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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
Commission file number: 33-67268
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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.)
515 WEST MARKET STREET
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 (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
DATE CLASS SHARES OUTSTANDING
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August 12, 1997 A 21,308,325
August 12, 1997 B 1,947,646
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TABLE OF CONTENTS
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--
June 30, 1997 and December 31, 1996. . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations--
Three and Six Months Ended June 30, 1997 and 1996. . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1997 and 1996. . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . .14
PART II. OTHER INFORMATION
1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .29
2. Change in Securities . . . . . . . . . . . . . . . . . . . . . . . . . .29
4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . .30
5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .31
6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . .31
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
2
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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) 1997 1996 1997 1996
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Cash and investments:
Fixed maturities available-for-sale,
at fair value (amortized cost:
June 30, 1997-$3,383,226; December 31,
1996-$3,048,834) $3,392,030 $3,054,513 $3,392,030 $3,054,513
Equity securities, at fair value
(cost: June 30, 1997-$21,158;
December 31, 1996-$21,268) 21,171 22,552 21,171 22,552
Mortgage loans on real estate 28,346 36,879 28,346 36,879
Policy loans 123,131 123,466 123,131 123,466
Cash and cash equivalents 164,269 110,067 164,269 110,067
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Total cash and investments 3,728,947 3,347,477 3,728,947 3,347,477
Assets held in separate accounts 1,598,019 1,135,048 1,598,019 1,135,048
Accrued investment income 41,915 36,233 41,915 36,233
Value of insurance in force 46,648 52,024 126,718 112,389
Deferred policy acquisition costs 77,545 59,001 -- --
Goodwill 7,319 7,636 7,319 7,636
Deferred federal income taxes 35,856 35,604 41,516 42,653
Receivable for investment securities sold 23,583 4,671 23,583 4,671
Other assets 20,982 23,970 20,982 23,970
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Total assets $5,580,814 $4,701,664 $5,588,999 $4,710,077
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</TABLE>
3
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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) 1997 1996 1997 1996
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $3,611,900 $3,294,174 $3,575,305 $3,260,253
Customer deposits in separate accounts 1,593,428 1,130,159 1,593,428 1,130,159
Long-term debt 38,000 40,000 38,000 40,000
Accounts payable and accrued expenses 18,236 22,684 18,236 22,684
Payable for investment securities
purchased 4,109 10,431 4,109 10,431
Payable to reinsurer 9,542 10,000 9,542 10,000
Other liabilities 29,853 12,274 29,853 12,274
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Total liabilities 5,305,068 4,519,722 5,268,473 4,485,801
Contingencies
Shareholders' equity:
Preferred stock, $25.00 stated value 50,000 50,000
Class A common stock, $.01 par value,
21,308,325 shares issued and outstanding 213 *
Class B common stock, $.01 par value,
1,947,646 shares issued and
outstanding 19 *
Additional paid-in capital 211,335 124,609
Net unrealized gains on available-
for-sale securities 5,138 3,669
Retained earnings 9,041 3,664
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Total shareholders' equity 275,746 181,942 320,526 224,276
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Total liabilities and shareholders' equity $5,580,814 $4,701,664 $5,588,999 $4,710,077
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</TABLE>
* LESS THAN $1,000.
SEE ACCOMPANYING NOTES.
4
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ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Investment income $77,759 $62,670 $147,459 $117,863
Interest credited on customer deposits (58,282) (44,897) (109,607) (86,012)
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Net investment spread 19,477 17,773 37,852 31,851
Fee income:
Variable annuity fees 3,412 2,662 6,651 5,024
Asset management fees 1,882 1,196 3,766 2,711
Other fee income 450 343 847 628
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Total fee income 5,744 4,201 11,264 8,363
Other income and expenses:
Surrender charges 973 1,320 1,855 2,890
Operating expenses (6,926) (7,771) (15,082) (14,754)
Commissions, net of deferrals (748) (653) (1,386) (1,197)
Interest expense on debt (580) (744) (1,266) (1,531)
Amortization:
Deferred policy acquisition costs (2,436) (1,418) (4,611) (3,105)
Value of insurance in force (2,118) (2,424) (4,359) (4,481)
Acquisition-related deferred charges (125) (184) (251) (684)
Goodwill (106) (122) (228) (244)
Non-recurring charges:
Stock-based compensation (8,145) -- (8,145) --
Other (1,188) -- (2,633) --
Other, net (914) (1,971) (1,909) (2,640)
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Total other income and expenses (22,313) (13,967) (38,015) (25,746)
Realized investment gains (losses) 420 (814) 2,651 (1,217)
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Income before federal income taxes 3,328 7,193 13,752 13,251
Federal income tax expense (3,185) (1,190) (5,999) (2,763)
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Net income 143 6,003 7,753 10,488
Dividends on preferred stock (1,188) (1,188) (2,376) (2,376)
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Net income (loss) applicable
to common shareholders $(1,045) $4,815 $5,377 $8,112
---------------------------- --------------------------
---------------------------- --------------------------
Net income (loss) per common share $ (0.06) $ 0.28 $ 0.30 $ 0.46
---------------------------- --------------------------
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Average common shares outstanding 18,201 17,491 17,855 17,490
---------------------------- --------------------------
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</TABLE>
SEE ACCOMPANYING NOTES.
5
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ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS) 1997 1996
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $95,559 $88,554
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (2,508,366) (1,526,142)
Maturities and redemptions 170,973 118,596
Sales 1,978,072 1,044,921
Other investments:
Purchases (34,014) (33,153)
Maturities and redemptions 8,740 2,351
Sales 35,725 27,394
Policy loans, net 335 (2,787)
Purchase of separate account assets (387,670) (132,932)
Proceeds from sale of separate account assets 46,561 40,272
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Cash flows used in investing activities (689,644) (461,480)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 78,813 --
Amounts received from customers 858,715 597,998
Amounts paid to customers (284,407) (230,095)
Principal payment on long-term debt (2,000) --
Change in payable to reinsurer (458) --
Dividends on preferred stock (2,376) (2,376)
Change in repurchase agreement liability -- (12,008)
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Cash flows provided by financing activities 648,287 353,519
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Net increase (decrease) in cash and cash equivalents 54,202 (19,407)
Cash and cash equivalents at beginning of period 110,067 76,896
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Cash and cash equivalents at end of period $164,269 $57,489
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------------------------
SEE ACCOMPANYING NOTES.
6
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ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
1. BASIS OF PRESENTATION AND ORGANIZATION
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 three and six month periods ended June 30,
1997, are not necessarily indicative of those to be expected for the year ending
December 31, 1997. 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, 1996.
Certain amounts from prior years have been reclassified to conform to the
current year's presentation. Such 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 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
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the
7
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aggregate fair value amounts presented do not necessarily represent the
underlying value of the Company.
The Company's management of interest rate risk reduces its exposure to
changing interest rates through a close matching 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.
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 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 non-guaranteed separate accounts is based on
the quoted market prices of the underlying mutual funds. The fair value of
assets held in guaranteed separate accounts 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.
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.
8
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CUSTOMER DEPOSITS AND VALUE OF INSURANCE IN FORCE
The fair value of customer deposits for single premium immediate annuity
contracts 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 single premium immediate
annuity contracts represents the fair values of those contracts as a whole which
implicitly eliminates the corresponding value of insurance in force. The fair
value amounts of the remaining customer deposits, primarily related to deferred
annuity contracts, single premium endowment contracts 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 single premium immediate annuity contracts, 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 AND PAYABLE TO REINSURER
The carrying amounts of long-term debt and payable to reinsurer approximate
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 income 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. Such changes include providing a
full valuation allowance on the Company's non-life net operating loss
carryforwards, which in 1997 includes the one-time non-cash stock-based
compensation expense charge.
9
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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 GAAP net income reported in the
accompanying condensed consolidated statements of operations:
Six Months Ended
June 30,
------------------------
(IN THOUSANDS) 1997 1996
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Insurance subsidiaries (statutory-basis)(1) $22,267 $18,680
Non-insurance companies(2) 898 (608)
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Consolidated statutory-basis pretax operating income 23,165 18,072
Reconciling items:
Amortization of interest maintenance reserve (1,877) (2,165)
Adjustments to customer deposits (11,577) (329)
Interest expense on debt (1,266) (1,531)
Deferral of policy acquisition costs,
net of amortization 18,579 7,071
Amortization of value of insurance in force (4,359) (4,481)
Amortization of acquisition-related deferred
charges and goodwill (479) (928)
Non-recurring charges (10,778) --
Realized investment gains (losses) 2,651 (1,217)
Other (307) (1,241)
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GAAP-basis:
Income before federal income taxes 13,752 13,251
Federal income tax expense (5,999) (2,763)
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Net income 7,753 10,488
Dividends on preferred stock (2,376) (2,376)
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Net income applicable to common shareholders 5,377 8,112
Exclude, net of tax:
Realized investment (gains) losses (1,723) 791
Non-recurring charges 10,778 --
Income from defined benefit pension plan asset
management operations (853) (176)
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Operating earnings(3) $13,579 $8,727
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------------------------
(1) Insurance company statutory-basis pretax income excluding realized gains
and losses.
(2) Non-insurance company pretax income excluding amortization of
acquisition-related deferred charges, interest expense on debt, realized
investment gains and losses, and non-recurring corporate costs and charges
related to acquisition, financing and restructuring activities.
(3) Net income applicable to common shareholders, excluding, net of tax,
realized investment gains and losses, non-recurring charges and income from
defined benefit pension plan asset management operations of ARM Capital
Advisors which are being sold.
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5. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING OF COMMON STOCK
In June 1997, the Company completed an initial public offering (the
"Offering") of 9.2 million shares of Class A common stock, par value of $.01 per
share (the "New Class A Common Stock"), of which 5.75 million shares were sold
by the Company and 3.45 million shares were sold by the Morgan Stanley
Stockholders (as defined below). The net proceeds of the Offering to the Company
were $78.8 million, after deducting underwriting discounts and commissions and
other expenses of the Offering payable by the Company. On June 30, 1997, the
Company used a portion of such net proceeds to make a capital contribution to
its primary insurance subsidiary, Integrity Life Insurance Company
("Integrity"), thereby strengthening Integrity's capital base to provide for
future growth. The Company intends to also use the net proceeds to enhance the
Company's retail market presence, to consolidate operating locations and for
other corporate purposes, which may include acquisitions.
Concurrent with the closing of the Offering, the Company amended and
restated its Certificate of Incorporation to effectuate a recapitalization such
that (i) the common equity of the Company consists of New Class A Common Stock
and Class B Non-Voting Common Stock, par value of $.01 per share (the "New Class
B Common Stock" and, together with the New Class A Common Stock, the "New Common
Stock"), (ii) authorized shares of the New Class A Common Stock and New Class B
Common Stock were increased to 150 million shares and 50 million shares,
respectively, (iii) each outstanding share of common stock of the Company was
converted into one share of New Class A Common Stock, (iv) certain shares of the
New Class A Common Stock owned by private equity funds sponsored by Morgan
Stanley, Dean Witter, Discover & Co. (the successor to Morgan Stanley Group Inc.
in its merger with Dean Witter, Discover & Co.) (the "Morgan Stanley
Stockholders") were converted into New Class B Common Stock such that, after
giving effect to such conversion, but not giving effect to the Offering, the
Morgan Stanley Stockholders owned, in the aggregate, 49% of the outstanding New
Class A Common Stock, and (v) each share of New Common Stock was split into 706
shares of New Common Stock. Holders of New Class B Common Stock have no right to
vote on matters submitted to a vote of stockholders, except in certain
circumstances. Shares of the New Class B Common Stock have no preemptive or
other subscription rights and are convertible into an equal number of shares of
New Class A Common Stock (1) at the option of the holder thereof to the extent
that, following such conversion, the Morgan Stanley Stockholders will not, in
the aggregate, own more than 49% of the outstanding shares of New Class A Common
Stock, and (2) automatically upon the transfer of such shares by any Morgan
Stanley Stockholder to a person that is not a Morgan Stanley Stockholder or an
affiliate of a Morgan Stanley Stockholder. The Morgan Stanley Stockholders owned
approximately 91% of the outstanding shares of the Company's common stock prior
to the Offering and approximately 53% following the Offering.
All references to number of shares, per share amounts and stock option data
appearing in the financial statements and notes thereto have been retroactively
adjusted for the stock split.
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STOCK OPTIONS
The Company's Amended and Restated Stock Option Plan (the "Plan"),
originally adopted in December 1993, provides for granting of options to
purchase up to 2,432,170 shares of Class A common stock. In connection with the
Offering, the remaining 512,980 unallocated options were granted on a pro rata
basis to participants of the Plan with the exercise prices and vesting schedules
of such options being the average weighted exercise prices and vesting
percentages of the options previously held by such holders. As of June 30, 1997,
all options of the Plan have been issued of which 2,428,640 are outstanding and
1,142,539 are exercisable. Prior to the Offering, the Plan provided that the
option exercise price increased at the end of every three month period following
the date of grant at a rate of 12% per annum, compounded annually, while the
option remained unexercised. Concurrent with the Offering, the exercise prices
applicable to the outstanding options were fixed at exercise prices ranging from
$11.14 per share to $12.24 per share.
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its employee stock options. As a result of the
granting of previously unallocated options and the determination of the exercise
prices for all options of the Plan which occurred in conjunction with the
Offering, a one-time non-cash stock-based compensation expense charge of $8.1
million was recorded during June 1997. Such charge equals the aggregate
difference between the $15 initial public offering price of the New Class A
Common Stock and the exercise prices of all of the outstanding options.
In June 1997, the Company adopted the 1997 Equity Incentive Plan (the "1997
Equity Plan") which will be administered by the Compensation Committee. The 1997
Equity Plan provides for the granting of incentive stock options and
nonqualified stock options, stock appreciation rights, restricted stock,
performance units, and performance shares to those officers and other key
employees and consultants with potential to contribute to the future success of
the Company or its subsidiaries; provided that only employees may be granted
incentive stock options. The maximum number of shares of New Class A Common
Stock that may be subject to granting under the 1997 Equity Plan is 1.6 million
shares, subject to adjustment in accordance with the terms of the 1997 Equity
Plan. No awards under the 1997 Equity Plan have been granted as of June 30,
1997.
EARNINGS PER SHARE
Net income per common share is based on the weighted average number of
common shares outstanding during the period. In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which is
required to be adopted by the Company on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the potentially dilutive effect of stock
options will be excluded. If SFAS No. 128 had been adopted by the Company at
June 30, 1997, the impact on the calculation of earnings per share would not
have been material.
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6. DEBT
On June 24, 1997, the Company entered into a Credit Agreement to provide
the Company with a new senior secured revolving credit facility. The maximum
amount that may be borrowed under this Credit Agreement is $75 million, of which
$38 million was drawn on June 24, 1997 and used to repay $38 million of
outstanding borrowings under the Company's prior Credit Agreement, which was
terminated. Borrowings under the new Credit Agreement will bear a floating
interest rate equal to the London Interbank Offered Rate ("LIBOR") plus a
percentage ranging from 0.325% to 0.875%, depending on the ratings of the
Company's preferred stock. The Credit Agreement has a variable annual commitment
fee which can range from 0.10% to 0.25% of the unused portion of the borrowing,
depending on the ratings of the Company's preferred stock. The Credit Agreement
matures on June 24, 2002, subject to optional prepayment and contingent upon the
Company's compliance with various financial covenants.
7. SALE OF ARM CAPITAL ADVISORS
On May 21, 1997, the Company entered into a purchase agreement pursuant to
which the Company has agreed to transfer substantially all of the assets and
operations of ARM Capital Advisors, Inc. ("ARM Capital Advisors") to a newly
formed subsidiary, ARM Capital Advisors, LLC, and to sell an 80% interest in
such company to ARM Capital Advisors Holdings, LLC, an entity controlled by Emad
A. Zikry, the current President of ARM Capital Advisors. The Company expects to
recognize an immaterial gain on the sale. ARM Capital Advisors is a registered
investment adviser and wholly owned subsidiary of the Company that provides
asset management services to the Company's subsidiaries and certain
institutional clients, primarily defined benefit pension plans. The pending sale
will allow ARM Capital Advisors, LLC to better compete with other independent
asset managers that are not affiliated with insurance companies. Under the terms
of the pending sale, ARM Capital Advisors, LLC will continue to provide the
Company's subsidiaries with investment management services through December 31,
1997 on the same basis as in the past. The terms of the sale further provide
that after December 31, 1997, the Company can continue to engage ARM Capital
Advisors, LLC as its investment adviser at agreed upon rates; but, the Company
may also consider retaining other investment management firms. After
consummation of the pending sale, ARM Capital Advisors will be renamed Integrity
Capital Advisors, Inc. The transaction is expected to close during the third
quarter of 1997.
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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 a variety of products and services
designed to serve the growing long-term savings and retirement markets.
The Company's revenues are derived from its spread-based business and its
fee-based business. The products and services comprising the spread-based and
fee-based businesses are sold in two principal markets, the retail and
institutional markets, through a broad spectrum of distribution channels. In the
spread-based line of business the Company earns a spread between what is earned
on invested assets and what is credited to customer accounts. In the fee-based
line of business the Company receives a fee in exchange for managing customers'
deposits, and the customer accepts the investment risk. The Company believes
that market forces and population demographics are producing and will continue
to generate strong consumer demand for long-term savings and retirement
products, including variable, indexed and fixed annuity products. Acquisitions
by the Company have provided it with the opportunity to leverage its resources
and enter into new markets in order to try to meet this demand. Although the
Company's core business is developing and managing spread-based investment
products, it has also focused on the development of its fee-based variable
annuity business in addition to exploring other alternatives to increase the
size of the fee-based business line. Fee-based business is less capital
intensive than the spread-based business and provides the Company with
diversified sources of income. Although the Company believes it is desirable to
achieve a reasonable business mix between its spread-based and fee-based
businesses, the business mix may vary from time to time, due to opportunistic
acquisitions and market conditions.
Although third-party assets managed by ARM Capital Advisors have grown
since the Company acquired these operations in 1995, the Company believes that
market attitudes towards developing an asset management service for defined
benefit pension plans within a holding company structure consisting
predominantly of insurance companies has constrained ARM Capital Advisors'
growth. Accordingly, the Company is selling an 80% interest in the assets and
operations of ARM Capital Advisors. ARM Capital Advisors' management of defined
benefit pension plan accounts generated asset management fees of $3.7 million
and $1.9 million during the six months ended June 30, 1997 and 1996,
respectively.
On December 13, 1996, the Company transferred its contracts to perform
management and advisory services for the State Bond Mutual Funds to Federated
Investors for $4.5 million. Asset management fee income of $0.8 million was
recorded by the Company during the six months ended June 30, 1996 with respect
to management of such funds. Had the pending sale of ARM Capital Advisors and
the sale of the management contracts for the State Bond Mutual Funds occurred on
January 1, 1996, they would have had an immaterial effect on the Company's
pretax income for the six months ended June 30, 1997 and 1996, respectively.
14
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
Net income during the six months ended June 30, 1997 was $7.8 million
compared to $10.5 million for the six months ended June 30, 1996. Operating
earnings (net income applicable to common shareholders, excluding, net of tax,
realized investment gains and losses, non-recurring charges and income from
defined benefit pension plan asset management operations of ARM Capital Advisors
which are being sold) were $13.6 million and $8.7 million for the six months
ended June 30, 1997 and 1996, respectively. The increase in operating earnings
is primarily attributable to an increase in net investment spread due to both
deposit growth from sales of retail and institutional spread-based products and
ongoing asset/liability management.
Pro forma operating earnings (operating earnings including pro forma
adjustments to earnings for investment income that could have been earned on the
net proceeds of the Company's Offering assuming it occurred at the beginning of
the period) were $15.8 million and $11.0 million for the six months ended June
30, 1997 and 1996, respectively. Pro forma operating earnings per share were
$0.66 and $0.46 for the same respective six month periods. This pro forma
information is not necessarily indicative of what would have occurred had the
Offering occurred on the dates indicated.
Spread-based operating earnings were $21.2 million and $15.4 million during
the six months ended June 30, 1997 and 1996, respectively. Retail spread
products (primarily fixed annuities) and institutional spread products (GICs),
which comprise the spread-based line of business, contributed annualized
operating earnings of 1.32% and 0.63% of average retail spread-based and average
institutional spread-based assets under management for the six months ended June
30, 1997, respectively, compared to 1.09% and 0.51% for the corresponding prior
year period. The increase in spread-based margins is primarily attributable to
ongoing asset/liability management, which generated higher net investment
spreads. Annualized fee-based operating earnings of $1.9 million and $1.8
million, which are primarily derived from retail variable products (variable
annuities) and minimally from institutional enhanced fee products (synthetic
GICs), were 0.42% and 0.53% of average fee-based assets under management for the
six months ended June 30, 1997 and 1996, respectively. The decrease in fee-based
margins for the six months ended June 30, 1997 is due to an increase in
amortization of deferred policy acquisition costs. Certain expenses including
federal income taxes and unallocated corporate overhead are not reflected in
spread-based and fee-based operating earnings.
15
<PAGE>
Net investment spread for the six months ended June 30, 1997 and 1996 was
as follows:
Six Months Ended
June 30,
----------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED) 1997 1996
- --------------------------------------------------------------------------
Investment income $147,459 $117,863
Interest credited on customer deposits (109,607) (86,012)
----------------------------
Net investment spread $37,852 $31,851
----------------------------
----------------------------
Annualized investment yield 7.61% 7.70%
Annualized average credited rate 5.76% 5.71%
----------------------------
Annualized investment spread 1.85% 1.99%
----------------------------
----------------------------
Average cash and investments (in billions) $ 3.88 $ 3.06
Average spread-based customer
deposits (in billions) $ 3.80 $ 3.01
Changes in investment yield must be analyzed in relation to the liability
portfolios that they support. The annualized investment yield on cash and
investments, excluding assets supporting GIC deposits, was 8.00% for the first
half of 1997, up from 7.87% for the comparable 1996 period. The increase
reflects the benefits of ongoing investment portfolio management. In comparison,
the annualized investment yield on cash and investments supporting GIC deposits
was 6.60% and 6.41% for the six months ended June 30, 1997 and 1996,
respectively. GIC deposits grew from $586.0 million at June 30, 1996 to $1.3
billion at June 30, 1997 causing the aggregate decrease in investment yields.
The proceeds from GIC sales are invested in securities of shorter duration
(which generally have lower investment yields) than the Company's other
investment portfolios. The average credited rate pattern is dependent upon the
general trend of interest rates, frequency of credited rate resets and business
mix. Crediting rates are reset monthly based on the LIBOR for GICs and
semi-annually or annually for certain fixed annuities. To date, the Company has
been able to react to changes in market interest rates and maintain a desired
investment spread without a significant effect on surrender and withdrawal
activity although there can be no assurance that the Company will be able to
continue to do so.
Fee income increased to $11.3 million during the six months ended June 30,
1997 from $8.4 million during the six months ended June 30, 1996. This increase
is primarily attributable to variable annuity fees, which are based on the
market value of the mutual fund assets supporting variable annuity customer
deposits in separate accounts. Variable annuity fees increased to $6.7 million
during the six months ended June 30, 1997 from $5.0 million during the six
months ended June 30, 1996 principally due to asset growth 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. Fee-based variable
annuity deposits averaged $883.5 million during the six months ended June 30,
1997, an increase from $690.9 million during the six months ended June 30, 1996.
In addition, asset management fees earned by ARM Capital Advisors on off-balance
sheet assets, primarily related to defined benefit pension plans (and, in 1996
only, fees from the State Bond Mutual Funds which were sold by the Company in
December, 1996), increased to $3.8 million during the six months ended June 30,
1997 from $2.7 million during the six months ended June 30, 1996, reflecting a
significant
16
<PAGE>
increase in the average fair value of off-balance sheet assets managed, from
$1.9 billion during the six months ended June 30, 1996 to $3.4 billion during
the six months ended June 30, 1997. As a result of the pending sale of ARM
Capital Advisors' operations and the sale of the State Bond Mutual Funds, asset
management fee income is expected to decrease in the future.
Assets under management by type of product and service as of June 30, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
June 30,
1997 1996
------------------------------- ----------------------------
Percent of Percent of
(DOLLARS IN MILLIONS) Amount Total Amount Total
- ------------------------------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Spread-based:
Retail (fixed and indexed annuity
and face-amount certificate deposits) $2,856.6 51.4% $2,605.1 59.5%
Institutional (GIC deposits) 1,302.5 23.5 586.0 13.4
------------------------ ------------------------
Total spread-based 4,159.1 74.9 3,191.1 72.9
Fee-based:
Retail (variable annuity deposits
invested in mutual funds) 964.7 17.4 749.2 17.1
Institutional (off-balance sheet
synthetic GIC deposits) 10.5 0.2 -- --
------------------------ ------------------------
Total fee-based* 975.2 17.6 749.2 17.1
Corporate and other:
Off-balance sheet deposits under
marketing partnership arrangements 257.4 4.6 379.1 8.7
Cash and investments in excess of
customer deposits 159.7 2.9 55.7 1.3
------------------------ ------------------------
Total corporate and other 417.1 7.5 434.8 10.0
------------------------ ------------------------
Total assets under management* $5,551.4 100.0% $4,375.1 100.0%
------------------------ ------------------------
------------------------ ------------------------
</TABLE>
* Does not include off-balance sheet assets managed by ARM Capital Advisors
for institutional clients and, for 1996 only, off-balance sheet assets in
the State Bond Mutual Funds. Including such assets, total fee-based assets
under management at June 30, 1997 and 1996 were $5,115.1 million and
$2,963.2 million, respectively, and total assets under management at June
30, 1997 and 1996 were $9,691.3 million and $6,589.1 million, respectively.
The increase in spread-based deposits was primarily attributable to sales
of GICs to institutional customers and, to a lesser extent, sales of guaranteed
rate option fixed annuities to retail customers. The increase in the fee-based
line of business was primarily attributable to the investment performance of the
variable annuity mutual funds due to strong stock market returns and, to a
lesser extent, variable annuity sales.
Sales of spread-based products include premiums and deposits received for
products issued by the Company's insurance and face-amount certificate
subsidiaries. Sales of fee-based products include premiums for the investment
portfolio options of variable annuity products issued by the Company's insurance
subsidiaries.
17
<PAGE>
Sales by market and type of business for the six months ended June 30, 1997
and 1996 were as follows:
Six Months Ended
June 30,
-------------------------
(IN MILLIONS) 1997 1996
- --------------------------------------------------------------------------------
Retail:
Spread-based $313.2 $31.1
Fee-based 67.7 119.6
-------------------------
Total retail 380.9 150.7
Institutional:
Spread-based 460.8 441.4
-------------------------
Total sales* $841.7 $592.1
-------------------------
-------------------------
* Does not include new deposits related to off-balance sheet assets
managed by ARM Capital Advisors for institutional clients and, for 1996
only, new deposits in the State Bond Mutual Funds. Including such deposits,
total retail sales for the six months ended June 30, 1997 and 1996 were
$380.9 million and $158.6 million, respectively, and total institutional
sales for the six months ended June 30, 1997 and 1996 were $1,945.1 million
and $1,263.8 million, respectively.
Sales have gained momentum during the first half of 1997 with an increase
of approximately 42% over the corresponding prior period. This growth is
primarily attributable to an increase in marketing efforts surrounding the
Company's retail spread-based guaranteed rate option annuity products.
Successful efforts to expand and diversify the Company's retail market presence
have also contributed to an increase in spread-based sales through the
independent agent channel where non-registered investment products are sold,
thereby resulting in a decrease in sales of retail fee-based variable annuity
products.
Net surrenders of fixed and variable annuity products issued by the
Company's insurance subsidiaries were $155.1 million for the six months ended
June 30, 1997 compared to $173.5 million for the six months ended June 30, 1996.
Surrender charge income decreased to $1.9 million for the six months ended
June 30, 1997 from $2.9 million for the six months ended June 30, 1996. The
decrease in surrender charge income is primarily attributable to an increase in
partial surrenders which did not result in a surrender charge penalty and to the
decrease in net surrenders. Policies issued by the Company's insurance
subsidiaries generally include lapse protection provisions that provide a
deterrent to 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 month periods ended June 30,
1996 and 1997 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.
The Company has programs designed to reduce surrender activity and improve
persistency. During the six months ended June 30, 1997 and 1996,
18
<PAGE>
through one such program, $12.6 million and $9.6 million, respectively, of new
annuity contracts were issued to customers that had initiated a withdrawal
request.
Operating expenses increased to $15.1 million for the six months ended June
30, 1997 from $14.8 million for the six months ended June 30, 1996. The increase
is primarily attributable to increased marketing efforts (including an increase
in marketing staff and additional investments in technology) to expand and
enhance the support of distribution channels in the retail and institutional
markets. The Company is actively pursuing and retaining producers within these
distribution channels to market its products.
Amortization of deferred policy acquisition costs related to operations was
$4.6 million and $3.1 million during the six months ended June 30, 1997 and
1996, respectively. This increase was primarily the result of growth in the
deferred policy acquisition cost asset due to additional sales of fixed and
variable annuity products. Amortization specifically attributable to variable
annuity products increased $1.2 million from the corresponding prior period.
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 contract.
The Company recorded non-recurring charges of $10.8 million for the six
months ended June 30, 1997 including a one-time non-cash stock-based
compensation expense charge of $8.1 million, $2.2 million related to relocating
the Company's main processing center from Columbus, Ohio to Louisville, Kentucky
and costs of $0.5 million for merger and acquisition activities that did not
result in a transaction. Costs associated with the relocation are expected to
continue through the end of 1997.
Other expenses, net are primarily premiums paid on agreements to reinsure
substantially all mortality risks associated with single premium endowment and
variable annuity deposits.
Realized investment gains, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $2.7
million for the six months ended June 30, 1997 compared to realized investment
losses of $1.2 million for the six months ended June 30, 1996. Such realized
investment gains and losses were primarily 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 sectors perceived to be
relatively overvalued to sectors perceived to be undervalued with the aim of
improving cash flows. The Company endeavors to accomplish this repositioning
without materially changing the overall credit, asset duration, convexity, and
liquidity characteristics of its investment portfolios.
Federal income tax expense was $6.0 million and $2.8 million for the six
months ended June 30, 1997 and 1996, respectively, reflecting effective tax
rates of 43.6% and 20.9% as a percentage of
19
<PAGE>
pretax income. If the non-recurring stock-based compensation expense charge was
added back to pretax income, the effective tax rate for the six months ended
June 30, 1997 would be 27.4%. A tax benefit was not recognized for the charge
because a full valuation allowance was provided on the Company's non-life net
operating loss carryforwards.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED JUNE 30,
1996
Net income during the second quarter of 1997 was $0.1 million compared to
$6.0 million for the second quarter of 1996. The decrease in net income is
attributable to a $8.1 million non-recurring stock-based compensation expense
charge recorded during the second quarter of 1997. Operating earnings were $7.7
million and $5.3 million for the second quarters of 1997 and 1996, respectively.
The increase in operating earnings is primarily attributable to an increase in
net investment spread due to both deposit growth from sales of retail and
institutional spread-based products and ongoing asset/liability management.
Pro forma operating earnings were $8.8 million and $6.4 million for the
three months ended June 30, 1997 and 1996, respectively. Pro forma operating
earnings per share were $0.37 and $0.27 for the same respective three month
periods.
Total net investment spread for the three months ended June 30, 1997 and
1996 was as follows:
Three Months Ended
June 30,
---------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED) 1997 1996
- --------------------------------------------------------------------------------
Investment income $77,759 $62,670
Interest credited on customer deposits (58,282) (44,897)
---------------------------
Net investment spread $19,477 $17,773
---------------------------
---------------------------
Annualized investment yield 7.67% 7.83%
Annualized average credited rate 5.89% 5.68%
---------------------------
Investment spread 1.78% 2.15%
---------------------------
---------------------------
Average cash and investments (in billions) $ 4.06 $ 3.20
Average spread-based customer deposits (in billions) $ 3.96 $ 3.16
The annualized net investment spread rate, excluding institutional GIC
business, was 2.18% and 2.44% for the second quarters of 1997 and 1996,
respectively. The decrease reflects a change in business mix. During the second
quarter of 1997, the volume of sales for retail guaranteed rate option fixed
annuities increased to $225.4 million from $3.7 million in the corresponding
prior period. These annuities are priced at a lower net investment spread rate
due to their lower capital requirements. As a result, the overall net investment
spread rate on retail spread products decreased. In contrast, the annualized net
investment spread rate on institutional GIC products was 0.86% and 0.71% for the
second quarters of 1997 and 1996, respectively. The increase in the GIC net
investment spread rate is a result of ongoing asset/liability management.
20
<PAGE>
Fee income grew to $5.7 million in the second quarter of 1997 from $4.2
million in the second quarter of 1996. This increase is attributable to sales
and a market-driven increase in the value of both variable annuity deposits and
off-balance sheet assets managed by ARM Capital Advisors. Variable annuity fees
increased to $3.4 million in the second quarter of 1997 from $2.7 million in the
second quarter of 1996. Asset management fees earned by ARM Capital Advisors on
off-balance sheet assets, primarily related to defined benefit pension plans
(and, in 1996 only, fees from the State Bond Mutual Funds), increased to $1.9
million in the second quarter of 1997 from $1.2 million in the second quarter of
1996. Fee-based variable annuity deposits averaged $904.4 million in the second
quarter of 1997, an increase from $722.1 million in the second quarter of 1996.
In addition, the average fair value of off-balance sheet assets managed by ARM
Capital Advisors increased from $2.0 billion during the second quarter of 1996
to $3.7 billion in the second quarter of 1997.
Sales by market and type of business for the three months ended June 30,
1997 and 1996 were as follows:
Three Months Ended
June 30,
---------------------------
(IN MILLIONS) 1997 1996
- --------------------------------------------------------------------------------
Retail:
Spread-based $244.4 $19.2
Fee-based 31.4 62.6
---------------------------
Total retail 275.8 81.8
Institutional:
Spread-based 212.2 201.8
---------------------------
Total sales* $488.0 $283.6
---------------------------
---------------------------
* Does not include new deposits related to off-balance sheet assets managed
by ARM Capital Advisors for institutional clients and, for 1996 only, new
deposits in the State Bond Mutual Funds. Including such deposits, total
retail sales for the three months ended June 30, 1997 and 1996 were $275.8
million and $85.9 million, respectively, and total institutional sales for
the three months ended June 30, 1997 and 1996 were $1,063.6 million and
$594.4 million, respectively.
The increase in retail sales was attributable to an increase in marketing
efforts surrounding the Company's spread-based guaranteed rate option fixed
annuity product. This increase is partially offset by a decrease in fee-based
variable annuity sales as a result of expansion in the independent agent
distribution channel which primarily sells non-registered spread-based retail
products.
Net surrenders of fixed and variable annuity products issued by the
Company's insurance subsidiaries were $79.0 million in the second quarter of
1997 compared to $85.1 million in the second quarter of 1996. Surrender charge
income decreased to $1.0 million in the second quarter of 1997 from $1.3 million
in the second quarter of 1996. The decrease in surrender charge income is
primarily attributable to an increase in partial surrenders which did not result
in a surrender charge penalty and to the decrease in surrenders.
21
<PAGE>
Operating expenses decreased to $6.9 million in the second quarter of 1997
from $7.8 million in the second quarter of 1996. The decrease is primarily
attributable to an increase in deferrals of policy acquisition costs.
Amortization of deferred policy acquisition costs related to operations was
$2.4 million and $1.4 million during the three months ended June 30, 1997 and
1996, respectively. This increase was the result of growth in the deferred
policy acquisition cost asset for fixed and variable annuity products.
The Company recorded non-recurring charges of $9.3 million for the three
months ended June 30, 1997 including a one-time non-cash stock-based
compensation charge of $8.1 million and $1.2 million related to relocating the
Company's main processing center from Columbus, Ohio to Louisville, Kentucky.
Realized investment gains were $0.4 million in the second quarter of 1997
compared to realized investment losses of $0.8 million in the second quarter of
1996. Such realized investment gains and losses were primarily 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 $3.2 million and $1.2 million for the
quarters ended June 30, 1997 and 1996, respectively, reflecting effective tax
rates of 27.8% and 16.5% as a percentage of pretax income (after adding back the
1997 non-recurring stock-based compensation expense charge for comparability
purposes).
ASSET PORTFOLIO REVIEW
The Company primarily invests in fixed maturities with the objective of
earning reasonable returns while limiting credit and liquidity risks. The
amortized cost of fixed maturities at June 30, 1997 totaled $3.38 billion,
compared with $3.05 billion at December 31, 1996, representing 91% of total cash
and investments at both dates. This increase in fixed maturities is primarily
attributable to the investment of the proceeds from the sales of GICs.
22
<PAGE>
The Company's cash and investments as of June 30, 1997 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 $1,078.7 29.0% $1,078.3
U.S. Treasury securities and obligations
of U.S. government agencies 204.7 5.5 205.6
Other government securities 86.9 2.3 86.9
Asset-backed securities ("ABSs") 357.5 9.6 357.2
Mortgage-backed securities ("MBSs"):
Agency pass-throughs 282.5 7.6 282.8
Collateralized mortgage obligations ("CMOs"):
Agency 342.9 9.2 346.2
Non-agency 1,011.7 27.2 1,019.5
Interest only 18.3 0.5 15.5
-------------------------- -------------
Total fixed maturities 3,383.2 90.9 3,392.0
Equity securities (i.e., non-redeemable
preferred stocks) 21.2 0.6 21.2
Mortgage loans on real estate 28.3 0.8 28.3
Policy loans 123.1 3.3 123.1
Cash and cash equivalents 164.3 4.4 164.3
-------------------------- -------------
Total cash and investments $3,720.1 100.0% $3,728.9
-------------------------- -------------
-------------------------- -------------
</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 as in the pass-through structure. The underlying mortgages of
agency CMOs are guaranteed by the U.S. government or U.S. government agencies.
