<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended: March 31, 1998
Commission file number: 33-67268
ARM FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1244251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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.
<TABLE>
<CAPTION>
<S><C>
DATE CLASS SHARES OUTSTANDING
- --------------------------------------------------------------------------------
May 14, 1998 A 23,397,471
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and investments:
Fixed maturities, available-for-sale, at fair value (amortized cost: March 31,
1998-$4,413,322; December 31, 1997-$4,021,495) $4,420,538 $4,068,386
Equity securities, at fair value (cost: March 31, 1998-$28,165; December 31,
1997-$28,177) 27,897 28,342
Mortgage loans on real estate 16,235 16,429
Policy loans 126,300 126,114
Cash and cash equivalents 344,079 228,206
------------------------------------
Total cash and investments 4,935,049 4,467,477
Assets held in separate accounts:
Guaranteed 1,292,589 1,266,796
Nonguaranteed 1,345,118 1,173,088
Accrued investment income 50,117 44,546
Value of insurance in force 30,951 25,975
Deferred policy acquisition costs 95,914 87,170
Goodwill 6,229 6,523
Deferred federal income taxes 43,763 31,049
Other assets 59,006 35,800
------------------------------------
Total assets $7,858,736 $7,138,424
------------------------------------
------------------------------------
</TABLE>
2
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
March 31, December 31,
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $4,647,540 $4,242,578
Customer deposits in separate accounts:
Guaranteed 1,281,509 1,254,801
Nonguaranteed 1,336,469 1,160,595
Long-term debt 38,000 38,000
Accounts payable and accrued expenses 23,004 18,741
Payable for investment securities purchased 195,026 69,286
Payable to reinsurer 8,330 8,800
Other liabilities 31,301 38,078
------------------------------------
Total liabilities 7,561,179 6,830,879
Contingencies
Shareholders' equity:
Preferred stock, $25.00 stated value 50,000 50,000
Class A common stock, $.01 par value, 21,441,641 and 21,316,068 shares issued and
outstanding, respectively 214 213
Class B common stock, $.01 par value, 1,947,646 shares issued and outstanding 19 19
Additional paid-in capital 216,024 211,430
Retained earnings 30,474 25,583
Accumulated other comprehensive income from net unrealized gains on available-for-
sale securities 826 20,300
------------------------------------
Total shareholders' equity 297,557 307,545
------------------------------------
Total liabilities and shareholders' equity $7,858,736 $7,138,424
------------------------------------
------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
3
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income $104,406 $69,700
Interest credited on customer deposits (81,680) (51,325)
------------------------------------
Net investment spread 22,726 18,375
Fee income:
Variable annuity fees 4,426 3,239
Asset management fees -- 1,884
Other fee income 232 397
------------------------------------
Total fee income 4,658 5,520
Other income and expenses:
Surrender charges 1,334 882
Operating expenses (7,550) (8,156)
Commissions, net of deferrals (598) (638)
Interest expense on debt (617) (686)
Amortization:
Deferred policy acquisition costs (2,724) (2,175)
Value of insurance in force (1,531) (2,241)
Acquisition-related deferred charges (126) (126)
Goodwill (94) (122)
Non-recurring charges (3,570) (1,445)
Other, net (593) (995)
------------------------------------
Total other income and expenses (16,069) (15,702)
Realized investment gains 5,165 2,231
------------------------------------
Income before income taxes 16,480 10,424
Income tax expense (5,499) (2,814)
------------------------------------
Net income 10,981 7,610
Dividends on preferred stock (1,188) (1,188)
------------------------------------
Net income applicable to common shareholders $9,793 $6,422
------------------------------------
------------------------------------
Net income per common share (basic) $0.42 $0.37
------------------------------------
------------------------------------
Net income per common and common equivalent share (diluted) $0.40 $0.37
------------------------------------
------------------------------------
Cash dividends paid per common share $0.02 --
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $60,234 $46,677
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (2,105,306) (1,199,200)
Maturities and redemptions 202,755 59,905
Sales 1,617,874 947,397
Other investments:
Purchases -- (10,489)
Maturities and redemptions 337 8,029
Sales 75 10,892
Policy loans, net (186) 169
Transfers (to) from the separate accounts:
Purchase of assets held in separate accounts (112,026) (102,059)
Proceeds from sale of assets held in separate accounts 37,657 20,383
------------------------------------
Cash flows used in investing activities (358,820) (264,973)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts received from customers from the sale of general
account and separate account products 565,728 357,581
Amounts paid to customers for benefits and withdrawals
related to general and separate account products (149,143) (112,693)
Principal payment on long-term debt -- (2,000)
Change in payable to reinsurer (470) --
Dividends on common stock (468) --
Dividends on preferred stock (1,188) (1,188)
------------------------------------
Cash flows provided by financing activities 414,459 241,700
------------------------------------
Net increase in cash and cash equivalents 115,873 23,404
Cash and cash equivalents at beginning of period 228,206 110,067
------------------------------------
Cash and cash equivalents at end of period $344,079 $133,471
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1998 are not
necessarily indicative of those to be expected for the year ending December 31,
1998. 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, 1997.
Certain amounts from prior years have been reclassified to conform to the
current year's presentation. Such reclassifications have no effect on previously
reported net income or shareholders' equity.
2. INCOME TAXES
Income tax expense differs from that computed using 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.
3. NON-RECURRING CHARGES
Effective February 10, 1998, John Franco, the Company's Co-Chairman and
Co-Chief Executive Officer, retired. Mr. Franco had shared that title with
Martin H. Ruby since the Company was founded in 1993. As part of the retirement
package for Mr. Franco, the Company recorded a non-recurring charge of $3.6
million in the first quarter of 1998. The charge consisted of (i) a $2.1 million
non-cash charge in connection with the vesting of the unvested portion of the
options held by Mr. Franco to purchase 232,647 shares of the Company's common
stock and (ii) a $1.5 million charge for fulfilling remaining compensation
related to his employment agreement. Concurrent with Mr. Franco's retirement,
Mr. Ruby assumed the role of Chairman and Chief Executive Officer of the
Company.
The Company recorded non-recurring charges of $1.4 million in the first
quarter of 1997 primarily related to the relocation and consolidation of the
Company's operations facilities from Ohio to Louisville, Kentucky.
6
<PAGE>
4. EARNINGS PER SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which superseded
Accounting Principles Board Opinion No. 15 of the same name. Earnings per share
("EPS") for all periods presented reflect the adoption of SFAS No. 128. SFAS No.
128 requires companies to present basic and, if applicable, diluted EPS, instead
of primary and fully diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income applicable to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if options to issue common stock were
exercised into common stock.
The following is a reconciliation of the number of shares used in the
basic and diluted EPS computations:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---------------------- ----------------------
Weighted Weighted
Average Per Share Average Per Share
Shares Amount Shares Amount
- ------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
(SHARES IN THOUSANDS)
Basic EPS 23,322 $0.42 17,506 $0.37
Effect of dilutive stock options 1,030 (0.02) -- --
---------------------- ----------------------
Diluted EPS 24,352 $0.40 17,506 $0.37
---------------------- ----------------------
---------------------- ----------------------
</TABLE>
5. SEGMENT INFORMATION
Effective December 31, 1997, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 superseded SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments. The
adoption of SFAS No. 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information.
The Company currently has four reportable segments: retail spread products
(fixed and indexed annuities and face-amount certificates), institutional
spread products (funding agreements, guaranteed investment contracts ("GICs")
and face-amount certificates), retail variable products (fee-based variable
annuity mutual fund options), and corporate and other. The Company's
corporate and other segment includes earnings on surplus of insurance
subsidiaries and holding company cash and investments, fee income from
marketing partnerships and broker-dealer operations, unallocated amortization
expenses, and other various corporate expenditures that are not allocated to
specific products. Income tax expense and preferred stock dividends are not
allocated to any segment.
7
<PAGE>
The Company's reportable segments are based on the characteristics of the
product or service and the markets through which the product or service is sold.
The reportable segments are each managed separately because the impact of
fluctuating interest rates and changes in the equity market environment affects
each segments' products and services differently. The Company evaluates
performance based on operating earnings. Operating earnings represents net
income applicable to common shareholders, excluding, net of tax, realized
investment gains and losses, non-recurring charges and for 1997, income from
defined benefit pension plan asset management operations which were sold.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Retail spread products $ 55,508 $ 51,959
Institutional spread products 46,966 16,036
Retail variable products 4,426 3,239
Corporate and other 2,164 3,986
-----------------------------
Consolidated total revenues (investment income and fee income) $ 109,064 $ 75,220
-----------------------------
-----------------------------
EARNINGS SUMMARY
Retail spread products $ 10,517 $ 8,726
Institutional spread products 4,182 1,345
Retail variable products 1,601 878
Corporate and other (1,415) (1,892)
-----------------------------
Pretax operating earnings (before preferred stock dividends) 14,885 9,057
Income taxes on operations (3,691) (2,033)
Preferred stock dividends (1,188) (1,188)
-----------------------------
Operating earnings 10,006 5,836
Realized investment gains, net of tax 3,357 1,450
Non-recurring charges (3,570) (1,445)
Income from defined benefit pension plan asset management operations -- 581
-----------------------------
Net income applicable to common shareholders $ 9,793 $ 6,422
-----------------------------
-----------------------------
</TABLE>
6. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or total shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income.
