 1996 were 19% lower than a year earlier primarily as a result of the sale of Insurance Company Investment Management ("ICIM"), a specialized asset manager conducting business through the company's Aeltus Investment Management subsidiary ("Aeltus"), in the first quarter of 1996. ICIM was not a significant contributor to Large Case Pensions' earnings in 1995 or in the first quarter of 1996. 31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ Experience rated contractholder and participant withdrawals and transfers were as follows (excluding contractholder transfers to other company products) (in millions):
Three Months Ended March 31 ____________________________ 1996 1995 ____ ____ Scheduled contract maturities and benefit payments (1).......... $ 318.1 $ 270.3 ________ ________ ________ ________ Contractholder withdrawals other than scheduled contract maturities and benefit payments.............. $ 315.2 (2) $ 97.6 ________ ________ ________ ________ Participant withdrawals............ $ 56.4 $ 54.5 ________ ________ ________ ________ (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules. (2) Primarily relates to an unscheduled withdrawal by one contractholder.
The company is exploring sale or other alternatives for certain portions of its large case pension investment management and advisory business conducted through its subsidiary, Aeltus. Such actions have included the signing, in 1996, of a letter of intent to sell Aetna Realty Investors ("ARI") to TA Associates. The sale is expected to close in the second quarter of 1996. ARI contributed $2 million to Large Case Pensions' net income for the three months ended March 31, 1996 and 1995. Discontinued Products Results of discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single-premium annuities ("SPAs")) for the three months ended March 31, 1996 and 1995 were credited/charged to the reserve for anticipated future losses and did not affect the company's results of operations. Future net losses (including capital losses) for each product will be charged to the respective reserve at the time such losses are realized. Management believes the reserve for anticipated losses at March 31, 1996 is adequate to provide for future losses associated with the guaranteed product liabilities. To the extent that actual future losses are greater than anticipated future net losses, the company's results of operations would be adversely affected. Conversely, if actual future losses are less than anticipated future losses, the company's results of operations would be favorably affected. (Please refer to the company's 1995 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) 32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ At the time of discontinuance, a receivable from continuing business was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables, on which interest is accrued at the discount rates used to calculate the loss on discontinuance, will be funded, net of taxes on the accrued interest, from invested assets supporting Large Case Pensions. The offsetting payable, on which interest is similarly accrued, was established in the continuing business. The interest on such payable generally offsets the investment income on the assets available to fund the shortfall. At March 31, 1996, for GICs and SPAs, the receivables from continuing business, net of the related deferred taxes payable of $16 million and $23 million, respectively, on the accrued interest income, were $419 million and $478 million, respectively. As of March 31, 1996, no funding had taken place. Results of discontinued products were as follows (in millions):
Three Months Ended March 31 ________________________________ 1996 ________________________________ GICs SPAs Total ____ ____ _____ Interest margin (a)...................... $ 2.4 $ 6.2 $ 8.6 Net realized capital gains............... 7.0 7.2 14.2 Interest earned on receivable from continuing business.................... 3.4 5.1 8.5 Other, net............................... 2.7 4.1 6.8 ________ ________ ________ Results of discontinued products, after-tax.............................. $ 15.5 $ 22.6 $ 38.1 ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax.................................. $ 25.3 $ 33.8 $ 59.1 ________ ________ ________ ________ ________ ________ Net realized capital gains from sales of bonds, after tax, included above.... $ 2.1 $ 4.4 $ 6.5 ________ ________ ________ ________ ________ ________
Three Months Ended March 31 ________________________________ 1995 ________________________________ GICs SPAs Total ____ ____ _____ Negative interest margin (a)............. $ (14.9) $ (2.8) $ (17.7) Net realized capital gains (losses)...... (12.0) 5.2 (6.8) Interest earned on receivable from continuing business.................... 3.3 5.0 8.3 Other, net............................... 1.1 1.6 2.7 ________ ________ ________ Results of discontinued products, after-tax.............................. $ (22.5) $ 9.0 $ (13.5) ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax. $ (33.5) $ 12.8 $ (20.7) ________ ________ ________ ________ ________ ________ Net realized capital gains (losses) from sales of bonds, after tax, included above......................... $ (5.7) $ 9.4 $ 3.7 ________ ________ _________ ________ ________ _________ (a) Represents the amount by which interest credited to holders of fully guaranteed large case pension contracts (exceeds) or is less than interest earned on invested assets supporting such contracts.
33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ The results of the discontinued products in the first quarter of 1996 were favorably affected by nonrecurring items including rental income received on a foreclosed property of $6 million (after tax) related to GICs and $3 million (after tax) related to SPAs. Such rental income had previously not been recognized due to uncertainties associated with its ultimate collection. Additionally, the adoption of FAS No. 121, favorably impacted the results of GICs by $4 million (after tax) and SPAs by $2 million (after tax). Despite the improvement in earnings in the first quarter of 1996, management expects that negative interest margins related to GICs will recur and negative interest margins related to SPAs will emerge over the next several years as the average yield from the investment portfolio declines and will continue as the liabilities are paid. The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
Three Months Ended March 31, 1996 _________________________________ GICs SPAs Total ____ ____ _____ Reserve at December 31, 1995..... $ 221.4 $ 737.4 $ 958.8 Results of discontinued products. 25.3 33.8 59.1 ________ ________ ________ Reserve at March 31, 1996........ $ 246.7 $ 771.2 $1,017.9 ________ ________ ________ ________ ________ ________
Distributions on GICs and SPAs were as follows (in millions):
Three Months Ended March 31 ____________________________________ 1996 ____________________________________ GICs SPAs Total ____ ____ _____ Scheduled contract maturities, GIC settlements and benefit payments (1)...................... $ 500.2 $ 133.0 $ 633.2 ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 15.5 $ - $ 15.5 ________ ________ ________ ________ ________ ________ Three Months Ended March 31 ____________________________________ 1995 ____________________________________ GICs SPAs Total ____ ____ _____ Scheduled contract maturities, GIC settlements and benefit payments (1)...................... $ 644.8 $ 133.7 $ 778.5 ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 27.1 $ - $ 27.1 ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity, early contractual settlements of GIC liabilities, and other amounts distributed in accordance with contract schedules.
Cash required to meet the above payments was provided by earnings on, sales of, and scheduled payments on, invested assets. (Please see "General Account Investments" on page 36 for a discussion of investments supporting discontinued products.) 34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Corporate _________
Operating Summary (Millions, after-tax) Three Months Ended March 31 ___________________________________ 1996 1995 % Change ____ ____ ________ Interest expense.................... $ 19.4 $ 18.1 7.2% Other expense, net.................. 24.5 32.0 (23.4)
Other expense for the three months ended March 31, 1996 and 1995 included after-tax net realized capital gains of $3 million and after-tax net realized capital losses of $2 million, respectively. Excluding net realized capital gains and losses, the decrease of $3 million in other expenses in 1996 primarily resulted from a reduction in corporate staff area expenses associated with continued cost reduction efforts. In conjunction with the sale of the company's property-casualty operations, Travelers subleased the space currently occupied by the company in the CityPlace office facility in Hartford for eight years at current market rates. The company will reflect a charge of approximately $190 million (after tax) in the second quarter of 1996 representing the present value of the difference between rent required to be paid by the company under the lease and future rentals expected to be received by the company. The company also expects to reflect additional severance and facilities charges in the second quarter of 1996 of approximately $45 million (after tax) due to actions expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by the property-casualty operations. 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Discontinued Operations - Property-Casualty Operations ______________________________________________________
Operating Summary (Millions) Three Months Ended March 31 ___________________________________ 1996 1995 % Change ____ ____ ________ Premiums............................ $ 1,038.4 $ 1,046.9 (.8)% Net investment income............... 242.9 215.9 12.5 Fees and other income............... 18.3 22.6 (19.0) Net realized capital gains.......... 239.7 6.8 - _________ _________ Total revenue.................... 1,539.3 1,292.2 19.1 Current and future benefits......... 964.0 842.1 14.5 Operating expenses.................. 151.9 198.5 (23.5) Amortization of deferred policy acquisition costs.................. 160.7 155.1 3.6 _________ _________ Total benefits and expenses...... 1,276.6 1,195.7 6.8 _________ _________ Income before income taxes.......... 262.7 96.5 172.2 Income taxes........................ 80.5 28.1 186.5 _________ _________ Net income.......................... $ 182.2 $ 68.4 166.4 _________ _________ _________ _________ Net realized capital gains, net of tax (included above)........ $ 156.4 $ 3.6 - _________ _________ _________ _________ Statutory combined loss and expense ratio...................... 125.9% 111.1% - _________ _________ _________ _________ GAAP combined loss and expense ratio 123.9% 112.7% - _________ _________ _________ _________ Catastrophe loss ratio (included in combined ratios above).......... 6.6% 1.9% - _________ _________ _________ _________
Discontinued Operations' net income for the three months ended March 31, 1996 increased $114 million compared with the same period a year ago. Excluding net realized capital gains, results for the three months ended March 31, 1996 decreased $39 million from the prior year primarily reflecting increased catastrophe losses due to winter storms of $44 million (after-tax and net of reinsurance) ($91 million pretax and before reinsurance) for the three months ended March 31, 1996 compared to $13 million (after tax and net of reinsurance) ($27 million pretax and before reinsurance) for the three months ended March 31, 1995. Net realized capital gains (after tax) in the first quarter of 1996 include $129 million from the sale of equity securities and $33 million from the sale of debt securities in connection with the agreement to sell the property-casualty operations. As a result of the sale, the company retained no property-casualty liabilities other than those associated with indemnifying Travelers for a portion of certain potential liability exposures. While there can be no assurances, management currently does not believe that the aggregate ultimate loss arising from these indemnifications, if any, will be material to the annual net income, liquidity or financial condition of the company, although it is reasonably possible. 36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments ___________________________ Investment-related amounts disclosed in the following investment section relate to assets supporting continuing operations (including assets supporting discontinued products and experience rated products). Please see Note 4 of Condensed Notes to Financial Statements for assets supporting Discontinued Operations. The company's invested assets were comprised of the following, net of impairment reserves:
March 31, December 31, (Millions) 1996 1995 ____________________________________________________________________________ Debt securities: Available for sale, at fair value (amortized cost $29,687.7 and $29,962.5) $ 30,344.9 $ 31,860.3 Equity securities, at fair value (cost $785.1 and $597.8) 929.1 659.7 Short-term investments 637.5 607.8 Mortgage loans 7,947.8 8,327.2 Real estate 1,301.9 1,277.3 Policy loans 639.2 629.4 Other 689.4 688.6 __________________________________________________________________________ Total invested assets $ 42,489.8 $ 44,050.3 __________________________________________________________________________ ________________________
Please refer to the company's 1995 Annual Report to Shareholders for a description of the company's investment objectives and policies. The change in the invested assets portfolio from December 31, 1995 to March 31, 1996 primarily reflected depreciation of debt securities due to an increase in interest rates and a net decrease in the aggregate mortgage loan and real estate portfolios. Debt securities reflected net unrealized capital gains of $657 million at March 31, 1996, compared with net unrealized capital gains of $1.9 billion at December 31, 1995. Of such net unrealized capital gains at March 31, 1996, $179 million and $314 million related to assets supporting discontinued products and experience rated pension contractholders, respectively. The net decrease in the aggregate mortgage loan and real estate portfolios of $355 million principally reflected prepayments, payments at maturity on mortgage loans, write-offs on foreclosures and sales of foreclosed properties. The risks associated with investments supporting experience rated pension and annuity products are assumed by those customers subject to, among other things, certain minimum guarantees. The anticipated future losses associated with investments supporting discontinued fully guaranteed large case pension products were provided for in the reserve established upon discontinuance of those products. 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Debt Securities As of March 31, 1996 and December 31, 1995, the company's investments in debt securities represented 71% and 72%, respectively, of total general account invested assets and were as follows:
March 31, December 31, (Millions) 1996 1995 __________________________________________________________________________ Supporting discontinued products $ 5,452.5 $ 5,765.2 Supporting experience rated products 13,552.0 14,243.4 Supporting remaining products 11,340.4 11,851.7 ____________________________ Total debt securities $30,344.9 $31,860.3 ____________________________ ____________________________
Included in the company's debt security balances were the following categories of debt securities:
(Millions) March 31, 1996 _______________________________________________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Securities Securities Debt Securities _________________ ______________ ___________________ Total $1,727.3 $ 72.5 $ 104.3 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 28.8% 36.7% 49.6% Supporting experience rated products 45.4 12.7 20.8 Supporting remaining products 25.8 50.6 29.6 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ December 31, 1995 ________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Securities Securities Debt Securities _________________ ______________ ___________________ Total $1,623.8 $ 81.0 $ 90.4 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 32.7% 36.9% 57.5% Supporting experience rated products 42.6 12.5 24.1 Supporting remaining products 24.7 50.6 18.4 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________
"Below investment grade" securities (which include "problem" debt securities and "potential problem" debt securities described below) are defined to be securities that carry a rating below BBB- /Baa3. Such debt securities have been written down for other than temporary declines in value. Management defines "problem" debt securities to be securities for which payment is in default, securities of issuers which are currently in bankruptcy or in out-of-court reorganizations, or securities of issuers for which bankruptcy or reorganization within six months is considered likely. 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ "Potential problem" debt securities are currently performing debt securities for which neither payment default nor debt restructuring is anticipated within six months, but whose issuers are experiencing significant financial difficulties. Identifying such potential problem debt securities requires significant judgment as to likely future market conditions and developments specific to individual debt securities. The company does not accrue interest on problem debt securities when management believes the likelihood of collection of interest is doubtful. Lost investment income on problem debt securities was as follows:
Three Months Ended March 31, __________________ (Millions) 1996 1995 ___________________________________________________________ Allocable to discontinued products $ .3 $ .4 Allocable to experience rated products .2 .2 Allocable to remaining products .2 .9 __________________ Total lost investment income $ .7 $ 1.5 __________________ __________________
Included in the company's total collateralized mortgage obligations ("CMOs") balances were the following categories of CMOs:
(Millions) March 31, 1996 December 31, 1995 _______________________________________________________________ _______________________ Fair Amortized Fair Amortized Value Cost Value Cost _________ _________ ________ _________ Total CMOs (1) $ 2,866.9 $ 2,776.7 $ 3,191.1 $ 2,984.4 _________ _________ _________ _________ _________ _________ _________ _________ Percentage of total CMOs: Sequential and planned amortization class bonds 70.5% 73.1% Z-tranches 16.9 15.2 Interest-only strips and principal-only strips 3.6 3.2 Other 9.0 8.5 _________ _________ 100.0% 100.0% _________ _________ _________ _________ (1) At March 31, 1996 and December 31, 1995, approximately 70% and 74%, respectively, of the company's CMO holdings were collateralized by residential mortgage loans, on which the timely payment of principal and interest is backed by specified government agencies (e.g., GNMA, FNMA, FHLMC).
39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates whereby the value of the CMOs would be subject to variability on the repayment of principal from the underlying mortgages earlier or later than originally anticipated. The various categories of CMOs are subject to different degrees of risk from changes in interest rates and defaults (for non-agency- backed bonds). Sequential and planned amortization class bonds are subject to less prepayment and extension risk than other CMO instruments. Interest- only strips ("IOs") receive payments of interest and principal-only strips ("POs") receive payments of principal on the underlying pool of residential mortgages. The company has mitigated the risks associated with holding IOs and POs by holding positions in both types of instruments such that exposure from significant changes in interest rates is reduced. Z-tranches receive principal payments from the underlying mortgage pool only after all other priority classes have been retired. Mortgage Loans During the first quarter of 1996, the mortgage loan portfolio was reduced 5% to $7.9 billion, net of impairment reserves. The company's total mortgage loan investments, net of impairment reserves, supported the following types of business:
March 31, December 31, (Millions) 1996 1995 ______________________________________________________________________ Supporting discontinued products $ 3,248.1 $ 3,388.6 Supporting experience rated products 2,440.9 2,642.6 Supporting remaining products 2,258.8 2,296.0 _____________________________ Total mortgage loan investments $ 7,947.8 $ 8,327.2 _____________________________ _____________________________
During the first quarter of 1996, the company continued to manage its mortgage loan portfolio to reduce the balance in absolute terms and relative to invested assets, and to reduce its overall risk. The principal balance of mortgage loans decreased $511 million since December 31, 1995 primarily reflecting the effect of repayments of maturing loans, loan prepayments and foreclosures. Loans with a principal balance of $135 million and collateral with a fair market value of $37 million were foreclosed upon in the first quarter of 1996. Additional loans with a principal balance of $91 million were in the process of foreclosure at March 31, 1996. In certain cases, the company has taken substantive possession of the property supporting its loan, coupled with the borrower surrendering its interest in the future economic benefits in the property. Where this has occurred, the loans are considered in-substance foreclosures, written down to their fair market value less selling costs and classified as real estate held for sale. At March 31, 1996 and December 31, 1995, there were $136 million and $190 million, respectively, of in-substance foreclosures (net of write-offs of $72 million and $126 million, respectively). 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Included in the company's total mortgage loan balances were the following categories of mortgage loans:
(Millions) March 31, 1996 __________________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans Total _____________ ____________ _____________ _____ Total $ 201.2 $ 494.8 $ 703.7 $1,399.7 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 24.2% 53.4% 46.8% Supporting experience rated products 35.9 26.2 27.5 Supporting remaining products 39.9 20.4 25.7 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves on loans (1) $ 473.6 ________ ________ Impairment reserves as a percentage of total 33.8% ________ ________ December 31, 1995 __________________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans Total _____________ ____________ _____________ _____ Total $ 160.3 $ 514.1 $ 839.1 $1,513.5 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 22.6% 50.9% 54.3% Supporting experience rated products 39.7 30.7 25.2 Supporting remaining products 37.7 18.4 20.5 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves on loans (1) $ 604.9 ________ ________ Impairment reserves as a percentage of total 40.0% ________ ________ (1) Please see Note 6 of Condensed Notes to Financial Statements for composition of impairment reserves between specific and general impairment reserves.
"Problem loans" are defined to be loans with payments over 60 days past due, loans on properties in the process of foreclosure, loans on properties involved in bankruptcy proceedings and loans on properties subject to redemption. Loans on properties in the process of foreclosure decreased to $91 million at March 31, 1996 from $101 million at December 31, 1995. 41 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ "Restructured loans" are loans whose original contract terms have been modified to grant concessions to the borrower and are currently performing pursuant to such modified terms. Restructured loans that have a market rate of interest at the time of the restructure (which represents the interest rate the company would charge for a new loan with comparable risk) and demonstrate sustainable performance (as generally evidenced by six months of pre- or post-restructuring payment performance in accordance with the restructured terms) may be returned to performing status. (Please see the company's 1995 Annual Report to Shareholders for a complete description of the company's restructuring program.) No such restructures and transfers to performing status occurred during the three month period ended March 31, 1996. "Potential problem loans" include all loans which are performing pursuant to existing terms and are considered likely to become classified as problem or restructured loans. Such loans are identified through the portfolio review process on the basis of known information about the ability of borrowers to comply with present loan terms. Identifying such potential problem loans requires significant judgment as to likely future market conditions and developments specific to individual properties and borrowers. Provision for losses that management believes are likely to arise from such potential problem loans is included in the specific impairment reserves. (Please see Note 6 of Condensed Notes to Financial Statements for a discussion of mortgage loan impairment reserves.) The company does not accrue interest on problem loans or restructured loans when management believes the collection of interest is unlikely. The amount of pretax investment income required by the original terms of such problem and restructured loans outstanding at March 31 and the portion thereof actually recorded as income were as follows:
Three Months Ended March 31, __________________ (Millions) 1996 1995 _________________________________________________________ Income which would have been recorded under original terms of loans $ 17.9 $ 28.6 Income recorded 11.4 10.4 _______ _______ Lost investment income $ 6.5 $ 18.2 _______ _______ _______ _______ Lost investment income allocated to investments supporting discontinued products (included above) $ 2.6 $ 9.5 _______ _______ _______ _______ Lost investment income allocated to investments supporting experience rated pension products (included above) $ 3.1 $ 7.1 _______ _______ _______ _______ Lost investment income allocated to investments supporting remaining products (included above) $ .8 $ 1.6 _______ _______ _______ _______
42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Real Estate The company's equity real estate balances, net of write-downs and reserves, were as follows:
(Millions) March 31, 1996 ________________________________________________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total equity real estate $ 159.5 $1,142.4 (1) $1,301.9 ________ ________ ________ ________ ________ ________ Percentage of total equity real estate: Supporting discontinued products 11.2% 57.6% Supporting experience rated products 7.6 23.3 Supporting remaining products 81.2 19.1 ________ ________ 100.0% 100.0% ________ ________ ________ ________ December 31, 1995 _________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total equity real estate $ 153.0 $1,124.3 (1) $1,277.3 ________ ________ ________ ________ ________ ________ Percentage of total equity real estate: Supporting discontinued products 7.5% 55.5% Supporting experience rated products 7.8 24.4 Supporting remaining products 84.7 20.1 ________ ________ 100.0% 100.0% ________ ________ ________ ________ (1) Includes $136.1 million and $190.4 million of in-substance foreclosures at March 31, 1996 and December 31, 1995, respectively. (Please see "Mortgage Loans" on page 39 for discussion of in-substance foreclosures.)
Real estate which the company has the intent to hold for the production of income is classified as investment real estate. Investment real estate is carried at depreciated cost plus capital additions, net of impairment write downs. All real estate acquired through foreclosure, including in- substance foreclosures, is classified as properties held for sale. The fair value at foreclosure is established as the new cost basis for these assets, which are carried at the lower of cost or fair value less estimated selling costs. As a result of adopting FAS No. 121 on January 1, 1996 (please see Note 6 of Condensed Notes to Financial Statements), the company no longer depreciates properties held for sale. Adjustments to the carrying value of properties held for sale are recorded in a valuation reserve when the fair value less estimated selling costs is below cost. Fair value is generally determined using a discounted future cash flow analysis in conjunction with comparable sales information. Property valuations are reviewed regularly by investment management. The company intends to sell a significant amount of the properties held for sale over the next one to two years, real estate and capital market conditions permitting. 43 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Foreclosed real estate classified as properties held for sale was carried at 56% and 61% of the company's cash investment (unpaid mortgage balance plus capital additions) at March 31, 1996 and December 31, 1995, respectively. Net investment income included $65 million (pretax) from the net operations of properties held for sale for the three months ended March 31, 1996. Total real estate write-downs and valuation reserves on properties included in the company's equity real estate balances were as follows:
March 31, December 31, (Millions) 1996 1995 ______________________________________________________________________ Allocable to discontinued products $ 462.1 $ 381.0 Allocable to experience rated products 213.8 208.2 Allocable to remaining products 97.4 96.8 ________ ________ Total real estate write-downs and valuation reserves $ 773.3 (*) $ 686.0 ________ ________ ________ ________ * As a result of the adoption of FAS No. 121 on January 1, 1996, valuation reserves were increased by $52.9 million in connection with the reversal of previously recorded accumulated depreciation related to properties held for sale. The adoption of FAS No. 121 resulted in an immaterial impact on results of operations.
Total after-tax net realized capital gains from real estate write- downs and changes in the valuation reserves in the first quarter of 1996 were $3 million. Such gains were attributable to discontinued products and were credited to the reserve for future losses which did not affect the company's results of operations. There were no after-tax net realized capital gains or losses from real estate write-downs and changes in the valuation reserves in the first quarter of 1995. 44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Use of Derivatives and Other Investments The company's use of derivatives is limited to hedging activity and has principally consisted of using foreign exchange forward contracts, futures and forward contracts and interest rate swap agreements to hedge interest rate risk and currency risk. These instruments, viewed separately, subject the company to varying degrees of market and credit risk. However, when used for hedging, the expectation is that these instruments would reduce overall market risk. Market risk is the possibility that future changes in market prices may decrease the market value of one or all of these financial instruments. Credit risk arises from the potential inability of counterparties to perform under the terms of the contracts. Management does not believe that the current level of hedging activity will have a material effect on the company's liquidity or results of operations. (Please see Note 8 of Condensed Notes to Financial Statements for a discussion of the company's hedging activities.) The company also had investments in certain debt instruments with derivative characteristics, including those where market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short term or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities included in the debt securities portfolio as of March 31, 1996 was as follows:
Amortized Fair (Millions) Cost Value _____________________________________________________________________________ Collateralized mortgage obligations:............ $ 2,776.7 $ 2,866.9 Interest-only strips (included above)......... 40.7 54.8 Principal-only strips (included above)........ 37.1 48.0 Structured notes (1)............................ 113.9 117.9 Warrants to purchase debt securities (2)........ 2.8 3.8 (1) Represents nonleveraged instruments whose fair values and credit risk are based on underlying securities, including fixed-income securities and interest rate swap agreements. (2) Represents the right to purchase specific debt securities and is accounted for as a hedge. Upon exercise, the cost of the warrants will be added to the basis of the debt securities purchased and amortized over their lives.
45 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources _______________________________ Cash and cash equivalents at March 31, 1996 and December 31, 1995 were $1.6 billion and $1.7 billion, respectively. For the three months ended March 31, 1996 and 1995, net cash used for operating activities was $539 million and $67 million, respectively. For the first three months of 1996, net cash provided by investing activities was $714 million and included $408 million from maturities and repayments of mortgage loans and $359 million from a net decrease in debt securities. Net cash provided by investing activities of $441 million for the three months ended March 31, 1995 included $496 million from maturities and repayments of mortgage loans. Short-term borrowings are used from time to time to provide for timing differences between receipts and disbursements in various portfolios. The maximum amount of domestic short-term borrowings outstanding during the first three months of 1996 was $491 million. The company has extended the maturity of, and adjusted interest rates to current market on, certain maturing mortgage loans where the borrower was unable to obtain financing elsewhere due to tight lending practices by banks and other financial institutions over the past several years. For the three months ended March 31, 1996, the mortgage loan portfolio generated $376 million in cash which included $155 million of payoffs or 39% of scheduled maturities, $189 million of prepayments, and $32 million of amortization. Despite various indications that liquidity has returned to certain real estate markets, the company expects it will continue to extend or refinance maturing loans. In the second quarter of 1996, the company invested $200 million in the common stock of the entity which acquired Aetna's property- casualty operations. On April 25, 1996, such investment had a market value of approximately $349 million. The merger of the company and U.S. Healthcare is expected to close in the third quarter of 1996 and the company expects to finance the transaction with a combination of $5.3 billion in cash ($3.9 billion from the net proceeds received from the sale of its property-casualty operations and $1.4 billion of additional bank debt, which may initially be financed with commercial paper) and the issuance of $2.7 billion of new Aetna Inc. common stock and $0.9 billion of Aetna Inc. mandatorily convertible preferred stock. Pending the closing of this transaction, the company expects to invest the proceeds from the sale of its property- casualty operations in high quality short-term investments. As indicated above, a portion of the approximately $8.9 billion of consideration to be paid in connection with the merger will be raised through the issuance of new common and mandatorily convertible preferred stock. The additional shares of common and mandatorily convertible preferred stock expected to be issued would increase the common shares outstanding by approximately 31% (or by approximately 40% assuming the conversion of the mandatorily convertible preferred stock into common stock). 46 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) ___________________________________________ The annual amortization of goodwill and other intangibles expected to occur as a result of the merger with U.S. Healthcare is expected to be material to earnings, but is not expected to affect the liquidity and capital resources of the company. Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission, the company may offer and sell up to $550 million of various types of securities, and Aetna Capital L.L.C., a subsidiary of the company, may offer and sell up to an additional $225 million of preferred securities. Rating Agencies The ratings of Aetna Life and Casualty Company and certain of its subsidiaries at February 6, 1996, as set forth in the 1995 Form 10-K, and at April 26, 1996 follow:
Rating Agencies ____________________________________________________________ Moody's Investors Standard A.M. Best Duff & Phelps Service & Poor's ____________________________________________________________ Aetna Life and Casualty Company (senior debt) February 6, 1996 * A ** A2 A- ** April 26, 1996 * A ** A2 ** A- **** Aetna Life and Casualty Company (commercial paper) February 6, 1996 * D-1 ** P-1 A-2 ** April 26, 1996 * D-1 ** P-1 A-2 **** Aetna Life Insurance Company (claims paying) February 6, 1996 A AA- ** Aa3 A+ ** April 26, 1996 A *** AA- ** Aa3 A+ **** Aetna Life Insurance and Annuity Company (claims paying) February 6, 1996 A+ AA+ Aa2 AA ** April 26, 1996 A+ *** AA+ Aa2 AA **** * Not rated by the agency. ** On rating watch-up or credit watch with positive implications. *** On rating watch with developing implications. **** On credit watch negative.
Dividends On February 23, 1996, the Board of Directors declared a quarterly dividend of $.69 per share of common capital stock for shareholders of record at the close of business on April 26, 1996, payable May 15, 1996. Upon consummation of the merger with U.S. Healthcare, the company intends to adopt a dividend policy to maintain an annual payout of 10% - 20% of operating earnings before amortization of goodwill and other intangibles. Pursuant to the merger agreement, the company has agreed that initially after the consummation of the merger, subject to applicable law, the annual dividend on Aetna Inc. common stock will not be less than $0.80 per share. 47 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) New Accounting Pronouncements _____________________________ Please see Note 3 of Condensed Notes to Financial Statements for a discussion of recently issued accounting pronouncements. Forward-Looking Information ___________________________ The Private Securities Litigation Reform Act of 1995 (the "Act") provides a new "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward- looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The company desires to take advantage of the new "safe harbor" provisions of the Act. Certain information contained herein, particularly the information relating to synergies anticipated upon completion of the merger with U.S. Healthcare appearing under the heading "Overview" herein, is forward-looking. The estimate of synergies is based upon a variety of assumptions relating to the business of the company and U.S. Healthcare which may not be realized and are subject to significant uncertainties and contingencies, many of which are beyond the control of the company and U.S. Healthcare. For example, the achievement of such synergies depends upon, among other things, (i) the successful offering of U.S. Healthcare managed care products to existing company corporate customers and cross-selling of company group life, specialty health and other products through U.S. Healthcare's existing network; (ii) timely integration of U.S. Healthcare management and information systems with those of the company; (iii) timely elimination of redundant administrative expenses; and (iv) achievement of revenue enhancements and medical cost reductions. See also prior SEC filings for additional factors that may affect the company's health and other businesses. 48 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations as an insurer. While the ultimate outcome of such litigation cannot be determined at this time, such litigation, net of reserves established therefor, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. Item 5. Other Information. (a) NAIC IRIS Ratios The NAIC IRIS ratios cover 12 categories of financial data with defined usual ranges for each category. The ratios are intended to provide insurance regulators "early warnings" as to when a given company might warrant special attention. An insurance company may fall out of the usual range for one or more ratios and such variances may result from specific transactions that are in themselves immaterial or eliminated at the consolidated level. As of the date of this filing, none of Aetna Life and Casualty Company's significant subsidiaries had more than two IRIS ratios that were outside of the NAIC usual ranges for 1995. (b) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends The following table sets forth the company's ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the periods indicated.
Three Months Ended Years ended December 31 ____________________________________ March 31, 1996 1995 1994 1993 1992 1991 __________________ ____ ____ ____ ____ ____ Ratio of Earnings to Fixed Charges.... 6.04 4.97 4.74 (a) 1.90 .54(b) Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 6.04 4.97 4.74 (a) 1.90 .54(b) (a) The company reported a pretax loss from continuing operations in 1993 which was inadequate to cover fixed charges by $1.0 billion. (b) Earnings were inadequate to cover fixed charges by $92.0 million in 1991.
