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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997 Commission file number: 33-67268
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ARM FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1244251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 582-7900
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Class A Common Stock (par value $.01 American Stock Exchange
per share) 9.5% Cumulative Perpetual American Stock Exchange
Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
/ / Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
Aggregate market value of voting common stock held by non-affiliates,
computed as of February 20, 1998 was $214,359,305.
Indicate the number of shares outstanding of each of the issuer's classes
of commons stock as of the latest practicable date.
Date Class Shares Outstanding
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February 20, 1998 A 21,441,641
February 20, 1998 B 1,947,646
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held May 27, 1998, is incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
ARM Financial Group, Inc. (the "Company") specializes in the growing asset
accumulation business with particular emphasis on retirement savings and
investment products. The Company's earnings are derived from investment spread
(the difference between income earned on investments and interest credited on
customer deposits) and fee income. The Company's retail products include a
variety of fixed, indexed and variable annuities and face-amount certificates
sold through a broad spectrum of distribution channels including independent
broker-dealers, independent agents, stockbrokers, and financial institutions.
The Company offers institutional products, such as funding agreements and
guaranteed investment contracts ("GICs") directly to bank trust departments,
plan sponsors, cash management funds, corporate treasurers, and other
institutional investors.
The Company was established in July 1993 and completed its acquisition of
Integrity Holdings, Inc. in November 1993. The Company's assets under management
have grown from $2.3 billion as of December 31, 1993 to $6.9 billion as of
December 31, 1997. The Company attributes this growth to internally generated
sales, new product offerings and opportunistic acquisitions. Operating earnings
(net income applicable to common shareholders, excluding, net of tax, realized
investment gains and losses, non-recurring charges and income from defined
benefit pension plan asset management operations which were sold during November
1997) have grown to $34.1 million in 1997 from $22.2 million in 1996 and $4.5
million in 1995. In June 1997, the Company raised $78.8 million through an
initial public offering of its common stock. See "--History."
The Company expects to benefit from demographic trends and a growing demand
for retirement savings. As the U.S. population has aged, demand for retirement
savings has accelerated. According to U.S. Census Bureau information,
approximately 30% of today's population was born during the Baby Boom (1946 to
1964). By the time the Baby Boom generation begins to reach age 65 in 2011, the
population between the ages of 45 and 64 -- the peak period for asset
accumulation -- is projected to increase by approximately 45% to 79 million
people.
The Company also expects to benefit from anticipated higher consumer
savings due to an overburdened social security system, extended life spans,
concerns about corporate restructurings and downsizing, and volatile financial
markets. Among the products expected to benefit are tax-advantaged annuities.
Annual industry sales of individual annuity products increased dramatically from
$65 billion in 1990 to a preliminary estimate of $124 billion in 1997, with
projected growth of 8% to 12% per year for the next few years, according to an
industry study conducted by LIMRA.
The Company also expects to benefit from the growing institutional
marketplace, which is partially fueled by growth in retirement and consumer
savings. The Company intends to expand its institutional deposit base by
increasing penetration in the stable value and fixed income markets and the
development of new products and applications.
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The discussion of the Company's business contains certain forward-looking
statements, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Forward-Looking Statements."
STRATEGY
The Company's strategy is focused on the following:
DEVELOPING AND MARKETING A BROAD ARRAY OF CUSTOMIZED PRODUCTS. The Company
believes that long-term success in the asset accumulation industry will depend
upon the Company's ability to adapt to rapidly changing consumer preferences in
fluctuating interest rate and equity market environments. The Company
continually redesigns existing products with enhanced features and continues to
develop and sell new and innovative products with a particular focus on
minimizing its dependence on any one product and meeting a variety of needs for
consumers and distribution channels. The Company works closely with the people
involved with its retail and institutional distribution to develop products that
are customized to suit their customers' particular needs. The Company was one of
the first to recognize the market opportunity for equity-indexed annuities and
in 1996 introduced OMNI, the Company's equity-indexed annuity product. In 1997,
the Company introduced OMNISELECT, a second generation equity-indexed annuity
product with enhanced features. Additionally in 1997, the Company enhanced its
multi-manager variable annuity product, PINNACLE, making it one of the first in
the industry to offer Bankers Trust indexed funds, along with a diverse
selection of asset classes from well-known fund managers, guaranteed rate
options and the ability for systematic transfer of deposits over time -- all in
one product. In the institutional market, the Company offers a short-term
floating rate institutional spread-based product designed to meet the market
demand for products with attractive current yields and access to liquidity. In
1997, the Company developed and funded a unique asset-backed funding agreement,
in alliance with Bayerische Landesbank Girozentrale, New York Branch, ("BLB"), a
triple-A rated international banking institution. In connection with another
highly-rated international bank, the Company is developing a synthetic GIC
product for the institutional spread marketplace that will provide institutional
clients with either absolute or relative investment performance guarantees.
CAPTURING A GROWING SHARE OF SALES IN RETAIL DISTRIBUTION CHANNELS. Over
the past few years, the Company has built the infrastructure necessary to
support increased growth in the retail market. The Company believes that it
can distinguish itself by strengthening its relationships with individual
distributors, often referred to as producers. To accomplish this objective,
the Company seeks to (i) provide superior service to producers through an
expanded and dedicated producer services unit; (ii) enhance the Company's
technological platform to permit superior and immediate access for producers
to the Company's administrative systems for transacting business; (iii)
heighten producers' awareness of the Company's products and insurance
affiliates through focused advertisements in industry publications and
selective promotional programs; and (iv) quickly develop innovative products
with new features and services which are responsive to market needs. For
example, in 1997, as a means to strengthen its relationships with
distributors, the Company implemented a program, called AnnuiTRAC-SM-,
whereby certain distributors have the capability to remotely access the
Company's systems and transact business with the Company on-line. The Company
also seeks to increase its retail market share by expanding and diversifying
its retail distribution channels. In 1996, the Company began offering
variable annuities through banks and thrifts, and in late 1997 introduced a
new variable annuity product customized for that distribution channel.
Additionally, the Company recognizes the importance of building and
maintaining a strong capital base. Primarily as a result of the Company's
strengthened financial condition, A.M. Best
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Company, Inc. ("A.M. Best") raised the claims-paying ability rating of the
Company's insurance subsidiaries from "A- (Excellent)" to "A (Excellent)" in
1995.
EXPANDING AND DIVERSIFYING THE DEPOSIT BASE IN THE INSTITUTIONAL
MARKETPLACE. Since the Company's inception, its institutional business has
grown to $2.5 billion of funding agreement and GIC deposits on the Company's
December 31, 1997 balance sheet. The Company believes that its integrated
asset/liability management approach to the business, along with its sound
underwriting philosophy, has allowed it to build competitive advantages. The
Company has found it beneficial to form strategic partnerships with
organizations possessing strong financial ratings and market presence. Since
1995, the Company has written funding agreements and GICs through General
American Life Insurance Company ("General American") and reinsures one-half of
the business written. In late 1997, the Company sold its first funding agreement
structure outside the General American relationship with a $500 million,
five-year term offering, in alliance with BLB, a triple-A rated international
banking institution. In addition to offering its current products, the Company
intends to continue its growth in the institutional market by (i) diversifying
its product line with (a) customized product features for alternative
distribution channels, (b) fixed terms extending beyond current product
offerings and (c) on- and off-balance sheet synthetic products or new funding
agreement products in which the Company offers certain performance guarantees;
(ii) attracting new partners with larger and stronger balance sheets to provide
credit enhancement to help support and market the new product structures and
marketing initiatives; and (iii) expanding market penetration within its
existing clients while maintaining the persistency and profitability of the
current client base.
ENHANCING EFFECTIVE USE OF TECHNOLOGY. The Company continues to invest in
technology designed to enhance the services provided to producers and customers,
increase the efficiency of operations and allow for administration of innovative
and complex products. The Company's technology also allows it to quickly respond
to customer needs for new products by reducing product development time. In
addition, to supplement traditional inquiry and transaction processing methods,
the Company's client/server network can provide producers, customers and
employees with services and information easily accessible through Internet,
voice response and wide-area network technology. One such example is the
Company's 1997 introduction of AnnuiTRAC, its Internet based producer service
program.
MINIMIZING FIXED COST STRUCTURE. The Company attempts to minimize fixed
distribution costs by marketing its products through fiduciaries and other third
parties. Unlike many of its competitors, the Company does not maintain its own
field sales force, and distributors are primarily paid based on production. As a
consequence of its low fixed distribution costs, the Company has flexibility to
shift the mix of its sales and distribution channels in order to respond to
changes in market demand. In addition, the Company believes that its
administrative cost structure has benefited from economies of scale achieved as
a result of its strategic acquisitions. The relocation of the Company's main
processing center from Columbus, Ohio to the Company's headquarters in
Louisville, Kentucky, which was substantially completed during 1997, has
provided benefits of consolidation and supplemented the effective delivery of
service.
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IMPLEMENTING AN ADVANCED AND INTEGRATED RISK MANAGEMENT PROCESS. Using its
experience in offering investment guarantees in the insurance market sector, the
Company employs a highly analytical and disciplined asset/liability risk
management approach to develop new products and monitor investment portfolios
and liabilities. The Company does not view asset/liability management as a
discrete function to be performed by a separate committee. Instead,
asset/liability management permeates every aspect of the Company's operations.
Beginning with product design and continuing through the product sale and
eventual payout, professionals in each functional area (such as marketing,
actuarial, investments, legal, finance, and administration) work jointly with a
common set of risk/return characteristics to achieve the Company's overall
liquidity and profit objectives (rather than the specific objectives of any
particular functional area). The Company implements this process with the
analytical risk and capital management skills and the experience of its
management team. This foundation is supported with sophisticated computer
software and an emphasis on securities whose cash flows can be modeled
extensively against liability cash flows under different interest rate
scenarios. Risk components that cannot be appropriately modeled are typically
hedged or reinsured.
MAINTAINING FOCUS ON COMPANY PROFITABILITY. The Company designs products
and manages capital with a goal of achieving a superior return on common equity.
The Company's return on average common equity (based on operating earnings and
equity before unrealized gains and losses and giving pro forma effect to the
Company's initial public offering of common stock) was 16.4% in 1997 and 13.5%
in 1996. The Company's focus on profitability is supported by an integrated team
approach to developing products and operating the Company's business. The
Company's compensation system further reinforces the Company's focus on the
objective of profitability. Employees at all levels of the Company are eligible
to receive bonuses based on profitability. As of February 20, 1998, executive
officers held shares and options to purchase shares representing 7% of the
Company's outstanding common stock and options.
The Company, a Delaware Corporation, conducts its different businesses
through the following subsidiaries:
- INTEGRITY LIFE INSURANCE COMPANY ("INTEGRITY") -- provides
individual fixed, indexed and variable annuities to retail
customers and funding agreements and GICs to institutional
customers;
- NATIONAL INTEGRITY LIFE INSURANCE COMPANY ("NATIONAL INTEGRITY")
-- provides individual fixed and variable annuities to retail
customers and funding agreements and GICs to institutional
customers, primarily in New York (wholly owned subsidiary of
Integrity, and collectively, the "Integrity Companies");
- SBM CERTIFICATE COMPANY -- offers retail face-amount certificates
which guarantee a fixed rate of return to investors at a future
date. Face-amount certificates are similar to bank-issued
certificates of deposit but are regulated by the Investment
Company Act of 1940, as amended (the "Investment Company Act")
and are not subject to Federal Deposit Insurance Corporation
("FDIC") protection; and
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- ARM SECURITIES CORPORATION ("ARM SECURITIES") (FORMERLY KNOWN AS
SBM FINANCIAL SERVICES, INC.) -- this broker-dealer supports the
Company's retail annuity operations and the Company's sales of
independent third-party mutual funds.
In addition, ARM Capital Advisors, LLC ("New ARMCA"), which remains a 20%
owned affiliate, offers fixed income asset management to third-party
institutional clients (currently consisting primarily of defined benefit pension
plans) and to the Company.
HISTORY
INTEGRITY COMPANIES
The Company was established in July 1993 by The Morgan Stanley
Leveraged Equity Fund II, L.P. ("MSLEF II"), an investment fund sponsored by
Morgan Stanley Group Inc. (now known as Morgan Stanley Dean Witter & Co.),
and Analytical Risk Management, Ltd. to acquire Integrity Holdings, Inc.
(formerly N.M. U.S. Limited) from The National Mutual Life Association of
Australasia Limited ("National Mutual"). In connection with the acquisition,
which occurred on November 26, 1993, National Mutual provided the Integrity
Companies with indemnification as to future claims for taxes, assessments
from guaranty funds, and claims from litigation, which arise from preclosing
events.
ARM CAPITAL ADVISORS
Through its acquisition of the U.S. fixed income unit of Kleinwort Benson
Investment Management Americas Inc. ("KBIMA") in January 1995, the Company
obtained a recognized fixed income management business, which became part of the
then newly-formed ARM Capital Advisors, Inc. ("ARM Capital Advisors"), to manage
the investment portfolios of the Company's subsidiaries. In addition, the
acquisition enabled the Company to provide asset management services to
institutional clients. Although third-party assets managed by ARM Capital
Advisors grew since the acquisition, the Company believes that market attitudes
towards developing an asset management business for defined benefit pension
plans within a holding company structure consisting predominantly of insurance
companies constrained ARM Capital Advisors' growth. Accordingly, on November 7,
1997, the Company transferred substantially all of the assets and operations of
ARM Capital Advisors to a newly formed subsidiary, New ARMCA, and sold an 80%
interest therein to ARM Capital Advisors Holdings, LLC, an entity controlled by
Emad A. Zikry, the President of ARM Capital Advisors prior to the sale. The
Company has continued to engage New ARMCA as its investment adviser but will
consider retaining other investment management firms as it deems appropriate.
Importantly, the Company has and will continue to monitor the investment
practices of New ARMCA and any other firm it uses to ensure that the Company's
prescribed guidelines are followed. After the sale, ARM Capital Advisors was
renamed Integrity Capital Advisors, Inc.
In connection with the consummation of the sale, the Company and Mr. Zikry
mutually agreed to terminate his employment with the Company and he resigned as
an officer of the Company and as an officer and director of ARM Capital
Advisors.
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SBM COMPANY
In June 1995, the Company completed the acquisition of substantially all of
the assets and business operations of SBM Company ("SBM"), including all of the
issued and outstanding capital stock of SBM's subsidiaries, SBM Life (which was
subsequently merged with and into Integrity to create certain operating
efficiencies), SBM Financial Services, Inc. (which subsequently changed its name
to ARM Securities Corporation), SBM Certificate Company, and SBM's management
contracts with six mutual funds (the "State Bond Mutual Funds"). The aggregate
purchase price for the SBM acquisition was $38.8 million. The Company issued
approximately 6.9 million shares of common stock (adjusted for the 706-for-1
stock split of June 1997) primarily to Morgan Stanley Capital Partners III,
L.P., Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors, L.P.
(together with MSLEF II, the "Morgan Stanley Stockholders"), for an aggregate
sale price of $63.5 million. The Company used the proceeds from the issuance of
new common equity to acquire the assets and business operations of SBM and to
make a $19.9 million capital contribution to SBM Life. The Company subsequently
determined that the State Bond Mutual Funds were not a strategic line of
business for the Company and on December 13, 1996, the Company transferred its
contracts to perform management and advisory services for the State Bond Mutual
Funds to Federated Investors for $4.5 million. The State Bond Mutual Funds had
aggregate assets of $236.9 million on December 13, 1996.
INITIAL PUBLIC OFFERING OF COMMON STOCK
In June 1997, the Company completed an initial public offering of 9.2
million shares of its Class A common stock, par value $.01 per share (the "Class
A Common Stock"), of which 5.75 million shares were sold by the Company and 3.45
million shares were sold by the Morgan Stanley Stockholders. The net proceeds of
the offering to the Company were $78.8 million, after deducting underwriting
discounts and commissions and other expenses payable by the Company. On June 30,
1997, the Company used $40 million of such net proceeds to make a capital
contribution to its primary insurance subsidiary, Integrity, thereby
strengthening Integrity's capital base to provide for future growth. The Company
plans to use the remaining proceeds from the offering to enhance the Company's
retail market presence, to consolidate operating locations and for other
corporate purposes, which may include acquisitions.
Concurrent with its initial public offering, the Company amended and
restated its Certificate of Incorporation to effectuate a recapitalization such
that (i) the common equity of the Company consists of Class A Common Stock and
Class B Non-Voting Common Stock, par value $.01 per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"), (ii)
authorized shares of the Class A Common Stock and Class B Common Stock were
increased to 150 million shares and 50 million shares, respectively, (iii) each
outstanding share of common stock of the Company was converted into one share of
Class A Common Stock, (iv) certain shares of the Class A Common Stock owned by
the Morgan Stanley Stockholders were converted into Class B Common Stock such
that, after giving effect to such conversion, but not giving effect to the
offering, the Morgan Stanley Stockholders owned, in the aggregate, 49% of the
outstanding Class A Common Stock, and (v) each share of Common Stock was split
into 706 shares of Common Stock. Holders of Class B Common Stock have no right
to vote on matters submitted to a vote of stockholders, except in certain
circumstances. Shares of the Class B Common Stock have no preemptive or other
subscription rights and are convertible into an equal number of shares of Class
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A Common Stock (1) at the option of the holder thereof to the extent that,
following such conversion, the Morgan Stanley Stockholders will not, in the
aggregate, own more than 49% of the outstanding shares of Class A Common Stock,
and (2) automatically upon the transfer of such shares by any Morgan Stanley
Stockholder to a person that is not a Morgan Stanley Stockholder or an affiliate
of a Morgan Stanley Stockholder. The Morgan Stanley Stockholders owned
approximately 91% of the outstanding shares of the Company's common stock prior
to the offering and approximately 53% following the offering.
PRODUCTS AND SERVICES
The Company offers a diversified array of products and services to meet the
needs of a variety of customers. The Company endeavors to adapt its products to
respond to changes in the retail and institutional marketplace and generally
seeks to have "a product for every market environment." The Company's retail
products include a variety of variable, indexed and fixed annuities and
face-amount certificates. The Company's retail variable annuity products offer
customers participation in various investment portfolios, some of which are
offered exclusively by the Company's insurance subsidiaries. The Company also
offers funding agreements and GICs to its institutional clients and is currently
developing a synthetic GIC product for its institutional clients.
The Company derives its earnings from the net investment spread and fee
income generated by the assets it manages. With retail and institutional spread
products, the Company's insurance and face-amount certificate subsidiaries agree
to return customer deposits with interest at a specified rate or based on a
specified index (e.g., LIBOR, S&P 500--both defined below). As a result, the
Company's insurance and face-amount certificate subsidiaries accept investment
risk in exchange for the opportunity to achieve a spread between what the
Company earns on invested assets and what it pays or credits on customer
deposits. With retail variable products, the Company's subsidiaries receive a
fee in exchange for managing deposits, and the customer accepts investment risk
associated with their chosen mutual fund option. Because the investment risk is
borne by the customer, this business requires significantly less capital support
than spread-based business.
RETAIL AND INSTITUTIONAL SPREAD PRODUCTS
The Company seeks to limit the volatility of investment spreads in a
variety of interest rate environments. To this end, management (i) structures
investment asset durations, convexity and liquidity characteristics to match
with customer deposit characteristics, (ii) regularly trades investment assets
to improve yield while maintaining other portfolio characteristics, (iii) offers
an array of products whose credited rates are based on differing points on the
yield curve, and (iv) actively manages the trade-off between credited rates and
persistency.
The Company's retail and institutional spread products include retail
guaranteed rate options ("GROs") sold as a stand-alone product or as an
investment option within variable annuity contracts, flexible premium deferred
annuity ("FPDA") contracts, single premium deferred annuity ("SPDA") contracts,
face-amount certificates, and institutional funding agreements and GICs as
described below. Sales of such products include premiums and deposits received.
Sales of such retail and institutional spread products for the years ended
December 31, 1997, 1996 and 1995 were as follows:
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<TABLE>
<CAPTION>
Year Ended December 31,
(IN MILLIONS) 1997 1996 1995
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Retail spread product sales:
<S> <C> <C> <C>
GRO $ 320.3 $ 83.6 $ 47.1
FPDA 31.1 29.9 12.5
SPDA 0.8 8.6 44.3
Face-amount certificates 9.8 8.0 10.7
Other 20.5(1) 0.5 0.8
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Total retail spread products 382.5 130.6 115.4
Institutional spread product sales:
Funding agreements and GICs(2) 1,708.7 747.5 142.2
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Total sales of spread products $2,091.2 $ 878.1 $ 257.6
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</TABLE>
(1) Includes $19.8 million of systematic transfer option sales which are
systematically transferred into other products within one year.
(2) The marketing partnership arrangement with General American was converted
from a fee-based to primarily a spread-based arrangement in late 1995
through a reinsurance agreement with General American. General American
cedes 50% of new funding agreement and GIC deposits to Integrity under the
reinsurance agreement which the Company records on its balance sheet. The
Company receives nominal fee income for the 50% portion retained by General
American (which the Company recognizes as "other fee income"); accordingly,
such deposits are not included in sales.
Assets under management for retail and institutional spread products at
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
December 31,
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1997 1996 1995
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Percent Percent Percent
(DOLLARS IN MILLIONS) Amount of Total Amount of Total Amount of Total
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<S> <C> <C> <C> <C> <C> <C>
Retail spread products:
GRO $ 558.2 10.4% $ 223.1 6.3% $ 164.5 5.8%
FPDA 403.2 7.5 428.1 12.1 436.2(1) 15.2
SPDA 698.9 13.0 838.2 23.7 969.8(1) 33.9
SPIA 654.4 12.2 650.1 18.4 644.8 22.6
SPE 383.3 7.2 396.7 11.2 403.3 14.1
Face-amount certificates 45.1 0.8 50.2 1.4 52.5(1) 1.8
Other 77.5 1.5 59.8 1.7 45.1 1.6
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Total retail spread products 2,820.6 52.6 2,646.2 74.8 2,716.2 95.0
Institutional spread products:
Funding agreements and GICs(2) 2,542.3 47.4 891.9 25.2 143.2 5.0
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Total assets under management for spread products $ 5,362.9 100.0% $ 3,538.1 100.0% $ 2,859.4 100.0%
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</TABLE>
(1) Includes amounts acquired in 1995 in connection with the SBM acquisition of
$297.7 million (SPDA), $436.2 million (FPDA) and $52.5 million (face-amount
certificates).
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(2) The marketing partnership arrangement with General American was converted
from a fee-based to primarily a spread-based arrangement late in 1995
through a reinsurance agreement with General American. See "--Funding
Agreements and Guaranteed Investment Contracts."
GUARANTEED RATE OPTIONS. Guaranteed rate options provide a fixed-rate
investment alternative for holders of the Company's variable annuity contracts
and are also issued as a separate product by the Company's insurance
subsidiaries. GROs, which were first introduced by the Company's insurance
subsidiaries in 1994, allow customers to lock in a fixed return for three, five,
seven, or ten years. There are no up-front or annual fees attached to these
options, but surrender charges apply to withdrawals in excess of a stated
maximum. Funds may be transferred to or from any of the guaranteed interest rate
periods (or other investment options within the variable annuity contract)
subject to a market value adjustment ("MVA"). The MVA can be either positive or
negative, but the customer is guaranteed principal by the issuing insurance
company plus a return of 3%, before surrender charges. Transfers at the end of a
guarantee period are not subject to the MVA provision. The MVA provision is
intended to offset the gain or loss attributable to the impact of changes in
interest rates on the market value of assets that would be sold to fund
surrenders occurring prior to the end of the guarantee period. The Company
currently uses an immunized investment strategy designed to achieve a target
dollar amount over the selected time horizon despite interest rate volatility,
while maintaining a tight duration match between the assets in the portfolio and
the customer deposits they support. Deposits into GROs are held in a guaranteed
separate account established by the insurance company.
FLEXIBLE PREMIUM DEFERRED ANNUITY CONTRACTS. Flexible premium deferred
annuity contracts are marketed primarily through independent agents. Under these
contracts, the issuing insurance company guarantees the customer's principal and
credits the accumulated deposit with a rate of interest that is guaranteed for a
specified initial period and reset annually or semi-annually thereafter. FPDA
contract holders can make additional contributions, subject to minimums, after
the contract is issued. The Company generally determines the crediting rate by
reference to current yields along the intermediate term section of the yield
curve. Certain FPDA contracts, which were acquired as a result of the SBM
acquisition and which are not currently marketed by the Company, are qualified
under section 403(b) of the Internal Revenue Code of 1986, as amended, and were
sold to qualified employers such as public school districts and churches. The
Company developed a new FPDA product, OMNI, in 1995, with sales commencing in
February of 1996 and developed a second generation of equity-indexed product,
OMNISELECT, in 1997. The OMNI and OMNISELECT products furnish customers with the
ability to allocate assets among equity index-based returns and guaranteed rates
of return. The index-based options offer upside potential tied to a percentage
of the appreciation in the S&P 500 Composite Stock Price Index ("S&P 500"), but
protect the customer against the related downside risk through a guarantee of
principal by the issuing insurance company. By hedging the equity-based risk
component of the product through the purchase of call options or other
investment strategies, the Company focuses on managing the interest rate spread
component.
SINGLE PREMIUM DEFERRED ANNUITY CONTRACTS. Single premium deferred annuity
contracts have in the past been sold through independent broker-dealers,
independent agents, stockbrokers, and financial institutions. Under these
contracts, the issuing insurance company guarantees the
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customer's principal and credits the accumulated deposit with a rate of interest
that is guaranteed for a specified initial period and reset annually or
semi-annually thereafter, subject to guaranteed minimum crediting rates set
forth in the contracts (currently 3% or 4%). The Company generally determines
the crediting rate by reference to current yields along the intermediate term
section of the yield curve. No front-end sales charges are imposed for purchases
of such contracts, but all contain surrender charges for withdrawals in excess
of a specified amount during the surrender charge period. These surrender
charges vary depending upon the guarantee periods in the contracts. As a result
of changes in the marketing environment for this product and the increased
competition in pricing, the Company is not actively marketing this product.
SINGLE PREMIUM IMMEDIATE ANNUITY CONTRACTS. Single premium immediate
annuity contracts were historically marketed by the Company to insurance
companies and defendants in connection with lawsuits involving structured
liability settlements. As a result of changes in the marketing environment for
this product and the increased competition in pricing, the Company's insurance
subsidiaries are not currently focusing on this segment of the immediate annuity
marketplace. SPIA contracts provide guaranteed payments to contract holders and
are not subject to surrender. Pricing is determined by reference to the
long-term end of the yield curve.
SINGLE PREMIUM ENDOWMENT CONTRACTS. While single premium endowment
contracts continue to represent a portion of the Company's insurance
subsidiaries' business in force, as a result of changes in applicable tax laws,
the Company is no longer selling this product. Under these contracts, principal
is guaranteed, and the face amount of the policy is paid upon the death of the
insured. The contracts are credited with a specified rate of interest that is
guaranteed for a period of time and then reset annually thereafter, subject to
guaranteed minimums and certain other restrictions. The Company generally
determines the crediting rate by reference to current yields along the
intermediate term section of the yield curve. Due to changes in applicable tax
laws, and the consequential loss of tax benefits associated with SPEs in the
event of a withdrawal, the Company believes that the level of surrenders of SPEs
associated with increases in interest rates will be lower than would otherwise
be the case.
FACE-AMOUNT CERTIFICATES. Face-amount certificates are obligations of SBM
Certificate Company which require it to pay holders the original invested amount
of the certificate, plus a three-year fixed-rate return, at a given maturity
date. Holders are required to accept a reduced rate of interest it they withdraw
their investment prior to the maturity date. The Company determines the interest
rate offered on face-amount certificates based on the short to intermediate term
sections of the yield curve. Face-amount certificates, which are similar to bank
certificates of deposit, generally compete with various types of individual
savings products offered by banks and insurance companies that provide a fixed
rate of return on investors' money. Face-amount certificates are regulated under
the Investment Company Act and, unlike bank certificates of deposit of less than
$100,000, are not guaranteed by the FDIC. The Company continues to investigate
opportunities to expand upon its face-amount certificate retail distribution
channels.
FUNDING AGREEMENTS AND GUARANTEED INVESTMENT CONTRACTS. Funding agreements
and guaranteed investment contracts are issued by the Company to institutional
customers primarily through a marketing partnership with General American, which
began as a fee-based arrangement
11
<PAGE>
in March 1993. Funding agreements are investment contracts issued by the
Company's insurance subsidiaries to the nonqualified (i.e., non retirement
plans) market, and GICs are issued by the Company's insurance subsidiaries to
qualified pension plans. The marketing partnership with General American
permits the Company to use its established distribution channel contacts to
market funding agreements and GICs that are backed by the financial strength
of General American's higher claims-paying ability ratings. The Company
markets General American contracts which have been designed by the Company to
meet customer needs. Since September 1995, General American has ceded 50% of
new deposits to Integrity under a coinsurance agreement. Sales of funding
agreements and GICs made through General American accounted for 48% and
69% of total retail and institutional sales for the years ended December 31,
1997 and 1996, respectively. The interest rate on funding agreements and GICs
is typically based upon a short-term floating rate, such as the London
Interbank Offered Rate ("LIBOR"), which periodically resets to provide
current yields. Funding agreement and GIC products offered by the Company are
designed and have historically been held by customers as long-term core cash
investments, even though under most contracts customers have the option to
liquidate their holdings with written notice of thirty days or less. The
Company has experienced withdrawals (excluding scheduled interest payments)
by funding agreement and GIC customers of approximately 4.5% and 0.0% of
average funding agreement and GIC customer deposits for the years ended
December 31, 1997 and 1996, respectively. The Company also broadened its
institutional product lines and distribution channels by launching a new
funding agreement product. In November 1997, the Company received a deposit
of $500 million for the new product, which was sold in partnership with BLB
and initially matures in five years and is renewable annually thereafter.
RETAIL VARIABLE PRODUCTS
The Company's retail variable products business is less capital intensive
than spread business and generally provides the Company with a diversified
source of income, due to the relative insensitivity of fee-based income to
changes in interest rates. However, significant decreases in price levels in the
securities market could adversely affect sales and the level of fee income
earned by the Company from variable annuities and, thereby, the Company's
results of operations.
The Company's retail variable products are the investment portfolio options
of variable annuity contracts. Sales of such products represent premiums and
deposits received. Sales of retail variable products for years ended
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
(IN MILLIONS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retail variable product sales:
Investment portfolio options of variable annuities $ 206.3 $ 200.1 $ 177.7
--------------------------------
--------------------------------
</TABLE>
12
<PAGE>
Assets under management for retail variable products at December 31, 1997,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retail variable product assets under management:
Investment portfolio options of variable annuities $ 1,129.1 $ 844.3 $ 617.3
-----------------------------------
-----------------------------------
</TABLE>
VARIABLE ANNUITY CONTRACTS. Variable annuity contracts issued by the
Company's insurance subsidiaries are distributed through independent
broker-dealers, stockbrokers and financial institutions. Under variable annuity
contracts, customers may allocate all or a portion of their account values to a
nonguaranteed separate account that invests in shares of one or more investment
portfolios (registered investment companies). Values in the separate account
will vary with the investment performance of the underlying investment
portfolio. The Integrity Companies receive income in the form of mortality and
expense fees based primarily on the market value of the invested deposits and
from administrative expense charges in connection with variable annuity contract
deposits. The Company reinsures most of the mortality risk associated with its
variable annuity contracts. The Integrity Companies also receive spread income
from deposits allocated to the Company's GRO products. Because the investment
risk under the investment portfolio options of variable annuity products is
borne by the customer, these products are treated as securities under federal
securities laws and, therefore, the salespeople are both appointed as insurance
agents for the Company's insurance subsidiaries and registered as securities
representatives. In addition, Integrity Capital Advisors, Inc. earns fee income
by serving as an advisory manager and by providing supervisory and
administrative services to the portfolios of the Legends Fund, Inc. ("Legends
Fund"), a registered investment company. Shares of the Legends Fund are offered
only to nonguaranteed separate accounts of Integrity and National Integrity.
DISTRIBUTION
RETAIL DISTRIBUTION
The Company's retail distribution strategy is focused on diversifying sales
of its products across various distribution channels, reducing its reliance on
any one third-party marketing organization and providing superior services to
its producers and customers. Currently, the Company's fixed, variable and
equity-indexed annuities are sold through the independent broker-dealer,
independent agent, stockbroker, and financial institution channels. In addition,
registered representatives affiliated with ARM Securities sell the Company's
annuities and face-amount certificates and independent third-party mutual funds.
During 1996, the Company began the process of working with its producers to
enhance its existing products and develop new products that are customized to
meet the needs of customers in each channel. The Company has initiated a
streamlined product development process designed to enable the Company to
respond quickly to changes in the marketplace and reduce the time required to
introduce new or enhanced products. By working with producers in this manner,
the Company
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<PAGE>
was one of the first to recognize the market opportunity for equity-indexed
annuities and introduced OMNI in 1996, the Company's equity-indexed annuity
product. Based on these initial marketing efforts, the Company developed
OMNISELECT, a second generation of equity-indexed product that provides enhanced
benefits to customers in the independent agent channel and is more appealing to
other distribution channels. The Company's 1997 product development efforts
included the addition of new investment options to GRANDMASTER and PINNACLE, the
Company's variable annuity products, and the introduction of a new variable
annuity product customized for the financial institution channel.
In addition to diversifying sales across distribution channels, the Company
is focused on reducing its reliance on any one third-party marketing
organization. During 1996, this effort involved the development of an in-house
wholesaling unit, a function that in 1995 was performed by an outside marketing
organization. This unit works in the stockbroker and independent agent channels
and is responsible for generating sales from existing producers, recruiting and
developing new producers and promoting the features and benefits of the
Company's products through seminars and one-on-one meetings with producers.
The Company uses third-party marketing organizations with sales networks
to distribute certain of its retail annuity products. One such organization,
Financial Marketing Group, Inc. ("FMG"), supplements the Company's in-house
wholesaling unit by performing this function for certain independent
broker-dealers. Broker-dealers affiliated with FMG accounted for 45% and 61%
of total retail sales, and 11% and 19% of total retail and institutional
sales, for the years ended December 31, 1997 and 1996, respectively. No
individual broker-dealer affiliated with FMG accounted for more than 9% and
13% of total retail sales for the years ended December 31, 1997 and 1996,
respectively. In addition to FMG, the Company utilizes PaineWebber
Incorporated ("PaineWebber") in the stockbroker channel for the distribution
of certain products. For the years ended December 31, 1997 and 1996,
approximately 13% and 19% of the Company's total retail sales, respectively,
and approximately 3% and 6% of total retail and institutional sales,
respectively, were made through PaineWebber.
To strengthen relationships with existing producers and assist the
wholesaling unit in recruiting new producers, the Company has significantly
expanded its in-house capability to provide service to producers and to promote
the Company's products and services. Company representatives directly servicing
producers have immediate system response capabilities for virtually any service
request through the Company's PC-based client/server system. Service requests
can also be turned into sales opportunities by keeping producers informed of new
product features and current rate and performance information. In addition,
through this servicing group, the Company works with producers and customers to
retain existing business.
Retail sales by distribution channel for the years ended December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996
---------------------------------------------
Percent
Percent of
(DOLLARS IN MILLIONS) Amount of Total Amount Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distribution channel:
Independent broker-
dealers $264.5 44.9% $199.0 60.2%
Independent agents 218.2 37.1 60.6 18.3
Stockbrokers 96.7 16.4 70.2 21.2
Financial institutions 9.4 1.6 0.9 0.3
---------------------------------------------
Total retail sales $588.8 100.0% $330.7 100.0%
---------------------------------------------
---------------------------------------------
</TABLE>
14
<PAGE>
INSTITUTIONAL DISTRIBUTION
In the institutional market, the Company has been able to generate a
significant level of sales volume with relatively minimal overhead or marketing
expenses. A small team of in-house marketing professionals markets and sells the
Company's products which are distributed directly to defined contribution plans,
bank trust departments, investment managers, consultants, corporate treasurers,
cash management funds, endowments and foundations, and other insurance
companies. Where the Company's financial strength ratings constrain in its
ability to underwrite products directly, the Company structures arrangements
with highly-rated and respected partners, in essence, to credit enhance the
performance guarantees.
ASSET/LIABILITY SPREAD MANAGEMENT
The Company views asset/liability spread management as an integrated
process, rather than as a series of segregated functions, and incorporates this
process into each aspect of its operations. The Company's overall goal is to
ensure that invested asset cash flows will be sufficient to meet customer
obligations and to maximize investment spreads on a consistent basis. Beginning
with product design and continuing through the product sale and contract
maturity, professionals in each functional area (such as marketing, actuarial,
investments, legal, finance and administration) work jointly with a common set
of risk/return characteristics toward the goal of achieving the Company's
liquidity and profit objectives (rather than the specific objectives of any
particular functional area). The Company also conducts a thorough periodic
analysis of its assets and liabilities using sophisticated software to model the
effect of changes in economic conditions on both its assets and liabilities.
During product development, the Company sets product features and rate
crediting strategies only after it has devised an appropriate investment
strategy. The Company employs an extensive, iterative modeling process to test
various asset combinations against proposed product features over sets of
randomly generated interest rate scenarios. The modeling evaluates whether a
particular investment strategy backing the product features under consideration,
will provide adequate cash flow and generate yields that achieve specified
minimum targets consistently over a reasonable range of interest rate
environments. If necessary, the Company redesigns investment strategies or
product features until these objectives are met.
The Company utilizes several key strategies in managing its spread-based
products. This approach allows the Company to leverage its resources and
expertise. One example is an immunization strategy currently used for the
Company's GRO products, in which a portfolio of assets is constructed and
managed to provide a target dollar amount over a pre-established time
horizon. The Company engineers and packages its spread products to deliver
products to suit the needs of different types of customers in both the retail
and institutional marketplaces.
Once the Company has constructed an asset portfolio having the desired
performance characteristics, the Company's investment managers have the
flexibility to trade the portfolio in order to increase yields while remaining
within well-defined risk parameters (such as duration, convexity, credit
quality, and liquidity). In so doing, these professionals follow prescribed
measures designed to (i) limit exposure to credit risks, (ii) manage call,
prepayment or extension losses and
15
<PAGE>
(iii) enhance yield through sector rotation and security selection. In addition,
the Company aims to generate and maintain liquidity from scheduled interest and
principal payments, projected prepayments and early calls, cash on hand,
floating rate securities and lines of credit (but not from new product sales),
sufficient to presently cover approximately two times expected cash needs (for
benefits and withdrawals for general account retail spread products, expenses
and dividends) without having to sell any investments at a material loss.
Internal control measures are in place throughout the process to help
identify any necessary adjustments in the investment portfolio as promptly as
possible. For example, Company personnel assess, independently of portfolio
managers, whether trades would alter portfolio characteristics and how
investment yields or realized gains or losses would be accounted for under
statutory accounting practices and generally accepted accounting principles
("GAAP"). The Company also remodels its assets and liabilities periodically to
determine whether any significant changes in assumptions or interest rates have
changed the overall risk profile.
In pursuing its investment spread objectives, the Company focuses primarily
on cash flow risks that are quantifiable and measurable. This approach permits
the Company to measure specifically the changes in yield and cash flow on its
investments at any given time. This approach emphasizes securities which are
liquid and easily tradeable and more easily modeled and hedged, if appropriate.
The Company's array of retail and institutional spread deposits, with
crediting rates pegged to various points on the interest rate yield curve, also
supports the Company's approach to asset/liability management. The liability
structures, in combination with asset structures, generally are aimed at
providing balance in the portfolio as interest rates fluctuate. As a result, the
Company believes it is better positioned to achieve stable margins. In addition,
the Company believes that this diversity gives it flexibility to respond to
changing market conditions and to take advantage of investment opportunities.
SURRENDERS
To encourage persistency and discourage withdrawals, the Company's
insurance products generally incorporate surrender charges, market value
adjustments and/or other features which may discourage or prevent such
surrenders or withdrawals for a specified number of years. As of December 31,
1997, the Company had approximately $2.8 billion of customer deposits (43% of
total customer deposits), including $2.0 billion of institutional spread product
deposits, which were not subject to surrender charges or other restrictions on
withdrawal. During 1998, surrender charges will no longer apply to an additional
$206.3 million of customer deposits which were in force as of December 31, 1997.
During 1994 and continuing to date, the Company has implemented programs
designed to improve persistency. Such programs involve direct contact with
customers and are designed to inform customers of the financial strength of the
Company and its insurance subsidiaries and to describe other product offerings
available.
16
<PAGE>
REINSURANCE CEDED
The Company's insurance subsidiaries reinsure risks under certain of their
products with other insurance companies through reinsurance agreements. Through
these reinsurance agreements, substantially all mortality risks associated with
SPE and most variable annuity deposits and substantially all risks associated
with the variable life business have been reinsured. The Company's primary
reinsurers in respect of mortality risks associated with SPE deposits are Swiss
Reinsurance Company, RGA Reinsurance Company and The Equitable Life Assurance
Society, which are respectively rated A+, A+ and A by A.M. Best. Connecticut
General Life Insurance Company is the Company's principal reinsurer of the
mortality risks associated with variable annuity deposits and is rated A+ by
A.M. Best. Phoenix Home Life Mutual and American Franklin Life are the Company's
principal reinsurers in respect of risks associated with the variable life
business and are respectively rated A and A++ by A.M. Best. In addition,
Integrity cedes a block of SPDAs on a coinsurance basis to Harbourton
Reassurance, Inc., and in accordance with the treaty all assets supporting the
liabilities are held in trust. Reinsurance does not fully discharge the
Company's obligation to pay policy claims on the reinsured business; the ceding
reinsurer remains responsible for policy claims to the extent the reinsurer
fails to pay such claims.
RATINGS AND RATING AGENCIES
Insurance companies are rated by independent rating agencies to provide
both industry participants and insurance consumers meaningful information on
specific insurance companies. Higher ratings generally indicate a higher
relative level of financial stability and a stronger ability to pay claims. In
general, the rating agencies issue opinions on the insurance companies'
abilities to meet policyholder claims and obligations on a timely basis. The
basis for an opinion on a particular rating includes such factors as capital
resources, financial strength, demonstrated management expertise and stability
of cash flow as well as the quality of investment operations, administration and
marketing. These particular types of ratings are based upon factors relevant to
policyholders and are not directed toward protection of stockholders. Such
ratings are neither a rating of securities nor a recommendation to buy, hold or
sell any security. The Company's insurance subsidiaries currently hold ratings
from four such rating agencies: A.M. Best, Standard & Poor's Corporation
("S&P"), Duff & Phelps, and Moody's Investors Service ("Moody's").
The Company's insurance subsidiaries are currently classified "A
(Excellent)" by A.M. Best, reflecting an upgrade from A- in October 1995. A.M.
Best's ratings range from "A++ (Superior)" to "F (In liquidation)", and some
companies are not rated.
The Company's insurance subsidiaries currently hold an "A (Good)"
claims-paying ability rating from S&P. The S&P claims-paying ability rating
categories range from "AAA (Superior)" to "D (Liquidation)."
In addition, the Company's insurance subsidiaries currently hold an "A-1"
short-term rating from S&P. The short-term rating is used for any obligation
whose maturity is typically one year or less or would apply to a put option or
demand feature which would give the policyholder the right to
17
<PAGE>
receive their funds within one year. The S&P short-term rating categories range
from "A-1+" to "D."
The Company's insurance subsidiaries currently have a claims-paying ability
rating from Duff & Phelps of "A+ (High)" and a short-term claims paying ability
of "D-1." Duff & Phelps' claims-paying ability ratings range from "AAA" to "DD"
and short-term claims paying ability ratings range from "D-1+" to "D-5".
Moody's has currently assigned the Company's insurance subsidiaries a "Baa1
(Adequate)" insurance financial strength rating. Moody's ratings range from "Aaa
(Exceptional)" to "C (Lowest)," and some companies are not rated.
Customers and many financial institutions and broker-dealers tend to focus
on the A.M. Best ratings of an insurer in determining whether to buy or market
the insurer's annuities. If any of the Company's ratings were downgraded from
their current levels or if the ratings of the Company's competitors improved and
the Company's did not, the ability of the Company to distribute its products and
the persistency of its existing business could be adversely affected. Each of
the rating agencies reviews its ratings periodically, and there can be no
assurance that the Company's current ratings will be maintained in the future.
PRODUCER AND CUSTOMER SERVICE, TECHNOLOGY AND ADMINISTRATION
The Company believes that it can strategically employ technology to
strengthen individual distributor and customer relationships by providing
superior service, reducing operating costs, improving work flow efficiency, and
reducing product development time.
The Company's integrated approach to business requires that information be
shared within and across functional groups. Management, therefore, believes that
a PC-based client/server data processing platform provides users with direct
access to information more efficiently than a mainframe system. To facilitate
this process, the Company's principal locations in Kentucky, Ohio, New York and
Minnesota use linked voice and data communications technologies over a wide-area
network ("WAN"). With proper security clearance, employees can access data bases
on file servers from any location. Some of these file servers are owned and
operated by the Company, while others and some main frame systems are owned and
operated by external entities. Using an automated interface system to access
these data bases, the Company achieves reduced costs, strengthened internal
control, and decreased possibility for error from manual intervention. The
Company has and will continue to outsource systems or administrative functions
in which the Company does not possess critical mass. The Company improved the
productivity and effectiveness of its processing operations by relocating and
consolidating its Columbus, Ohio office to the corporate headquarters in
Louisville, Kentucky. Final consolidation of non-critical operating functions in
the Ohio office is anticipated to be completed by the end of the second quarter
of 1998.
The Company maintains a plan to recover its systems and operations
promptly in the event of a disaster. For critical WAN applications, redundant
servers with backed-up data are in place. Key functions are intended to be
available within a matter of a few hours. For recovery of computer
18
<PAGE>
systems accessed through external parties, these vendors provide their own
disaster recovery plans. Off-site storage of magnetic media is intended to
ensure that data processing systems and the imaging system can also be restored
in the event of a disaster.
Additionally, in 1996, the Company expanded and improved the efficiency of
its work flow processing and management reporting systems by employing an image
based work flow system to route packets of information within and across
functional groups. Not only does this system reduce the amount of paper
generated in the back office, but it also reduces the manual work required to
process transactions and allows the Company to track transactions and measure
the performance of its personnel in order to improve operations and deliver more
effective results to customers. Continued software development and systems
migration projects will help eliminate computer redundancies in certain lines of
business and improve the Company's ability to quickly bring increasingly complex
and competitive products to market.
The Company believes that the World Wide Web will become an important
vehicle for conducting business in the financial services industry. In 1997, the
Company introduced its Internet based producer service program called AnnuiTRAC.
The Company further believes that the convenience and ease of using this system
will help attract and retain producers. AnnuiTRAC uses Web-based technology to
provide producers with on-line access to policy and product information, 24
hours a day, seven days a week. Not only does this system automate account
processing, but it also helps the Company meet the demands of a growing sales
force without significantly increasing operating costs. Using this technology,
producers can devote more time to selling new business and the Company spends
less time processing the paperwork. Previously, when producers needed the status
on pending accounts, historical transaction data, or product summaries, they
requested the information from the Company's producer services unit and received
it via facsimile or mail. With AnnuiTRAC, this process is simplified with an
interactive software system. Producers can now find valuable account information
immediately and directly by accessing AnnuiTRAC through the Internet.
The Company also uses technology to decrease the amount of time it takes to
develop new products. Additionally, in 1997, the Company developed an improved
policy administration system that allows it to quickly respond to changing
customer needs and reduces the amount of time required to modify software
necessary to implement new product features. The Company envisions using this
system to support various aspects of its business in the future.
COMPETITION
The financial services industry is highly competitive, and each of the
Company's subsidiaries competes with companies that are significantly larger and
have greater access to financial and other resources.
The life insurance industry comprises approximately 1,800 companies in the
United States and is highly competitive, with no one company dominating any of
the principal markets in which the Company's insurance subsidiaries operate.
Many insurance companies and insurance holding companies have substantially
greater capital and surplus, larger and more diversified portfolios of
19
<PAGE>
life insurance policies and annuities, higher ratings and greater access to
distribution channels than the Company's insurance subsidiaries. Competition is
based upon many factors, such as the form and content of annuity policies,
premiums charged, investment return, customer and producer service, access to
distribution channels, financial strength and ratings of the company,
experience, and reputation. The Company's insurance subsidiaries also encounter
increasing competition from banks, securities brokerage firms, mutual funds, and
other financial intermediaries marketing insurance products, annuities and other
forms of savings and pension products.
On January 18, 1995, the United States Supreme Court held in NATIONSBANK OF
NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY that annuities are not
insurance for purposes of the National Bank Act. In addition, the Supreme Court
held on March 26, 1996 in BARNETT BANK OF MARION COUNTY V. NELSON that state
laws prohibiting national banks from selling insurance in small town locations
are pre-empted by federal law. The Office of the Comptroller of the Currency
also adopted a ruling in November 1996 that permits national banks, under
certain circumstances, to expand into other financial services, thereby
increasing potential competition for the Company. At present, the extent to
which banks can sell insurance and annuities without regulation by state
insurance departments is being litigated in various courts in the United States.
Although the effect of these recent developments on the Company and its
competitors is uncertain, the Company may encounter increased competition from
banks in the future. The Company believes that the fact that it is not hampered
with a large captive sales force like many insurance companies is an advantage
in creating strategic alliances with banks and other financial institutions.
The principal competitive factors in the sale of annuity products are
product features, perceived stability of the insurer, customer and producer
service, name recognition, crediting rates, and commissions. The Company's
insurance subsidiaries compete in their markets with numerous major national
life insurance companies. Management believes that its ability to build market
share and compete with other insurance companies is dependent upon its ability
to expand and diversify its distribution channels and develop competitive
products with unique features and services that focus on the needs of targeted
market segments.
REGULATION
The Company's business activities are subject to extensive regulation. Set
forth below is a summary discussion of the principal regulatory requirements
applicable to the Company.
INSURANCE REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision by the states in which they are organized and in the other
jurisdictions where they are authorized to transact business. State insurance
laws establish supervisory agencies with broad administrative and supervisory
powers including granting and revoking licenses to transact business, regulation
of marketing and other trade practices, operating guaranty associations,
licensing agents, approving policy forms, regulating certain premium rates,
regulating insurance holding company systems, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
performing financial and other examinations, determining the reasonableness and
adequacy of statutory capital and surplus, regulating the type and amount of
investments permitted, limiting the amount of dividends that can be paid without
first obtaining regulatory approval, and
20
<PAGE>
other related matters. The primary purpose of such supervision and regulation
under the insurance statutes of Ohio and New York, as well as other
jurisdictions, is the protection of policyholders rather than investors or
shareholders of an insurer. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require the filing of
annual and other reports relating to the financial condition of insurance
companies.