8
<PAGE>
The components of comprehensive income (loss), net of related tax, for the
three months ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
- -----------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 10,981 $ 7,610
Net unrealized losses on available-for-sale securities (19,474) (30,390)
---------------------------
Comprehensive income (loss) $ (8,493) $ (22,780)
---------------------------
---------------------------
</TABLE>
7. SUBSEQUENT EVENTS
312 CERTIFICATE COMPANY
The Company established a new subsidiary, 312 Certificate Company ("312"), a
bankruptcy-remote, restricted special purpose corporation, to sell face-amount
certificates in the institutional market. On April 24, 1998, 312 completed its
first sale of a $500 million face-amount certificate to a large institutional
purchaser. 312 is a wholly-owned subsidiary of ARM Face-Amount Certificate
Group, which is a wholly-owned subsidiary of the Company.
PUBLIC OFFERING
In May 1998, the Company completed a public offering of approximately 12.4
million shares of common stock held by certain private equity funds (the "Morgan
Stanley Stockholders") sponsored by Morgan Stanley Dean Witter & Co. The
Company did not receive any of the proceeds from the public offering. As a
result of the public offering, the Morgan Stanley Stockholders no longer own any
shares of the Company's outstanding common stock and all Class B common stock
was converted into Class A common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products. The Company's
products and services are sold in two principal markets, the retail and
institutional markets, through a broad spectrum of distribution channels.
The Company derives its earnings from the investment spread and fee income
generated by the assets it manages. The Company earns a spread between what is
earned on invested assets and what is credited to customer accounts with its
retail spread products (primarily fixed and indexed annuities) and institutional
spread products (funding agreements, GICs and face-amount certificates). The
9
<PAGE>
Company receives a fee in exchange for managing customers' deposits, and the
customer accepts the investment risk with its retail variable products
(variable annuity mutual fund options). 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 fixed, indexed and variable annuity products. In
addition, the Company expects to benefit from the growing institutional
marketplace by increasing penetration in the stable value and fixed income
markets and developing new products and applications. 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. Fee-based business is less capital intensive than spread-based
business and provides the Company with diversified sources of income.
On November 7, 1997 the Company transferred substantially all of the assets
and operations of ARM Capital Advisors, Inc. ("ARM Capital Advisors") to ARM
Capital Advisors, LLC ("New ARMCA") and sold an 80% interest in New ARMCA.
Although third-party assets managed by ARM Capital Advisors grew since 1995 when
ARM Capital Advisors began its operations, 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 constrained ARM Capital Advisors' growth. ARM Capital
Advisors' management of defined benefit pension plan accounts generated asset
management fees of $1.9 million during the first quarter of 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Net income during the first quarter of 1998 was $11.0 million compared to
$7.6 million for the first quarter of 1997. Operating earnings (net income
applicable to common shareholders, excluding, net of tax, realized investment
gains and losses, non-recurring charges and for 1997, income from defined
benefit pension plan asset management operations which were sold) were $10.0
million and $5.8 million for the first quarter of 1998 and 1997, respectively.
The increase in operating earnings is primarily attributable to an increase in
net investment spread due to deposit growth from sales of retail and
institutional spread products.
Pro forma operating earnings for the first quarter of 1997 (operating
earnings including a pro forma adjustment to reflect investment income at an
assumed rate of 7.5% on the net proceeds of the Company's June 1997 initial
public offering of Class A common stock assuming it occurred on January 1,
1997) were $7.0 million. Operating earnings per share (pro forma for 1997)
were $0.41 and $0.29 for the first quarter of 1998 and 1997, respectively.
The pro forma information for 1997 is not necessarily indicative of what
would have occurred had the initial public offering occurred on the date
indicated.
Annualized pretax operating earnings for retail spread products were 1.49%
and 1.33% of average assets under management of $2.82 billion and $2.63
billion for that segment during the first quarter of 1998 and 1997,
respectively. Annualized pretax operating earnings for institutional spread
products were 0.60% and 0.54% of average assets under management of $2.80
billion and $1.00 billion for that segment during the first quarter of 1998
and 1997, respectively. Annualized pretax operating earnings for retail
variable products (fee business) were 0.53% and 0.41% of average assets
10
<PAGE>
under management of $1.20 billion and $847.9 million for that segment during the
first quarter of 1998 and 1997, respectively. The Company's corporate and
other segment includes earnings on surplus of insurance subsidiaries and holding
company cash and investments, fee income from marketing partnerships and
broker-dealer fee operations, unallocated amortization expenses, and other
various corporate expenditures that are not allocated to specific products.
Income tax expense and preferred stock dividends are not allocated to any
segment.
Net investment spread for the three months ended March 31, 1998 and 1997 was
as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Investment income $ 104,406 $ 69,700
Interest credited on customer deposits (81,680) (51,325)
-----------------------------
Net investment spread $ 22,726 $ 18,375
-----------------------------
-----------------------------
Annualized investment yield 7.24% 7.45%
Annualized average credited rate (5.94)% (5.67)%
-----------------------------
Investment spread rate 1.30% 1.78%
-----------------------------
-----------------------------
Average cash and investments (IN BILLIONS) $ 5.77 $ 3.74
Average spread-based customer deposits (IN BILLIONS) $ 5.58 $ 3.67
</TABLE>
The decrease in the overall investment spread rate from 1.78% in 1997 to
1.30% in 1998 is primarily attributable to a greater proportion of
institutional spread product deposits in 1998, which generate lower spreads.
Changes in investment yield and average credited rates must be analyzed in
relation to the liability portfolios to which they relate. The annualized
investment yield on cash and investments, excluding assets supporting
institutional spread product deposits, was 7.74% for the first quarter of
1998, down slightly from 7.83% for the comparable 1997 period. In comparison,
the annualized investment yield on cash and investments supporting
institutional spread product deposits was 6.70% and 6.42% for the first
quarter of 1998 and 1997, respectively. Average cash and investments related
to institutional spread product deposits grew from $1.00 billion during the
first quarter of 1997 to $2.80 billion during the first quarter of 1998,
contributing to the aggregate decrease in investment yields. The proceeds
from institutional spread product 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 market interest rates, frequency of credited rate
resets and business mix. Crediting rates are reset monthly or quarterly based
on London Interbank Offered Rates ("LIBOR") for institutional spread products
and semi-annually or annually for certain fixed annuities. The increase in
the average rate of interest credited on customer deposits during the first
quarter of 1998 was primarily attributable to higher LIBOR compared to the
first quarter of 1997 and to a greater proportion of institutional spread
product deposits in 1998. To date, the Company has been able to react to
changes in market interest rates and maintain an adequate investment spread
without a significant effect on retail surrender and withdrawal activity,
although there can be no assurance that the Company will be able to continue
to do so.
11
<PAGE>
Variable annuity fees, which are based on the market value of the mutual fund
assets supporting variable annuity customer deposits in nonguaranteed separate
accounts, increased to $4.4 million in the first quarter of 1998 from $3.2
million in the first quarter of 1997. This increase is 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.
Assets under management as of March 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
March 31,
------------------------------------------
1998 1997
------------------------------------------
Percent of Percent of
(DOLLARS IN MILLIONS) Amount Total Amount Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail spread products (primarily
fixed and indexed annuity and
face-amount certificate deposits) $2,815.4 37% $2,653.5 52%
Institutional spread products
(funding agreement and
GIC deposits) 2,989.6 40 1,141.3 22
Retail variable products
(variable annuity deposits
invested in mutual funds) 1,302.1 17 859.5 17
Corporate and other:
Off-balance sheet deposits under
marketing partnership arrangements 233.7 3 368.7 7
Cash and investments in excess
of customer deposits 190.6 3 75.1 2
------------------------------------------
Total assets under management $7,531.4 100% $5,098.1 100%
------------------------------------------
------------------------------------------
</TABLE>
The increase in total assets under management was primarily attributable to
sales of floating rate funding agreements and GICs to institutional customers
and an increase in retail variable product deposits attributable to variable
annuity sales and the investment performance of variable annuity mutual funds
due to strong stock market returns.
Sales of retail and institutional spread products include premiums and
deposits received for products issued by the Company's insurance and face-amount
certificate subsidiaries. Sales of retail variable products include premiums for
the investment portfolio options of variable annuity products issued by the
Company's insurance subsidiaries.
12
<PAGE>
Sales by market and type of product for the three months ended March 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
(IN MILLIONS) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Retail:
Spread products $38.0 $68.8
Variable products 83.5 36.3
---------------------
Total retail 121.5 105.1
Institutional:
Spread products 447.2 248.6
---------------------
Total sales $568.7 $353.7
---------------------
---------------------
</TABLE>
Sales of retail variable products increased $47.2 million over the first
quarter of 1997. This increase is primarily attributable to the reintroduction
and enhancement of the PINNACLE variable annuity product in late 1997. Sales of
retail spread products decreased to $38.0 million for the first quarter of 1998.
