<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
Commission file number: 001-12294
ARM FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1244251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 582-7900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Date Class Shares Outstanding
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November 12, 1999 A 23,829,596
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and investments:
Fixed maturities, available-for-sale, at fair value
(amortized cost: September 30, 1999-
$1,884,275; December 31, 1998 - $1,903,560) $1,678,654 $1,835,441
Equity securities, at fair value (cost: September 30,
1999 - $23,729; December 31, 1998 - $23,609) 21,514 21,795
Mortgage loans on real estate 12,372 14,554
Policy loans 132,033 129,163
Cash and cash equivalents 324,478 202,020
------------------------------------
Total cash and investments 2,169,051 2,202,973
Assets held in separate accounts:
Guaranteed 676,350 738,076
Nonguaranteed 1,756,216 1,641,005
Accrued investment income 34,977 26,922
Deferred policy acquisition costs 162,023 125,589
Value of insurance in force 64,943 49,651
Deferred federal income taxes 10,400 57,892
Goodwill - 5,348
Other assets 21,755 17,409
Discontinued operations - cash and investments and other assets 126,748 4,939,038
------------------------------------
Total assets $5,022,463 $9,803,903
------------------------------------
------------------------------------
</TABLE>
2
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
(IN THOUSANDS) 1999 1998
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(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $2,360,511 $2,087,543
Customer deposits in separate accounts:
Guaranteed 679,581 738,075
Nonguaranteed 1,756,216 1,641,005
Long-term debt - 38,000
Notes payable 62,222 -
Accounts payable and accrued expenses 9,433 20,117
Payable for investment securities purchased 5,403 17,639
Payable to reinsurer 40,194 6,935
Other liabilities 39,860 24,175
Discontinued operations - customer deposits 130,153 5,019,981
------------------------------------
Total liabilities 5,083,573 9,593,470
Contingencies
Shareholders' equity:
Preferred stock: Series A fixed/adjustable
rate cumulative (5.575%) 75,000 75,000
Common stock: Class A; 23,829,596 and 23,704,411
shares issued and outstanding, respectively 238 237
Additional paid-in capital 221,400 218,268
Retained earnings (deficit) (195,886) 55,253
Accumulated other comprehensive income from net
unrealized losses on available-for-sale securities (161,862) (138,325)
------------------------------------
Total shareholders' equity (61,110) 210,433
------------------------------------
Total liabilities and shareholders' equity $5,022,463 $9,803,903
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Investment income $ 59,547 $ 58,026 $ 178,423 $ 171,800
Interest credited on customer deposits (44,960) (40,355) (128,045) (120,765)
----------------------------- -----------------------------
Net investment spread 14,587 17,671 50,378 51,035
Fee income:
Variable annuity fees 7,041 5,208 19,879 14,663
Other fee income 191 253 742 640
----------------------------- -----------------------------
Total fee income 7,232 5,461 20,621 15,303
Other income and expenses:
Surrender charges 4,960 1,307 7,972 4,457
Operating expenses (10,948) (7,588) (28,875) (21,530)
Commissions, net of deferrals (228) (375) (1,002) (1,397)
Interest expense on debt (493) (677) (1,862) (1,955)
Amortization:
Deferred policy acquisition costs (7,616) (3,243) (16,796) (9,152)
Value of insurance in force (1,528) (1,504) (4,416) (4,436)
Acquisition-related deferred charges and goodwill (235) (178) (611) (602)
Write-off of intangible assets (16,089) - (16,089) -
Non-recurring charges:
Stock-based compensation - - - (2,036)
Other - - - (2,639)
Other, net (2,090) (940) (3,848) (1,823)
----------------------------- -----------------------------
Total other income and expenses (34,267) (13,198) (65,527) (41,113)
Realized investment gains (losses) (6,590) (4,638) (28,428) 4,742
----------------------------- -----------------------------
Income (loss) from continuing operations
before income taxes (19,038) 5,296 (22,956) 29,967
Income tax benefit (expense) (20,576) 10 (31,356) (6,937)
----------------------------- -----------------------------
Income (loss) from continuing operations (39,614) 5,306 (54,312) 23,030
Discontinued operations:
Income (loss) from operations of discontinued
operations, net of applicable income taxes of
$762 and $10,381, respectively, in 1999 and
$220 and $2,980, respectively, in 1998 (48,232) 372 (193,013) 5,524
----------------------------- -----------------------------
Net income (loss) (87,846) 5,678 (247,325) 28,554
Dividends on preferred stock (1,045) (2,000) (3,135) (4,376)
----------------------------- -----------------------------
Net income (loss) applicable to common
shareholders $ (88,891) $ 3,678 $(250,460) $24,178
----------------------------- -----------------------------
----------------------------- -----------------------------
Per common share:
Income (loss) from continuing operations $ (1.71) $ 0.14 $ (2.41) $ 0.80
Discontinued operations (2.02) 0.02 (8.10) 0.23
----------------------------- -----------------------------
Net income (loss) $ (3.73) $ 0.16 $ (10.51) $ 1.03
----------------------------- -----------------------------
----------------------------- -----------------------------
Per common and common equivalent share (diluted):
Income (loss) from continuing operations $ (1.71) $ 0.14 $ (2.41) $ 0.77
Discontinued operations (2.02) 0.01 (8.10) 0.22
----------------------------- -----------------------------
Net income (loss) $ (3.73) $ 0.15 $ (10.51) $ 0.99
Cash dividends paid per common share - $ 0.04 $ 0.10 $ 0.10
----------------------------- -----------------------------
----------------------------- -----------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 251,412 $ 191,301
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (1,876,293) (6,525,621)
Maturities and redemptions 529,251 559,558
Sales 5,287,745 4,015,398
Other investments:
Purchases - (9,950)
Maturities, redemptions and sales 2,492 1,481
Sales - 7,285
Policy loans, net (2,870) (836)
Transfers (to) from the separate accounts:
Purchase of assets held in separate accounts (286,875) (371,163)
Proceeds from sale of assets held in separate accounts 719,561 151,215
------------------------------------
Cash flows provided by (used in) investing activities 4,373,011 (2,172,633)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts received from customers 1,106,820 2,474,486
Amounts paid to customers (5,964,716) (518,442)
Net proceeds from issuance of common stock 1,577 655
Net proceeds from issuance of preferred stock - 73,638
Change in payable to reinsurer 33,259 (1,395)
Tax benefit of exercised stock options 1,610 -
Dividends on preferred stock (1,905) (4,376)
Dividends on common stock (1,906) (2,343)
------------------------------------
Cash flows provided by (used in) financing activities (4,825,261) 2,022,223
Net increase (decrease) in cash and cash equivalents (200,838) 40,891
Cash and cash equivalents at beginning of period 525,316 228,206
------------------------------------
Cash and cash equivalents at end of period $ 324,478 $ 269,097
====================================
SEE ACCOMPANYING NOTES.
</TABLE>
5
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
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 nine
months ended September 30, 1999 are not necessarily indicative of those to be
expected for the year ending December 31, 1999 (see Notes 2, 3 and 4 below).
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, 1998.
In addition, the accompanying unaudited condensed consolidated financial
statements have been prepared on the basis of accounting principles applicable
to going concerns and contemplate the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The financial
statements do not include further adjustments, if any, reflecting the possible
future effects on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the outcome of
uncertainties discussed herein.
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. MATERIAL EVENTS
On July 29, 1999, the Company announced that it was restructuring its
institutional business and positioning its retail business and technology
operations for the sale of the Company or its businesses or its assets (a "
Sale Transaction"). The Company's efforts to consummate a Sale Transaction
have not yet been concluded. In order to preserve and maximize value for
policyholders as well as for the Company's creditors and/or stockholders, the
Company requested and was granted regulatory supervision with respect to its
insurance subsidiary, Integrity Life Insurance Company ("Integrity"), from
the Ohio Department of Insurance, its domiciliary regulator.
On August 20, 1999, the Ohio Department of Insurance issued a
Supervision Order. Under the terms of the Supervision Order, Integrity has
continued payments of death benefits, previously scheduled systematic
withdrawals, previously scheduled immediate annuity payments, and agent
commissions, but must receive written consent from the Ohio Department of
Insurance for other payments, including dividends to the Company. The
Supervision Order also suspended the processing of surrenders of policies
except in cases of approved hardship.
6
<PAGE>
On August 31, 1999, the Supervision Order was amended to allow Integrity to
resume processing surrender requests from its variable life and annuity
policyholders. The Supervision Order is automatically extended for successive
60-day periods until written notice ending the supervision is given to
Integrity. On October 30, 1999, the Supervision Order was automatically
extended.
This regulatory action is intended to ensure an orderly process for
addressing the financial obligations of Integrity and to protect the
interests of its individual policyholders. The Ohio Department of Insurance,
in its supervision role, has retained outside consultants including
investment bankers, lawyers, and actuaries to monitor Integrity's operations.
There can be no assurance as to whether a Sale Transaction will be
consummated or whether the Ohio Department of Insurance will seek to place
Integrity in rehabilitation and/or liquidation. At present, the Company
believes that as long as the negotiation process with a current prospective
buyer has a reasonable probability of success, the Ohio Department of
Insurance will not take such action.
Currently, National Integrity Life Insurance Company ("National
Integrity") is not under regulator supervision. However, the possibility
exists that National Integrity could be placed in rehabilitation by the New
York Department of Insurance if the New York Department believes that such
action is necessary or appropriate to protect the interests of policyholders.
National Integrity is domiciled in New York.
The Board of Directors of the Company is continuing to explore certain
strategic alternatives, including a Sale Transaction. There can be no assurance
that a Sale Transaction or any other strategic alternative will be developed or
consummated or as to the price or value that might be obtained, or whether such
price would be sufficient to satisfy all known or potential claims of the
Company's creditors and/or stockholders.
Regardless of whether the Company is able to find a suitable buyer for
its insurance subsidiaries or its businesses or assets, the Company is likely
to cease doing business as a going concern. Even in the event of a sale of
the Company's insurance subsidiaries, the Company is more likely to liquidate
its other assets rather than seek new business initiatives without its
insurance subsidiaries. Accordingly, the Company is considering all of the
options available to it, including a bankruptcy filing. Depending upon
whether a Sale Transaction occurs or not, and depending upon the amount of
the proceeds of any Sale Transaction, there can be no assurance that the
Company is or will be solvent or will be able to avoid a voluntary or
involuntary Chapter 11 or Chapter 7 proceeding under federal bankruptcy law.
Seven shareholder class action lawsuits have been filed in the United
States District Court for the Western District of Kentucky against the Company
and certain of its officers. The lawsuits allege that the Company and certain of
its officers violated sections 10(b) and 20(a) of the Securities Exchange Act of
1934 by, among other things, misrepresenting and/or omitting material
information about its results of operations and financial condition. The
lawsuits further allege that as a result of the purportedly false and misleading
information and failure to disclose material facts, the price of the Company's
securities were artificially inflated. The lawsuits seek damages in an amount to
be proven at trial, interest thereon, reasonable attorney and expert witness
fees and other costs, and other relief as permitted by law or equity. The
Company intends to defend such lawsuits vigorously. The ultimate outcome of
these lawsuits cannot be predicted with certainty.
7
<PAGE>
As part of the institutional restructuring, on August 3, 1999, the Company
and General American Life Insurance Company ("General American") completed a
transaction (the "General American Transaction") whereby General American
recaptured approximately $3.4 billion of assets and related liabilities
previously ceded through a reinsurance agreement to one of the Company's
insurance subsidiaries, Integrity. The General American Transaction, which
terminated the reinsurance and related agreements, including a marketing
partnership agreement, was effective as of July 26, 1999. These assets and
related liabilities were part of a joint product development, marketing and
reinsurance relationship with General American involving funding agreements and
guaranteed investment contracts. As a result of the General American
Transaction, the Company recorded a charge of $90 million during the second
quarter of 1999, primarily due to interest rate related decreases in the fair
value of investment securities recaptured by General American.
By October 15, 1999, the Company reached settlement agreements with its
remaining three institutional clients, each of which had, or may have had, the
right to withdraw their deposits due to the Company's lower ratings (described
below), the Supervision Order from the Ohio Department of Insurance and/or other
negotiated covenants. Pursuant to these settlement agreements, the parties
agreed to transactions (collectively, the "Termination Transactions") whereby
all of the liabilities of the Company's institutional business with these
remaining three clients were terminated and discharged subject only to the
payment of the March 2000 Note and the March 2000 Payable described below.
As part of the Termination Transactions, the Company transferred or
assigned to these institutional clients all assets (and/or proceeds from the
sale of assets) backing the discharged institutional liabilities, including all
of the marketable securities owned by the Company's special purpose vehicles
("SPVs"), 212 Certificate Company and 312 Certificate Company, and all of the
assets held in certain Integrity separate accounts. Integrity, or the Company,
also paid these institutional clients an aggregate amount in cash of
approximately $15.75 million (the "Cash Payments") at or shortly following
execution of the settlement agreements.
Integrity also executed and delivered a promissory note (the "March 2000
Note") in favor of an institutional client in the principal amount of $16.4
million as part of the Termination Transactions. The March 2000 Note will mature
on the earlier of March 31, 2000, or the closing of certain material sale
transactions ("Acquisition Transactions") with respect to Integrity or National
Integrity, including a change of control transaction. Maturity of the March 2000
Note may be accelerated in the event of a default by Integrity in connection
with insolvency, bankruptcy or certain other events involving Integrity or its
subsidiaries. At maturity, the unpaid principal and accrued interest is payable
in full, provided that if the maturity date occurs prior to March 31, 2000, by
reason of the closing of an Acquisition Transaction, the total principal amount
due will be only $12.0 million if paid in full, with all accrued interest, on
such earlier maturity date.
Integrity also agreed to pay an institutional client, as part of the
Termination Transactions, $7.9 million with interest paid monthly, plus
certain fees and expenses not in excess of $500,000, on the earlier of March
31, 2000, or the closing of certain material transactions by Integrity,
including a change of control transaction (such payment obligation, the
"March 2000 Payable").
8
<PAGE>
The Company does not intend to pursue additional institutional spread or
fee business. As a result of the General American Transaction and the
Termination Transactions, the Company has now effectively exited from the
institutional line of business and, as such, the Company has presented the
operating results and financial condition for all of its institutional business
as discontinued operations on the Condensed Consolidated Statements of
Operations and Balance Sheets, respectively. Prior period amounts have been
restated to reflect this presentation (see Note 4 below). The Company recorded a
total charge of $48.2 million and $193.0 million during the three months and
nine months ended September 30, 1999, respectively, as loss from operations of
discontinued operations.
The Company's decision to restructure and ultimately exit the
institutional business was driven by the need to address concerns of rating
agencies and potential purchasers, improve the Company's statutory
capitalization ratios, and address the interest rate related decline in the
fair value of investment securities in the Company's institutional spread
products segment. In addition, management believes that the restructuring was
necessary in order to position the Company for a Sale Transaction. Statutory
capitalization ratios reflect the Company's surplus, or assets held in excess
of customer deposits and other liabilities, as a percentage of the Company's
assets. The declining fair values were substantially affected by credit
spread widening of market interest rates and bond market illiquidity,
following a period of rapid growth in institutional deposits.
Following the Company's July 29, 1999 announcement, the ratings of the
Company and its insurance subsidiaries were lowered several times by four
significant rating agencies (see ratings table in Management's Discussion and
Analysis of Financial Condition and Results of Operations, "Recent
Developments"). Following the publication of the lower ratings, the Company
complied with institutional customers' withdrawal requests of $160.3 million
during August 1999.
The Company was subject to a covenant in its bank credit agreement (a
restriction on transferring more than 15% of the Company's assets) that required
the Company to pay off, renegotiate or obtain a waiver with respect to its $38
million long-term debt prior to completing the General American Transaction. On
August 3, 1999, the Company secured new debt financing of a $38 million note
from GenAmerica Corporation, an affiliate of General American ("GenAmerica"),
paid in full its outstanding long-term bank debt, and terminated its revolving
line of credit associated with the bank credit agreement.
