<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
Commission file number: 33-67268
ARM FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1244251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 582-7900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /x/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Date Class Shares Outstanding
- --------------------------------------------------------------------------------
August 11, 1998 A 23,469,552
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
1998 December 31,
(IN THOUSANDS) (Unaudited) 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and investments:
Fixed maturities, available-for-sale, at fair value (amortized cost: June 30,
1998-$5,615,744; December 31, 1997-$4,021,495) $ 5,605,965 $ 4,068,386
Equity securities, at fair value (cost: June 30, 1998-$31,086; December 31,
1997-$28,177)
30,423 28,342
Mortgage loans on real estate 15,460 16,429
Policy loans 125,642 126,114
Cash and cash equivalents 204,739 228,206
--------------------------------
Total cash and investments 5,982,229 4,467,477
Assets held in separate accounts:
Guaranteed 1,307,690 1,266,796
Nonguaranteed 1,441,639 1,173,088
Accrued investment income 56,556 44,546
Value of insurance in force 33,280 25,975
Deferred policy acquisition costs 107,593 87,170
Goodwill 5,935 6,523
Deferred federal income taxes 50,141 31,049
Other assets 40,746 35,800
--------------------------------
Total assets $ 9,025,809 $ 7,138,424
--------------------------------
--------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30,
1998 December 31,
(IN THOUSANDS) (Unaudited) 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $ 5,418,223 $ 4,242,578
Customer deposits in separate accounts:
Guaranteed 1,295,557 1,254,801
Nonguaranteed 1,438,978 1,160,595
Long-term debt 38,000 38,000
Accounts payable and accrued expenses 24,680 18,741
Payable for investment securities purchased 316,404 69,286
Payable to reinsurer 7,869 8,800
Repurchase agreement liability 150,910 -
Other liabilities 34,703 38,078
--------------------------------
Total liabilities 8,725,324 6,830,879
Contingencies
Shareholders' equity:
Cumulative perpetual preferred stock, $25.00 stated value 50,000 50,000
Class A common stock, $.01 par value, 23,465,806 and 21,316,068
shares issued and outstanding, respectively 235 213
Class B common stock, $.01 par value, no shares and 1,947,646 shares
issued and outstanding, respectively - 19
Additional paid-in capital 216,951 211,430
Retained earnings 40,247 25,583
Accumulated other comprehensive income from net unrealized gains
(losses) on available-for-sale securities (6,948) 20,300
--------------------------------
Total shareholders' equity 300,485 307,545
--------------------------------
Total liabilities and shareholders' equity $ 9,025,809 $ 7,138,424
--------------------------------
--------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
<TABLE>
<CAPTION>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Investment income $ 115,163 $ 77,759 $ 219,569 $ 147,459
Interest credited on customer deposits (92,657) (58,282) (174,337) (109,607)
------------------------------ ------------------------------
Net investment spread 22,506 19,477 45,232 37,852
Fee income:
Variable annuity fees 5,029 3,412 9,455 6,651
Asset management fees - 1,882 - 3,766
Other fee income 385 450 617 847
------------------------------ ------------------------------
Total fee income 5,414 5,744 10,072 11,264
Other income and expenses:
Surrender charges 1,816 973 3,150 1,855
Operating expenses (7,984) (6,926) (15,534) (15,082)
Commissions, net of deferrals (424) (748) (1,022) (1,386)
Interest expense on debt (661) (580) (1,278) (1,266)
Amortization:
Deferred policy acquisition costs (3,185) (2,436) (5,909) (4,611)
Value of insurance in force (1,401) (2,118) (2,932) (4,359)
Acquisition-related deferred charges (111) (125) (237) (251)
Goodwill (93) (106) (187) (228)
Non-recurring charges:
Stock-based compensation - (8,145) (2,036) (8,145)
Other (1,105) (1,188) (2,639) (2,633)
Other, net (455) (914) (1,048) (1,909)
------------------------------ ------------------------------
Total other income and expenses (13,603) (22,313) (29,672) (38,015)
Realized investment gains 1,786 420 6,951 2,651
------------------------------ ------------------------------
Income before income taxes 16,103 3,328 32,583 13,752
Income tax expense (4,208) (3,185) (9,707) (5,999)
------------------------------ ------------------------------
Net income 11,895 143 22,876 7,753
Dividends on preferred stock (1,188) (1,188) (2,376) (2,376)
------------------------------ ------------------------------
Net income (loss) applicable to common
shareholders $ 10,707 $ (1,045) $ 20,500 $ 5,377
------------------------------ ------------------------------
------------------------------ ------------------------------
Net income (loss) per common share (basic) $ 0.46 $ (0.06) $ 0.88 $ 0.30
------------------------------ ------------------------------
------------------------------ ------------------------------
Net income (loss) per common and common
equivalent share (diluted) $ 0.44 $ (0.06) $ 0.84 $ 0.30
------------------------------ ------------------------------
------------------------------ ------------------------------
Cash dividends paid per common share $ 0.04 - $ 0.06 -
------------------------------ ------------------------------
------------------------------ ------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
<TABLE>
<CAPTION>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 134,251 $ 95,559
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (4,501,093) (2,508,366)
Maturities and redemptions 360,266 170,973
Sales 2,788,703 1,978,072
Other investments:
Purchases (9,950) (34,014)
Maturities and redemptions 1,214 8,740
Sales 7,101 35,725
Policy loans, net 472 335
Transfers (to) from the separate accounts:
Purchase of assets held in separate accounts (245,506) (387,670)
Proceeds from sale of assets held in separate accounts 100,442 46,561
------------------------------
Cash flows used in investing activities (1,498,351) (689,644)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock (945) 78,813
Amounts received from customers 1,533,766 858,715
Amounts paid to customers (338,387) (284,407)
Principal payment on long-term debt - (2,000)
Change in payable to reinsurer (931) (458)
Change in repurchase agreement liability 150,910 -
Dividends on common stock (1,404) -
Dividends on preferred stock (2,376) (2,376)
------------------------------
Cash flows provided by financing activities 1,340,633 648,287
------------------------------
Net increase (decrease) in cash and cash equivalents (23,467) 54,202
Cash and cash equivalents at beginning of period 228,206 110,067
------------------------------
Cash and cash equivalents at end of period $ 204,739 $ 164,269
------------------------------
------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1998 are not necessarily indicative of those to be expected for the year ending
December 31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the annual report on Form 10-K of
ARM Financial Group, Inc. (the "Company") for the year ended December 31, 1997.
Certain amounts from prior years have been reclassified to conform to the
current year's presentation. Such reclassifications have no effect on previously
reported net income or shareholders' equity.
2. INCOME TAXES
Income tax expense differs from that computed using the expected federal
income tax rate of 35%. The differences are primarily attributable to changes in
valuation allowances related to deferred federal income tax assets.
3. SHAREHOLDERS' EQUITY
PUBLIC OFFERING OF COMMON STOCK
In May 1998, the Company completed a public offering of approximately 12.4
million shares of common stock held by certain private equity funds sponsored by
Morgan Stanley Dean Witter & Co. (the "Morgan Stanley Stockholders"). The
Company did not receive any of the proceeds from the public offering. As a
result of the public offering, the Morgan Stanley Stockholders no longer own any
shares of the Company's outstanding common stock and all of the Company's
outstanding Class B common stock was converted into Class A common stock.
6
<PAGE>
STOCK OPTIONS
Certain employees of the Company were granted a total of 188,000 and
207,000 stock options during April and May of 1998, respectively, under the
Company's 1997 Equity Incentive Plan at exercises prices of $22.53 and $19.81
per share. Such options will automatically vest and become exercisable in four
equal installments of 25% annually commencing on the first anniversary of the
date of grant.
In addition, 30,000 stock options were awarded to certain members of the
board of directors of the Company in April 1998, under the Company's 1998
Non-Employee Director Stock Option Plan at an exercise price of $22.53 per
share. Such options are fully vested to such directors in recognition of their
tenure as directors of the Company.
4. NON-RECURRING CHARGES
Effective February 10, 1998, John Franco, the Company's Co-Chairman and
Co-Chief Executive Officer, retired. Mr. Franco had shared that title with
Martin H. Ruby since the Company was founded in 1993. As part of the retirement
package for Mr. Franco, the Company recorded a non-recurring charge of $3.6
million in the first quarter of 1998. The charge consisted of (i) a $2.0 million
non-cash charge in connection with the vesting of the unvested portion of the
options held by Mr. Franco to purchase 232,647 shares of the Company's common
stock and (ii) a $1.6 million charge for fulfilling the remaining compensation
related to his employment agreement. Concurrent with Mr. Franco's retirement,
Mr. Ruby assumed the role of Chairman and Chief Executive Officer of the
Company.
In addition, the Company recorded a charge of $1.1 million during the
second quarter of 1998 for registration expenses associated with the Company's
public offering of common stock in May 1998 (see Note 3).
The Company recorded non-recurring charges of $10.8 million for the six
months ended June 30, 1997 including a non-cash stock-based compensation expense
charge of $8.1 million in connection with 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 Ohio to
Louisville, Kentucky. The stock-based compensation expense charge represents the
aggregate difference between the $15 per share initial public offering price of
Class A common stock and the exercise prices of the then-outstanding options.
5. EARNINGS PER SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share," which superseded
Accounting Principles Board Opinion No. 15 of the same name. Earnings per share
("EPS") for all periods presented reflect the adoption of SFAS No. 128. SFAS No.
128 requires companies to present basic and, if applicable, diluted EPS, instead
of primary and fully diluted EPS. Basic EPS is computed by dividing net income
applicable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if options to issue common stock were exercised into common
stock.
7
<PAGE>
The following is a reconciliation of the number of shares used in the basic
and diluted EPS computations:
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------
1998 1997
------------------- -------------------
Weighted Weighted
Average Per Share Average Per Share
(SHARES IN THOUSANDS) Shares Amount Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS 23,408 $ 0.46 18,201 $ (.06)
Effect of dilutive stock options 929 (.02) 118 -
------------------- ------------------
Diluted EPS 24,337 $ 0.44 18,319 $ (.06)
------------------- ------------------
------------------- ------------------
<CAPTION>
Six Months Ended June 30,
--------------------------------------------
1998 1997
------------------- -------------------
Weighted Weighted
Average Per Share Average Per Share
(SHARES IN THOUSANDS) Shares Amount Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS 23,365 $ 0.88 17,855 $ 0.30
Effect of dilutive stock options 981 (.04) 50 -
------------------- ------------------
Diluted EPS 24,346 $ 0.84 17,905 $ 0.30
------------------- ------------------
------------------- ------------------
</TABLE>
6. SEGMENT INFORMATION
Effective December 31, 1997, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." SFAS No. 131
superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments. The adoption of SFAS
No. 131 did not affect results of operations or financial position, but did
affect the disclosure of segment information.
8
<PAGE>
The Company currently has four reportable segments: retail spread products
and options (fixed and indexed annuities and face-amount certificates),
institutional spread products (funding agreements, guaranteed investment
contracts ("GICs") and face-amount certificates), retail variable fund options
(fee-based variable annuity mutual fund options), and corporate and other. The
Company's corporate and other segment includes investment income on the surplus
assets of its insurance subsidiaries and holding company cash and investments,
fee income from marketing partnerships and broker-dealer operations, unallocated
amortization expenses, and other various corporate expenditures that are not
allocated to specific products. Income tax expense and preferred stock dividends
are not allocated to any segment.
The Company's reportable segments are based on the characteristics of the
product and the markets through which the product 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 differently. The Company evaluates performance based on operating
earnings. Operating earnings represents net income applicable to common
shareholders excluding, net of tax, realized investment gains and losses,
non-recurring charges and for 1997, income from defined benefit pension plan
asset management operations which were sold.
Segment revenues and earnings for the three and six months ended June 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Retail spread products and options $ 54,180 $ 55,382
Institutional spread products 58,829 20,869
Retail variable fund options 5,029 3,412
Corporate and other 2,539 3,840
------------------------------
Consolidated total revenues (investment income and fee income) $ 120,577 $ 83,503
------------------------------
------------------------------
EARNINGS
Retail spread products and options $ 9,502 $ 9,006
Institutional spread products 4,336 2,170
Retail variable fund options 2,094 989
Corporate and other (510) (196)
------------------------------
Pretax operating earnings (before preferred stock dividends) 15,422 11,969
Income taxes on operations (3,583) (3,038)
Preferred stock dividends (1,188) (1,188)
------------------------------
Operating earnings 10,651 7,743
Realized investment gains, net of tax 1,161 420
Non-recurring charges (1,105) (9,480)
Income from defined benefit pension plan asset management operations - 272
------------------------------
Net income applicable to common shareholders $ 10,707 $ (1,045)
------------------------------
------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Retail spread products and options $ 109,688 $ 107,341
Institutional spread products 105,795 36,905
Retail variable fund options 9,455 6,651
Corporate and other 4,703 7,826
------------------------------
Consolidated total revenues (investment income and fee income) $ 229,641 $ 158,723
------------------------------
------------------------------
EARNINGS
Retail spread products and options $ 20,019 $ 17,732
Institutional spread products 8,518 3,515
Retail variable fund options 3,695 1,875
Corporate and other (1,925) (2,096)
------------------------------
Pretax operating earnings (before preferred stock dividends) 30,307 21,026
Income taxes on operations (7,274) (5,071)
Preferred stock dividends (2,376) (2,376)
------------------------------
Operating earnings 20,657 13,579
Realized investment gains, net of tax 4,518 2,651
Non-recurring charges (4,675) (11,706)
Income from defined benefit pension plan asset management operations - 853
------------------------------
Net income applicable to common shareholders $ 20,500 $ 5,377
------------------------------
------------------------------
</TABLE>
7. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or total shareholders'
equity. SFAS No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities to be included in other comprehensive income.
10
<PAGE>
The components of comprehensive income (loss), net of related tax, for the
three and six months ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 11,895 $ 143
Net unrealized gains (losses) on available-for-sale securities (7,774) 31,859
------------------------------
Comprehensive income $ 4,121 $ 32,002
------------------------------
------------------------------
<CAPTION>
Six Months Ended June 30,
------------------------------
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 22,876 $ 7,753
Net unrealized gains (losses) on available-for-sale securities (27,248) 1,469
------------------------------
Comprehensive income (loss) $ (4,372) $ 9,222
------------------------------
------------------------------
</TABLE>
8. DERIVATIVES AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted for fiscal years beginning after June 15,
1999. The Statement will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. To the extent that a derivative is ineffective as a hedge, the
ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet determined what
the effect of SFAS No. 133 will be on the earnings and financial position of
the Company.
9. SUBSEQUENT EVENTS
In July 1998, the Company completed a $75 million offering of Series A
Fixed/Adjustable Rate Cumulative Preferred Stock ("Preferred Stock") with an
initial coupon rate of 5.575% through June 15, 2003. The net proceeds from the
sale of the Preferred Stock will be used for the redemption of the Company's
existing preferred stock, which may be redeemed on or after December 15, 1998,
and for other general corporate purposes.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products. The Company's
products and services are sold in two principal markets, the retail and
institutional markets, through a broad spectrum of distribution channels.
The Company derives its earnings from the investment spread and fee income
generated by the assets it manages. The Company earns a spread between what is
earned on invested assets and what is credited to customer accounts with its
retail spread products and options (primarily fixed and indexed annuities) and
institutional spread products (funding agreements, GICs and face-amount
certificates). The Company receives a fee in exchange for managing customers'
deposits and the customers accept the investment risk with its retail variable
fund options (variable annuity mutual fund options). The Company believes that
market forces and population demographics are producing and will continue to
generate strong consumer demand for long-term savings and retirement products,
including fixed, indexed and variable annuity products. In addition, the Company
expects to benefit from the growing institutional marketplace by increasing
penetration in the stable value and fixed income markets and developing new
products and applications. Although the Company's core business is developing
and managing spread-based investment products, it continues to focus on the
development of its fee-based variable annuity business. Fee-based business is
less capital intensive than spread-based business and provides the Company with
diversified sources of income.
On November 7, 1997 the Company transferred substantially all of the assets
and operations of ARM Capital Advisors, Inc. ("ARM Capital Advisors") to ARM
Capital Advisors, LLC ("New ARMCA") and sold an 80% interest in New ARMCA.
Although third-party assets managed by ARM Capital Advisors grew since 1995 when
ARM Capital Advisors began its operations, the Company believes that market
attitudes towards developing an asset management service for defined benefit
pension plans within a holding company structure consisting predominantly of
insurance companies constrained ARM Capital Advisors' growth. ARM Capital
Advisors' management of defined benefit pension plan accounts generated asset
management fees of $3.8 million and $1.9 million during the six and three months
ended June 30, 1997, respectively.
12
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Net income during the six months ended June 30, 1998 was $22.9 million
compared to $7.8 million for the six months ended June 30, 1997. Operating
earnings (net income applicable to common shareholders excluding, net of tax,
realized investment gains and losses, non-recurring charges and for 1997,
income from defined benefit pension plan asset management operations which
were sold) were $20.7 million and $13.6 million for the six months ended
June 30, 1998 and 1997, respectively. The increase in operating earnings is
primarily attributable to an increase in net investment spread due to the
growth of assets under management which increased from $5.6 billion at
June 30, 1997 to $8.4 billion at June 30, 1998.