In recent years, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the National
Association of Insurance Commissioners ("NAIC"). Various states have considered
or enacted legislation that changes, and in many cases increases, the states'
authority to regulate insurance companies. Over the past few years, the NAIC has
approved and recommended to the states for adoption and implementation several
regulatory initiatives designed to reduce the risk of insurance company
insolvencies. These initiatives include new investment reserve requirements,
risk-based capital standards and restrictions on an insurance company's ability
to pay dividends to its stockholders. Specifically, the NAIC "Codification of
Statutory Accounting Principles" project may revamp the current statutory
accounting practices for the Company's insurance subsidiaries. Certain proposals
under consideration may have a negative impact on the statutory surplus of the
Company's insurance subsidiaries and thus their ability to pay dividends to the
Company. Issue papers were released for industry review and Statements of
Statutory Accounting Principles were issued by the NAIC in 1997, subject to
final approval. In certain states, this project will not undermine the states'
authority to make a final determination on acceptable and appropriate accounting
practices as the NAIC proposals may be subject to implementation only upon
legislative enactment by the applicable state legislature. The Company is
monitoring developments in the regulatory area and assessing the potential
effects any changes would have on the Company.
Although the federal government currently does not directly regulate the
business of insurance generally, federal initiatives can significantly affect
the insurance business. Legislation has been introduced from time to time in
Congress that could result in the federal government assuming a role in the
regulation of insurance companies. Congress and certain federal agencies are
investigating the current condition of the insurance industry in the United
States in order to decide whether some form of federal regulation of insurance
companies would be appropriate. It is not possible to predict the outcome of any
such congressional activity, which could result in the federal government
assuming some role in the regulation of the insurance industry, or the potential
effects thereof on the Company.
INSURANCE HOLDING COMPANY REGULATION. The Company and its affiliates are
subject to regulation under the insurance holding company statutes of Ohio, the
domiciliary state of Integrity, and of New York, the domiciliary state of
National Integrity, and under the insurance statutes of other states in which
the Integrity Companies are licensed to transact the business of insurance. Most
states have enacted legislation which regulates insurance holding company
systems, including acquisitions, extraordinary dividends, the terms of
transactions between affiliates including insurance companies and other related
matters. The Integrity Companies are required to file certain reports in Ohio,
New York and certain other states, including information concerning their
capital structure, ownership, financial condition, and general business
operations. The Ohio and New York insurance laws also require prior notice or
approval of changes in control of an insurer or its holding companies and of
21
<PAGE>
material intercorporate transfers of assets and material agreements between an
insurer and affiliates within the holding company structure. Under the Ohio and
New York insurance laws, any person, corporation or other entity which seeks to
acquire, directly or indirectly, 10% or more of the voting securities of an Ohio
or New York insurance company or any of its parent companies is presumed to
acquire "control" of such insurance company and must obtain the prior approval
of both the Ohio Insurance Director and New York Insurance Superintendent. Prior
to acquiring such control, the proposed acquirer must either file an application
containing certain information including, but not limited to, the identity and
background of the acquirer and its affiliates and the source and amount of funds
to be used to effect the acquisition, or obtain an exemption from the approval
requirement.
In the event of a default on the Company's debt or the insolvency,
liquidation or other reorganization of the Company, the creditors and
stockholders of the Company will have no right to proceed against the assets of
Integrity or National Integrity or to cause their liquidation under federal or
state bankruptcy laws. Insurance companies are not subject to such bankruptcy
laws but are instead governed by state insurance laws relating to liquidation or
rehabilitation due to insolvency or impaired financial condition. Therefore, if
Integrity or National Integrity were to be liquidated or be the subject of
rehabilitation proceedings, such liquidation or rehabilitation proceedings would
be conducted by the Ohio Insurance Director and the New York Insurance
Superintendent, respectively, as the receiver with respect to all of Integrity's
or National Integrity's assets and business. Under the Ohio and New York
insurance laws, all creditors of Integrity or National Integrity, including
policyholders, would be entitled to payment in full from such assets before the
Company or Integrity Holdings, Inc., as indirect or direct stockholders, would
be entitled to receive any distribution therefrom.
DIVIDEND RESTRICTIONS. The Company's ability to declare and pay dividends
are affected by Ohio and New York laws regulating the ability of National
Integrity to pay dividends to Integrity and the ability of Integrity to pay
dividends to the Company.
Under Ohio law, an Ohio domestic life insurance company may not make,
without the prior approval of the Ohio Insurance Director, dividend payments in
excess of the greater of (i) 10% of such insurance company's statutory capital
and surplus as of the preceding December 31 and (ii) such insurance company's
statutory net income for the preceding year. Under New York insurance law,
National Integrity may pay dividends to Integrity only out of its earnings and
surplus and may not distribute any dividends without at least 30 days' prior
written notice to the New York Insurance Superintendent, who may disapprove a
proposed dividend upon a determination that National Integrity's financial
condition does not warrant such distribution. Because National Integrity is a
subsidiary of Integrity, dividend payments made by National Integrity to
Integrity must be made in compliance with New York standards, and the ability of
Integrity to pass those dividends on to the Company is subject to compliance
with Ohio standards.
Integrity paid $26 million in dividends to the Company during 1997, the
maximum amount that was payable. For 1998, the maximum dividend payments that
may be paid by Integrity to the Company without prior regulatory approval are
$38 million.
22
<PAGE>
MANDATORY INVESTMENT RESERVE. Under NAIC rules, life insurance companies
must maintain an asset valuation reserve ("AVR"), supplemented by an interest
maintenance reserve ("IMR"). These reserves are recorded for purposes of
statutory accounting practices; they are not recorded under the provisions of
GAAP and therefore have no impact on the Company's reported results of
operations or financial position. These reserves affect the determination of
statutory surplus, and changes in such reserves may impact the ability of the
Integrity Companies to pay dividends or other distributions to the Company. The
extent of the impact of the AVR will depend upon the future composition of the
investment portfolio of the Integrity Companies. The extent of the impact of the
IMR will depend upon the extent of the gains and losses of the Integrity
Companies' investment portfolio and the related amortization thereof. Based on
the current investment portfolio of the Company's insurance subsidiaries, the
Company does not anticipate that expected provisions for the AVR and IMR will
materially adversely affect the ability of the Integrity Companies to pay
dividends or other distributions to the Company.
RISK-BASED CAPITAL REQUIREMENTS. The NAIC Risk-Based Capital ("RBC")
requirements evaluate the adequacy of a life insurance company's adjusted
statutory capital and surplus in relation to investment, insurance and other
business risks. The RBC formula is used by the states as an early warning tool
to identify potential weakly capitalized companies for the purpose of initiating
regulatory action and is not designed to be a basis for ranking the financial
strength of insurance companies. In addition, the formula defines a minimum
capital standard which supplements the previous system of low fixed minimum
capital and surplus requirements. The RBC requirements provide for four
different levels of regulatory attention depending on the ratio of a company's
adjusted capital and surplus to its RBC.
The consolidated statutory capital and surplus of the Company's life
insurance subsidiaries totaled $211.8 million and $163.8 million at December 31,
1997 and 1996, respectively, and were substantially in excess of the minimum
level of RBC that would require regulatory action. In addition, the consolidated
statutory AVRs of the Company's insurance subsidiaries totaled $24.9 million and
$15.6 million at December 31, 1997 and 1996, respectively (excluding voluntary
reserves of $5.3 million and $12.5 million at December 31, 1997 and 1996,
respectively). AVRs are generally added to statutory capital and surplus for
purposes of assessing capital adequacy against various measures used by rating
agencies and regulators, including RBC.
GUARANTY FUND ASSESSMENTS. Under the insurance guaranty fund laws existing
in each state, insurers licensed to do business in the state can be assessed for
certain obligations of insolvent insurance companies to policyholders and
claimants. In connection with the acquisition by the Company of the Integrity
Companies from National Mutual, National Mutual agreed to indemnify the Company
for guaranty fund assessments levied in respect of companies declared insolvent
or subject to conservatorship prior to November 26, 1993. The amounts actually
assessed to and paid by the Company's insurance subsidiaries for the years ended
December 31, 1997, 1996 and 1995 were approximately $1.6 million, $1.5 million
and $1.1 million, respectively. Of such amounts, approximately $0.5 million,
$0.5 million and $0.4 million, respectively, were reimbursed by National Mutual
under its indemnity obligation to the Company. Because such assessments are
typically not made for several years after an insurer fails and depend upon the
final outcome of liquidation or rehabilitation proceedings, the Company cannot
accurately determine the precise
23
<PAGE>
amount or timing of its exposure to known insurance company insolvencies at this
time. During 1996 and 1995, the Company recorded provisions for future state
guaranty fund association assessments of $1.6 million and $0.3 million,
respectively. No provision was recorded during 1997. At December 31, 1997, the
Company's reserve for such assessments was $4.9 million. No assurance can be
given that the Company's reserve for assessments or such indemnity will be
adequate in the event of any loss suffered by the Company in respect of any
assessment made under state insurance guaranty fund laws. The reserve does not
include any provision for future assessments related to unknown failures or to
known failures for which no estimate of the Company's exposure currently can be
made. The Company estimates its reserve for assessments using information
provided by the National Organization of Life and Health Guaranty Associations.
The insolvency of large life insurance companies in future years could result in
additional material assessments to the Company by state guaranty funds that
could have a material adverse impact on the Company's future earnings and
liquidity.
TRIENNIAL EXAMINATIONS. The Ohio and New York insurance departments usually
conduct an examination of Integrity and National Integrity, respectively, every
three years, and may do so at such other times as are deemed advisable by the
Ohio Insurance Director and New York Insurance Superintendent. The report with
respect to the most recent triennial examination of Integrity issued in 1997
covered the periods 1993 through 1995 and contained no material adverse
findings. The report with respect to the most recent triennial examination of
National Integrity issued in 1997 covered the periods 1993 through 1995 and also
contained no material adverse findings.
INSURANCE REGULATORY INFORMATION SYSTEM. The NAIC has developed a set of
financial relationships or "tests" called the Insurance Regulatory Information
System ("IRIS") that were designed for early identification of companies that
may require special attention by insurance regulatory authorities. These tests
were developed primarily to assist state insurance departments in executing
their statutory mandate to oversee the financial condition of insurance
companies. Insurance companies submit data on an annual basis to the NAIC, which
in turn analyzes the data using ratios covering twelve categories of financial
data with defined "usual ranges" for each category.
Falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as a part of the regulatory early
warning monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall outside of the usual range for one
or more ratios because of specific transactions that are in themselves
immaterial or eliminated at the consolidated level. Generally, an insurance
company will become subject to increased regulatory scrutiny if it falls outside
the usual ranges of four or more of the ratios. In normal years, 15% of the
companies included in the IRIS system are expected by the NAIC to be outside the
usual range on four or more ratios.
In 1997, two IRIS ratios for Integrity and three IRIS ratios for National
Integrity fell outside the usual range due to normal business operations which
included the sale of a substantial volume of funding agreements and GICs
("institutional spread products"). For Integrity, the change in premium ratio
was +197%, as compared to the usual range of between +50% and -10%. This ratio
was above
24
<PAGE>
the usual range due to an increase in institutional spread product premiums from
$507.9 million in 1996 to $1.7 billion in 1997 and an increase in guaranteed
rate option annuity premiums from $51.6 million in 1996 to $210.4 million in
1997. Such increases were a result of increased marketing efforts. Integrity's
change in reserving ratio was -99% as compared to the usual range of between
+20% and -20%. This ratio measures the difference in reserves as a percentage of
premiums from one year to the next for business classified as life insurance for
statutory accounting and reporting purposes. This ratio is not meaningful as it
applies to Integrity because Integrity primarily writes retail fixed, indexed
and variable annuity products and institutional spread products rather than life
insurance, and due to its mix of life insurance reserves and premiums. Over 85%
of Integrity's life insurance reserves are a closed block of SPE contracts which
have reserve changes from year to year, but generate no premiums. Integrity's
life insurance premiums ($1.2 million in 1997) are primarily generated from
variable life business which is reinsured through a modified coinsurance
reinsurance treaty. This treaty generates premium flow but not reserve
adjustments. Thus, for Integrity, the ratio, in essence, compares SPE reserve
changes to variable life premiums.
For National Integrity, the change in premium ratio was -38%, as compared
to the usual range of between +50% and -10%. This ratio was below the usual
range due to a decrease in institutional spread product premiums from $239.6
million in 1996 to zero in 1997, partially offset by an increase in guaranteed
rate option annuity premiums from $31.9 million in 1996 to $125.3 million in
1997. National Integrity's change in product mix ratio was 9.9%, as compared to
the usual range of 5% or less. This ratio was slightly above the usual range due
to the decrease in sales of institutional spread products and the increase in
sales of guaranteed rate option annuities during 1997. National Integrity's
change in reserving ratio was -23% as compared to the usual range of between
+20% and -20%. This ratio is not meaningful as it applies to National Integrity
because National Integrity primarily writes fixed and variable annuity products
rather than life insurance, and due to its mix of life insurance reserves and
premiums.
OTHER REGULATION
The Company's non-insurance activities are also subject to extensive
regulation. Integrity Capital Advisors, Inc. is registered with the Securities
and Exchange Commission (the "SEC") as an investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act") and is subject to
regulation and examination under the Employee Retirement Income Security Act
("ERISA") by the U.S. Department of Labor and under the Advisers Act by the SEC.
In addition, variable annuities and the related nonguaranteed separate accounts
of the Company's insurance subsidiaries are subject to regulation by the SEC
under the Securities Act of 1933, as amended, and the Investment Company Act.
The Company's broker-dealer subsidiary, ARM Securities, is registered with
the SEC under the Securities Exchange Act of 1934 and is subject to regulation
by the SEC. ARM Securities is also subject to regulation, supervision and
examination by the states in which it transacts business, as well as by the
National Association of Securities Dealers, Inc. ("NASD"). The NASD has broad
administrative and supervisory powers relative to all aspects of ARM Securities'
business and may examine its business and accounts at any time.
SBM Certificate Company is subject to regulation and supervision by federal
and state regulators. The Investment Company Act and rules issued by the SEC
thereunder specify certain
25
<PAGE>
terms applicable to face-amount certificates, the method for calculating reserve
liabilities on outstanding certificates, the minimum amounts and types of
investments to be deposited with a qualified custodian to support such reserve
liabilities, and a variety of other restrictions on the operation and governance
of a face-amount certificate company. Pursuant to statutory authority, the
Minnesota Department of Commerce (the "MDC") exercises supervisory powers over
SBM Certificate Company's face-amount certificate business similar to those
exercised by the SEC under the Investment Company Act. In addition, the MDC
conducts annual examinations of SBM Certificate Company. The offer and sale of
its face-amount certificates also are subject to federal and state securities
laws.
The securities laws and regulations referred to above generally grant
supervisory agencies and bodies broad administrative powers, including the power
to fine, limit or restrict a firm from conducting its business in the event that
it fails to comply with such laws and regulations. In addition to maintaining
registrations, the regulatory requirements include reporting, maintaining books
and records in prescribed forms, maintaining certain mandatory custodial
arrangements, approving employees, representatives and, in some cases, owners,
and other compliance procedures. Possible sanctions that may be imposed in the
event of noncompliance include, without limitation, the suspension of individual
employees, limitations on the firm's engaging in business for specified periods
of time, revocation of the firm's registration as an investment advisor or
broker-dealer, censures and fines. The regulators make periodic examinations and
review annual, monthly and other reports on the operations of the Company or its
subsidiaries. Changes in these laws or regulations could have a material adverse
impact on the profitability and mode of operations of the Company.
EXAMINATIONS. During 1997, the SEC conducted an examination of National
Integrity's nonguaranteed separate account products, which are registered. No
material control deficiencies were found during this examination. In addition,
the SEC conducts routine examinations of the Company's registered investment
adviser operations to ensure compliance with the requirements prescribed by the
Advisers Act. Similarly, the NASD regulates the activities of the Company's
broker-dealer operations and conducts routine examinations thereof.
FEDERAL INCOME TAX
In recent years, several proposals have been made to change the federal
income tax system. These proposals have included various flat tax rate and
consumption taxes. Under a proposal currently included in The
Administration's Fiscal Year 1999 Budget all exchanges involving a variable
annuity contract and all reallocations within variable annuity contracts
would be taxed. It is impossible to predict the effect on the Company's
business of the adoption of any of these proposals. It is possible that the
adoption of a tax proposal that reduces or eliminates the tax-deferred status
of annuities could adversely affect the Company's business.
EMPLOYEES
At December 31, 1997, the Company and its subsidiaries had approximately
300 employees, none of whom was represented by a labor union. The Company
believes that its relations with its employees are good.
26
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 62,000 square feet of office space in
Louisville, Kentucky under a lease agreement (the "Lease") which expires on
September 1, 2006, and which is subject to two five-year renewal options. This
office space accommodates the executive, marketing, product development,
actuarial, accounting, corporate finance, and legal functions of the Company.
The Company has a standby letter of credit in the amount of approximately $1.7
million with one of its lending institutions to secure the Company's obligations
under the Lease.
In addition to its headquarters, the Company and its subsidiaries lease
approximately 72,000 square feet of space in the Columbus, Ohio vicinity, 15,000
square feet of space on Chamberlain Lane in Louisville, Kentucky and subleases
approximately 1,000 square feet of office space in New York City from New ARMCA.
The operations of the Company's New York insurance subsidiary, National
Integrity, are conducted from the New York facility. Additional office space
owned in New Ulm, Minnesota supports the distribution operations of SBM
Certificate Company. The Chamberlain Lane space in Louisville, Kentucky serves
as the Company's primary distribution center for all of its operations. The
Columbus office space was vacated upon the consolidation of the Company's
Columbus operations with the corporate headquarters in Louisville and the
Company intends to either sublease this space or buy out the remainder of the
lease at a discount.
ITEM 3. LEGAL PROCEEDINGS
As a consequence of the acquisition of SBM Life and SBM Life's merger with
and into Integrity, Integrity became a party to a marketing agreement with
Multico Marketing Corporation ("Multico"). In reliance upon the marketing
agreement, Integrity eliminated commissions to Multico on new product sales on a
prospective basis effective July 1, 1995. Multico filed a lawsuit in the United
States District Court for the Western District of Kentucky against Integrity on
February 23, 1996, alleging breach of contract and breach of the covenant of
good faith and fair dealing, and seeking a trial by jury and compensatory and
punitive damages of approximately $61 million. Integrity filed a counterclaim
against Multico seeking a declaration that Integrity's actions in revising
commissions did not constitute a breach of contract, and the recovery of the
commissions, fees, trailers, overwrites and bonuses paid to Multico in the
amount of approximately $9.3 million. On May 23, 1996, Integrity filed a motion
for summary judgement in the litigation; this motion was denied by the court on
March 10, 1997. Discovery and settlement discussions are proceeding between the
parties. Company management believes that the ultimate resolution of this
litigation will not result in any material adverse impact to the financial
position of the Company.
Except as described above, the Company is currently involved in no material
legal or administrative proceedings that could result in a material adverse
impact on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
27
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages, and positions with the
Company as of March 26, 1998, are set forth below:
<TABLE>
<CAPTION>
Name Age Title
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Martin H. Ruby 47 Chairman of the Board and Chief Executive Officer
John R. Lindholm 49 President--Retail Business Division
Dennis L. Carr 48 Executive Vice President and Chief Actuary
David E. Ferguson 50 Executive Vice President and Chief Technology Officer
John R. McGeeney 41 Executive Vice President--Retail Business Division
Robert H. Scott 51 Executive Vice President, General Counsel and Secretary
Patricia L. Winter 39 Executive Vice President--Investment Assurance and
Institutional Products
Edward L. Zeman 43 Executive Vice President and Chief Financial Officer
Peter S. Resnik 37 Treasurer
Barry G. Ward 36 Controller
</TABLE>
MARTIN H. RUBY was named Chairman of the Board and Chief Executive Officer
of the Company in February 1998. Prior to that time, he had served as
Co-Chairman of the Board and Co-Chief Executive Officer of the Company since
July 1993. From its inception in March 1992 until November 1993, Mr. Ruby served
as Co-Chief Executive Officer of Oldarm L.P. From May 1990 to January 1992, he
was President and Managing Director of the ICH Capital Management Group of ICH
Corporation, and the President of Constitution Life Insurance Company, the
accumulation product subsidiary of ICH Corporation. From 1986 to 1989, Mr. Ruby
was the Chief Executive Officer and Managing Director of Capital Initiatives
Corporation, a subsidiary of the former Capital Holding Corporation. Mr. Ruby
also held various other positions with Capital Holding Corporation from 1980
until 1986.
JOHN R. LINDHOLM has served as President--Retail Business Division of the
Company since January 1997. He had been Executive Vice President and Chief
Marketing Officer of the Company since July 1993. Until November 1993, he served
as the Chief Marketing Officer of Oldarm L.P., a position he held since its
inception in March 1992. From June 1990 to February 1992, Mr. Lindholm was the
Chief Marketing Officer and a Managing Director of the ICH Capital Management
Group of ICH Corporation. From 1980 to 1990, he was employed by Capital Holding
Corporation, first as Vice President--Compensation and Benefits and then as
Chief Marketing Officer and Managing Director of its Accumulation and Investment
Group. Mr. Lindholm is also Chairman of the Board of The Legends Fund, Inc.
DENNIS L. CARR has served as Executive Vice President and Chief Actuary of
the Company since June 1996. He had been Executive Vice President and Chief
Product Development Officer of the Company since September 1993, and was
appointed Actuary in June 1995. Prior to joining the
28
<PAGE>
Company in September 1993, he was Director of Product Development for the
Accumulation and Investment Group of Capital Holding Corporation. From July
1983 to July 1988, Mr. Carr was a consulting actuary for Tillinghast, being
named a principal of that firm in 1987.
DAVID E. FERGUSON has served as Executive Vice President and Chief
Technology Officer of the Company since January 1997. He had been Executive Vice
President and Chief Administrative Officer of the Company since July 1993. He
also served as Chief Technology Officer of Oldarm L.P. from January 1993 until
November 1993, and was Chief Technology Officer of Franco Associates, Ltd. from
its inception in March 1992 to its merger with Oldarm L.P. in December 1992.
From 1990 to March 1992, Mr. Ferguson was employed as the President and Chief
Executive Officer of the James Graham Brown Foundation, Inc., a private
philanthropic association in Louisville, Kentucky. From 1984 to 1990, Mr.
Ferguson was a partner at Ernst & Young LLP (or its predecessor Arthur Young)
and National Director of their Insurance Industry Consulting groups.
JOHN R. MCGEENEY has served as Executive Vice President--Retail Business
Division of the Company since January 1997. He had been Co-General Counsel of
the Company since January 1994, was Assistant General Counsel of the Company
from October 1993 to December 1993, and served as Secretary from December 1993
to December 1995. From February 1988 to October 1993, Mr. McGeeney served as
Assistant General Counsel for the Accumulation and Investment Group of Capital
Holding Corporation. He had also been an associate with the law firm of
Middleton & Reutlinger from 1986 until 1988.
ROBERT H. SCOTT has served as Executive Vice President and General Counsel
of the Company since January 1997, and was appointed Secretary of the Company in
December 1995. He had been Co-General Counsel of the Company since January 1994,
and was Assistant General Counsel of the Company from July 1993 to December
1993. From June 1993 until November 1993, he served as Assistant General Counsel
of Oldarm L.P. Mr. Scott also served as Deputy General Counsel for ICH
Corporation from June 1990 to March 1993. Prior to that time, he was employed by
Capital Holding Corporation as Second Vice President--Tax from November 1976 to
May 1990.
PATRICIA L. WINTER was named Executive Vice President--Investment Assurance
and Institutional Products of the Company in February 1998. She had been Senior
Vice President--Mergers/Acquisitions and Investment Assurance since March 1997.
Ms. Winter also served in other various positions within the Company from April
1992 to February 1997, the last of which was Asset/Liability Officer. Prior to
that time, Ms. Winter was a Director--Accumulation Product Development of the
ICH Capital Management Group of ICH Corporation from August 1990 to March 1992.
EDWARD L. ZEMAN has been Executive Vice President and Chief Financial
Officer of the Company since September 1995. Prior to joining the Company, Mr.
Zeman served in various positions with SBM Company from June 1990 to June 1995,
the last of which was Vice President, Chief Operating Officer, Chief Financial
Officer and Treasurer. He also served in various positions with Deloitte &
Touche LLP, a certified public accounting firm, from 1977 through 1990, the last
of which was Senior Manager. Mr. Zeman currently serves on the Board of
Directors of Dotronix, Inc.
29
<PAGE>
PETER S. RESNIK has been the Treasurer of the Company since December 1993.
From December 1992 to November 1993, he served in various financial and
operational positions for Oldarm L.P. From June 1986 through July 1992, he
served as Assistant Vice President of Commonwealth Life Insurance Company, a
subsidiary of Capital Holding Corporation in various management positions, the
last of which was Director of Planning and Budgets in the Agency Group Division.
BARRY G. WARD has served as Controller of the Company since April 1996.
From October 1993 to April 1996, Mr. Ward served as financial officer directly
responsible for the Company's financial reporting function. From January 1989 to
October 1993, he served in various positions within Ernst & Young LLP's
Insurance Practice, the last of which was Audit Manager.
30
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 19, 1997, the Company's Class A Common Stock began trading on the
American Stock Exchange under the symbol "ARM". Prior to such date, no
established public trading of the Company's common equity existed. There is no
trading or other market for the non-voting Class B Common Stock. At December 31,
1997, approximately 53% of the outstanding shares of the Class A and Class B
Common Stock of the Company were held by the Morgan Stanley Stockholders.
The following table sets forth for the periods indicated, the high and low
sale prices of the Company's Class A Common Stock as reported on the American
Stock Exchange:
<TABLE>
<CAPTION>
1997
----------------------------------
Cash
Dividend
High Low Per Share
----------------------------------
<S> <C> <C> <C>
2nd Quarter (from June 19, 1997) $20 $18 1/2 $ --
3rd Quarter 23 13/16 19 7/16 0.02
4th Quarter 26 3/8 20 0.02
</TABLE>
As of December 31, 1997, there were approximately 2,400 holders of record
of the outstanding shares of Class A Common Stock and 4 holders of record of the
outstanding shares of Class B Common Stock.
The Company is dependent on dividends from Integrity and management and
service fee income from the Company's subsidiaries to meet ongoing cash needs,
including amounts required to pay dividends on the preferred stock and common
stock. The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates is limited by state insurance laws. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Financial Resources - Holding Company Operations."
On February 13, 1998, the Company declared a dividend of $0.02 per share of
Common Stock and $0.59375 per share of 9.5% Cumulative Perpetual Preferred
Stock. Both dividends were paid on March 16, 1998, to shareholders of record on
February 27, 1998.
31
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information of
the Company and its subsidiaries for the years ended December 31, 1997, 1996,
1995 and 1994, for the period from November 27, 1993 through December 31, 1993,
and for the period from January 1, 1993 through November 26, 1993 (for the
Historical Integrity Companies). The financial information has been derived from
consolidated financial statements of the Company, prepared in conformity with
GAAP, that have been audited by Ernst & Young LLP.
Effective May 31, 1995, the Company acquired substantially all of the
assets and business operations of SBM. This acquisition was accounted for as a
purchase, and the results of operations of the acquired businesses are included
in the Company's historical financial information from the date of acquisition.
Because 1997 and 1996 include full years of acquired SBM business operations
compared to seven months in 1995, the results of operations for 1997, 1996,
1995, and 1994 are not completely comparable. "Historical Integrity Companies"
refers to operations, for accounting and reporting purposes, prior to the
Company's November 26, 1993 acquisition of the Integrity Companies. The
Historical Integrity Companies' results of operations for 1993 are presented for
purposes of comparison; however, because of purchase accounting adjustments, a
new capital structure and new management team resulting from that acquisition,
the Company's results have differed from the results of the Historical Integrity
Companies.
The selected historical financial information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company's consolidated financial
statements and the notes thereto and other financial and operating information
included herein.
32
<PAGE>
<TABLE>
<CAPTION>
Historical
Integrity
The Company Companies(1)
------------------------------------------------------------------------ ------------
Period form
Period from January 1,
Year Ended December 31, November 27, 1993 through
------------------------------------------------------- 1993 through November 26,
(IN THOUSANDS, December 31, 1993
EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Investment income $ 329,979 $ 250,031 $ 196,024 $ 149,142 $ 16,260 $ 148,120
Interest credited on customer deposits (247,418) (182,161) (146,867) (116,463) (13,563) (116,341)
----------------------------------------------------------------------- ----------
Net investment spread 82,561 67,870 49,157 32,679 2,697 31,779
Fee income:
Variable annuity fees 14,630 10,786 7,238 4,291 91 1,000
Asset management fees 8,595 5,780 3,161 -- -- --
Other fee income 1,386 1,267 949 4,100 369 1,258
----------------------------------------------------------------------- ----------
Total fee income 24,611 17,833 11,348 8,391 460 2,258
Other income and expenses:
Surrender charges 4,482 5,024 3,339 2,356 145 1,615
Operating expenses (32,528) (31,055) (22,957) (21,484) (1,423) (30,663)
Commissions, net of deferrals (2,218) (2,372) (1,557) (2,551) (309) (4,877)
Interest expense on debt (2,517) (3,146) (3,461) (3,136) (245) (133)
Amortization:
Deferred policy acquisition costs (10,416) (6,835) (2,932) (1,296) (12) (1,470)
Value of insurance in force (9,293) (7,320) (7,104) (3,830) (552) (6,444)
Acquisition-related deferred
charges (503) (1,503) (9,920) (2,163) (249) --
Goodwill (424) (488) (358) -- -- --
Non-recurring charges(2):
Stock-based compensation (8,145) -- -- -- -- --
Other (6,678) (5,004) -- -- -- --
Other, net (386) (5,366) (687) 4,972 (46) --
----------------------------------------------------------------------- ----------
Total other income and expenses (68,626) (58,065) (45,637) (27,132) (2,691) (41,972)
Realized investment gains (losses) 3,192 907 4,048 (36,727) (79) (32,776)
----------------------------------------------------------------------- ----------
Income (loss) before income taxes 41,738 28,545 18,916 (22,789) 387 (40,711)
Income tax benefit (expense) (14,139) (5,167) (7,026) 6,018 (508) --
----------------------------------------------------------------------- ----------
Net income (loss) 27,599 23,378 11,890 (16,771) (121) $ (40,711)
Dividends on preferred stock (4,750) (4,750) (4,750) (4,750) (462) ----------
----------------------------------------------------------------------- ----------
Net income (loss) applicable to
common shareholders $ 22,849 $ 18,628 $ 7,140 $ (21,521) $ (583)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net income (loss) per common and
common equivalent share (diluted)(3) $ 1.07 $ 1.06 $ 0.49 $ (2.03) $ (0.06)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Average common and common
equivalent shares outstanding(3) 21,305 17,498 14,614 10,590 10,590
-----------------------------------------------------------------------
-----------------------------------------------------------------------
OTHER OPERATING DATA:
Operating earnings (loss)(4) $ 34,149 $ 22,227 $ 4,509 $ 2,352 $ (532)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Operating earnings (loss) per common
and common equivalent share
(diluted)(3) $ 1.60 $ 1.27 $ 0.31 $ 0.22 $ (0.05)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET AND OTHER DATA:
Total cash and investments(5) $ 4,467,477 $ 3,347,477 $ 2,798,027 $ 1,782,501 $ 2,103,856
Assets held in separate accounts 2,439,884 1,135,048 809,927 506,270 231,687
Total assets(5) 7,138,424 4,701,664 3,793,580 2,447,888 2,427,886
Long-term debt 38,000 40,000 40,000 40,000 40,000
Total liabilities 6,830,879 4,519,722 3,605,589 2,462,021 2,315,535
Shareholders' equity:
Carrying amount(5) 307,545 181,942 187,991 (14,133) 112,351
Excluding the effects of SFAS
No. 115(6) 287,245 178,273 159,461 90,816 n/a(8)
Fair value(7) 321,087 224,276 187,721 115,192 111,709
</TABLE>
(1) The Company had no significant business activity until November 26, 1993,
when it acquired the Integrity Companies from National Mutual. Results of
operations prior to the acquisition for the period from January 1, 1993
through November 26, 1993 are presented for comparative purposes.
(2) The Company recorded non-recurring charges of $14.8 million for 1997
including a one-time non-cash stock-based compensation charge of $8.1
million related to the Company's initial public offering of common stock,
and other non-recurring costs primarily attributable to the relocation and
consolidation of the Company's operations facilities from Columbus, Ohio to
Louisville, Kentucky. The Company recorded a non-recurring charge of $5.0
million in 1996 that also included $3.2 million for facilities
consolidation and costs of $1.8 million primarily related to merger and
acquisition activity that did not result in a transaction.
(3) Shares and per share amounts have been restated, for all periods presented,
to reflect the 706-for-1 stock split that occurred in conjunction with the
initial public offering of the Company's common stock.
(4) "Operating earnings" is defined as net income applicable to common
shareholders, excluding, net of tax, realized investment gains and losses,
non-recurring charges and income from defined benefit pension plan asset
management operations which were sold during November 1997.
(5) Total cash and investments, total assets and carrying amount shareholders'
equity for the periods ending subsequent to December 31, 1993 reflect a
change in accounting principle for the January 1, 1994 adoption of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
(6) Excludes from carrying amount shareholders' equity the net unrealized gains
and losses on securities classified as available-for-sale, net of related
amortization and taxes.
(7) The methodologies used to estimate fair value are described in the notes to
the consolidated financial statements contained herein.
(8) Not applicable.
34
<PAGE>
ITEM 7. 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 annuities) and institutional
spread products (funding agreements and GICs). The Company receives a fee in
exchange for managing customers' deposits, and the customer accepts the
investment risk with its retail variable products (variable annuities). The
Company believes that market forces and population demographics are producing
and will continue to generate strong consumer demand for long-term savings
and retirement products, including variable, indexed and fixed annuity
products. 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 in addition to exploring other alternatives to
increase the size of its fee-based business, such as expanded offerings of
synthetic GICs. 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 to 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.
On December 13, 1996, the Company transferred its contracts to perform
management and advisory services for the State Bond Mutual Funds to Federated
Investors for $4.5 million. Had the sale of ARM Capital Advisors' operations and
the sale of the management contracts for the State Bond Mutual Funds occurred on
January 1, 1995, they would not have had a material effect on the Company's net
income for the years ended December 31, 1997, 1996 and 1995.
The following discussion compares the results of operations for the Company
for the three years ended December 31, 1997. As the Company acquired
substantially all of the assets and business operations of SBM effective May 31,
1995, results for 1996 and 1997 each include a full year of
35
<PAGE>
acquired SBM business operations compared to seven months in 1995. Therefore,
results of operations for 1995 are not completely comparable with 1996 and 1997.
For certain financial information regarding the Company's business segments,
see Note 13 of the consolidated financial statements included herein.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net income during 1997 was $27.6 million compared to $23.4 million for
1996. Operating earnings (net income applicable to common shareholders,
excluding, net of tax, realized investment gains and losses, non-recurring
charges and income from defined benefit pension plan asset management operations
which were sold) were $34.1 million and $22.2 million for 1997 and 1996,
respectively. The increase in operating earnings is primarily attributable to an
increase in net investment spread due to both deposit growth from sales of
retail and institutional spread products and ongoing asset/liability management
and, to a lesser extent, an increase in fee income as a result of a larger base
of variable annuity deposits.
Pro forma operating earnings (operating earnings including a pro forma
adjustment to reflect investment income that the Company believes could have
been earned at an assumed rate of 7.5% on the net proceeds of the Company's
initial public offering of common stock assuming it occurred on January 1,
1996) were $36.3 million and $26.8 million for 1997 and 1996, respectively.
Pro forma operating earnings per share were $1.51 and $1.13 for the same
respective years. This pro forma information is not necessarily indicative of
what would have occurred had the offering occurred on the date indicated.
Operating earnings for retail spread products were 1.36% and 1.30% of
average assets under management of $2.76 billion and $2.66 billion for that
segment during 1997 and 1996, respectively. This increase in retail spread
margins is primarily attributable to ongoing asset/liability management, which
generated higher net investment spreads. Operating earnings for institutional
spread products were 0.62% and 0.57% of average assets under management of $1.48
billion and $567.7 million for that segment during 1997 and 1996, respectively.
The increase in institutional spread margins is also primarily attributable to
ongoing asset/liability management. Operating earnings for retail variable
products were 0.52% and 0.66% of average assets under management of $970.3
million and $728.2 million for that segment during 1997 and 1996, respectively.
The decline in retail variable margins is primarily attributable to lower
amortization expense of deferred policy acquisition costs during 1996. The
Company's corporate and other segment primarily includes earnings on insurance
subsidiaries surplus and holding company cash and investments, marketing
partnership and broker-dealer fee income, and unallocated corporate overhead.
Income tax expense and preferred stock dividends are not allocated to any
segment.
36
<PAGE>
Net investment spread for the years ended December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED) 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Investment income $ 329,979 $ 250,031
Interest credited on customer deposits (247,418) (182,161)
---------------------------
Net investment spread $ 82,561 $ 67,870
---------------------------
---------------------------
Investment yield 7.60% 7.75%
Average credited rate (5.83)% (5.67)%
---------------------------
Investment spread rate 1.77% 2.08%
---------------------------
---------------------------
Average cash and investments (IN BILLIONS) $ 4.34 $ 3.23
Average spread-based customer deposits (IN BILLIONS) $ 4.24 $ 3.21
</TABLE>
The decrease in the overall investment spread rate from 2.08% in 1996 to
1.77% in 1997 is attributable to a greater proportion of institutional spread
product deposits in 1997, which generate lower spreads. Changes in investment
yield and interest credited rates must be analyzed in relation to the liability
portfolios to which they relate. When analyzed individually, investment spread
rates increased in 1997 for both retail and institutional spread products. The
investment yield on cash and investments, excluding assets supporting
institutional spread product deposits, was 8.04% for 1997, up from 8.01% in
1996. In comparison, the investment yield on cash and investments supporting
institutional spread product deposits was 6.74% and 6.53% for 1997 and 1996,
respectively. These increases reflect the benefits of ongoing investment
portfolio management. Average cash and investments related to institutional
spread product deposits grew from $567.7 million during 1996 to $1.48 billion
during 1997, causing 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 (which were somewhat higher on the
average in 1997), frequency of credited rate resets and business mix. Crediting
rates are reset monthly based on the LIBOR for institutional spread products and
semi-annually or annually for certain fixed annuities. To date, the Company has
been able to react to changes in market interest rates and maintain a desired
investment spread without a significant effect on surrender and withdrawal
activity, although there can be no assurance that the Company will be able to
continue to do so.
Fee income increased to $24.6 million in 1997 from $17.8 million in
1996. This increase is attributable to variable annuity fees, which are based
on the market value of the mutual fund assets supporting variable annuity
customer deposits in nonguaranteed separate accounts. Variable annuity fees
increased to $14.6 million in 1997 from $10.8 million in 1996 principally due
to asset growth from the receipt of variable annuity deposits and from a
market-driven increase in the value of existing variable annuity deposits
invested in mutual funds. Variable annuity deposits averaged $970.3 million
in 1997, an increase from $728.2 million in 1996. In addition, asset
management fees earned by ARM Capital Advisors on off-balance sheet assets,
primarily related to defined benefit pension plans (and, in 1996 only, fees
from the State Bond Mutual Funds which were sold by the Company in December
1996), increased to $8.6 million in 1997 from $5.8 million in 1996,
reflecting a significant increase
37
<PAGE>
in the average fair value of off-balance sheet assets managed due to sales. As a
result of the sale of ARM Capital Advisors' operations and the State Bond Mutual
Funds management contracts, asset management fee income will decrease in the
future.
Assets under management as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
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) $ 2,820.6 41% $ 2,646.2 55%
Institutional spread products (funding agreement
and GIC deposits) 2,542.3 37 891.9 18
Retail variable products (variable annuity deposits
invested in mutual funds) 1,129.1 16 844.3 17
Corporate and other:
Off-balance sheet deposits under marketing
partnership arrangements 232.9 3 366.2 8
Cash and investments in excess of customer deposits 180.8 3 77.0 2
--------------------------------------------------------
Total corporate and other 413.7 6 443.2 10
--------------------------------------------------------
Total assets under management $ 6,905.7 100% $ 4,825.6 100%
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
The increase in total assets under management was primarily attributable
to sales of floating rate funding agreements and GICs to institutional
customers and, to a lesser extent, 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.
38
<PAGE>
Sales by market and type of product for 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
(In millions) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Retail:
Spread products $ 382.5 $ 130.6
Variable products 206.3 200.1
------------------------
Total retail 588.8 330.7
Institutional:
Institutional spread products 1,708.7 747.5
------------------------
Total sales $ 2,297.5 $ 1,078.2
------------------------
------------------------
</TABLE>
Total sales during 1997 rose to $2,297.5 million, an increase of
approximately 113% over 1996. The growth is primarily attributable to continued
diversification and expansion in the retail and institutional markets. The
growth in retail spread product sales is largely due to an increase in marketing
efforts for the Company's guaranteed rate option annuity products. Institutional
spread product sales increased as a result of (i) the addition of sales staff
and further penetration into institutional channels and (ii) the launching of a
new funding agreement product. In November 1997, the Company received a deposit
of $500 million for the new product, which was sold in partnership with BLB and
initially matures in five years and is renewable annually thereafter.
Net surrenders of retail fixed and variable annuity products issued by the
Company's insurance subsidiaries were $344.5 million for 1997 compared to $326.2
million for 1996. Surrender charge income decreased to $4.5 million in 1997 from
$5.0 million in 1996. The decrease in surrender charge income is attributable to
a larger portion of the surrenders being partial surrenders which do not result
in a surrender charge penalty. 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 in 1996 and 1997 was generally expected by the
Company due to the level of customer deposits written several years ago that
were subject to declining or expiring surrender charges, and the Company's
strategy of maintaining investment spreads. The Company attempts to reduce
surrender activity and improve persistency through various programs.
Operating expenses increased to $32.5 million in 1997 from $31.1 million in
1996. The increase is primarily attributable to increased marketing efforts
(including an increase in marketing staff and additional investments in
technology) to expand and enhance the support of distribution channels in the
retail and institutional markets, partially offset by a reduction in guaranty
fund assessment accruals. The Company continues to actively pursue and retain
producers within its distribution channels to market its products.
39
<PAGE>
Amortization of deferred policy acquisition costs related to operations was
$10.4 million and $6.8 million in 1997 and 1996, respectively. This increase was
primarily the result of growth in the deferred policy acquisition cost asset due
to additional sales of retail fixed and variable annuity products. Amortization
specifically attributable to variable annuity products increased $1.9 million
during 1997. Variable costs of selling and issuing the Company's 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 $9.3
million and $7.3 million for 1997 and 1996, respectively, primarily reflects the
amortization of the value of insurance in force established as an asset by the
Company in connection with the acquisition of SBM's insurance subsidiary. The
increase in amortization expense corresponds with lower than expected gross
margins for that block of annuity business.
The Company recorded non-recurring charges of $14.8 million for 1997
including a one-time non-cash stock-based compensation charge of $8.1 million
related to the Company's initial public offering of common stock, and other
non-recurring costs primarily attributable to the relocation and consolidation
of the Company's operations facilities from Columbus, Ohio to Louisville,
Kentucky. The Company recorded a non-recurring charge of $5.0 million in 1996
that also included $3.2 million for facilities consolidation and costs of $1.8
million primarily related to merger and acquisition activity that did not result
in a transaction.
Other expenses, net decreased to $0.4 million in 1997 from $5.4 million in
1996. This decrease is attributable to higher mortality costs in 1996 related to
immediate annuity deposits. In addition, 1997 benefited from mortgage loan
prepayment penalty income of $2.1 million and the favorable resolution of a
reinsurance claim of $2.4 million.
Realized investment gains, which are reported net of related
amortization of deferred policy acquisition costs and value of insurance in
force, were $3.2 million in 1997 compared to $0.9 million in 1996. Realized
investment gains in 1997 includes an estimated loss of $4.0 million related
to the write-down to fair value of an investment in a fixed income security.
Realized investment gains in 1996 includes an estimated loss of $15.2 million
related to the write-down to fair value of an investment in a fixed income
security and a gain of $4.5 million, before selling expenses, related to the
transfer of the State Bond Mutual Funds management contracts. Other realized
investment gains and losses were primarily interest-rate related and
attributable to the ongoing management of the Company's fixed maturity
securities classified as available-for-sale which can result in
period-to-period swings in realized investment gains and losses since
securities are sold during both rising and falling interest rate
environments. The ongoing management of securities is a significant component
of the Company's asset/liability management strategy. The ongoing portfolio
management process involves evaluating the various asset sectors (i.e.,
security types and industry classes) and individual securities comprising the
Company's investment portfolios and, based on market yield rates,
repositioning holdings from sectors perceived to be relatively overvalued to
sectors perceived to be undervalued with the aim of improving cash flows. The
Company endeavors to accomplish this repositioning without materially
changing the overall credit, asset duration, convexity, and liquidity
characteristics of its investment portfolios.
40
<PAGE>
Income tax expense was $14.1 million and $5.2 million in 1997 and 1996,
respectively, reflecting effective tax rates of 33.9% and 18.1% as a percentage
of pretax income. If the non-recurring stock-based compensation charge was added
back to pretax income, the effective tax rate for 1997 would be 28.3%. A tax
benefit was not recognized for the charge because a full valuation allowance was
provided on the Company's non-life deferred tax assets.
1996 COMPARED TO 1995
During 1996, net income for the Company was $23.4 million compared to
$11.9 million for 1995. Operating earnings (net income applicable to common
shareholders, excluding, net of tax, realized investment gains and losses,
non-recurring charges and income from defined benefit pension plan asset
management operations which were sold during November 1997) were $22.2
million and $4.5 million for 1996 and 1995, respectively. The increase in
operating earnings is primarily attributable to (i) an increase in net
investment spread due to ongoing asset/liability management and deposit
growth from the full year's effects of the May 31, 1995 acquisition of the
SBM assets and business operations and additional sales of retail and
institutional spread products and (ii) an increase in fee income as a result
of a growing base of variable annuity deposits. Such increases in revenues
were partially offset by an increase in operating expenses as a result of
business growth.
Operating earnings for retail spread products were 1.30% and 0.91% of
average assets under management of $2.66 billion and $2.43 billion for that
segment during 1996 and 1995, respectively. This increase in retail spread
margins is primarily attributable to ongoing asset/liability management, which
generated higher net investment spreads. Operating earnings for institutional
spread products were 0.57% and 0.60% of average assets under management of
$567.7 million and $38.5 million for that segment during 1996 and 1995,
respectively. Operating earnings for retail variable products for 1996 were
slightly higher than the corresponding prior period as evidenced by the increase
to 0.66% from 0.64% of average retail variable assets under management of $728.2
million and $491.5 million during 1996 and 1995, respectively.
Net investment spread for the years ended December 31, 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Investment income $ 250,031 $ 196,024
Interest credited on customer deposits (182,161) (146,867)
-----------------------
Net investment spread $ 67,870 $ 49,157
-----------------------
-----------------------
Investment yield 7.75% 7.84%
Average credited rate (5.67)% (5.90)%
-----------------------
Investment spread rate 2.08% 1.94%
-----------------------
-----------------------
Average cash and investments (IN BILLIONS) $ 3.23 $ 2.50
Average customer deposits (IN BILLIONS) $ 3.21 $ 2.49
</TABLE>
41
<PAGE>
The decrease in investment yields on cash and investments primarily
relates to a significant increase in institutional spread product deposits
which grew from zero to $143.2 million during 1995 and to $891.9 million at
December 31, 1996. 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
investment yield on cash and investments supporting institutional spread
product deposits was 6.53% for 1996. In comparison, the investment yield on
cash and investments, excluding assets supporting institutional spread
product deposits, was 8.01% for 1996, up from 7.85% for 1995, which reflects
the benefits of the ongoing management of the Company's investment
portfolios. The decrease in the average rate of interest credited on
customer deposits during 1996 was due primarily to annual or semi-annual
crediting rate resets occurring at a time when the overall interest rate
environment was generally lower (the last half of 1995 and the first half of
1996 compared to the last half of 1994 and the first half of 1995).
Fee income increased to $17.8 million in 1996 from $11.3 million in 1995.
This increase is in part attributable to variable annuity fees which are based
on the market value of assets supporting the investment portfolio options of
variable annuity customer deposits in separate accounts. Variable annuity fees
increased to $10.8 million in 1996 from $7.2 million in 1995 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. Variable annuity deposits increased to $844.3 million
in 1996 from $617.3 million in 1995. In addition, asset management fees earned
by ARM Capital Advisors on off-balance sheet assets, related to defined benefit
pension plans and the State Bond Mutual Funds, increased to $5.8 million in 1996
from $3.2 million in 1995. This increase in asset management fees reflects a
significant increase in the average amount of corresponding off-balance sheet
assets managed due to new defined benefit pension plan accounts. The average
amount of off-balance sheet assets managed by ARM Capital Advisors was $2.16
billion in 1996 compared to $1.10 billion in 1995.
Assets under management as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
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) $ 2,646.2 55% $ 2,716.2 69%
Institutional spread products (funding agreement and GIC
deposits) 891.9 18 143.2 4
Retail variable products (variable annuity deposits
invested in mutual funds) 844.3 17 617.3 16
Corporate and other:
Off-balance sheet deposits under marketing partnership
arrangements 366.2 8 387.3 10
Cash and investments in excess of customer deposits 77.0 2 61.1 1
---------------------------- ----------------------------
Total corporate and other 443.2 10 448.4 11
---------------------------- ----------------------------
Total assets under management* $ 4,825.6 100% $ 3,925.1 100%
---------------------------- ----------------------------
---------------------------- ----------------------------
</TABLE>
42
<PAGE>
* Does not include off-balance sheet assets managed by ARM Capital Advisors
for institutional clients and off-balance sheet assets in the State Bond
Mutual Funds. Including such assets, total assets under management at
December 31, 1996 and 1995 were $7,553.0 million and $5,364.2 million,
respectively.
The increase in total assets under management was primarily attributable to
an increase in sales of funding agreements and GICs to institutional customers
and, to a lesser extent, increased sales of retail variable products.
Sales by market and type of product for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
(IN MILLIONS) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Retail:
Spread products $ 130.6 $115.4
Variable products 200.1 177.7
------------------
Total retail 330.7 293.1
Institutional:
Institutional spread products 747.5 142.2
Fee-based marketing partnerships -- 272.9
------------------
Total institutional 747.5 415.1
------------------
Total sales*
$1,078.2 $708.2
------------------
------------------
</TABLE>
* Does not include new deposits related to off-balance sheet assets managed
by ARM Capital Advisors for institutional clients and the State Bond Mutual
Funds. Total retail sales for the years ended December 31, 1996 and 1995
were $342.8 million and $300.9 million, respectively, and total
institutional sales for the years ended December 31, 1996 and 1995 were
$2,401.5 million and $886.9 million, respectively, including such deposits.
The increase in retail sales was primarily attributable to an increase
in sales of investment portfolio options of variable annuity contracts due,
in part, to the strong stock market returns during 1996 and an increased
emphasis on marketing efforts of retail products during the fourth quarter,
principally through stockbrokers and independent agents. Expanded
distribution of funding agreement and GIC products through bank trust
departments, mutual fund companies, investment managers, insurance companies
and investment consultants contributed to the increase in sales of such
products. The decrease in institutional fee-based sales was attributable to
the Company's marketing partnership arrangement with General American which
was converted from a fee-based to primarily a spread-based arrangement in
late 1995.
Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $326.2 million and $319.8 million in 1996 and 1995,
respectively. Of these amounts, $106.9 million and $62.8 million, respectively,
can be attributed to fixed annuity business acquired from SBM. Surrender charge
income increased to $5.0 million in 1996 from $3.3 million in 1995, due to
higher average surrender charges associated with SBM products compared to other
products of the Company's insurance subsidiaries and to the overall increase in
the volume of surrenders. The surrender and withdrawal activity during 1995 and
1996 was generally expected by the Company due to the level of customer deposits
written several years ago that were subject to declining or expiring surrender
charges and the Company's strategy of maintaining investment spreads.
43
<PAGE>
Operating expenses increased to $31.1 million in 1996 from $23.0 million in
1995. The increase was primarily attributable to (i) the inclusion of twelve
months of incremental operating expenses related to the acquired SBM operations
in the 1996 results versus seven months for the comparable 1995 period, (ii) the
expansion of product distribution channels and (iii) a charge of $1.6 million to
increase the reserve for anticipated future guaranty fund assessments.
Commissions, net of deferrals, were $2.4 million and $1.6 million in 1996
and 1995, respectively. The increase was primarily attributable to the inclusion
in 1996 results of twelve months' renewal and trailer commissions under certain
deferred annuity contracts acquired through the SBM acquisition versus seven
months for the comparable 1995 period.
Amortization of deferred policy acquisition costs related to operations was
$6.8 million and $2.9 million during 1996 and 1995, respectively. This increase
was the result of growth in the deferred policy acquisition cost asset due to
additional sales of fixed and variable annuity products.
Amortization of value of insurance in force related to operations increased
to $7.3 million in 1996 from $7.1 million in 1995. The increase is attributable
to amortization of the value of insurance in force established as an asset by
the Company on May 31, 1995 in connection with the acquisition of SBM's
insurance subsidiary.
Amortization of acquisition-related deferred charges was $1.5 million and
$9.9 million in 1996 and 1995, respectively. The decrease was primarily
attributable to the accelerated amortization during the third quarter of 1995 of
certain costs and charges deferred during 1993 and 1994. During the third
quarter of 1995, Company management determined that changes in facts and
circumstances had resulted in a change in their original estimate of the periods
benefited by these costs and charges. As a result of this change in estimate,
the remaining unamortized balances of these deferred costs and charges were
fully amortized as of September 30, 1995, resulting in lower amortization in
future periods.
Other expenses, net were $5.4 million in 1996 compared to $0.7 million in
1995. The increase is primarily attributable to an increase in premiums and fees
paid or accrued in 1996, net of a reduction in net benefits paid, under
reinsurance agreements. Through the reinsurance agreements, one of which
commenced December 31, 1995, substantially all mortality risks associated with
single premium endowment deposits have been reinsured.
The Company recorded a $5.0 million non-recurring charge in 1996 including
$3.2 million related to the move of operations facilities from Columbus, Ohio to
Louisville, Kentucky and costs of $1.8 million primarily related to mergers and
acquisitions activities that did not result in a transaction.
Realized investment gains, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $0.9
million in 1996 compared to $4.0 million in 1995. Realized investment gains
in 1996 include an estimated loss of $15.2 million related to the write-down to
fair value of an investment in a fixed income security and a gain of $4.5
million, before selling expenses, related to the transfer of the State Bond
Mutual Funds management
44
<PAGE>
contracts. Other 1996 and all 1995 realized investment gains and losses were
interest-rate related and attributable to the ongoing management of the
Company's fixed maturity securities classified as available-for-sale which
can result in period-to-period swings in realized investment gains and losses
since securities are sold during both rising and falling interest rate
environments.
Income tax expense was $5.2 million and $7.0 million in 1996 and 1995,
respectively, reflecting effective tax rates of 18.1% and 37.1%. The lower
effective tax rate in 1996 resulted primarily from the recognition of benefits
associated with certain deferred tax assets established in connection with the
Company's acquisition of the Integrity Companies on November 26, 1993 for which
a full valuation allowance was originally provided. These deferred tax benefits
are being recognized based on the taxable income generated by the Integrity
Companies in the post-acquisition period and projections of future taxable
income.
ACQUISITION ACTIVITY
ARM CAPITAL ADVISORS
Through its acquisition of the U.S. fixed income unit of KBIMA in January
1995, the Company obtained a recognized fixed income management service which
became part of the then newly-formed ARM Capital Advisors. In addition to
providing asset management services to institutional clients, ARM Capital
Advisors managed the investment portfolios of the Company's subsidiaries.
Although third-party assets managed by ARM Capital Advisors grew since the
acquisition, 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. Accordingly, on November 7, 1997, the Company
transferred substantially all of the assets and operations of ARM Capital
Advisors to New ARMCA and sold an 80% interest in New ARMCA.
SBM COMPANY
Effective May 31, 1995, the Company completed the acquisition of
substantially all of the assets and business operations of SBM, including all of
the issued and outstanding capital stock of SBM's subsidiaries, SBM Life and ARM
Securities (formerly known as SBM Financial Services, Inc.), as well as the
management contracts for the State Bond Mutual Funds. The aggregate purchase
price for the SBM acquisition was $38.8 million. The Company financed the
acquisition by issuing approximately 6.9 million shares of common stock,
primarily to the Morgan Stanley Stockholders, for an aggregate sale price of
$63.5 million. The Company used proceeds from the issuance of the new common
equity in excess of the adjusted purchase price for the acquisition to make a
$19.9 million capital contribution to SBM Life and acquire SBM Certificate
Company from SBM Life for $3.3 million. The capital contribution to SBM Life of
$19.9 million was used to strengthen SBM Life's financial position and allowed
for a significant investment portfolio restructuring immediately following the
acquisition with no net adverse effect on statutory adjusted capital and
surplus. On December 31, 1995, SBM Life was merged with and into Integrity to
create certain operating efficiencies. The SBM acquisition provided the Company
with expanded distribution channels, as well as a deposit base in the 403(b)
tax-deferred annuity marketplace. On December 13, 1996, the Company transferred
its responsibility for performing management and investment advisory services
45
<PAGE>
for the State Bond Mutual Funds to Federated Investors for $4.5 million. The
State Bond Mutual Funds had aggregate assets of $236.9 million on December 13,
1996.
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 December 31, 1997 totaled $4.0
billion, compared with $3.0 billion at December 31, 1996, both representing
approximately 91% of total cash and investments. This increase in investments in
fixed maturities primarily resulted from the investment of the proceeds from
sales of institutional spread products.
The Company's cash and investments as of December 31, 1997 are detailed as
follows:
<TABLE>
<CAPTION>
Amortized Cost
--------------------------
Estimated
Percent Fair
(DOLLARS IN MILLIONS) Amount of Total Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Corporate securities $ 1,390.3 31.5% $ 1,410.0
U.S. Treasury securities and obligations of U.S. government agencies 318.6 7.2 319.7
Other government securities 84.3 1.9 83.8
Asset-backed securities 400.3 9.1 400.4
Mortgage-backed securities:
Agency pass-throughs 268.9 6.1 271.1
Collateralized mortgage obligations:
Agency 423.3 9.6 432.0
Non-agency 1,135.8 25.7 1,151.4
-------------------------------------------
Total fixed maturities 4,021.5 91.1 4,068.4
Equity securities (i.e., non-redeemable preferred stock) 28.2 0.6 28.3
Mortgage loans on real estate 16.4 0.4 16.4
Policy loans 126.1 2.8 126.1
Cash and cash equivalents 228.2 5.1 228.2
-------------------------------------------
Total cash and investments $ 4,420.4 100.0% $ 4,467.4
-------------------------------------------
-------------------------------------------
</TABLE>
Agency pass-through certificates are mortgage-backed securities ("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. Collateralized mortgage obligations
("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-
46
<PAGE>
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 December 31, 1997, 90.2% 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 9.8% of the
non-agency CMOs used commercial mortgage loans as collateral.
The Company manages prepayment exposure on CMO holdings by diversifying
not only within the more stable CMO tranches, but across alternative collateral
classes such as commercial mortgages and Federal Housing Administration project
loans, which are generally less volatile than agency-backed, residential
mortgages. Additionally, prepayment sensitivity is evaluated and monitored,
giving full consideration to the collateral characteristics such as weighted
average coupon rate, weighted average maturity and the prepayment history of the
specific collateral. MBSs are subject to risks associated with prepayments of
the underlying collateral pools. Prepayments cause these securities to have
actual maturities different from those projected at the time of purchase.
Securities that have an amortized cost that is greater than par (i.e., purchased
at a premium) that are backed by mortgages that prepay faster than expected will
incur a reduction in yield or a loss, versus an increase in yield or a gain if
the mortgages prepay slower than expected. Those securities that have an
amortized cost that is less than par (i.e., purchased at a discount) that are
backed by mortgages that prepay faster than expected will generate an increase
in yield or a gain, versus a decrease in yield or a loss if the mortgages prepay
slower than expected. The reduction or increase in yields may be partially
offset as funds from prepayments are reinvested at current interest rates. The
degree to which a security is susceptible to either gains or losses is
influenced by the difference between its amortized cost and par, the relative
sensitivity of the underlying mortgages backing the assets to prepayments in a
changing interest rate environment and the repayment priority of the securities
in the overall securitization structure. The Company has gross unamortized
premiums and unaccreted discounts of MBSs of $44.5 million and $82.7 million,
respectively, at December 31, 1997. Although the interest rate environment has
experienced significant volatility during 1997, 1996 and 1995, prepayments and
extensions of cash flows from MBSs have not materially affected investment
income of the Company.
Asset-backed securities ("ABS") 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 December 31, 1997
home equity loan collateral represented 53.8% 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 were 95% and 96% investment grade or equivalent
as of December 31, 1997 and 1996, respectively. Investment grade securities are
those classified as 1 or 2 by the NAIC or, where such classifications are not
available, having a rating on the scale used by 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
47
<PAGE>
Company's investment portfolio has minimal exposure to real estate, mortgage
loans and common equity securities, which represent less than 1% of cash and
investments as of December 31, 1997.
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 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 December 31, 1997 the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio, and the percentage of total
fixed maturity investments classified in each category were as follows:
<TABLE>
<CAPTION>
Amortized Cost
---------------------------
Percent Estimated
NAIC Designation (Comparable S&P Rating) Amount of Total Fair Value
- --------------------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
1 (AAA, AA, A) $ 2,758.0 69% $ 2,793.6
2 (BBB) 1,023.8 25 1,041.6
3 (BB) 137.9 3 139.0
4 (B) 101.8 3 94.2
5 (CCC, CC, C) -- -- --
6 (CI, D) -- -- --
--------------------------------------------
Total fixed maturities $ 4,021.5 100% $ 4,068.4
--------------------------------------------
--------------------------------------------
</TABLE>
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
classifies its entire fixed maturities portfolio as available-for-sale. Fixed
maturities classified as available-for-sale are carried at fair value and
changes in fair value, net of related value of insurance in force and deferred
policy acquisition cost amortization and deferred income taxes, are charged or
credited directly to shareholders' equity.
The fluctuations in interest rates during 1997 resulted in unrealized gains
on available-for-sale securities which totaled $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, compared to unrealized gains of $3.7 million (net of $1.3 million of
related
48
<PAGE>
amortization of deferred policy acquisition costs and value of insurance in
force and $2.0 million of deferred income taxes) at December 31, 1996. This
change in net unrealized gains on available-for-sale securities for the year
ended December 31, 1997 increased reported shareholders' equity by $16.6 million
as compared to a decrease of $24.9 million for the year ended December 31, 1996.
This volatility in reported shareholders' equity occurs as a result of SFAS
No. 115, which requires that available-for-sale securities be carried at fair
value while other assets and all liabilities are carried at historical values.
At December 31, 1997 and 1996, shareholders' equity excluding the effects of
SFAS No. 115 was $287.2 million and $178.3 million, respectively.
The Company manages assets and liabilities in a closely integrated manner,
with the aim of reducing the volatility of investment spreads during a changing
interest rate environment. As a result, adjusting shareholders' equity for
changes in the fair value of the Company's fixed maturities and equity
securities without reflecting offsetting changes in the value of the Company's
liabilities or other assets creates volatility in reported shareholders' equity
but does not reflect the underlying economics of the Company's business. The
Company's accompanying consolidated financial statements include fair value
balance sheets which demonstrate that the general rise in interest rates during
1996 and subsequent decrease during 1997 did not have a material effect on the
financial position of the Company when all assets and liabilities are adjusted
to estimated fair values.
Assets held in the Company's guaranteed separate accounts include $1,255.5
million and $258.7 million of cash and investments at December 31, 1997 and
1996, of which approximately 87% and 89% were fixed maturities, respectively.
Total guaranteed separate account cash and investments were 99% and 98%
investment grade at December 31, 1997 and 1996, 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 the 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 agreement, dividend payments
on its 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 and management and service fee income
from the Company's subsidiaries to meet ongoing cash needs, including amounts
required to pay dividends on its common and preferred stock.
The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates for the payment of service or other fees
is limited by state insurance laws. During 1997, the Company received dividends
of $14.9 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 of which $6.0 million was paid in the first
quarter of 1998. The Company had cash and investments at the holding company
level of $41.9 million at
49
<PAGE>
December 31, 1997. In addition, the Company has access to bank lines of credit
totaling $37.0 million at December 31, 1997.
In June 1997, the Company completed an initial public offering of 9.2
million shares of Class A Common Stock of which 5.75 million shares were sold by
the Company for net proceeds of $78.8 million. The remaining 3.45 million shares
were sold by Morgan Stanley Stockholders. On June 30, 1997, the Company used a
portion of such net proceeds to make a $40 million capital contribution to its
primary insurance subsidiary, Integrity, thereby strengthening Integrity's
capital base to provide for future growth. The Company plans to also use the net
proceeds to enhance the Company's retail market presence, to consolidate
operating locations and for other corporate purposes, which may include
acquisitions.
INSURANCE SUBSIDIARIES OPERATIONS
The primary sources of liquidity of the Company's insurance subsidiaries
are investment income and proceeds from maturities and redemptions of
investments. The principal uses of such funds are benefits, withdrawals and
loans associated with customer deposits, commissions, operating expenses, and
the purchase of new investments.
The Company develops cash flow projections under a variety of interest rate
scenarios generated by the Company. The Company attempts to structure asset
portfolios so that the interest and principal payments, along with other fee
income, are more than sufficient to cover the cash outflows for benefits,
withdrawals and expenses under the expected scenarios developed by the Company.
In addition, the Company maintains other liquid assets and aims to meet
unexpected cash requirements without exposure to material realized losses
during a higher interest rate environment. These other liquid assets include
cash and cash equivalents and high-grade floating-rate securities held by both
the Company and its insurance subsidiaries.
During the years ended December 31, 1997, 1996 and 1995, the Company met
its liquidity needs entirely by cash flows from operating activities and
principal payments and redemptions of investments. At December 31, 1997, cash
and cash equivalents totaled $228.2 million compared to $110.1 million at
December 31, 1996. The Company's aim is to manage its cash and cash equivalents
position in order to satisfy short-term liquidity needs. In connection with this
management of cash and cash equivalents, the Company may invest idle cash in
short-duration fixed maturities to capture additional yield when short-term
liquidity requirements permit.
The Company generated cash flows of $216.1 million, $192.9 million and
$138.4 million from operating activities during the years ended December 31,
1997, 1996 and 1995, respectively. These cash flows resulted principally from
investment income, less commissions and operating expenses. Proceeds from sales,
maturities and redemptions of investments generated $3,884.2 million, $2,214.3
million and $1,463.3 million in cash flows during 1997, 1996 and 1995,
respectively, which were offset by purchases of investments of $4,782.6 million,
$2,772.0 million and $1,506.5 million, respectively. An increase in investment
purchases and sales activity during 1997 compared to 1996 reflects the Company's
ongoing management of its fixed maturity portfolio which has increased in size
due to sales of retail and institutional spread products.
50
<PAGE>
INCOME TAXES
At December 31, 1997, the Company reported an asset for deferred income
taxes of $31.0 million on the carrying amount balance sheet. Such amount is
net of a valuation allowance of $36.6 million. The net deferred tax asset
represents deductible temporary differences and net operating loss
carryforwards. Based on historical operating results and projections of
future taxable ordinary income, management believes that the net tax benefit
recorded will be fully utilized.
DERIVATIVES
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
specific interest rate risks and, with respect to the Company's equity-indexed
annuity deposits, equity market risks.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
The Company believes that inflation will not have a material adverse effect
on results of operations. The Company manages its investment portfolios in part
to reduce its exposure to interest rate fluctuations. In general, the fair value
of the Company's fixed maturities portfolio increases or decreases inversely
with fluctuations in interest rates, and the Company's investment income
increases or decreases directly with interest rate changes. For example, if
interest rates decline, the Company's fixed maturity investments generally will
increase in fair value, while investment income will decrease as fixed income
investments are sold or mature and proceeds are reinvested at declining rates.
The converse will generally be true if interest rates rise.
YEAR 2000
The Company is currently evaluating, on an ongoing basis, its computer
systems and the systems of other companies on which the Company's operations
rely to determine if they will function properly with respect to dates in the
year 2000 and beyond. These activities are designed to ensure that there is no
adverse effect on the Company's core business operations. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's operations rely will be converted on a timely basis and will not have
a material effect on the Company. The cost of the Company's Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial condition.
51
<PAGE>
FORWARD-LOOKING STATEMENTS
Except for historical information contained in the Annual Report on Form
10-K, certain matters discussed herein, including (without limitation) in
particular under Part I, Item 1, "Business - General" and "Business -
Strategy" and under Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements
that involve risks and uncertainties, including (without limitation) the
Company's belief as to its competitive position in the industry and 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, the
stimulation of future demand for the long-term savings and retirement
products and the statements regarding the development of future products to
meet the changing needs of the markets that the Company serves. Factors that
could cause actual results to differ materially from the forward-looking
statements related to the demand for variable, indexed and fixed annuity
products include, but are not limited to, a change in population
demographics, development of alternative investment products, a change in
economic conditions, and changes in current federal income tax laws. In
addition, there can be no assurance that (i) the Company has correctly
identified and assessed all of the factors affecting its business; (ii) the
publicly available and other information on which the Company has based its
analyses is complete or correct; (iii) the Company's analyses are correct; or
(iv) the Company's strategy, which is based in part on these analyses, will
be successful.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements begin on page F-3.
Reference is made to the Index to Financial Statements on page F-1 herein.
Additional financial statement schedules are included on pages S-3 through
S-10. Reference is made to the Index to Financial Statement Schedules on page
S-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants.
PART III
The Proxy Statement for the Annual Meeting of Stockholders (excluding
the Report on Executive Compensation and the Performance Graph sections),
which, when filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, is incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K, provides the information
required under Part III (Item 10 - Directors and Executive Officers of the
Company, Item 11 - Executive Compensation, Item 12 - Security Ownership of
Certain Beneficial Owners and Management, and Item 13 - Certain Relationships
and Related Transactions), except for the information regarding the executive
officers of the Company, which is included in Part I on pages 28-30.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules
Reference is made to the indexes set forth on pages F-1 and S-1 of this
report.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of 1997.
52
<PAGE>
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated as of January 5, 1995, among
Kleinwort Benson Investment Management Holdings Ltd., Kleinwort
Benson Investment Management Americas Inc., ARM Financial
Group, Inc., and ARM Capital Advisors, Inc. (Incorporated by
reference to the Form 10-K filed by the Company on March 30,
1995.)
2.2 Stock and Asset Purchase Agreement by and between SBM Company
and ARM Financial Group, Inc. dated as of February 16, 1995.
(Incorporated by reference to the Form 10-K filed by the
Company on March 30, 1995.)
2.3 Amended and Restated Stock and Asset Purchase Agreement dated
as of April 7, 1995, by and between SBM Company and ARM
Financial Group, Inc. (Incorporated by reference to the Form
10-Q filed by the Company on May 15, 1995.)
2.4 Subscription Agreement dated as of June 12, 1995, among ARM
Financial Group, Inc. and Morgan Stanley Capital Partners III,
L.P., Morgan Stanley Capital Investors, L.P. and MSCP III 892
Investors, L.P. (Incorporated by reference to the Form 10-K
filed by the Company on March 29, 1996.)
2.5 Subscription Agreement dated as of June 12, 1995, among ARM
Financial Group, Inc. and New ARM, LLC, Dudley J. Godfrey, Jr.,
and Edward Powers. (Incorporated by reference to the Form 10-K
filed by the Company on March 29, 1996.)
2.6 Subscription Agreement dated as of July 1, 1996, between ARM
Financial Group, Inc. and Warren M. Foss. (Incorporated by
reference to the Form S-1 Registration Statement filed by the
Company on October 23, 1996.)
3(i).1 Restated Certificate of Incorporation of ARM Financial Group,
Inc. filed with the Delaware Secretary of State on June 20,
1997. (Filed herewith.)
3(ii).1 Amended and Restated By-laws of ARM Financial Group, Inc.
(Filed herewith.)
4.1 Second Amended and Restated Stockholders Agreement dated as of
June 24, 1997, among ARM Financial Group, Inc., The Morgan
Stanley Leveraged Equity Fund II, L.P., John Franco, Martin H.
Ruby, Oldarm L.P., Morgan Stanley Capital Partners III, L.P.,
Morgan Stanley Capital Investors, L.P., MSCP III 892 Investors,
L.P., and New ARM, LLC. (Incorporated by reference to Amendment
No. 3 to the Form S-1 Registration Statement filed by the
Company on May 23, 1997.)
10.1 ARM Financial Group, Inc. Amended and Restated Stock Option
Plan dated as of June 14, 1995. (Incorporated by reference to
the Form 10-K filed by the Company on March 29, 1996.)
10.2 Amendment No. 2 to ARM Financial Group, Inc. Amended and
Restated Stock Option Plan. (Incorporated by reference to
Amendment No. 3 to the Form S-1 Registration Statement filed by
the Company on May 23, 1997.)
53
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
10.3 1997 Equity Incentive Plan. (Incorporated by reference to
Amendment No. 3 to the Form S-1 Registration Statement filed by
the Company on May 23, 1997.)
10.4 Guaranty dated as of December 13, 1995, made by ARM Financial
Group, Inc. in favor of First Bank, FSB, in connection with the
sale of certain SBM Certificate Company mortgage loans.
(Incorporated by reference to the Form 10-K filed by the
Company on March 29, 1996.)
10.5 Guaranty dated as of December 13, 1995, made by ARM Financial
Group, Inc. in favor of First Bank, FSB, in connection with the
sale of certain State Bond and Mortgage Life Insurance Company
mortgage loans. (Incorporated by reference to the Form 10-K
filed by the Company on March 29, 1996.)
10.6 Credit Agreement dated June 24, 1997 (the "Credit Agreement"),
among ARM Financial Group, Inc., the financial institutions
listed in Schedule 2.01 of the Credit Agreement (the
"Lenders"), and The Chase Manhattan Bank, as administrative
agent for the Lenders ("Chase"). (Incorporated by reference to
the Form 10-Q filed by the Company on August 14, 1997.)
10.7 Assignment Agreement dated as of June 24, 1997, between ARM
Financial Group, Inc., Integrity Holdings, Inc. ("Integrity
Holdings") and Chase. (Incorporated by reference to the Form
10-Q filed by the Company on August 14, 1997.)
10.8 Guarantee Agreement dated as of June 24, 1997, between
Integrity Holdings and Chase. (Incorporated by reference to the
Form 10-Q filed by the Company on August 14, 1997.)
10.9 Pledge Agreement dated as of June 24, 1997, among ARM Financial
Group, Inc., Integrity Holdings and Chase. (Incorporated by
reference to the Form 10-Q filed by the Company on August 14,
1997.)
10.10 Amendment Agreement dated as of December 15, 1997, to the
Credit Agreement between ARM Financial Group, Inc., the Lenders
and Chase. (Filed herewith.)
10.11 Administrative Services Agreement dated as of September 28,
1994, between ARM Financial Group, Inc. and National Integrity
Life Insurance Company. (Incorporated by reference to Amendment
No. 2 to the Form S-1 Registration Statement filed by the
Company on May 7, 1997.)
10.12 Administrative Services Agreement dated as of January 1, 1995,
between ARM Financial Group, Inc. and Integrity Life Insurance
Company. (Incorporated by reference to the Form 10-K filed by
the Company on March 29, 1996.)
10.13 Administrative Services Agreement dated as of June 14, 1995,
between ARM Financial Group, Inc. and SBM Certificate Company.
(Incorporated by reference to the Form 10-K filed by the
Company on March 29, 1996.)
10.14 Administrative Services Agreement dated as of June 14, 1995,
between ARM Financial Group, Inc. and ARM Financial Services,
Inc. (Incorporated by reference to the Form 10-K filed by the
Company on March 29, 1996.)
54
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
10.15 Administrative Services Agreement dated as of November 7, 1997,
between ARM Financial Group, Inc. and ARM Capital Advisors,
LLC. (Filed herewith.)
10.16 Investment Advisory Agreement dated as of July 29, 1994,
between ARM Financial Group, Inc. and National Integrity Life
Insurance Company. (Incorporated by reference to Amendment No.
2 to the Form S-1 Registration Statement filed by the Company
on May 7, 1997.)
10.17 Investment Services Agreement dated as of January 1, 1995,
between ARM Financial Group, Inc. and Integrity Life Insurance
Company. (Incorporated by reference to the Form 10-K filed by
the Company on March 29, 1996.)
10.18 Investment Services Agreement dated as of June 14, 1995,
between ARM Financial Group, Inc. and SBM Certificate Company.
(Incorporated by reference to the Form 10-K filed by the
Company on March 29, 1996.)
10.19 Investment Services Agreement dated as of November 7, 1997,
between ARM Financial Group, Inc. and ARM Capital Advisors,
LLC. (Filed herewith.)
10.20 Tax Allocation Agreement dated as of March 21, 1996 by and
among ARM Financial Group, Inc. and certain of its subsidiaries
for taxable periods beginning January 1, 1995. (Incorporated by
reference to the Form 10-K filed by the Company on March 29,
1996.)
10.21 Employment Agreement dated as of July 1, 1996, between ARM
Financial Group, Inc. and John Franco. (Incorporated by
reference to the Form S-1 Registration Statement filed by the
Company on October 23, 1996.)
10.22 Employment Agreement dated as of July 1, 1996, between ARM
Financial Group, Inc. and Martin H. Ruby. (Incorporated by
reference to the Form S-1 Registration Statement filed by the
Company on October 23, 1996.)
10.23 Employment Agreement dated as of July 1, 1996, between ARM
Financial Group, Inc. and David E. Ferguson. (Incorporated by
reference to the Form S-1 Registration Statement filed by the
Company on October 23, 1996.)
10.24 Employment Agreement dated as of July 1, 1996, between ARM
Financial Group, Inc. and John R. Lindholm. (Incorporated by
reference to the Form S-1 Registration Statement filed by the
Company on October 23, 1996.)
10.25 Letter Amendment dated as of December 4, 1997, to the
Employment Agreement between ARM Financial Group, Inc. and John
Franco. (Filed herewith.)
10.26 Letter Amendment dated as of December 4, 1997, to the
Employment Agreement between ARM Financial Group, Inc. and
Martin H. Ruby. (Filed herewith.)
55
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
10.27 Letter Amendment dated as of March 20, 1998, to the Employment
Agreement, as amended, between ARM Financial Group, Inc. and
Martin H. Ruby. (Filed herewith.)
10.28 Letter Amendment dated as of December 4, 1997, to the
Employment Agreement between ARM Financial Group, Inc. and John
R. Lindholm. (Filed herewith.)
10.29 Letter Amendment dated as of March 20, 1998, to the Employment
Agreement, as amended, between ARM Financial Group, Inc. and
John R. Lindholm. (Filed herewith.)
10.30 Letter Amendment dated as of December 4, 1997, to the
Employment Agreement between ARM Financial Group, Inc. and
David E. Ferguson. (Filed herewith.)
10.31 Letter Amendment dated as of March 20, 1998, to the Employment
Agreement, as amended, between ARM Financial Group, Inc. and
David E. Ferguson. (Filed herewith.)
10.32 Agreement dated as of February 10, 1998, between ARM Financial
Group, Inc. and John Franco. (Filed herewith.)
10.33 Termination Agreement dated as of May 21, 1997, between ARM
Capital Advisors Holding, LLC and ARM Financial Group, Inc.
(Filed herewith.)
10.34 Termination Agreement dated as of November 7, 1997, to the
Employment Agreement between Emad A. Zikry and ARM Financial
Group, Inc. (Filed herewith.)
10.35 Change in Control Agreement dated as of December 4, 1997,
between ARM Financial Group, Inc. and Dennis L. Carr. (Filed
herewith.)
10.36 Letter Amendment dated as of March 20, 1998, to the Change in
Control Agreement between ARM Financial Group, Inc. and Dennis
L. Carr. (Filed herewith.)
10.37 Change in Control Agreement dated as of December 4, 1997,
between ARM Financial Group, Inc. and Edward L. Zeman. (Filed
herewith.)
10.38 Letter Amendment dated as of March 20, 1998, to the Change in
Control Agreement between ARM Financial Group, Inc. and Edward
L. Zeman. (Filed herewith.)
10.39 Change in Control Agreement dated as of December 4, 1997,
between ARM Financial Group, Inc. and Daniel R. Gattis. (Filed
herewith.)
10.40 Change in Control Agreement dated as of December 4, 1997,
between ARM Financial Group, Inc. and Robert H. Scott. (Filed
herewith.)
56
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
10.41 Letter Amendment dated as of March 20, 1998, to the Change in
Control Agreement between ARM Financial Group, Inc. and Robert
H. Scott. (Filed herewith.)
10.42 Change in Control Agreement dated as of December 4, 1997,
between ARM Financial Group, Inc. and John R. McGeeney. (Filed
herewith.)
10.43 Letter Amendment dated as of March 20, 1998, to the Change in
Control Agreement between ARM Financial Group, Inc. and John R.
McGeeney. (Filed herewith.)
10.44 Change in Control Agreement dated as of December 4, 1997,
between ARM Financial Group, Inc. and Patricia L. Winter.
(Filed herewith.)
10.45 Letter Amendment dated as of March 20, 1998, to the Change in
Control Agreement between ARM Financial Group, Inc. and
Patricia L. Winter. (Filed herewith.)
10.46 Assignment and Assumption of Lease dated January 5, 1995,
between Kleinwort Benson International Investments, Ltd. and
A R M Capital Advisors, Inc. (Obligations of ARM Capital
Advisors, Inc. have been fully guaranteed by ARM Financial
Group, Inc.) (Incorporated by reference to the Form 10-K filed
by the Company on March 30, 1995.)
10.47 Consent to Assignment of Lease dated October 9, 1997, between
ARM Financial Group, Inc., ARM Capital Advisors, Inc. and
Metropolitan Life Insurance Company. (Filed herewith.)
10.48 Lease made as of June 14, 1996, by and between Northwestern
National Life Insurance Company and ARM Financial Group, Inc.
(Incorporated by reference to the Form 10-K filed by the
Company on March 29, 1996.)
10.49 Assignment and Assumption Agreement dated as of June 28, 1996,
between Northwestern National Life Insurance Company and ARM
Financial Group, Inc. (Incorporated by reference to the Form S-
1 Registration Statement filed by the Company on October 23,
1996.)
10.50 First Amendment to Lease made as of March 1, 1997, by and
between Reliastar Life Insurance Company and ARM Financial
Group, Inc. (Incorporated by reference to Amendment No. 4 to
the Form S-1 Registration Statement filed by the Company on
June 10, 1997.)
10.51(*) Engagement Agreement, dated March 12, 1993, between Analytical
Risk Management, LTD and General American Life Insurance
Company--Group Pension. (Incorporated by reference to Amendment
No. 2 to the Form S-1 Registration Statement filed by the
Company on May 7, 1997.)
10.52 Consent to Assignment of Engagement Agreement, dated September
8, 1993, between General American Life Insurance Company--Group
Pension. (Incorporated by reference to Amendment No. 2 to the
Form S-1 Registration Statement filed by the Company on May 7,
1997.)
57
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
10.53 Amendment No. 1 to Engagement Agreement, dated as of August 14,
1995, between General American Life Insurance Company and ARM
Financial Group, Inc. (Incorporated by reference to Amendment
No. 2 to the Form S-1 Registration Statement filed by the
Company on May 7, 1997.)
10.54 Amendment No. 2 to Engagement Agreement, dated September 1,
1995, between General American Life Insurance Company and ARM
Financial Group, Inc. (Incorporated by reference to Amendment
No. 2 to the Form S-1 Registration Statement filed by the
Company on May 7, 1997.)
10.55(*) Reinsurance Agreement between General American Life Insurance
Company and Integrity Life Insurance Company. (Incorporated by
reference to Amendment No. 3 to the Form S-1 Registration
Statement filed by the Company on May 23, 1997.)
10.56 Amendment No. 1 to Trust Agreement effective as of April 1,
1996, among, Integrity Life Insurance Company, General American
Life Insurance Company and Fleet National Bank. (Incorporated
by reference to the Form 10-Q filed by the Company on August
14, 1997.)
21.1 Subsidiaries of the Company. (Filed herewith.)
23.1 Consent of Ernst & Young LLP. (Filed herewith.)
27 Financial Data Schedule. (Filed herewith.)
(*) Portions of the exhibit have been omitted pursuant to the SEC granting
confidential treatment under Rule 406. The omitted material has been filed
separately with the SEC.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 1998.
ARM FINANCIAL GROUP, INC.
By: /s/ MARTIN H. RUBY
----------------------------
Martin H. Ruby
Chief Executive Officer
59
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities indicated on the 27th day of March, 1998.
Name Title
- ------------------------------------- -------------------------------------
/s/ MARTIN H. RUBY Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Martin H. Ruby
/s/ EDWARD L. ZEMAN Executive Vice President - Chief
- ------------------------------------- Financial Officer (Principal
Edward L. Zeman Financial Officer)
/s/ BARRY G. WARD Controller (Principal Accounting
- ------------------------------------- Officer)
Barry G. Ward
/s/ DUDLEY J. GODFREY, JR. Director
- -------------------------------------
Dudley J. Godfrey, Jr.
/s/ ALAN E. GOLDBERG Director
- -------------------------------------
Alan E. Goldberg
/s/ ROBERT H. NIEHAUS Director
- -------------------------------------
Robert H. Niehaus
/s/ EDWARD D. POWERS Director
- -------------------------------------
Edward D. Powers
/s/ COLIN F. RAYMOND Director
- -------------------------------------
Colin F. Raymond
/s/ IRWIN T. VANDERHOOF Director
- -------------------------------------
Irwin T. Vanderhoof
60
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 . . . . . . . . .F-3
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . .F-5
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . .F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . .F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . .F-8
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
ARM Financial Group, Inc.
We have audited the accompanying consolidated carrying amount balance sheets of
ARM Financial Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Company's management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
We have also audited in accordance with generally accepted auditing standards
the consolidated supplemental fair value balance sheets of ARM Financial Group,
Inc. and subsidiaries as of December 31, 1997 and 1996. As described in Note 4,
the consolidated supplemental fair value balance sheets have been prepared by
management to present relevant financial information that is not provided by the
carrying amount balance sheets and is not intended to be a presentation in
conformity with generally accepted accounting principles. In addition, the
consolidated supplemental fair value balance sheets do not purport to present
the net realizable, liquidation or market value of ARM Financial Group, Inc. as
a whole. Furthermore, amounts ultimately realized by ARM Financial Group, Inc.
from the disposal of assets may vary significantly from the fair values
presented. In our opinion, the consolidated supplemental fair value balance
sheets referred to above present fairly, in all material respects, the
information set forth therein as described in Note 4.
In our opinion, the financial statements referred to in paragraph one above
present fairly, in all material respects, the consolidated financial position of
ARM Financial Group, Inc. and subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 10, 1998
F-2
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Carrying Amount Fair Value
----------------------------- -----------------------------
December 31, December 31,
(IN THOUSANDS) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and investments:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 1997-$4,021,495; 1996-$3,048,834) $ 4,068,386 $ 3,054,513 $ 4,068,386 $ 3,054,513
Equity securities, at fair value (cost:
1997-$28,177; 1996-$21,268) 28,342 22,552 28,342 22,552
Mortgage loans on real estate 16,429 36,879 16,429 36,879
Policy loans 126,114 123,466 126,114 123,466
Cash and cash equivalents 228,206 110,067 228,206 110,067
----------------------------- -----------------------------
Total cash and investments 4,467,477 3,347,477 4,467,477 3,347,477
Assets held in separate accounts:
Guaranteed 1,266,796 261,823 1,266,796 261,823
Nonguaranteed 1,173,088 873,225 1,173,088 873,225
Accrued investment income 44,546 36,233 44,546 36,233
Value of insurance in force 25,975 52,024 -- --
Deferred policy acquisition costs 87,170 59,001 -- --
Goodwill 6,523 7,636 6,523 7,636
Deferred federal income taxes 31,049 35,604 51,887 42,653
Other assets 35,800 28,641 35,800 28,641
----------------------------- -----------------------------
Total assets $ 7,138,424 $ 4,701,664 $ 7,046,117 $ 4,597,688
----------------------------- -----------------------------
----------------------------- -----------------------------
</TABLE>
F-3
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
Carrying Amount Fair Value
----------------------------- -----------------------------
December 31, December 31,
(IN THOUSANDS) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $ 4,242,578 $ 3,294,174 $ 4,218,297 $ 3,199,638
Customer deposits in separate accounts:
Guaranteed 1,254,801 261,823 1,224,551 249,132
Nonguaranteed 1,160,595 868,336 1,109,277 829,253
Long-term debt 38,000 40,000 38,000 40,000
Accounts payable and accrued expenses 18,741 22,684 18,741 22,684
Payable for investment securities purchased 69,286 10,431 69,286 10,431
Payable to reinsurer 8,800 10,000 8,800 10,000
Other liabilities 38,078 12,274 38,078 12,274
----------------------------- -----------------------------
Total liabilities 6,830,879 4,519,722 6,725,030 4,373,412
<CAPTION>
Contingencies
Shareholders' equity:
<S> <C> <C> <C> <C>
Preferred stock, $.01 par value, $25.00 stated value; 2,300,000
shares authorized; 2,000,000 shares issued and outstanding 50,000 50,000
Class A Common Stock, $.01 par value; 150,000,000 and 19,259,680
shares authorized, respectively; 21,316,068 and 16,799,976
shares issued and outstanding, respectively 213 *
Class B Common Stock, $.01 par value; 50,000,000 and 762,480
shares authorized, respectively; 1,947,646 and 706,000
shares issued and outstanding, respectively 19 *
Additional paid-in capital 211,430 124,609
Net unrealized gains on available-for-sale securities 20,300 3,669
Retained earnings 25,583 3,664
-----------------------------
Total shareholders' equity 307,545 181,942 321,087 224,276
----------------------------- -----------------------------
Total liabilities and shareholders' equity $ 7,138,424 $ 4,701,664 $ 7,046,117 $ 4,597,688
----------------------------- -----------------------------
----------------------------- -----------------------------
</TABLE>
* LESS THAN $1,000.
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income $ 329,979 $ 250,031 $ 196,024
Interest credited on customer deposits (247,418) (182,161) (146,867)
-------------------------------------------
Net investment spread 82,561 67,870 49,157
Fee income:
Variable annuity fees 14,630 10,786 7,238
Asset management fees 8,595 5,780 3,161
Other fee income 1,386 1,267 949
-------------------------------------------
Total fee income 24,611 17,833 11,348
Other income and expenses:
Surrender charges 4,482 5,024 3,339
Operating expenses (32,528) (31,055) (22,957)
Commissions, net of deferrals (2,218) (2,372) (1,557)
Interest expense on debt (2,517) (3,146) (3,461)
Amortization:
Deferred policy acquisition costs (10,416) (6,835) (2,932)
Value of insurance in force (9,293) (7,320) (7,104)
Acquisition-related deferred charges (503) (1,503) (9,920)
Goodwill (424) (488) (358)
Non-recurring charges:
Stock-based compensation (8,145) -- --
Other (6,678) (5,004) --
Other, net (386) (5,366) (687)
-------------------------------------------
Total other income and expenses (68,626) (58,065) (45,637)
Realized investment gains 3,192 907 4,048
-------------------------------------------
Income before income taxes 41,738 28,545 18,916
Income tax expense (14,139) (5,167) (7,026)
-------------------------------------------
Net income 27,599 23,378 11,890
Dividends on preferred stock (4,750) (4,750) (4,750)
-------------------------------------------
Net income applicable to common shareholders $ 22,849 $ 18,628 $ 7,140
-------------------------------------------
-------------------------------------------
Net income per common share (basic) $ 1.11 $ 1.06 $ 0.49
-------------------------------------------
-------------------------------------------
Net income per common and common equivalent share (diluted) $ 1.07 $ 1.06 $ 0.49
-------------------------------------------
-------------------------------------------
Cash dividends paid per common share $ 0.04 $ -- $ --
-------------------------------------------
-------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Gains
(Losses) on
Class A Class B Additional Available- Total
Preferred Common Common Paid-In for-Sale Retained Shareholders'
(IN THOUSANDS) Stock Stock Stock Capital Securities Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 50,000 $ * $ * $ 62,920 $ (104,949) $ (22,104) $ (14,133)
Issuance of 6,897,620
shares of Class A
common stock * 61,505 61,505
Net income 11,890 11,890
Dividends on preferred stock (4,750) (4,750)
Change in net unrealized
losses on available-
for-sale securities 133,479 133,479
------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 50,000 * * 124,425 28,530 (14,964) 187,991
Issuance of 18,356 shares of
Class A common stock * 184 184
Net income 23,378 23,378
Dividends on preferred stock (4,750) (4,750)
Change in net unrealized
gains on available-for-
sale securities (24,861) (24,861)
------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 50,000 * * 124,609 3,669 3,664 181,942
Recapitalization of Class A
and Class B common
stock 156 19 (175) --
Issuance of 5,750,000 shares
of Class A Common Stock
from initial public
offering 57 78,755 78,812
Issuance of 7,743 shares of
Class A Common Stock
from exercise of stock
options * 96 96
Net income 27,599 27,599
Dividends on preferred stock (4,750) (4,750)
Dividends on common stock (930) (930)
Stock-based compensation
charge 8,145 8,145
Change in net unrealized
gains on available-for-
sale securities 16,631 16,631
------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 50,000 $ 213 $ 19 $ 211,430 $ 20,300 $ 25,583 $ 307,545
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
</TABLE>
* LESS THAN $1,000.
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 27,599 $ 23,378 $ 11,890
Adjustments to reconcile net income to cash flows provided by operating activities:
Interest credited on general account customer deposits 212,964 172,202 136,824
Stock-based compensation charge 8,145 -- --
Realized investment gains (3,192) (907) (4,048)
Amortization of value of insurance in force and deferred policy
acquisition costs 19,709 14,155 10,036
Other amortization 1,426 1,374 12,406
Deferral of policy acquisition and other costs (40,033) (24,202) (24,505)
Deferred tax expense 1,003 2,554 6,385
(Increase) decrease in accrued investment income (8,313) 149 (1,609)
Changes in other assets and liabilities (3,243) 4,171 (9,020)
-------------------------------------------
Cash flows provided by operating activities 216,065 192,874 138,359
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (4,710,312) (2,716,010) (1,498,623)
Maturities and redemptions 445,772 241,391 205,319
Sales 3,355,461 1,922,689 1,197,468
Other investments:
Purchases (72,283) (55,995) (7,891)
Maturities and redemptions 20,806 7,310 24,377
Sales 62,196 42,961 36,119
Policy loans, net (2,648) (5,938) (6,428)
Transfers (to) from the separate accounts:
Purchase of assets held in separate accounts (1,066,348) (302,993) (226,812)
Proceeds from sale of assets held in separate accounts 110,524 83,077 45,249
Cash and cash equivalents acquired in excess of purchase price paid for
substantially all assets of SBM Company -- -- 36,490
-------------------------------------------
Cash flows used in investing activities (1,856,832) (783,508) (194,732)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts received from customers from the sale of general
and separate account products 2,268,496 1,072,323 425,628
Amounts paid to customers for benefits and withdrawals related
to general and separate account products (579,618) (441,944) (406,977)
Net proceeds from issuance of common stock 80,308 184 63,505
Organizational, debt and stock issuance costs (1,400) -- (2,000)
Principal payment on long-term debt (2,000) -- --
Change in payable to reinsurer (1,200) 10,000 --
Dividends on common stock (930) -- --
Dividends on preferred stock (4,750) (4,750) (4,750)
Change in repurchase agreement liability -- (12,008) 12,008
-------------------------------------------
Cash flows provided by financing activities 1,758,906 623,805 87,414
-------------------------------------------
Increase in cash and cash equivalents 118,139 33,171 31,041
Cash and cash equivalents at beginning of year 110,067 76,896 45,855
-------------------------------------------
Cash and cash equivalents at end of year $ 228,206 $ 110,067 $ 76,896
-------------------------------------------
-------------------------------------------
Supplemental cash flow information:
Interest paid on debt $ 1,837 $ 2,613 $ 2,736
-------------------------------------------
-------------------------------------------
Income taxes paid $ 2,943 $ 7,230 $ --
-------------------------------------------
-------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ARM Financial Group, Inc. (the "Company") specializes in the growing asset
accumulation business with particular emphasis on retirement savings and
investment products. The Company's retail products include a variety of fixed,
indexed and variable annuities and face-amount certificates sold through a broad
spectrum of distribution channels including independent broker-dealers,
independent agents, stockbrokers, and financial institutions. The Company offers
institutional products, such as funding agreements and guaranteed investment
contracts ("GICs") directly to bank trust departments, plan sponsors, cash
management funds, corporate treasurers, and other institutional investors.
The Company derives its earnings from the net investment spread and fee
income generated by the assets it manages. With retail and institutional spread
products offered by the Company, the Company's insurance and face-amount
certificate subsidiaries agree to return customer deposits with interest at a
specified rate or based on a specified index (e.g., LIBOR, S&P 500 -- both
defined below). As a result, the Company's insurance and face-amount certificate
subsidiaries accept investment risk in exchange for the opportunity to achieve a
spread between what the Company earns on invested assets and what it pays or
credits on customer deposits. With retail variable products offered by the
Company, the Company's subsidiaries receive a fee in exchange for managing
deposits, and the customer accepts investment risk associated with their chosen
mutual fund options. Because the investment risk is borne by the customer, this
business requires significantly less capital support than spread-based business.
The Company conducts its different businesses through a variety of
subsidiaries. Retail fixed, indexed and variable annuities and institutional
funding agreements and GICs are issued by the Company's insurance subsidiaries,
Integrity Life Insurance Company ("Integrity") and National Integrity Life
Insurance Company ("National Integrity") (collectively, the "Integrity
Companies"). ARM Securities Corporation ("ARM Securities"), a registered
broker-dealer, provides a distribution channel for selling affiliated and
nonaffiliated retail products. SBM Certificate Company is an issuer of
face-amount certificates, a retail product similar to certificates of deposit
issued by banks.
The Company received initial start-up capital as partial funding for the
acquisition of the Integrity Companies through the private issuance of common
stock in November 1993. In June 1995, the Company received additional capital
to fund the acquisition of substantially all of the assets and business
operations of SBM Company ("SBM") also through the private issuance of common
stock. Such capital was primarily provided by certain private equity funds
sponsored by Morgan Stanley Dean Witter & Co. (the "Morgan Stanley
Stockholders"). In June 1997, the Company completed an initial public
offering (the "Offering") of common stock. The Morgan Stanley Stockholders
owned approximately 91% of the outstanding shares of the Company's common
stock prior to the Offering and, as a result of the Offering, owned
approximately 53% at December 31, 1997. At December 31,
F-8
<PAGE>
1997, approximately 40% of the outstanding shares of the Company's common stock
was publicly held, with the remainder being nonregistered common stock issued to
certain original private investors of the Company (excluding the Morgan Stanley
Stockholders).
The Company had no significant business activity until November 26, 1993,
when it acquired the Integrity Companies resulting in $2.3 billion of assets
under management. Assets under management have grown to $6.9 billion as of
December 31, 1997.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts from prior
years have been reclassified to conform to the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management of the Company to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
The consolidated balance sheets include a dual presentation of carrying
amount and fair value balances. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," fixed maturities classified as available-for-sale
are reported at fair value in the carrying amount balance sheets; however,
corresponding customer deposits are reported at historical values. In contrast,
in the fair value balance sheets, both assets and liabilities are reported at
fair value. As permitted by SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," the fair value balance sheets are presented as a
supplemental disclosure to provide a more meaningful picture of the Company's
financial position. Note 4 describes the methods and assumptions used by the
Company in estimating fair value.
INVESTMENTS
All of the Company's fixed maturities and equity securities are classified
as available-for-sale and stated at fair value. Unrealized gains and losses on
available-for-sale securities are reported as a separate component of
shareholders' equity, net of adjustments to value of insurance in force and
deferred policy acquisition costs equal to the change in amortization that would
have been recorded if these securities had been sold as of the balance sheet
date, and net of deferred income taxes. The amortized cost of fixed maturities
is adjusted for amortization of premiums and accretion of discounts to maturity,
or in the case of mortgage-backed and asset-backed securities, over the
estimated life of the security. Such amortization and accretion is computed
using the interest method and is included in investment income. Anticipated
prepayments on mortgage-backed and asset-backed securities are considered in
determining the effective yield on such securities. If a difference arises
between anticipated and actual prepayments, the carrying value of the investment
is adjusted with a corresponding charge or credit to investment income. Interest
and dividends are included in investment income. Mortgage loans on real estate
and policy loans are carried at their unpaid principal balances. Cash and cash
equivalents consist of highly liquid investments with maturities of three months
or less at their time of purchase.
F-9
<PAGE>
Realized gains and losses on the sale of investments are determined based
upon the average cost method and include provisions for other-than-temporary
impairments where appropriate. In addition, the amortization of value of
insurance in force and deferred policy acquisition costs is adjusted for gains
and losses realized on sales of investments which support customer deposits. The
adjustment to amortization associated with such realized gains and losses is
included in Realized Investment Gains in the consolidated statements of income.
VALUE OF INSURANCE IN FORCE, DEFERRED POLICY ACQUISITION COSTS AND GOODWILL
A portion of the purchase price paid for the insurance subsidiaries was
allocated to the value of insurance in force based on the actuarially-determined
present value of the expected pretax future profits from the business assuming a
discount rate of 13%. This present value amount was reduced to the extent that
the fair value of the net assets acquired including the value of insurance in
force exceeded the purchase price allocated to the insurance subsidiaries.
Interest is accrued on the balance annually at a rate consistent with the rate
credited on the acquired policies on the acquisition date. Recoverability of the
value of insurance in force is evaluated quarterly by comparing the current
estimate of the present value of expected pretax future profits to the
unamortized asset balance. If such current estimate is less than the existing
asset balance, the difference would be charged to expense. To the extent
recoverable from future gross profits, costs of producing new business
(primarily commissions and certain policy issuance and marketing costs) which
vary with and are primarily related to the production of new business are
deferred. Value of insurance in force and deferred policy acquisition costs are
amortized in proportion to the emergence of future gross profits, including
related realized investment gains and losses, over the estimated term of the
underlying policies. In addition, an adjustment is made to value of insurance in
force and deferred policy acquisition costs equal to the change in amortization
that would have been recorded if unrealized gains and losses on
available-for-sale securities had been realized as of the balance sheet date.