On November 15, 1999, the Company entered into an extension agreement
with GenAmerica in conjunction with the new note. Pursuant to the extension
agreement, the note will mature on November 30, 1999. The note had previously
been extended to November 15, 1999.Maturity of the note may be accelerated by
GenAmerica in the event of a default by the Company in connection with
insolvency, bankruptcy or certain other events involving the Company or its
subsidiaries upon written notice. At maturity the unpaid principal and all
accrued interest is payable. There can be no assurance that this note will be
further extended.
The Company believes that its capability to market retail products and the
persistency of existing retail business have been materially and adversely
impacted by the Company's insurance subsidiaries' lower ratings.
9
<PAGE>
Accordingly, management believes that the Company's ability to generate earnings
has been substantially impaired. However, it is not possible to determine the
financial effects of this impairment.
On August 26, 1999, the New York Stock Exchange suspended trading of the
Company's common stock. Following the suspension, application was made to the
Securities and Exchange Commission to delist the issue. The Exchange's action
was taken due to the Company's unsatisfactory financial condition as well as the
stock's low selling price. The Exchange's appraisal was based on disclosures
included in the Company's June 1999 Form 10-Q, filed on August 23, 1999. The
Company's common stock subsequently began trading electronically on the OTC
Bulletin Board under the ticker symbol "ARMGA."
On August 27, 1999, Martin H. Ruby resigned his position as Chief Executive
Officer of the Company and as Chairman and a member of the Board of Directors of
the Company. However, his employment has not been terminated by the Company.
Following Mr. Ruby's resignation, the Company's Board of Directors created an
Office of the President, which is comprised of John R. Lindholm, President -
Retail Business Division, John R. McGeeney, Executive Vice President - General
Counsel, and William H. Panning, Executive Vice President and Chief Investment
Officer. Effective as of November 15, 1999, by mutual agreement between David E.
Ferguson and the Company, Mr. Ferguson's employment with the Company was
terminated. Mr. Ferguson had served as the President-ARM Technology Group since
May 1998 and held other positions within the Company since July 1993. Under the
terms of the agreement, the Company will not provide severance pay to Mr.
Ferguson.
No quarterly cash dividend was paid on the Company's common stock or
preferred stock during the third quarter of 1999. The Company will not pay or
declare a dividend on the Company's common stock or preferred stock during the
fourth quarter of 1999. The declaration and payment of dividends is subject to
the discretion of the Company's Board of Directors based on the Company's
results of operations, financial condition, capital requirements, and investment
opportunities, but subject to legal and regulatory restrictions on the payment
of dividends to the Company by its insurance subsidiaries.
By correspondence dated August 5, 1999, Fidelity's Variable Insurance
Products Fund and Variable Insurance Products Fund II (the "VIP Funds"), managed
by Fidelity Management and Research Company, terminated the various
participation agreements between the VIP Funds and the Company's insurance
subsidiaries effective October 4, 1999. Contractholders of variable annuities in
effect on October 4, 1999 will continue to be permitted to reallocate
investments in the VIP Funds, redeem investments in the VIP Funds and/or invest
in the VIP Funds. Shares of the VIP Funds will not be made available to variable
annuity contractholders who purchase variable annuities offered by the Company's
insurance subsidiaries after October 4, 1999.
The VIP Funds indicated that the decision to terminate the various
participation agreements resulted from the determination that a material adverse
change in the business or financial condition of the Company's insurance
subsidiaries had occurred. The VIP Funds further stated that if they determined
that sufficient improvement in the financial condition of the Company's
insurance subsidiaries occurred, the notice would be withdrawn.
10
<PAGE>
During the third quarter of 1999, the Company experienced approximately 50
employee resignations out of 330 full time employees. Consequently, management
enacted an incentive stay pay program for certain of its remaining employees.
The program is intended to provide sufficient incentive to retain employees
through at least March 31, 2000. The program has been approved by the Ohio
Department of Insurance with payments to employees guaranteed by Integrity.
There can be no assurances that key employees will in fact be retained and the
Company could incur additional third party consulting expenses as a result.
3. EFFECTS OF RATING AGENCY DOWNGRADES AND SUPERVISION ORDER ON ESTIMATES AND
ASSUMPTIONS
The preparation of financial statements in conformity with GAAP requires
management of the Company to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. The lowering of the Company's insurance subsidiaries' ratings, any future
downgrades and the Supervision Order could cause actual results to be
significantly adversely different from those estimates. These estimates are
outlined below.
Customers and distributors of an insurer's annuity products tend to
focus on the ratings of the insurer to determine whether to buy or market
such products. The ability of the Company to distribute its products and the
persistency of its existing business has been materially adversely affected
by the Company's insurance subsidiaries' lower ratings and the Supervision
Order. Each of the rating agencies continues to assess the Company's
insurance subsidiaries, and there can be no assurance that the Company's
insurance subsidiaries current ratings will be maintained in the future.
Accelerated withdrawals of retail customer deposits could materially
adversely affect management estimates currently used for certain intangible
assets including value of insurance in force and deferred policy acquisition
costs.
The Company's insurance subsidiaries held an intangible asset of $64.9
million for value of insurance in force and $162.0 million for deferred policy
acquisition costs as of September 30, 1999. Value of insurance in force and
deferred policy acquisition costs are amortized in proportion to the emergence
of gross profits, including realized investment gains and losses, over the
estimated term of the underlying policies. As noted above, the lowering of the
Company's insurance subsidiaries' ratings and the Supervision Order has had, and
will continue to have, a significant adverse impact on the persistency of its
existing business. A significant increase in surrenders will cause these
intangible assets to be amortized more quickly than current estimates because
gross margin estimates used to actuarially determine the amortization of the
assets, could be adversely affected by the acceleration of retail withdrawals.
Considering the substantial doubt surrounding the Company's ability to
continue as a going concern, and the impairment of the Company's ability to
generate future business, $16.1 million of certain intangible assets were
written off during the third quarter of 1999. These intangible assets primarily
included goodwill and certain other costs associated with the SBM Company
acquisition in 1995 and the acquisition of a third party distributor in 1999.
4. DISCONTINUED OPERATIONS
As a result of the General American Transaction and the Termination
Transactions, the Company has now effectively exited from the institutional line
of business. In addition, the
11
<PAGE>
Company has made the decision to no longer pursue additional institutional
spread or fee business (see Note 2 -- "Material Events").
Accordingly, the Company has presented the operating results and financial
condition for all of its institutional business as discontinued operations on
the Condensed Consolidated Statements of Operations and Balance Sheets,
respectively. Prior period amounts have been restated to reflect this
presentation. The Company incurred charges of $193.0 million and $48.2 million
for the nine months ended and three months ended September 30, 1999,
respectively, as a loss from operations of discontinued operations. These
charges include realized losses, net of tax, of $206.6 million and $47.3 million
for the nine months ended and three months ended September 30,1999,
respectively.
Revenues from discontinued operations (consisting of investment income and
fee income) for the nine months ended September 30, 1999 and 1998 totaled $177.3
million and $173.8 million, respectively, and for the three months ended
September 30, 1999 and 1998 totaled $17.4 million and $67.7 million,
respectively.
5. SEGMENT INFORMATION
Through June 30, 1999, the Company had 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 certificates); retail variable fund options
(fee-based variable annuity mutual fund options); and corporate and other. As
discussed in Note 4 - "Discontinued Operations," effective during the third
quarter, the institutional spread products ceased to be a reportable segment.
This change is reflected for all periods presented below. The Company's
corporate and other segment includes earnings on surplus assets of the
Company's subsidiaries and holding company cash and investments, fee income
from broker-dealer operations, unallocated amortization expenses, and various
corporate expenditures that are not allocated to retail products. Income tax
expense and preferred stock dividends are not allocated to any segment.
The Company's reportable segments are based on the earnings characteristics
of the product or service sold. The reportable segments are managed separately
because the impact of fluctuating interest rates and changes in the equity
market environment affects each segment's products and services differently. The
Company evaluates segment performance based on pretax operating earnings.
12
<PAGE>
Revenues and earnings by segment for the three and nine months ended
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
REVENUES (INVESTMENT INCOME AND FEE INCOME)
<S> <C> <C>
Retail spread products and options $ 59,607 $54,568
Retail variable fund options 7,041 5,208
Corporate and other 131 3,711
-------------------------------------
Total revenues from continuing operations $ 66,779 $63,487
=====================================
EARNINGS
Retail spread products and options $ 9,099 $ 9,163
Retail variable fund options 2,792 1,797
Corporate and other (24,339) (1,026)
-------------------------------------
Pretax operating earnings from continuing operations (12,448) 9,934
Realized investment losses (6,590) (4,638)
-------------------------------------
Income (loss) from continuing operations before income taxes (19,038) 5,296
Income tax benefit (expense) on operations (20,576) 10
-------------------------------------
Income (loss) from continuing operations (39,614) 5,306
Income (loss) from operations of discontinued operations, net of income taxes (48,232) 372
-------------------------------------
Net income (loss) (87,846) 5,678
Preferred stock dividends (1,045) (2,000)
-------------------------------------
Net income (loss) applicable to common shareholders $(88,891) $ 3,678
=====================================
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
(IN THOUSANDS) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
REVENUES (INVESTMENT INCOME AND FEE INCOME)
<S> <C> <C>
Retail spread products and options $ 172,792 $164,256
Retail variable fund options 19,879 14,663
Corporate and other 6,373 8,184
------------------------------------
Total revenues from continuing operations $ 199,044 $187,103
====================================
EARNINGS
Retail spread products and options $ 28,217 $ 29,182
Retail variable fund options 7,182 5,492
Corporate and other (29,927) (4,774)
------------------------------------
Pretax operating earnings from continuing operations 5,472 29,900
Non-recurring charges - (4,675)
Realized investment gains (losses) (28,428) 4,742
------------------------------------
Income (loss) from continuing operations before income taxes (22,956) 29,967
Income tax expense on operations (31,356) (6,937)
------------------------------------
Income (loss) from continuing operations (54,312) 23,030
Income (loss) from operations of discontinued operations, net of income taxes (193,013) 5,524
------------------------------------
Net income (loss) (247,325) 28,554
Preferred stock dividends (3,135) (4,376)
------------------------------------
Net income (loss) applicable to common shareholders $(250,460) $ 24,178
====================================
</TABLE>
6. INCOME TAXES
Income tax expense from both continuing and discontinued operations for the
nine months ended September 30, 1999, differs from that computed using the
expected federal income tax rate of 35%. The difference is primarily
attributable to (1) net increases of $9.1 million in valuation allowances
relating to existing deferred tax assets as of December 31, 1998; (2)
establishing a valuation allowance of $24.5 million for SFAS No. 115 unrealized
losses(see below); (3) the Company not recording a tax benefit of $92.5 million
for realized capital losses, partially offset by (4) the Company's use of
temporary differences of $19.1 million for which a full valuation allowance was
provided at December 31, 1998 (primarily net operating loss carry forwards).
The following table progresses the Company's valuation allowance on
deferred tax assets from December 31, 1998 through September 30, 1999 (in
thousands): <TABLE>
<S> <C>
Balance at December 31, 1998 $ 28,033
Realized investment losses 92,505
Unrealized investment losses 74,377
Nonlife (primarily utilization of net operating loss carryforward) (19,079)
Current operations 9,147
---------------------
Balance at September 30, 1999 $184,983
=====================
</TABLE>
14
<PAGE>
For 1999, due to limited capital loss carry back potential, a full
valuation allowance of $92.5 million was provided against capital loss carry
forwards generated in excess of amounts available for capital loss carry
back. In addition, a full valuation allowance of $74.4 million was
established on deferred tax assets related to SFAS No. 115 unrealized losses
on available-for-sale securities. Furthermore, a valuation allowance of $9.1
million was provided against ordinary deferred tax assets net of deferred tax
liabilities. This valuation allowance reduced the net deferred tax asset to
$10.4 million, an amount equal to the potential benefit of operating loss
carry backs of the Company. Finally, the Company utilized temporary
differences of $19.1 million for which a valuation allowance was previously
provided.
The portion of the SFAS No. 115 related valuation allowance related to
unrealized losses existing at December 31, 1998 was recorded as a charge to
income tax expense pursuant to the requirements of SFAS No. 109, "Accounting for
Income Taxes". This charge increased income tax expense by $24.5 million for the
nine months ended September 30, 1999. The portion of this valuation allowance
related to unrealized losses that have emerged subsequent to December 31, 1998
was recorded as a component of other comprehensive income in shareholders'
equity.
As of December 31, 1998 and March 31, 1999, it was management's judgment
that no valuation allowance was necessary on deferred tax assets related to SFAS
No. 115 unrealized investment losses. This judgment changed during the second
quarter of 1999, due primarily to realized investment losses on the termination
of a reinsurance agreement and realized investment losses on investment
securities associated with the Company's remaining institutional line of
business. As a result of this change in estimate, a valuation allowance of
approximately 50% was provided. It is management's best estimate that as of
September 30, 1999, a valuation allowance of 100% is necessary on deferred tax
assets related to unrealized investment losses. This estimate changed during the
third quarter of 1999, as it is now likely that no substantial tax benefits will
ultimately be realized related to existing unrealized investment losses.
7. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires companies to present basic
and, if applicable, diluted earnings per share ("EPS"), instead of primary and
fully diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income applicable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if options to issue common stock were exercised into
common stock.
15
<PAGE>
The following is a reconciliation of the number of shares used in the basic
and diluted EPS computations for continuing operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
Weighted Weighted
Average Per Share Average Per Share
(SHARES IN THOUSANDS) Shares Amount Shares Amount
- ------------------------------------------------------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
Basic EPS 23,829 $ (1.71) 23,491 $0.14
Effect of dilutive stock options - - 759 -
--------------------------------- ---------------------------------
Diluted EPS 23,829 $ (1.71) 24,250 $0.14
================================= =================================
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998
--------------------------------- ----------------------------------
Weighted Weighted
Average Per Share Average Per Share
(SHARES IN THOUSANDS) Shares Amount Shares Amount
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Basic EPS 23,823 $(2.41) 23,407 $ 0.80
Effect of dilutive stock options 8 - 904 (0.03)
--------------------------------- ----------------------------------
Diluted EPS 23,831 $(2.41) 24,311 $ 0.77
================================= ==================================
</TABLE>
8. COMPREHENSIVE INCOME
The components of comprehensive loss, net of related tax, for the three and
nine months ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
(IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ (87,846) $ 5,678
Change in net unrealized gains and losses on available-for-sale securities (83,072) (38,985)
----------------------------------
Comprehensive loss $ (170,918) $ (33,307)
==================================
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ (247,325) $ 28,554
Change in net unrealized gains and losses on available-for-sale (23,537) (66,233)
securities
-------------------------------------
Comprehensive loss $ (270,862) $ (37,679)
=====================================
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On July 29, 1999, the Company announced that it was restructuring its
institutional business and positioning its retail business and technology
operations for the sale of the Company or its businesses or its assets (a
"Sale Transaction"). The Company's efforts to consummate a Sale Transaction
have not yet been concluded. In order to preserve and maximize value for
policyholders as well as for the Company's creditors and/or stockholders, the
Company requested and was granted regulatory supervision with respect to its
insurance subsidiary, Integrity Life Insurance Company ("Integrity"), from
the Ohio Department of Insurance, its domiciliary regulator.
On August 20, 1999, the Ohio Department of Insurance issued a Supervision
Order. Under the terms of the Supervision Order, Integrity has continued
payments of death benefits, previously scheduled systematic withdrawals,
previously scheduled immediate annuity payments, and agent commissions, but must
receive written consent from the Ohio Department of Insurance for other
payments, including dividends to the Company. The Supervision Order also
suspended the processing of surrenders of policies except in cases of approved
hardship. On August 31, 1999, the Supervision Order was amended to allow
Integrity to resume processing surrender requests from its variable life and
annuity policyholders. The Supervision Order is automatically extended for
successive 60-day periods until written notice ending the supervision is given
to Integrity. On October 30, 1999, the Supervision Order was automatically
extended.
This regulatory action is intended to ensure an orderly process for
addressing the financial obligations of Integrity and to protect the
interests of its individual policyholders. The Ohio Department of Insurance,
in its supervision role, has retained outside consultants including
investment bankers, lawyers, and actuaries to monitor Integrity's operations.
