<PAGE>
================================================================================
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 period ended: June 30, 1996
Commission file number: 33-67268
-----------
ARM FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1244251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
239 S. FIFTH STREET, 12TH FLOOR
LOUISVILLE, KENTUCKY 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 582-7900
Indicate by check mark whether the registrant (i) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
As of June 30, 1996, 23,775 and 1,000 shares of the registrant's Class A
and Class B common stock, respectively, were outstanding, all of which are
privately owned and not traded on a public market.
================================================================================
Exhibit Index is on page 26
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
<S> <C>
1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--June 30, 1996
and December 31, 1995............................................ 3
Condensed Consolidated Statements of Operations--
Six and Three Months Ended June 30, 1996 and 1995................ 5
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1996 and 1995.......................... 6
Notes to Condensed Consolidated Financial Statements.............. 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 11
</TABLE>
PART II. OTHER INFORMATION
<TABLE>
<S> <C>
1. Legal Proceedings.................................................. 24
6. Exhibits and Reports on Form 8-K................................... 24
Signatures......................................................... 25
Exhibit Index...................................................... 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
-------------------------- -------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
(In thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------- -------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Cash and investments:
Fixed maturities available-for-sale, at
fair value (amortized cost: June 30,
1996-$2,854,061; December 31,
1995-$2,490,843) $2,812,843 $2,547,909 $2,812,843 $2,547,909
Equity securities, at fair value (cost:
June 30, 1996-$16,345;
December 31, 1995-$10,756) 16,331 11,751 16,331 11,751
Mortgage loans on real estate 41,593 43,943 41,593 43,943
Policy loans 120,315 117,528 120,315 117,528
Cash and cash equivalents 57,489 76,896 57,489 76,896
-------------------------- -------------------------
Total cash and investments 3,048,571 2,798,027 3,048,571 2,798,027
Assets held in separate accounts 954,964 809,927 954,964 809,927
Accrued investment income 35,513 36,382 35,513 36,382
Value of insurance in force 66,165 51,051 118,715 98,977
Deferred policy acquisition costs 50,947 43,113 -- --
Goodwill 7,880 8,124 7,880 8,124
Deferred federal income taxes 46,845 19,776 44,599 48,642
Other assets 24,033 27,180 24,033 27,180
-------------------------- -------------------------
Total assets $4,234,918 $3,793,580 $4,234,275 $3,827,259
========================== =========================
</TABLE>
3
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
-------------------------- -------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
(In thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------------- -------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $3,062,628 $2,708,260 $3,007,618 $2,742,209
Customer deposits in separate accounts 949,052 808,345 949,052 808,345
Long-term debt 40,000 40,000 40,000 40,000
Payable for investment securities
purchased 12,856 8,538 12,856 8,538
Accounts payable and accrued expenses 11,699 15,496 11,699 15,496
Other liabilities 12,788 24,950 12,788 24,950
-------------------------- -------------------------
Total liabilities 4,089,023 3,605,589 4,034,013 3,639,538
Contingencies
Shareholders' equity:
Preferred stock, $25.00 stated value 50,000 50,000
Class A common stock, $.01 par value,
23,775 and 23,770 shares issued,
respectively * *
Class B common stock, $.01 par value,
1,000 shares issued * *
Additional paid-in capital 124,456 124,425
Net unrealized gains (losses) on
available-for-sale securities (21,709) 28,530
Retained-earnings deficit (6,852) (14,964)
--------------------------
Total shareholders' equity 145,895 187,991 200,262 187,721
-------------------------- -------------------------
Total liabilities and shareholders' equity $4,234,918 $3,793,580 $4,234,275 $3,827,259
========================== =========================
</TABLE>
* Less than $1,000.
See accompanying notes.
4
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
(Dollars in thousands, except per share amounts) 1996 1995 1996 1995
- ------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Investment income $ 117,863 $ 84,963 $ 62,670 $ 45,371
Interest credited on customer deposits (86,012) (64,282) (44,897) (34,133)
--------------------------- ---------------------------
Net investment spread 31,851 20,681 17,773 11,238
Fee income:
Variable annuity fees 5,024 3,158 2,662 1,684
Asset management fees 2,711 1,131 1,196 678
Other fee income 628 228 343 145
-------------------------- ---------------------------
Total fee income 8,363 4,517 4,201 2,507
Other income and expenses:
Surrender charges 2,890 1,115 1,320 549
Operating expenses (15,187) (10,369) (7,830) (5,237)
Commissions, net of deferrals (1,197) (490) (653) (299)
Interest expense on long-term debt (1,531) (1,673) (744) (697)
Amortization:
Deferred policy acquisition costs (3,105) (1,291) (1,418) (709)
Value of insurance in force (4,481) (2,486) (2,424) (1,481)
Acquisition-related deferred charges (251) (2,444) (125) (1,378)
Goodwill (244) (47) (122) (47)
Other, net (2,640) (410) (1,971) (224)
-------------------------- ---------------------------
Total other income and expenses (25,746) (18,095) (13,967) (9,523)
Realized investment gains (losses) (1,217) 2,694 (814) 5,205
-------------------------- ---------------------------
Income before federal income taxes 13,251 9,797 7,193 9,427
Federal income tax expense (2,763) (4,938) (1,190) (4,742)
-------------------------- ---------------------------
Net income 10,488 4,859 6,003 4,685
Dividends on preferred stock (2,376) (2,376) (1,188) (1,188)
-------------------------- ---------------------------
Net income applicable to common shareholders $ 8,112 $ 2,483 $ 4,815 $ 3,497
========================== ==========================
Net income per common share $ 327.44 $ 149.33 $ 194.35 $ 191.54
========================== ===========================
Average common shares outstanding 24,774 16,628 24,775 18,257
========================== ===========================
</TABLE>
See accompanying notes.
5
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 88,554 $ 55,456
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (1,526,142) (704,791)
Maturities and redemptions 118,596 45,315
Sales 1,044,921 622,198
Other investments:
Purchases (33,153) (5,133)
Maturities and redemptions 2,351 18,513
Sales 27,394 --
Policy loans, net (2,787) (2,633)
Purchase of assets held in separate accounts (132,932) (101,912)
Proceeds from sale of assets held in separate accounts 40,272 18,127
Cash and cash equivalents acquired in excess of purchase price
paid for substantially all assets of SBM Company -- 36,490
=========================
Cash flows used in investing activities (461,480) (73,826)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 63,505
Stock issuance costs -- (2,000)
Amounts received from customers 597,998 155,368
Amounts paid to customers (230,095) (188,105)
Increase (decrease) in repurchase agreement liability (12,008) 24,007
Preferred stock dividends (2,376) (2,376)
-------------------------
Cash flows provided by financing activities 353,519 50,399
-------------------------
Net change in cash and cash equivalents (19,407) 32,029
Cash and cash equivalents at beginning of period 76,896 45,855
-------------------------
Cash and cash equivalents at end of period $ 57,489 $ 77,884
=========================
</TABLE>
See accompanying notes.
6
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month and three month periods ended June
30, 1996 are not necessarily indicative of those to be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report on Form
10-K of ARM Financial Group, Inc. (the "Company") for the year ended December
31, 1995.
Certain amounts from prior periods have been reclassified to conform to the
current period presentation. These reclassifications had no effect on previously
reported net income or shareholders' equity.
2. FAIR VALUE BALANCE SHEETS
The consolidated balance sheets include a dual presentation of carrying
amount and fair value balances. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," fixed maturities classified as available-for-sale
are reported at fair value in the carrying amount balance sheets; however,
corresponding customer deposits are reported at historical values. In contrast,
in the fair value balance sheets both assets and liabilities are reported at
fair value. As permitted by SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," the fair value balance sheets are presented as a
supplemental disclosure to provide a more meaningful picture of the Company's
financial position.
SFAS No. 107 requires disclosure of fair value information about all
financial instruments, including insurance liabilities classified as investment
contracts, unless specifically exempted. The accompanying fair value balance
sheets reflect fair values for those financial instruments specifically covered
by SFAS No. 107, along with fair value amounts for other assets and liabilities
for which disclosure is permitted but not required.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
7
<PAGE>
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of the Company.
The Company seeks to reduce its exposure to changing interest rates through
the management of duration, convexity and cash flow characteristics of both
assets and liabilities while maintaining liquidity redundancies (i.e., sources
of liquidity in excess of projected liquidity needs). As a result, fair values
of the Company's assets and liabilities will tend to respond similarly to
changes in interest rates. Consequently, the Company believes that it will have
only limited volatility in its "fair value" adjusted shareholders' equity,
although volatility cannot be completely eliminated.
The following methods and assumptions were used in estimating fair values:
Fixed Maturities and Equity Securities
Fair values for fixed maturities and equity securities are based on quoted
market prices, where available. For fixed maturities for which a quoted market
price is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable instruments.
Mortgage Loans on Real Estate
Pursuant to the terms of the acquisition of certain of the Company's
insurance operations, payments of principal and interest on substantially its
entire current mortgage loan portfolio are guaranteed by The National Mutual
Life Association of Australasia Limited ("National Mutual"). Principal received
in excess of statutory book value is to be returned to National Mutual.
Accordingly, book value is deemed to be fair value for these mortgage loans.
Policy Loans
The carrying amount of policy loans approximates their fair value.
Cash and Cash Equivalents and Accrued Investment Income
The carrying amount of cash and cash equivalents and accrued investment
income approximates their fair value given the short-term nature of these
assets.
Assets Held in Separate Accounts and Customer Deposits in Separate Accounts
Fair value of assets held in separate accounts is based on the quoted
market prices of the underlying mutual funds for assets invested in variable
options. The fair value of assets held in separate accounts invested in
guaranteed rate options is primarily based on quoted market prices of fixed
maturity securities. The fair value of customer deposits in separate accounts is
based on the account values of the underlying policies, plus or minus market
value adjustments applicable to certain customers who are guaranteed a fixed
rate of return.
Goodwill
The carrying amount of goodwill approximates fair value.
8
<PAGE>
Deferred Federal Income Taxes
The deferred federal income tax asset and related valuation allowance were
adjusted for federal income tax which may be incurred as a result of the
differences between the estimated fair values and carrying amounts of the assets
and liabilities.
Customer Deposits and Value of Insurance In Force
The fair value of customer deposits for structured settlements and
immediate annuities is based on discounted cash flow calculations using a
current market yield rate for assets with similar durations (i.e., indexed to
the U.S. Treasury yield curve). The fair value of customer deposits for
structured settlements and immediate annuities represents the fair values of
those insurance policies as a whole which implicitly eliminates the
corresponding value of insurance in force. The fair value amounts of the
remaining customer deposits, primarily deferred annuities, single premium
endowments, and guaranteed investment contracts ("GICs"), represent the account
values of the underlying contracts before applicable surrender charges. The fair
value of the value of insurance in force represents the estimated present value
of future profits for all customer deposits, excluding those related to
structured settlements and immediate annuities, assuming a discount rate of 13%.
Deferred policy acquisition costs do not appear on the fair value presentation
because those values are implicitly considered in the determination of the fair
value of the corresponding customer deposits and value of insurance in force.
Long-Term Debt
The carrying amount of long-term debt approximates fair value.
Other Assets and Liabilities
The fair values of other assets and liabilities are reported at their
financial statement carrying amounts.
3. FEDERAL INCOME TAXES
Federal income taxes are different from the amount determined by
multiplying pretax earnings by the expected federal income tax rate of 35%.
The differences are primarily attributable to changes in valuation allowances
related to deferred federal income tax assets.
9
<PAGE>
4. STATUTORY INFORMATION
Following is a reconciliation of income based on statutory accounting
practices prescribed or permitted by insurance regulatory authorities for the
Company's insurance subsidiaries with net income reported in the accompanying
condensed consolidated statements of operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
(In thousands) 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Insurance subsidiaries (statutory-basis)/(1)/ $18,680 $14,116
Non-insurance companies/(2)/ (608) (628)
-----------------
Consolidated statutory-basis pretax operating income 18,072 13,488
Reconciling items:
Deferral of policy acquisition costs, net of amortization 7,071 7,304
Adjustments to customer deposits (329) (4,137)
Adjustments to invested asset carrying values at acquisition date (435) (247)
Amortization of value of insurance in force (4,481) (2,486)
Amortization of interest maintenance reserve (2,165) (2,070)
Amortization of goodwill (244) (47)
Amortization of acquisition-related deferred charges (251) (2,444)
Interest expense on long-term debt (1,531) (1,673)
Realized investment gains (losses) (1,217) 2,694
Federal income tax expense (2,763) (4,938)
Other (1,239) (585)
------------------
Consolidated GAAP-basis net income $10,488 $ 4,859
=================
</TABLE>
- -------------------------------
/(1)/ Insurance company general account and separate account statutory-
basis pretax income excluding realized gains and losses as reported
to insurance regulatory authorities.
/(2)/ Non-insurance company pretax loss excluding amortization of
acquisition-related deferred charges, interest expense on long-term
debt and realized investment gains and losses.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company specializes in the asset accumulation business, providing
retail and institutional customers with products designed to serve the growing
retirement and long-term savings markets as well as providing other asset
management services. At June 30, 1996, the Company had approximately $6.6
billion of assets under management.
The Company's revenues are derived from its spread-based business and
its fee-based business. The products and services of the spread-based and fee-
based businesses are sold in two principal markets, the retail and institutional
markets. In the spread-based line of business the Company earns a spread between
what it earns on invested assets and what it credits to customer accounts. In
the fee-based line of business the Company receives a fee for managing
customers' deposits.
The following discussion compares the Company's results of operations
for the six and three months ended June 30, 1996 and 1995. As the Company
acquired substantially all the assets and business operations of SBM Company
("SBM") effective May 31, 1995, the results of operations for the six and three
months ended June 30, 1996 include the acquired SBM operations for the entire
period. Results of operations for the six and three months ended June 30, 1995
include only one month of earnings related to acquired SBM operations.
Therefore, results of the current periods are not completely comparable with
results of the prior corresponding periods.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared with Six Months Ended June 30, 1995
Net income during the six months ended June 30, 1996 was $10.5 million
compared to $4.9 million for the six months ended June 30, 1995. Operating
earnings (net income applicable to common shareholders excluding realized
investment gains and losses net of taxes) were $8.9 million and $0.7 million for
the six months ended June 30, 1996 and 1995, respectively. The increase in
operating earnings is primarily attributable to an increase in net investment
spread due to ongoing asset/liability management and deposit growth from the
acquisition of the SBM business operations and, to a lesser extent, additional
sales of spread-based products. In addition, fee income increased as a result of
a growing base of variable annuity deposits and institutional assets under
management. Such increases in revenues were partially offset by increases in
operating and amortization expenses.
Annualized spread-based operating earnings were 1.01% and 0.92% of average
spread-based assets under management of $3.05 billion and $2.13 billion during
the six months ended June 30, 1996 and 1995, respectively. This increase in
spread-based margins is primarily attributable to ongoing asset/liability
management, which generated higher net investment spreads. Annualized fee-based
operating earnings were 0.18% and 0.20% of average fee-based assets under
management of $2.92 billion and $1.54 billion during the six months ended June
30, 1996 and 1995, respectively.
11
<PAGE>
Fee-based margins for the 1996 period were essentially flat compared to the
prior period resulting from a relatively consistent mix of variable annuity
deposits and other assets under management which generate fee income.
Net investment spread, which is the difference between income earned on
investments and interest credited on customer deposits, increased to $31.9
million during the six months ended June 30, 1996 from $20.7 million during the
six months ended June 30, 1995. These amounts reflect the net investment spread
of 2.05% and 1.85% during the six months ended June 30, 1996 and 1995,
respectively, between the Company's annualized investment yield on average cash
and investments and the annualized average rate credited on customer deposits.
The Company's investment income increased to $117.9 million during the six
months ended June 30, 1996 from $85.0 million during the six months ended June
30, 1995. These amounts represent annualized investment yields of 7.70% and
7.89% on average cash and investments of $3.06 billion and $2.15 billion during
the six months ended June 30, 1996 and 1995, respectively. The decrease in
annualized investment yields on cash and investments primarily relates to a
significant increase in sales of GICs, the proceeds of which are invested in
securities of shorter duration (which generally have lower investment yields)
than many of the Company's other investments.