Of the Company's non-agency CMOs (on an amortized cost basis), 81.9% are backed
by mortgage loans or mortgage loan pools, letters of credit, agency mortgage
pass-through securities and other types of credit enhancement as collateral. The
remaining 18.1% of the non-agency CMOs are backed by commercial mortgage loans
as collateral.
The Company 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 collateral. MBSs are subject to risks associated with prepayments of
the underlying collateral pools. Prepayments cause these securities to have
actual maturities different from those projected at the time of purchase.
23
<PAGE>
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 is 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 had gross unamortized premiums and
unaccreted discounts of MBSs of $32.9 million and $31.1 million, respectively,
at June 30, 1997. Although the interest rate environment has experienced
significant volatility during 1996 and the first six months of 1997, prepayments
and extensions of cash flows from MBSs have not materially affected investment
income of the Company.
ABSs are securitized bonds which can be backed by collateral such as, but
not limited to, home equity loans, second mortgages, automobile loans, and
credit card receivables. Home equity loan collateral represents 68.6% of the
Company's investments in the ABS market. The typical structure of an ABS
provides for favorable yields, high credit ratings and stable prepayments.
Total cash and investments (on an amortized cost basis) were 93% and 96%
investment grade or equivalent as of June 30, 1997 and December 31, 1996,
respectively. 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
represented less than 0.1% of cash and investments as of June 30, 1997.
The Company continually monitors and analyzes its investment portfolio,
including non-investment grade securities, in order to determine if its ability
to realize its carrying value on any investment has been impaired. For fixed
maturity and equity securities, if impairment in value is determined to be other
than temporary (i.e., if it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the security), the
cost basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the write-down is included in
earnings as a realized loss. Future events may occur, or additional or updated
information may be received, which may necessitate future write-downs of
securities in the Company's portfolio. Significant write-downs in the carrying
value of investments could materially adversely affect the Company's net income
in future periods.
24
<PAGE>
At June 30, 1997, the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio, the percentage of total fixed
maturity investments classified in each category and the corresponding fair
value, were as follows:
<TABLE>
<CAPTION>
Amortized Cost
--------------------------
Percent of Estimated
NAIC Designation (Comparable S&P Rating) Amount Total Fair Value
- ----------------------------------------------------------------------------- -------------
<S> <C> <C> <C>
1 (AAA, AA, A) $2,349.7 69% $2,357.6
2 (BBB) 799.5 24 802.0
3 (BB) 121.9 4 122.0
4 (B) 107.4 3 106.0
5 (CCC, CC, C) -- -- --
6 (CI, D) 4.7 * 4.4
-----------------------------------------
Total fixed maturities $3,383.2 100% $3,392.0
-----------------------------------------
-----------------------------------------
</TABLE>
* Less than 1%.
Pursuant to 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 acquisition cost amortization and
deferred income taxes, are charged or credited directly to shareholders' equity.
The fluctuations in interest rates during the six months ended June 30,
1997 contributed to net unrealized gains on available-for-sale securities which
totaled $5.1 million (net of $0.9 million of related amortization and $2.8
million in deferred income taxes) at June 30, 1997, compared to net unrealized
gains of $3.7 million (net of $1.3 million of related amortization and $2.0
million in deferred income taxes) at December 31, 1996. This volatility in
reported shareholders' equity occurs as a result of SFAS No. 115 which requires
that available-for-sale securities be carried at fair value while corresponding
customer deposit liabilities are carried at historical values. At June 30, 1997
and December 31, 1996, shareholders' equity excluding the effects of SFAS No.
115 was $270.6 million and $178.3 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, adjusting 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 creates volatility in reported shareholders' equity but does not
fully reflect the underlying economics of the Company's business.
Mortgage loans on real estate represented approximately 1% of total cash
and investments at June 30, 1997 and December 31, 1996. Pursuant to the terms of
the acquisition of certain of the
25
<PAGE>
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, 1997. In support of its indemnification obligations, National Mutual
placed $23 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.
Customer deposits in separate accounts related to retail guaranteed rate
option and indexed annuities are held in a guaranteed separate account where the
Company provides some form of guarantee on the rate credited to the annuity
contract. Assets held in the Company's guaranteed separate account include
$583.6 million of cash and investments at June 30, 1997, of which approximately
91% are fixed maturities. Total guaranteed separate account cash and investments
were 98% investment grade at June 30, 1997 and December 31, 1996.
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, operating expenses, and corporate development
expenditures. The Company is dependent on dividends from Integrity and
management and service fee income from the Company's subsidiaries to meet
ongoing cash needs, including amounts required to pay dividends on its common
and 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 1997, the Company received dividends of $14.9 million from
Integrity. The Company had cash and investments at the holding company level of
$51.6 million at June 30, 1997. In addition, the Company had access to bank
lines of credit totaling $37.0 million at June 30, 1997.
In June 1997, the Company completed an initial public offering of 9.2
million shares of New Class A Common Stock of which 5.75 million shares of New
Class A Common Stock were sold by the Company for net proceeds of $78.8 million.
The remaining 3.45 million shares were sold by the Morgan Stanley Stockholders.
On June 30, 1997, the Company used a portion of such net proceeds to make a
capital contribution to its primary insurance subsidiary, Integrity, thereby
strengthening Integrity's capital base to provide for future growth. The Company
intends to also use the net proceeds to enhance the Company's retail market
presence, to consolidate operating locations and for other corporate purposes,
which may include acquisitions.
26
<PAGE>
INSURANCE SUBSIDIARIES OPERATIONS
The primary 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 customer deposits, commissions, operating expenses, and
the purchase of new investments.
The Company develops cash flow projections under a variety of interest rate
scenarios generated 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 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.
During the six months ended June 30, 1997 and 1996, the Company met its
liquidity needs entirely from cash flows provided by operating activities and
principal payments on and redemptions of investments. At June 30, 1997, cash and
cash equivalents totaled $164.3 million compared to $110.1 million at December
31, 1996. The Company's aim is to manage its cash and cash equivalents position
in order 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.
The Company generated cash flows of $95.6 million and $88.6 million from
operating activities during the six months ended June 30, 1997 and 1996,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $2,193.5 million and $1,193.3 million in
cash flows during the six months ended June 30, 1997 and 1996, respectively,
which were offset by purchases of investments of $2,542.4 million and $1,559.3
million, respectively. An increase in investment purchases and sales activity
during the first half of 1997 reflects the Company's ongoing management of its
fixed maturity portfolio which has increased in size due to sales of
spread-based products.
The net increase to Integrity's adjusted capital and surplus, under
statutory accounting practices, for the capital contribution from the holding
company from the proceeds of the Offering, net of dividends paid by
Integrity during the six months ended June 30, 1997, was approximately 7%
computed as of June 30, 1997.
FORWARD-LOOKING STATEMENTS
The Company has made a number of forward-looking statements in this
document that are subject to risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future results of
operations and those preceded by, followed by or that include the words
"believes," "expects," "anticipates" or similar expressions. Such
forward-looking
27
<PAGE>
statements are based on the Company's beliefs as to its competitive position in
its industry and the factors affecting its business. In particular, the
statements of the Company's belief as to the stimulation of future demand for
long-term savings and retirement products, including variable, indexed and fixed
annuity products under the heading "General" are forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements related to the demand for variable, indexed and fixed
annuity products 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. In
addition, there can be no assurance that (i) the Company has correctly
identified and assessed all of the factors affecting its business; (ii) the
publicly available and other information on which the Company has based its
analyses is complete or correct; (iii) the Company's analyses are correct; or
(iv) the Company's strategy, which is based in part on these analyses, will be
successful.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a consequence of the acquisition of State Bond and Mortgage Life
Insurance Company and its merger with and into Integrity, Integrity became a
party to a marketing agreement with Multico Marketing Corporation ("Multico").
In reliance upon the marketing 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 compensatory and punitive 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 the 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; this motion was denied by the court on
March 10, 1997. It is anticipated that the parties will proceed with further
discovery. Company management believes that the ultimate resolution of this
litigation will not result in any material adverse impact to the financial
position of the Company.
Except as described above, the Company is currently involved in no material
legal or administrative proceedings that could result in a material adverse
impact to the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES
Prior to the Offering, the Company's authorized capital stock consisted of
27,280 shares of Class A Common Stock (the "Old Class A Common Stock"), 1,080
shares of Class B Common Stock (the "Old Class B Common Stock"), and 2,300,100
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"), of
which 2,300,000 shares were designated as 9 1/2% Cumulative Perpetual Preferred
Stock. The Old Class A Common Stock had a liquidation preference of $5,000 per
share over the Old Class B Common Stock. Holders of the Old Class A Common Stock
and Old Class B Common Stock were entitled to one vote for each share of Old
Class A Common Stock or Old Class B Common Stock held by them on each matter
submitted to a vote of stockholders.
Concurrent with the closing of the Offering, the Company amended and
restated its Certificate of Incorporation to effect a recapitalization such that
(i) the authorized capital stock of the Company consists of 150 million shares
of New Class A Common Stock, 50 million shares of New Class B Common Stock, and
10 million shares of Preferred Stock; (ii) each share of the Old Class A Common
Stock and Old Class B Common Stock outstanding prior to the Offering was
converted into one share of New Class A Common Stock; (iii) Morgan Stanley
Stockholders converted a certain number of shares of Old Class A Common Stock
held by them into New Class B Common Stock such that, after giving effect to
such conversion, and the sale of shares by the Morgan Stanley Stockholders in
the Offering, the Morgan Stanley Stockholders own, in the aggregate, 49% of the
29
<PAGE>
outstanding New Class A Common Stock; and (iv) each share of New Common Stock
outstanding was split into 706 shares.
Holders of the New Class A Common Stock are entitled to one vote for each
share of New Class A Common Stock on each matter submitted to a vote of
stockholders, including the election of directors. The holders of New Class A
Common Stock are not entitled to cumulative voting. Shares of New Class A Common
Stock have no preemptive or other subscription rights and are convertible by the
Morgan Stanley Stockholders into an equal number of shares of New Class B Common
Stock.
Holders of the New Class B Common Stock have no right to vote on matters
submitted to a vote of stockholders, except in certain circumstances. The shares
of the New Class B Common Stock have no preemptive or other subscription rights
and are convertible into an equal number of shares of New Class A Common Stock
(1) at the option of the holder thereof to the extent that, following such
conversion, the Morgan Stanley Stockholders will not, in the aggregate, own more
than 49% of the outstanding shares of the New Class A Common Stock; and (2)
automatically upon the transfer of such shares by any Morgan Stanley Stockholder
to a person that is not a Morgan Stanley Stockholder or an affiliate of a Morgan
Stanley Stockholder.
All holders of New Common Stock are entitled to receive such dividends or
other distributions, if any, as may be declared from time to time by the Board
of Directors in its discretion, out of the funds legally available therefore,
subject to the prior rights of any Preferred Stock then outstanding, and to
share equally, share for share, in such dividends or other distributions as if
all shares of New Common Stock were a single class.
Subject to the rights of any holders of Preferred Stock outstanding, upon
the dissolution, liquidation of winding up of the Company, the holders of New
Common Stock are entitled to share equally and ratably in the assets available
for distribution after payments are made to the Company's creditors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE FOR SECURITY HOLDERS
At the Company's annual meeting of stockholders held May 15, 1997, the
stockholders elected James S. Cole, Warren M. Foss, John Franco, Dudley J.
Godfrey, Jr., Edward D. Powers, Colin F. Raymond, Martin H. Ruby, Frank V. Sica,
and Irwin T. Vanderhoof as the directors to serve for the ensuing year, and
ratified the action of the directors taken or adopted since the last annual
meeting
30
<PAGE>
of stockholders. The number of votes cast for and against each matter voted
upon, as well as the number of abstentions were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
-------------- ------------- -------------
<S> <C> <C> <C>
Election of James S. Cole 22,434.46 -0- 2,361.54
Election of Warren M. Foss 22,434.46 -0- 2,361.54
Election of John Franco 22,434.46 -0- 2,361.54
Election of Dudley J. Godfrey, Jr. 22,434.46 -0- 2,361.54
Election of Edward D. Powers 22,434.46 -0- 2,361.54
Election of Colin F. Raymond 22,434.46 -0- 2,361.54
Election of Martin H. Ruby 22,434.46 -0- 2,361.54
Election of Frank V. Sica 22,434.46 -0- 2,361.54
Election of Irwin T. Vanderhoof 22,434.46 -0- 2,361.54
Ratification of Actions 22,434.46 -0- 2,361.54
</TABLE>
On May 30, 1997, a majority of the stockholders of the Company, by written
consent in lieu of a special meeting approved and adopted certain matters
relating to the Offering, including (i) the amendment and restatement of the
Company's Certificate of Incorporation to effect the recapitalization; (ii) the
706-for-one stock split of shares of New Common Stock; (iii) the 1997 Equity
Plan; and (iv) an amendment to the Amended and Restated Stock Option Plan.
ITEM 5. OTHER INFORMATION
The Board of Directors by unanimous written consent dated August 14, 1997,
declared a quarterly dividend of 59.375 cents per share payable September 15,
1997 to holders of the 9 1/2% Cumulative Perpetual Preferred Stock of record
on August 29, 1997, and a quarterly dividend of 2 cents per share payable
September 15, 1997 to holders of the New Common Stock of record on August 29,
1997.
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, 1997.
31
<PAGE>
EXHIBITS (ELECTRONIC FILING ONLY)
10.1 Credit Agreement dated June 24, 1997 (the "Credit Agreement"), among
the registrant, the financial institutions listed in Schedule 2.01 of
the Credit Agreement (the "Lenders"), and The Chase Manhattan Bank, as
administrative agent for the Lenders ("Chase").
10.2 Assignment Agreement dated as of June 24, 1997, between the
registrant, Integrity Holdings, Inc. ("Integrity Holdings") and Chase.
10.3 Guarantee Agreement dated as of June 24, 1997, between Integrity
Holdings and Chase.
10.4 Pledge Agreement dated as of June 24, 1997, among the registrant,
Integrity Holdings and Chase.
10.5 Amendment No. 1 to Trust Agreement effective as of April 1, 1996,
among Integrity, General American Life Insurance Company and Fleet
National Bank.
27 Financial Data Schedule.
32
<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 14, 1997.
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)
33
<PAGE>
CONFORMED COPY
ARM FINANCIAL GROUP, INC.
$75,000,000
Credit Agreement
June 24, 1997
The Lenders Party Hereto
Chase Securities Inc.
as Arranger
The Chase Manhattan Bank
as Administrative Agent
CHASE
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
Definitions
-----------
SECTION 1.01. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. Terms Generally . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE II
The Credits
-----------
SECTION 2.01. Commitments . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.02. Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.03. Notice of Borrowings. . . . . . . . . . . . . . . . . . . . 13
SECTION 2.04. Evidence of Debt; Repayment of Loans. . . . . . . . . . . . 13
SECTION 2.05. Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 2.06. Interest on Loans . . . . . . . . . . . . . . . . . . . . . 14
SECTION 2.07. Default Interest. . . . . . . . . . . . . . . . . . . . . . 14
SECTION 2.08. Alternate Rate of Interest. . . . . . . . . . . . . . . . . 14
SECTION 2.09. Termination and Reduction of Commitments. . . . . . . . . . 14
SECTION 2.10. Conversion and Continuation of Borrowings . . . . . . . . . 14
SECTION 2.11. Prepayment. . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 2.12. Reserve Requirements; Change in Circumstances . . . . . . . 15
SECTION 2.13. Change in Legality. . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.14. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.15. Pro Rata Treatment. . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.16. Sharing of Setoffs. . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.17. Payments. . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.18. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.19. Termination or Assignment of Commitments
Under Certain Circumstances . . . . . . . . . . . . . . . 19
SECTION 2.20. Notice of Costs . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE III
Representations and Warranties
------------------------------
SECTION 3.01. Organization; Powers. . . . . . . . . . . . . . . . . . . . 20
SECTION 3.02. Authorization . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.03. Enforceability. . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.04. Governmental Approvals. . . . . . . . . . . . . . . . . . . 20
SECTION 3.05. Financial Statements. . . . . . . . . . . . . . . . . . . . 20
SECTION 3.06. No Material Adverse Change. . . . . . . . . . . . . . . . . 20
SECTION 3.07. Title to Properties; Possession Under Leases. . . . . . . . 21
SECTION 3.08. Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.09. Litigation; Compliance with Laws. . . . . . . . . . . . . . 21
SECTION 3.10. Agreements. . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.11. Federal Reserve Regulations . . . . . . . . . . . . . . . . 21
SECTION 3.12. Investment Company Act; Public Utility Holding Company Act. 21
SECTION 3.13. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.14. Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.15. True and Complete Disclosure. . . . . . . . . . . . . . . . 22
SECTION 3.16. Employee Benefit Plans. . . . . . . . . . . . . . . . . . . 22
SECTION 3.17. Environmental and Safety Matters. . . . . . . . . . . . . . 22
SECTION 3.18. Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 3.19. Absence of Certain Restrictions . . . . . . . . . . . . . . 22
SECTION 3.20. Labor Matters . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.21. Reinsurance Agreements. . . . . . . . . . . . . . . . . . . 23
<PAGE>
2
SECTION 3.22. Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.23. Capitalization. . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.24. Collateral Documents. . . . . . . . . . . . . . . . . . . . 23
ARTICLE IV
Conditions of Lending
---------------------
SECTION 4.01. All Borrowings. . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 4.02. First Borrowing . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE V
Affirmative Covenants
---------------------
SECTION 5.01. Existence; Businesses and Properties. . . . . . . . . . . . 26
SECTION 5.02. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 5.03. Obligations and Taxes . . . . . . . . . . . . . . . . . . . 26
SECTION 5.04. Financial Statements, Reports, etc. . . . . . . . . . . . . 26
SECTION 5.05. Litigation and Other Notices. . . . . . . . . . . . . . . . 27
SECTION 5.06. Employee Benefits . . . . . . . . . . . . . . . . . . . . . 28
SECTION 5.07. Maintaining Records; Access to Properties and Inspections . 28
SECTION 5.08. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 5.09. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 5.10. Additional Security . . . . . . . . . . . . . . . . . . . . 28
SECTION 5.11. Further Assurances. . . . . . . . . . . . . . . . . . . . . 28
ARTICLE VI
Negative Covenants
------------------
SECTION 6.01. Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 6.02. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 6.03. Sale and Lease-Back Transactions. . . . . . . . . . . . . . 30
SECTION 6.04. Investments, Loans and Advances . . . . . . . . . . . . . . 30
SECTION 6.05. Mergers, Consolidations, Sales of Assets and Acquisitions . 30
SECTION 6.06. Dividends and Distributions . . . . . . . . . . . . . . . . 31
SECTION 6.07. Transactions with Affiliates. . . . . . . . . . . . . . . . 31
SECTION 6.08. Business of the Borrower and the Subsidiaries . . . . . . . 32
SECTION 6.09. Debt Payments . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 6.10. Amendments and Assignments. . . . . . . . . . . . . . . . . 32
SECTION 6.11. Total Funded Indebtedness to Total Capital Ratio. . . . . . 32
SECTION 6.12. Interest Coverage Ratio . . . . . . . . . . . . . . . . . . 32
SECTION 6.13. Adjusted Statutory Surplus. . . . . . . . . . . . . . . . . 32
SECTION 6.14. Risk-Based Capital Ratio. . . . . . . . . . . . . . . . . . 32
SECTION 6.15. Investment Ratios . . . . . . . . . . . . . . . . . . . . . 32
SECTION 6.16. Surplus Relief Ratio. . . . . . . . . . . . . . . . . . . . 32
ARTICLE VII
EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE VIII
THE ADMINISTRATIVE AGENT. . . . . . . . . . . . . . . . . . 34
<PAGE>
3
ARTICLE IX
Miscellaneous
-------------
SECTION 9.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 9.02. Survival of Agreement . . . . . . . . . . . . . . . . . . . 36
SECTION 9.03. Binding Effect. . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 9.04. Successor and Assigns . . . . . . . . . . . . . . . . . . . 36
SECTION 9.05. Expenses; Indemnity . . . . . . . . . . . . . . . . . . . . 38
SECTION 9.06. Right of Setoff . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 9.07. Applicable Law. . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 9.08. Waivers; Amendment. . . . . . . . . . . . . . . . . . . . . 38
SECTION 9.09. Interest Rate Limitation. . . . . . . . . . . . . . . . . . 39
SECTION 9.10. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . 39
SECTION 9.11. Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . 39
SECTION 9.12. Severability. . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 9.13. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 9.14. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 9.15. Jurisdiction; Consent to Service of Process . . . . . . . . 39
SCHEDULES:
- ----------
Schedule 1.01 -- Individual Investors
Schedule 2.01 -- Commitments
Schedule 3.06 -- Disclosed Matters
Schedule 3.07 -- Title to Properties; Possession under Leases
Schedule 3.08 -- Subsidiaries
Schedule 3.09(a) -- Litigation
Schedule 3.09(b) -- Compliance with Laws
Schedule 3.10 -- Agreements
Schedule 3.20 -- Labor Matters
Schedule 6.01 -- Existing Indebtedness
Schedule 6.02 -- Existing Liens
EXHIBITS:
- ---------
Exhibit A -- Form of Guarantee Agreement
Exhibit B -- Form of Assignment and Acceptance
Exhibit C -- Form of Assignment Agreement
Exhibit D -- Form of Pledge Agreement
Exhibit E -- Form of Administrative Questionnaire
Exhibit F-1 -- Form of Opinion of Borrower's Counsel
Exhibit F-2 -- Form of Opinion of Borrower's General Counsel
Exhibit G -- Summary of Reinsurance Agreements
Exhibit H -- Form of Subordination Provisions
Exhibit I -- Amended and Restated Stock Option Plan
<PAGE>
CREDIT AGREEMENT dated as of June 24, 1997, among ARM FINANCIAL
GROUP, INC., a Delaware corporation (the "BORROWER"), the financial
institutions listed on Schedule 2.01 (the "LENDERS") and THE CHASE
MANHATTAN BANK, a New York banking corporation (individually and as
holder of the collateral subject to the Security Documents (as
hereinafter defined), "CHASE") as administrative agent for the Lenders
(Chase, in such capacity, the "ADMINISTRATIVE AGENT").
The Borrower has requested the Lenders to extend credit in order to enable
the Borrower, on the terms and subject to the conditions of this Agreement, to
borrow on a revolving basis, at any time and from time to time prior to the
Maturity Date (such term and each other capitalized term used but not defined in
this introductory statement having the meaning assigned thereto in Article I),
an aggregate principal amount at any time outstanding not in excess of
$75,000,000. The proceeds of the Loans are to be used (a) to repay all amounts
outstanding under the Credit Agreement dated as of November 15, 1993, as amended
(the "EXISTING CREDIT AGREEMENT"), among the Borrower, Integrity Holdings, Inc.,
a Delaware corporation ("HOLDINGS"), the financial institutions from time to
time party thereto and Chase, as Managing Agent, and (b) to provide working
capital for the Borrower and for other general corporate purposes.
The Lenders are willing to extend such credit to the Borrower, on the terms
and subject to the conditions set forth herein.
Accordingly, the Borrower, the Lenders and the Administrative Agent agree
as follows:
ARTICLE I. DEFINITIONS
SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following terms
shall have the meanings specified below:
"ABR BORROWING" shall mean a Borrowing comprised of ABR Loans.
"ABR LOAN" shall mean any Loan bearing interest at a rate determined by
reference to the Alternate Base Rate in accordance with the provisions of
Article II.
"ADJUSTED LIBO RATE" shall mean, with respect to any Eurodollar Borrowing
for any Interest Period, an interest rate per annum (rounded upwards, if
necessary, to the next 1/100 of 1%) equal to the product of (a) the LIBO Rate in
effect for such Interest Period (or such 12-month period) and (b) Bank Statutory
Reserves. For purposes hereof, the term "LIBO RATE" for any Interest Period
shall mean the arithmetic average of the respective rates per annum at which
dollar deposits approximately equal in principal amount to the Administrative
Agent's portion of such Eurodollar Borrowing for a maturity comparable to such
Interest Period, are offered to the principal London office of the
Administrative Agent in immediately available funds in the London interbank
market at approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period (or such 12-month period).
"ADJUSTED STATUTORY SURPLUS" shall mean, at any time, determined at such
time for the Insurance Subsidiaries, taken as a whole, the sum of (a) Statutory
Surplus of the Insurance Subsidiaries (consolidated in accordance with SAP) at
such time and (b) the Asset Valuation Reserve of the Insurance Subsidiaries
(consolidated in accordance with SAP) at such time.
"ADMINISTRATIVE SERVICES AGREEMENTS" shall mean the Administrative Services
Agreements referred to in Section 5.13 between the Borrower and each of
Integrity, National Integrity, SBM Certificate Company and ARM Financial
Services, Inc., and any other agreement, including any investment management
agreement, whether in effect on the Closing Date or entered into at any time
thereafter, between the Borrower and any Subsidiary or any third party pursuant
to which the Borrower provides services to such Subsidiary or third party and
receives fees.
"AFFILIATE" shall mean, when used with respect to a specified Person,
another Person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the Person
specified.
"AGGREGATE NET PROCEEDS" shall mean the aggregate amount of Net Proceeds
received by the Borrower and its Subsidiaries since the Closing Date.
"ALTERNATE BASE RATE" shall mean, for any day, a rate per annum (rounded
upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a)
the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such
day plus 1% and (c) the Federal Funds Effective Rate in effect on such day
plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the
Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective
Rate shall be effective on the effective date of such change in the Prime
Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate,
respectively. If for any reason Chase shall have determined (which
determination shall be conclusive absent manifest error) that it is unable to
ascertain the Base CD Rate or the Federal Funds Effective Rate or both for
any reason, including the inability or failure of Chase to obtain sufficient
quotations in accordance with the terms thereof, the
<PAGE>
2
Alternate Base Rate shall be determined without regard to clause (b) or (c), or
both, of the first sentence of this definition, as appropriate, until the
circumstances giving rise to such inability no longer exist.
"ANNUAL STATEMENT" shall mean, with respect to any Insurance Subsidiary,
the Annual Statement of such Insurance Subsidiary required to be filed with the
Applicable Insurance Regulatory Authority in accordance with state law,
including any exhibits, schedules, certificates or actuarial opinions filed or
delivered therewith.
"APPLICABLE INSURANCE REGULATORY AUTHORITY" shall mean, with respect to any
Insurance Subsidiary, (a) the insurance commission or similar Governmental
Authority located in (i) the state in which such Insurance Subsidiary is
domiciled, (ii) any state in which, by virtue of the amount (in each case,
whether in the aggregate or by types) of premiums written or business done by
such Insurance Subsidiary in such state or otherwise, such Insurance Subsidiary
becomes subject under the laws of such state (including laws governing
commercial domiciliation) to requirements that are in addition to, or more
restrictive on such Insurance Subsidiary than, the general requirements
applicable under the laws of such state to insurance companies licensed to do
business in such state or (iii) either the State of New York or the State of
Ohio (to the extent that such state imposes any requirements on such Insurance
Subsidiary) and (b) any Federal insurance Governmental Authority.
"APPLICABLE LENDING OFFICE" shall mean the office of a Lender or
participating bank in which a Loan or commitment or participation is recorded or
such other office as may, for United States Federal income tax purposes, be
deemed the office to which such Loan or commitment or participation is
effectively connected.
"APPLICABLE MARGIN" shall mean, for any day, with respect to the Loans
comprising any Eurodollar Borrowing or with respect to the commitment fees
payable hereunder, as the case may be, the applicable rate per annum set forth
in the chart below under the caption "LIBOR Margin" or "Commitment Fee", as the
case may be, based upon the Preferred Stock Rating. The Preferred Stock Rating
shall mean the actual or implied rating by Moody's Investors Service, Inc. and
Standard & Poor's Rating Group, respectively, of the Preferred Stock. In the
event that Moody's and S&P do not rate the Preferred Stock on the same level,
the rating used to determine the applicable margin shall be (a) in the event one
service rates the Preferred Stock two or more levels higher than the equivalent
level used by the other service, the lower rating plus one level and (b) in all
other cases, the higher level.
------------------------------------------------------
Preferred Stock Rating LIBOR Margin Commitment Fee
------------------------------------------------------
> A- or A3 0.325% 0.1000%
-
------------------------------------------------------
BBB+ or Baa1 0.375% 0.1250%
------------------------------------------------------
BBB or Baa 2 0.400% 0.1375%
------------------------------------------------------
BBB- or Baa3 0.450% 0.1500%
------------------------------------------------------
BB+ or Ba1 0.625% 0.1875%
------------------------------------------------------
< BB or Ba2 0.875% 0.2500%
-
------------------------------------------------------
Each change in the Applicable Margin shall apply during the period
commencing on the effective date of such change and ending on the date
immediately preceding the effective date of the next such change. If the
ratings system of Moody's or S&P shall change, or if any such rating agency
shall cease to be in the business of rating corporate equity obligations, the
Borrower and the Lenders shall negotiate in good faith to agree upon a
substitute rating agency and to amend the references to specific ratings in this
definition to reflect the ratings used by such substitute rating agency and,
pending such agreement, the Applicable Margin shall be determined on the basis
of the ratings provided by the other rating agency, or in the event both such
rating agencies cease to rate the Preferred Stock, the Applicable Margin shall
be the highest of the applicable rates per annum set forth in the chart above
until such time as a substitute rating agency is agreed upon by the Borrower and
the Required Lenders.
"ASSESSMENT RATE" shall mean for any date the annual rate (rounded upwards,
if necessary, to the next 1/100 of 1%) most recently estimated by Chase as the
then-current net annual assessment rate that will be employed in determining
amounts payable by Chase to the Federal Deposit Insurance Corporation (or any
successor) for insurance by such Corporation (or such successor) of time
deposits made in dollars at the domestic offices of Chase.
"ASSET VALUATION RESERVE" shall mean, with respect to any Insurance
Subsidiary at any time, the aggregate amount of the asset valuation reserve of
such Insurance Subsidiary, computed in accordance with SAP and as set forth in
the Annual Statement or the Quarterly Statement of such Insurance Subsidiary
most recently delivered prior to such time to the Administrative Agent and the
Lenders pursuant to Section 5.04(c) or Section 5.04(d), as the case may be.
<PAGE>
3
"ASSIGNMENT AGREEMENT" shall mean the Assignment Agreement dated the
Closing Date, among the Borrower, Holdings and the Administrative Agent, and
consented to by Integrity and National Integrity, substantially in the form of
Exhibit C, as such agreement may be amended, supplemented or otherwise modified
and in effect from time to time.
"ASSIGNMENT AND ACCEPTANCE" shall mean an assignment and acceptance entered
into by a Lender and an assignee, and accepted by the Administrative Agent, in
the form of Exhibit B or such other form as shall be approved by the
Administrative Agent.
"AUTHORIZED CONTROL LEVEL RISK-BASED CAPITAL" shall mean, with respect to
the Insurance Subsidiaries at any time, the Authorized Control Level Risk-Based
Capital as defined by the NAIC at such time and as computed in accordance with
SAP.
"BANK STATUTORY RESERVES" shall mean a fraction (expressed as a decimal),
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board and any other banking authority to which the
Administrative Agent is subject with respect to (a) the Base CD Rate (as such
term is used in the definition of the term "Alternate Base Rate"), for new
negotiable nonpersonal time deposits in dollars of over $100,000 with maturities
approximately equal to three months, and (b) the Adjusted LIBO Rate, for
Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve
percentages shall include those imposed pursuant to such Regulation D.
Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and to
be subject to such reserve requirements without benefit of or credit for
proration, exemptions or offsets that may be available from time to time to any
Lender under such Regulation D. Bank Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
"BASE CD RATE" shall mean the sum of (a) the product of (i) the Three-Month
Secondary CD Rate and (ii) Bank Statutory Reserves and (b) the Assessment Rate.
"BOARD" shall mean the Board of Governors of the Federal Reserve System of
the United States.
"BOOK VALUE" shall mean with respect to any asset sold, transferred, leased
or otherwise disposed of (a) by the Borrower or any Subsidiary other than an
Insurance Subsidiary, the "value" (as defined in Section 2(41)(B) of the
Investment Company Act) of such asset of the Borrower or such Subsidiary and (b)
by an Insurance Subsidiary, the book value of such asset (determined in
accordance with SAP; PROVIDED, HOWEVER, that with respect to any block of
business sold by an Insurance Subsidiary, the term "Book Value" shall mean the
Insurance Liabilities associated with such block of business).
"BORROWING" shall mean a group of Loans of a single Type made by the
Lenders on a single date and as to which a single Interest Period is in effect.
"BUSINESS DAY" shall mean any day (other than a day that is a Saturday,
Sunday or legal holiday in the State of New York) on which banks are open for
business in New York City; PROVIDED, HOWEVER, that, when used in connection with
a Eurodollar Loan, the term "Business Day" shall also exclude any day on which
banks are not open for dealings in dollar deposits in the London interbank
market.
"CAPITAL EXPENDITURES" shall mean, for any period, the sum of all amounts
that would, in accordance with GAAP, be included as additions to property, plant
and equipment and other capital expenditures on a consolidated statement of cash
flows for the Borrower and the Subsidiaries during such period; PROVIDED,
HOWEVER, that Capital Expenditures shall exclude (a) deferred acquisition costs,
(b) value of insurance in force acquired and (c) goodwill.
"CAPITAL LEASE OBLIGATIONS" of any Person shall mean the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.
"CASH CONTRIBUTIONS" shall mean cash payments to be made by the Borrower to
Holdings and by Holdings to one or both of the Insurance Subsidiaries to provide
additional Statutory Surplus to such Insurance Subsidiaries.
"CASH EQUIVALENTS" shall mean:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent such obligations are backed
by the full faith and credit of the United States of America), in each case
that either (i) mature within 365 days from the date of acquisition thereof
or (ii) as to obligations with a total purchase price not in excess of
$15,000,000 in the aggregate at any time outstanding, the coupons of which
reset within 365 days and the purchase prices of which do not exceed 102%
of their respective par values;
<PAGE>
4
(b) direct obligations of any State of the United States maturing
within 365 days from the date of acquisition thereof by the Borrower or its
Subsidiaries and having, at such date of acquisition, the highest credit
rating obtainable from S&P and from Moody's;
(c) investments in commercial paper or corporate debt maturing within
365 days from the date of acquisition thereof and having, at such date of
acquisition, a credit rating of at least "A-1" or "AAA" (or the then
equivalent rating) from S&P or a credit rating of at least "Prime-1" or
"Aaa" (or the then equivalent rating) from Moody's;
(d) investments in certificates of deposit, bankers' acceptances and
time deposits (including Eurodollar time deposits) maturing within 365 days
from the date of acquisition thereof issued or guaranteed by or placed
with, and money market deposit accounts issued or offered by, any domestic
office of any commercial bank organized under the laws of the United States
of America or any State thereof that has Tier 1 Capital of not less than
$250,000,000;
(e) investments pursuant to repurchase agreements with any Lender; and
(f) other short-term investment instruments approved in writing by the
Required Lenders and (i) offered by financial institutions that have a
combined capital and surplus and undivided profits of not less than
$250,000,000 and (ii) having, at the time of acquisition, the highest
credit rating obtainable from a nationally recognized rating agency.
"CERTIFICATE OF DESIGNATION" shall mean the Certificate of Designations
relating to the Preferred Stock, as filed with the Secretary of State of the
State of Delaware on November 23, 1993.
A "CHANGE IN CONTROL" shall be deemed to have occurred if at any time
(a) any person or group (within the meaning of Rule 13d-5 of the Securities
Exchange Act of 1934), other than the MS Investors, Morgan Stanley Group Inc.,
Morgan Stanley, Dean Witter, Discover & Co. or any of their affiliates, shall,
in the aggregate (i) own, directly or indirectly, common stock representing 25%
or more of the common equity capitalization of the Borrower at such time or
(ii) have the right to exercise voting control of at least a majority of the
aggregate ordinary voting power of the capital stock of the Borrower outstanding
at such time or (b) a majority of the seats (other than vacant seats) on the
board of directors of the Borrower shall at such time be occupied by persons who
were neither nominated by the management of the Borrower nor appointed by
directors so nominated.
"CHASE" shall have the meaning assigned to such term in the introduction or
shall mean any successor to The Chase Manhattan Bank pursuant to Article VIII.
"CLASS A COMMON STOCK" shall mean the Class A Common Stock, par value $.01
per share, of the Borrower.
"CLASS B COMMON STOCK" shall mean the Class B Common Stock, par value $.01
per share, of the Borrower.
"CLOSING DATE" shall mean the first date on which the conditions set forth
in Section 4.02 shall have been satisfied or waived.
"CODE" shall mean the Internal Revenue Code of 1986, as the same may be
amended from time to time.
"COMMITMENT" shall mean, with respect to each Lender, the commitment of
such Lender to make Loans hereunder as set forth on Schedule 2.01, as the same
may be reduced from time to time pursuant to Section 2.09.
"COMMITMENT FEE" shall have the meaning assigned to such term in
Section 2.05(a).
"COMMITMENT FEE PERCENTAGE" shall mean at any time the Commitment Fee
percentage in effect at such time pursuant to the definition of the term
"Applicable Margin".
"COMMON STOCK OFFERING" shall mean the underwritten public offering of at
least 5,750,000 shares of Class A Common Stock (assuming no exercise of the
Overallotment Option) contemplated by the Prospectus.
"CONTROL" shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of a Person,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "CONTROLLING" and "CONTROLLED" shall have meanings correlative
thereto.
"DEFAULT" shall mean any event or condition that upon notice, lapse of time
or both would constitute an Event of Default.
"DESIGNATED INTERCOMPANY LOAN" shall mean any loan, advance or extension of
credit of any of the Subsidiaries to the Borrower.
<PAGE>
5
"DOLLARS" or "$" shall mean lawful money of the United States of America.
"DUFF & PHELPS" shall mean Duff & Phelps Credit Rating Co.