A portion of the purchase price paid for subsidiaries was allocated to
goodwill representing the excess of the purchase price paid over the fair value
of net assets acquired. Goodwill currently recorded is amortized over a period
not exceeding twenty years using the straight-line method.
Incremental costs directly related to the integration of acquired companies
are deferred, to the extent recoverable from future gross profits of the
acquired companies. Such deferred transition costs are amortized using the
straight-line method over the estimated term of the policies underlying the
acquired companies.
ASSETS HELD IN SEPARATE ACCOUNTS AND CUSTOMER DEPOSITS IN SEPARATE ACCOUNTS
Assets held in separate accounts of the Company's insurance subsidiaries
are segregated from other investments and are not subject to claims that arise
out of any other business of the Company. The separate accounts include customer
deposits and related invested assets, for retail and institutional spread
products (guaranteed) and retail variable products (nonguaranteed). Separate
account assets and liabilities are carried at estimated fair values. Investment
income and interest credited on customer deposits related to spread product
deposits are included as such in the statements of income. The Company receives
administrative fees for managing retail variable product deposits and other fees
for assuming mortality and certain expense risks. Such fees are included in
Variable Annuity Fees in the statements of income.
F-10
<PAGE>
During 1996, the Company began offering an equity-indexed annuity product
through its separate accounts which aims to meet consumer demand for equity
investments with downside protection. In connection with this product, the
Company's separate accounts purchased call options based on the S&P 500
Composite Stock Price Index ("S&P 500"). The options perform as a hedge against
the Company's obligation to pay equity-indexed annuity policyholders returns
tied to the S&P 500. As of December 31, 1997 and 1996, these options are carried
at fair value and unrealized gains and losses increase or decrease obligations
to policyholders.
CUSTOMER DEPOSITS
For single and flexible premium deferred annuities, single premium
endowments, face-amount certificates, funding agreements, and guaranteed
investment contracts, customer deposits represent account values before
applicable surrender charges. Such account values represent premiums and
deposits received, plus interest credited, less withdrawals and assessed fees.
For structured settlements and other single premium immediate annuities,
customer deposits represent the present value of future benefit payments and
maintenance expenses. The interest rate used in determining such present value
was approximately 7.35% as of December 31, 1997.
RECOGNITION OF FEE INCOME
Variable annuity fees and asset management fees are recorded in income as
earned. Other fee income includes marketing partnership fees earned related to
ventures with other insurance companies and certain fees earned by ARM
Securities (primarily net retained commissions). Premiums and deposits received
from customers are not included in the statements of income.
FEDERAL INCOME TAXES
Deferred income tax reflects the net tax effects of (i) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (ii)
operating and capital losses.
NET INCOME PER SHARE OF COMMON STOCK
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share," which superseded Accounting Principles Board Opinion No. 15 of the same
name. Earnings per share for all periods presented reflect the adoption of SFAS
No. 128. SFAS No. 128 requires companies to present basic earnings per share,
and, if applicable, diluted earnings per share, instead of primary and fully
diluted earnings per share. Basic earnings per share 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
earnings per share reflects the potential dilution that could occur if options
to issue common stock were exercised into common stock.
2. ACQUISITIONS
SBM COMPANY
Effective May 31, 1995, the Company completed the acquisition of
substantially all of the assets and business operations of SBM, including all of
the issued and outstanding capital stock of SBM's subsidiaries, State Bond and
Mortgage Life Insurance Company ("SBM Life"), SBM Financial Services, Inc.
(which subsequently changed its name to ARM Securities), SBM Certificate
F-11
<PAGE>
Company, and SBM's management contracts with six mutual funds (the "State Bond
Mutual Funds").
The aggregate purchase price for the acquisition was $38.8 million. The
Company financed the acquisition by issuing approximately 6.9 million shares of
the Company's Class A common stock, primarily to the Morgan Stanley
Stockholders, for an aggregate sale price of $63.5 million. The Company used the
proceeds from the issuance of new common equity in excess of the aggregate
purchase price for the acquisition to make a $19.9 million capital contribution
to SBM Life and acquire all of the issued and outstanding capital stock of SBM
Certificate Company from SBM Life for a purchase price of $3.3 million.
The capital contribution to SBM Life was used to strengthen SBM Life's
financial position and allowed for a significant investment portfolio
restructuring immediately following the acquisition with no net adverse effect
on statutory adjusted capital and surplus. On December 31, 1995, SBM Life was
merged with and into Integrity to create certain operating efficiencies intended
to benefit the Company and its customers. On December 13, 1996, the Company
transferred its contracts to perform management and advisory services for the
State Bond Mutual Funds to Federated Investors for $4.5 million. Asset
management fee income of $1.6 million and $1.0 million was recorded by the
Company during 1996 and 1995, respectively, with respect to the management of
such funds. The State Bond Mutual Funds had aggregate assets of $236.9 million
on December 13, 1996.
ARM CAPITAL ADVISORS
On January 5, 1995, the Company completed the acquisition of substantially
all the assets and business of the U.S. fixed income unit of Kleinwort Benson
Investment Management Americas Inc. ("KBIMA"), including its third-party account
asset management operations. KBIMA provided investment advisory services to the
Company during 1994. The business acquired became part of the then newly-formed
ARM Capital Advisors, Inc. ("ARM Capital Advisors"). ARM Capital Advisors is a
registered investment advisor and wholly owned subsidiary of the Company. ARM
Capital Advisors' management of third-party accounts generated asset management
fees of $8.6 million, $4.2 million and $2.2 million during 1997, 1996 and 1995,
respectively. Although third-party assets managed by ARM Capital Advisors grew
since the acquisition, the Company believes that market attitudes towards
developing an asset management business for defined benefit pension plans within
a holding company structure consisting predominantly of insurance companies
constrained ARM Capital Advisors' growth. Accordingly, on November 7, 1997, the
Company transferred substantially all of the assets and operations of ARM
Capital Advisors to a newly formed subsidiary, ARM Capital Advisors, LLC ("New
ARMCA"), and sold an 80% interest therein to ARM Capital Advisors Holdings, LLC,
an entity controlled by Emad A. Zikry, the President of ARM Capital Advisors
prior to the sale. The Company recognized an immaterial gain on the sale. The
Company has continued to engage New ARMCA as its investment adviser but will
consider retaining other investment management firms as it deems appropriate.
The terms of the sale provided for a transition period following the sale
through December 31, 1997 whereby the Company (i) provided all accounting and
administrative services required by New ARMCA and paid all of its costs and
expenses and (ii) received all of the gross revenues of New ARMCA. After the
sale, ARM Capital Advisors was renamed Integrity Capital Advisors, Inc.
F-12
<PAGE>
INTEGRITY COMPANIES
On November 26, 1993, the Company completed the acquisition of the
Integrity Companies from the National Mutual Life Association of Australasia
Limited ("National Mutual"). In connection with the acquisition, National Mutual
provided the Integrity Companies with indemnification as to future claims
for taxes, assessments from guaranty funds, and claims from litigation, which
arise from preclosing events.
3. INVESTMENTS
The amortized cost and estimated fair values of available-for-sale securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Fixed Maturities:
Mortgage-backed securities $1,828,062 $ 29,881 $ 3,456 $1,854,487
Corporate securities 1,390,274 35,875 16,134 1,410,015
Asset-backed securities 400,276 1,981 1,832 400,425
U.S. Treasury securities and obligations of
U.S. government agencies 318,583 1,464 371 319,676
Foreign governments 79,466 1,633 1,867 79,232
Obligations of state and political subdivisions 4,834 12 295 4,551
------------------------------------------------
Total fixed maturities 4,021,495 70,846 23,955 4,068,386
Equity securities 28,177 309 144 28,342
------------------------------------------------
Total available-for-sale securities $4,049,672 $ 71,155 $ 24,099 $4,096,728
------------------------------------------------
------------------------------------------------
DECEMBER 31, 1996:
Fixed Maturities:
Mortgage-backed securities $1,459,851 $ 19,393 $ 11,644 $1,467,600
Corporate securities 992,003 13,260 13,693 991,570
Asset-backed securities 299,365 686 1,951 298,100
U.S. Treasury securities and obligations of
U.S. government agencies 247,041 1,363 1,481 246,923
Foreign governments 45,611 611 462 45,760
Obligations of state and political subdivisions 4,963 3 406 4,560
------------------------------------------------
Total fixed maturities 3,048,834 35,316 29,637 3,054,513
Equity securities 21,268 1,286 2 22,552
------------------------------------------------
Total available-for-sale securities $3,070,102 $ 36,602 $ 29,639 $3,077,065
------------------------------------------------
------------------------------------------------
</TABLE>
F-13
<PAGE>
The amortized cost and estimated fair value of available-for-sale
securities, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------
Estimated
(IN THOUSANDS) Cost Fair Value
- ----------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 13,522 $ 13,584
Due after one year through five years 143,662 143,102
Due after five years through ten years 335,043 333,618
Due after ten years 1,300,930 1,323,169
Asset-backed securities 400,276 400,426
Mortgage-backed securities 1,828,062 1,854,487
Equity securities 28,177 28,342
-----------------------
Total available-for-sale securities $4,049,672 $4,096,728
-----------------------
-----------------------
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties and because mortgage-backed and asset-backed securities
(including floating-rate securities) provide for periodic payments throughout
their lives.
During 1997, 1996 and 1995, gross gains of $45.0 million, $33.5 million and
$24.1 million, respectively, and gross losses of $36.0 million, $18.9 million
and $15.6 million, respectively, were realized on sales of fixed maturities. For
the years ended December 31, 1997 and 1996, the Company recorded losses of $4.0
million and $15.2 million related to write-downs to the fair value of
investments in fixed income securities. For the years ended December 31, 1997
and 1996, the recognition of net realized gains on investments supporting
customer deposits resulted in an increase in the amortization of value of
insurance in force of $3.0 million and $1.9 million, respectively, and in an
increase in the amortization of deferred policy acquisition costs of $0.4
million and $28,000, respectively.
In accordance with SFAS No. 115, net unrealized gains and losses on
investments classified as available-for-sale were reduced by deferred federal
income taxes and adjustments to value of insurance in force and deferred policy
acquisition costs that would have been required had such gains and losses been
realized. Net unrealized gains on available-for-sale securities reflected as a
separate component of shareholders' equity are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
(IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized gains on available-for-sale securities
before adjustments for the following: $ 47,056 $ 6,963
Amortization of value of insurance in force and
deferred policy acquisition costs (15,825) (1,318)
Deferred federal income taxes (10,931) (1,976)
--------------------
Net unrealized gains on available-for-sale securities $ 20,300 $ 3,669
--------------------
--------------------
</TABLE>
F-14
<PAGE>
Investments, aggregated by issuer, in excess of 10% of shareholders' equity
(before net unrealized gains on available-for-sale securities) at December 31,
1997 and 1996, other than investments in affiliates and investments issued or
guaranteed by the United States government are as follows. Such securities were
99.8% and 97.4% investment grade at December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Carrying
(IN MILLIONS) Amount
- --------------------------------------------------------------------------------
<S> <C>
1997:
Fixed maturities:
Aames Mortgage Trust $ 31.7
Aircraft Lease Portfolio Securities 34.6
Bear Stearns Mortgage Securities 39.7
Countrywide Mortgage Backed 39.1
CRAVE Trust 52.7
Delta Funding Home Equity Loan Trust 31.6
DLJ Mortgage Acceptance Corporation 75.9
First Chicago/Lennar 34.5
General Electric Capital Mortgage Services 33.4
Greenwich Capital Acceptance 50.6
Headlands Mortgage Securities, Inc. 30.5
J.P. Morgan & Company 35.9
LB Mortgage Trust 62.9
Merit Securities Corporation 55.3
Norwest Asset Securities Corporation 64.5
PNC Mortgage Securities Corporation 46.7
Residential Accredit Loans 47.1
Residential Asset Securities Trust 50.4
Residential Funding 47.3
Salomon Brothers Mortgage Securities VII 95.4
Sears Mortgage Securities 29.8
Structured Asset Securities Corporation 64.6
1996:
Fixed maturities:
ABN AMRO Bank 19.3
Advanta Corporation 20.1
Aircraft Lease Portfolio Securities 27.4
American President Company 18.4
Amresco Residential Mortgage Loan 23.8
Augusta Funding LTD VI 20.0
Augusta Funding LTD VIII 24.8
Bear Stearns Company 30.4
Chevy Chase Master Credit Card Trust 20.0
Commonwealth Edison Company 19.2
Conseco Commercial Mortgage 20.2
Countrywide Home Loans 29.1
Countrywide Mortgage Backed 50.7
Delta Funding Home Equity Loan Trust 17.9
DLJ Acceptance Corporation 58.7
First USA Credit Card Trust 25.0
Ford Motor Corporation 25.0
General Electric Capital Mortgage 91.3
Greenwich Capital Acceptance 36.8
Guardian National Acceptance Corporation 21.4
J.P. Morgan & Company 24.8
LB Mortgage Trust 27.3
Lehman Brothers Holdings 23.5
Matterhorn One, Ltd. 45.2
Merit Securities Corporation 30.0
Mobil Producing Nigeria 19.0
National Westminster Bank 22.3
Paine Webber Group, Incorporated 29.4
Philadelphia Electric 18.5
Residential Funding Mortgage 44.0
Resolution Trust Corporation 47.0
Ryland Mortgage Securities Corporation 34.4
Salomon Brothers Mortgage Securities VII 22.2
Structured Asset Securities Corporation 106.2
TCI Communications, Incorporated 23.9
Tenaga Nasional Berhad 19.2
Time Warner Entertainment Company, L.P. 21.6
TMS Home Equity Loan Trust 48.0
Wilshire Manufactured Housing Trust 22.9
Equity securities:
Santander Finance, Ltd. 19.2
</TABLE>
F-15
<PAGE>
The components of investment income were:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 300,327 $ 228,473 $ 177,123
Policy loans 8,925 8,629 7,579
Mortgage loans on real estate 4,038 4,321 6,712
Cash and cash equivalents 13,514 5,705 3,096
Income from other investments 3,175 2,903 1,514
-------------------------------
Investment income $ 329,979 $ 250,031 $ 196,024
-------------------------------
-------------------------------
</TABLE>
At December 31, 1997, the fair value of futures contracts, call and put
options and interest rate swaps held by the Company was $11.3 million. These
derivative financial instruments are used to hedge specific market value
risks associated with the Company's equity-indexed annuity products and separate
account seed money investments and interest rate risks associated with certain
institutional spread deposits. The derivative financial instruments are not held
for trading purposes and are classified on the Company's balance sheet as assets
held in guaranteed separate accounts. The derivative financial instruments hedge
items carried at fair value and are therefore marked to market with unrealized
gains and losses recognized through the separate account statements of
operations. The Company is exposed to credit-related losses in the event of
nonperformance by counter parties to the derivative financial instruments, but
does not expect any counter parties to fail to meet their obligations given
their high credit ratings.
4. FAIR VALUE BALANCE SHEETS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about all financial instruments,
including insurance liabilities classified as investment contracts, unless
specifically exempted. The accompanying fair value balance sheets reflect fair
values for those financial instruments specifically covered by SFAS No. 107,
along with fair value amounts for other assets and liabilities for which
disclosure is permitted but not required.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of the Company.
The Company's management of interest rate risk reduces its exposure to
changing interest rates through a close matching of duration, convexity and cash
flow characteristics of both assets and liabilities while maintaining liquidity
redundancies (i.e., sources of liquidity in excess of projected
F-16
<PAGE>
liquidity needs). As a result, fair values of the Company's assets and
liabilities will tend to respond similarly to changes in interest rates.
The following methods and assumptions were used in estimating fair values:
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities are based on quoted
market prices, where available. For fixed maturities for which a quoted market
price is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable instruments.
MORTGAGE LOANS ON REAL ESTATE AND POLICY LOANS
The carrying amount of mortgage loans on real estate and policy loans
approximates their fair value.
CASH AND CASH EQUIVALENTS AND ACCRUED INVESTMENT INCOME
The carrying amount of cash and cash equivalents and accrued investment
income approximates their fair value given the short-term nature of these
assets.
ASSETS HELD IN SEPARATE ACCOUNTS AND CUSTOMER DEPOSITS IN SEPARATE ACCOUNTS
The fair value of assets held in guaranteed separate accounts is primarily
based on quoted market prices of fixed maturity securities held in such
separate accounts. The fair value of customer deposits in guaranteed separate
accounts is based on the account values of the underlying policies, plus or
minus market value adjustments. Fair values of assets and customer deposits
in nonguaranteed separate accounts is based on the quoted market prices of
the underlying mutual funds. The reduction in fair values for customer
deposits in separate accounts reflect the present value of future gross
margins from net investment spread, product charges, distribution fees, and
surrender charges.
GOODWILL
The carrying amount of goodwill approximates fair value.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
Deferred policy acquisition costs and value of insurance in force do not
appear on the fair value presentation because those values are implicitly
considered in the determination of the fair value of the corresponding customer
deposits and customer deposits in separate accounts.
DEFERRED FEDERAL INCOME TAXES
The deferred federal income tax asset and related valuation allowance were
adjusted for federal income tax which may be incurred as a result of the
differences between the estimated fair values and carrying amounts of the assets
and liabilities.
CUSTOMER DEPOSITS
The fair value of customer deposits for single premium immediate annuity
contracts is based on discounted cash flow calculations using rates from a
current market yield curve for assets with similar durations. The fair value
amounts of the remaining customer deposits, primarily related to deferred
annuity contracts, single premium endowment contracts, and funding agreements
and GICs,
F-17
<PAGE>
represent the estimated present value of cash flows using current market rates
and the duration of the liabilities.
LONG-TERM DEBT AND PAYABLE TO REINSURER
The carrying amounts of long-term debt and payable to reinsurer approximate
fair value.
OTHER ASSETS AND LIABILITIES
The fair values of other assets and liabilities are reported at their
financial statement carrying amounts.
5. VALUE OF INSURANCE IN FORCE
The following provides information on the value of insurance in force
during 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization excluding effects of realized and unrealized investment gains
and losses $ (11,798) $ (10,474) $ (10,490)
Interest accrued on unamortized balance 2,505 3,154 3,386
-----------------------------------------
Net amortization as reported in the statements of income (9,293) (7,320) (7,104)
Amortization related to realized investment gains and losses(a) (2,987) (1,890) (2,562)
Change in amortization related to unrealized gains and losses on available-
for-sale securities(b) (13,769) 13,180 (14,170)
Addition resulting from the acquisition of SBM Life -- -- 61,131
Recognition of acquired tax benefits -- (2,997) (18,004)
-----------------------------------------
Net change in value of insurance in force (26,049) 973 19,291
Balance at beginning of period 52,024 51,051 31,760
-----------------------------------------
Balance at end of period $ 25,975 $ 52,024 $ 51,051
-----------------------------------------
-----------------------------------------
</TABLE>
(a) Included in Realized Investment Gains in the statements of income.
(b) Included in Change in Net Unrealized Gains and Losses on
Available-for-Sale Securities in the statements of shareholders'
equity.
The interest rates used to accrue interest on the unamortized value of
insurance in force are consistent with the rates credited on acquired policies
and range from 5% to 8%. Net amortization of the value of insurance in force,
excluding the effects of realized and unrealized investment gains and losses, in
each of the following years is estimated to be: 1998 -- $7.0 million; 1999 --
$6.1 million; 2000 -- $4.9 million; 2001 -- $4.0 million; and 2002 -- $3.4
million.
F-18
<PAGE>
6. NON-RECURRING CHARGES
The Company recorded non-recurring charges of $14.8 million for the year
ended December 31, 1997, including a one-time non-cash stock-based compensation
charge of $8.1 million (see Note 10), and costs primarily related to the
relocation and consolidation of the Company's operations facilities from
Columbus, Ohio to Louisville, Kentucky. The Company recorded a $5.0 million
non-recurring charge in 1996, including $3.2 million for facilities
consolidation charges and costs of $1.8 million primarily related to merger and
acquisition activities that did not result in a transaction.
7. DEBT
LONG-TERM DEBT
On June 24, 1997, the Company entered into a Credit Agreement to provide
the Company with a new senior revolving credit facility. The maximum amount that
may be borrowed under this Credit Agreement is $75 million, of which $38 million
was drawn on June 24, 1997 and used to repay $38 million of outstanding
borrowings under the Company's prior Credit Agreement, which was terminated.
Borrowings under the new Credit Agreement bear a floating interest rate equal to
the London Interbank Offered Rate ("LIBOR") plus a percentage ranging from
0.325% to 0.875%, depending on the ratings of the Company's preferred stock. The
Credit Agreement has a variable annual commitment fee which can range from 0.10%
to 0.25% of the unused portion of the borrowing, depending on the ratings of the
Company's preferred stock. The Credit Agreement matures on June 24, 2002,
subject to optional prepayment and contingent upon the Company's compliance with
various financial covenants.
PAYABLE TO REINSURER
The Company holds $8.8 million of funds withheld under a modified
coinsurance reinsurance agreement related to a block of variable annuity
contracts. This liability bears a floating interest rate indexed to the LIBOR.
Repayment is scheduled for equal quarterly installments over the next five
years.
8. INCOME TAXES
The components of the provision for income tax expense consist of the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 13,136 $ 2,613 $ 641
Deferred 1,003 2,554 6,385
-----------------------------------
Total income tax expense $ 14,139 $ 5,167 $ 7,026
-----------------------------------
-----------------------------------
</TABLE>
F-19
<PAGE>
Significant components of the deferred tax liabilities and assets as of
December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Difference between GAAP and tax reserves $ 78,404 $ 72,513
Net operating loss carryforward 13,863 11,783
Other 16,285 10,752
--------------------
Total deferred tax assets 108,552 95,048
Valuation allowance for deferred tax assets (36,568) (38,798)
--------------------
Net deferred tax assets 71,984 56,250
Deferred tax liabilities:
Deferred policy acquisition costs 26,096 16,910
Net unrealized gains on available-for-sale securities 10,931 1,976
Other 3,908 1,760
--------------------
Total deferred tax liabilities 40,935 20,646
--------------------
Total deferred federal income taxes $ 31,049 $ 35,604
--------------------
--------------------
</TABLE>
In the event that deferred tax assets are recognized on deductible
temporary differences for which a valuation allowance was provided at the date
of an acquisition, such benefits will be applied to first reduce the balance of
intangible assets related to the acquisition, such as value of insurance in
force and goodwill.
A full valuation allowance was provided on the difference between
deferred tax assets and liabilities of the Integrity Companies as of the
acquisition date resulting in zero deferred federal income taxes at that
date. Based on the Integrity Companies' ability to generate taxable income in
the post-acquisition period and projections of future taxable income, the
Integrity Companies' valuation allowance was reduced by $8.0 million, $11.0
million and $27.9 million during 1997, 1996 and 1995, respectively. As a
result of realizing such benefits, the value of insurance in force was
reduced by $3.0 million and $18.0 million during 1996 and 1995, respectively.
The balance of goodwill was also reduced by $0.7 million during 1997 and $1.0
million during 1995. Additionally, the Company has established a full
valuation allowance on its non-life net operating loss carryforwards.
Realization of these carryforward benefits is dependent on future non-life
earnings.
The Company files a consolidated federal income tax return with its
non-life subsidiaries, but is not currently eligible to file with its life
insurance subsidiaries. Accordingly, Integrity and National Integrity file a
consolidated federal life insurance company income tax return.
F-20
<PAGE>
Income tax expense differs from that computed using the federal income tax
rate of 35% for the following reasons:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense at statutory rate $ 14,608 $ 9,991 $ 6,621
Increase (decrease) in valuation allowance (1,540) (5,490) 1,052
Other 1,071 666 (647)
------------------------------
Total income tax expense $ 14,139 $ 5,167 $ 7,026
------------------------------
------------------------------
</TABLE>
The Company had net operating loss carryforwards of approximately $39.6
million, $33.7 million and $43.8 million at December 31, 1997, 1996 and 1995,
respectively. The net operating loss carryforwards expire in years 2005 to 2012.
F-21
<PAGE>
9. STATUTORY INFORMATION
Following is a reconciliation of income based on statutory accounting
practices prescribed or permitted by insurance regulatory authorities for the
Company's insurance subsidiaries with GAAP net income reported in the
accompanying statements of income:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Insurance subsidiaries (statutory-basis)(1) $ 49,718 $ 38,769 $ 31,179
Non-insurance companies(2) 3,273 927 255
-------------------------------------
Consolidated statutory-basis pretax operating income 52,991 39,696 31,434 (3)
Reconciling items:
Amortization of interest maintenance reserve (3,920) (4,091) (3,905)
Adjustments to customer deposits (16,004) (2,324) (5,994)
Interest expense on debt (2,517) (3,146) (3,461)
Deferral of policy acquisition costs, net of amortization 29,331 16,223 16,650
Amortization of value of insurance in force (9,293) (7,320) (7,104)
Amortization of acquisition-related deferred charges and goodwill (927) (1,991) (10,278)
Adjustments to invested asset carrying values at acquisition date (107) (572) (769)
Non-recurring charges (14,823) (5,004) --
Realized investment gains 3,192 907 4,048
Other 3,815 (3,833) (1,705)
-------------------------------------
GAAP-basis:
Income before income taxes 41,738 28,545 18,916
Income tax expense (14,139) (5,167) (7,026)
-------------------------------------
Net income 27,599 23,378 11,890
Dividends on preferred stock (4,750) (4,750) (4,750)
-------------------------------------
Net income applicable to common shareholders 22,849 18,628 7,140
Exclude, net of tax:
Realized investment gains (2,075) (590) (2,631)
Non-recurring charges 14,823 4,539 --
Income from defined benefit pension plan asset management operations (1,448) (350) --
-------------------------------------
Operating earnings(4) $ 34,149 $ 22,227 $ 4,509
-------------------------------------
-------------------------------------
</TABLE>
(1) Insurance company general account and separate account statutory-basis
pretax income excluding realized gains and losses.
(2) Non-insurance company pretax income excluding amortization of
acquisition-related deferred charges, interest expense on debt,
realized investment gains and losses, and non-recurring corporate
costs and charges related to acquisition, financing and restructuring
activities.
(3) Includes the results of operations of the acquired SBM businesses for
the seven months ended December 31, 1995.
(4) Net income applicable to common shareholders, excluding, net of tax,
realized investment gains and losses, non-recurring charges and income
from defined benefit pension plan asset management operations which
were sold during November 1997.
F-22
<PAGE>
Dividends that the Company may receive from Integrity in any year without
prior approval of the Ohio Insurance Director are limited by statute to the
greater of (i) 10% of Integrity's statutory capital and surplus as of the
preceding December 31 and (ii) Integrity's statutory net income for the
preceding year. For 1998, the maximum dividend payments that may be paid by
Integrity to the Company without prior regulatory approval are $38.2 million.
The consolidated statutory capital and surplus of the Company's
insurance subsidiaries was $211.8 million and $163.8 million at December 31,
1997 and 1996, respectively. In addition, the consolidated statutory asset
valuation reserve ("AVR") of the Company's insurance subsidiaries was $24.9
million and $15.6 million at December 31, 1997 and 1996, respectively
(excluding statutory voluntary investment reserves of $5.3 million and $12.5
million). The AVR is generally added to statutory capital and surplus for
purposes of assessing capital adequacy against various measures used by
rating agencies and regulators.
The National Association of Insurance Commissioners Risk-Based Capital
("RBC") requirements attempt to evaluate the adequacy of a life insurance
company's statutory-basis adjusted capital and surplus in relation to
investment, insurance and other business risks. The RBC formula is used by
the states as an early warning tool to identify possible weakly capitalized
companies for the purpose of initiating regulatory action and is not designed
to be a basis for ranking the financial strength of insurance companies. In
addition, the formula establishes a minimum capital standard which
supplements the prevailing system of low fixed minimum capital and surplus.
The RBC requirements provide for four different levels of regulatory
attention depending on the ratio of the company's adjusted capital and
surplus to its RBC. As of December 31, 1997 and 1996, the adjusted capital
and surplus of Integrity and National Integrity are substantially in excess
of the minimum level of RBC that would require regulatory response.
10. SHAREHOLDERS' EQUITY
PREFERRED STOCK
During 1993, the Company issued 2,000,000 shares of non-voting 9.5%
Cumulative Perpetual Preferred Stock, stated value $25, in connection with the
acquisition of the Integrity Companies. Cash dividends at a rate of 9.5% per
annum per share are payable quarterly (equivalent to an annual amount of $2.375
per share). The shares of preferred stock may not be redeemed prior to
December 15, 1998. On or after December 15, 1998, the Company may, at its
option, redeem all or part of the shares at a redemption price of $25 per share.
INITIAL PUBLIC OFFERING OF COMMON STOCK
In June 1997, the Company completed an initial public offering of 9.2
million shares of Class A common stock, par value $.01 per share (the "Class
A Common Stock"), of which 5.75 million shares were sold by the Company and 3.45
million shares were sold by the Morgan Stanley Stockholders. The net proceeds of
the Offering to the Company were $78.8 million, after deducting underwriting
discounts and commissions and other expenses of the Offering payable by the
Company. On June 30, 1997, the Company used a portion of such net proceeds to
make a capital contribution to its primary insurance subsidiary, Integrity,
thereby strengthening Integrity's capital base to provide for future growth. The
Company plans to also use the net proceeds to enhance the
F-23
<PAGE>
Company's retail market presence, to consolidate operating locations and for
other corporate purposes, which may include acquisitions.
Concurrent with the closing of the Offering, the Company amended and
restated its Certificate of Incorporation to effectuate a recapitalization
such that (i) the common equity of the Company consists of Class A Common
Stock and Class B Non-Voting Common Stock, par value $.01 per share (the
"Class B Common Stock" and, together with the Class A Common Stock, the
"Common Stock"), (ii) authorized shares of the Class A Common Stock and Class
B Common Stock were increased to 150 million shares and 50 million shares,
respectively, (iii) each outstanding share of common stock of the Company was
converted into one share of Class A Common Stock, (iv) certain shares of the
Class A Common Stock owned by the Morgan Stanley Stockholders were converted
into Class B Common Stock such that, after giving effect to such conversion,
but not giving effect to the Offering, the Morgan Stanley Stockholders owned,
in the aggregate, 49% of the outstanding Class A Common Stock, and (v) each
share of Common Stock was split into 706 shares of Common Stock. Holders of
Class B Common Stock have no right to vote on matters submitted to a vote of
stockholders, except in certain circumstances. Shares of the Class B Common
Stock have no preemptive or other subscription rights and are convertible
into an equal number of shares of Class A Common Stock (1) at the option of
the holder thereof to the extent that, following such conversion, the Morgan
Stanley Stockholders will not, in the aggregate, own more than 49% of the
outstanding shares of Class A Common Stock, and (2) automatically upon the
transfer of such shares by any Morgan Stanley Stockholder to a person that is
not a Morgan Stanley Stockholder or an affiliate of a Morgan Stanley
Stockholder.
All references to number of shares, per share amounts and stock option data
appearing in the financial statements and notes thereto have been restated, for
all periods presented, to reflect the stock split.
STOCK OPTIONS
The Company's Amended and Restated Stock Option Plan (the "Plan"),
originally adopted in December 1993, provides for granting of options to
purchase up to 2,432,170 shares of Class A common stock. In connection with the
Offering, 512,980 unallocated options were granted on a pro rata basis to
participants of the Plan with the exercise prices and vesting schedules of such
options being the average weighted exercise prices and vesting percentages of
the options previously held by such holders. As of June 30, 1997, all options of
the Plan had been issued. At December 31, 1997 a total of 2,420,897 were
outstanding and 1,399,399 were exercisable at an average price of $11.44. Prior
to the Offering, the Plan provided that the option exercise price increased at
the end of every three month period following the date of grant at a rate of 12%
per annum, compounded annually, while the option remained unexercised.
Concurrent with the Offering, the exercise prices applicable to the outstanding
options were fixed at exercise prices ranging from $11.14 per share to $12.24
per share.
F-24
<PAGE>
Information with respect to the stock option plan is as follows:
<TABLE>
<CAPTION>
Outstanding
-------------------------
Shares Average
Subject to Exercise
Option Price
-------------------------
<S> <C> <C>
Balance at December 31, 1994 816,136 $ 7.93
Options granted 883,912 9.17
Options forfeited (14,120) 9.21
------------
Balance at December 31, 1995 1,685,928 9.33
Options granted 240,040 10.01
Options exercised (3,530) 8.88
Options forfeited (38,830) 10.22
------------
Balance at December 31, 1996 1,883,608 10.50
Options granted 887,587 11.45
Options exercised (7,743) 12.23
Options forfeited (342,555) 11.66
------------
Balance at December 31, 1997 2,420,897 11.65
------------
------------
</TABLE>
Shares under options that were exercisable were 633,282 and 306,404 as of
December 31, 1996 and 1995, respectively, at an average exercise price of $10.22
and $8.88. At December 31, 1997, outstanding option shares had exercise prices
ranging from $11.14 to $12.24 and average contractual life remaining of 1.8
years.
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its employee stock options. As a result of the
granting of previously unallocated options and the determination of the exercise
prices for all options of the Plan which occurred in conjunction with the
Offering, a one-time non-cash stock-based compensation charge of $8.1 million
was recorded during June 1997. Such charge equals the aggregate difference
between the $15 initial public offering price of the Class A Common Stock and
the exercise prices of all of the outstanding options.
The Company adopted the disclosure-only option under SFAS No. 123,
"Accounting for Stock-Based Compensation," as of December 31, 1995. If the
accounting provisions of SFAS No. 123 had been adopted as of the beginning of
1995, the effects on 1995, 1996 and 1997 net income would have been immaterial.
In June 1997, the Company adopted the 1997 Equity Incentive Plan (the "1997
Equity Plan"). The 1997 Equity Plan provides for the granting of incentive stock
options and nonqualified stock options, stock appreciation rights, restricted
stock, performance units, and performance shares to those officers and other key
employees and consultants with potential to contribute to the future
F-25
<PAGE>
success of the Company or its subsidiaries; provided that only employees may be
granted incentive stock options. The maximum amount of Class A Common Stock that
may be granted under the 1997 Equity Plan is 1.6 million shares, subject to
adjustment in accordance with the terms of the 1997 Equity Plan. No awards under
the 1997 Equity Plan have been granted as of December 31, 1997.
EARNINGS PER SHARE
The following is a reconciliation of the number of shares (denominator)
used in the basic and diluted earnings per share ("EPS") computations:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------
Per Share Per Share Per Share
(SHARES IN THOUSANDS) Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 20,579 $ 1.11 17,498 $ 1.06 14,614 $ 0.49
Effect of dilutive stock options 726 (0.04) -- -- -- --
------------------------------------------------------------------
Diluted EPS 21,305 $ 1.07 17,498 $ 1.06 14,614 $ 0.49
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
11. CONTINGENCIES
The Company is a defendant in various lawsuits in connection with the
normal conduct of its operations. Company management believes the ultimate
resolution of such litigation will not result in any material adverse impact to
the financial position of the Company.
The number of insurance companies that are under regulatory supervision has
resulted in and is expected to continue to result in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabilitated
companies. The Company has accrued for expected non-indemnified assessments.
F-26
<PAGE>
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT PER SHARE DATA) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Net investment spread $ 18,375 $ 19,477 $ 22,087 $ 22,622
Fee income 5,520 5,538 6,470 7,083
Other income and expenses (15,702) (22,107) (16,105) (14,712)
Realized investment gains 2,231 420 376 165
-----------------------------------------------------------
Income before income taxes 10,424 3,328 12,828 15,158
Income tax expense (2,814) (3,185) (3,735) (4,405)
-----------------------------------------------------------
Net income 7,610 143 9,093 10,753
Dividends on preferred stock (1,188) (1,188) (1,187) (1,187)
-----------------------------------------------------------
Net income (loss) applicable to common shareholders 6,422 (1,045) 7,906 9,566
Exclude, net of tax:
Realized investment gains (1,450) (273) (245) (107)
Non-recurring charges 1,445 9,333 2,489 1,556
Income from defined benefit pension plan
asset management operations (581) (272) (325) (270)
-----------------------------------------------------------
Operating earnings $ 5,836 $ 7,743 $ 9,825 $ 10,745
-----------------------------------------------------------
-----------------------------------------------------------
Per common and common equivalent share (diluted):
Net income (loss) $ 0.37 $ (0.06) $ 0.33 $ 0.39
Operating earnings $ 0.33 $ 0.42 $ 0.40 $ 0.44
1996:
Net investment spread $ 14,078 $ 17,773 $ 18,003 $ 18,016
Fee income 4,162 4,201 4,964 4,506
Other income and expenses (11,779) (13,967) (16,572) (15,747)
Realized investment gains (losses) (403) (814) (1,115) 3,239
-----------------------------------------------------------
Income before income taxes 6,058 7,193 5,280 10,014
Income tax expense (1,573) (1,190) (956) (1,448)
-----------------------------------------------------------
Net income 4,485 6,003 4,324 8,566
Dividends on preferred stock (1,188) (1,188) (1,187) (1,187)
-----------------------------------------------------------
Net income applicable to common shareholders 3,297 4,815 3,137 7,379
Exclude, net of tax:
Realized investment (gains) losses 262 529 725 (2,106)
Non-recurring charges -- -- 940 3,599
Income from defined benefit pension plan (88) (88) (87) (87)
asset management operations
-----------------------------------------------------------
Operating earnings $ 3,471 $ 5,256 $ 4,715 $ 8,785
-----------------------------------------------------------
-----------------------------------------------------------
Per common and common equivalent share (diluted):
Net income $ 0.19 $ 0.28 $ 0.18 $ 0.42
Operating earnings $ 0.20 $ 0.30 $ 0.27 $ 0.50
</TABLE>
F-27
<PAGE>
13. 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. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. 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 and GICs), retail variable products (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.
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. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Retail spread products $ 220,810 $ 206,296 $ 185,961
Institutional spread products 99,861 37,210 2,515
Retail variable products 14,630 10,786 7,238
Corporate and other 19,289 13,572 11,658
---------------------------------------------
Consolidated total revenues (investment income and fee income) $ 354,590 $ 267,864 $ 207,372
---------------------------------------------
---------------------------------------------
AMORTIZATION EXPENSE
Retail spread products $ 13,951 $ 10,804 $ 8,422
Retail variable products 5,758 3,839 1,837
Corporate and other 927 1,503 10,055
---------------------------------------------
Consolidated total amortization expense $ 20,636 $ 16,146 $ 20,314
---------------------------------------------
---------------------------------------------
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS SUMMARY
Retail spread products $ 37,618 $ 34,440 $ 22,072
Institutional spread products 9,221 3,241 250
Retail variable products 5,068 4,827 3,168
Corporate and other 14 (10,216) (10,622)
-----------------------------------
Pretax operating earnings (before preferred stock dividends) 51,921 32,292 14,868
Income taxes on operations (13,022) (5,315) (5,609)
Preferred stock dividends (4,750) (4,750) (4,750)
-----------------------------------
Operating earnings 34,149 22,227 4,509
Realized investment gains 3,192 907 4,048
Non-recurring charges (14,823) (5,004) --
Income from defined benefit pension plan asset management operations 1,448 350 --
Income taxes not related to operating results (1,117) 148 (1,417)
-----------------------------------
Net income applicable to common shareholders $ 22,849 $ 18,628 $ 7,140
-----------------------------------
-----------------------------------
ASSETS
Retail spread products $3,153,040 $2,789,626 $2,887,920
Institutional spread products 2,542,350 891,936 143,156
Retail variable products 1,192,875 883,483 647,132
Corporate and other 250,159 136,619 115,372
-----------------------------------
Consolidated total assets $7,138,424 $4,701,664 $3,793,580
-----------------------------------
-----------------------------------
</TABLE>
14. SUBSEQUENT EVENT
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 will take a one-time charge of approximately $3.5
million during the first quarter of 1998. The charge will consist of (i) a $2.0
million non-cash charge for accelerating the vesting period of 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 agreements 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.
F-29
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
----
Report of Independent Auditors on Financial Statement Schedules. . . . . . S-2
Schedule I Summary of Investments (Other than Investments in
Related Parties) . . . . . . . . . . . . . . . . . . . . . . S-3
Schedule II Condensed Financial Information of Registrant. . . . . . . . S-4
Schedule III Supplementary Insurance Information. . . . . . . . . . . . . S-8
Schedule IV Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . S-9
Schedule V Valuation and Qualifying Accounts. . . . . . . . . . . . . .S-10
Schedules required by Article 7 of Regulation S-X other than those listed are
omitted because they are not required, are not applicable, or equivalent
information has been included in the financial statements and notes thereto, or
elsewhere herein.
S-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES
Board of Directors and Shareholders
ARM Financial Group, Inc.
We have audited the consolidated financial statements of ARM Financial
Group, Inc. as of December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, and have issued our report thereon dated
February 10, 1998, included elsewhere in this Annual Report (Form 10-K). Our
audits also included the financial statement schedules listed in the Index at
Item 14 of this Annual Report (Form 10-K). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 10, 1998
S-2
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS
(OTHER THAN INVESTMENTS IN RELATED PARTIES)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Amount at
Which Shown in
the Balance
Type of Investment Cost Value Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
U.S. government and government agencies and authorities $ 318,583 $ 319,676 $ 319,676
States, municipalities and political subdivisions 4,834 4,551 4,551
Foreign governments 79,466 79,232 79,232
Public utilities 173,000 178,700 178,700
Industrial and miscellaneous 3,445,612 3,486,227 3,486,227
--------------------------------------------
Total fixed maturities 4,021,495 4,068,386 4,068,386
Equity securities 28,177 28,342 28,342
Mortgage loans on real estate 16,429 16,429 16,429
Policy loans 126,114 126,114 126,114
Cash and cash equivalents 228,206 228,206 228,206
--------------------------------------------
Total cash and investments $ 4,420,421 $ 4,467,477 $ 4,467,477
--------------------------------------------
--------------------------------------------
</TABLE>
S-3
<PAGE>
ARM FINANCIAL GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available-for-sale, at fair value $ 27,115 $ --
Equity securities, at fair value 5,215 109
Cash and cash equivalents 7,058 3,317
Investments in subsidiaries* 296,431 212,423
Receivable from subsidiaries* 4,103 5,185
Goodwill 2,525 2,670
Deferred federal income taxes 577 --
Other assets 15,922 8,550
-------------------
Total assets $ 358,946 $232,254
-------------------
-------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt $ 38,000 $ 40,000
Accounts payable and other liabilities 13,401 10,312
-------------------
Total liabilities 51,401 50,312
Shareholders' equity:
Preferred stock 50,000 50,000
Common stock 232 **
Additional paid-in capital 211,430 124,609
Net unrealized gains on available-for-sale securities 20,300 3,669
Retained earnings (including undistributed net income
of subsidiaries*: 1997--$45,415; 1996--$19,110) 25,583 3,664
-------------------
Total shareholders' equity 307,545 181,942
-------------------
Total liabilities and shareholders' equity $ 358,946 $232,254
-------------------
-------------------
</TABLE>
* Eliminated in consolidation.
** Less than $1,000.
SEE ACCOMPANYING NOTE.
S-4
<PAGE>
ARM FINANCIAL GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Dividends from subsidiary* $ 14,934 $ 16,000 $ 12,800
Management and service fee income* 37,574 28,901 19,040
Investment and other income 3,848 1,332 689
Realized investment gains (losses) 1,257 3,712 (45)
----------------------------
Total revenues 57,613 49,945 32,484
Expenses:
Operating expenses 38,586 31,813 22,735
Interest expense 2,517 3,161 3,461
Amortization:
Acquisition-related deferred charges 503 1,503 9,695
Goodwill 145 145 84
Non-recurring charges:
Stock-based compensation 8,145 -- --
Other 6,678 5,004 --
----------------------------
Total expenses 56,574 41,626 35,975
----------------------------
Income (loss) before federal income tax benefit
and equity in undistributed net income of
subsidiaries 1,039 8,319 (3,491)
Federal income tax benefit 255 242 271
----------------------------
Income (loss) before equity in undistributed net
income of subsidiaries 1,294 8,561 (3,220)
Equity in undistributed net income of subsidiaries* 26,305 14,817 15,110
----------------------------
Net income $ 27,599 $ 23,378 $ 11,890
----------------------------
----------------------------
</TABLE>
* Eliminated in consolidation.
SEE ACCOMPANYING NOTE.
S-5
<PAGE>
ARM FINANCIAL GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash flows provided by operating activities $ 4,742 $ 2,962 $ 1,175
Cash flows provided by (used in) investing
activities:
Net (purchases) sales of investments (32,229) 2,437 5,986
Contribution of capital to subsidiaries (40,000) -- (21,100)
Acquisition of subsidiaries -- -- (42,134)
--------------------------
Net cash flows (used in) provided by investing
activities (72,229) 2,437 (57,248)
Cash flows provided by (used in) financing
activities:
Proceeds from issuance of common stock 80,308 184 63,505
Organization, debt and stock issuance costs (1,400) -- (2,000)
Principal payment on long-term debt (2,000) -- --
Dividends on common stock (930) -- --
Preferred stock dividends (4,750) (4,750) (4,750)
--------------------------
Net cash flows provided by (used in) financing
activities 71,228 (4,566) 56,755
--------------------------
Increase in cash and cash equivalents 3,741 833 682
Cash and cash equivalents at beginning of year 3,317 2,484 1,802
--------------------------
Cash and cash equivalents at end of year $ 7,058 $ 3,317 $2,484
--------------------------
--------------------------
</TABLE>
SEE ACCOMPANYING NOTE.
S-6
<PAGE>
ARM FINANCIAL GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Note to Condensed Financial Statements
December 31, 1997
1. BASIS OF PRESENTATION
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes of ARM
Financial Group, Inc. and subsidiaries for the year ended December 31, 1997
included herein.
S-7
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Customer
Deposits
and
Deferred Customer Interest
Policy Deposits in Credited on Other
Acquisition Separate Investment Customer Income and
Segment Costs Accounts Income* Deposits Fee Income Expenses*
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Retail spread products $ 35,852 $ 2,862,828 $ 220,810 $ 159,761 $ -- $ (23,431)
Institutional spread products -- 2,624,551 99,861 87,657 -- (2,983)
Retail variable products 51,318 1,129,064 -- -- 14,630 (9,562)
Corporate and other -- 41,531 9,308 -- 9,981 (32,650)
------------------------------------------------------------------------------------
Consolidated $ 87,170 $ 6,657,974 $ 329,979 $ 247,418 $ 24,611 $ (68,626)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
December 31, 1996:
Retail spread products $ 19,919 $ 2,646,180 $ 206,179 $ 148,594 $ 117 $ (23,262)
Institutional spread products -- 891,936 37,210 32,877 -- (1,092)
Retail variable products 39,082 844,330 -- -- 10,786 (5,959)
Corporate and other -- 41,887 6,642 690 6,930 (27,752)
------------------------------------------------------------------------------------
Consolidated $ 59,001 $ 4,424,333 $ 250,031 $ 182,161 $ 17,833 $ (58,065)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
December 31, 1995:
Retail spread products $ 14,787 $ 2,716,183 $ 185,961 $ 143,947 $ -- $ (19,943)
Institutional spared products -- 143,156 2,515 2,194 -- (71)
Retail variable products 28,326 617,312 -- -- 7,238 (4,070)
Corporate and other -- 39,954 7,548 726 4,110 (21,553)
------------------------------------------------------------------------------------
Consolidated $ 43,113 $ 3,516,605 $ 196,024 $ 146,867 $ 11,348 $ (45,637)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
* Allocation of "investment income" and "other income and expenses" is based
on a number of assumptions and estimates, the results of which would change
if different methods were applied.
S-8
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
<TABLE>
<CAPTION>
Percentage of
Ceded to Other Assumed from Amount Assumed
Gross Amount Companies Other Companies Net Amount to Net Amount
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Life insurance in force $ 1,137,219 $ 2,015,951 $ 1,740,519 $ 861,787 202.0%
Year Ended December 31, 1996
Life insurance in force $ 1,214,895 $ 2,056,073 $ 1,852,732 $ 1,011,554 183.2%
Year Ended December 31, 1995
Life insurance in force $ 1,309,604 $ 1,728,116 $ 985,870 $ 567,358 173.8%
</TABLE>
S-9
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------------
Charged Charged to
Beginning of to Other End of Year
Description Year Expense Accounts Deductions
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Valuation allowance on deferred tax
assets:
1997 $ 38,798 $ 6,692 $ -- $ (8,922)(1) $ 36,568
1996 $ 37,336 $ 2,517 $ 9,949 (2) $ (11,004)(1) $ 38,798
1995 $ 66,489 $ 5,895 $ 3,956 (3) $ (39,004)(1) $ 37,336
</TABLE>
(1) In the event that deferred tax assets are recognized on deductible
temporary differences for which a valuation allowance was provided at the
date of an acquisition, such benefits are applied to first reduce the
balance of intangible assets related to the acquisition, and then income
tax expense. As such, the Company reduced its valuation allowance with an
offsetting reduction to acquisition-related intangible assets such as value
of insurance in force and goodwill. In addition, after acquisition-related
intangible assets were reduced to zero for two of the Company's
subsidiaries, the reduction in valuation allowance resulted in a reduction
of income taxes. The portion of the December 31, 1994 valuation allowance
related to deferred tax assets for net unrealized losses on
available-for-sale securities was reduced to zero as of December 31, 1995.
The Company's available-for-sale portfolios had net unrealized gains at
December 31, 1997, 1996 and 1995 which did not require a valuation
allowance.
(2) As the acquisition-related valuation allowance described in (1) above was
initially released, the reduction in the intangible assets related to the
acquisition generated additional deferred tax assets. A valuation allowance
was provided for these additional deferred tax assets.
(3) Related to deferred tax assets on acquired capital losses established on
May 31, 1995 in connection with the SBM acquisition.
S-10
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF
"ARM FINANCIAL GROUP, INC.", FILED IN THIS OFFICE ON THE TWENTIETH DAY OF JUNE,
A.D. 1997, AT 11 O'CLOCK A.M.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2343817 8100 AUTHENTICATION: 8525261
971207055 DATE: 06-24-97
<PAGE>
----------------------------
RESTATED
CERTIFICATE OF INCORPORATION
OF
ARM FINANCIAL GROUP, INC.
----------------------------
ARM FINANCIAL GROUP, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is ARM Financial Group, Inc. The
Corporation was originally incorporated under the name A R M Financial Group,
Inc. The original Certificate of Incorporation of the Corporation was filed with
the Secretary of State of the State of Delaware on July 15, 1993.
2. Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware (the "DGCL"), this Restated Certificate of
Incorporation restates and integrates and further amends the provisions of the
Certificate of Incorporation of this Corporation. Pursuant to and in accordance
with the provisions of Section 228 of the DGCL, written consent to this Restated
Certificate of Incorporation has been given in lieu of a vote of stockholders at
a meeting and written notice of such written consent has been given to all
stockholders who have not consented in writing to this Restated Certificate of
Incorporation.
3. The text of the original Certificate of Incorporation as
heretofore amended or supplemented is hereby restated and further amended to
read in its entirety as follows:
ARTICLE I
NAME
SECTION 1.1 NAME. The name of the Corporation is ARM Financial
Group, Inc.