This decrease is related to the decline in the yield on intermediate-term
U.S. Treasury securities which is one of the factors considered in setting
credited rates on retail spread products. The Company's sales strategy is to
broaden its mix of products, services and distribution channels to enable it to
achieve its target sales within different interest rate environments. The
increase in institutional sales was attributable to increased sales of
institutional funding agreements.
Net surrenders of retail spread and variable annuity products issued by
the Company's insurance subsidiaries were $79.7 million in the first quarter
of 1998 compared to $76.1 million in the first quarter of 1997. Surrender
charge income increased to $1.3 million in the first quarter of 1998 from
$0.9 million in the first quarter of 1997. The increase in surrender charge
income is attributable to a larger mix of surrenders of customer deposits
acquired in connection with the 1995 acquisition of SBM Company's insurance
subsidiary which have higher surrender charge penalties. Retail products
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 first quarters of 1997 and 1998 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 attempts to reduce
retail surrender activity and improve persistency through various programs.
The Company has experienced minimal withdrawals (excluding scheduled interest
payments) by institutional spread product customers during the first quarter
of 1997 and 1998.
Amortization of deferred policy acquisition costs related to operations was
$2.7 million and $2.2 million during the three months ended March 31, 1998 and
1997, respectively. This increase was primarily the result of growth in the
deferred policy acquisition cost asset due to additional sales of fixed, indexed
and variable annuity products. Variable costs of selling and issuing the
Company's
13
<PAGE>
insurance subsidiaries' products (primarily commissions and certain policy
issuance and marketing costs) are deferred and then amortized over the expected
life of the contract.
Amortization of value of insurance in force related to operations of $1.5
million and $2.2 million for the three months ended March 31, 1998 and 1997,
respectively, primarily reflects the amortization of the value of insurance
in force established as an asset by the Company in connection with the 1995
acquisition of SBM Company's insurance subsidiary. The decrease in
amortization of value of insurance in force related to operations is a result
of the decrease in the value of insurance in force asset from $50.8 million
at March 31, 1997 to $31.0 million at March 31, 1998.
The Company recorded non-recurring charges of $3.6 million in the first
quarter of 1998 as part of a retirement package for John Franco, the Company's
Co-Chairman and Co-Chief Executive Officer. Mr. Franco retired effective
February 10, 1998. These charges consisted of (i) a $2.1 million non-cash
charge in connection with the vesting of the unvested portion of the options
held by Mr. Franco to purchase 232,647 shares of the Company's common stock and
(ii) a $1.5 million charge for fulfilling remaining compensation related to his
employment agreement. The Company recorded non-recurring charges of $1.4
million in the first quarter of 1997 primarily related to the relocation and
consolidation of the Company's operations facilities from Ohio to Louisville,
Kentucky.
Other expenses, net primarily includes premiums paid on agreements to
reinsure the majority of the 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 $5.2
million in the first quarter of 1998 compared to $2.2 million in the first
quarter of 1997. Such realized investment gains 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.
Income tax expense was $5.5 million and $2.8 million during the three
months ended March 31, 1998 and 1997, respectively, reflecting effective tax
rates of 33.4% and 27.0%.
14
<PAGE>
ASSET PORTFOLIO REVIEW
The Company primarily invests in securities with fixed maturities with the
objective of earning reasonable returns while limiting credit and liquidity
risks. At amortized cost, fixed maturities at March 31, 1998 totaled $4.4
billion, compared with $4.0 billion at December 31, 1997, representing
approximately 90% and 91% of total cash and investments, respectively. This
increase in investments in fixed maturities primarily resulted from the
investment of the proceeds from the sales of institutional spread products.
The Company's cash and investments as of March 31, 1998 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 $1,595.6 32% $1,599.1
U.S. Treasury securities and obligations of U.S.
government agencies 333.5 7 334.3
Other government securities 84.9 2 85.9
Asset-backed securities 416.5 9 415.1
Mortgage-backed securities ("MBSs"):
Agency pass-throughs 37.5 1 37.6
Collateralized mortgage obligations ("CMOs"):
Agency 258.3 5 260.4
Non-agency 1,687.0 34 1,688.1
------------------------ --------------
Total fixed maturities 4,413.3 90 4,420.5
Equity securities (i.e., non-redeemable preferred stock) 28.2 1 27.9
Mortgage loans on real estate 16.2 * 16.2
Policy loans 126.3 2 126.3
Cash and cash equivalents 344.1 7 344.1
------------------------ --------------
Total cash and investments $4,928.1 100% $4,935.0
------------------------ --------------
------------------------ --------------
</TABLE>
* Less than 1%.
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 CMO investments at March 31, 1998 (on an amortized
cost basis), 87% used mortgage loans or mortgage loan pools, letters of credit,
agency mortgage pass-through securities and other types of credit enhancement as
collateral. The remaining 13% of the non-agency CMOs used commercial mortgage
loans as collateral.
15
<PAGE>
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.
Securities that have an amortized cost that is greater than par (i.e., purchased
at a premium) that are backed by mortgages that prepay faster than expected will
incur a reduction in yield or a loss, versus an increase in yield or a gain if
the mortgages prepay slower than expected. Those securities that have an
amortized cost that is less than par (i.e., purchased at a discount) that are
backed by mortgages that prepay faster than expected will generate an increase
in yield or a gain, versus a decrease in yield or a loss if the mortgages prepay
slower than expected. The reduction or increase in yields may be partially
offset as funds from prepayments are reinvested at current interest rates. The
degree to which a security is susceptible to either gains or losses is
influenced by the difference between its amortized cost and par, the relative
sensitivity of the underlying mortgages backing the assets to prepayments in a
changing interest rate environment and the repayment priority of the securities
in the overall securitization structure. The Company had gross unamortized
premiums and unaccreted discounts of MBSs of $19.9 million and $15.3 million,
respectively, at March 31, 1998. Although the interest rate environment has
experienced volatility during 1997 and the first quarter of 1998, prepayments
and extensions of cash flows from MBSs have not materially affected investment
income of the Company.
Asset-backed securities ("ABSs") are securitized bonds which can be backed
by, but not limited to, collateral such as home equity loans, second mortgages,
automobile loans and credit card receivables. At March 31, 1998, home equity
loan collateral represented 42% of the Company's investments in the ABS market.
The typical structure of an ABS provides for favorable yields, high credit
rating and stable prepayments.
Total cash and investments (on an amortized cost basis) were 93% and 95%
investment grade or equivalent as of March 31, 1998 and December 31, 1997,
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 has a diversified foreign
portfolio of Yankee Bonds, including a limited exposure to the Asian market. The
Company reduces the risks associated with buying foreign securities by limiting
the exposure to both issuer and country. The Company closely monitors the
creditworthiness of such issuers and the stability of each country.
Additionally, the Company's investment portfolio has minimal exposure to real
estate, mortgage loans and common equity securities, which represented less than
1% of cash and investments as of March 31, 1998.
The Company analyzes its investment portfolio, including below investment
grade securities, at least quarterly 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
16
<PAGE>
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.
At March 31, 1998 the ratings assigned by the NAIC and comparable S&P ratings
on the Company's fixed maturity portfolio were as follows:
<TABLE>
<CAPTION>
Amortized Cost
------------------------
Percent Estimated
NAIC Designation (Comparable S&P Rating) Amount of Total Fair Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in millions)
1 (AAA, AA, A) $2,804.4 64% $2,803.4
2 (BBB) 1,241.5 28 1,250.6
3 (BB) 204.8 4 206.3
4 (B) 162.6 4 160.2
5 (CCC, CC, C) -- -- --
6 (CI, D) -- -- --
-----------------------------------------
Total fixed maturities $4,413.3 100% $4,420.5
-----------------------------------------
-----------------------------------------
</TABLE>
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 deferred policy
acquisition cost and value of insurance in force amortization and deferred
income taxes, are charged or credited directly to shareholders' equity and
classified as accumulated other comprehensive income from net unrealized gains
on available-for-sale securities.
The fluctuations in interest rates during the first quarter of 1998 resulted
in net unrealized gains on available-for-sale securities which totaled $0.8
million (net of $5.7 million of related amortization of deferred policy
acquisition costs and value of insurance in force and $0.4 million of deferred
income taxes) at March 31, 1998, compared to net unrealized gains of $20.3
million (net of $15.8 million of related amortization of deferred policy
acquisition costs and value of insurance in force and $10.9 million of deferred
income taxes) at December 31, 1997. This change in net unrealized gains on
available-for-sale securities for the first quarter of 1998 decreased reported
shareholders' equity by $19.5 million as compared to an increase of $16.6
million for the year ended December 31, 1997. 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 other assets and
all liabilities are carried at historical values. At March 31, 1998 and
December 31, 1997, shareholders' equity excluding the effects of SFAS No. 115
was $296.7 million and $287.2 million, respectively.