Pro forma operating earnings for the six months ended June 30, 1997
(operating earnings including a pro forma adjustment to reflect investment
income at an assumed rate of 7.5% on the net proceeds of the Company's June 1997
initial public offering of Class A common stock assuming it occurred on January
1, 1997) were $15.8 million. Operating earnings per diluted share (pro forma for
1997) were $0.85 and $0.66 for the six months ended June 30, 1998 and 1997,
respectively. The pro forma information for 1997 is not necessarily indicative
of what would have occurred had the initial public offering occurred on the date
indicated.
Annualized pretax operating earnings for retail spread products and options
were 1.43% and 1.32% of average assets under management of $2.81 billion and
$2.68 billion for that segment during the six months ended June 30, 1998 and
1997, respectively. Annualized pretax operating earnings for institutional
spread products were 0.53% and 0.63% of average assets under management of $3.18
billion and $1.11 billion for that segment during the six months ended June 30,
1998 and 1997, respectively. Annualized pretax operating earnings for
retail variable fund options (fee business) were 0.58% and 0.43% of average
assets under management of $1.27 billion and $0.88 billion for that segment
during the six months ended June 30, 1998 and 1997, respectively.
13
<PAGE>
Net investment spread for the six months ended June 30, 1998 and 1997 was
as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income $ 219,569 $ 147,459
Interest credited on customer deposits (174,337) (109,607)
------------------------------
Net investment spread $ 45,232 $ 37,852
------------------------------
------------------------------
Annualized investment yield 7.11% 7.49%
Annualized average credited rate (5.87%) (5.77%)
------------------------------
Investment spread rate 1.24% 1.72%
------------------------------
------------------------------
Average cash and investments (IN BILLIONS) $ 6.18 $ 3.94
Average spread-based customer deposits (IN BILLIONS) $ 5.99 $ 3.83
</TABLE>
Changes in investment yield and average credited rates must be analyzed in
relation to the liability portfolios to which they relate. The decrease in the
overall investment spread rate from 1.72% in 1997 to 1.24% in 1998 is primarily
attributable to a greater proportion of institutional spread product deposits in
1998, which generate lower spreads. In addition, lower market interest rates and
a flatter U.S. Treasury yield curve during 1998 contributed to suppressed
investment returns. The annualized investment yield on cash and investments,
excluding assets supporting institutional spread product deposits, was 7.60% for
the first half of 1998, a decrease from 7.83% for the comparable 1997 period. In
comparison, the annualized investment yield on cash and investments supporting
institutional spread product deposits was 6.64% and 6.62% for the six months
ended June 30, 1998 and 1997, respectively. Average cash and investments related
to institutional spread product deposits grew from $1.1 billion during the six
months ended June 30, 1997 to $3.2 billion during the six months ended June 30,
1998, contributing to the aggregate decrease in investment yields. The proceeds
from institutional spread product sales are invested in securities of shorter
duration (which generally have lower investment yields) than the Company's other
investment portfolios. The average credited rate pattern is dependent upon the
general trend of market interest rates, frequency of credited rate resets and
business mix. For institutional spread products, crediting rates are reset
monthly or quarterly based on London Interbank Offered Rates ("LIBOR") and
semi-annually or annually for certain fixed annuities. The increase in the
average rate of interest credited on customer deposits during the six months
ended June 30, 1998 was primarily attributable to the greater proportion of
institutional spread product deposits and to higher LIBOR compared to the six
months ended June 30, 1997.
14
<PAGE>
Variable annuity fees, which are based on the market value of the mutual
fund assets supporting variable annuity customer deposits in nonguaranteed
separate accounts, increased to $9.5 million in the six months ended June 30,
1998 from $6.7 million in the six months ended June 30, 1997. This increase is
primarily attributable to asset growth from the receipt of variable annuity
deposits and from a stock market-driven increase in the value of existing
variable annuity deposits invested in mutual funds.
Assets under management as of June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
1998 1997
---------------------------- -----------------------
Percent of Percent of
(DOLLARS IN MILLIONS) Amount Total Amount Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail spread products and options (primarily fixed
and indexed annuity deposits) $ 2,782.8 33% $ 2,856.6 51%
Institutional spread products (funding agreement,
GIC and face-amount certificate deposits) 3,811.4 45 1,302.5 24
Retail variable fund options (variable annuity
deposits invested in mutual funds) 1,404.7 17 964.7 17
Corporate and other:
Off-balance sheet deposits under marketing partnership arrangements 233.7 3 257.4 5
Cash and investments in excess of customer deposits 201.9 2 170.2 3
----------------------------------------------------
Total assets under management $ 8,434.5 100% $ 5,551.4 100%
----------------------------------------------------
----------------------------------------------------
</TABLE>
The increase in total assets under management was primarily attributable to
sales of floating rate funding agreements, GICs and face-amount certificates to
institutional customers and an increase in retail variable fund option 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 and options include
premiums and deposits received for products issued by the Company's insurance
and face-amount certificate subsidiaries. Sales of retail variable fund options
include premiums for the investment portfolio options of variable annuity
products issued by the Company's insurance subsidiaries.
15
<PAGE>
Sales by market and type of product for the six months ended June 30, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
(IN MILLIONS) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Retail:
Spread products $ 64.1 $ 289.7
Variable products:
Spread options 36.0 28.8
Fund options 164.6 62.4
----------------------------
Total variable products 200.6 91.2
----------------------------
Total retail 264.7 380.9
Institutional:
Spread products 1,266.0 460.8
----------------------------
Total sales $ 1,530.7 $ 841.7
----------------------------
----------------------------
</TABLE>
Sales of retail variable products during the six months ended June 30, 1998
increased $109.4 million over the six months ended June 30, 1997. This increase
is primarily attributable to continued growth in sales of the PINNACLE variable
annuity product. Retail variable products sales include spread-based systematic
transfer option sales which are transferred into other products and options
within one year. Sales of retail spread products decreased to $64.1 million for
the six months ended June 30, 1998. The decrease is related to the decline in
the yield on intermediate-term U.S. Treasury securities which is one of the
factors considered in setting credited rates on retail spread products. Retail
spread product sales of $289.7 million during the six months ended June 30, 1997
were a result of the spike up in market interest rates early in 1997. The
Company continues its sales strategy of developing a broad mix of products,
services and distribution channels to enable it to achieve its target sales
within different interest rate environments. The increase in institutional sales
is primarily attributable to the sale of a $500 million face-amount certificate
through the newly formed subsidiary, ARM Face-Amount Certificate Group, Inc.,
and its subsidiary 312 Certificate Company, as well as increased sales of
institutional funding agreements.
16
<PAGE>
Net surrenders of retail spread and variable annuity products and options
issued by the Company's insurance subsidiaries were $184.0 million in the six
months ended June 30, 1998 compared to $155.1 million for the six months ended
June 30, 1997. Surrender charge income increased to $3.2 million for the six
months ended June 30, 1998 from $1.9 million for the six months ended June 30,
1997. The increase in surrender charge income is attributable to a larger mix
of surrenders of customer deposits acquired in connection with the 1995
acquisition of SBM Company's insurance subsidiary which have higher surrender
charge penalties. Retail products issued by the Company's insurance subsidiaries
generally include lapse protection provisions that provide a deterrent to
surrenders when interest rates rise. These provisions can include surrender
charges and market value adjustments on annuity withdrawals. During the period
that surrender charges are assessable (generally the first five to seven years
after a policy is issued) surrenders are relatively low. The surrender and
withdrawal activity during the first six months of 1997 and 1998 was generally
expected by the Company due to the level of customer deposits written several
years ago that were subject to declining or expiring surrender charges, and the
Company's strategy of maintaining investment spreads. The Company attempts to
reduce retail surrender activity and improve persistency through various
programs. The Company has experienced minimal withdrawals (excluding scheduled
interest payments) by institutional spread product customers during the first
six months of 1997 and 1998.
Operating expenses were $15.5 million for the six months ended June 30,
1998 compared to $15.1 million for the six months ended June 30, 1997.
Amortization of deferred policy acquisition costs related to operations was
$5.9 million and $4.6 million during the six months ended June 30, 1998 and
1997, respectively. This increase was primarily the result of growth in the
deferred policy acquisition cost asset due to additional sales of fixed, indexed
and variable annuity products. Variable costs of selling and issuing the
Company's insurance subsidiaries' products (primarily commissions and certain
policy issuance and marketing costs) are deferred and then amortized over the
expected life of the contracts.
Amortization of value of insurance in force related to operations of $2.9
million and $4.4 million for the six months ended June 30, 1998 and 1997,
respectively, primarily reflects the amortization of the value of insurance in
force established as an asset by the Company in connection with the 1995
acquisition of SBM Company's insurance subsidiary. The decrease in amortization
of value of insurance in force related to operations is a result of the decrease
in the value of insurance in force asset from $46.6 million at June 30, 1997 to
$33.3 million at June 30, 1998.
17
<PAGE>
The Company recorded non-recurring charges of $4.7 million in the six
months ended June 30, 1998 of which $3.6 million was part of a retirement
package for John Franco, the Company's former Co-Chairman and Co-Chief Executive
Officer, and $1.1 million was related to registration expenses associated with
the Company's secondary offering of common stock. The Company recorded
non-recurring charges of $10.8 million for the six months ended June 30, 1997
which included a non-cash stock-based compensation expense charge and other
non-recurring costs primarily related to the relocation and consolidation of the
Company's operations facilities from Ohio to Louisville, Kentucky.
Other expenses, net primarily includes premiums paid on agreements to
reinsure the majority of the mortality risks associated with single premium
endowment and variable annuity deposits.
Realized investment gains, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $7.0
million during the six months ended June 30, 1998 compared to $2.7 million
during the six months ended June 30, 1997. Such realized investment gains were
primarily interest-rate related and attributable to the ongoing management of
the Company's fixed maturity securities classified as available-for-sale which
can result in period-to-period swings in realized investment gains and losses
since securities are sold during both rising and falling interest rate
environments. The ongoing management of securities is a significant component of
the Company's asset/liability management strategy. The ongoing portfolio
management process involves evaluating the various asset sectors (i.e., security
types and industry classes) and individual securities comprising the Company's
investment portfolios and, based on market yield rates, repositioning holdings
from sectors perceived to be relatively overvalued to sectors perceived to be
undervalued with the aim of improving cash flows. The Company endeavors to
accomplish this repositioning without materially changing the overall credit,
asset duration, convexity, and liquidity characteristics of its investment
portfolios.
Income tax expense was $9.7 million and $6.0 million during the six months
ended June 30, 1998 and 1997, respectively, reflecting effective tax rates of
29.8% and 43.6% as a percentage of pretax income. If the 1997 non-recurring
stock-based compensation expense charge was added back to pretax income, the
effective tax rate for the six months ended June 30, 1997 would be 27.4%. A tax
benefit was not recognized for the charge because a full valuation allowance was
provided on the Company's non-life net operating loss carryforwards.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30,
1997
Net income during the second quarter of 1998 was $11.9 million compared
to $143,000 for the second quarter of 1997. Operating earnings were $10.7
million and $7.7 million for the second quarters of 1998 and 1997,
respectively. Operating earnings for the second quarter of 1998 were
positively impacted by increased institutional assets under management from
strong sales and increased variable annuity assets under management from
solid sales results and positive stock market performance.
18
<PAGE>
Pro forma operating earnings for the second quarter of 1997 were $8.8
million. Operating earnings per share (pro forma for 1997) were $0.44 and $0.37
for the second quarter of 1998 and 1997, respectively.
Annualized pretax operating earnings for retail spread products and
options were 1.36% and 1.32% of average assets under management of $2.80
billion and $2.73 billion for that segment during the second quarter of 1998
and 1997, respectively. Annualized pretax operating earnings for
institutional spread products were 0.49% and 0.71% of average assets under
management of $3.57 billion and $1.23 billion for that segment during the
second quarter of 1998 and 1997, respectively. Annualized pretax operating
earnings for retail variable fund options (fee business) were 0.62% and 0.44%
of average assets under management of $1.35 billion and $0.90 billion for
that segment during the second quarter of 1998 and 1997, respectively
Net investment spread for the three months ended June 30, 1998 and 1997 was
as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Investment income $ 115,163 $ 77,759
Interest credited on customer deposits (92,657) (58,282)
------------------------
Net investment spread $ 22,506 $ 19,477
------------------------
------------------------
Annualized investment yield 7.02% 7.58%
Annualized average credited rate (5.84%) (5.87%)
------------------------
Investment spread rate 1.18% 1.71%
------------------------
------------------------
Average cash and investments (IN BILLIONS) $ 6.56 $ 4.09
Average spread-based customer deposits (IN BILLIONS) $ 6.36 $ 3.99
</TABLE>
The decrease in the overall investment spread rate from 1.71% in 1997 to
1.18% in 1998 is primarily attributable to a greater proportion of
institutional spread product deposits in 1998, which generate lower spreads.
In addition, lower market interest rates and a flatter U.S. Treasury yield
curve during 1998 contributed to suppressed investment returns. The
annualized investment yield on cash and investments, excluding assets
supporting institutional spread product deposits, was 7.53% for the second
quarter of 1998, a decrease from 7.92% for the comparable 1997 period. In
comparison, the annualized investment yield on cash and investments
supporting institutional spread product deposits was 6.60% and 6.79% for the
second quarter of 1998 and 1997, respectively. Average cash and investments
related to institutional spread product deposits grew from $1.2 billion
during the second quarter of 1997 to $3.6 billion during the second quarter
of 1998, contributing to the aggregate decrease in investment yields.
19
<PAGE>
Sales by market and type of product for the three months ended June 30,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
(IN MILLIONS) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Retail:
Spread products $ 30.8 $ 227.5
Variable products:
Spread options 19.5 16.5
Fund options 92.9 31.8
--------------------------
Total variable products 112.4 48.3
--------------------------
Total retail 143.2 275.8
Institutional:
Spread products 818.8 212.2
Total sales $ 962.0 $ 488.0
--------------------------
--------------------------
</TABLE>
Sales of retail variable products during the second quarter of 1998
increased $64.1 million over the second quarter of 1997. This increase is
primarily attributable to continued growth in sales of the PINNACLE variable
annuity product. Sales of retail spread products decreased to $30.8 million for
the second quarter of 1998. The decrease is related to the decline in the yield
on intermediate-term U.S. Treasury securities which is one of the factors
considered in setting credited rates on retail spread products. Retail spread
product sales of $227.5 million during the second quarter of 1997 were a result
of the spike up in market interest rates early in 1997. The increase in
institutional sales is primarily attributable to the sale of a $500 million
face-amount certificate through the Company's newly formed wholly owned
subsidiary, ARM Face-Amount Certificate Group, Inc., and its subsidiary 312
Certificate Company, as well as increased sales of institutional funding
agreements.
Net surrenders of retail spread and variable annuity products issued by the
Company's insurance subsidiaries were $83.0 million for the three months ended
June 30, 1998 compared to $79.0 million in the second quarter of 1997. Surrender
charge income increased to $1.8 million in the second quarter of 1998 from $1.0
million for the three months ended June 30, 1997. The increase in surrender
charge income is attributable to a larger mix of surrenders of customer deposits
acquired in connection with the 1995 acquisition of SBM Company's insurance
subsidiary which have higher surrender charge penalties.
Operating expenses were $8.0 million in the second quarter of 1998 compared
$6.9 million in the second quarter of 1997.
Amortization of deferred policy acquisition costs related to operations was
$3.2 million and $2.4 million during the three months ended June 30, 1998 and
1997, respectively. This increase was primarily the result of growth in the
deferred policy acquisition cost asset due to additional sales of fixed, indexed
and variable annuity products.
20
<PAGE>
Amortization of value of insurance in force related to operations was $1.4
million and $2.1 million for the three months ended June 30, 1998 and 1997,
respectively. The decrease in amortization of value of insurance in force
related to operations is a result of the decrease in the value of insurance in
force asset from $46.6 million at June 30, 1997 to $33.3 million
at June 30, 1998.
The Company recorded non-recurring charges of $1.1 million and $9.3 million
for the three months ended June 30, 1998 and 1997, respectively. The 1998 charge
is for registration expenses associated with the Company's public offering of
common stock in May. The 1997 charge includes a non-cash stock-based
compensation charge of $8.1 million in connection with the Company's initial
public offering of common stock.
Realized investment gains, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $1.8
million in the second quarter of 1998 compared to $0.4 million in the second
quarter of 1997. Such realized investment gains 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 $4.2 million and $3.2 million during the three
months ended June 30, 1998 and 1997, respectively, reflecting effective tax
rates of 26.1% and 27.8% (after adding back the 1997 non-recurring stock-based
compensation expense charge for comparability purposes).
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 June 30, 1998 totaled $5.6
billion, compared with $4.0 billion at December 31, 1997, representing
approximately 94% and 91% of total cash and investments, respectively. This
increase in investments in fixed maturities primarily resulted from the
investment of the proceeds from the sales of institutional spread products.
21
<PAGE>
The Company's cash and investments as of June 30, 1998 are detailed as
follows:
<TABLE>
<CAPTION>
Amortized Cost
-------------------------
Percent of Estimated Fair
(DOLLARS IN MILLIONS) Amount Total Value
- ----------------------------------------------------------------------------------------------- --------------
<S> <C> <C> <C>
Fixed maturities:
Corporate securities $ 1,976.0 33% $ 1,968.3
U.S. Treasury securities and obligations of U.S.
government agencies 470.0 8 469.4
Other government securities 54.7 1 50.2
Asset-backed securities 524.5 9 524.0
Mortgage-backed securities (MBSs):
Agency pass-throughs 98.5 2 98.3
Collateralized mortgage obligations (CMOs):
Agency 369.1 6 370.0
Non-agency 2,122.9 35 2,125.8
------------------------- --------------
Total fixed maturities 5,615.7 94 5,606.0
Equity securities (i.e., non-redeemable preferred stock) 31.1 1 30.4
Mortgage loans on real estate 15.5 * 15.5
Policy loans 125.6 2 125.6
Cash and cash equivalents 204.7 3 204.7
Total cash and investments $ 5,992.6 100% $ 5,982.2
------------------------- --------------
------------------------- --------------
</TABLE>
* Less than 1%.