There can be no assurance as to whether a Sale Transaction will be
consummated or whether the Ohio Department of Insurance will seek to place
Integrity in rehabilitation and/or liquidation. At present, the Company
believes that as long as the negotiation process with a current prospective
buyer has a reasonable probability of success, the Ohio Department of
Insurance will not take such action.
Currently, National Integrity Life Insurance Company ("National Integrity")
is not under regulator supervision. However, the possibility exists that
National Integrity could be placed
17
<PAGE>
in rehabilitation by the New York Department of Insurance if the New York
Department believes that such action is necessary or appropriate to protect
the interests of policyholders. National Integrity is domiciled in New York.
The Board of Directors of the Company is continuing to explore certain
strategic alternatives, including a Sale Transaction. There can be no
assurance that a Sale Transaction or any other strategic alternative will be
developed or consummated or as to the price or value that might be obtained,
or whether such price would be sufficient to satisfy all known or potential
claims of the Company's creditors and/or stockholders.
Regardless of whether the Company is able to find a suitable buyer for
its insurance subsidiaries or its businesses or assets, the Company is likely
to cease doing business as a going concern. Even in the event of a sale of
the Company's insurance subsidiaries, the Company is more likely to liquidate
its other assets rather than seek new business initiatives without its
insurance subsidiaries. Accordingly, the Company is considering all of the
options available to it, including a bankruptcy filing. Depending upon
whether a Sale Transaction occurs or not, and depending upon the amount of
the proceeds of any Sale Transaction, there can be no assurance that the
Company is or will be solvent or will be able to avoid a voluntary or
involuntary Chapter 11 or Chapter 7 proceeding under federal bankruptcy law.
As part of the institutional restructuring, on August 3, 1999, the Company
and General American Life Insurance Company ("General American") completed a
transaction (the "General American Transaction") whereby General American
recaptured approximately $3.4 billion of assets and related liabilities
previously ceded through a reinsurance agreement to one of the Company's
insurance subsidiaries, Integrity. The General American Transaction, which
terminated the reinsurance and related agreements, including a marketing
partnership agreement, was effective as of July 26, 1999. These assets and
related liabilities were part of a joint product development, marketing and
reinsurance relationship with General American involving funding agreements and
guaranteed investment contracts. As a result of the General American
Transaction, the Company recorded a charge of $90 million during the second
quarter of 1999, primarily due to interest rate related decreases in the fair
value of investment securities recaptured by General American.
By October 15, 1999, the Company reached settlement agreements with its
remaining three institutional clients, each of which had, or may have had, the
right to withdraw their deposits due to the Company's lower ratings (described
below), the Supervision Order from the Ohio Department of Insurance and/or other
negotiated covenants. Pursuant to these settlement agreements, the parties
agreed to transactions (collectively, the "Termination Transactions") whereby
all of the liabilities of the Company's institutional business with these
remaining three clients were terminated and discharged subject only to the
payment of the March 2000 Note and the March 2000 Payable described below.
Seven shareholder class action lawsuits have been filed in the United
States District Court for the Western District of Kentucky against the
Company and certain of its officers. The lawsuits allege that the Company
and certain of its officers violated sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by, among other things, misrepresenting
and/or omitting material information about its results of operations and
financial condition. The lawsuits further allege that as a result of the
purportedly false and misleading information and failure to disclose material
facts, the price of the Company's securities were artificially inflated. The
lawsuits seek damages in an amount to be proven at trial, interest thereon,
reasonable attorney and expert witness fees and other costs, and other relief
as permitted by law or equity. The Company intends to defend such lawsuits
vigorously. The ultimate outcome of these lawsuits cannot be predicted with
certainty.
As part of the Termination Transactions, the Company transferred or
assigned to these institutional clients all assets (and/or proceeds from the
sale of assets) backing the discharged institutional liabilities, including all
of the marketable securities owned by the Company's special purpose vehicles
("SPVs"), 212 Certificate Company and 312 Certificate Company, and all of the
assets held in certain Integrity separate accounts. Integrity, or the Company,
also paid these
18
<PAGE>
institutional clients an aggregate amount in cash of approximately $15.75
million (the "Cash Payments") at or shortly following execution of the
settlement agreements.
Integrity also executed and delivered a promissory note (the "March 2000
Note") in favor of an institutional client in the principal amount of $16.4
million as part of the Termination Transactions. The March 2000 Note will mature
on the earlier of March 31, 2000, or the closing of certain material sale
transactions ("Acquisition Transactions") with respect to Integrity or National
Integrity, including a change of control transaction. Maturity of the March 2000
Note may be accelerated in the event of a default by Integrity in connection
with insolvency, bankruptcy or certain other events involving Integrity or its
subsidiaries. At maturity, the unpaid principal and accrued interest is payable
in full, provided that if the maturity date occurs prior to March 31, 2000, by
reason of the closing of an Acquisition Transaction, the total principal amount
due will be only $12.0 million if paid in full, with all accrued interest, on
such earlier maturity date.
Integrity also agreed to pay an institutional client, as part of the
Termination Transactions, $7.9 million with interest paid monthly, plus
certain fees and expenses not in excess of $500,000, on the earlier of March
31, 2000, or the closing of certain material transactions by Integrity,
including a change of control transaction (such payment obligation, the
"March 2000 Payable").
The Company does not intend to pursue additional institutional spread or
institutional fee business. As a result of the General American Transaction and
the Termination Transactions, the Company has now effectively exited from the
institutional line of business and, as such, the Company has presented the
operating results and financial condition for all of its institutional business
as discontinued operations on the Condensed Consolidated Statements of
Operations and Balance Sheets, respectively. Prior period amounts have been
restated to reflect this presentation (see Note 4 below). The Company recorded a
total charge of $48.2 million and $193.0 million during the three months and
nine months ended September 30, 1999, respectively, as loss from operations of
discontinued operations.
The Company's decision to restructure and ultimately exit the
institutional business was driven by the need to address concerns of rating
agencies and potential purchasers, improve the Company's statutory
capitalization ratios, and address the interest rate related decline in the
fair value of investment securities in the Company's institutional spread
products segment. In addition, management believes that the restructuring was
necessary in order to position the Company for a Sale Transaction. Statutory
capitalization ratios reflect the Company's surplus, or assets held in excess
of customer deposits and other liabilities, as a percentage of the Company's
assets.
19
<PAGE>
Following the Company's July 29, 1999 announcement, the Company's and its
insurance subsidiaries' ratings were lowered several times. The ratings of the
Company's insurance subsidiaries before and after the downgrades are as follows:
<TABLE>
<CAPTION>
Rating
-----------------------------------------------------
Rating Agency From To
----------------------------- -----------------------------------------------------
Financial Strength and Claims-Paying Ability:
<S> <C> <C>
A.M. Best Company A (Excellent) E (Under Regulatory
Supervision)
Duff & Phelps A+ (High) DD (Under Regulatory
Intervention)
Moody's Investors Service Baa1 (Adequate) B3 (Poor)
Standard & Poor's Corp. (Integrity) A (Strong) R (Regulatory Action)
Standard & Poor's Corp. (National Integrity) A (Strong) B (Weak)
Short-Term Claims-Paying Ability:
Duff & Phelps D-1 D-5
Standard & Poor's Corp. A-1 C
</TABLE>
Customers and distributors of an insurer's annuity products tend to
focus on the ratings of the insurer to determine whether to buy or market
such products. The ability of the Company to distribute its products and the
persistency of its existing business has been and is likely to be materially
adversely affected by the lower ratings and Supervision Order.
Following publication of the lower ratings, the Company complied with
institutional customers' withdrawal requests of $160.3 million during August
1999.
The Company was subject to a covenant in its bank credit agreement (a
restriction on transferring more than 15% of the Company's assets) that required
the Company to pay off, renegotiate or obtain a waiver with respect to its $38
million long-term debt prior to completing the General American Transaction. On
August 3, 1999, the Company secured new debt financing of a $38 million note
from GenAmerica Corporation, an affiliate of General American ("GenAmerica"),
paid in full its outstanding long-term bank debt, and terminated its revolving
line of credit associated with the bank credit agreement.
On November 15, 1999, the Company entered into an extension agreement
with GenAmerica in conjunction with the new note. Pursuant to the extension
agreement, the note will mature on November 30, 1999. The note had previously
been extended to November 15, 1999. Maturity of the note may be accelerated
by GenAmerica in the event of a default by the Company in connection with
insolvency, bankruptcy or certain other events involving the Company or its
subsidiaries upon written notice. At maturity the unpaid principal and all
accrued interest is payable. There can be no assurance that this note will be
further extended.
20
<PAGE>
The Company believes that its capability to market retail products and
the persistency of existing retail business have been materially and
adversely impacted by the Company's insurance subsidiaries' lower ratings.
Accordingly, management believes that the Company's ability to generate
earnings has been substantially impaired. However, it is not possible to
determine the financial effects of this impairment.
On August 26, 1999, the New York Stock Exchange suspended trading of the
Company's common stock. Following the suspension, application was made to the
Securities and Exchange Commission to delist the issue. The Exchange's action
was taken due to the Company's unsatisfactory financial condition as well as the
stock's low selling price. The Exchange's appraisal was based on disclosures
included in the Company's June 1999 Form 10-Q, filed on August 23, 1999. The
Company's common stock subsequently began trading electronically on the OTC
Bulletin Board under the ticker symbol "ARMGA."
On August 27, 1999, Martin H. Ruby also resigned his position as Chief
Executive Officer of the Company and as Chairman and a member of the Board of
Directors of the Company. However, his employment has not been terminated by
the Company. Following Mr. Ruby's resignation, the Company's Board of
Directors created an Office of the President, which is comprised of John R.
Lindholm, President - Retail Business Division, John R. McGeeney, Executive
Vice President - General Counsel, and William H. Panning, Executive Vice
President and Chief Investment Officer. Effective as of November 15, 1999, by
mutual agreement between David E. Ferguson and the Company, Mr. Ferguson's
employment with the Company was terminated. Mr. Ferguson had served as the
President-ARM Technology Group since May 1998 and held other positions within
the Company since July 1993. Under the terms of the agreement, the Company
will not provide severance pay to Mr. Ferguson.
No quarterly cash dividend was paid on the Company's common stock or
preferred stock during the third quarter of 1999. The Company will not pay or
declare a dividend on the Company's common stock or preferred stock during the
fourth quarter of 1999. The declaration and payment of dividends is subject to
the discretion of the Company's Board of Directors based on the Company's
results of operations, financial condition, capital requirements, and investment
opportunities, but subject to legal and regulatory restrictions on the payment
of dividends to the Company by its insurance subsidiaries.
By correspondence dated August 5, 1999, Fidelity's Variable Insurance
Products Fund and Variable Insurance Products Fund II (the "VIP Funds"), managed
by Fidelity Management and Research Company, terminated the various
participation agreements between the VIP Funds and the Company's insurance
subsidiaries effective October 4, 1999. Contractholders of variable annuities in
effect on October 4, 1999 will continue to be permitted to reallocate
investments in the VIP Funds, redeem investments in the VIP Funds and/or invest
in the VIP Funds. Shares of the VIP Funds will not be made available to variable
annuity contractholders who purchase variable annuities offered by the Company's
insurance subsidiaries after October 4, 1999.
The VIP Funds indicated that the decision to terminate the various
participation agreements resulted from the determination that a material adverse
change in the business or financial
21
<PAGE>
condition of the Company's insurance subsidiaries had occurred. The VIP Funds
further stated that if they determined that sufficient improvement in the
financial condition of the Company's insurance subsidiaries occurred, the notice
would be withdrawn.
During the third quarter of 1999, the Company experienced approximately 50
employee resignations out of 330 full time employees. Consequently, management
enacted an incentive stay pay program for certain of its remaining employees.
The program is intended to provide sufficient incentive to retain employees
through at least March 31, 2000. The program has been approved by the Ohio
Department of Insurance with payments to employees guaranteed by Integrity.
There can be no assurances that key employees will in fact be retained and the
Company could incur additional third party consulting expenses as a result.
GENERAL
The Company provides retirement savings and investment products through its
insurance company subsidiaries. During July 1999, the Company made a decision to
no longer pursue institutional spread or institutional fee business. This
business is now classified as discontinued operations for all periods presented
(see Notes 2 and 4 of Notes to Condensed Consolidated Financial Statements). The
Company derives its earnings from the investment spread and fee income generated
by the assets it manages. The Company groups its operations into two operating
segments (retail spread products and options and retail variable fund options)
and a corporate segment, based on the earnings characteristics of the products
or services.
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 segment (primarily fixed and indexed annuities). The Company receives a
fee in exchange for managing customers' deposits, and the customers accept the
investment risk with its retail variable fund options segment (variable annuity
mutual fund options). Fee-based business is less capital intensive than the
spread businesses and provides the Company with diversified sources of income.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998.
The Company recognized a net loss of $39.6 million from continuing
operations during the third quarter of 1999 compared to net income of $5.3
million for the third quarter of 1998. For the nine months ended September 30,
the net loss from continuing operations was $54.3 million in 1999, compared with
net income of $23.0 million in 1998. Major components of the net loss from
continuing operations includes a $16.1 million write-off of intangible assets
(mainly goodwill) in each period, realized investment losses of $6.6 million and
$28.4 million for the three and nine months periods, respectively, and income
taxes substantially higher than the expected 35% federal income tax rate in each
period. (See Note 6 of Notes to Condensed Consolidated Financial Statements.)
Annualized pretax operating earnings for the retail spread products and
options segment were 1.19% and 1.32% of average assets under management of $3.1
billion and $2.78 billion for that segment during the third quarter of 1999 and
1998, respectively. For the nine months ended
22
<PAGE>
September 30, annualized pretax operating earnings for that segment were 1.28%
and 1.39% of average assets under management of $3.0 billion and $2.80 billion
in 1999 and 1998, respectively. Annualized pretax operating earnings for the
retail variable fund options segment (fee business) were 0.61% and 0.53% of
average assets under management of $1.84 billion and $1.36 billion for that
segment during the third quarter of 1999 and 1998, respectively. For the nine
months, annualized pretax operating earnings for that segment were 0.54% and
0.57% of average assets under management of $1.77 billion and $1.29 billion in
1999 and 1998, respectively.
Annualized investment spread rates for the Company's spread-based operating
segment for the three and nine months ended September 30, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------------
1999 1998
------------------------------------------------------------------------ --------------------- ------------------
Retail spread products and options segment:
<S> <C> <C>
Investment yield 7.75% 7.81%
Average credited rate (5.86%) (5.78%)
--------------------- ------------------
Investment spread rate 1.89% 2.03%
===================== ==================
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------
1999 1998
--------------------- ------------------
Retail spread products and options segment:
<S> <C> <C>
Investment yield 7.84% 7.85%
Average credited rate (5.81%) (5.77%)
--------------------- ------------------
Investment spread rate 2.03% 2.08%
===================== ==================
</TABLE>
During the third quarter of 1999, the Company held higher cash balances in
order to meet increased surrender activity. This resulted in an overall decrease
in investment yields for 1999 compared to 1998.
The average credited rate pattern is dependent upon the general trend of
market interest rates, frequency of credited rate resets and business mix.
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 $7.0 million in the third quarter of 1999 from
$5.2 million in the third quarter of 1998. For the nine months ended September
30, variable annuity fees increased to $19.9 million in 1999 from $14.7 million
in 1998. This increase is primarily attributable to asset growth from a stock
market driven increase in the value of existing variable annuity deposits
invested in mutual funds and from the receipt of variable annuity deposits.
23
<PAGE>
Assets under management by business segment as of September 30, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1999 1998
----------------------------------------------------------
Percent of Percent of
(DOLLARS IN MILLIONS) Amount Total Amount Total
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Spread products and options (primarily fixed annuity
deposits) $3,063.7 64% $2,760.9 67%
Variable fund options (variable annuity deposits
invested in mutual funds) 1,723.1 36 1,340.2 33
---------------------------------------------------------
Total assets under management $ 4,786.8* 100% $ 4,101.1 100%
=========================================================
</TABLE>
* Persistency of existing retail business has been materially adversely
affected by the lower ratings of the Company's insurance subsidiaries and
Supervision Order. (See Notes 2 and 3 of Notes to Condensed Consolidated
Financial Statements and "--Recent Developments.")