<PAGE>
2
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
SECTION 2.1 OFFICE AND AGENT. The address of the registered
office of the Corporation in the State of Delaware is Corporation Trust
Center, 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the registered agent of the Corporation at such address is The
Corporation Trust Company.
ARTICLE III
CORPORATE PURPOSE
SECTION 3.1 PURPOSE. The purpose of the Corporation is to engage in
any lawful act or activity for which corporations may be organized under the
DGCL.
ARTICLE IV
CAPITALIZATION
SECTION 4.1 AUTHORIZED CAPITAL. SHARES. (a) The Corporation is
authorized to issue three classes of stock to be designated, respectively,
"Class A Convertible Common Stock", "Class B Convertible Non-Voting Common
Stock" (referred to herein collectively together with the Class A Convertible
Common Stock as the "Common Stock") and "Preferred Stock." The total number of
shares that the Corporation is authorized to issue is two hundred ten million
(210,000,000) shares. One hundred fifty million (150,000,000) shares shall be
Class A Convertible Common Stock, par value $.01 per share, Fifty million
(50,000,000) shares shall be Class B Convertible Non-Voting Common Stock, par
value $.01 per share, and ten million (10,000,000) shares shall be Preferred
Stock, par value $.01 per share.
(b) Concurrently with the effectiveness of this Restated Certificate
of Incorporation, each share of Class A Common Stock, par value $.01 per share,
and Class B Common Stock, par value $.01 per share, of the Corporation
outstanding immediately prior to the effectiveness of this Restated Certificate
of Incorporation shall be redesignated as one share of Class A Convertible
Common Stock.
<PAGE>
3
SECTION 4.2 COMMON STOCK. The designations and the powers,
preferences and rights of the Common Stock are as follows:
(a) VOTING RIGHTS.
(i) CLASS A CONVERTIBLE COMMON STOCK . Except as set forth herein or
as otherwise required by law, each outstanding share of Class A Convertible
Common Stock shall be entitled to vote on each matter on which the
stockholders of the Corporation shall be entitled to vote, including the
election of directors, and each holder of Class A Convertible Common Stock
shall be entitled to one vote for each share of such stock held by such
holder.
(ii) CLASS B CONVERTIBLE NON-VOTING COMMON STOCK. Except as set forth
herein or as otherwise required by law, each outstanding share of Class B
Convertible Non-Voting Common Stock shall not be entitled to vote on any
matter on which the stockholders of the Corporation shall be entitled to
vote, and shares of Class B Convertible Non-Voting Common Stock shall not
be included in determining the number of shares voting or entitled to vote
on any such matters. Notwithstanding the foregoing, holders of shares of
the Class B Convertible Non-Voting Common Stock shall be entitled to vote
as a separate class on any amendment to this subparagraph (a)(ii) and on
any amendment, repeal or modification of any provision of this Restated
Certificate of Incorporation that adversely affects the powers, preferences
or special rights of holders of the Class B Convertible Non-Voting Common
Stock.
The number of authorized shares of Class B Convertible Non-Voting
Common Stock may be increased or decreased (but not below the number of
shares thereof then outstanding plus the number of shares of Class B
Convertible Non-Voting Common Stock issuable or exercisable pursuant to any
security of the Corporation providing for the issuance or delivery of Class
B Convertible Non-Voting Common Stock) by the affirmative vote of the
holders of a majority of the outstanding shares of Class A Convertible
Common Stock and without any vote or consent of the holders of shares of
Class B Convertible Non-Voting Common Stock.
(b) DIVIDENDS AND DISTRIBUTIONS. Subject to the prior rights of
holders of all classes of stock at the time outstanding having prior rights as
to dividends, the Board of Directors of the Corporation (the "Board of
Directors") may cause dividends to be paid to the holders of shares of Common
Stock out of funds legally available for the payment of dividends by declaring
an amount per share as a dividend. When and as dividends or other distributions
(including without limitation any grant or distribution of rights to subscribe
for or purchase shares of capital stock or securities or indebtedness
convertible into capital stock of the Corporation) are declared, whether payable
in cash, in property or in shares of stock of the Corporation (other than in
shares of Common Stock) the holders of Common Stock shall be entitled to share
equally, share for share, in such dividends or other distributions as if all
such shares were of a single class. No dividends or other distributions shall be
<PAGE>
4
declared or paid in shares of Common Stock, or options, warrants or rights to
acquire such stock or securities convertible into or exchangeable for shares of
such stock, except dividends or other distributions payable to all of the
holders of Common Stock ratably according to the number of shares held by them,
in shares of Class A Convertible Common Stock to holders of that class of stock,
and in shares of Class B Convertible Non-Voting Common Stock to holders of that
class of stock.
(c) LIQUIDATION. Subject to the prior rights of holders of all
classes of stock outstanding having prior rights with respect to the assets of
the Corporation, in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, holders of Common
Stock shall be entitled to share ratably according to the number of shares held
by them, in all assets of the Corporation available for distribution to its
stockholders.
(d) CONVERSION
(i) CONVERSION OF CLASS A CONVERTIBLE COMMON STOCK. Subject to and
upon compliance with the provisions of this subparagraph (d), each Morgan
Stanley Stockholder (as hereinafter defined) shall be entitled to convert,
at any time and from time to time, any or all of the shares of Class A
Convertible Common Stock held by such stockholder into an equal number of
shares of Class B Convertible Non-Voting Common Stock; PROVIDED that:
(A) following receipt of a Deferral Notice (as defined in
paragraph (d)(iv) below), the aggregate number of shares of Class A
Convertible Common Stock permitted to be converted at the end of the
related Deferral Period (as defined in paragraph (d)(iv) below) by
each such stockholder (other than a stockholder that requested a
conversion and thereby triggered such Deferral Notice, which
stockholder shall be entitled to convert all shares such stockholder
has requested to convert) in accordance with paragraph (d)(iv) shall
be equal to the number of shares of Class A Convertible Common Stock
held by such stockholder that are required to be converted so that
such stockholder (after giving effect to the proposed redemption,
repurchase or other acquisition, if any, and to all other conversions
during or upon the expiration of such Deferral Period) holds the same
percentage of the total outstanding Class A Convertible Common Stock
as such stockholder held immediately prior to the receipt of the
relevant Deferral Notice, and
(B) notwithstanding anything to the contrary in the immediately
preceding clause (A), in the case of any such conversion (including
any conversion in accordance with paragraph (d)(iv)) or in the case of
any acquisition of additional shares of Class A Convertible Common
Stock by any Morgan Stanley Stockholder, shares of Class A Convertible
Common Stock
<PAGE>
5
held by Morgan Stanley Stockholders shall be automatically converted
into shares of Class B Convertible Non-Voting Common Stock to the
extent necessary so that, after giving effect to all such conversions
(and to any other related redemptions, repurchases or other
acquisitions), the Morgan Stanley Stockholders shall not own in the
aggregate a number of shares of Class A Convertible Common Stock
greater than the MS Percentage (as hereinafter defined).
(ii) CONVERSION OF CLASS B CONVERTIBLE NON-VOTING COMMON STOCK.
Subject to and upon compliance with the provisions of this subparagraph
(d), each Morgan Stanley Stockholder shall be entitled at any time and from
time to time, if at such time the Morgan Stanley Stockholders shall
beneficially own, in the aggregate, a number of shares of Class A
Convertible Common Stock less than the MS Percentage, to convert a number
of its shares of Class B Convertible Non-Voting Common Stock held by such
Morgan Stanley Stockholder, PRO RATA in proportion to the number of shares
of Class B Convertible Non-Voting Common Stock held by all Morgan Stanley
Stockholders, into an equal number of shares of Class A Convertible Common
Stock such that, if all Morgan Stanley Stockholders were to exercise the
right to convert as set forth in this subparagraph (d)(ii), the Morgan
Stanley Stockholders would, following such conversion, beneficially own in
the aggregate a number of shares of Class A Convertible Common Stock no
greater than the MS Percentage.
(iii) CONVERSION PROCEDURE. Each conversion of shares of any class of
Common Stock of the Corporation into shares of another class of Common
Stock of the Corporation shall be effected by the surrender of the
certificate or certificates representing the shares to be converted (the
"Converting Shares") at the principal office of the Corporation (or such
other office or agency of the Corporation as the Corporation may designate
by written notice to the holders of Common Stock) at any time during its
usual business hours, together with written notice by the holder of such
Converting Shares, stating that such holder desires to convert the
Converting Shares, or a stated number of the shares represented by such
certificate or certificates, into an equal number of shares of the class
into which such shares may be converted (the "Converted Shares"). Such
notice shall also state the name or names (with addresses) and
denominations in which the certificate or certificates for Converted Shares
are to be issued and shall include instructions for the delivery thereof.
The Corporation shall promptly notify each Morgan Stanley Stockholder of
its receipt of such notice. Promptly after such surrender and the receipt
of such written notice, the Corporation will, subject to the terms of
subparagraphs (d)(i) and (d)(ii) hereof, issue and deliver in accordance
with the surrendering holder's instructions the certificate or certificates
evidencing the Converted Shares issuable upon such conversion, and the
Corporation will deliver to the converting holder a certificate (which
shall contain such legends as were set forth on the surrendered certificate
or certificates) representing any shares which were represented by the
certificate or certificates that
<PAGE>
6
were delivered to the Corporation in connection with such conversion, but
which were not converted; PROVIDED, HOWEVER, that if such conversion is
subject to subparagraph (d)(iv) below, the Corporation shall not issue such
certificate or certificates until the expiration of the Deferral Period
referred to therein. Such conversion, to the extent permitted by law, shall
be deemed to have been effected as of the close of business on the date on
which such surrendered certificate or certificates shall have been received
by the Corporation, and at such time the rights of the holder of the
Converting Shares as such holder shall cease and the person or persons in
whose name or names the certificate or certificates for the Converted
Shares are to be issued upon such conversion shall be deemed to have become
the holder or holders of record of the Converted Shares. Notwithstanding
the foregoing, in the case of a conversion subject to subparagraph (d)(iv)
below. the conversion shall be deemed effective upon the expiration of the
Deferral Period referred to therein.
(iv) NOTICE OF CONVERSIONS OR OTHER TRANSFERS TO THE MORGAN STANLEY
STOCKHOLDERS. The Corporation shall not convert or directly or indirectly
redeem, repurchase or otherwise acquire any shares of Class A Convertible
Common Stock or any other class of capital stock of the Corporation or take
any other action affecting the voting rights of such shares if such action
would increase the percentage of any class of outstanding voting securities
beneficially owned or controlled by any Morgan Stanley Stockholder (other
than any such stockholder which requested that the Corporation take such
action, or which otherwise waives in writing its rights under this
subparagraph (d)(iv)), unless the Corporation gives written notice (the
"Deferral Notice") of such action to each Morgan Stanley Stockholder. The
Corporation will defer making any such conversion, redemption, purchase or
other acquisition, or taking any such other action for a period of 10
business days (the "Deferral Period") after giving the Deferral Notice in
order to allow each Morgan Stanley Stockholder to determine whether it
wishes to convert or take any other action with respect to the Common Stock
it beneficially owns, controls or has the power to vote, and if any such
Morgan Stanley Stockholder then elects to convert any shares of Class A
Convertible Common Stock it shall notify the Corporation in writing within
5 business days of the issuance of the Deferral Notice, in which case the
Corporation shall (i) defer taking the pending action until the end of the
Deferral Period, (ii) promptly notify from time to time each Morgan Stanley
Stockholder holding shares of each proposed conversion and the proposed
transactions, and (iii) effect the conversions requested by all Morgan
Stanley Stockholders in response to the notices issued pursuant to this
subparagraph (d)(iv) at the end of the Deferral Period.
The Corporation shall deliver notice to each Morgan Stanley
Stockholder (i) of the issuance of any shares of Class A Convertible Common
Stock which, together with any other such issuances since the date of the
last prior such notice, results in the number of outstanding shares of
Class A Convertible Common Stock increasing by 3 percent or more since the
date of such last prior notice and (ii) on the first day
<PAGE>
7
of each quarter, of the number of shares of each class of stock outstanding
on such date.
(v) AUTOMATIC CONVERSION UPON TRANSFER. Upon a Transfer (as
hereinafter defined) by any Morgan Stanley Stockholder of any shares of
Class B Convertible Non-Voting Common Stock to a person other than any
other Morgan Stanley Stockholder or any Affiliate of any Morgan Stanley
Stockholder, any shares of Class B Convertible Non-Voting Common Stock so
Transferred shall automatically, without any action on part of the
transferor, the transferee or the Corporation, be converted into an equal
number of shares of Class A Convertible Common Stock upon the consummation
of such Transfer. Upon surrender of the certificate or certificates
representing the shares so Transferred and converted, the Corporation shall
issue and deliver in accordance with the surrendering holder's instructions
the certificate or certificates representing the shares of Class A
Convertible Common Stock into which such Transferred shares have been
converted.
(vi) STOCK SPLITS; ADJUSTMENTS. If the Corporation shall in any
manner subdivide (by stock split, stock dividend or otherwise) or combine
(by reverse stock split or otherwise) the outstanding shares of any class
of Common Stock, the outstanding shares of each other class of Common Stock
shall be subdivided or combined, as the case may be, to the same extent,
share and share alike, and effective provision shall be made for the
protection of the conversion rights hereunder.
In case of any reorganization, reclassification or change of shares of
any class of Common Stock (other than a change in par value or from par to
no par value as a result of a subdivision or combination), or in case of
any consolidation of the Corporation with one or more corporations or a
merger of the Corporation with another corporation, each holder of a share
of Common Stock, irrespective of class, shall have the right at any time
thereafter, so long as the conversion right hereunder with respect to such
share would exist had such event not occurred, to convert such share into
the kind and amount of shares of stock and other securities and properties
(including cash) receivable upon such reorganization, reclassification,
change, consolidation, merger, sale, lease or other disposition by a holder
of the number of shares of the class of Common Stock into which such shares
of Common Stock might have been converted immediately prior to such
reclassification, change, consolidation, merger, sale, lease or other
disposition. In the event of such a reorganization, reclassification,
change, consolidation, merger, sale, lease or other disposition, effective
provision shall be made in the certificate of incorporation of the
resulting or surviving corporation or otherwise for the protection of the
conversion rights of the shares of Common Stock of each class that shall be
applicable, as nearly as reasonably may be, to any such other shares of
stock and other securities and property deliverable upon conversion of
shares of Common Stock into which such Common Stock might have been
converted immediately prior to such event.
<PAGE>
8
(vii) RESERVATION OF SHARES. The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of
each class of Common Stock or its treasury shares, solely for the purposes
of issuance upon the conversion of shares of any class of Common Stock,
such number of shares of such class as are then issuable upon the
conversion of all outstanding shares of each such class of Common Stock.
(viii) NO CHARGE. The issuance of certificates for shares of any class
of Common Stock upon conversion of shares of any other class of Common
Stock shall be made without charge to the holders of such shares for any
issuance tax in respect thereof or other cost incurred by the Corporation
in connection with such conversion and the related issuance of shares of
Common Stock; PROVIDED, HOWEVER, that the Corporation shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other
than that of the holder of the Common Stock converted.
(e) NO PREEMPTIVE RIGHTS. The holders of shares of Common Stock shall
have no preemptive or preferential rights of subscription to any shares of any
class of capital stock of the Corporation or any securities convertible into or
exchangeable for shares of any class of capital stock of the Corporation.
SECTION 4.3 PREFERRED STOCK. (a) Shares of Preferred Stock of the
Corporation may be issued from time to time in one or more classes or series,
each of which class or series shall have such distinctive designation or title
as shall be fixed by the affirmative vote of a majority of the whole Board of
Directors prior to the issuance of any shares thereof. Each such class or series
of Preferred Stock shall have such voting powers, full or limited, or no voting
powers, and such designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions,
including the dividend rate, redemption price and liquidation preference, and
may be convertible into, or exchangeable for, at the option of either the holder
or the Corporation or upon the happening of a specified event, shares of any
other class or classes or any other series of the same or any other class or
classes of capital stock, or any debt securities, of the Corporation at such
price or prices or at such rate or rates of exchange and with such adjustments
as shall be stated and expressed in this Restated Certificate of Incorporation
or in any amendment hereto or in such resolution or resolutions providing for
the issuance of such class or series of Preferred Stock as may be adopted from
time to time by the affirmative vote of a majority of the whole Board of
Directors prior to the issuance of any shares thereof pursuant to the authority
hereby expressly vested in it, all in accordance with the DGCL. The authority of
the Board of Directors with respect to each series shall also include, but not
be limited to, the determination of restrictions, if any, on the issue or
reissue of any additional shares of Preferred Stock.
(b) Pursuant to the authority conferred by this Section 4.3 of
Article IV, the following series of Preferred Stock has been designated,
consisting of such number of
<PAGE>
9
shares, with such voting power and with such designations, preferences, and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof as are stated and expressed in the exhibit
with respect to such series attached hereto as specified below and incorporated
herein by reference:
Exhibit P-1 9 1/2% Cumulative Perpetual Preferred Stock
SECTION 4.4 DEFINITIONS. As used herein, the following terms shall
have meanings shown below:
(a) "AFFILIATE" means with respect to any Person, any other Person,
directly or indirectly controlling, controlled by or under common control with
such Person, whether through the ownership of voting securities, by contract or
otherwise, and shall include, in the case of any Person that is a trust or is
acting through a nominee, any successor trust or nominee.
(b) "MORGAN STANLEY STOCKHOLDERS" means Morgan Stanley, Dean Witter,
Discover & Co., a Delaware corporation, its successors, any of its affiliates
(including, without limitation, Morgan Stanley Capital Investors, L.P., Morgan
Stanley Capital Partners III, L.P., MSCP 892 Investors, L.P. and The Morgan
Stanley Leveraged Equity Fund II, L.P., each a Delaware limited partnership) or
any member of the Board of Directors who was nominated for election to the Board
of Directors by any Morgan Stanley Stockholder.
(c) "MS PERCENTAGE" means 49% of the outstanding shares of Class A
Convertible Common Stock.
(d) "PERSON" means an individual, corporation, partnership,
association, trust or other entity or organization, including a government or
political subdivision or any agency or instrumentality thereof.
(e) "TRANSFER or "TRANSFERRED" means a transfer, sale, assignment,
pledge or other disposition.
ARTICLE V
COMPROMISE OR ARRANGEMENT
SECTION 5.1 COMPROMISE OR ARRANGEMENT. Whenever a compromise or
arrangement is proposed between the Corporation and its creditors or any class
of them and/or between the Corporation and its stockholders or any class of
them, any court of equitable jurisdiction within the State of Delaware may, on
the application in a summary way of the Corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers appointed
for the Corporation under the provisions of Section 291 of the
<PAGE>
10
DGCL or on the application of trustees in dissolution or of any receiver or
receivers appointed for the Corporation under the provisions of Section 279 of
the DGCL, order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such a manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization, if sanctioned by the
court to which the said application has been made, shall be binding on all the
creditors or the members of the class of creditors, and/or on all the
stockholders or the members of the class of stockholders, of the Corporation, as
the case may be, and also on the Corporation.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 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 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
<PAGE>
11
(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 of Directors.
(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, of 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 VI. 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 of Directors deems appropriate.
<PAGE>
12
(g) RIGHTS NOT EXCLUSIVE. The indemnification and advancement of
expenses provided by, or granted pursuant to, the other subsections of this
Article VI 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 DGCL.
(i) DEFINITION OF "CORPORATION". For purposes of this Article VI,
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 VI with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(j) CERTAIN OTHER DEFINITIONS. For purposes of this Article VI,
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 VI.
(k) CONTINUATION OF RIGHTS. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article VI 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.
<PAGE>
13
(l) REPEAL OR MODIFICATION. Any repeal or modification of this
Article VI 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 VII
LIABILITY OF A DIRECTOR
SECTION 7.1 DIRECTOR LIABILITY. (a) A director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived any improper personal benefit.
(b) If the DGCL is amended hereafter to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
authorized by the DGCL, as so amended, without further action by either the
Board of Directors or the stockholders of the Corporation.
(c) Any repeal or modification of this Article VII shall not
adversely affect any right or protection of a director of the Corporation
existing hereunder with respect to any act or omission occurring prior to or
at the time of such repeal or modification.
ARTICLE VIII
MANAGEMENT OF THE AFFAIRS OF THE CORPORATION
SECTION 8.1 MANAGEMENT OF THE AFFAIRS OF THE CORPORATION. (a) The
business and affairs of the Corporation shall be managed by the Board of
Directors, which may exercise all the powers of the Corporation and do all such
lawful acts and things that are not conferred upon or reserved to the
stockholders by law, by this Amended and Restated Certificate of Incorporation
or by the by-laws of the Corporation (the "By-Laws").
(b) Election of directors of the Corporation need not be by written
ballot, unless required by the By-Laws.
<PAGE>
14
(c) The following provisions are inserted for the limitation and
regulation of the powers of the Corporation and of its directors and
stockholders:
(1) The 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 this Amended and Restated Certificate of Incorporation as it
may be amended from time to time, either by a majority of the whole Board
of Directors or by the stockholders of the Corporation upon the affirmative
vote of the holders of at least a 80% of the outstanding capital stock
entitled to vote thereon.
(2) The Board of Directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as
nearly as may be possible, of one-third of the total number of directors
constituting the entire Board of Directors. The initial division of the
Board of Directors shall be made by the decision of a majority of the
entire Board of Directors. The term of the initial Class I directors shall
terminate on the date of the 1998 annual meeting of stockholders; the term
of the initial Class II directors shall terminate on the date of the 1999
annual meeting of stockholders; and the term of the initial Class III
directors shall terminate on the date of the 2000 annual meeting of
stockholders. At each annual meeting of stockholders, beginning with the
1998 annual meeting of stockholders, successors to the class of directors
whose term expires at that annual meeting shall be elected for a three-year
term. If the number of directors is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of directors
in each class as nearly equal as possible, but in no case will a decrease
in the number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting for the year in which
his term expires and until his successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. 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 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.
Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at
an annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be
governed by the terms of this Restated Certificate of Incorporation or the
resolution or resolutions adopted by the Board of Directors
<PAGE>
15
pursuant to Section 4.3 hereof applicable thereto, and such directors so
elected shall not be divided into classes pursuant to this Section 8.1(c)
unless expressly provided by such terms.
(3) 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 this 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.
(A) Nomination of persons for election to the Board of
Directors 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 of
Directors (or any duly authorized committee thereof) or (ii) by any
stockholder of the Corporation (x) who is a stockholder of record
on the date of the giving of the notice provided for in this
Section 8.1(c)(3) and on the record date for the determination of
stockholders entitled to vote at such meeting and (y) who complies
with the notice procedures set forth in this Section 8.1(c)(3). In
addition to any other applicable requirements, for a nomination to
be made by a stockholder pursuant to clause (ii) of this Section
8.1(c)(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 8.1(c)(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 8.1(c)(3)(A) must
set forth (a) as to each person whom the stockholder proposes to
nominate
<PAGE>
16
for election as a director, (i) the name, age, business address and
residence address of the person, (ii) the principal occupation or
employment of the person, (iii) 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 (iv) 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 (b) as to the
stockholder giving the notice, (i) the name and record address of
such stockholder, (ii) 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, (iii) 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, (iv) 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 (v) 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 8.1(c)(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.
(4) Subject to the rights, if any, of the holders of shares
of Preferred Stock then outstanding, any or all of the directors of the
Corporation may be removed from office at any time only for cause by the
affirmative vote of holders of a majority of the outstanding shares of
the Corporation entitled to vote generally in the election of directors,
considered for purposes of this paragraph as one class.
(5) So long as the Morgan Stanley Stockholders own in the
aggregate at least 25% of the voting Common Stock of the Corporation, an
action required or
<PAGE>
17
permitted to be taken at an annual or special meeting of stockholders
may be taken with the written consent of the stockholder or stockholders
having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. From and after the time
that the Morgan Stanley Stockholders no longer own in the aggregate at
least 25% of the voting Common Stock of the Corporation, an action
required or permitted to be taken at an annual or special meeting of
stockholders will not be permitted to be taken by written consent in
lieu of a meeting of stockholders, and, thus, stockholders will only be
permitted to take action at an annual or special meeting called in
accordance with the By-Laws.
(6) Special meetings of the stockholders of the Corporation for
any purpose or purposes may be called at any time by (i) a majority of
the members of the Board of Directors or (ii) any one of the Co-Chairman
of the Corporation. Special meetings of the stockholders of the
Corporation may not be called by any other person or persons.
ARTICLE IX
AMENDMENTS
SECTION 9.1 AMENDMENTS. Notwithstanding anything contained in
this Restated Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 80% of the outstanding shares of capital
stock of the Corporation entitled to vote thereon shall be required to amend,
repeal, or adopt any provision inconsistent with, Section 4.3 of Article IV,
Section 8.1(c) of Article VIII or this Article IX of this Restated
Certificate of Incorporation.
ARTICLE X
PRIVATE PROPERTY
SECTION 10.1 PRIVATE PROPERTY. The private property of the
stockholders of the Corporation shall not be subject to the payment of
corporate debts to any extent whatsoever.
This Restated Certificate of Incorporation shall become effective at
9:45 am (EST), June 24, 1997.
<PAGE>
18
IN WITNESS WHEREOF, ARM FINANCIAL GROUP, INC. has caused this Restated
Certificate of Incorporation to be signed by John Franco, its Co-Chairman of the
Board of Directors and Co-Chief Executive Officer, and by Martin H. Ruby, its
Co-Chairman of the Board of Directors and Co-Chief Executive Officer, and
attested by, Robert H. Scott, its Secretary, this 18th day of June, 1997.
ARM FINANCIAL GROUP, INC.
By: /s/ John Franco
--------------------------
John Franco
Co-Chairman of the Board of Directors
and Co-Chief Executive Officer.
By: /s/ Martin H. Ruby
--------------------------
Martin H. Ruby
Co-Chairman of the Board of Directors
and Co-Chief Executive Officer.
ATTEST
By: /s/ Robert H. Scott
-------------------------
Robert H. Scott
Secretary
<PAGE>
EXHIBIT P-1
ARM FINANCIAL GROUP, INC.
-------------------------
9 1/2% CUMULATIVE PERPETUAL PREFERRED STOCK
-------------------------
1. DESIGNATION. 2,300,000 shares of the Preferred Stock of the
Corporation are hereby constituted as a series of Preferred Stock, par value
$.01 per share, stated value $25.00 per share, and designated as "9-1/2%
Cumulative Perpetual Preferred Stock" (hereinafter referred to as the
"Cumulative Perpetual Preferred Stock"). The number of authorized shares of
Cumulative Perpetual Preferred Stock may be increased or decreased by further
resolution duly adopted by the Board of Directors and by the filing of a
certificate pursuant to the provisions of the General Corporation Law of the
State of Delaware (the "Corporation Law") stating that such increase or decrease
has been so authorized, but the number of authorized shares of Cumulative
Perpetual Preferred Stock shall not be decreased to a number below the total
number of shares then outstanding.
2. DEFINITIONS. As used herein, the following terms shall have the
following meanings, unless the context otherwise requires:
"Additional Directors" shall have the meaning specified in paragraph B
of Section 6 hereof.
"Board of Directors" shall mean the Board of Directors of the
Corporation or, unless the context otherwise requires, an authorized
committee thereof.
"Business Day" shall mean a day on which the New York Stock Exchange is
open for trading and which is neither a Saturday, Sunday nor other day on
which banks in The City of New York, New York, are authorized by law to close.
"Date of Original Issue" shall mean, as to any Share, the date on which
the Corporation initially issues such Share.
"Default Period" shall have the meaning specified in paragraph B of
Section 6 hereof.
"Dividend Disbursing Agent" shall have the meaning specified in section
9 hereof.
<PAGE>
2
"Dividend Payment Date" shall have the meaning specified in paragraph A
of Section 3 hereof.
"Dividend Period" shall have the meaning specified in paragraph A of
Section 3 hereof.
"Dividend Rate" shall have the meaning specified in paragraph B of
Section 3 hereof.
"Holder" or "holder" shall mean, when used with respect to the Shares,
the holder of such Shares as the same appears on the Stock Books.
"Initial Dividend Period" shall have the meaning specified in paragraph
A of Section 3 hereof.
"Junior Liquidation Stock" shall have the meaning specified in Section 4
hereof.
"Junior Shares" shall have the meaning specified in paragraph A of
Section 3 hereof.
"Outstanding" shall mean, with respect to Shares, as of any date, Shares
theretofore issued by the Corporation except for (i) any Shares theretofore
cancelled or delivered for cancellation by the Corporation, (ii) any Shares
as to which the Corporation or any subsidiary thereof shall be an owner,
beneficially or of record, or (iii) any Shares evidenced by any certificate
in lieu of which a new certificate has been executed and delivered by the
Corporation.
"Parity Preferred" shall have the meaning specified in paragraph A of
Section 3 hereof.
"Parity Securities" shall have the meaning specified in paragraph B of
Section 6 hereof.
"Person" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
"Redemption Date" shall have the meaning specified in paragraph A of
Section 5 hereof.
"Redemption Price" shall have the meaning specified in paragraph A of
Section 5 hereof.
"Registrar" shall have the meaning specified in Section 9 hereof.
"Shares" shall mean shares of the Cumulative Perpetual Preferred Stock.
<PAGE>
3
"Stated Liquidation Preference" shall have the meaning specified in
Section 4 hereof.
"Stock Books" shall mean the stock transfer books of the Corporation
maintained by the Corporation or any agent of the Corporation.
"Transfer Agent" shall have the meaning specified in Section 9 hereof.
3. DIVIDENDS AND DIVIDEND PERIODS. A. GENERAL. The holders of
Shares shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation, out of funds legally available therefor,
cumulative cash preferential dividends at the Dividend Rate per annum, on the
dates, for the periods and otherwise in the manner provided in this Section 3.
The dates at which such preferential dividends on the Cumulative Perpetual
Preferred Stock shall accumulate shall be the fifteenth day of March, June,
September and December of each year or, if such date is not a Business Day, on
the next succeeding Business Day (each a "Dividend Payment Date"), commencing on
March 15, 1994. Each preferential dividend on the Cumulative Perpetual Preferred
Stock shall accumulate with respect to a quarterly dividend period starting on
the day after a Dividend Payment Date and ending on the next Dividend Payment
Date (a "Dividend Period"); PROVIDED that the initial preferential dividend
shall accumulate with respect to a period that commences on the Date of Original
Issue and ends on March 15, 1994 (the "Initial Dividend Period"). Such
preferential dividends on the Cumulative Perpetual Preferred Stock shall be
declared and paid or set apart for payment in full for all previous Dividend
Periods before the declaration, payment or setting apart of any funds or assets
for payment of any dividends (other than dividends in common stock of the
Corporation or other stock ranking junior to the Cumulative Perpetual Preferred
Stock as to dividends or the distribution of assets) on, or the making of, or
the setting apart of, any funds or assets for any distribution with respect to
any shares of the Corporation's common stock or any other stock of the
Corporation ranking junior to the Cumulative Perpetual Preferred Stock as to
dividends or the distribution of assets ("Junior Shares"), and before any
purchase, redemption or other acquisition of any Junior Shares or the setting
apart of any funds or assets for such purchase, redemption or acquisition. No
preferential dividend shall be declared or paid or set apart for payment on any
Shares for any current Dividend Period if dividends on any other Share or any
other stock of the Corporation ranking on a parity with the Cumulative Perpetual
Preferred Stock as to payment of dividends and distribution of assets ("Parity
Preferred") are accumulated and unpaid for any prior Dividend Period or, in case
of payment of dividend arrearages on Cumulative Perpetual Preferred Stock or
Parity Preferred, unless at the same time the Corporation shall also declare,
pay or set apart for payment, as the case may be, such amounts with respect to
all such dividend arrearages on all Cumulative Perpetual Preferred Stock and
Parity Preferred so that all such shares shall share ratably in such
declaration, payment or reserve for payment in proportion to the respective
amounts of dividends in arrears on all such shares to the date of payment. For
purposes of this Section 3, dividend accumulations and arrearages do not include
any dividends for any Dividend Payment Date that has not occurred.
<PAGE>
4
B. FIXED DIVIDEND RATE. Dividends on the Cumulative Perpetual
Preferred Stock shall be cumulative from the Date of Original Issue and shall be
payable to Holders as they appear on the Stock Books on the close of business on
such respective dates, not exceeding 60 days preceding such Dividend Payment
Date, as may be fixed by the Board of Directors in advance of the related
Dividend Payment Date. Dividends on the Cumulative Perpetual Preferred Stock
will accrue whether or not there are funds legally available for the payment of
such dividends and whether or not such dividends are declared and will
accumulate to the extent they are not paid an the Dividend Payment Date for the
Dividend Period during which they accrue. Dividends paid with respect to Shares
shall be paid pro rata to the holders entitled thereto. Dividends on account of
arrears for any past Dividend Periods may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to Holders on such date,
not exceeding 60 days preceding the payment date thereof, as may be fixed by the
Board of Directors. The dividend rate ("Dividend Rate") on the Cumulative
Perpetual Preferred Stock for the initial Dividend Period, and for each Dividend
Period thereafter, shall be 9-1/2% per annum. The amount of dividends payable
for each full quarter Dividend Period for each Share shall be computed by
dividing the Dividend Rate by four and multiplying the resulting rate by the
amount of $25.00 per Share. The amount of dividends payable for the Initial
Dividend Period on the Cumulative Perpetual Preferred Stock, or any other period
shorter or longer than a full Dividend Period on the Cumulative Perpetual
Preferred Stock, shall be computed on the basis of a 360-day year of twelve
30-day months. Holders shall not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends, as herein
provided, on the Cumulative Perpetual Preferred Stock unless declared by the
Board of Directors. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Cumulative
Perpetual Preferred Stock which may be in arrears.
4. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding
up of the affairs of the Corporation, whether voluntary or involuntary, Holders
shall be entitled to receive, out of assets of the Corporation available for
distribution to stockholders after satisfying claims of creditors but before
distribution to holders of the Corporation's common stock or any other stock of
the Corporation ranking junior to the Cumulative Perpetual Preferred Stock upon
liquidation ("Junior Liquidation Stock"), a liquidation distribution in the
amount of $25.00 per Share (the "Stated Liquidation Preference") plus, with
respect to each Share, an amount equal to all accrued and unpaid dividends on
such Share (whether or not earned or declared) to and including the date of
final distribution (together with the Stated Liquidation Preference, the
"Preference Amount"). If, upon any liquidation, dissolution or winding up of the
affairs of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of the Cumulative Perpetual Preferred
Stock and any other class or series of stock ranking on a parity with the
Cumulative Perpetual Preferred Stock as to payments upon liquidation,
dissolution or winding-up shall be insufficient to pay in full the Preference
Amount together with the full amount of the preferential amounts payable on such
other stock then such assets, or the proceeds thereof, shall be distributed
among such holders ratably in accordance with the respective amounts that would
be payable on such shares if all preferential amounts payable
<PAGE>
5
thereon were paid in full. The voluntary sale, conveyance, lease, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all the property or assets of the Corporation to, or a
consolidation or merger of the Corporation with or into, one or more other
corporations (whether or not the Corporation is the corporation surviving such
consolidation or merger) will not be deemed to be a liquidation, dissolution or
winding-up, voluntary or involuntary.
5. OPTIONAL REDEMPTION. A. GENERAL. The Shares may not be
redeemed prior to December 15, 1998. The Shares will be subject to redemption,
at the option of the Board of Directors, in whole or in part, at any time and
from time to time on or after December 15, 1998, upon at least 30 but not more
than 60 days' notice, at a redemption price equal in amount to the Stated
Liquidation Preference plus, with respect to each Share all accrued and unpaid
dividends and distributions (the "Redemption Price"), whether or not declared,
to the date of redemption (the "Redemption Date"). If less than all of the
Outstanding Shares are to be redeemed, the Corporation will select the Shares to
be redeemed by lot or pro rata (as nearly as may be practicable). There is no
sinking fund or other obligation of the Corporation to redeem or retire the
Shares. Unless full accumulated dividends on all Outstanding Shares shall have
been or contemporaneously are declared and paid or set apart for payment for all
past Dividend Periods, Shares may not be redeemed unless all of the Outstanding
Shares are redeemed and neither the Corporation nor any subsidiary of the
Corporation may purchase any Shares otherwise than pursuant to a purchase offer
made on the same terms to all Holders, provided that the Corporation may
complete the purchase or redemption of Shares for which a purchase contract was
entered into, or notice of redemption of which was initially given, prior to any
time at which the Corporation becomes in arrears with respect to any dividends
thereon. If fewer than all the Shares evidenced by any certificate are redeemed,
a new certificate shall be issued evidencing the unredeemed Shares without cost
to the holder thereof.
B. NOTICE. In the event that the Board of Directors shall determine
to redeem any Shares, notice of such redemption shall be given by the Transfer
Agent by first class mail, postage prepaid, mailed not less than thirty nor more
than sixty days prior to the Redemption Date, to each Holder of record to be
redeemed at such Holder's address as the same appears on the Stock Books. Each
such notice shall state: (i) the Redemption Date; (ii) the number of Shares to
be redeemed and, if less than all the Shares held by such holder are to be
redeemed, the number of Shares to be redeemed from such Holder; (iii) the
Redemption Price and the manner in which such Redemption Price is to be paid and
delivered; (iv) the place or places where certificates evidencing such Shares
are to be surrendered for payment of the Redemption Price; and (v) that
dividends on the Shares to be redeemed will cease to accrue on the Redemption
Date. The Corporation's obligation to provide moneys in accordance with the
provisions of Section 5(A) shall be deemed fulfilled if, on or before the
Redemption Date, but not earlier than 45 days prior to the Redemption Date, the
Corporation shall deposit with the Transfer Agent or other redemption agent, as
a trust fund, a sum sufficient to redeem the Shares called for redemption, with
irrevocable instructions and authority to such agent to give or complete the
required notice of redemption and to pay the
<PAGE>
6
Holders the Redemption Price upon surrender of their certificates evidencing
the Shares to be redeemed. Notice having been mailed as aforesaid, from and
after the Redemption Date, such deposit of moneys with such agent by the
Corporation shall be deemed to constitute full payment of such Shares to the
holders thereof, and, from and after the date of such deposit,
notwithstanding that any certificates evidencing such Shares shall not have
been surrendered for cancellation, (i) such Shares shall no longer be deemed
to be outstanding, (ii) the right to receive dividends and distributions on
the Shares so called for redemption shall cease to accrue from and after the
Redemption Date, (iii) arrearages in dividends, if any, on the Shares so
called for redemption shall cease to accumulate and all right of the holders
of Shares called for redemption as stockholders of the Corporation shall
cease and terminate, except for the right to receive the Redemption Price,
without interest, upon the surrender of such certificates. Any interest
accrued on the funds deposited with such agent shall be paid to the
Corporation from time to time. Any funds so deposited and unclaimed at the
end of six years from the Redemption Date shall, if thereafter requested by
the Board of Directors, be released or repaid to the Corporation, after
which, subject to any applicable laws relating to escheat or unclaimed
property, the holder or holders of such Shares so called for redemption shall
look only to the Corporation for payment of the Redemption Price.
6. VOTING RIGHTS. A. GENERAL. Holders of the Shares will have no
voting rights except as hereinafter described.
B. RIGHT TO ELECT TWO ADDITIONAL MEMBERS OF THE BOARD OF DIRECTORS.
(1) During any period when dividends on the Shares shall be in arrears for at
least six quarterly dividends, whether or not consecutive, and shall not have
been paid in full (a "Default Period") the authorized number of members of the
Board of Directors shall automatically be increased by two and the holders of
record of the Shares and any other Parity Preferred which have voting rights
comparable to the Shares which are then exercisable (the Shares and all such
other shares being referred to, collectively, as the "Parity Securities"),
voting as a class as described below, will be entitled to fill the vacancies so
created by electing two additional directors of the Corporation at the next
annual meeting of stockholders or at a special meeting of all of the holders of
the Parity Securities called in accordance with paragraph B(2) of this Section
6. The directors so elected (the "Additional Directors") will have only the
normal powers of members of the Board of Directors.
(2) At any time when such voting rights shall have vested, a proper
officer of the Corporation shall call or cause to be called, upon written
request of holders of record of 10% of the Shares then outstanding, a special
meeting of the holders of all the series of Parity Securities by mailing or
causing to be mailed to such holders a notice of such special meeting to be held
not less than ten and not more than 45 days after the date such notice is given.
The record date for determining holders of the Parity Securities entitled to
notice of and to vote at such special meeting will be the close of business on
the third Business Day preceding the day on which such notice is mailed. At any
such special meeting, all of the holders of the Parity Securities, by plurality
vote, voting together as a single class without regard to series will be
entitled to elect two directors on the basis of one vote per $25.00 of
<PAGE>
7
liquidation preference to which such Parity Securities are entitled by their
terms (excluding amounts in respect of accumulated and unpaid dividends) and not
cumulatively. The holder or holders of one-third of the Parity Securities then
outstanding, present in person or by proxy, will constitute a quorum for the
election of the Additional Directors except as otherwise provided by law. Notice
of all meetings at which holders of the Shares shall be entitled to vote will be
given to such Holders at their addresses as they appear in the Stock Books. At
any such meeting or adjournment thereof in the absence of a quorum, subject to
the provisions of any applicable law, a majority of the holders of the Parity
Securities present in person or by proxy shall have the power to adjourn the
meeting for the election of the Additional Directors, without notice, other than
an announcement at the meeting, until a quorum is present. If a Default Period
shall terminate after the notice of a special meeting has been given but before
such special meeting has been held, the Corporation shall, as soon as
practicable after such termination, mail or cause to be mailed notice of such
termination to holders of the Shares that would have been entitled to vote at
such special meeting.
(3) The term of office of all persons who are directors of the
Corporation at the time of a special meeting of holders of Parity Securities to
elect Additional Directors shall continue, notwithstanding the election of the
Additional Directors at such meeting by such holders. The Additional Directors,
together with the incumbent directors elected by holders of the Corporation's
common stock or other stock of the Corporation that are entitled to vote
generally for the election of directors shall constitute the duly elected
directors of the Corporation.
(4) So long as a Default Period continues, (i) any vacancy in the
office of an Additional Director may be filled (except as provided in the
following clause (ii)) by the person appointed in an instrument in writing
signed by the remaining Additional Director and filed with the secretary of the
Corporation or, in the event there is no remaining Additional Director by the
vote of the holders of the outstanding Parity Securities, voting together as a
single class without regard to series, in a meeting of stockholders or at a
meeting of holders of Parity Securities called for such purpose, and (ii) in the
case of the removal of any Additional Director, the vacancy may be filled by the
person elected by the vote of the holders of the outstanding Parity Securities,
voting together as a single class without regard to series on the basis set
forth in paragraph B(2) of this Section 6, at the same meeting at which such
removal shall be voted upon or any subsequent meeting. Each director who shall
be elected or appointed by the remaining Additional Director as aforesaid shall
be an Additional Director. Additional Directors may be removed only upon the
vote of the holders of the Outstanding Parity Securities voting together as a
single class without regard to series on the basis set forth in Paragraph B(2)
of this Section 6. The Default Period shall terminate upon payment in full of
all arrearages on dividends on the Cumulative Perpetual Preferred Stock. Upon
termination of the Default Period, the right of the holders of all of the series
of Parity Securities to vote for directors shall terminate and the term of
office of all Additional Directors shall also terminate.
<PAGE>
8
C. CONSENT TO NEW SHARES OR CHANGES IN PROVISIONS. The affirmative
vote or consent of the holders of at least (i) a majority of the Outstanding
Shares, voting as a class, will be required to authorize, create, or issue, or
increase the authorized or issued amount of shares of, any class or series of
Parity Preferred, and (ii) two-thirds of the Outstanding Shares, voting as a
class, will be required to (a) authorize, create, or issue, or increase the
authorized or issued amount of shares of, any class or series of stock ranking
prior to the Cumulative Perpetual Preferred Stock either as to dividends or upon
liquidation, or (b) amend, alter or repeal (whether by merger, consolidation or
otherwise) any provision of the Corporation's Certificate of incorporation or of
this Certificate of Designations of the Cumulative Perpetual Preferred Stock so
as to materially and adversely affect the preferences, special rights or powers
of the Cumulative Perpetual Preferred Stock, PROVIDED, HOWEVER, that any
increase in the number of authorized shares of preferred stock or the creation
and issuance of any other series of Parity Preferred or any Junior Shares shall
not be deemed to materially and adversely affect such preferences, special
rights or powers. With respect to any such amendment, alteration or repeal
(whether by merger, consolidation or otherwise) of any provision of the
Corporation's Certificate of Incorporation or of this Certificate of
Designations which would not equally affect each series of the Cumulative
Perpetual Preferred Stock, an affirmative vote or consent of the holders of at
least two-thirds of the Outstanding Shares and an affirmative vote or consent of
the holders of at least two-thirds of the Outstanding Shares of the series that
will have a diminished status as a result of such amendment, alteration or
repeal will be required. Except as set forth above or as required by law, the
holders of Cumulative Perpetual Preferred Stock will not be entitled to vote on
any merger or consolidation involving the Corporation or a sale of all or
substantially all of the assets of the Corporation.
7. PREEMPTIVE RIGHTS; CONVERSION OR EXCHANGE. The holders of
Shares shall not have, by virtue of their ownership of Shares, any preemptive
rights with respect to any shares of capital stock of the Corporation or any
other securities of the Corporation convertible into, or carrying rights or
options to purchase, any such shares. In addition, the holders of Shares shall
not have, by virtue of their ownership of Shares, any rights herein to convert
such Shares into or exchange such Shares for shares of any other class or
classes or of any other series of any class or classes of any securities of the
Corporation.
8. EXCLUSIVE REMEDY. In the event that dividends are not timely
declared on the Cumulative Perpetual Preferred Stock the exclusive remedy of the
Holders against the Corporation shall be as set forth in this Certificate of
Designations and in no event shall Holders have any right to maintain a suit or
proceeding against the Corporation in respect of such dividends or damages for
the failure to receive the same.
<PAGE>
9
9. ADDITIONAL AGREEMENTS. The Transfer Agent, Dividend Disbursing
Agent and Registrar for the Cumulative Perpetual Preferred Stock is Chemical
Bank.
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY "ARM FINANCIAL GROUP, INC." IS DULY INCORPORATED UNDER THE LAWS OF THE
STATE OF DELAWARE AND IS IN GOOD STANDING AND HAS A LEGAL CORPORATE EXISTENCE SO
FAR AS THE RECORDS OF THIS OFFICE SHOW, AS OF THE SEVENTEENTH DAY OF JUNE, A.D.
1997.
AND I DO HEREBY FURTHER CERTIFY THAT THE ANNUAL REPORTS HAVE BEEN FILED TO
DATE.
AND I DO HEREBY FURTHER CERTIFY THAT THE FRANCHISE TAXES HAVE BEEN PAID TO
DATE.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2343817 8300 AUTHENTICATION: 8514259
971197841 DATE: 06-17-97
<PAGE>
- -------------------------------------------------------------------------------
----------------------------
AMENDED AND RESTATED BY-LAWS
----------------------------
of
ARM FINANCIAL GROUP, INC.
Effective as of June 24, 1997
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
OFFICES
<TABLE>
<CAPTION>
<S> <C> <C>
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 . . . . . . . . . . . . . . . . . . 2
SECTION 2.4. Waiver of Notice . . . . . . . . . . . . . . . . . . . 2
SECTION 2.5. Adjournments . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.6. Quorum . . . . . . . . . . . . . . . . . . . . . . . . 3
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 . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.2. Number and Term of Holding Office . . . . . . . . . . . 5
SECTION 3.3. Nomination of Directors and Advance Notice Thereof. . . 5
SECTION 3.4. Resignation . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 3.5. Vacancies . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 3.6. Meetings . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 3.7. Action by Consent . . . . . . . . . . . . . . . . . . . 8
SECTION 3.8. Meetings by Conference Telephone, etc . . . . . . . . . 8
SECTION 3.9. Compensation . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV
COMMITTEES
SECTION 4.1. Committees . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
<PAGE>
ii
Page
ARTICLE V
OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 5.1. Officers . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.2. Authority and Duties . . . . . . . . . . . . . . . . . 10
SECTION 5.3. Term of Office, Resignation and Removal . . . . . . . . 10
SECTION 5.4. Vacancies . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.5. The Co-Chairmen . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.6. Vice Presidents . . . . . . . . . . . . . . . . . . . . 11
SECTION 5.7. The Secretary . . . . . . . . . . . . . . . . . . . . . 11
SECTION 5.8. Assistant Secretaries . . . . . . . . . . . . . . . . . 11
SECTION 5.9. The Treasurer . . . . . . . . . . . . . . . . . . . . . 11
SECTION 5.10. Assistant Treasurers . . . . . . . . . . . . . . . . . 12
SECTION 5.11. Additional Officers . . . . . . . . . . . . . . . . . . 12
ARTICLE VI
CHECKS, DRAFTS, NOTES AND PROXIES
SECTION 6.1. Checks, Drafts and Notes . . . . . . . . . . . . . . . 12
SECTION 6.2. Execution of Proxies . . . . . . . . . . . . . . . . . 12
ARTICLE VII
SHARES AND TRANSFER OF SHARES
SECTION 7.1. Certificates of Stock . . . . . . . . . . . . . . . . . 13
SECTION 7.2. Record . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 7.3. Transfer of Stock . . . . . . . . . . . . . . . . . . . 13
SECTION 7.4. Addresses of Stockholders . . . . . . . . . . . . . . . 13
SECTION 7.5. Lost, Destroyed or Mutilated Certificates . . . . . . . 13
SECTION 7.6. Facsimile Signatures . . . . . . . . . . . . . . . . . 14
SECTION 7.7. Regulations . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 7.8. Record Date . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 7.9. Registered Stockholders . . . . . . . . . . . . . . . . 14
SECTION 7.10. Stockholder Agreements . . . . . . . . . . . . . . . . 15
</TABLE>
ARTICLE VIII
BOOKS AND RECORDS
<PAGE>
iii
Page
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 8.1. Books and Records . . . . . . . . . . . . . . . . . . . 15
ARTICLE IX
SEAL
SECTION 9.1. Corporate Seal . . . . . . . . . . . . . . . . . . . . 15
ARTICLE X
FISCAL YEAR
SECTION 10.1. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE XI
INDEMNIFICATION
SECTION 11.1. Indemnification . . . . . . . . . . . . . . . . . . . . 16
ARTICLE XII
AMENDMENTS
SECTION 12.1. Amendments. . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE>
----------------------------------
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 one of the Co-Chief Executive Officers 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
<PAGE>
2
hour of the 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
<PAGE>
3
class, on any matter 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.
<PAGE>
4
(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 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.
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5
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 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
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6
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 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, one of the Co-Chief Executive Officers 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.
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7
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 one of the
Co-Chairman of the Board or any two directors,
(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.
(f) ORGANIZATION AND ORDER OF BUSINESS. At each meeting of the Board,
one of the following shall act as chairman of the meeting and preside, in the
following order of precedence:
(i) with respect to the first meeting, the eldest Co-Chairman
present;
(ii) with respect to each subsequent meeting:
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8
(A) if present, the Co-Chairman who did not preside at the most
recent meeting;
(B) the Co-Chairman who presided at the most recent meeting;
(C) any director chosen by a majority of the directors present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman of
the meeting shall appoint shall act as secretary of such meeting and keep the
minutes thereof.