17
<PAGE>
Assets held in the Company's guaranteed separate accounts include $1.20
billion and $1.26 billion of cash and investments at March 31, 1998 and December
31, 1997, of which approximately 93% and 87% were fixed maturities,
respectively. Total guaranteed separate account cash and investments were 98%
and 99% investment grade at March 31, 1998 and December 31, 1997, respectively.
Separate accounts are investment accounts maintained by an insurer to which
funds have been allocated for certain policies under provisions of relevant
state law. The investments in each separate account are maintained separately
from those in other separate accounts and from an insurance company's general
account.
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 agreements, dividend payments on
its common and preferred stock, operating expenses not absorbed by management
fees charged to its subsidiaries, and corporate development expenditures. The
Company is dependent on dividends from Integrity Life Insurance Company
("Integrity") and management and service fee income from the Company's
subsidiaries to meet ongoing cash needs.
The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates for the payment of service or other fees
is limited by state insurance laws. In March 1998, the Company received a cash
dividend of $6.0 million from Integrity. The maximum dividend payments that may
be made by Integrity to the Company during 1998 without the prior approval of
the Ohio Insurance Director are $38.2 million. The Company had cash and
investments at the holding company level of $44.6 million at March 31, 1998. In
addition, the Company has access to bank lines of credit totaling $75.0 million
at March 31, 1998, of which $37.0 million is available to the Company.
In May 1998, the Company completed a public offering of approximately 12.4
million shares of common stock held by the Morgan Stanley Stockholders. The
Company did not receive any of the proceeds from the public offering. As a
result of the public offering, the Morgan Stanley Stockholders no longer own any
shares of the Company's outstanding common stock and all Class B common stock
was converted into Class A common stock.
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
18
<PAGE>
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 three months ended March 31, 1998 and 1997, the Company met its
liquidity needs entirely by cash flows from operating activities and
principal payments and redemptions of investments. At March 31, 1998, cash
and cash equivalents totaled $344.1 million compared to $228.2 million at
December 31, 1997. This increase in cash and cash equivalents is temporary
and is a result of deposits for institutional spread products received prior
to March 31, 1998, which were not fully invested until after March 31, 1998.
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 $60.2 million and $46.7 million from
operating activities during the quarters ended March 31, 1998 and 1997,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $1,821.0 million and $1,026.2 million in
cash flows during the quarters ended March 31, 1998 and 1997, respectively,
which were offset by purchases of investments of $2,105.3 million and $1,209.7
million, respectively. An increase in investment purchases and sales activity
during the first quarter of 1998 reflects the Company's ongoing management of
its fixed maturity portfolio which has increased in size due primarily to sales
of retail and institutional spread products.
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,"
or similar expressions. Such forward-looking 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 growth of the long-term savings and retirement market and the stimulation
of future demand for long-term savings and retirement products, including fixed,
indexed and variable 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 fixed,
indexed and variable 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.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in no material legal or administrative
proceedings. The Company's subsidiaries are currently involved only in routine
legal and administrative proceedings incidental to the conduct of their
businesses. The Company believes that none of these proceedings will have a
material adverse impact to the financial position or results of operations of
the Company or its subsidiaries.
ITEM 5. OTHER INFORMATION
The Board of Directors by unanimous written consent dated May 12, 1998,
declared a quarterly dividend of 59.375 cents per share payable June 15, 1998 to
holders of the 9 1/2% Cumulative Perpetual Preferred Stock of record on May 29,
1998, and a quarterly dividend of 4 cents per share payable June 15, 1998 to
holders of Class A common stock of record on May 29, 1998.
As a result of the successful public offering of Class A common stock held
by the Morgan Stanley Stockholders. Messrs. Alan E. Goldberg and Robert H.
Niehaus resigned from the Company's Board of Directors on May 13, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
On March 4, 1998, the Company filed a current report on Form 8-K
announcing that (i) as of February 10, 1998, Martin H. Ruby was named Chief
Executive Officer and Chairman of the Board of Directors and (ii) as of
February 20, 1998, Patricia L. Winter was named Executive Vice
President--Investment Assurance and Institutional Products.
20
<PAGE>
EXHIBITS (ELECTRONIC FILING ONLY)
3(ii) Second Amended and Restated By-Laws of ARM Financial Group, Inc.
10 Release and Settlement Agreement effective as of February 13, 1998,
entered into between Daniel R. Gattis and ARM Financial Group, Inc.
27 Financial Data Schedule.
21
<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 May 15, 1998.
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)
22
<PAGE>
-----------------------------------------------------------------------
-------------------------------------
SECOND AMENDED AND RESTATED BY-LAWS
-------------------------------------
of
ARM FINANCIAL GROUP, INC.
Effective as of February 20, 1998
-----------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
OFFICES
SECTION 1.1. Registered Office in Delaware . . . . . . . . . . . . . . . . .1
SECTION 1.2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1. Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 2.2. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 2.3. Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . .1
SECTION 2.4. Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . . .2
SECTION 2.5. Adjournments. . . . . . . . . . . . . . . . . . . . . . . . . .2
SECTION 2.6. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
SECTION 2.7. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
SECTION 2.8. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
SECTION 2.9. Advance Notice of Business to Be Transacted at Annual Meetings.3
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. General Powers. . . . . . . . . . . . . . . . . . . . . . . . .4
SECTION 3.2. Number and Term of Holding Office . . . . . . . . . . . . . . .4
SECTION 3.3. Nomination of Directors and Advance Notice Thereof. . . . . . .5
SECTION 3.4. Resignation . . . . . . . . . . . . . . . . . . . . . . . . . .6
SECTION 3.5. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . .6
SECTION 3.6. Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . .6
SECTION 3.7. Action by Consent . . . . . . . . . . . . . . . . . . . . . . .7
SECTION 3.8. Meetings by Conference Telephone, etc.. . . . . . . . . . . . .7
SECTION 3.9. Compensation. . . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE IV
COMMITTEES
SECTION 4.1. Committees. . . . . . . . . . . . . . . . . . . . . . . . . . .8
<PAGE>
ii
Page
ARTICLE V
OFFICERS
SECTION 5.1. Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
SECTION 5.2. Authority and Duties. . . . . . . . . . . . . . . . . . . . . .8
SECTION 5.3. Term of Office, Resignation and Removal . . . . . . . . . . . .8
SECTION 5.4. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . .9
SECTION 5.5. The Chairman. . . . . . . . . . . . . . . . . . . . . . . . . .9
SECTION 5.6. Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . .9
SECTION 5.7. The Secretary . . . . . . . . . . . . . . . . . . . . . . . . .9
SECTION 5.8. Assistant Secretaries . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.9. The Treasurer . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.10. Assistant Treasurers. . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.11. Additional Officers . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VI
CHECKS, DRAFTS, NOTES AND PROXIES
SECTION 6.1. Checks, Drafts and Notes. . . . . . . . . . . . . . . . . . . 10
SECTION 6.2. Execution of Proxies. . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VII
SHARES AND TRANSFER OF SHARES
SECTION 7.1. Certificates of Stock . . . . . . . . . . . . . . . . . . . . 11
SECTION 7.2. Record. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 7.3. Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 7.4. Addresses of Stockholders . . . . . . . . . . . . . . . . . . 11
SECTION 7.5. Lost, Destroyed or Mutilated Certificates . . . . . . . . . . 11
SECTION 7.6. Facsimile Signatures. . . . . . . . . . . . . . . . . . . . . 12
SECTION 7.7. Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 7.8. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 7.9. Registered Stockholders . . . . . . . . . . . . . . . . . . . 12
SECTION 7.10. Stockholder Agreements. . . . . . . . . . . . . . . . . . . . 13
<PAGE>
iii
Page
ARTICLE VIII
BOOKS AND RECORDS
SECTION 8.1. Books and Records . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE IX
SEAL
SECTION 9.1. Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE X
FISCAL YEAR
SECTION 10.1. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE XI
INDEMNIFICATION
SECTION 11.1. Indemnification . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE XII
AMENDMENTS
SECTION 12.1. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
-------------------------------------
SECOND AMENDED AND RESTATED BY-LAWS
OF
ARM FINANCIAL GROUP, INC.
-------------------------------------
ARTICLE I
OFFICES
SECTION 1.1. REGISTERED OFFICE IN DELAWARE. The address of the
registered office of ARM Financial Group, Inc. (hereinafter called the
"CORPORATION") in the State of Delaware shall be The Corporation Trust Company,
1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware
19801, and the registered agent in charge thereof shall be The Corporation Trust
Company.
SECTION 1.2. OTHER OFFICES. The Corporation may have an office or
offices at any other place or places within or without the State of Delaware.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1. ANNUAL MEETING. The annual meeting of stockholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting shall be held at such place within or without
the State of Delaware, and at such date and hour, as shall be designated by the
Board of Directors of the Corporation (the "BOARD") and set forth in the notice
or in a duly executed waiver of notice thereof.
SECTION 2.2. SPECIAL MEETINGS. A special meeting of the
stockholders for any purpose or purposes may be called at any time by a majority
of the members of the Board or the Chief Executive Officer of the Corporation.
A special meeting of stockholders of the Corporation may not be called by any
other person or persons. Any such meeting shall be held at such place within or
without the State of Delaware, and at such date and hour, as shall be designated
in the notice or in a duly executed waiver of notice of such meeting.