Interest credited on customer deposits increased to $86.0 million during
the six months ended June 30, 1996 from $64.3 million during the six months
ended June 30, 1995. These amounts represent annualized average rates of
interest credited on customer deposits of 5.65% and 6.04% on average customer
deposits of $3.04 billion and $2.13 billion during the six months ended June 30,
1996 and 1995, respectively. The decrease in annualized average rates of
interest credited on customer deposits resulted from the Company's decision to
reset crediting rates during the second half of 1995 consistent with an overall
declining interest rate environment during that period.
Fee income increased to $8.4 million during the six months ended June 30,
1996 from $4.5 million during the six months ended June 30, 1995. This increase
is in part attributable to variable annuity fees which are based on the market
value of assets supporting the mutual fund options of variable annuity customer
deposits in separate accounts. Variable annuity fees increased to $5.0 million
during the six months ended June 30, 1996 from $3.2 million during the six
months ended June 30, 1995 principally due to asset growth from the receipt of
variable annuity deposits and, to a lesser extent, from a market-driven increase
in the value of existing variable annuity deposits invested in mutual funds.
Fee-based variable annuity deposits increased to $749.2 million at June 30, 1996
from $477.6 million at June 30, 1995. In addition, asset management fees earned
by ARM Capital Advisors, Inc. ("ARM Capital Advisors") on off-balance sheet
assets in private accounts increased to $2.7 million during the six months ended
June 30, 1996 from $1.1 million during the six months ended June 30, 1995. This
increase in asset management fees reflects a significant increase in the average
fair value of off-balance sheet assets managed due to sales. The average fair
value of off-balance sheet assets managed by the Company was $1.9 billion during
the six months ended June 30, 1996 compared to $1.1 billion during the six
months ended June 30, 1995.
12
<PAGE>
Assets under management by type of product and service as of June 30, 1996
and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
--------------------------------------------------
PERCENT OF PERCENT OF
(Dollars in millions) AMOUNT TOTAL AMOUNT TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Spread-based:
Retail (fixed annuity, guaranteed rate option and face-
amount certificate deposits) $2,634.8 40% $2,716.2 50%
Institutional (GIC deposits) 586.0 9 143.2 3
-------------------------------------------------
Total spread-based 3,220.8 49 2,859.4 53
Fee-based:
Retail (mutual fund options of variable annuity deposits
and off-balance sheet mutual fund assets managed) 984.1 15 845.7 16
Institutional (off-balance sheet assets managed in
private accounts and deposits under marketing
partnerships) 2,358.2 35 1,598.0 29
-------------------------------------------------
Total fee-based 3,342.3 50 2,443.7 45
Corporate and other (primarily cash and investments in
excess of customer deposits) 55.7 1 101.0 2
-------------------------------------------------
Total assets under management $6,618.8 100% $5,404.1 100%
=================================================
</TABLE>
The increase in spread-based deposits was attributable to sales of GICs
to institutional customers. The increase in the fee-based line of business is
primarily attributable to deposits under new investment management contracts
managed by ARM Capital Advisors. The Company continues to develop its fee-based
line of business, as reflected in its growth as a percentage of total assets
under management and, additionally, to diversify its spread-based and fee-based
products and services and expand their associated channels of distribution.
Sales for spread-based products include premiums and deposits received
under products issued by the Company's insurance and face-amount certificate
subsidiaries. Sales for fee-based products and services include premiums and
deposits for the mutual fund options of variable annuity products issued by the
Company's insurance subsidiaries and the amount of new off-balance sheet assets
managed by ARM Capital Advisors.
Sales by market and type of business for the six months ended June 30, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
(In millions) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Retail:
Spread-based $ 31.2 $ 64.0
Fee-based 127.5 65.4
-------------------
Total retail 158.7 129.4
Institutional:
Spread-based 441.3 25.0
Fee-based 822.5 350.6
-------------------
Total institutional 1,263.8 375.6
-------------------
Total sales $ 1,422.5 $ 505.0
===================
</TABLE>
13
<PAGE>
The increase in retail sales is attributable to sales of fee-based mutual
fund options of variable annuities due, in part, to the continuing strong stock
market returns during the first half of 1996 and marketing efforts. This
increase was somewhat offset by lower retail sales of spread-based fixed annuity
products due to greater industry-wide competition from banks and other financial
services institutions for savings products primarily as a result of a U.S.
Treasury yield curve that was generally flatter during the first half of 1996
relative to the first half of 1995. A flattened yield curve tends to weaken
sales of retail spread-based products due to increased competition from short-
term instruments such as bank certificates of deposit and money market funds
because the difference between short-term and intermediate-term market interest
rates decreases. The Company believes that the recent steepening of the yield
curve during the second quarter of 1996 may stimulate the demand for retail
spread-based fixed annuity products in the future. Expanded distribution
channels developed by the Company benefited sales of institutional spread-based
products (i.e., GICs), which accumulate interest based on short-term rates. The
Company's GIC products are issued mainly through a marketing partnership with
another insurance company. The increase in institutional fee-based sales is
primarily attributable to deposits in private accounts by new customers of ARM
Capital Advisors. The Company's strategy is to broaden its mix of products,
services and distribution channels to enable it to achieve its target sales
within different interest rate environments.
Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $173.5 million and $153.4 million during the six months ended
June 30, 1996 and 1995, respectively. Of these amounts, $54.4 million and $8.0
million, respectively, can be attributed to business acquired from SBM,
primarily fixed annuities. Surrender charge income increased to $2.9 million
during the six months ended June 30, 1996 from $1.1 million during the six
months ended June 30, 1995, due to higher average surrender charges associated
with SBM products compared to other products of the Company's insurance
subsidiaries and to the overall increase in the volume of surrenders. Policies
issued by the Company's insurance subsidiaries include lapse protection
provisions that provide a deterrent against surrenders when interest rates rise.
These provisions can include surrender charges and market value adjustments on
annuity withdrawals. During the period that surrender charges are assessable,
generally the first five to seven years after a policy is issued, surrenders are
relatively low. The surrender and withdrawal activity during the six months
ended June 30, 1995 and 1996 was generally expected by the Company due to the
level of customer deposits written several years ago that were subject to
declining or expiring surrender charges and the Company's strategy of
maintaining investment spreads. During the third quarter of 1994, and continuing
to-date, the Company began implementing programs designed to reduce surrender
activity and improve persistency. During the six months ended June 30, 1996 and
1995, through one such program, $9.6 million and $9.8 million, respectively, of
new annuity contracts were issued to customers that had initiated a withdrawal
request. The Company excludes this activity from its net surrenders and sales
disclosures because such amounts have no impact on net cash flow. Other programs
involve direct contact with customers and are designed to inform customers of
the financial strength of the Company and its insurance subsidiaries and to
describe other product offerings available.
Operating expenses increased to $15.2 million during the six months ended
June 30, 1996 from $10.4 million during the six months ended June 30, 1995. The
increase is primarily attributable to the inclusion of six months of incremental
operating expenses related to the acquired SBM
14
<PAGE>
operations in the 1996 results versus one month for the comparable 1995 period,
as well as the expansion of distribution channels.
Amortization of deferred policy acquisition costs related to operations was
$3.1 million and $1.3 million during the six months ended June 30, 1996 and
1995, respectively. This increase is the result of growth in the deferred policy
acquisition cost asset as variable costs of selling and issuing the Company's
insurance subsidiaries' products (primarily first-year commissions) are deferred
and then amortized over the expected life of the policy.
Amortization of value of insurance in force related to operations
increased to $4.5 million during the six months ended June 30, 1996 from $2.5
million during the six months ended June 30, 1995. The increase is primarily
related to amortization of the value of insurance in force established as an
asset by the Company on May 31, 1995 in connection with the acquisition of SBM's
insurance subsidiary.
Amortization of acquisition-related deferred charges was $0.3 million and
$2.4 million during the six months ended June 30, 1996 and 1995, respectively.
The decrease is primarily attributable to the accelerated amortization during
the third quarter of 1995 of certain costs and charges deferred during 1993 and
1994. During the third quarter of 1995, Company management determined that
changes in facts and circumstances had resulted in a change in their original
estimate of the periods benefited by these costs and charges. As a result of
this change in estimate, the remaining unamortized balances of these deferred
costs and charges were fully amortized as of September 30, 1995, resulting in
lower amortization in future periods.
Realized investment losses, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $1.2
million during the six months ended June 30, 1996 compared to realized
investment gains of $2.7 million during the six months ended June 30, 1995. Such
realized investment gains and losses were interest-rate related and attributable
to the ongoing management of the Company's fixed maturity securities classified
as available-for-sale which can result in period-to-period swings in realized
investment gains and losses since securities are sold during both rising and
falling interest rate environments. The ongoing management of securities is a
significant component of the Company's asset/liability management strategy. The
ongoing portfolio management process involves evaluating the various asset
sectors (i.e., security types and industry classes) and individual securities
comprising the Company's investment portfolios and, based on market yield rates,
repositioning holdings from relatively overvalued sectors to undervalued ones
with the aim of improving cash flows. The Company endeavors to accomplish this
repositioning without materially changing the overall credit, asset duration and
convexity characteristics of its portfolios.
Federal income tax expense was $2.8 million and $4.9 million for the six
months ended June 30, 1996 and 1995, respectively, reflecting effective tax
rates of 20.9% and 50.4%. The lower effective tax rate in 1996 resulted
primarily from the recognition of benefits associated with certain deferred tax
assets established in connection with the Company's acquisition of Integrity
Life Insurance Company and National Integrity Life Insurance Company
(collectively, the "Integrity Companies") on November 26, 1993 for which a full
valuation allowance was originally provided. These deferred
15
<PAGE>
tax benefits are being recognized based on the taxable income generated by the
Integrity Companies' in the post-acquisition period and projections of future
taxable income.
Three Months Ended June 30, 1996 Compared with Three Months Ended June 30,
1995
Net income during the second quarter of 1996 was $6.0 million compared to
$4.7 million for the second quarter of 1995, and operating earnings were $5.3
million and $0.1 million, respectively. The increase in operating earnings is
primarily attributable to an increase in net investment spread due to ongoing
asset/liability management and deposit growth from the acquisition of the SBM
business operations and, to a lesser extent, additional sales of spread-based
products. In addition, fee income increased as a result of a growing base of
variable annuity deposits and institutional assets under management. Such
increases in revenues were partially offset by increases in operating and
amortization expenses.
Net investment spread increased to $17.8 million in the second quarter of
1996 from $11.2 million in the second quarter of 1995. These amounts reflect the
net investment spread of 2.14% and 1.94% in the second quarters of 1996 and
1995, respectively, between the Company's annualized investment yield on average
cash and investments and the annualized average rate credited on customer
deposits. The Company's investment income increased to $62.7 million in the
second quarter of 1996 from $45.4 million in the second quarter of 1995. These
amounts represent annualized investment yields of 7.83% and 7.96% on average
cash and investments of $3.20 billion and $2.28 billion during the second
quarters of 1996 and 1995, respectively. The decrease in annualized investment
yields on cash and investments primarily relates to a significant increase in
sales of GICs, the proceeds of which are invested in securities of shorter
duration than many of the Company's other investments.
Interest credited on customer deposits increased to $44.9 million in the
second quarter of 1996 from $34.1 million in the second quarter of 1995. These
amounts represent annualized average rates of interest credited on customer
deposits of 5.69% and 6.02% on average customer deposits of $3.16 billion and
$2.27 billion during the second quarters of 1996 and 1995, respectively. The
decrease in annualized average rates of interest credited on customer deposits
resulted from the Company's decision to reset crediting rates during the second
half of 1995 consistent with an overall declining interest rate environment
during that period.
Fee income increased to $4.2 million in the second quarter of 1996 from
$2.5 million in the second quarter of 1995. Variable annuity fees increased to
$2.7 million in the second quarter of 1996 from $1.7 million in the second
quarter of 1995 principally due to asset growth from the receipt of variable
annuity deposits and, to a lesser extent, from a market-driven increase in the
value of existing variable annuity deposits invested in mutual funds. In
addition, asset management fees earned by ARM Capital Advisors on off-balance
sheet assets in private accounts increased to $1.2 million in the second quarter
of 1996 from $0.7 million in the second quarter of 1995. This increase in asset
management fees reflects a significant increase in the average fair value of
off-balance sheet assets managed due primarily to sales. The average fair value
of off-balance sheet assets managed by the Company was $2.1 billion during the
second quarter of 1996 compared to $1.4 billion in the second quarter of 1995.
16
<PAGE>
Sales by market and type of business for the three months ended June 30,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------
(In millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Retail:
Spread-based $ 19.2 $ 33.9
Fee-based 66.8 38.4
-------------------------
Total retail 86.0 72.3
Institutional:
Spread-based 201.8 25.0
Fee-based 392.6 294.1
-------------------------
Total institutional 594.4 319.1
-------------------------
Total sales $ 680.4 $ 391.4
=========================
</TABLE>
The increase in retail sales is attributable to sales of fee-based mutual
fund options of variable annuities due, in part, to the continuing strong market
returns during the second quarter of 1996 and marketing efforts. This increase
was somewhat offset by lower retail sales of spread-based fixed annuity products
due to greater industry-wide competition from banks and other financial services
institutions for savings products. Expanded distribution channels developed by
the Company benefited sales of spread-based institutional products. The increase
in institutional fee-based sales is primarily attributable to deposits in
private accounts by new customers of ARM Capital Advisors.
Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $85.2 million and $87.9 million in the second quarters of 1996
and 1995, respectively. Of these amounts, $27.8 million and $8.0 million,
respectively, can be attributed to business acquired from SBM, primarily fixed
annuities. Surrender charge income increased to $1.3 million in the second
quarter of 1996 from $0.5 million in the second quarter of 1995, due to higher
average surrender charges associated with SBM products compared to other
products of the Company's insurance subsidiaries.
Operating expenses increased to $7.8 million in the second quarter of 1996
from $5.2 million in the second quarter of 1995. The increase is primarily
attributable to the inclusion of three months of incremental operating expenses
related to the acquired SBM operations in the 1996 results versus one month for
the comparable 1995 period, as well as the expansion of distribution channels.
Amortization of deferred policy acquisition costs related to operations was
$1.4 million and $0.7 million during the three months ended June 30, 1996 and
1995, respectively. This increase is the result of growth in the deferred policy
acquisition cost asset as variable costs of selling and issuing the Company's
insurance subsidiaries' products are deferred and then amortized over the
expected life of the policy.
17
<PAGE>
Amortization of value of insurance in force related to operations increased
to $2.4 million in the second quarter of 1996 from $1.5 million in the second
quarter of 1995. The increase was primarily related to amortization of the value
of insurance in force established as an asset by the Company on May 31, 1995 in
connection with the acquisition of SBM's insurance subsidiary.
Amortization of acquisition-related deferred charges was $0.1 million and
$1.4 million in the second quarters of 1996 and 1995, respectively. During the
third quarter of 1995, Company management determined that changes in facts and
circumstances had resulted in a change in their original estimate of the periods
benefited by these costs and charges. As a result of this change in estimate,
the remaining unamortized balances of certain costs and charges deferred during
1993 and 1994 were fully amortized as of September 30, 1995, resulting in lower
amortization in future periods.
Realized investment losses were $0.8 million in the second quarter of 1996
compared to realized investment gains of $5.2 million in the second quarter of
1995. Such realized investment gains and losses were interest-rate related and
attributable to the ongoing management of the Company's fixed maturity
securities classified as available-for-sale which can result in period-to-period
swings in realized investment gains and losses since securities are sold during
both rising and falling interest rate environments.
Federal income tax expense was $1.2 million and $4.7 million for the three
months ended June 30, 1996 and 1995, respectively, reflecting effective tax
rates of 16.5% and 50.3%. The lower effective tax rate in the second quarter of
1996 resulted primarily from the recognition of benefits associated with certain
deferred tax assets established in connection with the Company's acquisition of
the Integrity Companies on November 26, 1993 for which a full valuation
allowance was originally provided.
ASSET PORTFOLIO REVIEW
The Company primarily invests in securities with fixed maturities with the
objective of providing reasonable returns while limiting credit and liquidity
risks. At amortized cost, fixed maturities at June 30, 1996 totaled $2.9
billion, compared with $2.5 billion at December 31, 1995, representing
approximately 92% and 90%, respectively, of total cash and investments. The
increase primarily resulted from the investment of the proceeds from sales of
GIC products.