49 Item 5. Other Information. (Continued) For purposes of computing both the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" represent consolidated earnings from continuing operations before income taxes, cumulative effect adjustments and extraordinary items plus fixed charges and minority interest. "Fixed charges" consist of interest (and the portion of rental expense deemed representative of the interest factor) and includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1995 Annual Report to Shareholders.) For the three months ended March 31, 1996 and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 there was no preferred stock outstanding. As a result, the ratios of earnings to combined fixed charges and preferred stock dividends were the same as the ratios of earnings to fixed charges. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (4) Instruments defining the rights of security holders, including indentures. (4.1) Conformed copy of Amendment No. 1 to Rights Agreement dated as of December 19, 1995, between Aetna Life and Casualty Company and First Chicago Trust Company of New York, incorporated herein by reference to the company's Form 8-A filed on December 19, 1995. (10) Material contracts (10.1) Agreement and Plan of Merger, dated as of March 30, 1996, among Aetna Life and Casualty Company, U.S. Healthcare, Inc., Aetna Inc. (formerly named Butterfly, Inc.), Antelope Sub, Inc. and New Merger Corporation. (10.2) Voting Agreement, dated as of March 30, 1996, among Leonard Abramson, Aetna Life Insurance Company and Aetna Life Insurance and Annuity Company. (10.3) Registration Rights Agreement, dated as of March 30, 1996, between Aetna Inc. (formerly named Butterfly, Inc.) and Leonard Abramson. (10.4) Agreement, dated as of March 30, 1996, by and between Aetna Inc. and Leonard Abramson. (10.5) Letter Agreement, dated January 31, 1996, between Aetna Life and Casualty Company and The Travelers Insurance Group Inc. (10.6) Amendment, dated April 2, 1996, to Stock Purchase Agreement, dated as of November 28, 1995, between Aetna Life and Casualty Company and The Travelers Insurance Group Inc. 50 Item 6. Exhibits and Reports on Form 8-K (Continued). (a) Exhibits (Continued) (12) Statement Re Computation of Ratios. (12.1) Computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the three months ended March 31, 1996 and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991. (15) Letter Re Unaudited Interim Financial Information. (15.1) Letter from KPMG Peat Marwick LLP acknowledging awareness of the use of a report on unaudited interim financial information, dated April 25, 1996. (27) Financial Data Schedule. (b) Reports on Form 8-K None. 51 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aetna Life and Casualty Company _______________________________ (Registrant) Date April 26, 1996 By /s/ Robert J. Price ______________________________ (Signature) Robert J. Price Vice President and Corporate Controller (Chief Accounting Officer) EX-10 2 MATERIAL CONTRACTS CONFORMED COPY AGREEMENT AND PLAN OF MERGER dated as of March 30, 1996 among AETNA LIFE AND CASUALTY COMPANY U.S. HEALTHCARE, INC. BUTTERFLY, INC., ANTELOPE SUB, INC. AND NEW MERGER CORPORATION TABLE OF CONTENTS(1) Page ARTICLE 1 THE MERGERS SECTION 1.1. U.S. Healthcare Sub Merger . . . . . . . 1 SECTION 1.2. Aetna Sub Merger. . . . . . . . . . . . . 4 SECTION 1.3. Surrender and Payment . . . . . . . . . . 5 SECTION 1.4. Cancellation of Parent Stock . . . . . . 7 SECTION 1.5. The Merger Date . . . . . . . . . . . . . 7 SECTION 1.6. Dissenting Shares . . . . . . . . . . . . 8 SECTION 1.7. Stock Options of U.S. Healthcare; Restricted Stock . . . . . 9 SECTION 1.8. Stock Options of Aetna . . . . . . . . . 11 SECTION 1.9. Adjustments . . . . . . . . . . . . . . . 12 SECTION 1.10. Fractional Shares . . . . . . . . . . . . 12 ARTICLE 2 THE SURVIVING CORPORATIONS SECTION 2.1. Articles and Certificate of Incorporation; Bylaws . . . . . . . . . 13 SECTION 2.2. Directors and Officers . . . . . . . . . 13 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF U.S. HEALTHCARE SECTION 3.1. Corporate Existence and Power . . . . . . 14 SECTION 3.2. Corporate Authorization . . . . . . . . . 14 SECTION 3.3. Governmental Authorization . . . . . . . 15 SECTION 3.4. Non-Contravention . . . . . . . . . . . . 15 SECTION 3.5. Capitalization . . . . . . . . . . . . . 16 SECTION 3.6. Subsidiaries . . . . . . . . . . . . . . 17 SECTION 3.7. SEC Filings . . . . . . . . . . . . . . . 17 SECTION 3.8. Financial Statements. . . . . . . . . . . 18 SECTION 3.9. Disclosure Documents. . . . . . . . . . . 18 SECTION 3.10. Information Supplied . . . . . . . . . . 19 (1) The Table of Contents is not a part of this Agreement. SECTION 3.11. Absence of Certain Changes . . . . . . . 20 SECTION 3.12. No Undisclosed Material Liabilities . . . . . . . . . . . . . . 23 SECTION 3.13. Litigation; Investigations . . . . . . . 24 SECTION 3.14. Taxes . . . . . . . . . . . . . . . . . . 24 SECTION 3.15. ERISA . . . . . . . . . . . . . . . . . . 26 SECTION 3.16. Permits; Compliance with Laws . . . . . . 29 SECTION 3.17. Finders' Fees . . . . . . . . . . . . . . 30 SECTION 3.18. Intellectual Property Rights . . . . . . 30 SECTION 3.19. Takeover Statutes . . . . . . . . . . . . 31 SECTION 3.20. Fairness Opinion . . . . . . . . . . . . 31 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF AETNA SECTION 4.1. Corporate Existence and Power . . . . . . 32 SECTION 4.2. Corporate Authorization . . . . . . . . . 32 SECTION 4.3. Governmental Authorization . . . . . . . 33 SECTION 4.4. Non-Contravention . . . . . . . . . . . . 33 SECTION 4.5. Capitalization . . . . . . . . . . . . . 34 SECTION 4.6. SEC Filings . . . . . . . . . . . . . . . 34 SECTION 4.7. Financial Statements . . . . . . . . . . 34 SECTION 4.8. Disclosure Documents . . . . . . . . . . 35 SECTION 4.9. Information Supplied . . . . . . . . . . 35 SECTION 4.10. Absence of Certain Changes . . . . . . . 36 SECTION 4.11. No Undisclosed Material Liabilities . . . . . . . . . . . . . . 38 SECTION 4.12. Litigation; Investigations . . . . . . . 39 SECTION 4.13. Subsidiaries . . . . . . . . . . . . . . 39 SECTION 4.14. Taxes . . . . . . . . . . . . . . . . . . 40 SECTION 4.15. ERISA . . . . . . . . . . . . . . . . . . 41 SECTION 4.16. Permits; Compliance with Laws . . . . . . 42 SECTION 4.17. Intellectual Property Rights . . . . . . 43 SECTION 4.18. Fairness Opinions . . . . . . . . . . . . 44 ARTICLE 5 COVENANTS OF U.S. HEALTHCARE SECTION 5.1. Conduct of U.S. Healthcare . . . . . . . 44 SECTION 5.2. Shareholder Meeting; Proxy Material . . . . . . . . . . . . . . . 48 SECTION 5.3. Access to Information . . . . . . . . . . 49 SECTION 5.4. Other Offers Relating to U.S. Healthcare . . . . . . . . . . . . . . 49 SECTION 5.5. Notices of Certain Events . . . . . . . . 51 SECTION 5.6. Fiduciary Matters . . . . . . . . . . . . 51 ARTICLE 6 COVENANTS OF AETNA SECTION 6.1. Voting of U.S. Healthcare Stock . . . . . 52 SECTION 6.2. Shareholder Meeting; Proxy Materials . . . . . . . . . . . . . . . 52 SECTION 6.3. Access to Information . . . . . . . . . . 53 SECTION 6.4. Notices of Certain Events . . . . . . . . 53 SECTION 6.5. Certain Corporate Actions . . . . . . . . 53 SECTION 6.6. Other Offers Relating to Aetna . . . . . 56 SECTION 6.7. Amendment of the Stock Purchase Agreement . . . . . . . . . . . . . . . 57 SECTION 6.8. Dividends . . . . . . . . . . . . . . . . 57 ARTICLE 7 COVENANTS OF AETNA, U.S. HEALTHCARE AND PARENT SECTION 7.1. Best Efforts . . . . . . . . . . . . . . 58 SECTION 7.2. Cooperation . . . . . . . . . . . . . . . 58 SECTION 7.3. Public Announcements . . . . . . . . . . 58 SECTION 7.4. Further Assurances . . . . . . . . . . . 59 SECTION 7.5. Rule 145 Affiliates . . . . . . . . . . . 59 SECTION 7.6. Director and Officer Liability . . . . . 59 SECTION 7.7. Subsidiary Agreements . . . . . . . . . . 62 SECTION 7.8. Plans Following the Closing . . . . . . . 62 SECTION 7.9. Voting of Shares . . . . . . . . . . . . 62 SECTION 7.10. Form S-4 . . . . . . . . . . . . . . . . 62 SECTION 7.11. Certain Corporate Matters with Respect to Parent . . . . . . . . . . . 62 SECTION 7.12. Governmental Authorization . . . . . . . 65 SECTION 7.13. Disclosure Documents . . . . . . . . . . 65 SECTION 7.14. Listing of Stock . . . . . . . . . . . . 65 ARTICLE 8 CONDITIONS TO THE MERGERS SECTION 8.1. Conditions to the Obligations of Each Party . . . . . . . . . . . . . . 65 SECTION 8.2. Conditions to the Obligations of Aetna . . . . . . . . . . . . . . . . . 67 SECTION 8.3. Conditions to the Obligations of U.S. Healthcare . . . . . . . . . . . . 68 ARTICLE 9 TERMINATION SECTION 9.1. Termination . . . . . . . . . . . . . . . 69 SECTION 9.2. Effect of Termination . . . . . . . . . . 71 ARTICLE 10 MISCELLANEOUS SECTION 10.1. Notices . . . . . . . . . . . . . . . . 71 SECTION 10.2. Entire Agreement; Survival of Representations and Warranties . . . . . . . . . . . . . . 72 SECTION 10.3. Amendments; No Waivers . . . . . . . . . 72 SECTION 10.4. Expenses . . . . . . . . . . . . . . . . 73 SECTION 10.5. Successors and Assigns . . . . . . . . . 74 SECTION 10.6. Governing Law . . . . . . . . . . . . . 74 SECTION 10.7. Jurisdiction . . . . . . . . . . . . . . 74 SECTION 10.8. Counterparts; Effectiveness . . . . . . 75 Exhibit A Form of Designations, Rights and Preferences of Parent Preferred Stock Exhibit B Forms of Affiliate Letters TABLE OF DEFINITIONS Term Section 1933 Act 1.7(d) 1933 Act Affiliates 7.5 1934 Act 1.7(a) Acquisition Proposal 5.4 Aetna preamble Aetna Acquisition Proposal 6.6 Aetna Balance Sheet 4.7 Aetna Balance Sheet Date 4.7 Aetna Benefit Arrangements 4.15(c) Aetna Certificate of Merger 1.5 Aetna Common Stock 4.5 Aetna Class A Stock 4.5 Aetna Class B Stock 4.5 Aetna Class C Stock 4.5 Aetna Disclosure Documents 4.8(a) Aetna Employee Plan 4.15(a) Aetna Health Operations 4.10(d) Aetna Merger Consideration 1.2(b) Aetna Permits 4.16(a) Aetna Proxy Statement 4.8(a) Aetna Shareholder Meeting 6.2(a) Aetna Software 4.17(b) Aetna Stock 1.2(b) Aetna Stock Option 1.8(a) Aetna Sub preamble Aetna Sub Common Stock 1.2(b) Aetna Sub Merger 1.2(a) Aetna Subsidiary Securities 4.13(b) Aetna Substitute Option 1.8(a) Aetna Surviving Corporation 1.2(a) Aetna Surviving Corporation Common Stock 1.2(b) Aetna 10-K 4.6(a) Affiliate 1.1(b) Average Closing Stock Price 8.3(b) Cash Consideration 1.1(b) Claim 7.6(a) Class B Stock 1.1(b) Code preamble Common Stock 1.1(b) Confidentiality Agreement 5.4 Connecticut Law 1.2(b) The Consolidated Health Operations 7.11(c) Co-Presidents 7.11(c) D&O Insurance 7.6(d) Employee Benefit Plan 3.15(a) ERISA 3.15(a) ERISA Affiliate 3.15(a) Excess Shares 1.10 Exchange Agent 1.3(a) Form S-4 7.10 HSR Act 3.3 Indemnified Party 7.6(a) Initial Number of U.S. Healthcare Option Shares 1.7(a)(i) Lien 3.4 Material Adverse Effect 3.1 Mergers 1.4 Merger Date 1.5 Merger Consideration 1.1(b) Multiemployer Plan 3.15(b) New Annual Dividend 6.8 NYSE 1.10 Parent preamble Parent Common Stock 1.1(b) Parent Disclosure Documents 7.13 Parent Preferred Stock 1.1(b) Pennsylvania Law 1.1(b) Pension Plans 3.15(a) Person 1.3(c) Pre-Merger Matters 7.6(a) Principal Shareholder 7.11(b) SEC 1.7(d) Scheduled Contracts 7.7 Specified U.S. Healthcare Officer 3.11(j) Stock Purchase Agreement 8.1(i) Subject Company 7.5 Subsidiary 1.1(b) Taxes 3.14(k) Taxing Authorities 3.14(k) Tax Return 3.14(k) U.S. Healthcare preamble U.S. Healthcare Articles of Merger 1.5 U.S. Healthcare Balance Sheet 3.8 U.S. Healthcare Balance Sheet Date 3.8 U.S. Healthcare Benefit Arrangements 3.15(e) U.S. Healthcare Designees 7.11(b) U.S. Healthcare Disclosure Documents 3.9(a) U.S. Healthcare Employee Stock Option 1.7(a) U.S. Healthcare Merger Consideration 1.1(b) U.S. Healthcare Non-Employee Stock Option 1.7(a) U.S. Healthcare Permits 3.16(a) U.S. Healthcare Proxy Statement 3.9(a) U.S. Healthcare Restricted Stock 1.7(b) U.S. Healthcare Securities 3.5 U.S. Healthcare Shareholder Meeting 5.2(a) U.S. Healthcare Software 3.18(b) U.S. Healthcare Stock 1.1(b) U.S. Healthcare Stock Option 1.7(a) U.S. Healthcare Sub preamble U.S. Healthcare Sub Common Stock 1.1(b) U.S. Healthcare Sub Merger 1.1(a) U.S. Healthcare Substitute Option 1.7(a)(i) U.S. Healthcare Surviving Corporation 1.1(a) U.S. Healthcare Surviving Corporation Common 1.1(b) Stock U.S. Healthcare 10-K 3.6(a) Voting Agreement 9.1(d) AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER dated as of March 30, 1996 among Aetna Life and Casualty Company, a Connecticut insurance corporation ("Aetna"), U.S. Healthcare, Inc., a Pennsylvania corporation ("U.S. Healthcare"), Butterfly, Inc., a Connecticut corporation ("Parent"), Antelope Sub, Inc., a Connecticut corporation and a wholly-owned subsidiary of Parent ("Aetna Sub"), and New Merger Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Parent ("U.S. Healthcare Sub"). WHEREAS, the respective Boards of Directors of Aetna and U.S. Healthcare have determined that it is in the best interests of their respective shareholders to combine their health businesses and to enter into this Agreement; WHEREAS, the respective Boards of Directors of Aetna and U.S. Healthcare have approved this Agreement and the mergers contemplated hereby; and WHEREAS, for United States federal income tax purposes, it is intended that the transactions contemplated by this Agreement qualify as transfers subject to Section 351(a) of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (the "Code") and that the shareholders of U.S. Healthcare be treated as if they transferred their U.S. Healthcare Stock to Parent in exchange for the U.S. Healthcare Merger Consideration and that the shareholders of Aetna be treated as if they transferred their Aetna Stock to Parent in exchange for the Aetna Merger Consideration; NOW, THEREFORE, in consideration of the promises and the representations, warranties, covenants, and agreements set forth herein, intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1 THE MERGERS SECTION 1.1. U.S. Healthcare Sub Merger. (a) __________________________ Upon the terms and subject to the conditions set forth herein, on the Merger Date, U.S. Healthcare Sub shall merge into U.S. Healthcare (the "U.S. Healthcare Sub Merger") and the separate existence of U.S. Healthcare Sub shall cease. U.S. Healthcare shall be the surviving corporation in the U.S. Healthcare Sub Merger (hereinafter sometimes referred to as the "U.S. Healthcare Surviving Corporation") and its separate corporate existence, with all its purposes, objects, rights, privileges, powers and franchises, shall continue unaffected and unimpaired by the U.S. Healthcare Sub Merger. (b) Pursuant to the U.S. Healthcare Sub Merger: (i) Each share of Common Stock, par value $0.005 per share, of U.S. Healthcare (the "Common Stock"), and each share of Class B Stock, par value $0.005 per share, of U.S. Healthcare (the "Class B Stock", and together with the Common Stock, the "U.S. Healthcare Stock") held by U.S. Healthcare as treasury stock or owned by Aetna or any Subsidiary of Aetna immediately prior to the Merger Date shall be canceled and no payment shall be made with respect thereto; provided ________ that any shares of U.S. Healthcare Stock (i) held by Aetna or any Subsidiary of Aetna for the account of another Person, (ii) as to which Aetna or any Subsidiary or Affiliate of Aetna is or may be required to act as a fiduciary or in a similar capacity or (iii) the cancellation of which would violate any legal duties or obligations of Aetna or any Subsidiary or Affiliate of Aetna shall not be canceled but, instead, shall be treated as set forth in Section 1.1(b)(ii) or 1.6. For purposes of this Agreement, the term "Subsidiary", when used with respect to any Person, means any corporation or other organization, whether incorporated or unincorporated, (A) of which (i) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or (ii) such Person or any other Subsidiary of such Person is a general partner or (B) which is controlled, directly or indirectly, by such Person (through ownership of securities, by contract or otherwise) but shall not include investment companies managed by subsidiaries of Aetna. For purposes of this Agreement, the term "Affiliate", when used with respect to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with such Person; and (ii) Each share of U.S. Healthcare Stock outstanding immediately prior to the Merger Date shall, except as otherwise provided in Section 1.1(b)(i) or as provided in Section 1.6 with respect to shares of U.S. Healthcare Stock as to which dissenters rights have been exercised (which shares shall be treated in accordance with Section 1930 of the Pennsylvania Business Corporation Law of 1988, as amended (the "Pennsylvania Law")), be converted into the following (the consideration referred to in the following clauses (A), (B) and (C) is referred to collectively as the "U.S. Healthcare Merger Consideration"): (A) the right to receive 0.2246 shares of Common Capital Stock, par value $1.00 per share, of Parent ("Parent Common Stock"); (B) the right to receive 0.0749 shares of 6.25% Class C Non-Voting Preferred Stock, par value $.01 per share, of Parent (the terms of which are set forth in Exhibit A hereto) (the "Parent Preferred Stock"); and (C) subject to any adjustment as contemplated by Section 8.3(b) hereof, the right to receive in cash without interest an amount equal to $34.20 (the "Cash Consideration"). (iii) At the Merger Date, each share of common stock, without par value, of U.S. Healthcare Sub ("U.S. Healthcare Sub Common Stock") outstanding immediately prior to the Merger Date shall be converted into an equal number of shares of Common Stock, par value $1.00 per share, of the U.S. Healthcare Surviving Corporation ("U.S. Healthcare Surviving Corporation Common Stock"). From and after the Merger Date, all shares of U.S. Healthcare Stock converted in accordance with Section 1.1(b)(ii) shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of such shares shall cease to have any rights with respect thereto, except the right to receive the U.S. Healthcare Merger Consideration, the right to exercise dissenters rights in accordance with and subject to the provisions of the Pennsylvania Law and the other rights specified in this Agreement. From and after the Merger Date, all certificates representing U.S. Healthcare Sub Common Stock shall be deemed for all purposes to represent the number of shares of U.S. Healthcare Surviving Corporation Common Stock into which they were converted in accordance with Section 1.1(b)(iii). SECTION 1.2. Aetna Sub Merger. (a) Upon the ________________ terms and subject to the conditions set forth herein, on the Merger Date, Aetna Sub shall merge into Aetna (the "Aetna Sub Merger") and the separate existence of Aetna Sub shall cease. Aetna shall be the surviving corporation in the Aetna Sub Merger (hereinafter sometimes referred to as the "Aetna Surviving Corporation") and its separate corporate existence, with all its purposes, objects, rights, privileges, powers and franchises, shall continue unaffected and unimpaired by the Aetna Sub Merger. (b) Pursuant to the Aetna Sub Merger: (i) Each share of common capital stock without par value of Aetna (the "Aetna Stock") held by Aetna as treasury stock or owned by U.S. Healthcare or any Subsidiary of U.S. Healthcare immediately prior to the Merger Date shall be canceled and no payment shall be made with respect thereto; (ii) Each share of Aetna Stock outstanding immediately prior to the Merger Date shall, except as otherwise provided in Section 1.2(b)(i) or as provided in Section 1.6 with respect to shares of Aetna Stock as to which rights of objecting shareholders have been exercised (which shares shall be treated in accordance with Sections 33-373 and 33-374 of the Connecticut Stock Corporation Act (the "Connecticut Law")), be converted into the right to receive one share of Parent Common Stock (the "Aetna Merger Consideration" and, together with the U.S. Healthcare Merger Consideration, the "Merger Consideration"). (iii) At the Merger Date, each share of common stock, par value $1.00 per share, of Aetna Sub ("Aetna Sub Common Stock"), outstanding immediately prior to the Merger Date shall be converted into an equal number of shares of Common Stock, par value $.01 per share, of the Aetna Surviving Corporation ("Aetna Surviving Corporation Common Stock"). From and after the Merger Date, all shares of Aetna Stock converted in accordance with Section 1.2(b)(ii) shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of such shares shall cease to have any rights with respect thereto, except the right to receive the Aetna Merger Consideration, the right to exercise dissenters rights in accordance with and subject to the provisions of the Connecticut Law and the other rights specified in this Agreement. From and after the Merger Date, all certificates representing Aetna Sub Common Stock shall be deemed for all purposes to represent the number of shares of the Aetna Surviving Corporation Common Stock into which they were converted in accordance with Section 1.2(b)(iii). (c) Upon consummation of the Aetna Sub Merger, the Rights Agreement (the "Rights Agreement") dated as of October 27, 1989 between Aetna and First Chicago Trust Company of New York shall automatically terminate and be of no further force or effect; and Aetna shall effect any amendments to the Rights Agreement necessary to effect the foregoing. SECTION 1.3. Surrender and Payment. (a) Prior _____________________ to the Merger Date, Aetna and U.S. Healthcare shall cause Parent to appoint an agent (the "Exchange Agent") for the purpose of exchanging certificates representing shares of U.S. Healthcare Stock for the U.S. Healthcare Merger Consideration. Parent will make available to the Exchange Agent, as needed, certificates representing the Parent Common Stock and the Parent Preferred Stock in respect of the U.S. Healthcare Merger Consideration and the Cash Consideration to be paid in respect of shares of U.S. Healthcare Stock, in accordance with the terms of Section 1.1(b). Promptly after the Merger Date, Parent shall send, or shall cause the Exchange Agent to send, to each holder of shares of U.S. Healthcare Stock at the Merger Date a letter of transmittal for use in such exchange (which shall specify that delivery of the U.S. Healthcare Merger Consideration shall be effected, and risk of loss and title shall pass, only upon proper delivery of the certificates representing shares of U.S. Healthcare Stock, to the Exchange Agent). Upon the conversion of Aetna Stock into Parent Common Stock in accordance with Section 1.2(b), all shares of Aetna Stock so converted shall be cancelled and cease to exist, and each certificate theretofore representing any such shares shall, without any action on the part of the holder thereof, be deemed to represent an equivalent number of shares of Parent Common Stock. (b) Each holder of shares of U.S. Healthcare Stock that have been converted into a right to receive the U.S. Healthcare Merger Consideration upon surrender to the Exchange Agent of a certificate or certificates representing such shares of U.S. Healthcare Stock together with a properly completed letter of transmittal covering such shares of U.S. Healthcare Stock will be entitled to receive the U.S. Healthcare Merger Consideration payable in respect of such shares of U.S. Healthcare Stock and the other amounts, if any, specified in this Agreement. Until so surrendered, each such certificate shall, after the Merger Date, represent for all purposes only the right to receive the U.S. Healthcare Merger Consideration and the other amounts, if any, specified in this Agreement. (c) If any portion of the U.S. Healthcare Merger Consideration is to be paid to a Person other than the registered holder of the shares of U.S. Healthcare Stock represented by the certificate or certificates surrendered in exchange therefor, it shall be a condition to such payment that the certificate or certificates so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required as a result of such payment to a Person other than the registered holder of such shares of U.S. Healthcare Stock or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. For purposes of this Agreement, "Person" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including, without limitation, a government or political subdivision or any agency or instrumentality thereof. (d) After the Merger Date, there shall be no further registration of transfers of shares of U.S. Healthcare Stock. If, after the Merger Date, certificates representing shares of U.S. Healthcare Stock or Aetna Stock are presented to the respective surviving corporations in the Mergers, they shall be canceled and exchanged for the consideration provided for, and in accordance with the procedures set forth, in this Article 1. (e) Any portion of the U.S. Healthcare Merger Consideration made available to the Exchange Agent pursuant to Section 1.3(a) that remains unclaimed by the holders of shares of U.S. Healthcare Stock six months after the Merger Date shall be returned to Parent, upon demand, and any such holder who has not exchanged his shares of U.S. Healthcare Stock for the U.S. Healthcare Merger Consideration in accordance with this Section 1.3 prior to that time shall thereafter look only to Parent for his claim for Parent Common Stock, Parent Preferred Stock, any cash in lieu of fractional shares of Parent Common Stock or Parent Preferred Stock, as applicable, and any dividends or distributions with respect to Parent Common Stock or Parent Preferred Stock, as applicable, and the Cash Consideration. Notwithstanding the foregoing, Parent shall not be liable to any holder of shares of U.S. Healthcare Stock for any amount paid to a public official pursuant to applicable abandoned property laws. Any amounts remaining unclaimed by holders of shares of U.S. Healthcare Stock immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity shall, to the extent permitted by applicable law, become the property of Parent free and clear of any claim or interest of any Person previously entitled thereto. (f) Any portion of the U.S. Healthcare Merger Consideration made available to the Exchange Agent pursuant to Section 1.3(a) to pay for shares of U.S. Healthcare Stock in respect of which dissenters rights have been perfected shall be returned to Parent, upon demand. (g) No dividends or other distributions with respect to the Parent Common Stock or Parent Preferred Stock, as applicable, constituting all or a portion of the U.S. Healthcare Merger Consideration shall be paid to the holder of any unsurrendered certificate representing U.S. Healthcare Stock until such certificates are surrendered as provided in this Section 1.3. Subject to the effect of applicable laws, following such surrender, there shall be paid, without interest, to the record holder of the certificates representing the Parent Common Stock or Parent Preferred Stock, as applicable, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Merger Date payable prior to or on the date of such surrender with respect to such whole shares of Parent Common Stock or Parent Preferred Stock, as applicable, and not paid, less the amount of any withholding taxes which may be required thereon, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Merger Date but prior to the date of surrender and a payment date subsequent to the date of surrender payable with respect to such whole shares of Parent Common Stock or Parent Preferred Stock, as applicable, less the amount of any withholding taxes which may be required thereon. SECTION 1.4. Cancellation of Parent Stock. All ____________________________ outstanding shares of the capital stock of Parent immediately prior to the Merger Date shall be canceled immediately upon consummation of the Aetna Sub Merger. The U.S. Healthcare Sub Merger and the Aetna Sub Merger are sometimes together referred to as the "Mergers". SECTION 1.5. The Merger Date. As soon as _______________ practicable (but in no event more than two business days) after the satisfaction or, to the extent permitted hereunder or under applicable law, waiver of all conditions to each of the Mergers, (a) U.S. Healthcare and U.S. Healthcare Sub shall file the articles of merger required to effect the U.S. Healthcare Sub Merger (the "U.S. Healthcare Articles of Merger") with the Department of State of the Commonwealth of Pennsylvania and make all other filings or recordings required by the Pennsylvania Law in connection with the U.S. Healthcare Sub Merger, and (b) Aetna and Aetna Sub shall file a certificate of merger (the "Aetna Certificate of Merger") with the Secretary of the State of the State of Connecticut and make all other filings or recordings required by the Connecticut Law in connection with the Aetna Sub Merger, and (c) the Mergers shall become effective, it being understood that the U.S. Healthcare Sub Merger shall become effective immediately prior to the Aetna Sub Merger in accordance with the terms of such U.S. Healthcare Articles of Merger and Aetna Certificate of Merger (such time and date are referred to as the "Merger Date"). SECTION 1.6. Dissenting Shares. Notwithstanding _________________ Section 1.1 or Section 1.2, as applicable, shares of U.S. Healthcare Stock or Aetna Stock outstanding immediately prior to the Merger Date and held by a holder who has not voted in favor of the U.S. Healthcare Sub Merger or the Aetna Sub Merger, as applicable, and who has exercised dissenters rights in respect of such shares of U.S. Healthcare Stock in accordance with the Pennsylvania Law, or rights of objecting shareholders in respect of such shares of Aetna Stock in accordance with the Connecticut Law, shall not be converted into a right to receive the U.S. Healthcare Merger Consideration or the Aetna Merger Consideration, as applicable, unless such holder fails to perfect or withdraws or otherwise loses his dissenters' or objecting shareholders' rights. Shares of U.S. Healthcare Stock in respect of which dissenters rights have been exercised shall be treated in accordance with Section 1930 of the Pennsylvania Law. Shares of Aetna Stock in respect of which objecting shareholders' rights have been exercised shall be treated in accordance with Sections 33-373 and 33-374 of the Connecticut Law. If after the Merger Date such holder fails to perfect or withdraws or otherwise loses his right to demand the payment of fair value for shares of U.S. Healthcare Stock under Pennsylvania Law, or shares of Aetna Stock under Connecticut Law, as applicable, such shares of U.S. Healthcare Stock or Aetna Stock shall be treated as if they had been converted as of the Merger Date into a right to receive the U.S. Healthcare Merger Consideration or the Aetna Merger Consideration, as applicable. U.S. Healthcare shall give Aetna prompt notice of any demands received by U.S. Healthcare for the exercise of dissenters rights with respect to shares of U.S. Healthcare Stock and Aetna shall have the right to participate in all negotiations and proceedings with respect to such demands. U.S. Healthcare shall not, except with the prior written consent of Aetna, make any payment with respect to, or settle or offer to settle, any such demands. SECTION 1.7. Stock Options of U.S. Healthcare; ________________________________ Restricted Stock. (a) As of the date of this Agreement, ________________ each outstanding option granted to (i) a U.S. Healthcare employee to acquire U.S. Healthcare Stock (a "U.S. Healthcare Employee Stock Option") and (ii) each outstanding option granted to a non-employee to acquire U.S. Healthcare Stock (a "U.S. Healthcare Non-Employee Stock Option" and together with the U.S. Healthcare Employee Stock Options, the "U.S. Healthcare Stock Options"), in each case, under any incentive plan of U.S. Healthcare, shall become fully vested and exercisable. At the Merger Date, each U.S. Healthcare Stock Option then outstanding shall be canceled and treated as follows: (i) with respect to all U.S. Healthcare Non- Employee Stock Options and the number of shares subject to U.S. Healthcare Employee Stock Options held by each holder which, if all such holder's canceled U.S. Healthcare Employee Stock Options were exercised immediately prior to the Merger Date, would give rise to 40% of the income which would be recognized by such holder upon such exercise (assuming, for these purposes, that all such options were nonqualified options) (the "Initial Number of U.S. Healthcare Option Shares"), Parent shall issue in substitution therefor options to purchase Parent Common Stock on the terms and conditions described herein (each such substitute option, a "U.S. Healthcare Substitute Option"). U.S. Healthcare Substitute Options shall be issued under a Parent stock option plan to be adopted prior to the Merger Date and which shall comply in all respects with the applicable requirements of Rule 16b- 3 promulgated under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "1934 Act"). The number of shares of Parent Common Stock subject to each such U.S. Healthcare Substitute Option and the exercise price thereunder shall be computed in compliance with the requirements of Section 424(a) of the Code, and each such U.S. Healthcare Substitute Option shall otherwise be subject to the other applicable terms and conditions of the U.S. Healthcare Stock Option for which it is substituted. Without limiting the generality of the foregoing, (A) the exercise price of each U.S. Healthcare Substitute Option shall equal the exercise price of the U.S. Healthcare Stock Option for which such U.S. Healthcare Substitute Option was substituted, multiplied by a fraction, the numerator of which is the average closing price of Parent Common Stock for the five trading days following the Merger Date ("X") and the denominator of which is the closing price of U.S. Healthcare Stock on the last trading day preceding the Merger Date ("Y") and (B) the number of shares subject to such U.S. Healthcare Substitute Option shall equal the Initial Number of U.S. Healthcare Option Shares, multiplied by a fraction, the numerator of which is Y and the denominator of which is X. The U.S. Healthcare Stock Options for which U.S. Healthcare Substitute Options shall be issued with respect to each holder shall be selected in the following order: (1) first, incentive stock options, and (2) second, nonqualified options, in each case giving priority to those with the highest exercise price. (ii) with respect to each remaining canceled U.S. Healthcare Employee Stock Option, the holder shall receive in cash, within two business days following the Merger Date, an amount equal to the excess of (A) the closing price of U.S. Healthcare Stock on the last trading day preceding the Merger Date, over (B) the exercise price of such U.S. Healthcare Stock Option, multiplied by the number of shares of U.S. Healthcare Stock subject to such remaining U.S. Healthcare Employee Stock Option. (b) As of the date of this Agreement, each outstanding share of restricted stock of U.S. Healthcare issued to U.S. Healthcare employees (the "U.S. Healthcare Restricted Stock") shall become fully vested and entitled to receive the U.S. Healthcare Merger Consideration. Each outstanding share of restricted stock of U.S. Healthcare issued to any Person who is not an employee of U.S. Healthcare shall become fully vested and entitled to receive the U.S. Healthcare Merger Consideration on the Merger Date. (c) Prior to the Merger Date, U.S. Healthcare (i) shall use its best efforts to obtain any consents from holders of any U.S. Healthcare Stock Options or U.S. Healthcare Restricted Stock and (ii) shall make any amendments to the terms of any of their respective incentive plans or arrangements, in each case that are necessary to give effect to the transactions contemplated by this Section 1.7. (d) As soon as practicable after the Merger Date, Parent shall file with the Securities and Exchange Commission ("SEC") a registration statement on Form S-8 with respect to the shares of Parent Common Stock underlying the U.S. Healthcare Substitute Options and use its reasonable best efforts to have such registration statement declared effective under the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "1933 Act") SECTION 1.8. Stock Options of Aetna. (a) At ______________________ the Merger Date, each outstanding option to purchase shares of Aetna Stock (an "Aetna Stock Option") under any of Aetna's incentive plans, whether vested or unvested, shall be canceled and Parent shall issue in substitution therefor an option to purchase Parent Common Stock on the terms and conditions described herein (each such replacement option an "Aetna Substitute Option"). Aetna Substitute Options shall be issued under a Parent stock option plan to be adopted prior to the Merger Date and which shall comply in all respects with the applicable requirements of Rule 16b-3 promulgated under the 1934 Act. The number of shares of Parent Common Stock subject to each such Aetna Substitute Option and the exercise price thereunder shall be computed in compliance with the requirements of Section 424(a) of the Code and each such Aetna Substitute Option shall be subject to substantially all of the other terms and conditions (including vesting schedule) of the Aetna Stock Option it replaces. Without limiting the generality of the foregoing, (A) the exercise price of each Aetna Substitute Option shall equal the exercise price of the Aetna Stock Option for which such Aetna Substitute Option was substituted, multiplied by a fraction, the numerator of which is the average closing price of Parent Common Stock for the five trading days following the Merger Date ("X") and the denominator of which is the closing price of Aetna Stock on the last trading day preceding the Merger Date ("Y") and (B) the number of shares subject to such Aetna Substitute Option shall equal the number of Aetna Option shares, multiplied by a fraction, the numerator of which is Y and the denominator of which is X. (b) Prior to the Merger Date, Aetna shall (i) use its best efforts to obtain any consents from holders of any Aetna Stock Options and (ii) make any amendments to the terms of any of its incentive plans or arrangements, in each case, that are necessary to give effect to the transactions contemplated by this Section 1.8. (c) As soon as practicable after the Merger Date, Parent shall file with the SEC a registration statement on Form S-8 with respect to the shares of Parent Common Stock underlying the Aetna Substitute Options and use its reasonable best efforts to have such registration statement declared effective under the 1933 Act. SECTION 1.9. Adjustments. If at any time during ___________ the period between the date of this Agreement and the Merger Date, any change in the outstanding shares of Aetna Stock or U.S. Healthcare Stock shall occur, including by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any stock dividend thereon with a record date during such period, the Merger Consideration shall be appropriately adjusted. SECTION 1.10. Fractional Shares. No fractional _________________ shares of Parent Common Stock or Parent Preferred Stock shall be issued in the U.S. Healthcare Sub Merger, but in lieu thereof each holder of U.S. Healthcare Stock otherwise entitled to a fractional share of Parent Common Stock or Parent Preferred Stock, as applicable, will be entitled to receive, from the Exchange Agent in accordance with the provisions of this Section 1.10, a cash payment in lieu of such fractional shares of Parent Common Stock or Parent Preferred Stock, as applicable, representing such holder's proportionate interest, if any, in the net proceeds from the sale by the Exchange Agent in one or more transactions (which sale transactions shall be made at such times, in such manner and on such terms as the Exchange Agent shall determine in its reasonable discretion) on behalf of all such holders of the aggregate of the fractional shares of Parent Common Stock or Parent Preferred Stock, as applicable, which would otherwise have been issued (the "Excess Shares"). The sale of the Excess Shares by the Exchange Agent shall be executed on the New York Stock Exchange, Inc. (the "NYSE") through one or more member firms of the NYSE and shall be executed in round lots to the extent practicable. Until the net proceeds of such sale or sales have been distributed to the holders of shares of U.S. Healthcare Stock, the Exchange Agent will hold such proceeds in trust for the holders of U.S. Healthcare Stock. Parent shall pay all commissions, transfer taxes and other out-of-pocket transaction costs, including, without limitation, the expenses and compensation of the Exchange Agent, incurred in connection with such sale of the Excess Shares. As soon as practicable after the determination of the amount of cash, if any, to be paid to holders of U.S. Healthcare Stock in lieu of any fractional shares of Parent Common Stock or Parent Preferred Stock, as applicable, the Exchange Agent shall make available such amounts to such holders of shares of U.S. Healthcare Stock without interest. ARTICLE 2 THE SURVIVING CORPORATIONS SECTION 2.1. Articles and Certificate of ___________________________ Incorporation; Bylaws. (a) The articles of incorporation _____________________ and bylaws of U.S. Healthcare in effect at the Merger Date shall be the articles of incorporation and bylaws, respectively, of the U.S. Healthcare Surviving Corporation until amended in accordance with applicable law. The U.S. Healthcare Surviving Corporation shall have the same name as U.S. Healthcare. The U.S. Healthcare Surviving Corporation shall succeed to all of the rights, privileges, powers and franchises, of a public as well as of a private nature, of U.S. Healthcare and U.S. Healthcare Sub, all of the properties and assets and all of the debts of U.S. Healthcare and U.S. Healthcare Sub, chooses in action and other interests due or belonging to U.S. Healthcare and U.S. Healthcare Sub and shall be subject to, and responsible for, all of the debts, liabilities and duties of U.S. Healthcare and U.S. Healthcare Sub with the effect set forth in the Pennsylvania Law. (b) The certificate of incorporation and bylaws of Aetna in effect at the Merger Date shall be the certificate of incorporation and bylaws, respectively, of the Aetna Surviving Corporation until amended in accordance with applicable law. The Aetna Surviving Corporation shall have the same name as Aetna. The Aetna Surviving Corporation shall succeed to all of the rights, privileges, powers and franchises, of a public as well as of a private nature, of Aetna and Aetna Sub, all of the properties and assets of and all of the debts of Aetna and Aetna Sub, chooses in action and other interests due or belonging to Aetna and Aetna Sub and shall be subject to, and responsible for, all of the debts, liabilities and duties of Aetna and Aetna Sub with the effect set forth in the Connecticut Law. SECTION 2.2. Directors and Officers. From and ______________________ after the Merger Date, until successors are duly elected or appointed and qualified in accordance with applicable law, (a) the directors of the U.S. Healthcare Surviving Corporation immediately after the Merger Date shall be designated by Parent and shall include, without limitation, the two Co-Presidents, (b) the directors of Parent immediately after the Merger Date shall be the directors of the Aetna Surviving Corporation, (c) the officers of U.S. Healthcare immediately prior to the Merger Date (other than the Principal Shareholder) shall be the officers of the U.S. Healthcare Surviving Corporation and (d) the officers of Aetna immediately prior to the Merger Date shall be the officers of the Aetna Surviving Corporation. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF U.S. HEALTHCARE U.S. Healthcare represents and warrants to Aetna that: SECTION 3.1. Corporate Existence and Power. _____________________________ U.S. Healthcare is a corporation duly incorporated, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. U.S. Healthcare is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on U.S. Healthcare. For purposes of this Agreement, a "Material Adverse Effect" means, with respect to any Person, a material adverse effect on the condition (financial or otherwise), business, assets, or results of operations of such Person and its Subsidiaries taken as a whole or on the ability of such Person to perform its obligations hereunder. U.S. Healthcare has heretofore delivered to Aetna true and complete copies of U.S. Healthcare's articles of incorporation and bylaws as currently in effect. SECTION 3.2. Corporate Authorization. The _______________________ execution, delivery and, subject to receipt of the approvals referred to in Section 3.3, the performance by U.S. Healthcare of this Agreement and the consummation by U.S. Healthcare of the transactions contemplated by this Agreement are within U.S. Healthcare's corporate powers and, except as set forth in the third sentence of this Section 3.2, have been duly authorized by all necessary corporate action. Without limiting the generality of the foregoing, the Board of Directors of U.S. Healthcare has unanimously adopted a resolution adopting and approving this Agreement. The affirmative vote of a majority of the total voting power represented by the outstanding shares of U.S. Healthcare Stock entitled to vote thereon, voting as a single class, is the only vote of any class or series of U.S. Healthcare's capital stock necessary to approve and adopt this Agreement and the transactions contemplated by this Agreement. This Agreement has been duly executed and delivered by U.S. Healthcare and constitutes a valid and binding agreement of U.S. Healthcare, enforceable against U.S. Healthcare in accordance with its terms, subject to (a) bankruptcy, insolvency, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (b) general principles of equity (regardless of whether considered in a proceeding at law or in equity). SECTION 3.3. Governmental Authorization. The __________________________ execution, delivery and performance by U.S. Healthcare of this Agreement, and the consummation by U.S. Healthcare of the transactions contemplated by this Agreement require no action, by or in respect of, or filing with, any governmental body, agency, official or authority other than (a) the filing of the U.S. Healthcare Articles of Merger in accordance with the Pennsylvania Law; (b) compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"); (c) compliance with any applicable requirements of the 1934 Act; (d) compliance with any applicable requirements of the 1933 Act; (e) compliance with any applicable foreign or state securities or Blue Sky laws; (f) approvals or filings required under laws, rules and regulations governing insurance and insurance companies, health maintenance organizations, health care service plans, third party administrators or other managed health care organizations; and (g) filings and notices not required to be made or given until after the Merger Date. SECTION 3.4. Non-Contravention. Except as _________________ disclosed on Schedule 3.4, the execution, delivery and performance by U.S. Healthcare of this Agreement and the consummation by U.S. Healthcare of the transactions contemplated by this Agreement do not and will not (a) assuming receipt of the approvals referred to in Sections 3.2, contravene or conflict with the articles of incorporation or bylaws of U.S. Healthcare, (b) assuming compliance with the matters referred to in Section 3.3, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to U.S. Healthcare or any Subsidiary of U.S. Healthcare, (c) constitute a default (or an event which with notice, the lapse of time or both would become a default) under or give rise to a right of termination, cancellation or acceleration of any right or obligation of U.S. Healthcare or any Subsidiary of U.S. Healthcare or to a loss of any benefit to which U.S. Healthcare or any Subsidiary of U.S. Healthcare is entitled under any provision of any agreement, contract or other instrument binding upon U.S. Healthcare or any Subsidiary of U.S. Healthcare or any license, franchise, permit or other similar authorization held by U.S. Healthcare or any Subsidiary of U.S. Healthcare, or (d) result in the creation or imposition of any Lien on any asset of U.S. Healthcare or any Subsidiary of U.S. Healthcare, except for such contraventions, conflicts or violations referred to in clause (b) or defaults, rights of termination, cancellation or acceleration, losses or Liens referred to in clause (c) or (d) that would not, individually or in the aggregate, have a Material Adverse Effect on U.S. Healthcare. For purposes of this Agreement, "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. SECTION 3.5. Capitalization. As of February 29, ______________ 1996, the authorized capital stock of U.S. Healthcare consists of 275,000,000 shares of Common Stock, 50,000,000 shares of Class B Stock and 50,000,000 shares of preferred stock. As of February 29, 1996, there were (i) 139,481,136 shares of Common Stock outstanding, including 748,481 shares of employee and non-employee unvested restricted common stock, (ii) 14,429,867 shares of Class B Stock outstanding and (iii) no shares of preferred stock outstanding. As of February 29, 1996, there were employee and non-employee stock options to purchase an aggregate of 4,004,857 shares of Common Stock outstanding (of which options to purchase an aggregate of 802,346 shares of Common Stock were exercisable). All outstanding shares of capital stock of U.S. Healthcare have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in this Section 3.5 and except for changes since February 29, 1996 resulting from the exercise of stock options outstanding on such date, there are outstanding (a) no shares of capital stock or other voting securities of U.S. Healthcare, (b) no securities of U.S. Healthcare convertible into or exchangeable for shares of capital stock or voting securities of U.S. Healthcare, and (c) no options or other rights to acquire from U.S. Healthcare, and no obligation of U.S. Healthcare to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of U.S. Healthcare (the items in clauses (a), (b) and (c) being referred to collectively as the "U.S. Healthcare Securities"). There are no outstanding obligations of U.S. Healthcare or any Subsidiary of U.S. Healthcare to repurchase, redeem or otherwise acquire any U.S. Healthcare Securities other than put rights with respect to not more than 100,000 shares of Common Stock held by providers of medical services. SECTION 3.6. Subsidiaries. (a) Each Subsidiary ____________ of U.S. Healthcare is duly incorporated, validly existing (as an insurance corporation, corporation organized as a health maintenance organization or otherwise) and in good standing under the laws of its jurisdiction of incorporation, has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted and is duly qualified to do business as a foreign corporation or is duly licensed to do business as an insurer, a health maintenance organization or otherwise and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where failure to be so qualified or licensed would not, individually or in the aggregate, have a Material Adverse Effect on U.S. Healthcare. All Subsidiaries and their respective jurisdictions of incorporation are identified in U.S. Healthcare's annual report on Form 10-K for the fiscal year ended December 31, 1995 (the "U.S. Healthcare 10-K"). (b) Except as disclosed on Schedule 3.6, all of the outstanding capital stock of, or other ownership interests in, each Subsidiary of U.S. Healthcare, is owned by U.S. Healthcare, directly or indirectly, free and clear of any Lien and free of any other limitation or restriction (including, without limitation, any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests). Except as disclosed on Schedule 3.6, there are no outstanding (i) securities of U.S. Healthcare or any Subsidiary of U.S. Healthcare convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary of U.S. Healthcare, and (ii) options or other rights to acquire from U.S. Healthcare or any Subsidiary of U.S. Healthcare, and no other obligation of U.S. Healthcare or any Subsidiary of U.S. Healthcare to issue, any capital stock, voting securities or other ownership interests in, or any securities convertible into or exchangeable for, any capital stock, voting securities or ownership interests in, any Subsidiary of U.S. Healthcare (the items in clauses (i) and (ii) being referred to collectively as the "U.S. Healthcare Subsidiary Securities"). Except as disclosed on Schedule 3.6, there are no outstanding obligations of U.S. Healthcare or any Subsidiary of U.S. Healthcare to repurchase, redeem or otherwise acquire any outstanding U.S. Healthcare Subsidiary Securities. SECTION 3.7. SEC Filings. (a) U.S. Healthcare ___________ has delivered to Aetna (i) U.S. Healthcare's annual reports on Form 10-K for its fiscal years ended December 31, 1995, 1994 and 1993, (ii) its proxy or information statements relating to meetings of, or actions taken without a meeting by, the shareholders of U.S. Healthcare held since January 1, 1993, and (iii) all of its other reports, statements, schedules and registration statements filed with the SEC since January 1, 1993. (b) As of its filing date, each such report, statement, schedule or registration statement filed pursuant to the 1934 Act did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (c) Each such registration statement, as amended or supplemented, if applicable, filed pursuant to the 1933 Act as of the date such registration statement or amendment became effective did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. SECTION 3.8. Financial Statements. The audited ____________________ consolidated financial statements of U.S. Healthcare included in its annual reports on Form 10-K referred to in Section 3.7 fairly present, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of U.S. Healthcare and its consolidated Subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended. For purposes of this Agreement, "U.S. Healthcare Balance Sheet" means the consolidated balance sheet of U.S. Healthcare as of December 31, 1995 set forth in the U.S. Healthcare 10-K and "U.S. Healthcare Balance Sheet Date" means December 31, 1995. SECTION 3.9. Disclosure Documents. (a) Each ____________________ document required to be filed by U.S. Healthcare with the SEC in connection with the transactions contemplated by this Agreement (the "U.S. Healthcare Disclosure Documents"), including, without limitation, the proxy or information statement of U.S. Healthcare (the "U.S. Healthcare Proxy Statement"), if any, to be filed with the SEC in connection with the U.S. Healthcare Sub Merger, and any amendments or supplements thereto, will, when filed, comply as to form in all material respects with the applicable requirements of the 1934 Act. (b) At the time the U.S. Healthcare Proxy Statement or any amendment or supplement thereto is first mailed to shareholders of U.S. Healthcare and at the time such shareholders vote on the adoption and approval of this Agreement, the U.S. Healthcare Proxy Statement, as supplemented or amended, if applicable, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. At the time of the filing of any U.S. Healthcare Disclosure Document other than the U.S. Healthcare Proxy Statement and at the time of any distribution thereof, such U.S. Healthcare Disclosure Document will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 3.9(b) will not apply to statements included in or omissions from the U.S. Healthcare Disclosure Documents based upon information furnished to U.S. Healthcare in writing by Aetna or Parent specifically for use therein. SECTION 3.10. Information Supplied. The ____________________ information supplied or to be supplied by U.S. Healthcare for inclusion or incorporation by reference in (i) the Aetna Proxy Statement or any amendment or supplement thereto will not, at the time the Aetna Proxy Statement is first mailed to shareholders of Aetna and at the time such shareholders vote on the proposals relating to the Aetna Sub Merger set forth therein, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made is not misleading, (ii) the Form S-4 or any amendment or supplement thereto will not, at the time the Form S-4 becomes effective under the 1933 Act and at the Merger Date, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Aetna Disclosure Document or Parent Disclosure Document (other than the Aetna Proxy Statement, the Form S-4 and any amendments or supplements to either) will not, at the time of effectiveness of such Aetna Disclosure Document or Parent Disclosure Document and at the time of any distribution thereof, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. SECTION 3.11. Absence of Certain Changes. Except __________________________ as disclosed in the U.S. Healthcare 10-K, as set forth on Schedule 3.11, or as specifically permitted by Section 5.1, since the U.S. Healthcare Balance Sheet Date U.S. Healthcare and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any event, occurrence or facts which has had or is reasonably expected to have a Material Adverse Effect on U.S. Healthcare; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of U.S. Healthcare (other than payment of U.S. Healthcare's regular quarterly dividend on U.S. Healthcare Common Stock in an amount not exceeding $0.275 per share and on Class B Stock in an amount not exceeding $0.248 per share), or any repurchase, redemption or other acquisition by U.S. Healthcare or any Subsidiary of U.S. Healthcare of any amount of outstanding shares of capital stock or other securities of, or other ownership interests in, U.S. Healthcare, which repurchase, redemption or other acquisition, individually or in the aggregate, is material to U.S. Healthcare and its Subsidiaries, taken as a whole; (c) any amendment of any term of any outstanding security of U.S. Healthcare or any Subsidiary of U.S. Healthcare (other than amendments to the U.S. Healthcare Stock Options or the restricted stock of U.S. Healthcare to accelerate the vesting thereof upon execution of this Agreement); (d) any incurrence, assumption or guarantee by U.S. Healthcare or any Subsidiary of U.S. Healthcare of any indebtedness from any third party for borrowed money other than in the ordinary course of business and in amounts and on terms consistent with past practices; (e) any creation or assumption by U.S. Healthcare or any Subsidiary of U.S. Healthcare of any Lien on any material asset other than in the ordinary course of business consistent with past practices; (f) any making of any loan, advance or capital contribution to or investment in any Person other than (i) loans, advances or capital contributions to or investments in Subsidiaries of U.S. Healthcare, (ii) investments in securities consistent with past practice or (iii) other loans, advances, capital contributions or investments in an aggregate amount not exceeding $25,000,000; (g) any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the business or assets of U.S. Healthcare or any Subsidiary of U.S. Healthcare which, individually or in the aggregate, is or may reasonably be expected to be material to U.S. Healthcare and its Subsidiaries, taken as a whole; (h) any transaction or commitment made, or any contract or agreement entered into, by U.S. Healthcare or any Subsidiary of U.S. Healthcare relating to its assets or business (including, without limitation, the acquisition or disposition of any assets) or any relinquishment by U.S. Healthcare or any Subsidiary of U.S. Healthcare of any contract, license or other right which, in any such case, individually or in the aggregate, would have a Material Adverse Effect on U.S. Healthcare, other than transactions, commitments, contracts or agreements contemplated by this Agreement; (i) any change in any method of accounting or accounting principle or practice by U.S. Healthcare or any Subsidiary of U.S. Healthcare, except for any such change required by reason of a concurrent change in generally accepted accounting principles or statutory accounting principles; (j) (A) except for new employment agreements with the Persons listed on Schedule 3.11(j) (each, a "Specified U.S. Healthcare Officer"), entered into as of the date hereof, or in the case of those Specified U.S. Healthcare Officers listed on Schedule 8.2(b), in the form of Schedule 3.11(j)(A) hereto (i) any grant by U.S. Healthcare or any of its Subsidiaries of any severance or termination pay to, or entry into any employment, termination or severance arrangement with, any Specified U.S. Healthcare Officer or, (ii) except in the ordinary course of business consistent in magnitude and character with past practice and with the terms of severance or termination arrangements in effect or pending on the U.S. Healthcare Balance Sheet Date with respect to individuals with comparable positions or responsibilities, any grant of any severance or termination pay to, or entry into any employment, termination or severance arrangement with, any other employees; (B)(i) any amendment in any material respect of any employment, termination or severance arrangement with any Specified U.S. Healthcare Officer or (ii) except in the ordinary course, any amendment in any material respect of any employment termination or severance arrangement with any other directors, officers or employees (it being understood that for the purposes of clauses (i) and (ii), any increase or acceleration of benefits under any such agreement or arrangement shall be deemed material); (C) any (x) establishment, adoption, entry into, or (y) except (I) the matters described in the parenthetical clause of Section 3.11(c) hereof and (II) the acceleration of vesting of U.S. Healthcare Non-Employee Stock Options and restricted stock of U.S. Healthcare issued to Persons who are not employees of U.S. Healthcare, amendment or action to accelerate or enhance any rights or benefits under, (i) any plan providing for options, stock, performance awards or other forms of incentive or deferred compensation or (ii) any collective bargaining, bonus, profit sharing, thrift, compensation, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any of its directors, officers or employees; (D) any grant, conferment or award of any options, stock, performance awards or other awards to acquire any shares of capital stock of U.S. Healthcare (other than an aggregate of 150,000 options to acquire U.S. Healthcare Stock and/or shares of restricted stock of U.S. Healthcare pursuant to the terms existing on the date hereof of U.S. Healthcare's plans to persons other than the Specified U.S. Healthcare Officers); (E) any increase in the contribution percentages under U.S. Healthcare's defined contribution plans; or (F) (i) other than an annual adjustment with respect to the 1997 calendar year if the Merger Date occurs after December 31, 1996, which adjustment shall be of a magnitude and character consistent with past practice, any increase in the compensation or benefits of Specified U.S. Healthcare Officers or any payment of any benefit not required by any plan or arrangement in effect as of the date hereof or (ii) except in the ordinary course of business consistent in magnitude and character with past practice and in no event greater than 6% in the aggregate on a per annum basis for all other individuals as a group, any increase in the compensation or benefits of any other employees or payment of any benefit not required by any plan or arrangement as in effect on the U.S. Healthcare Balance Sheet Date; (k) except such contracts as would not be material to U.S. Healthcare and its Subsidiaries as a whole or material to their operations in any Standard Metropolitan Statistical Area, any entry by U.S. Healthcare or any of its Subsidiaries into any contract limiting the right of U.S. Healthcare or any of its Subsidiaries at any time on or after the date of this Agreement or Aetna or any of its Subsidiaries or Affiliates at or after the Merger Date, to engage in, or to compete with any Person in, any business, including, without limitation, any contract which includes exclusivity provisions restricting the geographical area in which, or the method by which, any such business may be conducted by U.S. Healthcare or any of its Subsidiaries or Affiliates, or by Aetna or any of its Subsidiaries or Affiliates after the Merger Date; (l) any entry by U.S. Healthcare or any of its Subsidiaries into any acquisition, joint venture, or franchising agreement or arrangement which is material to U.S. Healthcare and its Subsidiaries, taken as a whole; or (m) any entry by U.S. Healthcare or any of its Subsidiaries into any agreement or arrangement with a third party on an exclusive basis to offer or market any of the following services of such third party: group life, disability, managed workers' compensation, long term care, dental, behavioral or pharmacy benefits. SECTION 3.12. No Undisclosed Material _______________________ Liabilities. There are no liabilities, commitments or ___________ obligations (whether pursuant to contracts or otherwise) of U.S. Healthcare or any Subsidiary of U.S. Healthcare of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, including, without limitation, any fines, disciplinary actions or other adverse actions that may be taken or reported concerning the conduct of U.S. Healthcare or any of its Subsidiaries, other than: (a) liabilities, commitments or obligations disclosed or provided for in the U.S. Healthcare Balance Sheet or in the U.S. Healthcare 10-K; (b) liabilities, commitments or obligations incurred in the ordinary course of business since the U.S. Healthcare Balance Sheet Date; (c) liabilities, commitments or obligations under this Agreement; and (d) liabilities, commitments or obligations which, individually or in the aggregate, have not had, and are not reasonably likely to have, a Material Adverse Effect on U.S. Healthcare. SECTION 3.13. Litigation; Investigations. Except __________________________ as disclosed or referred to in the U.S. Healthcare 10-K or in Schedule 3.13, there is no action, claim, suit, investigation, proceeding or examination, including, without limitation, any insurance or health related investigations, proceedings or examinations pending against or affecting, or to the knowledge of U.S. Healthcare threatened against or affecting, U.S. Healthcare or any Subsidiary of U.S. Healthcare or any of their respective properties before any court or arbitrator or any governmental body, agency, authority or official which, net of reserves established therefor reflected in the U.S. Healthcare 10-K and giving effect to reinsurance probable of recovery, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on U.S. Healthcare. SECTION 3.14. Taxes. (a) All Tax Returns _____ required to be filed (taking into account all extensions heretofore granted) on or before the date hereof or the Merger Date by or on behalf of U.S. Healthcare or any of its Subsidiaries have been filed within the time and in the manner prescribed by law, other than those Tax Returns the failure of which to file would not have a Material Adverse Effect on U.S. Healthcare. (b) As of the time of filing, all such Tax Returns correctly reflected in all material respects all facts regarding the income, business, assets, operations, activities and status of U.S. Healthcare and its Subsidiaries and any other information required to be shown therein. (c) All Taxes shown to be due and payable by U.S. Healthcare and any of its Subsidiaries on all such Tax Returns have been timely paid, or withheld and remitted to the appropriate Taxing Authorities. (d) Except as set forth on Schedule 3.14, all applicable statutes of limitations for the assessment of material Taxes against U.S. Healthcare and any of its Subsidiaries have expired. No deficiency payment of any Taxes for any period has been asserted by any Taxing Authority which remains unsettled at the date hereof except for deficiencies which would not have a Material Adverse Effect on U.S. Healthcare. (e) Except for Tax Returns required to be filed with respect to the 1995 taxable year, neither U.S. Healthcare nor any of its Subsidiaries has requested any extension of time within which to file any Tax Return which has not yet been filed. (f) There are no material Liens upon any property or assets of U.S. Healthcare or any of its Subsidiaries for Taxes, except for Tax liens in respect of Taxes not yet due or which are being contested in good faith and by appropriate proceedings (and for the payment of which adequate reserves have been provided) and reflected in the U.S. Healthcare 10-K. (g) Except as set forth on Schedule 3.14, there is no claim, audit, action, suit, proceeding, or investigation now pending or threatened against or with respect to U.S. Healthcare or any of its Subsidiaries in respect of any Taxes. (h) Neither U.S. Healthcare nor any of its Subsidiaries has any contractual obligations under any tax sharing agreement or similar agreement or tax indemnity agreement with any corporation which is not a member of the affiliated group of corporations of which U.S. Healthcare is the common parent. (i) There are no requests for rulings or determinations in respect of any Tax pending between U.S. Healthcare or any of its Subsidiaries and any Taxing Authorities. (j) Neither U.S. Healthcare nor any of its Subsidiaries owns any interest in real property in the State of New York or in any other jurisdiction in which a Tax is imposed on the transfer of a controlling interest in an entity that owns any interest in real property. (k) For purposes of this Agreement, "Taxes" means all United States Federal, state, local and foreign taxes, levies and other assessments, including, without limitation, all income, sales, use, goods and services, value added, capital, capital gains, net worth, transfer, profits, withholding, payroll, employer health, unemployment insurance payments, excise, real property and personal property taxes, and any other taxes, assessments or similar charges in the nature of a tax, including, without limitation, interest, additions to tax, fines and penalties, imposed by a governmental or public body, agency, official or authority (the "Taxing Authorities"). For purposes of this Agreement, "Tax Return" shall mean any return, report, information return or other document (including any related or supporting information) required to be filed with any Taxing Authority in connection with the determination, assessment, collection, administration or imposition of any Taxes. SECTION 3.15. ERISA. (a) Schedule 3.15 contains _____ a list identifying each "Employee Benefit Plan", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), which (i) is subject to any provision of ERISA and (ii) is maintained, administered or contributed to by U.S. Healthcare or any Subsidiary of U.S. Healthcare and covers any employee or former employee of U.S. Healthcare or any Subsidiary of U.S. Healthcare or under which U.S. Healthcare or any Subsidiary of U.S. Healthcare has any liability. Copies of such plans (and, if applicable, related trust agreements) and all amendments thereto and written interpretations thereof have been furnished to Aetna together with (A) the three most recent annual reports (Form 5500 including, if applicable, Schedule B thereto) prepared in connection with any such plan and (B) the most recent actuarial valuation report prepared in connection with any such plan. Such plans are referred to collectively herein as the "U.S. Healthcare Employee Plans". For purposes of this Section, "ERISA Affiliate" of any Person means any other Person which, together with such Person, would be treated as a single employer under Section 414 of the Code. The only U.S. Healthcare Employee Plans which individually or collectively would constitute an "employee pension benefit plan" as defined in Section 3(2) of ERISA (the "Pension Plans") are identified as such in the list referred to above. U.S. Healthcare has provided Aetna with complete age, salary, service and related data as of a recent date for employees and former employees of U.S. Healthcare and any Subsidiary of U.S. Healthcare covered under the Pension Plans. (b) Except as set forth in Schedule 3.15, no U.S. Healthcare Employee Plan (i) constitutes a "multiemployer plan", as defined in Section 3(37) of ERISA (a "Multiemployer Plan"), (ii) is maintained in connection with any trust described in Section 501(c)(9) of the Code or (iii) is subject to Title IV of ERISA. Neither U.S. Healthcare nor any ERISA Affiliate of U.S. Healthcare has (i) engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Sections 4069 or 4212(c) of ERISA or (ii) incurred, or reasonably expects to incur prior to the Merger Date, (A) any liability under Title IV of ERISA arising in connection with the termination of, or a complete or partial withdrawal from, any plan covered or previously covered by Title IV of ERISA or (B) any liability under Section 4971 of the Code that in either case could become a liability of Parent or any of its Affiliates after the Merger Date. Nothing done or omitted to be done and no transaction or holding of any asset under or in connection with any U.S. Healthcare Employee Plan has or will make U.S. Healthcare or any Subsidiary of U.S. Healthcare, or any officer or director of U.S. Healthcare or any Subsidiary of U.S. Healthcare, subject to any liability under Title I of ERISA or liable for any tax pursuant to Section 4975 of the Code that could have a Material Adverse Effect on U.S. Healthcare. (c) With respect to each U.S. Healthcare Employee Plan which is intended to be qualified under Section 401(a) of the Code, U.S. Healthcare has received a favorable determination letter that the plan is so qualified and that each trust forming a part thereof is exempt from tax pursuant to Section 501(a) of the Code and, to the knowledge of U.S. Healthcare, no event has occurred since the date of such determination that would adversely affect such qualification and exception. U.S. Healthcare has furnished to Aetna copies of the most recent Internal Revenue Service determination letters with respect to each such Plan. Each U.S. Healthcare Employee Plan has been maintained in all material respects in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including but not limited to ERISA and the Code, which are applicable to such Plan. (d) Except as set forth in Schedule 3.15 or in, connection with the transactions contemplated by this Agreement, there is no contract, agreement, plan or arrangement covering any employee or former employee of U.S. Healthcare or any Subsidiary of U.S. Healthcare that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Sections 162(a)(1), 162(m) or 280G of the Code. (e) U.S. Healthcare has provided Aetna with a list of each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (i) is not an U.S. Healthcare Employee Plan, (ii) is entered into, maintained or contributed to, as the case may be, by U.S. Healthcare or any of its Subsidiaries and (iii) covers any employee or former employee of U.S. Healthcare or any of its Subsidiaries. Such contracts, plans and arrangements as are described above, copies or descriptions of all of which have been furnished or made available previously to Aetna, are referred to collectively herein as the "U.S. Healthcare Benefit Arrangements". Each U.S. Healthcare Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such U.S. Healthcare Benefit Arrangement. (f) Except for the Retiree Health Benefit Plan, neither U.S. Healthcare nor any Subsidiary of U.S. Healthcare has any current or projected liability in respect of post-employment or post-retirement health or medical or life insurance benefits for retired, former or current employees of U.S. Healthcare or any Subsidiary of U.S. Healthcare, except as required to avoid excise tax under Section 4980B of the Code. No condition exists that would prevent U.S. Healthcare or any Subsidiary of U.S. Healthcare from amending or terminating any U.S. Healthcare Employee Plan or U.S. Healthcare Benefit Arrangement providing health or medical benefits in respect of any active employee of U.S. Healthcare or any Subsidiary other than limitations imposed under the terms of a collective bargaining agreement. (g) Except as disclosed in writing to Aetna prior to the date hereof, there has been no amendment to, written interpretation or announcement (whether or not written) by U.S. Healthcare or any of its Subsidiaries relating to, or change in employee participation or coverage under, any U.S. Healthcare Employee Plan or U.S. Healthcare Benefit Arrangement which would increase materially the expense of maintaining such U.S. Healthcare Employee Plan or U.S. Healthcare Benefit Arrangement above the level of the expense incurred in respect thereof for the fiscal year ended on the U.S. Healthcare Balance Sheet Date. (h) Except as set forth in Schedule 3.15, neither U.S. Healthcare nor any Subsidiary of U.S. Healthcare is a party to or subject to any union contract or any employment contract or arrangement providing for annual future cash compensation of $250,000 or more with any officer, director or employee. (i) U.S. Healthcare has provided or made available a list of (a) the names, titles, annual salaries and other compensation of all officers of U.S. Healthcare or its Subsidiaries and all other employees of U.S. Healthcare or its Subsidiaries whose annual base salary exceeds $250,000 and (b) the wage rates for non- salaried employees of U.S. Healthcare and its Subsidiaries (by classification). None of the employees referred to in clause (a) and no other key employee of U.S. Healthcare or its Subsidiaries has disclosed to U.S. Healthcare and its Subsidiaries that he or she intends to resign or retire as a result of the transactions contemplated by this Agreement, or otherwise for any other reason within one year after the date of this Agreement (other than the Principal Shareholder). (j) U.S. Healthcare and its Subsidiaries are in compliance with all currently applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and are not engaged in any unfair labor practice, failure to comply with which or engagement in which, as the case may be, would reasonably be expected to have a Material Adverse Effect on U.S. Healthcare. There is no unfair labor practice complaint pending or, to the knowledge of U.S. Healthcare, threatened against U.S. Healthcare or any Subsidiary of U.S. Healthcare before the National Labor Relations Board which would reasonably be expected to have a Material Adverse Effect on U.S. Healthcare; and (k) None of the assets of U.S. Healthcare constitute the assets of any employee benefit plan subject to Title I of ERISA or Section 4975 of the Code. SECTION 3.16. Permits; Compliance with Laws. (a) _____________________________ U.S. Healthcare and its Subsidiaries hold all governmental licenses, authorizations, consents and approvals required to carry on their respective businesses as now conducted (the "U.S. Healthcare Permits") and are in compliance in all respects with the terms of the U.S. Healthcare Permits, except for any noncompliance which, individually or in the aggregate, has not had and is not reasonably likely to have a Material Adverse Effect on U.S. Healthcare or as disclosed in the U.S. Healthcare 10-K. Except as disclosed in the U.S. Healthcare 10-K, neither U.S. Healthcare nor any Subsidiary of U.S. Healthcare is in violation of, or has violated, any applicable provisions of any laws, rules, ordinances or regulations, in any such case, in a manner that, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on U.S. Healthcare. U.S. Healthcare has advised Aetna of the facts underlying currently pending formal proceedings with respect to any potentially material violations of any of the foregoing. (b) U.S. Healthcare and its Subsidiaries have complied in all respects with all laws, rules, ordinances and regulations governing all Medicare, Medicaid and any other contracts with any government entity and have filed all returns, cost reports and other filings in the manner prescribed by applicable laws, rules, ordinances or regulations, except for any such non-compliance or failure to make any such filing or filings, which individually or in the aggregate, has not had and is not reasonably expected to have a Material Adverse Effect on U.S. Healthcare. All returns, cost reports and other financial filings made by U.S. Healthcare or any of its Subsidiaries to Medicare, Medicaid or any other governmental health or welfare related entity or third party payor were true, correct and complete in all material respects as of their date of filing. Neither U.S. Healthcare nor any of its Subsidiaries has been subject to any written finding of fraudulent procedures or practices arising out of the provision of health care services relating to Medicare, Medicaid or any other government entity with which U.S. Healthcare or any Subsidiary of U.S. Healthcare has a contract to provide health care services or benefits, and except as disclosed in Schedule 3.16, neither U.S. Healthcare nor any of its Subsidiaries is currently subject to any pending or threatened audit relating to such fraudulent procedures or practices. SECTION 3.17. Finders' Fees. Except for Goldman, _____________ Sachs & Co. and Merrill Lynch & Co., Inc., copies of whose engagement agreements have been or will be promptly provided to Aetna, there is no investment banker, broker, finder or other intermediary which has been retained by, or is authorized to act on behalf of, U.S. Healthcare or any Subsidiary of U.S. Healthcare who might be entitled to any fee or commission from U.S. Healthcare, Aetna or any Subsidiary or Affiliate of either upon consummation of the transactions contemplated by this Agreement. SECTION 3.18. Intellectual Property Rights. (a) ____________________________ U.S. Healthcare and its Subsidiaries own or have rights to use, free and clear of all Liens, and have not assigned, hypothecated or otherwise encumbered, the name "U.S. Healthcare" and any of U.S. Healthcare's related trademarks, tradenames, service marks or logos. Except as set forth on Schedule 3.18, U.S. Healthcare has no knowledge of any current pending or threatened infringement or challenge by any Person with respect to the name "U.S. Healthcare" and the U.S. Healthcare logo. (b) Except as set forth on Schedule 3.18, each of U.S. Healthcare and its Subsidiaries owns outright or holds valid and enforceable licenses to all copies of the operating and applications computer software programs and databases material to the conduct by U.S. Healthcare and its Subsidiaries of their respective businesses (other than programs and databases that are generally commercially available) as of the date hereof (collectively, the "U.S. Healthcare Software"). None of the U.S. Healthcare Software used by U.S. Healthcare and its Subsidiaries, and no use thereof, infringes upon or violates any patent, copyright, trade secret or other proprietary right of any other Person and, to the best knowledge of U.S. Healthcare, no claim with respect to any such infringement or violation is pending or threatened, except for any such infringement which, individually or in the aggregate, has not had and is not reasonably expected to have a Material Adverse Effect on U.S. Healthcare. Upon consummation of the transactions contemplated by this Agreement, except for U.S. Healthcare Software sold or otherwise disposed of in the ordinary course of business after the date hereof, each of U.S. Healthcare and its Subsidiaries (i) will continue to own all the U.S. Healthcare Software owned by it, free and clear of all claims, Liens, encumbrances, obligations and liabilities and (ii) with respect to all agreements for the lease or license of U.S. Healthcare Software which require consents or other actions as a result of the consummation of the transactions contemplated by this Agreement in order for U.S. Healthcare and its Subsidiaries to continue to use and operate such U.S. Healthcare Software after the consummation of the transactions contemplated by this Agreement, shall have obtained such consents or taken such other actions so required prior to the Merger Date, except for such consents or actions that if not obtained or taken, individually or in the aggregate, would not be reasonably expected to have a Material Adverse Effect on U.S. Healthcare. SECTION 3.19. Takeover Statutes. The provisions _________________ of Subchapters G, H, I and J of Chapter 25 of the Pennsylvania Law are not applicable to U.S. Healthcare. SECTION 3.20. Fairness Opinion. U.S. Healthcare ________________ has received the opinion of Merrill Lynch & Co., Inc. to the effect that, as of the date hereof, the U.S. Healthcare Merger Consideration to be received by the holders of U.S. Healthcare Stock (other than Aetna and its Affiliates) in the U.S. Healthcare Sub Merger is fair to such holders from a financial point of view and the opinion of Goldman, Sachs & Co. that the U.S. Healthcare Merger Consideration to be received by the holders of U.S. Healthcare Stock pursuant to this Agreement is, as of the date of this Agreement, fair to such holders. It is agreed and understood that such opinions are for the sole benefit of the Board of Directors of U.S. Healthcare and may not be relied upon by Parent, Aetna or any third party. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF AETNA Aetna represents and warrants to U.S. Healthcare that: SECTION 4.1. Corporate Existence and Power. _____________________________ Aetna is duly incorporated and validly existing as an insurance corporation in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Aetna is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on Aetna. Aetna has heretofore delivered to U.S. Healthcare true and complete copies of Aetna's certificate of incorporation and bylaws as currently in effect. SECTION 4.2. Corporate Authorization. The _______________________ execution, delivery and, subject to receipt of the approvals referred to in Section 4.3, the performance by Aetna of this Agreement and the consummation by Aetna of the transactions contemplated by this Agreement are within the corporate powers of Aetna and have been duly authorized by all necessary corporate action, except for any required approval by Aetna's shareholders of this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by Aetna and constitutes a valid and binding agreement of Aetna enforceable against Aetna in accordance with its terms, subject to (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and, in the case of Aetna, the rights of creditors of insurance companies generally and (b) general principles of equity (regardless of whether considered in a proceeding at law or in equity). SECTION 4.3. Governmental Authorization. The __________________________ execution, delivery and performance by Aetna of this Agreement and the consummation by Aetna of the transactions contemplated by this Agreement require no action by or in respect of, or filing with, any governmental body, agency, official or authority other than (a) the filing of an Aetna Certificate of Merger in accordance with the Connecticut Law; (b) compliance with any applicable requirements of the HSR Act; (c) compliance with any applicable requirements of the 1934 Act; (d) compliance with any applicable requirements of the 1933 Act; (e) compliance with any applicable foreign or state securities or Blue Sky laws; (f) approvals or filings required under laws, rules and regulations governing insurance and insurance companies, health maintenance organizations, health care services plans, third party administrators or other managed health care organizations; (g) the filing with the Secretary of the State and, if required, the Insurance Commissioner of the State of Connecticut of an amendment to Parent's certificate of incorporation to reflect the changes contemplated by Section 7.11 hereof; and (h) filings and notices not required to be made or given until after the Merger Date. SECTION 4.4. Non-Contravention. Except as _________________ disclosed on Schedule 4.4, the execution, delivery and performance by Aetna of this Agreement and the consummation by Aetna of the transactions contemplated by this Agreement do not and will not (a) assuming receipt of the approvals referred to in Section 4.2, contravene or conflict with the certificate of incorporation or bylaws of Aetna, (b) assuming compliance with the matters referred to in Section 4.3, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to Aetna or any Subsidiary of Aetna, (c) constitute a default (or an event which with notice, the lapse of time or both would become a default) under or give rise to a right of termination, cancellation or acceleration of any right or obligation of Aetna or any Subsidiary of Aetna or to a loss of any benefit to which Aetna or any Subsidiary of Aetna is entitled under any provision of any agreement, contract or other instrument binding upon Aetna or any Subsidiary of Aetna or any license, franchise, permit or other similar authorization held by Aetna or any Subsidiary of Aetna, or (d) result in the creation or imposition of any Lien on any asset of Aetna or any Subsidiary of Aetna, except for such contraventions, conflicts or violations referred to in clause (b) or defaults, rights of termination, cancellation or acceleration, losses or Liens referred to in clause (c) or (d) that would not, individually or in the aggregate, have a Material Adverse Effect on Aetna. SECTION 4.5. Capitalization. As of February 29, ______________ 1996, the authorized capital stock of Aetna consisted of 10,000,000 shares of Class A Voting Preferred Stock without par value ("Aetna Class A Stock"), 15,000,000 shares of Class B Voting Preferred Stock without par value ("Aetna Class B Stock"), 15,000,000 shares of Class C Non-Voting Preferred Stock without par value ("Aetna Class C Stock") and 250,000,000 shares of Aetna common stock without par value ("Aetna Common Stock"). As of February 29, 1996, there were (i) no shares of Aetna Class A Stock outstanding, (ii) no shares of Aetna Class B Stock outstanding, (iii) no shares of Aetna Class C Stock outstanding and (iv) 114,990,477 shares of Aetna Common Stock outstanding. As of February 29, 1996, an aggregate of 15,208,090 shares of Aetna Common Stock were reserved for issuance or issuable under employee benefit or other compensation plans or programs or dividend reinvestment plans of Aetna. All outstanding shares of capital stock of Aetna have been duly authorized and validly issued and are fully paid and nonassessable. SECTION 4.6. SEC Filings. (a) Aetna has ___________ delivered to U.S. Healthcare (i) Aetna's annual reports on Form 10-K for its fiscal years ended December 31, 1995 (the "AETNA 10-K"), 1994 and 1993, (ii) its proxy or information statements relating to meetings of or actions taken without a meeting by Aetna's shareholders held since January 1, 1993, and (iii) all of its other reports, statements, schedules and registration statements filed with the SEC since January 1, 1993. (b) As of its filing date, each such report or statement, schedule or registration filed pursuant to the 1934 Act did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (c) Each such registration statement, as amended or supplemented, if applicable, filed pursuant to the 1933 Act as of the date such registration statement or amendment became effective did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. SECTION 4.7. Financial Statements. The audited ____________________ consolidated financial statements of Aetna included in its annual reports on Form 10-K referred to in Section 4.6 fairly present, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of Aetna and its consolidated Subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended. For purposes of this Agreement, "Aetna Balance Sheet" means the consolidated balance sheet of Aetna as of December 31, 1995 set forth in the Aetna 10-K and the "Aetna Balance Sheet Date" means December 31, 1995. SECTION 4.8. Disclosure Documents. (a) Each ____________________ document required to be filed by Aetna with the SEC in connection with the transactions contemplated by this Agreement (the "Aetna Disclosure Documents"), including, without limitation, the proxy or information statement of Aetna (the "Aetna Proxy Statement"), if any, to