Only such business as is stated in the written notice of a special
meeting may be acted upon thereat.
SECTION 2.3. NOTICE OF MEETINGS. Except as otherwise provided by
law, written notice of each annual or special meeting of stockholders stating
the place, date and hour of the
<PAGE>
2
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is held, shall be given personally or by first class mail to
each stockholder entitled to vote at such meeting, not less than 10 nor more
than 60 calendar days before the date of the meeting. If mailed, such notice
shall be deemed to be given when deposited in the United States mail, postage
prepaid, directed to the stockholder at such stockholder's address as it appears
on the records of the Corporation. If, prior to the time of mailing, the
Secretary shall have received from any stockholder entitled to vote a written
request that notices intended for such stockholder are to be mailed to an
address other than the address that appears on the records of the Corporation,
notices intended for such stockholder shall be mailed to the address designated
in such request.
Notice of a special meeting may be given by the person or persons
calling the meeting, or, upon the written request of such person or persons, by
the Secretary of the Corporation on behalf of such person or persons. If the
person or persons calling a special meeting of stockholders give notice thereof,
such person or persons shall forward a copy thereof to the Secretary. Every
request to the Secretary for the giving of notice of a special meeting of
stockholders shall state the purpose or purposes of such meeting.
SECTION 2.4. WAIVER OF NOTICE. Notice of any annual or special
meeting of stockholders need not be given to any stockholder entitled to vote at
such meeting who files a written waiver of notice with the Secretary, duly
executed by the person entitled to notice, whether before or after the meeting.
Neither the business to be transacted at, nor the purpose of, any meeting of
stockholders need be specified in any written waiver of notice. Attendance of a
stockholder at a meeting, in person or by proxy, shall constitute a waiver of
notice of such meeting, except as provided by law.
SECTION 2.5. ADJOURNMENTS. When a meeting is adjourned to another
date, hour or place, notice need not be given of the adjourned meeting if the
date, hour and place thereof are announced at the meeting at which the
adjournment is taken. If the adjournment is for more than 30 calendar days, or
if after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the adjourned meeting. At the adjourned meeting any
business may be transacted which might have been transacted at the original
meeting.
When any meeting is convened the presiding officer, if directed by the
Board, may adjourn the meeting if (a) no quorum is present for the transaction
of business, or (b) the Board determines that adjournment is necessary or
appropriate to enable the stockholders (i) to consider fully information which
the Board determines has not been made sufficiently or timely available to
stockholders or (ii) otherwise to exercise effectively their voting rights.
SECTION 2.6. QUORUM. Except as otherwise provided by law or the
Restated Certificate of Incorporation of the Corporation (the "RESTATED
CERTIFICATE OF INCORPORATION"), whenever a class of stock of the Corporation is
entitled to vote as a separate class, or whenever classes of stock of the
Corporation are entitled to vote together as a single class, on any matter
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brought before any meeting of the stockholders, whether annual or special,
holders of shares entitled to cast a majority of the votes entitled to be cast
by all the holders of the shares of stock of such class voting as a separate
class, or classes voting together as a single class, as the case may be,
outstanding and entitled to vote thereat, present in person or by proxy, shall
constitute a quorum at any such meeting of the stockholders. If, however, such
quorum shall not be present or represented at any such meeting of the
stockholders, the stockholders entitled to vote thereat may adjourn the meeting
from time to time in accordance with Section 2.5 until a quorum shall be present
or represented.
SECTION 2.7. VOTING. Unless otherwise provided in the Restated
Certificate of Incorporation, each stockholder represented at a meeting of
stockholders shall be entitled to cast one vote for each share of capital stock
entitled to vote thereat held by such stockholder. Except as otherwise provided
by law or the Restated Certificate of Incorporation or these By-Laws, when a
quorum is present with respect to any matter brought before any meeting of the
stockholders, the vote of the holders of shares entitled to cast a majority of
the votes entitled to be cast by all the holders of the shares constituting such
quorum shall decide any such matter. Votes need not be by written ballot,
unless the Board, in its discretion, or the officer of the Corporation presiding
at a meeting of stockholders, in his discretion, requires any vote or votes cast
at such meeting to be cast by written ballot.
SECTION 2.8. PROXIES. Each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for such
stockholder by proxy. Such proxy shall be filed with the Secretary before such
meeting of stockholders at such time as the Board may require. No proxy shall
be voted or acted upon after three years from its date, unless the proxy
provides for a longer period.
SECTION 2.9. ADVANCE NOTICE OF BUSINESS TO BE TRANSACTED AT ANNUAL
MEETINGS. (a) To be properly brought before the annual meeting of stockholders,
business must be either (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board (or any duly
authorized committee thereof), (ii) otherwise properly brought before the
meeting by or at the direction of the Board (or any duly authorized committee
thereof) or (iii) otherwise properly brought before the meeting by any
stockholder of the Corporation (A) who is a stockholder of record on the date of
the giving of the notice provided for in this Section 2.9 and on the record date
for the determination of stockholders entitled to vote at such meeting and (B)
who complies with the notice procedures set forth in this Section 2.9. In
addition to any other applicable requirements, including but not limited to the
requirements of Rule 14a-8 promulgated by the Securities and Exchange commission
under the Securities and Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
for business to be properly brought before an annual meeting by a stockholder
pursuant to clause (iii) of this Section 2.9(a), such stockholder must have
given timely notice thereof in proper written form to the Secretary of the
Corporation.
(b) To be timely, a stockholder's notice to the Secretary pursuant to
clause (iii) of Section 2.9(a) must be delivered to or mailed and received at
the principal executive offices of the Corporation, not less than 60 days nor
more than 90 days prior to the anniversary date of the
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4
immediately preceding annual meeting of stockholders; PROVIDED, HOWEVER, that in
the event that the annual meeting is called for a date that is not within 30
days before or after such anniversary date, notice by the stockholder in order
to be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the annual
meeting is mailed or such public disclosure of the date of the annual meeting is
made, whichever first occurs.
(c) To be in proper written form, a stockholder's notice to the
Secretary pursuant to clause (iii) of Section 2.9(a) must set forth as to each
matter such stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of such stockholder, (iii) the class or series and number of shares of
capital stock of the Corporation which are owned beneficially or of record by
such stockholder, together with evidence reasonably satisfactory to the
Secretary of such beneficial ownership, (iv) a description of all arrangements
or understandings between such stockholder and any other person or persons
(including their names) in connection with the proposal of such business by such
stockholder and any material interest of such stockholder in such business and
(v) a representation that such stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting.
(d) Notwithstanding anything in these By-laws to the contrary, no
business shall be conducted at the annual meeting of stockholders except
business brought before such meeting in accordance with the procedures set forth
in this Section 2.9; PROVIDED, HOWEVER, that, once business has been properly
brought before such meeting in accordance with such procedures, nothing in this
Section 2.9 shall be deemed to preclude discussion by any stockholder of any
such business. If the chairman of such meeting determines that business was not
properly brought before the meeting in accordance with the foregoing procedures,
the chairman shall declare to the meeting that the business was not properly
brought before the meeting and such business shall not be transacted.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS. The property, business and affairs of
the Corporation shall be managed by the Board, which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law or by the Restated Certificate of Incorporation directed or required to be
exercised or done by the stockholders.
SECTION 3.2. NUMBER AND TERM OF HOLDING OFFICE. Subject to the
rights, if any, of holders of preferred stock of the Corporation, the number of
directors which shall constitute the whole Board shall consist of not less than
three (3) nor more than fifteen (15) members, the exact number of which shall be
fixed by the Board from time to time by a majority of the whole Board. The
Board shall, by resolution passed by a majority of the Board, designate the
directors to serve as
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initial Class I, Class II and Class III directors upon the effectiveness of the
Restated Certificate of Incorporation. Except as provided in Section 3.4,
directors shall be elected by a plurality of the votes cast at annual meetings
of stockholders, and each director so elected shall hold office as provided by
Article VIII of the Restated Certificate of Incorporation. None of the
directors need be stockholders of the Corporation.
SECTION 3.3. NOMINATION OF DIRECTORS AND ADVANCE NOTICE THEREOF. (a)
Only persons who are nominated in accordance with the following procedures
shall be eligible for election as directors of the Corporation, except as may be
otherwise provided in the Restated Certificate of Incorporation with respect to
the right of holders of preferred stock of the Corporation to nominate and elect
a specified number of directors in certain circumstances. Nominations of
persons for election to the Board may be made at any annual meeting of
stockholders, or at any special meeting of stockholders called for the purpose
of electing directors, (i) by or at the direction of the Board (or any duly
authorized committee thereof) or (ii) by any stockholder of the Corporation (A)
who is a stockholder of record on the date of the giving of the notice provided
for in this Section 3.3 and on the record date for the determination of
stockholders entitled to vote at such meeting and (B) who complies with the
notice procedures set forth in this Section 3.3. In addition to any other
applicable requirements, for a nomination to be made by a stockholder pursuant
to clause (ii) of this Section 3.3(a), such stockholder must have given timely
notice thereof in proper written form to the Secretary of the Corporation.