18
<PAGE>
The Company's cash and investments as of June 30, 1996 are detailed as
follows:
<TABLE>
<CAPTION>
AMORTIZED COST
--------------
PERCENT OF ESTIMATED
(Dollars in millions) AMOUNT TOTAL FAIR VALUE
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Corporate securities $ 1,057.5 34% $ 1,030.2
U.S. Treasury securities
and obligations of 130.7 4 129.6
U.S. government agencies
Other government securities 109.1 3 113.7
Asset-backed securities 249.6 8 246.9
Mortgage-backed
securities ("MBSs"):
Agency pass-throughs 109.0 3 109.1
Collateralized mortgage
obligations ("CMOs"):
Agency 455.0 15 447.9
Non-agency 726.3 24 716.5
Interest only and residual 16.9 1 19.0
-------------------------------------------
Total fixed maturities 2,854.1 92 2,812.9
Equity securities (i.e.,
non-redeemable preferred
stock) 16.3 1 16.3
Mortgage loans on real
estate 41.6 1 41.6
Policy loans 120.3 4 120.3
Cash and cash equivalents 57.5 2 57.5
-------------------------------------------
Total cash and investments $ 3,089.8 100% $ 3,048.6
===========================================
</TABLE>
Agency pass-through certificates are MBSs which represent an undivided
interest in a specific pool of residential mortgages. The payment of principal
and interest is guaranteed by the U.S. government or U.S. government agencies.
CMOs are pools of mortgages that are segregated into sections, or tranches,
which provide prioritized retirement of bonds rather than a pro rata share of
principal return in the pass-through structure. The underlying mortgages of
agency CMOs are guaranteed by the U.S. government or U.S. government agencies.
MBSs are subject to risks associated with prepayments of the underlying
mortgage loans. Prepayments cause these securities to have actual maturities
different from those expected at the time of purchase. Securities that have an
amortized cost that is greater than par (i.e., purchased at a premium) that are
backed by mortgages that prepay faster than expected will incur a reduction in
yield or a loss, versus an increase in yield or a gain if the mortgages prepay
slower than expected. Those securities that have an amortized cost that is less
than par (i.e., purchased at a discount) that are backed by mortgages that
prepay faster than expected will generate an increase in yield or a gain, versus
a decrease in yield or a loss if the mortgages prepay slower than expected. The
reduction or increase in yields may be partially offset as funds from
prepayments are reinvested at current interest rates. The degree to which a
security is susceptible to either gains or losses is influenced by the
difference between its amortized cost and par, the relative sensitivity of the
underlying mortgages backing the assets to prepayments in a changing interest
rate environment and the repayment priority of the securities in the overall
securitization structure. The Company has limited its exposure during periods of
accelerated prepayments, as the gross unamortized premiums and unaccrued
discounts
19
<PAGE>
of MBSs was $27.1 million and $49.2 million, respectively, at June 30, 1996.
Although the interest rate environment has experienced significant volatility
during 1995 and the first half of 1996, prepayments and extensions of cash flows
from MBSs have not materially affected investment income of the Company.
The Company also manages prepayment exposure on CMO holdings by
diversifying not only within the more stable CMO tranches, but across
alternative collateral classes such as commercial mortgages and Federal Housing
Administration project loans, which are generally less volatile than agency-
backed, residential mortgages. Additionally, prepayment sensitivity is evaluated
and monitored giving full consideration to the collateral characteristics such
as weighted average coupon rate, weighted average maturity and the prepayment
history of the specific loan pool.
Total cash and investments were 93% investment grade or equivalent as of
June 30, 1996 and December 31, 1995. Investment grade securities are those
classified as 1 or 2 by the National Association of Insurance Commissioners
("NAIC") or, where such classifications are not available, having a rating on
the scale used by Standard & Poor's Corporation ("S&P") of BBB- or above. Yields
available on non-investment grade securities are generally higher than are
available on investment grade securities. However, credit risk is greater with
respect to such non-investment grade securities. The Company attempts to reduce
the risks associated with non-investment grade securities by limiting the
exposure to any one issuer and by closely monitoring the creditworthiness of
such issuers. Additionally, the Company's investment portfolio has minimal
exposure to real estate, non-indemnified mortgage loans and common equity
securities, which represent less than 1% of cash and investments as of June 30,
1996. As of June 30, 1996, the book value of securities in the Company's
investment portfolios which had defaulted on principal or interest payments was
$0.7 million. However, in July 1996 the Company sold such securities at cost.
At June 30, 1996 the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio and the percent of total cash
and investments are as follows:
<TABLE>
<CAPTION>
AMORTIZED COST
NAIC Designation ----------------------------
(Comparable S&P Rating) PERCENT OF ESTIMATED
(Dollars in millions) AMOUNT TOTAL FAIR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1 (AAA,AA,A) $1,908.4 62% $1,886.1
2 (BBB) 719.5 23 707.2
3 (BB) 146.5 5 143.1
4 (B) 79.0 2 75.8
5 (CCC,CC,C) -- -- --
6 (CI,D) 0.7 -- 0.7
--------------------------------------------
Total fixed maturities $2,854.1 92% $2,812.9
============================================
</TABLE>
As of January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Company classifies its
entire fixed maturities portfolio as available-for-sale. Fixed maturities
classified as available-for-sale are carried at fair value and changes in fair
value, net of related value of insurance in force and deferred policy
20
<PAGE>
acquisition cost amortization and deferred income taxes, are charged or credited
directly to shareholders' equity.
The general decline in interest rates during 1995 and subsequent rise in
interest rates during the first half of 1996 resulted in unrealized losses on
available-for-sale securities which totaled $21.7 million (net of $7.9 million
of related amortization of deferred policy acquisition costs and value of
insurance in force and $11.6 million of deferred income taxes) at June 30, 1996,
compared to unrealized gains of $28.5 million (net of $14.2 million of related
amortization of deferred policy acquisition costs and value of insurance in
force and $15.4 million of deferred income taxes) at December 31, 1995. This
change in net unrealized gains and losses on available-for-sale securities for
the six months ended June 30, 1996 decreased reported shareholders' equity by
$50.2 million as compared to an increase of $133.5 million for the year ended
December 31, 1995. This volatility in reported shareholders' equity occurs as a
result of SFAS No. 115, which requires some assets to be carried at fair value
while all liabilities and other assets are carried at historical values. At June
30, 1996 and December 31, 1995, shareholders' equity excluding the effects of
SFAS No. 115 was $167.6 million and $159.5 million, respectively.
The Company manages assets and liabilities in a closely integrated manner,
with the aim of reducing the volatility of investment spreads during a changing
interest rate environment. As a result, shareholders' equity for changes in the
fair value of the Company's fixed maturities and equity securities without
reflecting offsetting changes in the value of the Company's liabilities or other
assets creates volatility in reported shareholders' equity but does not always
reflect the underlying economics of the Company's business. The Company's
accompanying consolidated financial statements include fair value balance sheets
which demonstrate that the general rise in interest rates during the first half
of 1996 did not have a material effect on the financial position of the Company
when all assets and liabilities are adjusted to fair values.
Mortgage loans on real estate represented 1% and 2% of total cash and
investments at June 30, 1996 and December 31, 1995, respectively. Pursuant to
the terms of the acquisition of certain of the Company's insurance operations,
National Mutual has indemnified the Company with respect to principal (up to
100% of the investments' year-end 1992 statutory book value) and interest with
respect to approximately 99% of these loans at June 30, 1996. In support of its
indemnification obligations, National Mutual placed $23.0 million into escrow in
favor of the Company's insurance subsidiaries, which will remain available until
the subject commercial and agricultural loans have been paid in full.
Assets held in separate accounts at June 30, 1996 totaled $955.0 million,
compared to $809.9 million at December 31, 1995. The $145.1 million increase
primarily resulted from the receipt of variable annuity deposits and from a
market-driven increase in the value of existing variable annuity deposits
invested in mutual funds.
21
<PAGE>
LIQUIDITY AND FINANCIAL RESOURCES
Holding Company Operations
The Company's principal need for liquidity has historically consisted of
debt service obligations under its bank financing agreement, dividend payments
on its preferred stock and operating expenses not absorbed by management fees
charged to its subsidiaries. The Company is dependent on dividends or other
distributions from its insurance subsidiaries and fee income generated by ARM
Capital Advisors, its asset management subsidiary, and other non-insurance
operations to meet ongoing cash needs, including amounts required to pay
dividends on its preferred stock.
The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates is limited by state insurance laws. During
the first half of 1996, the Company received dividends of $11.0 million from
Integrity Life Insurance Company. The amount remaining in 1996 that the
Company's insurance subsidiaries can transfer in the form of dividends to the
Company is limited to $6.6 million. The Company had cash and unaffiliated
investments of $6.4 million at June 30, 1996. In addition, $20.0 million was
available on unused bank lines of credit at June 30, 1996.
Insurance Subsidiaries Operations
The sources of liquidity of the Company's insurance subsidiaries are
investment income and proceeds from maturities and redemptions of investments.
The principal uses of such funds are benefits, withdrawals and loans associated
with the various customer deposits, commissions, operating expenses and the
purchase of new investments.
The Company develops cash flow projections under a variety of interest rate
scenarios developed by the Company. The Company attempts to structure asset
portfolios so that the interest and principal payments, along with other fee
income, are more than sufficient to cover the cash outflows for benefits,
withdrawals, and expenses under the expected scenarios developed by the Company.
In addition, the Company maintains other liquid assets and aims to meet
unexpected cash requirements (with the projected cash inflows and liquid assets
being approximately double the expected cash outflows) without exposure to
material realized losses during a higher interest rate environment. These other
liquid assets include cash and cash equivalents and high-grade floating-rate
securities held by both the Company and its insurance subsidiaries. The Company
also has $20 million available on unused bank lines of credit.
During the six months ended June 30, 1996 and 1995, the Company met its
liquidity needs entirely by cash flows from operating activities and principal
payments and redemptions of investments. At June 30, 1996, cash and cash
equivalents totaled $57.5 million compared to $76.9 million at December 31,
1995. The Company's aim is to manage its cash and cash equivalents position so
as to satisfy short-term liquidity needs. In connection with this management of
cash and cash equivalents, the Company may invest idle cash in short-duration
fixed maturities to capture additional yield when short-term liquidity
requirements permit.
22
<PAGE>
The Company generated cash flows of $88.6 million and $55.5 million from
operating activities during the six months ended June 30, 1996 and 1995,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $1,193.3 million and $686.0 million in cash
flows during the six months ended June 30, 1996 and 1995, respectively, which
were offset by purchases of investments of $1,559.3 million and $709.9 million,
respectively. An increase in investment purchases and sales activity during the
first half of 1996 compared to 1995 reflects the Company's ongoing management of
its fixed maturity portfolio which has increased in size due to the acquisition
of the SBM businesses.
FORWARD-LOOKING STATEMENTS
The statement of the Company's belief as to the stimulation of future
demand for retail spread-based fixed annuity products under the heading "Results
of Operations" is a forward-looking statement. Factors that could cause actual
results to differ materially from this forward-looking statement include, but
are not limited to, a change in population demographics, development of
alternative investment products, a change in economic conditions, and changes in
current federal income tax laws.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a consequence of the acquisition of State Bond and Mortgage Life
Insurance Company ("SBM Life") on June 14, 1995, and SBM Life's merger with and
into Integrity Life Insurance Company ("Integrity") on December 31, 1995,
Integrity became a party to a marketing agreement (the "Agreement") with Multico
Marketing Corporation ("Multico"). In reliance upon the Agreement, Integrity
eliminated commissions to Multico on new product sales on a prospective basis
effective July 1, 1995. Multico filed a lawsuit in the United States District
Court for the Western District of Kentucky against Integrity on February 23,
1996, alleging breach of contract and breach of the covenant of good faith and
fair dealing, and seeking a trial by jury and damages of approximately $61
million. Integrity filed a counterclaim against Multico seeking a declaration
that Integrity's actions in revising commissions did not constitute a breach of
contract, and recovery of commissions, fees, trailers, overwrites and bonuses
paid to Multico in the amount of approximately $9.3 million. Discovery is
proceeding between the parties. On May 23, 1996, Integrity filed a motion for
summary judgement in the litigation. While the Company believes that the Multico
action is without merit, there can be no assurance that Integrity will prevail
in the litigation.
Except for the Multico lawsuit discussed above, the Company and its
subsidiaries are currently involved only in routine legal and administrative
proceedings incidental to the conduct of their businesses. The Company believes
that none of these proceedings will have a material adverse effect on the
financial condition or results of operations of the Company or its subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1996.
Exhibits
See Exhibit Index on page 26 of this report.
24
<PAGE>
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, on August 12, 1996.
ARM FINANCIAL GROUP, INC.
By: /s/EDWARD L. ZEMAN
--------------------------------
Edward L. Zeman
Executive Vice President-Chief
Financial Officer
(Principal Financial Officer)
By: /s/ BARRY G. WARD
--------------------------------
Barry G. Ward
Controller (Principal Accounting
Officer)
25
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
================================================================================
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
10.1 Lease made as of June 14, 1996, by and between Northwestern National
Life Insurance Company and ARM Financial Group, Inc.
10.2 Fourth Amendment to the Credit Agreement dated as of June 28, 1996.
27 Financial Data Schedule (electronic filing only).
</TABLE>
26
<PAGE>
Exhibit 10.1
LEASE
BY AND BETWEEN
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
("LANDLORD")
AND
ARM FINANCIAL GROUP, INC.
("TENANT")
JUNE 14, 1996
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
1. PREMISES ........................................................ 1
2. RENTABLE AREA; TENANT'S PRO RATA SHARE .......................... 1
3. TENANT'S LEASEHOLD IMPROVEMENTS ................................. 1
4. TERM ............................................................ 2
5. BASE RENT ....................................................... 2
6. CONTRIBUTION TO OPERATING COST INCREASES ........................ 3
7. USE ............................................................. 5
8. ASSIGNMENT AND SUBLETTING ....................................... 5
9. MAINTENANCE ..................................................... 7
10. ALTERATIONS; SIGNS; EQUIPMENT; MOVING ........................... 7
11. RIGHT OF ENTRY .................................................. 9
12. SERVICES AND UTILITIES; PARKING; ACCESS ......................... 9
13. WAIVER AND INDEMNITY ............................................ 10
14. INSURANCE ....................................................... 11
15. FIRE OR OTHER CASUALTY .......................................... 12
16. CONDEMNATION .................................................... 13
17. SECURITY INTEREST ............................................... 13
18. DEFAULT ......................................................... 13
19. LANDLORD'S RIGHT TO CURE DEFAULT; LATE PAYMENT .................. 15
20. WAIVER .......................................................... 15
21. SUBORDINATION ................................................... 15
-i-
<PAGE>
22. RULES AND REGULATIONS ........................................... 16
23. COVENANT OF QUIET ENJOYMENT ..................................... 16
24. NO REPRESENTATIONS BY LANDLORD .................................. 17
25. NOTICES ......................................................... 17
26. ESTOPPEL CERTIFICATES ........................................... 17
27. SURRENDER; HOLDING OVER ......................................... 18
28. ENERGY CONSERVATION ............................................. 18
29. RELOCATION ...................................................... 18
30. BROKERS ......................................................... 18
31. TENANT'S TAXES .................................................. 19
32. SECURITY DEPOSIT; ADDITIONAL SECURITY ........................... 19
33. LEASE ASSUMPTION ................................................ 20
34. RENT CONCESSION ................................................. 21
35. OPTION TO RENEW ................................................. 21
36. EXPANSION OPTION ................................................ 22
37. RIGHT OF FIRST OFFER ............................................ 22
38. MISCELLANEOUS ................................................... 23
Exhibit A Floor Plan
Exhibit B Rules and Regulations
-ii-
<PAGE>
LEASE
This Lease is made as of June 14, 1996, by and between Northwestern
National Life Insurance Company, a Minnesota corporation ("Landlord") and ARM
Financial Group, Inc., a Delaware corporation ("Tenant").
1. PREMISES:
Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, for the term and upon the conditions hereinafter provided, space
consisting of approximately 31,010 square feet of Rentable Area as designated on
Exhibit A attached hereto (the "Premises"), on the seventh and eighth floors of
the building commonly known as the 515 Building (the "Building") located at 515
West Market Street, Louisville, Kentucky (such land and building being
hereinafter referred to as the "Project"). The Premises are assigned Suite Nos.
700 and 800.
2. RENTABLE AREA; TENANT'S PRO RATA SHARE:
2.1 For purposes of this Lease, Landlord represents and warrants,
and Tenant hereby acknowledges and agrees, that (a) the Rentable Area of the
Premises is 31,010 square feet and (b) the Rentable Area of the Project is
119,165 square feet, both measured pursuant to BOMA standards.