be filed with the SEC in connection with this Agreement and the Aetna Sub Merger, and any amendments or supplements thereto, will, when filed, comply as to form in all material respects with the applicable requirements of the 1934 Act. (b) At the time the Aetna Proxy Statement or any amendment or supplement thereto is first mailed to shareholders of Aetna and at the time such shareholders vote on the proposals relating to this Agreement and the Aetna Sub Merger set forth therein, the Aetna Proxy Statement, as supplemented or amended, if applicable, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. At the time of the filing of any Aetna Disclosure Document other than the Aetna Proxy Statement and at the time of any distribution thereof, such Aetna Disclosure Document will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 4.8 will not apply to statements included in or omissions from the Aetna Disclosure Documents based upon information furnished to Aetna in writing by U.S. Healthcare or Parent specifically for use therein. SECTION 4.9. Information Supplied. The ____________________ information supplied or to be supplied by Aetna for inclusion or incorporation by reference in (i) the U.S. Healthcare Proxy Statement or any amendment or supplement thereto will not, at the time the U.S. Healthcare Proxy Statement is first mailed to shareholders of U.S. Healthcare and at the time such shareholders vote on the approval and adoption of this Agreement, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading, (ii) the Form S-4 or any amendment or supplement thereto will not, at the time the Form S-4 or any amendment or supplement thereto become effective under the 1933 Act and on the Merger Date, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any U.S. Healthcare Disclosure Document or Parent Disclosure Document (other than the U.S. Healthcare Proxy Statement and the Form S-4) will not, at the time of effectiveness of such U.S. Healthcare Disclosure Document and at the time of any distribution thereof contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. SECTION 4.10. Absence of Certain Changes. Except __________________________ as disclosed on Schedule 4.10 or as specifically permitted by Section 6.5 and except as disclosed in the Aetna 10-K and except for the proposed sale of Aetna's property-casualty business and transactions related thereto, since the Aetna Balance Sheet Date, Aetna has conducted the Aetna Health Operations in the ordinary course consistent with past practice and there has not been: (a) any event, occurrence or facts which has had or is reasonably expected to have a Material Adverse Effect on Aetna; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of Aetna (other than payment of Aetna's regular quarterly dividend on Aetna Common Stock in an amount not exceeding $0.69 per share), or any repurchase, redemption or other acquisition by Aetna or any Subsidiary of Aetna of any amount of outstanding shares of capital stock or other securities of, or other ownership interests in, Aetna which repurchase, redemption or other acquisition, individually or in the aggregate, is material to Aetna and its Subsidiaries taken as a whole; (c) any amendment of any term of any outstanding security of Aetna; (d) any incurrence, assumption or guarantee by any of Aetna's domestic (U.S.) health care operations ("Aetna Health Operations") of any indebtedness from any third party for borrowed money other than in the ordinary course of business and in amounts and on terms consistent with past practices; (e) any creation or assumption by Aetna Health Operations of any Lien on any material asset other than in the ordinary course of business consistent with past practices; (f) any making of any loan, advance or capital contribution by any Aetna Health Operations to or investment in any Person other than (i) loans, advances or capital contributions to or investments in Subsidiaries of Aetna, (ii) investments in securities consistent with past practice or (iii) other loans, advances, capital contributions or investments in an aggregate amount not exceeding $25,000,000; (g) any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the business or assets of Aetna or any Subsidiary of Aetna which, individually or in the aggregate, is or may reasonably be expected to be material to Aetna and its Subsidiaries, taken as a whole; (h) any transaction or commitment made, or any contract or agreement entered into, by any Aetna Health Operations relating to its assets or business (including, without limitation, the acquisition or disposition of any assets) or any relinquishment by any Aetna Health Operations of any contract, license or other right, which in any such case, individually or in the aggregate, would have a Material Adverse Effect on Aetna, other than transactions, commitments, contracts or agreements contemplated by this Agreement; (i) any change in any method of accounting or accounting principle or practice by Aetna or any Subsidiary of Aetna, except for any such change required by reason of a concurrent change in generally accepted accounting principles or statutory accounting principles; (j) except for such contracts as would not be material to Aetna and its Subsidiaries taken as a whole or material to their operation in any Standard Metropolitan Statistical Area, any entry by any Aetna Health Operations into any contract limiting the right of any Aetna Health Operations at any time on or after the date of this Agreement or U.S. Healthcare or any of its Subsidiaries or Affiliates at or after the Merger Date, to engage in, or to compete with any Person in, any business conducted by U.S. Healthcare, including, without limitation, any contract which includes exclusivity provisions restricting the geographical area in which, or the method by which, any such business may be conducted by Aetna or any of its Subsidiaries or Affiliates, or by U.S. Healthcare or any of its Subsidiaries or Affiliates after the Merger Date; or (k) any entry by any Aetna Health Operations into any acquisition, joint venture or franchising agreement or arrangement which is material to Aetna and its Subsidiaries taken as a whole; or (m) any entry by any Aetna Health Operations or any of its Subsidiaries into any agreement or arrangement with a third party on an exclusive basis to offer or market any of the following services of such third party: group life, disability, managed workers' compensation, long term care, dental, behavioral or pharmacy benefits. SECTION 4.11. No Undisclosed Material _______________________ Liabilities. There are no liabilities, commitments or ___________ obligations (whether pursuant to contracts or otherwise) of Aetna or any Subsidiary of Aetna of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability, commitment or obligation, including, without limitation, any fines, disciplinary actions or other adverse actions that may be taken or reported concerning the conduct of Aetna or any of its Subsidiaries, other than: (a) liabilities, commitments or obligations disclosed or provided for in the Aetna Balance Sheet or in the Aetna 10-K; (b) liabilities, commitments or obligations incurred in the ordinary course of business since the Aetna Balance Sheet Date; (c) liabilities, commitments or obligations under this Agreement; and (d) liabilities, commitments or obligations which, individually or in the aggregate, have not had, and are not reasonably likely to have, a Material Adverse Effect on Aetna. SECTION 4.12. Litigation; Investigations. Except __________________________ as disclosed or referred to in the Aetna 10-K or on Schedule 4.12, there is no action, claim, suit, investigation, proceeding or examination, including, without limitation, any insurance or health related investigations, proceedings or examinations pending against or affecting, or to the knowledge of Aetna threatened against or affecting, Aetna or any Subsidiary of Aetna or any of their respective properties before any court or arbitrator or any governmental body, agency, authority or official which, net of reserves established therefor reflected in the Aetna 10-K and giving effect to reinsurance probable of recovery, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on Aetna. SECTION 4.13. Subsidiaries. (a) Each Subsidiary ____________ of Aetna is duly incorporated, validly existing (as an insurance corporation, corporation organized as a health maintenance organization or otherwise) and in good standing under the laws of its jurisdiction of incorporation, has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted and is duly qualified to do business as a foreign corporation or is duly licensed to do business as an insurer, a health maintenance organization or otherwise and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where failure to be so qualified or licensed would not, individually or in the aggregate, have a Material Adverse Effect on Aetna. All material Subsidiaries and their respective jurisdictions of incorporation are identified in the Aetna 10-K. (b) Except as disclosed on Schedule 4.13, all of the outstanding capital stock of, or other ownership interests in, each Subsidiary of Aetna, is owned by Aetna, directly or indirectly, free and clear of any Lien and free of any other limitation or restriction (including, without limitation, any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests). Except as disclosed on Schedule 4.13, there are no outstanding (i) securities of Aetna or any Subsidiary of Aetna convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary of Aetna, and (ii) options or other rights to acquire from Aetna or any Subsidiary of Aetna, and no other obligation of Aetna or any Subsidiary of Aetna to issue, any capital stock, voting securities or other ownership interests in, or any securities convertible into or exchangeable for, any capital stock, voting securities or ownership interests in, any Subsidiary of Aetna (the items in clauses (i) and (ii) being referred to collectively as the "Aetna Subsidiary Securities"). Except as disclosed in Schedule 4.13, there are no outstanding obligations of Aetna or any Subsidiary of Aetna to repurchase, redeem or otherwise acquire any outstanding Aetna Subsidiary Securities. SECTION 4.14. Taxes. (a) All Tax Returns _____ required to be filed (taking into account all extensions heretofore granted) on or before the date hereof or the Merger Date by or on behalf of Aetna or any of its Subsidiaries have been filed within the time and in the manner prescribed by law, other than those Tax Returns the failure of which to file would not have a Material Adverse Effect on Aetna. (b) As of the time of filing, all such Tax Returns correctly reflected in all material respects all facts regarding the income, business, assets, operations, activities and status of Aetna and its Subsidiaries and any other information required to be shown therein. (c) All Taxes shown to be due and payable by Aetna and any of its Subsidiaries on all such Tax Returns have been timely paid, or withheld and remitted to the appropriate Taxing Authorities. (d) Except as set forth on Schedule 4.14(d), all applicable statutes of limitations for the assessment of material Taxes against Aetna and any of its Subsidiaries have expired. No deficiency payment of any Taxes for any period has been asserted by any Taxing Authority which remains unsettled at the date hereof except for deficiencies which would not have a Material Adverse Effect on Aetna. (e) Except for Tax Returns required to be filed with respect to the 1995 taxable year, neither Aetna nor any of its Subsidiaries has requested any extension of time within which to file any Tax Return which has not yet been filed. (f) There are no material Liens upon any property or assets of Aetna or any of its Subsidiaries for Taxes, except for Tax liens in respect of Taxes not yet due or which are being contested in good faith and by appropriate proceedings (and for the payment of which adequate reserves have been provided) and reflected in the Aetna 10-K. (g) Except as set forth on Schedule 4.14(g), there is no claim, audit, action, suit, proceeding, or investigation now pending or threatened against or with respect to Aetna or any of its Subsidiaries in respect of any Taxes. (h) Except as set forth in Schedule 4.14(h), neither Aetna nor any of its Subsidiaries has any contractual obligations under any tax sharing agreement or similar agreement or tax indemnity agreement with any corporation which is not a member of the affiliated group of corporations of which Aetna is the common parent. (i) Except as set forth on Schedule 4.14(i), there are no requests for rulings or determinations in respect of any Tax pending between Aetna or any of its Subsidiaries and any Taxing Authorities. SECTION 4.15. ERISA. (a) Neither Aetna nor any _____ ERISA Affiliate of Aetna has (i) engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Sections 4069 or 4212(c) of ERISA or (ii) incurred, or reasonably expects to incur prior to the Merger Date, (A) any liability under Title IV of ERISA arising in connection with the termination of, or a complete or, except as may be incurred by reason of the transactions contemplated by the Stock Purchase Agreement, partial withdrawal from, any plan covered or previously covered by Title IV of ERISA or (B) any liability under Section 4971 of the Code that in either case could become a liability of Parent or any of its Affiliates after the Merger Date. Nothing done or omitted to be done, and no transaction or holding of any asset under or in connection with any "employee benefit plan" as defined in Section 3(3) of ERISA which (i) is subject to any provision of ERISA and (ii) is maintained, administered or contributed to by Aetna or any Subsidiary of Aetna and covers any employees or former employees of Aetna or any Subsidiary of Aetna under which Aetna or any Subsidiary of Aetna has any liability (each an "Aetna Employee Plan") has or will make Aetna or any Subsidiary of Aetna, or any officer or director of Aetna or any Subsidiary of Aetna, subject to any liability under Title I of ERISA or liable for any tax pursuant to Section 4975 of the Code that could have a Material Adverse Effect on Aetna. (b) With respect to each Aetna Employee Plan which is intended to be qualified under Section 401(a) of the Code, Aetna has received a favorable determination letter that the plan is so qualified and that each trust forming a part thereof is exempt from tax pursuant to Section 501(a) of the Code. Each Aetna Employee Plan has been maintained in all material respects in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including but not limited to ERISA and the Code, which are applicable to such Plan. (c) Each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (i) is not an Aetna Employee Plan, (ii) is entered into, maintained or contributed to, as the case may be, by Aetna or any of its Subsidiaries and (iii) covers any employee or former employee of Aetna or any of its Subsidiaries (the "Aetna Benefit Arrangements") has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Aetna Benefit Arrangement. (d) Aetna and its Subsidiaries are in compliance with all currently applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and are not engaged in any unfair labor practice, failure to comply with which or engagement in which, as the case may be, would reasonably be expected to have a Material Adverse Effect on Aetna. There is no unfair labor practice complaint pending or, to the knowledge of Aetna, threatened against Aetna or any Subsidiary of Aetna before the National Labor Relations Board which would reasonably be expected to have a Material Adverse Effect on Aetna. (e) None of the assets of Aetna constitute the assets of any employee benefit plan subject to Title I of ERISA or Section 4975 of the Code. SECTION 4.16. Permits; Compliance with Laws. (a) _____________________________ Aetna and its Subsidiaries hold all governmental licenses, authorizations, consents and approvals required to carry on their respective businesses as now conducted (the "Aetna Permits") and are in compliance in all respects with the terms of the Aetna Permits, except for any noncompliance which, individually or in the aggregate, has not had and is not reasonably likely to have a Material Adverse Effect on Aetna or as disclosed in the Aetna 10-K. Except as disclosed in the Aetna 10- K, neither Aetna nor any Subsidiary of Aetna is in violation of, or has violated, any applicable provisions of any laws, rules, ordinances or regulations, in any such case, in a manner that, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on Aetna. Aetna has advised U.S. Healthcare of the facts underlying currently pending formal proceedings with respect to any potentially material violations of any of the foregoing. (b) Neither Aetna nor any of its Subsidiaries has been subject to any written finding of fraudulent procedures or practices arising out of the provision of health care services relating to Medicare, Medicaid or any other government entity with which Aetna or any Subsidiary of Aetna has a contract to provide health care services or benefits, and except as disclosed in Schedule 4.16, neither Aetna nor any of its Subsidiaries is currently subject to any pending or threatened audit relating to such fraudulent procedures or practices. SECTION 4.17. Intellectual Property Rights. (a) ____________________________ Aetna and its Subsidiaries own or have rights to use, free and clear of all Liens, and have not assigned, hypothecated or otherwise encumbered, the name "Aetna" and any of Aetna's related trademarks, tradenames, service marks or logos. Aetna has no knowledge of any current pending or threatened infringement or challenge by any Person with respect to the name "Aetna" and the Aetna logo. (b) Except as set forth on Schedule 4.17, each of Aetna and its Subsidiaries owns outright or holds valid and enforceable licenses to all copies of the operating and applications computer software programs and databases material to the conduct by Aetna and its Subsidiaries of their respective businesses (other than programs and databases that are generally commercially available) as of the date hereof (collectively, the "Aetna Software"). None of the Aetna Software used by Aetna and its Subsidiaries, and no use thereof, infringes upon or violates any patent, copyright, trade secret or other proprietary right of any other Person and, to the best knowledge of Aetna, no claim with respect to any such infringement or violation is pending or threatened, except for any such infringement which, individually or in the aggregate, has not had and is not reasonably expected to have a Material Adverse Effect on Aetna. Upon consummation of the transactions contemplated by this Agreement, except for Aetna Software sold or otherwise disposed of in the ordinary course of business after the date hereof, each of Aetna and its Subsidiaries (i) will continue to own all the Aetna Software owned by it, free and clear of all claims, Liens, encumbrances, obligations and liabilities and (ii) with respect to all agreements for the lease or license of Aetna Software which require consents or other actions as a result of the consummation of the transactions contemplated by this Agreement in order for Aetna and its Subsidiaries to continue to use and operate such Aetna Software after the consummation of the transactions contemplated by this Agreement, shall have obtained such consents or taken such other actions so required prior to the Merger Date, except for such consents or actions that if not obtained or taken, individually or in the aggregate, would not be reasonably expected to have a Material Adverse Effect on Aetna. SECTION 4.18. Fairness Opinions. Aetna has _________________ received opinions of Wasserstein Perella & Co., Inc. and J.P. Morgan & Co. to the effect that, as of the date hereof, the consideration to be paid to the holders of U.S. Healthcare Stock in the U.S. Healthcare Sub Merger is fair, from a financial point of view, to Aetna. It is agreed and understood that such opinions are for the sole benefit of the Board of Directors of Aetna and may not be relied upon by Parent, U.S. Healthcare or any third party. ARTICLE 5 COVENANTS OF U.S. HEALTHCARE U.S. Healthcare agrees that: SECTION 5.1. Conduct of U.S. Healthcare. From __________________________ the date hereof until the Merger Date, U.S. Healthcare and its Subsidiaries shall conduct their business in the ordinary course consistent with past practice and shall use their best efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees. Without limiting the generality of the foregoing, from the date hereof until the Merger Date, except as contemplated by this Agreement, without the prior written consent of Aetna: (a) U.S. Healthcare will not adopt or propose any change in its articles of incorporation or bylaws; (b) U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, (i) merge or consolidate with any other Person (other than a merger of consolidation of a Subsidiary of U.S. Healthcare with a wholly-owned Subsidiary of U.S. Healthcare) or (ii) acquire, whether by means of merger, consolidation or otherwise, any business or assets, other than acquisitions of products or services used in the ordinary course operations of the business of U.S. Healthcare and its Subsidiaries in a manner consistent with past practice and other acquisitions in an aggregate amount not exceeding $75,000,000; (c) U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, sell, lease, license or otherwise dispose of any material assets or property except in the ordinary course of business pursuant to contracts or commitments existing on the date hereof; (d) U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, declare, set aside or pay any dividend (other than the payment of U.S. Healthcare regular quarterly dividend on U.S. Healthcare Common Stock in an amount not exceeding $0.275 per share and on Class B Stock in an amount not exceeding $0.248 per share) or make any other distribution with respect to any shares of U.S. Healthcare' capital stock; (e) U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, create or assume any Lien on any material asset other than in the ordinary course consistent with past practices; (f) except pursuant to contracts or commitments existing on the date hereof and other than the issuance of an aggregate of 150,000 options to acquire U.S. Healthcare Stock and/or shares of restricted stock of U.S. Healthcare to Persons other than the Specified U.S. Healthcare Officers, U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any U.S. Healthcare Securities, any U.S. Healthcare Subsidiary Securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any U.S. Healthcare Securities or U.S. Healthcare Subsidiary Securities; (g) Except as disclosed on Schedule 5.1(g), (i) U.S. Healthcare will not split, combine or reclassify, or take any other similar action with respect to, any capital stock of U.S. Healthcare, and (ii) U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, repurchase, redeem or otherwise acquire an amount of shares of capital stock of, or other ownership interests in, U.S. Healthcare or any Subsidiary of U.S. Healthcare, which repurchase, redemption or other acquisition, individually or in the aggregate, is material to U.S. Healthcare and its Subsidiaries, taken as a whole; (h) Except for borrowings or guarantees in the ordinary course of business consistent with past practice, U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, incur or assume any indebtedness from any third party for borrowed money or guarantee any such indebtedness; (i) Except for (i) loans, advances or capital contributions to or investments in Subsidiaries of U.S. Healthcare, (ii) investments in securities consistent with past practices or (iii) other loans, advances, capital contributions or investments in an aggregate amount not exceeding $25,000,000, U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, make any material loans, advances or capital contributions to, or investments in, any other Person; (j) except for new employment agreements with those Specified U.S. Healthcare Officers listed on Schedule 8.2(b) in the form attached hereto as Schedule 3.11(j)(A), U.S. Healthcare will not, and will not permit any of its Subsidiaries to: (i) (A) grant any severance or termination pay to, or enter into any employment, termination or severance arrangement with, any Specified U.S. Healthcare Officer or, (B) except in the ordinary course of business consistent in magnitude and character with past practice and with the terms of severance or termination arrangements in effect or pending on the date hereof with respect to individuals with comparable positions or responsibilities, grant any severance or termination pay to, or enter into any employment, termination or severance arrangement with, any other employees; (ii) (A) amend in any material respect any employment, termination or severance arrangement with any Specified U.S. Healthcare Officer or (B) except in the ordinary course, amend in any material respect any employment, termination or severance arrangement with any other directors, officers or employees (it being understood that for purposes of clauses (A) and (B) any increase or acceleration of benefits under any such agreement shall be deemed material); (iii) (x) establish, adopt, enter into, or (y) except (I) the matters described in the parenthetical clause of Section 3.11(c) hereof and (II) the acceleration of vesting of U.S. Healthcare Non-Employee Stock Options and restricted stock of U.S. Healthcare issued to Persons who are not employees of U.S. Healthcare, amend or take action to accelerate or enhance any rights or benefits under, (A) any plan providing for options, stock, performance awards or other forms of incentive or deferred compensation or (B) any collective bargaining, bonus, profit sharing, thrift, compensation, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any of its directors, officers or employees; (iv) grant, confer or award any options, stock, performance awards or other awards to acquire any shares of its capital stock (other than an aggregate of 150,000 options to acquire U.S. Healthcare Stock and/or shares of restricted stock of U.S. Healthcare pursuant to the terms existing on the date hereof of U.S. Healthcare's plans to Persons other than the Specified U.S. Healthcare Officers; (v) increase the contribution percentages under U.S. Healthcare's defined contribution plans; or (vi) (A) other than an annual adjustment with respect to the 1997 calendar year if the Merger Date occurs after December 31, 1996, which adjustment shall be of a magnitude and character consistent with past practice, increase the compensation or benefits of any Specified U.S. Healthcare Officer or pay any benefit not required by any plan or arrangement as in effect as of the date hereof or (B) except in the ordinary course of business consistent in magnitude and character with past practice and in no event greater than 6% in the aggregate on a per annum basis for all such individuals as a group, increase the compensation or benefits of any other employees or pay any benefit not required by any plan or arrangement as in effect as of the date hereof; provided that Aetna agrees it will ________ not unreasonably withhold its consent, if requested by U.S. Healthcare, to transactions proposed under this paragraph (j); (k) U.S. Healthcare will not, and will not permit any of its Subsidiaries to, authorize, recommend, propose or announce an intention to adopt a plan of complete or partial liquidation or dissolution of U.S. Healthcare or any Subsidiary of U.S. Healthcare, or any plan of division or share exchange involving U.S. Healthcare or any of its Subsidiaries; (l) U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, change any method of accounting or any accounting principle or practice used by U.S. Healthcare or any Subsidiary of U.S. Healthcare, except for any such change required by reason of a concurrent change in generally accepted accounting principles or statutory accounting principles; (m) except as previously disclosed to Aetna and except for such contracts as would not be material to U.S. Healthcare and its Subsidiaries taken as a whole or material to their operation in any Standard Metropolitan Statistical Area, U.S. Healthcare will not and will not permit any Subsidiary of U.S. Healthcare to enter into any contract limiting the right of U.S. Healthcare or any of its Subsidiaries at any time on or after the date of this Agreement or Aetna or any of its Subsidiaries or Affiliates at or after the Merger Date, to engage in, or to compete with any Person in, any business, including, without limitation, any contract which includes exclusivity provisions restricting the geographical area in which, or the method by which, any such business may be conducted by U.S. Healthcare or any of its Subsidiaries or Affiliates, or by Aetna or any of its Subsidiaries or Affiliates after the Merger Date; (n) subject (in the case of an acquisition) to Section 5.1(b), U.S. Healthcare will not and will not permit any of its Subsidiaries to enter into any acquisition, joint venture, national vendor or franchising agreement or arrangement which is material to U.S. Healthcare and its Subsidiaries, taken as a whole; (o) U.S. Healthcare will not, and will not permit any of its Subsidiaries to, enter into any agreement or arrangement with a third party on an exclusive basis to offer or market any of the following services of such third party: group life, disability, managed workers' compensation, long term care, dental, behavioral or pharmacy benefits; and (p) U.S. Healthcare will not, and will not permit any Subsidiary of U.S. Healthcare to, agree, commit or adopt any plan or proposal to do any of the foregoing. SECTION 5.2. Shareholder Meeting; Proxy __________________________ Material. (a) U.S. Healthcare shall cause a meeting of ________ its shareholders (the "U.S. Healthcare Shareholder Meeting") to be duly called and held as soon as reasonably practicable for the purpose of voting on the approval and adoption of this Agreement and, to the extent submitted to U.S. Healthcare's shareholders for approval, the transactions contemplated by this Agreement, and the Board of Directors of U.S. Healthcare shall recommend approval and adoption of this Agreement and the U.S. Healthcare Sub Merger by U.S. Healthcare's shareholders; provided that such meeting need not be ________ called and held and, prior to the U.S. Healthcare Shareholder Meeting, such recommendation may be withdrawn, modified or amended to the extent that, as a result of the commencement or receipt of an Acquisition Proposal with respect to U.S. Healthcare, the Board of Directors of U.S. Healthcare determines in good faith that it is necessary to so act in order to comply with its fiduciary duties under applicable law after consultation with independent counsel. (b) In connection with the U.S. Healthcare Shareholder Meeting, and subject to the proviso to Section 5.2(a), U.S. Healthcare (i) will promptly prepare and file with the SEC, will use its best efforts to have cleared by the SEC and will thereafter mail to its shareholders as promptly as practicable the U.S. Healthcare Proxy Statement and all other proxy materials for such meeting, (ii) will use its best efforts to obtain the shareholder approvals referred to in Section 5.2(a) and (iii) will otherwise comply with all legal requirements applicable to such meeting. SECTION 5.3. Access to Information. To the _____________________ extent permitted by applicable law, from the date hereof until the Merger Date, U.S. Healthcare will give (or cause to be given) Aetna, its counsel, financial advisors, auditors and other authorized representatives full access to the offices, properties, books and records of U.S. Healthcare and its Subsidiaries, will furnish (or cause to be furnished) to Aetna, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such Persons may reasonably request and will instruct the employees, counsel and financial advisors of U.S. Healthcare and its Subsidiaries to cooperate with Aetna in its investigation of the business of U.S. Healthcare and its Subsidiaries; provided that no investigation pursuant to this Section shall affect any representation or warranty given by U.S. Healthcare to Aetna hereunder. SECTION 5.4. Other Offers Relating to U.S. ____________________________ Healthcare. From the date hereof until the termination __________ of this Agreement, U.S. Healthcare will not, and will cause its Subsidiaries and the directors, officers, employees, financial advisors and other agents or representatives of U.S. Healthcare or any of its Subsidiaries not to, directly or indirectly, take any action to solicit, initiate or encourage any Acquisition Proposal with respect to U.S. Healthcare or engage in negotiations with, or disclose any nonpublic information relating to U.S. Healthcare or any Subsidiary of U.S. Healthcare or afford access to the properties, books or records of U.S. Healthcare or any Subsidiary of U.S. Healthcare to, any Person that may be considering making, or has made, an Acquisition Proposal with respect to U.S. Healthcare; provided that nothing contained in this ________ Section 5.4 shall prevent U.S. Healthcare from furnishing non-public information to, or entering into discussions or negotiations with, any Person in connection with an unsolicited bona fide Acquisition Proposal with respect to U.S. Healthcare, if and only to the extent that (1) the Board of Directors of U.S. Healthcare determines in good faith after consultation with independent counsel that such action is necessary in order to comply with its fiduciary duties under applicable law and (2) prior to furnishing non-public information to, or entering into discussions or negotiations with, such Person, U.S. Healthcare receives from such Person an executed confidentiality agreement with terms no less favorable to U.S. Healthcare than those contained in the Confidentiality Agreement dated as of January 16, 1996 between U.S. Healthcare and Aetna (the "Confidentiality Agreement"). U.S. Healthcare will promptly (and in no event later than 24 hours after receipt of the relevant Acquisition Proposal with respect to U.S. Healthcare), notify (which notice shall be provided orally and in writing and shall identify the Person making the relevant Acquisition Proposal with respect to U.S. Healthcare and set forth the material terms thereof) Aetna after receipt of any Acquisition Proposal with respect to U.S. Healthcare or any request for nonpublic information relating to U.S. Healthcare or any Subsidiary of U.S. Healthcare or for access to any properties, books or records of U.S. Healthcare or any Subsidiary of U.S. Healthcare by any Person that may be considering making, or has made, an Acquisition Proposal with respect to U.S. Healthcare and will keep Aetna fully informed of the status and details of any such Acquisition Proposal with respect to U.S. Healthcare. U.S. Healthcare shall give Aetna at least one days' advance notice of any information to be supplied to, and at least three days' advance notice of any agreement to be entered into with, any Person making such Acquisition Proposal with respect to U.S. Healthcare. U.S. Healthcare shall, and shall cause its Subsidiaries and the directors, officers, employees, financial advisors and other agents or representatives of U.S. Healthcare or any of its Subsidiaries to, cease immediately and cause to be terminated all activities, discussions or negotiations, if any, with any Persons conducted heretofore with respect to any Acquisition Proposal with respect to U.S. Healthcare. For purposes of this Agreement, with respect to any Person, "Acquisition Proposal" means any offer or proposal for, or any indication of interest in, (i) a merger or other business combination involving such Person or any Subsidiary of such Person or (ii) the acquisition in any manner of any significant equity interest in, or a substantial portion of the assets of, such Person or any Subsidiary of such Person, in each case other than the transactions contemplated by this Agreement. SECTION 5.5. Notices of Certain Events. U.S. _________________________ Healthcare shall promptly notify Aetna of: (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental body, agency, official or authority in connection with the transactions contemplated by this Agreement; and (c) any actions, suits, claims, investigations, proceedings or health or insurance related proceedings or market conduct examinations or audits commenced or, to the best of U.S. Healthcare's knowledge threatened against, relating to or involving or otherwise affecting U.S. Healthcare or any Subsidiary of U.S. Healthcare which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.13 or which relate to the consummation of the transactions contemplated by this Agreement. SECTION 5.6. Fiduciary Matters. U.S. Healthcare _________________ shall, and shall direct the appropriate fiduciaries to, exercise all appropriate fiduciary responsibilities with respect to shares of U.S. Healthcare Stock held in any of its U.S. Healthcare Employee Plans. ARTICLE 6 COVENANTS OF AETNA Aetna agrees that: SECTION 6.1. Voting of U.S. Healthcare Stock. _______________________________ Aetna agrees to vote or cause to be voted all shares of U.S. Healthcare Stock owned by it or any of its Subsidiaries in favor of the approval and adoption of this Agreement at the U.S. Healthcare Shareholder Meeting; provided that this Section 6.1 shall not impose ________ any obligations in respect of shares of U.S. Healthcare Stock (i) held by Aetna or any Subsidiary of Aetna for the account of another Person, (ii) as to which Aetna or any Subsidiary or Affiliate of Aetna is or may be required to act as fiduciary or in a similar capacity or (iii) the voting of which pursuant to the provisions of this Section 6.1 would violate any legal duties or obligations of Aetna or any Subsidiary or Affiliate of Aetna. SECTION 6.2. Shareholder Meeting; Proxy __________________________ Materials. (a) Aetna shall cause a special meeting of _________ its shareholders (the "Aetna Shareholder Meeting") to be duly called and held as soon as reasonably practicable for the purpose of voting on the approval and adoption of this Agreement, and, to the extent submitted to Aetna's shareholders for approval, the transactions contemplated by this Agreement, and the Board of Directors of Aetna shall recommend approval and adoption of this Agreement by Aetna's shareholders; provided that such special ________ meeting need not be called and held and, prior to the Aetna Shareholder Meeting, such recommendation may be withdrawn, modified or amended, to the extent that, as a result of the commencement or receipt of an Aetna Acquisition Proposal, the Board of Directors of Aetna determines in good faith that it is necessary to so act in order to comply with its fiduciary duties under applicable law after consultation with independent counsel. (b) In connection with the Aetna Shareholder Meeting, and subject to the proviso to Section 6.2(a), Aetna (i) will promptly prepare and file with the SEC, will use its best efforts to have cleared by the SEC and will thereafter mail to its shareholders as promptly as practicable the Aetna Proxy Statement and all other proxy materials for such meeting, (ii) will use its best efforts to obtain the shareholder approvals referred to in Section 6.2(a), and (iii) will otherwise comply with all legal requirements applicable to such meeting. SECTION 6.3. Access to Information. To the _____________________ extent permitted by applicable law, from the date hereof until the Merger Date, Aetna will give (or cause to be given) U.S. Healthcare, its counsel, financial advisors, auditors and other authorized representatives full access to the offices, properties, books and records of Aetna and its Subsidiaries, will furnish (or cause to be furnished) to U.S. Healthcare, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such Persons may reasonably request and will instruct the employees, counsel and financial advisors of Aetna and its Subsidiaries to cooperate with U.S. Healthcare in its investigation of the business of Aetna and its Subsidiaries; provided that no investigation pursuant to this Section shall affect any representation or warranty given by Aetna to U.S. Healthcare hereunder. SECTION 6.4. Notices of Certain Events. Aetna _________________________ shall promptly notify U.S. Healthcare of: (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental body, agency, official or authority in connection with the transactions contemplated by this Agreement; and (c) any actions, suits, claims, investigations, proceedings or health or insurance related proceedings or market conduct examinations commenced or, to the best of Aetna's knowledge threatened against, relating to or involving or otherwise affecting Aetna or any Subsidiary of Aetna which relate to the consummation of the transactions contemplated by this Agreement. SECTION 6.5. Certain Corporate Actions. Prior _________________________ to the Merger Date, except as contemplated by this Agreement or in Schedule 6.5, unless U.S. Healthcare has consented in writing thereto: (a) Aetna will not adopt or propose any change in its certificate of incorporation or bylaws; (b) (i) Aetna will not, and will not permit any Subsidiary of Aetna to, merge or consolidate with any other Person (other than a merger or consolidation of a Subsidiary of Aetna with a wholly-owned Subsidiary of Aetna) and (ii) Aetna shall cause the Aetna Health Operations not to acquire, whether by means of merger, consolidation or otherwise, any business or assets, other than acquisitions of products or services used in the ordinary course operations of the business of Aetna and its Subsidiaries in a manner consistent with past practice and other acquisitions in an aggregate amount not exceeding $75,000,000; (c) Aetna will not permit any Aetna Health Operations to, sell, lease, license or otherwise dispose of any material assets or property except in the ordinary course of business pursuant to contracts or commitments existing on the date hereof; (d) Aetna will not, and will not permit any Subsidiary of Aetna to, declare, set aside or pay any dividend (other than the payment of a regular quarterly dividend on Aetna Common Stock in an amount not exceeding $0.69 per share), or make any other distribution, with respect to any shares of Aetna's capital stock; (e) Aetna will not, and will not permit the Aetna Health Operations to, create or assume any Lien on any material asset other than in the ordinary course consistent with past practices; (f) Aetna will not, and will not permit any Subsidiary of Aetna to, issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any capital stock of Aetna or Aetna Subsidiary Securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such securities of Aetna or any Aetna Subsidiary Securities except (i) pursuant to contracts and commitments existing on the date hereof, (ii) the issuance of Aetna Stock pursuant to existing Aetna stock plans or in connection with the exercise of Aetna Stock Options, and (iii) any such securities issued in one or a series of transactions at fair market value which would not require the approval of the shareholders of Aetna under the applicable NYSE rules; (g) except as disclosed in Schedule 6.5(g), (i) Aetna will not split, combine or reclassify, or take any other similar action with respect to, any capital stock of Aetna, and (ii) Aetna will not, and will not permit any Subsidiary of Aetna to, repurchase, redeem or otherwise acquire an amount of shares of capital stock of, or other ownership interests in, Aetna or any Aetna Subsidiary Securities which repurchase, redemption or other acquisition, individually or in the aggregate, is material to Aetna and its Subsidiaries taken as a whole; (h) except for borrowings or guarantees in the ordinary course of business consistent with past practice, Aetna will not permit any Aetna Health Operation to incur or assume any indebtedness from any third party for borrowed money or guarantee any such indebtedness; (i) except for (i) loans, advances or capital contributions to or investments in Subsidiaries of Aetna, (ii) investments in securities consistent with past practice or (iii) other loans, advances, capital contributions or investments in an aggregate amount not exceeding $25,000,000, Aetna will not permit any Aetna Health Operation to, make any material loans, advances or capital contributions to, or investments in, any other Person; (j) Aetna will not, and will not permit any of its Subsidiaries to, authorize, recommend, propose or announce an intention to adopt a plan of complete or partial liquidation or dissolution of Aetna or any Subsidiary of Aetna, or any plan of division or share exchange involving Aetna or any of its Subsidiaries; (k) Aetna will not, and will not permit any Subsidiary of Aetna to, change any method of accounting or any accounting principle or practice used by Aetna or any Subsidiary of Aetna, except for any such change required by reason of a concurrent change in generally accepted accounting principles or statutory accounting principles; (l) except as previously disclosed to U.S. Healthcare and except for such contracts as would not be material to Aetna or the Aetna Health Operation or material to their operation in any Standard Metropolitan Statistical Area, Aetna will not permit any Aetna Health Operation to enter into any contract limiting the right of any Aetna Health Operation at any time on or after the date of this Agreement or U.S. Healthcare or any of its Subsidiaries or Affiliates at or after the Merger Date, to engage in, or to compete with any Person in, any business, including, without limitation, any contract which includes exclusivity provisions restricting the geographical area in which, or the method by which, any such business may be conducted by Aetna or any of its Subsidiaries or Affiliates, or by U.S. Healthcare or any of its Subsidiaries or Affiliates after the Merger Date; (m) Aetna will not permit