(b) To be timely, a stockholder's notice to the Secretary pursuant to
clause (ii) of Section 3.3(a) must be delivered to or mailed and received at the
principal executive offices of the Corporation (i) in the case of an annual
meeting, not less than 60 days nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting of stockholders; PROVIDED,
HOWEVER, that in the event that the annual meeting is called for a date that is
not within 30 days before or after such anniversary date, notice by the
stockholder in order to be timely must be so received not later than the close
of business on the tenth day following the day on which such notice of the date
of the annual meeting is mailed or such public disclosure of the date of the
annual meeting is made, whichever first occurs, or (ii) in the case of a special
meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the tenth day following the day on which notice of
the date of the special meeting is mailed or public disclosure of the date of
the special meeting is made, whichever first occurs.
(c) To be in proper written form, a stockholder's notice to the
Secretary pursuant to clause (ii) of Section 3.3(a) must set forth (i) as to
each person whom the stockholder proposes to nominate for election as a
director, (A) the name, age, business address and residence address of the
person, (B) the principal occupation or employment of the person, (C) the class
or series and number of shares of capital stock of the Corporation which are
owned beneficially or of record by the person and (D) any other information
relating to the person that would be required to be disclosed in a proxy
statement or other filings required to be made in connection with solicitations
of proxies for election of directors pursuant to Section 14 of the Exchange Act
and the rules and regulations promulgated thereunder; and (ii) as to the
stockholder giving the notice, (A) the name
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and record address of such stockholder, (B) the class or series and number of
shares of capital stock of the Corporation which are owned beneficially or of
record by such stockholder, together with evidence reasonably satisfactory to
the Secretary of such beneficial ownership, (C) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such stockholder, (D) a representation
that such stockholder intends to appear in person or by proxy at the meeting to
nominate the persons named in its notice and (E) any other information relating
to such stockholder that would be required to be disclosed in a proxy statement
or other filings required to be made in connection with solicitations of proxies
for election of directors pursuant to Section 14 of the Exchange Act and the
rules and regulations promulgated thereunder. Such notice must be accompanied
by a written consent of each proposed nominee to being named as a nominee and to
serve as a director if elected.
(d) No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 3.3. If the chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the chairman of the meeting
shall declare to the meeting that the nomination was defective and such
defective nomination shall be disregarded.
SECTION 3.4. RESIGNATION. Any director may resign at any time by
giving written notice to the Board, the Chief Executive Officer or the Secretary
of the Corporation. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, then it shall take effect when accepted by action of the
Board. Except as aforesaid, acceptance of such resignation shall not be
necessary to make it effective.
SECTION 3.5. VACANCIES. Subject to the rights of the holders of any
series of preferred stock or any other class of capital stock of the Corporation
(other than common stock) then outstanding, any vacancy in the Board, arising
from death, resignation, removal, an increase in the number of directors or any
other cause, may be filled only by the Board, the stockholders acting at an
annual meeting or, if the vacancy is with respect to a director elected by a
voting group, by action of any other directors elected by such voting group or
such voting group. Any director elected to fill a vacancy shall hold office for
a term that shall coincide with the term of the class to which such director
shall have been elected.
SECTION 3.6. MEETINGS. (a) ANNUAL MEETINGS. As soon as practicable
after each annual election of directors, the Board shall meet for the purpose of
organization and the transaction of other business, unless it shall have
transacted all such business by written consent pursuant to Section 3.7.
(b) OTHER MEETINGS. Other meetings of the Board shall be held at
such times as the Board shall from time to time determine or upon call by the
Chairman of the Board or any two directors.
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(c) NOTICE OF MEETINGS. Regular meetings of the Board may be held
without notice. The Secretary of the Corporation shall give notice to each
director of each special meeting, including the time and place of such special
meeting. Notice of each such meeting shall be given to each director either by
mail, at least two days before the day on which such meeting is to be held, or
by telephone, telegram, facsimile, telex or cable not later than the day before
the day on which such meeting is to be held or on such shorter notice as the
person or persons calling such meeting may deem necessary or appropriate in the
circumstances. Notice of any meeting shall not be required to be given to any
director who shall attend such meeting. A waiver of notice by the person
entitled thereto, whether before or after the time of any such meeting, shall be
deemed equivalent to adequate notice.
(d) PLACE OF MEETINGS. The Board may hold its meetings at such place
or places within or without the State of Delaware as the Board may from time to
time by resolution determine or as shall be designated in the respective notices
or waivers of notice thereof.
(e) QUORUM AND MANNER OF ACTING. Except as otherwise provided by
law, the Restated Certificate of Incorporation or these By-Laws, a majority of
the total number of directors then in office shall be necessary at any meeting
of the Board in order to constitute a quorum for the transaction of business at
such meeting, and the affirmative vote of a majority of those directors present
at any such meeting at which a quorum is present shall be necessary for the
passage of any resolution or act of the Board. In the absence of a quorum for
any such meeting, a majority of the directors present thereat may adjourn such
meeting from time to time until a quorum shall be present thereat. Notice of
any adjourned meeting need not be given.
SECTION 3.7. ACTION BY CONSENT. Any action required or permitted to
be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent or consents thereto is signed by all
members of the Board or such Committee, as the case may be, and such written
consent or consents are filed with the minutes of the proceedings of the Board
or such committee.
SECTION 3.8. MEETINGS BY CONFERENCE TELEPHONE, ETC. Any one or more
members of the Board, or of any committee thereof, may participate in a meeting
of the Board, or of such committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting by such means shall
constitute presence in person at such meeting.
SECTION 3.9. COMPENSATION. Each director, in consideration of his
serving as such, shall be entitled to receive from the Corporation such amount
per annum, if any, or such fees, if any, for attendance at meetings of the Board
or of any committee thereof, or both, as the Board shall from time to time
determine. The Board may likewise provide that the Corporation shall reimburse
each director or member of a committee for any expenses incurred by him on
account of his attendance at any such meeting. Nothing contained in this
Section 3.9 shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
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ARTICLE IV
COMMITTEES
SECTION 4.1. COMMITTEES. The Board, by resolution passed by a
majority of the whole Board, may designate members of the Board to constitute
one or more committees which shall in each case consist of such number of
directors, not fewer than two, and, to the extent permitted by law and provided
in the resolution establishing such committee, shall have and exercise all the
powers and authority of the Board in the management of the business and affairs
of the Corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified members at
any meeting of any such committee. In the absence or disqualification of a
member of a committee, and in the absence of a designation by the Board of an
alternate member to replace the absent or disqualified member, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board to act at the meeting in the place of any absent or disqualified
member. A majority of all the members of any such committee may fix its rules
of procedure, determine its action and fix the time and place, whether within or
without the State of Delaware, of its meetings and specify what notice thereof,
if any, shall be given, unless the Board shall otherwise by resolution provide.
The Board shall have power to change the members of any such committee at any
time, to fill vacancies therein and to discharge any such committee, either with
or without cause, at any time. Any committee, to the extent allowed by law and
provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation. Each committee shall keep regular
minutes and report to the Board when required.
ARTICLE V
OFFICERS
SECTION 5.1. OFFICERS. The officers of the Corporation shall be the
Chairman, the Secretary and a Treasurer and may include one or more Vice
Presidents and one or more Assistant Secretaries and one or more Assistant
Treasurers. Any two or more offices may be held by the same person.
SECTION 5.2. AUTHORITY AND DUTIES. All officers shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these By-Laws or, to the extent not so provided, by resolution of
the Board.
SECTION 5.3. TERM OF OFFICE, RESIGNATION AND REMOVAL. (a) Each
officer shall be appointed by the Board and shall hold office for such term as
may be determined by the Board. Each officer shall hold office until his
successor has been appointed and qualified or his earlier death or resignation
or removal in the manner hereinafter provided. The Board may require any
officer to give security for the faithful performance of his duties.
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(b) Any officer may resign at any time by giving written notice to
the Board, the Chairman or the Secretary. Such resignation shall take effect at
the time specified in such notice or, if the time be not specified, upon receipt
thereof by the Board, the Chairman or the Secretary, as the case may be. Unless
otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective.
(c) All officers and agents appointed by the Board shall be subject
to removal, with or without cause, at any time by the Board or by the action of
the recordholders of a majority of the shares entitled to vote thereon.
SECTION 5.4. VACANCIES. Any vacancy occurring in any office of the
Corporation, for any reason, shall be filled by action of the Board. Unless
earlier removed pursuant to Section 5.3, any officer appointed by the Board to
fill any such vacancy shall serve only until such time as the unexpired term of
his predecessor expires unless reappointed by the Board.
SECTION 5.5. THE CHAIRMAN. The Chairman of the Board shall be the
Chief Executive Officer of the Corporation and shall have general and active
management and control of the business and affairs of the Corporation, subject
to the control of the Board, and shall see that all orders and resolutions of
the Board are carried into effect. The Chairman shall perform all duties
incident to the office of Chairman of the Board and Chief Executive Officer and
all such other duties as may from time to time be assigned to him by the Board
or these By-Laws. The Chairman shall have the power to call special meetings of
stockholders and to call special meetings of the Board, and shall preside at all
meetings of the Board and stockholders.