The increase in total retail assets under management was primarily
attributable to sales, net of surrenders, of a variety of retail products, and
the investment performance of variable fund options due to strong stock market
returns.
Sales represent premiums and deposits received for products offered through
the Company's insurance subsidiaries. Sales by market and type of product for
the three and nine months ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
(IN MILLIONS) 1999 1998
-------------------------------- ---------------- ---------------
Retail sales:
<S> <C> <C>
Spread products $ 88.4 $ 40.3
Variable products:
Spread options 20.3 27.0
Fund options 47.7 72.5
---------------- ---------------
Total variable products 68.0 99.5
================ ===============
Total retail sales $ 156.4 $ 139.8
================ ===============
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
(IN MILLIONS) 1999 1998
--------------------------------------- ---------------- ---------------
Retail sales:
<S> <C> <C>
Spread products $ 414.0 $ 104.4
Variable products:
Spread options 97.1 63.0
Fund options 172.3 237.1
---------------- ---------------
Total variable products 269.4 300.1
---------------- ---------------
Total retail sales $ 683.4 $ 404.5
================ ===============
</TABLE>
The lowering of the Company's insurance subsidiaries' ratings during the
third quarter of 1999 and the Supervision Order have materially adversely
affected both current and future retail sales growth and persistency of existing
retail business. As a result of the downgrades a number of broker dealers are no
longer accepting business from the Company. Also, effective October 4, 1999,
Fidelity Management and Research Company terminated the various participation
agreements between the Variable Insurance Product Funds and the Company's
insurance subsidiaries. In addition, the Company has exited the institutional
spread and institutional fee businesses. Accordingly, management believes that
the Company's ability to generate earnings has been substantially impaired. (See
Note 2 of Notes to Condensed Consolidated Financial Statements and "-Recent
Developments").
Total retail sales increased during the nine months and three months ended
September 30, 1999 with an increase of approximately 69% and 12%, respectively,
over the corresponding prior periods. The increase in retail sales occurred
during the first half of the year and early in the third quarter prior to the
lowering of the Company's insurance subsidiaries' ratings during the third
quarter of 1999 and the Supervision Order. The previous growth in the first half
of the year and early third quarter was attributable to an increase in marketing
efforts to broaden and strengthen the Company's retail franchise. This included
efforts to expand and diversify the Company's retail market presence by
increasing the number of producers. Effective April 16, 1999, the Company
completed the acquisition of the assets and operations of Financial Marketing
Group, Inc., FMG Distributors, Inc. and FMG Advisors, Inc. (collectively,
"FMG"). FMG, one of the nation's largest independent marketers of variable and
fixed annuities, was a key distributor of the Company's products. The
acquisition was intended to expand the Company's in-house retail distribution
capabilities. However, as discussed above, sales of all retail products have
been materially adversely affected by the lowering of the Company's insurance
subsidiaries' ratings during the third quarter of 1999 and the Supervision
Order.
Net surrenders of retail spread and variable annuity products and options
issued by the Company's insurance subsidiaries were $232.5 million for the third
quarter of 1999, compared to $99.7 million for the third quarter of 1998. For
the nine months, such net surrenders were $427.8 million in 1999, compared to
$283.7 million in 1998. Surrender charge income increased to $5.0 million in the
third quarter of 1999, from $1.3 million in the third quarter of 1998. For the
nine months ended September 30, surrender charge income increased to $8.0
million in 1999 from $4.5 million in 1998. Current and future surrenders of
retail products have been adversely affected due to the lowering of the
Company's insurance subsidiaries' ratings
25
<PAGE>
during the third quarter of 1999 and the Supervision Order. However, the
Supervision Order regarding Integrity suspended the processing of surrender of
policies (except variable life and annuity policies) which has kept the level of
surrenders from being even higher. It is likely that surrender activity will
continue at a high level if the Company is unable to find a suitable buyer
for the Company's insurance subsidiaries.
Operating expenses were $10.9 million in the third quarter of 1999,
compared to $7.6 million in the third quarter of 1998. For the nine months ended
September 30, operating expenses were $28.9 million in 1999, compared to $21.5
million in 1998. Operating expenses for the first nine months of 1999 included
increased spending to strengthen the in-house investment department, marketing
operations and on technology infrastructure to enhance retail franchise Internet
applications. In addition, the third quarter operating expenses include certain
costs associated with the potential sale of the Company.
Amortization of deferred policy acquisition costs related to operations was
$7.6 million in the third quarter of 1999, compared to $3.2 million in the third
quarter of 1998. For the nine months ended September 30, such amortization was
$16.8 million in 1999, compared to $9.2 million in 1998. This increase was the
result of growth in the deferred policy acquisition cost asset due to additional
sales of fixed, indexed and variable annuity products and increased amortization
in the third quarter as the result of higher surrenders as discussed previously.
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.
Approximately $16.0 million of certain intangible assets were written
off during the third quarter of 1999. These intangible assets primarily
include goodwill and certain other costs associated with the SBM Company
acquisition in 1995 and the acquisition of a third party distributor in 1999.
The Company recorded non-recurring charges of $4.7 million for the nine
months ended September 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.
Other expenses, net, increased to $3.8 million in 1999, from $1.8 million
in 1998. The increase is primarily attributable to higher mortality related
costs in 1999.
Realized investment gains and losses, which are reported net of related
amortization of deferred policy acquisition costs and value of insurance in
force, were losses of $6.6 million during the third quarter of 1999 and $4.6
million during the third quarter of 1998. For the nine months ended September
30, realized investment losses were $28.4 million in 1999, compared to realized
investment gains of $4.7 million in 1998. The higher level of losses in 1999
include an estimated loss of $17.9 million related to the write-down to fair
value of fixed income securities believed to be permanently impaired and
securities sold in the third quarter at a loss in order to increase liquidity
for higher surrenders from the ratings downgrade and Supervision Order.
The Company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability to
realize the 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
26
<PAGE>
collect all amounts due according to the contractual terms of the security), the
cost basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the write-down is included in
earnings as a realized loss. Future events may occur, or additional or updated
information may be received, which may necessitate future write-downs of
securities in the Company's portfolio. Significant write-downs in the carrying
value of investments could materially adversely affect the Company's net income
in future periods.
The Company recorded income tax expense from both continuing and
discontinued operations of $21.3 million for the third quarter of 1999, compared
to income tax expense of $0.2 million for the third quarter of 1998. For the
nine months ended September 30, income tax expense was $41.7 million in 1999,
compared to $9.9 million in 1998. The difference between the 35% statutory tax
rate and the 1999 effective rates for both the three months and nine months
ended September 30, 1999 primarily relates to increases in deferred tax asset
valuation allowances primarily attributable to (1) the Company determining that
it is now more likely than not that certain deferred tax assets related to
continuing operations and SFAS No. 115 in unrealized losses that existed as of
December 31, 1998 will not be realized, and (2) the Company not recording a tax
benefit for capital and other losses incurred during 1999. The increases in
deferred tax asset valuation allowances were partially offset as a result of the
Company utilizing net operating loss carry forwards and other temporary
differences for which a valuation allowance was previously provided.
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 September 30, 1999 totaled $1.9
billion, compared with $1.9 billion at December 31, 1998, representing
approximately 79% and 84% of total cash and investments, respectively.
27
<PAGE>
The Company's cash and investments as of September 30, 1999 are detailed as
follows:
<TABLE>
<CAPTION>
Amortized Cost
---------------------------
Percent of Estimated
(DOLLARS IN MILLIONS) Amount Total Fair Value
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Corporate securities $1,155.5 48.7% 1,018.4
Mortgage-backed securities:
Collateralized mortgage obligations:
Non-agency 426.5 17.9 390.1
Agency 58.0 2.4 50.7
Agency pass-throughs 17.4 0.7 17.3
Asset-backed securities 136.6 5.7 119.8
U.S. Treasury securities and obligations
of U.S. government agencies 50.7 2.1 49.6
Other government securities (primarily foreign) 39.5 1.7 32.8
------------------------------------------
Total fixed maturities 1,884.2 79.2 1,678.7
Equity securities (i.e., non-redeemable
preferred stock) 23.7 1.0 21.5
Mortgage loans on real estate 12.4 0.5 12.4
Policy loans 132.0 5.6 132.0
Cash and cash equivalents 324.5 13.7 324.5
------------------------------------------
Total cash and investments $2,376.8 100.0% 2,169.1
==========================================
</TABLE>
28
<PAGE>
Pursuant to SFAS No. 115, the Company classifies its entire fixed
maturities portfolio as available-for-sale. Fixed maturities classified as
available-for-sale are carried at fair value and changes in fair value, net of
related value of insurance in force and deferred policy acquisition cost
amortization and deferred income taxes, are charged or credited directly to
shareholders' equity and classified as accumulated other comprehensive income
from net unrealized gains and losses on available-for-sale securities.
Net unrealized losses on available-for-sale securities totaled $161.9
million (net of $40.2 million of related capitalization of deferred policy
acquisition costs and value of insurance in force and $10.5 million of deferred
income tax benefit which was completely offset by a full valuation allowance
included in the Company's tax provision) at September 30, 1999, compared to net
unrealized losses of $138.3 million (net of $20.6 million of related
capitalization of deferred policy acquisition costs and value of insurance in
force and $74.5 million of deferred income tax benefit) at December 31, 1998.
The unrealized losses on available-for-sale securities are attributable to
volatility in the bond market that began during the third quarter of 1998 and
continue currently. Economic contractions in Asia, Latin America and Russia
created a "flight to quality," mainly to U.S. Treasury securities, which
decreased values in the rest of the bond market as a result of the widening of
credit spreads on bonds (i.e., the yield on an investment above the yield of a
U.S. Treasury security with a similar duration). In addition, the liquidity in
the bond market has diminished which further depressed bond prices. Also, during
1999, the overall level of interest rates increased further. Further increases
in interest rates and/or widening of credit spreads will further decrease bond
prices and increase the unrealized losses on available-for-sale securities.
The change in net unrealized gains and losses on available-for-sale
securities for the nine months ended September 30, 1999 decreased reported
shareholders' equity by $23.5 million as compared to a decrease of $158.6
million for the year ended December 31, 1998. At September 30, 1999 and December
31, 1998, shareholders' equity excluding the effects of SFAS No. 115 was $100.8
million and $348.8 million, respectively.
The Company's portfolio includes collateralized mortgage obligations
("CMOs"), which are pools of mortgages that are segregated into sections, or
tranches, that provide prioritized retirement of bonds rather than a pro rata
share of principal return as in the agency pass-through structure. The
underlying mortgages of agency CMOs are guaranteed by the U.S. government or
U.S. government agencies. At September 30, 1999, 77% of the Company's non-agency
CMO investments (on an amortized cost basis) used mortgage loans or mortgage
loan pools (primarily residential in nature), letters of credit, agency mortgage
pass-through securities, and other types of credit enhancement as collateral.
The remaining 23% of the non-agency CMOs used commercial mortgage loans as
collateral.
The Company attempts to manage prepayment exposure on CMO holdings by
diversifying among various CMO tranches, and across alternative collateral
classes. Additionally, prepayment sensitivity is evaluated and monitored, giving
consideration to the collateral characteristics such as weighted average coupon
rate, weighted average maturity and the prepayment history of the specific
collateral. Mortgage-backed securities ("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.
29
<PAGE>
Securities that have an amortized cost that is greater than par (i.e., purchased
at a premium) that are backed by mortgages that prepay faster than expected will
incur a reduction in yield or a loss, versus an increase in yield or a gain if
the mortgages prepay slower than expected. Those securities that have an
amortized cost that is less than par (i.e., purchased at a discount) that are
backed by mortgages that prepay faster than expected will generate an increase
in yield or a gain, versus a decrease in yield or a loss if the mortgages prepay
slower than expected. The reduction or increase in yields 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 $2.9 million and $11.2 million,
respectively, at September 30, 1999.
Asset-backed securities ("ABS") are securitized bonds which can be backed
by, but not limited to, collateral such as home equity loans, second mortgages,
automobile loans and credit card receivables. At September 30, 1999, home equity
loan collateral represented 44% 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.
The Company's investment in corporate securities includes collateralized
bond obligations ("CBOs") and collateralized loan obligations ("CLOs"). CBOs are
securities backed by pools of bonds, structured so that there are several
classes of bondholders with varying maturities, called tranches. The principal
payments from the underlying pool of bonds are used to retire the bonds on a
priority basis. CLOs are similar to CBOs except that they are securities backed
by pools of commercial loans.
Total cash and investments (on an amortized cost basis) were 91% and 89%
investment grade or equivalent at September 30, 1999 and December 31, 1998,
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 and Poor's Corporation ("S&P") of BBB- or above. Yields available on
non-investment grade securities are generally higher than are available on
investment grade securities. However, credit risk is greater with respect to
such non-investment grade securities. The Company attempts to reduce the
risks associated with non-investment grade securities by limiting exposure to
any one issuer and by monitoring the creditworthiness of such issuers.
Additionally, the Company has a diversified portfolio of dollar denominated
bonds issued in the U.S. by foreign governments, banks and corporations,
including an exposure to the Asian and Latin American markets. At September
30, 1999, such foreign securities represented 8% of the Company's cash and
investments (on an amortized cost basis), with Asian and Latin American
securities representing 6% of total cash and investments. The Company's Asian
and Latin American non-investment grade securities represented approximately
37% of the Company's total investment in non-investment grade securities. The
Company reduces the risks associated with buying foreign securities by
limiting the exposure to both issuer and country. The Company monitors the
creditworthiness of such issuers and the stability of each country. The
Company's investment portfolio has minimal exposure to real estate, mortgage
loans and common equity securities, which represented less than 0.5% of cash
and investments as of September 30, 1999.
30
<PAGE>
At September 30, 1999, 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
-------------------------
NAIC S&P Percent Estimated
Designation Comparable Rating Amount of Total Fair Value
-------------------------------- ------------------------------------------- ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1 AAA, AA, A $ 840.7 44.5% 760.4
2 BBB 819.9 43.5 732.1
3 BB 114.1 6.1 89.8
4 B 101.6 5.4 88.6
5 CCC, CC, C 6.7 0.4 6.4
6 CI, D 1.2 0.1 1.4
------------ ------------ ------------
Total fixed maturities $1,884.2 100.0% 1,678.7
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Assets held in the Company's insurance subsidiaries' guaranteed separate
accounts (on an amortized cost basis) include $820 million and $720 million of
cash and investments at September 30, 1999 and December 31, 1998, respectively,
of which approximately 85% and 91% were fixed maturities. Total guaranteed
separate account cash and investments were 91% investment grade at both
September 30, 1999 and December 31, 1998. Separate accounts are investment
accounts maintained by an insurer to which funds have been allocated for certain
products under provisions of relevant state law. The investments in each
separate account are maintained separately from those in other separate accounts
and from the insurer's general account.
On March 9, 1999, the Company named BlackRock Financial Management, Inc.
("BlackRock") as the core fixed income manager for the Company's investment
portfolio. BlackRock provides the Company with investment management services
for a broad range of asset classes and investment strategies.
BlackRock, headquartered in New York City, is majority-owned by PNC Bank
Corp., one of the largest diversified financial services companies in the U.S.
As of December 31, 1998, BlackRock managed $131 billion of assets on behalf of
individual and institutional investors worldwide. As one of the largest
independent managers of insurance assets in the nation, BlackRock has combined
its capital markets capabilities with its sophisticated proprietary investment
technology to customize service on behalf of insurers in the U.S. and abroad.