"EBIT" on any Interest Coverage Measurement Date shall consist of the
aggregate of Net Income for the Prior Applicable Period for such Interest
Coverage Measurement Date, but shall exclude the effects of (a) realized
investment gains and losses, (b) Interest Expense and (c) federal income taxes,
all with respect to the Borrower and its subsidiaries on a consolidated basis.
"ELIGIBLE ASSIGNEE" shall mean (a) a commercial bank having total assets in
excess of $2,000,000,000, (b) a savings and loan association or savings bank
organized under the laws of the United States or any state thereof and having a
net worth of at least $300,000,000 computed in accordance with GAAP or (c) a
finance company, insurance company or other financial institution or fund that
is regularly engaged in making, purchasing or investing in loans and has total
assets in excess of $300,000,000.
"EMPLOYMENT AGREEMENTS" shall mean (a) the Employment Agreement dated
July 1, 1996, between the Borrower and Martin H. Ruby and (b) the Employment
Agreement dated July 1, 1996, between the Borrower and John Franco.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
the same may be amended from time to time.
"ERISA AFFILIATE" shall mean any trade or business (whether or not
incorporated) that is a member of a group of which the Borrower is a member and
which is treated as a single employer under Section 414 of the Code.
"EURODOLLAR BORROWING" shall mean a Borrowing comprised of Eurodollar
Loans.
"EURODOLLAR LOAN" shall mean any Loan bearing interest at a rate determined
by reference to the Adjusted LIBO Rate in accordance with the provisions of
Article II.
"EVENT OF DEFAULT" shall have the meaning assigned to such term in
Article VII.
"FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published on the
next succeeding Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day that is a Business Day, the average of
the quotations for the day of such transactions received by Chase from three
Federal funds brokers of recognized standing selected by it.
"FEES" shall mean the Administrative Agent's Fees and the Commitment Fees.
"FINANCIAL SERVICES BUSINESS" shall mean money management, asset-liability
management advisory services, insurance product development, the issuance of
face amount certificates and other types of annuity products and "investment
company" (as defined in Section 3.12) distribution services and related
financial services businesses and activities reasonably incidental thereto.
"GAAP" shall mean United States generally accepted accounting principles,
applied on a basis consistent with those that, in accordance with the last
sentence of Section 1.02, are to be used (except as expressly indicated) in
making the calculations for purposes of determining compliance with this
Agreement.
"GOVERNMENTAL AUTHORITY" shall mean any Federal, state, local or foreign
court or governmental agency, authority, instrumentality or regulatory body.
"GUARANTEE" of or by any Person shall mean any obligation, contingent or
otherwise, of such Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person (the "PRIMARY OBLIGOR") in any
manner, whether directly or indirectly, and including any obligation of such
Person, direct or indirect, (a) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such
Indebtedness, (b) to purchase property, securities or services for the purpose
of assuring the owner of such Indebtedness of the payment of such Indebtedness
or (c) to maintain working capital, equity capital or other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness; PROVIDED, HOWEVER, that the term "Guarantee"
shall not include endorsements for collection or deposit, in either case in the
ordinary course of business.
"GUARANTEE AGREEMENT" shall mean the Guarantee Agreement, substantially in
the form of Exhibit A, between Holdings and the Administrative Agent.
"INCOME TAXES" of the Borrower shall mean, in respect of any Interest
Coverage Measurement Date, (a) the aggregate amount of all Federal, state and
local income taxes (i) paid by the Borrower during the Prior Applicable Period
<PAGE>
6
for such Interest Coverage Measurement Date, including such taxes of
Subsidiaries to the extent paid by the Borrower if the Borrower was liable
therefor, or (ii) due on such Interest Coverage Measurement Date and payable by
the Borrower within 12 months after such Interest Coverage Measurement Date
MINUS (b) any Federal, state and local income taxes due on the fourth preceding
Interest Coverage Measurement Date and payable by the Borrower within 12 months
after the fourth preceding Interest Coverage Measurement Date.
"INDEBTEDNESS" of any Person shall mean, without duplication, (a) all
obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such Person
upon which interest charges are customarily paid, (d) all obligations of such
Person under conditional sale or other title retention agreements relating to
property or assets purchased by such Person, (e) all obligations of such
Person issued or assumed as the deferred purchase price of property or
services, (f) all Indebtedness of others secured by (or for which the holder
of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien on property owned or acquired by such Person, whether or
not the obligations secured thereby have been assumed, (g) all Guarantees by
such Person of Indebtedness of others, (h) all Capital Lease Obligations of
such Person, (i) all obligations of such Person in respect of Rate Protection
Agreements (it being understood that the amount of Indebtedness of such
Person under any Rate Protection Agreement as of any date shall be deemed to
equal the termination value payable by such Person if such Rate Protection
Agreement was terminated on such date) and (j) all obligations of such Person
as an account party in respect of letters of credit and bankers' acceptances;
PROVIDED, HOWEVER, that the term "Indebtedness" shall exclude (x) any
insurance product, insurance policy claim payable or any other
insurance-related obligation or trade payable incurred by the Borrower or any
of the Subsidiaries in the ordinary course of the Insurance Business, (y) any
Rate Protection Agreement entered into by any Insurance Subsidiary in the
ordinary course of its Insurance Business and (z) any face amount
certificates issued by, or Rate Protection Agreements entered into by, SBM
Certificate Company in the ordinary course of the Financial Services
Business. The Indebtedness of any Person shall include the Indebtedness of
any partnership in which such Person is a general partner.
"INDIVIDUAL INVESTORS" shall mean the members of the Borrower's management
listed on Schedule 1.01 and certain other employees of the Borrower.
"INSURANCE BUSINESS" shall mean one or more aspects of the business of
selling, issuing or underwriting insurance or reinsurance, asset-liability
management and activities reasonably incidental thereto.
"INSURANCE LIABILITIES" shall mean, at any time, the aggregate amount of
all liabilities of the Borrower that would be classified as "Insurance
Liabilities" on a consolidated balance sheet of the Borrower, computed and
consolidated in accordance with the method used in the Pro Forma Consolidated
Balance Sheet.
"INSURANCE REGULATORY INFORMATION SYSTEM" shall mean the Insurance
Regulatory Information System promulgated by the NAIC, or any successor system
promulgated by the NAIC.
"INSURANCE SUBSIDIARIES" shall mean Integrity, National Integrity and any
other Subsidiary, whether now owned or hereafter acquired, that is regulated, in
accordance with applicable state law or any Federal law, as an insurer by any
Applicable Insurance Regulatory Authority.
"INTEGRITY" shall mean Integrity Life Insurance Company, an Ohio stock life
insurance company.
"INTERCOMPANY LOAN" shall mean (a) any Designated Intercompany Loan,
(b) any loan, advance or extension of credit of the Borrower to any of the
Subsidiaries, (c) any loan, advance or extension of credit of any of the
Subsidiaries to any other of the Subsidiaries and (d) any combination of the
foregoing; PROVIDED, HOWEVER, that the term "Intercompany Loan" shall not
include any direct or indirect loan or advance to or from Holdings.
"INTEREST COVERAGE MEASUREMENT DATE" shall mean the last day of any fiscal
quarter of the Borrower.
"INTEREST COVERAGE RATIO" shall mean, with respect to the Borrower on any
Interest Coverage Measurement Date, the ratio of (a) EBIT on such date to
(b) Interest Expense for the Prior Applicable Period ending on such date.
"INTEREST EXPENSE" of the Borrower for any period shall mean the cash
interest expense of the Borrower for such period, as shown on the
unconsolidated statement of earnings and cash flow of the Borrower, and shall
exclude (a) non-cash interest-related expense, (b) Commitment Fees and (c)
other debt-related expenses, in each case for such period.
"INTEREST PAYMENT DATE" shall mean, with respect to any Loan, the last day
of the Interest Period applicable to the Borrowing of which such Loan is a part
and, in the case of a Eurodollar Borrowing with an Interest Period of more than
three months' duration, each day that would have been an Interest Payment Date
had successive Interest Periods of three months' duration, been applicable to
such Borrowing, and, in addition, the date of any refinancing or conversion of
such Borrowing with or to a Borrowing of a different Type.
<PAGE>
7
"INTEREST PERIOD" shall mean (a) as to any Eurodollar Borrowing, the period
commencing on the date of such Borrowing or on the last day of the immediately
preceding Interest Period applicable to such Borrowing, as the case may be, and
ending on the numerically corresponding day (or, if there is no numerically
corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6
months thereafter, as the Borrower may elect, and (b) as to any ABR Borrowing,
the period commencing on the date of such Borrowing or on the last day of the
immediately preceding Interest Period applicable to such Borrowing, as the case
may be, and ending on the earliest of (i) the next succeeding March 31, June 30,
September 30 or December 31, (ii) the Maturity Date and (iii) the date such
Borrowing is converted to a Borrowing of a different Type in accordance with
Section 2.10 or repaid or prepaid in accordance with Section 2.11; PROVIDED,
HOWEVER, that if any Interest Period would end on a day other than a Business
Day, such Interest Period shall be extended to the next succeeding Business Day
unless, in the case of a Eurodollar Borrowing only, such next succeeding
Business Day would fall in the next calendar month, in which case such Interest
Period shall end on the next preceding Business Day. Interest shall accrue from
and including the first day of an Interest Period to but excluding the last day
of such Interest Period.
"INVESTED ASSETS" of any Person shall mean (a) in the case of any Insurance
Subsidiary, the assets reflected on lines 10A and 16 of the Assets Statement in
the Annual Statement or Quarterly Statement of the Insurance Subsidiary most
recently delivered to the Administrative Agent and the Lenders pursuant to
Section 5.04 or, if such statement shall be modified, the equivalent statement
on any applicable successor form or (b) in the case of any other Person, assets
of such Person of the type described in clause (a) above.
"INVESTMENT-GRADE SECURITY" shall mean any of the following: (a) any Cash
Equivalent, (b) any Invested Asset that is rated NAIC 1 or NAIC 2 by the NAIC,
(c) any commercial or agricultural mortgage investment asset that is guaranteed
by any Person the long-term debt of which is rated not lower than NAIC 2 and
(d) any Substituted Mortgage.
"INVESTOR GROUP" shall mean the MS Investors, ARM, the Individual Investors
and the holders of the Preferred Stock.
"LIEN" shall mean, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement relating to such asset and
(c) in the case of securities, any purchase option, call or similar right of a
third party with respect to such securities.
"LOAN" shall have the meaning given such term in Section 2.01.
"LOAN DOCUMENTS" shall mean this Agreement, the Guarantee Agreement and the
Security Documents.
"MANAGEMENT FEES" shall mean, for any period, the fees earned by the
Borrower in such period pursuant to the Administrative Services Agreements;
PROVIDED, HOWEVER, that fees earned by ARM Capital Advisors, Inc. shall not be
included in determining such management fees earned by the Borrower.
"MARGIN STOCK" shall have the meaning given such term under Regulation U.
"MATERIAL ADVERSE EFFECT" shall mean (a) a materially adverse effect on the
business, assets, operations or condition, financial or otherwise, of the
Borrower and the Subsidiaries, taken as a whole, (b) material impairment of the
ability of the Borrower or any Subsidiary to perform any of its obligations
under any Loan Document to which it is or will be a party or (c) material
impairment of the rights or remedies available to the Lenders under any Loan
Document.
"MATERIAL SUBSIDIARY" shall mean on any date, (a) any Subsidiary with
consolidated revenues during the fiscal year of the Borrower most recently ended
greater than 2-1/2% of the total revenues of the Borrower and the Subsidiaries
during such year, computed and consolidated in accordance with GAAP, (b) any
Subsidiary with consolidated assets as of the last day of the fiscal quarter
immediately prior to such date greater than 2-1/2% of the total assets of the
Borrower and the Subsidiaries on such date, computed and consolidated in
accordance with GAAP, and (c) any Subsidiary with consolidated net income during
the fiscal year of the Borrower most recently ended greater than 2-1/2% of the
net income of the Borrower and the Subsidiaries, computed and consolidated in
accordance with GAAP.
"MATURITY DATE" shall mean the fifth anniversary of the date of this
agreement.
"MOODY'S" shall mean Moody's Investors Service, Inc.
"MS Investors" shall mean The Morgan Stanley Leveraged Equity Fund II,
L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital
Investors, L.P., and MSCP III 892 Investors, L.P., each a Delaware limited
partnership.
"MULTIEMPLOYER PLAN" shall mean a multiemployer plan as defined in Section
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate (other than one
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of
Section 414 of the Code) is making or accruing an obligation to make
contributions, or has within any of the preceding five plan years made or
accrued an obligation to make contributions.
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8
"NAIC" shall mean the National Association of Insurance Commissioners or
any association or Governmental Authority succeeding to any or all of the
functions of the National Association of Insurance Commissioners.
"NAIC 1" shall mean (a) the rating NAIC 1 of the NAIC and (b) the rating
assigned to any asset that requires a Risk-Based Capital Factor of not more than
the Risk-Based Capital Factor required for Invested Assets rated NAIC 1. If the
ratings system of the NAIC shall change or if the NAIC shall cease to assign
quality ratings to Invested Assets, then, in furtherance of the last sentence of
Section 1.02, the Borrower and the Lenders will negotiate in good faith to
substitute for the references to NAIC 1 in this Agreement references to
equivalent ratings reflecting such changed rating system or the non-availability
of ratings from the NAIC.
"NAIC 2" shall mean the rating NAIC 2 of the NAIC. If the ratings system of
the NAIC shall change or if the NAIC shall cease to assign quality ratings to
Invested Assets, then, in furtherance of the last sentence of Section 1.02, the
Borrower and the Lenders will negotiate in good faith to substitute for the
references to NAIC 2 in this Agreement references to equivalent ratings
reflecting such changed rating system or the non-availability of ratings from
the NAIC.
"NATIONAL INTEGRITY" shall mean National Integrity Life Insurance Company,
a New York stock life insurance company.
"NATIONAL MUTUAL CORPORATION" shall mean National Mutual Corporation (No.
2) Pty. Ltd., a proprietary limited company incorporated under the laws of
Victoria, Commonwealth of Australia.
"NET INCOME" shall mean, for any period, the aggregate net income (or net
deficit) of the Borrower and its subsidiaries determined on a consolidated basis
for such period, which consists of (a) income earned on investments less
interest credited on customer deposits (net investment spread), (b) fee income
from managing deposits, (c) income from surrender charges, (d) commissions (net
of deferrals), (e) realized investment gains and (f) any other item treated as
income under GAAP, less (i) operating expenses, (ii) amortization expenses,
(iii) interest expense on debt, (iv) non-recurring charges, (v) realized
investment losses, (vi) federal income taxes and (vii) any other items that are
treated as expense under GAAP, all calculated in accordance with GAAP, PROVIDED,
HOWEVER, that the term "Net Income" shall exclude, for all purposes,
(A) extraordinary gains or losses (as defined by GAAP) from the sale of assets
other than in the ordinary course of business, (B) one-time charges taken in
connection with the Transactions, (C) any write-up in the value of any asset and
(D) stock-based compensation expense.
"NET PROCEEDS" shall mean with respect to any event (a) the cash proceeds
received in respect of such event, including (i) in the case of a casualty,
insurance proceeds and (ii) in the case of a condemnation or similar event,
condemnation awards and similar payments, net of (b) the sum of (i) all
reasonable fees and out-of-pocket expenses paid by the Borrower, Holdings and
the Subsidiaries to third parties (other than Affiliates) in connection with
such event, (ii) in the case of a sale or other disposition of an asset
(including pursuant to a casualty or condemnation), the amount of all payments
required to be made by the Borrower, Holdings and the Subsidiaries as a result
of such event to repay Indebtedness (other than Loans) secured by such asset and
(iii) the amount of all taxes that (A) are paid (or reasonably estimated to be
payable) by the Borrower, Holdings and the Subsidiaries during the year in which
such event occurred or the next succeeding year and (B) are directly
attributable to such event (as determined reasonably and in good faith by the
chief financial officer of the Borrower).
"1997 EQUITY CONTRIBUTION" shall mean the receipt by the Borrower on
June 24, 1997, of not less than $50,000,000 in cash as consideration for the
Borrower's issuance and sale of shares of its Class A Common Stock.
"NON-INVESTMENT GRADE INVESTMENTS" shall mean (a) investments in real
estate and commercial mortgages (other than mortgages that are indemnified by a
corporation the long-term debt of which is rated the equivalent of NAIC 1 or
NAIC 2), (b) equity investments (other than any such investments in subsidiaries
of the Borrower or any Insurance Subsidiary) and (c) investments in bonds that
are not rated NAIC 1 or NAIC 2 by the NAIC.
"NON-SUBSIDIARY INVESTMENTS" shall mean, with respect to the Borrower, SBM
Certificate Company, ARM Capital Advisors, Inc. and ARM Securities Corp., the
Invested Assets of the Borrower, SBM Certificate Company, ARM Capital Advisors,
Inc. and ARM Securities Corp. (determined, in each case, on an unconsolidated
basis in accordance with GAAP) other than their respective Subsidiary
Investments.
"OBLIGATIONS" shall mean (a) the due and punctual payment of (i) the
principal of and interest on each Loan, when and as due, whether at maturity, by
acceleration, by notice of prepayment or otherwise, and (ii) all other monetary
obligations of the Borrower under the Loan Documents and (b) the performance of
all other obligations of the Borrower to the Lenders and the Administrative
Agent under this Agreement and the other Loan Documents.
"OTHER TAXES" shall have the meaning given such term in Section 2.18.
"OVERALLOTMENT OPTION" shall mean the option granted by the Borrower to the
underwriters in the Underwriting Agreement pursuant to which the underwriters
may elect to purchase at least 862,500 additional shares of Class A Common Stock
to cover overallotments.
<PAGE>
9
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and
defined in ERISA.
"PERMITTED SWAP" shall mean any Rate Protection Agreement of the type
described in clause (a) of the definition of the term "Rate Protection
Agreement" that hedges Interest Expense on the Loans between the Borrower and a
Lender or an Affiliate of a Lender.
"PERSON" shall mean any natural Person, corporation, business trust, joint
venture, trust, association, company, partnership or government, or any agency
or political subdivision thereof.
"PLAN" shall mean any pension plan (other than a Multiemployer Plan) that
is subject to the provisions of Title IV of ERISA or Section 412 of the Code and
is maintained for employees of the Borrower or any ERISA Affiliate.
"PLEDGE AGREEMENT" shall mean the Pledge Agreement dated the Closing Date,
among the Borrower, Holdings and the Administrative Agent, substantially in the
form of Exhibit D, as such agreement may be amended, supplemented or otherwise
modified and in effect from time to time.
"PLEDGED SECURITIES" shall have the meaning given such term in the Pledge
Agreement.
"PREFERRED STOCK" shall mean the 9 1/2% Cumulative Perpetual Preferred
Stock, $25.00 stated value per share, of the Borrower.
"PRIME RATE" shall mean the rate of interest per annum publicly announced
from time to time by the Administrative Agent as its prime rate in effect at its
principal offices in New York City. Each change in the Prime Rate shall be
effective on the date on which the Administrative Agent publicly announces such
change as being effective.
"PRINCIPAL" amount of any obligation at any time shall mean (a) the
then-outstanding principal amount of such obligation, (b) the
then-outstanding principal component of such obligation (if such obligation
is a Capital Lease Obligation) or (c) the sum of the issue price plus the
original issue discount accrued but unpaid attributable to such obligation
(in the case of a discount obligation).
"PRIOR APPLICABLE PERIOD" for any Interest Coverage Measurement Date shall
mean the period of four consecutive fiscal quarters of the Borrower ending on
such Interest Coverage Measurement Date.
"PRO FORMA CONSOLIDATED BALANCE SHEET" shall mean the pro forma
consolidated balance sheet of the Borrower and the consolidated Subsidiaries as
of March 31, 1997.
"PROSPECTUS" shall mean the form of prospectus included in the Registration
Statement at the time it was declared effective by the Securities and Exchange
Commission.
"QUARTERLY STATEMENT" shall mean, with respect to any Insurance Subsidiary,
the Quarterly Statement of such Insurance Subsidiary required to be filed with
the Applicable Insurance Regulatory Authority in accordance with state law,
including any exhibits, schedules, certificates or actuarial opinions filed or
delivered therewith.
"RATE PROTECTION AGREEMENT" shall mean (a) any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate collar agreement, interest rate
hedge agreement, basis swap agreement, forward rate agreement or other similar
agreement or arrangement designed to protect any Person against fluctuations in
interest rates (including any option to enter into any of the foregoing and any
master agreement for any of the foregoing); (b) any foreign exchange contract,
forward foreign exchange agreement, currency swap agreement, cross-currency rate
swap agreement, currency option or other similar agreement or arrangement
designed to protect any Person against fluctuations in currency values
(including any option to enter into any of the foregoing and any master
agreement for any of the foregoing); or (c) to the extent not covered by clauses
(a) and (b) above, any derivative instrument, agreement or product used or
entered into by any Person in the ordinary course of the Insurance Business.
"REGISTER" shall have the meaning given such term in Section 9.04(d).
"REGISTRATION STATEMENT" shall mean the Borrower's Registration Statement
on Form S-1 (Registration No. 333-14693) filed on March 27, 1997, with the
Securities and Exchange Commission, relating to the Common Stock Offering, as
amended to the date hereof.
"REGULATION G" shall mean Regulation G of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"REGULATION U" shall mean Regulation U of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
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10
"REGULATION X" shall mean Regulation X of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"REINSURANCE AGREEMENTS" shall mean all agreements, contracts, treaties,
certificates and other arrangements whereby an insurance company agrees to
transfer or cede to another insurer all or part of the liability assumed by such
insurance company under a policy or policies of insurance reinsured by such
insurance company.
"REPORTABLE EVENT" shall mean any reportable event as defined in
Section 4043(b) of ERISA or the regulations issued thereunder with respect to a
Plan (other than a Plan maintained by an ERISA Affiliate that is considered an
ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the
Code).
"REQUIRED LENDERS" shall mean, at any time, Lenders holding Loans
representing a majority of the aggregate principal amount of the Loans
outstanding or, if no Loans are outstanding, Lenders having Commitments
representing a majority of the aggregate Commitments.
"RESERVE LIABILITIES" shall have the meaning given such term in
Section 3.22.
"RESPONSIBLE OFFICER" of any Person shall mean any executive officer, chief
financial officer, principal accounting officer, Treasurer or Controller of such
Person.
"RISK-BASED CAPITAL" shall mean, with respect to the Insurance Subsidiaries
at any time, the Risk-Based Capital (as defined by the NAIC at such time and as
computed in accordance with SAP) of the Insurance Subsidiaries (consolidated in
accordance with SAP) at such time.
"RISK-BASED CAPITAL FACTOR" shall mean, with respect to any component of
the statutory statement of an Insurance Subsidiary, the risk factor attributed
(in accordance with the NAIC and SAP) to such component for purposes of
calculating the Risk-Based Capital of such Insurance Subsidiary.
"S&P" shall mean Standard & Poor's Ratings Group, a division of the McGraw
Hill Companies, Inc.
"SAP" shall mean, with respect to any Insurance Subsidiary, the accounting
procedures prescribed or permitted by the Applicable Insurance Regulatory
Authority applied on a basis consistent with those that are indicated in
Section 1.02.
"SBM CERTIFICATE COMPANY" shall mean SBM Certificate Company, a Minnesota
corporation.
"SECURITY DOCUMENTS" shall mean the Pledge Agreement and the Assignment
Agreement.
"SEPARATE ACCOUNT ASSETS" shall mean, with respect to any Insurance
Subsidiary at any time, the assets reflected on line 23 of the Assets Statement
in the Annual Statement or Quarterly Statement most recently delivered to the
Administrative Agent and the Lenders pursuant to Section 5.04 or, if such
statement shall be modified, the equivalent item on any applicable successor
form.
"SHAREHOLDERS' EQUITY" shall mean, with respect to the Borrower at any
time, the total shareholders' equity of the Borrower at such time, computed in
accordance with GAAP.
"SPA GUARANTY AGREEMENT" shall mean the Guaranty Agreement dated not later
than the Closing Date among the Borrower, Integrity and National Integrity.
"STATEMENT OF ACTUARIAL OPINION" shall mean, with respect to any Insurance
Subsidiary, the Statement of Actuarial Opinion required to be filed with the
Applicable Insurance Regulatory Authority in accordance with state law or, if
such Applicable Insurance Regulatory Authority shall no longer require such a
statement, information equivalent to that required to be included in the
Statement of Actuarial Opinion that was filed immediately prior to the time such
statement was no longer required.
"STATUTORY INCOME" shall mean, for any period with respect to any Insurance
Subsidiary, the statutory net gain from operations of such Insurance Subsidiary,
computed in accordance with SAP and as set forth on line 31 of the Summary of
Operations in the Annual Statement or the Quarterly Statement of such Insurance
Subsidiary most recently delivered to the Administrative Agent and the Lenders
pursuant to Section 5.04 or, if such statement shall be modified, the equivalent
item on any applicable successor form.
"STATUTORY NET INCOME" shall mean, for any period with respect to any
Insurance Subsidiary, the statutory net income of such Insurance Subsidiary,
computed in accordance with SAP and as set forth on line 33 of the Summary of
Operations in the Annual Statement or the Quarterly Statement of such Insurance
Subsidiary most recently delivered to the Administrative Agent and the Lenders
pursuant to Section 5.04, or, if such statement shall be modified, the
equivalent item on any applicable successor form.
<PAGE>
11
"STATUTORY SURPLUS" or "SURPLUS" shall mean, with respect to any Insurance
Subsidiary at any time, the amount set forth on line 37 of the Liabilities,
Surplus and Other Funds Statement in the Annual Statement or the Quarterly
Statement of such Insurance Subsidiary most recently delivered to the
Administrative Agent and the Lenders pursuant to Section 5.04 or, if such
statement shall be modified, the equivalent item on any applicable successor
form.
"STOCK OPTION PLAN" shall mean the Amended and Restated Stock Option Plan
and the 1997 Equity Incentive Plan as set forth in Exhibit I, as such plan may
be amended, supplemented or otherwise modified from time to time.
"STOCKHOLDERS AGREEMENT" shall mean the Amended and Restated Stockholders
Agreement dated as of June 24, 1997 as such agreement may be amended,
supplemented or otherwise modified and in effect from time to time as permitted
by Section 6.11.
"SUBSIDIARY" shall mean, with respect to any Person (herein referred to as
the "PARENT"), any corporation, partnership, association or other business
entity of which securities or other ownership interests representing more than
50% of the equity or more than 50% of the ordinary voting power or more than 50%
of the general partnership interests are, at the time any determination is being
made, owned, controlled or held by the parent or by one or more subsidiaries of
the parent.
"SUBSIDIARY" shall mean any subsidiary of the Borrower, including Holdings.
"SUBSIDIARY INVESTMENTS" shall mean, at any time, (a) with respect to the
Borrower, its aggregate investment in the Subsidiaries, computed on an
unconsolidated basis in accordance with GAAP, and the aggregate amount of all
Intercompany Loans made by the Borrower at such time, (b) with respect to any
Insurance Subsidiary, its aggregate investment in any other Subsidiary, computed
on an unconsolidated basis in accordance with SAP, and the aggregate amount of
all Designated Intercompany Loans made by such Insurance Subsidiary and all
Intercompany Loans made by such Insurance Subsidiary to any other Subsidiary and
(c) with respect to any Subsidiary (other than an Insurance Subsidiary), its
aggregate investments in any other Subsidiary (whether or not an Insurance
Subsidiary), computed on an unconsolidated basis in accordance with GAAP, and
the aggregate amount of all Designated Intercompany Loans made by such
Subsidiary and all Intercompany Loans made by such Subsidiary, in each case to
any other Subsidiary (whether or not an Insurance Subsidiary).
"SUBSTITUTED MORTGAGE" shall mean any commercial or agricultural mortgage
investment asset that is substituted prior to the Closing Date into the general
accounts of Integrity or National Integrity for any other such asset of
Integrity or National Integrity.
"SURPLUS RELIEF RATIO" shall mean, with respect to the Insurance
Subsidiaries at any time, the Surplus Relief Ratio of the Insurance Subsidiaries
at such time, as defined by the NAIC and as computed and consolidated in
accordance with the Insurance Regulatory Information System.
"TAXES" shall have the meaning given such term in Section 2.18(a).
"THREE-MONTH SECONDARY CD RATE" shall mean, for any day, the secondary
market rate for three-month certificates of deposit reported as being in effect
on such day (or, if such day shall not be a Business Day, the next preceding
Business Day) by the Board through the public information telephone line of the
Federal Reserve Bank of New York (which rate will, under the current practices
of the Board, be published in Federal Reserve Statistical Release H.15(519)
during the week following such day), or, if such rate shall not be so reported
on such day or such next preceding Business Day, the average of the secondary
market quotations for three-month certificates of deposit of major money center
banks in New York City received at approximately 10:00 a.m., New York City time,
on such day (or, if such day shall not be a Business Day, on the next preceding
Business Day) by Chase from three New York City negotiable certificate of
deposit dealers of recognized standing selected by them.
"TIER 1 CAPITAL" shall mean, (a) with respect to any commercial bank
organized under the laws of the United States of America, "Tier 1 Capital" as
defined in the applicable regulations of the Treasury Department's Office of the
Comptroller of the Currency and (b) with respect to any commercial bank
organized under the laws of any State of the United States of America, "Tier 1
Capital" as defined in the applicable regulations of the Board, in each case as
in effect from time to time.
"TOTAL ASSETS" shall mean the total assets of the Borrower and its
subsidiaries, determined on a consolidated basis in accordance with GAAP, but
excluding all Separate Account Assets.
"TOTAL ADJUSTED CAPITAL" shall mean, with respect to the Insurance
Subsidiaries at any time, the Total Adjusted Capital (as defined by the NAIC at
such time and as computed in accordance with SAP) of the Insurance Subsidiaries
(taken together) at such time.
"TOTAL ADMITTED ASSETS" shall mean, with respect to the Insurance
Subsidiaries at any time, the sum of all assets of the Insurance Subsidiaries
that would be permitted at such time by their respective Applicable Insurance
Regulatory
<PAGE>
12
Authorities to be classified as admitted assets in accordance with SAP, and in
any event shall exclude Subsidiary Investments of the Insurance Subsidiaries.
"TOTAL CAPITAL" shall mean at any time the sum of Total Funded Indebtedness
of the Borrower at such time and Shareholders' Equity at such time, determined
in accordance with GAAP excluding the effect of Financial Accounting Standards
Board, Statement of Financial Accounting Standards No. 115: Accounting for
Certain Investments in Debt and Equity Securities (May, 1993).
"TOTAL FUNDED INDEBTEDNESS" shall mean, at any time, the principal amount
of all Indebtedness of the type referred to in clauses (a), (b), (c) and (h) of
the definition of the term "Indebtedness" of the Borrower and the Subsidiaries
at such time, but in any event shall exclude (a) the amount of the unused
Commitments at such time and (b) the aggregate amount of undrawn letters of
credit of the Borrower and the Subsidiaries at such time, computed and
consolidated in accordance with GAAP. The term "Total Funded Indebtedness" shall
include all such Indebtedness of any partnership in which the Borrower or a
Subsidiary is a general partner.
"TRANSACTIONS" shall mean (a) the execution, delivery and performance by
the Borrower of each of the Loan Documents to which it is a party and the
borrowings by the Borrower under this Agreement and (b) the Common Stock
Offering.
"TRANSFEREE" shall have the meaning given such term in Section 2.18(a).
"TYPE", when used in respect of any Loan or Borrowing, shall refer to the
Rate by reference to which interest on such Loan or on the Loans comprising such
Borrowing is determined. For purposes hereof, the term "RATE" shall mean the
Adjusted LIBO Rate and the Alternate Base Rate.
"UNDERWRITING AGREEMENT" shall mean the Underwriting Agreement dated as of
June 18, 1997, among the Borrower, Morgan Stanley & Co. Incorporated, Donaldson
Lufkin & Jenrette Securities Corporation and Oppenheimer & Co., Inc., as such
agreement may be amended or otherwise modified from time to time.
"WITHDRAWAL LIABILITY" shall mean liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. TERMS GENERALLY. The definitions in Section 1.01 shall apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". All references
herein to Articles, Sections, Exhibits and Schedules shall be deemed references
to Articles and Sections of, and Exhibits and Schedules to, this Agreement
unless the context shall otherwise require. Except as otherwise expressly
provided herein, all terms of an accounting or financial nature shall be
construed in accordance with GAAP or, to the extent such terms apply to an
Insurance Subsidiary, SAP, in each case as in effect from time to time;
PROVIDED, HOWEVER, that, for purposes of determining compliance with any
covenant set forth in Article VI, such terms shall be construed in accordance
with GAAP or SAP (and the NAIC and the Insurance Regulatory Information System),
as applicable, as in effect on the Closing Date, in each case applied on a basis
consistent with the application used in preparing the Borrower's and the
Insurance Subsidiaries' audited financial statements referred to in
Section 3.05, or the Insurance Subsidiaries' financial statements filed with
their respective Applicable Insurance Regulatory Authorities, as the case may
be, unless the Borrower shall have objected to determining compliance on such
basis and the Borrower and the Required Lenders shall have agreed to determine
compliance in accordance with GAAP or SAP (and the NAIC and the Insurance
Regulatory Information System), as applicable, in effect on such date of
objection (or on another basis).
ARTICLE II. THE CREDITS
SECTION 2.01. COMMITMENTS. Upon the terms and subject to the conditions and
relying upon the representations and warranties herein set forth, each Lender
agrees, severally and not jointly, to make loans (each a "LOAN") to the
Borrower, at any time and from time to time on or after the Closing Date and
until the earlier of the Maturity Date and the termination of the Commitment of
such Lender in accordance with the terms hereof, in an aggregate principal
amount at any time outstanding not to exceed its Commitment at such time.
Within the limits set forth in clause (b) of the preceding sentence, the
Borrower may borrow, pay or prepay and reborrow Loans on or after the Closing
Date and prior to the Maturity Date, upon the terms and subject to the
conditions and limitations set forth herein.
SECTION 2.02. LOANS. (a) Each Loan shall be made as part of a Borrowing
consisting of Loans made by the Lenders ratably in accordance with their
respective Commitments; PROVIDED, HOWEVER, that the failure of any Lender to
make any Loan shall not in itself relieve any other Lender of its obligation to
lend hereunder (it being understood, however, that no Lender shall be
responsible for the failure of any other Lender to make any Loan required to be
made by such other Lender). The Loans comprising each Borrowing shall be in an
aggregate principal amount that is an integral
<PAGE>
13
multiple of $1,000,000 and not less than $1,000,000 (or an aggregate principal
amount equal to the remaining balance of the Commitments).
b) Each Borrowing shall be comprised entirely of ABR Loans or entirely of
Eurodollar Loans, as the Borrower may request pursuant to Section 2.03;
PROVIDED, HOWEVER, that each Borrowing prior to the date that is 30 days after
the Closing Date shall be comprised of ABR Loans unless the Administrative Agent
shall otherwise agree in writing. Each Lender may at its option fulfill its
Commitment with respect to any Eurodollar Loan by causing any domestic or
foreign branch or Affiliate of such Lender to make such Loan; PROVIDED, HOWEVER,
that any exercise of such option shall not affect the obligation of the Borrower
to repay such Loan in accordance with the terms of this Agreement. Borrowings of
more than one Type may be outstanding at the same time; PROVIDED, HOWEVER, that
the Borrower shall not be entitled to request any Borrowing that, if made, would
result in an aggregate of more than five separate Eurodollar Loans of any Lender
being outstanding hereunder at any one time. For purposes of the foregoing,
Eurodollar Loans by the same Lender having different Interest Periods,
regardless of whether they commence on the same date, shall be considered
separate Eurodollar Loans.
(c) Subject to paragraph (e) below, each Lender shall make a Loan in the
amount of its pro rata portion, as determined under Section 2.15, of each
Borrowing hereunder on the proposed date thereof by wire transfer of immediately
available funds to the Administrative Agent in New York, New York, not later
than 12:00 noon, New York City time, and the Administrative Agent shall by 3:00
p.m., New York City time, credit the amounts so received to the general deposit
account of the Borrower with the Administrative Agent or, if a Borrowing shall
not occur on such date because any condition precedent herein specified shall
not have been met, return the amounts so received to the respective Lenders.
Unless the Administrative Agent shall have received notice from a Lender prior
to the date of any Borrowing that such Lender will not make available to the
Administrative Agent such Lender's portion of such Borrowing, the Administrative
Agent may assume that such Lender has made such portion available to the
Administrative Agent on the date of such Borrowing in accordance with this
paragraph (c) and the Administrative Agent may, in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If and to the extent that such Lender shall not have made such portion available
to the Administrative Agent, such Lender and the Borrower severally agree to
repay to the Administrative Agent forthwith on demand such corresponding amount
together with interest thereon, for each day from the date such amount is made
available to the Borrower until the date such amount is repaid to the
Administrative Agent at (i) in the case of the Borrower the interest rate
applicable at the time to the Loans comprising such Borrowing and (ii) in the
case of such Lender, the Federal Funds Effective Rate. If such Lender shall
repay to the Administrative Agent such corresponding amount, such amount shall
constitute such Lender's Loan as part of such Borrowing for purposes of this
Agreement.
(d) Notwithstanding any other provision of this Agreement, the Borrower
shall not be entitled to request any Borrowing comprised of Eurodollar Loans if
the Interest Period requested with respect thereto would end after the Maturity
Date.