SECTION 5.6. VICE PRESIDENTS. Vice Presidents, if any, in such
order as may be determined by the Board, shall generally assist the Chairman and
perform such other duties as the Board or the Chairman shall prescribe, and in
the absence or disability of the Chairman, shall perform the duties and exercise
the powers of the Chairman.
SECTION 5.7. THE SECRETARY. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of stockholders
and shall record all votes and the minutes of all proceedings in a book to be
kept for that purpose, and shall perform the same duties for any committee of
the Board when so requested by such committee. He shall give or cause to be
given notice of all meetings of stockholders and of the Board, shall perform
such other duties as may be prescribed by the Board or the Chairman and shall
act under the supervision of the Chairman. He shall keep in safe custody the
seal of the Corporation and affix the same to any instrument that requires that
the seal be affixed to it and which shall have been duly authorized for
signature in the name of the Corporation and, when so affixed, the seal shall be
attested by his signature or by the signature of the Treasurer of the
Corporation (the "TREASURER") or an Assistant Secretary or Assistant Treasurer
of the Corporation. He shall keep in safe custody the certificate books and
stockholder records and such other books and records of the Corporation as the
Board or the Chairman may direct and shall perform all other duties incident to
the office of Secretary and such other duties as from time to time may be
assigned to him by the Board or the Chairman.
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SECTION 5.8. ASSISTANT SECRETARIES. Assistant Secretaries of the
Corporation ("ASSISTANT SECRETARIES"), if any, in order of their seniority or in
any other order determined by the Board, shall generally assist the Secretary
and perform such other duties as the Board or the Secretary shall prescribe,
and, in the absence or disability of the Secretary, shall perform the duties and
exercise the powers of the Secretary.
SECTION 5.9. THE TREASURER. The Treasurer shall have the care and
custody of all the funds of the Corporation and shall deposit such funds in such
banks or other depositories as the Board, or any officer or officers, or any
officer and agent jointly, duly authorized by the Board, shall, from time to
time, direct or approve. He shall disburse the funds of the Corporation under
the direction of the Board and the Chairman. He shall keep a full and accurate
account of all moneys received and paid on account of the Corporation and shall
render a statement of his accounts whenever the Board or the Chairman shall so
request. He shall perform all other necessary actions and duties in connection
with the administration of the financial affairs of the Corporation and shall
generally perform all the duties usually appertaining to the office of treasurer
of a corporation. When required by the Board, he shall give bonds for the
faithful discharge of his duties in such sums and with such sureties as the
Board shall approve.
SECTION 5.10. ASSISTANT TREASURERS. Assistant Treasurers of the
Corporation ("ASSISTANT TREASURERS"), if any, in order of their seniority or in
any other order determined by the Board, shall generally assist the Treasurer
and perform such other duties as the Board or the Treasurer shall prescribe,
and, in the absence or disability of the Treasurer, shall perform the duties and
exercise the powers of the Treasurer.
SECTION 5.11. ADDITIONAL OFFICERS. The Board may appoint such other
officers and assistant officers and agents as it shall deem necessary, who shall
hold their offices for such terms and shall have authority and exercise such
powers and perform such duties as shall be determined from time to time by the
Board by resolution not inconsistent with these By-laws.
ARTICLE VI
CHECKS, DRAFTS, NOTES AND PROXIES
SECTION 6.1. CHECKS, DRAFTS AND NOTES. All checks, drafts and other
orders for the payment of money, notes and other evidences of indebtedness
issued in the name of the Corporation shall be signed by such officer or
officers, agent or agents of the Corporation and in such manner as shall be
determined, from time to time, by resolution of the Board.
SECTION 6.2. EXECUTION OF PROXIES. The Chairman or, in the absence
or disability of the Chairman, any Vice President, may authorize, from time to
time, the execution and issuance of proxies to vote shares of stock or other
securities of other corporations held of record by the Corporation and the
execution of consents to action taken or to be taken by any such corporation.
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All such proxies and consents, unless otherwise authorized by the Board, shall
be signed in the name of the Corporation by the Chairman or any Vice President.
ARTICLE VII
SHARES AND TRANSFER OF SHARES
SECTION 7.1. CERTIFICATES OF STOCK. Every owner of shares of stock
of the Corporation shall be entitled to have a certificate evidencing the number
of shares of stock of the Corporation owned by him or it and designating the
class of stock to which such shares belong, which shall otherwise be in such
form as the Board shall prescribe. Each such certificate shall bear the
signature (or a facsimile thereof) of the Chairman of the Board or any Vice
President and of the Treasurer or any Assistant Treasurer or the Secretary or
any Assistant Secretary of the Corporation.
SECTION 7.2. RECORD. A record shall be kept of the name of the
person, firm or corporation owning the stock represented by each certificate
evidencing stock of the Corporation issued, the number of shares represented by
each such certificate, and the date thereof, and, in the case of cancellation,
the date of cancellation. Except as otherwise expressly required by law, the
person in whose name shares of stock stand on the books of the Corporation shall
be deemed the owner thereof for all purposes as regards the Corporation.
SECTION 7.3. TRANSFER OF STOCK. (a) The transfer of shares of stock
and the certificates evidencing such shares of stock of the Corporation shall be
governed by Article 8 of Subtitle I of Title 6 of the Delaware Code (the Uniform
Commercial Code), as amended from time to time.
(b) Registration of transfers of shares of stock of the Corporation
shall be made only on the books of the Corporation upon request of the
registered holder thereof, or of his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the Corporation, and upon
the surrender of the certificate or certificates evidencing such shares properly
endorsed or accompanied by a stock power duly executed.
SECTION 7.4. ADDRESSES OF STOCKHOLDERS. Each stockholder shall
designate to the Secretary of the Corporation an address at which notices of
meetings and all other corporate notices may be served or mailed to him, and, if
any stockholder shall fail to so designate such an address, corporate notices
may be served upon him by mail directed to him at his post office address, if
any, as the same appears on the share record books of the Corporation or at his
last known post office address.
SECTION 7.5. LOST, DESTROYED OR MUTILATED CERTIFICATES. A holder of
any shares of stock of the Corporation shall promptly notify the Corporation of
any loss, destruction or mutilation of any certificate or certificates
evidencing all or any such shares of stock. The Board may, in its discretion,
cause the Corporation to issue a new certificate in place of any certificate
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theretofore issued by it and alleged to have been mutilated, lost, stolen or
destroyed, upon the surrender of the mutilated certificate or, in the case of
loss, theft or destruction of the certificate, upon satisfactory proof of such
loss, theft or destruction, and the Board may, in its discretion, require the
owner of the lost, stolen or destroyed certificate or his legal representative
to give the Corporation a bond sufficient to indemnify the Corporation against
any claim made against it on account of the alleged loss, theft or destruction
of any such certificate or the issuance of such new certificate.
SECTION 7.6. FACSIMILE SIGNATURES. Any or all of the signatures on
a certificate evidencing shares of stock of the Corporation may be facsimiles.
SECTION 7.7. REGULATIONS. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with the Restated
Certificate of Incorporation or these By-Laws, concerning the issue, transfer
and registration of certificates evidencing stock of the Corporation. It may
appoint, or authorize any principal officer or officers to appoint, one or more
transfer agents and one or more registrars, and may require all certificates of
stock to bear the signature or signatures (or a facsimile or facsimiles thereof)
of any of them. The Board may at any time terminate the employment of any
transfer agent or any registrar of transfers. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall cease to be such officer, transfer agent or registrar,
whether because of death, resignation, removal or otherwise, before such
certificate or certificates shall have been delivered by the Corporation, such
certificate or certificates may nevertheless be adopted by the Corporation and
be issued and delivered as though the person or persons who signed or whose
facsimile signature has been placed upon such certificate or certificates had
not ceased to be such officer, transfer agent or registrar.
SECTION 7.8. RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of, or to vote at, any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board may fix, in advance, a
record date, which shall not be more than sixty nor less than ten days before
the date of such meeting, nor more than sixty days prior to any other such
action. A determination of stockholders entitled to notice of, or to vote at,
any meeting of stockholders shall apply to any adjournment of the meeting;
PROVIDED, HOWEVER, that the Board may fix a new record date for the adjourned
meeting.
SECTION 7.9. REGISTERED STOCKHOLDERS. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its records
as the owner of shares of stock to receive dividends and to vote as such owner,
shall be entitled to hold liable for calls and assessments a person registered
on its records as the owner of shares of stock, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares of
stock on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the State of
Delaware.
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SECTION 7.10. STOCKHOLDER AGREEMENTS. Shares of stock of the
Corporation may be subject to one or more agreements abridging, limiting or
restricting the rights of any one or more stockholders to sell, assign,
transfer, mortgage, pledge or hypothecate any or all of the stock of the
Corporation held by them, or may be subject to one or more agreements providing
a purchase option with respect to any shares of stock of the Corporation. If
such agreements exist, all certificates evidencing shares of stock subject to
such abridgements, limitations, restrictions or options shall have reference
thereto endorsed on such certificate and such stock shall not thereafter be
transferred on the books of the Corporation except in accordance with the terms
and conditions of such agreement or agreements. Copies of such agreement or
agreements shall be maintained at the offices of the Corporation.