Agency pass-through certificates are MBSs which represent an undivided
interest in a specific pool of residential mortgages. The payment of principal
and interest is guaranteed by the U.S. government or U.S. government agencies.
CMOs are pools of mortgages that are segregated into sections, or tranches,
which provide prioritized retirement of bonds rather than a pro rata share of
principal return as in the pass-through structure. The underlying mortgages of
agency CMOs are guaranteed by the U.S. government or U.S. government agencies.
Of the Company's non-agency CMO investments at June 30, 1998 (on an amortized
cost basis), 84% 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 16% 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.
22
<PAGE>
MBSs are subject to risks associated with prepayments of the underlying
collateral pools. Prepayments cause these securities to have actual maturities
different from those projected at the time of purchase. Securities that have an
amortized cost that is greater than par (i.e., purchased at a premium) that are
backed by mortgages that prepay faster than expected will incur a reduction in
yield or a loss, versus an increase in yield or a gain if the mortgages prepay
slower than expected. Those securities that have an amortized cost that is less
than par (i.e., purchased at a discount) that are backed by mortgages that
prepay faster than expected will generate an increase in yield or a gain, versus
a decrease in yield or a loss if the mortgages prepay slower than expected. The
reduction or increase in yields may be partially offset as funds from
prepayments are reinvested at current interest rates. The degree to which a
security is susceptible to either gains or losses is influenced by the
difference between its amortized cost and par, the relative sensitivity of the
underlying mortgages backing the assets to prepayments in a changing interest
rate environment and the repayment priority of the securities in the overall
securitization structure. The Company had gross unamortized premiums and
unaccreted discounts of MBSs of $31.7 million and $15.2 million, respectively,
at June 30, 1998.
Asset-backed securities ("ABSs") are securitized bonds which can be backed
by, but not limited to, collateral such as home equity loans, second mortgages,
automobile loans and credit card receivables. At June 30, 1998, home equity loan
collateral represented 42% of the Company's investments in the ABS market. The
typical structure of an ABS provides for favorable yields, high credit rating
and stable prepayments.
Total cash and investments (on an amortized cost basis) were 94% and 95%
investment grade or equivalent as of June 30, 1998 and December 31, 1997,
respectively. Investment grade securities are those classified as 1 or 2 by
the National Association of Insurance Commissioners ("NAIC") or, where such
classifications are not available, having a rating on the scale used by
Standard & Poor's Corporation ("S&P") of BBB- or above. Yields available on
non-investment grade securities are generally higher than are available on
investment grade securities. However, credit risk is greater with respect to
such non-investment grade securities. The Company has a diversified portfolio
of dollar denominated bonds issued in the U.S. by foreign governments, banks
and corporations, including a limited exposure to the Asian market. The
Company reduces the risks associated with buying foreign securities by
limiting the exposure to both issuer and country. The Company closely
monitors the creditworthiness of such issuers and the stability of each
country. Additionally, the Company's investment portfolio has minimal
exposure to real estate, mortgage loans and common equity securities, which
represented less than 1% of cash and investments as of June 30, 1998.
23
<PAGE>
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
income 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 June 30, 1998, the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio were as follows:
<TABLE>
<CAPTION>
Amortized Cost
-----------------------
Percent Estimated
NAIC Designation (Comparable S&P Rating) Amount of Total Fair Value
- --------------------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
1 (AAA, AA, A) $ 3,366.3 60% $ 3,361.5
2 (BBB) 1,886.7 33 1,894.8
3 (BB) 203.6 4 197.9
4 (B) 159.1 3 151.8
5 (CCC, CC, C) - - -
6 (CI, D) - - -
----------------------------------------
Total fixed maturities $ 5,615.7 100% $ 5,606.0
----------------------------------------
----------------------------------------
</TABLE>
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company classifies its entire fixed maturities portfolio
as available-for-sale. Fixed maturities classified as available-for-sale are
carried at fair value and changes in fair value, net of related deferred policy
acquisition cost and value of insurance in force amortization and deferred
income taxes, are charged or credited directly to shareholders' equity and
classified as accumulated other comprehensive income from net unrealized gains
and losses on available-for-sale securities.
24
<PAGE>
The fluctuations in interest rates during the first six months of 1998
resulted in net unrealized losses on available-for-sale securities which
totaled $6.9 million (net of $0.2 million of related amortization of deferred
policy acquisition costs and value of insurance in force and $3.7 million of
deferred income taxes) at June 30, 1998, compared to net unrealized gains of
$20.3 million (net of $15.8 million of related amortization of deferred
policy acquisition costs and value of insurance in force and $10.9 million of
deferred income taxes) at December 31, 1997. This change in net unrealized
gains and losses on available-for-sale securities for the first six months of
1998 decreased reported shareholders' equity by $27.2 million as compared to
an increase of $16.6 million for the year ended December 31, 1997. This
volatility in reported shareholders' equity occurs as a result of SFAS No.
115, which requires that available-for-sale securities be carried at fair
value while other assets and all liabilities are carried at historical
values. At June 30, 1998 and December 31, 1997, shareholders' equity
excluding the effects of SFAS No. 115 was $307.4 million and $287.2 million,
respectively.
Assets held in the Company's guaranteed separate accounts include $1.27
billion and $1.26 billion of cash and investments at June 30, 1998 and December
31, 1997, of which approximately 91% and 87% were fixed maturities,
respectively. Total guaranteed separate account cash and investments were 98%
and 99% investment grade at June 30, 1998 and December 31, 1997, respectively.
Separate accounts are investment accounts maintained by an insurer to which
funds have been allocated for certain policies under provisions of relevant
state law. The investments in each separate account are maintained separately
from those in other separate accounts and from an insurance company's general
account.
LIQUIDITY AND FINANCIAL RESOURCES
HOLDING COMPANY OPERATIONS
The Company's principal need for liquidity has historically consisted of
debt service obligations under its bank financing agreements, dividend payments
on its common and preferred stock, operating expenses not absorbed by management
fees charged to its subsidiaries, and corporate development expenditures. the
Company is dependent on dividends from Integrity Life Insurance Company
("Integrity") and management and service fee income from the Company's
subsidiaries to meet ongoing cash needs, 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 the first half of 1998, the Company
received cash dividends of $6.0 million from Integrity. The maximum dividend
payments that may be made by Integrity to the Company during 1998 without the
prior approval of the Ohio Insurance Director are $38.2 million. The Company had
cash and investments at the holding company level of $44.3 million at June 30,
1998. In addition, the Company has a $75.0 million syndicated bank credit
facility of which $37.0 million is available to the Company at June 30, 1998.
25
<PAGE>
In May 1998, the Company completed a public offering of approximately 12.4
million shares of common stock held by the Morgan Stanley Stockholders. The
Company did not receive any of the proceeds from the public offering. As a
result of the public offering, the Morgan Stanley Stockholders no longer own any
shares of the Company's outstanding common stock and all of the Company's
outstanding Class B common stock was converted into Class A common stock.
INSURANCE SUBSIDIARIES OPERATIONS
The primary sources of liquidity of the Company's insurance subsidiaries
are investment income and proceeds from maturities and redemptions of
investments. The principal uses of such funds are benefits, withdrawals and
loans associated with customer deposits, commissions, operating expenses, and
the purchase of new investments.
The Company develops cash flow projections under a variety of interest rate
scenarios generated by the Company. The Company attempts to structure asset
portfolios so that the interest and principal payments, along with other fee
income, are more than sufficient to cover the cash outflows for benefits,
withdrawals and expenses under the expected scenarios developed by the Company.
In addition, the Company maintains other liquid assets and aims to meet
unexpected cash requirements without exposure to material realized losses during
a higher interest rate environment. These other liquid assets include cash and
cash equivalents and high-grade floating-rate securities held by both the
Company and its insurance subsidiaries.
During the six months ended June 30, 1998 and 1997, the Company met its
liquidity needs entirely by cash flows from operating activities and principal
payments and redemptions of investments. At June 30, 1998, cash and cash
equivalents totaled $210.6 million compared to $228.2 million at December 31,
1997. 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 $134.3 million and $95.6 million from
operating activities during the six months ended June 30, 1998 and 1997,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $3.2 billion and $2.2 billion in
cash flows during the six months ended June 30, 1998 and 1997, respectively,
which were offset by purchases of investments of $4.5 billion and $2.5 billion,
respectively. An increase in investment purchases and sales activity
during the first six months of 1998 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.
26
<PAGE>
YEAR 2000
The Company has undertaken a Year 2000 project which includes all of its
subsidiaries. The Company has completed the assessment phase of the project.
All production applications, hardware (personal computers and servers),
system software, facilities, vendors, and business partners have been
assessed. Although the Company is still waiting for responses from a few
vendors and business partners, the Company's major production systems are
substantially Year 2000 compliant. Where Year 2000 problems were found, the
necessary upgrades and repairs have begun and are scheduled for completion no
later than March 31, 1999.
The Company is currently in the repair and certification testing phase of
its project. The testing phase will serve to verify the results of repairs
and assessments. Steps needed to correct any problems uncovered during testing
will begin immediately at that time. The Company's Year 2000 project is well
underway and management believes that it will be 100% Year 2000 compliant by
March 31, 1999. 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.
FORWARD-LOOKING STATEMENTS
The Company has made a number of forward-looking statements in this
document that are subject to risks and uncertainties. Forward-looking
statements include the information concerning possible or assumed future
results of operations and those preceded by, followed by or that include the
words "believes," "expects," or similar expressions. Such forward-looking
statements are based on the Company's beliefs as to its competitive position
in its industry and the factors affecting its business. In particular, the
statements of the Company's belief as to the growth of the long-term savings
and retirement market and the stimulation of future demand for long-term
savings and retirement products, including fixed, indexed and variable
annuity products under the heading "General" are forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements related to the demand for fixed, indexed and
variable annuity products include, but are not limited to, a change in
population demographics, development of alternative investment products, a
change in economic conditions, and changes in current federal income tax
laws. In addition, there can be no assurance that (i) the Company has
correctly identified and assessed all of the factors affecting its business;
(ii) the publicly available and other information on which the Company has
based its analyses is complete or correct; (iii) the Company's analyses are
correct; or (iv) the Company's strategy, which is based in part on these
analyses, will be successful.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in no material legal or administrative
proceedings. The Company's subsidiaries are currently involved only in routine
legal and administrative proceedings incidental to the conduct of their
businesses. The Company believes that none of these proceedings will have a
material adverse impact to the financial position or results of operations of
the Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of the stockholders on May 27, 1998. At
the annual meeting, the stockholders elected two directors to serve for a term
of three years expiring in 2001. The number of votes cast for or withheld for
each director were as follows:
Votes For Votes Withheld
---------- --------------
Dudley J. Godfrey, Jr. 19,691,731 15,720
John R. Lindholm 19,690,931 16,520
In addition, the stockholders approved the ARM Financial Group, Inc. 1998
Non-Employee Director Stock Option Plan by the vote of 19,082,270 in favor,
600,826 against and 23,355 abstentions and 1,000 non-broker votes.
ITEM 5. OTHER INFORMATION
The Board of Directors by unanimous written consent dated August 12,
1998, declared (i) a quarterly dividend of 59.375 cents per share payable
September 15, 1998 to holders of the 91/2% Cumulative Perpetual Preferred
Stock of record on August 31, 1998; (ii) a quarterly dividend of 4 cents per
share payable September 15, 1998 to holders of the Class A common stock of
record on August 31, 1998; and (iii) the first quarterly dividend (partial
period) of approximately $1.77 per share payable September 15, 1998 to
holders of the Series A Fixed/Adjustable Rate Cumulative Preferred Stock of
record on August 31, 1998.
On August 6, 1998, the Company announced that William H. Panning will
assume the newly created position of Executive Vice President and Chief
Investment Officer on August 17, 1998. The Company also announced the
resignation, effective August 7, 1998, of Robert H. Scott as Executive Vice
President, General Counsel and Secretary.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
On April 22, 1998, the Company filed a current report on Form 8-K to
announce operating results for the first quarter of 1998.
On June 1, 1998, the Company filed a current report on Form 8-K announcing
that as of May 29, 1998, (i) Patricia L. Winter resigned as Executive Vice
President-Investment Assurance and Institutional Products and (ii) Dennis L.
Carr, Executive Vice President and Chief Actuary of the Company, will assume Ms.
Winter's duties with respect to the Company's institutional product group.
EXHIBITS
10.1 Amendment dated as of April 20, 1998 to the Credit Agreement dated as of
June 24, 1997, as amended by the Release and Amendment dated as of
December 15, 1997, among the Registrant, the financial institutions from
time to time party thereto, and The Chase Manhattan Bank (filed
herewith).
10.2 Administrative Services Agreement dated April 22, 1998 between the
Registrant and 312 Certificate Company (filed herewith).
10.3 Investment Services Agreement dated April 22, 1998 between Integrity
Capital Advisors, Inc. and ARM Capital Advisors, LLC (filed herewith).
10.4 Investment Management Agreement dated as of April 24, 1998 among 312
Certificate Company, Integrity Capital Advisors, Inc. and The First
National Bank of Chicago (filed herewith).
10.5 ARM Financial Group, Inc. 1998 Non-Employee Director Stock Option Plan
(incorporated herein by reference to Annex A to the Company's Notice of
1998 Annual Meeting and Proxy Statement, filed April 22, 1998).
27 Financial Data Schedule.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 11, 1998.
ARM FINANCIAL GROUP, INC.
By: /S/ EDWARD L. ZEMAN
--------------------------------------------
Edward L. Zeman
Executive Vice President-Chief
Financial Officer
(Principal Financial Officer)
By: /S/ BARRY G. WARD
--------------------------------------------
Barry G. Ward
Controller (Principal Accounting Officer)
30
<PAGE>
AMENDMENT dated as of April 20, 1998
(this "Amendment"), to the Credit Agreement dated
as of June 24, 1997, as amended by the Release and
Amendment dated as of December 15, 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 agent for the Lenders (in such
capacity, the "Agent").
WHEREAS the Borrowers have requested that the Lenders
amend certain provisions of the Credit Agreement as set forth
herein;
WHEREAS the Lenders are willing, on the terms, subject to
the conditions and to the extent set forth below, to provide such
amendments; and
WHEREAS capitalized terms used and not otherwise defined
herein shall have the meanings assigned to them in the Credit
Agreement.
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the
parties hereto hereby agree, on the terms and subject to the
conditions set forth herein, as follows:
SECTION 1. Amendments to Credit Agreement.
(a) Section 1.01 of the Credit Agreement is amended by amending and
restating the definitions of "Change of Control" and "Subsidiary" as
follows, and adding the following defined terms for "Designated
Activity", "Designated Subsidiary", "Structured Finance", "312",
"Total Return Swaps" and "212" in proper alphabetical order:
A "Change of Control" shall be deemed to have occurred if
at any time a majority of the seats (other than vacant seats) on
the board of directors of the Borrower shall at such time be
occupied by persons who were neither nominated by the management
of the Borrower nor appointed by directors so nominated.
"Subsidiary" shall mean any subsidiary of the Borrower,
except that, for purposes of clauses (f) and (g) of Article VII,
the term Subsidiary (and any terms that include the definition
of Subsidiary) shall not include any Designated Subsidiary.
"Designated Activity" of any Person shall mean each of
the following: (i) the holding of the stock of one or more
of Structured Finance, 312 and 212; (ii) the issuance by
<PAGE>
such Person (if such Person is 312 or 212) of face-amount
certificates in such amounts as are otherwise permitted by
this Agreement; (iii) the acquisition and maintenance by such
Person of fixed income securities with an average credit quality
of no less than AA; (iv) the establishment of liquidity
facilities (with such Person as the borrower) and/or standby
letters of credit (with such Person as the account party) in such
amounts as are otherwise permitted by this Agreement; (v) the
execution, delivery and performance of swap agreements and other
derivative agreements (including, without limitation, Rate
Protection Agreements and Total Return Swaps) with any one or
more of Integrity, Structured Finance, 312, 212 and any other
Person (except for the Borrower or any Subsidiary other than the
Structured Finance, 312 or 212); (vi) the securitization of
such face-amount certificates; (vii) the securing with such
securities of all Indebtedness and obligations of such Person
(including, without limitation, such as constitute or arise
from Designated Activities) which are permitted under this
Agreement; (viii) administrative support arrangements between
or among one or more of Structured Finance, 312 and 212, on the
one hand, and one or more of the Borrower and the Subsidiaries,
on the other, providing, among other things, for the lease or
sublease of office facilities for Structured Finance, 312 or 212
and/or the hiring or use of personnel employed by the Borrower;
(ix) all other actions and activities and circumstances by or
in respect of such Person which are otherwise permitted by this
Agreement; (x) the execution, delivery and performance of
agreements, documents and instruments evidencing or required by
the Designated Acitivities; and (xi) actions and activities
incidental or related to the foregoing.