INSURANCE REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision by the states in which they are organized and in the other
jurisdictions where they are authorized to transact business. State insurance
laws establish supervisory agencies with broad administrative and supervisory
powers including granting and revoking licenses to transact business, regulation
of marketing and other trade practices, operating guaranty associations,
licensing agents, approving
31
<PAGE>
policy forms, regulating certain premium rates, regulating insurance holding
company systems, establishing reserve requirements, prescribing the form and
content of required financial statements and reports, performing financial
and other examinations, determining the reasonableness and adequacy of
statutory capital and surplus, regulating the type and amount of investments
permitted, limiting the amount of dividends that can be paid without first
obtaining regulatory approval, and other related matters. The primary purpose
of such supervision and regulation under the insurance statutes of Ohio and
New York (the domiciliary states of the Company's insurance subsidiaries,
Integrity and National Integrity, respectively), as well as other
jurisdictions, is the protection of policyholders rather than investors or
shareholders of an insurer. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require the filing of
annual and other reports relating to the financial condition of insurance
companies.
In the event of a default on the Company's debt or the insolvency,
liquidation or other reorganization of the Company, the creditors and
stockholders of the Company will have no right to proceed against the assets of
Integrity or National Integrity or to cause their liquidation under federal or
state bankruptcy laws. Insurance companies are not subject to such bankruptcy
laws but are instead governed by state insurance laws relating to liquidation or
rehabilitation due to insolvency or impaired financial condition. Therefore, if
Integrity or National Integrity were to be liquidated or be the subject of
rehabilitation proceedings, such liquidation or rehabilitation proceedings would
be conducted by the OhioSuperintendent of Insurance and the New York Insurance
Superintendent, respectively, as the receiver with respect to all of Integrity's
or National Integrity's assets and business. Under the Ohio and New York
insurance laws, all creditors of Integrity or National Integrity, including
policyholders, would be entitled to payment in full from such assets before the
Company or Integrity Holdings, Inc., as indirect or direct stockholders, would
be entitled to receive any distribution therefrom. On August 20, 1999, a
Supervision Order was issued with respect to Integrity. On October 30, 1999, the
Supervision Order was automatically extended (see " - Recent Developments").]
LIQUIDITY AND FINANCIAL RESOURCES
HOLDING COMPANY OPERATIONS
The Company's efforts to consummate a Sale Transaction have not yet been
concluded. In order to preserve and maximize value for policyholders as well
as for the Company's creditors and/or stock holders the Company requested and
was granted regulatory protection with respect to Integrity from the Ohio
Department of Insurance. On August 20, 1999, Integrity consented to a
Supervision Order issued by the Ohio Department of Insurance. On August 31,
1999, the Supervision Order was amended and on October 30, 1999, the
Supervision Order was automatically extended.
The Board of Directors of the Company is continuing to explore certain
strategic alternatives, including a Sale Transaction. There can be no
assurance that a Sale Transaction or any other strategic alternative will be
developed or consummated or as to the price or value that might be obtained,
or whether such price would be sufficient to satisfy all known or potential
claims of the Company's creditors and/or stockholders.
Due to the Company's limited resources and the substantial likelihood
that the Company will be unable to receive dividends from its insurance
subsidiaries sufficient to meet ongoing cash needs, management believes that
if a Sale Transaction is not consummated, then the Company's ability to
32
<PAGE>
continue as a going concern is in substantial doubt. Without the financial
strength of a buyer, the Company may not have adequate levels of capital to
service its obligations, including the $38 million note and the $75 million
of preferred stock. There can be no assurance that the Company will be able
to obtain sufficient capital to meet its liquidity needs. Even in the event
of a sale of the Company's insurance subsidiaries, the Company is more likely
to liquidate its other assets rather than seek new business initiatives
without its insurance subsidiaries. Accordingly, the Company is considering
all of the options available to it, including a bankruptcy filing. Depending
upon whether a Sale Transaction occurs or not, and depending upon the amount
of the proceeds of any Sale Transaction, there can be no assurance that the
Company is or will be solvent or will be able to avoid a voluntary or
involuntary Chapter 11 or Chapter 7 proceeding under federal bankruptcy law.
The Company's principal need for liquidity has historically consisted of
debt service obligations under its bank financing agreement, dividend
payments on its common and preferred stock, operating expenses not absorbed
by management fees charged to its subsidiaries, and corporate development
expenditures. At September 30, 1999, the Company had cash and investments at
the holding company level of approximately $30.0 million. The agreement for
the Company's new debt financing in the amount of a $38 million note provides
that the note will mature on November 30, 1999. Maturity of the note may be
accelerated by GenAmerica in the event of a default by the Company in
connection with insolvency or certain other events affecting the Company or
its subsidiaries upon written notice. At maturity, the unpaid principal and
all accrued interest is payable. There can be no assurance that this note
will be further extended.
To support the operations of its subsidiaries, the Company has from time to
time made capital contributions to its subsidiaries. To date during 1999, the
Company has made capital contributions of approximately $15 million to 312
Certificate Company, one of its subsidiaries.
The Company is dependent on dividends from Integrity and management and
service fee income from the Company's subsidiaries to meet ongoing cash needs,
including amounts needed to pay dividends and for debt service. The ability of
the Company's insurance subsidiaries to pay dividends and enter into agreements
with affiliates for the payment of fee income is limited by state insurance
laws. During 1998, the Company received dividends in the amount of $6 million
from Integrity. During the first half of 1999, the Company received dividends in
the amount of $4 million from Integrity. As a result of the Supervision Order,
Integrity may not pay dividends to the Company without prior approval of the
Ohio Department of Insurance. It is unlikely that the Ohio Department of
Insurance will allow Integrity to pay any dividends to the Company for the
foreseeable future.
No quarterly cash dividend was paid on the Company's common stock or
preferred stock during the third quarter of 1999. The Company will not pay or
declare a dividend on the Company's common stock or preferred stock during
the fourth quarter of 1999.
33
<PAGE>
INSURANCE SUBSIDIARIES OPERATIONS
The primary sources of liquidity for 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 supporting retail business 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.
The regulatory action of the Ohio Department of Insurance is intended to
ensure an orderly process for addressing the financial obligations of Integrity
and to protect the interests of its individual policyholders. Integrity has
continued payments of death benefits, previously scheduled systematic
withdrawals, previously scheduled immediate annuity payments, and agent
commissions, but must receive written consent from the Ohio Department of
Insurance for other payments including dividends to the Company. The Supervision
Order also suspended the processing of surrenders of policies except in cases of
approved hardship. On August 31, 1999, the Supervision Order was amended to
allow Integrity to resume processing surrender requests from its variable life
and annuity policyholders. The Supervision Order is automatically extended for
successive 60-day periods until written notice ending the supervision is given
to Integrity. On October 30, 1999, the Supervision Order was automatically
extended.
If a Sale Transaction is not consummated, the Ohio and New York
Departments of Insurance may take action with regard to the insurance
subsidiaries that could include rehabilitation or liquidation proceedings.
(See " - Insurance Regulation").
During the nine months ended September 30, 1999 and 1998, the Company
met its liquidity needs primarily by cash flows from operating activities and
principal payments and redemptions of investments. At September 30, 1999,
cash and cash equivalents totaled $324.5 million compared to $202.0 million
($525.3 million including cash from discontinued operations) at December 31,
1998. The Company's aim is to manage its cash and cash equivalents position
in order to satisfy short-term liquidity needs. In connection with this
management of cash and cash equivalents, the Company may invest cash in
short-duration fixed maturities to capture additional yield when short-term
liquidity requirements permit.
The Company generated cash flows of $286.1 million and $191.3 million from
operating activities during the nine months ended September 30, 1999 and 1998,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $5.8 billion and $4.6 billion in cash flows
during the nine months ended September 30, 1999 and 1998, respectively, which
were offset by purchases of investments of $1.9 billion and $6.5 billion.
34
<PAGE>
EFFECTS OF INTEREST RATE CHANGES
The Company's retail spread and its discontinued institutional spread
businesses are subject to several inherent risks arising from movements in
interest rates. First, interest rate changes can cause compression of the
Company's net spread between interest earned on investments and interest
credited on customer deposits, thereby adversely affecting the Company's
results. Second, if interest rate changes produce an unanticipated increase in
surrenders of the Company's spread-based products, the Company may be forced to
sell investment assets at a loss in order to fund such surrenders. Finally,
changes in interest rates can have significant effects on the performance of the
Company's portfolio of MBSs, including its CMOs, as a result of changes in the
prepayment rate of the loans underlying such securities.
The Company will experience spread compression when it is unable to
maintain the margin between its investment earnings and its crediting rates.
When interest rates rise, the Company may not be able to replace the assets in
its investment portfolio with sufficient higher-yielding assets to fund higher
crediting rates or to maintain full profit margins without assuming excessive
asset side risk. As a result, the Company may experience either a decrease in
sales and an increase in surrenders where it is able to maintain its spread by
not raising its crediting rates, or spread compression if it is willing or
contractually required to increase its crediting rates. Conversely, when
interest rates fall, the Company would have to reinvest the cash received from
its investments (i.e., interest and payments of principal upon maturity or
redemption) in the lower-yielding instruments then available. If the Company
chose not to or was unable (i.e., due to guaranteed minimum or fixed crediting
rates or limitations on the frequency of crediting-rate resets) to reduce the
crediting rate on its spread-based products or acquire relatively higher-risk
securities yielding higher rates of return, spread compression would occur.
If, as a result of interest rate increases, the Company were unable or
chose not to raise its crediting rates to keep them competitive, the Company
might experience a decrease in sales and increase in surrenders. If the Company
lacked sufficient liquidity, the Company might have to sell investment
securities to fund associated surrender payments. Because the value of such
securities would likely have decreased in response to the increase in interest
rates, the Company would realize a loss on such sales. Although certain of the
Company's products contain market value adjustment features which approximate
and transfer a portion of such loss to the customer if the selected time horizon
for the fixed return investment is terminated prior to maturity, there can be no
assurance that the Company would be fully insulated from realizing any losses on
sales of its securities. In addition, regardless of whether the Company realizes
an investment loss, surrenders would produce a decrease in invested assets, with
an adverse effect on future earnings therefrom.
YEAR 2000
The Company has undertaken a Year 2000 project that includes all of its
subsidiaries. The Company's Year 2000 project is on schedule and is currently
95% complete.
During the assessment phase of the project, the Company assessed all
production applications, hardware (personal computers and servers), system
software, vendors, facilities and business partners. Where Year 2000 problems
were found, the necessary upgrades and repairs have been
35
<PAGE>
completed. Although the Company is still assessing various logistic concerns
with its facilities, its production systems are now Year 2000 compliant.
The Company has also conducted certification testing. Certification testing
serves to verify the results of the assessment and repairs. The few problems
that were discovered in this phase have been repaired and re-tested.
As a precaution, the Company is in the process of developing a contingency
and business resumption plan. Preparations to implement the contingency and
business resumption plan will continue through December 31, 1999.
Although the Company anticipates no major interruption of business
activities due to Year 2000 problems, that will be dependent, in part, upon the
activity of third parties. Even though the Company has assessed and continues to
assess third party issues, it has no direct ability to influence the compliance
actions of such parties. Accordingly, while the Company believes its actions in
this regard should have the effect of reducing Year 2000 risks, it is unable to
eliminate them or to estimate the ultimate effect Year 2000 risks will have on
the Company's operations.
The cost of the Company's Year 2000 initiatives has not been and is not
expected to be material to the Company's results of operations or financial
condition.
The estimated date on which the Company believes it will complete its Year
2000 compliance efforts, and the expenses related to the Company's Year 2000
compliance efforts are based upon management's best estimates, which were based
on assumptions of future events, including the availability of certain
resources, third party modification plans and other factors. There can be no
assurance that these results and estimates will be achieved and the actual
results could materially differ from those anticipated.
FORWARD-LOOKING STATEMENTS
Statements other than historical information contained in this report are
forward-looking statements and, therefore, subject to risks and uncertainties,
including those identified below, which would cause the actual results to differ
materially from statements made. In addition to statements which are
forward-looking by reason of context, the words "believe," "expect,"
"anticipate," "intend," "designed," "goal," "objective," "optimistic," "will"
and similar expressions identify forward-looking statements. Factors which could
cause actual results to differ materially from the forward-looking statements,
thereby resulting in a material adverse impact on the business, results of
operations or financial condition of the Company, include but are not limited to
(i) the Company's ability to consummate a Sale Transaction, to continue as a
going concern, to service its obligations or to meet its liquidity needs; (ii)
access to sufficient capital to fund the Company's operations; (iii) changes in
population demographics; (iv) changes in current federal income tax, securities
and insurance laws and regulations; (v) the Company's ability to develop and
receive any necessary regulatory or other approval of new products intended to
be marketed to individuals for retirement planning and/or to large institutions
for cash management and other investment; (vi) regulatory constraints on
existing or future products rendering the products unmarketable or unprofitable;
(vii) a downgrade in the short term, financial strength or other credit ratings
of the Company's insurance affiliates, the Company's counterparties or other
issuers of securities invested in by the Company; (viii) the
36
<PAGE>
Company's ability to favorably differentiate its products and service levels
from those of competitors, including other insurance and financial services
companies and various investment vehicles readily available to consumers and
large institutions; (ix) loss of key personnel; (x) the Company's ability to
manage assets and produce returns providing sufficient spread on invested assets
backing policyholder and other liabilities; (xi) the strength and liquidity of
the securities markets and the interest rate environment; (xii) increase in the
size and improvement in the productivity of the Company's distribution system;
(xiii) access to sufficient capital at favorable rates as needed to operate and
grow the Company's business lines; (xiv) the Company's ability to ensure the
continuous availability of technology at levels necessary to efficiently process
and maintain the business produced for the entire enterprise and manage the
assets of the enterprise; (xv) litigation, with or without merit, claiming
significant resources of the enterprise; (xvi) the impact of consolidations,
mergers, acquisitions or other business investments or combinations in the
financial services industry, including or not including, the Company and/or its
affiliates; and (xvii) the ability of the Company to adequately remediate all
operational systems and non-computer devices and internal computer software to
avoid Year 2000 problems without significant additional expense, and the
reliability of assurances obtained from and ongoing data exchange testing with
key vendors and business partners to address Year 2000 problems. 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.
Forward-looking statements speak only as of the date on which they are made, and
the Company does not undertake an obligation to update or revise any
forward-looking statements.
37
<PAGE>
PART II. OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Seven shareholder class action lawsuits have been filed in the United
States District Court for the Western District of Kentucky against the Company
and certain of its officers. These lawsuits are as follows: Gottlieb v. ARM
Financial Group, Inc., et al. (Civil Action No. 3:99 CV-539-H), was filed on
August 18, 1999; Kehoe v. ARM Financial Group, Inc., et al. (Civil Action No.
3:99 CV-542-H), was filed on August 19, 1999; Yurkoski v. ARM Financial Group,
Inc. et al. (Civil Action No. 3:99 CV-571-H) was filed on August 30, 1999; Trust
Advisors Equity Plus, LLC v. ARM Financial Group, Inc. et al. (Civil Action No.
3:99 CV-577-H) was filed on September 1, 1999; Galli v. ARM Financial Group,
Inc. et al. (Civil Action No. 3:99 CV-580-S) was filed on September 3, 1999;
Gross and Chaveton v. ARM Financial Group, Inc. et al. (Civil Action No. 3:99
CV-596-S) was filed on September 9, 1999; and Shaheen v. ARM Financial Group,
Inc. et al. (Civil Action No. 3:99 CV-605-H) was filed on September 15, 1999.
The lawsuits allege that the Company and certain of its officers violated
sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by, among other
things, misrepresenting and/or omitting material information about its results
of operations and financial condition. The lawsuits further allege that as a
result of the purportedly false and misleading information and failure to
disclose material facts, the price of the Company's securities were artificially
inflated. The lawsuits seek damages in an amount to be proven at trial, interest
thereon, reasonable attorney and expert witness fees and other costs, and other
relief as permitted by law or equity. The Company intends to defend such
lawsuits vigorously. The ultimate outcome of these lawsuits cannot be predicted
with certainty.
ITEM 5. OTHER INFORMATION
On August 26, 1999, the New York Stock Exchange suspended trading of the
Company's common stock. Following the suspension, application was made to the
Securities and Exchange Commission to delist the issue. The Exchange's action
was taken due to the Company's unsatisfactory financial condition as well as the
stock's low selling price. The Exchange's appraisal was based on disclosures
included in the Company's 10-Q, filed on August 23, 1999. The Company's common
stock has subsequently begun trading electronically on the NASD Bulletin Board
under the ticker symbol "ARMGA."