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.
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
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9
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
Co-Chairmen, 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.
(b) Any officer may resign at any time by giving written notice to
the Board, either Co-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,
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10
such Co-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 CO-CHAIRMEN. The Co-Chairmen of the Board shall be
the Co-Chief Executive Officers 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 Co-Chairmen 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 them
by the Board or these By-Laws. Each of the Co-Chairmen shall have the power to
call special meetings of Stockholders and to call special meetings of the Board.
The eldest Co-Chairman present shall preside at the first meeting of the Board
and the first meeting of Stockholders. At each subsequent meeting of the Board
and each subsequent meeting of Stockholders, the Co-Chairman who did not preside
at the most recent meeting of the Board, in the case of meetings of the Board,
or the most recent meeting of Stockholders, in the case of meetings of
Stockholders, shall preside if present.
SECTION 5.6. VICE PRESIDENTS. Vice Presidents, if any, in such order
as may be determined by the Board, shall generally assist the Co-Chairmen and
perform such other duties as the Board or the Co-Chairmen shall prescribe, and
in the absence or disability of the Co-Chairmen, shall perform the duties and
exercise the powers of the Co-Chairmen.
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 Co-Chairmen and shall
act under the supervision of the Co-Chairmen. 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
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11
stockholder records and such other books and records of the Corporation as the
Board or the Co-Chairmen 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 Co-Chairmen.
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 Co-Chairmen. 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
Co-Chairmen 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
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12
Corporation and in such manner as shall be determined, from time to time, by
resolution of the Board.
SECTION 6.2. EXECUTION OF PROXIES. Either Co-Chairman or, in the
absence or disability of both of them, 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.
All such proxies and consents, unless otherwise authorized by the Board, shall
be signed in the name of the Corporation by either Co-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 either Co-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.
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13
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
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
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14
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.
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.
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15
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 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
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16
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.
(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
<PAGE>
17
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.
(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
<PAGE>
18
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 AMENDMENT AGREEMENT dated as of December
15, 1997 (this "Amendment Agreement"), to (a) the Credit
Agreement dated as of June 24, 1997 (the "Credit
Agreement"), among ARM Financial Group, Inc., a Delaware
corporation (the "Borrower"), the financial institutions
from time to time party thereto (the "Lenders") and The
Chase Manhattan Bank, a New York banking corporation, as
administrative agent (in such capacity, the "Administrative
Agent") for the Lenders, (b) the Pledge Agreement dated as
of June 24, 1997, among the Borrower, Integrity Holdings,
Inc., a Delaware corporation ("Holdings") and The Chase
Manhattan Bank, a New York banking corporation, as
representative (the "Representative") for the Secured
Parties (as defined in the Pledge Agreement (the "Pledge
Agreement") and (c) the Assignment Agreement dated as of
June 24, 1997, among the Borrower, Holdings and the
Representative (the "Assignment Agreement").
A. The Borrower has requested that the Lenders amend certain
provisions of the Credit Agreement, the Pledge Agreement and the Assignment
Agreement to (i) release any and all liens and security interests in favor of
the Representative for the benefit of the Lenders, (ii) amend certain of the
negative convenants continued in the Credit Agreement and (iii) make certain
other changes to the Credit Agreement in order to effectuate the foregoing.
B. The Lenders are willing to enter into this Amendment Agreement on
the terms and subject to the conditions set forth herein.
C. Capitalized terms used but not defined herein shall have the
meanings assigned to them in the Credit Agreement.
Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. COLLATERAL RELEASE. The Representative hereby agrees, and
the Lenders hereby consent, that as of the date first above written (i) any and
all liens, charges, encumbrances and security interests in favor of the
Representative for the benefit of the Lenders created pursuant to the Assignment
Agreement and the Pledge Agreement shall automatically be released and
terminated without any further action on the part of the Representative or any
Lender and (ii) the Representative, at the request of the Borrower or Holdings,
as applicable, shall execute any documents and instruments (including UCC
termination statements), deliver any certificates or documents representing the
Collateral and will take any other reasonable action necessary to effect the
release and termination of such liens and security interests.
SECTION 2. AMENDMENTS. (a) Section 1.01 of the Credit Agreement is
hereby amended by (i) deleting the definition of "Adjusted Statutory Surplus"
in its entirety, (ii) amending the definition of "Non-Investment Grade
Investments" by (A) deleting the word "equity" appearing as the first word in
clause (b) thereto and substituting therefor the words "common stock", (B)
deleting the word "and" appearing at the end of clause (b) thereto and
substituting therefor a comma, (C) deleting the period appearing at the end
of clause (c) thereof and substituting therefor the word "and" and (D)
adding to the end of such section a new clause (d) which shall read in its
entirety: "(d) investments in preferred stocks that are not rated P1, P2,
PSF1 or PSF2 by the NAIC", (iii) deleting the definition of "Loan Documents"
in its entirety and substituting therefor the following definition:
"LOAN DOCUMENTS" shall mean this Agreement and the Guarantee Agreement.
<PAGE>
2
(iv) adding the following definition:
"CAPITAL" shall mean, with respect to any Insurance Subsidiary at
any time, the sum of the amounts set forth on lines 29 and 30 of the
Liabilities, Surplus, and Other Funds Statement in the Annual
Statement or the Quarterly Statement of such Insurance Subsidiary most
recently delivered to the Administrative Agent and the Lenders
pursuant to Section 5.04 or, if such statement shall be modified, the
equivalent item on any successor form.
and (v) amending the definition of "Invested Assets" by deleting
the figures "10A" and "16" contained in the second line thereof and
substituting therefor the figures "11" and "17", respectively.
(b) Section 3.24 of the Credit Agreement is hereby deleted in its
entirety.
(c) Section 5.04(a)(ii)(B) of the Credit Agreement is hereby
amended by deleting the numbers "6.12" and "6.17" appearing in the second line
thereof and substituting respectively therefor the numbers "6.11" and "6.16".
(d) Section 5.10 of the Credit Agreement is hereby amended and
restated to read in its entirety:
SECTION 5.10. INTENTIONALLY OMITTED.
(e) Section 5.11 of the Credit Agreement is hereby amended and
restated to read in its entirety:
SECTION 5.11. FURTHER ASSURANCES. Execute any and all further
documents, agreements and instruments, and take all further actions in
order to effectuate the transactions contemplated by the Loan
Documents.
(f) Section 6.05(c) of the Credit Agreement is hereby amended by
(i) deleting "(i)" appearing in the fifth line of the first sentence thereof,
(ii) deleting the word "and" appearing in the sixth line of the first sentence
thereof and (iii) deleting clause (ii) in its entirety.
(g) Section 6.12 of the Credit Agreement is hereby amended by
deleting the number "2.00" appearing in the second line thereof and
substituting therefor the number "3.00".
(h) Section 6.13 of the Credit Agreement is hereby amended by (i)
deleting the words "Adjusted Statutory Surplus" appearing in the caption and in
the first line thereof and substituting therefor in both such places the words
"Total Adjusted Capital" and (ii) deleting the amount "$135,000,000" appearing
in the third line thereof and substituting therefor the amount "$175,000,000".
(i) Section 6.16 of the Credit Agreement is hereby amended by
adding, following the words "10% of the" appearing in the third line thereof,
the following: "Capital and".
(j) Article VII, Paragraph (n) of the Credit Agreement is hereby
amended by (i) deleting, following the word "terms" appearing in the second
line thereof, the following:
, or the security interest purported to be created by any Security
Document shall cease to be a valid and perfected first priority
security interest in the relevant collateral for any reason other than
the failure of Chase, on behalf of the Lenders, to take any action
that is within its control and not otherwise prohibited by applicable
law, applicable regulation or the order of any court
<PAGE>
3
SECTION 3. REPRESENTATIONS AND WARRANTIES. To induce the other parties
hereto to enter into this Amendment Agreement, the Borrower represents and
warrants to each of the Lenders and the Administrative Agent that (a) before and
after giving effect to this Amendment Agreement, the representations and
warranties set forth in Article III of the Credit Agreement are true and correct
in all material respects on and as of the date hereof with the same effect as
though made on and as of the date hereof, except to the extent such
representations and warranties expressly relate to an earlier date, and (b)
before and after giving effect to this Amendment Agreement, no Default or Event
of Default has occurred and is continuing.
SECTION 4. CONDITIONS TO EFFECTIVENESS. This Amendment Agreement shall
become effective as of the date first above written on the date that the
Administrative Agent shall have received counterparts of this Amendment
Agreement that, when taken together, bear the signatures of the Borrower,
Holdings and each of the Lenders.
SECTION 5. EFFECT OF AMENDMENT AGREEMENT. Except as expressly set
forth herein, this Amendment Agreement shall not by implication or otherwise
limit, impair, constitute a waiver of, or otherwise affect the rights and
remedies of the Lenders, the Administrative Agent or the Borrower under the
Credit Agreement, and shall not alter, modify, amend or in any way affect any
of the terms, conditions, obligations, covenants or agreements contained in
the Credit Agreement, all of which are ratified and affirmed in all respects
and shall continue in full force and effect. Nothing herein shall be deemed
to entitle the Borrower to a consent to, or a waiver, amendment, modification
or other change of, any of the terms, conditions, obligations, covenants or
agreements contained in the Credit Agreement in similar or different
circumstances. This Amendment Agreement shall apply and be effective only
with respect to the provisions of the Credit Agreement specifically referred
to herein. Any default under this Amendment Agreement shall constitute an
Event of Default under the Credit Agreement.
SECTION 6. COUNTERPARTS. This Amendment Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument. Delivery of any executed counterpart of a signature page of
this Amendment Agreement by facsimile transmission shall be as effective as
delivery of a manually executed counterpart hereof.
SECTION 7. APPLICABLE LAW. THIS AMENDMENT AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 8. HEADINGS. The headings of this Amendment Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof.
SECTION 9. EXPENSES. The Company agrees to reimburse the
Administrative Agent for its reasonable out-of-pocket expenses in connection
with this Amendment Agreement, including the reasonable fees, charges and
disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent.
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment Agreement
to be duly executed by their duly authorized officers, all as of the date and
year first above written.
ARM FINANCIAL GROUP, INC.,
by /s/ Peter S. Resnik
-------------------------------
Name: Peter S. Resnik
Title: Treasurer
by /s/ Edward L. Zemm
-------------------------------
Name: Edward L. Zemm
Title: Chief Financial Officer
INTEGRITY HOLDINGS, INC.,
by /s/ Peter S. Resnik
-------------------------------
Name: Peter S. Resnik
Title: Treasurer
THE CHASE MANHATTAN BANK,
individually, as Administrative
Agent and as representative for
the Secured Parties,
by /s/ Peter Platten
-------------------------------
Name: Peter Platten
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY,
by /s/ Douglas J. Beir
-------------------------------
Name: Douglas J. Beir
Title: Vice President
<PAGE>
5
DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES,
by /s/ Louis Caltavuturo
-------------------------------
Name: Louis Caltavuturo
Title: Vice President
by /s/ Alan Krosk
-------------------------------
Name: Alan Krosk
Title:
DRESDNER BANK AG, NEW YORK
BRANCH AND GRAND CAYMAN BRANCH,
by /s/ Robert P. Donohue
-------------------------------
Name: Robert P. Donohue
Title: Vice President
by /s/ Lloyd C. Stevens
-------------------------------
Name: Lloyd C. Stevens
Title: Vice President
THE FIRST NATIONAL BANK OF
CHICAGO,
by /s/ Fred T. Crawford
-----------------------------
Name: Fred T. Crawford
Title: First Vice President
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA,
by /s/ Gail M. Golightly
-------------------------------
Name: Gail M. Golightly
Title: Senior Vice President
<PAGE>
6
PNC BANK, KENTUCKY, INC.,
by /s/ Brennan T. Danile
-------------------------------
Name: Brennan T. Danile
Title: Corporate Banking Officer
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
by /s/ Janet P. Sommons
-------------------------------
Name: Janet P. Sommons
Title: Vice President
<PAGE>
STATE OF GEORGIA
COUNTY OF FULTON
ON THE 12TH DAY OF DECEMBER, 1997 PERSONALLY APPEARED Janet P. Sommons, AS THE
Vice President OF SUNTRUST BANKS, INC., APPEARING AS AGENT OF SUNTRUST BANK,
CENTRAL FLORIDA, NATIONAL ASSOCIATION, AND BEFORE ME EXECUTED THE RELEASE AND
AMENDMENT AGREEMENT, BETWEEN ARM FINANCIAL GROUP INC, (AS BORROWER) AND
SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION.
IN WITNESS WHEREOF, I HAVE HEREUNTO SET MY HAND AND OFFICIAL SEAL, IN THE
STATE AND COUNTY AFORESAID.
STATE OF Georgia
COUNTY OF Fulton
Sworn to and subscribed to before me this 12th day of December, 1997,
by Janet P. Sommons, who is PERSONALLY KNOWN to me or who
provided , as identification.
/s/ Christine B. Alford
-----------------------
Notary Public
My Commission Expires:
Notary Public, DeKalb county, Georgia
My Commission Expires June 29th, 2001
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
This is an ADMINISTRATIVE SERVICES AGREEMENT this ("Agreement") made as of
the 7 day of November, 1997, by and between ARM FINANCIAL GROUP, INC., a
Delaware corporation ("Provider"), and ARM CAPITAL ADVISORS, LLC, a Delaware
limited liability company ("Company"), which is registered as an investment
adviser under the Investment Advisers Act of 1940 (the "Act").
RECITALS
WHEREAS, Provider has experience in providing certain administrative
services support to investment advisors; and
WHEREAS, Company desires Provider to perform certain administrative
services ("services") for Company; and
WHEREAS, Provider and Company contemplate that the availability of services
and facilities will achieve certain operating efficiencies and improve services
provided by Company to its clients; and
WHEREAS, Provider and Company wish to identify the services to be rendered
to Company by Provider and the facilities to be used by Company and to provide
for the fees to be paid by Company to Provider;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
set forth herein, and intending to be legally bound hereby, Provider and Company
agree as follows:
1. PERFORMANCE OF SERVICES AND USE OF FACILITIES. Subject to the terms,
conditions and limitations of this Agreement, Provider agrees to provide the
following services to Company:
(i) investment accounting support for the investment portfolio
of third parties (i.e., other than Provider) at an annualized cost of one basis
point (.0001) multiplied times the market value of the Company's monthly average
assets under management during the course of the year;
(ii) investment accounting support for Provider's investment
portfolio under management by Company during the course of the year at an
annualized cost of (A) seven-tenths of one basis point (.0007) times the first
two billion dollars of monthly average market value of assets under management,
(B) six-tenths of one basis point (.00006) times the monthly average market
value of assets under management in excess of two billion dollars and up to
three billion
<PAGE>
dollars, and (C) five-tenths of one basis point (.00005) times the monthly
average market value of assets under management in excess of three billion
dollars;
(iii) if requested by Company, programming and other systems
support at mutually agreed prices, plus out-of-pocket expenses subject to
Company's prior written approval.
(iv) such other services at such prices as are mutually agreed
upon by Provider and Company and set forth in an addendum to this Agreement
signed by both parties hereto.
Subject to the terms, conditions and limitations of this Agreement,
Provider agrees to make available to Company such of its facilities or the
facilities of its subsidiaries as Provider in its discretion deems to be
reasonably necessary in the conduct of Company's investment advisory operations.
(a) CAPACITY OF PERSONNEL AND STATUS OF FACILITIES. Whenever
Provider utilizes its personnel to perform services for Company
pursuant to this Agreement, such personnel shall at all times
remain employees of Provider, and Provider shall alone retain
full liability for their compensation, employee benefits, payroll
deductions and legally required employer contributions and
withholding tax obligations. No facility of Provider or its
affiliates used in performing services for (or subject to use by)
Company pursuant to this Agreement shall be deemed to be transferred,
assigned, conveyed or leased by performance or use.
(b) EXERCISE OF JUDGMENT IN RENDERING SERVICES. In providing any
services hereunder which require the exercise of judgment by Provider,
Provider shall use its best efforts to perform such services in
accordance with all applicable standards and guidelines to ensure that
any such services comply with the requirements of the Act and other
applicable law.
2
<PAGE>
(c) CONTROL. The performance of services by Provider for Company
pursuant to this Agreement shall in no way impair the absolute control of
the business and operations of Company by its Board of Directors and
shareholders. Provider shall act hereunder so as to assure the separate
operating and corporate identity of Company.
2. BILLING AND PAYMENT PROCEDURES. Provider shall periodically submit to
Company a written statement of the amount owed by Company for services provided
hereunder (including applicable out-of-pocket expenses) and Company shall pay to
Provider within thirty (30) days of such written statement the amount set forth
in such statement.
3. ACCOUNTING RECORDS AND DOCUMENTS. Provider shall be responsible for
maintaining full and accurate accounts and records of all services rendered and
facilities used pursuant to this Agreement and such additional information as
Company may reasonably request for purposes of its internal bookkeeping and
accounting operations. Provider shall also maintain such accounts and records
insofar as they pertain to the computation of charges hereunder available at its
principal offices for audit, inspection and copying by Company and persons
authorized by it or any governmental agency having jurisdiction over Company
during reasonable business hours.
4. OTHER RECORDS AND DOCUMENTS. All other books, records, and files
established and maintained by Provider by reason of its performance of its
obligations under this Agreement which, absent this Agreement, would have been
held by Company, shall be deemed the property of Company, and shall be subject
to examination during reasonable business hours by Company and persons
authorized by it or any governmental agency having jurisdiction over Company.
5. RIGHT TO CONTRACT WITH THIRD PARTIES. Except as agreed otherwise by the
parties hereto, Company hereby grants Provider a non-exclusive right to perform
the services (or use of the facilities) called for hereunder. Nothing herein
shall be deemed to prohibit Provider from providing any or all of the services
to be provided to Company hereunder to other persons, whether or not affiliated
with Provider. Further, Provider has right to subcontract with any third party,
3
<PAGE>
affiliated or unaffiliated, for services (or facilities) Provider is
obligated to provide to Company pursuant to this Agreement.
6. CONFIDENTIALITY. In rendering its services hereunder Provider may be
furnished with information concerning the Company's business and affairs
including, without limitation, customer lists (the "Confidential Information").
Provider agrees that (a) except as otherwise required by law, to keep all
Confidential Information confidential and not to disclose or reveal any
confidential information (b) not to sell or distribute any customer lists and
(c) not to use Confidential Information for any other purpose other than
rendering services hereunder.
7. CONTACT PERSON(S). Company and Provider each shall appoint one or more
individuals who shall serve as contact person(s) for the purpose of carrying out
this Agreement. Such contact person(s) shall be authorized to act on behalf of
their respective parties as to the matters pertaining to this Agreement.
Effective upon execution of this Agreement, the initial contact person(s) shall
be those set forth in Section 14 of this Agreement. Each party shall notify the
other, in writing, as to the name, address and telephone number of any
replacement for any such designated contact person or additional contact
persons.
8. TERMINATION AND MODIFICATION. This Agreement shall remain in effect
until terminated by either Provider or Company upon giving 180 days' or more
advance written notice. Upon termination, Provider shall promptly deliver to
Company all books and records that are, or are deemed by this Agreement to be,
the property of Company.
9. SETTLEMENT ON TERMINATION. No later than 30 days after the effective
date of the termination of this Agreement, Provider shall deliver to Company a
detailed written statement for all charges incurred and not included in any
previous statement to the effective date of termination. The amount owed or to
be refunded hereunder shall be due and payable within thirty (30) days of
receipt of such statement.
4
<PAGE>
10. INDEPENDENT CONTRACTOR. In rendering its services hereunder, Provider
shall act as an independent contractor, and any duties of Provider arising
hereunder shall be owed exclusively to Company.
11. FORCE MAJEURE. If any cause or condition shall occur beyond the
control of Provider which wholly or partially prevents the performance by
Provider of its obligations hereunder, including, without limitation, any act of
God or the public enemy, fire, explosion, flood, earthquake, war, riot, adverse
weather conditions, breakdowns in equipment or facilities, strike, slowdown,
work stoppage or other labor trouble or delays in receiving or failures to
receive any permits, licenses or approvals from any governmental authority, then
Provider shall be excused to the extent made necessary by such cause or
condition and during the continuance thereof, and Provider shall incur no
liability by reason of its failure to perform the obligations so excused. Such
cause or condition shall not, however, relieve Company of the obligation to pay
to Provider fees and charges due to Provider for services rendered and expenses
incurred hereunder prior to such stoppage.
12. ASSIGNMENT. This Agreement and any rights pursuant hereto shall not
be assignable by either party hereto, except by operation of law. Except as and
to the extent specifically provided in this Agreement, nothing in this
Agreement, expressed or implied, is intended to confer on any person other than
the parties hereto, or their respective legal successors, any rights, remedies,
obligations or liabilities, or to relieve any person other than the parties
hereto, or their respective legal successors, from any obligations or
liabilities that would otherwise be applicable. The representations, warranties,
covenants and agreements contained in this Agreement shall be binding upon,
extend to and inure to the benefit of the parties hereto, their, and each of
their, successors and assigns respectively.
13. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the applicable to contracts
made and to be performed entirely within the State of New York.
5
<PAGE>
14. HOLD HARMLESS. The Company will indemnify and hold Provider harmless
from any and all damages, claims, suits, actions, courses of action,
proceedings, investigations, loses, liabilities and expenses (including, without
limitation, reasonable legal accounting and other professional expenses)
("Liabilities") asserted against or incurred or sustained by Provider,
associated with or arising out of the services hereunder, except to the extent
such Liabilities resulted from the gross negligence, bad faith or willful
misconduct of Provider.
Provider will indemnify and hold Company harmless from all Liabilities
asserted against or incurred or sustained by Company associated with or arising
out of the services hereunder, except to the extent such liabilities resulted
from the gross negligence, bad faith or willful misconduct of Company.
15. NOTICE. All notices, statements or requests provided for hereunder
shall be deemed to have been duly given when delivered by hand to an officer of
the other party, or when deposited with the U.S. Postal Service, as first class
certified or registered mail, postage prepaid, overnight courier services, telex
or telecopier, addressed:
(a) If to Provider to:
ARM Financial Group, Inc.
515 West Market Street, 8th Floor
Louisville, KY 40202
Telecopier: (502) 582-7995
Attention: Robert H. Scott
(b) If to Company to:
ARM Capital Advisors, LLC
200 Park Avenue
New York, NY 10166
Telecopier: (212) 973-2201
Attention: Emad A. Zikry
or to such other persons or places as each party may from time to time designate
by written notice sent as aforesaid.
16. ENTIRE AGREEMENT. This Agreement, together with such amendments as
may from time to time be executed in writing by the parties, constitutes the
entire agreement and
6
<PAGE>
understanding between the parties in respect to the transactions contemplated
hereby and supersedes all prior agreements, arrangements and understandings
relating to the subject matter hereof.
17. INVALID PROVISIONS. If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under any present or future law, and if
the rights or obligations of Provider or Company under this Agreement will
not be materially and adversely affected thereby, (a) such provision will be
fully severable; (b) this Agreement will be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part
hereof; (c) the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal, invalid, or
unenforceable provision or by its severance herefrom; and (d) in lieu of such
illegal, invalid, or unenforceable provision, there will be added
automatically as a part of this Agreement a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible.
18. SECTION HEADINGS. Section headings contained herein are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
19. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
in duplicate by their respective officers duly authorized so to do as of the
date and year first above written.
ARM FINANCIAL GROUP, INC.
By: /s/ John Franco
-------------------------------
Name: John Franco
Title: Co-Chief Executive Officer
By: /s/ Martin H. Ruby
-------------------------------
Name: Martin H. Ruby
Title: Co-Chief Executive Officer
ARM CAPITAL ADVISORS, LLC
By: /s/ Emad Zikry
-------------------------------
Name: Emad Zikry
Title: President
8
<PAGE>
INVESTMENT SERVICES AGREEMENT
This is an INVESTMENT SERVICES AGREEMENT (this "Agreement") made effective
as of the 7 day of November, 1997, by and between ARM FINANCIAL GROUP, INC., a
Delaware corporation ("Company"), and ARM CAPITAL ADVISORS, LLC, a Delaware
limited liability company ("Advisor") which is registered as an investment
adviser under the Investment Advisers Act of 1940 (the "Advisers Act").
RECITALS
WHEREAS, certain subsidiaries of Company (the "Subsidiaries"), as
identified on Appendix A hereto (as such Appendix A may be revised by Company
from time to time), have allocated all or a portion of their assets to several
segregated custodial accounts with account numbers as designated by Company in
writing from time to time (the "Accounts") maintained with Chase Manhattan Bank
and/or such other banks as designated by Company in writing from time to time
(the "Custodians"); and
WHEREAS, Company has agreed to provide investment services with respect to
the assets in the Accounts, but has reserved the right to sub-contract such
investment services to an affiliate or third party; and
WHEREAS, Advisor's management has extensive experience in asset/liability
and investment portfolio management and supervision; and
WHEREAS, in order to achieve certain operating economies and improve the
investment services to the benefit of the Subsidiaries and the Subsidiaries'
policyholders and/or certificateholders, Company desires to retain Advisor to
supervise and manage the assets now or hereafter contained in the Accounts; and
WHEREAS, Company and Advisor wish to assure that all charges incurred
hereunder are reasonable and in accordance with the requirements of the
Advisers Act, the Investment Company Act of 1940, the appropriate investment
provisions of the applicable state of domicile for each of the Subsidiaries,
and all other applicable laws, rules and regulations (collectively, "Laws");
and
WHEREAS, Company and Advisor wish to identify the investment advisory
services to be rendered by Advisor, and to provide a method for determining the
fees to be paid by Company in connection with such services;
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the mutual promises
set forth herein, the adequacy and sufficiency of which are hereby acknowledged,
and intending to be legally bound hereby, Company and Advisor agree as follows:
1. PERFORMANCE OF SERVICES. Subject to the terms, conditions, and
limitations of this Agreement, Advisor agrees, to the extent requested by
Company, to perform diligently and in a manner consistent with past practice the
investment advisory services as set forth in Appendix B attached hereto and made
a part of this Agreement (collectively, the "Services") with respect to the
assets now or hereafter contained in the Accounts. All charges for services
incurred hereunder shall be reasonable and in accordance with or as required by
any Laws. Advisor agrees to maintain sufficient facilities and trained personnel
of the kind necessary to perform this Agreement.
(a) CAPACITY OF PERSONNEL AND STATUS OF FACILITIES. Whenever Advisor
utilizes its personnel to perform the services pursuant to this Agreement,
such personnel shall be subject to Advisor's direction and control, and
Company shall have no liability to such personnel for their welfare,
salaries, fringe benefits, legally required employer contributions, tax
obligations or other obligations. No facility of Advisor used in performing
services for Company shall be deemed to be transferred, assigned, conveyed,
or leased by performance or use pursuant to this Agreement.
(b) EXERCISE OF JUDGMENT IN RENDERING SERVICES. In providing any
services hereunder which require the exercise of judgment by Advisor,
Advisor shall perform such services in accordance with any standards and
guidelines which Company develops and communicates to Advisor in writing.
In performing any services hereunder, Advisor shall at all times act in a
manner reasonably calculated to be in or not opposed to the best interests
of Company and the Subsidiaries.
(c) CONTROL. The performance of services by Advisor for Company
pursuant to this Agreement shall in no way impair the absolute control of
the business and operations of Company or Advisor by their respective
Boards of Directors. Advisor shall act hereunder
2
<PAGE>
so as to assure the maintenance of the operational controls and the
separate operating identity of Company.
2. CHARGES. Company agrees to pay to Advisor for services provided by
Advisor pursuant to this Agreement the fees set forth on Appendix C attached
hereto (as such Appendix may be revised by the parties hereto from time to
time).
3. PAYMENT. Advisor shall periodically submit to Company a written
statement of the amount owed by Company for services rendered pursuant to this
Agreement for the appropriate period, and Company shall pay such amount to
Advisor within thirty (30) days of such written statement.
4. RIGHT TO CONTRACT WITH THIRD PARTIES. Nothing herein shall he deemed to
grant Advisor an exclusive right to provide services to Company, and Company
retains the right to contract with any third party, affiliated or unaffiliated,
for the performance of services as are available to or have been requested by
Company pursuant to this Agreement. It is also understood and agreed that
Advisor's services are not exclusively for Company. Advisor shall remain free to
provide services to other persons, pursuant to objectives which may or may not
be similar to the strategy adopted as appropriate for Company.
5. CONFIDENTIALITY. In rendering its services hereunder, Advisor may be
furnished with information concerning the Company's businesses and affairs
("Confidential Information"). Advisor agrees (a) except as required by law, to
keep all Confidential Information confidential and not to disclose or reveal any
Confidential Information and (b) not to use Confidential Information for any
purpose other than rendering services hereunder.
6. CONTACT PERSONS. Company and Advisor each shall appoint one or more
individuals who shall serve as contact persons for the purpose of carrying out
this Agreement. Such contact persons shall be authorized to act on behalf of
their respective parties as to the matters pertaining to this Agreement.
Effective upon execution of this Agreement, the initial contact persons
3
<PAGE>
shall be those set forth in Section 10 of this Agreement. Each party shall
notify the other, in writing, as to the name, address, and telephone number of
any replacement for any such designated contact person.
7. TERMINATION. This Agreement may be terminated by either party hereto at
any time, upon 180 days' or more advance written notice, provided that Advisor
shall not have the right, by unilateral action, to terminate this Agreement
prior to December 31, 1997. No penalty shall be charged to Company upon
termination of this Agreement, and following any such termination Advisor shall
promptly deliver to Company all books and records that are, or are deemed by
this Agreement to be, the property of Company and/or the Subsidiaries.
8. NO ASSIGNMENT. This Agreement and any rights pursuant hereto shall not
be assignable by either party hereto. Except as and to the extent specifically
provided in this Agreement or as required by applicable Laws, nothing in this
Agreement, expressed or implied, is intended to confer on any person other than
the parties hereto, or their respective legal successors, any rights, remedies,
obligations, or liabilities, or to relieve any person other than the parties
hereto, or their respective legal successors, from any obligations or
liabilities that would otherwise be applicable; and the representations,
warranties, covenants, and agreements contained in this Agreement shall be
binding upon, extend to and inure to the benefit of, the parties hereto, their,
and each of their, successors respectively.
9. INDEPENDENT CONTRACTOR. In rendering its services hereunder, Advisor
shall act as an independent contractor, and any duties of Advisor arising
hereunder shall be owed exclusively to Company.
10. GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of New York
applicable to contracts made and to be performed entirely within that State.
4
<PAGE>
11. NOTICE. All notices, statements or requests provided for hereunder
shall be deemed to have been duly given when actually given (orally or in
writing) or when delivered by hand to an officer of the other party, or when
deposited with the U.S. Postal Service, as first class certified or registered
mail, postage prepaid, overnight courier services, telex or telecopier,
addressed:
(a) If to Company to:
ARM Financial Group, Inc.
515 West Market Street, 8th Floor
Louisville, KY 40202-3271
Telecopier: (502) 582-7995
Attention: Robert H. Scott
(b) If to Advisor to:
ARM Capital Advisors, LLC
200 Park Avenue, 20th Floor
New York, New York 10166
Telecopier: (212) 973-2201
Attention: Emad A. Zikry
or to such other persons or places as each party may from time to time designate
by written notice sent as aforesaid.
12. COMPLIANCE WITH LAWS. Advisor shall at all times comply with the terms
of this Agreement and all applicable Laws.
13. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if
the rights or obligations of Advisor or Company under this Agreement will not
be materially and adversely affected thereby, (a) such provision will be
fully severable; (b) this Agreement will be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part
hereof; (c) the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal, invalid, or
unenforceable provision or by its severance herefrom; and (d) in lieu of such
illegal, invalid, or unenforceable provision, there will be added
automatically as a part of this
5
<PAGE>
Agreement a legal, valid, and enforceable provision as similar in terms to such
illegal, invalid, or unenforceable provision as may be possible.
14. SECTION HEADINGS. Section headings contained herein are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
15. COUNTERPARTS. This Agreement may be executed in separate counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
16. INTEGRATION. This Agreement is the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior written or oral agreements related to the matters referenced herein.
6
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in duplicate by their respective officers duly authorized so to do,
as of the date and year first above written.
ARM FINANCIAL GROUP, INC.
By: /s/ John Franco
-------------------------------------
Name: John Franco
Title: Co-Chief Executive Officer
By: /s/ Martin H. Ruby
-------------------------------------
Name: Martin H. Ruby
Title: Co-Chief Executive Officer
ARM CAPITAL ADVISORS, LLC
By: /s/ Emad Zikry
-------------------------------------
Name: Emad Zikry
Title: President
7
<PAGE>
APPENDIX A
SUBSIDIARIES
Integrity Life Insurance Company
National Integrity Life Insurance Company
SBM Certificate Company
<PAGE>
APPENDIX B
INVESTMENT ADVISORY SERVICES
Subject to the terms, conditions and limitations of this Agreement and the
supervision by the Subsidiaries' Boards of Directors of the assets now or
hereafter contained in the respective Accounts, Advisor shall provide the
following services:
1. Except as otherwise expressly provided herein, Advisor shall be free to
buy, sell, exchange, convert, or otherwise trade the assets now or hereafter
contained in the Accounts in the exercise of its sole discretion, provided
Advisor acts in a manner consistent with any and all written direction received
from Company as to each of the Investment Policies adopted by the Board of
Directors of the respective Subsidiaries, as the same may be modified from time
to time. Advisor shall acquire or dispose of any specific investment if so
directed by Company and/or the Board of Directors of the applicable
Subsidiaries.
2. All investments made by Advisor shall be in those classes of
investments as permitted or required by any Laws; PROVIDED, HOWEVER, that
nothing contained herein shall authorize Advisor to purchase or dispose of,
without the applicable Subsidiaries' prior written approval, any interest in
real property or mortgages.
3. In the course of its investment advisory services activity, Advisor MAY
NOT pledge, mortgage or hypothecate the assets in the Accounts, or enter into
any investment which would violate any Laws.
4. Advisor shall not at any time have custody or possession of any of the
assets in the Accounts. Custody and possession of any and all assets in the
Accounts shall at all times be maintained in one or more segregated custodial
accounts maintained with the Custodians, and held on behalf of and in the name
of the respective Subsidiaries. All transactions authorized by this Agreement
shall be carried out through such custodial accounts maintained with the
Custodians. Advisor shall not be responsible for any act or omission of the
Custodians thereunder.
<PAGE>
APPENDIX C
SCHEDULE OF FEES
COMPUTATION OF FEES. During 1997, Advisor shall provide to Company, at no
cost to Company, investment management services at current levels of support for
Company's insurance company subsidiaries and Company's client's risk-based
monies (where Company retains the risk of Advisor's performance). After December
31, 1997, Company shall have the right to engage Advisor to perform the above
described investment management services at an annualized cost of (A) twenty
basis points (.0020) times the first $100 million of the average market value
of assets under management, (B) seven basis points (.0007) times the average
market value of assets under management in excess of $100 million and up to $2
billion, (C) six basis points (.0006) times the average market value of assets
under management in excess of $2 billion and up to $3 billion, and (D) five
basis points (.0005) times the average market value of assets under management
in excess of $3 billion. Such fee to be calculated and payable on the average of
the market value of all assets in the Accounts on the first and last days of
each calendar month.
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
December 4, 1997
Mr. John Franco
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear John:
This letter sets forth our mutual understanding concerning your
Employment Agreement with ARM Financial Group, Inc. (the "COMPANY") dated as
of July 1, 1996 (the "EMPLOYMENT AGREEMENT").
It is hereby understood and agreed that you will retire from the Company
upon the occurrence of a Change in Control (as defined in the Employment
Agreement) unless the purchaser or the surviving corporation and you mutually
agree to a transition period following the closing date of such Change in
Control (the "Closing Date") on such terms and conditions to be agreed upon
between such parties. You and the Company mutually agree that the Employment
Agreement will terminate and be of no further force and effect on the Closing
Date with no obligation of the Company thereunder. The provisions of Section 7
(other than 7.3), Section 8 and Section 9.2 will survive such termination of
the Employment Agreement.
You and the Company agree to execute on the Closing Date a mutual release
in substantially the form attached hereto as Annex A.
Until such time as a Change in Control occurs, the Employment Agreement
shall remain in full force and effect. In the event that a Change in Control
has not occurred prior to June 30, 1998 (or such later date as may be agreed
in writing by you and the Company), this letter will be null, void and of no
further force and effect.
This letter will be governed in accordance with the laws of the State of
New York.
<PAGE>
2
Please evidence your agreement with this letter by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Frank V. Sica
-------------------------
Name: Frank V. Sica
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ John Franco
- ---------------------
John Franco
<PAGE>
ANNEX A
RELEASE
For good and valuable consideration, the sufficiency of which is hereby
acknowledged, ARM Financial Group, Inc. (the "COMPANY") and John Franco (the
"EXECUTIVE") agree as follows:
1. (a) GENERAL RELEASE. (i) The Executive hereby releases and forever
discharges the Company (and its successors), its subsidiaries and affiliates
and each of their respective officers, employees, directors and agents from
any and all claims, actions and causes of action (collectively, "CLAIMS"),
including, without limitation, any Claims arising under any applicable
federal, state, local or foreign law, that you may have, or in the future may
possess, arising out of (x) your employment relationship with and service, on
or prior to the date hereof, as an employee, director or officer of the
Company or any of its subsidiaries or affiliates, and the termination of
[such relationship or service] [the Employment Agreement dated as of July 1,
1996 between the Company and the Executive (the "EMPLOYMENT AGREEMENT")], or
(y) any event, condition, circumstance or obligation that occurred, existed
or arose on or prior to the date hereof; PROVIDED, HOWEVER, that the release
set forth in this Section 1(a)(i) will not apply to (A) the obligations of
the Company and its subsidiaries to continue to provide director and officer
indemnification and (B) the Company's obligations under its retirement and
welfare plans.
(ii) The Company and its subsidiaries and affiliates hereby
release and forever discharge the Executive, your estate and your legal
representatives from any and all Claims, including, without limitation, any
Claims arising under any applicable federal, state, local or foreign law,
that it may have, or in the future may possess, arising out of (x) your
employment relationship with and service, on or prior to the date hereof, as
an employee, director or officer of the Company or any of its subsidiaries or
affiliates, and the termination of [such relationship or service]
[the Employment Agreement], or (y) any event, condition, circumstance or
obligation that occurred, existed or arose on or prior to the date hereof;
PROVIDED, HOWEVER, that the release set forth in this Section 1(a)(ii) will
not apply to (A) your obligations under Section 7 (excluding 7.3) of the
Employment Agreement or (B) any act or omission of yours which is in
violation of any applicable civil or criminal law or regulation.
(b) SPECIFIC RELEASE OF ADEA CLAIMS. The Executive hereby releases
and forever discharges the Company (and its successors), each of its
subsidiaries and affiliates and each of their respective officers, employees,
directors and agents from any and all claims, actions and causes of action
that you may have as of the date you sign this Agreement arising under the
Federal Age Discrimination in Employment Act of 1967, as amended, and the
applicable rules and regulations promulgated thereunder ("ADEA"). By signing
this Agreement, you hereby acknowledge and confirm the following: (i) you
were advised by the Company in connection with your termination to consult
with an attorney of your choice prior to signing this Agreement and to have
such attorney explain to you the terms of this
<PAGE>
2
Agreement, including, without limitation, the terms relating to your release
of claims arising under ADEA; (ii) you have been given a period of not fewer
than 21 days to consider the terms of this Agreement and to consult with an
attorney of your choosing with respect thereto; and (iii) you are providing
the release and discharge set forth in this Section 1(b) only in exchange for
consideration in addition to anything of value to which you are already
entitled.
2. REVOCATION. This Agreement may be revoked by you within the 7-day
period commencing on the date you sign this Agreement (the "REVOCATION
PERIOD"). In the event of any such revocation by you, this Agreement will
terminate and be of no further force and effect as of the date of such
revocation. No such revocation by you will be effective unless it is in
writing and signed by you and received by the Company prior to the expiration
of the Revocation Period.
ARM FINANCIAL GROUP, INC.
-------------------------
Name:
Title:
/s/ John Franco
-------------------------
John Franco
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
December 4, 1997
Mr. Martin H. Ruby
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear Marty:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Employment Agreement with ARM
Financial Group, Inc. (the "COMPANY") dated as of July 1, 1996 (the "EMPLOYMENT
AGREEMENT").
1. Section 5.1.1 is hereby amended by inserting the words "the
penultimate sentence of this Section 5.1.1 and" after the word "of" in the
first line of Section 5.1.1.
2. Section 5.1.1 is hereby further amended by inserting the
following as the penultimate sentence in such Section 5.1.1:
"In the event the Executive terminates his employment hereunder
pursuant to Section 5.4(iv) or (v), the payments described in the
first sentence of this Section 5.1.1 shall be reduced by an amount
equal to the payments received by the Executive as a Sale Bonus under
the Company's Sale Bonus Plan."
3. The parenthetical contained in the second line of Section 5.4 is
amended in its entirety to read as follows: "(without the Executive's
prior written consent in the case of clauses (i), (ii) and (iii) below)".
4. This Amendment shall be governed in accordance with the laws of
the State of New York.
5. Except as modified hereby, the Employment Agreement remains in
full force and effect.
<PAGE>
2
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Frank V. Sica
-------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ Martin H. Ruby
- -----------------------
Martin H. Ruby
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
March 20, 1998
Mr. Martin H. Ruby
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear Marty:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Employment Agreement with
ARM Financial Group, Inc. (the "COMPANY") dated as of July 1, 1996, as
amended December 4, 1997 (the "EMPLOYMENT AGREEMENT").
1. Section 5.1.1 is hereby amended by deleting the words "the
penultimate sentence of this Section 5.1.1 and" in the first line of
Section 5.1.1.
2. Section 5.1.1 is hereby further amended by deleting the
penultimate sentence in such Section 5.1.1.
3. This Amendment shall be governed in accordance with the laws of
the State of New York.
4. Except as modified hereby, the Employment Agreement remains in
full force and effect.
<PAGE>
2
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Colin F. Raymond
--------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ Martin H. Ruby
- ---------------------
Martin H. Ruby
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
December 4, 1997
Mr. John R. Lindholm
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear John:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Employment Agreement with ARM
Financial Group, Inc. (the "COMPANY") dated as of July 1, 1996 (the "EMPLOYMENT
AGREEMENT").
1. Section 5.1.1 is hereby amended by inserting the words "the
penultimate sentence of this Section 5.1.1 and" after the word "of" in
the first line of Section 5.1.1.
2. Section 5.1.1 is hereby further amended by inserting the
following as the penultimate sentence in such Section 5.1.1:
"In the event the Executive terminates his employment hereunder
pursuant to Section 5.4(iv) or (v), the payments described in the
first sentence of this Section 5.1.1 shall be reduced by an amount
equal to the payments received by the Executive as a Sale Bonus under
the Company's Sale Bonus Plan."
3. The parenthetical contained in the second line of Section 5.4 is
amended in its entirety to read as follows: "(without the Executive's prior
written consent in the case of clauses (i), (ii) and (iii) below)".
4. Section 5.4 is further hereby amended by inserting a new
subsection (ii) to read as follows and to renumber the subsections that
follow accordingly:
"(ii) a material diminution of the authority, responsibilities or
positions of the Executive with the Company;"
<PAGE>
2
5. This Amendment shall be governed in accordance with the laws of
the State of New York.
6. Except as modified hereby, the Employment Agreement remains in
full force and effect.
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Frank V. Sica
-------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ John R. Lindholm
- ---------------------
John R. Lindholm
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
March 20, 1998
Mr. John R. Lindholm
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear John:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Employment Agreement with
ARM Financial Group, Inc. (the "COMPANY") dated as of July 1, 1996, as
amended December 4, 1997 (the "EMPLOYMENT AGREEMENT").
1. Section 5.1.1 is hereby amended by deleting the words "the
penultimate sentence of this Section 5.1.1 and" in the first line of
Section 5.1.1.
2. Section 5.1.1 is hereby further amended by deleting the
penultimate sentence in such Section 5.1.1.
3. This Amendment shall be governed in accordance with the laws of
the State of New York.
4. Except as modified hereby, the Employment Agreement remains in
full force and effect.
<PAGE>
2
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Martin H. Ruby
-------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ John R. Lindholm
- ---------------------
John R. Lindholm
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
December 4, 1997
Mr. David E. Ferguson
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear David:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Employment Agreement with ARM
Financial Group, Inc. (the "COMPANY") dated as of July 1, 1996 (the "EMPLOYMENT
AGREEMENT").
1. Section 5.1.1 is hereby amended by inserting the words "the
penultimate sentence of this Section 5.1.1 and" after the word "of" in the
first line of Section 5.1.1.
2. Section 5.1.1 is hereby further amended by inserting the
following as the penultimate sentence in such Section 5.1.1:
"In the event the Executive terminates his employment hereunder
pursuant to Section 5.4(iv) or (v), the payments described in the
first sentence of this Section 5.1.1 shall be reduced by an amount
equal to the payments received by the Executive as a Sale Bonus under
the Company's Sale Bonus Plan."
3. The parenthetical contained in the second line of Section 5.4 is
amended in its entirety to read as follows: "(without the Executive's prior
written consent in the case of clauses (i), (ii) and (iii) below)".
4. Section 5.4 is further hereby amended by inserting a new
subsection (ii) to read as follows and to renumber the subsections that
follow accordingly:
"(ii) a material diminution of the authority, responsibilities or
positions of the Executive with the Company;"
<PAGE>
2
5. This Amendment shall be governed in accordance with the laws of
the State of New York.
6. Except as modified hereby, the Employment Agreement remains in
full force and effect.
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Frank V. Sica
----------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ David E. Ferguson
- ----------------------------
David E. Ferguson
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
March 20, 1998
Mr. David E. Ferguson
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear David:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Employment Agreement with
ARM Financial Group, Inc. (the "COMPANY") dated as of July 1, 1996, as
amended December 4, 1997 (the "EMPLOYMENT AGREEMENT").
1. Section 5.1.1 is hereby amended by deleting the words "the
penultimate sentence of this Section 5.1.1 and" in the first line of
Section 5.1.1.
2. Section 5.1.1 is hereby further amended by deleting the
penultimate sentence in such Section 5.1.1.
3. This Amendment shall be governed in accordance with the laws of
the State of New York.
4. Except as modified hereby, the Employment Agreement remains in
full force and effect.
<PAGE>
2
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Martin H. Ruby
-------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ David E. Ferguson
- ----------------------
David E. Ferguson
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
February 10, 1998
Mr. John Franco
3114 Arden Road
Glenview, KY 40025
Dear John:
This letter agreement (the "AGREEMENT") sets forth our mutual
agreement concerning your retirement as a director, officer and employee of
ARM Financial Group, Inc., a Delaware corporation (the "COMPANY"), and its
subsidiaries and affiliates (collectively with the Company, the "ARM GROUP").
1. RETIREMENT. (a) You hereby retire, effective as of the
expiration of the Revocation Period (as defined in Section 13 below)(the
"RETIREMENT DATE"), as a director, officer and employee of the Company and
of the other members of the ARM Group and from all other positions held by
you with the Company or any other member of the ARM Group.
2. EMPLOYMENT AGREEMENT. Effective as of the Retirement
Date, the Employment Agreement dated as of July 1, 1996 between you and the
Company (the "EMPLOYMENT AGREEMENT") and all other employment agreements and
arrangements between the Company or any other member of the ARM Group and you
will be terminated and of no further force and effect other than the Plan and
Option Agreement (as such terms are defined below).
3. SEVERANCE BENEFITS. (a) The Company will pay you an
amount equal to $314,000 as a bonus for services rendered during the fiscal
year ended December 31, 1997 at such time as such bonus payments are
generally paid to officers of the Company.
(b) The Company will continue to pay you your base salary
("BASE SALARY") at the current rate of $416,000 through December 31, 1998,
payable in accordance with the Company's prevailing payroll practices. The
Company will pay you on January 1, 1999 an amount equal to the sum of (i) an
amount equal to Base Salary for the period from January 1, 1999 through the
second anniversary of the Retirement Date and (ii) $648,000, representing
bonus payments that would otherwise have been paid to you for fiscal years
ending December 31, 1998 and December 31, 1999.
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2
(c) On the Retirement Date, you shall receive a lump sum
payment in satisfaction of your accrued vacation in accordance with Company
policy.
(d) Except as otherwise specifically provided herein, you
will not be entitled to any compensation or benefits or to participate in any
past, present or future employee benefit programs or arrangements of the
Company or any other member of the ARM Group after the Retirement Date,
PROVIDED that you will be entitled to receive your vested accrued benefits
under the Company's retirement plans in accordance with the terms and
conditions thereof, you may convert your coverage under the Company's group
life insurance policy into an individual policy to the extent permitted by
the terms of the Company's group life insurance and you will be entitled to
continuation of your health and dental coverage in accordance with the
Consolidated Omnibus Budget Reconciliation Act of 1986.
4. SHARES OF COMPANY STOCK. You hereby agree, for a period
of 120 days following the date hereof (the "LOCK-UP PERIOD"), not to offer to
sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to (collectively, a "DISPOSITION") any shares of
Class A Convertible Common Stock, $.01 par value, of the Company ("COMMON
STOCK"), any options or warrants to purchase any shares of Common Stock or
any securities convertible into or exchangeable for shares of Common Stock
(collectively, "SECURITIES"), now owned or hereafter acquired by you or with
respect to which you have or hereafter acquire the power of disposition,
other than with the prior written consent of the Company; PROVIDED, HOWEVER,
that the Lock-Up Period will terminate upon the consummation of a Change in
Control (as defined in the Plan) of the Company. The foregoing restriction
is expressly agreed to preclude you from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result
in a Disposition of Securities during the Lock-Up Period even if such
Securities would be disposed of by someone other than you. You further agree
and consent to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the Securities held by you except in
compliance with this Agreement.
5. STOCK OPTIONS. Your options ("OPTIONS") to purchase
386,084 shares of Common Stock that are vested as of the date hereof may be
exercised during the ninety-day period commencing on February 17, 1998 and
otherwise in accordance with the terms of the Company's Amended and Restated
Stock Option Plan (the "PLAN") and the Amended and Restated Stock Option
(Nonqualified) Certificate and Agreement thereunder (the "OPTION AGREEMENT").
During such ninety-day period, you may exercise the Options by satisfying the
exercise price and tax withholding obligations in cash or by delivering
shares of Common Stock that are already owned by you for a period of at least
six months having a Fair Market Value as of the date of exercise of such
Options equal to the aggregate exercise price. For purposes of this
Agreement, "Fair Market Value" means the average of the closing prices of the
Common Stock on the American Stock Exchange for the ten-day period prior to
the date of exercise without regard to any discount for blockage, Rule 144
limitations or otherwise. You may also satisfy the tax withholding
obligations upon exercise (based on the same tax rate normally applicable to
<PAGE>
3
your compensation, for which such compensation will be treated as marginal
income) by means of the Company withholding a sufficient number of shares of
Common Stock to satisfy such tax obligation. Your options to purchase
232,647 shares of the Common Stock that are not vested as of the Retirement
Date ("TRANCHE 2 OPTIONS") will continue to vest and become exercisable in
accordance with the vesting schedule specified in the Option Agreement and
the Plan as if you remained in the employ of the Company (including, without
limitation, the provision regarding acceleration of vesting in the event of a
Change in Control (as defined in the Plan)), subject to the terms and
conditions thereof; PROVIDED, HOWEVER, that all Options that are not vested
as of January 1, 1999 will vest and become exercisable on such date, subject
to the terms and conditions thereof. Each of your Tranche 2 Options will be
exercisable for a period of 90 days following the respective date on which it
vests.