"Designated Subsidiary" shall mean (i) ARM Structured
Finance Group, Inc., a direct wholly owned Subsidiary
("Structured Finance"); (ii) 312 Cerfiticate Company, an
indirect wholly owned Subsidiary ("312"); and (iii) 212
Certificate Company, an indirect wholly owned Subsidiary
("212"), but only for so long as (A) the activities of such
corporations are confined to Designated Activities and (B)
the creditors of such corporations do not have direct or
contingent recourse (whether pursuant to partnership law or
by reason of any Guarantee or similar agreement or arrangement)
to the Borrower or any Subsidiary (except for Structured
Finance, 312 or 212), in each case in respect of any
indebtedness or other obligation owed to such holders by
Structured Finance, 312 or 212 (it being understood that the
obligations to perform, and the performance of, Designated
Activities by the Designated Subsidiaries [the Borrower
or the other Subsidiaries], shall not be deemed to
constitute direct or contingent recourse).
"Structured Finance" shall have the meaning given such
term in the definition of "Designated Subsidiary".
<PAGE>
"312" shall have the meaning given such term in the
definition of "Designated Subsidiary".
"Total Return Swap" shall mean, at any time, any total
return and/or total yield swap, derivative instrument or product
and any derivation thereof (including, without limitation, any
option to enter into any of the foregoing and any master agreement for
any of the foregoing) between or among any two or more of Integrity,
Structured Finance, 312 or 212 and any other Person (except for the
Borrower or any Subsidiary other than Structured Finance, 312, or 212)
and/or by virtue of assignment or otherwise, the holders of the
face-amount certificates issued by 312 or 212, in each case in order to
Guarantee, provide cash flows or credit enhancement in support of, or
otherwise protect, the payment of principal of, interest on, and other
amounts in respect of, such face-amount certificates, any Indebtedness
or other obligation of Integrity, Structured Finance, 312, 212 or any
such holder that constitutes a Designated Activity or, in each case,
any securitization of any of the foregoing.
"212" shall have the meaning given such term in the definition of
"Designated Subsidiary".
(b) Section 6.01 of the Credit Agreement is amended by deleting
the word "and" appearing at the end of clause (k) thereof and inserting after
clause (l) thereof a semicolon followed by the word "and" and the following
additional clause:
(m) Indebtedness of the Designated Subsidiaries (evidenced by or
incurred pursuant to any agreements, instruments, commitments or
arrangements, irrespective of their individual or aggregate face
amount, in each case arising from or related to one or more Designated
Activities) in an aggregate outstanding principal amount not to exceed at
any time $1,050,000,000 plus accrued but unpaid interest thereon.
(c) Section 6.02 of the Credit Agreement is amended by deleting the
word "and" at the end of clause (k) thereof and inserting after clause (l)
thereof a semicolon and the following additional clause:
(m) Liens on the assets of any Designated Subsidiary.
(d) Section 6.04 of the Credit Agreement is amended (i) by
inserting at the end of clause (a) thereof the phrase "(other than
the Designated Subsidiaries)" and (ii) by deleting the word "and" at the
end of clause (d) thereof and inserting after clause (e) thereof a semicolon
and the following additional clauses:
(f) investments in (including cash capital contributions to)
the Designated Subsidiaries in an
<PAGE>
amount not greater in the aggregate for both such Subsidiaries than
$1,500,000 plus any amounts contributed in satisfaction of amounts
that are due from but have not been paid by Integrity under the Total
Return Swaps;
(g) the Total Return Swaps; and
(h) investments by any Designated Subsidiaries.
(e) Section 6.05 of the Credit Agreement is hereby amended by
adding the following paragraph (d) at the end of such Section:
(d) Notwithstanding paragraphs (a), (b) and (c) above,
transactions by the Designated Subsidiaries shall not be subject
to (and shall not be included in or aggregated with transactions
effected by the Borrower and the other Subsidiaries for purposes
of determining compliance by the Borrower and the other
Subsidiaries with) the limitations contained in this Section 6.05.
(f) Section 6.07 of the Credit Agreement is amended by deleting
the word "and" at the end of the clause (e) thereof and inserting after
clause (f) thereof a comma and the following additional clause:
(g) Integrity may enter into Total Return Swaps with the
Designated Subsidiaries.
(g) Section 6.09 of the Credit Agreement is amended by deleting
the word "and" at the end of clause (a) thereof and inserting after clause
(b) thereof a comma and the following additional clause:
(c) payments by any Designated Subsidiary with respect to
its Indebtedness.
(h) The parties hereto agree that (i) all Indebtedness of the
Designated Subsidiaries, and all payments of interest and fees in respect of
such Indebtedness, will be excluded for purposes of determining the
Borrower's compliance with Sections 6.11 and 6.12 and (ii) to the extent
includible in net income of the Borrower under GAAP, items of income and
expense of the Designated Subsidiaries will be included for purposes of
determining the Borrower's compliance with Sections 6.11 and 6.12.
SECTION 3. Representations and Warranties. The Borrower
hereby represents and warrants to each Lender, on and as of the date hereof,
and after giving effect to this Amendment, that:
<PAGE>
a) 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, except to the extent such representations and
warranties relate to an earlier date; and
(b) no Event of Default or Default has occurred and is continuing.
SECTION 4. Effectiveness. The amendments to the Credit Agreement
set forth in Section 1 shall become effective only upon receipt by the Agent
of duly executed counterparts hereof which, when taken together, bear the
authorized signatures of the Borrower and the Required Lenders.
SECTION 5. Governing Law. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
SECTION 6. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be an original but all of which,
when taken together, shall constitute but one instrument. Delivery of an
executed counterpart of a signature page of this Amendment by facsimile
transmission shall be as effective as delivery of a manually executed
counterpart of this Amendment.
SECTION 7. Expenses. The Borrower agrees to pay all expenses
incurred by the Agent in connection with the preparation, execution and
delivery of this Amendment, including the fees, charges and disbursements of
counsel.
SECTION 8. Headings. Section headings used herein are for
convenience of reference only, are not part of this Amendment and are not to
affect the construction of, or to be taken into consideration in
interpreting, this Amendment.
SECTION 9. Effect of this Amendment Generally, except as expressly
set forth herein, this Amendment shall not by implication or otherwise limit,
impair, constitute a waiver of, or otherwise affect the rights and remedies
of the Lenders under the Credit Agreement or any other Loan Document, 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 or any other Loan Document, 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 or any
other Loan Document in similar or different circumstances. This
<PAGE>
Amendment shall apply and be effective only with respect to the provisions of
the Credit Agreement specifically referred to herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the day and
year first above written.
ARM FINANCIAL GROUP, INC.,
by /s/ Edward L. Zeman
---------------------------------
Name: Edward L. Zeman
Title: CFO
by /s/ Martin H. Ruby
---------------------------------
Name: Martin H. Ruby
Title: Chief Executive Officer
THE CHASE MANHATTAN BANK,
individually, as Administrative Agent
and as representative for the Secured
Parties,
by
---------------------------------
Name:
Title:
BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
by
---------------------------------
Name:
Title:
DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES,
by
---------------------------------
Name:
Title:
by
---------------------------------
Name:
Title:
<PAGE>
Document in similar or different circumstances. This Amendment shall apply and
be effective only with respect to the provisions of the Credit Agreement
specifically referred to herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the day and
year first above written.
ARM FINANCIAL GROUP, INC.,
by /s/ Edward L. Zeman
----------------------------------
Name: Edward L. Zeman
Title: CFO
by /s/ Martin H. Ruby
----------------------------------
Name: Martin H. Ruby
Title: Chief Executive Officer
THE CHASE MANHATTAN BANK,
individually, as Administrative Agent
and as representative for the
Secured Parties,
by /s/ Peter Platton
----------------------------------
Name: Peter Platton
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY,
by
----------------------------------
Name:
Title:
DEUTSCHE BANK AG. NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES,
by
----------------------------------
Name:
Title:
<PAGE>
Document in similar or different circumstances. This Amendment shall apply and
be effective only with respect to the provisions of the Credit Agreement
specifically referred to herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the day and
year first above written.
ARM FINANCIAL GROUP, INC.,
by
----------------------------------
Name:
Title:
by
----------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
individually, as Administrative Agent
and as representative for the
Secured Parties,
by
----------------------------------
Name:
Title:
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY,
by /s/ John E. Beckwith
----------------------------------
Name: John E. Beckwith
Title: Vice President
DEUTSCHE BANK AG. NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES,
by
----------------------------------
Name:
Title:
by
----------------------------------
Name:
Title:
<PAGE>
Document in similar or different circumstances. This Amendment shall apply
and be effective only with respect to the provisions of the Credit Agreement
specifically referred to herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the day and
year first above written.
ARM FINANCIAL GROUP, INC.,
by
---------------------------------
Name:
Title:
by
---------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
individually, as Administrative Agent
and as representative for the Secured
Parties.
by
---------------------------------
Name:
Title:
BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
by
---------------------------------
Name:
Title:
DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES,
by /s/ Gayma Z. Shivnarain
---------------------------------
Name: Gayma Z. Shivnarain
Title: Vice President
by /s/ John S. McGill
---------------------------------
Name: John S. McGill
Title: Vice President
<PAGE>
DRESDNER BANK AG, NEW YORK
BRANCH AND GRAND CAYMAN BRANCH,
by /s/ Robert P. Donohue
---------------------------------
Name: Robert P. Donohue
Title: Vice President
by /s/ Anthony C. Valencourt
---------------------------------
Name: Anthony C. Valencourt
Title: Senior Vice President
THE FIRST NATIONAL BANK OF CHICAGO
by
---------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK,
by
---------------------------------
Name:
Title:
PNC BANK, KENTUCKY, INC.
by
---------------------------------
Name:
Title:
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
by
---------------------------------
Name:
Title:
<PAGE>
DRESDNER BANK AG, NEW YORK
BRANCH AND GRAND CAYMAN BRANCH,
by
------------------------------
Name:
Title:
by
------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
CHICAGO,
by
/s/ Fred J. Lawford
------------------------------
Name: Fred J. Lawford
Title: First Vice President
FIRST UNION NATIONAL BANK,
by
------------------------------
Name:
Title:
PNC BANK, KENTUCKY, INC.
by
------------------------------
Name:
Title:
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
by
------------------------------
Name:
Title:
<PAGE>
DRESDNER BANK AG, NEW YORK
BRANCH AND GRAND CAYMAN BRANCH,
by
------------------------------
Name:
Title:
by
------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
CHICAGO,
by
------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK,
by
/s/ Gail M. Golightly
------------------------------
Name: Gail M. Golightly
Title: Senior Vice President
PNC BANK, KENTUCKY, INC.
by
------------------------------
Name:
Title:
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
by
------------------------------
Name:
Title:
<PAGE>
DRESDNER BANK AG, NEW YORK
BRANCH AND GRAND CAYMAN BRANCH,
by
--------------------------
Name:
Title:
by
--------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
CHICAGO,
by
--------------------------
Name:
Title:
FIRST UNION NATIONAL BANK,
by
--------------------------
Name:
Title:
PNC BANK, N.A.
by
/s/ Ralph A. Phillips
--------------------------
Name: Ralph A. Phillips
Title: Vice President
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
by
--------------------------
Name:
Title:
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
This Administrative Services Agreement (this "Agreement") is made on this
22nd day of April, 1998, by and between ARM Financial Group, Inc., a Delaware
corporation ("Parent") and 312 Certificate Company, a Delaware corporation
("Company").
WHEREAS, Parent's management has extensive experience in the investment
advisory company business operations; and
WHEREAS, Company desires Parent to perform certain administrative and
special services (collectively, "services") for Company in its business
operations and desires further to make use in its day-to-day operations of
certain property, equipment and facilities (collectively, "facilities") of
Parent and its subsidiaries; and
WHEREAS, Parent and Company contemplate that the availability of services
and facilities will achieve certain operating efficiencies and improve certain
services provided by Company; and
WHEREAS, Parent and Company wish to assure that all charges for services
and the use of facilities incurred hereunder are reasonable and in accordance
with the requirements of any applicable laws and regulations applicable to the
Company; and
WHEREAS, Parent and Company wish to identify the services to be rendered to
Company by Parent and the facilities to be used by Company and to provide for
the fees to be paid by Company;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
set forth herein, and intending to be legally bound hereby, Parent and Company
agree as follows:
1. PERFORMANCE OF SERVICES AND USE OF FACILITIES. Subject to the terms,
conditions and limitations of this Agreement, Parent agrees to perform such
services for Company as may be reasonably necessary in the conduct of Company's
business operations and as set forth in Section 2 of this Agreement.
Subject to the terms, conditions and limitations of this Agreement, Parent
agrees to make available to Company such of its facilities or the facilities of
its subsidiaries as may be reasonably necessary in the conduct of Company's
business operations, including, without limitation, data processing equipment,
office facilities (whether owned or leased) and communications equipment.
1
<PAGE>
(a) CAPACITY OF PERSONNEL AND STATUS OF FACILITIES. Whenever Parent
utilizes its personnel to perform services for Company pursuant to this
Agreement, such personnel shall at all times remain employees of Parent,
and Parent shall alone retain full liability for their compensation,
employee benefits, payroll deductions and legally required employer
contributions and withholding tax obligations.
No facility of Parent or its subsidiaries 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 Parent, Parent
shall perform such services in accordance with standards and guidelines
established by the Board of Directors of Company and communicated to
Parent.
(c) CONTROL. The performance of services by Parent 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. Parent
shall act hereunder so as to assure the separate operating and corporate
identity of Company.
2. SERVICES. Subject to the terms, conditions and limitations of this
Agreement, Parent shall provide on behalf of Company the services set forth
below.
(a) INVESTMENT ACCOUNTING. Investment accounting support for the
Company's investment portfolios.
(b) ACCOUNTING, TAX AND AUDITING. Parent shall provide all
accounting services, including the following: the processing and
maintenance of the financial records of Company, the preparation of
financial statements and reports including annual statements on both
statutory and GAAP bases, the preparation of tax returns, and the
preparation of additional financial reports used by Company in the
operations of its business. Parent shall also provide services in
connection with tax and auditing matters.
2
<PAGE>
(e) MARKETING AND PRODUCT DEVELOPMENT. Parent shall provide
marketing and product development services to Company.
(f) FUNCTIONAL SUPPORT SERVICES. Parent shall provide: (i)
actuarial services, and (ii) telecommunications services and electronic
data processing services, including, without limitation, software
programming and documentation and hardware utilization.
(g) PAYROLL FUNCTIONS. Parent shall perform all payroll functions
including, but not limited to, the preparation of all payroll checks and
withholding tax reports.
(h) PERSONNEL FUNCTIONS. Parent will provide to Company all
personnel functions.
(i) ADMINISTRATIVE SUPPORT SERVICES. Parent will provide other
administrative support services to Company including, without limitation,
legal services and assistance with regulatory compliance matters.
3. CHARGES. Company agrees to pay to Parent for services and facilities
provided by Parent to Company pursuant to this Agreement the fees set forth on
Appendix A attached hereto, as such Appendix may be revised by the parties from
time to time.
4. PAYMENT. Parent shall submit to Company at the beginning of each
calendar month a written statement of the amount estimated to be owed by Company
for services and the use of facilities pursuant to this Agreement for that
calendar month, and Company shall pay to Parent within five (5) days following
receipt of such written statement the amount set forth in the statement.
Within thirty (30) days after the end of each calendar quarter, Parent will
submit to Company a detailed written statement of the charges due from Company
to Parent in the preceding calendar quarter, including charges not included in
any previous statements, based on the computation of fees set forth on Appendix
A, and any balance payable or to be refunded as shown in such statement shall be
paid or refunded within fifteen (15) days following receipt of such written
statement by Company.
5. ACCOUNTING RECORDS AND DOCUMENTS. Parent 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. Parent shall also maintain such
3
<PAGE>
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 all reasonable business hours.
6. OTHER RECORDS AND DOCUMENTS. All other books, records, and files
established and maintained by Parent 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 at all times by Company and persons authorized by it or any
governmental agency having jurisdiction over Company, and the originals or
copies thereof shall be delivered to Company not less frequently than quarterly.
7. RIGHT TO CONTRACT WITH THIRD PARTIES. Nothing herein shall be deemed
to grant Parent 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 or for the use of facilities as are available to
or have been requested by Company pursuant to this Agreement. Nothing herein
shall be deemed to prohibit Parent from providing any or all of the services to
be provided to Company hereunder to other persons, whether or not affiliated
with Parent. In addition, Company shall have the right to solicit bids and
contract with any third party for the services to be provided hereunder, in
which event this Agreement may be terminated in accordance with Section 9
hereof. Further, Parent has right to subcontract with any third party,
affiliated or unaffiliated, for services Parent is obligated to provide to
Company pursuant to this Agreement.
8. CONTACT PERSON(S). Company and Parent 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 16 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.
9. TERMINATION AND MODIFICATION. This Agreement shall remain in effect
until terminated by either Parent or Company upon giving thirty (30) days or
more advance written notice; PROVIDED HOWEVER, that Company may terminate this
Agreement upon giving ten (10) days or more
4
<PAGE>
advance written notice in the event that it reasonably determines that it may
contract with an unaffiliated party for comparable services at lower fees. Upon
termination, Parent shall promptly deliver to Company all books and records that
are, or are deemed by this Agreement to be, the property of Company.
10. SETTLEMENT ON TERMINATION. No later than ninety (90) days after the
effective date of the termination of this Agreement, Parent 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.
11. INDEPENDENT CONTRACTOR. In rendering its services hereunder, Parent
shall act as an independent contractor, and any duties of Parent arising
hereunder shall be owed exclusively to Company.