Effective as of November 15, 1999, by mutual agreement between David E.
Ferguson and the Company, Mr. Ferguson's employment with the Company was
terminated. Mr. Ferguson had served as the President-ARM Technology Group since
May 1998 and held other positions within the Company since July 1993. Under the
terms of the agreement, the Company will not provide severance pay to Mr.
Ferguson.
38
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
A report on form 8-K was filed by the Company on August 18, 1999, to
announce the completion of the transaction whereby General American Life
Insurance Company recaptured approximately $3.4 billion of assets and related
liabilities previously ceded through a reinsurance agreement to one of the
Company's insurance subsidiaries, Integrity Life Insurance Company.
39
<PAGE>
EXHIBITS (ELECTRONIC FILING ONLY)
10.1 Forbearance Agreement dated as of August 11, 1999, by and among 312
Certificate Company, Integrity Capital Advisors, Inc., Integrity Life
Insurance Company, International Securitization Corporation, each of
the Liquidity Banks whose names appear on the signature pages of the
Forbearance Agreement, and The First National Bank of Chicago.
10.2 Termination and Sale Agreement dated as of August 27, 1999, by and
among 312 Certificate Company, Integrity Capital Advisors, Inc.,
Integrity Life Insurance Company, International Securitization
Corporation, and The First National Bank of Chicago.
10.3 Termination Agreement between The Chase Manhattan Bank and 212
Certificate Company.
10.4 Form of Settlement Agreement dated as of September 23, 1999, by and
among 212 Certificate Company, Integrity Life Insurance Company, Park
Avenue Receivables Corporation and The Chase Manhattan Bank.
10.5 Promissory Note dated as of September 23, 1999, made by Integrity Life
Insurance Company in favor of The Chase Manhattan Bank.
10.6 Termination Agreement dated as of October 14, 1999, by and among the
Corporation, Bayerische Landesbank Girozentrale, New York Branch,
Lehman Brothers Inc., The Bank of New York, U.S. Bank Trust National
Association, and BRAVO Trust Series 1997-1.
10.7 Note and Term Loan Agreement Revision Agreement dated as of October
29, 1999, between GenAmerica Corporation and ARM Financial Group, Inc.
10.8 Revision Agreement dated as of November 15, 1999, between GenAmerica
Corporation and ARM Financial Group, Inc.
27 Financial Data Schedule.
99.1 Amended Supervision Order dated August 31, 1999, issued by the
Director of Insurance of the State of Ohio.
40
<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 November 15, 1999.
ARM FINANCIAL GROUP, INC.
By: /s/ EDWARD L. ZEMAN
-------------------------------------
Edward L. Zeman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ JOHN R. LINDHOLM
-------------------------------------
John R. Lindholm
President-Retail Business Division
(Office of the President)
By: /s/ JOHN R. MCGEENEY
-------------------------------------
John R. McGeeney
Executive Vice President-General
Counsel
(Office of the President)
By: /s/ WILLIAM H. PANNING
-------------------------------------
William H. Panning
Executive Vice-President and
Chief Investment Officer
(Office of the President)
41
<PAGE>
FORBEARANCE AGREEMENT
This Forbearance Agreement ("FORBEARANCE AGREEMENT") is
entered into as of August 11, 1999 by and among 312 CERTIFICATE COMPANY, a
bankruptcy-remote Delaware corporation (the "ISSUER"), INTEGRITY CAPITAL
ADVISORS, INC., a Delaware corporation (the "PORTFOLIO MANAGER"), INTEGRITY
LIFE INSURANCE COMPANY, an Ohio stock insurance corporation (the "SWAP
PROVIDER"), INTERNATIONAL SECURITIZATION CORPORATION, a bankruptcy-remote
Delaware corporation ("ISC"), each of the LIQUIDITY BANKS whose names appear
on the signature pages hereto, THE FIRST NATIONAL BANK OF CHICAGO ("FNBC"),
as the sole "Letter of Credit Bank" party to the Letter of Credit Agreement
and as agent (the "AGENT") for the Certificateholders.
WITNESSETH:
WHEREAS, the Issuer, ISC and the Agent are parties to that certain
Face Amount Certificate Agreement dated as of April 24, 1998 among the
Issuer, ISC and the Agent, as amended by an Amendment No. 1, dated as of
April 21, 1999 (as amended, and as the same may be amended, restated,
supplemented or otherwise modified from time to time, the "FACE AMOUNT
CERTIFICATE AGREEMENT");
WHEREAS, the senior short-term claims paying ability of the Swap
Provider has ceased to be rated A-1 or better by Standard & Poor's and D-1 or
better by Duff & Phelps Credit Rating Co., and such event constitutes an
Amortization Event and a Liquidation Event (the "SPECIFIED DEFAULT");
WHEREAS, as a result of such Specified Default and pursuant to the
Face Amount Certificate Agreement and the other Transaction Documents, the
Agent and the Certificateholders are entitled immediately to enforce certain
rights and remedies against the Issuer and with respect to the Portfolio,
including, without limitation, the right to require the liquidation of the
Portfolio; and
WHEREAS, the Issuer has requested that the Agent and the
Certificateholders agree and, subject to the terms and conditions of this
Forbearance Agreement, the Agent and the Certificateholders party hereto have
agreed to forbear from demanding immediate liquidation of the Portfolio and
enforcing their security interests in and liens against the Pledged
Collateral during the period commencing on the date hereof and ending on the
Forbearance Termination Date (the "FORBEARANCE PERIOD").
<PAGE>
NOW, THEREFORE, the Issuer, the Portfolio Manager, the Swap
Provider, the Agent and the Certificateholders party hereto hereby agree as
follows:
1. Capitalized terms used in this Forbearance Agreement which
are not otherwise defined herein, shall have the meanings given such terms in
the Face Amount Certificate Agreement. For purposes of this Forbearance
Agreement, the following capitalized terms shall have the meanings set forth
below:
"FORBEARANCE TERMINATION DATE" means the earliest to occur of (i)
April 20, 2000; (ii) an Amortization Event other than the Specified Default;
(iii) the Swap Provider's failure to pay any indebtedness, including, without
limitation, net liabilities under interest rate swap, exchange or cap
agreements, in excess of $5,000,000, individually or in the aggregate, when
due, or default in the performance of any term, provision or condition
contained in any agreement under which any such indebtedness was created or
is governed, the effect of which is to cause, or to permit the holder or
holders of such Indebtedness to cause, such indebtedness to become due prior
to its stated maturity, or any indebtedness, including, without limitation,
net liabilities under interest rate swap, exchange or cap agreements, of the
Swap Provider in excess of the $5,000,000, individually or in the aggregate,
shall be declared to be due and payable or required to be prepaid (other than
by a regularly scheduled payment) prior to the date of maturity thereof; (iv)
the Issuer, the Portfolio Manager, the Swap Provider or any agent of any of
the foregoing fails to perform any obligation, or shall breach any covenant or
other agreement, under this Forbearance Agreement; (v) a Swap Guaranty,
executed by a Guaranty Party, shall not be delivered to the Agent on or
before August 25, 1999; (vi) a Replacement Total Return Swap, executed by a
counterparty which satisfies the definition of a Guaranty Party, shall not be
delivered to the Agent on or before September 30, 1999; (vii) the party to
the Swap Guaranty or the Replacement Total Return Swap shall fail, at any
time, to satisfy clause (i) of the definition of Guaranty Party; (viii) a
letter of intent to close the Proposed Transaction is not delivered by a
Proposed Purchaser to the Agent on or before August 25, 1999; or (ix) the
Proposed Transaction is not consummated by a Proposed Purchaser on or before
January 15, 2000.
"GUARANTY PARTY" means a corporation or other entity which (i) has
its senior long-term claims paying ability rated AA- or better by Standard &
Poor's and either (x) Aa3 or better by Moody's Investors Service, Inc. or (y)
A or better by A.M. Best & Co. and (ii) is otherwise acceptable to the Agent,
ISC and each of the Liquidity Banks.
"HOLDING COMPANY" means ARM Financial Group, Inc., a Delaware
corporation.
"PROPOSED PURCHASER" means a corporation or other entity which has
its senior long-term claims paying ability rated AA- or better by Standard &
Poor's and either (x) Aa3 or better by Moody's Investors Service, Inc. or (y)
A or better by A.M. Best & Co.
"PROPOSED TRANSACTION" means the purchase by a Proposed Purchaser of
one hundred percent (100%) of the capital stock of the Holding Company.
-2-
<PAGE>
"REPLACEMENT TOTAL RETURN SWAP" means a total return swap, executed
by a Guaranty Party, having terms and conditions substantially similar to the
Swap Agreement and otherwise acceptable to the Agent, ISC and each of the
Liquidity Banks.
"SWAP GUARANTY" means an unconditional and irrevocable guaranty,
executed by a Guaranty Party, of all obligations of the Swap Provider under
the Swap Agreement containing such waivers of defenses and other terms and
conditions as may be acceptable to the Agent.
2. The recitals set forth above by this reference hereto are
hereby incorporated into this Forbearance Agreement. Without limiting the
foregoing, the Issuer hereby acknowledges that (i) the Specified Default has
occurred and is continuing under the terms of the Face Amount Certificate
Agreement and has not been waived or cured, (ii) the Agent and the
Certificateholders have the right to enforce immediately their rights and
remedies under the Face Amount Certificate Agreement and the other
Transaction Documents, to refuse to make any further Installment Purchases
and to enforce immediately its security interests in and liens on the Pledged
Collateral and (iii) the Agent's and the Certificateholders' execution of
this Forbearance Agreement shall not constitute a novation, refinancing,
discharge, extinguishment or refunding nor is it to be construed as a
release, waiver or modification of any of the terms, conditions,
representations, warranties, covenants, rights or remedies set forth in the
Face Amount Certificate Agreement or any of the other Transaction Documents,
except as expressly provided herein.
3. The Agent and the Certificateholders will not, during the
Forbearance Period, exercise those rights afforded to the Agent and the
Certificateholders under the Face Amount Certificate Agreement, the
Transaction Documents and applicable law to: (a) remove the Portfolio
Manager pursuant to Section 13(b) of the Investment Management Agreement, (b)
other than as described in Section 4(a) below, increase the Earned Yield
payable with respect to the Invested Amount to a rate equal to the Base Rate
plus 2.0%, (c) deliver a "Notice of Exclusive Control" under and as defined
in the Control Agreement, or (d) immediately enforce its security interests
in or liens against the Pledged Collateral.
4. Notwithstanding the provisions of paragraph 3 above, during
the Forbearance Period:
(a) As additional Earned Yield payable under the Face Amount
Certificate Agreement, the Issuer shall pay to FNBC, in its capacity as
Letter of Credit Bank, those fees described in, and on the dates
provided for in, that certain fee letter executed by the Issuer and the
Swap Provider on the date hereof. Notwithstanding the provisions of
clause (ii) of the definition of Earned Yield, in the event that any
portion of the Invested Amount is held on the books and records of the
Agent by the Liquidity Banks (x) during the period beginning on the date
hereof and ending on the date a Replacement Total Return Swap, executed
by a counterparty which satisfies the definition of a Guaranty Party, is
delivered to the Agent or (y) on or after the occurrence of the
Forbearance Termination Date, the amount of Earned Yield payable
pursuant to such clause (ii) shall
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<PAGE>
equal the product of (x) the average outstanding Invested Amount held on
the books and records of the Agent by the Liquidity Banks for the
applicable period during which Earned Yield accrues times (y) the Base
Rate, plus 2.0% per annum.
(b) Notwithstanding the provisions of Section 9(a) of the Face
Amount Certificate Agreement, all Cashflow shall, on each Business Day,
be paid to, held and applied by the Custodian, for the benefit of the
Certificateholders in the manner described in paragraph 4(c), to reduce
the Invested Amount in accordance with the payment priorities set forth
in the Investment Management Agreement until such Invested Amount and the
other obligations hereunder are reduced to zero, and no Installment
Purchases shall be made on or after the date hereof.
(c) Notwithstanding the provisions of Section 5(a) of the
Investment Management Agreement, on the second Business Day of each
week, the Portfolio Manager shall apply, or instruct the Custodian in
writing to apply, all Cashflow received during the previous week as if
such Business Day is a Settlement Date occurring during the Amortization
Period in accordance with the terms of clause (b) of such Section 5;
PROVIDED, HOWEVER, that if such Cashflow not previously remitted to the
Agent exceeds $500,000 at any time, then all such Cashflow shall be
immediately remitted to the Agent. In addition, all payments made to
the Agent pursuant to Sections 5(b)(4), (5) and (6) shall be made no
later than 11:00 a.m. (Chicago time) on the applicable Business Day, and
any payments received thereafter shall be deemed to be received by the
Agent on the next succeeding Business Day.
(d) Notwithstanding the provisions of Section 7(h) of the
Investment Management Agreement, the Portfolio Manager shall not arrange
for the Issuer to acquire any Security, and the Issuer shall not enter
into, or become bound to acquire any Security on or after the date
hereof.
(e) On the first Business Day of each week, the Portfolio
Manager shall deliver, or cause to be delivered by BlackRock Financial
Management, Inc. (for so long as BlackRock Financial Management, Inc.
is acting as the investment sub-Portfolio Manager pursuant to the terms
of that certain Investment Manager Agreement between ARM Financial
Group, Inc. and BlackRock Financial Management, Inc. dated as of March
9, 1999, as amended), to the Agent a report listing the Securities in
the Portfolio and their Fair Market Value as of the close of business on
the Business Day immediately preceding the last Business Day of the week
preceding the delivery of such report; PROVIDED, HOWEVER, that such
report shall be delivered more frequently if so reasonably requested by
the Agent.
5. Upon the occurrence of the Forbearance Termination Date, a
Liquidation Event shall be deemed to have occurred and the Amortization
Period shall immediately commence without notice of any kind from the Agent
and the Certificateholders, and the Agent
-4-
<PAGE>
and the Certificateholders shall have the right to immediately commence
enforcement of all of their rights and remedies under the Face Amount
Certificate Agreement, the other Transaction Documents and applicable law. The
parties hereto agree that after the deemed occurrence of a Liquidation Event or
the commencement of an Amortization Period in accordance with this Section 5, no
amendment, waiver, forbearance or similar agreement by or on behalf of ISC, the
Certificateholders, the Agent for the Certificateholders or the Liquidity Agent
shall be effected without the consent of each of those Liquidity Banks then
holding an interest in a Certificate or obligated to make a purchase under the
Liquidity Agreement, if the result is to rescind such Liquidation Event or
Amortization Period or otherwise modify the terms of the Transaction Documents
relating to Liquidation Events or the Amortization Period or the consequences
thereof.
6. Effective as of the date hereof,
(a) The definition of "Party A Floating Amount" set forth in Section
2.B. of the confirmation to the Swap Agreement is hereby amended and
restated in its entirety as follows:
Party A Floating Amount: (a) If the ratio, expressed as a
percentage and determined as of the
preceding Business Day (such percentage,
the "Value Percentage"), of (i) the sum
of the aggregate Fair Market Value of the
Portfolio on such date plus any free
cash balances on deposit in the Custodial
Account on such date, to (ii) the
outstanding "Invested Amount" under and
as defined in the Face Amount Certificate
Agreement on such date, is less than
100%, then an amount equal to the
"Shortfall Amount" under and as defined
in the Investment Management Agreement,
or (b) if the Value Percentage is greater
than or equal to 100%, then zero;
PROVIDED, HOWEVER, that the references
to "100%" in this definition shall be
"98.5%" until the earlier to occur of (i)
a Forbearance Termination Date or (ii)
the delivery of a Replacement Total
Return Swap to the Agent executed by a
counterparty that satisfies the
definition of a Guaranty Party.
PROVIDED, HOWEVER, that the Party A
Floating Payment Dates and the Party A
Floating Amount described above are
subject to Section 3 below.
-5-
<PAGE>
(b) The definition of "Shortfall Amount" set forth in Section 1 of
the Investment Management Agreement is hereby amended and restated in its
entirety as follows:
"SHORTFALL AMOUNT" means, on any date, the positive difference,
if any, of (i) the product of 100% times 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; PROVIDED,
HOWEVER, that the reference herein to "100%" in this definition shall
be "98.5%" until the earlier to occur of (i) a Forbearance
Termination Date or (ii) the delivery of a Replacement Total Return
Swap to the Agent executed by a counterparty that satisfies the
definition of a Guaranty Party.