2.2 "Tenant's Pro Rata Share" shall mean that percentage
representing a fraction, the numerator of which is the Rentable Area of the
Premises and the denominator of which is the Rentable Area of the Project, both
as set forth in Section 2.1 above. Based upon this formula, Tenant's Pro Rata
Share shall be twenty-six and 02/100 percent (26.02%).
3. TENANT'S LEASEHOLD IMPROVEMENTS:
3.1 Tenant acknowledges and agrees that Tenant is taking the
Premises "AS IS" and Landlord shall not be obligated to do any work whatsoever
in the Premises. In the event any work is necessary or appropriate to prepare
the Premises for occupancy by Tenant ("Tenant's Work"), the same shall be
completed by Tenant at its sole cost and expense; provided, however, that
Landlord will provide Tenant with an allowance to fund Tenant's Work (the
"Tenant Allowance") in an amount not to exceed Four Hundred Sixty-five Thousand
one Hundred Fifty and No/100 Dollars ($465,150.00), in accordance with Section
3.3 below. Notwithstanding anything to the contrary herein, Tenant may, at its
option, utilize up to one Hundred Fifty-five Thousand Fifty and No/100 Dollars
($155,050.00) of the Tenant Allowance for expenses incurred by Tenant in
connection with or arising out of its relocation to the Building (including, but
not limited to, installation of new work stations and furniture).
3.2 Prior to the commencement of Tenant's Work, Tenant shall: (i)
submit a list of its contractors to Landlord for Landlord's written approval,
which approval shall not be unreasonably withheld; (ii) obtain Landlord's
written approval of the plans and specifications for Tenant's Work, which
approval shall not be unreasonably withheld; (iii) furnish Landlord with such
protection or security against mechanics' or other liens as Landlord may
reasonably request;
<PAGE>
and (iv) provide Landlord with such other documentation relating to Tenant's
Work as Landlord may reasonably require, including without limitation copies of
bids and final prices.
3.3 The Tenant Allowance shall be paid to Tenant after satisfaction
of all of the following conditions:
(a) Satisfactory substantial completion of Tenant's Work in
accordance with Tenant's approved plans and specifications;
(b) Submission by Tenant of evidence reasonably satisfactory to
Landlord that all costs of construction relating to Tenant's
Work have been paid, which evidence may include lien waivers
from Tenant's general contractor and all subcontractors
providing materials or labor to the Premises; and
(c) Tenant is not in default of its obligations under this Lease.
4. TERM:
The term of this Lease shall commence upon the "Commencement Date",
which shall be September 1, 1996. Notwithstanding the foregoing, Tenant shall
have the right, at any time after the date of this Lease, to enter upon and
occupy the Premises prior to the Commencement Date; provided, however, that
Tenant shall have no right to early possession of that portion of the Premises
on the seventh floor of the Building currently occupied by John D. Heyburn &
Associates (the "Existing Tenant") until such time as the Existing Tenant
surrenders possession of said portion of the Premises; and further provided that
any such entry and/or occupancy shall be subject to all of the terms and
conditions of this Lease other than the obligation to pay Base Rent and
additional rent. Following the Commencement Date the term of this Lease shall
continue for ten (10) years (the "Term"), subject to renewal as provided in
Section 3.5 below.
5. BASE RENT:
Tenant shall pay as monthly "Base Rent" for the Premises one-twelfth
(1/12th) of the product of: (i) the rental rate per square foot of Rentable
Area per year as set forth below, times (ii) the number of square feet of
Rentable Area of the Premises (as set forth in Section 2.1).
<TABLE>
<CAPTION>
Annual Monthly
Rental Base Base
Period Rate (psf) Rent Rent
- ----------------- ----------- ----------- ----------
<S> <C> <C> <C>
9/1/96 - 9/30/96 --$0-- --$0-- --$0--
l0/1/96 - 8/31/97 $ 9.00 $279,090.00 $ 23,257.50
9/1/97 - 8/31/98 $ 10.00 $310,100.00 $ 25,841.67
9/1/98 - 8/31/00 $ 15.50 $480,655.00 $ 40,054.58
9/1/00 - 8/31/01 $ 16.50 $511,665.00 $ 42,638.75
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
9/1/01 - 8/31/04 $ 17.50 $542,675.00 $ 45,222.92
9/1/04 - 8/31/06 $ 18.00 $558,180.00 $ 46,515.00
</TABLE>
The Base Rent shall be paid in monthly installments, in advance, on the first
day of each and every calendar month during the Term. If the initial or final
month of the Term of this Lease is less than a calendar month, Base Rent for
such partial month shall be prorated at the rate of one-thirtieth (1/30th) of
the monthly Base Rent for each day, payable in advance. Tenant will pay said
Base Rent, together with its Pro Rata Share of operating Cost Increases and all
other amounts due under this Lease, to Landlord at Northwestern National Life
Insurance Company, c/o Unison Commercial Group, Inc., The Starks Building, 455
South 4th Avenue, Louisville, Kentucky 40202-2527 (the "Landlord Address"), or
to such other party or to such other address as Landlord may designate from time
to time by written notice to Tenant. Tenant's obligation to pay the Base Rent,
Tenant's Pro Rata Share of operating Cost Increases and other amounts due under
this Lease is an independent covenant, and is and shall not be subject to any
abatement, deduction, counterclaim, reduction, setoff or defense of any kind
whatsoever except as otherwise specifically set forth herein.
6. CONTRIBUTION TO OPERATING COST INCREASES:
6.1 There is established under this Lease a "Base Year," which for
these purposes is that portion of the year 1996 occurring after the Commencement
Date, annualized to a full twelve-month calendar year. In the event that the
operating Costs (defined in Section 6.2 below) incurred by Landlord in the
operation of the Project during the first calendar year after the Base Year, or
during any subsequent calendar year, shall differ from the operating Costs for
the Base Year, Tenant shall pay as additional rent Tenant's Pro Rata Share of
operating Cost Increases. The term "operating Cost Increases" shall mean the
amount by which Actual operating Costs (defined in Section 6.3 below) for a
given calendar year exceeds Actual operating Costs for the Base Year.
6.2 "Operating Costs" are hereby defined with respect to any
calendar year to include but not be limited to the following costs incurred by
Landlord in such calendar year with respect to the Project: all real estate
taxes and installments of special assessments which shall accrue or become a
lien against, or are payable in respect of, any part of the Project during the
Term of this Lease; all other governmental impositions, including but not
limited to amounts payable under assessment agreements, gross receipts taxes and
taxes on rentals (other than income taxes) relating to the Project; the costs of
heat, cooling, utilities, insurance (including but not limited to liability
insurance and fire and casualty insurance with rental abatement endorsement,
boiler and pressure vessel insurance, war risk insurance, builders risk
insurance, and owners protective liability insurance), security, landscaping,
janitorial and cleaning services; all employment costs including salaries, wages
and fringe benefits; all types of management fees in effect upon the
Commencement Date, including expenses reimbursable to any manager and rental of
property management office; fees for professional services; charges under
maintenance and service contracts; all supplies purchased for use in the
Project; all maintenance and repair costs; any equipment rental; depreciation of
the cost of capital improvements (i) made to reduce operating Costs or limit
increases therein, or (ii) required by Landlord's insurance carrier or (iii)
required by any law, rule, regulation or order of any governmental or quasi-
governmental
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<PAGE>
authority having jurisdiction; and any and all other costs of operation, whether
ordinary or extraordinary.
Operating Costs shall not include direct out-of-pocket costs of the
following: leasing commissions and costs of marketing; the cost of constructing
leasehold improvements; payments of principal and interest on any mortgages,
deeds of trust or other encumbrances upon the Project; depreciation of the
capital cost of the Project except as provided above; the cost of any items for
which Landlord is directly reimbursed by insurance proceeds, condemnation
awards, a tenant of the Project or the like; wages, salaries or other
compensation paid to executive employees of Landlord or the property manager
ranking above the highest-ranking, on-site employee; costs associated with the
operation of the business of the entity which constitutes Landlord, which costs
are not directly related to maintaining or operating the Project (by way of
example, the formation of the entity, internal accounting and legal matters,
including but not limited to preparation of tax returns and financial statements
and gathering of data therefor, costs of defending any lawsuits related to
maintaining or operating the Project, costs of selling, syndicating, financing,
mortgaging or hypothecating any of Landlord's interest in the Project, and costs
of any disputes between Landlord and its employees); any expense representing an
amount paid for products or services (other than overall property management) to
a person or entity relating to or affiliated with Landlord which is in excess of
the fair market value of such services and products; fees incurred in disputes
with tenants; costs of remediation of Hazardous Materials not directly
attributable to use of the Project by Tenant.
6.3 The term "Actual Operating Costs" shall mean, with respect to
each calendar year during the Lease Term, the actual Operating Costs for said
year computed in accordance with the provisions of Section 6.2.
6.4 Prior to (or within a reasonable time after) the commencement
of each calendar year after the Base Year, Landlord shall provide Tenant with an
estimate of operating Cost Increases ("Estimated Operating Cost Increases") for
the upcoming year, and Tenant shall pay monthly in advance as additional rent an
amount equal to one-twelfth (l/12th) of Tenant's Pro Rata Share of Estimated
operating Cost Increases. Within a reasonable time after the expiration of each
calendar year, Landlord shall provide Tenant with a statement setting forth (a)
Tenant's Pro Rata Share of Actual operating Cost Increases for the year just
ended and (b) the aggregate of Tenant's payments of Estimated operating Cost
Increases for such year. Within thirty (30) days after the delivery of such
statement (including any statement delivered after the expiration or termination
of the Term of this Lease), the party in whose favor the difference, if any,
between (a) and (b) exists shall pay the amount of such difference to the other.
6.5 Landlord's books and records relating to Actual operating Costs
for any particular calendar year shall be available for inspection by Tenant or
Tenant's designee, during the ninety (90) day period following delivery of
Landlord's statement with respect to such year, and during normal business hours
upon prior appointment at Landlord's local business address. Each statement
furnished by Landlord hereunder shall constitute a final determination upon
Tenant unless Tenant shall within ninety (90) days after delivery thereof give
written notice to Landlord that Tenant disputes the accuracy thereof, which
notice shall specify in reasonable detail the inaccuracies of the statement.
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<PAGE>
6.6 Landlord may at its option by thirty (30) days' written notice
to Tenant change its accounting year hereunder from the calendar year to a
fiscal year, making such adjustments from the end of the last calendar year to
the commencement of the first full fiscal year as shall be appropriate pursuant
to generally accepted accounting principles. Upon such change, references in
this Section 6 to a calendar year shall be deemed to be references to a fiscal
year.
7. USE:
7.1 Tenant will use and occupy the Premises solely for general
office purposes. Tenant will not use or occupy the Premises for any unlawful
purpose, and will comply with all present and future laws, ordinances,
regulations and orders of all governmental units having jurisdiction over the
Premises. Tenant shall not cause or permit any unusual noise, vibrations, odors
or nuisance in or about the Premises. Landlord disclaims any warranty that the
Premises are suitable for Tenant's use and Tenant acknowledges that it has had a
full opportunity to make its own determination in this regard.
7.2 Tenant will not conduct or permit to be conducted any activity,
or place any equipment in or about the Premises, which will in any way increase
the rate of fire insurance or other insurance on the Project; and if any
increase in the rate of fire insurance or other insurance is concluded by any
insurance company or by the applicable Insurance Rating Bureau to be due to
activity or equipment of Tenant in or about the Premises, Tenant shall be liable
for such increase and shall reimburse Landlord therefor and, further, shall
discontinue or cause the discontinuance of such conduct, or shall remove such
equipment, upon Landlord's demand made at any time thereafter.
7.3 Tenant shall not install, use, generate, store or dispose of in
or about the Premises any hazardous substance, toxic chemical, pollutant or
other material regulated by the Comprehensive Environmental Response,
Compensation and Liability Act of 1985 or the Kentucky Environmental Protection
Act or any similar law or regulation, including without limitation any material
containing asbestos, PCB, CFC or HCFC (collectively "Hazardous Materials")
without Landlord's written approval of each Hazardous Material. Landlord shall
not unreasonably withhold its approval of use by Tenant of immaterial quantities
of Hazardous Materials customarily used in office business operations so long as
Tenant uses such Hazardous Materials in accordance with all applicable laws.
Tenant shall indemnify, defend and hold Landlord harmless from and against any
claim, damage or expense arising out of Tenant's installation, use, generation,
storage, or disposal of any Hazardous Materials, regardless of whether Landlord
has approved the activity. Landlord represents and warrants that, to the best of
its knowledge, on the date of this Lease there are no Hazardous Materials within
the Premises or the Building, with the possible exception of asbestos in HVAC
gaskets.
8. ASSIGNMENT AND SUBLETTING:
8.1 Tenant will not assign, transfer, mortgage or encumber this
Lease or sublet or rent or permit occupancy or use of the Premises, or any part
thereof by any third party; nor shall any assignment or transfer of this Lease
be effectuated by operation of law or otherwise,
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<PAGE>
(any of the foregoing being hereinafter referred to as an "Assignment") without
in each such case obtaining the prior written consent of Landlord, which consent
shall be subject to Landlord's sole discretion, which shall not be unreasonably
withheld. The consent by Landlord to any Assignment shall not be construed as a
waiver or release of Tenant from the terms of any covenant or obligation under
this Lease, nor shall the collection or acceptance of rent from any transferee
under an Assignment constitute an acceptance of the Assignment or a waiver or
release of Tenant or any transferee of any covenant or obligation contained in
this Lease, nor shall any Assignment be construed to relieve Tenant from the
requirement of obtaining the consent in writing of Landlord to any further
Assignment.
8.2 INTENTIONALLY OMITTED.
8.3 If Tenant desires at any time to make an Assignment, it shall
first notify Landlord of its desire to do so and shall submit in writing to
Landlord (i) the name of the proposed assignee, mortgagee, subtenant or other
transferee (any of the foregoing being hereinafter referred to as an
"Assignee"), (ii) the nature of the proposed Assignee's business to be carried
on the Premises, (iii) a copy of the proposed Assignment agreement and any other
agreements to be entered into concurrently with such Assignment, including full
disclosure of all financial terms, and (iv) such financial information as
Landlord may reasonably request concerning the proposed Assignee. The furnishing
of such information shall not limit any of Landlord's rights or alternatives
under this Section 8.
8.4 Upon any request for Landlord's consent under this Section 8,
Landlord shall have the option, to be exercised by giving written notice to
Tenant within sixty (60) days after receipt by Landlord of the information
concerning such Assignment required by Section 8.3, to terminate this Lease as
to the portion of the Premises for which Tenant proposes an Assignment,
effective as of the date Tenant proposes the Assignment to take place, unless
Tenant shall by written notice to Landlord withdraw its request for Landlord's
consent within ten (10) days of receipt of Landlord's notice of termination.
Upon termination of this Lease as to such portion of the Premises, (i) the Base
Rent shall be reduced by the lesser of (x) the then current Base Rent per square
foot of Rentable Area, multiplied by the number of square feet of Rentable Area
for which Tenant proposes an Assignment and (y) the Base Rent stated in Tenant's
notice under Section 8.3; (ii) Tenant's Pro Rata Share shall be reduced in
proportion to the reduction of the Rentable Area of the Premises; (iii) such
portion of the Premises shall, at Tenant's expense, be a separately demised area
complying with all codes and with a reasonable and appropriate entrance separate
from the entrance for the remainder of the Premises; (iv) Tenant shall at all
times provide non-exclusive use of any common facilities; and (v) Landlord shall
have the right to use such portion of the Premises for any legal purpose
compatible with a first class office building, in its sole discretion, and the
right to further assign or sublease the portion of the Premises shall be subject
to Landlord's election without the consent of Tenant. Upon termination of this
Lease as to all or any portion of the Premises, any option to extend the term of
this Lease with respect to such portion of the Premises shall also terminate,
whether or not such options have been exercised. Non-exercise by Landlord of its
rights under this Section 8.4 shall not limit any of Landlord's other rights and
alternatives under Section 8.
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<PAGE>
8.5 Whether or not Landlord has consented to the applicable
Assignment, fifty percent (50%) of the amount by which the income received by
Tenant with respect to any Assignment exceeds, in any month, the Base Rent and
operating Cost Increases payable by Tenant to Landlord, shall be payable by
Tenant directly to Landlord as additional rent hereunder on or before the last
day of each such month. Tenant shall make full disclosure to Landlord of all
consideration paid or payable, agreements and other relevant understandings with
respect to any such Assignment.