SECTION 2.03. NOTICE OF BORROWINGS. The Borrower shall give the
Administrative Agent written notice (or telephone notice promptly confirmed in
writing or by telecopy) (a) in the case of a Eurodollar Borrowing, not later
than 10:00 a.m., New York City time, three Business Days before a proposed
borrowing and (b) in the case of an ABR Borrowing, not later than 12:00 (noon),
New York City time, one Business Day before a proposed borrowing. Such notice
shall be irrevocable and shall in each case refer to this Agreement and specify
(i) whether such Borrowing is to be a Eurodollar Borrowing or an ABR Borrowing;
(ii) the date of such Borrowing (which shall be a Business Day) and the amount
thereof; and (iii) if such Borrowing is to be a Eurodollar Borrowing, the
Interest Period with respect thereto. If no election as to the Type of Borrowing
is specified in any such notice, then the requested Borrowing shall be an
ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is
specified in any such notice, then the Borrower shall be deemed to have selected
an Interest Period of one month's duration, in the case of a Eurodollar
Borrowing. The Administrative Agent shall promptly advise the Lenders of any
notice given pursuant to this Section 2.03 and of each Lender's portion of the
requested Borrowing.
SECTION 2.04. EVIDENCE OF DEBT; REPAYMENT OF LOANS. (a) Each Lender shall
maintain in accordance with its usual practice an account or accounts evidencing
the indebtedness of the Borrower to such Lender resulting from each Loan made by
such lender from time to time, including the amounts of principal and interest
payable and paid to such Lender from time to time under this Agreement.
(b) The Administrative Agent shall maintain accounts in which it will
record (i) the amount of each Loan made hereunder, (ii) the amount of any
principal or interest due and payable or to become due and payable from the
Borrower to each Lender hereunder and (iii) the amount of any sum received by
the Administrative Agent hereunder from the Borrower or any Guarantor and each
Lender's share thereof.
(c) The entries made in the accounts maintained pursuant to paragraphs (a)
and (b) above shall be prima facie evidence of the existence and amounts of the
obligations therein recorded; PROVIDED, HOWEVER, that the failure of any Lender
or the Administrative Agent to maintain such accounts or any error therein shall
not in any manner affect the obligations of the Borrower to repay the Loans in
accordance with their terms.
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14
(d) Notwithstanding any other provision of this Agreement, in the event any
Lender shall request and receive a promissory note payable to such Lender and
its registered assigns, the interests represented by such note shall at all
times (including after any assignment of all or part of such interests pursuant
to Section 9.04) be represented by one or more promissory notes payable to the
payee named therein or its registered assigns.
SECTION 2.05. FEES. (a) The Borrower agrees to pay to each Lender, through
the Administrative Agent, on the last day of March, June, September and December
in each year, and on the date on which the Commitment of such Lender shall be
terminated as provided herein, a commitment fee (a "COMMITMENT FEE") at a rate
per annum equal to the Commitment Fee Percentage from time to time in effect on
the average daily unused amount of the Commitment of such Lender during the
preceding quarter (or shorter period commencing with the Closing Date or ending
with the Maturity Date or the date on which the Commitment of such Lender shall
be terminated). All Commitment Fees shall be computed on the basis of the actual
number of days elapsed in a year of 360 days. The Commitment Fee due to each
Lender shall commence to accrue on the date of this Agreement and shall cease to
accrue on the date on which the Commitment of such Lender shall be terminated as
provided herein.
(b) The Commitment Fees shall be paid on the dates due, in immediately
available funds, to the Administrative Agent for distribution as appropriate
among the Lenders. The Administrative Agent's Fees shall be paid on the dates
due, in immediately available funds, as set forth in the Fee Letter. Once paid,
none of the Fees shall be refundable under any circumstances.
SECTION 2.06. INTEREST ON LOANS. (a) Subject to the provisions of
Section 2.07, the Loans comprising each ABR Borrowing shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 365
or 366 days, as the case may be, when determined by reference to the Prime Rate
and over a year of 360 days at all other times) at a rate per annum equal to the
Alternate Base Rate.
(b) Subject to the provisions of Section 2.07, the Loans comprising each
Eurodollar Borrowing shall bear interest (computed on the basis of the actual
number of days elapsed over a year of 360 days) at a rate per annum equal to the
Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the
Applicable Margin.
(c) Interest on each Loan shall be payable on the Interest Payment Dates
applicable to such Loan except as otherwise provided in this Agreement. The
applicable Alternate Base Rate or Adjusted LIBO Rate for each Interest Period or
day within an Interest Period, as the case may be, shall be determined by the
Administrative Agent, and such determination shall be conclusive absent manifest
error.
SECTION 2.07. DEFAULT INTEREST. If the Borrower shall default in the
payment of the principal of or interest on any Loan or any other amount becoming
due hereunder, by acceleration or otherwise, the Borrower shall on demand from
time to time pay interest, to the extent permitted by law, on such defaulted
amount up to (but not including) the date of actual payment (after as well as
before judgment) at a rate per annum equal to the Alternate Base Rate plus the
Applicable Margin plus 2%.
SECTION 2.08. ALTERNATE RATE OF INTEREST. In the event, and on each
occasion, that on the day two Business Days prior to the commencement of any
Interest Period for a Eurodollar Borrowing the Administrative Agent shall have
determined that dollar deposits in the principal amounts of the Loans comprising
such Borrowing are not generally available in the London interbank market, or
that the rates at which such dollar deposits are being offered will not
adequately and fairly reflect the cost to any Lender of making or maintaining
its Eurodollar Loan during such Interest Period, or that reasonable means do not
exist for ascertaining the Adjusted LIBO Rate, the Administrative Agent shall,
as soon as practicable thereafter, give written notice of such determination to
the Borrower and the Lenders. In the event of any such determination, any
request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.03 or
2.10 shall, until the Administrative Agent shall have advised the Borrower and
the Lenders that the Administrative Agent has determined that the circumstances
giving rise to such notice no longer exist, be deemed to be a request for an
ABR Borrowing. Each determination by the Administrative Agent under this
Section 2.08 shall be conclusive absent manifest error.
SECTION 2.09. TERMINATION AND REDUCTION OF COMMITMENTS. (a) The Commitments
shall be automatically terminated at 12:00 (noon), New York City time, on the
Maturity Date. Notwithstanding the foregoing, the Commitments shall be
automatically terminated at 5:00 p.m., New York City time, on June 30, 1997, if
the Closing Date has not occurred by such time.
(b) Upon at least three Business Days' prior irrevocable written notice to
the Administrative Agent, the Borrower may at any time in whole permanently
terminate, or from time to time in part permanently reduce, the Commitments;
PROVIDED, HOWEVER, that each partial reduction of the Commitments shall be in an
integral multiple of $500,000 and in a minimum principal amount of $1,000,000.
(c) Each reduction in the Commitments hereunder shall be made ratably among
the Lenders in accordance with their respective applicable Commitments. The
Borrower shall pay to the Administrative Agent for the account of the Lenders,
on the date of each termination or reduction, the accrued Commitment Fees on the
amount of such Commitments so terminated or reduced through the date of such
termination or reduction.
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15
SECTION 2.10. CONVERSION AND CONTINUATION OF BORROWINGS. The Borrower shall
have the right at any time upon prior irrevocable notice to the Administrative
Agent (i) not later than 12:00 (noon), New York City time, one Business Day
prior to conversion, to convert any Eurodollar Borrowing to an ABR Borrowing,
(ii) not later than 10:00 a.m., New York City time, three Business Days prior to
conversion or continuation, to convert any ABR Borrowing into a Eurodollar
Borrowing, or to continue any Eurodollar Borrowing for an additional Interest
Period and (iii) not later than 10:00 a.m., New York City time, three Business
Days prior to conversion, to convert the Interest Period with respect to any
Eurodollar Borrowing to another permissible Interest Period, subject in each
case to the following:
(a) each conversion or continuation shall be made pro rata among the
Lenders in accordance with the respective principal amounts of the Loans
comprising the converted or continued Borrowing;
(b) accrued interest on the Loan (or portion thereof) being converted
shall be paid by the Borrower at the time of conversion;
(c) if any Eurodollar Borrowing is converted at a time other than the
end of the Interest Period applicable thereto, the Borrower shall pay, upon
demand, any amounts due to the Lenders pursuant to Section 2.14;
(d) any portion of a Borrowing maturing or required to be repaid in
less than one month may not be converted into or continued as a Eurodollar
Borrowing;
(e) any portion of a Eurodollar Borrowing that cannot be converted
into or continued as a Eurodollar Borrowing by reason of clause (d) above
shall be automatically converted at the end of the Interest Period in
effect for such Borrowing into an ABR Borrowing;
(f) no Interest Period may be selected for any Eurodollar Borrowing
that would end later than the Maturity Date; and
(g) no ABR Borrowing may be converted to a Eurodollar Borrowing on any
date prior to the 30th day following the Closing Date without the prior
written consent of the Administrative Agent.
Each notice pursuant to this Section 2.10 shall be irrevocable and shall
refer to this Agreement and specify (i) the identity and amount of the Borrowing
that the Borrower requests be converted or continued, (ii) whether such
Borrowing is to be converted to or continued as a Eurodollar Borrowing or an
ABR Borrowing, (iii) if such notice requests a conversion, the date of such
conversion (which shall be a Business Day) and (iv) if such Borrowing is to be
converted to or continued as a Eurodollar Borrowing, the Interest Period with
respect thereto. If no Interest Period is specified in any such notice with
respect to any conversion to or continuation as a Eurodollar Borrowing, the
Borrower shall be deemed to have selected an Interest Period of one month's
duration. The Administrative Agent shall advise the other Lenders of any notice
given pursuant to this Section 2.10 and of each Lender's portion of any
converted or continued Borrowing. If the Borrower shall not have given notice in
accordance with this Section 2.10 to continue any Borrowing into a subsequent
Interest Period (and shall not otherwise have given notice in accordance with
this Section 2.10 to convert such Borrowing), such Borrowing shall, at the end
of the Interest Period applicable thereto (unless repaid pursuant to the terms
hereof), automatically be continued into a new Interest Period as an ABR
Borrowing.
SECTION 2.11. PREPAYMENT. (a) The Borrower shall have the right at any time
and from time to time to prepay any Borrowing, in whole or in part, upon at
least three Business Days' prior written notice (or telephone notice promptly
confirmed by written notice) to the Administrative Agent; PROVIDED, HOWEVER,
that each partial prepayment pursuant to this paragraph (a) shall be in an
amount that is an integral multiple of $500,000 and not less than $1,000,000.
(b) On the date of any termination or reduction of the Commitments pursuant
to Section 2.09, the Borrower shall pay or prepay so much of the Borrowings as
shall be necessary in order that the aggregate principal amount of the Loans
outstanding will not exceed the aggregate Commitments after giving effect to
such termination or reduction.
(c) To the extent that the Borrower shall have redeemed, purchased, retired
or otherwise acquired for value shares of its Class A Common Stock in accordance
with the terms of the Stock Option Plan and pursuant to Section 6.06(c) for an
aggregate purchase price in excess of $5,000,000, then the Borrower shall reduce
the Commitments in an aggregate principal amount equal to such excess. To the
extent that, following any such reduction of the Commitments, the aggregate
Borrowings then outstanding shall exceed the aggregate amount of Commitments
then remaining, the Borrower shall prepay the Borrowings in a principal amount
equal to such excess.
(d) Each notice of prepayment shall specify the prepayment date and the
principal amount of each Borrowing (or portion thereof) to be prepaid, shall be
irrevocable and shall commit the Borrower to prepay such Borrowing by the amount
stated therein on the date stated therein. All prepayments under this Section
2.11 shall be subject to Section 2.14 but otherwise without premium or penalty.
All prepayments under this Section 2.11 shall be accompanied by accrued interest
on the principal amount being prepaid to the date of payment.
<PAGE>
16
SECTION 2.12. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES. (a)
Notwithstanding any other provision herein, if after the date of this Agreement
any change in applicable law or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof (whether or not having the force of
law) shall change the basis of taxation of payments to any Lender of the
principal of or interest on any Eurodollar Loan made by such Lender or any Fees
or other amounts payable hereunder (other than changes in respect of taxes
imposed on the overall net income of such Lender by the jurisdiction in which
such Lender is organized, has its principal office or Applicable Lending Office
or by any political subdivision or taxing authority therein), or shall impose,
modify or deem applicable any reserve, special deposit or similar requirement
against assets of, deposits with or for the account of or credit extended by
such Lender (except any such reserve requirement that is reflected in the
Adjusted LIBO Rate) or shall impose on such Lender or the London interbank
market any other condition affecting this Agreement or Eurodollar Loans made by
such Lender, and the result of any of the foregoing shall be to increase the
cost to such Lender of making or maintaining any Eurodollar Loan or to reduce
the amount of any sum received or receivable by such Lender hereunder (whether
of principal, interest or otherwise) by an amount reasonably deemed by such
Lender to be material, then the Borrower will pay to such Lender upon demand in
accordance with Section 2.12(c) hereof such additional amount or amounts as will
compensate such Lender for such additional costs incurred or reduction suffered.
(b) If any Lender shall have determined that the adoption after the date
hereof of any law, rule, regulation, agreement or guideline regarding capital
adequacy, or any change in any of the foregoing or in the interpretation or
administration of any of the foregoing by any Governmental Authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Lender (or any lending office of such Lender) or
any Lender's holding company with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on such Lender's capital or on the capital of such Lender's holding
company, if any, as a consequence of this Agreement or the Loans made by such
Lender pursuant hereto to a level below that which such Lender or such Lender's
holding company could have achieved but for such applicability, adoption, change
or compliance (taking into consideration such Lender's policies and the policies
of such Lender's holding company with respect to capital adequacy) by an amount
reasonably deemed by such Lender to be material, then from time to time the
Borrower shall pay to such Lender such additional amount or amounts as will
compensate such Lender or such Lender's holding company in accordance with
Section 2.12(c) hereof for any such reduction suffered.
(c) A certificate of each Lender setting forth in reasonable detail such
amount or amounts and the calculations thereof as shall be necessary to
compensate such Lender or its holding company as specified in paragraph (a) or
(b) above, as the case may be, shall be delivered to the Borrower and shall be
conclusive absent manifest error. The Borrower shall pay each Lender the amount
shown as due on any such certificate delivered by the Lender within 10 days
after the Borrower's receipt of the same.
(d) Failure on the part of any Lender to demand compensation for any
increased costs or reduction in amounts received or receivable or reduction in
return on capital with respect to any period shall not constitute a waiver of
such Lender's right to demand compensation with respect to such period or any
other period. The protection of this Section 2.12 shall be available to each
Lender regardless of any possible contention of the invalidity or
inapplicability of the law, rule, regulation, guideline or other change or
condition that shall have occurred or been imposed.
(e) Each Lender agrees to use reasonable efforts to avoid or minimize the
amount of any demand for payment from the Borrower under this Section 2.12 and
under Section 2.13, including reasonable efforts to change its lending office or
to transfer its affected Loans to an Affiliate of such Lender; PROVIDED,
HOWEVER, that no Lender shall be required by this paragraph (e) to effect any
change or transfer that is, in the reasonable judgment of such Lender,
disadvantageous to such Lender.
SECTION 2.13. CHANGE IN LEGALITY. (a) Notwithstanding any other provision
herein, if any change in any law or regulation or in the interpretation thereof
by any Governmental Authority charged with the administration or interpretation
thereof shall make it unlawful, in the determination of the Lender, which
determination shall be conclusive absent manifest error, for any Lender to make
or maintain any Eurodollar Loan or to give effect to its obligations as
contemplated hereby with respect to any Eurodollar Loan, then, by written notice
to the Borrower and to the Administrative Agent, such Lender may:
(i) declare that Eurodollar Loans will not thereafter be made by such
Lender hereunder, whereupon any request by the Borrower for a Eurodollar
Borrowing shall, as to such Lender only, be deemed a request for an ABR
Loan unless such declaration shall be subsequently withdrawn; and
(ii) require that all outstanding Eurodollar Loans made by it be
converted to ABR Loans, in which event all such Eurodollar Loans shall be
automatically converted to ABR Loans as of the effective date of such
notice as provided in paragraph (b) below.
In the event any Lender shall exercise its rights under clause (i) or
(ii) above, all payments and prepayments of principal that would otherwise have
been applied to repay the Eurodollar Loans that would have been made by such
Lender or the
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17
converted Eurodollar Loans of such Lender shall instead be applied to repay the
ABR Loans made by such Lender in lieu of, or resulting from the conversion of,
such Eurodollar Loans.
(b) For purposes of this Section 2.13, a notice to the Borrower by any
Lender shall be effective as to each Eurodollar Loan, if lawful, on the last day
of the Interest Period currently applicable to such Eurodollar Loan; in all
other cases such notice shall be effective on the date of receipt by the
Borrower.
SECTION 2.14. INDEMNITY. The Borrower shall indemnify each Lender against
any reasonable loss or expense that such Lender may sustain or incur as a
consequence of (a) any failure by the Borrower to fulfill on the date of any
borrowing hereunder the applicable conditions set forth in Article IV, (b) any
failure by the Borrower to borrow, refinance, convert or continue any Loan
hereunder after irrevocable notice of such borrowing, refinancing, conversion or
continuation has been given pursuant to Section 2.03 or 2.10, (c) any payment,
prepayment or conversion of a Eurodollar Loan required by any other provision of
this Agreement or otherwise made or deemed made on a date other than the last
day of the Interest Period applicable thereto or (d) any default in payment or
prepayment of the principal amount of any Loan or any part thereof or interest
accrued thereon, as and when due and payable (at the due date thereof, whether
by scheduled maturity, acceleration, irrevocable notice of prepayment or
otherwise), including, in each such case, any loss or reasonable expense
sustained or incurred or to be sustained or incurred in liquidating or employing
deposits from third parties acquired to effect or maintain such Loan or any part
thereof as a Eurodollar Loan. Such loss or reasonable expense shall include an
amount equal to the excess, if any, as reasonably determined by such Lender, of
(a) its cost of obtaining the funds for the Loan being paid, prepaid, converted
or not borrowed, converted or continued (assumed to be the Adjusted LIBO Rate
applicable thereto) for the period from the date of such payment, prepayment,
conversion or failure to borrow, convert or continue to the last day of the
Interest Period for such Loan (or, in the case of a failure to borrow, convert
or continue, the Interest Period for such Loan that would have commenced on the
date of such failure) over (b) the amount of interest (as reasonably determined
by such Lender) that would be realized by such Lender in reemploying the funds
so paid, prepaid, converted or not borrowed, converted or continued for such
period or Interest Period, as the case may be. A certificate of any Lender
setting forth any amount or amounts that such Lender is entitled to receive
pursuant to this Section 2.14 and explaining in reasonable detail the basis for
calculating such amount or amounts (provided that no Lender shall be required to
match or trace deposits funding any Loan) shall be delivered to the Borrower and
shall be conclusive absent manifest error.
SECTION 2.15. PRO RATA TREATMENT. Except as required under Section 2.13 and
Section 2.19, each Borrowing, each payment or prepayment of principal of any
Borrowing, each payment of interest on the Loans, each payment of the Commitment
Fees, each reduction of the Commitments and each refinancing of any Borrowing
with, conversion of any Borrowing to or continuation of any Borrowing as a
Borrowing of any Type shall be allocated pro rata among the Lenders in
accordance with their respective Commitments (or, if such Commitments shall have
expired or been terminated, in accordance with the respective principal amounts
of their outstanding Loans). Each Lender agrees that in computing such Lender's
portion of any Borrowing to be made hereunder, Chase may, in its discretion,
round each Lender's percentage of such Borrowing, computed in accordance with
Section 2.01, to the next higher or lower whole dollar amount.
SECTION 2.16. SHARING OF SETOFFS. Each Lender agrees that if it shall,
through the exercise of a right of banker's lien, setoff or counterclaim against
the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of
the United States Code or other security or interest arising from, or in lieu
of, such secured claim, received by such Lender under any applicable bankruptcy,
insolvency or other similar law or otherwise, or by any other means, obtain
payment (voluntary or involuntary) in respect of any Loan or Loans as a result
of which the unpaid principal portion of its Loans shall be proportionately less
than the unpaid principal portion of the Loans of any other Lender, it shall be
deemed simultaneously to have purchased from such other Lender at face value,
and shall promptly pay to such other Lender the purchase price for, a
participation in the Loans of such other Lender, so that the aggregate unpaid
principal amount of the Loans and participations in Loans held by each Lender
shall be in the same proportion to the aggregate unpaid principal amount of all
Loans then outstanding as the principal amount of its Loans prior to such
exercise of banker's lien, setoff or counterclaim or other event was to the
principal amount of all Loans outstanding prior to such exercise of banker's
lien, setoff or counterclaim or other event; PROVIDED, HOWEVER, that, if any
such purchase or purchases or adjustments shall be made pursuant to this
Section 2.16 and the payment giving rise thereto shall thereafter be recovered,
such purchase or purchases or adjustments shall be rescinded to the extent of
such recovery and the purchase price or prices or adjustment restored without
interest. To the extent permitted by applicable law, the Borrower expressly
consents to the foregoing arrangements and agrees that any Lender holding a
participation in a Loan deemed to have been so purchased may exercise any and
all rights of banker's lien, setoff or counterclaim with respect to any and all
moneys owing by the Borrower to such Lender by reason thereof as fully as if
such Lender had made a Loan directly to the Borrower in the amount of such
participation.
SECTION 2.17. PAYMENTS. (a) The Borrower shall make each payment (including
principal of or interest on any Borrowing or any Fees or other amounts)
hereunder and under any other Loan Document not later than 12:00 (noon), New
York City time, on the date when due in dollars to Chase at 270 Park Avenue, New
York, New York 10017.
(b) Whenever any payment (including principal of or interest on any
Borrowing or any Fees or other amounts) hereunder or under any other Loan
Document shall become due, or otherwise would occur, on a day that is not a
Business Day, such payment may be made on the next succeeding Business Day
(unless, in the case of a Eurodollar Borrowing
<PAGE>
18
only, such next succeeding Business Day would fall in the next calendar month,
in which case such payment shall be made on the next preceding Business Day),
and such extension of time shall in such case be included in the computation of
interest or Fees, if applicable.
SECTION 2.18. TAXES. (a) Any and all payments by the Borrower hereunder
shall be made, in accordance with Section 2.17, free and clear of and without
deduction for any and all present or future taxes, levies, imposts, deductions,
charges or withholdings, and all liabilities with respect thereto, excluding
(i) income taxes and franchise taxes imposed on the net or gross income or gross
receipts (but not including any such tax in the nature of a withholding tax) of
the Administrative Agent or any Lender (or any transferee or assignee thereof,
including a participation holder (any such entity being called a "TRANSFEREE")),
by the jurisdiction under the laws of which the Administrative Agent or any such
Lender (or Transferee) is organized or has its Applicable Lending Office or any
political subdivision of or within any of the foregoing and (ii) taxes that
would not have been imposed if the only connection between the Administrative
Agent or any Lender (or Transferee) and the jurisdiction imposing such taxes
were activities of the Administrative Agent or such Lender (or Transferee)
pursuant to or in respect of this Agreement (including entering into, lending
money or extending credit pursuant to, receiving payments under or enforcing
this Agreement) and the activities of such party pursuant to or in respect of
similar agreements (all such nonexcluded taxes, levies, imposts, deductions,
charges, withholdings and liabilities, collectively or individually, "TAXES").
If the Borrower shall be required to deduct any Taxes from or in respect of any
sum payable hereunder to any Lender (or any Transferee) or the Administrative
Agent, (i) the sum payable shall be increased by the amount (an "ADDITIONAL
AMOUNT") necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section 2.18) such
Lender (or Transferee) or Administrative Agent (as the case may be) shall
receive an amount equal to the sum it would have received had no such deductions
been made, (ii) the Borrower shall make such deductions and (iii) the Borrower
shall pay the full amount deducted to the relevant Governmental Authority in
accordance with applicable law.
(b) In addition, the Borrower agrees to pay to the relevant Governmental
Authority in accordance with applicable law any current or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement or any
other Loan Document ("OTHER TAXES").
(c) The Borrower will indemnify each Lender (or Transferee) and
Administrative Agent for the full amount of Taxes and Other Taxes paid by such
Lender (or Transferee) or Administrative Agent, as the case may be, and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted by the relevant taxing authority or other Governmental
Authority. Such indemnification shall be made within 30 days after the date any
Lender (or Transferee) or the Administrative Agent, as the case may be, makes
written demand therefor; but in no event shall such indemnification be required
to be made prior to five days before the date such Lender (or Transferee) or the
Administrative Agent, as the case may be, pays such Taxes or Other Taxes to the
relevant taxing authority or other Governmental Authority. Each Lender (or
Transferee) or Administrative Agent shall make written demand for such
indemnification no later than 180 days after the earlier of (i) the date on
which such Lender (or Transferee) or Administrative Agent makes such payment of
Taxes or Other Taxes and (ii) the date on which such relevant taxing authority
or other Governmental Authority makes written demand upon such Lender (or
Transferee) or Administrative Agent for payment of such Taxes or Other Taxes.
(d) If a Lender (or Transferee) or Administrative Agent shall become aware
that it is entitled to receive a refund or credit from a Governmental Authority
in respect of Taxes or Other Taxes as to which it has been indemnified by the
Borrower pursuant to this Section 2.18, it shall promptly notify the Borrower of
the availability of such refund and shall, within 30 days after receipt of a
request by the Borrower, make a claim to such Governmental Authority for such
refund or credit at the Borrower's expense. If any Lender (or Transferee) or
Administrative Agent receives a refund or credit in respect of any Taxes or
Other Taxes as to which it has been indemnified by the Borrower pursuant to this
Section 2.18 or with respect to which the Borrower has paid additional amounts
pursuant to this Section 2.18, it shall promptly notify the Borrower of such
refund or credit and shall within 30 days from the date of receipt of such
refund or benefit of such credit pay over the amount of such refund or benefit
of such credit (including any interest paid or credited by the relevant
Governmental Authority with respect to such refund or credit) to the Borrower
(but only to the extent of indemnity payments made, or additional amounts paid,
by the Borrower under this Section 2.18 with respect to Taxes or Other Taxes
giving rise to such refund or credit), net of all out-of-pocket expenses of such
Lender (or Transferee) or Administrative Agent and without interest; PROVIDED,
HOWEVER, that the Borrower, upon the request of such Lender (or Transferee) or
Administrative Agent, agrees to repay the amount paid over to the Borrower (plus
penalties, interest or other charges) to such Lender (or Transferee) or
Administrative Agent in the event such Lender (or Transferee) or Administrative
Agent is required to repay such refund or credit to such Governmental Authority.
(e) As soon as practicable after the date of any payment of Taxes or Other
Taxes by the Borrower to the relevant Governmental Authority, the Borrower will
furnish to Chase, at its address referred to in Section 9.01, the original or a
certified copy of a receipt issued by such Governmental Authority evidencing
payment thereof to the extent such receipt is legally available.
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19
(f) Without prejudice to the survival of any other agreement contained
herein, the agreements and obligations contained in this Section 2.18 shall
survive the payment in full of the principal of and interest on all Loans made
hereunder.
(g) Each Lender (or Transferee) that is organized under the laws of a
jurisdiction outside the United States, any State thereof or the District of
Columbia (a "NON-U.S. BANK") shall deliver to the Borrower (i) two copies of
either United States Internal Revenue Service Form 1001 or Form 4224 or (ii) in
the case of a Non-U.S. Bank claiming exemption from U.S. Federal withholding tax
under Section 871(h) or 881(c) of the Code, with respect to payments of
"portfolio interest", a Form W-8 or any subsequent versions thereof or
successors thereto and a certificate representing that such Non-U.S. Bank is not
a bank for purposes of Section 881(c) of the Code, is not a 10-percent
shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the
Borrower and is not a controlled foreign corporation related to the Borrower
(within the meaning of Section 864(d)(4) of the Code)), in either case properly
completed and duly executed by such Non-U.S. Bank claiming complete exemption
from, or (in the case of a Transferee, an assignment to a New Lending Office (as
defined below) or any form delivered pursuant to the second succeeding sentence)
reduced rate of, U.S. Federal withholding tax on payments by the Borrower under
this Agreement and the other Loan Documents. Such forms shall be delivered by
each Non-U.S. Bank on or before the date it becomes a party to this Agreement
(or, in the case of a Transferee that is a participation holder, on or before
the date such participation holder becomes a Transferee hereunder) and on or
before the date, if any, such Non-U.S. Bank changes its Applicable Lending
Office by designating a different lending office (a "NEW LENDING OFFICE"). In
addition, each Non-U.S. Bank shall deliver such forms promptly upon the
obsolescence or invalidity of any form previously delivered by such Non-U.S.
Bank. Notwithstanding any other provision of this Section 2.18(g), other than on
the date of this Agreement, a Non-U.S. Bank shall not be required to deliver any
form pursuant to this Section 2.18(g) that such Non-U.S. Bank is not legally
able to deliver. Each Lender (or Transferee) that is organized under the laws of
the United States or any state thereof or the District of Columbia shall deliver
to the Borrower an original copy of Internal Revenue Service Form W-9 (or
applicable successor form) properly completed and duly executed by such Lender
(or Transferee).
(h) The Borrower shall not be required to indemnify any Non-U.S. Bank, or
to pay any additional amounts to any Non-U.S. Bank, in respect of United States
Federal withholding tax pursuant to paragraph (a) or (c) of this Section 2.18 to
the extent that: (i) the obligation to withhold amounts with respect to United
States Federal withholding tax or make indemnification existed on the date such
Non-U.S. Bank became a party to this Agreement (or, in the case of a Transferee
that is a participation holder, on the date such participation holder became a
Transferee hereunder) or, with respect to payments to a New Lending Office, the
date such Non-U.S. Bank designated such New Lending Office with respect to a
Loan (or, in each case, arose thereafter as a result of a change in the place of
incorporation or organization of such Non-U.S. Bank, its principal place of
business or the nature of its business operations); PROVIDED, HOWEVER, that this
clause (i) shall not apply to any Transferee or New Lending Office that becomes
a Transferee or New Lending Office as a result of an assignment, participation,
transfer or designation made at the request of the Borrower; and PROVIDED
FURTHER, HOWEVER, that this clause (i) shall not apply to the extent the
indemnity payment or the additional amounts any Transferee, or Lender (or
Transferee) through a New Lending Office, would be entitled to receive (without
regard to this clause (i)) do not exceed the indemnity payment or additional
amounts that the Lender making the assignment, participation or transfer to such
Transferee, or the Lender (or Transferee) making the designation of such New
Lending Office, would have been entitled to receive in the absence of such
assignment, participation, transfer or designation; or (ii) the obligation to
make such indemnification or to pay such additional amounts would not have
arisen but for a failure by such Non-U.S. Bank to comply with the provisions of
paragraph (g) above.
(i) Any Lender (or Transferee) or Administrative Agent claiming any
indemnity payments or additional amounts payable pursuant to this Section 2.18
shall use reasonable efforts (consistent with legal and regulatory restrictions)
to take any action to avoid or minimize any amounts that otherwise may be
payable by the Borrower pursuant to this Section 2.18, including filing any
certificate or document reasonably requested in writing by the Borrower or
changing the jurisdiction of its Applicable Lending Office, if the taking of
such action would avoid the need for or reduce the amount of any such indemnity
payment or additional amounts that may thereafter accrue and would not, in the
good faith judgment of such Lender (or Transferee) or Administrative Agent, be
otherwise disadvantageous to such Lender (or Transferee) or Administrative
Agent.
(j) Nothing contained in this Section 2.18 shall require any Lender (or
Transferee) or the Administrative Agent to make available any of its tax returns
(or any other information relating to its taxes which it deems to be
confidential).
SECTION 2.19. TERMINATION OR ASSIGNMENT OF COMMITMENTS UNDER CERTAIN
CIRCUMSTANCES. In the event that (a) any Lender shall have delivered a notice or
certificate pursuant to Section 2.12 or 2.13; (b) the Borrower shall be required
to make additional payments to any Lender under Section 2.18; (c) any Lender
shall have refused (and shall not have retracted such refusal) to make available
any Loan on its part to be made available hereunder, other than solely as a
result of the failure of any condition set forth in Article IV to be satisfied
(such condition not having been effectively waived in accordance with the terms
hereof); (d) any Lender shall have notified the Administrative Agent or the
Borrower (and shall not have retracted such notification) that it does not
intend to comply with any of its obligations hereunder, other than solely as a
result of the failure of any condition set forth in Article IV to be satisfied
(such condition not having been effectively waived in accordance with the terms
hereof); or (e) either (A) a receiver, trustee, conservator or other custodian
shall have been appointed with respect to any Lender or its property at the
direction or request of any regulatory agency
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20
or authority or (B) an order, action, process or proceeding of the type
contemplated by paragraph (g) or (h) of Article VII shall be commenced by or
against such Lender (or such Lender shall have consented to any such order,
action, process or proceeding), the Borrower shall have the right, at its own
expense, upon notice to such Lender and the Administrative Agent, to require
such Lender to transfer and assign without recourse (in accordance with and
subject to the restrictions contained in Section 9.04) all its interests, rights
and obligations under this Agreement to another financial institution that shall
assume such obligations; PROVIDED, HOWEVER, that (a) no such termination or
assignment shall conflict with any law, rule or regulation or order of any
Governmental Authority and (b) the Borrower or the assignee, as the case may be,
shall pay to the affected Lender in immediately available funds on the date of
such termination or assignment the principal of and interest accrued to the date
of payment on the Loans made by it hereunder and all other amounts accrued for
its account or owed to it hereunder.
SECTION 2.20. NOTICE OF COSTS. Neither the Administrative Agent nor any
Lender shall be entitled to compensation under Section 2.12 for any costs
incurred or reductions suffered with respect to any date unless it shall have
notified the Borrower that it will demand compensation for such costs or
reductions suffered not more than 180 days after the later of (a) such date and
(b) the date on which such Lender or Administrative Agent shall have become
aware of such costs or reductions.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to each of the Lenders that:
SECTION 3.01. ORGANIZATION; POWERS. The Borrower and each of the
Subsidiaries (a) is a corporation or limited partnership duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, (b) 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, (c) 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 (d) 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 and, in the case of the Borrower, to borrow hereunder.
SECTION 3.02. AUTHORIZATION. The Transactions (a) have been duly authorized
by all requisite corporate and, if required, stockholder action and (b) will not
(i) violate (A) any provision of law, 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 (B) 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, (ii) 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 (iii) 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.
SECTION 3.03. ENFORCEABILITY. This Agreement has been duly executed and
delivered by the Borrower and constitutes, and each other Loan Document when
executed and delivered by the Borrower will constitute, a legal, valid and
binding obligation of the Borrower enforceable against the Borrower 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).
SECTION 3.04. GOVERNMENTAL APPROVALS. 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 the Transactions, except (a) such as
have been made or obtained and are in full force and effect, (b) filings and
other actions required pursuant to the Securities Act of 1933, the Securities
Exchange Act of 1934 and the respective rules and regulations thereunder, and
filings and other actions required pursuant to state securities or blue sky
laws, in each case to the extent that such filings and other actions are not
required to have been made or taken prior to the date hereof, (c) filings and
other actions required pursuant to any law, rule or regulation of any insurance
Governmental Authority, to the extent that either (i) such filings and other
actions are not required to have been made or taken prior to the Closing Date or
(ii) the failure to make such filings or take such other actions would not
result in a Material Adverse Effect and (d) any approvals that may be required
by the New York and Arizona insurance Governmental Authorities 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 pursuant to the
Pledge Agreement.
SECTION 3.05. FINANCIAL STATEMENTS. The Borrower has heretofore furnished
to the Lenders (i) the consolidated balance sheet and statements of earnings and
cash flow of the Borrower and its Subsidiaries (A) as of and for the fiscal
years ended December 31, 1995, and December 31, 1996, prepared in accordance
with GAAP and audited by and accompanied by the opinion of Ernst & Young LLP,
independent public accountants and (B) as of and for the fiscal quarter and the
portion of the fiscal year ended March 31, 1997, prepared in accordance with
GAAP and certified by its chief financial officer and (ii) the Annual Statement
of each of the Insurance Subsidiaries for the year ended December 31, 1996, and
the Quarterly Statement of each of the Insurance Subsidiaries for the fiscal
quarter ended March 31, 1997 in
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21
each case prepared in accordance with SAP and filed with such Insurance
Subsidiary's Applicable Insurance Regulatory Authority. All the foregoing
financial statements that were prepared in accordance with GAAP present
fairly the financial condition and results of operations of the Borrower and
its Subsidiaries and all of the foregoing statements that were prepared in
accordance with SAP present fairly the statutory assets, liabilities, capital
and surplus, results of operations and cash flows of the applicable Insurance
Subsidiary, as of such dates and for such periods, subject, in the case of
any unaudited interim financial statements, to changes resulting from normal
year-end adjustments. All the foregoing balance sheets and the notes thereto
disclose all material liabilities, direct or contingent, of the Borrower and
its Subsidiaries or such Insurance Subsidiary, as the case may be, as of the
dates thereof, as required in accordance with GAAP or SAP, as applicable.
SECTION 3.06. NO MATERIAL ADVERSE CHANGE. Except for changes disclosed in
this Agreement, the Schedules or the statements referred to in Section 3.05
(including the notes thereto), there has been no material adverse change in the
business, assets, operations or condition, financial or otherwise, of the
Borrower and the Subsidiaries, taken as a whole, since December 31, 1996.
SECTION 3.07. TITLE TO PROPERTIES; POSSESSION UNDER LEASES. (a) Except as
set forth on Schedule 3.07, each of the Borrower and the Subsidiaries has good
and marketable title to, or valid leasehold interests in, all its material
properties and assets, except for minor defects in title that do not interfere
with its ability to conduct its business as currently conducted or to utilize
such properties and assets for their intended purposes. All such material
properties and assets are free and clear of Liens, other than Liens expressly
permitted by Section 6.02.
(b) Each of the Borrower and the Subsidiaries has complied with all
obligations under all material leases to which it is a party and all such leases
are in full force and effect. Each of the Borrower and the Subsidiaries enjoys
peaceful and undisturbed possession under all such material leases under which
it is a lessee.