(c) Each of ISC, the Liquidity Banks, FNBC and the Agent are express
third party beneficiaries of the Swap Agreement.
(d) Capitalized terms defined herein and used in paragraph 6(a) and
6(b) shall have the meanings described herein.
7. THIS FORBEARANCE 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, WITHOUT REGARD TO ANY
CONFLICT OF LAW PRINCIPLES.
8. Except as specifically set forth in this Forbearance Agreement,
the Face Amount Certificate Agreement and the other Transaction Documents, shall
remain in full force and effect and are hereby ratified and confirmed. Nothing
herein shall constitute a waiver by the Agent or any Certificateholder, or
otherwise entitle the Issuer, the Portfolio Manager or the Swap Provider to a
waiver, of any existing or hereafter arising Amortization Event (including,
without limitation, the Specified Default) nor shall the Agent's or any
Certificateholder's execution and delivery of this Forbearance Agreement
establish a course of dealing among the Agent or any Certificateholder and the
Issuer, the Portfolio Manager or the Swap Provider or in any other way obligate
the Agent or any Certificateholder to hereafter provide any waiver or further
time for payment prior to the enforcement of their security or to provide any
other financial accommodations to or on behalf of the Issuer, the Portfolio
Manager or the Swap Provider.
9. This Forbearance Agreement shall become effective and be deemed
effective as of the date hereof, if and only if:
-6-
<PAGE>
(a) the Agent shall have received two (2) copies of this Forbearance
Agreement executed by the Issuer, the Portfolio Manager, the Swap Provider, the
Agent, ISC, the Letter of Credit Bank and all of the Liquidity Banks together
with opinions of counsel for the Issuer, the Portfolio Manager and the Swap
Provider in form and substance acceptable to the Agent;
(b) other than the Specified Default, no Amortization Event or any
other event which, with the passage of time or the giving of notice, or both,
would constitute an Amortization Event shall have occurred and be continuing
or shall result from the execution of this Forbearance Agreement;
(c) the legal fees and expenses referred to in paragraph 12 below
that have accrued through the date of this Agreement shall be paid to the
Agent; and
(d) any Shortfall Amount, calculated as of the date of this
Agreement, shall be paid to the Agent for reduction of the Invested Amount.
10. This Forbearance Agreement may be executed in one or more
counterparts, each of which shall be considered an original counterpart, and
shall become a binding agreement when the Issuer, the Portfolio Manager, the
Swap Provider, the Agent, ISC, the sole Letter of Credit Bank and the Required
Liquidity Providers have each executed one counterpart. Each of the parties
hereto agrees that a signature transmitted to the Agent or its counsel by
facsimile transmission shall be effective to bind the party so transmitting its
signature.
11. This Forbearance Agreement contains the entire understanding of
the parties hereto with regard to the subject matter contained herein. This
Forbearance Agreement supersedes all prior or contemporaneous negotiations,
promises, covenants, agreements and representations of every nature whatsoever
with respect to the matters referred to in this Forbearance Agreement, all of
which have become merged and finally integrated into this Forbearance Agreement.
Each of the parties understands that in the event of any subsequent litigation,
controversy or dispute concerning any of the terms, conditions or provisions of
this Forbearance Agreement, no party shall be entitled to offer or introduce
into evidence any oral promises or oral agreements between the parties relating
to the subject matter of this Forbearance Agreement not included or referred to
herein and not reflected by a writing included or referred to herein. Any
single or partial exercise of any right under this Forbearance Agreement shall
not preclude other or further exercise thereof or the exercise of any other
right, and no waiver, amendment or other variation of the terms, conditions or
provisions of this Forbearance Agreement whatsoever shall be valid unless in
writing signed by the Agent and the Certificateholders party hereto, and then
only to the extent in such writing specifically set forth. All remedies
contained in this Forbearance Agreement or by law afforded shall be cumulative
and all shall be available to the Agent and the Certificateholders until the
Invested Amount and the other obligations under the Face Amount Certificate
Agreement have been reduced to zero. The failure of any party to enforce at any
time any provision of this Forbearance Agreement
-7-
<PAGE>
shall not be construed to be a waiver of such provisions, nor in any way to
affect the validity of this Forbearance Agreement or any part hereof or the
right of such party thereafter to enforce each and every such provision. No
waiver of any breach of this Forbearance Agreement shall be held to constitute
a waiver of any other or subsequent breach.
12. Without limiting any provisions of the Face Amount
Certificate Agreement and the other Transaction Documents, the Issuer agrees to
pay on demand all reasonable costs and out-of-pocket legal fees and expenses of
FNBC, individually and as Agent (including without limitation such fees and
expenses of Sidley & Austin and internal lawyers for FNBC), in connection with
the negotiation, preparation, execution, delivery and enforcement of this
Forbearance Agreement.
13. This Forbearance Agreement is solely for the benefit of the
parties hereto and is not intended to confer upon any other third party any
rights or benefits.
-8-
<PAGE>
IN WITNESS WHEREOF, this Forbearance Agreement has been duly executed
as of the date first above-written.
312 CERTIFICATE COMPANY
By: /s/ Craig A. Hawley
--------------------------------------------
Name: Craig A. Hawley
Title: General Counsel
INTEGRITY CAPITAL ADVISORS, INC.
By: /s/
--------------------------------------------
Name:
Title:
INTEGRITY LIFE INSURANCE COMPANY
By: /s/
--------------------------------------------
Name:
Title:
INTERNATIONAL SECURITIZATION
CORPORATION
By:
--------------------------------------------
Name:
Title:
SIGNATURE PAGE TO FORBEARANCE AGREEMENT
<PAGE>
IN WITNESS WHEREOF, this Forbearance Agreement has been duly executed
as of the date first above-written.
312 CERTIFICATE COMPANY
By:
--------------------------------------------
Name:
Title:
INTEGRITY CAPITAL ADVISORS, INC.
By:
--------------------------------------------
Name:
Title:
INTEGRITY LIFE INSURANCE COMPANY
By:
--------------------------------------------
Name:
Title:
INTERNATIONAL SECURITIZATION
CORPORATION
By: /s/ Stephanie Wolf
--------------------------------------------
Name: Stephanie Wolf
Title: Authorized Signatory
SIGNATURE PAGE TO FORBEARANCE AGREEMENT
<PAGE>
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent, Liquidity
Provider and Letter of Credit Bank
By: /s/ Stephanie Wolf
--------------------------------------------
Name: Stephanie Wolf
Title: First Vice President
DEUTSCHE BANK AG, NEW YORK AND
CAYMAN ISLANDS BRANCHES,
as a Liquidity Provider
By:
--------------------------------------------
Name:
Title:
FIRSTAR BANK, N.A.,
as a Liquidity Provider
By:
--------------------------------------------
Name:
Title:
SIGNATURE PAGE TO FORBEARANCE AGREEMENT
<PAGE>
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent, Liquidity
Provider and Letter of Credit Bank
By:
--------------------------------------------
Name:
Title:
DEUTSCHE BANK AG, NEW YORK AND
CAYMAN ISLANDS BRANCHES,
as a Liquidity Provider
By: /s/ Alan Krouk /s/ John S. McGill
--------------------------------------------
Name: Alan Krouk John S. McGill
Title: Assistant Vice President Director
FIRSTAR BANK, N.A.,
as a Liquidity Provider
By:
--------------------------------------------
Name:
Title:
SIGNATURE PAGE TO FORBEARANCE AGREEMENT
<PAGE>
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent, Liquidity Provider and
Letter of Credit Bank
By:
--------------------------------------------
Name:
Title:
DEUTSCHE BANK AG, NEW YORK AND
CAYMAN ISLANDS BRANCHES,
as a Liquidity Provider
By:
--------------------------------------------
Name:
Title:
FIRSTAR BANK, N.A.,
as a Liquidity Provider
By: /s/ Toby B. Raw
--------------------------------------------
Name: Toby B. Raw
Title: AVP
SIGNATURE PAGE TO FORBEARANCE AGREEMENT
<PAGE>
TERMINATION AND SALE AGREEMENT
This Termination and Sale Agreement ("AGREEMENT") is entered
into as of August 27, 1999 by and among 312 CERTIFICATE COMPANY, a
bankruptcy-remote Delaware corporation (the "ISSUER"), INTEGRITY CAPITAL
ADVISORS, INC., a Delaware corporation (the "PORTFOLIO MANAGER"), INTEGRITY LIFE
INSURANCE COMPANY, an Ohio stock insurance corporation (the "SWAP PROVIDER"),
INTERNATIONAL SECURITIZATION CORPORATION, a bankruptcy-remote Delaware
corporation ("ISC") and THE FIRST NATIONAL BANK OF CHICAGO ("FNBC"), as the sole
"Letter of Credit Bank" party to the Letter of Credit Agreement and as agent
(the "AGENT") for the Certificateholders.
WITNESSETH:
WHEREAS, the Issuer, ISC and the Agent are parties to that
certain Face Amount Certificate Agreement dated as of April 24, 1998 among the
Issuer, ISC and the Agent, as amended by an Amendment No. 1, dated as of April
21, 1999 and by a Forbearance Agreement dated as of August 11, 1999 (the
"FORBEARANCE AGREEMENT", and the Face Amount Certificate Agreement, as so
amended, the "FACE AMOUNT CERTIFICATE AGREEMENT");
WHEREAS, the Swap Provider has advised the Issuer and the
Agent that it is in the best interest of the Swap Provider to terminate the Swap
Agreement;
WHEREAS, the Issuer and the Agent have advised the Swap
Provider that ISC will consent to the termination of the Swap Agreement in
consideration for a termination payment from the Swap Provider;
WHEREAS, the Issuer has advised the Agent that it has received
an offer from Banc Once Capital Markets, Inc. (the "Securities Purchaser") for
the sale to, and the purchase by the Securities Purchaser (the "Securities
Sale") of the Securities described on Exhibit A attached hereto and made a part
hereof, and the Issuer has determined that it is in the best interest of the
Issuer to accept such offer and to consummate such Securities Sale;
WHEREAS, the Agent has advised the Issuer that the
Certificateholders have directed the Agent to release the security interest in
and lien on the Securities subject to the Securities Sale, which security
interest and lien have been granted pursuant to the Pledge Agreement, on
condition that such security interest and lien will remain on the cash proceeds
of the sale of such Securities, and that such cash proceeds will be applied as
described herein;
WHEREAS, the Issuer, the Portfolio Manager and the Swap
Provider have requested and, each of the other parties hereto, in the their
various capacities described above
<PAGE>
have agreed, subject to the terms hereof, to terminate the Face Amount
Certificate Agreement and the other agreements related thereto.
NOW, THEREFORE, the Issuer, the Portfolio Manager, the Swap
Provider, the Agent and the Certificateholders party hereto hereby agree, for
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, as follows:
1. In consideration for the agreement of the Issuer and the
Agent (on behalf of the Certificateholders) to release the Swap Provider from
any further liability under the Swap Agreement, the Swap Provider hereby
agrees to pay to the Agent, (i) on the date hereof, in immediately available
funds, an amount equal to $6,000,000 and (ii) on the earlier of (x) March 31,
2000 or (y) the "PAYOUT DATE" (as defined below; the earlier of March 31,
2000 and the Payout Date being referred to herein as the "MATURITY DATE"), in
immediately available funds, an amount equal to $7,9000,000 plus (a) accrued
Certificate Yield and fees through the date of the Agent's receipt of the
"SALE PROCEEDS" (as defined below) and (b) all amounts owing pursuant to the
fee letter (the "FORBEARANCE FEE LETTER") dated as of August 11, 1999 (the
amount described in clause (i) of this sentence shall be referred to as the
"CASH AMOUNT" and the amount described in clause (ii) of this sentence shall
be referred to as the "DEFERRED AMOUNT", and the Cash Amount and the Deferred
Amount, exclusive of the amounts arising pursuant to the Forbearance Fee
Letter, shall be referred to in the aggregate as the "SWAP TERMINATION
AMOUNT"); provided, however that FNBC hereby agrees to forego the $500,000
set forth in the Forbearance Fee Letter which is due on the date which the
Proposed Transaction is consummated (as described in the Forbearance Fee
Letter) shall be due on the Payout Date. From the date hereof until the
Deferred Amount is paid in full to the Agent, the Swap Provider shall pay
interest on the amount of the Deferred Amount at the per annum interest rate
equal to the Base Rate plus 2%; provided, however, if the full amount of the
Deferred Amount is not paid to the Agent on or before the date due as
described above, then interest shall accrue on the Deferred Amount from such
due date until paid in full at the per anum interest rate equal to the Base
Rate plus 4%. All accrued interest shall be payable monthly on the last
business day of each calendar month, with the first such interest payment to
commence September 30, 1999. The Swap Provider agrees that its obligation to
pay the Deferred Amount and interest thereon pursuant to this Paragraph 1 is
unconditional and irrevocable, without any deduction for any set-offs,
counterclaims or defenses whatsoever. In consideration for the agreement of
the Agent (on behalf of the Certificateholders) to terminate the Face Amount
Certificate Agreement and the other Transaction Documents (other than this
Agreement), the Issuer hereby agrees that the Swap Termination Amount and the
interest thereon shall be paid to the Agent for application by the Agent in
such manner as shall be agreed to by the Agent and the Certificateholders.
The Issuer further agrees that it shall have no right, title or interest in
or to the Swap Termination Amount or interest thereon, and the Agent (on
behalf of the Certificateholders) shall own all of the right, title and
interest in and to such Swap Termination Amount and interest thereon. Upon
the effectiveness of this Agreement, the Swap Agreement shall terminate, and
neither the Issuer nor the Swap Provider shall be required to make any
additional payments thereunder at any time thereafter, but such termination
shall not affect the Swap Provider's obligation to make the payments required
pursuant to this Paragraph 1. Subject
-2-
<PAGE>
to the provisions of paragraph 4 and 5 of this Agreement, the remittance by
the Swap Provider to the Agent of all the payments required pursuant to this
Paragraph 1 shall constitute payment in full of all of the Swap Provider's
liability arising from the termination of the Swap Agreement. The "PAYOUT
DATE" shall mean the date on which either the capital stock of the Swap
Provider or substantially all of the assets of the Swap Provider (excluding
those assets that relate to the Swap Provider's business commonly referred to
as its "institutional business") are sold to any person or other entity,
whether effected through cash purchase or a reinsurance transaction. The Swap
Provider further agrees that if, prior to the Maturity Date, any financial
institution which has provided financing to the Swap Provider in connection
with its "institutional business" prior to the date hereof (including
off-balance sheet financing in a form similar to that evidenced by the Face
Amount Certificate Agreement), whether directly to the Swap Provider or
through a subsidiary or an affiliate of the Swap Provider, is paid an amount
on account of any unsecured claim, including, without limitation, any
deficiency claim, with legal priority not senior to the Deferred Amount but
excluding interest rate swaps, caps, swaptions or options used in a bona fide
interest rate hedging transaction in a general or separate account of the
Swap Provider (an "Other Claim"), then to the extent that the aggregate
percentage recovery on account of such Other Claim from and after August 20,
1999 (the "SUPERVISION DATE") is greater than 43.2% then the Swap Provider
shall accelerate payment to the Agent of a portion of the Deferred Amount
(and thereby reduce the Deferred Amount by the amount of the True-Up Amount
(as defined below)) so that, contemporaneously with the payment on account of
such Other Claim, the Agent is paid an amount (the "TRUE-UP AMOUNT") such
that the Agent's percentage recovery computed as the sum of the Cash Amount
plus all True-Up Amount payments divided by the sum of the Cash Amount plus
the Deferred Amount is no less than the aggregate percentage recovery
received after the Supervision Date on account of such Other Claim.