9. MAINTENANCE:
Without limitation of Landlord's obligation to provide routine
janitorial services as set forth in Section 12, Tenant agrees to keep and
maintain the Premises and the fixtures and equipment therein in first class,
properly functioning, safe, orderly and sanitary condition, will make all
reasonably necessary replacements thereto, will suffer no waste or injury
thereto, and will at the expiration or other termination of the Term of this
Lease, surrender the same with all improvements in the same order and condition
in which they were on the date of completion of Tenant's Work, or in such better
condition as they may hereafter be put, ordinary wear and tear and casualty
damage to the extent covered by insurance excepted. Landlord shall promptly make
all necessary repairs to the outer walls, roof, downspouts, gutters and basic
structural elements and common areas of the Project. Landlord shall also make
all necessary repairs to the portions of the building systems (plumbing, sewage,
heating, air conditioning and electrical) providing service jointly to the
Premises and other portions of the Project. Tenant shall be responsible for all
other portions of the building systems serving the Premises. Notwithstanding
anything apparently to the contrary in this Section, any cost of repairs or
improvements to the Project, to the Premises or to any common areas which are
occasioned by the negligence or default of Tenant, its officers, employees,
agents or invitees, or by requirements of law, ordinance or other governmental
directive and which arise out of the nature of Tenant's use and occupancy of the
Premises or the installations of Tenant in the Premises shall be paid for by
Tenant, as additional rent hereunder, promptly upon billing.
10. ALTERATIONS; SIGNS; EQUIPMENT; MOVING:
10.1 Tenant will not make or permit anyone to make any alterations,
decorations, additions or improvements, structural or otherwise, in or to the
Premises or the Project without the prior written consent of Landlord, which
consent shall not be unreasonably withheld. As a condition precedent to consent
of Landlord hereunder, Tenant agrees to indemnify Landlord in writing against
mechanic's and other such liens as Landlord shall reasonably request. If any
mechanic's lien is filed against any part of the Project for work claimed to
have been done for, or materials claimed to have been furnished to, Tenant, such
mechanic's lien shall be discharged by Tenant within twenty (20) days
thereafter, at Tenant's sole cost and expense, by the payment thereof or by
making any deposit required by law. Regardless of whether Landlord's consent is
required or obtained hereunder: (i) all alterations shall be made in accordance
with applicable laws, codes and insurance guidelines, and shall be performed in
a good and workmanlike manner, and (ii) if the construction or installation of
Tenant's alterations or fixtures causes any labor disturbance, Tenant shall
immediately take any action necessary to end such labor disturbance. All
alterations, additions or fixed improvements in or to the Premises or the
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Project made by Tenant shall become the property of Landlord upon expiration of
the Term and shall remain upon and be surrendered with the Premises as a part
thereof without disturbance or injury, unless Landlord requires specific items
thereof to be removed by Tenant at Tenant's sole expense, in which event Tenant
shall do so prior to the expiration of the Term at its expense, and shall repair
any damage caused thereby. Notwithstanding the foregoing, if (x) Tenant is not
in default in the performance of any of its obligations under this Lease, (y) if
any and all damage resulting therefrom be repaired, and (z) Tenant shall post
such security with respect to damage as Landlord may reasonably request, Tenant
shall have the right to remove, during the last ninety (90) days of the term of
this Lease, all movable furniture, furnishings or trade fixtures installed in
the Premises at the direct expense of Tenant, provided the same is completed
with no damage to the Premises, reasonable wear and tear excepted.
10.2 Tenant shall not place or maintain any sign, advertisement or
notice on any part of the outside of the Premises or the Project except in such
place, number, size, color and style as has been approved in writing by
Landlord, which approval shall not be unreasonably withheld. Any such signs
shall be at the sole expense of Tenant. Tenant shall remove all signs at the
expiration or termination of this lease and restore the affected area to its
original condition. Landlord shall include Tenant's name and suite number(s) on
the Project building directory. Notwithstanding anything to the contrary herein,
Tenant shall have the right to place and maintain, at its sole cost and expense,
up to two (2) exterior signs in such location(s) on the side or sides of the
Building as Tenant may elect (the "Exterior Signs"); provided, however, that the
Exterior Signs shall be subject to Landlord's prior approval as to design and
specifications, which approval shall not be unreasonably withheld. Provided
Tenant has two (2) Exterior Signs, in the event another tenant leases premises
in the Building having a greater rentable area than the Premises or the Building
is sold to a user purchaser, and such other tenant or purchaser requires removal
of the Exterior Signs, then Landlord shall have the right to direct Tenant to
remove one (1) of the Exterior Signs as designated by Tenant, and Tenant shall,
at its sole cost and expense, remove said Exterior Sign and repair any damage
occasioned by such removal.
10.3 Tenant shall not install any equipment which will or may
necessitate any changes, replacements or additions to, or in the use of, the
heating, ventilating or air conditioning system, or electrical system of the
Premises or the Project nor any equipment containing Hazardous Materials without
first obtaining the prior written consent of Landlord, which consent shall not
be unreasonably withheld; provided, however, that Tenant shall have the right,
at its sole cost and expense (including all utility charges associated
therewith), to install, maintain and operate temperature/humidity control
equipment and all cabling necessary for the operation of Tenant's computers.
Equipment belonging to Tenant which causes noise or vibration that may be
transmitted to the structure of the Project or to any space therein to such a
degree as to be objectionable to Landlord or to any tenant in the Project shall
be installed and maintained by Tenant, at Tenant's expense, on vibration
eliminators or other devices sufficient to eliminate noise and vibration.
Landlord shall have the right at any time to limit the weight and prescribe the
position of safes, concentrated filing systems and other heavy equipment or
fixtures.
10.4 No furniture, equipment or other bulky matter of any
description will be received into the Project or carried in the elevator except
as approved by Landlord, which approval shall not be unreasonably withheld. All
moving of furniture, equipment and other
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material shall be done at other than normal business hours, be under the direct
control and supervision of Landlord who shall, however, not be responsible for
any damage to or charges for moving the same unless damage is the direct result
of Landlord's gross negligence. Any and all material damage or injury to the
Premises or the Project caused by moving the property of Tenant in or out of the
Premises, or due to the same being on the Premises, shall be repaired by, and at
the sole cost of, Tenant. No deliveries or pickups shall be left unattended at
the loading dock.
11. RIGHT OF ENTRY:
11.1 Tenant will furnish a master key to the Premises to Landlord
and permit Landlord, or its representative, to enter the Premises upon
reasonable notice and at reasonable times, to examine, inspect and protect the
Premises, and to make such alterations, renovations, restorations and/or repairs
as Landlord reasonably deems necessary or desirable for the Premises, for any
other premises in the Project, or the Project itself (including access to
distribution systems above the ceiling of the Premises), or to exhibit the same
to prospective tenants during the last year of the Term of this Lease or during
any period Tenant is in default hereunder, or to prospective purchasers or
lenders at any time. Landlord shall use its best efforts to not unreasonably
interfere with the conduct of Tenant's business, but Landlord shall in no event
be liable to Tenant for any damages in connection with such entry or
installation.
11.2 Landlord reserves the right to impose such security
restrictions in the common areas as it deems reasonably appropriate.
12. SERVICES AND UTILITIES; PARKING; ACCESS:
12.1 During the Project operating hours of 7:00 AM to 6:00 PM Monday
through Friday and 8:00 AM to 1:00 PM Saturday, holidays excluded, or during
such other operating days and hours as established by Landlord from time to
time, Landlord shall furnish reasonably adequate water, escalator and elevator
service and heat and air conditioning during such seasons of the year when such
services are normally furnished in office buildings in the Louisville, Kentucky
metropolitan area. After-hours HVAC shall be available to Tenant, upon written
request to Landlord, at a charge of $20.00 per hour per floor (subject to
increase based upon increases in Landlord's cost of providing such service),
payable as additional rent hereunder. Landlord shall provide evening cleaning
and janitorial service to the Premises, Saturdays, Sundays and holidays
excluded. Landlord shall provide access to electric and telephone service in
accordance with Landlord's electric and telephone service regulations in effect
from time to time, and Tenant shall comply with such regulations. Landlord shall
not be liable for, and there shall be no abatement of rent by reason of, failure
to furnish, or for delay or suspension in furnishing, any services to be
provided by Landlord, caused by breakdown, maintenance, repairs, strikes,
scarcity of labor or materials, energy conservation pursuant to Section 28
hereof, or causes beyond Landlord's control. Landlord shall make reasonable
efforts to remedy or restore such services promptly. Tenant shall conserve heat,
air conditioning, water and electricity and shall use due care in the use of the
Premises and of the public areas in the Project. All thermostats within the
Premises shall be under the sole control of Landlord, and Tenant shall not, nor
shall it permit any of its employees, agents, representatives, guests or
invitees, to open, change or tamper with any
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thermostats. Landlord shall maintain the temperature and humidity of the
Premises within reasonably comfortable ranges.
12.2 During the Term of this Lease and conditional upon Tenant not
being in default hereunder, Tenant shall be permitted to rent twelve (12)
parking spaces in the Project's on-site parking facility for parking vehicles.
Except as provided below, Tenant shall not be assigned to designated parking
spaces, but shall be permitted to use whichever spaces are available on a first-
come, first-served basis in areas of the on-site parking facility designated by
Landlord. The rent for each space shall be at the then-current market rate
(which presently is $72.50 per space per month), payable in advance by Tenant to
Landlord or, at Landlord's request, to the operator of the parking facility.
Such rental rate shall be subject to adjustment as determined from time to time
by Landlord. Tenant shall have the right to relinquish any parking spaces that
it has previously rented but no longer needs by giving written notice to
Landlord, which notice shall be effective as of the last day of the month in
which it is received by Landlord. Tenant shall have no right to recover any
spaces so relinquished. Use of the parking facility shall be subject to such
rules and regulations as may be promulgated from time to time by Landlord and/or
the operator of the parking facility. Notwithstanding anything to the contrary
herein, up to six (6) of the twelve (12) parking spaces allowed to Tenant
hereunder may at Tenant's option be designated for Tenant' s exclusive use (the
"Designated Spaces"), provided the location of the Designated Spaces shall be
mutually agreed upon by Landlord and Tenant, and further provided that any
identification of the Designated Spaces (by signage or otherwise) shall be
installed by Landlord at Tenant's expense.
12.3 So long as Tenant is not in default hereunder, Tenant shall
have, at any and all times throughout the Term of this Lease, the right of
access to the Premises and the Project, including the on-site parking facility,
in accordance with the terms of this Lease and subject to Landlord's reasonable
rules and regulations and all applicable laws. Notwithstanding anything to the
contrary contained in this Lease or the exhibits attached hereto, Tenant shall
have the right, at its sole cost and expense (including all utility charges
associated therewith), to install, maintain and operate its own security card
system in the Premises, provided such system has no impact on the rest of the
Building, and further provided Tenant's exercise of said right shall in no way
diminish Landlord's rights or Tenants obligations with respect to Sections 11.1
and 11.2 hereof.
13. WAIVER AND INDEMNITY:
13.1 Notwithstanding anything apparently to the contrary in this
Lease, Landlord and Tenant hereby release one another and their respective
partners, officers and employees and property manager from any and all liability
(to the other or anyone claiming through or under them by way of subrogation or
otherwise) for any loss or damage covered by property insurance or coverable by
a customary policy of insurance required by Section 14.1(a) or 14.3(a), even if
such loss or damage shall have been caused by the fault or negligence of the
other party, or anyone for whom such party may be responsible.
13.2 Notwithstanding anything apparently to the contrary in this
Lease, Landlord and its partners, officers and employees and property manger
shall not be liable to Tenant, and Tenant hereby releases such parties from all
damage, compensation or claims from
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<PAGE>
any cause other than the gross negligence or intentional misconduct of Landlord
or its partners, officers or employees or property manager arising from: loss
or damage to personal property or trade fixtures in the Premises including
books, records, files, computer equipment, computer data, money, securities,
negotiable instruments or other papers; lost business or other consequential
damage arising out of interruption in the use of the Premises; and any criminal
act by any person other than Landlord or its partners, officers or employees.
13.3 Tenant agrees to indemnify, defend and hold Landlord and its
partners, officers and employees and property manager harmless from and against
any claim, loss or expense arising out of injury, death or property loss or
damage occurring in the Premises, except only to the extent caused by the
negligent act or intentional misconduct of Landlord or its partners, officers or
employees or property manager.
13.4 Landlord agrees to indemnify, defend and hold Tenant and its
partners, officers and employees harmless from and against any claim, loss or
expense arising out of injury, death or property loss or damage occurring in the
common areas of the Project, except to the extent caused by the negligent act or
intentional misconduct of Tenant or its partners, officers or employees.
14. INSURANCE:
14.1 Tenant agrees to purchase, in advance, and to carry in full
force and effect the following insurance:
(a) "All risk" property insurance covering the full replacement
value of all of Tenant's leasehold improvements, trade fixtures and personal
property within the Premises. Landlord shall be named as loss payee under all
such policies.
(b) Commercial general liability insurance, providing coverage on
an "occurrence" rather than a "claims made" basis, which policy shall include
coverage for Bodily Injury, Property Damage, Personal Injury, Contractual
Liability (applying to this Lease), and Independent Contractors, in current
Insurance Services office form or other form which provides coverage at least as
broad. Tenant shall maintain a combined policy limit of at least $2,000,000
applying to Bodily Injury, Property Damage and Personal Injury, which limit may
be satisfied by Tenant's basic policy, or by the basic policy in combination
with umbrella or excess policies so long as the coverage is at least as broad as
that required herein. Such liability, umbrella and/or excess policies may be
subject to aggregate limits so long as the aggregate limits have not at any
pertinent time been reduced to less than the policy limit stated above, and
provided further that any umbrella or excess policy provides coverage from the
point that such aggregate limits in the basic policy become reduced or
exhausted. Landlord shall be named as additional insured under all such
policies.
14.2 At least ten (10) days prior to entry by Tenant on the
Premises, Tenant shall deliver to Landlord evidence that the insurance required
by this Lease is in full force and effect. At least ten (10) days prior to
expiration of any such coverage, Tenant shall deliver evidence that the coverage
in question will be renewed or replaced upon expiration. Such
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<PAGE>
evidence of insurance shall contain sufficient information to enable Landlord to
determine whether Tenant's insurance complies with the requirements of this
Lease. Upon request, Tenant shall also furnish insurer-certified copies of all
pertinent policies. All polices used to provide the coverage required by this
Lease shall (i) be endorsed to require the insurer to provide at least ten (10)
days notice to Landlord prior to cancellation or non-renewal, and (ii) be issued
by financially sound companies having a current A.M. Best Company rating of at
least A:VII.
14.3 Landlord agrees to purchase in advance, and to carry in full
force and effect the following insurance:
(a) "All risk" property insurance coverage on the Project,
exclusive of Tenant's leasehold improvements, in such amount as Landlord deems
prudent.
(b) Commercial general public liability insurance covering the
Project, in a combined single limit amount of at least $2,000,000, and written
on an "occurrence" basis.
14.4 If any insurance required hereunder ceases to be available, or
is available on terms so unacceptable that prudent landlords or tenants, as the
case may be, generally do not carry such insurance, then in lieu of such
insurance the pertinent party may carry the most comparable insurance which is
available and generally carried by prudent parties.
15. FIRE OR OTHER CASUALTY:
If the Premises or the Project shall be damaged by fire or other cause
Landlord shall at its option either (a) undertake to restore such damage with
all due diligence, or (b) in the event the Premises or the Project are damaged
by fire or other cause to such extent that damage cannot, in Landlord's sole
judgment, be economically repaired within ninety (90) days after the date of
such damage (taking into account the time necessary to effectuate a satisfactory
settlement with any insurance company and using normal construction methods
without overtime or other premium), terminate this Lease, by notice given to
Tenant within sixty (60) days after the date of the damage. Any termination
hereunder by reason of damage to the Premises shall be effective as of the date
of the damage. Any termination by reason of damage to the Project but not the
Premises shall be effective as of the date notice is given. If Landlord elects
to restore, Landlord shall not be obligated to restore any improvements in the
Premises which were not owned and constructed by Landlord. Upon substantial
completion by Landlord of its work, Tenant shall undertake to restore its
leasehold improvements and trade fixtures with all due diligence. This Lease
shall, unless terminated by Landlord pursuant to this Section 15, remain in full
force and effect following such damage, and, in the case of damage to the
Premises, the Base Rent, Operating Costs and additional rent, prorated to the
extent that the Premises are rendered untenantable, shall be equitably abated
until such repairs are completed; provided, however, that if Tenant does not
restore its leasehold improvements and trade fixtures with due diligence,
abatement shall cease as of the date restoration could have been completed using
due diligence.