12. FORCE MAJEURE. If any cause or condition shall occur beyond the
control of Parent which wholly or partially prevents the performance by Parent
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 Parent
shall be excused to the extent made necessary by such cause or condition and
during the continuance thereof, and Parent 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 Parent fees and
charges due to Parent for services rendered and expenses incurred hereunder
prior to such stoppage.
13. 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
5
<PAGE>
upon, extend to and inure to the benefit of the parties hereto, their, and each
of their, successors and assigns respectively.
14. 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.
15. INTENTIONALLY OMITTED.
16. 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 Parent to:
ARM Financial Group, Inc.
515 West Market Street
Louisville, KY 40202-3271
Telecopier: (502) 582-7995
Attention: Robert H. Scott
(b) If to Company to:
312 Certificate Company
515 West Market Street
Louisville, KY 40202-3271
Telecopier: (502) 582-7903
Attention: Robert L Maddox Esq.
or to such other persons or places as each party may from time to time designate
by written notice sent as aforesaid.
17. 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 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.
6
<PAGE>
18. 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 Parent 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.
19. SECTION HEADINGS. Section headings contained herein are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
20. 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/ Robert Scott
---------------------------
Title: General Counsel
------------------------
312 CERTIFICATE COMPANY
By: /s/ William D. Morris
---------------------------
Title: Chief Executive Officer
------------------------
8
<PAGE>
APPENDIX A
SCHEDULE OF FEES
1. COMPUTATION OF FEES. The annual charge to Company (the "Annual
Charge") for such services and facilities shall be equal to the product of four
basis points (.0004) multiplied by the Invested Amount outstanding (as such term
is defined in that certain Face Amount Certificate Agreement, dated as of April
22, 1998, by and among the Company, International Securitization Corporation and
The First National Bank of Chicago.
2. ANNUAL ACCOUNTING. At the election of Parent, a cost analysis may be
performed by Parent to determine, as closely as possible, the actual cost of
services rendered to Company hereunder. The amount of the Annual Charge to
Company shall then be adjusted (the "Adjustment to Actual Cost") to equal the
actual cost of the services rendered to Company. The Adjustment to Actual Cost
shall be taken into account at the end of the next calendar quarter on the
detailed written statement of the charges due from Company described in the
second paragraph of Section 4 of the Administrative Services Agreement.
<PAGE>
INVESTMENT SERVICES AGREEMENT
This is an INVESTMENT SERVICES AGREEMENT (this "Agreement") made effective
as of the 24th day of April, 1998, by and between INTEGRITY CAPITAL ADVISORS,
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 (the "Subsidiaries") of ARM Financial Group,
Inc. ("ARM"), 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 one or more segregated custodial accounts with account numbers as
designated by ARM in writing from time to time (the "Accounts") maintained with
Chase Manhattan Bank and/or such other banks as designated by ARM 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 face amount 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;
1
<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 be 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 non-public 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 11 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. 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 by operation of law. 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.
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
4
<PAGE>
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, 4th 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
Agreement a legal, valid, and enforceable provision as similar in terms to such
illegal, invalid, or unenforceable provision as may be possible.
5
<PAGE>
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.
INTEGRITY CAPITAL ADVISORS, INC.
By: /s/ Robert H. Scott
-----------------------------------
Name: Robert H. Scott
---------------------------------
Title: General Counsel
--------------------------------
ARM CAPITAL ADVISORS, LLC
By: /s/ Christopher T. Kracke
-----------------------------------
Name: Christopher T. Kracke
---------------------------------
Title: Chief Financial Officer
--------------------------------
7
<PAGE>
APPENDIX A
SUBSIDIARIES
312 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. 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>
Exhibit 10.4
INVESTMENT MANAGEMENT AGREEMENT
This INVESTMENT MANAGEMENT AGREEMENT (this "Agreement"), dated as of
the 24th day of April, 1998, is made by and among 312 CERTIFICATE COMPANY, a
Delaware corporation (the "Issuer"), INTEGRITY CAPITAL ADVISORS, INC., a
Delaware corporation (the "Portfolio Manager"), and THE FIRST NATIONAL BANK
OF CHICAGO, as Agent for the Certificateholders (as such term is defined
below). Capitalized terms used herein which are not otherwise defined herein
shall have the meanings assigned to such terms in the Face Amount Certificate
Agreement (as such term is defined below).
WHEREAS,
A. Pursuant to the Face Amount Certificate Agreement of even date
herewith (as the same may be amended, restated, supplemented or otherwise
modified from time to time, the "Face Amount Certificate Agreement"), among
the Issuer, International Securitization Corporation, a Delaware corporation
("ISC"), and the Agent, the Agent has acquired a $500,000,000 Installment
Face Amount Certificate of even date herewith (as amended, substituted or
replaced from time to time, the "Face Amount Certificate") issued by the
Issuer in favor of the Agent for the benefit of ISC and certain financial
institutions ("Liquidity Banks") from time to time party to that certain
Liquidity Agreement dated as of even date herewith, among The First National
Bank of Chicago, as the "Liquidity Agent" thereunder, ISC and such Liquidity
Banks (ISC and such Liquidity Banks being referred to herein collectively as
the "Certificateholders").
B. The proceeds of the sale of the Face Amount Certificate will be
deposited in an account (the "Custodial Account") held with an independent,
third-party custodian mutually agreed upon by the parties hereto in order to
maintain such proceeds as security for the Face Amount Certificate by
investing in a pool of fixed-income securities which will be actively managed
pursuant to a set of investment guidelines attached hereto as Exhibit A (the
"Investment Guidelines") and agreed upon between the Issuer and the
Certificateholders.
C. The Issuer desires to appoint the Portfolio Manager to manage the
securities and other investments now or hereafter owned by the Issuer
including, without limitation, those held in the Custodial Account (the
"Portfolio"), and has directed the Custodian to respond to the investment
instructions of the Portfolio Manager. the Portfolio Manager desires to serve
as investment manager with respect to the Portfolio, and the
Certificateholders desire to ensure that the Portfolio is managed pursuant to
the investment guidelines agreed upon between the Issuer and the
Certificateholders.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Issuer, the Portfolio
Manager and the Agent do hereby agree as follows:
<PAGE>
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings set forth below:
"Defaulted Security" means a Security: (i) as to which the Obligor
thereof has taken any action, or suffered any event to occur, of the type
constituting an Insolvency Event, or (ii) as to which any other event has
occurred and is continuing which has caused, the acceleration of the maturity
of all or a portion of the principal of such Security, or which otherwise
entitles, or with the giving of notice or the passage of time or both could
entitle, the holder or holders of such Security to take actions for the
enforcement of such Security or any collateral or security therefor.
"Eligible Security" means a Security:
(i) which is payable only in the United States (except for Eurodollar
Perpetual Floating Rate Securities), and is denominated only in U.S.
Dollars;
(ii) with respect to which (x) no Obligor thereunder is an Obligor on a
Defaulted Security; (y) no Obligor thereunder is an affiliate of the
Parent or any Transaction-Related Party; and (z) each Obligor thereunder
is incorporated or organized under the laws of the United States or any
state thereof or under the laws of an Organization for Economic
Cooperation and Development country;
(iii) which is scheduled to be paid in full on or prior to the 30th
anniversary of its issuance or is a Eurodollar Perpetual Floating Rate
Security rated NAIC 1 by the National Association of Insurance
Commissioners whose base level index resets at least semiannually;
(iv) which is rated by any of Standard & Poor's Ratings Group, Moody's
Investors Service, Inc. or the National Association of Insurance
Commissioners;
(v) with respect to which any payments of interest made to the Issuer
thereon are not subject to any taxes, levies, imposts, deductions,
charges or withholdings imposed by any governmental authority of any
jurisdiction (other than taxes imposed on or measured by the net income or
overall gross receipts, capital and franchise taxes attributable to the
Issuer);
(vi) which is not a Security (a) with respect to which any related
Obligor is primarily engaged in the building, real estate, land
development or real estate investment trust industries, or except as
otherwise permitted in the Investment Guidelines, (b) which is
principally secured by a lien upon real estate, and either (x) does not
provide for recourse to the general assets of the related Obligor for the
repayment of such Security, or (y) such real estate constitutes all or
substantially all of the assets of the related Obligor;
2
<PAGE>
(vii) which, at the time of the Issuer's acquisition of such Security, is
not being redeemed pursuant to its terms;
(viii) which is not by its terms convertible into or exchangeable for, or
secured by, any capital stock, equity security or interest in the equity of
an entity, or any warrant, option, right or other agreement pursuant to which
any such capital stock, equity security or interest can be acquired, whether
or not actually evidenced by a security;
(ix) as to which, at the time of the Issuer's acquisition of such
Security, the Issuer will have good and marketable title to such Security,
free and clear from liens except as created under the Pledge Agreement, and
which has been the subject of the grant under the Pledge Agreement of a first
priority perfected "security interest" (within the meaning of the Uniform
Commercial Code of the jurisdiction the law of which governs the perfection
of the security interest in such Security created by the Pledge Agreement)
therein (and in the proceeds thereof);
(x) which is not a Defaulted Security;
(xi) which will at all times be the bona fide, legal and assignable
payment obligation of the Obligor of such Security, and with respect to which
each instrument, document or agreement evidencing such Security will at all
times be the bona fide, legal and assignable obligation of the Obligor
(including any guarantor of the primary Obligor) of such Security, in each
case enforceable against such Obligor in accordance with its terms except as
such enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting creditors' rights generally,
and except as such enforceability may be limited by general principles of
equity (whether considered in a suit at law or in equity);
(xii) which complies in all material respects with all material
requirements of the Investment Guidelines;
(xiii) which is either an "instrument", a "certificated security" or a
"security entitlement" (in each case within the meaning of Sections 9-105,
9-106 and/or 9-115 of the Uniform Commercial Code; and if an instrument or a
certificated security, only one original thereof exists, which has been or
will be delivered to the Custodian pursuant to the Pledge Agreement;
(xiv) which is not subject to any enforceable provision prohibiting the
transfer, sale or assignment to, or by, the Issuer of such payment obligation;
(xv) as to which the Agent has not notified the Portfolio Manager that the
Agent has determined that such Security is not acceptable in its reasonable
judgment as an Eligible Security;
3
<PAGE>
(xvi) if such Security bears interest at a fixed per annum rate, as to
which, at the time of the Issuer's acquisition of such Security, will not
cause the aggregate Fair Market Value of all Securities owned by the Issuer
which bear interest at a fixed per annum rate to exceed 60.0% of the
aggregate Fair Market Value of all Securities owned by the Issuer; and
(xvii) which is not a leveraged future or other leveraged/speculative
derivative.
"Eurodollar Perpetual Floating Rate Security" means a security which pays
interest and principal in U.S. Dollars held in banks outside the U.S. and
which either has not stated maturity or a maturity date so distant in the
future such that it effectively pays interest indefinitely and with respect
to which the coupon payments reset periodically typically as specified by a
short-term interest index plus a spread.
"Fair Market Value" means, with respect to any Security or Short-Term
Investment, at any date, (i) if quotations are then available, the price of
such Security or Short-Term Investment on the preceding Business Day, as
calculated based on any regularly published reporting or quotation service,
or (ii) if quotations are not then available, the market value of such
Security or Short-Term Investment, as determined by the Portfolio Manager in
good faith, based on its standard valuation procedures acceptable to the
Agent in its reasonable discretion, but exclusive of the portion of such
price or valuation attributable to the accrued interest or discount with
respect to such Security or Short-Term Investment as of such date.
"Insolvency Event" shall mean, with respect to a specified person or
entity, the occurrence of any of the following events: (a) such person or
entity is wound up or dissolved or there is appointed over it or a
substantial part of its assets a receiver, administrator, administrative
receiver, trustee, or similar officer; or (b) such person or entity (i)
ceases to be able to, or admits in writing its inability to, pay its debts as
they become due and payable, or makes a general assignment for the benefit
of, or enters into any legal composition or arrangement with, its creditors
generally; (ii) applies for or consents (by admission of material allegations
of a petition or otherwise) to the appointment of a receiver, trustee,
assignee (other than the Agent), custodian (other than the Custodian),
liquidator or sequestrator (or other similar official) of such person or
entity of any substantial part of its properties or assets, or authorizes
such an application or consent, or proceedings seeking such appointment are
commenced without such authorization, consent or application against such
person or entity and continue undismissed for 60 days or any such appointment
is ordered by a court or regulatory body having jurisdiction; (iii)
authorizes or files a voluntary petition in bankruptcy, or applies for or
consents (by admission of material allegations of a petition or otherwise) to
the application of any bankruptcy, insolvency or similar law, or authorizes
such application or consent, or proceedings to such end are instituted
against such person or entity without such authorization, application or
consent and remain undismissed for 60 days or result in adjudication of
bankruptcy or insolvency or the issuance of an order for relief; or (iv)
permits or suffers all or any substantial part of its properties or assets to
be
4
<PAGE>
sequestered or attached by court order and the order (if contested in good
faith) remains undismissed for 60 days.
"Instrument" means an instrument (including, without limitation, a
promissory note) or certificated security, as each such term is defined in
the Uniform Commercial Code of any applicable jurisdiction.
"Obligor" shall mean, with respect to any Security, each person or
entity which is obligated to make payments with respect to such Security,
including any guarantor of such person or entity's obligations.
"Security" means indebtedness constituting a debenture, bond,
note, security entitlement, certified security or other Instrument or
evidence of indebtedness issued by an Obligor or Obligors, other than a line
of credit or a loan.
"Short-Term Investments" means the short-term interest bearing and
short-term discount obligations held by the Issuer form time to time in the
Custodial Account pursuant to Section 6 of the Custodial Agreement.
"Shortfall Amount" means, on any date, the positive difference, if
any, of (i) the outstanding Invested Amount on such date, minus (ii) the sum
of the aggregate Fair Market Value of all Securities and Short-Term
Investments owned by the Issuer on such date on deposit in the Custodial
Account plus any free cash balance in the Custodial Account on such date.
"Surplus Amount" means, on any date, the positive difference, if
any, of (i) the sum of the aggregate Fair Market Value of all Securities and
Short-Term Investments owned by the Issuer on such date on deposit in the
Custodial Account plus any free cash balance in the Custodial Account on such
date, minus (ii) the outstanding Invested Amount on such date.
"Swap Event" means the occurrence of any one or more of the
following: (a) the Swap Provider shall have voluntarily commenced any
proceeding or filed any petition under any bankruptcy, insolvency or similar
law seeking the dissolutions, liquidation or reorganization of the Swap
Provider, (b) involuntary proceedings or an involuntary petition shall have
been commenced or filed against the Swap Provider by any person or entity
under any bankruptcy, insolvency or similar law seeking the dissolution,
liquidation or reorganization of the Swap Provider or an order of relief
shall have been entered or such proceeding or petition shall not have been
dismissed within sixty (60) days, or (c) the Swap Provider (i) shall fail to
make any payment or deposit when due under the Swap Agreement or (ii) shall
fail to perform or shall breach any covenant or any other agreement under the
Swap Agreement and such failure to perform or breach is not cured within five
Business Days, such period to begin at the time at which the Swap Provider
knew, or reasonably should have known, of such breach or failure to perform.
5
<PAGE>
2. Appointment and Authority of the Portfolio Manager.
(a) Appointment. The Issuer hereby appoints the Portfolio Manager,
the Agent hereby acknowledges and consents to such appointment, and the
Portfolio Manager hereby accepts its appointment as the exclusive investment
manager with respect to the Portfolio. The Portfolio Manager shall at all
times manage the Portfolio in accordance with the Investment Guidelines.
Except as provided in Section 4 hereof, the Issuer represents and warrants
that it has appointed no other investment advisor or manager with respect to
the Portfolio. The Issuer agrees to provide (or to direct the Custodian to
provide) the Portfolio Manager with such additional information as may be
requested by the Portfolio Manager from time to time to assist it in managing
the Portfolio. The Portfolio Manager's appointment under this Agreement shall
remain in effect until changed or terminated by the Issuer and/or the Agent
as provided herein.
(b) Acquisition of Securities. Except as otherwise provided
herein, the Portfolio Manager is authorized, on behalf of the Issuer, to
subscribe for and purchase Securities of issuers offered to the Issuer from
time to time. The Issuer represents and warrants to the Portfolio Manager
that at the time of any such purchase it will be an "accredited investor"
as such term is defined in Regulation D under the Securities Act of 1933, as
amended, and a "qualified institutional buyer" as that term is defined in
Rule 144A under the Securities Act and that the Issuer shall promptly inform
the Portfolio Manager in writing should its status as such change in the
future. In connection with any purchase of Securities eligible for purchase
hereunder and deemed acceptable by the Portfolio Manager in accordance with
the terms hereof, the Issuer authorizes the Portfolio Manager to:
(i) commit to purchase such Securities for the account of the
Issuer on the terms and conditions under which Securities are offered and are
deemed acceptable to the Portfolio Manager in accordance with the terms
hereof, and
(ii) on behalf of the Issuer, execute such agreements, instruments
and documents, and make such commitments, as may be required by the issuer
and/or the seller of such securities, including, but not limited to, a
representation that the Issuer is an "accredited investor" and/or a
"qualified institutional buyer", and a commitment that such securities will
not be offered or sold by the Issuer except in compliance with the
registration requirements of the Securities Act or an exemption therefrom, if
so required in connection with the acquisition thereof.