any Aetna Health Operation to enter into any acquisition, joint venture, national vendor or franchising agreement or arrangement which is material to Aetna and its Subsidiaries, taken as a whole; (n) subject (in the case of an acquisition) to Section 6.5(b), Aetna will not permit any Aetna Health Operation to enter into any agreement or arrangement with a third party on an exclusive basis to offer or market any of the following services of such third party: group life, disability, managed workers' compensation, long term care, dental, behavioral or pharmacy benefits; and (o) Aetna will not, and will not permit any Subsidiary of Aetna to, agree, commit or adopt any plan or proposal to do any of the foregoing. SECTION 6.6. Other Offers Relating to Aetna. ______________________________ From the date hereof until the termination hereof, Aetna will not, and will cause its Subsidiaries and the directors, officers, employees, financial advisors and other agents or representatives of Aetna or any of its Subsidiaries not to, directly or indirectly, take any action to solicit, initiate or encourage any Aetna Acquisition Proposal or engage in negotiations with, or disclose any nonpublic information relating to Aetna or any Subsidiary of Aetna or afford access to the properties, books or records of Aetna or any Subsidiary of Aetna to, any Person that may be considering making, or has made, an Aetna Acquisition Proposal; provided that nothing contained in this Section 6.6 shall prevent Aetna from furnishing non-public information to, or entering into discussions or negotiations with, any Person in connection with an unsolicited bona fide Aetna Acquisition Proposal, with respect to if and only to the extent that (1) the Board of Directors of Aetna determines in good faith after consultation with independent counsel that such action is necessary in order to comply with its fiduciary duties under applicable law and (2) prior to furnishing non-public information to, or entering into discussions or negotiations with, such Person, Aetna receives from such Person an executed confidentiality agreement with terms no less favorable to Aetna than those contained in the Confidentiality Agreement. Aetna will promptly (and in no event later than 24 hours after receipt of the relevant Aetna Acquisition Proposal) notify (which notice shall be provided orally and in writing and shall identify the Person making the relevant Aetna Acquisition Proposal and set forth the material terms thereof) U.S. Healthcare after receipt of any Aetna Acquisition Proposal or any request for nonpublic information relating to Aetna or any Subsidiary of Aetna or for access to any properties, books or records of Aetna or any Subsidiary of Aetna by any Person that may be considering making, or has made, an Aetna Acquisition Proposal and will keep U.S. Healthcare fully informed of the status and details of any such Aetna Acquisition Proposal. Aetna shall give U.S. Healthcare at least one days' advance notice of any information to be supplied to, and at least three days' advance notice of any agreement to be entered into with, any Person making such Aetna Acquisition Proposal. Aetna shall, and shall cause its Subsidiaries and the directors, officers, employees, financial advisors and other agents or representatives of Aetna or any of its Subsidiaries to, cease immediately and cause to be terminated all activities, discussions or negotiations, if any, with any Persons conducted heretofore with respect to any Aetna Acquisition Proposal. For purposes of this Agreement, "Aetna Acquisition Proposal" means any offer or proposal for, or any indication of interest in, (i) a merger or other business combination involving Aetna or any of the Aetna Health Operations or (ii) the acquisition in any manner of any significant equity interest in, or a substantial portion of the assets of, the Aetna Health Operations, in each case other than the transactions contemplated by this Agreement. SECTION 6.7. Amendment of the Stock Purchase _______________________________ Agreement. Aetna agrees that it will not agree to any _________ amendment, modification or waiver of the Stock Purchase Agreement which would have a Material Adverse Effect on Aetna or which would materially impair or adversely affect in a material respect the ability of Aetna to satisfy its obligations under this Agreement. SECTION 6.8. Dividends. It is understood by _________ U.S. Healthcare that the annual dividend to be paid in respect of Parent Common Stock (the "New Annual Dividend") will be an amount below the dividend currently paid in respect of Aetna Common Stock. Initially after the Merger Date, subject to applicable law, the New Annual Dividend will not be less than $0.80 per share of Parent Common Stock. ARTICLE 7 COVENANTS OF AETNA, U.S. HEALTHCARE AND PARENT The parties hereto agree that: SECTION 7.1. Best Efforts. Subject to the terms ____________ and conditions of this Agreement, each party will use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the Mergers and the other transactions contemplated by this Agreement. SECTION 7.2. Cooperation. Without limiting the ___________ generality of Section 7.1, Aetna and U.S. Healthcare shall together, or pursuant to an allocation of responsibility to be agreed between them, coordinate and cooperate (i) with respect to the timing of the Aetna Shareholder Meeting and U.S. Healthcare Shareholder Meeting and shall use their reasonable best efforts to hold such meetings on the same day, (ii) in connection with the preparation of U.S. Healthcare Disclosure Documents, the Aetna Disclosure Documents and the Parent Disclosure Documents, (iii) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the Mergers or the other transactions contemplated by this Agreement, (iv) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith or with the U.S. Healthcare Disclosure Documents, the Aetna Disclosure Documents and the Parent Disclosure Documents, and timely seeking to obtain any such actions, consents, approvals or waivers and (v) in diligently opposing any objections to, appeals from or other similar actions with respect to any such actions, consents, approvals or waivers. Subject to the terms and conditions of this Agreement, Parent, Aetna and U.S. Healthcare will each use its reasonable best efforts to have the Form S-4 declared effective under the 1933 Act as promptly as practicable after the Form S-4 is filed. SECTION 7.3. Public Announcements. Aetna and ____________________ U.S. Healthcare will (i) mutually agree on the text of any press release and (ii) consult with each other before making any other public statement with respect to this Agreement and the transactions contemplated by this Agreement, except, in each such case, as may be required by applicable law or any listing or similar agreement with any national securities exchange or the National Association of Securities Dealers Automated Quotation System. SECTION 7.4. Further Assurances. At and after __________________ the Merger Date, the directors and officers of each of the surviving corporations in the Mergers will be authorized to execute and deliver, in the name and on behalf of (x) U.S. Healthcare or U.S. Healthcare Sub, and (y) Aetna or Aetna Sub, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of (x) U.S. Healthcare or U.S. Healthcare Sub, and (y) Aetna or Aetna Sub, any other actions and things to vest, perfect or confirm of record or otherwise in such surviving corporation any and all right, title and interest in, to and under any of the rights, properties or assets of U.S. Healthcare or Aetna, as applicable, acquired or to be acquired by such surviving corporation as a result of, or in connection with, the Mergers. SECTION 7.5. Rule 145 Affiliates. At least 40 ___________________ days prior to the Merger Date, each of U.S. Healthcare and Aetna (each of which is referred to for purposes of this Section 7.5 as a "Subject Company") shall cause to be delivered to Parent a letter identifying all Persons who are at the time of the Subject Company's Shareholder Meeting described in Section 5.2 or 6.2, as applicable, deemed to be "affiliates" of the Subject Company for purposes of Rule 145 under the 1933 Act (the "1933 Act Affiliates"). Each Subject Company shall use its best efforts to cause each person who is identified as a 1933 Act Affiliate to deliver to Parent at least 30 days prior to the Merger Date an agreement substantially in the form of Exhibit B-1 or B-2, as applicable, to this Agreement. SECTION 7.6. Director and Officer Liability. ______________________________ (a) From and after the Merger Date, Parent shall, and shall cause the U.S. Healthcare Surviving Corporation to, indemnify, defend and hold harmless any person who is on the date hereof, or has been at any time prior to the date hereof, or who becomes prior to the Merger Date, an officer, director, or employee or agent, and the Principal Shareholder (the "Indemnified Party") of U.S. Healthcare or any of its Subsidiaries against all losses, claims, damages, liabilities, costs and expenses (including attorney's fees and expenses), judgments, fines, losses, and amounts paid in settlement in connection with any actual or threatened action, suit, claim, proceeding or investigation (each a "Claim") to the extent that any such Claim is based on, or arises out of, (i) the fact that such person is or was a director, officer, employee or agent or the Principal Shareholder of U.S. Healthcare or any of its Subsidiaries at any time prior to the Merger Date or is or was serving at the request of U.S. Healthcare or any of its Subsidiaries as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at any time prior to the Merger Date, or (ii) this Agreement, the Voting Agreement or any of the transactions contemplated hereby or thereby, or (iii) Claims relating to the facts specified in the consolidated lawsuit captioned J.H. Realty et. al. v. _____________________ U.S. Healthcare (C.A. 95-CV-4176 and 95-CV-7180 (E.D. _______________ Pa.)) in each case to the extent that any such Claim pertains to any matter or fact arising, existing, or occurring prior to or at the Merger Date, regardless of whether such Claim is asserted or claimed prior to, at or after the Merger Date (the matters described in clauses (i), (ii) and (iii) the "Pre-Merger Matters"), to the fullest extent indemnified under U.S. Healthcare's articles of incorporation, bylaws in effect as of the date hereof or indemnification agreements in effect at the date hereof, including provisions relating to advancement of expenses incurred in the defense of any action or suit; provided that, for purposes of the ________ foregoing, the Principal Shareholder, in his capacity as such, shall be deemed to be a beneficiary of such indemnification provisions; and, provided further that ________ _______ such indemnification shall be subject to any limitation imposed from time to time under applicable laws. (b) Parent and the U.S. Healthcare Surviving Corporation agree that all rights to indemnification and all limitations or exculpation of liabilities existing in favor of the Indemnified Party as provided in U.S. Healthcare's articles of incorporation and bylaws as in effect as of the date hereof shall continue in full force and effect with respect to Pre-Merger Matters, without any amendment thereto, for a period of six years from the Merger Date to the extent such rights are consistent with Pennsylvania Law; provided that, in the event any Claim ________ ____ or Claims with respect to any such Pre-Merger Matters are asserted or made within such six year period, all rights to indemnification in respect of any such Claim or Claims shall continue until disposition of any and all such Claims; provided further, that any determination required ________ _______ to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under Pennsylvania Law, U.S. Healthcare's articles of incorporation or bylaws or such agreements, as the case may be, shall be made by independent legal counsel selected by the Indemnified Party and reasonably acceptable to Parent; and provided further, that nothing ________ _______ in this Section 7.6 shall impair any rights or obligations of any present or former directors or officers of U.S. Healthcare. (c) In the event Parent or the U.S. Healthcare Surviving Corporation or any of their successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary to effectuate the purposes of this Section 7.6, proper provision shall be made so that the successors and assigns of Parent and U.S. Healthcare assume the obligations set forth in this Section 7.6 and none of the actions described in clause (i) or (ii) shall be taken until such provision is made. (d) Parent or the U.S. Healthcare Surviving Corporation shall maintain U.S. Healthcare's officers' and directors' liability insurance policy as of the Merger Date ("D&O Insurance") with respect to Pre-Merger Matters for a period of not less than six years after the Merger Date, provided, that Parent or the U.S. Healthcare ________ Surviving Corporation may substitute therefor policies of substantially similar coverage and amounts containing terms no less advantageous to such former directors or officers; provided, further, if the existing D&O ________ _______ Insurance with respect to Pre-Merger Matters expires or is canceled during such period, Parent or the U.S. Healthcare Surviving Corporation will use their best efforts to obtain substantially similar D&O Insurance; and provided further that in satisfying its obligations ________ _______ under this Section, Parent shall not be obligated to pay premiums in excess of 150% of the premium for D&O Insurance paid by U.S. Healthcare as of the date hereof, which amount has previously been disclosed to Aetna. (e) The terms of Section 7.6(a) - 7.6(d) shall also apply, mutatis mutandis, to Aetna, and Parent shall _______ ________ have obligations with respect to Aetna corresponding to those of Parent with respect to U.S. Healthcare set forth in Section 7.6. (f) Notwithstanding anything to the contrary in Section 7.6(a), the obligations of Parent to indemnify the Principal Shareholder set forth in Section 7.6(a) in his capacity as such and not as a director or officer shall (i) take effect as of the date hereof, (ii) prior to the Merger Date, be the obligations of Aetna and (iii) be limited to Claims based on, or arising out of, this Agreement, the Voting Agreement or any of the transactions contemplated hereby or thereby involving the Principal Shareholder in his capacity as such. Expenses that are subject to indemnification under this Section 7.6 shall be advanced by Parent or Aetna, as applicable, and indemnification shall be paid in accordance with the procedures set forth in U.S. Healthcare's bylaws in effect as of the date hereof as the same have been modified pursuant to Section 7.6(b). SECTION 7.7. Subsidiary Agreements. Parent _____________________ shall cause the U.S. Healthcare Surviving Corporation to perform its obligations under the agreements described in Schedule 7.7 (the "Scheduled Contracts") and the employment agreements with the Specified U.S. Healthcare Officers. In addition, Parent shall not permit the U.S. Healthcare Surviving Corporation to terminate the Scheduled Contracts until 2004 absent a breach by any other party thereto. SECTION 7.8. Plans Following the Closing. ___________________________ Through December 31, 1998, Parent will maintain employee plans and benefit arrangements for the benefit of U.S. Healthcare employees that are reasonably comparable in the aggregate to the U.S. Healthcare Employee Plans and U.S. Healthcare Benefit Arrangements. Any changes shall be deemed reasonably comparable in the aggregate unless unanimously rejected by the two Co-Presidents of U.S. Healthcare in their reasonable good faith discretion. SECTION 7.9. Voting of Shares. Aetna and U.S. ________________ Healthcare shall cause Parent to vote, whether by means of written consent or otherwise, all shares of capital stock of U.S. Healthcare Sub and Aetna Sub owned by Parent or any of its Subsidiaries in favor of the approval and adoption of this Agreement. SECTION 7.10. Form S-4. Subject to Sections 5.2 ________ and 6.2, Aetna and U.S. Healthcare shall cause Parent to promptly prepare and file with the SEC a registration statement on Form S-4 with respect to the Parent Common Stock and Parent Preferred Stock issuable in connection with the Mergers (the "Form S-4") and to take any action required to be taken under applicable Blue Sky law in connection with such issuance of Parent Common Stock and Parent Preferred Stock. SECTION 7.11. Certain Corporate Matters with ______________________________ Respect to Parent. (a) Aetna and U.S. Healthcare shall _________________ cause Parent to take all necessary corporate action to amend the certificate of incorporation and bylaws of Parent prior to the Merger Date (x) to be in substantially the form of the certificate of incorporation and bylaws of Aetna in effect on the date hereof (modified (i) as may be appropriate to effect the transactions contemplated by this Agreement, (ii) as may be appropriate to reflect the fact that Parent is not an "insurance corporation", (iii) to change the par value of the Parent Common Stock from $1.00 to $.01, (iv) to change the name of Parent to Aetna, Inc., (v) to increase the authorized capital stock of the Parent and (vi) as may be agreed by U.S. Healthcare and Aetna), and (y) to fix the designation, rights and preferences of the Parent Preferred Stock substantially in the form of Exhibit A hereto. (b) From and after the Merger Date, until successors are duly elected or appointed and qualified in accordance with applicable law, the Board of Directors of Parent shall consist of the Board of Directors of Aetna immediately prior to the Merger Date, and, no later than sixty days following the Merger Date, the Board of Directors of Parent shall be expanded to include Leonard Abramson (the "Principal Shareholder"), and two other Persons designated by U.S. Healthcare (the Principal Shareholder and such Persons, the "U.S. Healthcare Designees"), provided that such other Persons may elect ________ to become members of the Board of Directors of Parent at any time during such sixty day period. The U.S. Healthcare Designees shall be nominated by the Parent Board of Directors for election to the Parent Board of Directors for a period of no less than two consecutive years immediately following the Merger Date. The Parent Board of Directors shall appoint the Principal Shareholder to any committee of the Parent Board of Directors that is constituted for the purpose of identifying and recommending a candidate to become Chief Executive Officer of Parent at such time as the current Chief Executive Officer of Parent retires. (c) From and after the Merger Date, all of the lines of business and operations of U.S. Healthcare (including but not limited to all HMO, POS, indemnity health insurance and other lines of business and operations) and all of the domestic (U.S.) lines of business and operations of Aetna Health Plans (including but not limited to all Health, Specialty Health and Group Insurance lines of business and operations) (hereinafter referred to collectively as "The Consolidated Health Operations") shall report to the two Co-Presidents of U.S. Healthcare as of the date hereof, who will then assume the positions of Co- Presidents of the Consolidated Health Operations (hereinafter referred to as the "Co-Presidents"). The Co-Presidents shall have their principal offices in Blue Bell, PA or such other location as they shall determine, and shall report directly and exclusively to the Chief Executive Officer of Aetna. Reporting directly and exclusively to the Co- Presidents shall be the individuals who serve as the Chief Financial Officer, Chief Medical Officer, Senior Sales Officer and Chief Legal Officer of U.S. Healthcare as of the date hereof, who will each assume similar positions and responsibilities for the Consolidated Health Operations as of the Merger Date except as may otherwise be mutually agreed between the Co-Presidents and any of the specific officers. The Co-Presidents will also select and appoint those other senior officers who will be reporting directly to the Co-Presidents and responsible for other areas of responsibility for the Consolidated Health Operations (including but not limited to Group Insurance, Information Technology, Operations, Sales, National Accounts, Behavioral Health, Dental, Pharmacy, Health Education, and Human Resources), provided, however, that such appointments shall be made only in consultation with and with the approval of the Chief Executive Officer of Aetna. The Co-Presidents will also serve as Co-Chairs of a transition group consisting of U.S. Healthcare and Aetna executives who will plan for and oversee the integration activities of the Consolidated Health Operations to occur on and after the Merger Date. For a period of twenty-four (24) months from the Merger Date, no person employed by U.S. Healthcare as of the date hereof will be discharged with or without cause or have his or her compensation reduced or his or her principal office location changed absent the prior consent and approval of the Co-Presidents. Any change or termination in the use of the U.S. Healthcare name or apple logo with respect to U.S. Healthcare products marketed as of the date hereof shall be as mutually agreed by the Chairman of Aetna and the Co- Presidents. The provisions of this paragraph shall be subject to the terms of any employment agreements entered into by U.S. Healthcare with any of its employees as of the date hereof or with the Specified U.S. Healthcare Officers as contemplated by this Agreement. (d) Each of U.S. Healthcare and Aetna shall cause Parent to take all necessary corporate action for the establishment of the Parent stock option plan contemplated by Sections 1.7 and 1.8 hereof and agrees to vote the shares of capital stock of Parent owned by it in favor of the adoption of such plan as required under the laws of the State of Connecticut. (e) From the date hereof until the Merger Date, Aetna and U.S. Healthcare shall cause Parent (x) not to take any action inconsistent with the provisions of this Agreement and (y) not to conduct business or activity other than in connection with this Agreement. SECTION 7.12. Governmental Authorization. Aetna __________________________ and U.S. Healthcare shall cause Parent to take all actions by or in respect of, or filing with, any governmental body, agency, official or authority required for the execution, delivery and performance by Parent of this Agreement and the consummation by Parent of the transactions contemplated by this Agreement, including (a) compliance with any applicable requirements of the HSR Act; (b) compliance with any applicable requirements of the 1934 Act; (c) compliance with any applicable requirements of the 1933 Act; (d) compliance with any applicable foreign or state securities or Blue Sky laws; (e) approvals or filings required under laws, rules and regulations governing insurance and insurance companies, health maintenance organizations, health care services plans, third party administrators or other managed health care organizations; and (f) the filing with the Secretary of the State and, if required, the Insurance Commissioner of the State of Connecticut of an amendment to the Parent's certificate of incorporation to reflect the matters contemplated by Section 7.11. SECTION 7.13. Disclosure Documents. Aetna and ____________________ U.S. Healthcare shall cause each document required to be filed by Parent with the SEC in connection with the transactions contemplated by this Agreement (the "Parent Disclosure Documents"), including, without limitation, the Form S-4, if any, to be filed with the SEC in connection with the Mergers, and any amendments or supplements thereto, to, when filed, comply as to form in all material respects with the applicable requirements of the 1934 Act. SECTION 7.14. Listing of Stock. Each of Aetna ________________ and U.S. Healthcare shall, subject to the terms of this Agreement, use its reasonable best efforts to make application to the NYSE or such other stock exchanges as shall be agreed for the listing of the Parent Common Stock and Parent Preferred Stock and to list such stock on the NYSE or such other exchanges. ARTICLE 8 CONDITIONS TO THE MERGERS SECTION 8.1. Conditions to the Obligations of ________________________________ Each Party. The obligations of U.S. Healthcare to __________ consummate the U.S. Healthcare Sub Merger and of Aetna to consummate the Aetna Sub Merger are subject to the satisfaction (or waiver by the party for whose benefit such conditions exist) of the following conditions: (a) this Agreement and the transactions contemplated by this Agreement shall have been approved and adopted by the shareholders of U.S. Healthcare in accordance with the laws of the Commonwealth of Pennsylvania; (b) this Agreement and the transactions contemplated by this Agreement shall have been approved and adopted by the shareholders of Aetna in accordance with the laws of the State of Connecticut; (c) any applicable waiting period under the HSR Act relating to the transactions contemplated by this Agreement shall have expired; (d) no provision of any applicable law or regulation and no judgment, injunction, order or decree of a court of competent jurisdiction shall prohibit the consummation of either of the Mergers; (e) the Form S-4 shall have been declared effective under the 1933 Act and no stop order suspending the effectiveness of the Form S-4 shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC; (f) (i) U.S. Healthcare shall have received an opinion of Skadden, Arps, Slate, Meagher & Flom in form and substance reasonably satisfactory to U.S. Healthcare, and (ii) Aetna shall have received an opinion of Davis Polk & Wardwell in form and substance satisfactory to Aetna, in each case on the basis of certain facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing on the Merger Date, to the effect that neither it nor any of its shareholders shall recognize gain or loss for U.S. Federal income tax purposes as a result of the Merger to which it is a party (other than in respect of (x) the Cash Consideration or (y) any cash paid in lieu of fractional shares). In rendering the opinions described in the preceding sentence, such counsel may require and rely upon representations contained in certificates of officers of Parent, U.S. Healthcare, Aetna and their respective Subsidiaries; (g) the shares of Parent Common Stock and Parent Preferred Stock issuable in the Mergers shall have been approved for listing on the NYSE upon official notice of issuance or such other stock exchanges as shall be agreed; (h) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the U.S. Healthcare Sub Merger and the Aetna Sub Merger including, without limitation, any approvals or filings required under federal or state laws, rules and regulations governing insurance and insurance companies, health maintenance organizations, health care services plans, third party administrators or other managed health care organizations, or any actions or filings pursuant to the New Jersey Industrial Site Recovery Act shall have been made or obtained; and (i) the transaction contemplated by the Stock Purchase Agreement dated as of November 28, 1995 between The Travelers Insurance Group Inc. and Aetna (the "Stock Purchase Agreement") relating to the purchase and sale of 100% of the Common Stock of The Aetna Casualty and Surety Company and The Standard Fire Insurance Company shall have been consummated. SECTION 8.2. Conditions to the Obligations of ________________________________ Aetna. The obligations of Aetna to consummate the Aetna _____ Sub Merger are subject to the satisfaction (or waiver by Aetna) of the following further conditions: (a) (i) U.S. Healthcare shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Merger Date, (ii) the representations and warranties of U.S. Healthcare contained in this Agreement shall be true at and as of the Merger Date, as if made at and as of the Merger Date (without giving effect to any materiality or Material Adverse Effect qualifications or materiality exceptions contained therein); provided that the condition set forth in ________ clause (ii) shall be deemed satisfied if any inaccuracies in any such representations and warranties at and as of the Merger Date (without giving effect to any materiality or Material Adverse Effect qualifications or materiality exceptions contained therein) would not, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect on U.S. Healthcare; and Aetna shall have received a certificate signed by an executive officer of U.S. Healthcare to the effect set forth in clauses (i) and (ii) (after giving effect to the proviso therein); and (b) At least twelve of the Persons listed on Schedule 8.2(b) shall have entered into employment agreements with U.S. Healthcare substantially in the form of Schedule 3.11(j)(A) hereto. SECTION 8.3. Conditions to the Obligations of ________________________________ U.S. Healthcare. The obligations of U.S. Healthcare to _______________ consummate the U.S. Healthcare Sub Merger are subject to the satisfaction (or waiver by U.S. Healthcare) of the following further conditions: (a) (i) Aetna shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Merger Date, (ii) the representations and warranties of Aetna contained in this Agreement shall be true at and as of the Merger Date, as if made at and as of the Merger Date (without giving effect to any materiality or Material Adverse Effect qualifications or materiality exceptions contained therein); provided ________ that the condition set forth in clause (ii) shall be deemed satisfied if any inaccuracies in any such representations and warranties at and as of the Merger Date (without giving effect to any materiality or Material Adverse Effect qualifications or materiality exceptions contained therein) would not, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect on Aetna; and U.S. Healthcare shall have received a certificate signed by an executive officer of Aetna to the effect set forth in clauses (i) and (ii) hereof (after giving effect to the proviso therein); and (b) the average of the closing prices per share of the Aetna Common Stock on the NYSE Composite Tape for the 20 consecutive trading days immediately prior to the proposed Merger Date (the "Average Closing Stock Price") is not less than $60.90, provided that ________ this condition shall be deemed to be satisfied notwithstanding the fact that the Average Closing Stock Price is less than $60.90 if Aetna, in its sole discretion, agrees to increase that portion of the Merger Consideration payable in respect of each share of U.S. Healthcare Stock by an amount in cash equal to (A) the difference between (I) a fraction, the numerator of which is $60.90 and the denominator of which is the Average Closing Stock Price and (II) 1, and multiplying such difference by (B) the product of (y) 0.2995 and (z) the Average Closing Stock Price. ARTICLE 9 TERMINATION SECTION 9.1. Termination. This Agreement may be ___________ terminated and the Mergers may be abandoned at any time prior to the Merger Date (notwithstanding any approval of this Agreement by the shareholders of U.S. Healthcare or Aetna): (a) by mutual written consent of U.S. Healthcare and Aetna; (b) by either U.S. Healthcare or Aetna, if the Merger has not been consummated by the date twelve months following the date of this Agreement; (c) by either U.S. Healthcare or Aetna, if there shall be any law or regulation that makes consummation of either of the Mergers illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Aetna or U.S. Healthcare from consummating their respective Mergers is entered and such judgment, injunction, order or decree shall become final and nonappealable; (d) by Aetna, in the event of any breach by the Principal Shareholder of any obligations under the Voting Agreement dated as of the date hereof (the "Voting Agreement") among the Principal Shareholder, Aetna Life Insurance and Annuity Company and Aetna Life Insurance Company; (e) (i) by U.S. Healthcare, if the approvals of the shareholders of Aetna contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the required vote at a duly held meeting of shareholders or any adjournment thereof or (ii) by Aetna, if the approvals of the shareholders of U.S. Healthcare contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the required vote at a duly held meeting of shareholders or any adjournment thereof; (f) by Aetna, if, (i) the Board of Directors of U.S. Healthcare determines not to call or hold the U.S. Healthcare Shareholder Meeting or (ii) prior to the U.S. Healthcare Shareholder Meeting, the Board of Directors of U.S. Healthcare shall have withdrawn, modified or changed in a manner adverse to Aetna its approval or recommendation of this Agreement or the U.S. Healthcare Sub Merger; (g) by U.S. Healthcare, if, (i) the Board of Directors of Aetna determines not to call or hold the Aetna Shareholder Meeting or (ii) prior to the Aetna Shareholder Meeting, the Board of Directors of Aetna shall have withdrawn, modified or changed in a manner adverse to U.S. Healthcare its approval or recommendation of this Agreement or the Aetna Sub Merger; (h) by Aetna, upon a breach of any representation, warranty, covenant or agreement of U.S. Healthcare, or if any representation or warranty of U.S. Healthcare shall become untrue, in either case such that the conditions set forth in Section 8.2(a) would be incapable of being satisfied by the first anniversary of the date hereof (or as otherwise extended); (i) by U.S. Healthcare, upon a breach of any representation, warranty, covenant or agreement of Aetna, or if any representation or warranty of Aetna shall become untrue, in either case such that the conditions set forth in Section 8.3(a) would be incapable of being satisfied by the first anniversary of the date hereof (or as otherwise extended); (j) by U.S. Healthcare, upon payment to Aetna of the amounts referred to in Section 10.4(b), if prior to the U.S. Healthcare Shareholder Meeting, the Board of Directors of U.S. Healthcare shall have withdrawn or modified in a manner adverse to Aetna its approval or recommendation of this Agreement or the U.S. Healthcare Sub Merger in order to permit U.S. Healthcare to execute a definitive agreement in connection with an Acquisition Proposal with respect to U.S. Healthcare which the Board of Directors of U.S. Healthcare determines in good faith (based on the presentation of an investment banking firm of national reputation) to be more favorable to U.S. Healthcare's shareholders than the U.S. Healthcare Sub Merger; and (k) by U.S. Healthcare, if the Stock Purchase Agreement is terminated in accordance with its terms. The party desiring to terminate this Agreement pursuant to this Section 9.1 shall give written notice of such termination to the other party in accordance with Section 10.1. SECTION 9.2. Effect of Termination. If this _____________________ Agreement is terminated pursuant to Section 9.1, this Agreement shall become void and of no effect with no liability on the part of any party hereto, except that (a) the agreements contained in this Section 9.2 and in Section 10.4 shall survive the termination hereof and (b) no such termination shall relieve any party of any liability or damages resulting from any breach by that party of this Agreement. ARTICLE 10 MISCELLANEOUS SECTION 10.1. Notices. Except as provided in _______ Section 5.4, all notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to Aetna, to: Aetna Life and Casualty Company 151 Farmington Avenue Hartford, CT 06156-7505 Fax: 860-549-6755 Attention: Richard L. Huber Vice Chairman with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Fax: (212) 450-4800 Attention: Lewis B. Kaden if to U.S. Healthcare, to: U.S. Healthcare, Inc. 780 Jolly Road P.O. Box 1109 Blue Bell, PA 19422 Fax: 215-283-6401 Attention: David Simon with a copy to: Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, New York 10022 Fax: (212) 735-2000 Attention: Stephen M. Banker if to Parent, to: each of the addresses set forth above or such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto. Each such notice, request or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and the appropriate telecopy confirmation is received or (b) if given by any other means, when delivered at the address specified in this Section. SECTION 10.2. Entire Agreement; Survival of _____________________________ Representations and Warranties. (a) This Agreement ______________________________ (including the Exhibits hereto), the other agreements referred to in this Agreement and the Confidentiality Agreement constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to such subject matter. None of this Agreement, the Confidentiality Agreement or any other agreement contemplated hereby or thereby (or any provision hereof or thereof) is intended to confer on any Person other than the parties hereto or thereto any rights or remedies (except that Sections 7.6 and 7.7 are intended to confer rights and remedies on the Persons specified therein, Sections 7.8 and 7.11(c) are intended to confer rights and remedies on the Co-Presidents and Section 7.11(b) is intended to confer rights and remedies on the Principal Shareholder). (b) The representations and warranties contained herein shall not survive the Merger Date. SECTION 10.3. Amendments; No Waivers. (a) Any ______________________ provision of this Agreement may be amended or waived prior to the Merger Date if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by U.S. Healthcare, Aetna and Parent or, in the case of a waiver, by the party against whom the waiver is to be effective; provided that after the ________ adoption of this Agreement by the shareholders of (i) U.S. Healthcare, no such amendment or waiver shall, without the further approval of such shareholders, alter or change (A) the amount or kind of consideration to be received in exchange for any shares of capital stock of U.S. Healthcare, or (B) any of the terms or conditions of this Agreement if such alteration or change would adversely affect the holders of any shares of capital stock of U.S. Healthcare and (ii) Aetna, no such amendment or waiver shall, without the further approval of such shareholders, alter or change (A) the amount or kind of consideration to be received in exchange for any shares of capital stock of Aetna or (B) any of the terms or conditions of this Agreement if such alteration or change would adversely affect the holders of any shares of capital stock of Aetna. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.4. Expenses. (a) Except as ________ otherwise specified in this Section 10.4 or agreed in writing by the parties, all costs and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such cost or expense. (b) U.S. Healthcare agrees that if this Agreement shall be terminated pursuant to Section 9.1(e)(ii), (f), or (j), it will pay Aetna an amount equal to $100,000,000 plus all out-of-pocket expenses, ____ not to exceed $25,000,000, incurred by Aetna in connection with this Agreement, the Mergers and all related transactions by wire transfer of immediately available funds promptly, but in no event later than two business days, after such termination; provided that no ________ payment will be required pursuant to this Section 10.4(b) if this Agreement is terminated pursuant to Section 9.1(e)(ii) unless, after the date hereof, U.S. Healthcare shall have received, or there shall have been commenced, an Acquisition Proposal with respect to U.S. Healthcare. (c) U.S. Healthcare agrees that if this Agreement shall be terminated pursuant to Section 9.1(e)(ii) and no payment is required by it pursuant to Section 10.4(b), it will reimburse Aetna for all out-of- pocket expenses (not to exceed $25,000,000) incurred by Aetna in connection with this Agreement, the Merger and all related transactions. Such payment shall be made by wire transfer of immediately available funds promptly, but in no event later than two business days, after such termination. (d) Aetna agrees that if this Agreement shall be terminated (i) pursuant to Section 9.1(e)(i), (g) or (k), or (ii) pursuant to Section 9.1(b) and (A) the condition set forth in Section 8.1(i) has not been satisfied or waived by Aetna and (B) all other conditions set forth in Section 8.1 and 8.2 have theretofore been, or are then capable of being satisfied, it will pay U.S. Healthcare an amount equal to $100,000,000 plus all out-of-pocket ____ expenses, not to exceed $25,000,000, incurred by U.S. Healthcare in connection with this Agreement, the Mergers and all related transactions by wire transfer of immediately available funds promptly, but in no event later than two business days, after such termination; provided that no payment will be required pursuant to ________ this Section 10.4(d) if this Agreement is terminated pursuant to Section 9.1(e)(i) unless, after the date hereof, Aetna shall have received, or there shall have been commenced, an Aetna Acquisition Proposal. (e) Aetna agrees that if this Agreement shall be terminated pursuant to Section 9.1(e)(i) and no payment is required by it pursuant to Section 10.4(d), it will reimburse U.S. Healthcare for all out-of-pocket expenses (not to exceed $25,000,000) incurred by U.S. Healthcare in connection with this Agreement, the Mergers and all related transactions. Such payment shall be made by wire transfer of immediately available funds promptly, but in no event later than two business days, after receipt by Aetna of a written notice given by U.S. Healthcare setting forth the amount of such expenses. SECTION 10.5. Successors and Assigns. The ______________________ provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party ________ may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto; provided further ________ _______ that Aetna may assign its rights, but not its obligations, under this Agreement to a wholly-owned subsidiary of Aetna. SECTION 10.6. Governing Law. This Agreement _____________ shall be construed in accordance with and governed by the law of the State of New York (without regard to principles of conflict of laws). SECTION 10.7. Jurisdiction. Any suit, action or ____________ proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated by this Agreement may be brought against any of the parties in the United States District Court for the Southern District of New York or any state court sitting in the City of New York, Borough of Manhattan, and each of the parties hereto hereby consents to the exclusive jurisdiction of such courts (and of the appropriate appellate courts) in any such suit, action or proceeding and waives any objection to venue laid therein. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the State of New York. Without limiting the generality of the foregoing, each party hereto agrees that service of process upon such party at the address referred to in Section 10.1, together with written notice of such service to such party, shall be deemed effective service of process upon such party. SECTION 10.8. Counterparts; Effectiveness. This ___________________________ Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. AETNA LIFE AND CASUALTY COMPANY By /s/ Ronald Compton _____________________ Name: Ronald Compton Title: Chairman and Chief Executive Officer U.S. HEALTHCARE, INC. By /s/ Joseph T. Sebastianelli ______________________________ Name: Joseph T. Sebastianelli Title: Co-President BUTTERFLY, INC. By /s/ Richard Huber ____________________ Name: Richard Huber Title: Vice President ANTELOPE SUB, INC. By /s/ Richard Huber ____________________ Name: Richard Huber Title: Vice President NEW MERGER CORPORATION By /s/ James Dickerson ______________________ Name: James Dickerson Title: President EXHIBIT A FORM OF Designations, Rights and Preferences of 6.25% Class C Non-Voting Preferred Stock The terms, limitations and relating rights and preferences of shares of the Corporation's Class C Non- Voting Preferred Stock without par value to be designated as 6.25% PACS, Class C Non-Voting Preferred Stock are hereby fixed as follows: SECTION 1. DESIGNATION AND AMOUNT. The designation of the series of Class C Non- Voting Preferred Stock created by this Article ___ shall be "6.25% PACS, Class C Non-Voting Preferred Stock" (the "PACS"). The authorized number of shares constituting the PACS shall be ________ shares. SECTION 2. DIVIDENDS. (a) The holders of outstanding shares of PACS shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of funds legally available therefor, cumulative preferential dividends from [closing date], 1996, at the rate per share of $4.7578 per annum,* in cash payable quarterly in equal amounts (other than with respect to the initial dividend period) on _______________, ________________, ________________, and ____________ of each year (each such date being hereinafter referred to as a "Dividend Payment Date"), or, if any Dividend Payment Date is not a business day, then the Dividend Payment Date shall be the next succeeding business day; provided, however, that ________ _______ with respect to any dividend period during which a redemption occurs, the Corporation may, at its option, declare accrued dividends to, and pay such dividends on, the redemption date, in which case such dividends would be payable on the redemption date in cash to the holders of the shares of PACS as of the record date for such dividend payment and such accrued dividends would not be included in the calculation of the related Call Price (as hereinafter defined). Each dividend on the shares of PACS shall be payable to holders of record as they appear on the stock register of the Corporation on such record date, not less than 10 nor more than 70 days preceding the payment dates thereof, as shall be fixed by the Board of Directors of the Corporation. The first dividend payment shall be for the period from [closing date], 1996 to ________, 1996 and the first dividend will be payable on _________, 1996. Dividends (or amounts equal to accrued and unpaid dividends) payable on shares of PACS for any period less than a full quarterly dividend period will be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in any period less than one month. *If the annual dividend for the Aetna Common Stock at the Merger Date is set at a level above $0.83 per share, the annual PACS dividend will be determined as follows: $4.7578 + [(annual dividend per share on Aetna Common Stock - $0.83) x 0.8197] Dividends on the shares of PACS will accrue on a daily basis beginning on the date immediately following a Dividend Payment Date (except that, with respect to the initial Dividend Payment Date, dividends on the shares of PACS will accrue beginning on [closing date], 1996) whether or not there are funds legally available for the payment of such dividends and whether or not such dividends are declared. Accumulated unpaid dividends shall not bear interest. Dividends will cease to accrue in respect of shares of PACS on the Mandatory Conversion Date (as hereinafter defined) or on the date of their earlier conversion or redemption. (b) So long as any shares of PACS are outstanding, no dividends or other distributions (other than dividends payable in Junior Securities (as defined below) or warrants, rights or options exercisable for or convertible into Junior Securities, together with cash in lieu of fractional shares of Junior Securities or fractional interests in any such warrants, rights or options), and no redemption, purchase or other acquisition for value (other than redemptions, purchases or acquisitions payable in Junior Securities or warrants, rights or options exercisable for or convertible into Junior Securities, together with cash in lieu of fractional shares of Junior Securities or fractional interests in any such warrants, rights or options), shall be paid or made, as the case may be, with respect to, nor may any funds be set aside or made available for any sinking fund for the purchase or redemption of, (a) the Common Capital Stock ____ par value of the Corporation ("Common Stock") or any other class or series of the Corporation's capital stock ranking junior to the PACS with respect to dividends or liquidation preferences (such capital stock, including the Common Stock, collectively "Junior Securities") or (b) Parity Preferred Stock (as defined below) until cumulative dividends on the PACS and Parity Preferred Stock in the full amounts owing for all dividend periods ending, and all amounts payable upon redemption or conversion of PACS and Parity Preferred Stock, on or prior to the date on which the proposed dividend or distribution is paid, or the proposed redemption, purchase or other acquisition is effected, have been, in the case of dividends, declared and, in all cases, paid or set apart for payment. (c) If any dividends are not paid or set apart in full, as aforesaid, with respect to shares of PACS and any Parity Preferred Stock, all dividends declared with respect to shares of PACS and any Parity Preferred Stock shall be declared pro rata based on the number of shares so that the amount of dividends declared per share on shares of PACS and such Parity Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on shares of PACS and such Parity Preferred Stock bear to each other. Holders of the shares of PACS shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends as provided in Section (2)(a). (d) Subject to the foregoing provisions of this Section (2), the Board of Directors may declare and the Corporation may pay or set apart for payment dividends and other distributions on any of the Junior Securities and Parity Preferred Stock and may redeem, purchase or otherwise acquire any Junior Securities and Parity Preferred Stock, in either case from time to time, and the holders of the shares of PACS shall not be entitled to share therein. (e) Any dividend payment made on shares of PACS shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of PACS. (f) All dividends paid with respect to shares of PACS pursuant to this Section (2) shall be paid pro rata to the holders entitled thereto. SECTION 3. REDEMPTION AND CONVERSION. (a) Mandatory Conversion. On [anniversary date of closing date], 2000 (the "Mandatory Conversion Date"), subject to (x) the right of the Corporation to redeem the shares of PACS on or after [anniversary date of closing date], 1999 (the "Initial Redemption Date") and prior to the Mandatory Conversion Date, as described below, and (y) the conversion of the shares of PACS at the option of the holder at any time prior to the Mandatory Conversion Date, as described below, each outstanding share of PACS shall convert automatically (the "Mandatory Conversion") into (i) shares of Common Stock at the Common Equivalent Rate (as hereinafter defined) in effect on the Mandatory Conversion Date; and (ii) the right to receive an amount in cash equal to all accrued and unpaid dividends on such share of PACS (the "Accrued Dividend Amount") (other than previously declared dividends payable to a different holder of record on a prior date) to the Mandatory Conversion Date, whether or not declared, out of funds legally available for the payment of dividends. The Common Equivalent Rate is initially one share of Common Stock for each share of PACS and is subject to adjustment as set forth below (the "Common Equivalent Rate"). (b) Redemption by the Corporation. (i) Right to Redeem. Shares of PACS are not _______________ redeemable by the Corporation prior to the Initial Redemption Date. At any time and from time to time on or after the Initial Redemption Date and prior to the Mandatory Conversion Date, the Corporation shall have the right to redeem, in whole or in part, the outstanding shares of PACS. Upon any such redemption, the Corporation shall deliver to the holders of shares of PACS in exchange for each share so redeemed, the greater of (A) a number of shares of Common Stock equal to the Call Price (as hereinafter defined) in effect on the redemption date, divided by the Current Market Price of the Common Stock determined as of the second trading day immediately preceding the Notice Date (as hereinafter defined) or (B) .8197 of a share of Common Stock (each a "Redemption Rate")(subject to adjustment as set forth below). The public announcement of any call for redemption shall be made prior to, or at the time of, the mailing of the notice of such call to holders of shares of PACS as described below. If fewer than all the outstanding shares of PACS are to be redeemed, shares of PACS to be redeemed shall be selected by the Corporation from outstanding shares of PACS not previously redeemed by lot or pro rata (as nearly as may be practicable). As used in this subparagraph (b), the term "Notice Date" with respect to any notice given by the Corporation in connection with a redemption of shares of PACS means the date on which first occurs either the public announcement of such redemption or the commencement of mailing of such notice to the holders of shares of PACS. (ii) Notice of Redemption. The Corporation ____________________ shall provide notice of any redemption of the shares of PACS pursuant to this subparagraph (b) to holders of record of PACS to be called for redemption not less than 15 days nor more than 60 days prior to the date fixed for such redemption. The earliest Notice Date for any call for redemption of shares of PACS is not earlier than [60 days prior to anniversary date of closing], 1999. Such notice shall be provided by mailing notice of such redemption, first class postage prepaid, to each holder of record of shares of PACS to be redeemed, at such holder's address as it appears on the stock register of the Corporation; provided that neither failure ________ to give such notice nor any defect therein shall affect the validity of the proceeding for the redemption of any shares of PACS to be redeemed except as to the holders to whom the Corporation has failed to give said notice or whose notice was defective. Each such notice shall state, as appropriate, the following and may contain such other information as the Corporation deems advisable: (A) the redemption date; (B) that all outstanding shares of PACS are to redeemed or, in the case of a call for redemption of fewer than all outstanding shares of PACS, the number of such shares held by such holder to be redeemed; (C) the number of shares of Common Stock deliverable upon redemption of each share of PACS to be redeemed and, if applicable, the Redemption Rate and the Current Market Price used to calculate such number of shares of Common Stock; (D) the place or places where certificates for such shares are to be surrendered for redemption; and (E) that dividends on the shares of PACS to be redeemed shall cease to accrue on such redemption date (except as otherwise provided herein). (c) Procedures Upon Conversion and Redemption. (i) Deposit of Shares and Funds. The ___________________________ Corporation's obligation to deliver shares of Common Stock and provide funds upon redemption in accordance with Sections 3(a) and 3(b) shall be deemed fulfilled if, on or before the Mandatory Conversion Date or a redemption date, as applicable, the Corporation shall irrevocably deposit, with a bank or trust company, or an affiliate of a bank or trust company, having an office or agency in New York City, or shall set aside or make other reasonable provision for the issuance of such number of shares of Common Stock as are required to be delivered by the Corporation pursuant to Section 3(a) or 3(b), as the case may be, upon the occurrence of the Mandatory Conversion or the related redemption (and for the payment of cash in lieu of the issuance of fractional share amounts and accrued and unpaid dividends payable in cash on the shares to be redeemed as and to the extent provided by Section 3(a) or 3(b), as the case may be). Any interest accrued on such funds shall be paid to the Corporation from time to time. Subject to applicable laws, any shares of Common Stock or funds so deposited and unclaimed at the end of two years from such redemption date shall be repaid and released to the Corporation, after which time the holder or holders of such shares of PACS so converted or called for redemption shall look only to the Corporation for delivery of such shares of Common Stock or funds. (ii) Surrender of Certificates; Status. Each _________________________________ holder of shares of PACS to be converted or redeemed pursuant to Section 3(a) or 3(b), as the case may be, shall surrender the certificates evidencing such shares (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state) to the Corporation at the place designated by the Corporation and shall thereupon be entitled to receive certificates evidencing shares of Common Stock and to receive any funds payable pursuant to Sections 3(a) or 3(b), as the case may be, following such surrender and following the date of such conversion or redemption. In case fewer than all the shares represented by any such surrendered certificate are called for redemption, a new certificate shall be issued at the expense of the Corporation representing the unredeemed shares. If, on the Mandatory Conversion Date, or, in the event of a redemption, on the date fixed for redemption, as the case may be, shares of Common Stock and funds necessary for such Mandatory Conversion or redemption, as applicable, shall have been irrevocably either set aside by the Corporation separate and apart from its other funds or assets in trust for the account of the holders of the shares to be converted or to be redeemed (and so as to be and continue to be available therefor) or deposited with a bank or trust company or an affiliate thereof or the Corporation shall have made other reasonable provision therefor, then, notwithstanding that the certificates evidencing any shares of PACS so converted or called for redemption shall not have been surrendered, the shares of PACS represented thereby so converted or called for redemption shall be deemed no longer outstanding, dividends with respect to the shares so converted or called for redemption shall cease to accrue on the Mandatory Conversion Date or the date fixed for redemption, as applicable, (except that holders of shares of PACS at the close of business on a record date for any payment of dividends shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the redemption of such shares following such record date and prior to such Dividend Payment Date) and all rights with respect to the shares so converted or called for redemption shall forthwith after such date cease and terminate, except for the rights of the holders to receive the shares of Common Stock and funds, if any, payable pursuant to Sections 3(a) or 3(b) without interest upon surrender of their certificates therefor (unless the Corporation defaults on the delivery of such shares or the payment of such funds). Holders of shares of PACS that are converted or redeemed shall not be entitled to receive dividends declared and paid on such shares of Common Stock, and such shares of Common Stock shall not be entitled to vote, until such shares of Common Stock are issued upon the surrender of the certificates representing such shares of PACS and upon such surrender such holders shall be entitled to receive such dividends declared and paid on such shares of Common Stock subsequent to such redemption date or Mandatory Conversion Date with interest thereon. Amounts payable in cash in respect of shares of PACS or shares of Common Stock shall not bear interest. (d) Conversion at Option of Holder. Shares of PACS are convertible, in whole or in part, at the option of the holder thereof, at any time prior to the Mandatory Conversion Date, unless previously redeemed, into shares of Common Stock at a rate of .8197 of a share of Common Stock for each share of PACS (the "Optional Conversion Rate"), subject to adjustment as set forth below. The right to convert shares of PACS called for redemption shall terminate immediately prior to the close of business on the redemption date with respect to such shares. Conversion of shares of PACS at the option of the holder may be effected by delivering certificates evidencing such shares, together with written notice of conversion and a proper assignment of such certificates to the Corporation or in blank, to the office or agency to be maintained by the Corporation for that purpose (and, if applicable, cash payment of an amount equal to the dividend payable on such shares), and otherwise in accordance with conversion procedures established by the Corporation. Each optional conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the foregoing requirements shall have been satisfied. The conversion shall be at the Optional Conversion Rate in effect at such time and on such date. Holders of shares of PACS at the close of business on a record date for any payment of declared dividends shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the conversion of such shares following such record date and prior to the corresponding Dividend Payment Date. However, shares of PACS surrendered for conversion after the close of business on a record date for any payment of dividends and before the opening of business on the next succeeding Dividend Payment Date must be accompanied by payment to the Corporation in cash of an amount equal to the dividend thereon which is to be paid on such Dividend Payment Date (unless such shares have been called for redemption on a redemption date between such record date and such Dividend Payment Date). A holder of shares of PACS called for redemption on [anniversary date of closing date], 1999 or any other Dividend Payment Date thereafter will receive the dividend on such shares payable on that date without paying an amount equal to such dividend to the Corporation upon conversion. Except as provided above, upon any optional conversion of shares of PACS, the Corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares of PACS or for previously declared dividends or distributions on the shares of Common Stock issued upon such conversion. (e) Adjustments of the Common Equivalent Rate, Optional Conversion Rate and Redemption Rate. The Common Equivalent Rate, the Optional Conversion Rate and the Redemption Rates (collectively, the "Rates") shall be each subject to adjustment from time to time as provided below in this section (e). (i) If the Corporation shall, after [closing date], 1996: (A) pay a stock dividend or make a distribution with respect to its Common Stock in shares of such Common Stock, (B) subdivide or split its outstanding Common Stock into a greater number of shares, (C) combine its outstanding shares of Common Stock into a smaller number of shares, or (D) issue by reclassification of its shares of Common Stock any shares of Common Stock of the Corporation; then, in any such event, the Rates in effect immediately prior to such event shall each be adjusted so that the holder of any shares of PACS shall thereafter be entitled to receive, upon Mandatory Conversion or upon conversion at the option of the holder or redemption, the number of shares of Common Stock of the Corporation which such holder would have owned or been entitled to receive immediately following any event described above had such shares of PACS been converted immediately prior to such event or any record date with respect thereto. Such adjustment shall become effective at the opening of business on the business day next following the record date for determination of stockholders entitled to receive such dividend or distribution, in the case of a dividend or distribution, and shall become effective immediately after the effective date, in the case of a subdivision, split, combination or reclassification. Such adjustments shall be made successively. (ii) If the Corporation shall, after [closing date], 1996, issue rights or warrants to all holders of its Common Stock (other than Rights issued pursuant to any Rights Plan of the Corporation) entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price at the time of such issue, then, in any such event unless such rights or warrants are issued to holders of shares of PACS on a pro rata basis with the shares of Common Stock based on the Common Equivalent Rate on the date immediately preceding such issuance, each Rate shall be adjusted by multiplying such Rate, in effect immediately prior to the date of issuance of such rights or warrants, by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of additional shares of Common Stock offered for subscription or purchase pursuant to such rights or warrants, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered for subscription or purchase pursuant to such rights or warrants would purchase at such Current Market Price (determined by multiplying such total number of shares by the exercise price of such rights or warrants and dividing the product so obtained by such Current Market Price). Such adjustment shall become effective at the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, each Rate shall be readjusted to the applicable Rate which would then be in effect had the adjustments been made upon the issuance of such rights or warrants upon the basis of delivery of only the number of shares of Common Stock actually delivered. Such adjustment shall be made successively. (iii) If the Corporation shall after [closing date], 1996, pay a dividend or make a distribution to all holders of its Common Stock of evidences of its indebtedness, cash or other assets (including capital stock of the Corporation or any subsidiary of the Corporation, but excluding (x) the Corporation's regular quarterly cash dividend and (y) dividends referred to in subparagraph (i) above) or shall issue to all holders of its Common Stock rights or warrants to subscribe for or purchase any of its securities (other than Rights issued pursuant to any Rights Plan of the Corporation and those referred to in subparagraph (ii) above), then unless such dividend is paid or distribution is made to each holder of shares of PACS on a pro rata basis with the shares of Common Stock based on the Common Equivalent Rate on the date immediately preceding such payment or distribution, in any such event, each Rate shall be adjusted by multiplying such Rate in effect on the record date mentioned below, by a fraction of which the numerator shall be the Current Market Price per share of the Common Stock on the record date for the determination of stockholders entitled to receive such dividend or distribution, and of which the denominator shall be such Current Market Price per share of Common Stock less the fair market value (as determined in good faith by the Board of Directors, whose good faith determination shall be conclusive, and described in a resolution adopted with respect thereto) as of such record date of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants applicable to one share of Common Stock. Such adjustment shall become effective on the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such dividend or distribution. Such adjustment shall be made successively. (iv) Any shares of Common Stock issuable in payment of a dividend or other distribution shall be deemed to have been issued immediately prior to the close of business on the record date for such dividend or other distribution for purposes of calculating the number of outstanding shares of Common Stock under subsection (ii) above. (v) The Corporation shall also be entitled to make upward adjustments in the Common Equivalent Rate, the Optional Conversion Rate, the Redemption Rate and the Call Price, as it in its sole discretion shall determine to be advisable, in order that any stock dividends, subdivisions of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock (or any transaction which could be treated as any of the foregoing transactions pursuant to Section 305 of the Internal Revenue Code of 1986, as amended) made by the Corporation to its stockholders after [closing date], 1996 shall not be taxable. (vi) In any case in which subsection 4(e) shall require that an adjustment as a result of any event becomes effective at the opening of business on the business day next following a record date and the date fixed for conversion pursuant to subsection 3(a) or redemption pursuant to subsection 3(b) or 3(d) occurs after such record date, but before the occurrence of such event, the Corporation may, in its sole discretion, elect to defer the following until after the occurrence of such event: (A) issuing to the holder of any converted or redeemed shares of PACS the additional shares of Common Stock issuable upon such conversion or redemption over the shares of Common Stock issuable before giving effect to such adjustments and (B) paying to such holder any amount in cash in lieu of a fractional share of Common Stock pursuant to subsection 3(j). (vii) All adjustments to the Rates shall be calculated to the nearest 1/100th of a share of Common Stock. No adjustment in the Rates shall be required unless such adjustment would require an increase or decrease of at least one percent therein; provided, however, that any adjustment which by reason of this subsection (vii) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. (f) Adjustment for Consolidation or Merger. In case of any consolidation or merger to which the Corporation is a party (other than a merger or consolidation in which the Corporation is the surviving or continuing corporation and in which the Common Stock outstanding immediately prior to the merger or consolidation remains unchanged), or in the case of any sale or transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety, proper provisions shall be made so that each share of PACS shall, after consummation of such transaction, be subject to (i) conversion at the option of the holder into the kind and amount of securities, cash or other property receivable upon consummation of such transaction by a holder of the number of shares of Common Stock into which such share of PACS might have been converted immediately prior to consummation of such transaction, (ii) conversion on the Mandatory Conversion Date into the kind and amount of securities, cash or other property receivable upon consummation of such transaction by a holder of the number of shares of Common Stock into which such shares of PACS would have converted if the conversion on the Mandatory Conversion Date had occurred immediately prior to the date of consummation of such transaction, plus the right to receive cash in an amount equal to all accrued and unpaid dividends on such shares of PACS (other than previously declared dividends payable to a holder of record as of a prior date), and (iii) redemption on any redemption date in exchange for the kind and amount of securities, cash or other property receivable upon consummation of such transaction by a holder of the number of shares of Common Stock that would have been issuable at the Redemption Rate in effect on such redemption date upon a redemption of such share immediately prior to consummation of such transaction, assuming in each case that such holder of Common Stock failed to exercise rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon consummation of such transaction (provided that if the kind or amount of securities, cash or other property receivable upon consummation of such transaction is not the same for each non-electing share, then the kind and amount of securities, cash or other property receivable upon consummation of such transaction for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). The kind and amount of securities into or for which the shares of PACS shall be convertible or redeemable after consummation of such transaction shall be subject to adjustment as described in Section 3(e) following the date of consummation of such transaction. The Corporation may not become a party to any such transaction unless (A) the terms thereof are consistent with the foregoing or (B) the holders of shares of PACS shall have approved other terms in accordance with the provisions of Section 5(c). For purposes of the immediately preceding paragraph, any sale or transfer to another corporation of property of the Corporation which did not account for at least 50% of the consolidated net income of the Corporation for its most recent fiscal year ending prior to the consummation of such transaction shall not in any event be deemed to be a sale or transfer of the property of the Corporation as an entirety or substantially as an entirety. (g) Notices of Adjustments. (i) Whenever the Rates are adjusted as herein provided, the Corporation shall: (A) forthwith compute the adjusted Rates in accordance herewith and prepare a certificate signed by an officer of the Corporation setting forth the adjusted Rates, the method of calculation thereof in reasonable detail and the facts requiring such adjustment and upon which such adjustment is based, which certificate shall be conclusive, final and binding evidence of the correctness of the adjustment, and file such certificate forthwith with the transfer agent for the shares of PACS and the Common Stock; and (B) make a prompt public announcement and mail a notice to the holders of the outstanding shares of PACS stating that the Rates have been adjusted, the facts requiring such adjustment and upon which such adjustment is based and setting forth the adjusted Rates, such notice to be mailed at or prior to the time the Corporation mails an interim statement to its stockholders covering the fiscal quarter during which the facts requiring such adjustment occurred, but in any event within 45 days of the end of such fiscal quarter. (ii) In case, at any time while any of the shares of PACS are outstanding, (A) the Corporation shall declare a dividend (or any other distribution) on its Common Stock, excluding any cash dividends; or (B) the Corporation shall authorize the issuance to all holders of its Common Stock of rights or warrants to subscribe for or purchase shares of its Common Stock or of any other subscription rights or warrants; or (C) the Corporation shall authorize any reclassification, subdivision or split of its Common Stock (other than a subdivision or combination thereof) or any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required (except for a merger of the Corporation into one of its subsidiaries solely for the purpose of changing the corporate domicile of the Corporation to another state of the United States and in connection with which there is no substantive change in the rights or privileges of any securities of the Corporation other than changes resulting from differences in the corporate statutes of the then existing and the new state of domicile), or the sale or transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety; or (D) the Corporation shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed at each office or agency maintained for the purpose of conversion of the shares of PACS, and shall cause to be mailed to the holders of shares of PACS at their last addresses as they shall appear on the stock register, at least 10 days before the date hereinafter specified (or the earlier of the dates hereinafter specified, in the event that more than one date is specified), a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (B) the date on which any such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property (including cash), if any, deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. The failure to give or receive the notice required by this subsection (g)(ii) or any defect therein shall not affect the legality or validity of such dividend, distribution, right or warrant or other action. (h) Effect of Conversions and Redemptions. The person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon any conversion or redemption shall be deemed to have become on the date of any such conversion or redemption the holder or holders of record of the shares represented thereby; provided, however, that any such surrender on any date when the stock transfer books of the Corporation shall be closed shall constitute the person or persons in whose name or names the certificate or certificates for such shares are to be issued as the record holder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open. (i) No Fractional Shares. No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon the redemption or conversion of any shares of PACS. In lieu of any fractional share otherwise issuable in respect of the aggregate number of shares of PACS of any holder which are redeemed or converted on any redemption date or upon Mandatory Conversion or any optional conversion, such holder shall be entitled to receive an amount in cash (computed to the nearest cent) equal to the value of such fractional shares based on the (i) Current Market Price as of the second Trading Date immediately preceding the Notice Date, in the case of redemption, or (ii) Closing Price of the Common Stock determined (A) as of the fifth Trading Date immediately preceding the Mandatory Conversion Date, in the case of Mandatory Conversion, or (B) as of the second Trading Date immediately preceding the effective date of conversion, in the case of an optional conversion by a holder. If more than one share shall be surrendered for conversion or redemption at one time by or for the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of PACS so surrendered or redeemed. (j) Reissuance. Shares of PACS that have been issued and reacquired in any manner, including shares purchased, exchanged, redeemed or converted, shall not be reissued as part of PACS and shall (upon compliance with any applicable provisions of the laws of the State of Connecticut) have the status of authorized and unissued shares of preferred stock of the Corporation ("Preferred Stock") undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock. (k) Definitions. As used in this Article ___: (i) the term "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of New York or the State of Connecticut are authorized or obligated by law or executive order to close or are closed because of a banking moratorium or otherwise; (ii) the term "Call Price" of each share of PACS shall be the sum of (x) $76 1/8 and (y) all accrued and unpaid dividends thereon to but not including the redemption date (other than previously declared dividends payable to a holder of record as of a prior date); (iii) the term "Closing Price" on any day shall mean the last reported sales price on such day or, in case no such sale takes place on such day, the average of the reported closing high and low quotations, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on a national securities exchange, on the Nasdaq National Market System, or, if the Common Stock is not listed or admitted to trading on a national securities exchange or the Nasdaq National Market System, the average of the high bid and low-asked quotations of the Common Stock in the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similarly generally accepted reporting service, or, if no such quotations are available, the fair market value of the Common Stock as determined by any New York Stock Exchange member firm selected from time to time by the Board of Directors for such purpose; (iv) the term "Current Market Price" per share of Common Stock at any date shall be deemed to be the lesser of (x) the average of the daily Closing Prices for the twenty consecutive Trading Dates ending on and including the date in question or (y) the Closing Price of the Common Stock for such date of determination; provided, that, if ________ any event that results in an adjustment of the Common Equivalent Rate occurs during such twenty day period, the Current Market Price as determined pursuant to the foregoing shall be appropriately adjusted to reflect the occurrence of such event; (v) the term "Parity Preferred Stock" means the Corporation's Class A Voting Preferred Stock without par value and Class B Preferred Stock without par value and any other class or series of the Corporation's Preferred Stock that by its terms ranks on a parity as to both the payment of dividends and distribution of assets upon a liquidation of the Corporation; and (vi) the term "Trading Date" shall mean a date on which the New York Stock Exchange (or any successor thereto) is open for the transaction of business. (l) Payment of Taxes. The Corporation shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on the redemption or conversion of shares of PACS pursuant to this Section 3; provided, however, that the Corporation shall not be ________ _______ required to pay any tax which may be payable in respect of any registration of transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the registered holder of shares of PACS redeemed or converted or to be redeemed or converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (m) Reservation of Common Stock. The Corporation shall at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock and/or its issued Common Stock held in its treasury, for the purpose of effecting any Mandatory Conversion of the shares of PACS or any conversion of the shares of PACS at the option of the holder, the full number of shares of Common Stock then deliverable upon any such conversion of all outstanding shares of PACS. SECTION 4. LIQUIDATION RIGHTS. (a) In the event of the liquidation, dissolution, or winding up of the business of the Corporation, whether voluntary or involuntary, the holders of shares of PACS then outstanding, after payment or provision for payment of the debts and other liabilities of the Corporation and the payment or provision for payment of any distribution on any shares of the Corporation having a preference and a priority over the shares of PACS on liquidation, and before any distribution to the holders of Junior Securities, shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders an amount per share of PACS in cash equal to the sum of (i) $76 1/8 plus (ii) all accrued and unpaid dividends thereon. All amounts paid in respect of such liquidation, dissolution or winding up shall be paid pro rata to the holders of PACS entitled thereto. In the event the assets of the Corporation available for distribution to the holders of the shares of PACS upon any dissolution, liquidation or winding up of the Corporation shall be insufficient to pay in full the liquidation payments payable to the holders of outstanding shares of PACS and of all other series of Parity Securities, the holders of shares of PACS and of all series of Parity Securities shall share ratably in such distribution of assets in proportion to the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of PACS and the holders of outstanding shares of such Parity Preferred Stock were paid in full. Except as provided in this Section 4, holders of PACS shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. (b) For the purposes of this Section 4, none of the following shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Corporation: (i) the sale, transfer, lease or exchange of the assets of the Corporation as an entirety or substantially as an entirety; or (ii) the consolidation or merger of the Corporation with one or more other corporations (whether or not the Corporation is the corporation surviving such consolidation or merger). SECTION 5. VOTING RIGHTS. (a) The holders of record of shares of PACS shall not be entitled to any voting rights except as provided in Section 5 or as otherwise provided by law.** (**) At Aetna's election, the terms of the PACS may be modified to provide for voting rights as determined by Aetna. In that event, the PACS shall be designated "6.25% Class A Voting Preferred Stock." (b) For so long as any shares of PACS are outstanding, if at any time dividends payable on the shares of PACS or any other series of Preferred Stock are in arrears and unpaid in an aggregate amount equal to or exceeding the aggregate amount of dividends payable thereon for six quarterly dividend periods, or if any other series of Preferred Stock shall be entitled for any other reason to exercise voting rights, separate from the Common Stock, to elect any Directors of the Corporation ("Preferred Stock Directors"), the holders of the shares of PACS, voting separately as a class with the holders of all other series of Preferred Stock upon which like voting rights have been conferred and are exercisable, with each share of PACS entitled to vote on this and other matters upon which holders of Preferred Stock vote as a group, shall have the right to vote for the election of two Preferred Stock Directors of the Corporation, such Directors to be in addition to the number of Directors constituting the Board of Directors immediately prior to the accrual of such right. Such right of the holders of shares of PACS to elect two Preferred Stock Directors shall, when vested, continue until all dividends in arrears on the shares of PACS and such other series of Preferred Stock shall have been paid in full and the right of any other series of Preferred Stock to exercise voting rights, separate from the Common Stock, to elect Preferred Stock Directors shall terminate or have terminated and, when so paid, and any such termination occurs or has occurred, such right of the holders of shares of PACS to elect two Preferred Stock Directors separately as a class shall cease, subject always to the same provisions for the vesting of such right of the holders of the shares of PACS to elect two Preferred Stock Directors in the case of future dividend defaults. The term of office of each Director elected pursuant to the preceding paragraph shall terminate on the earlier of (i) the next annual meeting of stockholders at which a successor shall have been elected and qualified or (ii) the termination of the right of the holders of shares of PACS and such other series of Preferred Stock to vote for Directors pursuant to the preceding paragraph. Vacancies on the Board of Directors resulting from the death, resignation or other cause of any such Director shall be filled exclusively by no less than two-thirds of the remaining Directors and the Director so elected shall hold office until a successor is elected and qualified. (c) For as long as any shares of PACS remain outstanding, the affirmative consent of the holders of at least two-thirds thereof actually voting (voting separately as a class) given in person or by proxy, at any annual meeting or special meeting of the shareholders called for such purpose, shall be necessary to (i) amend, alter or repeal any of the provisions of the Articles of Incorporation of the Corporation which would adversely affect the powers, preferences or rights of the holders of the shares of PACS then outstanding or reduce the minimum time required for any notice to which holders of shares of PACS then outstanding may be entitled; provided, however, that any such amendment, alteration or ________ _______ repeal that would authorize, create or increase the authorized amount of any additional shares of Junior Securities or any other shares of stock (whether or not already authorized) ranking on a parity with the shares of PACS shall be deemed not to adversely affect such powers, preferences or rights and shall not be subject to approval by the holders of shares of PACS; and provided ________ further that clause (i) shall not be applicable to the _______ amendment, alteration or repeal of any provisions of the Articles of Incorporation of the Corporation approved at a meeting of the shareholders the record date of which is prior to the issuance of any shares of PACS; (ii) authorize or create, or increase the authorized amount of, any capital stock, or any security convertible into capital stock, of any class ranking senior to PACS as to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Corporation; or (iii) merge or consolidate with or into any other corporation, unless each holder of the shares of PACS immediately preceding such merger or consolidation shall have the right either to (A) receive or continue to hold in the resulting corporation the same number of shares, with substantially the same rights and preferences, as correspond to the shares of PACS so held or (B) convert into shares of Common Stock at the Common Equivalent Rate in effect on the date immediately preceding the announcement of any such merger or consolidation. There is no limitation on the issuance by the Corporation of Parity Preferred Stock or of any class ranking junior to the shares of PACS. Notwithstanding the provisions summarized in the preceding two paragraphs, however, no such approval described therein of the holders of the shares of PACS shall be required to authorize an increase in the number of authorized shares of Preferred Stock or if, at or prior to the time when such amendment, alteration, or repeal is to take effect or when the authorization, creation or increase of any such senior stock or security is to be made, or when such consolidation or merger, liquidation, dissolution or winding up is to take effect, as the case may be, provision is made for the redemption of all shares of PACS at the time outstanding. SECTION 6. PREEMPTIVE RIGHTS. The holders of shares of PACS shall have no preemptive rights, including rights with respect to any shares of capital stock or other securities of the Corporation convertible into or carrying rights or options to purchase any such shares. SECTION 7. LIMITATIONS. Except as may otherwise be required by law, the shares of PACS shall not have any terms, limitations, and relating rights and preferences other than those specifically set forth in this resolution (as such resolution may be amended from time to time) or otherwise in the Certificate of Incorporation of the Corporation. EXHIBIT B-1 FORM OF AFFILIATE LETTER (U.S. Healthcare) Butterfly, Inc. [address] [address] Ladies and Gentlemen: I have been advised that as of the date of this letter I may be deemed to be an "affiliate" of U.S. Healthcare, Inc., a Pennsylvania corporation ("U.S. Healthcare"), as the term "affiliate" is defined for purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of the Agreement and Plan of Merger dated as of March 30, 1996 (the "Agreement") among U.S. Healthcare, Aetna Life and Casualty Company, a Connecticut insurance corporation ("Aetna"), Butterfly, Inc., a Connecticut corporation ("Parent"), New Merger Corporation, a Pennsylvania corporation and a wholly owned subsidiary of Parent ("U.S. Healthcare Sub") and Antelope Sub, Inc., a Connecticut corporation and a wholly owned subsidiary of Parent, U.S. Healthcare will be merged with and into U.S. Healthcare Sub with U.S. Healthcare to be the survivor in the merger (the "U.S. Healthcare Sub Merger"). As a result of the U.S. Healthcare Sub Merger, I will receive shares of Common Stock, par value $1.00 per share, and Preferred Stock, par value $.01 per share, of Parent (the "Parent Securities") in exchange for shares owned by me of Common Stock, par value $0.005 per share, and Class B Stock, par value $0.005 per share, of U.S. Healthcare. I represent, warrant and covenant to Parent that as of the date I receive any Parent Securities as a result of the U.S. Healthcare Sub Merger: A. I shall not make any sale, transfer or other disposition of the Parent Securities in violation of the Act or the Rules and Regulations. B. I have carefully read this letter and the Agreement and discussed the requirements of such documents and other applicable limitations upon my ability to sell, transfer or otherwise dispose of the Parent Securities to the extent I felt necessary with my counsel or counsel for U.S. Healthcare. C. I have been advised that the issuance of Parent Securities to me pursuant to the U.S. Healthcare Sub Merger has been registered with the Commission under the Act on a Registration Statement on Form S-4. However, I have also been advised that, since at the time the U.S. Healthcare Sub Merger was submitted for a vote of the shareholders of U.S. Healthcare, I may be deemed to have been an affiliate of U.S. Healthcare and the distribution by me of the Parent Securities has not been registered under the Act, I may not sell, transfer or otherwise dispose of the Parent Securities issued to me in the U.S. Healthcare Sub Merger unless (i) such sale, transfer or other disposition has been registered under the Act, (ii) such sale, transfer or under other disposition is made in conformity with Rule 145 promulgated by the Commission under the Act, or (iii) in the opinion of counsel reasonably acceptable to Parent, or a "no action" letter obtained by the undersigned from the staff of the Commission, such sale, transfer or other disposition is otherwise exempt from registration under the Act. D. I understand that Parent is under no obligation to register the sale, transfer or other disposition of the Parent Securities by me or on my behalf under the Act or to take any other action necessary in order to make compliance with an exemption from such registration available.