SECTION 3.08. SUBSIDIARIES. Schedule 3.08 sets forth as of the Closing Date
a list of all Subsidiaries of the Borrower and the percentage ownership interest
of the Borrower therein. All outstanding shares of the capital stock of each
Subsidiary are fully paid and nonassessable and are owned beneficially and of
record as set forth in Schedule 3.08, free and clear of all Liens and
encumbrances whatsoever, except such as are created pursuant to the Security
Documents. There are no outstanding subscriptions, options, warrants, calls,
rights (including preemptive rights) or other agreements or commitments of any
nature relating to any capital stock of any Subsidiary.
SECTION 3.09. LITIGATION; COMPLIANCE WITH LAWS. (a) Except as set forth on
Schedule 3.09(a), there are not any actions, suits or proceedings at law or in
equity or by or before any Governmental Authority now pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower or any
Subsidiary or any business, property or rights of any such Person (i) that
involve any Loan Document or the Transactions or (ii) as to which there is a
reasonable possibility of an adverse determination and which, if adversely
determined, could reasonably be expected to result, individually or in the
aggregate, in a Material Adverse Effect.
(b) Except as set forth on Schedule 3.09(b), neither the Borrower nor any
Subsidiary is in violation of any law, rule or regulation, nor is the Borrower
or any Subsidiary in default with respect to any judgment, writ, injunction or
decree of any Governmental Authority, including any Applicable Insurance
Regulatory Authority of any Insurance Subsidiary, where such violation or
default could reasonably be expected to result in a Material Adverse Effect.
None of the Transactions will violate any judgment, writ, injunction or decree
of any Governmental Authority, including any Applicable Insurance Regulatory
Authority of any Insurance Subsidiary, where such violation or default could
reasonably be expected to result in a Material Adverse Effect.
SECTION 3.10. AGREEMENTS. Except as set forth on Schedule 3.10, neither the
Borrower nor any of its Subsidiaries is in default in any manner under (a) any
provision of any indenture or other agreement or instrument evidencing
Indebtedness or (b) any other material agreement or instrument to which it is a
party or by which it or any of its properties or assets are or may be bound,
where, in the case of clause (a) or (b), such default could reasonably be
expected to result in a Material Adverse Effect.
SECTION 3.11. FEDERAL RESERVE REGULATIONS. (a) Neither the Borrower nor any
of the Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of buying or
carrying Margin Stock.
(b) No part of the proceeds of any Loan will be used, whether directly or
indirectly, and whether immediately, incidentally or ultimately, (i) to buy or
carry Margin Stock or to extend credit to others for the purpose of buying or
carrying Margin Stock or to refund indebtedness originally incurred for such
purpose, or (ii) for any purpose that entails a violation of, or is inconsistent
with, the provisions of the Regulations of the Board, including Regulation G, U
or X.
(c) After giving effect to each Borrowing, not more than 25% of the value
of the assets of the Borrower, on an unconsolidated basis and on a consolidated
basis will be Margin Stock.
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22
SECTION 3.12. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT.
Neither the Borrower nor any Subsidiary (other than SBM Certificate Company) is
(a) an "investment company" as defined in, or subject to regulation under, the
Investment Company Act of 1940 or (b) a "holding company" as defined in, or
subject to regulation under, the Public Utility Holding Company Act of 1935.
SECTION 3.13. USE OF PROCEEDS. The Borrower will use the proceeds of the
Loans only for the purposes specified in the preamble to this Agreement;
PROVIDED, HOWEVER, that no proceeds of the Loans shall be used in violation of
the Investment Company Act of 1940.
SECTION 3.14. TAX RETURNS. Each of the Borrower and the Subsidiaries has
filed or caused to be filed all Federal, state and local tax returns required to
have been filed by it and has paid or caused to be paid all taxes shown to be
due and payable on such returns or on any assessments received by it, except
taxes that are being contested in good faith by appropriate proceedings and for
which the Borrower or the applicable Subsidiary shall have set aside on its
books adequate reserves.
SECTION 3.15. TRUE AND COMPLETE DISCLOSURE. On the Closing Date, all
factual information (taken as a whole) heretofore or contemporaneously furnished
by or on behalf of the Borrower to the Administrative Agent or any
Lender(including all information contained in the Loan Documents and the
Prospectus, as amended by any supplements thereto) for purposes of or in
connection with this Agreement is true and accurate in all material respects on
the date as of which such information is dated or certified and not incomplete
by omitting to state any material fact necessary to make such information (taken
as a whole) not misleading at such time in light of the circumstances under
which such information was provided. On the Closing Date, the projections and
pro forma financial information contained in such information are based on good
faith estimates and assumptions believed by the Borrower to be reasonable as of
the Closing Date, it being recognized by the Administrative Agent and the
Lenders that such projections as to future events are not to be viewed as facts
and that actual results during the period or periods covered by any such
projections may differ from the projected results.
SECTION 3.16. EMPLOYEE BENEFIT PLANS. Each of the Borrower and its ERISA
Affiliates is in compliance in all material respects with the applicable
provisions of ERISA and the regulations and published interpretations
thereunder. No Reportable Event has occurred in respect of any Plan of the
Borrower or any ERISA Affiliate. The present value of all benefit liabilities
under each Plan (based on those assumptions used to fund such Plan) did not, as
of the last annual valuation date applicable thereto, exceed by more than
$20,000,000 the value of the assets of such Plan, and the present value of all
benefit liabilities of all underfunded Plans (based on those assumptions used to
fund each Plan) did not, as of the last valuation dates applicable thereto,
exceed by more than $25,000,000 the value of the assets of all such Plans.
Neither the Borrower nor any ERISA Affiliate has incurred any Withdrawal
Liability that could reasonably be expected to result in a Material Adverse
Effect. Neither the Borrower nor any ERISA Affiliate has received any
notification that any Multiemployer Plan is in reorganization or has been
terminated within the meaning of Title IV of ERISA, and no Multiemployer Plan is
reasonably expected to be in reorganization or to be terminated where such
reorganization or termination has resulted or could reasonably be expected to
result in an increase in the contributions required to be made to such Plan or
otherwise, in a Material Adverse Effect.
SECTION 3.17. ENVIRONMENTAL AND SAFETY MATTERS. The Borrower and each
Subsidiary has complied in all material respects with all Federal, state, local
and other statutes, ordinances, orders, judgments, rulings and regulations
relating to environmental pollution or to environmental regulation or control or
to employee health or safety. Neither the Borrower nor any Subsidiary has
received notice of any material failure so to comply. The Borrower's and the
Subsidiaries' plants do not manage any hazardous wastes, hazardous substances,
hazardous materials, toxic substances, toxic pollutants or substances similarly
denominated, as those terms or similar terms are used in the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response
Compensation and Liability Act, the Hazardous Materials Transportation Act, the
Toxic Substance Control Act, the Clean Air Act, the Clean Water Act or any other
applicable law relating to environmental pollution or employee health and
safety, in violation of any law or any regulations promulgated pursuant thereto,
which violation would result in a Material Adverse Effect. The Borrower is aware
of no events, conditions or circumstances involving environmental pollution or
contamination or employee health or safety that could reasonably be expected to
result in material liability on the part of the Borrower or any Subsidiary.
SECTION 3.18. SOLVENCY. (a) On and as of the Closing Date, the fair salable
value of the assets of the Borrower and the Subsidiaries, taken as a whole and
on a consolidated basis, exceeds the amount that will be required to be paid on
or in respect of the existing debts and other liabilities (including contingent
liabilities) of the Borrower and the Subsidiaries, taken as a whole and on a
consolidated basis, as they become absolute and mature.
(b) On and as of the Closing Date, the capital of the Borrower and the
Subsidiaries, taken as a whole and on a consolidated basis, do not constitute
unreasonably small capital for the Borrower and the Subsidiaries, taken as a
whole on a consolidated basis, to carry out their respective businesses as now
conducted and as proposed to be conducted, including the capital needs of the
Borrower and the Subsidiaries, taking into account the particular capital
requirements of such business and the projected capital requirements and capital
availability thereof.
(c) The Statutory Surplus of each Insurance Subsidiary is in excess of
zero.
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(d) The representations made in this Section 3.18 are made after taking
into consideration and giving effect to the Transactions. To the extent that the
representations made in paragraphs (a), (b) and (d) of this Section 3.18 relate
to any contingent liability, the amount of such contingent liability is computed
as the amount that, based on the Borrower's good faith estimates and assumptions
(made as of the Closing Date and determined in light of all facts and
circumstances known to the Borrower on the Closing Date and, in the case of any
contingent liability incurred in the ordinary course of the Insurance Business,
in accordance with actuarial assumptions used in the insurance industry),
represents the portion of such contingent liability in effect on the Closing
Date that can reasonably be expected, on the Closing Date, to become an actual
or matured liability. The Borrower is not aware as of the Closing Date of any
event, condition or circumstance that would make such estimates and assumptions
unreasonable.
SECTION 3.19. ABSENCE OF CERTAIN RESTRICTIONS. Except as required by law,
rule or regulation or by any Governmental Authority, including any Applicable
Insurance Regulatory Authority, no indenture, certificate of designation for
preferred stock, agreement or instrument to which any Material Subsidiary is a
party will, directly or indirectly, prohibit or restrain the payment of
dividends by such Subsidiary. As of the Closing Date, no such indenture,
certificate, agreement or instrument to which the Borrower or any Material
Subsidiary is a party will require the prepayment of any amounts owed by the
Borrower or such Subsidiary as a result of the consummation of the Transactions.
SECTION 3.20. LABOR MATTERS. Except as set forth on Schedule 3.20, there
are no strikes or other labor disputes against the Borrower or any of the
Subsidiaries pending or, to the Borrower's knowledge, threatened. The hours
worked and payments made to employees of the Borrower and each of the
Subsidiaries have not been in violation in any material respect of the Fair
Labor Standards Act or any other applicable law dealing with such matters. All
material payments due from the Borrower or any of the Subsidiaries, or for which
any claim may be made against the Borrower or any of the Subsidiaries, on
account of wages and employee health and welfare insurance and other benefits
have been paid or accrued as a liability on the books of the Borrower or such
Subsidiary.
SECTION 3.21. REINSURANCE AGREEMENTS. Exhibit G summarizes all the
Reinsurance Agreements to which any Insurance Subsidiary is a party on the
Closing Date and the Borrower has delivered copies of each such Reinsurance
Agreement with respect to which the Administrative Agent requested copies. On
the Closing Date, each such Reinsurance Agreement is in full force and effect
and none of the Borrower, any Subsidiary or, to the best of the knowledge of the
Borrower and the Subsidiaries, any other Person party thereto is in default in
respect of any material provision thereof.
SECTION 3.22. RESERVES. All reserves and other liabilities with respect to
insurance policies and annuity contracts reflected in each Annual Statement or
Quarterly Statement of each Insurance Subsidiary filed with an Applicable
Insurance Regulatory Authority since March 31, 1997, or delivered to any Lender
or the Administrative Agent ("RESERVE LIABILITIES") (a) were determined in
accordance with generally accepted actuarial standards consistently applied,
(b) were fairly stated in accordance with sound actuarial principles, (c) were
based on actuarial assumptions that were in accordance with or more conservative
than those appropriate (in the reasonable determination of the applicable
Insurance Subsidiary) for the related insurance policies and annuity contracts,
(d) met the requirements of the insurance laws, rules and regulations of their
respective states of domicile and met in all material respects the requirements
of the insurance laws, rules and regulations of each other jurisdiction in which
they are licensed to write life insurance or issue annuities and (e) reflected
(on a net basis) the related reinsurance, coinsurance and other similar
agreement of such Insurance Subsidiary. Adequate provision for all such Reserve
Liabilities has been made (under generally accepted actuarial principles
consistently applied) to cover the total amount of all reasonably anticipated
matured and unmatured benefits, claims and other liabilities of such Insurance
Subsidiary under all insurance policies and annuity contracts under which such
Insurance Subsidiary has any liability (including any liability arising under or
as a result of any reinsurance, coinsurance or other similar agreement) on the
respective dates of the Annual Statements or Quarterly Statements based on
commonly accepted actuarial assumptions as to future contingencies that are
reasonable and appropriate under the circumstances.
SECTION 3.23. CAPITALIZATION. (a) As of the Closing Date, the authorized
capital stock of the Borrower consists of 150,000,000 shares of Class A Common
Stock, 50,000,000 shares of Class B Common Stock and 10,000,000 shares of
Preferred Stock. Of such authorized capital stock, 14,543,619 shares of Class A
Common Stock, assuming no exercise of the Overallotment Option, 8,712,352 shares
of Class B Common Stock and 2,000,000 shares of Preferred Stock will be issued
and outstanding as of the Closing Date.
(b) The authorized capital stock of Holdings consists of 50,000 shares of
common stock, par value $1.00 per share. Of such authorized capital stock,
1,000 shares are issued and outstanding, fully paid and nonassessable and owned
beneficially and of record by the Borrower, free and clear of all Liens and
encumbrances whatsoever other than the Lien of the Pledge Agreement.
(c) The authorized capital stock of Integrity consists of 1,500,000 shares
of Common Stock, par value $1.33 per share, all of which shares are issued and
outstanding, fully paid and nonassessable and owned beneficially and of record
by Holdings, free and clear of all Liens and encumbrances whatsoever other than
the Lien of the Pledge Agreement.
(d) The authorized capital stock of National Integrity consists of
200,000 shares of Common Stock, par value $10.00 per share, all of which shares
are issued and outstanding, fully paid and nonassessable and owned beneficially
and of record by Integrity, free and clear of all Liens and encumbrances
whatsoever.
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SECTION 3.24. COLLATERAL DOCUMENTS. (a) The security interests created in
favor of Chase for the benefit of the Lenders under the Pledge Agreement
constitute valid, first-priority, perfected security interests in all the
pledgor's directly held capital stock of the Subsidiaries and such stock is not
subject to any Liens of any other Person. No filings or recordings are or will
be required in order to perfect the security interests created under the Pledge
Agreement in such stock.
(b) Upon execution and delivery of the Security Documents (other than the
Pledge Agreement) and the filing of financing statements in the appropriate
jurisdictions, the security interests created in favor of Chase for the benefit
of the Lenders under such Security Documents constitute, and at all times
thereafter will constitute, valid, perfected security interests in the
collateral subject thereto.
ARTICLE IV. CONDITIONS OF LENDING
The obligations of the Lenders to make Loans hereunder are subject to the
satisfaction of the following conditions:
SECTION 4.01. ALL BORROWINGS. On the date of each Borrowing (other than, in
the case of paragraphs (b) and (c) below, a Borrowing in a principal amount such
that, immediately after the making of such Borrowing and all other simultaneous
Borrowings and giving effect to the application of the proceeds thereof, the
aggregate principal amount of all Borrowings hereunder shall not exceed the
aggregate amount of all Borrowings hereunder immediately prior thereto):
(a) The Administrative Agent shall have received a notice of such
Borrowing as required by Section 2.03.
(b) The representations and warranties set forth in Article III hereof
shall be true and correct in all material respects on and as of the date of
such Borrowing with the same effect as though made on and as of such date,
except to the extent such representations and warranties expressly relate
to an earlier date.
(c) At the time of and immediately after such Borrowing, no Event of
Default or Default shall have occurred and be continuing.
Each Borrowing to which the conditions specified in paragraphs (b) and (c) of
this Section 4.01 apply shall be deemed to constitute a representation and
warranty by the Borrower on the date of such Borrowing as to the matters
specified in such paragraphs.
SECTION 4.02. FIRST BORROWING. On the date of the first Borrowing
hereunder:
(a) The Administrative Agent shall have received (i) a favorable
written opinion of Shearman & Sterling, counsel for the Borrower, to the
effect set forth in Exhibit F-1 hereto and (ii) a favorable written opinion
of Robert H. Scott, Esq., General Counsel of the Borrower, to the effect
set forth in Exhibit F-2 hereto, in each case dated the Closing Date and
addressed to the Lenders and the Administrative Agent, and the Borrower
hereby instruct such counsel to deliver such opinions to the Administrative
Agent.
(b) All legal matters incident to this Agreement and the Borrowings
hereunder shall be satisfactory to the Administrative Agent, the Lenders
and to Cravath, Swaine & Moore, counsel for the Administrative Agent.
(c) The Administrative Agent shall have received (i) a copy of the
certificate or articles of incorporation, including all amendments thereto,
of the Borrower, certified as of a recent date by the Secretary of State of
the state of its organization, and a certificate as to the good standing of
the Borrower as of a recent date, from such Secretary of State; (ii) a
certificate of the Secretary or Assistant Secretary of the Borrower dated
the Closing Date and certifying (A) that attached thereto is a true and
complete copy of the by-laws of the Borrower as in effect on the Closing
Date and at all times since a date prior to the date of the resolutions
described in clause (B) below, (B) that attached thereto is a true and
complete copy of resolutions duly adopted by the Board of Directors of the
Borrower authorizing the execution, delivery and performance of the Loan
Documents to which it is a party, the Borrowings hereunder and the other
Transactions, and that such resolutions have not been modified, rescinded
or amended and are in full force and effect, (C) that the certificate or
articles of incorporation of the Borrower have not been amended since the
date of the last amendment thereto shown on the certificate of good
standing furnished pursuant to clause (i) above, and (D) as to the
incumbency and specimen signature of each officer executing any Loan
Document or any other document delivered in connection herewith on behalf
of the Borrower; (iii) a certificate of another officer as to the
incumbency and specimen signature of the Secretary or Assistant Secretary
executing the certificate pursuant to (ii) above; and (iv) such other
documents as the Administrative Agent or Cravath, Swaine & Moore, counsel
for the Administrative Agent, may reasonably request.
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25
(d) The Administrative Agent shall have received a certificate, dated
the Closing Date and signed by a Responsible Officer of the Borrower,
confirming compliance with the conditions precedent set forth in paragraphs
(b) and (c) of Section 4.01.
(e) The Pledged Securities shall have been delivered to Chase, as
representative for the Lenders under the Security Documents, all requisite
Uniform Commercial Code Financing Statements shall have been filed and each
of the Security Documents shall have been duly executed and delivered by
each pledgor or grantor thereunder and shall be in full force and effect.
Upon consummation of the actions set forth in the immediately preceding
sentence, each Security Document shall create in favor of Chase as holder
of the collateral for the Lenders under the Security Documents a perfected
first priority security interest in the collateral subject thereto, subject
to no Liens other than Liens permitted by Section 6.02.
(f) The Lenders shall be reasonably satisfied as to (i) the amount and
nature of the environmental and employee health and safety exposures to
which the Borrower and the Subsidiaries could reasonably be expected to be
subject and (ii) the plans of the Borrower with respect to the reduction of
such exposure.
(g) The aggregate amount of the Statutory Reserves of the Insurance
Subsidiaries (defined and determined, in the case of each Insurance
Subsidiary, in accordance with SAP), after giving effect to the Cash
Contributions, shall not be less than $1,700,000,000 in the aggregate.
(h) The Lenders shall be reasonably satisfied in all material respects
with the management of the Borrower and the arrangements for the retention
of such management, including the form and scope of the Employment
Agreements.
(i) All fees previously agreed upon to be paid to the Lenders shall
have been paid.
(j) The Lenders shall have been satisfied in all material respects
with the provisions of the Preferred Stock as set forth in the Certificate
of Designation, including such provisions relating to dividends and
mandatory and optional redemption, and the Preferred Stock shall have
received a rating of BBB- or higher by each of S&P and Ba1 by Moodys.
(k) All consents, approvals and agreements necessary or, in the
judgment of the Lenders, the Administrative Agent or Cravath, Swaine &
Moore, counsel for the Administrative Agent, advisable for consummation of
the Transactions shall have been obtained and shall be in full force and
effect. In the reasonable judgment of the Lenders and the Administrative
Agent, there shall not be any action, suit, litigation or similar
proceeding at law or in equity or by or before any court or Governmental
Authority pending (i) that would be materially inconsistent with the
assumptions underlying the projections regarding the Borrower and the
Subsidiaries heretofore furnished to the Lenders or (ii) that would
reasonably be expected to have a materially adverse effect on (A) the
business, assets, operations or condition, financial or otherwise,
prospects, or material contracts of the Borrower or any Subsidiary, (B) the
ability of the Borrower to consummate the Transactions or (C) the validity
or enforceability of any of the Loan Documents or the rights, remedies and
benefits available to the Administrative Agent or any Lender under the Loan
Documents.
(l) No judgment, order or decree shall be outstanding, and no action
shall have been taken by any Governmental Authority, that, in the
reasonable judgment of the Lenders, the Administrative Agent or Cravath,
Swaine & Moore, counsel for the Administrative Agent, has or is likely to
have the effect of restraining, preventing or imposing burdensome
conditions upon any of the Transactions.
(m) The Borrower shall have delivered to the Administrative Agent a
letter dated the Closing Date setting forth in reasonable detail the
estimated fees and expenses to be paid by the Borrower in connection with
the Transactions and the Lenders shall have been reasonably satisfied with
the aggregate amount of such fees and expenses.
(n) The Common Stock Offering shall have been completed on terms
reasonably satisfactory to Chase, and the Borrower shall have received net
cash proceeds from the Common Stock Offering of at least $50,000,000.
(o) Up to $38,000,000 drawn under the Loans shall be used to repay in
full all amounts outstanding under the Existing Credit Agreement, and all
commitments to lend under the Existing Credit Agreement shall be
permanently terminated.
(p) The Lenders shall have received a reasonably satisfactory Pro
Forma Consolidated Balance Sheet of the Borrower after giving effect to the
Common Stock Offering and the other transactions contemplated hereby, and
the Lenders shall be reasonably satisfied that such balance sheet is not
inconsistent with the projections heretofore or hereafter furnished to the
Lenders.
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26
(q) Each Insurance Subsidiary shall be rated A- or better by A.M. Best
Company, Inc.
(r) The Administrative Agent shall have received (i) the consolidated
balance sheet and statements of earnings and cash flow of the Borrower and
its Subsidiaries (A) as of and for the fiscal years ended December 31,
1995, and December 31, 1996, prepared in accordance with GAAP and audited
by and accompanied by the opinion of Ernst & Young LLP, independent public
accountants and (B) as of and for the fiscal quarter and the portion of the
fiscal year ended March 31, 1997, prepared in accordance with GAAP and
certified by its chief financial officer and (ii) the Annual Statement of
each of the Insurance Subsidiaries for the year ended December 31, 1996,
and the Quarterly Statement of each of the Insurance Subsidiaries for the
fiscal quarter ended March 31, 1997 in each case prepared in accordance
with SAP and filed with such Insurance Subsidiary's Applicable Insurance
Regulatory Authority.
(s) The Guarantee Agreement shall have been duly executed by Holdings
and Chase, as representative for the Lenders.
(t) The Assignment Agreement shall have been duly executed by the
Borrower, Holdings and Chase, as representative for the Lenders, and
consented to by Integrity and National Integrity.
Notwithstanding the satisfaction of the Lenders with respect to any
matters set forth in this Section 4.02, the Lenders shall at all times be deemed
to have relied on the representations and warranties set forth in this Agreement
and the other Loan Documents.
ARTICLE V. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with each Lender that so long as (a) the
principal of or interest on any Loan shall remain unpaid, (b) any Lender shall
have any Commitment hereunder or (c) any Fees, expenses or other amounts payable
under any Loan Document (if due and payable on the first date that the principal
of and interest on all Loans have been paid in full and the Commitments have
been terminated) shall remain unpaid, unless the Required Lenders shall
otherwise consent in writing, the Borrower will, and will cause each of its
respective Subsidiaries to:
SECTION 5.01. EXISTENCE; BUSINESSES AND PROPERTIES. (a) Do or cause to be
done all things necessary to preserve, renew and keep in full force and effect
its legal existence, except as otherwise expressly permitted under Section 6.05
and with respect to any Material Subsidiary.
(b) (i) Do or cause to be done all things necessary to obtain, preserve,
renew, extend and keep in full force and effect the rights, licenses, permits,
franchises, authorizations, patents, copyrights, trademarks and trade names
material to the conduct of its business; PROVIDED, HOWEVER, that neither the
Borrower, nor any of its Subsidiaries shall be required to preserve any rights,
licenses, permits, franchises, authorizations, patents, copyrights, trademarks
and tradenames if the applicable Board of Directors of the Borrower or any of
its Subsidiaries shall determine the preservation thereof is no longer desirable
in the conduct of the Insurance Business or the Financial Services Business, as
the case may be, and that the loss thereof is not disadvantageous in any
material respect to the Borrower or such Subsidiary or the Lenders; maintain and
operate such business in a manner consistent with the manner permitted under
Section 6.08; (ii) comply in all material respects with all applicable laws,
rules, regulations and orders of any Governmental Authority, whether now in
effect or hereafter enacted; and (iii) at all times maintain and preserve all
property material to the conduct of such business and keep such property in
normal working order and condition (ordinary wear and tear excepted) and from
time to time make, or cause to be made, all needful and proper repairs,
renewals, additions, improvements and replacements thereto necessary in order
that the business carried on in connection therewith may be properly conducted
at all times.
SECTION 5.02. INSURANCE. Keep its insurable properties adequately insured
at all times by financially sound and reputable insurers; maintain such other
insurance, to such extent and against such risks, including fire and other risks
insured against by extended coverage, as is customary with companies engaged in
the same or similar businesses and owning properties of similar type, including
public liability insurance against claims for personal injury or death or
property damage occurring upon, in, about or in connection with the use of any
properties owned, occupied or controlled by it; and maintain such other
insurance as may be required by law.
SECTION 5.03. OBLIGATIONS AND TAXES. Pay its Indebtedness and other
obligations promptly and in accordance with their terms and pay and discharge
promptly when due all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits or in respect of its property,
before the same shall become delinquent or in default, as well as all lawful
claims for labor, materials and supplies or otherwise that, if unpaid, might
give rise to a Lien upon such properties or any part thereof; PROVIDED, HOWEVER,
that such payment and discharge shall not be required with respect to any such
tax, assessment, charge, levy or claim so long as the validity or amount thereof
shall be contested in good faith by appropriate proceedings and the Borrower
shall have set aside on its books adequate reserves with respect thereto.
<PAGE>
27
SECTION 5.04. FINANCIAL STATEMENTS, REPORTS, ETC. In the case of the
Borrower, furnish to the Administrative Agent:
(a) within 90 days after the end of each fiscal year, (i) its
unconsolidated and consolidated balance sheets and related statements of
earnings and cash flow, showing the financial condition of the Borrower or
the Borrower and the consolidated Subsidiaries, as the case may be, as of
the close of such fiscal year and the results of its operations or of its
operations and the operations of such Subsidiaries during such year, as the
case may be, all audited by and accompanied by an opinion of Ernst & Young
or other independent public accountants of recognized national standing to
the effect that such financial statements fairly present the financial
condition and results of operations of the Borrower or of the Borrower and
the consolidated Subsidiaries on a consolidated basis, as the case may be,
in accordance with GAAP consistently applied, (ii) a certificate of Ernst &
Young or such other accounting firm opining on or certifying such
statements (which certificate may be limited to accounting matters and
disclaim responsibility for legal interpretations), (A) certifying that in
the course of the regular audit of the business of the Borrower or the
Borrower and its consolidated Subsidiaries, as the case may be, such
accounting firm has obtained no knowledge that an Event of Default or
Default has occurred and is continuing or, if in the opinion of such
accounting firm an Event of Default or Default has occurred and is
continuing, specifying the nature and extent thereof and (B) setting forth
computations in reasonable detail satisfactory to the Administrative Agent
demonstrating compliance with the covenants contained in Sections 6.12
through 6.17 and (iii) its consolidating schedules relating to the balance
sheets and related statements of earnings delivered pursuant to clause (i)
above, certified by a Responsible Officer of the Borrower;
(b) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, (i) its unconsolidated and consolidated
balance sheets, related statements of earnings and cash flow, and related
consolidating schedules (other than with respect to cash flow) showing the
financial condition of the Borrower or of the Borrower and the consolidated
Subsidiaries, as the case may be, as of the close of such fiscal quarter
and the results of its operations or its operations and the operations of
such Subsidiaries, as the case may be, during such fiscal quarter and the
then-elapsed portion of the fiscal year, all certified by one of its
Responsible Officers as fairly presenting the financial condition and
results of operations of the Borrower or the Borrower and the consolidated
Subsidiaries on a consolidated basis, as the case may be, in accordance
with GAAP consistently applied, subject to normal year-end audit
adjustments, and (ii) a certificate of a Responsible Officer opining on or
certifying such statements, (A) certifying that no Event of Default or
Default has occurred and is continuing or, if such an Event of Default or
Default has occurred and is continuing, specifying the nature and extent
thereof and any corrective action taken or proposed to be taken with
respect thereto and (B) setting forth computations in reasonable detail
satisfactory to the Administrative Agent demonstrating compliance with the
covenants contained in Sections 6.12 through 6.16 (and stating that such
computations have been reviewed by such accounting firm referred to in
clause (a)(i) above);
(c) as soon as available and in any event within 90 days after the end
of each fiscal year, (i) the Statement of Actuarial Opinion of each
Insurance Subsidiary for such fiscal year and as filed with the Applicable
Insurance Regulatory Authority and (ii) the Annual Statement of each
Insurance Subsidiary for such fiscal year and as filed with the Applicable
Insurance Regulatory Authority, together with, in the case of the
statements delivered pursuant to clause (ii) above, a certificate of a
Responsible Officer of such Insurance Subsidiary or a Responsible Officer
of the Borrower, as the case may be, to the effect that such statements
present fairly the statutory assets, liabilities, capital and surplus,
results of operations and cash flows of such Insurance Subsidiary in
accordance with SAP;
(d) as soon as available and in any event within 45 days after the end
of each of the first three fiscal quarters of each fiscal year, the
Quarterly Statement of each Insurance Subsidiary for such fiscal quarter
and as filed with the Applicable Insurance Regulatory Authority, certified
by a Responsible Officer of the Borrower as fairly presenting the statutory
assets, liabilities, capital and surplus, results of operations and cash
flows of such Insurance Subsidiary;
(e) upon the request of the Required Lenders at any time that a
Default has occurred and is continuing, but not more often than once in any
fiscal year, an actuarial value report regarding actuarial valuations of
Surplus and in force business of each Insurance Subsidiary, prepared by any
independent actuarial or accounting firm of nationally recognized standing
acceptable to the Required Lenders;
(f) promptly after delivery to an Insurance Subsidiary, final copies
of all regular and periodic reports of reviews or examinations of such
Insurance Subsidiary, delivered to such Insurance Subsidiary by the
Applicable Insurance Regulatory Authority;
(g) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by
it with the Securities and Exchange Commission, or any Governmental
Authority succeeding to any of or all the functions of said Commission, or
with any national securities exchange, or distributed to its shareholders,
as the case may be;
<PAGE>
28
(h) upon the request of the Administrative Agent, a summary of the
Reinsurance Agreements of the Insurance Subsidiaries as in effect on the
date of such request, such summary to be substantially in the form of
Exhibit G, and copies of any Reinsurance Agreement of any Insurance
Subsidiary; and
(i) promptly, from time to time, such other information regarding the
operations, business affairs and financial condition of the Borrower or any
Subsidiary, or compliance with the terms of any Loan Document, as the
Administrative Agent or any Lender may reasonably request (it being
understood that any non-public information provided hereunder shall be kept
confidential in accordance with sound banking practices and in any event
subject to Section 9.04(g)).
SECTION 5.05. LITIGATION AND OTHER NOTICES. Furnish to the Administrative
Agent prompt written notice of the following:
(a) any Event of Default or Default continuing on the date of such
notice, specifying the nature and extent thereof and the corrective action
(if any) proposed to be taken with respect thereto;
(b) the filing or commencement of, or any threat or notice of
intention of any Person to file or commence, any action, suit or
proceeding, whether at law or in equity or by or before any Governmental
Authority, against the Borrower or any Subsidiary that, if adversely
determined, could reasonably be expected to result in a Material Adverse
Effect; and
(c) any development that has resulted, in the Borrower's reasonable
judgment, in a Material Adverse Effect.
SECTION 5.06. EMPLOYEE BENEFITS. (a) Comply in all material respects with
the applicable provisions of ERISA and (b) furnish to the Administrative Agent
and each Lender (i) as soon as possible, and in any event within 30 days after
any Responsible Officer of the Borrower or any ERISA Affiliate either knows or
has reason to know that any Reportable Event has occurred that alone or together
with any other Reportable Event could reasonably be expected to result in
liability of the Borrower to the PBGC in an aggregate amount exceeding
$2,000,000 a statement of a Responsible Officer of the Borrower setting forth
details as to such Reportable Event and the action that the Borrower proposes to
take with respect thereto, together with a copy of the notice, if any, of such
Reportable Event given to the PBGC, (ii) promptly after receipt thereof, a copy
of any notice that the Borrower or any ERISA Affiliate may receive from the PBGC
relating to the intention of the PBGC to terminate any such Plan (other than a
Plan maintained by an ERISA Affiliate which is considered an ERISA Affiliate
only pursuant to subsection (m) or (o) of Section 414 of the Code) or to appoint
a trustee to administer any such Plan, (iii) within 15 days after the due date
for filing with the PBGC pursuant to Section 412(n) of the Code of a notice of
failure to make a required installment or other payment with respect to a Plan,
a statement of a Responsible Officer of the Borrower setting forth details as to
such failure and the action the Borrower or its ERISA Affiliates propose to take
with respect thereto, together with a copy of such notice given to the PBGC and
(iv) promptly and in any event within 30 days after receipt thereof by the
Borrower or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy
of each notice received by the Borrower or any ERISA Affiliate concerning (A)
the imposition of Withdrawal Liability or (B) a determination that a
Multiemployer Plan is, or is expected to be, terminated or in reorganization,
both within the meaning of Title IV of ERISA.
SECTION 5.07. MAINTAINING RECORDS; ACCESS TO PROPERTIES AND INSPECTIONS.
Maintain all financial records in accordance with GAAP and, with respect to any
Insurance Subsidiary, SAP, and permit any representatives designated by any
Lender to visit and inspect the financial records and the properties of the
Borrower or any Subsidiary from time to time upon reasonable notice, at
reasonable times, during normal business hours and as often as requested and to
make extracts from and copies of such financial records, and permit any
representatives designated by any Lender to discuss the affairs, finances and
condition of the Borrower or any Subsidiary with the officers thereof and
independent accountants therefor.
SECTION 5.08. USE OF PROCEEDS. Use the proceeds of the Loans only for the
purposes set forth in the preamble to this Agreement; PROVIDED, HOWEVER, that no
proceeds of the Loans shall be used in violation of the Investment Company Act
of 1940.
SECTION 5.09. FISCAL YEAR. Cause its fiscal year to end on December 31 of
each year.
SECTION 5.10. ADDITIONAL SECURITY. Promptly upon the direct acquisition of
the capital stock of any United States Subsidiary by the Borrower or Holdings
(including any capital stock acquired in connection with the creation of any
subsidiary of the Borrower or Holdings), amend the applicable Pledge Agreement
to include such stock as Pledged Securities thereunder and take all actions
necessary in order to perfect the validity and first priority of the security
interest of the Lenders in such stock, except to the extent that such amendment
or any such action is prohibited by any law, rule or regulation of any
Governmental Authority, including any Applicable Insurance Regulatory Authority;
and promptly upon the direct acquisition of the capital stock of any other
Material Subsidiary by the Borrower or Holdings (including any capital stock
acquired in connection with the creation of any subsidiary of the Borrower or
Holdings), negotiate in good faith with the Lenders to provide such additional
security in respect of the stock of such subsidiary; PROVIDED,
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29
HOWEVER, that neither the Borrower nor Holdings shall be required hereunder or
under any of the Security Documents to pledge shares possessing more than 65% of
the voting power of all classes of capital stock entitled to vote of any
subsidiary that is a controlled foreign corporation (as defined in
Section 957(a) and (b) (or any successor provisions) of the Code) or of any
subsidiary that acts solely or principally as a holding company (directly or
indirectly) for the stock of one or more controlled foreign corporations and
that shares of only one such corporation in a corporate chain shall be required
to be pledged and, in any event, no pledge of the shares of capital stock of any
subsidiary shall be required or effective to the extent that such pledge would
trigger an increase in income of a United States shareholder of the pledgor of
such stock pursuant to Section 951 (or a successor provision) of the Code.
SECTION 5.11. FURTHER ASSURANCES. Execute any and all further documents,
financing statements, agreements and instruments, and take all further actions
(including (i) filing Uniform Commercial Code financing statements that may be
required under applicable law or which the Required Lenders or the
Administrative Agent may reasonably request and (ii) delivering any securities
to be subject to the Pledge Agreement), in order to effectuate the transactions
contemplated by the Loan Documents and in order to grant, preserve, protect and
perfect the validity and first priority of the security interests created or
intended to be created by the Security Documents.