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<PAGE>
16. CONDEMNATION:
If the whole or any substantial part of the Premises shall be taken or
condemned or purchased under threat of condemnation by any governmental
authority, then the Term of this Lease shall cease and terminate as of the date
when the condemning authority takes possession of the Premises and Tenant shall
have no claim against the condemning authority, Landlord or otherwise for any
portion of the amount that may be awarded as damages as a result of such taking
or condemnation or for the value of any unexpired term of this Lease; provided,
however, that Landlord shall not be entitled to any separate award made to
Tenant for loss of business or costs of relocation. In the event part of the
Project, but not the Premises, is condemned to the extent that the Project
cannot, in Landlord's sole judgment, be economically restored within a
reasonable time, Landlord shall have the option by notice given to Tenant within
ninety (90) days after the date the condemning authority takes possession to
terminate this Lease as of the date of such possession.
17. SECURITY INTEREST:
INTENTIONALLY OMITTED.
18. DEFAULT:
18.1 Any one of the following events shall constitute an Event of
Default:
(i) Tenant shall fail to pay any monthly installment of Base Rent
or additional rent as herein provided, and such default shall, after written
notice from Landlord, continue for a period of seven (7) days after the due date
therefor;
(ii) Tenant shall violate or fail to perform any of the other
conditions, covenants or agreements herein made by Tenant and such default shall
continue for fifteen (15) days after written notice from Landlord; provided,
however, that if the nature of such default is such that Tenant can cure the
default, but not within fifteen (15) days, then the Event of Default shall be
suspended for a period not in excess of thirty (30) additional days so long as
Tenant commences cure within fifteen (15) days and thereafter diligently
prosecutes the curing of the default to completion, and so long as continuation
of the default does not create material risk to the Project or to persons using
the Project;
(iii) Tenant shall file or have filed against it or any guarantor of
this Lease any bankruptcy or other creditor's action, or make an assignment for
the benefit of its creditors.
18.2 If an Event of Default (as defined above) shall have occurred
and be continuing, Landlord may at its sole option by written notice to Tenant
terminate this Lease. Except as otherwise provided in this Lease, neither the
passage of time after the occurrence of the Event of Default nor exercise by
Landlord of any other remedy with regard to such Event of Default shall limit
Landlord's rights under this Section 18.2.
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<PAGE>
18.3 If an Event of Default shall have occurred and be continuing,
whether or not Landlord elects to terminate this Lease, Landlord may enter upon
and repossess the Premises (said repossession being hereinafter referred to as
"Repossession") by force, summary proceedings, ejectment or otherwise, and may
remove Tenant and all other persons and property therefrom.
18.4 From time to time after Repossession of the Premises, whether or
not this Lease has been terminated, Landlord may, but shall not be obligated to,
attempt to relet the Premises for the account of Tenant in the name of Landlord
or otherwise, for such term or terms (which may be greater or less than the
period which would otherwise have constituted the balance of the Term) and for
such terms (which may include concessions or free rent) and for such uses as
Landlord, in its uncontrolled discretion, may determine, and may collect and
receive the rent therefor. Any rent received shall be applied against Tenant's
obligations hereunder, but Landlord shall not be responsible or liable for any
failure to collect any rent due upon any such reletting.
18.5 No termination of this Lease pursuant to Section 18.2 and no
Repossession of the Premises pursuant to Section 18.3 or otherwise shall relieve
Tenant of its liabilities and obligations under this Lease, all of which shall
survive any such termination or Repossession. In the event of any such
termination or Repossession, whether or not the Premises shall have been relet,
Tenant shall pay to Landlord the Base Rent and other sums and charges to be paid
by Tenant up to the time of such termination or Repossession, and thereafter
Tenant, until the end of what would have been the Term in the absence of such
termination or Repossession, shall pay to Landlord, as and for liquidated and
agreed current damages for Tenant's default, the equivalent of the amount of the
Base Rent and such other sums and charges which would be payable under this
Lease by Tenant if this Lease were still in effect, less the net proceeds, if
any, of any reletting effected pursuant to the provisions of Section 18.4 after
deducting all of Landlord's reasonable expenses in connection with such
reletting, including, without limitation, all repossession costs, brokerage and
management commissions, operating expenses, legal expenses, attorneys' fees,
alteration costs, and expenses of preparation for such reletting. Tenant shall
pay such current damages to Landlord monthly on the days on which the Base Rent
would have been payable under this Lease if this Lease were still in effect, and
Landlord shall be entitled to recover the same from Tenant on each such day. At
any time after such termination or Repossession, whether or not Landlord shall
have collected any current damages as aforesaid, Landlord shall be entitled to
recover from Tenant, and Tenant shall pay to Landlord on demand, as and for
liquidated and agreed final damages for Tenant's default, an amount equal to the
then present value of the excess of the Base Rent and other sums or charges
reserved under this Lease from the day of such termination or Repossession for
what would be the then unexpired term if the same had remained in effect, over
the amount of rent Tenant demonstrates that Landlord could in all likelihood
actually collect for the Premises for the same period, said present value to be
arrived at on the basis of a discount of seven percent (7%) per annum.
18.6 In addition to all other remedies of Landlord, Landlord shall be
entitled to reimbursement upon demand of all reasonable attorneys fees incurred
by Landlord in connection with any Event of Default.
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<PAGE>
18.7 Landlord shall in no event be considered to be in default of
Landlord's obligations hereunder until the expiration of fifteen (15) days after
notice of default from Tenant (or such longer period as may be reasonably
necessary to cure such default so long as Landlord initiates the cure within
said fifteen (15) day period and thereafter prosecutes the cure to completion).
19. LANDLORD'S RIGHT TO CURE DEFAULT; LATE PAYMENT:
If Tenant commits an Event of Default, then Landlord may, but shall
not be required to, make such payment or do such act, or correct any damage
caused by such prohibited act and to enter the Premises as appropriate in
connection therewith, and the amount of the expense thereof, if made or done so
by Landlord, with interest thereon at the Interest Rate (as hereinafter defined)
from the date paid by Landlord, shall be paid by Tenant to Landlord and shall
constitute additional rent hereunder due and payable with the next monthly
installment of rent; but the making of such payment or the doing of such act by
Landlord shall not operate to cure such default or to estop Landlord from the
pursuit of any remedy of which Landlord would otherwise be entitled. If any
installment of rent is not paid by Tenant within five (5) days after the same
becomes due and payable: (i) a one-time late charge in the amount of one
Thousand and 00/100 Dollars ($1,000.00) shall become immediately due and payable
as compensation to Landlord for administrative costs; and (ii) the unpaid
balance due Landlord shall bear interest at the maximum legal rate or twelve
percent (12%), whichever is less, from the date such installment became due and
payable to the date of payment thereof by Tenant, and such interest shall
constitute additional rent hereunder which shall be immediately due and payable.
20. WAIVER:
No waiver by either party of any breach of any agreement herein
contained shall operate as a waiver of such agreement itself, or of any
subsequent breach thereof. No payment by Tenant or receipt by Landlord of a
lesser amount than the monthly installments of rent herein stipulated shall be
deemed to be other than on account of the earliest stipulated rent nor shall any
endorsement or statement on any check or letter accompanying a check for payment
of rent be deemed an accord and satisfaction, nor shall acceptance of rent with
knowledge of breach constitute a waiver of the breach, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent, to terminate this Lease, to Repossess the Premises or to
pursue any other remedy provided in this Lease. No re-entry by Landlord, and no
acceptance by Landlord of keys from Tenant, shall be considered an acceptance of
a surrender of the Lease.
21. SUBORDINATION:
21.1 For the purposes of this Section 21, the term "Mortgage" shall
mean at any time, any mortgage of record now or hereafter placed against the
Project, any increase, amendment, extension, refinancing or recasting of a
Mortgage and, in the case of a sale or lease and leaseback by Landlord of all or
any part of the Project, the lease creating the leaseback. For the purposes
hereof, a Mortgage shall be deemed to continue in effect after foreclosure
thereof and during the period of redemption therefrom.
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<PAGE>
21.2 This Lease is subject and subordinate to the lien of any Mortgage
which may now or hereafter encumber the Project or any development of which the
Project is a part. In confirmation of such subordination, Tenant shall, at
Landlord's request from time to time, promptly execute any certificate or other
document reasonably requested by the holder of the Mortgage. Tenant agrees that
in the event that any proceedings are brought for the foreclosure of any
Mortgage, Tenant shall immediately and automatically attorn to the purchaser at
such foreclosure sale, as the landlord under this Lease, and Tenant waives the
provisions of any statute or rule of law, now or hereafter in effect, which may
give or purport to give Tenant any right to terminate or otherwise adversely
affect this Lease or the obligations of Tenant hereunder in the event that any
such foreclosure proceeding is prosecuted or completed. Neither the holder of
the Mortgage (whether it acquires title by foreclosure or by deed in lieu
thereof) nor any purchaser at foreclosure sale shall be liable for any act or
omission of Landlord, subject to any offsets or defenses which Tenant might have
against Landlord or bound by any prepayment by Tenant of more than one month's
installment of Base Rent and additional rent or by any modification of this
Lease made subsequent to the granting of the Mortgage. Notwithstanding anything
to the contrary in this Section 21.2, so long as Tenant is not in default under
this Lease, this Lease shall remain in full force and effect and the holder of
the Mortgage and any purchaser at foreclosure sale thereof shall not disturb
Tenant's possession hereunder.
22. RULES AND REGULATIONS:
Tenant shall use the Premises and the common areas of the Project in
accordance with the terms of this Lease, the Rules and Regulations attached
hereto as Exhibit B (and by this reference made a part hereof) and such
additional rules and regulations as may from time to time be reasonably made by
Landlord for the general safety, comfort and convenience of the owners,
occupants and tenants of the Project, and Tenant shall use its best efforts to
cause Tenant's customers, employees and invitees to abide by such rules and
regulations. Landlord shall use reasonable efforts to enforce its rules and
regulations uniformly as to all tenants of the Project, but in no event shall
Landlord be responsible to Tenant for failing to enforce such rules and
regulations against other tenants. Notwithstanding anything to the contrary in
this Section 22, Tenant may use the Premises for any lawful purpose consistent
with standard practice and custom in the financial services industry.
23. COVENANT OF QUIET ENJOYMENT:
Landlord covenants that it has the right to make this Lease for the
term aforesaid and covenants that if Tenant shall pay the rent and perform all
of the covenants, terms and conditions of this Lease to be performed by Tenant,
Tenant shall, during the Term hereby created, freely, peaceably and quietly
occupy and enjoy the full possession of the Premises. The term "Landlord" as
used in this Lease shall mean solely the owner of the Project and underlying
land, or in the case of a sale-leaseback, the lessee of the underlying land, at
the relevant time. The liability of the original Landlord and any successor
Landlord under this Lease is limited to its interest in the Project.
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<PAGE>
24. NO REPRESENTATIONS BY LANDLORD:
Neither Landlord nor any agent or employee of Landlord has made any
representations or promises with respect to the Premises or the Project except
as herein expressly set forth, and no right, privileges, easements or licenses
are acquired by Tenant except as herein expressly set forth. No exhibit attached
to this Lease nor any other materials provided by Landlord shall constitute a
warranty or agreement as to the configuration of the Project or the occupants
thereof. Landlord reserves the right from time to time to modify the Project,
including common areas, appurtenances and rentable areas, without in any case
reducing the obligations of Tenant hereunder; provided, however, that in
exercising said right Landlord shall not unreasonably and permanently interfere
with Tenant's use or possession of, or access to, the Premises or the Project.
Tenant has no right to light or air over any premises adjoining the Project.
Tenant, by taking possession of the Premises, shall accept the same "as is"
except as expressly provided in this Lease and such taking of possession shall
be conclusive evidence that the Premises and the Project are in good and
satisfactory condition at the time of such taking of possession. In addition to
and without limitation of the immediately preceding sentence, Tenant agrees that
it is leasing the Premises on an "AS IS", "WHERE IS" and "WITH ALL FAULTS"
basis, based upon its own judgment, and hereby disclaims any reliance upon any
statement or representation whatsoever made by Landlord. LANDLORD MAKES NO
WARRANTY WITH RESPECT TO THE PREMISES, THE PROJECT OR ANY PART THEREOF, EXPRESS
OR IMPLED, AND LANDLORD SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY
AND OF FITNESS FOR A PARTICULAR PURPOSE AND ANY LIABILITY FOR CONSEQUENTIAL
DAMAGES ARISING OUT OF THE USE OF OR THE INABILITY TO USE THE PREMISES, THE
PROJECT OR ANY PART THEREOF.
25. NOTICES:
All notices or other communications hereunder shall be in writing and
shall be hand delivered or sent by registered or certified first-class mail,
postage prepaid, or by overnight air express service, (i) if to Landlord at the
Landlord Address, with a copy to Northwestern National Life Insurance Company,
c/o Reliastar Investment Research, Inc., 100 Washington Avenue South, Suite 800,
Minneapolis, Minnesota 55401, Attention: W.T. Nimmo, and (ii) if to Tenant, at
the Premises, unless notice of a change of address is given pursuant to the
provisions of this Section. The day notice is given by mail shall be deemed to
be the day following the day of mailing.
26. ESTOPPEL CERTIFICATES:
Tenant agrees at any time and from time to time, upon not less than
five (5) days prior written notice by Landlord, to execute, acknowledge and
deliver to Landlord or a party designated by Landlord a statement in writing (i)
certifying that this Lease is unmodified and in full force and effect, or if
there have been modifications, that the Lease is in full force and effect as
modified and stating the modifications, (ii) stating the dates to which the rent
and other charges hereunder have been paid by Tenant, (iii) stating to the best
of its knowledge whether or not Landlord is in default in the performance of any
covenant, agreement or condition contained in this Lease, and, if so, specifying
each such default (but Tenant's failure to specify any such default shall not
constitute a waiver thereof), (iv) agreeing that Tenant and Landlord will not
thereafter
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modify the Lease without the approval of any mortgagee identified by Landlord,
and (v) agreeing that, except for any security deposit required herein, Tenant
shall not prepay any rent more than thirty (30) days in advance, and (vi) such
other matters relating to this Lease as may reasonably be requested. Any such
statement delivered pursuant hereto may be relied upon by any owner of the
Project, any prospective purchaser of the Project, any mortgagee or prospective
mortgagee of the Project or of Landlord's interest, or any prospective assignee
of any such mortgagee. Tenant acknowledges that failure to comply with this
Section 26 on a timely basis shall constitute a default under this Lease.
27. SURRENDER; HOLDING OVER:
Upon the expiration of this Lease or the earlier termination of
Tenant's right to possession, Tenant shall immediately vacate the Premises,
remove all of its property therefrom, remove any Hazardous Materials installed,
used, generated, stored or disposed of by Tenant, and leave the Premises in the
condition required by this Lease. Any property not removed shall be deemed
abandoned, and Tenant shall be liable for all costs of removal. Should Tenant
continue to occupy the Premises, or any part thereof, after the expiration or
termination of the Term, whether with or without the consent of Landlord, such
tenancy shall be from month to month and the monthly Base Rent shall be twice
that which would otherwise be payable under Section 5. If Tenant's holdover is
without the consent of Landlord, neither this Section nor the acceptance of any
rent hereunder shall prevent Landlord from exercising any remedy to regain
immediate possession of the Premises.
28. ENERGY CONSERVATION:
Wherever in this Lease any terms, covenants or conditions are required
to be kept or performed by Landlord, Landlord shall be deemed to have kept and
performed such terms, covenants and conditions notwithstanding any act or
omission of Landlord, if such act or omission is pursuant to any governmental
regulations, requirements, directives or requests. Without limiting the
generality of the foregoing, Landlord may reduce the quantity or quality of all
utility and other services and impose such regulations as Landlord reasonably
deems necessary in order to conserve energy, so long as the Premises are
maintained at reasonably comfortable temperature and humidity levels.
29. RELOCATION:
INTENTIONALLY OMITTED.