ARTICLE VIII
BOOKS AND RECORDS
SECTION 8.1. BOOKS AND RECORDS. The books and records of the
Corporation may be kept at such place or places within or without the State of
Delaware as the Board may from time to time determine.
ARTICLE IX
SEAL
SECTION 9.1. CORPORATE SEAL. The Board shall provide a corporate
seal which shall bear the full name of the Corporation.
ARTICLE X
FISCAL YEAR
SECTION 10.1. FISCAL YEAR. The fiscal year of the Corporation shall
be fixed, and shall be subject to change from time to time, by the Board.
ARTICLE XI
INDEMNIFICATION
SECTION 11.1. INDEMNIFICATION. (a) GENERAL. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or
<PAGE>
14
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, to the full extent authorized or permitted
by law, as now or hereafter in effect, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement or
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person seeking indemnification did not act
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
(b) DERIVATIVE ACTIONS. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, to
the full extent authorized or permitted by law, as now or hereafter in effect,
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation; PROVIDED, HOWEVER, that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) SUCCESSFUL DEFENSE. To the extent that a director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) above, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
(d) PROCEEDINGS INITIATED BY ANY PERSON. Notwithstanding anything to
the contrary contained in subsections (a) or (b) above, except for proceedings
to enforce rights to indemnification, the Corporation shall not be obligated to
indemnify any person in connection with a proceeding (or part thereof) initiated
by such person unless such proceeding (or part thereof) was authorized in
advance, or unanimously consented to, by the Board.
<PAGE>
15
(e) PROCEDURE. Any indemnification under subsections (a) and (b)
above (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in subsections (a) and (b)
above. Such determination shall be made (i) by a majority vote of the directors
who are not parties to such action, suit or proceeding, even though less than a
quorum, or (ii) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (iii) by the stockholders
of the Corporation.
(f) ADVANCEMENT OF EXPENSES. Expenses (including attorneys' fees)
incurred by a director or an officer in defending any civil, criminal,
administrative or investigative action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking in form and substance satisfactory to
the Corporation by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the Corporation pursuant to this Article XI. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board deems appropriate.
(g) RIGHTS NOT EXCLUSIVE. The indemnification and advancement of
expenses provided by, or granted pursuant to, the other subsections of this
Article XI shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
law, by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
(h) INSURANCE. The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of the General Corporation Law of the State
of Delaware.
(i) DEFINITION OF "CORPORATION". For purposes of this Article XI,
references to the "Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article XI with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
<PAGE>
16
(j) CERTAIN OTHER DEFINITIONS. For purposes of this Article XI,
references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, employee
or agent of the Corporation which imposes duties on, or involves service by,
such director, officer, employee or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good faith
and in a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation", as referred to in
this Article XI.
(k) CONTINUATION OF RIGHTS. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article XI shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
(l) REPEAL OR MODIFICATION. Any repeal or modification of this
Article XI by the stockholders of the Corporation shall not adversely affect any
rights to indemnification and to advancement of expenses that any person may
have at the time of such repeal or modification with respect to any acts or
omissions occurring prior to such repeal or modification.
ARTICLE XII
AMENDMENTS
SECTION 12.1. AMENDMENTS. These By-Laws, or any of them, may be
altered, amended or repealed, or new by-laws may be made, but only to the extent
any such alteration, amendment, repeal or new by-law is not inconsistent with
any provision of the Restated Certificate of Incorporation, either by a majority
of the whole Board or by the stockholders of the Corporation upon the
affirmative vote of the holders of 80% of the outstanding shares of capital
stock of the Corporation entitled to vote thereon.
<PAGE>
RELEASE AND SETTLEMENT AGREEMENT
THIS RELEASE AND SETTLEMENT AGREEMENT is entered into by and between DANIEL
R. GATTIS ("Gattis") and ARM FINANCIAL GROUP, INC. ("Company").
WITNESSETH:
WHEREAS, Gattis resigned his employment with the Company on February 13,
1998;
WHEREAS, Gattis and the Company wish to clarify and memorialize certain
agreements made between them in regard to Gattis' employment and his
resignation;
NOW, THEREFORE, in consideration of the foregoing premises and the terms
stated herein, it is mutually agreed between the parties as follows;
1. Gattis and the Company agree that Gattis shall receive from the
Company the following:
(a) SEVERANCE PAY. Gattis is eligible to receive his regular base pay
for a period of six (6) months ("Severance Period"), payable in
accordance with the Company's prevailing payroll practices;
(b) BONUS. Gattis will receive his 1997 bonus in the amount of One
Hundred Fifty Seven Thousand Five Hundred Dollars ($157,500)
based on the 1997 fiscal year;
(c) HEALTH COVERAGE. Gattis is eligible to continue his health
coverage during his Severance Period at the same rates charged to
active employees. Gattis has the option to continue his health
insurance coverage at his expense after the Severance Period as
set forth under COBRA.
- 1 -
<PAGE>
The Company will withhold from any payments made pursuant to this provision
of the Agreement any taxes required by law to be withheld.
2. For good and valuable consideration, the parties, in consideration of
the receipt of Gattis' severance pay, benefits and 1997 bonus, Gattis agrees to
waive and relinquish any other benefits and compensation arising out of or in
connection with his employment or the termination thereof, whether or not
accrued or contingent. The parties release each other, their affiliates and
their respective officers, directors and employees from any claim or lawsuit
whatsoever, whether known or unknown, arising out of or in connection with
Gattis' employment by the Company or the circumstances of Gattis' resignation,
including but not limited to any claim based on Title VII of the Civil Rights
Act of 1964, the Age Discrimination in Employment Act of 1967, as amended by the
Older workers Benefit Protection Act, the Kentucky Civil Rights Act, or any
claims based on express or implied contract or tort, public policy, or the
common law, or any other federal, state or local laws.
3. Gattis and the Company mutually agree that this Agreement is not be
taken as an admission of liability on the part of either the Company or Gattis.
4. Gattis and the Company mutually agree not to disparage one another.
5. Gattis agrees to keep strictly confidential and not to use for his
personal benefit or disclose to any others any confidential business, customer
lists, financial information or trade secrets of the Company for so long as such
confidential business, customer lists, financial information or trade secrets
remain confidential and protectable information of the Company under applicable
law.
- 2 -
<PAGE>
6. Gattis and the Company agree to keep the terms and existence of this
Agreement confidential, except where necessary for processing payroll and
benefits information and as required for calculating taxes or as otherwise
required by law.
7. This Agreement constitutes the entire agreement between Gattis and the
Company, supersedes any and all prior agreements between the parties (including
the letter to Gattis on December 5, 1995 and the Agreement between Gattis and
the Company dated December 4, 1997), and may not be amended, modified or
supplemented in any way except by subsequent written agreement signed by both
parties.
8. The parties acknowledges that they have read and fully understand all
the provisions of this Agreement, that they are entering into this Agreement
freely and voluntarily and that the health benefits and 1997 bonus are in
consideration of his agreement to waive all possible claims against the Company
(including its affiliates and their respective employees).
9. Gattis acknowledges that he has been advised to consult an attorney
prior to executing this Agreement and that he was given a 21 day period to
consider whether or not to enter into this Agreement.
10. The Company agrees that for a period of seven (7) days following the
execution of this Agreement, Gattis may revoke this Agreement personally or
through his attorney by written notice to the Company via certified mail, return
receipt requested and must be accompanied by the return of all payments received
by Gattis in connection with this Agreement. Upon the expiration of the seven
(7) day period, Gattis agrees that this Agreement becomes irrevocable.
- 3 -
<PAGE>
WITNESS the signatures of the parties this 2nd day of April, 1998.
ARM FINANCIAL GROUP, INC. /S/ DANIEL R. GATTIS
-----------------------------
By: /s/ [ILLEGIBLE] DANIEL R. GATTIS
-----------------------------------
Its: E.V.P GENERAL COUNSEL & SECRETARY
- 4 -
<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 INCOME OF ARM FINANCIAL GROUP, INC'S FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 4,420,538
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 27,897
<MORTGAGE> 16,235
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,590,970
<CASH> 344,079
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 95,914
<TOTAL-ASSETS> 7,858,736
<POLICY-LOSSES> 4,647,540
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 38,000
0
50,000
<COMMON> 233
<OTHER-SE> 247,324
<TOTAL-LIABILITY-AND-EQUITY> 7,858,736
0
<INVESTMENT-INCOME> 104,406
<INVESTMENT-GAINS> 5,165
<OTHER-INCOME> 4,658
<BENEFITS> 81,680
<UNDERWRITING-AMORTIZATION> 2,724
<UNDERWRITING-OTHER> 8,765
<INCOME-PRETAX> 16,480
<INCOME-TAX> 5,499
<INCOME-CONTINUING> 10,981
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,981
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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</TABLE>