* E. I also understand that there will be placed on the certificates for the Parent Securities issued to me or any substitutions therefor, a legend stating in substance: * Affiliate Letter of the Principal Stockholder will contain the following additional language: "other than pursuant to the terms of the Registration Rights Agreement, dated as of March 30, 1996, between Parent and the Principal Stockholder." "THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED ___________ BETWEEN THE REGISTERED HOLDER HEREOF AND BUTTERFLY, INC., A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF BUTTERFLY, INC." F. I also understand that unless the transfer by me of my Parent Securities has been registered under the Act or is a sale made in conformity with the provisions of Rule 145, Parent reserves the right to put the following legend on the certificates issued to my transferee: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933." It is understood and agreed that the legends set forth in paragraphs E and F above shall be removed by delivery of substitute certificates without such legend if such legend is not required for purposes of the Act or this Agreement. Execution of this letter should not be considered an admission on my part that I am an "affiliate" of U.S. Healthcare as described in the first paragraph of this letter or as a waiver of any rights I may have to object to any claim that I am such an affiliate on or after the date of this letter. Very truly yours, ______________________ Name: Accepted this ____ day of ____________, 1996 by BUTTERFLY, INC. By: _____________________________ Name: Title EXHIBIT B-2 FORM OF AFFILIATE LETTER (Aetna) Butterfly, Inc. [address] [address] Ladies and Gentlemen: I have been advised that as of the date of this letter I may be deemed to be an "affiliate" of Aetna Life and Casualty Company, a Connecticut insurance corporation ("Aetna"), as the term "affiliate" is defined for purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of the Agreement and Plan of Merger dated as of March 30, 1996, (the "Agreement") among Aetna, U.S. Healthcare, Inc., a Pennsylvania corporation ("U.S. Healthcare"), Butterfly, Inc., a Connecticut corporation ("Parent"), Antelope Sub, Inc., a Connecticut corporation and a wholly owned subsidiary of Parent ("Aetna Sub") and New Merger Corporation, a Pennsylvania corporation and wholly owned subsidiary of Parent, Aetna will be merged with and into Aetna Sub with Aetna to be the survivor in the merger (the "Aetna Sub Merger"). As a result of the Aetna Sub Merger, I will receive shares of Common Stock, par value $1.00 per share, of Parent (the "Parent Securities") in exchange for shares owned by me of Common Stock, without par value, of Aetna. I represent, warrant and covenant to Parent that as of the date I receive any Parent Securities as a result of the Aetna Sub Merger: A. I shall not make any sale, transfer or other disposition of the Parent Securities in violation of the Act or the Rules and Regulations. B. I have carefully read this letter and the Agreement and discussed the requirements of such documents and other applicable limitations upon my ability to sell, transfer or otherwise dispose of the Parent Securities to the extent I felt necessary with my counsel or counsel for Aetna. C. I have been advised that the issuance of Parent Securities to me pursuant to the Aetna Sub Merger has been registered with the Commission under the Act on a Registration Statement on Form S-4. However, I have also been advised that, since at the time the Aetna Sub Merger was submitted for a vote of the shareholders of Aetna, I may be deemed to have been an affiliate of Aetna and the distribution by me of the Parent Securities has not been registered under the Act, I may not sell, transfer or otherwise dispose of the Parent Securities issued to me in the Aetna Sub Merger unless (i) such sale, transfer or other disposition has been registered under the Act, (ii) such sale, transfer or under other disposition is made in conformity with Rule 145 promulgated by the Commission under the Act, or (iii) in the opinion of counsel reasonably acceptable to Parent, or a "no action" letter obtained by the undersigned from the staff of the Commission, such sale, transfer or other disposition is otherwise exempt from registration under the Act. D. I understand that Parent is under no obligation to register the sale, transfer or other disposition of the Parent Securities by me or on my behalf under the Act or to take any other action necessary in order to make compliance with an exemption from such registration available. E. I also understand that there will be placed on the certificates for the Parent Securities issued to me or any substitutions therefor, a legend stating in substance: "THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED ___________ BETWEEN THE REGISTERED HOLDER HEREOF AND BUTTERFLY, INC., A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF BUTTERFLY, INC." F. I also understand that unless the transfer by me of my Parent Securities has been registered under the Act or is a sale made in conformity with the provisions of Rule 145, Parent reserves the right to put the following legend on the certificates issued to my transferee: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933." It is understood and agreed that the legends set forth in paragraphs E and F above shall be removed by delivery of substitute certificates without such legend if such legend is not required for purposes of the Act or this Agreement. Execution of this letter should not be considered an admission on my part that I am an "affiliate" of Aetna as described in the first paragraph of this letter or as a waiver of any rights I may have to object to any claim that I am such an affiliate on or after the date of this letter. Very truly yours, ______________________ Name: Accepted this ____ day of ____________, 1996 by BUTTERFLY, INC. By: _____________________________ Name: Title: EX-10 3 MATERIAL CONTRACTS CONFORMED COPY VOTING AGREEMENT Agreement dated as of March 30, 1996 among Leonard Abramson (the "Principal Shareholder"), Aetna Life Insurance Company, a Connecticut insurance corporation, Aetna Life Insurance and Annuity Company, a Connecticut insurance corporation (collectively, the "Other Shareholders"). Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Merger Agreement (as defined below). In consideration of the execution by Aetna Life and Casualty Company, a Connecticut insurance corporation ("Aetna"), of the Agreement and Plan of Merger dated as of March 30, 1996 (the "Merger Agreement") among Aetna, U.S. Healthcare, Inc., a Pennsylvania corporation ("U.S. Healthcare"), Butterfly, Inc. ("Parent"), a Connecticut corporation, New Merger Corporation, a Pennsylvania corporation, and Antelope Merger Sub, Inc., a Connecticut corporation, a copy of which is attached as Exhibit A hereto, and other good and valuable consideration, receipt of which is hereby acknowledged, the Principal Shareholder and the Other Shareholders hereby agree as follows: 1. Representations and Warranties of Principal ___________________________________________ Shareholder. The Principal Shareholder hereby represents ___________ and warrants to the Other Shareholders as follows: (a) Title. As of the date hereof, the _____ Principal Shareholder beneficially owns 1,818,755 shares (including 1,806,803 shares held in various trusts for the benefit of his children and grandchildren, but not including any stock options owned by him) of Common Stock ("Common Stock"), par value $0.005 per share, of U.S. Healthcare and 14,441,955 shares of Class B Stock ("Class B Stock"), par value $0.005 per share, of U.S. Healthcare (the shares of Class B Stock so owned by Principal Shareholder, the "Class B Shares"). As of the date hereof, the Principal Shareholder holds options to purchase 450,000 shares of Common Stock, all of which will become exercisable upon execution and delivery of the Merger Agreement. The Principal Shareholder holds no options to purchase Class B Stock and, except as set forth in this Section 1(a), as of the date hereof the Principal Shareholder does not (i) beneficially own any shares of any class or series of capital stock of U.S. Healthcare or any securities convertible into or exercisable for shares of any class or series of U.S. Healthcare's capital stock or (ii) have any rights to acquire any shares of any class or series of capital stock of U.S. Healthcare or any securities convertible into or exercisable for shares of any class of U.S. Healthcare's capital stock. The Principal Shareholder owns the Class B Shares free and clear of all liens, claims, options, charges or other encumbrances. The Class B Shares represent approximately 83.7% of the total voting power of U.S. Healthcare's capital stock as of the date hereof. (b) Right to Vote. The Principal Shareholder _____________ has full legal power, authority and right to vote all Class B Shares in favor of approval and adoption of the Merger Agreement and the transactions contemplated by the Merger Agreement without the consent or approval of, or any other action on the part of, any other person or entity. Without limiting the generality of the foregoing, except for this Agreement, the Principal Shareholder has not entered into any voting agreement with any person or entity with respect to any of the Class B Shares, granted any person or entity any proxy (revocable or irrevocable) or power of attorney with respect to any of the Class B Shares, deposited any of the Class B Shares in a voting trust or entered into any arrangement or agreement with any person or entity limiting or affecting the Principal Shareholder's legal power, authority or right to vote the Class B Shares in favor of the approval and adoption of the Merger Agreement or any of the transactions contemplated by the Merger Agreement. As of the date of the U.S. Healthcare shareholders meeting to vote on approval and adoption of the Merger Agreement and, to the extent submitted to shareholders for approval, the transactions contemplated by the Merger Agreement, including any adjournment or postponement thereof (the "U.S. Healthcare Shareholders Meeting"), except for this Agreement, the Principal Shareholder will have full legal power, authority and right to vote all Class B Shares in favor of the approval and adoption of the Merger Agreement and the transactions contemplated by the Merger Agreement without the consent or approval of, or any other action on the part of, any other person or entity. From and after the date hereof, the Principal Shareholder will not commit any act that could restrict or otherwise affect such legal power, authority and right to vote all Class B Shares in favor of the approval and adoption of the Merger Agreement and the transactions contemplated by the Merger Agreement. Without limiting the generality of the foregoing, from and after the date hereof the Principal Shareholder will not enter into any voting agreement with any person or entity with respect to any of the Class B Shares, grant any person or entity any proxy (revocable or irrevocable) or power of attorney with respect to any of the Class B Shares, deposit any of the Class B Shares in a voting trust or otherwise enter into any agreement or arrangement limiting or affecting the Principal Shareholder's legal power, authority or right to vote the Class B Shares in favor of the approval and adoption of the Merger Agreement and the transactions contemplated by the Merger Agreement (other than this Agreement). (c) Authority. The Principal Shareholder has _________ full legal power, authority and right to execute and deliver, and to perform his obligations under, this Agreement. This Agreement has been duly executed and delivered by the Principal Shareholder and constitutes a valid and binding agreement of the Principal Shareholder enforceable against the Principal Shareholder in accordance with its terms, subject to (i) bankruptcy, insolvency, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (ii) general principles of equity (regardless of whether considered in a proceeding at law or in equity). (d) Conflicting Instruments; No Transfer. ____________________________________ Neither the execution and delivery of this Agreement nor the performance by the Principal Shareholder of his agreements and obligations hereunder will result in any breach or violation of or be in conflict with or constitute a default under any term of (i) any agreement, judgment, injunction, order, decree, law, regulation or arrangement to which the Principal Shareholder is a party or by which the Principal Shareholder (or any of his assets) is bound, except for any such breach, violation, conflict or default which, individually or in the aggregate, would not impair or affect the Principal Shareholder's ability to cast all votes necessary to approve and adopt the Merger Agreement and the transactions contemplated by the Merger Agreement or (ii) the Articles of Incorporation of U.S. Healthcare. 2. Representations and Warranties of Other _______________________________________ Shareholders. Each Other Shareholder hereby represents ____________ and warrants to the Principal Shareholder that this Agreement has been duly authorized by all necessary corporate action on its part, has been duly executed and delivered by such Other Shareholder and is a valid and binding agreement of such Other Shareholder enforceable against such Other Shareholder in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and the rights of creditors of insurance companies generally and (ii) general principles of equity (regardless of whether considered in a proceeding at law or in equity). 3. Restriction on Transfer. The Principal _______________________ Shareholder agrees that (other than pursuant to the Merger Agreement) he will not, and will not agree to, (i) sell, assign, dispose of, encumber, mortgage, hypothecate or otherwise transfer (collectively, "Transfer") any Class B Shares or any options, warrants or other rights to acquire Class B Stock to any person or entity or (ii) convert (or allow the conversion of) any Class B Shares into shares of Common Stock of U.S. Healthcare; provided ________ that, notwithstanding clause (i), the Principal Shareholder shall be permitted to Transfer Class B Shares to any "Permitted Transferee" (as defined in U.S. Healthcare's Articles of Incorporation) if prior to and as a condition of such Transfer such Permitted Transferee enters into a written agreement with the Other Shareholders (in form and substance satisfactory to the Other Shareholders) agreeing to be bound by the terms of this Agreement binding on the Principal Shareholder. 4. Agreement to Vote of Principal Shareholder. __________________________________________ The Principal Shareholder hereby irrevocably and unconditionally agrees to vote or to cause to be voted all Class B Shares at the U.S. Healthcare Shareholders Meeting and at any other annual or special meeting of shareholders of U.S. Healthcare where such matters arise (a) in favor of the approval and adoption of the Merger Agreement and the transactions contemplated by the Merger Agreement and (b) against (i) approval of any proposal made in opposition to or in competition with the Mergers or any of the other transactions contemplated by the Merger Agreement, (ii) any merger, consolidation, sale of assets, business combination, share exchange, reorganization or recapitalization of U.S. Healthcare or any of its subsidiaries, with or involving any party other than Aetna, the Other Shareholders or one of their respective subsidiaries, (iii) any liquidation or winding up of U.S. Healthcare, (iv) any extraordinary dividend by U.S. Healthcare, (v) any change in the capital structure of U.S. Healthcare (other than pursuant to the Merger Agreement) and (vi) any other action that may reasonably be expected to impede, interfere with, delay, postpone or attempt to discourage the Mergers or the other transactions contemplated by the Merger Agreement or result in a breach of any of the covenants, representations, warranties or other obligations or agreements of U.S. Healthcare under the Merger Agreement which would materially and adversely affect U.S. Healthcare or its ability to consummate the transactions contemplated by the Merger Agreement. 5. Action in Principal Shareholder Capacity Only. _____________________________________________ The Principal Shareholder makes no agreement or understanding herein as director or officer of U.S. Healthcare. The Principal Stockholder signs solely in his capacity as a recordholder and beneficial owner of the Class B Shares, and nothing herein shall limit or affect any actions taken in his capacity as an officer or director of U.S. Healthcare. 6. Invalid Provisions. If any provision of this __________________ Agreement shall be invalid or unenforceable under applicable law, such provision shall be ineffective to the extent of such invalidity or unenforceability only, without it affecting the remaining provisions of this Agreement. 7. Executed in Counterparts. This Agreement may ________________________ be executed in counterparts each of which shall be an original with the same effect as if the signatures hereto and thereto were upon the same instrument. 8. Specific Performance. The parties hereto agree ____________________ that if for any reason the Principal Shareholder fails to perform any of his agreements or obligations under this Agreement irreparable harm or injury to the Other Shareholders and Aetna would be caused for which money damages would not be an adequate remedy. Accordingly, the Principal Shareholder agrees that, in seeking to enforce this Agreement against the Principal Shareholder, the Other Shareholders and Aetna shall be entitled to specific performance and injunctive and other equitable relief. The provisions of this Section 8 constitute the Other Shareholders' and Aetna's sole remedy in the event of a breach by the Principal Shareholder of any of his representations or warranties under this Agreement; provided that, with respect to the Principal ________ ____ Shareholder's agreements and obligations under this Agreement, the provisions of this Section 8 are without prejudice to any other rights or remedies, whether at law or in equity, that the Other Shareholders or Aetna may have against the Principal Shareholder for any failure to perform any of his agreements or obligations under this Agreement. 9. Governing Law. This Agreement shall be _____________ governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to the principles of conflicts of laws thereof. 10. Amendments; Termination. (a) This Agreement _______________________ may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. (b) The provisions of this Agreement shall terminate upon the earliest to occur of (i) the consummation of the Mergers, (ii) the date which is 18 months after the date hereof or (iii) the termination of the Merger Agreement if, but only if, the Merger Agreement is terminated solely for reasons that are not directly or indirectly related to the commencement of, or any Person's direct or indirect indication of interest in making, an Acquisition Proposal with respect to U.S. Healthcare. (c) For purposes of this Agreement, the term "Merger Agreement" includes the Merger Agreement, as the same may be modified or amended from time to time; provided that no such amendment or modification amends or ________ modifies the Merger Agreement in a manner such that the Merger Agreement, as so amended or modified, is less favorable to the Principal Shareholder in any material respect than is the Merger Agreement in effect on the date hereof. 11. Additional Shares. If, after the date hereof, _________________ the Principal Shareholder acquires beneficial ownership of any shares of Class B Stock (any such shares, "Additional Shares"), including, without limitation, upon exercise of any option, warrant or right to acquire Class B Stock or through any stock dividend or stock split, the provisions of this Agreement (other than those set forth in Section 1) applicable to Class B Shares shall be applicable to such Additional Shares as if such Additional Shares had been Class B Shares as of the date hereof. The provisions of the immediately preceding sentence shall be effective with respect to Additional Shares without action by any person or entity immediately upon the acquisition by the Principal Shareholder of beneficial ownership of such Additional Shares. 12. Action by Written Consent. If, in lieu of the _________________________ U.S. Healthcare Shareholders Meeting, shareholder action in respect of the Merger Agreement or any of the transactions contemplated by the Merger Agreement is taken by written consent, the provisions of this Agreement imposing obligations in respect of or in connection with the U.S. Healthcare Shareholders Meeting shall apply mutatis mutandis to such action by written ________________ consent. 13. Successors and Assigns. The provisions of this ______________________ Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal successors (including, in the case of the Principal Shareholder or any other individual, any executors, administrators, estates, legal representatives and heirs of the Principal Shareholder or such individual) and permitted assigns; provided that no party may assign, ________ delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the Other Shareholders (in the case of the Principal Shareholder or any of his permitted assigns) or the Principal Shareholder (in the case of the Other Shareholders or any of their permitted assigns), except that the Other Shareholders' rights under this Agreement may be transferred to Aetna or any wholly-owned subsidiary of Aetna. Without limiting the scope or effect of the restrictions on Transfer set forth in Section 3 hereof, Principal Shareholder agrees that this Agreement and the obligations hereunder shall attach to the Class B Shares and shall be binding upon any person or entity to which legal or beneficial ownership of such Class B Shares shall pass, whether by operation of law or otherwise. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of this 30th day of March, 1996. /s/ Leonard Abramson _______________________ LEONARD ABRAMSON AETNA LIFE INSURANCE COMPANY By: /s/ Richard Huber ________________________ Name: Richard Huber Title: Vice Chairman AETNA LIFE INSURANCE AND ANNUITY COMPANY By: /s/Susan Schechter _________________________ Name: Susan Schechter Title: Secretary EX-10 4 MATERIAL CONTRACTS CONFORMED COPY REGISTRATION RIGHTS AGREEMENT _____________________________ REGISTRATION RIGHTS AGREEMENT dated as of March 30, 1996 between Butterfly, Inc., a Connecticut corporation (the "Company") and Leonard Abramson (the "Shareholder"). ARTICLE I DEFINITIONS 1.1. Definitions. The following terms, as ___________ used herein, have the following meanings: "1933 Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "1934 Act" means the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York are authorized by law to close. "Commission" means the Securities and Exchange Commission. "Common Stock" means the Company's Common Stock, par value $1.00 per share. "Merger Agreement" means the Agreement and Plan of Reorganization dated as of the date hereof among Adonis, Inc., Antelope, Inc., the Company, Adonis Merger Sub, Inc. and Antelope Merger Sub, Inc. "Person" means an individual, a corporation, a partnership, limited liability company, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Piggyback Registration" means a Piggyback Registration as defined in Section 2.2. "Preferred Stock" means the Company's Class C Preferred Stock, par value $.01 per share. "Registrable Securities" means all shares of Common Stock and Preferred Stock owned by the Shareholder. "Shelf Registration Statement" means the Shelf Registration Statement as defined in Section 2.1. "Underwriter" means a securities dealer who purchases any Registrable Securities as principal and not as part of such dealer's market-making activities. ARTICLE II REGISTRATION RIGHTS 2.1. Shelf Registration. (a) The Company shall __________________ prepare and file with the Commission a shelf registration statement (as amended and supplemented from time to time, the "Shelf Registration Statement") relating to the Registrable Securities in accordance with Rule 415 under the 1933 Act and will use its best efforts to cause such Shelf Registration Statement to be declared effective no later than the Merger Date (as defined in the Merger Agreement) and to keep such Shelf Registration Statement continuously effective and in compliance with the 1933 Act and usable for resale of such Registrable Securities, for a period from the date on which the Commission declares such Shelf Registration Statement effective until the first date upon which the aggregate amount of Registrable Securities then owned by the Shareholder could be sold pursuant to Rule 145 under the 1933 Act within 15 trading days calculated in accordance with Rule 144 of the 1933 Act as of such date. (b) If the aggregate proceeds from an offering of Registrable Securities pursuant to the Shelf Registration Statement are expected to be more than $100 million and if Shareholder so elects, such offering may be in the form of an underwritten offering. Shareholder shall select the managing Underwriters and any additional investment bankers and managers to be used in connection with such offering; provided that such managing ________ Underwriters and additional investment bankers must be reasonably satisfactory to the Company. 2.2. Piggyback Registration. If the Company ______________________ proposes to file a registration statement under the 1933 Act with respect to an offering of Common Stock or Preferred Stock (i) for the Company's own account (other than a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the Commission)) or (ii) for the account of any of its holders of Common Stock or Preferred Stock, then the Company shall give written notice of such proposed filing to Shareholder as soon as practicable (but in no event less than 10 days before the anticipated filing date), and such notice shall offer Shareholder the opportunity to register such number of shares of Registrable Securities as Shareholder may request on the same terms and conditions as the Company's or such holder's Common Stock or Preferred Stock (a "Piggyback Registration"). 2.3. Reduction of Offering. Notwithstanding _____________________ anything contained herein, if the managing Underwriter of an offering described in Section 2.2 delivers a written opinion to the Company that (i) the size of the offering that Shareholder, the Company and any other Persons intend to make or (ii) the combination of securities that Shareholder, the Company and such other Persons intend to include in such offering are such that the success of the offering would be materially and adversely affected, then (A) if the size of the offering is the basis of such Underwriter's opinion, the amount of Registrable Securities to be offered for the account of Shareholder shall be reduced to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing Underwriter; provided that in the case of a Piggyback ________ Registration, if securities are being offered for the account of Persons other than the Company, then the proportion by which the amount of such Registrable Securities intended to be offered for the account of Shareholder is reduced shall not exceed the proportion by which the amount of such securities intended to be offered for the account of such other Persons is reduced; and (B) if the combination of securities to be offered is the basis of such Underwriter's opinion, (x) the Registrable Securities to be included in such offering shall be reduced as described in clause (A) above (subject to the proviso in clause (A)), and (y) in the case of a Piggyback Registration, if the actions described in sub-clause (x) of this clause (B) would, in the judgment of the managing Underwriter, be insufficient substantially to eliminate the adverse effect that inclusion of the Registrable Securities requested to be included would have on such offering, such Registrable Securities will be excluded from such offering. ARTICLE III REGISTRATION PROCEDURES 3.1. Filings; Information. In connection with ____________________ the Shelf Registration Statement pursuant to Section 2.1 hereof, the Company and Shareholder agree as follows: (a) Shareholder will notify Company at least 10 days prior to making any offer or sale of any Registrable Securities pursuant to the Shelf Registration Statement. The Company shall be entitled, by notifying Shareholder within 5 days of receiving the aforementioned notice from the Shareholder, to postpone or suspend for a reasonable period of time (in no event to exceed 75 days) the offering of any Registrable Securities if the Company shall determine in good faith that such offering will interfere with a pending or contemplated financing, merger, sale or acquisition of assets, recapitalization or other corporate action or policies of the Company. If the Company elects to so postpone or suspend the offering of any Registrable Securities, the Company shall, to the extent necessary, amend or supplement the Shelf Registration Statement to permit the offering of Registrable Securities within 75 days of receiving the aforementioned notice from the Shareholder. (b) The Company will, if requested, prior to filing the Shelf Registration Statement or any amendment or supplement thereto, furnish to Shareholder and each applicable managing Underwriter, if any, without charge, copies thereof, and thereafter furnish to Shareholder and each such Underwriter, if any, without charge, such number of copies of such registration statement, amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein) and the prospectus included in such registration statement (including each preliminary prospectus) as Shareholder or each such Underwriter may reasonably request in order to facilitate the sale of the Registrable Securities. (c) After the filing of the Shelf Registration Statement, the Company will promptly notify Shareholder of any stop order issued or, to the Company's knowledge, threatened to be issued by the Commission and use its best efforts to prevent the entry of such stop order or to remove it if entered at the earliest possible date. (d) The Company will use its best efforts in cooperation with Shareholder and the Underwriters or agents, as the case may be, to qualify the Registrable Securities for offer and sale under such other securities or blue sky laws of such jurisdictions in the United States as Shareholder reasonably requests; provided that the Company will ________ not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction. (e) The Company will as promptly as is practicable notify Shareholder, at any time when a prospectus relating to the sale of the Registrable Securities is required by law to be delivered in connection with sales by an Underwriter or dealer, of the occurrence of any event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and shall as promptly as practicable make available to Shareholder and to the Underwriters any such supplement or amendment. Shareholder agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in the preceding sentence, Shareholder will forthwith discontinue the offer and sale of Registrable Securities pursuant to the registration statement covering such Registrable Securities until receipt by Shareholder and the Underwriters of the copies of such supplemented or amended prospectus and, if so directed by the Company, Shareholder will deliver to the Company all copies, other than permanent file copies then in Shareholder's possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. (f) The Company will deliver to Shareholder and each Underwriter or agent participating in an offering pursuant to the Shelf Registration Statement, without charge, as many copies of each preliminary prospectus as Shareholder or such Underwriter or agent may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will deliver to Shareholder and each Underwriter or agent participating in such offering, without charge, from time to time during the period when a prospectus is required to be delivered under the 1933 Act, such number of copies of such prospectus (as supplemented or amended) as Shareholder or such Underwriter or agent may reasonably request. (g) The Company will comply with the 1933 Act and the rules and regulations of the Commission thereunder, and the 1934 Act and the rules and regulations of the Commission thereunder so as to permit the completion of the distribution of the Registrable Securities pursuant to the Shelf Registration Statement in accordance with the intended method or methods of distribution contemplated in the prospectus relating thereto. (h) Upon the request of Shareholder or the managing Underwriter or agent, as the case may be, or if required by the rules, regulations or instructions applicable to the registration form used by the Company, or by the 1933 Act or by any other rules and regulations thereunder in connection with the offering of Registrable Securities pursuant to the Shelf Registration Statement, the Company will prepare a prospectus supplement that complies with the 1933 Act and the rules and regulations of the Commission thereunder and that sets forth the aggregate amount of the Registrable Securities being sold, the name or names of any Underwriters or agents participating in the offering, the price at which the Registrable Securities are to be sold, any discounts, commissions or other items constituting compensation, and such other information as Shareholder or the managing Underwriter or agent, as the case may be, and the Company deem appropriate in connection with the offering of the Registrable Securities prior to its being used or filed with the Commission. (i) The Company may require the Shareholder to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities as may be legally required in connection with such registration. (j) The Company will enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the sale of such Registrable Securities. (k) The Company will furnish to Shareholder and to each Underwriter a signed counterpart, addressed to Shareholder or such Underwriter, of (i) an opinion or opinions of counsel to the Company and (ii) a comfort letter or comfort letters from the Company's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as Shareholder or the managing Underwriter reasonably requests. (l) The Company will make generally available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act and the rules and regulations of the Commission thereunder. (m) The Company will use its reasonable efforts to cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed. 3.2. Registration Expenses. In connection _____________________ with the Shelf Registration Statement and in connection with any Piggyback Registration, the Company shall pay, the following expenses incurred in connection with such registration: (i) filing fees with the Commission, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses, (iv) fees and expenses incurred in connection with the listing of the Registrable Securities, (v) fees and expenses of counsel and independent certified public accountants for the Company and (vi) the reasonable fees and expenses of any additional experts retained by the Company in connection with such registration. The Shareholder shall pay any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities and any out-of-pocket expenses of Shareholder. ARTICLE IV INDEMNIFICATION AND CONTRIBUTION 4.1. Indemnification by the Company. The ______________________________ Company agrees to indemnify and hold harmless Shareholder, its officers and directors, and each Person, if any, who controls Shareholder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information, relating to Shareholder or the plan of distribution furnished in writing to the Company by or on behalf of Shareholder expressly for use therein; provided ________ that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of Shareholder if a copy of the most current prospectus at the time of the delivery of the Registrable Securities was not provided to purchaser and such current prospectus would have cured the defect giving rise to such loss, claim, damage or liability and was in fact previously furnished to the Shareholder and the managing Underwriters, if any, in quantities sufficient to deliver the same to all such purchasers. The Company also agrees to indemnify any Underwriters of the Registrable Securities, their officers and directors and each person who controls such Underwriters on substantially the same basis as that of the indemnification of Shareholder provided in this Section 4.1. 4.2. Indemnification by Shareholder. ______________________________ Shareholder agrees to indemnify and hold harmless the Company, its officers and directors, and each Person, if any, who controls the Company within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing indemnity from the Company to Shareholder, but only with reference to information relating to Shareholder or the plan of distribution furnished in writing by or on behalf of Shareholder expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus. Shareholder also agrees to indemnify and hold harmless any Underwriters of the Registrable Securities, their officers and directors and each person who controls such Underwriters on substantially the same basis as that of the indemnification of the Company provided in this Section 4.2. 4.3. Conduct of Indemnification Proceedings. ______________________________________ In case any proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to Section 4.1 or Section 4.2, such Person (the "Indemnified Party") shall promptly notify the Person against whom such indemnity may be sought (the "Indemnifying Party") in writing and the Indemnifying Party, upon the request of the Indemnified Party, shall retain counsel reasonably satisfactory to such Indemnified Party to represent such Indemnified Party and any others the Indemnifying Party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by the Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. 4.4. Contribution. If the indemnification ____________ provided for in this Article IV is unavailable to an Indemnified Party in respect of any losses, claims, damages or liabilities referred to herein, then in lieu of such indemnification (i) as between the Company, on the one hand, and the Shareholder, on the other hand, the Company and Shareholder shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity incurred by the Company and Shareholder, as incurred, in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and of Shareholder, on the other hand, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations and (ii) as between the Company and the Shareholder, on the one hand, and the Underwriters or agents, on the other hand, the Company, Shareholder, Underwriters and agents shall contribute to such aggregate losses, liabilities, claims, damages and expenses in proportion such that (x) the Underwriters and agents are responsible for that portion represented by the percentage that the underwriting discounts and commissions for the offering appearing on the cover page of the relevant prospectus (or, if not set forth on the cover page, that are applicable to the relevant offering) bear to the initial public offering price appearing on the cover page (or, if not set forth on the cover page, that are applicable to the offering), and (y) Shareholder and the Company are responsible to contribute pro rata, based upon the amount of net proceeds realized by each, in respect of the balance. The relative fault of the Company on the one hand and Shareholder on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by Shareholder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Shareholder agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Article IV, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and Shareholder shall not be required to contribute any amount in excess of the amount by which the net proceeds of the offering (before deducting expenses) received by Shareholder exceeds the amount of any damages which Shareholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. ARTICLE V MISCELLANEOUS 5.1. Participation in Underwritten _____________________________ Registrations. No Person may participate in any _____________ underwritten registered offering contemplated hereunder unless such Person (a) agrees to sell its securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and these Registration Rights. 5.2. Rule 144. The Company covenants that it ________ will file any reports required to be filed by it under the 1933 Act and the 1934 Act and that it will take such further action as Shareholder may reasonably request to the extent required from time to time to enable Shareholder to sell Registrable Securities without registration under the 1933 Act within the limitation of the exemptions provided by Rule 144 under the 1933 Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. Upon the request of Shareholder, the Company will deliver to Shareholder a written statement as to whether it has complied with such reporting requirements. 5.3. Holdback Agreements. Shareholder agrees ___________________ not to offer, sell, contract to sell or otherwise dispose of any Registrable Securities, or any securities convertible into or exchangeable or exercisable for such securities, including any sale pursuant to Rule 144 under the 1933 Act, during the 14 days prior to, and during the 90-day period beginning on, the effective date of a registration statement for any shares of Common Stock or Preferred Stock. 5.4. Transfer of Registration Rights. None of _______________________________ the rights of Shareholder under this Agreement shall be assignable by Shareholder, except to "Permitted Transferees" as defined under the Articles of Incorporation of Adonis. 5.5. Notices. All notices, requests and other _______ communications to either party hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to the Company, to: Butterfly, Inc. c/o Aetna Life and Casualty Company 151 Farmington Avenue Hartford, CT 06156-7505 Telecopier: 860-549-6755 Attention: Richard L. Huber Vice Chairman and Butterfly, Inc. c/o U.S. Healthcare, Inc. 980 Jolly Road P.O. Box 1109 Blue Bell, PA 19422 Telecopier: 215-283-6401 Attention: David Simon with a copy to: David L. Caplan Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Telecopy: (212) 450-4800 if to Shareholder, to: Leonard Abramson c/o U.S. Healthcare, Inc. 980 Jolly Road P.O. Box 1109 Blue Bell, PA 19422 Telecopier: 215-283-6858 with a copy to: Howard S. Godwin, Jr. Brown & Wood One World Trade Center New York, New York 10048 Telecopy: (212) 839-5599 or such other address or telecopier number as such party may hereafter specify for the purpose by notice to the other party hereto. Each such notice, request or other communication shall be effective when delivered at the address specified in this Section 5.5. 5.6. Amendments; No Waivers. ______________________ (a) Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by Shareholder and the Company, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 5.7. Successors and Assigns. The provisions ______________________ of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither this Agreement nor any provision hereof is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. 5.8. Counterparts; Effectiveness. This ___________________________ Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. 5.9. Entire Agreement. This Agreement ________________ constitutes the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties with respect thereto. No representation, inducement, promise, understanding, condition or warranty not set forth herein or therein has been made or relied upon by any of the parties hereto. 5.10. Governing Law. This Agreement shall be _____________ construed in accordance with and governed by the laws of the State of New York, without regard to the conflicts of law rules of such state. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BUTTERFLY, INC. By: /s/ Richard Huber ________________________ Name: Richard Huber Title: Vice President /s/ Leonard Abramson ____________________ LEONARD ABRAMSON EX-10 5 MATERIAL CONTRACTS AGREEMENT AGREEMENT, dated as of March 30, 1996, by and between Butterfly, Inc., a Connecticut corporation (the "Company"), and Leonard Abramson ("Consultant"). WHEREAS, Consultant is the founder, principal executive officer and a shareholder of U.S. Healthcare, Inc., a Pennsylvania corporation ("U.S. Healthcare"); and WHEREAS, U.S. Healthcare, the Company, Aetna Life and Casualty Company, a Connecticut insurance corpo- ration, New Merger Corporation, a Pennsylvania corpora- tion, and Antelope Sub, Inc., a Connecticut corporation, contemporaneously herewith have entered into an Agreement and Plan of Merger (the "Merger Agreement"); and WHEREAS, due to the highly competitive nature of the business of the Company and in order for the Company to operate its business following the consumma- tion of the transactions contemplated by the Merger Agreement, the Company desires to enter into a non-compe- tition agreement with Consultant on the terms and condi- tions hereinafter set forth in this Agreement; and WHEREAS, the Company acknowledges the singular contribution of Consultant in having developed and ex- panded the business of U.S. Healthcare and in its conse- quent success and, accordingly, desires to retain the expertise and advisory services of Consultant and, to that end, desires to enter into an independent consulting agreement with him to become effective upon the consumma- tion of the transaction contemplated by the Merger Agree- ment, upon the terms and conditions herein set forth; and WHEREAS, Consultant desires to serve as an independent consultant for the Company upon such terms and conditions; and NOW THEREFORE, in consideration of the premises and the mutual agreements set forth below, the parties agree as follows: 1. Cancellation of Prior Agreement. It is agreed ______________________________ that subject to, and effective upon, the consummation of the transactions contemplated by the Merger Agreement ("Merger Date"), the employment agreement dated as of January 1, 1993 between U.S. Healthcare and Consultant (other than those provisions relating to compensation payable upon termination of such Agreement) shall be cancelled and superseded by this Agreement. 