30. BROKERS:
Tenant warrants that it has not engaged or dealt with any broker in
connection with this Lease other than Commercial Kentucky, Inc. and Tenant
agrees to indemnify, defendant and hold Landlord harmless from and against any
claim for broker's fees or finder's fees asserted by anyone other than those
specified above, on account of any dealings with Tenant in connection with this
Lease.
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<PAGE>
31. TENANT'S TAXES:
At least twenty (20) days prior to delinquency, Tenant shall pay all
taxes levied or assessed upon Tenant's equipment, furniture and other personal
property located in or about the Premises. If any such taxes are imposed upon
Landlord, Tenant shall pay to Landlord, at least twenty (20) days before the
date each installment is due to the taxing authority, the portion allocable to
Tenant pursuant to this Section 31.
32. SECURITY DEPOSIT; ADDITIONAL SECURITY:
32.1 INTENTIONALLY OMITTED.
32.2 Upon execution of this Lease, Tenant shall either (i) deposit One
Million One Hundred Thousand and No/100 Dollars ($1,100,000.00) in escrow with
Landlord (the "Cash Deposit"), which shall be invested in securities issued or
unconditionally guaranteed by the United States with an average weighted
maturity of not less than three (3) years, with interest payable to Tenant, or
(ii) deliver to Landlord a One Million One Hundred Thousand and No/100 Dollars
($1,100,000.00) unconditional, irrevocable letter of credit, assignable to a
transferee of the Project, from an issuer acceptable to Landlord providing that
it may be drawn upon presentation of the letter of credit accompanied by a
statement signed by Landlord that it is entitled to draw upon the letter of
credit under the terms of this Lease. Tenant may replace the letter of credit
from time to time with a letter of credit from the same or a comparable issuer,
in the then outstanding amount of the letter of credit, on the same terms as the
original letter of credit except for maturity date, and may from time to time
extend the original or any prior replacement letter of credit, as the same may
be extended from time to time, is called the "Letter of Credit". Landlord may
draw on the Letter of Credit if (a) there is an Event of Default as defined in
Section 18.1 of this Lease, or (b) the Letter of Credit is within twenty-eight
(28) days of its expiration date, and the proceeds of the draw shall be
invested, with interest payable to Tenant, in the manner provided above for a
Cash Deposit. The proceeds of a draw on the Letter of Credit or the Cash
Deposit, as the case may be, is called the "Security". Upon the occurrence and
during the continuance of any Event of Default under this Lease, Landlord may
apply the Security to amounts payable under this Lease, at such time and in such
order of priority as Landlord may in its absolute discretion determine (and may
not use or apply it for any other purpose), and Tenant shall be required to make
all payments and perform all obligations under this Lease to which Landlord does
not in fact apply the Security, whether or not Landlord is holding unapplied
Security. Landlord may pursue remedies for nonpayment of rent or other default
by Tenant even if it is holding unapplied Security. On the respective
anniversary dates of the Commencement Date of the Term of this Lease set forth
below, if on that anniversary date there has been no default under this Lease,
Landlord shall refund to Tenant the Cash Deposit, if any, in excess of the
amount set forth below for the anniversary date in question, or instruct the
Letter of Credit issuer to reduce the Letter of Credit to that amount, as the
case may be:
<TABLE>
<CAPTION>
Required Cash Deposit
Anniversary Date or Letter of Credit
------------------- ---------------------
-----------------------------------------------------
<S> <C>
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
September 1, 1997 $997,240.00
September 1, 1998 $921,867.00
September 1, 1999 $839,423.00
September 1, 2000 $749,245.00
</TABLE>
If on the fifth (5th) anniversary of the Commencement Date (i.e., September 1,
2001) there has been no default under the Lease, Landlord shall surrender to
Tenant any remaining balance of the Cash Deposit, the Letter of Credit, or, if
the Letter of Credit has been drawn, any remaining balance of the proceeds of
the draw, as the case may be. If the Letter of Credit or the Security is not
surrendered on the fifth (5th) anniversary of the Commencement Date, the Letter
of Credit, if undrawn, or the remaining Security, if any, shall be delivered to
Tenant at such time as all obligations of Tenant under the Lease have been
performed and Tenant could not be subject to further claims under the Lease.
33. LEASE ASSUMPTION:
33.1 Landlord agrees to assume or accept assignment of (at Landlord's
option) Tenant's lease for the twelfth (12th) and fourteenth (14th) floors of
the Kentucky Home Life Building (the "Kentucky Home Life Lease") through April
30, 1998. Landlord shall assume the payment of rent and related operating
expense pass-throughs from the date that Tenant delivers the space to Landlord
in a "broom clean" condition, but not sooner than the Commencement Date, through
April 30, 1998. Landlord shall not be responsible for any base rent, operating
expenses or other costs of any kind (collectively, the "Total Charges")
associated with the Kentucky Home Lease in excess of Four Hundred Twenty-one
Thousand Three Hundred Twelve and No/l00 Dollars ($421,312.00) in the aggregate.
If the Total Charges exceed Four Hundred Twenty-one Thousand Three Hundred
Twelve and No/l00 Dollars ($421,312.00) in the aggregate, Tenant shall pay the
excess to Landlord upon demand therefor.
33.2 Landlord's obligation under Section 33.1 is subject to receipt by
Landlord, on or before the Commencement Date of this Lease, of the consent of
the landlord under the Kentucky Home Lease to assignment of the Kentucky Home
Lease to Landlord and the right to make non-structural tenant improvements in
the space without that landlord's consent. Tenant shall make best efforts to
promptly obtain that consent. If, despite its efforts to do so, Tenant is unable
to obtain such consent on or before the Commencement Date, Landlord shall not be
obligated to assume or accept assignment of the Kentucky Home Lease; provided,
however, in such event Tenant shall be entitled to a credit against each monthly
installment of Base Rent payable by Tenant hereunder (the "Base Rent Credit") in
an amount equal to the Total Charges paid by Tenant under the Kentucky Home
Lease for that month. In no event shall the aggregate of the monthly amounts of
the Base Rent Credit exceed Four Hundred Twenty-one Thousand Three Hundred
Twelve and No/100 Dollars ($421,312.00). If the Kentucky Home Lease is not
assigned to Landlord, Landlord shall nevertheless have the right to obtain a
subtenant or subtenants for Tenant's premises under the Kentucky Home Lease or
to cause the Kentucky Home Lease to be assigned. Tenant hereby agrees to
cooperate with Landlord in its attempt to sublease the space or assign the lease
(or both) and agrees to allow any such proposed assignee or subtenant or
subtenants to inspect the space. Tenant further agrees to enter into any such
sublease or assignment to which the landlord under the Kentucky Home Lease
consents, provided Landlord
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<PAGE>
agrees to discharge the obligations of Tenant under the sublease or assignment.
In the event of any such subletting, the Base Rent Credit shall be reduced by
(i) the amounts paid by the subtenant to Tenant, as sublandlord, under such
sublease agreement, less (ii) the credit, if any, which Tenant would have
received with respect to those payments under Section 34 of this Lease if the
Kentucky Home Lease had been assigned to Landlord. If Tenant enters into a
sublease pursuant to this Section 33.2., Tenant shall take such action to
enforce or terminate the sublease or to evict the subtenant as Landlord may from
time to time direct if Landlord pays the cost of such action.
33.3 Tenant represents and warrants that the following are now true
and shall be true on the Commencement Date: (a) the Kentucky Home Lease consists
solely of the lease dated June 17, 1992, a May 4, 1993 addendum setting the
commencement date at May 1, 1993, letters dated September 17, 1993, and January
21, 1994, adding 14th floor space to the lease, and an Addendum to Lease dated
January 1, 1994, relating, among other things, to space on the 14th floor, and
has not been further amended, (b) the Kentucky Home Lease is in full force and
effect, (c) Tenant holds the tenant's interest in the Kentucky Home Lease, and
has not assigned or encumbered or agreed to assign or encumber the Kentucky Home
Lease, (d) Tenant has not exercised any extension options or any rights to take
additional space, other than pursuant to the letters referred to above, (e)
Tenant is not in default under the Kentucky Home Lease and, to Tenant's
knowledge, the landlord is not in default under the Kentucky Home Lease, (f) the
amount of monthly gross rent payable under the Kentucky Home Lease as of July 1,
1996 is $18,122.50, and (g) all past due rent and other obligations, including
any prior year operating expense adjustments, have been paid. Tenant shall make
good faith efforts to cause the landlord under the Kentucky Home Lease to
confirm the above items in a letter of estoppel or certificate to Landlord.
34. RENT CONCESSION:
If the Kentucky Home Lease is assigned to Landlord and thereafter
Landlord sublets any of the Kentucky Home Lease space referred to above or
further assigns the Kentucky Home Lease, or both, Landlord shall give Tenant a
rent credit equal to the lesser of (a) Fifty-one Thousand Six Hundred Eighty-
three and 33/100 Dollars ($51,683.33), or (b) an amount equal to fifty percent
(50%) of the rents received from the subletting and the consideration, if any,
received from the assignment, less leasing commissions, tenant improvement costs
and inducement payments and other costs incurred by Landlord in connection with
the subletting or assignment. If the Kentucky Home Lease is assigned to a third
party by Tenant at Landlord's request in accordance with Section 33.2, any
consideration paid by the assignee for the assignment shall be paid to Landlord,
but Tenant shall receive the credit, if any, to which Tenant would have been
entitled under this Section 34 if the Kentucky Home Lease had been assigned to
Landlord and then further assigned.
35. OPTION TO RENEW:
Tenant shall have two (2) five (5) year options to renew this Lease
upon twelve (12) months prior written notice to Landlord. The rental rate for
each renewal term shall be the then current fair market rate for comparable
space in comparable buildings within the Louisville
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<PAGE>
Central Business District, as determined by Landlord in good faith. The "Base
Year" set forth in Section 6.1 shall be adjusted to reflect the then current
base year for the Building for each renewal option exercised. At the beginning
of the first renewal term only, Landlord shall recarpet the floors and repaint
the walls of the Premises with materials equivalent in quality and quantity to
those installed or used in connection with the initial Tenant Work at a cost not
to exceed Five and No/100 Dollars ($5.00) per square foot of Rentable Area.
36. EXPANSION OPTION:
Tenant shall have the option, by written notice given to Landlord on
or before January 1, 1998, to add the sixth floor of the Building (the
"Expansion Space") to the Premises on June 1, 1998 (the "Expansion Date"), and
if such notice is given the Expansion Space shall become a part of the Premises
on the Expansion Date, subject to all of the terms and conditions of this Lease,
except that Landlord shall provide Tenant with an allowance for tenant
improvements in the Expansion Space in an amount not to exceed Twelve and No/100
Dollars ($12.00) per square foot of Rentable Area in the Expansion Space. Said
allowance shall only be used for improvements to the Expansion Space. Tenant
acknowledges and agrees that Tenant shall take the Expansion Space "AS IS" and
Landlord shall not be obligated to do any work whatsoever in connection
therewith. The Expansion Space is occupied by Vencor, Inc. ("Vencor"), for a
term ending May 31, 1998. If Vencor holds over after the expiration date of its
lease term, Landlord shall remove Vencor as soon as possible, but shall not be
liable for late delivery, and, if the Expansion Space is delivered to Tenant
after May 1, 1998, the Expansion Date shall be the date of delivery.
37. RIGHT OF FIRST OFFER:
If Tenant does not exercise its option to lease the sixth floor as
provided in Section 36, and, following lapse of that option, Landlord proposes
to lease any sixth floor space which is then vacant or will become vacant as of
a date specified by Landlord, for a term commencing at any time during the
period from December 1, 1998 through July 31, 2006 (both dates inclusive),
Landlord shall give Tenant notice of its intention to lease the space which
either states that the space is vacant or specifies the date on which it will be
vacant. Tenant may elect to lease the space identified in Landlord's notice by
written notice given to Landlord not more than fifteen (15) days after the date
of Landlord's notice, and, if Tenant timely elects to take the space, (i) the
space will become subject to this Lease immediately, if Landlord's notice states
that it is then vacant, or otherwise on the date on which it will become vacant
as specified in Landlord's notice, (ii) the space shall be taken "AS IS", (iii)
the base rent per square foot for the space at the commencement of the term for
that space shall be the then current rent per square foot under the Lease, and
shall increase when and as rent increases under the Lease, (iv) Landlord shall
pay Tenant a per square foot tenant improvement allowance for the space in an
amount not to exceed Fifteen and No/100 Dollars ($15.00) multiplied by a
fraction, the numerator of which is the number of days remaining in the initial
term following the commencement date for that space and the denominator of which
is 3,650, (v) the tenant improvement allowance shall be used only for
improvements to the space, and (vi) the space shall otherwise be subject to all
of the terms and provisions of the Lease. This right of first offer shall not
apply to any space which is leased to a third party for a term which begins
after June 1, 1998 and before December 1, 1998, or to any
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<PAGE>
space leased to a third party for a term which begins during any renewal term
under this Lease. If Tenant is entitled to lease space pursuant to this Section
37 and does not elect to lease it within the fifteen (15) day period herein
provided, Landlord may lease the space to any other party on such terms as
Landlord may elect.
38. MISCELLANEOUS:
(a) This is a Kentucky contract and shall be construed according to
the laws of Kentucky.
(b) The captions in this Lease are for convenience only and are not a
part of this Lease.
(c) If more than one person or entity shall sign this Lease as
Tenant, the obligations set forth herein shall be deemed joint and several
obligations of each such party.
(d) Time is of the essence.
(e) The provisions of this Lease which relate to periods subsequent
to the expiration of the Term shall survive expiration.
(f) If any provision of this Lease is invalid or unenforceable to any
extent, then such provision and the remainder of this Lease shall continue in
effect and be enforceable to the fullest extent permitted by law.
(g) This Lease contains the entire agreement of the parties hereto
with respect to the Premises and Project. This Lease may be modified only by a
writing executed and delivered by both parties.
(h) Nothing contained in this Lease shall be deemed or construed to
create a partnership or joint venture of or between Landlord and Tenant, or to
create any other relationship between the parties other than that of landlord
and tenant.
(i) This Lease shall be binding upon and inure to the benefit of the
parties hereto and, subject to the restrictions and limitations herein
contained, their respective heirs, successors and assigns.
-23-
<PAGE>
(j) This Lease and the obligations set forth herein are subject to
approval by the Landlord's investment committee, which approval shall be
requested on or before May 3, 1996.
LANDLORD TENANT
Northwestern National Life ARM Financial Group, Inc.
Insurance Company
By: Reliastar Investment Research, Inc.,
its authorized agent
By: By:
---------------------------------- ---------------------------
William T. Nimmo John Franco
Its: Vice President Its: Co-Chief Executive Officer
--------------------------- ---------------------------
-24-
<PAGE>
EXHIBIT A
---------
[Floor Plan]
<PAGE>
EXHIBIT B
---------
RULES AND REGULATIONS
1. Any sign, lettering or design of Tenant which is visible from the
exterior of the Prernises shall be subject to prior approval by Landlord and
shall conform to the uniform pattern of identification signs for tenants in the
Building as prescribed by Landlord. Tenant shall not inscribe or affix any sign,
lettering or design in the Premises or Building which is visible from the
exterior of the Building.
2. Landlord shall maintain a Building directory with the name of Tenant,
its organizational division and the naMe of any other business entities lawfully
occupying the Premises or any part thereof, and provided that the names so
listed do not take up more than Tenant's proportionate share of the space on the
Building directory, the size of which shall be determined by Landlord, Landlord
shall pay for the initial cost of placing Tenant's name on the Building
directory.
3. Landlord shall provide to Tenant at Landlord's cost Tenant's initial
identification signs for the entrance door or doors to the Premises, the form
for which shall be uniform throughout the Building and shall be selected by
Landlord. Any changes or alterations to such signs referred to in paragraphs 2
and 3.of this Exhibit B shall be paid for by Tenant.
4. No additional locks other than Building standard shall be placed upon
any doors of the Premises without Landlord's consent and Tenant agrees not to
have any duplicate keys made. If more than two keys for any door lock are
desired, such additional keys shall be acquired from Landlord and shall be paid
for by Tenant. Upon termination of this Lease, Tenant shall surrender all keys
to Landlord. Tenant shall not replace the locks on any door. Should Landlord
consent to the replacement of such lock, Landlord shall replace the lock at
Tenant's sole expense.