The Issuer understands and agrees to be bound by the terms of any commitment
entered into in connection with the purchase of securities on behalf of the
Issuer pursuant to the authority granted to the Portfolio Manager by this
Agreement, notwithstanding a subsequent termination of this Agreement as
provided herein. Notwithstanding the foregoing, the Portfolio Manager shall
not under any circumstances make any commitment on behalf of the Issuer to
acquire or make payment under any Security in excess of the Issuer's ability
to pay such committed amounts from time to time.
6
<PAGE>
(c) General Duties. In addition, and not in limitation of, any
other obligations of the Portfolio Manager, the duties and responsibilities
of the Portfolio Manager shall include the following:
(i) monitoring and enforcing on behalf of the Issuer compliance
with the terms of the Issuer's Securities by the Obligors thereunder, and
compliance with the terms of the Swap Agreement by the Swap Provider
thereunder.
(ii) recording, accounting for and enforcing payment of amounts
distributable or payable to the Issuer in connection with each of the Swap
Agreement and any Security or Short-Term Investment acquired or held on
behalf and for the account of the Issuer, and arranging for payments on the
Swap Agreement from the Swap Provider and on Securities to be collected from
the Obligors in respect thereof on behalf of and for the account of the
Issuer in accordance with the terms of the Transaction Documents;
(iii) on the request of the Issuer, arranging for the sale or other
divestment of any Security in accordance with this Agreement and the other
Transaction Documents or for the termination, cancellation, offsetting or
assignment of the Swap Agreement;
(iv) holding, maintaining and preserving records with respect to
acquisitions of, or investments in, sales or divestitures of, and
distributions and payments in connection with, Securities and Short-Term
Investments and with respect to the Swap Agreement; and
(v) taking such other steps as may be necessary or appropriate to
enable the Issuer to perform its duties or exercise its rights under or in
connection with any Security, any Short-Term Investments or the Swap
Agreement.
(d) Calculations: Notice. The Portfolio Manager shall make all
calculations and determinations (which calculations and determinations shall
be conclusive and binding absent manifest error) and give all notices or
other information required of it or the Issuer under any Transaction Document
to which it and/or the Issuer is a party.
(e) Books: Records. The Portfolio Manager shall maintain proper
books of account and complete records of all transactions undertaken or
performed by it and shall render statements or copies thereof to the Issuer,
prepare the tax returns of the Issuer and shall cooperate in all audits of
the Issuer (including any audits required by the Agent or the
Certificateholders under the Face Amount Certificate Agreement).
(f) Cash Management. The Portfolio Manager shall direct any
acquisition and sale of Securities and Short-Term Investments under the
Custodial Agreement such that the Issuer has, or is likely to have, available
funds to pay any costs, fees, expenses, taxes and other amounts due under the
Transaction Documents when due.
<PAGE>
(g) Direction by the Issuer: Conformity with Law and Covenants.
Notwithstanding anything herein to the contrary, the Portfolio Manager shall
perform its duties hereunder subject to the direction of the Issuer and in a
manner consistent with the Issuer's Certificate of Incorporation and Bylaws,
with any applicable resolutions of the board of directors of the Issuer in
effect from time to time and in accordance with the terms of the Transaction
Documents, with respect to which, in each case, the Portfolio Manager has
received a copy. The Portfolio Manager will not, in performing its
obligations hereunder, (a) take any action that would cause the Issuer to be
in violation of (i) and law, rule or regulation applicable to it or (ii) any
provision of the Certificate of Incorporation or Bylaws of the Issuer, (b)
take any action that would cause the Issuer to become subject to registration
as an ""investment company'' under the Investment Company Act of 1940, as
amended, (c) cause the Issuer to violate any of the Transaction Documents, or
(d) cause the Issuer to incur any obligation or to become bound by any
agreement which, in the reasonable judgment of the Portfolio Manager, the
Issuer would not reasonably be able to satisfy or perform.
(h) Attorney-in-Fact: Limitations on Authority of the Portfolio
Manager as Attorney-in-Fact: Authority with Respect to Bank Accounts: Nature
of Services. (i) Subject to clause (ii) of this clause (h), the Issuer
hereby irrevocably appoints the Portfolio Manager as the Issuer's
attorney-in-fact, with full authority in the place and stead of the Issuer
and in the name of the Issuer or otherwise, from time to time in the
Portfolio Manager's discretion, but subject to the direction of the Issuer,
to take such actions on behalf of the Issuer as may be necessary or advisable
for purposes of the administration and management of the operations of the
Issuer, and the right to ask, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become due in
connection therewith and to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper in connection therewith, and to file
any claims or take any action or institute any proceedings which may be
necessary or desirable for the collection thereof or to enforce compliance
with the terms and conditions of any of such documents, instruments, and
agreements.
(ii) Anything in clause (i) of this clause (h) or elsewhere in this
Agreement to the contrary notwithstanding, the Portfolio Manager is not
hereby authorized to execute on behalf of or as attorney-in-fact for the
Issuer any Transaction Document, or any amendment, modification or waiver to
or under any Transaction Document.
(iii) The Issuer authorizes the Portfolio Manager to transfer and
deposit funds of the Issuer to and in such bank accounts including, without
limitation, the Custodial Account, as may be established in the name of the
Issuer.
3. Custody. All transactions with respect to assets in the
Portfolio shall be carried out through the Custodian or such other
custodian(s) as the Issuer and the Agent shall jointly appoint and inform the
Portfolio Manager of in writing. The Issuer shall be solely responsible for
paying all fees or charges of the Custodian and the Portfolio Manager and the
<PAGE>
Agent shall have no responsibilities or liabilities with respect to custody
arrangements made by the Issuer, or with respect to any act, decision or
other conduct of any custodian or of any other person or entity having
possession of the Issuer's funds or other assets. The Issuer authorizes the
Portfolio Manager to give the Custodian instructions (and directs the
Custodian to follow any such instructions when given) for the purchase, sale,
conversion, redemption, exchange, retention or other transactions relating to
any security, cash or cash equivalent or other investment for the Portfolio.
The Issuer also authorizes the Portfolio Manager to instruct the Custodian
(and directs the Custodian to follow any such instructions when given) to
provide the Portfolio Manager with copies of all periodic statements and
other reports relating to the Portfolio, including, without limitation, any
reports that the Custodian typically sends to the Issuer.
4. Delegation: Appointment of ARM Capital Advisors, LLC. The Portfolio
Manager shall be permitted to perform its services hereunder through any of
its officers or through any agents selected by it, provided, that such agents
shall be approved in writing by the Agent from time to time. The services of
the Portfolio Manager to the Issuer under this Agreement are not to be deemed
exclusive, and the Portfolio Manager shall be free to render similar services
to others. The Agent hereby consents to the appointment of ARM Capital
Advisors, LLC, a Delaware limited liability company ("ARM Capital"), as
exclusive investment sub-Portfolio Manager to the Portfolio pursuant to the
terms of that certain Investment Portfolio Manager Agreement between the
Portfolio Manager and ARM Capital dated as of April 21, 1998, a copy of which
is attached hereto as Exhibit B. Notwithstanding any such delegation of its
obligations hereunder by the Portfolio Manager, the Portfolio Manager's
rights and obligations under this Agreement shall remain unchanged, and the
Portfolio Manager shall remain solely responsible for the performance of its
obligations hereunder.
5. Priority of Payments
(a) Daily Allocation of Cashflow. On each Business Day, the Portfolio
Manager shall apply, or instruct the Custodian in writing to apply, Cashflow
received on the immediately preceding Business Day in the following order of
priority:
(1) first, to the extent that any amounts payable under clauses (1)
through (4) of clause (b) below remain unpaid with respect to any
Settlement Date prior to such Business Day, such Cashflow shall be paid to
the persons or entities entitled thereto in the order of priority set forth
in clauses (1) through (4) of clause (b) below; and
(2) second, all remaining Cashflow shall be retained in the
Custodial Account and, at the election of the Portfolio Manager, be applied
to the purchase of Eligible Securities or Short-Term Investments to the
extent permitted by and in accordance with the terms of this Agreement, the
Face Amount Certificate
9
<PAGE>
Agreement and the other Transaction Documents, unless such Business Day is
a Settlement Date, in which case such Cashflow shall be applied in
accordance with clause (b) below, provided, however, that if such Business
Day occurs after the occurrence of (i) an Amortization Event or (ii) the
first anniversary of the commencement of the Amortization Period, then upon
the written request of the Agent, all remaining Cashflow shall be applied
as if such Business Day is a Settlement Date in accordance with the terms
of clause (b) below.
(b) Allocation of Payments on Settlement Dates. On each Settlement Date
after application of Cashflow pursuant to clause (a) above, the Portfolio
Manager shall apply, or instruct the Custodian in writing to apply, all free
cash balances or other available cash in the Custodial Account in the
following order of priority:
(1) to the Issuer, for application by the Issuer against the
payment of accrued and unpaid franchise taxes payable by the Issuer;
(2) If Integrity Capital Advisors, Inc., the Parent or an affiliate
thereof is no longer the Portfolio Manager hereunder, to the Portfolio
Manager in payment of the accrued and unpaid Portfolio Manager Fee due on
such Settlement Date or any prior Settlement Date;
(3) to the Custodian, for the payment of accrued and unpaid fees
and expenses payable under the Custodial Agreement;
(4) to the Agent, for distribution to or for the account of the
Certificateholders and Letter of Credit Banks for the payment of the
accrued and unpaid Certificate Yield due on such Settlement Date or any
prior Settlement Date;
(5) if such Settlement Date shall occur during the Amortization
Period or following the Agent's receipt of a Partial Amortization Notice,
to the Agent, for distribution to or for the account of the
Certificateholders for the repayment of the Invested Amount with respect
to the Face Amount Certificate until, in the case of the Amortization
Period, the Invested Amount is repaid in full, and in the case of such
period following the receipt of a Partial Amortization Notice, the
Invested Amount is reduced by the amount indicated on the applicable
Partial Amortization Notice;
(6) to the Agent, for distribution to or for the account of the
Certificateholders with respect to the payment of any other accrued and
unpaid fees, expenses, indemnities, reimbursements and other amounts
(other than principal) not paid pursuant to clause (4) above and payable
to any
10
<PAGE>
Certificateholder under the Face Amount Certificate Agreement
or the Face Amount Certificate;
(7) [Intentionally Omitted];
(8) to the payment of any other accrued and unpaid
out-of-pocket operating expenses of the Issuer (including, but not
limited to, a management fee equal to the product of (i) 0.075%
per annum times (ii) the average daily outstanding Invested Amount
during the most recently ended Settlement Period);
(9) to the Portfolio Manager in payment of accrued and
unpaid Portfolio Manager Fee due on such Settlement Date or any
prior Settlement Date, but only to the extent not paid in full
after application of all available cash in the Custodial Account
on such Settlement Date as specified above in this clause (b)
(and on each previous Settlement Date);
(10) if no Swap Event has occurred and is continuing,
to the Swap Provider, in payment of accrued and unpaid amounts
owing by the Issuer under the Swap Agreement; and
(11) if on such Settlement Date, the Surplus Amount
following the application of funds as provided herein is greater
than zero, then at the election of the Issuer, an amount not
greater than the Surplus Amount may be withdrawn from the
Custodial Account and deposited in such account as the Issuer
may direct and any remaining available cash in the Custodial
Account following such withdrawal shall be retained therein.
6. Representations and Warranties of the Portfolio Manager.
The Portfolio Manager, hereby represents and warrants that:
(a) Organization and Good Standing. The Portfolio Manager
is a corporation duly organized, validly existing and in good standing under
the applicable laws of the jurisdiction of its incorporation and has full
corporate power and authority to own its properties and conduct its business,
as such properties are presently owned and as such business is presently
conducted and as is proposed to be conducted under this Agreement, and to
execute, deliver and perform its obligations under this Agreement.
(b) Due Qualification. The Portfolio Manager is duly
qualified to do business and is good standing as a foreign corporation or
enterprise (or is exempt from such requirements), and has obtained all
necessary licenses and approvals, in each jurisdiction in which the
investment, management and servicing of the Securities in accordance with the
terms of this Agreement requires such qualification.
<PAGE>
(c) Due Authorization. The Portfolio Manager's execution,
delivery and performance of this Agreement and the other agreements and
instruments executed by the Portfolio Manager as contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Portfolio Manager.
(d) Enforceability. This Agreement constitutes a legal,
valid and binding obligation of the Portfolio Manager enforceable against
it in accordance with its terms except as such enforceability may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium or other
similar laws now and hereafter in effect affecting creditors' rights
generally, and except as such enforceability may be limited by general
principles of equity (whether considered in a suit at law or in equity).
(e) No Conflict. The Portfolio Manager's execution and
delivery of this Agreement and performance of its obligations under this
Agreement do not (i) conflict with or violate in any material respects any
law or regulation applicable to the Portfolio Manager, or (ii) conflict
with, result in any breach of any of the terms and provisions of, or
constitute (with or without notice or lapse of time or both) a default under,
any material indenture, contract, agreement, mortgage, deed of trust or other
instrument to which such Portfolio Manager is a party or by which it or its
properties are bound in any manner which, in either case, would have a
material adverse effect on the Portfolio Manager's financial condition or
operations or the Pledged Collateral or the Portfolio Manager's ability to
perform its obligations hereunder.
(f) No Proceedings. There are no proceedings or
investigations pending or, to the best knowledge of the Portfolio Manager,
threatened against it before any governmental agency (i) asserting the
illegality, invalidity or unenforceability or seeking any determination or
ruling that would affect the legality, binding effect, validity or
enforceability, of this Agreement, or (ii) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement, or
(iii) seeking any determination or ruling that is likely to have a material
and adverse effect on the performance by the Portfolio Manager of its
obligations under this Agreement.
(g) Consents. No authorization, consent, license, order or
approval of or registration or declaration with any governmental agency or
other person or entity is required to be obtained, effected or given by the
Portfolio Manager in connection with the execution and delivery of this
Agreement by such Portfolio Manager or the performance of its obligations
hereunder.
(h) Amortization Event. To the best of its knowledge, no
Amortization Event has occurred or is continuing.
(i) Year 2000 Compliance. The Portfolio Manager has
reviewed and assessed all computer applications which are material to the
Portfolio Manager's, and its affiliates performing any of its duties
hereunder, businesses with respect to the ability of such applications
<PAGE>
to correctly recognize references to, and abbreviations of, the year 2000
(including without limitation, references to "00" as the year 2000 and not
the year 1900). The Portfolio Manager reasonably believes, as a result of
such reviews, assessments and inquiries, that to the extent one or more of
such computer applications of the Portfolio Manager or its affiliates
performing any of its duties hereunder is unable to correctly recognize such
references to, or abbreviations of, the year 2000, that such deficiencies
would not materially and adversely affect its ability to perform its
obligations hereunder.
The representations and warranties set forth in this Section 6 shall
survive the issuance of the Certificates and any liability of the Portfolio
Manager in respect of such representations and warranties as and when made
shall cease and be of no effect only upon repayment in full of the Certificate
and all other obligations of the Issuer under the Face Amount Certificate
Agreement. Upon a discovery by the Issuer, the Portfolio Manager or the Agent
of a breach of any of the foregoing representations and warranties, the party
discovering such breach shall give prompt written notice to the other parties.
7. Covenants of the Portfolio Manager. The Portfolio Manager hereby
covenants that, until the Termination Date:
(a) Preservation of Existence. The Portfolio Manager will preserve and
maintain its existence, rights, franchises and privileges in the jurisdiction
of its formation, and qualify and remain qualified in good standing as a
foreign enterprise in each jurisdiction where the failure to maintain such
qualification would materially and adversely affect (i) the collectibility of
the Securities or (ii) the ability of the Portfolio Manager to perform its
obligations hereunder.
(b) Collections; Custodial Account. On each Business Day that the
Portfolio Manager receives any collections, payments or other amounts
required pursuant to the terms of any Transaction Document to be deposited in
the Custodial Account, the Portfolio Manager agrees to hold all such
collections, payments and other amounts in trust and to deposit such
collections, payments and other amounts, in kind and in the form received, to
the Custodial Account as soon as practicable, but in no event later than the
next succeeding Business Day.
(c) Requirements of Law. The Portfolio Manager will maintain in effect
all licenses, qualifications and franchises required under law or regulation
in order to direct the investment in, manage and service each Security and
will comply in all material respects with all other laws or regulations in
connection with investing in, managing and servicing each Security, in each
case except where the failure to perform such obligations or maintain such
qualifications would not be likely to have a material and adverse effect on
(i) the collectibility of any Security or (ii) the ability of the Portfolio
Manager to perform its obligations hereunder.
13
<PAGE>
(d) Defaulted Securities. Upon the Portfolio Manager becoming aware
that any Security is no longer an Eligible Security hereunder, the Portfolio
Manager shall within 30 days of such date, sell, assign or otherwise transfer
the Issuer's interest in such Security in accordance with its customary
procedures for the sale of such Securities.
(e) Protection of Agent's Rights. The Portfolio Manager will take no
action pursuant hereto which would materially impair the rights of the Issuer
or the Agent in any Security or other Pledged Collateral. The Portfolio
Manager shall, on behalf of the Issuer prosecute and/or defend all claims,
suits and causes of actions which arise for or against the Issuer in
connection with its (or the Portfolio Manager's) performance of its
obligations under this Agreement.