ARTICLE VI. NEGATIVE COVENANTS
The Borrower covenants and agrees with each Lender that, so long as (a) the
principal of or interest on any Loan shall remain unpaid, (b) any Lender shall
have any Commitment hereunder or (c) any Fees, expenses or other amounts payable
under any Loan Document (if due and payable on the first date that the principal
of and interest on all Loans have been paid in full and the Commitments have
been terminated) shall remain unpaid, unless the Required Lenders shall
otherwise consent in writing, the Borrower will not and will not permit the
Subsidiaries to:
SECTION 6.01. INDEBTEDNESS. Incur, create, assume or permit to exist any
Indebtedness, except:
(a) Indebtedness for borrowed money that is secured by Liens on or is
otherwise with recourse to the property or assets of the Borrower or any
Subsidiary to the extent that such Indebtedness is existing on the date
hereof and is set forth on Schedule 6.01, but not any extensions, renewals
or replacements of such Indebtedness;
(b) Indebtedness of the Borrower that is not secured by Liens on and
is otherwise without recourse to the property or assets (whether now owned
or hereafter acquired) of the Borrower or any Subsidiary;
(c) Intercompany Loans, provided that (i) the repayment obligations in
respect of such Intercompany Loans to the Borrower are subordinated, on
terms no less favorable to the Lenders than those set forth on Exhibit H,
to the prior payment in full in cash of the Obligations, (ii) no case,
proceeding or other action of the type referred to in paragraph (g) of
Article VII at any time has been commenced against any of the borrowers of
such Intercompany Loans and (iii) no Applicable Insurance Regulatory
Authority at any time has issued any order of the type referred to in
paragraph (o) of Article VII against any such borrowers;
(d) Indebtedness consisting of the Borrowings hereunder and the
Guarantee Agreement;
(e) in the case of the Borrower, Permitted Swaps;
(f) in the case of the Insurance Subsidiaries, Rate Protection
Agreements;
(g) Indebtedness of the Borrower pursuant to repurchase agreements
with any Lender;
(h) Indebtedness of the Borrower incurred or assumed in connection
with permitted Capital Expenditures;
(i) Indebtedness of the Borrower incurred in connection with the
acquisition of any capital stock or assets permitted by Section 6.05(c),
provided that the repayment obligations in respect of such Indebtedness are
subordinated, on terms no less favorable to the Lenders than those set
forth on Exhibit H, to the prior payment in full in cash of the
Obligations;
(j) obligations of the Borrower and/or the Subsidiaries as account
parties in respect of letters of credit and bankers' acceptances and
Guarantees of the Indebtedness of or by the Borrower and the Subsidiaries
in an aggregate principal amount in respect of this clause (j) not in
excess of $2,000,000 at any time outstanding, $1,600,000 of which may be
secured as permitted in Section 6.02(1);
(k) additional Indebtedness in an aggregate principal amount not
exceeding at any time $10,000,000; and
<PAGE>
30
(l) Indebtedness of the Borrower and its Subsidiaries in an aggregate
principal amount not exceeding at any time $12,000,000 owed to reinsurers,
the proceeds of which are used to finance the payment of commissions to
agents that sell insurance products on behalf of the Subsidiaries.
The Borrower and the Lenders agree to negotiate in good faith to amend paragraph
(f) of this Section 6.01 in the event that any change in law, rule or regulation
of any Governmental Authority, including any Applicable Insurance Regulatory
Authority, shall prohibit the Insurance Subsidiaries from entering into Rate
Protection Agreements.
SECTION 6.02. LIENS. Create, incur, assume or permit to exist any Lien on
any property or assets (including stock or other securities of any Person,
including any Subsidiary) now owned or hereafter acquired by it or any
Subsidiary or on any income or revenues or rights in respect of any thereof,
except:
(a) Liens on property or assets of the Subsidiaries existing on the
date hereof and set forth in Schedule 6.02; PROVIDED, HOWEVER, that such
Liens shall secure only those obligations that they secure on the date
hereof and refinancings of such obligations;
(b) any Lien existing on any property or asset (including any such
property or asset acquired in connection with Capital Expenditures) prior
to the acquisition thereof by the Borrower or any Subsidiary; PROVIDED,
HOWEVER, that (i) such Lien shall not be created in contemplation of or in
connection with such acquisition and (ii) such Lien shall not apply to any
other property or assets of the Borrower or any Subsidiary;
(c) Liens for taxes not yet due or which are being contested in
compliance with Section 5.03;
(d) carriers', warehousemen's, mechanic's, materialmen's, repairmen's
or other like Liens arising in the ordinary course of business and securing
obligations that are not due or which are being contested in compliance
with Section 5.03;
(e) pledges and deposits made in the ordinary course of business in
compliance with workmen's compensation, unemployment insurance and other
social security laws or regulations;
(f) deposits to secure the performance of bids, trade contracts (other
than for Indebtedness), leases (other than Capital Lease Obligations),
statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business;
(g) zoning restrictions, easements, rights-of-way, restrictions on use
of real property and other similar encumbrances incurred in the ordinary
course of business that, in the aggregate, are not substantial in amount
and do not materially detract from the value of the property subject
thereto or interfere with the ordinary conduct of the business of the
Borrower or any of its Subsidiaries;
(h) purchase options, calls and similar rights of third-parties with
respect to securities that constitute Invested Assets;
(i) Liens on the assets of any Insurance Subsidiary or of SBM
Certificate Company securing obligations of such Insurance Subsidiary or
SBM Certificate Company, respectively, in respect of Rate Protection
Agreements;
(j) Liens created under the Security Documents and Liens securing
Indebtedness referred to in paragraphs (a), (g) and (h) of Section 6.01;
PROVIDED HOWEVER, that in the case of Liens securing Indebtedness referred
to in paragraph (g) or (h) of Section 6.01, such Liens shall only exist on
the asset acquired to which such Indebtedness relates;
(k) additional Liens securing Indebtedness permitted to be incurred by
Section 6.01(k), 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 (k) of Section 6.01; and
(l) Liens on assets the aggregate fair market value of which does not
exceed $1,600,000, in connection with a letter of credit issued by The
First National Bank of Chicago.
SECTION 6.03. SALE AND LEASE-BACK TRANSACTIONS. Enter into any arrangement,
directly or indirectly, with any Person whereby it shall sell or transfer any
property, real or personal, used or useful in its business, whether now owned or
hereafter acquired, and thereafter rent or lease such property or other property
that it intends to use for substantially the same purpose or purposes as the
property being sold or transferred; PROVIDED, HOWEVER, that the Borrower or any
of the Subsidiaries may enter into any transaction otherwise prohibited under
this Section 6.03 if (a) the applicable lease
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31
pertains to property acquired after the Closing Date and (b) such transaction is
not prohibited by the provisions of Section 6.01.
SECTION 6.04. INVESTMENTS, LOANS AND ADVANCES. Purchase, hold or acquire
any capital stock, evidences of indebtedness or other securities of, make or
permit to exist any loans or advances to, or make or permit to exist any
investment or any other interest in, any other Person, except:
(a) investments by the Borrower and the Subsidiaries existing on the
date hereof in the capital stock of the Subsidiaries and, subject to
Section 6.05(c), investments by the Borrower and the Subsidiaries in any
other Subsidiaries;
(b) cash and Cash Equivalents;
(c) permitted Capital Expenditures; and
(d) investments by the Borrower or any Subsidiary in Invested Assets;
and
(e) investments consisting of loans to ARM Capital Advisors Holdings,
LLC in connection with the purchase of ARM Capital Advisors, LLC and the
provision of working capital loans to ARM Capital Advisors, LLC, in an
aggregate amount for all such loans not in excess of $4,000,000 at any time
outstanding.
SECTION 6.05. MERGERS, CONSOLIDATIONS, SALES OF ASSETS AND ACQUISITIONS.
(a) Merge into or consolidate with any other Person, or permit any other Person
to merge into or consolidate with it, except that if, at the time thereof and
immediately after giving effect thereto, no Event of Default or Default shall
have occurred and be continuing, (i) any wholly owned Subsidiary other than an
Insurance Subsidiary may merge into the Borrower so long as the Borrower is the
surviving corporation, (ii) any wholly owned Subsidiary may merge into or
consolidate with any other wholly owned Subsidiary other than Holdings so long
as the surviving entity is a wholly owned Subsidiary and no Person other than
the Borrower or a wholly owned Subsidiary receives any consideration and
(iii) subject to Section 6.08, any Subsidiary other than Holdings may merge with
any other Person that is principally engaged in the Insurance Business or the
Financial Services Business, provided that such Subsidiary is the surviving
entity.
(b) Sell, transfer, lease or otherwise dispose of (in one transaction or in
a series of transactions) any of its assets (whether now owned or hereafter
acquired), unless immediately after giving effect to such sale, transfer or
lease (i) no Event of Default or Default shall have occurred and be continuing
and (ii) the aggregate Net Proceeds of all such sales, transfers, leases and
dispositions since the Closing Date (other than such sales, transfers, leases
and dispositions permitted pursuant to the immediately following sentence) does
not exceed 15% of the Total Assets as of the date of such asset sale.
Notwithstanding the foregoing, the Borrower and any Subsidiary may (i) sell,
transfer, lease or otherwise dispose of assets (including Invested Assets) in
the ordinary course of business, (ii) sell, transfer, lease or otherwise dispose
of assets to the Borrower or a Subsidiary, PROVIDED that if such seller,
transferor or lessor is an Insurance Subsidiary, such assets shall be sold or
leased at fair market value, (iii) sell, transfer, lease or otherwise dispose of
assets that are replaced within six months of the date of sale with assets that
are either (A) comparable to and used in the same business as the assets sold or
(B) comparable to the assets sold and used in another business in which the
Borrower and the Subsidiaries are permitted to engage pursuant to Section 6.08,
(iv) sell or dispose of in the ordinary course of business property that is
obsolete or no longer useful in any of its business and that is (A) of DE
MINIMIS value or (B) in the case of any property the value of which exceeds
$500,000, determined in good faith by the Board of Directors of the Borrower or
such Subsidiary, as the case may be, to be obsolete or no longer useful and
(v) sell, transfer, lease or otherwise dispose of substantially all of the
assets of ARM Capital Advisors, Inc. in connection with the sale by Borrower of
an 80% membership interest in ARM Capital Advisors, LLC ("New ARMCA") to ARM
Capital Advisors Holdings, LLC ("ARMCA Holdings") and shall transfer, convey or
otherwise dispose of an 80% membership interest in New ARMCA to ARMCA Holdings.
To the extent the Required Lenders waive the provisions of this Section 6.05
with respect to the sale of any asset, or any asset or membership interest is
sold as permitted by this Section 6.05, such asset or membership interest shall
be sold free and clear of the Liens created by the Security Documents, and the
Administrative Agent shall take such actions as the Administrative Agent
reasonably deems appropriate at the expense of the Borrower in connection
therewith.
(c) Purchase, lease or otherwise acquire (in one transaction or a series of
transactions) all or any substantial part of the capital stock or assets of any
other Person, except that if, at the time thereof and immediately after giving
effect thereto, no Event of Default shall have occurred and be continuing, the
Borrower or any Subsidiary may, subject to the provisions of Sections 6.08,
acquire all or a substantial part of the capital stock or assets of any Person
that is principally engaged in the Insurance Business or the Financial Services
Business, provided that, (i) in the case of an acquisition of assets, such
assets are of the type used in the Insurance Business or the Financial Services
Business of such Person and (ii) in the case of an acquisition of capital stock
by the Borrower, such capital stock is, if required by Section 5.10, pledged to
the Administrative Agent, for the benefit of the Lenders, pursuant to the Pledge
Agreement.
SECTION 6.06. DIVIDENDS AND DISTRIBUTIONS. Declare or pay, directly or
indirectly, any dividend or make any other distribution (by reduction of capital
or otherwise), whether in cash, property, securities or a combination thereof,
with respect to any shares of its capital stock or directly or indirectly
redeem, purchase, retire or otherwise acquire for
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32
value (or permit any Subsidiary to purchase or acquire) any shares of any class
of its capital stock or set aside any amount for any such purpose; PROVIDED,
HOWEVER, that (a) any Subsidiary may declare and pay dividends or make other
distributions to the Borrower or any other Subsidiary; (b) so long as no Default
or Event of Default has occurred and is continuing or would occur after giving
effect thereto, (i) the Borrower may declare and pay dividends with respect to
the Preferred Stock as provided in the Certificate of Designation and (ii) the
Borrower may declare and pay cash dividends on, and may make redemptions and
repurchases of, any of its capital stock other than the Preferred Stock so long
as the amounts paid in any fiscal year in connection with such dividends,
redemptions and repurchases do not exceed the greater of (A) one-third of the
Borrower's Net Income in respect of the immediately preceding fiscal year and
(B) $3,000,000; and (c) the Borrower may directly or indirectly redeem,
purchase, retire or otherwise acquire for value any shares of its Class A Common
Stock in accordance with the terms of the Stock Option Plan.
SECTION 6.07. TRANSACTIONS WITH AFFILIATES. Sell or transfer any property
or assets to, or purchase or acquire any property or assets from, or
otherwise engage in any other transactions with, any of its Affiliates,
except that (a) the Borrower or any Subsidiary may engage in any of the
foregoing transactions in the ordinary course of business at prices and on
terms and conditions no less favorable to the Borrower or such Subsidiary
than could be obtained on an arm's-length basis from unrelated third parties,
(b) the Borrower and the Subsidiaries may perform their respective
obligations under the Administrative Services Agreements, the Employment
Agreements, any employment agreement with an executive of the Borrower and
the Stock Option Plan, (c) the Borrower may perform its obligations under the
Underwriting Agreement, (d) the Borrower and the Subsidiaries may engage in
the Transactions and in any other transaction with each other that is not
otherwise prohibited under this Agreement and in any transaction with an
Affiliate otherwise permitted pursuant to this Agreement, (e) the Borrower
may engage in the Transactions contemplated by clause (v) of Section 6.05(b)
and (f) the Borrower and the Subsidiaries may pay fees to Morgan Stanley
Group Inc., Morgan Stanley, Dean Witter, Discover & Co. and their Affiliates
for financial and consulting services (including any underwriting discounts
and commissions, placement agent fees and fees for asset management and
financial advisory services performed in the ordinary course of business of
Morgan Stanley Group Inc., Morgan Stanley, Dean Witter, Discover & Co. or any
of their Affiliates), provided that the amount of any such fees shall not
exceed the usual and customary fees of Morgan Stanley Group, Inc. or such
Affiliate, as the case may be, for similar services rendered to third parties.
SECTION 6.08. BUSINESS OF THE BORROWER AND THE SUBSIDIARIES. (a) In the
case of the Borrower and the Subsidiaries, other than Holdings, engage at any
time in any business or business activity other than (i) the Insurance Business
and the Financial Services Business (including the acquisition of such
businesses to the extent not otherwise prohibited by this Agreement),
(ii) activities in connection with the consummation of the Transactions and
(iii) the ownership or acquisition of the capital stock of, or the creation of
(in the form of new Subsidiaries), entities engaged in the Insurance Business or
the Financial Services Business.
(b) In the case of Holdings, engage at any time in any business or business
activity other than (i) the ownership or acquisition of the capital stock of, or
the creation of (in the form of new Subsidiaries), entities engaged in the
Insurance Business or the Financial Services Business and (ii) activities in
connection with the consummation of the Transactions.
SECTION 6.09. DEBT PAYMENTS. Directly or indirectly make any optional
payment, prepayment, redemption, retirement or defeasance, whether in cash,
property, securities or a combination thereof, on account of the principal
amount of any Indebtedness (other than the Obligations) of the Borrower or any
Subsidiary, except for (a) payments of insurance claims in the ordinary course
of the Insurance Business and (b) prepayments of any Intercompany Loan other
than a Designated Intercompany Loan.
SECTION 6.10. AMENDMENTS AND ASSIGNMENTS. (a) Permit any amendment or
modification to be made to, or any waiver of its rights (but not its
obligations) under the Stockholders Agreement, the SPA Guaranty Agreement, the
Certificate of Designation, either Employment Agreement or any Administrative
Services Agreement, other than any amendment, modification or waiver (i) that
could not reasonably be expected to materially adversely affect the business,
assets, operations or condition (financial or otherwise) of the Borrower and the
Subsidiaries taken as a whole and (ii) that could not reasonably be expected to
adversely affect the interests of the Lenders, including in the case of the
Certificate of Designation, by any increase in any dividend to accrue in any
period with respect to the Preferred Stock and the making of any other change
that would not materially increase the Borrower's obligations thereunder and/or
by replacing the terms of the Stock Option Plan contained in Exhibit B thereto
with any Stock Option Plan as in effect from time to time in accordance with the
definition of the term "Stock Option Plan". Notwithstanding the foregoing and
so long as no Default or Event of Default has occurred and is continuing or
shall occur as a result thereof, the Borrower shall be permitted to amend or
modify, or waive any provisions under, the Stockholders Agreement or either
Employment Agreement.
(b) Permit any assignment of the SPA Guaranty Agreement to any Person
without the consent of the Required Lenders.
SECTION 6.11. TOTAL FUNDED INDEBTEDNESS TO TOTAL CAPITAL RATIO. Permit the
ratio of Total Funded Indebtedness to Total Capital at the end of any fiscal
quarter of the Borrower to exceed 0.30 to 1.00.
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33
SECTION 6.12. INTEREST COVERAGE RATIO. Permit the ratio of EBIT of the
Borrower and its Subsidiaries on a consolidated basis to Interest Expense of the
Borrower and its Subsidiaries on a consolidated basis to be less than 2.00 to
1.00.
SECTION 6.13. ADJUSTED STATUTORY SURPLUS. Permit the excess of (a) Adjusted
Statutory Surplus at the end of any fiscal quarter of the Borrower over (b) the
aggregate principal amount of all Intercompany Loans outstanding at such time to
be less than $135,000,000.
SECTION 6.14. RISK-BASED CAPITAL RATIO. Permit (a) the ratio of Total
Adjusted Capital to Risk-Based Capital at the end of any fiscal quarter of the
Borrower to be less than 1.50 to 1.00 or (b) the ratio of Total Adjusted Capital
to the Authorized Control Level Risk-Based Capital at the end of any fiscal
quarter of the Borrower to be less than 3.00 to 1.00.
SECTION 6.15. INVESTMENT RATIOS. Permit, at any time, the sum of (a) the
aggregate amount of the Non-Subsidiary Investments of the Borrower, SBM
Certificate Company and ARM Securities Corp., Inc. at such time, determined on
an unconsolidated basis in accordance with GAAP, and (b) the Total Admitted
Assets (other than Separate Account Assets) of the Insurance Subsidiaries (taken
as a whole) at such time, determined on a consolidated basis, in accordance with
SAP, in each case that are Non-Investment Grade Investments, to exceed the sum
of (i) 10% of the aggregate amount of Non-Subsidiary Investments of the
Borrower, SBM Certificate Company and ARM Securities Corp. at such time,
determined on an unconsolidated basis, in accordance with GAAP, and (ii) 10% of
the aggregate amount of the Total Admitted Assets (other than Separate Account
Assets) of the Insurance Subsidiaries (taken as a whole) at such time determined
on a consolidated basis, in accordance with SAP.
SECTION 6.16. SURPLUS RELIEF RATIO. Permit, at the last day of any fiscal
quarter of the Borrower, the Surplus Relief Ratio of the Insurance Subsidiaries
(taken together) for any period of four consecutive fiscal quarters of the
Borrower to exceed 10% of the Surplus of the Insurance Subsidiaries during such
period.
ARTICLE VII. EVENTS OF DEFAULT
In case of the happening of any of the following events ("EVENTS OF
DEFAULT"):
(a) any representation or warranty made or deemed made in or in
connection with any Loan Document or the Borrowings hereunder, or any
representation, warranty, statement or information contained in any report,
certificate, financial statement or other instrument furnished in
connection with or pursuant to any Loan Document, shall prove to have been
false or misleading in any material respect when so made, deemed made or
furnished;
(b) default shall be made in the payment of any principal of any Loan
when and as the same shall become due and payable, whether at the due date
thereof or at a date fixed for prepayment thereof or by acceleration
thereof or otherwise;
(c) default shall be made in the payment of any interest on any Loan
or any Fee or any other amount (other than an amount referred to in
paragraph (b) above) due under any Loan Document, when and as the same
shall become due and payable, and such default shall continue unremedied
for a period of four Business Days;
(d) default shall be made in the due observance or performance by the
Borrower or any Subsidiary of any covenant, condition or agreement
contained in Section 5.01(a), 5.05, or 5.09 or in Article VI (it being
understood that if any covenant in Section 6.12, 6.13, 6.14, 6.15 or 6.16
is breached at the end of any applicable period but not as to any
subsequent period, such Event of Default is no longer continuing);
(e) default shall be made in the due observance or performance by the
Borrower or any Subsidiary of any covenant, condition or agreement
contained in any Loan Document (other than those specified in
paragraph (b), (c) or (d) above) and such default shall continue unremedied
for a period of 15 days after notice thereof from the Administrative Agent
or any Lender to the Borrower;
(f) the Borrower or any Subsidiary shall (i) fail to pay any principal
or interest, regardless of amount, due in respect of any Indebtedness in a
principal amount in excess of $5,000,000, when and as the same shall become
due and payable (and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument related to such
Indebtedness), or (ii) fail to observe or perform any other term, covenant,
condition or agreement contained in any agreement or instrument evidencing
or governing any such Indebtedness (and such failure shall continue after
the applicable grace period, if any, specified in the agreement or
instrument related to such Indebtedness) if the effect of any failure
referred to in this clause (ii) is to cause, or to permit the holder or
holders of such Indebtedness or a trustee on its or their behalf (with or
without the giving of notice, the lapse of time or both) to cause, such
Indebtedness to become due prior to its stated maturity;
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34
(g) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking
(i) relief in respect of the Borrower or any Material Subsidiary, or of a
substantial part of the property or assets of the Borrower or a Material
Subsidiary, under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal, state or foreign bankruptcy,
insolvency, receivership or similar law, (ii) the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official
for the Borrower or any Material Subsidiary or for a substantial part of
the property or assets of the Borrower or a Material Subsidiary or
(iii) the winding-up or liquidation of the Borrower or any Material
Subsidiary; and either (x) an order or decree approving or ordering any of
the foregoing shall be entered or, in the case of an Insurance Subsidiary,
such proceeding or petition shall result in adjudication or an appointment
of the type referred to in clause (i) or (y) such proceeding or petition
shall continue undismissed for 60 days;
(h) the Borrower or any Material Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking relief under Title 11
of the United States Code, as now constituted or hereafter amended, or any
other Federal, state or foreign bankruptcy, insolvency, receivership or
similar law, (ii) consent to the institution of, or fail to contest in a
timely and appropriate manner, any proceeding or the filing of any petition
described in (g) above, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official
for the Borrower or any Material Subsidiary or for a substantial part of
the property or assets of the Borrower or any Material Subsidiary,
(iv) file an answer admitting the material allegations of a petition filed
against it in any such proceeding, (v) make a general assignment for the
benefit of creditors, (vi) become unable, admit in writing its inability or
fail generally to pay its debts as they become due or (vii) take any action
for the purpose of effecting any of the foregoing;
(i) one or more judgments for the payment of money in an aggregate
amount (not covered by insurance as to which the applicable company has
acknowledged coverage) in excess of $1,000,000 shall be rendered against
the Borrower, any Subsidiary or any combination thereof and the same shall
remain undischarged for a period of 30 consecutive days during which
execution shall not be effectively stayed, or any action shall be legally
taken by a judgment creditor to levy upon assets or properties of the
Borrower or any Subsidiary to enforce any such judgment;
(j) a Reportable Event or Reportable Events, or a failure to make a
required installment or other payment (within the meaning of Section
412(n)(l) of the Code), shall have occurred with respect to any Plan or
Plans that reasonably could be expected to result in liability of the
Borrower to the PBGC or to a Plan in an aggregate amount exceeding
$2,000,000 and, within 30 days after the reporting of any such Reportable
Event to the Administrative Agent or after the receipt by the
Administrative Agent of the statement required pursuant to Section 5.06,
the Administrative Agent shall have notified the Borrower in writing that
(i) the Required Lenders have made a determination that, on the basis of
such Reportable Event or Reportable Events or the failure to make a
required payment, there are reasonable grounds (A) for the termination of
such Plan or Plans by the PBGC, (B) for the appointment by the appropriate
United States District Court of a trustee to administer such Plan or Plans
or (C) for the imposition of a lien in favor of a Plan and (ii) as a result
thereof an Event of Default exists hereunder; or a trustee shall be
appointed by a United States District Court to administer any such Plan or
Plans; or the PBGC shall institute proceedings (including giving notice of
intent thereof) to terminate any Plan or Plans;
(k) (i) the Borrower or any ERISA Affiliate shall have been notified
by the sponsor of a Multiemployer Plan that it has incurred Withdrawal
Liability to such Multiemployer Plan, (ii) the Borrower or such ERISA
Affiliate does not have reasonable grounds for contesting such Withdrawal
Liability or is not contesting such Withdrawal Liability in a timely and
appropriate manner and (iii) the amount of such Withdrawal Liability
specified in such notice, when aggregated with all other amounts required
to be paid to Multiemployer Plans in connection with Withdrawal Liabilities
(determined as of the date or dates of such notification), (A) exceeds
$500,000 or requires payments exceeding $100,000 in any year or (B) is less
than $500,000 but any Withdrawal Liability payment remains unpaid 30 days
after such payment is due;
(l) the Borrower or any ERISA Affiliate shall have been notified by
the sponsor of a Multiemployer Plan that such Multiemployer Plan is in
reorganization or is being terminated, within the meaning of Title IV of
ERISA, if solely as a result of such reorganization or termination the
aggregate annual contributions of the Borrower and its ERISA Affiliates to
all Multiemployer Plans that are then in reorganization or have been or are
being terminated have been or will be increased over the amounts required
to be contributed to such Multiemployer Plans for their most recently
completed plan years by an amount exceeding $100,000;
(m) there shall have occurred a Change in Control;
(n) any Loan Document shall cease to be or be asserted by the Borrower
or any Subsidiary not to be, in full force and effect, in accordance with
its terms, or the security interest purported to be created by any Security
Document shall cease to be a valid and perfected first priority security
interest in the relevant collateral
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35
for any reason other than the failure of Chase, on behalf of the Lenders,
to take any action that is within its control and not otherwise prohibited
by applicable law, applicable regulation or the order of any court; or
(o) any Applicable Insurance Regulatory Authority shall issue any
order of conservation, supervision or any other order of like effect
relating to any of the Insurance Subsidiaries;
then, and in every such event (other than an event with respect to the Borrower
described in paragraph (g) or (h) above), and at any time thereafter during the
continuance of such event, the Administrative Agent, at the request of the
Required Lenders, shall, by notice to the Borrower, take any or all of the
following actions, at the same or different times: (i) terminate forthwith the
Commitments, and (ii) declare the Loans then outstanding to be forthwith due and
payable in whole or in part, whereupon the principal of the Loans so declared to
be due and payable, together with accrued interest thereon and any unpaid
accrued Fees and all other liabilities of the Borrower accrued hereunder and
under any other Loan Document, shall become forthwith due and payable, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived by the Borrower, anything contained herein or in any
other Loan Document to the contrary notwithstanding; and in any event with
respect to the Borrower described in paragraph (g) or (h) above, the Commitments
shall automatically terminate and the principal of the Loans then outstanding,
together with accrued interest thereon and any unpaid accrued Fees and all other
liabilities of the Borrower accrued hereunder and under any other Loan Document,
shall automatically become due and payable, without presentment, demand, protest
or any other notice of any kind, all of which are hereby expressly waived by the
Borrower, anything contained herein or in any other Loan Document to the
contrary notwithstanding.
ARTICLE VIII. THE ADMINISTRATIVE AGENT
In order to expedite the transactions contemplated by this Agreement, (a)
Chase is hereby appointed to act as the Administrative Agent on behalf of the
Lenders and (b) Chase is hereby appointed to hold the collateral on behalf of
the Lenders under, and otherwise act in the capacity set forth in, the Security
Documents and to act in the capacity set forth in Article II. Each of the
Lenders hereby irrevocably authorizes the Administrative Agent to take such
actions on behalf of such Lender or holder and to exercise the powers as are
specifically delegated to the Administrative Agent by the terms and provisions
hereof and of the other Loan Documents, together with such actions and powers as
are reasonably incidental thereto. Chase is hereby expressly authorized by the
Lenders, without hereby limiting any implied authority, to, and shall,
(a) receive on behalf of the Lenders all payments of principal of and interest
on the Loans and all other amounts due to the Lenders hereunder, and promptly to
distribute to each Lender its proper share of each payment so received, (b) give
notice on behalf of each of the Lenders to the Borrower of any Event of Default
specified in this Agreement of which it has actual knowledge acquired in
connection with its agency hereunder and (c) distribute to each Lender copies of
all notices, financial statements and other materials required to be delivered
by the Borrower pursuant to this Agreement as received by Chase.
Neither the Administrative Agent nor any of its directors, officers,
employees or agents shall be liable as such for any action taken or omitted by
any of them except for its or his own gross negligence or wilful misconduct, or
be responsible for any statement, warranty or representation herein or the
contents of any document delivered in connection herewith, or be required to
ascertain or to make any inquiry concerning the performance or observance by the
Borrower of any of the terms, conditions, covenants or agreements contained in
any Loan Document. The Administrative Agent shall not be responsible to the
Lenders for the due execution, genuineness, validity, enforceability or
effectiveness of this Agreement or any other Loan Documents or other instruments
or agreements. The Administrative Agent shall in all cases be fully protected in
acting, or refraining from acting, in accordance with written instructions
signed by the Required Lenders and, except as otherwise specifically provided
herein, such instructions and any action or inaction pursuant thereto shall be
binding on all the Lenders. The Administrative Agent shall, in the absence of
knowledge to the contrary, be entitled to rely on any instrument or document
believed by it in good faith to be genuine and correct and to have been signed
or sent by the proper Person or persons. Neither the Administrative Agent nor
any of its directors, officers, employees or agents shall have any
responsibility to the Borrower on account of the failure of or delay in
performance or breach by any Lender of any of its obligations hereunder or to
any Lender on account of the failure of or delay in performance or breach by any
other Lender or the Borrower of any of their respective obligations hereunder or
under any other Loan Document or in connection herewith or therewith. The
Administrative Agent may execute any and all duties hereunder by or through
agents or employees and shall be entitled to rely upon the advice of legal
counsel selected by it with respect to all matters arising hereunder and shall
not be liable for any action taken or suffered in good faith by it in accordance
with the advice of such counsel.
The Lenders hereby acknowledge that the Administrative Agent shall not be
under any duty to take any discretionary action permitted to be taken by it
pursuant to the provisions of this Agreement or any Security Document unless it
shall be requested in writing to do so by the Required Lenders.
Subject to the appointment and acceptance of a successor Administrative
Agent if the Administrative Agent shall have resigned as provided below, the
Administrative Agent may resign at any time by notifying the Lenders and the
Borrower. Upon any such resignation, the Required Lenders shall have the right
to appoint a successor acceptable to the Borrower. Upon the acceptance of any
appointment as Administrative Agent hereunder by a successor bank, such
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36
successor shall succeed to and become vested with all the rights, powers,
privileges and duties of such resigning Administrative Agent. Upon the
resignation of an Administrative Agent, such resigning Administrative Agent
shall be discharged from its duties and obligations hereunder. After the
Administrative Agent's resignation hereunder, the provisions of this Article and
Section 9.05 shall continue in effect for its benefit in respect of any actions
taken or omitted to be taken by it while it was acting as Administrative Agent.
With respect to the Loans made by it hereunder, the Administrative Agent in
its individual capacity and not as the Administrative Agent shall have the same
rights and powers as any other Lender and may exercise the same as though it
were not the Administrative Agent, and the Administrative Agent and its
Affiliates may accept deposits from, lend money to and generally engage in any
kind of business with the Borrower or any Subsidiary or other Affiliate thereof
as if it were not the Administrative Agent.
Each Lender agrees (a) to reimburse the Administrative Agent, on demand, in
the amount of its pro rata share (based on its Commitment hereunder) of any
expenses incurred for the benefit of the Lenders by the Administrative Agent,
including counsel fees and compensation of agents and employees paid for
services rendered on behalf of the Lenders, that shall not have been reimbursed
by the Borrower and (b) to indemnify and hold harmless the Administrative Agent
and any of its directors, officers, employees or agents, on demand, in the
amount of such pro rata share, from and against any and all liabilities, taxes,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever that may be imposed
on, incurred by or asserted against it in its capacity as a Administrative Agent
or any of them in any way relating to or arising out of this Agreement or any
other Loan Document or any action taken or omitted by it or any of them under
this Agreement or any other Loan Document, to the extent the same shall not have
been reimbursed by the Borrower; PROVIDED, HOWEVER, that no Lender shall be
liable to the Administrative Agent for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the gross negligence or wilful
misconduct of the Administrative Agent or any of its directors, officers,
employees or agents.
Each Lender acknowledges that it has, independently and without reliance
upon the Administrative Agent or any other Lender and based on such documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Lender also acknowledges that it
will, independently and without reliance upon the Administrative Agent or any
other Lender and based on such documents and information as it shall from time
to time deem appropriate, continue to make its own decisions in taking or not
taking action under or based upon this Agreement or any other Loan Document, any
related agreement or any document furnished hereunder or thereunder.
ARTICLE IX. MISCELLANEOUS
SECTION 9.01. NOTICES. Notices and other communications provided for herein
shall be in writing and shall be delivered by hand or overnight courier service,
mailed or sent by telecopy, as follows:
(a) if to the Borrower, to it at 515 West Market Street, 12th Floor,
Louisville, Kentucky 40202-3271, Attention of Peter Resnick (Telecopy
No. 502-582-0903), with copies to Morgan Stanley & Co. Incorporated,
1251 Avenue of the Americas, 28th Floor, New York, New York 10020,
Attention of Frank V. Sica (Telecopy No. 212-703-7951);
(b) if to the Administrative Agent, to The Chase Manhattan Bank at One
Chase Manhattan Plaza, New York, New York 10081, Attention of Peter Platten
(Telecopy No. 212-552-5231);
(c) if to a Lender, to it at its address (or telecopy number) set
forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to
which such Lender shall have become a party hereto.
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telecopy or other telegraphic communications equipment of the sender, or on the
date five Business Days after dispatch by certified or registered mail if
mailed, in each case delivered, sent or mailed (properly addressed) to such
party as provided in this Section 9.01 or in accordance with the latest
unrevoked direction from such party given in accordance with this Section 9.01.
SECTION 9.02. SURVIVAL OF AGREEMENT. All covenants, agreements,
representations and warranties made by the Borrower herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Lenders and shall survive the making by the Lenders
of the Loans, regardless of any investigation made by the Lenders or on their
behalf, and shall continue in full force and effect as long as the principal of
or any accrued interest on any Loan or any Fee or any other amount payable under
this Agreement or any other Loan Document is outstanding and unpaid and so long
as the Commitments have not been terminated (it being understood that no
representation and warranty shall be deemed to have been made on or as of any
date other than the dates referred to in Section 4.01 and 4.02).
<PAGE>
37
SECTION 9.03. BINDING EFFECT. This Agreement shall become effective when it
shall have been executed by the Borrower and the Administrative Agent and when
the Administrative Agent shall have received copies hereof that, when taken
together, bear the signatures of each Lender, and thereafter shall be binding
upon and inure to the benefit of the Borrower, the Administrative Agent and each
Lender and their respective successors and assigns, except that the Borrower
shall not have the right to assign its rights hereunder or any interest herein
without the prior consent of all the Lenders.
SECTION 9.04. SUCCESSORS AND ASSIGNS. (a) Whenever in this Agreement any of
the parties hereto is referred to, such reference shall be deemed to include the
successors and assigns of such party; and all covenants, promises and agreements
by or on behalf of the Borrower, the Administrative Agent or the Lenders that
are contained in this Agreement shall bind and inure to the benefit of their
respective successors and assigns.
(b) Each Lender may assign to one or more assignees all or a portion of its
interests, rights and obligations under this Agreement (including all or a
portion of its Commitment and the Loans at the time owing to it); PROVIDED,
HOWEVER, that (i) except in the case of an assignment to a Lender or an
Affiliate of a Lender or to an Eligible Assignee, the Administrative Agent must
give its prior written consent to such assignment (which consent shall not be
unreasonably withheld) and prior to giving such consent the Administrative Agent
shall consult with the Borrower, (ii) each such assignment shall be of a
constant, and not a varying, percentage of all the assigning Lender's rights and
obligations in connection with its Commitment, (iii) the amount of the
Commitment of the assigning Lender subject to each such assignment (determined
as of the date the Assignment and Acceptance with respect to such assignment is
delivered to the Administrative Agent) shall not be less than $2,500,000 (or, if
less, the then-remaining Commitment of the assigning Lender) and the amount of
the Commitment of such Lender remaining after such assignment shall not be less
than $2,500,000 or shall be zero, (iv) the parties to each such assignment shall
execute and deliver to the Administrative Agent an Assignment and Acceptance,
and a processing and recordation fee of $3,500, and (v) the assignee, if it
shall not be a Lender, shall deliver to the Administrative Agent an
Administrative Questionnaire. Upon acceptance and recording pursuant to
paragraph (e) of this Section 9.04, from and after the effective date specified
in each Assignment and Acceptance, which effective date shall be at least five
Business Days after the execution thereof, (i) the assignee thereunder shall be
a party hereto and, to the extent of the interest assigned by such Assignment
and Acceptance, have the rights and obligations of a Lender under this Agreement
and shall be deemed to be a Lender under this Agreement and (ii) the assigning
Lender thereunder shall, to the extent of the interest assigned by such
Assignment and Acceptance, be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all or the remaining
portion of an assigning Lender's rights and obligations under this Agreement,
such Lender shall cease to be a party hereto but shall continue to be entitled
to the benefits of Sections 2.12, 2.14, 2.18 and 9.05, as well as to any Fees
accrued for its account and not yet paid).
(c) By executing and delivering an Assignment and Acceptance, the assigning
Lender thereunder and the assignee thereunder shall be deemed to confirm to and
agree with each other and the other parties hereto as follows: (i) such
assigning Lender warrants that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim and that its
Commitment, and the outstanding balances of its Loans, in each case without
giving effect to assignments thereof that have not become effective, are as set
forth in such Assignment and Acceptance, (ii) except as set forth in clause (i)
above, such assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement, or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement,
any other Loan Document or any other instrument or document furnished pursuant
hereto, or the financial condition of the Borrower or any Subsidiary or the
performance or observance by the Borrower or any Subsidiary of any of its
obligations under this Agreement, any other Loan Document or any other
instrument or document furnished pursuant hereto; (iii) such assignee represents
and warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 5.04 and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance; (v) such assignee will independently and
without reliance upon the Administrative Agent, such assigning Lender or any
other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement; (vi) such assignee appoints and
authorizes the Administrative Agent to take such action as agent on its behalf
and to exercise such powers under this Agreement as are delegated to the
Administrative Agent by the terms hereof, together with such powers as are
reasonably incidental thereto; and (vii) such assignee agrees that it will
perform in accordance with their terms all the obligations that by the terms of
this Agreement are required to be performed by it as a Lender.