5. No furniture, freight, supplies not carried by hand, or equipment of
any kind shall be brought into or removed from the Building without the consent
of Landlord. Landlord shall have the right to limit the weight and size and to
designate the position of all safes and such other heavy property brought into
the Building. The furniture, freight, supplies, equipment, safes and such other
heavy property shall be moved in or out of the Building only at the times and in
the manner permitted by Landlord. Landlord will not be responsible for loss of
or damage to any such items and all damage done to the Premises or the Building
by moving or maintaining any such items shall be repaired at the expense of
Tenant. Any merchandise not capable of being carried by hand shall utilize hand
trucks equipped with rubber tires and rubber side guards.
6. The entrances, corridors, stairways, elevators and other similar areas
in the Building shall not be obstructed by Tenant or used for any purpose other
than ingress or egress to and from the Premises. Tenant shall not bring into the
Building or keep within the Building any animal or bird.
<PAGE>
7. Tenant, its invitees or guests shall not disturb other occupants of
the Building by making any undue or unseemly noise, or otherwise. Tenant shall
not, without Landlord's written consent, install or operate in or upon the
Premises any machine or machinery causing noise or vibration perceptible outside
the Premises, electric heater, stove, device for the preparation of food, or
machinery of any kind, or carry on any mechanical business thereon, or keep or
use thereon oils, burning fluids, camphene, kerosene, naphtha, gasoline, or
other combustible materials. Notwithstanding the foregoing, Tenant may operate
within the Premises a device for the making of coffee to be consumed on the
Premises. No explosives shall be brought into the Building.
8. Tenant shall not mark or drive nails or screws into the woodwork or
plaster, or paint, or in any way deface the Premises, the Building, or any parts
thereof or fixtures therein. The expense of remedying any breakage, damage or
stoppage resulting from a violation of this rule shall be paid by Tenant.
9. Canvassing, soliciting and peddling in the Building are prohibited and
each tenant shall cooperate to prevent such activity, however, Landlord in its
discretion may allow coffee cart(s) and snack vending in the Building.
10. Tenant may request the assistance of Landlord's employees only upon
application at the office of the Building. Landlord's employees are not
required to perform any work or do anything outside of their regular office
duties, except upon issuance of special instructions from the office of the
Building. If Landlord's employees are made available to assist Tenant, Landlord
shall be paid for their services by Tenant at reasonable hourly rates.
Landlord's employees are not required to admit any person, Tenant or otherwise,
to an retail space without specific instructions from the office of the
Building.
11. Landlord reserves the right to close and keep locked all entrance and
exit doors of the Building on Saturdays, Sundays and legal holidays and between
the hours of 6:00 p.m. on any day and 7:00 a.m. of the following day and during
such further hours as Landlord may deem advisable for access control of the
Building. Notwithstanding the foregoing, Tenant shall have access to the
Building at all hours.
12. Landlord may utilize an outside agency to control access to the
Building when it is locked. Landlord does not assume any responsibility for, and
shall not be liable for, any damage resulting from an error in regard to any
identification of Tenant or its employees and from admission to, or exclusion
from, the Building by such outside agency.
13. The heating and air conditioning systems shall be operated from time
to time as designated by the Building's owner. Tenant shall not utilize any
equipment requiring extraordinary services without the prior written consent of
Landlord.
<PAGE>
14. Tenant shall exercise care and caution to insure that all water
faucets or water apparatus, electricity and gas are carefully and entirely shut
off before Tenant or its employees leave the Premises so as to prevent waste or
damage. Tenant shall be responsible for any damage to the Premises or the
Building and for all damage or injuries sustained by other tenants or occupants
of the building arising from Tenant's failure to observe this rule.
15. Landlord reserves the right to exclude or remove from the Building any
person who, in the judgment of Landlord, is under the influence of liquor or
drugs, or who is, in the judgment of Landlord, disturbing other tenants in any
way, or who shall in any manner do any act in violation of any of the rules and
regulations of the Building.
16. Toilet facilities shall be provided for men and women by Landlord.
Plumbing fixtures and appliances shall be used for the purpose for which they
were designed and no rubbish, rags or other unsuitable material shall be thrown
or placed therein. Repairs resulting from such damage to any such fixtures or
appliances from misuse by Tenant shall be paid for by Tenant and Landlord shall
not in any case be responsible therefor.
17. Landlord will replace tubes and lamps for lighting fixtures at
Tenant's expense if requested by Tenant to do so.
18. Tenant agrees that Landlord shall not be responsible for lost or
stolen personal property, money or jewelry from the Premises or Building,
regardless of whether such loss occurs when the area is locked against entry or
not.
19. Landlord may from time to time adopt appropriate systems and
procedures for the security or safety of the Building and/or the parking area,
any person occupying, using or entering the same, or any equipment, finishings
or contents thereof, and Tenant shall comply with Landlord's reasonable
requirements relative thereto.
20. Landlord reserves the right to rescind any of these rules and
regulations and to make such other and further reasonable rules and regulations
as in its judgment may from time to time be needed or desirable for the care and
cleanliness of the Premises and the Building. Such rules and regulations, when
made and upon written notice to Tenant, shall be binding upon Landlord and
Tenant in like manner as if originally set forth herein.
<PAGE>
Exhibit 10.2
FOURTH AMENDMENT, WAIVER AND CONSENT dated as of June 28, 1996 (this
"Amendment"), to the Credit Agreement dated as of November 15, 1993 (as amended,
the "Credit Agreement"), among ARM FINANCIAL GROUP, INC., a Delaware corporation
(the "Borrower"), INTEGRITY HOLDINGS, INC., a Delaware corporation ("Holdings")
formerly named N.M. U.S. Limited, as guarantor, the financial institutions
listed on Schedule 2.01 to the Credit Agreement (the "Lenders") and THE CHASE
MANHATTAN BANK, as successor to The Chase Manhattan Bank, N.A. and Chemical Bank
(individually, as holder of the collateral subject to the Security Documents
(such term and each other capitalized term used but not defined in this
Amendment having the meaning assigned thereto in the Credit Agreement), and as
managing agent for the Lenders, the "Managing Agent").
WHEREAS the Borrower and Holdings have requested that the Lenders (a) amend
certain provisions of the Credit Agreement as set forth below and (b) grant
certain waivers and consents with respect to the Credit Agreement; and
WHEREAS the Lenders are willing, on the terms and subject to the conditions
set forth below, to effect such amendment and grant such waivers and consents;
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto hereby agree, on
the terms and subject to the conditions set forth below, as follows:
SECTION 1. Amendment to Credit Agreement. (a) The Borrower, Holdings and
the Lenders hereby amend Section 2.02 of the Credit Agreement by deleting the
amount "$5,000,000" appearing therein and substituting therefor the amount
"$1,000,000".
(b) The Borrower, Holdings and the Lenders hereby amend Section 6.01 of the
Credit Agreement by (i) deleting, after the semicolon at the end of subparagraph
(j) of such Section, the word "and", (ii) deleting, after the word "Agreement"
at the end of subparagraph (k) of such Section, the period and substituting
therefor "; and" and (iii) inserting, after subparagraph (k) of such Section,
the following subparagraph (l):
(l) additional Indebtedness in an aggregate principal amount not
exceeding at any time $5,000,000.
(c) The Borrower, Holdings and the Lenders hereby amend Section 6.02
of the Credit Agreement by (i) deleting, after the semicolon at the end of
subparagraph (i) of such Section, the word "and", (ii) deleting, after the word
"relates" at the end of subparagraph (j) of such Section, the period and
substituting therefor "; and" and (iii) inserting, after subparagraph (j) of
such Section, the following subparagraph (k):
<PAGE>
2
(k) additional Liens securing Indebtedness permitted to be incurred by
Section 6.01(1), provided that such Liens shall apply only to properties
and assets, if any, of which the purchase, construction, maintenance or
development shall be (or shall have been) financed (or refinanced, replaced
or refunded) with, or which shall be (or shall have been) the subject of
any lease-financing (including any sale and leaseback) transaction
constituting or involving (or refinanced, replaced or refunded with),
Indebtedness incurred pursuant to subparagraph (l) of Section 6.01.
(d) The Borrower, Holdings and the Lenders hereby amend Section 6.13
of the Credit Agreement by (i) deleting the ratio "1.75 to 1.00" appearing in
clause (a) of such Section and substituting therefor the following: "1.50 to
l.00", (ii) deleting the date "March 31, 1996" each time it appears in clauses
(a) and (b) of such Section and substituting therefor the following: "December
31, 1996" and (iii) deleting the ratio "2.00 to 1.00" appearing in clause (b) of
such Section and substituting therefor the following: "1.75 to l.00".
SECTION 2. Consent and Waiver. (a) Holdings hereby consents to the
provisions of this Amendment, reaffirms its guarantee under Article VIII of the
Credit Agreement and reaffirms its grant of security interests under the Loan
Documents to which it is a party.
(b) The Lenders hereby waive compliance by the Borrower with, and any
Default or Event of Default arising under, any provisions of the Credit
Agreement to be amended pursuant to Section 1 above (as in effect immediately
before giving effect to such amendment), to the extent, but only to the extent,
that failure to comply with such provisions (as in effect immediately before
giving effect to such amendment) would not constitute a Default or an Event of
Default under the Credit Agreement (as in effect immediately after giving effect
to such amendment).
SECTION 3. Representations and Warranties. Each of the Borrower and
Holdings represents and warrants, jointly and severally, to each of the Lenders
as of the date hereof that:
(a) The Borrower and each of the Subsidiaries (i) is a corporation or
limited partnership duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (ii) has all requisite power
and authority to own its property and assets and to carry on its business as now
conducted and as proposed to be conducted, (iii) is qualified to do business in
every jurisdiction where such qualification is required, except where the
failure so to qualify would not result in a Material Adverse Effect, and (iv)
has the corporate power and authority to execute, deliver and perform its
obligations under each of the Loan Documents and each other agreement or
instrument contemplated thereby to which it is or will be a party.
(b) This Amendment (i) has been duly authorized by all requisite
corporate and, if required, stockholder action and (ii) will not (A) violate (I)
any provision of law,
<PAGE>
3
statute, rule or regulation applicable to the Borrower or any Subsidiary, or of
the certificate or articles of incorporation or other constitutive documents or
by-laws of the Borrower or any Subsidiary, or (II) any provision of any
indenture, agreement or other instrument to which the Borrower or any Subsidiary
is a party or by which any of them or any of their property is or may be bound,
(B) be in conflict with, result in a breach of or constitute (alone or with
notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or (C) result in the creation or imposition of any Lien upon
or with respect to any property or assets now owned or hereafter acquired by the
Borrower or any Subsidiary, other than the Liens created by the Security
Documents.
(c) This Amendment has been duly executed and delivered by the Borrower and
Holdings and constitutes a legal, valid and binding obligation of the Borrower
or Holdings, as applicable, enforceable against the Borrower or Holdings, as
applicable, in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general equity principles (whether enforcement is sought by proceedings in
equity or at law).
(d) No action, consent or approval of, registration or filing with or any
other action by any Governmental Authority is or will be required in order to
consummate this Amendment, except (i) such as have been made or obtained and are
in full force and effect and (ii) any approvals that may be required by any
Applicable Insurance Regulatory Authority in connection with the exercise of
rights or remedies with respect to any of the Collateral (as defined in the
Pledge Agreement) pledged by the Borrower or Holdings pursuant to the Pledge
Agreement.
The representations and warranties contained in this Section 3 shall survive the
termination of this Amendment Agreement (it being understood that no
representation and warranty contained herein shall have been deemed to have been
made on or as of any date other than the date first above written).
SECTION 4. Loan Documents. This Amendment shall, for purposes of paragraph
(a) of Article VII and Section 10.05 of the Credit Agreement, be deemed to be a
Loan Document.
SECTION 5. Effectiveness. This Amendment shall become effective as of the
date hereof when Chemical Bank, as a Managing Agent, shall have received copies
hereof that, when taken together, bear the signatures of the Borrower, Holdings
and each of the Required Lenders.
SECTION 6. Notices. All notices hereunder shall be given in accordance with
the provisions of Section 10.01 of the Credit Agreement.
<PAGE>
4
SECTION 7. Applicable Law. THIS AMENDMENT BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 8. No Novation. Except as expressly set forth herein, this
Amendment shall not by implication or otherwise limit, impair, constitute a
waiver of or otherwise affect the rights and remedies of any party under the
Credit Agreement, nor alter, modify, amend or in any way affect any of the
terms, conditions, obligations, covenants or agreements contained in the Credit
Agreement, all of which are ratified and affirmed in all respects and shall
continue in full force and effect. This Amendment shall apply and be effective
only with respect to the provisions of the Credit Agreement specifically
referred to herein.
SECTION 9. Counterparts. This Amendment may be executed in two or
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract. Delivery of an executed
counterpart of a signature page of this Amendment by facsimile transmission
shall be as effective as delivery of a manually executed counterpart of this
Amendment.
SECTION 10. Headings. Section headings used herein are for
convenience of reference only, are not part of this Amendment and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Amendment.
IN WITNESS WHEREOF, the Borrower, Holdings and the Lenders have caused
this Amendment to be duly executed by their duly authorized officers, all as of
the date and year first above written.
ARM FINANCIAL GROUP, INC.,
by
/s/ Peter S. Resnick
------------------------------------
Name: Peter S. Resnick
Title: Treasurer
<PAGE>
5
INTEGRITY HOLDINGS, INC., as
Guarantor,
by
/s/ Peter S. Resnick
--------------------------------
Name: Peter S. Resnick
Title: Treasurer
THE CHASE MANHATTAN BANK,
individually, and as the
Managing Agent and as
Representative of the Secured
Parties,
by
--------------------------------
Name:
Title:
FIRST BANK NATIONAL
ASSOCIATION,
by
--------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
by
--------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA,
by
--------------------------------
Name:
Title:
<PAGE>
5
INTEGRITY HOLDINGS, INC., as
Guarantor,
by
--------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
individually, and as the
Managing Agent and as
Representative of the Secured
Parties,
by
/s/ Peter W. Platten
--------------------------------
Name: PETER W. PLATTEN
Title: Vice President
FIRST BANK NATIONAL
ASSOCIATION,
by
--------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
by
--------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA,
by
--------------------------------
Name:
Title:
<PAGE>
5
INTEGRITY HOLDINGS, INC., as
Guarantor,
by
--------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
individually, and as the
Managing Agent and as
Representative of the Secured
Parties,
by
--------------------------------
Name:
Title:
FIRST BANK NATIONAL
ASSOCIATION,
by
/s/ Craig Hansen
--------------------------------
Name: Craig Hansen
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
by
--------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA,
by
--------------------------------
Name:
Title:
<PAGE>
5
INTEGRITY HOLDINGS, INC., as
Guarantor,
by
------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
individually, and as the
Managing Agent and as
Representative of the Secured
Parties,
by
------------------------
Name:
Title:
FIRST BANK NATIONAL
ASSOCIATION,
by
------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
by /s/ Paul T. Schultz
------------------------
Name: Paul T. Schultz
Title: Managing Director
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA,
by
------------------------
Name:
Title:
<PAGE>
5
INTEGRITY HOLDINGS, INC., as
Guarantor,
by
------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
individually, and as the
Managing Agent and as
Representative of the Secured Parties,
by
------------------------
Name:
Title:
FIRST BANK NATIONAL ASSOCIATION,
by
------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO,
by
------------------------
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA,
by /s/ Gail M. Golightly
------------------------
Name: Gail M. Golightly
Title: Senior Vice President
<PAGE>
6
FLEET NATIONAL BANK,
by /s/ Anson Harris
------------------------
Name: Anson Harris
Title: Assistant Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENT OF OPERATIONS OF ARM FINANCIAL GROUP, INC.'S
FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 2,812,843
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 16,331
<MORTGAGE> 41,593
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,991,082
<CASH> 57,489
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 50,947
<TOTAL-ASSETS> 4,234,918
<POLICY-LOSSES> 3,062,628
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 40,000
<COMMON> 0
0
50,000
<OTHER-SE> 95,895
<TOTAL-LIABILITY-AND-EQUITY> 4,234,918
0
<INVESTMENT-INCOME> 117,863
<INVESTMENT-GAINS> (1,217)
<OTHER-INCOME> 8,363
<BENEFITS> 86,012
<UNDERWRITING-AMORTIZATION> 3,105
<UNDERWRITING-OTHER> 16,384
<INCOME-PRETAX> 13,251
<INCOME-TAX> 2,763
<INCOME-CONTINUING> 10,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,488
<EPS-PRIMARY> 327.44
<EPS-DILUTED> 327.44
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