(f) Reporting Requirements. The Portfolio Manager will furnish to the
Issuer and the Agent:
(i) within three Business Days after its knowledge of the
occurrence of any Amortization Event, notification of such occurrence;
(ii) within ten Business Days after its receipt thereof, copies of
any documents relating to any litigation, claim, counterclaim or
proceeding commenced against the Issuer, the Portfolio Manager or the
Swap Provider which could have a material adverse effect on (i) the
financial condition, business or operations of the Issuer, the Portfolio
Manager or the Swap Provider, (ii) the ability of each of the Issuer,
the Portfolio Manager or the Swap Provider to perform its respective
obligation under any Transaction Document, (iii) the legality, validity or
enforceability of this Agreement or any other Transaction Document, or
(iv) the Issuer's interest in the Pledged Collateral, or (v) the
collectibility of the Pledged Collateral generally or of any material
portion of the Pledged Collateral;
(iii) as soon as practicable and in any event within 60 days after
the end of each first three fiscal quarters of each fiscal year of the
Issuer, a balance sheet of the Issuer as of the end of such quarter, and
the related revenue and expense statements for the period commencing at
the end of the previous fiscal year and ending with the end of such
quarter, all of the foregoing to be certified by an officer of the
Portfolio Manager and prepared in accordance with generally accepted
accounting principles;
(iv) as soon as practicable and in any event within 20 days after
the end of each fiscal year of the Issuer and the Parent, the audited
financial statements of the Parent which include the Parent's
consolidated subsidiaries (including, without limitation, the Issuer and
the Swap Provider) prepared in accordance with generally accepted
accounting principles by certified public accountants of national
standing reasonably satisfactory to the Agent;
14
<PAGE>
(v) on the third Business Day of each calendar week, a "Weekly
Report" with respect to the Portfolio as of the last Business Day of the
preceding calendar week substantially in the form attached hereto as
Exhibit C, which report shall include a calculation of the Shortfall
Amount, if any, as of such date;
(vi) not less than two Business Days prior to each Settlement Date, a
"Settlement Report" with respect to the Portfolio for the most recently
ended calendar month substantially in the form attached hereto as
Exhibit D, which report shall include a calculation of the Shortfall
Amount, if any, as of the last Business Day of such calendar month;
(vii) on each Settlement Date, a "Monthly Compliance Report" with
respect to the Portfolio for the most recently ended calendar month
substantially in the form attached hereto as Exhibit E, which report
shall demonstrate the Issuer's and the Portfolio Manager's compliance
with the Investment Guidelines and certain other restrictions set forth
herein, as of the last Business Day of such calendar month;
(viii) within three Business Days after the placement on watchlist for
downgrade, or the withdrawal or reduction of the ratings of any claims
paying ability or debt obligations of any of the Parent, or any of its
affiliates, including, without limitation, the Swap Provider, notice of
such placement on the watchlist, withdrawal or reduction; and
(ix) promptly, from time to time, such other information, documents,
records or reports respecting the Pledged Collateral or the condition or
operations, financial or otherwise, of the Issuer or the Portfolio
Manager and its affiliates performing services hereunder as the Agent
may reasonably request.
Without limiting the obligations of the Portfolio Manager and the Issuer
under clause (j) below, the Portfolio Manager shall provide to the Agent
access to the documentation in its possession or under its control regarding
the Securities and other Pledged Collateral serviced by it under or pursuant
to this agreement.
(g) Compliance with Investment Guidelines. The Portfolio Manager will
comply with and perform its obligations in all material respects with respect
to the Investment Guidelines in accordance with terms thereof.
(h) Acquisition of Securities. The Portfolio Manager shall not arrange
for the Issuer acquire any Security, and the Issuer shall not enter into, or
become bound to acquire any Security (i) during the Amortization Period or
(ii) if such Security does not constitute an Eligible Security or a
Short-Term Investment.
15
<PAGE>
(i) Other Agreements. The Portfolio Manager (acting on the Issuer's
behalf) will, subject to compliance with all laws and regulations, enforce
the Issuer's rights under each Security in accordance with its respective
terms, and make to any Obligor, such reasonable demands and requests for
information and reports or for action as the Issuer is entitled to make
thereunder.
(j) Delivery of Pledged Collateral. The Portfolio Manager shall instruct
the appropriate persons or entities to deliver each physical instrument,
chattel paper or certificated security evidencing any Pledged Collateral
(other than the Swap Agreement which, pursuant to the Pledge Agreement, has
been delivered, or will be delivered, to the Agent) to the Custodian
immediately upon the acquisition of the related Security, but in no case
later than ten (10) days after the receipt thereof.
(k) Payment Instructions. The Portfolio Manager (on behalf of the
Issuer) will instruct (or cause to be instructed) all obligors and the Swap
Provider, to make all payments with respect to the Pledged Collateral to the
Custodial Account.
(l) Reporting. Each Weekly Report and Monthly Report, and each other
report or certification, delivered by the Portfolio Manager pursuant to this
Agreement shall be true and correct in all material respects as of the date
of such report or certificate.
(m) Marking of Records. The Portfolio Manager shall either indicate in
its computer records or otherwise segregate the records related to any
Securities, Short-Term Investments or other Pledged Collateral in its
possession and mark the files containing the same with a legend, that a
security interest in the Securities and other Pledged Collateral has been
granted to the Agent, pursuant to the Pledge Agreement for the benefit of the
Certificateholders.
8. Execution of Transactions. The Portfolio Manager shall arrange for
the execution of securities transactions for Issuer through brokers or
dealers that the Portfolio Manager reasonably believes will provide the best
execution. In selecting a broker or dealer, the Portfolio Manager may
consider, among other things, the broker or dealer's execution capabilities,
financial circumstances, reputation, access to the markets for the securities
being traded, as well as the experience and skill of the firm's securities
traders. The Portfolio Manager shall not be responsible for any acts or
omissions by any broker(s) or dealer(s) selected by the Portfolio Manager,
provided that the Portfolio Manager is not negligent in the selection of such
broker(s) or dealer(s). Transactions for each of the Portfolio Manager's
other accounts will be effected independently of those related to the
Portfolio, unless the Portfolio Manager decides to purchase or sell the same
securities for several persons or entities at approximately the same time.
Nonetheless, the Portfolio Manager may (but is not obligated to) combine such
orders to take advantage of economies of scale and/or to provide better
execution. The Issuer authorizes the Portfolio Manager to instruct all
brokers and/or dealers executing orders for the Issuer's account
16
<PAGE>
to forward duplicate confirmations of those transactions to the Portfolio
Manager at such place and in such manner as may be designated from time to
time by the Portfolio Manager (and directs any such brokers and/or dealers to
follow such instructions when given) and the Issuer shall provide to the
Portfolio Manager such evidence as the Portfolio Manager may require to
confirm its authority to act on behalf of the Issuer with respect to
investment or reinvestment of the Portfolio.
9. Allocation of Investment Opportunities. The Issuer understands and
agrees that the Portfolio Manager performs investment management services
for various persons and entities and may take action with respect to any of
such persons or entities which may differ from any actions taken (or from the
timing or nature of actions taken) with respect to, or on behalf of, the
Issuer. The Portfolio Manager shall not be obligated to purchase or sell for
the Issuer securities which the Portfolio Manager may purchase or sell for
itself or for the portfolios of other persons and entities, if the Portfolio
Manager in its sole discretion deems that such investment or transaction
appears unsuitable, impractical, improper, ill-advised, or undesirable for
the Issuer.
10. Investment Information. The Portfolio Manager, its affiliates, and
any of their respective officers directors, employees, agents and
representatives (the "Affiliated Persons"), may from time to time come into
possession of material, non-public or other confidential information that, if
disclosed, might affect an investor's decision to buy, sell or hold a
Security. Under applicable law, the Affiliated Persons cannot improperly
disclose or use this information for their personal benefit or for the
benefit of any person or entity, including the Portfolio Manager's other
customers. If any Affiliated Person obtains non-public or other confidential
material information about any issuer, the Issuer and the Agent acknowledges
and agrees that such Affiliated Person will have no obligation to disclose
the information to the Issuer or the Agent or use it for the Issuer or the
Agent's benefit.
11. Liability and Indemnification. (a) The Portfolio Manager cannot and
does not guarantee the future performance of the Portfolio, the success of
any investment decision or strategy that the Portfolio Manager may utilize
with respect to the Portfolio, or the success of the Portfolio Manager's
overall management of the Portfolio. The Issuer understands that the
investment decisions made by the Portfolio Manager with respect to the
Portfolio are potentially subject to various market, currency, economic,
political and business risks, and that such investment decisions may not
always be profitable. Except as may otherwise be provided by law, none of the
Affiliated Persons shall be liable to the Issuer or any other party in
connection with, or for: (i) any loss that the Issuer may suffer by reason of
any investment decision made or other action taken or omitted in good faith
by the Portfolio Manager with that degree of care, skill, prudence, and
diligence under the circumstances that a prudent person acting in a similar
capacity would use; (ii) any loss arising from the Portfolio Manager's
adherence to the Issuer's instructions; or (iii) any act or failure to act by
the Custodian, any broker(s) or dealer(s) engaging in
17
<PAGE>
transactions for the Issuer's, or any other third party (other than its
delegees appointed in accordance with the terms of Section 4). The federal
and state securities laws impose liabilities under certain circumstances on
persons who act in good faith, and therefore nothing in this Agreement will
waive or limit any rights that the Issuer may have under those laws.
(b) Notwithstanding anything to the contrary set forth in clause (a)
above, the Portfolio Manager shall indemnify and hold harmless each
Indemnified Party and the Issuer from and against Indemnified Amounts arising
out of or resulting from (i) any breach by the Portfolio Manager of its
representations and warranties made in this Agreement, or otherwise made by
an officer of the Portfolio Manager pursuant to the terms hereof or thereof,
(ii) the failure by the Portfolio Manager to perform any of the duties
specifically undertaken by it under this Agreement, (iii) any lender
liability claim, suit or action or other similar claim or action arising out
of or resulting from any action or omission by the Portfolio Manager with
respect to the Securities or the other Pledged Collateral, (iv) any equitable
subordination claim, suit or action or other similar claim or action arising
out of or resulting from any action or omission by the Portfolio Manager, (v)
any failure by the Portfolio Manager to deliver, or cause the Issuer to
deliver, in accordance with the Pledge Agreement, any instrument, chattel
paper or certificated security evidencing any Pledged Collateral owned by the
Issuer within ten(10) days of the acquisition thereof, or (vi) the Portfolio
Manager's gross negligence or willful misconduct, excluding, however, in each
case, (1) Indemnified Amounts to the extent arising out of or resulting from
the willful misconduct or gross negligence by such Indemnified Party or the
Issuer of any of his, her or its obligations and duties or (2) resource for
uncollectible Securities (unless such Securities are uncollectible as a
result of any breach, failure or claim described in clause (i), (ii), (iii),
(iv), (v) or (vi) above) or, (3) indemnification of the Issuer or Indemnified
Party for lost profits or for consequential, special or punitive damages or
(4) any income or franchise taxes (or any interest or penalties with respect
thereto) or other taxes on or measured by the gross or net income or receipts
of such Indemnified Party or the Issuer or any withholding taxes. The
agreements contained in this Section 11(b) shall survive the Termination Date
and the payment of all amounts due under any Transaction Document.
12. Termination or Assignment. This Agreement shall be effective as of
the date that the Issuer transfers immediately available funds into the
Custodial Account for management hereunder. It shall remain in full force and
effect until such time that the Issuer's obligations under the Face Amount
Certificate have been paid in full and control over any remaining Securities
in the Portfolio has been transferred to the Issuer, or any successor
thereto. No assignment (as such term is defined in the Investment Company Act
of 1940, as amended) of this Agreement shall be made by the Portfolio Manager
without the prior written consent of the other parties to this Agreement or
as otherwise provided in Section 13 below.
13. Assignment, Resignation and Removal of Portfolio Manager.
18
<PAGE>
(a) Resignation of Portfolio Manager. The Portfolio Manager may at any
time resign from the obligations and duties imposed on it hereunder upon not
less than 180 days' written notice to the Agent and the Issuer. No such
resignation shall become effective until the Agent or a Successor Portfolio
Manager shall have assumed the responsibilities and obligations of the
resigning Portfolio Manager in accordance with this Section 13.
(b) Removal of Portfolio Manager. The Portfolio Manager may be removed
by the Agent upon the occurrence of (i) a Liquidation Event or (ii) the first
anniversary of the commencement of the Amortization Period. Any notice
delivered pursuant to the preceding sentence is referred to as a "Removal
Notice". No such removal shall become effective until the Agent or a
Successor Portfolio Manager shall have assumed the responsibilities and
obligations of the resigning Portfolio Manager in accordance with this
Section 13.
(c) Successor Portfolio Manager. (i) On and after the receipt by the
Portfolio Manager of a Removal Notice pursuant to clause (b) above or upon a
resignation by the Portfolio Manager pursuant to clause (a) above, the
Portfolio Manager shall continue to perform all advisory, servicing and
administrative functions applicable to the Portfolio Manager under this
Agreement and be entitled to receipt of all compensation payable to the
Portfolio Manager until (i) in the case of the receipt of a Removal Notice,
the date specified in such Removal Notice or otherwise specified by the Agent
in writing or, if no such date is specified in such Removal Notice or
otherwise specified by the Agent, until the earlier of a date agreed upon by
the Portfolio Manager and the Agent or a date specified by the Agent in a
written notice to the Portfolio Manager, and (ii) in the case of the
resignation of the Portfolio Manager, until the Agent or a Successor
Portfolio Manager shall have assumed the responsibilities and obligations of
the Portfolio Manager pursuant to this Section 13. The Agent shall as
promptly as practicable after the giving of a Removal Notice or such a
resignation appoint another person or entity (which may be the Agent, at its
option, or such other person or entity as it may appoint) as a successor
Portfolio Manager (the "Successor Portfolio Manager"). Such Successor
Portfolio Manager shall accept its appointment by a written assumption in a
form acceptable to the Agent. In the event that a Successor Portfolio Manager
has not been appointed or has not accepted its appointment or the appicable
consents have not been received by the Agent by the earlier of 30 days after
the date of such Removal Notice or at the time when the Portfolio Manager
ceases to act, the Agent without further action shall automatically be
appointed the Successor Portfolio Manager. At any time after such
appointment, the Agent may (x) delegate any of its administrative or other
obligations as Successor Portfolio Manager to an affiliate or agent in
accordance with the terms of this Agreement (all compensation to such
affiliate or agent being paid by, and being the sole responsibility of, the
Agent), or (y) resign as Portfolio Manager upon its appointment of, and the
acceptance of such appointment by, a Successor Portfolio Manager pursuant to
the terms hereof. Notwithstanding the foregoing, the Agent shall, if it is
legally unable so to act as Successor Portfolio Manager, petition a court of
competent jurisdiction to appoint any established institution (other than the
Agent) as the Successor Portfolio Manager hereunder. The Portfolio Manager
shall be entitled to be paid all amounts accrued and unpaid hereunder at the
time such removal or
19
<PAGE>
resignation becomes effective pursuant hereto in accordance with the
priorities set forth in Section 5.
(d) Portfolio Managery Transfer. After receipt by the Portfolio Manager
of a Removal Notice, and on the date that a Successor Portfolio Manager shall
have accepted its appointment and all related consents shall have been
received by the Agent pursuant to clause (a) above, all authority and power
of the predecessor Portfolio Manager under this Agreement shall pass to and
be vested in such Successor Portfolio Manager (a "Portfolio Managery
Transfer"), and thereupon (I) such Successor Portfolio Manager shall be
subject to all the responsibilities, duties and liabilities relating thereto
placed on the Portfolio Manager by the terms and provisions hereof (excluding
any liabilities incurred by the predecessor Portfolio Manager or which arose
from the actions or omissions of the predecessor Portfolio Manager), (II) all
references in this Agreement to the Portfolio Manager shall be deemed to
refer to such Successor Portfolio Manager, and (III) such Successor Portfolio
Manager (including, to the extent applicable, the Agent) shall be entitled to
receive such fees and other compensation to which the Portfolio Manager is
entitled hereunder. The predecessor Portfolio Manager agrees to cooperate, at
its expense, with the Agent and such Successor Portfolio Manager in (i)
effecting the termination of the responsibilities and rights of the Portfolio
Manager hereunder, including, without limitation, the transfer to such
Successor Portfolio Manager of all authority of the Portfolio Manager to
administer the Securities as provided under this Agreement, including all
authority over all Cashflow which shall on the date of such Portfolio
Managery Transfer be held by the Portfolio Manager for deposit to the
Custodial Account, or which have been deposited by the Portfolio Manager to
the Custodial Account, or which shall thereafter be received with respect to
the Securities, and (ii) assisting the Successor Portfolio Manager until all
management and administrative activities have been transferred to such
Successor Portfolio Manager, such assistance to include, without limitation,
(x) assisting any accountants selected by the Successor Portfolio Manager to
verify collection records and reports made prior to the Portfolio Managery
Transfer and (y) assisting the Successor Portfolio Manager in making the
computer systems of the Portfolio Manager and the Successor Portfolio Manager
compatible to the extent necessary to effect the Portfolio Managery Transfer.
The Portfolio Manager shall, at its expense, within five Business Days of
such Portfolio Managery Transfer, assemble each of the documents, instruments
and other records (including computer tapes and discs) available to it or in
its possession, which evidence the Securities and other Pledged Collateral,
and which are necessary or desirable to collect the Securities and the other
Pledged Collateral and shall make the same available to the Successor
Portfolio Manager or the Agent or its designee at a place selected by the
Successor Portfolio Manager and in such form as the Successor Portfolio
Manager or the Agent may reasonably request.