(d) Chase shall maintain at one of its offices in The City of New York a
copy of each Assignment and Acceptance delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the Commitment of,
and principal amount of the Loans owing to, each Lender pursuant to the terms
hereof from time to time (the "REGISTER"). The entries in the Register shall be
conclusive in the absence of manifest error and the Borrower, the Administrative
Agent and the Lenders may treat each Person whose name is recorded in the
Register pursuant to the terms hereof as a Lender hereunder for all purposes of
this Agreement. Any change in the Register from time to time shall be deemed an
amendment to Schedule 2.01. The Register shall be available for inspection by
the Borrower, the Administrative Agent and any Lender at any reasonable time and
from time to time upon reasonable prior notice.
<PAGE>
38
(e) Upon its receipt of a duly completed Assignment and Acceptance executed
by an assigning Lender and an assignee, an Administrative Questionnaire
completed in respect of the assignee (unless the assignee shall already be a
Lender hereunder), the processing and recordation fee referred to in
paragraph (b) above and, if required, the written consent of the Administrative
Agent to such assignment, the Administrative Agent shall (i) accept such
Assignment and Acceptance, (ii) record the information contained therein in the
Register and (iii) give prompt notice thereof to the Borrower, the
Administrative Agent and the Lenders.
(f) Each Lender may without the consent of the Borrower or the
Administrative Agent sell participations to one or more banks or other entities
in all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans owing to it);
PROVIDED, HOWEVER, that (i) such Lender's obligations under this Agreement shall
remain unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) the participating
banks or other entities shall be entitled to the benefit of the cost protection
provisions contained in Sections 2.12, 2.14 and 2.18 to the same extent as if
they were Lenders; PROVIDED, HOWEVER, that the Borrower shall not be required to
reimburse any participating bank pursuant to Section 2.12, Section 2.14 or
Section 2.18 for any amount in excess of the amount payable to the Lender
assigning such participation had such participation not been sold, (iv) the
voting rights of participating banks or other entities shall be limited to
matters in respect of (A) increases in commitments, (B) changes of principal,
interest or fees, (C) extensions of final maturity and (D) certain releases of
collateral and (v) the Borrower, the Administrative Agent and the other Lenders
shall continue to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under this Agreement, and such Lender shall
retain the sole right to enforce the obligations of the Borrower relating to the
Loans and to approve any amendment, modification or waiver of any provision of
this Agreement (other than amendments, modifications or waivers decreasing any
fees payable hereunder or the amount of principal of or the rate at which
interest is payable on the Loans, extending any scheduled principal payment date
or date fixed for the payment of interest on the Loans, changing or extending
the Commitments, releasing any collateral from the Lien created by any Security
Document or releasing any guarantor of the Obligations).
(g) Any Lender or participant may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
9.04, disclose to the assignee or participant or proposed assignee or
participant any information relating to the Borrower furnished to such Lender by
or on behalf of the Borrower; PROVIDED, HOWEVER, that, prior to any such
disclosure of information designated by the Borrower as confidential, each such
assignee or participant or proposed assignee or participant shall execute an
agreement (in form and substance reasonably satisfactory to the Borrower)
whereby such assignee or participant shall agree (subject to customary
exceptions) to preserve the confidentiality of such confidential information.
(h) Any Lender may at any time assign all or any portion of its rights
under this Agreement to a Federal Reserve Bank in accordance with Regulation A
of the Board; PROVIDED, HOWEVER, that no such assignment shall release a Lender
from any of its obligations hereunder.
(i) The Borrower shall not assign or delegate any of its rights or duties
hereunder.
SECTION 9.05. EXPENSES; INDEMNITY. (a) The Borrower agrees to pay all
reasonable out-of-pocket expenses incurred by the Administrative Agent in
connection with the preparation of this Agreement and the other Loan Documents
(including with respect to any due diligence performed in connection therewith)
or in connection with any amendments, modifications or waivers of the provisions
hereof or thereof (whether or not the transactions hereby contemplated shall be
consummated) or incurred by the Administrative Agent or any Lender in connection
with the enforcement or protection of their rights in connection with this
Agreement and the other Loan Documents or in connection with the Loans made
hereunder, including, but not limited to, the reasonable fees, charges and
disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent,
and, in connection with any such amendment, modification or waiver or any such
enforcement or protection, the fees, charges and disbursements of any other
counsel for the Administrative Agent.
(b) The Borrower agrees to indemnify the Administrative Agent, each Lender
and each of their respective directors, officers, employees and agents (each
such Person being called an "INDEMNITEE") against, and to hold each Indemnitee
harmless from, any and all losses, claims, damages, liabilities and related
expenses, including reasonable counsel fees, charges and disbursements, incurred
by or asserted against any Indemnitee arising out of, in any way connected with,
or as a result of (i) the execution or delivery of this Agreement or any other
Loan Document or any agreement or instrument contemplated thereby, the
performance by the parties thereto of their respective obligations thereunder or
the consummation of the Transactions and the other transactions contemplated
thereby, (ii) the use of the proceeds of the Loans or (iii) any claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether or not any Indemnitee is a party thereto; PROVIDED, HOWEVER, that such
indemnity shall not, as to any Indemnitee, be available to the extent that such
losses, claims, damages, liabilities or related expenses are determined by a
court of competent jurisdiction by final and nonappealable judgment to have
resulted from the gross negligence or wilful misconduct of such Indemnitee.
(c) The provisions of this Section 9.05 shall remain operative and in full
force and effect regardless of the expiration of the term of this Agreement, the
consummation of the Transactions, the repayment of any of the Loans, the
invalidity or unenforceability of any term or provision of this Agreement or any
other Loan Document, or any
<PAGE>
39
investigation made by or on behalf of the Administrative Agent or any Lender.
All amounts due under this Section 9.05 shall be payable on written demand
therefor.
SECTION 9.06. RIGHT OF SETOFF. If an Event of Default shall have occurred
and be continuing, each Lender is hereby authorized at any time and from time to
time, to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by such Lender to or for the
credit or the account of the Borrower against any of and all the obligations of
the Borrower now or hereafter existing under this Agreement and other Loan
Documents held by such Lender, irrespective of whether or not such Lender shall
have made any demand under this Agreement or such other Loan Document and
although such obligations may be unmatured. The rights of each Lender under this
Section are in addition to other rights and remedies (including other rights of
setoff) that such Lender may have.
SECTION 9.07. APPLICABLE LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK.
SECTION 9.08. WAIVERS; AMENDMENT. (a) No failure or delay of the
Administrative Agent or any Lender in exercising any power or right hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
the exercise of any other right or power. The rights and remedies of the
Administrative Agent and the Lenders hereunder and under the other Loan
Documents are cumulative and are not exclusive of any rights or remedies that
they would otherwise have. No waiver of any provision of this Agreement or any
other Loan Document or consent to any departure by the Borrower therefrom shall
in any event be effective unless the same shall be permitted by paragraph (b)
below, and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice or demand on the
Borrower in any case shall entitle the Borrower to any other or further notice
or demand in similar or other circumstances.
(b) Neither this Agreement nor the other Loan Documents nor any provision
hereof or thereof may be waived, amended or modified except pursuant to an
agreement or agreements in writing entered into by the Borrower and the Required
Lenders; PROVIDED, HOWEVER, that no such agreement shall (i)(A) decrease (or
waive or excuse the payment of) the principal amount of any Loan due to any
Lender on the Maturity Date, (B) extend the Maturity Date or (C) extend the
date for the payment of any interest on any Loan, or waive or excuse any such
payment or any part thereof, made by any Lender or (D) decrease the rate of
interest on any Loan made by any Lender, in each case, without the prior written
consent of each Lender (excluding from the coverage of this clause (i) interest
payable pursuant to Section 2.07 as a result of a default in the prepayment of
the principal amount of any Loan for which the Borrower has delivered a notice
pursuant to Section 2.11(a), the waiver of which shall be effective upon the
consent of the Required Lenders), (ii) increase or extend the Commitment of any
Lender past the Maturity Date or decrease the Commitment Fees of any Lender, in
each case without the prior written consent of each Lender, (iii) amend or
modify the provisions of Section 2.15, the provisions of this Section 9.08(b) or
the definition of the term "Required Lenders" (or any other provision hereof
specifying the number of Lenders required to take any action hereunder) without
the prior written consent of each Lender, (iv) release any of the collateral
from the Lien created by any Security Document without the prior written consent
of each Lender, except as provided in Section 6.05 hereof, Sections 2.04 and
5.15 of the Pledge Agreement and Sections 4 and 8 of the Assignment Agreement,
(v) waive any of the provisions of Section 4.02 without the prior written
consent of each Lender or (vi) release any guarantor without the prior consent
of each Lender; PROVIDED FURTHER, HOWEVER, that no such agreement shall amend,
modify or otherwise affect the rights or duties of the Administrative Agent
hereunder without the prior written consent of the Administrative Agent.
SECTION 9.09. INTEREST RATE LIMITATION. Notwithstanding anything herein to
the contrary, if at any time the applicable interest rate, together with all
fees and charges which are treated as interest under applicable law
(collectively the "CHARGES"), as provided for herein or in any other document
executed in connection herewith, or otherwise contracted for, charged, received,
taken or reserved by any Lender, shall exceed the maximum lawful rate (the
"MAXIMUM RATE") that may be contracted for, charged, taken, received or reserved
by such Lender in accordance with applicable law, the rate of interest payable
on the Loans of such Lender, together with all Charges payable to such Lender,
shall be limited to the Maximum Rate.
SECTION 9.10. ENTIRE AGREEMENT. This Agreement, the other Loan Documents
and the Fee Letter referred to in Section 2.05(c) constitute the entire contract
between the parties relative to the subject matter hereof. Any previous
agreement among the parties with respect to the subject matter hereof is
superseded by this Agreement and the other Loan Documents. Nothing in this
Agreement or in the other Loan Documents, expressed or implied, is intended to
confer upon any party other than the parties hereto and thereto any rights,
remedies, obligations or liabilities under or by reason of this Agreement or the
other Loan Documents.
SECTION 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH
PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED,
<PAGE>
40
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11.
SECTION 9.12. SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement or in any other Loan Document should be held
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and therein shall
not in any way be affected or impaired thereby. The parties shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.
SECTION 9.13. COUNTERPARTS. This Agreement 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, and shall become effective as
provided in Section 9.03. Delivery of an executed counterpart of a signature
page to this Agreement by facsimile transmission shall be effective as delivery
of a manually executed counterpart of this Agreement.
SECTION 9.14. HEADINGS. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 9.15. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) Each party
hereby irrevocably and unconditionally submits, for itself and its property, to
the nonexclusive jurisdiction of any New York State court or Federal court of
the United States of America sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to this
Agreement or the other Loan Documents, or for recognition or enforcement of any
judgment, and each of the parties hereto hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding may be heard
and determined in such New York State or, to the extent permitted by law, in
such Federal court. Each of the parties hereto agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that any Lender may otherwise
have to bring any action or proceeding relating to this Agreement or the other
Loan Documents against the Borrower or its properties in the courts of any
jurisdiction.
(b) Each party hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection that it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this agreement or the other Loan Documents in any
New York State or Federal court. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to service of process
in the manner provided for notices in Section 9.01. Nothing in this Agreement
will affect the right of any party to this Agreement to serve process in any
other manner permitted by law.
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Administrative Agent and the Lenders
have caused this Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
ARM FINANCIAL GROUP, INC.,
by
/s/: Martin H. Ruby
-------------------
Name: Martin H. Ruby
Title: Co-Chairman of the Board and
Co-Chief Executive Officer
by
/s/: John Franco
----------------
Name: John Franco
Title: Co-Chairman of the Board and
Co-Chief Executive Officer
THE CHASE MANHATTAN BANK, individually,
and as Administrative Agent,
by
/s/: Peter Platten
------------------
Name: Peter Platten
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
by
/s/: Douglas J. Weir
--------------------
Name: Douglas J. Weir
Title: Vice President
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES,
by
/s/: Louis Caltavuturo
----------------------
Name: Louis Caltavuturo
Title: Vice President
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES,
by
/s/: John S. McGill
-------------------
Name: John S. McGill
Title: Vice President
<PAGE>
DRESDNER BANK AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH,
by
/s/: John W. Sweeney
--------------------
Name: John W. Sweeney
Title: Assistant Vice President
DRESDNER BANK AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH,
by
/s/: Brigitte Sacin
-------------------
Name: Brigitte Sacin
Title: Assistant Treasurer
THE FIRST NATIONAL BANK OF CHICAGO,
by
/s/: Joseph M. Manzella
-----------------------
Name: Joseph M. Manzella
Title: Assistant Vice President
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
by
/s/: Gail M. Golightly
----------------------
Name: Gail M. Golightly
Title: Senior Vice President
PNC BANK, KENTUCKY, INC.
by
/s/: Mark F. Wheeler
--------------------
Name: Mark F. Wheeler
Title: Sr. Vice President
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
by
/s/: Harold P. Bitler
---------------------
Name: Harold P. Bitler
Title: First Vice President
<PAGE>
EXECUTION COPY
ASSIGNMENT AGREEMENT dated as of June 24, 1997, between ARM
FINANCIAL GROUP, INC., a Delaware corporation (the "BORROWER"),
Integrity Holdings, Inc., a Delaware corporation ("HOLDINGS" and
together with the Borrower, the "ASSIGNORS") and THE CHASE
MANHATTAN BANK, a New York banking corporation ("CHASE
MANHATTAN"), as representative for the Secured Parties (as
defined herein) (in such capacity, the "REPRESENTATIVE").
Reference is made to the Credit Agreement dated as of June 24, 1997
(as amended, supplemented or otherwise modified from time to time, the "CREDIT
AGREEMENT"), among the Borrower, the financial institutions party thereto as
lenders (the "LENDERS") and Chase Manhattan, as administrative agent (in such
capacity, the "ADMINISTRATIVE AGENT"). The Lenders have agreed to extend credit
to the Borrower pursuant to, and subject to the terms and conditions specified
in, the Credit Agreement. The obligations of the Lenders to extend credit under
the Credit Agreement are conditioned upon, among other things, the execution and
delivery by the Assignors of and the consent of certain parties to, an
assignment agreement in the form hereof to secure (a) the due and punctual
payment by the Borrower of (i) the principal of and interest on the Loans, when
and as due, whether at maturity, by acceleration, upon one or more dates set for
prepayment or otherwise and (ii) all other monetary obligations of the Borrower
to the Secured Parties under the Credit Agreement and the other Loan Documents
to which the Borrower is a party, (b) the due and punctual performance of all
other obligations of the Borrower under the Credit Agreement and the other Loan
Documents to which the Borrower is a party, (c) the due and punctual payment by
the Borrower of all obligations in respect of all Permitted Swaps that provide,
in the respective instruments creating such Permitted Swaps, that such Permitted
Swaps are to be secured pursuant hereto (each such Permitted Swap being referred
to herein as a "PERMITTED SECURED SWAP") and (d) the due and punctual
performance of all Obligations under the Guarantee Agreement (all the foregoing
obligations being collectively called the "OBLIGATIONS").
Accordingly, the Assignors and the Representative hereby agree as follows:
ARTICLE I. DEFINITIONS
SECTION 1. TERMS DEFINED IN THE CREDIT AGREEMENT. Terms used herein
and not otherwise defined herein shall have the meanings set forth in the Credit
Agreement.
SECTION 2. ASSIGNMENT. As security for the payment or performance, as
the case may be, of the Obligations, each Assignor hereby assigns and grants a
security interest in all of its right, title and interest, claims and remedies
and all other benefits in, to and under all tax sharing agreements between the
Borrower and the Subsidiaries and all management agreements between the Borrower
and the Subsidiaries (together, the "ASSIGNED AGREEMENTS"). The foregoing
assignment shall include (a) any and all rights of such Assignor to receive and
demand payments under any and all Assigned Agreements, (b) any and all rights of
such Assignor to receive and compel performance under any and all Assigned
Agreements and (c) any and all rights, interests and claims of such Assignor now
existing or hereinafter arising under any and all Assigned Agreements.
SECTION 3. NO ASSUMPTION OF LIABILITY. The assignment and security
interest granted herein is granted as security only and shall not subject the
Representative or any of (a) the Lenders party to the Credit Agreement, (b) the
Administrative Agent in its capacity under each Loan Document, (c) the
beneficiaries of any indemnification obligation undertaken by any Pledgor or
Grantor under any Loan Document, (d) the successors and assigns of the foregoing
or (e) the Lenders in their respective capacities as counterparties in respect
of any Permitted Secured Swaps (collectively, the "SECURED PARTIES") to, or in
any way alter or modify, any obligation or liability of any Assignor with
respect to or arising out of any of the Assigned Agreements.
SECTION 4. ACTIONS PRIOR TO AN EVENT OF DEFAULT. Unless and until the
Representative shall have notified the Borrower that an Event of Default shall
have occurred and be continuing, each Assignor may perform its respective
obligations under the Assigned Agreements and may take any other actions in
respect of such Assigned Agreement in any lawful manner not inconsistent with
the provisions of this Agreement, the Credit Agreement or any other Loan
Document.
SECTION 5. GOVERNING LAW. THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 6. COUNTERPARTS. This Assignment Agreement may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute one and the same instrument. Delivery
of an executed counterpart of a signature page of this Assignment Agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this Assignment Agreement.
<PAGE>
SECTION 7. EFFECTIVENESS. This Assignment Agreement shall not be
effective until each of Integrity, National Integrity and National Mutual of
Australasia shall have given written consent to the assignment of the Assigned
Agreements to which it is a party.
SECTION 8. TERMINATION. This Assignment Agreement and the security
interests granted hereby shall terminate when the principal of and interest on
all the Loans shall have been indefeasibly paid in full, the Commitments shall
have been terminated and (if due and payable on the first date that the
principal of and interest on all Loans have been paid in full and the
Commitments have been terminated) all Fees, expenses and other amounts payable
under any Loan Document shall have been paid.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Assignment Agreement as of the day and year first above written.
ARM FINANCIAL GROUP, INC.,
by
-------------------------------
Name:
Title:
by
-------------------------------
Name:
Title:
INTEGRITY HOLDINGS, INC.,
by
-------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, as representative for
the Secured Parties,
by
-------------------------------
Name:
Title:
Consented to by:
INTEGRITY LIFE
INSURANCE COMPANY,
by
----------------------------
Name:
Title:
NATIONAL INTEGRITY
LIFE INSURANCE COMPANY,
by
----------------------------
Name:
Title:
<PAGE>
EXECUTION COPY
GUARANTEE AGREEMENT
GUARANTEE AGREEMENT dated as of June 24, 1997, among
INTEGRITY HOLDINGS, INC., a Delaware corporation (the
"GUARANTOR") and THE CHASE MANHATTAN BANK, a New York banking
corporation, as representative for the Secured Parties (as
defined in the Pledge Agreement dated as of June 24, 1997 among
the Borrower, the Guarantor and the Representative) (in such
capacity, the "REPRESENTATIVE").
Reference is made to the Credit Agreement dated as of June 27,
1997(as amended, supplemented or otherwise modified from time to time,
the "CREDIT AGREEMENT"), among the Borrower, the financial institutions
party thereto as lenders (the "LENDERS") and The Chase Manhattan Bank,
as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT").
The Lenders have agreed to extend credit to the Borrower pursuant to,
and subject to the terms and conditions specified in, the Credit
Agreement. The Guarantor is a wholly owned Subsidiary of the Borrower
and acknowledges that it will derive substantial benefit from the making
of the Loans by the Lenders. The obligations of the Lenders to extend
credit under the Credit Agreement are conditioned upon, among other
things, the execution and delivery by the Guarantor of a guarantee
agreement in the form hereof. As consideration therefor and in order to
induce the Lenders to make Loans, the Guarantor is willing to execute
this Agreement. Terms used herein and not otherwise defined herein shall
have the meanings set forth in the Credit Agreement.
Accordingly, the parties hereto agree as follows:
SECTION 1. GUARANTEE. The Guarantor unconditionally guarantees,
as a primary obligor and not merely as a surety, (a) the due and
punctual payment by the Borrower of (i) the principal of and interest on
the Loans, when and as due, whether at maturity, by acceleration, upon
one or more dates set for prepayment or otherwise and (ii) all other
monetary obligations of the Borrower to the Secured Parties under the
Credit Agreement and the other Loan Documents to which the Borrower is
or is to be a party, (b) the due and punctual performance of all other
obligations of the Borrower under the Credit Agreement and the other Loan
Documents to which the Borrower is or is to be a party and (c) the due and
punctual payment of all obligations in respect of all Permitted Swaps that
provide, in the respective instruments creating such Permitted Swaps,
that such Permitted Swaps are to be guaranteed pursuant hereto (each
such Permitted Swap being referred to herein as a "PERMITTED SECURED
SWAP") (all the foregoing obligations referred to in the preceding
clauses (a) through (c) being collectively called the "OBLIGATIONS").
The Guarantor further agrees that the Obligations may be extended or
renewed, in whole or in part, without notice to or further assent from
it, and that it will remain bound upon its guarantee notwithstanding any
extension or renewal of any Obligation.
Anything contained in this Agreement to the contrary
notwithstanding, the obligations of the Guarantor hereunder shall be limited to
a maximum aggregate amount equal to the greatest amount that would not render
the Guarantor's obligations hereunder subject to avoidance as a fraudulent
transfer or conveyance under Section 548 of Title 11 of the United States Code
or any provisions of applicable state law (collectively, the "FRAUDULENT
TRANSFER LAWS"), in each case after giving effect to all other liabilities of
the Guarantor, contingent or otherwise, that are relevant under the Fraudulent
Transfer Laws (specifically excluding, however, any liabilities of the Guarantor
(a) in respect of intercompany indebtedness to the Borrower or Affiliates of the
Borrower to the extent that such indebtedness would be discharged in an amount
equal to the amount paid by the Guarantor hereunder and (b) under any Guarantee
of senior unsecured indebtedness or Indebtedness subordinated in right of
payment to the Obligations which Guarantee contains a limitation as to maximum
amount similar to that set forth in this paragraph, pursuant to which the
liability of the Guarantor hereunder is included in the liabilities taken into
account in determining such maximum amount) and after giving effect as assets to
the value (as determined under the applicable provisions of the Fraudulent
Transfer Laws) of any rights to subrogation, contribution, reimbursement,
indemnity or similar rights of the Guarantor pursuant to (i) applicable law or
(ii) any agreement providing for an equitable allocation among the Guarantor and
other Affiliates of the Borrower of obligations arising under guarantees by such
parties.
SECTION 2. OBLIGATIONS NOT WAIVED; NO DISCHARGE OR DIMINISHMENT
OF GUARANTEE. To the fullest extent permitted by applicable law, the
Guarantor waives presentment to,
<PAGE>
demand of payment from and protest to the Borrower of any of the
Obligations, and also waives notice of acceptance of its guarantee and
notice of protest for nonpayment. To the fullest extent permitted by
applicable law, the obligations of the Guarantor hereunder shall not be
subject to any reduction, limitation, impairment or termination for any
reason (other than the indefeasible payment in full in cash of the
Obligations), including any claim of waiver, release, surrender,
alteration or compromise of any of the Obligations, and shall not be
subject to any defense or setoff, counterclaim, recoupment or termination
whatsoever by reason of the invalidity, illegality or unenforceability of
the Obligations or otherwise. Without limiting the generality of the
foregoing, the obligations of the Guarantor hereunder shall not be
discharged or impaired or otherwise affected by (a) the failure of the
Representative or any other Secured Party to assert any claim or demand
or to enforce or exercise any right or remedy against the Borrower under
the provisions of the Credit Agreement, any other Loan Document or any
other agreement, (b) any rescission, waiver, amendment or modification
of, or any release from any of the terms or provisions of this
Agreement, any other Loan Document, any Guarantee or any other
agreement, (c) any default, failure or delay, wilful or otherwise, in the
performance of the Obligations, (d) any other act or omission that may or
might in any manner or to any extent vary the risk of the Guarantor or
that would otherwise operate as a discharge of the Guarantor as a matter
of law or equity (other than the indefeasible payment in full in cash of
all the Obligations) or (e) the failure to perfect any security interest
in, or the release of, any of the security held by or on behalf of the
Representative or any other Secured Party.
SECTION 3. GUARANTEE OF PAYMENT. The Guarantor further agrees
that its guarantee constitutes a guarantee of payment when due and not
of collection, and waives any right to require that any resort be had by
the Representative or any other Secured Party to any of the security
held for payment of the Obligations or to any balance of any deposit
account or credit on the books of the Representative or any other
Secured Party in favor of the Borrower or any other person.
SECTION 4. DEFENSES OF BORROWER WAIVED. To the fullest extent
permitted by applicable law, the Guarantor waives any defense based on or
arising out of any defense of the Borrower or the unenforceability of the
Obligations or any part thereof from any cause, or the cessation from
any cause of the liability of the Borrower, other than the final and
indefeasible payment in full in cash of the Obligations.
SECTION 5. AGREEMENT TO PAY; SUBORDINATION. In furtherance of
the foregoing and not in limitation of any other right that the
Representative or any other Secured Party has at law or in equity
against the Guarantor by virtue hereof, upon the failure of the Borrower
or any other Loan Party to pay any Obligation when and as the same shall
become due, whether at maturity, by acceleration, after notice of
prepayment or otherwise, the Guarantor hereby promises to and will
forthwith pay, or cause to be paid, to the Representative or such other
Secured Party as designated thereby in cash the amount of such unpaid
Obligations. Upon payment by the Guarantor of any sums to the
Representative or any Secured Party as provided above, all rights of the
Guarantor against the Borrower arising as a result thereof by way of right of
subrogation, contribution, reimbursement, indemnity or otherwise shall
in all respects be subordinate and junior in right of payment to the
prior indefeasible payment in full in cash of all the Obligations. In
addition, any indebtedness of the Borrower now or hereafter held by the
Guarantor is hereby subordinated in right of payment to the prior
payment in full of the Obligations. If any amount shall erroneously be
paid to the Guarantor on account of (i) such subrogation, contribution,
reimbursement, indemnity or similar right or (ii) any such indebtedness
of the Borrower, such amount shall be held in trust for the benefit of
the Secured Parties and shall forthwith be turned over to the Representative
in the exact form received by the Guarantor (duly endorsed by the
Guarantor to the Representative, if required) to be credited against the
payment of the Obligations, whether matured or unmatured, in accordance
with the terms of the Loan Documents.
SECTION 6. INFORMATION. The Guarantor assumes all
responsibility for being and keeping itself informed of the Borrower's
financial condition and assets, and of all other circumstances bearing
upon the risk of nonpayment of the Obligations and the nature, scope and
extent of the risks that the Guarantor assumes and incurs hereunder, and
agrees that none of the Representative or the other Secured Parties will
have any duty to advise the Guarantor of information known to it or any
of them regarding such circumstances or risks.
<PAGE>
SECTION 7. REPRESENTATIONS AND WARRANTIES. The Guarantor
represents and warrants as to itself that all representations and
warranties relating to it contained in the Credit Agreement are true and
correct.
SECTION 8. TERMINATION. The Guarantee made hereunder (a) shall
terminate when the principal of and interest on all the Loans shall have
been indefeasibly paid in full, the Commitments shall have been
terminated and (if due and payable on the first date that the principal
of and interest on all the Loans shall have been paid in full and the
Commitments shall have been terminated) all Fees, expenses and other
amounts payable under any Loan Document shall have been paid and (b)
shall continue to be effective or be reinstated, as the case may be, if
at any time payment, or any part thereof, of any Obligation is rescinded
or must otherwise be restored by any Secured Party or the Guarantor upon
the bankruptcy or reorganization of the Borrower, the Guarantor or
otherwise.
SECTION 9. BINDING EFFECT; SEVERAL AGREEMENT; ASSIGNMENTS.
Whenever in this Agreement any of the parties hereto is referred to,
such reference shall be deemed to include the successors and assigns of
such party; and all covenants, promises and agreements by or on behalf
of the Guarantor or the Representative that are contained in this
Agreement shall bind and inure to the benefit of each party hereto and
their respective successors and assigns. This Agreement shall become
effective as to the Guarantor when a counterpart hereof executed on
behalf of the Guarantor shall have been delivered to the Representative,
and a counterpart hereof shall have been executed on behalf of the
Representative, and thereafter shall be binding upon the Guarantor and the
Representative and their respective successors and assigns, and shall inure
to the benefit of the Guarantor, the Representative and the other
Secured Parties, and their respective successors and assigns, except
that the Guarantor shall not have the right to assign its rights or
obligations hereunder or any interest herein (and any such attempted
assignment shall be void). If all of the capital stock of the Guarantor
is sold, transferred or otherwise disposed of pursuant to a transaction
permitted by Section 6.05 of the Credit Agreement, the Guarantor shall
be released from its obligations under this Agreement without further
action.
SECTION 10. WAIVERS; AMENDMENT. (a) No failure or delay of the
Representative in exercising any power or right hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The rights and
remedies of the Representative hereunder and of the other Secured
Parties under the other Loan Documents are cumulative and are not
exclusive of any rights or remedies that they would otherwise have. No
waiver of any provision of this Agreement or consent to any departure by the
Guarantor therefrom shall in any event be effective unless the same shall
be permitted by paragraph (b) below, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for
which given. No notice or demand on the Guarantor in any case shall
entitle the Guarantor to any other or further notice or demand in
similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to a written agreement
entered into between the Guarantor and the Representative, with the
prior written consent of the Required Lenders (except as otherwise
provided in the Credit Agreement).
SECTION 11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 12. NOTICES. All communications and notices hereunder
shall be in writing and given as provided in Section 9.01 of the Credit
Agreement. All communications and notices hereunder to the Guarantor
shall be given to it at its address set forth on Schedule I hereto, with
a copy to the Borrower.
<PAGE>
SECTION 13. SURVIVAL OF AGREEMENT; SEVERABILITY. (a) All
covenants, agreements, representations and warranties made by the
Guarantor herein and in the certificates or other instruments prepared
or delivered in connection with or pursuant to this Agreement or any
other Loan Document shall be considered to have been relied upon by the
Representative and the other Secured Parties and, except for any
terminations, amendments or modifications thereof in accordance with the
terms hereof or thereof, shall survive the making by the Lenders of the
Loans regardless of any investigation made by the Secured Parties or on their
behalf, and, except for any termination, amendments or modifications
thereof in accordance with the terms hereof, shall continue in full
force and effect as long as the principal of or any accrued interest on
any Loan or any other fee or amount payable under this Agreement or any
other Loan Document is outstanding and unpaid and as long as the
Commitments have not been terminated.
(b) In the event any one or more of the provisions contained in
this Agreement or in any other Loan Document should be held invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby (it being
understood that the invalidity of a particular provision in a particular
jurisdiction shall not in and of itself affect the validity of such
provision in any other jurisdiction). The parties shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as
close as possible to that of the invalid, illegal or unenforceable
provisions.
SECTION 14. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall constitute an original, but all of which
when taken together shall constitute a single contract, and shall become
effective as provided in Section 9. Delivery of an executed signature
page to this Agreement by facsimile transmission shall be as effective
as delivery of a manually executed counterpart of this Agreement.
SECTION 15. RULES OF INTERPRETATION. The rules of
interpretation specified in Section 1.02 of the Credit Agreement shall
be applicable to this Agreement.
SECTION 16. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a)
The Guarantor hereby irrevocably and unconditionally submits, for itself and
its property, to the nonexclusive jurisdiction of any New York State court or
Federal court of the United States of America sitting in New York City, and
any appellate court from any thereof, in any action or proceeding arising out
of or relating to this Agreement or the other Loan Documents, or for
recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of
any such action or proceeding may be heard and determined in such New York
State or, to the extent permitted by law, in such Federal court. Each of the
parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Agreement
shall affect any right that the Representative or any other Secured Party may
otherwise have to bring any action or proceeding relating to this Agreement
or the other Loan Documents against the Guarantor or its properties in the
courts of any jurisdiction.
(b) The Guarantor hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement or
the other Loan Documents in any New York State or Federal court. Each of the
parties hereto hereby irrevocably waives, to the fullest extent permitted by
law, the defense of an inconvenient forum to the maintenance of such action
or proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 12. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
SECTION 17. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION
<PAGE>
DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 17.
SECTION 18. RIGHT OF SETOFF. If an Event of Default shall have
occurred and be continuing, each Secured Party is hereby authorized at
any time and from time to time, to the fullest extent permitted by law,
to set off and apply, in a manner consistent with Section 2.16 of the
Credit Agreement, any and all deposits (general or special, time or
demand, provisional or final) at any time held and other Indebtedness at
any time owing by such Secured Party to or for the credit or the account
of the Guarantor against any or all the obligations of the Guarantor now
or hereafter existing under this Agreement and the other Loan Documents
held by such Secured Party, irrespective of whether or not such Secured
Party shall have made any demand under this Agreement or any other Loan
Document and although such obligations may be unmatured. In the event a
Secured Party shall exercise its right of setoff pursuant to this
Section 18, such Secured Party shall promptly notify the Guarantor of such
setoff and the application of the proceeds thereof, PROVIDED that the
failure to give such notice shall not affect the validity of such setoff
and the application of the proceeds thereof. The rights of each Secured
Party under this Section 18 are in addition to other rights and remedies
(including other rights of setoff) which such Secured Party may have.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
INTEGRITY HOLDINGS, INC., as Guarantor,
by
______________________
Name:
Title: Authorized Officer
THE CHASE MANHATTAN BANK, as
Representative for the Secured
Parties,
by
_______________________
Name:
Title:
<PAGE>
EXECUTION COPY
PLEDGE AGREEMENT dated as of June 24, 1997, among ARM
FINANCIAL GROUP, INC., a Delaware corporation (the "BORROWER");
INTEGRITY HOLDINGS, INC., a Delaware corporation ("Holdings";
the Borrower and Holdings being collectively called the "PLEDGORS");
and THE CHASE MANHATTAN BANK, a New York banking corporation
("CHASE MANHATTAN"), as representative for the Secured Parties
(as defined herein) (in such capacity, the "REPRESENTATIVE").
Reference is made to the Credit Agreement dated as of June 24, 1997
(as amended, supplemented or otherwise modified from time to time, the
"CREDIT AGREEMENT"), among the Borrower, the financial institutions
party thereto as lenders (the "LENDERS") and Chase Manhattan, as
administrative agent (in such capacity, the "ADMINISTRATIVE AGENT"). The
Lenders have agreed to extend credit to the Borrower pursuant to, and
subject to the terms and conditions specified in, the Credit Agreement.
The obligations of the Lenders to extend credit under the Credit
Agreement are conditioned upon, among other things, the execution and
delivery by the Pledgors of a pledge agreement in the form hereof to secure
(a) the due and punctual payment by the Borrower of (i) the principal of
and interest on the Loans, when and as due, whether at maturity, by
acceleration, upon one or more dates set for prepayment or otherwise and
(ii) all other monetary obligations of the Borrower to the Secured
Parties under the Credit Agreement and the other Loan Documents to which
the Borrower is or is to be a party, (b) the due and punctual
performance of all other obligations of the Borrower under the Credit
Agreement and the other Loan Documents to which the Borrower is or is to
be a party, (c) the due and punctual payment of all obligations in
respect of all Permitted Swaps that provide, in the respective
instruments creating such Permitted Swaps, that such Permitted Swaps are to
be secured pursuant hereto (each such Permitted Swap being referred to
herein as a "PERMITTED SECURED SWAP") and (d) the due and punctual
performance or all Obligations under the Guarantee Agreement (all the
foregoing obligations being collectively called the "OBLIGATIONS").
Accordingly, the Pledgors and the Representative hereby agree as
follows:
ARTICLE I. DEFINITIONS
SECTION 1.01. TERMS DEFINED IN THE CREDIT AGREEMENT. Terms used
herein and not otherwise defined herein shall have the meanings set forth in the
Credit Agreement.
SECTION 1.02. DEFINITION OF CERTAIN TERMS USED HEREIN. As used
herein, the following terms shall have the following meanings:
"COLLATERAL" shall have the meaning assigned to such term in Section
2.01.
"CREDIT AGREEMENT" shall have the meaning assigned to such term
in the preliminary statement of this Agreement.
"FEDERAL SECURITIES LAWS" shall have the meaning assigned to such
term in Section 4.03.
"OBLIGATIONS" shall have the meaning assigned to such term in the
preliminary statement of this Agreement.
"PLEDGED SECURITIES" shall mean the Pledged Stock, all other shares of
capital stock, debt securities and other securities (including warrants, options
and similar rights to acquire securities) now or hereafter included in the
Collateral and all stock certificates and other instruments evidencing any such
securities.
"PLEDGED STOCK" shall have the meaning assigned to such term in
Section 2.01.
"SECURED PARTIES" shall mean (a) the Lenders party to the Credit
Agreement, (b) the Administrative Agent in such capacity under each Loan
Document, the Representative in such capacity under each Loan Document, (d) the
beneficiaries of each indemnification obligation undertaken by any Pledgor under
any Loan Document, (e) the successors and assigns of the foregoing and (f) the
Lenders in their respective capacities as counterparties in respect of any
Permitted Secured Swap.
SECTION 1.03. RULES OF INTERPRETATION. The rules of interpretation
specified in Section 1.02 of the Credit Agreement shall be applicable to this
Agreement.