6. NONSOLICITATION; CONFIDENTIALITY; NONCOMPETITION
6.1. NONSOLICITATION. For the period through the second
anniversary of the Retirement Date, you will not, without the prior written
consent of the Company, directly or indirectly, as a sole proprietor, member
of a partnership, stockholder or investor, officer or director of a
corporation, or as an employee, associate, consultant or agent of any person,
partnership, corporation or other business organization or entity other than
the Company: (x) solicit or endeavor to entice away from the Company or any
of its subsidiaries any person or entity who is, or, during the then most
recent 12-month period, was employed by, or had served as an agent or key
consultant of, the Company or any of its subsidiaries (in the case of a
consultant, only if such solicitation or enticement is reasonably likely to
cause a termination of or otherwise materially interfere with the continued
relationship between the Company and such consultant); or (y) solicit or
endeavor to entice away from the Company or any of its subsidiaries any
existing or reasonably anticipated (to your general knowledge or the public)
policy, contract or other business with any person or entity who is, or was
within the then most recent 12-month period, a customer or client (or
reasonably anticipated (to your general knowledge or the public) to become a
customer or client) of the Company or any of its subsidiaries.
6.2. CONFIDENTIALITY. You covenant and agree with the Company
that you will not at any time, except with the prior written consent of the
Company, directly or indirectly, disclose any secret or confidential
information that you may learn or has learned by reason of your association
with the Company or any of its subsidiaries and affiliates. The term
"confidential information" includes information not previously disclosed to
the public or to the trade by the management of the Company or otherwise in
the public domain, with respect to the products, facilities, applications and
methods, trade secrets and other intellectual property, systems, procedures,
manuals, confidential reports, product price lists, customer lists, technical
information, financial information (including the revenues, costs or profits
associated with any of the Company's products or services), business plans,
prospects or opportunities, but will exclude any information which (i) is or
becomes available to the public or is generally known in the industry or
industries in which the Company operates other than as a result of your
disclosure in
<PAGE>
4
violation of this Section 6.2 or (ii) you are required to disclose under any
applicable laws, regulations or directives of any government agency, tribunal
or authority having jurisdiction in the matter or under subpoena or other
process of law.
6.3. NO COMPETING EMPLOYMENT. For the period through January
1, 1999, you will not, directly or indirectly, as a sole proprietor, member
of a partnership, stockholder or investor (other than a stockholder or
investor owning not more than a 5% interest), officer or director of a
corporation, or as an employee, associate, consultant or agent of any person,
partnership, corporation or other business organization or entity other than
the Company or any of its subsidiaries, render any service to or in any way
be affiliated with a competitor (or any person or entity that is reasonably
anticipated (to your general knowledge or the public) to become a competitor)
of the Company or any of its subsidiaries in the business of accumulation
products and other insurance businesses in which the Company or any of its
subsidiaries is engaged. Notwithstanding anything contained in this Section
6.3 to the contrary, the period of applicability of this Section 6.3 will be
extended an additional day for each day on which you are in breach of this
Section 6.3.
6.4. EXCLUSIVE PROPERTY. You confirm that all confidential
information is and will remain the exclusive property of the Company. All
business records, papers and documents kept or made by you relating to the
business of the Company will be and remain the property of the Company,
except for such papers customarily deemed to be your personal copies. On or
prior to the Retirement Date, you will surrender to the Company all property
of the Company and the other members of the ARM Group in your possession and
all property made available to you in connection with your employment by the
Company and the other members of the ARM Group, including, without
limitation, any and all records, manuals, customer lists, notebooks,
computers, computer programs and files, papers, electronically stored
information and documents kept or made by you in connection with your
employment.
6.5. LIMITATION ON COMMENTS. At no time will you utter, issue
or circulate any false, inappropriate or disparaging statements, remarks or
rumors about the Company, Morgan Stanley, Dean Witter, Discover & Co. or any
other member of the ARM Group. Similarly, at no time will the Company,
Morgan Stanley, Dean Witter, Discover & Co. or any other member of the ARM
Group utter, issue or circulate any false, inappropriate or disparaging
statements, remarks or rumors about you.
6.6. INJUNCTIVE RELIEF. Without intending to limit the
remedies available to the parties hereto, the parties acknowledge that a
breach of any of the covenants contained in this Section 6 by the other (in
your case, a breach of Section 6.1, 6.2, 6.3, 6.4 or 6.5 and in the case of
the Company, a breach of Section 6.5) may result in material and irreparable
injury to the other party for which there is no adequate remedy at law, that
it will not be possible to measure damages for such injuries precisely and
that, in the event of such a breach or threat thereof, the damaged party will
be entitled to seek a temporary restraining order and/or a preliminary or
<PAGE>
5
permanent injunction restraining the breaching party from engaging in
activities prohibited by this Section 6 or such other relief as may be
required specifically to enforce any of the covenants in this Section 6. If
for any reason, it is held that the restrictions under this Section 6 are not
reasonable or that consideration therefor is inadequate, such restrictions
will be interpreted or modified to include as much of the duration and scope
identified in this Section 6 as will render such restrictions valid and
enforceable.
7. ARBITRATION
Any dispute or controversy arising under or in connection with
this Agreement that cannot be mutually resolved by the parties hereto will be
settled exclusively by arbitration in New York, New York before one
arbitrator of exemplary qualifications and stature, who will be selected
jointly by you and the Company, or, if you and the Company cannot agree on
the selection of the arbitrator, will be selected by the American Arbitration
Association (PROVIDED that any arbitrator selected by the American
Arbitration Association will not, without the consent of the parties hereto,
be affiliated with you or the Company or any of their respective affiliates).
Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The parties hereby agree that the arbitrator will be empowered
to enter an equitable decree mandating specific enforcement of the terms of
this Agreement. The Company will bear all expenses of the arbitrator
incurred in any arbitration hereunder and will reimburse you for any related
reasonable legal fees and out-of-pocket expenses directly attributable to
such arbitration; PROVIDED that such legal fees are calculated on an hourly,
and not on a contingency fee, basis; and PROVIDED, FURTHER, that you will
bear all expenses of the arbitrator and all of his legal fees and
out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that your
claim or position was frivolous and without reasonable foundation.
8. BREACH OF AGREEMENT. Without limiting the Company's
rights to obtain other available remedies, the obligations of the Company
under this Agreement will cease upon a breach of this Agreement or any
willful misconduct by you which is materially injurious to the financial
condition or business reputation of, or is otherwise materially injurious to,
the Company or any other member of the ARM Group.
9. INCIDENTAL REGISTRATION. (a) If the Morgan Stanley
Stockholders (as defined in the Second Amended and Restated Stockholders'
Agreement dated as of June 24, 1997 among the Company and certain of its
stockholders (the "STOCKHOLDERS' AGREEMENT")) at any time exercise their
rights under Section 3.01 or 3.02 of the Stockholders' Agreement or the
Company otherwise agrees to register under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), all or a portion of the shares of Common
Stock held by the Morgan Stanley Stockholders for sale to the public under
the Securities Act, the Company will at such time give prompt written notice
to you of its intention to do so, describing such securities and specifying
the form and manner and the other relevant facts involved in such proposed
registration
<PAGE>
(including, without limitation, whether or not such registration will be in
connection with an underwritten offering of its Common Stock and, if so, the
identity of the managing underwriter and whether such offering will be
pursuant to a "best efforts" or "firm commitment" underwriting if such
disclosure is acceptable to the managing underwriter). Upon your written
request delivered to and received by the Company within 30 days after such
notice shall have been given to you (which request will, subject to the
proviso below, specify the shares of Common Stock intended to be disposed of
by you), the Company will use its best efforts to effect the registration
under the Securities Act, as expeditiously as is reasonable, of all shares of
Common Stock that the Company has been so requested to register by you, to
the extent requisite to permit the disposition (in accordance with the
intended methods thereof as aforesaid) of the shares of Common Stock so to
be registered; PROVIDED, HOWEVER, that the percentage of shares of Common
Stock held by you that you may request to be registered may not exceed the
percentage of shares of Common Stock held by the Morgan Stanley Stockholders
that they request to be so registered. Notwithstanding the foregoing you
will be subject to clauses (i)-(iii) of the proviso contained in Section
3.02 of the Stockholders' Agreement as if you were a Morgan Stanley
Stockholder.
(b) The Company will pay all Registration Expenses (as
defined in the Stockholders' Agreement) in connection with each registration
of your shares of Common Stock effected by it pursuant to this Section 9.
10. CONFIDENTIALITY OF AGREEMENT; COOPERATION. (a) You
hereby agree not to discuss the terms of this Agreement with any employee of
any member of the ARM Group without the prior written consent of the Company.
(b) From and after the Retirement Date, you will cooperate in
all reasonable respects (after taking into account any employment obligations
you may have) with the Company and the other members of the ARM Group and
their respective directors, officers, attorneys and experts in connection
with the conduct of any action, proceeding, investigation or litigation
involving the Company or any other member of the ARM Group. The Company will
reimburse you for any reasonable out-of-pocket expenses incurred by you in
connection with your compliance with this Section 8, PROVIDED that such
expenses have been approved in accordance with the Company's policies and
procedures. The Company will cooperate in all reasonable respects with you
in connection with the conduct of any action, proceeding, investigation or
litigation involving you with respect to your employment with the Company.
11. RELEASE. (a) GENERAL RELEASE. (i) In consideration of
the payments and benefits provided to you under this Agreement, you hereby
release and forever discharge the Company (and its successors), the other
members of the ARM Group and each of their respective officers, employees,
directors and agents from any and all claims, actions and causes of action
(collectively, "CLAIMS"), including, without limitation, any Claims arising
under any applicable federal, state, local or foreign law, that you may have,
or in the future
<PAGE>
7
may possess, arising out of (x) your employment relationship with and
service, on or prior to the date hereof, as an employee, director or officer
of the Company or any other member of the ARM Group and the termination of
such relationship or service, or (y) any event, condition, circumstance or
obligation that occurred, existed or arose on or prior to the date hereof;
PROVIDED, HOWEVER, that the release set forth in this Section 11(a)(i) will
not apply to (A) any obligation of the Company under this Agreement, (B) the
obligations of the Company to continue to provide director and officer
indemnification for services rendered by you prior to the Retirement Date
and (C) the Company's obligations under its retirement and welfare plans.
(ii) The Company and its subsidiaries and affiliates hereby
release and forever discharge you, your estate and your legal representatives
from any and all Claims, including, without limitation, any Claims arising
under any applicable federal, state, local or foreign law, that it may have,
or in the future may possess, arising out of (x) your employment relationship
with and service, on or prior to the date hereof, as an employee, director or
officer of the Company or any other member of the ARM Group, and the
termination of such relationship or service, or (y) any event, condition,
circumstance or obligation that occurred, existed or arose on or prior to the
date hereof; PROVIDED, HOWEVER, that the release set forth in this
Section 11(a)(ii) will not apply to (A) any Claim arising from the breach of
this Agreement or (B) any Claim arising from any act or omission of yours
which is in violation of any applicable criminal law or regulation.
(b) SPECIFIC RELEASE OF ADEA CLAIMS. In consideration of the
payments and benefits provided to you under this Agreement, you hereby
release and forever discharge the Company (and its successors), the other
members of the ARM Group and each of their respective officers, employees,
directors and agents from any and all claims, actions and causes of action
that you may have as of the date you sign this Agreement arising under the
Federal Age Discrimination in Employment Act of 1967, as amended, and the
applicable rules and regulations promulgated thereunder ("ADEA"). By signing
this Agreement, you hereby acknowledge and confirm the following: (i) you
were advised by the Company in connection with your termination to consult
with an attorney of your choice prior to signing this Agreement and to have
such attorney explain to you the terms of this Agreement, including, without
limitation, the terms relating to your release of claims arising under ADEA;
(ii) you have been given a period of not fewer than 21 days to consider the
terms of this Agreement and to consult with an attorney of your choosing with
respect thereto; and (iii) you are providing the release and discharge set
forth in this Section 11(b) only in exchange for consideration in addition to
anything of value to which you are already entitled.
12. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement, the Plan and Option
Agreement set forth the entire agreement and understanding of the parties
hereto with respect to the matters
<PAGE>
8
covered hereby and supersede and replace any express or implied prior
agreement between the Company or any other member of the ARM Group and you
with respect to the terms of your employment and the termination thereof
which you may have had with the Company or any other member of the ARM Group.
This Agreement may be amended only by a written document signed by the
parties hereto.
(b) GOVERNING LAW. This Agreement will be governed by, and
construed in accordance with, the laws of the State of New York.
(c) WITHHOLDING TAXES. Any payments made or benefits
provided to you under this Agreement will be reduced by any applicable
withholding taxes.
(d) NOTICES. Any notices required or made pursuant to this
Agreement will be in writing and will be deemed to have been given when
delivered or mailed by United States certified mail, return receipt
requested, postage prepaid to the addresses set forth above or to such other
address as either party may furnish to the other in writing in accordance
with this Section 12(d). Notices of change of address will be effective only
upon receipt.
(e) SUCCESSORS. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform it if no
such succession had taken place.
(f) SEVERABILITY. Each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
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9
13. REVOCATION. This Agreement may be revoked by you within
the 7-day period commencing on the date you sign this Agreement (the
"REVOCATION PERIOD"). In the event of any such revocation by you, all
obligations of the Company under this Agreement will terminate and be of no
further force and effect as of the date of such revocation. No such
revocation by you will be effective unless it is in writing and signed by you
and received by the Company prior to the expiration of the Revocation Period.
ARM FINANCIAL GROUP, INC.
By: /s/ Martin H. Ruby
------------------------
Name:
Title:
Accepted and Agreed:
/s/ John Franco
- ----------------------------------
Dated: February 10, 1998
<PAGE>
TERMINATION AGREEMENT
WHEREAS, Emad A. Zikry ("Option Holder") has been granted options
to purchase shares of common stock (the "Options") of ARM Financial Group, Inc.
(the "Company"); and
WHEREAS, the Company and Option Holder wish to terminate the
Options in connection with the transactions contemplated by that certain
Purchase Agreement, dated as of May 21, 1997, by and between ARM Capital
Advisors Holdings, LLC and the Company (the "Purchase Agreement").
NOW, THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Option Holder hereby agree as follows:
1. Pursuant to Section 6(h)(iii) of the Purchase Agreement, Option
Holder hereby agrees that all of the Options are terminated and surrendered as
of December 1, 1996, and all obligations of the parties thereunder shall be
null and void effective as of December 1, 1996.
2. This Termination Agreement shall be construed in accordance with
the laws of the State of Delaware, without regard to the conflict of law
provisions thereof.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Termination Agreement on November 7, 1997, but effective as of December 1, 1996.
ARM FINANCIAL GROUP INC.
By:/s/ Martin H. Ruby
------------------------------
Title: Co-Chief Executive Officer
----------------------------
By:/s/ John Franco
------------------------------
Title: Co-Chief Executive Officer
---------------------------
OPTION HOLDER:
/s/ Emad Zikry
---------------------------------
Name: Emad Zikry
----------------------------
<PAGE>
TERMINATION AGREEMENT
WHEREAS, Emad A. Zikry ("Employee") and ARM Financial
Group, Inc. (the "Company") are parties to an Employment Agreement
dated as of October 31, 1994 (the "Employment Agreement"); and
WHEREAS, the Company and Employee wish to terminate the
Employment Agreement in connection with the transactions contemplated by that
certain Purchase Agreement, dated as of May 21, 1997, by and between ARM Capital
Advisors Holdings, LLC and the Company (the "Purchase Agreement").
NOW, THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Employee hereby agree as follows:
1. Pursuant to Section 6(h)(i) of the Purchase Agreement, Employee
and Company hereby agree that the Employment Agreement is terminated and
surrendered as of the date hereof, and except as set forth below, all
obligations of the parties thereunder shall be null and void effective as of the
date hereof.
2. Notwithstanding anything contained herein to the contrary, Sections
6.2, 6.4, 6.6 and 8.2 of the Employment Agreement shall survive this termination
for a period of two (2) years from the date hereof.
3. This Termination Agreement shall be construed in accordance with
the laws of the State of New York, without regard to the conflict of law
provisions thereof.
IN WITNESS WHEREOF, each of the parties hereto has
executed this Termination Agreement as of the date hereof, but
effective as of November 7, 1997.
ARM FINANCIAL GROUP, INC.
By:/s/ John Franco
------------------------------
Title: Co-Chief Executive Officer
---------------------------
By:/s/ Martin H. Ruby
------------------------------
Title: Co-Chief Executive Officer
---------------------------
EMPLOYEE:
/S/Emad A. Zikry
---------------------------------
Emad A. Zikry
<PAGE>
AGREEMENT dated as of December 4, 1997 (the "AGREEMENT"), between
ARM FINANCIAL GROUP, INC., a Delaware corporation (the "COMPANY"), and Dennis
L. Carr (the "EXECUTIVE").
WHEREAS, the Executive is currently employed by the Company in various
capacities and is rendering valuable services to the Company. The parties desire
to enter into this Agreement to provide certain assured severance benefits to
the Executive in the event of a Change in Control, as defined below, to further
the Company's aims to retain the Executive during an actual or attempted Change
in Control and to assure fair treatment of the Executive in the event of a
Change in Control;
NOW, THEREFORE, in order to induce the Executive to remain in his
present employment and in consideration of his agreement to continue his
employment subject to the terms and conditions hereof, this Agreement sets forth
the payments which the Company agrees will be provided to the Executive in the
event his employment is terminated in connection with a Change in Control.
1. DEFINITIONS
1.1 ANNUAL BONUS means the annual bonus awarded pursuant to the bonus
plan under which the cash bonuses of executives of the Company are awarded
(excluding any bonus under the Company's Sale Bonus Plan) or, if such amount is
not yet known, the most recent bonus awarded pursuant to such plan as of either
the Change in Control Date or the date on which the Executive's employment is
terminated, whichever is greater.
1.2 CAUSE. Termination for "CAUSE" shall mean termination of the
Executive's employment because of:
(i) any act or omission that constitutes a material breach by the
Executive of any of his material obligations under this Agreement (other
than by reason of his death or Permanent Disability);
(ii) the continued failure or refusal of the Executive to perform the
material duties required of him as an employee of the Company (other than
by reason of his death or Permanent Disability);
(iii) any willful material violation by the Executive of any law or
regulation applicable to the business of the Company or any of its
subsidiaries, or the Executive's conviction of a felony, or any willful
perpetration by the Executive of a common law fraud; or
(iv) any other willful misconduct by the Executive which is
materially injurious to the financial condition or business reputation of,
or is otherwise materially injurious to, the Company or any of its
subsidiaries or affiliates;
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2
PROVIDED, HOWEVER, that if any such Cause relates to the Executive's obligations
under this Agreement and (x) is susceptible to cure and (y) does not constitute
a repetition of such Cause, the Company shall not terminate the Executive's
employment hereunder unless the Company first gives the Executive notice of its
intention to terminate and of the grounds for such termination, and the
Executive has not, within 10 business days following receipt of the notice,
cured such Cause, or in the event such Cause is not susceptible to cure within
such 10 business day period, the Executive has not taken all reasonable steps
within such 10 business day period to cure such Cause as promptly as practicable
thereafter.
1.3 GOOD REASON shall mean any of the following (without the
Executive's prior written consent):
(1) a decrease in the Executive's base rate of compensation or a
failure by the Company to pay material compensation due and payable to the
Executive in connection with his employment; or
(ii) a relocation of the Executive's principal place of business
outside the Louisville, Kentucky metropolitan area and the Company fails to
agree to reimburse the Executive for reasonable relocation expenses on an
after-tax basis.
1.4 CHANGE IN CONTROL means the acquisition, directly or indirectly
through merger or otherwise in a single transaction or a series of transactions,
by a Third Party, of equity securities of the Company entitling such Third
Party, to elect a majority of the members of the Board of Directors or a sale of
all or substantially all of the assets of the Company to a Third Party.
1.5 CHANGE IN CONTROL DATE means the date on which a Change in
Control is consummated.
1.6 PERMANENT DISABILITY means a physical or mental disability or
infirmity of the Executive that prevents the normal performance of substantially
all his duties as an employee of the Company, which disability or infirmity
shall exist, or in the opinion of an independent physician is reasonably likely
to exist, for any continuous period of 180 days
1.7 THIRD PARTY means any person, entity or group (as defined under
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) that are
not, directly or indirectly through one or more intermediaries, in control of,
controlled by, or under common control with, the Company, Morgan Stanley, Dean
Witter, Discover & Co., The Morgan Stanley Leveraged Equity Fund II, L.P. or
Morgan Stanley Capital Partners III, L.P.
<PAGE>
3
2. EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective as of the date first set forth
above (the "EFFECTIVE DATE") and shall terminate on the second anniversary of
the Change in Control Date. The period commencing on the Change in Control Date
and ending on the second anniversary thereof is hereinafter referred to as the
"PROTECTED PERIOD".
3. COMPENSATION
3.1 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If, during the
Protected Period, the Executive's employment is terminated (except in the event
of death or Permanent Disability); (i) by the Company other than for Cause; or
(ii) by the Executive for "Good Reason," the Company shall make a lump sum
payment to the Executive in an amount equal to the sum of (i) and (ii) below:
(i) two times (A) the sum of (x) the higher of the Executive's
annual base salary in effect on the Change in Control Date or his annual
base salary in effect on the date of termination of his employment plus (y)
the Executive's Annual Bonus, multiplied by (B) a fraction, the numerator
which is equal to the number of months remaining in the Protected Period
and the denominator of which is equal to 24; PROVIDED, that in no event
shall such payment be less than 50% of the Executive's annual base salary
plus Annual Bonus; and
(ii) to the extent not previously paid to the Executive, an amount
equal to the Executive's Annual Bonus multiplied by a fraction the
numerator of which is the number of days that have elapsed during the
calendar year up to and including the date of termination and the
denominator of which is 365.
3.2 OTHER TERMINATIONS. In the event of the termination of the
Executive's employment with the Company for any reason other than as specified
in Section 3.1, the Company shall have no obligation to the Executive pursuant
to this Agreement.
3.3 ACCRUED AND UNPAID ANNUAL BONUS. In the event that the employment
of the Executive is terminated by the Company following the expiration of the
Protected Period, the Executive shall be entitled to receive any accrued but
unpaid Annual Bonus representing any portion of the Protected Period on the date
of such termination.
4. NONSOLICITATION; CONFIDENTIALITY; NONCOMPETITION
4.1 NONSOLICITATION. During the Protected Period (whether or not the
Executive remains an employee of the Company (or its successor)), the Executive
shall not, without the
<PAGE>
4
prior written consent of the Company, directly or indirectly, as a sole
proprietor, member of a partnership, stockholder or investor, officer or
director of a corporation, or as an employee, associate, consultant or agent of
any person, partnership, corporation or other business organization or entity
other than the Company: (x) solicit or endeavor to entice away from the Company
or any of its subsidiaries any person or entity who is, or, during the then most
recent 12-month period, was employed by, or had served as an agent or key
consultant of, the Company or any of its subsidiaries (in the case of a
consultant, only if such solicitation or enticement is reasonably likely to
cause a termination of or otherwise materially interferes with the continued
relationship between the Company and such consultant); or (y) solicit or
endeavor to entice away from the Company or any of its subsidiaries any existing
or reasonably anticipated (to the general knowledge of the Executive or the
public) policy, contract or other business with any person or entity who is, or
was within the then most recent 12-month period, a customer or client (or
reasonably anticipated (to the general knowledge of the Executive or the public)
to become a customer or client) of the Company or any of its subsidiaries.
4.2 CONFIDENTIALITY. The Executive covenants and agrees with the
Company that he will not at any time, except in performance of his obligations
to the Company hereunder or with the prior written consent of the Company,
directly or indirectly, disclose any secret or confidential information that he
may learn or has learned by reason of his association with the Company or any of
its subsidiaries and affiliates. The term "confidential information" includes
information not previously disclosed to the public or to the trade by the
management of the Company or otherwise in the public domain, with respect to the
products, facilities, applications and methods, trade secrets and other
intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information (including the revenues, costs or profits associated with any of the
Company's products or services), business plans, prospects or opportunities, but
shall exclude any information which (i) is or becomes available to the public or
is generally known in the industry or industries in which the Company operates
other than as a result of disclosure by the Executive in violation of his
agreements under this Section 4.2 or (ii) the Executive is required to disclose
under any applicable laws, regulations or directives of any government agency,
tribunal or authority having jurisdiction in the matter or under subpoena or
other process of law.
4.3 NO COMPETING EMPLOYMENT. During the Protected Period, the
Executive shall not, directly or indirectly, as a sole proprietor, member of a
partnership, stockholder or investor (other than a stockholder or investor
owning not more than a 5% interest), officer or director of a corporation, or as
an employee, associate, consultant or agent of any person, partnership,
corporation or other business organization or entity other than the Company or
any of its subsidiaries, render any service to or in any way be affiliated with
a competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of the Executive or the public) to become a competitor) of the
Company or any of its subsidiaries in the businesses in which the Company or any
of its subsidiaries is engaged; PROVIDED, HOWEVER, that this Section 4.3 shall
not apply in the event that the Executive's employment is terminated by the
Company
<PAGE>
5
without Cause or by the Executive with Good Reason. For purposes of this Section
4.3 only, "Good Reason" shall include a termination by the Executive as a result
of his refusal to relocate even if the Company has agreed to reimburse him for
his reasonable relocation expenses. Notwithstanding anything contained in this
Section 4.3 to the contrary, the period of applicability of this Section 4.3
shall be extended an additional day for each day on which the Executive is in
breach of this Section 4.3.
4.4 EXCLUSIVE PROPERTY. The Executive confirms that all confidential
information is and shall remain the exclusive property of the Company. All
business records, papers and documents kept or made by the Executive relating to
the business of the Company shall be and remain the property of the Company,
except for such papers customarily deemed to be the personal copies of the
Executive.
4.5 LIMITATION ON COMMENTS. At no time during or after the Protected
Period shall the Executive utter, issue or circulate any false, inappropriate or
disparaging statements, remarks or rumors about the Company, The Morgan Stanley
Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P. or
Morgan Stanley Capital Partners, the private equity unit of Morgan Stanley, Dean
Witter, Discover & Co. Similarly, at no time during the Protected Period or
thereafter shall the Company, The Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P., or Morgan Stanley Capital Partners,
the private equity unit of Morgan Stanley, Dean Witter, Discover & Co., utter,
issue or circulate any false, inappropriate or disparaging statements, remarks
or rumors about the Executive.
4.6 INJUNCTIVE RELIEF. Without intending to limit the remedies
available to the parties hereto, the parties acknowledge that a breach of any of
the covenants contained in this Section 4 by the other (in the case of the
Executive, a breach of Section 4.1, 4.2, 4.3, 4.4 or 4.5 and in the case of the
company, a breach of Section 4.5) may result in material and irreparable injury
to the other party for which there is no adequate remedy at law, that it will
not be possible to measure damages for such injuries precisely and that, in the
event of such a breach or threat thereof, the damaged party shall be entitled to
seek a temporary restraining order and/or a preliminary or permanent injunction
restraining the breaching party from engaging in activities prohibited by this
Section 4 or such other relief as may be required specifically to enforce any of
the covenants in this Section 4. If for any reason, it is held that the
restrictions under this Section 4 are not reasonable or that consideration
therefor is inadequate, such restrictions shall be interpreted or modified to
include as much of the duration and scope identified in this Section 4 as will
render such restrictions valid and enforceable.
5. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement that cannot be mutually resolved by the parties hereto shall be
settled exclusively by arbitration in Louisville, Kentucky before one arbitrator
of exemplary qualifications and stature, who shall be
<PAGE>
6
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (PROVIDED that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement. The Company shall bear all expenses of the arbitrator
incurred in any arbitration hereunder and shall reimburse the Executive for any
related reasonable legal fees and out-of-pocket expenses directly attributable
to such arbitration; PROVIDED that such legal fees are calculated on an hourly,
and not on a contingency fee, basis; and PROVIDED, FURTHER, that the Executive
shall bear all expenses of the arbitrator and all of his legal fees and
out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
6. MISCELLANEOUS
6.1 NOTICES. All notices or communications hereunder shall be in
writing, addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
Attention: Co-Chairman of the Board
To the Executive:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All such notices shall be conclusively deemed to
be received and shall be effective, (i) if sent by hand delivery, upon receipt,
(ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt
by the sender of such transmission or (iii) if sent by registered or certified
mail, on the fifth day after the day on which such notice is mailed.
<PAGE>
7
6.2 SEVERABILITY. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
6.3 ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Any business
entity succeeding to substantially all of the business of the Company by
purchase, merger, consolidation, sale of assets or otherwise, shall be bound by
and shall adopt and assume this Agreement and the Company shall obtain the
assumption of this Agreement by such successor.
6.4 ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive. This Agreement may be
amended at any time by mutual written agreement of the parties hereto.
6.5 WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the Company's employee benefit plans, if
any.
6.6 GOVERNING LAW. This Agreement shall be governed by in accordance
with the laws of the State of New York.
6.7 EXPIRATION DATE. This Agreement shall terminate and be null, void
and of no further force or effect in the event that a Change in Control has not
occurred by June 30, 1998, (unless the parties otherwise agree in writing to a
later date).
<PAGE>
8
6.8 SURVIVAL. Subject to Section 6.7, Sections 3.3, 4, 5 and 6.2
shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.
ARM FINANCIAL GROUP, INC.
By: /s/ Frank V. Sica
----------------------------
Name
Title:
EXECUTIVE
/s/ Dennis L. Carr
----------------------------
Dennis L. Carr
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
March 20, 1998
Mr. Dennis L. Carr
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear Dennis:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Change in Control Agreement
with ARM Financial Group, Inc. dated as of December 4, 1997 (the "CHANGE IN
CONTROL AGREEMENT").
1. Section 6.7 of the Change in Control Agreement is hereby
amended by deleting the words "June 30, 1998" and inserting the words
"December 31, 1998".
2. This Amendment shall be governed in accordance with the laws of
the State of New York.
3. Except as modified hereby, the Change in Control Agreement
remains in full force and effect.
<PAGE>
2
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Martin H. Ruby
-------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ Dennis L. Carr
- ---------------------
Dennis L. Carr
<PAGE>
AGREEMENT dated as of December 4, 1997 (the "AGREEMENT"), between
ARM FINANCIAL GROUP, INC. a Delaware corporation (the "COMPANY"), and Edward
L. Zeman (the "EXECUTIVE").
WHEREAS, the Executive is currently employed by the Company in various
capacities and is rendering valuable services to the Company. The parties desire
to enter into this Agreement to provide certain assured severance benefits to
the Executive in the event of a Change in Control, as defined below, to further
the Company's aims to retain the Executive during an actual or attempted Change
in Control and to assure fair treatment of the Executive in the event of a
Change in Control;
NOW, THEREFORE, in order to induce the Executive to remain in his
present employment and in consideration of his agreement to continue his
employment subject to the terms and conditions hereof, this Agreement sets forth
the payments which the Company agrees will be provided to the Executive in the
event his employment is terminated in connection with a Change in Control.
1. DEFINITIONS
1.1 ANNUAL BONUS means the annual bonus awarded pursuant to the bonus
plan under which the cash bonuses of executives of the Company are awarded
(excluding any bonus under the Company's Sale Bonus Plan) or, if such amount is
not yet known, the most recent bonus awarded pursuant to such plan as of either
the Change in Control Date or the date on which the Executive's employment is
terminated, whichever is greater.
1.2 CAUSE. Termination for "CAUSE" shall mean termination of the
Executive's employment because of:
(i) any act or omission that constitutes a material breach by the
Executive of any of his material obligations under this Agreement (other
than by reason of his death or Permanent Disability);
(ii) the continued failure or refusal of the Executive to perform the
material duties required of him as an employee of the Company (other than
by reason of his death or Permanent Disability);
(iii) any willful material violation by the Executive of any law or
regulation applicable to the business of the Company or any of its
subsidiaries, or the Executive's conviction of a felony, or any willful
perpetration by the Executive of a common law fraud; or
(iv) any other willful misconduct by the Executive which is
materially injurious to the financial condition or business reputation of,
or is otherwise materially injurious to, the Company or any of its
subsidiaries or affiliates;
<PAGE>
2
PROVIDED, HOWEVER, that if any such Cause relates to the Executive's obligations
under this Agreement and (x) is susceptible to cure and (y) does not constitute
a repetition of such Cause, the Company shall not terminate the Executive's
employment hereunder unless the Company first gives the Executive notice of its
intention to terminate and of the grounds for such termination, and the
Executive has not, within 10 business days following receipt of the notice,
cured such Cause, or in the event such Cause is not susceptible to cure within
such 10 business day period, the Executive has not taken all reasonable steps
within such 10 business day period to cure such Cause as promptly as practicable
thereafter.
1.3 GOOD REASON shall mean any of the following (without the
Executive's prior written consent):
(i) a decrease in the Executive's base rate of compensation or a
failure by the Company to pay material compensation due and payable to the
Executive in connection with his employment; or
(ii) a relocation of the Executive's principal place of business
outside the Louisville, Kentucky metropolitan area and the Company fails to
agree to reimburse the Executive for reasonable relocation expenses on an
after-tax basis.
1.4 CHANGE IN CONTROL means the acquisition, directly or indirectly
through merger or otherwise in a single transaction or a series of transactions,
by a Third Party, of equity securities of the Company entitling such Third
Party, to elect a majority of the members of the Board of Directors or a sale of
all or substantially all of the assets of the Company to a Third Party.
1.5 CHANGE IN CONTROL DATE means the date on which a Change in
Control is consummated.
1.6 PERMANENT DISABILITY means a physical or mental disability or
infirmity of the Executive that prevents the normal performance of substantially
all his duties as an employee of the Company, which disability or infirmity
shall exist, or in the opinion of an independent physician is reasonably likely
to exist, for any continuous period of 180 days
1.7 THIRD PARTY means any person, entity or group (as defined under
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) that are
not, directly or indirectly through one or more intermediaries, in control of,
controlled by, or under common control with, the Company, Morgan Stanley, Dean
Witter, Discover & Co., The Morgan Stanley Leveraged Equity Fund II, L.P. or
Morgan Stanley Capital Partners III, L.P.
<PAGE>
3
2. EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective as of the date first set forth
above (the "EFFECTIVE DATE") and shall terminate on the second anniversary of
the Change in Control Date. The period commencing on the Change in Control Date
and ending on the second anniversary thereof is hereinafter referred to as the
"PROTECTED PERIOD".
3. COMPENSATION
3.1 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If, during the
Protected Period, the Executive's employment is terminated (except in the event
of death or Permanent Disability); (i) by the Company other than for Cause; or
(ii) by the Executive for "Good Reason," the Company shall make a lump sum
payment to the Executive in an amount equal to the sum of (i) and (ii) below:
(i) two times (A) the sum of (x) the higher of the Executive's annual
base salary in effect on the Change in Control Date or his annual base
salary in effect on the date of termination of his employment plus (y) the
Executive's Annual Bonus, multiplied by (B) a fraction, the numerator which
is equal to the number of months remaining in the Protected Period and the
denominator of which is equal to 24; PROVIDED, that in no event shall such
payment be less than 50% of the Executive's annual base salary plus Annual
Bonus; and
(ii) to the extent not previously paid to the Executive, an amount
equal to the Executive's Annual Bonus multiplied by a fraction the
numerator of which is the number of days that have elapsed during the
calendar year up to and including the date of termination and the
denominator of which is 365.
3.2 OTHER TERMINATIONS. In the event of the termination of the
Executive's employment with the Company for any reason other than as specified
in Section 3.1, the Company shall have no obligation to the Executive pursuant
to this Agreement.
3.3 ACCRUED AND UNPAID ANNUAL BONUS. In the event that the employment
of the Executive is terminated by the Company following the expiration of the
Protected Period, the Executive shall be entitled to receive any accrued but
unpaid Annual Bonus representing any portion of the Protected Period on the date
of such termination.
4. NONSOLICITATION; CONFIDENTIALITY; NONCOMPETITION
4.1 NONSOLICITATION. During the Protected Period (whether or not the
Executive remains an employee of the Company (or its successor)), the Executive
shall not, without the
<PAGE>
4
prior written consent of the Company, directly or indirectly, as a sole
proprietor, member of a partnership, stockholder or investor, officer or
director of a corporation, or as an employee, associate, consultant or agent of
any person, partnership, corporation or other business organization or entity
other than the Company: (x) solicit or endeavor to entice away from the Company
or any of its subsidiaries any person or entity who is, or, during the then most
recent 12-month period, was employed by, or had served as an agent or key
consultant of, the Company or any of its subsidiaries (in the case of a
consultant, only if such solicitation or enticement is reasonably likely to
cause a termination of or otherwise materially interferes with the continued
relationship between the Company and such consultant); or (y) solicit or
endeavor to entice away from the Company or any of its subsidiaries any existing
or reasonably anticipated (to the general knowledge of the Executive or the
public) policy, contract or other business with any person or entity who is, or
was within the then most recent 12-month period, a customer or client (or
reasonably anticipated (to the general knowledge of the Executive or the public)
to become a customer or client) of the Company or any of its subsidiaries.
4.2 CONFIDENTIALITY. The Executive covenants and agrees with the
Company that he will not at any time, except in performance of his obligations
to the Company hereunder or with the prior written consent of the Company,
directly or indirectly, disclose any secret or confidential information that he
may learn or has learned by reason of his association with the Company or any of
its subsidiaries and affiliates. The term "confidential information" includes
information not previously disclosed to the public or to the trade by the
management of the Company or otherwise in the public domain, with respect to the
products, facilities, applications and methods, trade secrets and other
intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information (including the revenues, costs or profits associated with any of the
Company's products or services), business plans, prospects or opportunities, but
shall exclude any information which (i) is or becomes available to the public or
is generally known in the industry or industries in which the Company operates
other than as a result of disclosure by the Executive in violation of his
agreements under this Section 4.2 or (ii) the Executive is required to disclose
under any applicable laws, regulations or directives of any government agency,
tribunal or authority having jurisdiction in the matter or under subpoena or
other process of law.
4.3 NO COMPETING EMPLOYMENT. During the Protected Period, the
Executive shall not, directly or indirectly, as a sole proprietor, member of a
partnership, stockholder or investor (other than a stockholder or investor
owning not more than a 5% interest), officer or director of a corporation, or as
an employee, associate, consultant or agent of any person, partnership,
corporation or other business organization or entity other than the Company or
any of its subsidiaries, render any service to or in any way be affiliated with
a competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of the Executive or the public) to become a competitor) of the
Company or any of its subsidiaries in the businesses in which the Company or any
of its subsidiaries is engaged; PROVIDED, HOWEVER, that this Section 4.3 shall
not apply in the event that the Executive's employment is terminated by the
Company
<PAGE>
5
without Cause or by the Executive with Good Reason. For purposes of this Section
4.3 only, "Good Reason" shall include a termination by the Executive as a result
of his refusal to relocate even if the Company has agreed to reimburse him for
his reasonable relocation expenses. Notwithstanding anything contained in this
Section 4.3 to the contrary, the period of applicability of this Section 4.3
shall be extended an additional day for each day on which the Executive is in
breach of this Section 4.3.
4.4 EXCLUSIVE PROPERTY. The Executive confirms that all confidential
information is and shall remain the exclusive property of the Company. All
business records, papers and documents kept or made by the Executive relating to
the business of the Company shall be and remain the property of the Company,
except for such papers customarily deemed to be the personal copies of the
Executive.
4.5 LIMITATION ON COMMENTS. At no time during or after the Protected
Period shall the Executive utter, issue or circulate any false, inappropriate or
disparaging statements, remarks or rumors about the Company, The Morgan Stanley
Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P. or
Morgan Stanley Capital Partners, the private equity unit of Morgan Stanley, Dean
Witter, Discover & Co. Similarly, at no time during the Protected Period or
thereafter shall the Company, The Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P., or Morgan Stanley Capital Partners,
the private equity unit of Morgan Stanley, Dean Witter, Discover & Co., utter,
issue or circulate any false, inappropriate or disparaging statements, remarks
or rumors about the Executive.
4.6 INJUNCTIVE RELIEF. Without intending to limit the remedies
available to the parties hereto, the parties acknowledge that a breach of any of
the covenants contained in this Section 4 by the other (in the case of the
Executive, a breach of Section 4.1, 4.2, 4.3, 4.4 or 4.5 and in the case of the
Company, a breach of Section 4.5) may result in material and irreparable injury
to the other party for which there is no adequate remedy at law, that it will
not be possible to measure damages for such injuries precisely and that, in the
event of such a breach or threat thereof, the damaged party shall be entitled to
seek a temporary restraining order and/or a preliminary or permanent injunction
restraining the breaching party from engaging in activities prohibited by this
Section 4 or such other relief as may be required specifically to enforce any of
the covenants in this Section 4. If for any reason, it is held that the
restrictions under this Section 4 are not reasonable or that consideration
therefor is inadequate, such restrictions shall be interpreted or modified to
include as much of the duration and scope identified in this Section 4 as will
render such restrictions valid and enforceable.
5. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement that cannot be mutually resolved by the parties hereto shall be
settled exclusively by arbitration in Louisville, Kentucky before one arbitrator
of exemplary qualifications and stature, who shall be
<PAGE>
6
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (PROVIDED that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement. The Company shall bear all expenses of the arbitrator
incurred in any arbitration hereunder and shall reimburse the Executive for any
related reasonable legal fees and out-of-pocket expenses directly attributable
to such arbitration; PROVIDED that such legal fees are calculated on an hourly,
and not on a contingency fee, basis; and PROVIDED, FURTHER, that the Executive
shall bear all expenses of the arbitrator and all of his legal fees and
out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
6. MISCELLANEOUS
6.1 NOTICES. All notices or communications hereunder shall be in
writing, addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
Attention: Co-Chairman of the Board
To the Executive:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All such notices shall be conclusively deemed to
be received and shall be effective, (i) if sent by hand delivery, upon receipt,
(ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt
by the sender of such transmission or (iii) if sent by registered or certified
mail, on the fifth day after the day on which such notice is mailed.
<PAGE>
7
6.2 SEVERABILITY. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
6.3 ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Any business
entity succeeding to substantially all of the business of the Company by
purchase, merger, consolidation, sale of assets or otherwise, shall be bound by
and shall adopt and assume this Agreement and the Company shall obtain the
assumption of this Agreement by such successor.
6.4 ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive. This Agreement may be
amended at any time by mutual written agreement of the parties hereto.
6.5 WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the Company's employee benefit plans, if
any.
6.6 GOVERNING LAW. This Agreement shall be governed by in accordance
with the laws of the State of New York.
6.7 EXPIRATION DATE. This Agreement shall terminate and be null, void
and of no further force or effect in the event that a Change in Control has not
occurred by June 30, 1998, (unless the parties otherwise agree in writing to a
later date).
<PAGE>
8
6.8 SURVIVAL. Subject to Section 6.7, Sections 3.3, 4, 5 and 6.2
shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.
ARM FINANCIAL GROUP, INC.
By: /s/ Frank V. Sica
----------------------------------
Name:
Title:
EXECUTIVE
/s/ Edward L. Zeman
----------------------------------
Edward L. Zeman
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
March 20, 1998
Mr. Edward L. Zeman
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear Edward:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Change in Control Agreement
with ARM Financial Group, Inc. dated as of December 4, 1997 (the "CHANGE IN
CONTROL AGREEMENT").
1. Section 6.7 of the Change in Control Agreement is hereby
amended by deleting the words "June 30, 1998" and inserting the words
"December 31, 1998".
2. This Amendment shall be governed in accordance with the laws of
the State of New York.
3. Except as modified hereby, the Change in Control Agreement
remains in full force and effect.
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2
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Martin H. Ruby
-------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ Edward L. Zeman
- ---------------------
Edward L. Zeman
<PAGE>
AGREEMENT dated as of December 4th, 1997 (the "AGREEMENT"), between
ARM FINANCIAL GROUP, INC., a Delaware corporation (the "COMPANY"), and
Daniel R. Gattis (the "EXECUTIVE").
WHEREAS, the Executive is currently employed by the Company in various
capacities and is rendering valuable services to the Company. The parties desire
to enter into this Agreement to provide certain assured severance benefits to
the Executive in the event of a Change in Control, as defined below, to further
the Company's aims to retain the Executive during an actual or attempted Change
in Control and to assure fair treatment of the Executive in the event of a
Change in Control;
NOW, THEREFORE, in order to induce the Executive to remain in his
present employment and in consideration of his agreement to continue his
employment subject to the terms and conditions hereof, this Agreement sets forth
the payments which the Company agrees will be provided to the Executive in the
event his employment is terminated in connection with a Change in Control.
1. DEFINITIONS
1.1 ANNUAL BONUS means the annual bonus awarded pursuant to the bonus
plan under which the cash bonuses of executives of the Company are awarded
(excluding any bonus under the Company's Sale Bonus Plan) or, if such amount is
not yet known, the most recent bonus awarded pursuant to such plan as of either
the Change in Control Date or the date on which the Executive's employment is
terminated, whichever is greater.
1.2 CAUSE. Termination for "CAUSE" shall mean termination of the
Executive's employment because of:
(i) any act or omission that constitutes a material breach by
the Executive of any of his material obligations under this Agreement
(other than by reason of his death or Permanent Disability);
(ii) the continued failure or refusal of the Executive to
perform the material duties required of him as an employee of the
Company (other than by reason of his death or Permanent Disability);
(iii) any willful material violation by the Executive of any law
or regulation applicable to the business of the Company or any of its
subsidiaries, or the Executive's conviction of a felony, or any
willful perpetration by the Executive of a common law fraud; or
(iv) any other willful misconduct by the Executive which is
materially injurious to the financial condition or business reputation
of, or is otherwise materially injurious to, the Company or any of its
subsidiaries or affiliates;
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2
PROVIDED, HOWEVER, that if any such Cause relates to the Executive's
obligations under this Agreement and (x) is susceptible to cure and (y)
does not constitute a repetition of such Cause, the Company shall not
terminate the Executive's employment hereunder unless the Company first
gives the Executive notice of its intention to terminate and of the grounds
for such termination, and the Executive has not, within 10 business days
following receipt of the notice, cured such Cause, or in the event such
Cause is not susceptible to cure within such 10 business day period, the
Executive has not taken all reasonable steps within such 10 business day
period to cure such Cause as promptly as practicable thereafter.
1.3 GOOD REASON shall mean any of the following (without the
Executive's prior written consent):
(i) a decrease in the Executive's base rate of compensation or
a failure by the Company to pay material compensation due and payable
to the Executive in connection with his employment; or
(ii) a relocation of the Executive's principal place of business
outside the Louisville, Kentucky metropolitan area and the Company
fails to agree to reimburse the Executive for reasonable relocation
expenses on an after-tax basis.
1.4 CHANGE IN CONTROL means the acquisition, directly or
indirectly through merger or otherwise in a single transaction or a series of
transactions, by a Third Party, of equity securities of the Company entitling
such Third Party, to elect a majority of the members of the Board of Directors
or a sale of all or substantially all of the assets of the Company to a Third
Party.
1.5 CHANGE IN CONTROL DATE means the date on which a Change in
Control is consummated.
1.6 PERMANENT DISABILITY means a physical or mental disability
or infirmity of the Executive that prevents the normal performance of
substantially all his duties as an employee of the Company, which disability or
infirmity shall exist, or in the opinion of an independent physician is
reasonably likely to exist, for any continuous period of 180 days
1.7 THIRD PARTY means any person, entity or group (as defined
under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) that
are not, directly or indirectly through one or more intermediaries, in control
of, controlled by, or under common control with, the Company, Morgan Stanley,
Dean Witter, Discover & Co., The Morgan Stanley Leveraged Equity Fund II, L.P.
or Morgan Stanley Capital Partners III, L.P.
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3
2. EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective as of the date first set
forth above (the "EFFECTIVE DATE") and shall terminate on the second
anniversary of the Change in Control Date. The period commencing on the
Change in Control Date and ending on the second anniversary thereof is
hereinafter referred to as the "PROTECTED PERIOD".
3. COMPENSATION
3.1 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If, during the
Protected Period, the Executive's employment is terminated (except in the event
of death or Permanent Disability): (i) by the Company other than for Cause; or
(ii) by the Executive for "Good Reason," the Company shall make a lump sum
payment to the Executive in an amount equal to the sum of (i) and (ii) below:
(i) two times (A) the sum of (x) the higher of the Executive's annual
base salary in effect on the Change in Control Date or his annual base
salary in effect on the date of termination of his employment plus (y) the
Executive's Annual Bonus, multiplied by (B) a fraction, the numerator which
is equal to the number of months remaining in the Protected Period and the
denominator of which is equal to 24; PROVIDED, that in no event shall such
payment be less than 50% of the Executive's annual base salary plus Annual
Bonus; and
(ii) to the extent not previously paid to the Executive, an amount
equal to the Executive's Annual Bonus multiplied by a fraction the
numerator of which is the number of days that have elapsed during the
calendar year up to and including the date of termination and the
denominator of which is 365.
3.2 OTHER TERMINATIONS. In the event of the termination of the
Executive's employment with the Company for any reason other than as specified
in Section 3.1, the Company shall have no obligation to the Executive pursuant
to this Agreement.
3.3 ACCRUED AND UNPAID ANNUAL BONUS. In the event that the employment
of the Executive is terminated by the Company following the expiration of the
Protected Period, the Executive shall be entitled to receive any accrued but
unpaid Annual Bonus representing any portion of the Protected Period on the date
of such termination.
4. NONSOLICITATION; CONFIDENTIALITY; NONCOMPETITION
4.1 NONSOLICITATION. During the Protected Period (whether or not the
Executive remains an employee of the Company (or its successor)), the Executive
shall not, without the
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4
prior written consent of the Company, directly or indirectly, as a sole
proprietor, member of a partnership, stockholder or investor, officer or
director of a corporation, or as an employee, associate, consultant or agent of
any person, partnership, corporation or other business organization or entity
other than the Company: (x) solicit or endeavor to entice away from the Company
or any of its subsidiaries any person or entity who is, or, during the then most
recent 12-month period, was employed by, or had served as an agent or key
consultant of, the Company or any of its subsidiaries (in the case of a
consultant, only if such solicitation or enticement is reasonably likely to
cause a termination of or otherwise materially interferes with the continued
relationship between the Company and such consultant); or (y) solicit or
endeavor to entice away from the Company or any of its subsidiaries any existing
or reasonably anticipated (to the general knowledge of the Executive or the
public) policy, contract or other business with any person or entity who is, or
was within the then most recent 12-month period, a customer or client (or
reasonably anticipated (to the general knowledge of the Executive or the public)
to become a customer or client) of the Company or any of its subsidiaries.