(e) Release. In no event shall the appointment and acceptance of a
Successor Portfolio Manager (including the succession of the Agent to the
role of the Portfolio Manager pursuant to clause (c) above) release the
predecessor Portfolio Manager from any liabilities (including without
limitation, any indemnification obligation arising under Section 11) incurred
by it or otherwise arising prior to, or arising from acts or omissions on it
part occurring prior to, the
20
<PAGE>
effective date of the resignation or removal of such predecessor Portfolio
Manager, or otherwise relating to the basis for any such removal. Except to
the extent arising from a failure to perform its own obligations under the
Transaction Documents, the Agent shall not be liable for any acts or
omissions of any Portfolio Manager (including, without limitation, any
Successor Portfolio Manager appointed by the Agent pursuant to this Section
11) other than acts or omissions of the Agent to the extent acting as
Portfolio Manager hereunder.
14. Compensation of Portfolio Manager. The Portfolio Manager shall be
entitled to receive as compensation for services rendered hereunder a fee
equal to the product of (i) 0.25% per annum, times (ii) the average of the
outstanding Invested Amount on the first and last day of the most recently
ended Settlement Period assuming an actual over 360 day year. Such fee shall
be paid in arrears on each Settlement Date with respect to the Settlement
Period most recently ended. The Issuer acknowledges its understanding and
agreement that any amounts invested in Short-Term Investments will be
included in calculating the value of the Portfolio for purposes of computing
the Portfolio Manager's fees as described above, and that such assets may
also be subject to separate advisory and other fees and expenses charged by
the Portfolio Manager hereunder. Except as (a) set forth above or otherwise
agreed upon by the parties and (b) permissible under applicable law, the
Portfolio Manager shall not be compensated on the basis of a share of the
capital gains on, or the capital appreciation of, the Securities in the
Issuer's account or any portion thereof.
15. Issuer Brochure. The Issuer and the Agent acknowledge receipt of the
Portfolio Manager's current disclosure brochure, Form ADV Part II.
16. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws applicable to contracts made
and to be performed entirely within the State of Illinois.
(b) Notices. All communications and notices provided for hereunder shall
be in writing (including bank wire, telecopy or electronic facsimile
transmission or similar writing) and shall be given to the other parties
hereto at their respective addresses or telecopy numbers set forth on the
signature pages hereof. All such communications and notices shall, when
mailed, telecopied, telegraphed, telexed or cabled, be effective when
received through the mails, transmitted by telecopy, delivered to the
telegraph company, confirmed by telex answerback or delivered to the cable
company, respectively.
(c) Separability. In case one or more of the provisions contained in
this Agreement shall be found to be invalid, illegal or unenforceable in any
respect, the validity,
21
<PAGE>
legality and enforceability of the remaining provision contained herein shall
not in any way be affected or impaired thereby.
(d) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
(e) Integration; Amendment. This Agreement and the other Transaction
Documents referenced to herein is the entire agreement between the parties
hereto and supersedes and replaces any previous discussions or agreements,
written or oral, between the parties hereto. No term or provision of this
Agreement may be amended, supplemented, waived or modified, except pursuant
to an instrument in writing signed by the party or other person against whom
enforcement of such amendment, supplement, waiver or modifications sought.
(f) Remedies Cumulative; No Waiver. No right, power or remedy granted
or reserved herein is intended to be exclusive of any other right, power or
remedy, but each and every such right, power and remedy shall be cumulative
and concurrent and in addition to any other right, remedy or power hereunder
or under law. No delay or omission by either party to exercise any right,
power or remedy in connection with a default shall exhaust or impair any such
right, power or remedy or shall be construed to be a waiver of such default or
acquiescence therein. The Issuer or the Agent's forbearance in any particular
case shall not be a waiver as to action that may be taken by the Issuer or
the Agent with regard to any future non-compliance.
(g) Confidentiality. (i) The Portfolio Manager shall maintain and shall
cause each of its employees and officers to maintain the confidentiality of
this Agreement and the other confidential proprietary information with
respect to the Agent and ISC and their respective businesses obtained by it
or them in connection with the structuring, negotiating and execution of the
transactions contemplated herein, except that the Portfolio Manager and its
officers and employees may disclose such information to the Portfolio
Manager's external accountants and attorneys and required by any applicable
law or order of any judicial or administrative proceeding. In addition, the
Portfolio Manager may disclose any such nonpublic information pursuant to any
law, rule, regulation, direction, request or order of any judicial,
administrative or regulatory authority or proceedings (whether or not having
the force or effect of law) and in connection with any publication permitted
under Section 14(i) of the Face Amount Certificate Agreement.
(ii) Anything herein to the contrary notwithstanding, the Portfolio
Manager hereby consents to the disclosure of any nonpublic information with
respect to it (x) to the Agent or the Certificateholders by each other, (y)
by the Agent or the Certificateholders to any prospective or actual assignee
or participant of any of them or (z) by the Agent to any rating agency,
commercial paper dealer or provider of a surety, guaranty or credit or
liquidity enhancement to ISC or any entity organized for the purpose of
purchasing, or making loans secured by, financial assets for which FNBC acts
as the administrative agent and to any officers,
22
<PAGE>
directors, employees, outside accountants and attorneys of any of the
foregoing, provided each such Person is informed of the confidential nature
of such information in a manner consistent with the practice of the Agent for
the making of such disclosures generally to persons of such type. In
addition, the Certificateholders and the Agent may disclose any such
nonpublic information pursuant to any law, rule, regulation, direction,
request or order of any judicial, administrative or regulatory authority or
proceedings (whether or not having the force or effect of law) and to any
person or entity in connection with the enforcement of this Agreement, the
other Transaction Documents and the other documents delivered in connection
therewith and in connection with any restructuring or workout related to the
Face Amount Certificate Agreement, the Transaction Documents or such other
documents following an Amortization Event.
(h) Bankruptcy Petition. (i) The Portfolio Manager hereby covenants and
agrees that, prior to the date which is one year and one day after the
payment in full of all outstanding senior indebtedness of ISC, it will not
institute against, or join any other person or entity in instituting against,
ISC any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings or other similar proceeding under the laws of the United States
or any state of the United States.
(ii) The Portfolio Manager hereby covenants and agrees that, prior to
the date which is one year and one day after the Termination Date, it will
not institute against, or join any other person or entity in instituting
against, the Issuer any bankruptcy, reorganization, arrangement, insolvency
or liquidation proceedings or other similar proceeding under the laws of the
United States or any state of the United States.
(i) JURISDICTION. THE PORTFOLIO MANAGER HEREBY CONSENTS AND AGREES THAT
THE STATE OR FEDERAL COURTS LOCATED IN COOK COUNTY, CITY OF CHICAGO,
ILLINOIS, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS
OR DISPUTES BETWEEN THE ISSUER, THE PORTFOLIO MANAGER AND THE AGENT
PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS OR TO
ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER
TRANSACTION DOCUMENTS, PROVIDED, THAT THE ISSUER, THE PORTFOLIO MANAGER AND
THE AGENT ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD
BY A COURT LOCATED OUTSIDE OF COOK COUNTY, CITY OF CHICAGO, ILLINOIS, AND,
PROVIDED, FURTHER, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE
TO PRECLUDE THE AGENT FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY
OTHER JURISDICTION TO REALIZE ON THE PLEDGED COLLATERAL OR ANY OTHER SECURITY
FOR THE OBLIGATIONS OF THE ISSUER, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF THE AGENT. THE PORTFOLIO MANAGER EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND THE PORTFOLIO MANAGER HEREBY WAIVES ANY OBJECTION WHICH
IT MAY
23
<PAGE>
HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT THE PORTFOLIO MANAGER HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS
AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO
THE PORTFOLIO MANAGER AT THE ADDRESS SET FORTH IN SECTION 15(D) AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.
(j) WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY
AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND
FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE
THAT DISPUTES ARISING HEREUNDER OR RELATING HERETO BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF
THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN
THE AGENT AND THE PORTFOLIO MANAGER ARISING OUT OF, CONNECTED WITH, RELATED
TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED IN CONNECTION WITH, THIS
AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO.
(k) Headings. The headings and subheadings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the
meaning hereof.
(l) Authorization. Each party hereto represents and warrants that this
Agreement and its execution has been duly authorized by any necessary and
appropriate corporate or other action. In addition, the Issuer shall inform
the Portfolio Manager of any event or occurrence that might affect the
authority or the propriety of this Agreement.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
entered into on the day and year first above written.
INTEGRITY CAPITAL ADVISORS, INC.
By /s/ R H Scott
-------------------------------------
Title: General Counsel and Secretary
515 West Market Street, 4th Floor
Louisville, Kentucky 40202
Facsimile: (502) 582-7995
Attention: Robert H Scott
312 CERTIFICATE COMPANY
by /s/ William D. Morris CEO
-----------------------------------
Title: Chief Executive Officer
515 West Market Street, 8th Floor
Louisville, Kentucky 40202
Facsimile: (502) 582-7903
Attention: Robert Maddox, President
<PAGE>
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent
By /s/ Eleanor C. Nadbielny
-----------------------------------
Title: Authorized Agent
One First National Plaza
Mail Suite 0594
Chicago, Illinois 60670-0594
Attention: Anne Marie Somers
Facsimile No.: (312) 732-4487
<PAGE>
ARM Financial Group
SHORT-TERM PORTFOLIO GUIDELINES
<TABLE>
<CAPTION>
Min./Max/ Max. Per Max. Per
Asset Class Exp. Issue Issuer
- ----------------------------------- --------- -------- --------
<S> <C> <C> <C>
U.S. Government & Agencies 0/100% unlimited unlimited
Mortgage-backed Securities
Agency CMOs 0/50% 5% 9.5%
Non-agency CMOs (residential) 0/50% 5% 9.5%
Non-agency CMOs (commercial)(1) 0/10% 5% 9.5%
Agency Pass Throughs 0/50% 5% 9.5%
Support Tranches 0/10% 5% 9.5%
Asset-backed Securities 0/30% 5% 9.5%
Auto Loans
Credit Card Receivables
Home Equity
Manufactured Housing
Corporate Debt (2) 0/60% 5% 5%
Industrials
Telecommunications
Utilities
Banks
Finance Companies
144A Private Placements (3) 0/30% 2.5% 2.5%
Foreign Debt 0/20% 2.5% 2.5%
(U.S. Dollar Denominated only)
Non-Investment Grade Securities (4) 0/5% 1% 1%
(No lower than BB/NAIC "3" rated)
Cash and Cash Equivalents (6) 0/100% 5% 5%
Non-Speculative Hedging Instruments (5) 0/3% 1% 1%
</TABLE>
(1) Investment grade securities only.
(2) No industry can exceed 35% of the portfolio.
(3) There cannot be any prohibition of sale on any Private Placement
security purchased.
(4) Can also include non-investment grade, U.S. dollar denominated
foreign debt. Foreign debt must be issued by OECD countries.
(5) Caps, floors, swaps only. Counterparties must be AA rated. Caps &
Floors: the lesser of purchase cost or market value. Swaps:
Absolute Value of the Market Value. Any derivative position must be
used for hedging only, and must result in the portfolio still being
in compliance with all other investment guidelines.
(6) 10% Maximum Issue/Issuer during 90 day ramp up period for AI/PI
Securities or better.
<PAGE>
Short-term Portfolio Guidelines
Page Two
General
1. The average effective duration of the portfolio cannot exceed 1.75 years.
2. The average credit quality of the portfolio cannot be less than AA/NAIC
"1".
3. The portfolio cannot contain investments in real estate, direct commercial
mortgages, common stocks, leveraged futures or other leveraged/speculative
derivatives.
4. Any derivative position must be used for hedging only and must result in
the portfolio still being in compliance with all other investment
guidelines.
<PAGE>
Portfolio Objective
Maintain a high quality, liquid, short duration portfolio which generates a
consistent and stable return in excess of the liability cost of funds.
Aggregate Portfolio Risk Parameters
The average effective duration of the portfolio cannot exceed 1.75 years. The
average effective duration is calculated as the weighted average of the
effective duration of the individual securities within the portfolio weighted
by their respective market values. Effective duration measures the price
sensitivity of a security for a given change in interest rates, incorporating
any projected variability in the security's cashflows for the stated change
in interest rates.
The average credit quality of the portfolio cannot be less than AA/NAIC "1".
The average credit quality is calculated as the weighted average of the
credit quality of the individual securities within the portfolio weighted by
either their respective book values, or market values as appropriate per the
custodial arrangement. The individual security credit quality will be as
currently evaluated by either Moody's or Standard & Poor's.
The average credit quality is calculated by assigning a numeric value of each
rating. For example, the highest quality category of Governments is assigned
a value of 2, Agency securities receive a value of 3, Aaa/AAA 4, Aa1/AA+5,
Aa2/AA6, Aa3/AA-7 and so on. If an individual security is evaluated by both
Moody's and Standard & Poor's, the lower rating will be used in computing the
average. The weighted average numerical value is rounded and translated back
to an average credit quality rating, i.e. an average rating of 6.4 would
translate into an AA rating, and an average rating of 6.6 would equate to
AA-. Based on the above, the average numerical value must be less than or
equal to 6.5 to be in compliance with the stated investment guidelines.
Permitted Asset Classes
U.S. Government and Agency Securities
A debt security issued by the United States Treasury Department or an agency
created and sponsored by the United States government.
Mortgage-backed Securities
Ownership claim in a pool of mortgages or an obligation that is secured by
such a pool.
Agency CMOs
Securitization of a pool of first liens on residential properties
backed by GNMA, FNMA or FHLMC into at least two classes or tranches.
Non-agency CMOs
Securitization of a pool of first liens on residential mortgages
which do not conform to agency (GNMA, FNMA or FHLMC) underwriting
guidelines, or a pool of commercial loans into at least two classes
or tranches.
Agency Pass Throughs
Securitization of a pool of first liens on residential properties
backed by GNMA, FNMA
<PAGE>
or FHMLC into one class, which pays monthly interest and principal
passed directly from the debtor to the investor through an
intermediary.
Support Tranches
CMO classes that receive principal payments only after scheduled
payments have been made on specified PAC, TAC and/or Scheduled
bonds for each payment date.
Asset-backed Securities
Securitization of a pool of collateral into at least two classes or tranches.
Acceptable collateral includes auto loans, credit card receivables,
home-equity loans or manufactured housing loans.
Corporate Debt
Debt which is registered with the SEC and issued by either a corporation or a
public utility.
144A Private Placements
Private unregistered security issued under SEC Rule 144A.
Private Placements
Privately negotiated debt transactions between an issuer and buyer. Not
permitted.
Foreign Debt
Debt issued by a legal entity incorporated outside of the United States. Only
U.S. dollar denominated securities are permitted.
Non-investment Grade Securities
A security with a credit quality rating of BB+ or lower. Only securities
currently rated at least BB/NAIC "3" are permitted.
Cash and Cash Equivalents
Short-term debt such as listed below, with a stated maturity within 270 days
from date of purchase, rated at least A-1/P-1 or the equivalent:
- U.S. Government or agency securities
- Certificates of deposit
- Commercial paper
- Bankers acceptances
- Repurchase agreements
- Corporate debt rated AA or better
- Money market funds
- Loan participation notes; provided the notes are issued by A1/P1
companies and administered through A1/P1 banks.
- Bank One Money Market Deposit Account
During the 90 day ramp up period after closing, these investments can be made
in A2/P2 securities as long as the overall portfolio credit quality and
duration requirements are met.
<PAGE>
Non-speculative Hedging Instruments
Caps, floors or swaps may only be used as part of a hedging program to
explicitly manage the risk profile of the portfolio, and will only be written
against specified securities (i.e. caps/floors at lifetime maximums/minimums
for ARMs). They may not be used for speculative purposes. This does not imply
that all such security structures in the portfolio will be hedged at all
times. Credit quality of acceptable counterparties will be AA or better. Caps
and floors exposure will be calculated as the lesser of cost or market value.
Swap exposure for determining compliance with investment guideline
limitations will be calculated as the absolute value of the swap market
value. Any such derivative position will be included in the portfolio when
determining compliance with all other investment guidelines.
Additional Definitions
Newly issued and TBA securities as well as extended settlement on purchases
of permitted securities are explicitly allowed as long as the securities
involved otherwise comply with these stated investment guidelines. Such
transactions are not considered to be forward contacts.
Prohibited Asset Classes
The following asset classes are prohibited investments:
Interest only CMO class
Principal only CMO class
Inverse floater CMO class
Forwards*
Futures*
Options*
*Except as explicitly discussed under Permitted Asset Classes.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT
OF INCOME AT ARM FINANCIAL GROUP, INC'S FORM 10-Q FOR THE QUARTER ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 5,605,965
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 30,423
<MORTGAGE> 15,460
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,777,490
<CASH> 210,598
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 107,593
<TOTAL-ASSETS> 9,025,809
<POLICY-LOSSES> 5,418,223
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 38,000
0
50,000
<COMMON> 235
<OTHER-SE> 250,250
<TOTAL-LIABILITY-AND-EQUITY> 9,025,809
0
<INVESTMENT-INCOME> 219,569
<INVESTMENT-GAINS> 6,951
<OTHER-INCOME> 10,072
<BENEFITS> 174,337
<UNDERWRITING-AMORTIZATION> 5,909
<UNDERWRITING-OTHER> 17,834
<INCOME-PRETAX> 32,583
<INCOME-TAX> 9,707
<INCOME-CONTINUING> 22,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,876
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.84
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