<PAGE>
2
ARTICLE II. PLEDGE
SECTION 2.01. PLEDGE. As security for the payment or
performance, as the case may be, of its respective Obligations, each
Pledgor hereby bargains, sells, conveys, assigns, sets over, mortgages,
pledges, hypothecates and transfers to the Representative its successors
and its assigns (for the benefit of the Secured Parties) and hereby
grants to the Representative, its successors and assigns (for the
benefit of the Secured Parties) a security interest in, all of such
Pledgor's right, title and interest in, to and under (a) the securities
consisting of the shares of capital stock listed opposite the name of such
Pledgor on Schedule I and all shares of the capital stock of any United
States Subsidiary currently existing (other than ARM Capital Advisors,
LLC, which was created to effectuate the sale of substantially all of
the assets of ARM Capital Advisors, Inc. as permitted by Section 6.05 of
the Credit Agreement) or hereafter acquired by such Pledgor other than
subsidiaries of Insurance Subsidiaries (the "PLEDGED STOCK") and the
certificates representing the Pledged Stock, (b) all other property that
may be delivered to and held by the Representative pursuant to the terms
of Section 2.04(a)(iii), (c) subject to Section 2.04, all rights and
privileges of such Pledgor with respect to the securities and other
property referred to in clauses (a) and (b) above and (d) all proceeds
of any of the items referred to in clauses (a) through (c) above and in
this clause (d) (the items referred to in clauses (a) through (d) being
collectively called the "COLLATERAL").
TO HAVE AND TO HOLD the Collateral, together with all right,
title, interest, powers, privileges and preferences pertaining or
incidental thereto, unto the Representative, its successors and its
assigns, for the benefit of the Secured Parties, forever; SUBJECT,
HOWEVER, to the terms, covenants and conditions hereinafter set forth.
SECTION 2.02. DELIVERY OF THE COLLATERAL; INTERCOMPANY
OBLIGATIONS. (a) Upon delivery to the Representative (i) the Pledged
Securities shall be accompanied by stock powers duly executed in blank
or other instruments of transfer satisfactory to the Representative and
by such other instruments and documents as the Representative may
reasonably request and (ii) all other property comprising part of the
Collateral shall be accompanied by proper instruments of assignment duly
executed by the applicable Pledgor and such other instruments or
documents as the Representative may reasonably request. Each delivery of
Pledged Securities shall be accompanied by a schedule describing the
securities theretofore and then being pledged hereunder, which schedule shall
be attached hereto as Schedule I and made a part hereof. Each schedule
so delivered shall supersede any prior schedules so delivered.
(b) Each of the Pledgors agrees to promptly deliver or cause to
be delivered to the Representative any and all Pledged Securities, and
any and all certificates or other instruments or documents representing
the Collateral.
(c) Each Pledgor will cause any obligations in respect of
borrowed money or similar advances owed to such Pledgor by the Borrower
or any Subsidiary to be evidenced by a duly executed promissory note
that is pledged and delivered to the Representative pursuant to the
terms hereof. Any such promissory notes may be in the form of a demand
note for any and all moneys advanced.
SECTION 2.03. REGISTRATION IN NOMINEE NAME; DENOMINATIONS. The
Representative shall have the right (in its sole and absolute discretion)
to hold the Pledged Securities in its own name as pledgee, the name of
its nominee or the name of the applicable Pledgor, endorsed or assigned
in blank or in favor of the Representative. Each of the Pledgors will
promptly give to the Representative copies of any notices or other
communications received by it with respect to Pledged Securities
registered in the name of such Pledgor. The Representative shall at all
times have the right to exchange the certificates representing Pledged
Securities for certificates of smaller or larger denominations for any
purpose consistent with this Agreement.
SECTION 2.04. VOTING RIGHTS; DIVIDENDS AND INTEREST; ETC. (a)
Unless and until an Event of Default shall have occurred and be
continuing and the Representative shall have notified the Pledgors that
their rights under this Section 2.04 are being suspended:
(i) Each Pledgor shall be entitled to exercise any and all voting
and/or other consensual rights and powers accruing to an owner of Pledged
Securities or any part thereof for any purpose not inconsistent with the
terms of this Agreement, the Credit Agreement and the other Loan Documents.
(ii) The Representative shall execute and deliver to each Pledgor, or
cause to be executed and delivered to such Pledgor, all such proxies,
powers of attorney and other instruments as such Pledgor may reasonably
request for the purpose of enabling such Pledgor to exercise the voting
and/or consensual rights and powers that it is entitled to exercise
pursuant to subparagraph (i) above.
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3
(iii) Each Pledgor shall be entitled to receive and retain (A) any
and all dividends paid in cash on the Pledged Securities pledged by it and
(B) any and all principal and interest paid in cash in respect of the
Pledged Securities pledged by it, in each case to the extent and only to
the extent that such cash dividends or principal and interest payments are
permitted by the terms and conditions of the Credit Agreement and
applicable laws. Other than pursuant to the first sentence of this
paragraph (a)(iii), all noncash dividends and all dividends paid or payable
in cash or otherwise in connection with a partial or total liquidation or
dissolution, return of capital, capital surplus or paid-in surplus, and all
other distributions made on or in respect of Pledged Securities, whether
paid or payable in cash or otherwise, whether resulting from a subdivision,
combination or reclassification of the outstanding capital stock of the
issuer of any Pledged Securities or received in exchange for Pledged
Securities or any part thereof, or in redemption thereof, or as a result of
any merger, consolidation, acquisition or other exchange of assets to which
such issuer may be a party or otherwise, shall be and become part of the
Collateral, and, if received by a Pledgor, shall not be commingled by such
Pledgor with any of its other funds or property but shall be held separate
and apart therefrom, shall be held in trust for the benefit of the
Representative and shall be forthwith delivered to the Representative in
the same form as so received (with any necessary endorsement).
(b) Upon the occurrence and during the continuance of an Event
of Default and upon written notice from the Representative to any
Pledgor of such Event of Default, all rights of any Pledgor to
dividends, interest and principal payments that such Pledgor is
authorized to receive pursuant to paragraph (a)(iii) above shall cease,
and all such rights shall thereupon become vested in the Representative
(as representative for the Secured Parties), which shall have the sole
and exclusive right and authority to receive and retain such dividend,
interest and principal payments during the continuance of such Event of
Default. All dividends, interest and principal that are received by any
Pledgor contrary to the provisions of this Section 2.04 shall be received in
trust for the benefit of the Representative shall be segregated from
other property or funds of such Pledgor and shall be forthwith delivered
to the Representative in the same form as so received (with any
necessary endorsement). Any and all money and other property paid over
to or received by the Representative pursuant to the provisions of this
paragraph (b) shall be retained by the Representative in an account to
be established by the Representative upon receipt of such money or other
property and shall be applied in accordance with the provisions of
Section 4.02; PROVIDED, HOWEVER, that the rights of the Representative
hereunder shall be subject (i) to any restrictions, limitations or
approvals imposed by securities laws generally, (ii) to any
restrictions, limitations or approvals imposed pursuant to the Investment
Company Act of 1940 or the Investment Advisers Act of 1940, as each is in
effect from time to time, together with the rules and regulations
thereunder and interpretations thereof, and (iii) to any approvals that
may be required on any date from and including the date on which the
1997 Equity Contribution is consummated, any Applicable Insurance
Regulatory Authority.
(c) Upon the occurrence and during the continuance of an Event
of Default and upon written notice from the Representative to any
Pledgor of such Event of Default, all rights of the Pledgors to exercise
the voting and consensual rights and powers that they are entitled to
exercise pursuant to paragraph (a)(i) of this Section 2.04, and the
obligations of the Representative under paragraph (a)(ii) of this
Section 2.04, shall cease, and all such rights shall thereupon become
vested in the Representative (as representative for the Secured
Parties), which shall have the sole and exclusive right and authority to
exercise such voting and consensual rights and powers, subject only to the
approval of the Administrative Agent, during the continuance of such Event
of Default; PROVIDED, HOWEVER, that the rights of the Representative
hereunder shall be subject (i) to any restrictions, limitations or
approvals imposed by securities laws generally, (ii) to any
restrictions, limitations or approvals imposed pursuant to the
Investment Company Act of 1940 or the Investment Advisers Act of 1940,
as each is in effect from time to time, together with the rules and
regulations thereunder and interpretations thereof, and (iii) to any
approvals that may be required on any date from and including the date on
which the 1997 Equity Contribution is consummated, any Applicable
Insurance Regulatory Authority.
(d) Any notice given by the Representative to the Pledgors
suspending their rights under paragraph (a) above (i) may be given by
telephone if promptly confirmed in writing, (ii) may be given to one or
more of the Pledgors at the same or different times and (iii) may
suspend the rights of the Pledgors under paragraph (a)(i) or paragraph
(a)(iii) in part without suspending all such rights (as specified by the
Representative in its sole and absolute discretion) and without waiving
or otherwise affecting the Representative's rights, as holder of the
Collateral for the Secured Parties, to give additional notices from time
to time suspending other rights so long as an Event of Default has
occurred and is continuing.
ARTICLE III. REPRESENTATIONS, WARRANTIES AND COVENANTS
The Pledgors jointly and severally represent, warrant and covenant to
and with the Representative and the Lenders that:
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4
(a) the Pledged Stock represents all the outstanding capital stock of
Holdings and each United States Subsidiary directly owned by Holdings and
all the outstanding capital stock of each other United States Subsidiary
directly owned by the Borrower, other than subsidiaries of Insurance
Subsidiaries and ARM Capital Advisors, LLC;
(b) the Pledged Securities have been duly and validly authorized and
issued by the issuers thereof and are fully paid and nonassessable;
(c) except for the security interest granted hereunder, each of the
Pledgors (i) is and will at all times continue to be the direct owner,
beneficially and of record, of the Pledged Securities indicated on
Schedule I to be owned by such Pledgor, (ii) holds the same free and clear
of all Liens (subject to the Liens permitted by Section 6.02 of the Credit
Agreement), (iii) will make no assignment, pledge, hypothecation or
transfer of, or create any security interest in, the Collateral, other than
pursuant hereto, and (iv) to the extent required by Section 2.04, will
cause any and all Collateral, whether for value paid by any Pledgor or
otherwise, to be forthwith deposited with the Representative and pledged or
assigned hereunder;
(d) except for restrictions and limitations imposed by securities laws
generally and except as otherwise provided in Section 2.04, the Collateral
pledged hereunder is and will be freely transferable and assignable, and
no portion of such Collateral is or will be subject to any option, right
of first refusal, shareholders agreement, charter or by-law provision or
contractual restriction of any nature that prohibit, impair, delay or
otherwise affect the pledge of such Collateral hereunder, the sale or
disposition of the Collateral pursuant hereto after the occurrence and
continuance of an Event of Default or the exercise by the Representative of
its rights and remedies hereunder;
(e) each of the Pledgors (i) has the power and authority to pledge the
Collateral pledged by it pursuant to this Agreement in the manner hereby
done or contemplated and (ii) will defend its title or interest thereto or
therein against any and all Liens (other than the Lien of this Agreement),
however arising, of all persons whomsoever;
(f) no consent or approval of any Governmental Authority or any
securities exchange was or is necessary to the validity of the
pledge effected hereby;
(g) following the execution and delivery by the Pledgors of this
Agreement, when the Pledged Securities, certificates, instruments or other
documents representing or evidencing the Collateral are delivered to the
Representative in accordance with this Agreement, the Representative will
obtain a valid and perfected first priority security interest in the
Pledged Securities as security for the payment and performance of the
Obligations; and
(h) the pledge effected hereby is effective to vest in the
Representative the rights of the Representative in the Collateral as set
forth herein.
ARTICLE IV. REMEDIES
SECTION 4.01. REMEDIES UPON DEFAULT. If an Event of Default
shall have occurred and be continuing, the Representative may exercise,
to the extent permitted by law, all the rights of a secured party under
the Uniform Commercial Code of the State of New York (whether or not the
Code is in effect in the jurisdiction where such rights are exercised)
and, in addition, the Representative may, with the consent of the
Required Lenders, sell the Collateral, or any part thereof, at public or
private sale or at any broker's board or on any securities exchange, for
cash, upon credit or for future delivery as the Administrative Agent
shall deem appropriate and that shall be commercially reasonable;
PROVIDED, HOWEVER, that the rights of the Representative hereunder shall
be subject (i) to any restrictions, limitations or approvals imposed by
securities laws generally, (ii) to any restrictions,limitations or
approvals imposed pursuant to the Investment Company Act of 1940 or the
Investment Advisers Act of 1940, as each is in effect from time to time,
together with the rules and regulations thereunder and interpretations
thereof, and (iii) to any approvals that may be required on any date
from and including the date on which the 1997 Equity Contribution is
consummated, by any Applicable Insurance Regulatory Authority. The
Representative shall be authorized at any such sale (if it deems it
advisable to do so and to the extent permitted by law) to restrict the
prospective bidders or purchasers to persons who will represent and
agree that they are purchasing the Collateral for their own account for
investment and not with a view to the distribution or sale thereof, and upon
consummation of any such sale the Representative shall have the right to
assign, transfer and deliver to the purchaser or purchasers thereof the
Collateral so sold. To the extent permitted by law, each such purchaser
at any such sale shall hold the property sold absolutely free from any
claim or right on the part of any Pledgor, and each Pledgor hereby
waives (to the extent permitted by law) all rights of
<PAGE>
5
redemption, stay, valuation and appraisal that such Pledgor now has or
may at any time in the future have under any rule of law or statute now
existing or hereafter enacted.
The Representative shall give each Pledgor at least 10 days'
prior written notice (which each Pledgor agrees is reasonable notice
within the meaning of Section 9-504(3) of the Uniform Commercial Code as
in effect in the State of New York or its equivalent in other
jurisdictions) of the Representative's intention, as holder of the
Collateral for the Secured Parties, to make any sale of Collateral owned
by such Pledgor. Such notice, in the case of a public sale, shall state
the time and place for such sale and, in the case of a sale at a
broker's board or on a securities exchange, shall state the board or
exchange at which such sale is to be made and the day on which the
Collateral, or portion thereof, will first be offered for sale at such board
or exchange and, in the case of a private sale, shall state the time
after which any such sale is to be made. Any such public sale shall be
held at such time or times within ordinary business hours and at such
place or places as the Representative may fix and state in the notice of
such sale. At any such sale, the Collateral, or portion thereof, to be
sold may be sold in one lot as an entirety or in separate parcels, as
the Representative may (in its sole and absolute discretion) determine.
The Representative shall not be obligated to make any sale of any
Collateral if it shall determine not to do so, regardless of the fact
that notice of sale of such Collateral shall have been given. The
Representative may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for sale, and such sale may,
without further notice, be made at the time and place to which the same
was so adjourned. In case any sale of all or any part of the Collateral
is made on credit or for future delivery, the Collateral so sold may be
retained by the Representative until the sale price is paid in full by
the purchaser or purchasers thereof, but the Representative shall not
incur any liability in case any such purchaser or purchasers shall fail
to take up and pay for the Collateral so sold and, in case of any such
failure, such Collateral may be sold again upon like notice. At any
public sale made pursuant to this Section, any Secured Party may bid for or
purchase, free (to the extent permitted by law) from any right of
redemption, stay, valuation or appraisal on the part of any Pledgor (all
said rights being also hereby waived and released to the extent
permitted by law), the Collateral or any part thereof offered for sale
and may make payment on account thereof by using any claim then due and
payable to it from any Pledgor as a credit against the purchase price,
and the Representative may, upon compliance with the terms of sale,
hold, retain and dispose of such property without further accountability
to any Pledgor therefor. For purposes hereof, a written agreement to
purchase the Collateral or any portion thereof shall be treated as a sale
thereof; the Representative shall be free to carry out such sale pursuant to
such agreement, and, to the extent permitted by law, none of the
Pledgors shall be entitled to the return of the Collateral or any
portion thereof subject thereto, notwithstanding the fact that after the
Representative shall have entered into such an agreement all Events of
Default shall have been remedied and the Obligations paid in full;
PROVIDED, HOWEVER, that in the event the Obligations shall have been
paid in full, the relevant Pledgor shall be entitled to the return of
the proceeds of the sale of any such Collateral to the extent not
applied to payment of the Obligations. As an alternative to exercising the
power of sale herein conferred upon it, the Representative may proceed by a
suit or suits at law or in equity to foreclose this Agreement and to
sell the Collateral or any portion thereof pursuant to a judgment or
decree of a court or courts having competent jurisdiction or pursuant to
a proceeding by a court-appointed receiver.
SECTION 4.02. APPLICATION OF PROCEEDS OF SALE. After and during the
continuance of an Event of Default, any cash held by the Representative as
Collateral and all cash Proceeds received by the Representative in respect of
any sale of, collection from, or other realization upon all or any part of the
Collateral pursuant to the exercise by the Representative of its remedies as a
secured creditor as provided in Section 4.01 of this Agreement shall be applied
promptly from time to time as follows:
FIRST, to the payment of all costs and expenses incurred by the
Administrative Agent or the Representative (in its capacity hereunder), in
connection with such sale or otherwise in connection with this Agreement or
any of the Obligations, including all court costs and the fees and expenses
of its agents and legal counsel, the repayment of all cost and expenses
incurred by the Representative hereunder on behalf of any of the Pledgors
and any other costs or expenses incurred in connection with the exercise of
any right or remedy hereunder;
SECOND, to the payment in full of the Obligations or, in the case of
Permitted Secured Swaps that have not been terminated, to the cash
collateralization of the estimated amounts to be paid in respect of such
Permitted Secured Swaps (the amounts so applied to be distributed among the
Secured Parties pro rata in accordance with the amounts of the Obligations
owed to them on the date of any such distribution or in the case of
Permitted Secured Swaps, in accordance with the termination value in
respect of such Permitted Secured Swaps); and
THIRD, to the Pledgors, their successors or assigns, or as a court
of competent jurisdiction may otherwise direct.
<PAGE>
6
The Administrative Agent shall have absolute discretion as to the time of
application of any such proceeds, moneys or balances in accordance with
this Agreement. Upon any sale of the Collateral by the Representative
(including pursuant to a power of sale granted by statute or under a
judicial proceeding),the receipt of the Representative or of the
officer making the sale shall be a sufficient discharge to the purchaser
or purchasers of the Collateral so sold and such purchaser or purchasers
shall not be obligated to see to the application of any part of the
purchase money paid over to the Representative or such officer or be
answerable in any way for the misapplication thereof.
SECTION 4.03. SECURITIES ACT, ETC. In view of the position
of the Pledgors in relation to the Pledged Securities, or because of
other present or future circumstances, a question may arise under the
Securities Act of 1933, as now or hereafter in effect, or any similar
statute hereafter enacted analogous in purpose or effect (such Act and
any such similar statute as from time to time in effect being called the
"FEDERAL SECURITIES LAWS") with respect to any disposition of the
Pledged Securities permitted hereunder. The Pledgors understand that
compliance with the Federal Securities Laws might very strictly limit
the course of conduct of the Representative if the Representative were to
attempt to dispose of all or any part of the Pledged Securities, and might
also limit the extent to which or the manner in which any subsequent
transferee of any Pledged Securities could dispose of the same.
Similarly, there may be other legal restrictions or limitations
affecting the Representative in any attempt to dispose of all or part of
the Pledged Securities under applicable Blue Sky or other state
securities laws or similar laws analogous in purpose or effect. Under
applicable law, in the absence of an agreement to the contrary, the
Representative might be held to have certain general duties and obligations
to each of the Pledgors to make some effort toward obtaining a fair
price even though the Obligations may be discharged or reduced by the
proceeds of a sale at a lesser price. Each of the Pledgors clearly
understands that to the extent it would require action inconsistent with
applicable securities laws, (a) the Representative is not to have any
such general duty or obligation to such Pledgor and (b) such Pledgor
will not attempt to hold the Representative responsible for selling all
or any part of the Pledged Securities at an inadequate price even if the
Representative shall accept the first offer received or does not
approach more than one possible purchaser. Without limiting the
generality of the foregoing, the provisions of this Section 4.03 would apply
if, for example, the Representative were to place all or any part of the
Pledged Securities for private placement by an investment banking firm,
or if such investment banking firm purchased all or any part of the
Pledged Securities for its own account, or if the Representative placed
all or any part of the Pledged Securities privately with a purchaser or
purchasers. The provisions of this Section will apply notwithstanding
the existence of a public or private market upon which the quotations or
sales prices may exceed substantially the price at which the
Representative sells.
SECTION 4.04. REGISTRATION, ETC. Each of the Pledgors agrees
that, upon the occurrence and during the continuance of an Event of
Default, if for any reason the Representative desires to sell any of the
Pledged Securities at a public sale, it will, at any time and from time
to time, upon the written request of the Representative take or cause
the issuer of such Pledged Securities to take such action and prepare,
distribute and/or file such documents, as are required or advisable in
the reasonable opinion of counsel for the Representative to permit the
public sale of such Pledged Securities. Each of the Pledgors jointly and
severally agrees to indemnify, defend and hold harmless the Representative,
the other Secured Parties, any underwriter and their respective officers,
directors, affiliates and controlling persons from and against all losses,
liabilities, expenses, costs (including the reasonable fees and expenses
of legal counsel to the Representative and the Administrative Agent) and
claims (including the costs of investigation) which they may incur insofar
as any such loss, liability, expense, cost or claim arises out of or is
based upon any alleged untrue statement of a material fact contained in
any prospectus, offering circular or similar document (or any amendment or
supplement thereto), or arises out of or is based upon any alleged omission
to state a material fact required to be stated therein or necessary to make
the statements in any thereof not misleading, except insofar as the same may
have been caused by any untrue statement or omission based upon information
furnished in writing to any Pledgor or the issuer of such Pledged Securities
by the Representative or any other Secured Party or the underwriter expressly
for use therein. Each of the Pledgors further agrees to use all reasonable
efforts to qualify, file or register, or cause the issuer of such
Pledged Securities to qualify, file or register, any of the Pledged
Securities under the Blue Sky or other securities laws of such states as
may be requested by the Representative and keep effective, or cause to
be kept effective, all such qualifications, filings or registrations.
The Pledgors will jointly and severally bear all costs and expenses of
carrying out their obligations under this Section. The Pledgors
acknowledge that there is no adequate remedy at law for failure by them to
comply with the provisions of this Section and that such failure would not
be adequately compensable in damages, and therefore agree that their
agreements contained in this Section may be specifically enforced.
ARTICLE V. MISCELLANEOUS
SECTION 5.01. NOTICES. All communications and notices hereunder shall
be in writing and given as provided in Section 9.01 of the Credit Agreement.
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SECTION 5.02. SECURITY INTEREST ABSOLUTE. All rights of the
Representative hereunder, the security interests granted hereunder and all
obligations of the Pledgors hereunder shall be absolute and unconditional
irrespective of (a) any lack of validity or enforceability of the Credit
Agreement or any other Loan Document (other than this Agreement), any
agreement with respect to any of the Obligations or any other agreement or
instrument relating to any of the foregoing, (b) any change in the time,
manner or place of payment of, or in any other term of, all or any of
the Obligations, or any other amendment or waiver of or any consent to
any departure from the Credit Agreement, any other Loan Document or any
other agreement or instrument relating to any of the foregoing, (c) any
exchange, release or non-perfection of any Lien on other collateral, or
any release or amendment or waiver of or consent under or departure from
any guarantee, securing or guaranteeing all or any of the Obligations,
or (d) any other circumstance that might otherwise constitute a defense
available to, or a discharge of, any Pledgor in respect of the
Obligations or this Agreement (other than the indefeasible payment in full of
the Obligations).
SECTION 5.03. SURVIVAL OF AGREEMENT. All covenants, agreements,
representations and warranties made by any Pledgor herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement shall be considered to have been relied upon by
the Lenders and shall survive the making by the Lenders of the Loans, and the
execution and delivery to the Lenders of the Notes evidencing such Loans,
regardless of any investigation made by the Lenders or on their behalf, and
shall continue in full force and effect until this Agreement shall
terminate.
SECTION 5.04. BINDING EFFECT; SEVERAL AGREEMENT. This Agreement
shall become effective as to any Pledgor when a counterpart hereof
executed on behalf of such Pledgor shall have been delivered to the
Representative and a counterpart hereof shall have been executed on
behalf of the Representative and thereafter shall be binding upon such
Pledgor and the Representative and their respective successors and
assigns, and shall inure to the benefit of such Pledgor, the
Representative and the other Secured Parties and their respective
successors and assigns, except that no Pledgor shall have the right to assign
its rights hereunder or any interest herein or in the Collateral except
as expressly contemplated by this Agreement or the Credit Agreement.
This Agreement shall be construed as a separate agreement with respect
to each Pledgor and may be amended, modified, supplemented, waived or
released with respect to any Pledgor without the approval of any other
Pledgor and without affecting the obligations of any other Pledgor
hereunder.
SECTION 5.05. SUCCESSORS AND ASSIGNS. Whenever in this Agreement
any of the parties hereto is referred to, such reference shall be deemed
to include the successors and assigns of such party; and all covenants,
promises and agreements by or on behalf of any Pledgor or the
Representative that are contained in this Agreement shall bind and inure
to the benefit of their respective successors and assigns.
SECTION 5.06. THE REPRESENTATIVE APPOINTED ATTORNEY-IN-FACT. Each
of the Pledgors hereby appoints the Representative the attorney-in-fact
of such Pledgor for the purpose of carrying out the provisions of this
Agreement and taking any action and executing any instrument which the
Representative may deem necessary or advisable to accomplish the
purposes hereof, which appointment is irrevocable and coupled with an
interest. Without limiting the generality of the foregoing, the
Representative shall have the right, upon the occurrence and during the
continuance of an Event of Default, with full power of substitution
either in the Representative's name or in the name of any Pledgor, to ask
for,demand, sue for, collect, receive and give acquittance for any and
all moneys due or to become due under and by virtue of any Collateral,
to endorse checks, drafts, orders and other instruments for the payment
of money payable to such Pledgor representing any interest or dividend
or other distribution payable in respect of the Collateral or any part
thereof or on account thereof and to give full discharge for the same,
to settle, compromise, prosecute or defend any action, claim or
proceeding with respect thereto, and to sell, assign, endorse, pledge,
transfer and make any agreement respecting, or otherwise deal with, the
same; PROVIDED, HOWEVER, that nothing herein contained shall be construed as
requiring or obligating the Representative to make any commitment or to
make any inquiry as to the nature or sufficiency of any payment received
by the Representative or to present or file any claim or notice, or to
take any action with respect to the Collateral or any part thereof or
the moneys due or to become due in respect thereof or any property
covered thereby, and no action taken by the Representative or omitted to
be taken with respect to the Collateral or any part thereof shall give
rise to any defense, counterclaim or offset in favor of any Pledgor or
to any claim or action against the Representative or any other Secured
Party.
SECTION 5.07. THE REPRESENTATIVE'S FEES AND EXPENSES;
INDEMNIFICATION. (a) Each of the Pledgors jointly and severally agrees
to pay upon demand to the Representative the amount of any and all
reasonable expenses, including the reasonable fees and expenses of its
counsel and of any experts or agents, which the Representative may incur
in connection with (i) the administration of this Agreement, (ii) the
custody or preservation of, or the sale of, collection from or other
realization upon any of the Collateral, (iii) the exercise or
enforcement of any of the rights of the Representative hereunder or (iv) the
failure of the Pledgors to perform or observe any of the provisions hereof.
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(b) Without limitation of their indemnification obligations
under the other Loan Documents, each of the Pledgors jointly and
severally agrees to indemnify the Representative and the other
Indemnitees against, and hold each of them harmless from, any and all
losses, claims, damages, liabilities and related expenses, including
reasonable counsel fees and expenses, incurred by or asserted against
any of them arising out of, in any way connected with, or as a result
of, the execution, delivery or performance of this Agreement or any
claim, litigation, investigation or proceeding relating hereto or to the
Collateral, whether or not any Indemnitee is a party thereto, provided that
such indemnity shall not, as to any Indemnitee, be available to the
extent that such losses, claims, damages, liabilities or related
expenses are determined by a court of competent jurisdiction by final
and nonappealable judgment to have resulted from the gross negligence or
wilful misconduct of such Indemnitee.
(c) Any such amounts payable as provided hereunder shall be
additional Obligations secured hereby and by the other Security Documents.
The provisions of this Section shall remain operative and in full force
and effect regardless of the termination of this Agreement, the
consummation of the transactions contemplated hereby, the repayment of
any of the Loans, the invalidity or unenforceability of any term or
provision of this Agreement or any other Loan Document, or any
investigation made by or on behalf of the Representative or any Lender.
All amounts due under this Section shall be payable on written demand
therefor.
SECTION 5.08. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 5.09. WAIVERS; AMENDMENT. (a) No failure or delay of the
Representative in exercising any power or right hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The rights and
remedies of the Representative hereunder and of the Representative, the
Administrative Agent and the Lenders under the other Loan Documents are
cumulative and are not exclusive of any rights or remedies which they
would otherwise have. No waiver of any provisions of this Agreement or
consent to any departure by any Pledgor therefrom shall in any event be
effective unless the same shall be permitted by paragraph (b) below, and
then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No notice or demand on any Pledgor
in any case shall entitle such Pledgor or any other Pledgor to any other
or further notice or demand in similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Representative and the Pledgor or Pledgors with
respect to which such waiver, amendment or modification is to apply, subject to
any consent required in accordance with Section 9.08 of the Credit Agreement.
SECTION 5.10. WAIVER OF JURY TRIAL. Each party hereto hereby
waives, to the fullest extent permitted by applicable law, any right it
may have to a trial by jury in respect of any litigation directly or
indirectly arising out of, under or in connection with this Agreement.
Each party hereto (a) certifies that no representative, agent or
attorney of any other party has represented, expressly or otherwise,
that such other party would not, in the event of litigation, seek to
enforce the foregoing waiver and (b) acknowledges that it and the other
parties hereto have been induced to enter into this Agreement and the
other Loan Documents, as applicable, by, among other things, the mutual
waivers and certifications in this Section.
SECTION 5.11. SEVERABILITY. In the event any one or more of the
provisions contained in this Agreement or in any other Loan Document
should be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected or
impaired thereby. The parties shall endeavor in good-faith negotiations
to replace the invalid, illegal or unenforceable provisions with valid
provisions the economic effect of which comes as close as possible to
that of the invalid, illegal or unenforceable provisions.
SECTION 5.12. COUNTERPARTS. This Agreement and any amendments,
waivers, consents or supplements 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 (subject to
Section 5.04), and shall become effective as provided in Section 5.04.
Delivery of an executed counterpart of a signature page of this
Agreement by telecopier shall be effective as delivery of a manually
executed counterpart of this Agreement.
SECTION 5.13. HEADINGS. Article and Section headings used herein are
for convenience of reference only, are not part of this Agreement and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Agreement.
<PAGE>
9
SECTION 5.14. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a)
Each party to this Agreement hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction
of any New York State court or, to the extent permitted by applicable
law, Federal court of the United States of America sitting in New York
City, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Agreement, or for
recognition or enforcement of any judgment, and each of the parties
hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in such
New York State or, to the extent permitted by law, in such Federal
court. Each of the parties hereto agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that
the Representative or any Lender may otherwise have to bring any action
or proceeding relating to this Agreement or the other Loan Documents
against any Pledgor or its properties in the courts of any jurisdiction.
(b) Each party to this Agreement hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively
do so, any objection which it may now or hereafter have to the laying of
venue of any suit, action or proceeding arising out of or relating to
this Agreement in any New York State or Federal court. Each of the
parties hereto hereby irrevocably waives, to the fullest extent
permitted by law, the defense of an inconvenient forum to the
maintenance of such action or proceeding in any such court.
(c) Each party to this Agreement irrevocably consents to service
of process in the manner provided for notices in Section 5.01. Nothing
in this Agreement will affect the right of any party to this Agreement
to serve process in any other manner permitted by law.
SECTION 5.15. TERMINATION. This Agreement and the security
interests granted hereby shall terminate when the principal of and
interest on all the Loans shall have been indefeasibly paid in full, the
Commitments shall have been terminated and (if due and payable on the
first date that the principal of and interest on all the Loans shall
have been paid in full and the Commitments shall have been terminated)
all Fees, expenses and other amounts payable under any Loan Document
shall have been paid, at which time the Representative shall reassign
and deliver to the Pledgors, or to such Person or Persons as such
Pledgor shall designate, at the Pledgors' expense and against receipt, such
of the Collateral as shall not have been sold or otherwise applied
hereunder and shall remain held by the Representative hereunder,
together with such documents as the Pledgors shall reasonably request to
evidence such termination and reassignment. Any such reassignment and
any execution and delivery of documents pursuant to this Section shall
be without recourse to or warranty by the Representative.
SECTION 5.16. EXERCISE OF CARE. The Representative agrees to
exercise reasonable care in the custody and preservation of the Pledged
Securities in its possession and shall be deemed to have exercised
reasonable care if it accords the Collateral the same degree of care
that the Representative accords its own property, it being understood
that the Representative shall not have any responsibility or liability
(a) for ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to
the Pledged Securities, whether or not the Representative is deemed to have
knowledge of such matters, (b) for taking any necessary steps to preserve
rights against any parties with respect to any Collateral or (c) for the
collection of any proceeds of the Pledged Securities or by reason of any
invalidity, lack of value or uncollectibility of any proceeds to be
received by it.
<PAGE>
10
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
ARM FINANCIAL GROUP, INC.,
by
-------------------------
Name:
Title:
by
-------------------------
Name:
Title:
INTEGRITY HOLDINGS, INC.,
by
-------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, as representative
for the Secured Parties,
by
-------------------------
Name:
Title:
<PAGE>
AMENDMENT NO. 1 TO TRUST AGREEMENT
This is Amendment No. 1 (this "Amendment") to that certain Reinsurance
Trust Agreement (the "Trust Agreement") made by and among Integrity Life
Insurance Company (the "Grantor") General American Life Insurance Company (the
"Beneficiary") (collectively, the "Parties") and Fleet National Bank (the
"Trustee") effective as of April 1, 1996.
Whereas, the Parties desire to amend the Trust Agreement to clarify the
Grantor's ability to purchase Authorized Investments which are private
placements;
Now, therefore, the Parties hereby agree to add new Section 1.04A to the
Trust Agreement which new Section 1.04A shall read in its entirety as follows:
"1.04A PRIVATE PLACEMENTS. The Grantor is authorized to subscribe for and
purchase Authorized Investments which are private placements in reliance on
Regulation D under the Securities Act of 1933, as amended (the "1933 Act"),
or other exemptions from the 1933 Act (including, without limitation, Rule
144A thereunder). In connection with any purchase for the Trust Account of
investments offered to "accredited investors" in reliance on Regulation D or
other exemptions under the 1933 Act or offered to "qualified institutional
buyers" in reliance on Rule 144A of the 1933 Act, the Beneficiary authorizes
the Grantor to purchase such securities for the Trust Account on the terms
and conditions under which securities are offered, and authorizes and directs
the Grantor and/or the Trustee to execute such documents, and make such
commitments and/or representations, as may be required by the issuer and/or
the seller of such securities, including, but not limited to, a
representation that the Trust Account is an "accredited investor" and/or a
"qualified institutional buyer," and a commitment and/or representation that
such securities will not be offered, pledged, sold or transferred by the
Trust Account or any subsequent transferee (including the Beneficiary) except
in compliance with any applicable transfer restrictions imposed thereon by
the issuer and/or seller and any state or federal securities laws.
Notwithstanding any other provisions of the Trust Agreement, the Beneficiary
agrees to be bound by the terms, conditions and/or restrictions of any
investment intent letter, purchase agreement or other commitment or document
entered into by the Grantor and/or the Trustee (including, without
limitation, any applicable restrictions on transfer) in connection with the
purchase of such private placements pursuant to the investment authority
granted to the Grantor under this Section 1.04A and such agreement will
remain effective notwithstanding a subsequent termination of this Agreement.
In addition, the Beneficiary acknowledges its understanding that the transfer
of unregistered securities may be restricted and agrees that, prior to the
transfer of any such securities to it pursuant to the terms and conditions of
the Trust Agreement, it will execute any and all necessary and appropriate
documents and make any and all necessary and appropriate representations
and/or warranties required by the issuer and/or seller thereof in order to
effect such transfer. The Beneficiary acknowledges that if the conditions
for transfer are not satisfied the securities cannot be transferred until
such time that such conditions are satisfied and agrees that the Trustee
shall not be liable for its refusal to transfer any such securities under
such circumstances. The Trustee is hereby authorized and directed to hold
such transfer in abeyance
<PAGE>
until such time as such documents and/or representations are completed and
delivered and the issuer (and/or seller) notifies the Trustee of receipt
thereof."
In Witness Whereof, the Parties have caused this Amendment to be duly
executed effective as of the effective date of the Agreement (which Agreement
shall remain unchanged and in full force and effect except as amended hereby)
and agree that this Amendment may be signed in one or more counterparts any
one of which need not contain the signatures of more than one party but all
of which taken together (which may include copies delivered via facsimile)
shall constitute this Amendment in full force and effect.
GRANTOR
INTEGRITY LIFE INSURANCE COMPANY
By: /s/ Pat Scott
-----------------------------------
Title: SECRETARY
--------------------------------
BENEFICIARY
GENERAL AMERICAN LIFE INSURANCE COMPANY
By: /s/ Mark A. Blassic
-----------------------------------
Title: Vice President
--------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS OF ARM FINANCIAL GROUP, INC.'S FORM 10-Q FOR THE
PERIOD ENDED AND THE SIX MONTHS ENDED JUNE 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 3,392,030
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,171
<MORTGAGE> 28,346
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,564,678
<CASH> 164,269
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 77,545
<TOTAL-ASSETS> 5,580,814
<POLICY-LOSSES> 3,611,900
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 38,000
0
50,000
<COMMON> 232
<OTHER-SE> 225,514
<TOTAL-LIABILITY-AND-EQUITY> 5,580,814
0
<INVESTMENT-INCOME> 147,459
<INVESTMENT-GAINS> 2,651
<OTHER-INCOME> 11,264
<BENEFITS> 109,607
<UNDERWRITING-AMORTIZATION> 4,611
<UNDERWRITING-OTHER> 17,734
<INCOME-PRETAX> 13,752
<INCOME-TAX> 5,999
<INCOME-CONTINUING> 7,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,753
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