4.2 CONFIDENTIALITY. The Executive covenants and agrees with the
Company that he will not at any time, except in performance of his obligations
to the Company hereunder or with the prior written consent of the Company,
directly or indirectly, disclose any secret or confidential information that he
may learn or has learned by reason of his association with the Company or any of
its subsidiaries and affiliates. The term "confidential information" includes
information not previously disclosed to the public or to the trade by the
management of the Company or otherwise in the public domain, with respect to the
products, facilities, applications and methods, trade secrets and other
intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information (including the revenues, costs or profits associated with any of the
Company's products or services), business plans, prospects or opportunities, but
shall exclude any information which (i) is or becomes available to the public or
is generally known in the industry or industries in which the Company operates
other than as a result of disclosure by the Executive in violation of his
agreements under this Section 4.2 or (ii) the Executive is required to disclose
under any applicable laws, regulations or directives of any government agency,
tribunal or authority having jurisdiction in the matter or under subpoena or
other process of law.
4.3 NO COMPETING EMPLOYMENT. During the Protected Period, the
Executive shall not, directly or indirectly, as a sole proprietor, member of a
partnership, stockholder or investor (other than a stockholder or investor
owning not more than a 5% interest), officer or director of a corporation, or as
an employee, associate, consultant or agent of any person, partnership,
corporation or other business organization or entity other than the Company or
any of its subsidiaries, render any service to or in any way be affiliated with
a competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of the Executive or the public) to become a competitor) of the
Company or any of its subsidiaries in the businesses in which the Company or any
of its subsidiaries is engaged; PROVIDED, HOWEVER, that this Section 4.3 shall
not apply in the event that the Executive's employment is terminated by the
Company
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5
without Cause or by the Executive with Good Reason. For purposes of this Section
4.3 only, "Good Reason" shall include a termination by the Executive as a result
of his refusal to relocate even if the Company has agreed to reimburse him for
his reasonable relocation expenses. Notwithstanding anything contained in this
Section 4.3 to the contrary, the period of applicability of this Section 4.3
shall be extended an additional day for each day on which the Executive is in
breach of this Section 4.3.
4.4 EXCLUSIVE PROPERTY. The Executive confirms that all confidential
information is and shall remain the exclusive property of the Company. All
business records, papers and documents kept or made by the Executive relating to
the business of the Company shall be and remain the property of the Company,
except for such papers customarily deemed to be the personal copies of the
Executive.
4.5 LIMITATION ON COMMENTS. At no time during or after the Protected
Period shall the Executive utter, issue or circulate any false, inappropriate or
disparaging statements, remarks or rumors about the Company, The Morgan Stanley
Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P. or
Morgan Stanley Capital Partners, the private equity unit of Morgan Stanley, Dean
Witter, Discover & Co. Similarly, at no time during the Protected Period or
thereafter shall the Company, The Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P., or Morgan Stanley Capital Partners,
the private equity unit of Morgan Stanley, Dean Witter, Discover & Co., utter,
issue or circulate any false, inappropriate or disparaging statements, remarks
or rumors about the Executive.
4.6 INJUNCTIVE RELIEF. Without intending to limit the remedies
available to the parties hereto, the parties acknowledge that a breach of any of
the covenants contained in this Section 4 by the other (in the case of the
Executive, a breach of Section 4.1, 4.2, 4.3, 4.4 or 4.5 and in the case of the
Company, a breach of Section 4.5) may result in material and irreparable injury
to the other party for which there is no adequate remedy at law, that it will
not be possible to measure damages for such injuries precisely and that, in the
event of such a breach or threat thereof, the damaged party shall be entitled to
seek a temporary restraining order and/or a preliminary or permanent injunction
restraining the breaching party from engaging in activities prohibited by this
Section 4 or such other relief as may be required specifically to enforce any of
the covenants in this Section 4. If for any reason, it is held that the
restrictions under this Section 4 are not reasonable or that consideration
therefor is inadequate, such restrictions shall be interpreted or modified to
include as much of the duration and scope identified in this Section 4 as will
render such restrictions valid and enforceable.
5. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement that cannot be mutually resolved by the parties hereto shall be
settled exclusively by arbitration in Louisville, Kentucky before one arbitrator
of exemplary qualifications and stature, who shall be
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6
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (PROVIDED that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement. The Company shall bear all expenses of the arbitrator
incurred in any arbitration hereunder and shall reimburse the Executive for any
related reasonable legal fees and out-of-pocket expenses directly attributable
to such arbitration; PROVIDED that such legal fees are calculated on an hourly,
and not on a contingency fee, basis; and PROVIDED, FURTHER, that the Executive
shall bear all expenses of the arbitrator and all of his legal fees and
out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
6. MISCELLANEOUS
6.1 NOTICES. All notices or communications hereunder shall be in
writing, addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
Attention: Co-Chairman of the Board
To the Executive:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All such notices shall be conclusively deemed to
be received and shall be effective, (i) if sent by hand delivery, upon receipt,
(ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt
by the sender of such transmission or (iii) if sent by registered or certified
mail, on the fifth day after the day on which such notice is mailed.
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7
6.2 SEVERABILITY. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
6.3 ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Any business
entity succeeding to substantially all of the business of the Company by
purchase, merger, consolidation, sale of assets or otherwise, shall be bound by
and shall adopt and assume this Agreement and the Company shall obtain the
assumption of this Agreement by such successor.
6.4 ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive. This Agreement may be
amended at any time by mutual written agreement of the parties hereto
6,5 WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the Company's employee benefit plans, if
any.
6.6 GOVERNING LAW. This Agreement shall be governed by in accordance
with the laws of the State of New York.
6.7 EXPIRATION DATE. This Agreement shall terminate and be null, void
and of no further force or effect in the event that a Change in Control has not
occurred by June 30, 1998, (unless the parties otherwise agree in writing to a
later date).
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6.8 SURVIVAL. Subject to Section 6.7, Sections 3.3, 4, 5 and 6.2
shall survive the termination of this Agreement
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.
ARM FINANCIAL GROUP, INC.
By: /s/
--------------------------------
Name:
Title:
EXECUTIVE
/s/ Daniel R. Gattis
-----------------------------------
Daniel R. Gattis
<PAGE>
AGREEMENT dated as of December 4, 1997 (the "AGREEMENT"), between ARM
FINANCIAL GROUP, INC., a Delaware corporation (the "COMPANY"), and Robert H.
Scott (the "EXECUTIVE").
WHEREAS, the Executive is currently employed by the Company in various
capacities and is rendering valuable services to the Company. The parties desire
to enter into this Agreement to provide certain assured severance benefits to
the Executive in the event of a Change in Control, as defined below, to further
the Company's aims to retain the Executive during an actual or attempted Change
in Control and to assure fair treatment of the Executive in the event of a
Change in Control;
NOW, THEREFORE, in order to induce the Executive to remain in his present
employment and in consideration of his agreement to continue his employment
subject to the terms and conditions hereof, this Agreement sets forth the
payments which the Company agrees will be provided to the Executive in the event
his employment is terminated in connection with a Change in Control.
1. DEFINITIONS
1.1 ANNUAL BONUS means the annual bonus awarded pursuant to the bonus
plan under which the cash bonuses of executives of the Company are awarded
(excluding any bonus under the Company's Sale Bonus Plan) or, if such amount is
not yet known, the most recent bonus awarded pursuant to such plan as of either
the Change in Control Date or the date on which the Executive's employment is
terminated, whichever is greater.
1.2 CAUSE. Termination for "CAUSE" shall mean termination of the
Executive's employment because of:
(i) any act or omission that constitutes a material breach by the
Executive of any of his material obligations under this Agreement
(other than by reason of his death or Permanent Disability);
(ii) the continued failure or refusal of the Executive to perform
the material duties required of him as an employee of the Company
(other than by reason of his death or Permanent Disability);
(iii) any willful material violation by the Executive of any law
or regulation applicable to the business of the Company or any of its
subsidiaries, or the Executive's conviction of a felony, or any
willful perpetration by the Executive of a common law fraud; or
(iv) any other willful misconduct by the Executive which is
materially injurious to the financial condition or business reputation
of, or is otherwise materially injurious to, the Company or any of its
subsidiaries or affiliates;
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2
PROVIDED, HOWEVER, that if any such Cause relates to the Executive's obligations
under this Agreement and (x) is susceptible to cure and (y) does not constitute
a repetition of such Cause, the Company shall not terminate the Executive's
employment hereunder unless the Company first gives the Executive notice of its
intention to terminate and of the grounds for such termination, and the
Executive has not, within 10 business days following receipt of the notice,
cured such Cause, or in the event such Cause is not susceptible to cure within
such 10 business day period, the Executive has not taken all reasonable steps
within such 10 business day period to cure such Cause as promptly as practicable
thereafter.
1.3 GOOD REASON shall mean any of the following (without the
Executive's prior written consent):
(i) a decrease in the Executive's base rate of compensation or a
failure by the Company to pay material compensation due and payable to
the Executive in connection with his employment; or
(ii) a relocation of the Executive's principal place of business
outside the Louisville, Kentucky metropolitan area and the Company
fails to agree to reimburse the Executive for reasonable relocation
expenses on an after-tax basis.
1.4 CHANGE IN CONTROL means the acquisition, directly or indirectly
through merger or otherwise in a single transaction or a series of transactions,
by a Third Party, of equity securities of the Company entitling such Third
Party, to elect a majority of the members of the Board of Directors or a sale of
all or substantially all of the assets of the Company to a Third Party.
1.5 CHANGE IN CONTROL DATE means the date on which a Change in
Control is consummated.
1.6 PERMANENT DISABILITY means a physical or mental disability or
infirmity of the Executive that prevents the normal performance of substantially
all his duties as an employee of the Company, which disability or infirmity
shall exist, or in the opinion of an independent physician is reasonably likely
to exist, for any continuous period of 180 days.
1.7 THIRD PARTY means any person, entity or group (as defined under
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) that are
not, directly or indirectly through one or more intermediaries, in control of,
controlled by, or under common control with, the Company, Morgan Stanley, Dean
Witter, Discover & Co., The Morgan Stanley Leveraged Equity Fund II, L.P. or
Morgan Stanley Capital Partners III, L.P.
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2. EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective as of the date first set forth
above (the "EFFECTIVE DATE") and shall terminate on the second anniversary of
the Change in Control Date. The period commencing on the Change in Control Date
and ending on the second anniversary thereof is hereinafter referred to as the
"PROTECTED PERIOD".
3. COMPENSATION
3.1 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If, during the
Protected Period, the Executive's employment is terminated (except in the event
of death or Permanent Disability): (i) by the Company other than for Cause; or
(ii) by the Executive for "Good Reason," the Company shall make a lump sum
payment to the Executive in an amount equal to the sum of (i) and (ii) below:
(i) two times (A) the sum of (x) the higher of the Executive's
annual base salary in effect on the Change in Control Date or his
annual base salary in effect on the date of termination of his
employment plus (y) the Executive's Annual Bonus, multiplied by (B) a
fraction, the numerator which is equal to the number of months
remaining in the Protected Period and the denominator of which is
equal to 24; PROVIDED, that in no event shall such payment be less
than 50% of the Executive's annual base salary plus Annual Bonus; and
(ii) to the extent not previously paid to the Executive, an
amount equal to the Executive's Annual Bonus multiplied by a fraction
the numerator of which is the number of days that have elapsed during
the calendar year up to and including the date of termination and the
denominator of which is 365.
3.2 OTHER TERMINATIONS. In the event of the termination of the
Executive's employment with the Company for any reason other than as specified
in Section 3.1, the Company shall have no obligation to the Executive pursuant
to this Agreement.
3.3 ACCRUED AND UNPAID ANNUAL BONUS. In the event that the employment
of the Executive is terminated by the Company following the expiration of the
Protected Period, the Executive shall be entitled to receive any accrued but
unpaid Annual Bonus representing any portion of the Protected Period on the date
of such termination.
4. NONSOLICITATION; CONFIDENTIALITY; NONCOMPETITION
4.1 NONSOLICITATION. During the Protected Period (whether or not the
Executive remains an employee of the Company (or its successor)), the Executive
shall not, without the
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prior written consent of the Company, directly or indirectly, as a sole
proprietor, member of a partnership, stockholder or investor, officer or
director of a corporation, or as an employee, associate, consultant or agent of
any person, partnership, corporation or other business organization or entity
other than the Company: (x) solicit or endeavor to entice away from the Company
or any of its subsidiaries any person or entity who is, or, during the then most
recent 12-month period, was employed by, or had served as an agent or key
consultant of, the Company or any of its subsidiaries (in the case of a
consultant, only if such solicitation or enticement is reasonably likely to
cause a termination of or otherwise materially interferes with the continued
relationship between the Company and such consultant); or (y) solicit or
endeavor to entice away from the Company or any of its subsidiaries any existing
or reasonably anticipated (to the general knowledge of the Executive or the
public) policy, contract or other business with any person or entity who is, or
was within the then most recent 12-month period, a customer or client (or
reasonably anticipated (to the general knowledge of the Executive or the public)
to become a customer or client) of the Company or any of its subsidiaries.
4.2 CONFIDENTIALITY. The Executive covenants and agrees with the
Company that he will not at any time, except in performance of his obligations
to the Company hereunder or with the prior written consent of the Company,
directly or indirectly, disclose any secret or confidential information that he
may learn or has learned by reason of his association with the Company or any of
its subsidiaries and affiliates. The term "confidential information" includes
information not previously disclosed to the public or to the trade by the
management of the Company or otherwise in the public domain, with respect to the
products, facilities, applications and methods, trade secrets and other
intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information (including the revenues, costs or profits associated with any of the
Company's products or services), business plans, prospects or opportunities, but
shall exclude any information which (i) is or becomes available to the public or
is generally known in the industry or industries in which the Company operates
other than as a result of disclosure by the Executive in violation of his
agreements under this Section 4.2 or (ii) the Executive is required to disclose
under any applicable laws, regulations or directives of any government agency,
tribunal or authority having jurisdiction in the matter or under subpoena or
other process of law.
4.3 NO COMPETING EMPLOYMENT. During the Protected Period, the
Executive shall not, directly or indirectly, as a sole proprietor, member of a
partnership, stockholder or investor (other than a stockholder or investor
owning not more than a 5% interest), officer or director of a corporation, or as
an employee, associate, consultant or agent of any person, partnership,
corporation or other business organization or entity other than the Company or
any of its subsidiaries, render any service to or in any way be affiliated with
a competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of the Executive or the public) to become a competitor) of the
Company or any of its subsidiaries in the businesses in which the Company or any
of its subsidiaries is engaged; PROVIDED, HOWEVER, that this Section 4.3 shall
not apply in the event that the Executive's employment is terminated by the
Company
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5
without Cause or by the Executive with Good Reason. For purposes of this Section
4.3 only, "Good Reason" shall include a termination by the Executive as a result
of his refusal to relocate even if the Company has agreed to reimburse him for
his reasonable relocation expenses. Notwithstanding anything contained in this
Section 4.3 to the contrary, the period of applicability of this Section 4.3
shall be extended an additional day for each day on which the Executive is in
breach of this Section 4.3.
4.4 EXCLUSIVE PROPERTY. The Executive confirms that all confidential
information is and shall remain the exclusive property of the Company. All
business records, papers and documents kept or made by the Executive relating to
the business of the Company shall be and remain the property of the Company,
except for such papers customarily deemed to be the personal copies of the
Executive.
4.5 LIMITATION ON COMMENTS. At no time during or after the Protected
Period shall the Executive utter, issue or circulate any false, inappropriate or
disparaging statements, remarks or rumors about the Company, The Morgan Stanley
Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P. or
Morgan Stanley Capital Partners, the private equity unit of Morgan Stanley, Dean
Witter, Discover & Co. Similarly, at no time during the Protected Period or
thereafter shall the Company, The Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P., or Morgan Stanley Capital Partners,
the private equity unit of Morgan Stanley, Dean Witter, Discover & Co., utter,
issue or circulate any false, inappropriate or disparaging statements, remarks
or rumors about the Executive.
4.6 INJUNCTIVE RELIEF. Without intending to limit the remedies
available to the parties hereto, the parties acknowledge that a breach of any of
the covenants contained in this Section 4 by the other (in the case of the
Executive, a breach of Section 4.1, 4.2, 4.3, 4.4 or 4.5 and in the case of the
Company, a breach of Section 4.5) may result in material and irreparable injury
to the other party for which there is no adequate remedy at law, that it will
not be possible to measure damages for such injuries precisely and that, in the
event of such a breach or threat thereof, the damaged party shall be entitled to
seek a temporary restraining order and/or a preliminary or permanent injunction
restraining the breaching party from engaging in activities prohibited by this
Section 4 or such other relief as may be required specifically to enforce any of
the covenants in this Section 4. If for any reason, it is held that the
restrictions under this Section 4 are not reasonable or that consideration
therefor is inadequate, such restrictions shall be interpreted or modified to
include as much of the duration and scope identified in this Section 4 as will
render such restrictions valid and enforceable.
5. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement that cannot be mutually resolved by the parties hereto shall be
settled exclusively by arbitration in Louisville, Kentucky before one arbitrator
of exemplary qualifications and stature, who shall be
<PAGE>
6
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (PROVIDED that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement. The Company shall bear all expenses of the arbitrator
incurred in any arbitration hereunder and shall reimburse the Executive for any
related reasonable legal fees and out-of-pocket expenses directly attributable
to such arbitration; PROVIDED that such legal fees are calculated on an hourly,
and not on a contingency fee, basis; and PROVIDED, FURTHER, that the Executive
shall bear all expenses of the arbitrator and all of his legal fees and
out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
6. MISCELLANEOUS
6.1 NOTICES. All notices or communications hereunder shall be in
writing, addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
Attention: Co-Chairman of the Board
To the Executive:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All such notices shall be conclusively deemed to
be received and shall be effective, (i) if sent by hand delivery, upon receipt,
(ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt
by the sender of such transmission or (iii) if sent by registered or certified
mail, on the fifth day after the day on which such notice is mailed.
<PAGE>
7
6.2 SEVERABILITY. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
6.3 ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Any business
entity succeeding to substantially all of the business of the Company by
purchase, merger, consolidation, sale of assets or otherwise, shall be bound by
and shall adopt and assume this Agreement and the Company shall obtain the
assumption of this Agreement by such successor.
6.4 ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive. This Agreement may be
amended at any time by mutual written agreement of the parties hereto.
6.5 WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the Company's employee benefit plans, if
any.
6.6 GOVERNING LAW. This Agreement shall be governed by in accordance
with the laws of the State of New York.
6.7 EXPIRATION DATE. This Agreement shall terminate and be null,
void and of no further force or effect in the event that a Change in Control
has not occurred by June 30, 1998, (unless the parties otherwise agree in
writing to a later date).
<PAGE>
8
6.8 SURVIVAL. Subject to Section 6.7, Sections 3.3, 4, 5 and 6.2
shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.
ARM FINANCIAL GROUP, INC.
By: /s/ Frank V. Sica
-----------------------
Name:
Title:
EXECUTIVE
/s/ Robert H. Scott
--------------------------
Robert H. Scott
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
March 20, 1998
Mr. Robert H. Scott
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear Robert:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Change in Control Agreement
with ARM Financial Group, Inc. dated as of December 4, 1997 (the "CHANGE IN
CONTROL AGREEMENT").
1. Section 6.7 of the Change in Control Agreement is hereby
amended by deleting the words "June 30, 1998" and inserting the words
"December 31, 1998".
2. This Amendment shall be governed in accordance with the laws of
the State of New York.
3. Except as modified hereby, the Change in Control Agreement
remains in full force and effect.
<PAGE>
2
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Martin H. Ruby
-------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ Robert H. Scott
- ---------------------
Robert H. Scott
<PAGE>
AGREEMENT dated as of December 4th, 1997 (the "AGREEMENT"),
between ARM FINANCIAL GROUP, INC., a Delaware corporation (the "COMPANY"),
and John R. McGeeney (the "EXECUTIVE").
WHEREAS, the Executive is currently employed by the Company in
various capacities and is rendering valuable services to the Company. The
parties desire to enter into this Agreement to provide certain assured severance
benefits to the Executive in the event of a Change in Control, as defined below,
to further the Company's aims to retain the Executive during an actual or
attempted Change in Control and to assure fair treatment of the Executive in the
event of a Change in Control;
NOW, THEREFORE, in order to induce the Executive to remain in his
present employment and in consideration of his agreement to continue his
employment subject to the terms and conditions hereof, this Agreement sets forth
the payments which the Company agrees will be provided to the Executive in the
event his employment is terminated in connection with a Change in Control.
1. DEFINITIONS
1.1 ANNUAL BONUS means the annual bonus awarded pursuant to the
bonus plan under which the cash bonuses of executives of the Company are awarded
(excluding any bonus under the Company's Sale Bonus Plan) or, if such amount is
not yet known, the most recent bonus awarded pursuant to such plan as of either
the Change in Control Date or the date on which the Executive's employment is
terminated, whichever is greater.
1.2 CAUSE. Termination for "CAUSE" shall mean termination of
the Executive's employment because of:
(i) any act or omission that constitutes a material breach by
the Executive of any of his material obligations under this Agreement (other
than by reason of his death or Permanent Disability);
(ii) the continued failure or refusal of the Executive to
perform the material duties required of him as an employee of the Company
(other than by reason of his death or Permanent Disability);
(iii) any willful material violation by the Executive of any law
or regulation applicable to the business of the Company or any of its
subsidiaries, or the Executive's conviction of a felony, or any willful
perpetration by the Executive of a common law fraud; or
(iv) any other willful misconduct by the Executive which is
materially injurious to the financial condition or business reputation
of, or is otherwise materially injurious to, the Company or any of its
subsidiaries or affiliates;
<PAGE>
2
PROVIDED, HOWEVER, that if any such Cause relates to the Executive's obligations
under this Agreement and (x) is susceptible to cure and (y) does not constitute
a repetition of such Cause, the Company shall not terminate the Executive's
employment hereunder unless the Company first gives the Executive notice of its
intention to terminate and of the grounds for such termination, and the
Executive has not, within 10 business days following receipt of the notice,
cured such Cause, or in the event such Cause is not susceptible to cure within
such 10 business day period, the Executive has not taken all reasonable steps
within such 10 business day period to cure such Cause as promptly as practicable
thereafter.
1.3 GOOD REASON shall mean any of the following (without the
Executive's prior written consent):
(i) a decrease in the Executive's base rate of compensation or
a failure by the Company to pay material compensation due and payable to
the Executive in connection with his employment; or
(ii) a relocation of the Executive's principal place of business
outside the Louisville, Kentucky metropolitan area and the Company fails
to agree to reimburse the Executive for reasonable relocation expenses on
an after-tax basis.
1.4 CHANGE IN CONTROL means the acquisition, directly or
indirectly through merger or otherwise in a single transaction or a
series of transactions, by a Third Party, of equity securities of the
Company entitling such Third Party, to elect a majority of the members of
the Board of Directors or a sale of all or substantially all of the
assets of the Company to a Third Party.
1.5 CHANGE IN CONTROL DATE means the date on which a Change in
Control is consummated.
1.6 PERMANENT DISABILITY means a physical or mental disability
or infirmity of the Executive that prevents the normal performance of
substantially all his duties as an employee of the Company, which
disability or infirmity shall exist, or in the opinion of an independent
physician is reasonably likely to exist, for any continuous period of 180
days
1.7 THIRD PARTY means any person, entity or group (as defined
under Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) that are not, directly or indirectly through one or more
intermediaries, in control of, controlled by, or under common control
with, the Company, Morgan Stanley, Dean Witter, Discover & Co., The
Morgan Stanley Leveraged Equity Fund II, L.P. or Morgan Stanley Capital
Partners III, L.P.
<PAGE>
3
2. EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective as of the date first set
forth above (the "EFFECTIVE DATE") and shall terminate on the second anniversary
of the Change in Control Date. The period commencing on the Change in Control
Date and ending on the second anniversary thereof is hereinafter referred to as
the "PROTECTED PERIOD".
3. COMPENSATION
3.1 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If, during
the Protected Period, the Executive's employment is terminated (except in the
event of death or Permanent Disability): (i) by the Company other than for
Cause; or (ii) by the Executive for "Good Reason," the Company shall make a lump
sum payment to the Executive in an amount equal to the sum of (i) and (ii)
below:
(i) two times (A) the sum of (x) the higher of the Executive's
annual base salary in effect on the Change in Control Date or his annual
base salary in effect on the date of termination of his employment plus
(y) the Executive's Annual Bonus, multiplied by (B) a fraction, the
numerator which is equal to the number of months remaining in the
Protected Period and the denominator of which is equal to 24; PROVIDED,
that in no event shall such payment be less than 50% of the Executive's
annual base salary plus Annual Bonus; and
(ii) to the extent not previously paid to the Executive, an
amount equal to the Executive's Annual Bonus multiplied by a fraction the
numerator of which is the number of days that have elapsed during the
calendar year up to and including the date of termination and the
denominator of which is 365.
3.2 OTHER TERMINATIONS. In the event of the termination of the
Executive's employment with the Company for any reason other than as specified
in Section 3.1, the Company shall have no obligation to the Executive pursuant
to this Agreement.
3.3 ACCRUED AND UNPAID ANNUAL BONUS. In the event that the
employment of the Executive is terminated by the Company following the
expiration of the Protected Period, the Executive shall be entitled to receive
any accrued but unpaid Annual Bonus representing any portion of the Protected
Period on the date of such termination.
4. NONSOLICITATION; CONFIDENTIALITY; NONCOMPETITION
4.1 NONSOLICITATION. During the Protected Period (whether or
not the Executive remains an employee of the Company (or its successor)), the
Executive shall not, without the
<PAGE>
4
prior written consent of the Company, directly or indirectly, as a sole
proprietor, member of a partnership, stockholder or investor, officer or
director of a corporation, or as an employee, associate, consultant or agent of
any person, partnership, corporation or other business organization or entity
other than the Company: (x) solicit or endeavor to entice away from the Company
or any of its subsidiaries any person or entity who is, or, during the then most
recent 12-month period, was employed by, or had served as an agent or key
consultant of, the Company or any of its subsidiaries (in the case of a
consultant, only if such solicitation or enticement is reasonably likely to
cause a termination of or otherwise materially interferes with the continued
relationship between the Company and such consultant); or (y) solicit or
endeavor to entice away from the Company or any of its subsidiaries any existing
or reasonably anticipated (to the general knowledge of the Executive or the
public) policy, contract or other business with any person or entity who is, or
was within the then most recent 12-month period, a customer or client (or
reasonably anticipated (to the general knowledge of the Executive or the public)
to become a customer or client) of the Company or any of its subsidiaries.
4.2 CONFIDENTIALITY. The Executive covenants and agrees with
the Company that he will not at any time, except in performance of his
obligations to the Company hereunder or with the prior written consent of the
Company, directly or indirectly, disclose any secret or confidential information
that he may learn or has learned by reason of his association with the Company
or any of its subsidiaries and affiliates. The term "confidential information"
includes information not previously disclosed to the public or to the trade by
the management of the Company or otherwise in the public domain, with respect to
the products, facilities, applications and methods, trade secrets and other
intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information (including the revenues, costs or profits associated with any of the
Company's products or services), business plans, prospects or opportunities, but
shall exclude any information which (i) is or becomes available to the public or
is generally known in the industry or industries in which the Company operates
other than as a result of disclosure by the Executive in violation of his
agreements under this Section 4.2 or (ii) the Executive is required to disclose
under any applicable laws, regulations or directives of any government agency,
tribunal or authority having jurisdiction in the matter or under subpoena or
other process of law.
4.3 NO COMPETING EMPLOYMENT. During the Protected Period, the
Executive shall not, directly or indirectly, as a sole proprietor, member of a
partnership, stockholder or investor (other than a stockholder or investor
owning not more than a 5% interest), officer or director of a corporation, or as
an employee, associate, consultant or agent of any person, partnership,
corporation or other business organization or entity other than the Company or
any of its subsidiaries, render any service to or in any way be affiliated with
a competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of the Executive or the public) to become a competitor) of the
Company or any of its subsidiaries in the businesses in which the Company or any
of its subsidiaries is engaged; PROVIDED, HOWEVER, that this Section 4.3 shall
not apply in the event that the Executive's employment is terminated by the
Company
<PAGE>
5
without Cause or by the Executive with Good Reason. For purposes of this Section
4.3 only, "Good Reason" shall include a termination by the Executive as a result
of his refusal to relocate even if the Company has agreed to reimburse him for
his reasonable relocation expenses. Notwithstanding anything contained in this
Section 4.3 to the contrary, the period of applicability of this Section 4.3
shall be extended an additional day for each day on which the Executive is in
breach of this Section 4.3.
4.4 EXCLUSIVE PROPERTY. The Executive confirms that all
confidential information is and shall remain the exclusive property of the
Company. All business records, papers and documents kept or made by the
Executive relating to the business of the Company shall be and remain the
property of the Company, except for such papers customarily deemed to be the
personal copies of the Executive.
4.5 LIMITATION ON COMMENTS. At no time during or after the
Protected Period shall the Executive utter, issue or circulate any false,
inappropriate or disparaging statements, remarks or rumors about the Company,
The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital
Partners III, L.P. or Morgan Stanley Capital Partners, the private equity unit
of Morgan Stanley, Dean Witter, Discover & Co. Similarly, at no time during the
Protected Period or thereafter shall the Company, The Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P., or Morgan
Stanley Capital Partners, the private equity unit of Morgan Stanley, Dean
Witter, Discover & Co., utter, issue or circulate any false, inappropriate or
disparaging statements, remarks or rumors about the Executive.
4.6 INJUNCTIVE RELIEF. Without intending to limit the remedies
available to the parties hereto, the parties acknowledge that a breach of any of
the covenants contained in this Section 4 by the other (in the case of the
Executive, a breach of Section 4.1, 4.2, 4.3, 4.4 or 4.5 and in the case of the
Company, a breach of Section 4.5) may result in material and irreparable injury
to the other party for which there is no adequate remedy at law, that it will
not be possible to measure damages for such injuries precisely and that, in the
event of such a breach or threat thereof, the damaged party shall be entitled to
seek a temporary restraining order and/or a preliminary or permanent injunction
restraining the breaching party from engaging in activities prohibited by this
Section 4 or such other relief as may be required specifically to enforce any of
the covenants in this Section 4. If for any reason, it is held that the
restrictions under this Section 4 are not reasonable or that consideration
therefor is inadequate, such restrictions shall be interpreted or modified to
include as much of the duration and scope identified in this Section 4 as will
render such restrictions valid and enforceable.
5. ARBITRATION
Any dispute or controversy arising under or in connection with
this Agreement that cannot be mutually resolved by the parties hereto shall be
settled exclusively by arbitration in Louisville, Kentucky before one arbitrator
of exemplary qualifications and stature, who shall be
<PAGE>
6
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (PROVIDED that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement. The Company shall bear all expenses of the arbitrator
incurred in any arbitration hereunder and shall reimburse the Executive for any
related reasonable legal fees and out-of-pocket expenses directly attributable
to such arbitration; PROVIDED that such legal fees are calculated on an hourly,
and not on a contingency fee, basis; and PROVIDED, FURTHER, that the Executive
shall bear all expenses of the arbitrator and all of his legal fees and
out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
6. MISCELLANEOUS
6.1 NOTICES. All notices or communications hereunder shall be
in writing, addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
Attention: Co-Chairman of the Board
To the Executive:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All such notices shall be conclusively deemed to
be received and shall be effective, (i) if sent by hand delivery, upon receipt,
(ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt
by the sender of such transmission or (iii) if sent by registered or certified
mail, on the fifth day after the day on which such notice is mailed.
<PAGE>
7
6.2 SEVERABILITY. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
6.3 ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Any business
entity succeeding to substantially all of the business of the Company by
purchase, merger, consolidation, sale of assets or otherwise, shall be bound by
and shall adopt and assume this Agreement and the Company shall obtain the
assumption of this Agreement by such successor.
6.4 ENTIRE AGREEMENT. Except as expressly set forth herein,
this Agreement represents the entire agreement of the parties concerning the
subject matter hereof and shall supersede any and all previous contracts,
arrangements or understandings between the Company and the Executive. This
Agreement may be amended at any time by mutual written agreement of the parties
hereto.
6.5 WITHHOLDING. The payment of any amount pursuant to this
Agreement shall be subject to applicable withholding and payroll taxes, and such
other deductions as may be required under the Company's employee benefit plans,
if any.
6.6 GOVERNING LAW. This Agreement shall be governed by in
accordance with the laws of the State of New York.
6.7 EXPIRATION DATE. This Agreement shall terminate and be
null, void and of no further force or effect in the event that a Change in
Control has not occurred by June 30, 1998, (unless the parties otherwise agree
in writing to a later date).
<PAGE>
8
6.8 SURVIVAL. Subject to Section 6.7, Sections 3.3, 4, 5 and
6.2 shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
duly executed and the Executive has hereunto set his hand, as of the day and
year first above written.
ARM FINANCIAL GROUP, INC.
By /s/ Frank V. Sica
-------------------------------------
Name:
Title:
EXECUTIVE
/s/ John R. McGeeney
----------------------------------------
John R. McGeeney
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
March 20, 1998
Mr. John R. McGeeney
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear John:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Change in Control Agreement
with ARM Financial Group, Inc. dated as of December 4, 1997 (the "CHANGE IN
CONTROL AGREEMENT").
1. Section 6.7 of the Change in Control Agreement is hereby
amended by deleting the words "June 30, 1998" and inserting the words
"December 31, 1998".
2. This Amendment shall be governed in accordance with the laws of
the State of New York.
3. Except as modified hereby, the Change in Control Agreement
remains in full force and effect.
<PAGE>
2
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Martin H. Ruby
-------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ John R. McGeeney
- ---------------------
John R. McGeeney
<PAGE>
AGREEMENT dated as of December 4, 1997 (the "AGREEMENT"), between ARM
FINANCIAL GROUP, INC., a Delaware corporation (the "COMPANY"), and Patricia L.
Winter (the "EXECUTIVE").
WHEREAS, the Executive is currently employed by the Company in various
capacities and is rendering valuable services to the Company. The parties desire
to enter into this Agreement to provide certain assured severance benefits to
the Executive in the event of a Change in Control, as defined below, to further
the Company's aims to retain the Executive during an actual or attempted Change
in Control and to assure fair treatment of the Executive in the event of a
Change in Control;
NOW, THEREFORE, in order to induce the Executive to remain in her
present employment and in consideration of her agreement to continue her
employment subject to the terms and conditions hereof, this Agreement sets forth
the payments which the Company agrees will be provided to the Executive in the
event her employment is terminated in connection with a Change in Control.
1. DEFINITIONS
1.1 ANNUAL BONUS means the annual bonus awarded pursuant to the
bonus plan under which the cash bonuses of executives of the Company are awarded
(excluding any bonus under the Company's Sale Bonus Plan) or, if such amount is
not yet known, the most recent bonus awarded pursuant to such plan as of either
the Change in Control Date or the date on which the Executive's employment is
terminated, whichever is greater.
1.2 CAUSE. Termination for "CAUSE" shall mean termination of the
Executive's employment because of:
(i) any act or omission that constitutes a material breach by the
Executive of any of her material obligations under this Agreement (other
than by reason of her death or Permanent Disability);
(ii) the continued failure or refusal of the Executive to perform
the material duties required of her as an employee of the Company (other
than by reason of her death or Permanent Disability);
(iii) any willful material violation by the Executive of any law or
regulation applicable to the business of the Company or any of its
subsidiaries, or the Executive's conviction of a felony, or any willful
perpetration by the Executive of a common law fraud; or
(iv) any other willful misconduct by the Executive which is
materially injurious to the financial condition or business reputation of,
or is otherwise materially injurious to, the Company or any of its
subsidiaries or affiliates;
<PAGE>
2
PROVIDED, HOWEVER, that if any such Cause relates to the Executive's obligations
under this Agreement and (x) is susceptible to cure and (y) does not constitute
a repetition of such Cause, the Company shall not terminate the Executive's
employment hereunder unless the Company first gives the Executive notice of its
intention to terminate and of the grounds for such termination, and the
Executive has not, within 10 business days following receipt of the notice,
cured such Cause, or in the event such Cause is not susceptible to cure within
such 10 business day period, the Executive has not taken all reasonable steps
within such 10 business day period to cure such Cause as promptly as practicable
thereafter.
1.3 GOOD REASON shall mean any of the following (without the
Executive's prior written consent):
(i) a decrease in the Executive's base rate of compensation or a
failure by the Company to pay material compensation due and payable to the
Executive in connection with her employment; or
(ii) a relocation of the Executive's principal place of business
outside the Louisville, Kentucky metropolitan area and the Company fails to
agree to reimburse the Executive for reasonable relocation expenses on an
after-tax basis.
1.4 CHANGE IN CONTROL means the acquisition, directly or
indirectly through merger or otherwise in a single transaction or a series of
transactions, by a Third Party, of equity securities of the Company entitling
such Third Party, to elect a majority of the members of the Board of Directors
or a sale of all or substantially all of the assets of the Company to a Third
Party.
1.5 CHANGE IN CONTROL DATE means the date on which a Change in
Control is consummated.
1.6 PERMANENT DISABILITY means a physical or mental disability or
infirmity of the Executive that prevents the normal performance of substantially
all her duties as an employee of the Company, which disability or infirmity
shall exist, or in the opinion of an independent physician is reasonably likely
to exist, for any continuous period of 180 days
1.7 THIRD PARTY means any person, entity or group (as defined
under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) that
are not, directly or indirectly through one or more intermediaries, in control
of, controlled by, or under common control with, the Company, Morgan Stanley,
Dean Witter, Discover & Co., The Morgan Stanley Leveraged Equity Fund II, L.P.
or Morgan Stanley Capital Partners III, L.P.
<PAGE>
3
2. EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective as of the date first set forth
above (the "EFFECTIVE DATE") and shall terminate on the second anniversary of
the Change in Control Date. The period commencing on the Change in Control Date
and ending on the second anniversary thereof is hereinafter referred to as the
"PROTECTED PERIOD".
3. COMPENSATION
3.1 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If, during the
Protected Period, the Executive's employment is terminated (except in the event
of death or Permanent Disability): (i) by the Company other than for Cause; or
(ii) by the Executive for "Good Reason," the Company shall make a lump sum
payment to the Executive in an amount equal to the sum of (i) and (ii) below:
(i) two times (A) the sum of (x) the higher of the Executive's
annual base salary in effect on the Change in Control Date or her annual
base salary in effect on the date of termination of her employment plus (y)
the Executive's Annual Bonus, multiplied by (B) a fraction, the numerator
which is equal to the number of months remaining in the Protected Period
and the denominator of which is equal to 24; PROVIDED, that in no event
shall such payment be less than 50% of the Executive's annual base salary
plus Annual Bonus; and
(ii) to the extent not previously paid to the Executive, an amount
equal to the Executive's Annual Bonus multiplied by a fraction the
numerator of which is the number of days that have elapsed during the
calendar year up to and including the date of termination and the
denominator of which is 365.
3.2 OTHER TERMINATIONS. In the event of the termination of the
Executive's employment with the Company for any reason other than as specified
in Section 3.1, the Company shall have no obligation to the Executive pursuant
to this Agreement.
3.3 ACCRUED AND UNPAID ANNUAL BONUS. In the event that the
employment of the Executive is terminated by the Company following the
expiration of the Protected Period, the Executive shall be entitled to receive
any accrued but unpaid Annual Bonus representing any portion of the Protected
Period on the date of such termination.
4. NONSOLICITATION; CONFIDENTIALITY; NONCOMPETITION
4.1 NONSOLICITATION. During the protected period (whether or not
the Executive remains an employee of the Company (or its successor)), the
Executive shall not, without the
<PAGE>
4
prior written consent of the Company, directly or indirectly, as a sole
proprietor, member of a partnership, stockholder or investor, officer or
director of a corporation, or as an employee, associate, consultant or agent of
any person, partnership, corporation or other business organization or entity
other than the Company: (x) solicit or endeavor to entice away from the Company
or any of its subsidiaries any person or entity who is, or, during the then most
recent 12-month period, was employed by, or had served as an agent or key
consultant of, the Company or any of its subsidiaries (in the case of a
consultant, only if such solicitation or enticement is reasonably likely to
cause a termination of or otherwise materially interferes with the continued
relationship between the Company and such consultant); or (y) solicit or
endeavor to entice away from the Company or any of its subsidiaries any existing
or reasonably anticipated (to the general knowledge of the Executive or the
public) policy, contract or other business with any person or entity who is, or
was within the then most recent 12-month period, a customer or client (or
reasonably anticipated (to the general knowledge of the Executive or the public)
to become a customer or client) of the Company or any of its subsidiaries.
4.2 CONFIDENTIALITY. The Executive covenants and agrees with the
Company that she will not at any time, except in performance of her obligations
to the Company hereunder or with the prior written consent of the Company,
directly or indirectly, disclose any secret or confidential information that she
may learn or has learned by reason of her association with the Company or any of
its subsidiaries and affiliates. The term "confidential information" includes
information not previously disclosed to the public or to the trade by the
management of the Company or otherwise in the public domain, with respect to the
products, facilities, applications and methods, trade secrets and other
intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information (including the revenues, costs or profits associated with any of the
Company's products or services), business plans, prospects or opportunities, but
shall exclude any information which (i) is or becomes available to the public or
is generally known in the industry or industries in which the Company operates
other than as a result of disclosure by the Executive in violation of her
agreements under this Section 4.2 or (ii) the Executive is required to disclose
under any applicable laws, regulations or directives of any government agency,
tribunal or authority having jurisdiction in the matter or under subpoena or
other process of law.
4.3 NO COMPETING EMPLOYMENT. During the Protected Period, the
Executive shall not, directly or indirectly, as a sole proprietor, member of a
partnership, stockholder or investor (other than a stockholder or investor
owning not more than a 5% interest), officer or director of a corporation, or as
an employee, associate, consultant or agent of any person, partnership,
corporation or other business organization or entity other than the Company or
any of its subsidiaries, render any service to or in any way be affiliated with
a competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of the Executive or the public) to become a competitor) of the
Company or any of its subsidiaries in the businesses in which the Company or any
of its subsidiaries is engaged; PROVIDED, HOWEVER, that this Section 4.3 shall
not apply in the event that the Executive's employment is terminated by the
Company
<PAGE>
5
without Cause or by the Executive with Good Reason. For purposes of this Section
4.3 only, "Good Reason" shall include a termination by the Executive as a result
of her refusal to relocate even if the Company has agreed to reimburse her for
her reasonable relocation expenses. Notwithstanding anything contained in this
Section 4.3 to the contrary, the period of applicability of this Section 4.3
shall be extended an additional day for each day on which the Executive is in
breach of this Section 4.3.
4.4 EXCLUSIVE PROPERTY. The Executive confirms that all
confidential information is and shall remain the exclusive property of the
Company. All business records, papers and documents kept or made by the
Executive relating to the business of the Company shall be and remain the
property of the Company, except for such papers customarily deemed to be the
personal copies of the Executive.
4.5 LIMITATION ON COMMENTS. At no time during or after the
Protected Period shall the Executive utter, issue or circulate any false,
inappropriate or disparaging statements, remarks or rumors about the Company,
The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital
Partners III, L.P. or Morgan Stanley Capital Partners, the private equity unit
of Morgan Stanley, Dean Witter, Discover & Co. Similarly, at no time during the
Protected Period or thereafter shall the Company, The Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P., or Morgan
Stanley Capital Partners, the private equity unit of Morgan Stanley, Dean
Witter, Discover & Co., utter, issue or circulate any false, inappropriate or
disparaging statements, remarks or rumors about the Executive.
4.6 INJUNCTIVE RELIEF. Without intending to limit the remedies
available to the parties hereto, the parties acknowledge that a breach of any of
the covenants contained in this Section 4 by the other (in the case of the
Executive, a breach of Section 4.1, 4.2, 4.3, 4.4 or 4.5 and in the case of the
Company, a breach of Section 4.5) may result in material and irreparable injury
to the other party for which there is no adequate remedy at law, that it will
not be possible to measure damages for such injuries precisely and that, in the
event of such a breach or threat thereof, the damaged party shall be entitled to
seek a temporary restraining order and/or a preliminary or permanent injunction
restraining the breaching party from engaging in activities prohibited by this
Section 4 or such other relief as may be required specifically to enforce any of
the covenants in this Section 4. If for any reason, it is held that the
restrictions under this Section 4 are not reasonable or that consideration
therefor is inadequate, such restrictions shall be interpreted or modified to
include as much of the duration and scope identified in this Section 4 as will
render such restrictions valid and enforceable.
5. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement that cannot be mutually resolved by the parties hereto shall be
settled exclusively by arbitration in Louisville, Kentucky before one arbitrator
of exemplary qualifications and stature, who shall be
<PAGE>
6
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (PROVIDED that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement. The Company shall bear all expenses of the arbitrator
incurred in any arbitration hereunder and shall reimburse the Executive for any
related reasonable legal fees and out-of-pocket expenses directly attributable
to such arbitration; PROVIDED that such legal fees are calculated on an hourly,
and not on a contingency fee, basis; and PROVIDED, FURTHER, that the Executive
shall bear all expenses of the arbitrator and all of her legal fees and
out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
6. MISCELLANEOUS
6.1 NOTICES. All notices or communications hereunder shall be in
writing, addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
Attention: Co-Chairman of the Board
To the Executive:
ARM Financial Group, Inc.
515 W. Market Street
Louisville, Kentucky 40202
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All such notices shall be conclusively deemed to
be received and shall be effective, (i) if sent by hand delivery, upon receipt,
(ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt
by the sender of such transmission or (iii) if sent by registered or certified
mail, on the fifth day after the day on which such notice is mailed.
<PAGE>
7
6.2 SEVERABILITY. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
6.3 ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Any business
entity succeeding to substantially all of the business of the Company by
purchase, merger, consolidation, sale of assets or otherwise, shall be bound by
and shall adopt and assume this Agreement and the Company shall obtain the
assumption of this Agreement by such successor.
6.4 ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive. This Agreement may be
amended at any time by mutual written agreement of the parties hereto.
6.5 WITHHOLDING. The payment of any amount pursuant to this
Agreement shall be subject to applicable withholding and payroll taxes, and such
other deductions as may be required under the Company's employee benefit plans,
if any.
6.6 GOVERNING LAW. This Agreement shall be governed by in
accordance with the laws of the State of New York.
6.7 EXPIRATION DATE. This Agreement shall terminate and be null, void
and of no further force or effect in the event that a Change in Control has not
occurred by June 30, 1998, (unless the parties otherwise agree in writing to a
later date).
<PAGE>
8
6.8 SURVIVAL. Subject to Section 6.7, Sections 3.3, 4, 5 and 6.2
shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set her hand, as of the day and year
first above written.
ARM FINANCIAL GROUP, INC.
By: /s/ Frank V. Sica
-----------------------------
Name:
Title:
EXECUTIVE
/s/ Patricia L. Winter
--------------------------------
Patricia L. Winter
<PAGE>
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
March 20, 1998
Ms. Patricia L. Winter
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dear Patricia:
This letter amendment (this "AMENDMENT") sets forth our mutual
understanding concerning an amendment to your Change in Control Agreement
with ARM Financial Group, Inc. dated as of December 4, 1997 (the "CHANGE IN
CONTROL AGREEMENT").
1. Section 6.7 of the Change in Control Agreement is hereby
amended by deleting the words "June 30, 1998" and inserting the words
"December 31, 1998".
2. This Amendment shall be governed in accordance with the laws of
the State of New York.
3. Except as modified hereby, the Change in Control Agreement
remains in full force and effect.
<PAGE>
2
Please evidence your agreement with this Amendment by executing the
acknowledgment set forth below.
ARM FINANCIAL GROUP, INC.
/s/ Martin H. Ruby
-------------------------
Name:
Title:
ACKNOWLEDGED AND
AGREED AS OF THE DATE
FIRST ABOVE WRITTEN
/s/ Patricia L. Winter
- -----------------------
Patricia L. Winter
<PAGE>
ARM Financial Group, Inc.
October 9, 1997
VIA FEDERAL EXPRESS
Mr. Paul Muratore
Shorenstein Company
200 Park Avenue
New York, New York 10166
Re: Lease (the "Lease") dated as of August 4, 1993 between
Metropolitan Life Insurance Company, as landlord
("Landlord"), and Kleinwort Benson Investment Management
Americas, Inc. (successor in interest to Kleinwort Benson
International Investments Ltd.), as tenant, regarding space
(the "Premises") on the 20th floor at 200 Park Avenue, New
York, New York, as assigned to ARM Capital Advisors, Inc.
("ARMCA") as of January 5, 1995.
Dear Paul:
We are writing to advise you that we are transferring substantially all of
the assets of ARMCA, including without limitation ARMCA's right, title and
interest in and to the Lease, to ARM Capital Advisors, LLC ("ARMCA, LLC"), a
newly formed limited liability company which, upon consummation of this
transaction, will be 80% owned by ARM Capital Advisors Holdings, LLC, an entity
controlled by Mr. Emad Zikry, and 20% owned by ARM Financial Group, Inc.
In accordance with the terms of the Lease, please acknowledge your consent
to ARMCA assigning all of its right, title and interest in and to the Lease to
ARMCA, LLC by signing where indicated below. Upon closing this transaction, we
will send you a copy of the assignment and assumption of the Lease.
Thank you for your assistance. Please give me a call if you have any
questions.
Sincerely,
/s/ Craig A. Hawley
Craig A. Hawley,
Assistant General Counsel
ARM Financial Group. Inc.
515 West Market Street
Louisville, KY 40202-3319
<PAGE>
READ AND AGREED TO:
METROPOLITAN LIFE INSURANCE COMPANY
By:/S/ W. Mark Keeney
----------------------------------
Name:/S/ W. Mark Keeney
--------------------------------
Title: Regional Manager
-------------------------------
cc: Robert H. Scott, Esq.
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
------------------------------------
Integrity Holdings, Inc.
Integrity Life Insurance Company
National Integrity Life Insurance Company
ARM Securities Corporation (formerly, SBM Financial Services, Inc.)
ARM Transfer Agency, Inc.
SBM Certificate Company
Integrity Capital Advisors, Inc.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-36769) pertaining to the ARM Financial Group, Inc.
Amended and Restated Stock Option Plan and ARM Financial Group, Inc. 1997
Equity Incentive Plan of our reports dated February 10, 1998, with respect
to the consolidated financial statements and schedules of ARM Financial
Group, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
Ernst & Young LLP
Louisville, Kentucky
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME OF ARM FINANCIAL GROUP, INC.'S FORM 10K FOR THE
YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 4,068,386
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 28,342
<MORTGAGE> 16,429
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,239,271
<CASH> 228,206
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 87,170
<TOTAL-ASSETS> 7,138,124
<POLICY-LOSSES> 4,242,578
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 38,000
0
50,000
<COMMON> 232
<OTHER-SE> 257,313
<TOTAL-LIABILITY-AND-EQUITY> 7,138,424
0
<INVESTMENT-INCOME> 329,979
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<BENEFITS> 247,418
<UNDERWRITING-AMORTIZATION> 10,416
<UNDERWRITING-OTHER> 37,263
<INCOME-PRETAX> 41,738
<INCOME-TAX> 14,139
<INCOME-CONTINUING> 27,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 27,599
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.07
<RESERVE-OPEN> 0
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