2. Term. The initial term of this Agreement shall ____ be for a period of five years commencing on the Merger Date and ending on the fifth anniversary of the Merger Date (the "Initial Term"). Commencing on the fourth anniversary of the Merger Date and on each such subse- quent anniversary, the Term shall automatically be ex- tended for one additional year unless, not later than 180 days prior to such anniversary, the Company or Consultant shall have given notice that the Term of this Agreement will not be extended. The Initial Term together with any extensions thereof shall be referred to in this Agreement as the "Term of this Agreement." The period commencing upon the Merger Date and ending on the earlier of the termination of this Agreement by its terms, or the termi- nation of Consultant's services pursuant to Section 7 hereof, shall be referred to in this Agreement as the "Consulting Period". 3. Duties and Status. _________________ (a) Consultant agrees to make himself reason- ably available to the Chief Executive Officer of the Company during normal business hours (and upon reasonable advance notice) to provide advice on the strategic busi- ness activities, marketing strategies and public rela- tions efforts of U.S. Healthcare and the Company, includ- ing the Company's efforts to promote the history of U.S. Healthcare and Consultant's personal involvement in its development and success ("Consulting Services"). In the performance of his duties hereunder, Consultant shall not be required to devote any specified percentage of his business or professional time to the advisory services contemplated herein. (b) During the Consulting Period, Consultant may engage in other employment or consulting work, or in any trade or business, for his own account or on behalf of any person or entity and may serve on any corporate, political, civic or charitable boards or committees, provided, in each case, such activities do not violate any of his obligations under Section 6. (c) Consultant acknowledges that he is acting as an independent contractor, and that nothing in this Agreement shall be construed to create an employment relationship between the parties. Consultant is not authorized to enter into contracts or agreements on behalf of the Company or to otherwise create obligations of the Company to third parties. Consultant shall not be treated as an employee with respect to the services performed hereunder for Federal, state, or local tax purposes. Consultant shall be solely responsible for, and shall file, on a timely basis, tax returns and pay- ments required to be filed with, or made to, any Federal or state, or local tax authority with respect to his performance of Consulting Services under this Agreement. Neither Federal, nor state, nor local income tax of any kind shall be withheld from, or paid by, the Company with respect to the Consulting Fee, as defined below in Sec- tion 4(a). 4. Compensation. In consideration of his avail- ____________ ability to provide Consulting Services and of the Con- sulting Services provided by him under this Agreement, Consultant shall be compensated as follows: (a) Consulting Fee. The Company shall pay to ______________ Consultant, during the Term of this Agreement, a consult- ing fee of two million dollars ($2,000,000) per year ("Consulting Fee"), payable in equal monthly install- ments, in arrears, during the Term of this Agreement. (b) Welfare Benefits. During the Term of this ________________ Agreement, as additional consideration for the provision by Consultant of the advisory services hereunder, the Company shall arrange to provide Consultant with life (including split dollar), disability, accident, and health insurance benefits substantially similar to those which Consultant is provided in his capacity as principal executive officer of U.S. Healthcare and is receiving as of the date of this Agreement, or the economic equivalent thereof. Consultant shall not be eligible to participate in, or accrue or receive benefits under, any of the Company's employee compensation or benefit plans, poli- cies and programs. (c) Expense Reimbursement. During the Con- _____________________ sulting Period, Consultant shall be entitled to receive prompt reimbursement of all reasonable out-of-pocket expenses properly incurred by him in connection with his duties under this Agreement, including reasonable expens- es for entertainment and travel, provided that such expenses are properly approved, documented and reported in accordance with the policies and procedures of the Company applicable at the time the expenses are in- curred. (d) Office and Secretarial Support. During ______________________________ the Term of this Agreement, the Company shall furnish Consultant with the exclusive use of appropriate office space and full-time secretarial services commensurate with the office and services he was provided as principal executive officer of U.S. Healthcare at a site acceptable to Consultant not located in a U.S. Healthcare facility. All furnishings and decorative items in the Consultant's office on the date hereof shall be relocated to such new office. 5. Additional Matters. On the Merger Date the __________________ Company shall transfer, convey, and assign to Consultant (or to any person or entity designated in writing by Consultant) all its ownership rights and interests in, and title to, the Company-owned G-4 ("G-4") aircraft. In addition, during the Term of this Agreement, the Company shall pay directly (or, at Consultant's election, shall reimburse Consultant for) any and all costs and expenses incurred in the operation and maintenance of the G-4 up to a maximum amount of two million dollars, including, without limitation, all costs and expenses associated with all maintenance and repairs of the G-4, all costs and expenses for fuel, insurance, airport and landing fees, and all costs and expenses associated with provid- ing Consultant with the services of duly licensed pilots, on a full-time basis, comparable in experience to those pilots employed by U.S. Healthcare on the day immediately preceding the Merger Date. If the Internal Revenue Service or any state or local taxing authorities (indi- vidually and collectively referred to as "Taxing Authori- ty") takes the position that the benefits provided pursu- ant to the second sentence of this Section 5 during the Term of this Agreement results in the receipt of taxable income to Consultant, the Company shall pay Consultant an amount equal to the sum of (x) the aggregate Federal, state, and local income and employment taxes (and any penalties and interest thereon) imposed on Consultant as a direct result of the use of these benefits during the Term of this Agreement, (y) any costs reasonably incurred by Consultant (including reasonable attorneys' fees and expenses) directly resulting from Consultant's participa- tion in proceedings with any Taxing Authority relating to the tax consequences of the use of these benefits during the Term of this Agreement, and (z) the aggregate Feder- al, state, and local income and employment taxes imposed on Consultant with respect to the amounts payable hereun- der, including taxes payable under this clause (z) (col- lectively, the "Gross-Up Payment"). Subject to Section 10 below, Consultant shall be responsible for all such taxes and costs arising out of the transaction referred to in the first sentence of this Section 5. 6. Confidential Information; Non-Competition; _________________________________________ Company Property. Consultant and the Company recognize ________________ that, due to the nature of his prior history with U.S. Healthcare and his independent consulting relationship with the Company, Consultant has had and will continue to have access to and an opportunity to develop confidential business information, proprietary information, and trade secrets relating to the business and operations of U.S. Healthcare and the Company. Consultant acknowledges that such information is valuable to the business of the Company and that disclosure to, or use for the benefit of, any person or entity other than the Company or any affiliate of the Company, would cause substantial damage to the Company. Consultant further acknowledges that the Consulting Services he provides to the Company include the duty to develop and maintain client, customer, em- ployee, supplier and other business relationships on behalf of the Company; and that access to and development of those close business relationships for the Company render his services special, unique and extraordinary. In recognition that the good will and business relation- ships described herein are assets and part of the value being acquired pursuant to the Merger Agreement, and that loss of or damage to those relationships would destroy or diminish the value of the Company, Consultant agrees as follows: 6.1. Non-Competition. During the Consulting _______________ Period and for a period of five years thereafter (the "Non-Competition Period"), and regardless of the reason Consultant's services are terminated, Consultant shall not engage in any of the following activities, either directly or indirectly (individually, or through or on behalf of another entity as owner, investor, director, partner, agent, employee, consultant, or in any other capacity): (i) engage in any business which is, as of the time of any occurrence under this Section 6.1 (and, for the period after Consultant's Date of Termination, was, as of Consultant's Date of Termination), in competi- tion with any of the health care operations conducted directly or indirectly by the Company or any of its affiliates: (A) in the United States; or (B) in any other country (except Israel) where, as of the Merger Date, the Company or any of its affiliates, is engaged in any health care operations ("Competitive Business"); (ii) contact, communicate with, solicit, or accept the business of any Company Client (as defined below) for the purpose of making arrangements to provide such Company Client with services of the type then or previously provided by the Company, except on behalf of and for the benefit of the Company; (iii) engage in any activity to interfere with, disrupt or damage the business of the Company or any affiliate; or (iv) hire any Employee (as defined below) of the Company or any of its affiliates; or solicit, encourage, or engage in any activity to induce any Em- ployee of the Company or any of its affiliates to termi- nate employment with the Company or such affiliate, or to become employed by, or to enter into a business relation- ship with, any other person or entity. Nothing herein, however, will prohibit Consul- tant from acquiring or holding not more than five percent of any class of publicly traded securities of any Compet- itive Business; provided that such securities entitle Consultant to no more than five percent of the total outstanding votes entitled to be cast by securityholders of such business in matters on which such securityholders are entitled to vote. For purposes of the Non-Competi- tion Period of this Agreement, the term "Company Client" shall mean: (A) any person or entity who as of the date immediately preceding Consultant's Date of Termination: (i) is a supplier, customer or client of the Company or any of its affiliates; or (ii) during the 12 month period prior to Consultant's Date of Termination had been solic- ited by Consultant on behalf of the Company or any of its affiliates to provide or receive services as a supplier, client or customer of the Company or any of its affili- ates; and (B) any other supplier, client or customer of the Company or any of its affiliates, as the Company and Consultant shall mutually agree to in writing after Consultant's Date of Termination. The term "Employee" as used in this Agreement means: (i) any employee or consul- tant of the Company or any of its affiliates, or (ii) any person or entity who, within 12 months prior to Consultant's Date of Termination, had left the employment or service of the Company or any of its affiliates. 6.2. Confidential Information. During the Non- ________________________ Competition Period, and at all times thereafter, Consul- tant shall maintain the confidentiality of all trade secrets and confidential or proprietary information of the Company or its affiliates and, except in furtherance of the business of the Company or its affiliates, he shall not directly or indirectly disclose any such infor- mation to any person or entity. 6.3. Company Property. Consultant acknowledges ________________ that all originals and copies of materials, records and documents relating to the business of U.S. Healthcare or the Company generated by him or coming into his posses- sion during his employment with U.S. Healthcare or during the Term of this Agreement are the sole property of the Company ("Company Property"). Upon the expiration of the Consulting Period, or upon request of the Company at any time, Consultant shall promptly deliver to the Company all copies of Company Property in his possession or control. 6.4. Company's Remedies for Breach. Consultant _____________________________ acknowledges that if he breaches any provision of this Section 6, the Company or its affiliates will suffer irreparable injury. It is therefore agreed that the Company (or its affiliates) shall have the right to enjoin any such breach, without posting any bond. The existence of this right to injunctive, or other equitable relief, shall not limit any other rights or remedies the Company may have at law or in equity including, without limitation, the right to monetary, compensatory and punitive damages. Consultant acknowledges and agrees that the provisions of this Section 6.4 are reasonable and necessary for the successful operation of the Company. 6.5 Compensation for Non-Competition Agree- ______________________________________ ment. In recognition of his singular contribution to the ____ success of U.S. Healthcare and in consideration of the Consultant's agreement to abide by the restrictive cove- nants set forth above in Sections 6.1, 6.2 and 6.3 the Company shall pay Consultant (or his legal representative or estate, as the case may be), the following amounts, regardless of any termination of his services as a Con- sultant under this Agreement for any reason: (i) the sum of ten million dollars ($10,000,000), payable on the Merger Date; (ii) during the five-year period commencing on the Merger Date, two million dollars ($2,000,000) per year in equal quarterly installments, in arrears; and (iii) a final lump sum payment in the amount of five million dollars ($5,000,000), payable upon the Termina- tion or expiration of the Consulting Period. The amounts payable under this Section 6.5 shall be payable half in cash and half in shares of common stock of the Company ("Company Common Stock") that has a Fair Market Value (calculated as described below) equal to half of the required payment. The Fair Market Value of the Company Common Stock shall be determined on any date of determi- nation as follows: (A) if the Company Common Stock then trades on the New York Stock Exchange (or any other national securities exchange), the Fair Market Value of the Company Common Stock, on a per share basis, shall be the average of the last reported sale prices per share of the Company Common Stock (or, in the case of the first payment hereunder, the common stock of Aetna Life and Casualty Company) during the 15 trading days immediately preceding the date of determination on the New York Stock Exchange (or such other exchange as has the greatest trading volume in such security during such period); or (B) if the Company Common Stock is no longer traded on the New York Stock Exchange or any other national securi- ties exchange, then any amount payable to Consultant under this Section 6.5 shall be paid entirely in cash. The Company and Consultant agree to enter into an agree- ment providing for certain registration rights to be provided to Consultant covering the Company Common Stock on terms and conditions that are mutually satisfactory to the Company and Consultant. 6.6. Survival and Independent Covenants. The __________________________________ provisions of this Section 6 shall survive termination of this Agreement. The covenants of Section 6 shall be construed as independent of any of the other provisions contained in this Agreement. 7. Termination of Consultant's Services. The ____________________________________ Consulting Period may be terminated during the Term of this Agreement as follows: (a) Death. Consultant's services shall termi- _____ nate automatically upon Consultant's death, which date shall be the Date of Termination. (b) Disability. If, as a result of __________ Consultant's incapacity due to physical or mental illness (as determined by a medical doctor mutually agreed to by Consultant or his legal representative and the Company), Consultant shall have been absent from his duties for a period of six consecutive months and, within 30 days after written Notice of Termination (as defined in sub- section (f) of this Section 7) is given, shall not have returned to the performance of his duties hereunder ("Disability"), the Company may terminate Consultant's services hereunder. In this event, the Date of Termina- tion shall be 30 days after Notice of Termination is given (provided that Consultant shall not have returned to the performance of his advisory services during such 30 day period). (c) Cause. The Board of Directors of the _____ Company (the "Board") may terminate Consultant's services at any time for "Cause." For purposes of this Agreement, "Cause" shall mean that the Board concludes, in good faith and after reasonable investigation that: (i) Con- sultant is convicted of a felony involving dishonesty with respect to the Company; or (ii) Consultant committed an act of fraud relating to the business of the Company. If Consultant's services are terminated for Cause, the Date of Termination is the day that Consultant receives the Notice of Termination. (d) Without Cause. The Board may terminate _____________ Consultant's services at any time without Cause, and the Date of Termination is the day that Consultant receives the Notice of Termination. (e) Resignation. If Consultant resigns or ___________ otherwise terminates his services under this Agreement with the Company, the Date of Termination is the date of such resignation or termination as set forth in the Notice of Termination received by the Company. (f) Notice of Termination. Any termination of _____________________ Consultant's services by the Company or by Consultant, other than termination as a result of death, shall be communicated by Notice of Termination, which shall be in writing and shall set forth in detail the reasons there- for. 8. Payments Upon Termination. _________________________ (a) Death, Disability, or Without Cause. In ___________________________________ the event the Consultant's services are terminated during the term of this Agreement by reason of Consultant's death or Disability (as defined above in Section 7(b)), or by the Company without Cause, the Company shall pay to Consultant or, in the event of his death, to Consultant's estate or, in the event of his Disability, to Consultant or his legal representative, within seven days of the Date of Termination: (i) all unpaid Consulting Fees accrued as of the Date of Termination; (ii) any accrued, unpaid compensation or benefits due to Consultant upon death or Disability under the terms of any benefit or insurance plan, policy or program of U.S. Healthcare or provided by the Company pursuant to Section 4(b) in effect at the time Consultant receives Notice of Termina- tion or at the time of death; and (iii) all Consulting Fees to which Consultant would have been entitled had Consultant continued working through the remainder of the Term of this Agreement, payable in a lump sum. In addi- tion, the Company shall (i) continue to make any pay- ments required by and in accordance with Section 6.5; and (ii) provide for the continuation of Consultant's cover- age, at the Company's sole cost and expense, in any disability, accident or health insurance plans, policies or programs provided by the Company pursuant to Section 4(b) through the remainder of the Term of this Agreement. Except as so provided, no further benefits, compensation or rights continue to accrue to Consultant after the Date of Termination. (b) For Cause or Resignation. If Consultant's ________________________ services are terminated for Cause, or Consultant resigns or terminates his services with the Company for any reason (other than the Company's breach of its obligation to make any payments due to Consultant under this Agree- ment), the Company shall pay to Consultant: (i) all unpaid Consulting Fees accrued and payable as of the Date of Termination; (ii) any other compensation or benefits due and payable to Consultant under the terms of any benefit or insurance plan, policy or program of provided by the Company pursuant to Section 4(b) in effect at the time the Notice of Termination is received; and (iii) in the event Consultant resigns or terminates his services hereunder, any amounts owed to Consultant pursuant to, and in accordance with Section 6.5. Except as so provid- ed, no further benefits, compensation or rights continue to accrue to Consultant after the Date of Termination. (c) Mitigation. Consultant shall not be __________ required to mitigate any amounts payable pursuant to this Section 8. (d) Expiration of the Term. If Consultant's ______________________ services by the Company terminate because either the Company or Consultant gives timely written notice to the other party in accordance with Section 2 above, then this Agreement (other than Section 6) shall terminate at the end of the Initial Term and, until that time, the rights and obligations of the Company and Consultant under this Agreement shall continue in full force and effect. 9. Indemnification; Attorneys' Fees. The Company ________________________________ shall indemnify and hold Consultant harmless to the maximum extent permitted by the laws of the State of Connecticut and the Charter and By-Laws of the Company, as applicable: (i) against all costs, expenses, liabili- ties and legal fees which Consultant may incur in the discharge of his services under this Agreement; and (ii) against all judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees in- curred by Consultant, in connection with the defense, or as a result of any action or proceeding (or any appeal from any action or proceeding) in which Consultant is made or is threatened to be made a party by reason of the fact that he is or was an officer, director or agent of U.S. Healthcare or the Company, regardless of whether such action or proceeding is one brought by or in the right of the Company to procure a judgment in its favor. The Company shall cause Consultant to be insured under the Company's Directors and Officers' Liability Insurance Policy as in effect from time to time or, if such Policy would not permit the Consultant to be covered thereby, the Company shall provide Consultant with an insurance policy providing comparable coverage. In connection with any dispute or proceeding arising under this Agreement where Consultant is ultimately the substantially prevail- ing party, the Company shall promptly reimburse Consul- tant for all costs, including, without limitation, the reasonable attorneys' fees of any attorney of Consultant's choosing, incurred by Consultant in any such dispute or proceeding arising under this Agreement. Any termination of Consultant's services, or of this Agree- ment, shall have no effect on the continuing operation of this Section 9. 10. Gross-Up For Excise Tax. _______________________ (a) Whether or not Consultant becomes entitled to any payments under Section 8 hereof, if any payments or benefits received or to be received by Consultant (including, without limitation, any payments or benefits received or to be received by Consultant pursuant to any U.S. Healthcare stock options), whether pursuant to Sections 4 or 5 hereof, or any other provision of this Agreement or any other plan, arrangement or agreement with the Company or U.S. Healthcare or its affiliates in effect on the date hereof in connection with the services rendered by Consultant to U.S. Healthcare or the Company (such payments or benefits, excluding the Gross-Up Pay- ment described herein, being hereinafter referred to as the "Total Payments"), will be subject to any excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "Excise Tax"), the Company shall pay to Consultant an additional amount (the "Gross-Up Payment"), such that the net amount retained by Consul- tant after deduction of any Excise Tax on the Total Payments and any Federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Pay- ment, shall be equal to the Total Payments. (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax: (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b) (2) of the Code) unless, in the opinion of tax counsel selected by the Company and reasonably acceptable to Consultant ("Tax Counsel"), a reasonable basis exists for determining that such pay- ments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b) (4) (A) of the Code; (ii) all "excess parachute payments" within the meaning of section 280G(b) (1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, a reasonable basis exists for determining that such excess parachute pay- ments (in whole or in part) represent reasonable compen- sation for services actually rendered (within the meaning of section 280G(b) (4) (B) of the Code) in excess of the "base amount" (within the meaning of section 280G(b) (3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax; and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by an independent auditor selected by the Company and reasonably acceptable to Consultant, in accordance with the principles of sections 280G(d) (3) and (4) of the Code. For purposes of deter- mining the amount of the Gross-Up Payment, Consultant shall be deemed to pay Federal income tax at the highest marginal rate of Federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of Consultant's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 10), net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes. (c) In the event that the Excise Tax is final- ly determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Consultant shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attribut- able to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and Federal, state, and local income and employment taxes imposed on the Gross-Up Payment being repaid by Consultant to the extent that such repayment results in a reduction in Excise Tax and/or a Federal, state, or local income or employment tax deduction) plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b) (2) (B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable to Consultant with respect to such excess) at the time that the amount of such excess is finally determined. Consultant and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceed- ings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 11. No Setoff. The Company's obligations to make _________ the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affect- ed by any setoff, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Consultant. 12. Compliance with Other Agreements. Consultant ________________________________ represents and warrants to the Company that the execution of this Agreement by him and the performance of his obligations hereunder, will not conflict with, breach, or constitute a default under any agreement to which Consul- tant is a party or by which Consultant is bound. 13. Enforceability. If any provision of this Agree- ______________ ment is determined by a court of competent jurisdiction to be not enforceable in the manner set forth in this Agreement, Consultant and the Company agree that it is the intention of the parties that such provision should be enforceable to the maximum extent possible under applicable law. If any provisions of this Agreement are held to be invalid or unenforceable, such invalidation or unenforceability shall not affect the validity or en- forceability of any other provision of this Agreement (or any portion thereof). 14. Governing Law. This Agreement shall be gov- _____________ erned by and construed in accordance with the laws of the State of Connecticut, without giving effect to the con- flicts of laws principles thereof. 15. Amendments. This Agreement may not be amended __________ or modified except by a written agreement executed by Consultant and the Company (upon approval by the Board), or by their successors or legal representatives. 16. Notices. All notices and other communications _______ under this Agreement shall be in writing and shall be given by hand delivery to the other party or by regis- tered or certified mail, return receipt requested, post- age prepaid, addressed as follows: If to Consultant: ________________ Mr. Leonard Abramson c/o U.S. Healthcare 980 Jolly Road Blue Bell, PA 19422 With copies to: Howard G. Godwin, Jr., Esq. Brown & Wood One World Trade Center New York, NY 10048 If to the Company: _________________ Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut 06156 With copies to: David L. Caplan, Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 or to such other address as either party shall have furnished to the other in writing in accordance with this Agreement. Notices and communications shall be effective when actually received by the addressee. 17. Waiver. Consultant's or the Company's failure ______ to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of that provi- sion, or of any other provision of this Agreement. Any waiver by the Company shall not be effective unless approved by the Board and set forth in a writing signed by the Chief Executive Officer of the Company. 18. No Other Agreements. This Agreement contains ___________________ the entire understanding of the Company and Consultant with respect to the independent consulting relationship between the Company and Consultant, except as to benefit plans of U.S. Healthcare or provided by the Company pursuant to Section 4(b) which are governed by the terms thereof. Any prior agreements, oral or written, and any prior representations are hereby superseded and are of no further force and effect. Neither the Company nor Con- sultant has relied on any representations in connection with entering into this Agreement other than those ex- pressly set forth herein, and those set forth in the Merger Agreement. 19. Cooperation. Consultant agrees to give prompt ___________ written notice to the Company of any claim or injury relating to the Company, and to fully cooperate in good faith and to the best of his ability with the Company in connection with all pending, potential or future claims, investigations or actions which directly or indirectly relate to any transaction, event or activity about which Consultant may have knowledge because of his employment with U.S. Healthcare or his Consulting Services to the Company. Such cooperation shall include all assistance that the Company, its counsel, or its representatives may reasonably request, including reviewing documents, meet- ing with counsel, providing factual information and material, and appearing or testifying as a witness. If the Company requires such assistance from Consultant after the expiration of the Term of this Agreement, this Company shall reasonably compensate Consultant for his time based on a per diem rate derived, pro rata, from the Consulting Fee. 20. Binding Effect. This Agreement shall be bind- ______________ ing upon and inure solely to the benefit of the parties hereto and their respective successors, permitted as- signs, heirs, and legal representatives, including any corporation or other business organization with which the Company may merge or consolidate. Nothing in this Agree- ment, express or implied, is intended to confer upon any other person or entity any rights or remedies. 21. Business Days. If any action or payment is due _____________ on a day which is not a Business Day, as defined below, then such action or payment (without any additional interest) shall be made on the next Business Day. For purposes of this Agreement, "Business Day" shall mean any day excluding Saturday, Sunday, and any day on which banking institutions close. 22. Headings. The captions of this Agreement are ________ not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. /s/ Leonard Abramson ____________________ Leonard Abramson Butterfly, Inc. By:/s/ Ronald Compton _____________________ Name: Ronald Compton Title: President ADDENDUM TO AGREEMENT Dated as of April 1, 1996 1. This addendum shall constitute an amendment to the Agreement, dated as of March 30, 1996, between the parties hereto (the "Agreement"), in accordance with Section 15 of the Agreement. Notwithstanding anything to the contrary in Section 6.1 of the Agreement, during the term of the Agree- ment and thereafter, Leonard Abramson, at his discretion, may hire or solicit any of the following employees of U.S. Healthcare, Inc.: (a) up to two (2) secretaries; (b) up to three (3) security personnel; (c) up to three (3) aviation personnel; and (d) with prior consent of Butterfly, Inc. (which shall not be unreasonably withheld), a limited number of non-key employees. 2. Except as otherwise specified herein, all of the terms of the Agreement shall remain in full force and effect. This Addendum will be governed by and construed in accordance with the Laws of the State of Connecticut applicable to agreements made and to be performed in that State, without giving effect to the conflicts of laws principles thereof. /s/ Leonard Abramson ____________________ Leonard Abramson Butterfly, Inc. By:/s/ Richard L. Huber _____________________ Name: Richard L. Huber Title: Vice President EX-10 6 MATERIAL CONTRACTS 1 January 31, 1996 Mr. Richard L. Huber Aetna Life and Casualty Company 151 Farmington Avenue Hartford, CT 06156 Dear Dick: This is to confirm our understanding with respect to the use of "Aetna" in the name of the corporate entity that will own The Aetna Casualty and Surety Company and The Standard Fire Insurance Company. You have agreed to permit us limited rights to use the name "Travelers/Aetna Property Casualty Corp." as the name of such holding company and we have agreed as follows: (i) the name will only be used in full in similar size type; (ii) the entity will not be an insurance company; (iii) no later than December 31, 1997, the name of the entity will be changed to eliminate the word "Aetna"; and (iv) it is our mutual intent that the name be used only for the corporate holding company and for holding company types of activities [such as selling holding company securities (provided that any prospectus state that the holding company is not controlled by Aetna Life and Casualty Company, or its successor), dealing with the investment community, corporate advertising of the existence of the holding company, and usage of business cards and letterheads by the senior employees on matters directly related to holding company types of activities] and expressly not used for operating company types of activities [such as sales, advertising, marketing or transmitting insurance policies, bonds or other products or services to customers or potential customers, executing leases, purchase agreements and other agreements related to the operation of the operating companies, or pursuing causes of action which arise out of the activities of the operating companies]. The rights to the names and marks licensed under the License Agreement dated as of November 28, 1995 (the "License Agreement"), which was annexed as Exhibit 7.4(a) to the Stock Purchase Agreement between The Travelers Insurance Group Inc., and Aetna Life and Casualty Company (the "Stock Purchase Agreement"), shall not be otherwise affected in any way by this letter agreement and our rights to use the "Travelers/Aetna Property Casualty Corp." name shall be governed by the License Agreement as if the name had been included on its Schedule A, except to the extent that this letter agreement imposes additional restrictions on our rights to such name. This letter agreement constitutes and amendment to Section 7.4(b) of the Stock Purchase Agreement. Except as otherwise specifically set forth herein, the Stock Purchase Agreement remains in full force and effect. 2 If the foregoing sets forth your understanding of our agreement, please so indicate by signing two copies of this letter in the space provided below and return one fully executed copy to me at your earliest convenience. The Travelers Insurance Group Inc. By: /s/ Jay S. Fishman __________________________________ Jay S. Fishman Vice Chairman ACKNOWLEDGED AND AGREED: Aetna Life and Casualty Company By: /s/ Richard L. Huber _______________________________ Richard L. Huber Vice Chairman EX-10 7 MATERIAL CONTRACTS 1 AMENDMENT TO STOCK PURCHASE AGREEMENT Pursuant to Section 13.2(a) of the Stock Purchase Agreement (the "Purchase Agreement") dated as of November 28, 1995 between Aetna Life and Casualty Company, a Connecticut stock insurance corporation (the "Seller") and The Travelers Insurance Group Inc., a Connecticut stock insurance corporation, which entity has assigned its rights and obligations under the Purchase Agreement to Travelers/Aetna Property Casualty Corp. a Delaware corporation (the "Buyer"), and relating to the purchase and sale of 100% of the common stock of The Aetna Casualty and Surety Company and The Standard Fire Insurance Company, Buyer and Seller hereby: 1. amend Section 6.3 of the Purchase Agreement by deleting the phrase "Regulation 113 of the New York Insurance Department" from such section and replacing such phrase with the phrase: "Regulation 114 of the New York Insurance Department"; 2. amend Section 7.4(f) of the Purchase Agreement by inserting after the phrase "other printed material or matter which are included as of the Closing in the assets or inventory of any Company or any Subsidiary of any Company" the phrase "as well as any system- generated material or matter used by any Company or any Subsidiary of any Company" and by inserting after the phrase "(excluding signs" the phrase "and discontinue use of such system-generated material or matter"; 3. amend the Purchase Agreement by adding a new Section 7.14 as follows: 7.14 Certain Agreements Relating to Real Property. _____________________________________________ (a) Buyer and Seller hereby agree to reasonably cooperate from and after the Closing Date to modify existing property tax consulting agreements entered into by Aetna Life Insurance Company on its own behalf and on behalf of entities under common control with or controlled by Aetna Life Insurance Company, to the extent that such agreements relate to properties owned by the Companies or by Subsidiaries of the Companies as of the Closing Date to equitably apportion the rights and responsibilities thereunder based on the ownership of the properties affected thereby, and to obtain any required consent of the parties to such agreements. 2 (b) Buyer and Seller hereby agree to reasonably cooperate from and after the Closing Date to modify or, if Buyer and Seller agree, to terminate that certain Management Agreement dated as of November 30, 1993 by and between Aetna Life Insurance Company, Aetna Casualty and Surety Company and AE Properties, Inc. as it relates to Pratt Street Limited Partnership (collectively, "Owner") and LaSalle Partners ("Manager"), which agreement relates to CityPlace I, 242 Trumbull Street, Pratt Street Retail and Civic Center Mall ("CityPlace I"), to secure a replacement agreement between Aetna Casualty and Surety Company and Manager relating to CityPlace I and to obtain the consent of the Manager to such termination and replacement agreement; provided, however, that Buyer will not be required to incur any costs in obtaining such consents; and 4. agree that if there are any books, records, assets or other items that Seller is obligated to produce, make available or deliver under the terms of the Purchase Agreement, such obligation in respect of such books, records, assets or other items shall survive the Closing (as defined in the Purchase Agreement) to the extent that any such books, records, assets or other items have not been delivered to Buyer as of the Closing. 5. agree that the representations contained in Section 3.11(b) shall survive the Closing for ninety (90) days but only to the extent of written notice received prior to the Closing by the executive officers, the chief legal or compliance officers of the Seller or the Companies or the senior in-house counsel for property and casualty insurance matters of the Companies and their Subsidiaries; provided, however, that the Agreement dated April 2, 1996 by and between Aetna Life and Casualty Company, The Aetna Casualty and Surety Company and Travelers/Aetna Property Casualty Corp. relating to American Re Corporation shall be the sole remedy with respect to the subject matter thereof. 3 This amendment shall be governed by and construed in accordance with the law of the State of New York, without regard to the conflict of laws rules of such state. This amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Except as amended hereby, the terms of the Purchase Agreement are unmodified and remain in full force and effect. IN WITNESS WHEREOF, Buyer and Seller have caused this amendment to be duly executed by their respective authorized officers as of the 2nd day of April, 1996. TRAVELERS/AETNA PROPERTY CASUALTY CORP. BY: /s/William P. Hannon ___________________________ Name: William P. Hannon Title: CFO AETNA LIFE AND CASUALTY COMPANY By: /s/Robert E. Broatch ___________________________ Name: Robert E. Broatch Title: Senior Vice President, Finance 3 EX-12 8 STATEMENT RE COMPUTATION OF RATIOS 1 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
3 Months Ended (Millions) March 31, 1996 1995 1994 1993 1992 1991 ______________ ____ ____ ____ ____ ____ Pretax income (loss) from continuing operations........... $ 246.3 $ 726.2 $ 627.5 $(1,014.7) $ 145.5 $ (97.9) Add back fixed charges............ 49.7 187.0 170.8 154.7 171.5 200.5 Minority interest................ 4.0 16.1 11.4 7.0 8.6 5.9 ________ _________ ________ ________ ________ ________ Income (loss) as adjusted..... $ 300.0 $ 929.3 809.7 $ (853.0) $ 325.6 $ 108.5 ________ _________ ________ _________ ________ ________ ________ _________ ________ _________ ________ ________ Fixed charges: Interest on indebtedness....... $ 31.7(1) $ 115.9(1) $ 98.6(1) $ 77.4 $ 81.4 $ 110.9 Portion of rents representative of interest factor............ 18.0 71.1 72.2 77.3 90.1 89.6 ________ _________ ________ _________ ________ ________ Total fixed charges........... $ 49.7 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5 ________ _________ ________ _________ ________ ________ ________ _________ ________ _________ ________ ________ Preferred stock dividend requirements.................... - - - - - - ________ _________ ________ _________ ________ ________ Total combined fixed charges and preferred stock dividend requirements.................... $ 49.7 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5 ________ _________ ________ _________ ________ ________ ________ _________ ________ _________ ________ ________ Ratio of earnings to fixed charges......................... 6.04 4.97 4.74 (5.51) 1.90 .54 ________ _________ ________ _________ ________ ________ ________ _________ ________ _________ ________ ________ Ratio of earnings to combined fixed charges and preferred stock dividends................. 6.04 4.97 4.74 (5.51) 1.90 .54 ________ _________ ________ _________ ________ ________ ________ _________ ________ _________ ________ ________ (1) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1995 Annual Report to Shareholders.)
EX-15 9 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION 1 Letter Re: Unaudited Interim Financial Information ___________________________________________________ Aetna Life and Casualty Company Hartford, Connecticut Gentlemen: Re: Registration Statements No. 2-73911, 2-91514, 33-12993, 33-49543, 33-50427, 33-52819, 33-52819-01 and 33-62893 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated April 25, 1996 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. By /s/ KPMG PEAT MARWICK LLP _____________________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut April 25, 1996 EX-27 10 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the quarterly period ended March 31, 1996 for Aetna Life and Casualty Company and is qualified in its entirety by reference to such statements. 1,000,000 3-MOS DEC-31-1996 MAR-31-1996 30,345 0 0 929 7,948 1,302 42,490 1,559 0 2,007 84,102 18,460 159 1,479 21,703 986 0 0 1,474 5,554 84,102 1,844 886 62 518 2,237 37 0 246 81 166 182 0 0 348 3.00 0 0 0 0 0 0 0 0 There is no difference between primary and fully diluted earnings per share.
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