2. The Agent, on behalf of the Certificateholders, hereby
consents to the Securities Sale subject to the satisfaction of each of the
following conditions: (i) the cash proceeds from such Securities Sale
(collectively, the "Sale Proceeds") shall equal at least $195,304,351_____,
(ii) such Sale Proceeds shall be remitted to the Agent, in immediately
available funds, for application in accordance with the terms of Paragraph 3
below and (iii) such Sale Proceeds shall be subject to the lien and security
interest of the Agent arising under the Pledge Agreement. Upon the receipt
by the Agent of the Sale Proceeds in the amount and manner described in the
preceding sentence, the Agent's lien on and security interest in the
Securities subject to the Securities Sale (but not including the Sale
Proceeds) shall be automatically released. The Agent agrees to apply the Sale
Proceeds it so receives pursuant to Paragraph 3 below. The Issuer and the
Agent hereby acknowledge and agree, after consultation with, in the case of
the Issuer, Blackrock Financial Management, Inc., that the Sale Proceeds
reflect the fair market value of the Securities subject to the Securities
Sale. The Issuer further represents and warrants to the Securities Purchaser
that upon the effectiveness of the release described in the second preceding
sentence, the Securities subject to the Securities Sale shall be owned by the
Securities Purchaser free and clear of any lien, security interest, option or
other charge or encumbrance. Promptly after the Securities Sale and the
satisfaction of the conditions described in this Paragraph 2, the Agent will
execute and deliver to the Securities Purchaser UCC-3 Termination Statements
terminating
-3-
<PAGE>
the Agent's lien on, and security interest in the Securities subject to the
Securities Sale and the Sale Proceeds related thereto.
3. The Sale Proceeds shall be applied by the Agent in such
manner as shall be agreed to by the Agent and the Certificateholders.
4. Each of the parties hereto hereby agrees that following
(i) the receipt of the Cash Amount by the Agent, (ii) the receipt by the
Agent of the Sale Proceeds in the amount required by Paragraph 2, (iii) the
receipt by the Agent from the Custodian of $74,263,099.71, representing the
cash proceeds from the sales of or otherwise related to Securities but which
cash proceeds have not yet been paid to the Agent as of the execution of this
Agreement and (iv) the effectiveness of this Agreement as described in
Paragraph 8, each of the Face Amount Certificate Agreement, the Certificate,
the Pledge Agreement, the Investment Management Agreement, the Liquidity
Agreement, the Swap Agreement, the Letter of Credit Agreement, the
Forbearance Agreement, the Forbearance Fee Letter and the Liquidity Fee
Letter (each a "TERMINATED AGREEMENT", and collectively, the "TERMINATED
AGREEMENTS") shall automatically terminate and none of the parties thereto
shall have any further obligations or liabilities thereunder other than any
obligations which expressly survive the termination thereof. Notwithstanding
the preceding sentence, (i) the Swap Provider on behalf of itself and its
successors and assigns, agrees that to the extent any payment previously paid
to ISC, FNBC, the Agent or any of the Liquidity Banks is required to be
repaid by any such party for any reason, including without limitation, as a
preference under any bankruptcy or other insolvency law, then the party
making such repayment shall have a claim against the Swap Provider and its
successors and assigns for the amount so repaid and (ii) to the extent that
the Custodian, the Issuer or the Swap Provider receives, after 10:00 A.M. on
August 31, 1999, cash proceeds in excess of the amount described in clause
(iii) of the first sentence of this Paragraph 4, from the sales of Securities
that occurred prior to the date hereof, the Issuer and the Swap Provider
shall, and shall direct the Custodian to, promptly remit such proceeds to the
Agent, and the Agent shall apply any such proceeds against the unpaid
principal amount of the Deferred Amount.
5. The Swap Provider, on behalf of itself and its
successors and assigns, hereby fully and forever releases and discharges ISC,
FNBC, the Certificateholders, the Liquidity Banks and the Agent from, and
covenants not to sue them with respect to, any and all claims, rights,
remedies, obligations or liabilities either of them may have under contract or
applicable law, including without limitation, under any voidable preference
statute that relate to or arise from the transactions evidenced by the Face
Amount Certificate Agreement and the other Transaction Documents.
6. 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, WITHOUT REGARD TO
ANY CONFLICT OF LAW PRINCIPLES.
-4-
<PAGE>
7. ISC, as the sole Certificateholder, hereby directs the Agent
to take the action described in this Agreement, and the Liquidity Banks and FNBC
hereby consent and agree to the terms and conditions described in this
Agreement.
8. This Agreement shall become effective and be deemed effective
as of the date hereof, if and only if the Agent shall have received (i) two (2)
copies of this Agreement executed by the Issuer, the Portfolio Manager, the Swap
Provider, the Agent, ISC, and the Letter of Credit Bank together with an opinion
of counsel for the Swap Provider and a certificate of the Secretary or Assistant
Secretary of the Issuer certifying the accuracy of copies of Board of Director
resolutions and the Issuer's Articles of Incorporation and By-laws attached
thereto, each in form and substance acceptable to the Agent, and (ii) a written
consent to this transaction from the State of Ohio Department of Insurance
Superintendent which consent is in form and substance acceptable to the Agent,
(iii) the entire cash amount of the Sale Proceeds and the Cash Amount and the
cash amount described in clause (iii) of Paragraph 4, and (iv) an amount equal
to $40,000 representing the accrued legal fees and expenses of counsel for the
Agent; provided, however that if the Agent has not received all of the foregoing
by 10:00 A.M. on Tuesday, August 31, 1999, then the Agent may, in its sole
discretion, declare this Agreement null and void and without effect.
9. This Agreement may be executed in one or more counterparts,
each of which shall be considered an original counterpart, and shall become a
binding agreement when the Issuer, the Portfolio Manager, the Swap Provider, the
Agent, ISC, and the sole Letter of Credit Bank have each executed one
counterpart. Each of the parties hereto agrees that a signature transmitted to
the Agent or its counsel by facsimile transmission shall be effective to bind
the party so transmitting its signature. Capitalized terms used herein and not
otherwise defined herein shall have the meanings given to such terms in the
Face Amount Certificate Agreement.
10. This Agreement contains the entire understanding of the parties
hereto with regard to the subject matter contained herein. This Agreement
supersedes all prior or contemporaneous negotiations, promises, covenants,
agreements and representations of every nature whatsoever with respect to the
matters referred to in this Agreement, all of which have become merged and
finally integrated into this Agreement. Each of the parties understands that in
the event of any subsequent litigation, controversy or dispute concerning any of
the terms, conditions or provisions of this Agreement, no party shall be
entitled to offer or introduce into evidence any oral promises or oral
agreements between the parties relating to the subject matter of this Agreement
not included or referred to herein and not reflected by a writing included or
referred to herein. Any single or partial exercise of any right under this
Agreement shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of this Agreement whatsoever shall be valid unless in
writing signed by the Agent, FNBC and the Cerificateholders party hereto, and
then only to the extent in such writing specifically set forth.
-5-
<PAGE>
11. In addition to the legal fees and expenses to be paid pursuant
to Paragraph 8, the Swap Provider agrees to pay on demand all reasonable costs
and out-of-pocket legal fees and expenses of FNBC, individually and as Agent
(including without limitation such fees and expenses of Sidley & Austin and
internal lawyers for FNBC), in connection with (i) the enforcement of this
Agreement, (ii) any bankruptcy, insolvency or receivership proceeding involving
the Swap Provider or any of its affiliates, (iii) any regulatory proceeding
involving the Swap Provider, (iv) or any other proceeding or controversy in
which the enforceability of this Agreement is challenged; provided that the Swap
Provider will not be obligated to pay any legal fees under this Paragraph 11
that arise from income tax proceedings or disputes.
12. This Agreement is solely for the benefit of the parties hereto
and is not intended to confer upon any other third party any rights or benefits.
Each of the parties hereto agrees that ISC may assign all or any portion of its
rights hereunder, including without limitation the rights with respect to the
Swap Termination Amount, to any other person or entity, and upon any such
assignment in full of all of ISC's rights hereunder, ISC shall have no further
rights or obligations under this Agreement. None of the other parties hereto
may assign their rights or obligations under this Agreement.
-6-
<PAGE>
IN WITNESS WHEREOF, this Termination and Sale Agreement has been duly
executed as of the date first above-written.
312 CERTIFICATE COMPANY
By: /s/ Craig A. Hawley
--------------------------------------
Name: Craig A. Hawley
Title: General Counsel CFO
INTEGRITY CAPITAL ADVISORS, INC.
By: /s/ John R. McGeeney
--------------------------------------
Name: John R. McGeeney
Title: General Counsel and Chief Compliance Officer
INTEGRITY LIFE INSURANCE COMPANY
By: /s/ John R. McGeeney
--------------------------------------
Name: John R. McGeeney
Title: Exec. V.P. and General Counsel
INTERNATIONAL SECURITIZATION
CORPORATION
By: /s/ Kirk D. Farney
--------------------------------------
Name: Kirk D. Farney
Title: Authorized Signatory
SIGNATURE PAGE TO TERMINATION AND SALE AGREEMENT
<PAGE>
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent, Liquidity Provider and
Letter of Credit Bank
By: /s/ Kirk D. Farney
--------------------------------------
Name: Kirk D. Farney
Title: SVP
SIGNATURE PAGE TO TERMINATION AND SALE AGREEMENT
<PAGE>
TERMINATION AGREEMENT
TERMINATION AGREEMENT dated as of September 10, 1999 between The Chase
Manhattan Bank, successor-in-interest to Chemical Bank ("Chase") and 212
Certificate Company (the "Counterparty"). Capitalized terms used but not
defined in this Agreement shall have the meanings assigned to them in the form
of ISDA Master Agreement published by the International Swaps and Derivatives
Association, Inc.
Chase and the Counterparty hereby agree as follows:
1. Effective upon, and in consideration of, the payment of $9,000,559.00 by
Chase to Counterparty on September 17, 1999, all rights, obligations, and
liabilities of Chase and Counterparty under the transaction governed by the
Confirmation dated May 19, 1999 between the parties (Chase Reference Number
298406/50654042, Trade Date May 13, 1999) shall be terminated and discharged.
No other payments shall be required to be made by either party in respect of
such transaction.
2. Each party represents to the other party with respect to itself that
(i) it has authority to enter into this Agreement, (ii) the person entering
into this Agreement on its behalf has been duly authorized to do so, and (iii)
this Agreement is binding upon it and enforceable against it in accordance
with its terms (subject to applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally and
applicable principles of equity) and does not and will not violate the terms
of any material agreements to which it is bound.
3. (a) This Agreement shall be governed by and construed in accordance with
the laws of the State of New York (without reference to choice of law doctrine).
(b) With respect to any suit, action or proceedings relating to this
Agreement ("Proceedings"), each party irrevocably (i) submits to the
non-exclusive jurisdiction of the courts of the State of New York and the United
States District Court located in the Borough of Manhattan in New York City and
(ii) waives any objection which it may have at any time to the laying of venue
of any Proceedings brought in any such court, waives any claim that such
Proceedings have been brought in an inconvenient forum and further waives the
right to object, with respect to such Proceedings, that such court does not have
any jurisdiction over such party. Nothing in this Agreement precludes either
party from bringing Proceedings in any other jurisdiction, nor will the bringing
of Proceedings in any one or more jurisdictions preclude the bringing of
Proceedings in any other jurisdiction.
4. This Agreement may be executed in counterparts (and by different parties
hereto on different counterparts), each of which shall constitute an original,
but all of which when taken
<PAGE>
together shall constitute a single contract. Delivery of an executed
counterpart of a signature page of this Agreement by rapidfax or telecopy shall
be effective as delivery of a manually executed counterpart of this Agreement.
THE CHASE MANHATTAN BANK
By: /s/ George W. Brash, Jr.
-------------------------
Name: George W. Brash, Jr.
Title: Managing Director
By: /s/ Anna Maria Beissel
-------------------------
Name: Anna Maria Beissel
Title: Vice President
212 CERTIFICATE COMPANY
By:
-------------------------
Name:
Title:
By:
-------------------------
Name:
Title:
By:
-------------------------
Name:
Title:
<PAGE>
together shall constitute a single contract. Delivery of an executed
counterpart of a signature page of this Agreement by rapidfax or telecopy
shall be effective as delivery of a manually executed counterpart of this
Agreement.
THE CHASE MANHATTAN BANK
By:
-------------------------
Name:
Title:
By:
-------------------------
Name:
Title:
212 CERTIFICATE COMPANY
By: /s/ William H. Panning
-------------------------
Name: William H. Panning
Title: Chief Investment Officer
By: /s/ Craig A. Hawley
-------------------------
Name: Craig A. Hawley
Title: General Counsel
<PAGE>
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT, dated as of September 23, 1999 (as amended,
supplemented or otherwise modified and in effect from time to time, this
"AGREEMENT") is by and among 212 CERTIFICATE COMPANY, a Delaware corporation
(together with its permitted successors and assigns, the "ISSUER"), INTEGRITY
LIFE INSURANCE COMPANY, an Ohio insurance company (together with its permitted
successors and assigns, "INTEGRITY LIFE"), PARK AVENUE RECEIVABLES CORPORATION,
a Delaware corporation (together with its permitted successors and assigns,
"PARCO"), and THE CHASE MANHATTAN BANK, a New York banking corporation (together
with its permitted successors and assigns, "CHASE"), individually as APA Bank
(together with its permitted successors and assigns, in such capacity, the "APA
BANK") and as funding agent for the benefit of PARCO and the APA Bank (together
with its permitted successors and assigns in such capacity, the "FUNDING
AGENT"). Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in, or incorporated by reference into,
the FAC Agreement (defined below).
WHEREAS, the Issuer, PARCO, the Funding Agent and the APA Bank have
entered into that certain Installment Face-Amount Certificate Agreement, dated
as of September 15, 1998 (as amended, supplemented or otherwise modified and in
effect, the "FAC AGREEMENT"), pursuant to which the Issuer has issued to the
Funding Agent, for the benefit of PARCO and the APA Bank, that certain
[REDACTED] Face-Amount Certificate dated as of February 23, 1999 (as amended,
supplemented or otherwise modified and in effect, the "FACE-AMOUNT CERTIFICATE);
WHEREAS, PARCO, the APA Bank and the Funding Agent have entered into
that certain Asset Purchase Agreement, dated as of September 15, 1998 (as
amended, supplemented or otherwise modified and in effect, the "ASSET PURCHASE
AGREEMENT");
WHEREAS, Integrity Life and Chase, as successor-in-interest to
Chemical Bank, have entered into that certain Termination Agreement, dated as of
September 10, 1999 (the "TERMINATION AGREEMENT") with respect to certain
transactions between them;
1
<PAGE>
WHEREAS, the parties hereto acknowledge and agree that one or more
Amortization Events and Liquidation Events have occurred and are continuing
under the FAC Agreement;
WHEREAS, in order to avoid the consequences of such Amortization
Events and Liquidation Events set forth in the FAC Agreement and the other
Transaction Documents, and to achieve a remedy beneficial to each of the Issuer,
Integrity Life, PARCO, the APA Bank and the Funding Agent, the parties hereto
have agreed to enter into this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. PREPAYMENT OF INVESTED AMOUNT. On September 23, 1999 (the
"SETTLEMENT DATE"), the Issuer hereby agrees to pay to the Funding Agent, for
the benefit of PARCO and the APA Bank, [REDACTED] in immediately available
funds. The parties hereto acknowledge and agree that the foregoing payment by
the Issuer constitutes the aggregate proceeds from the Issuer's sales of the
remainder of its assets consisting of marketable securities (other than the Swap
Agreement). The Funding Agent shall apply such payment to the permanent
reduction of the Invested Amount under the Face-Amount Certificate and the FAC
Agreement. Immediately following (and conditioned upon the occurrence of) such
reduction of the Invested Amount, PARCO hereby notifies the Funding Agent and
the APA Bank that a PARCO Wind-Down Event has occurred and is continuing under
the Transaction Documents (such notice hereby also constituting a Sale Notice
under the Asset Purchase Agreement with the Purchase Date hereby designated as
September 23, 1999), and the APA Bank hereby purchases the PARCO Interest
pursuant to Section 2.1 of the Asset Purchase Agreement. The proceeds of such
purchase shall be delivered to PARCO pursuant to Section 2.1(b) of the Asset
Purchase Agreement. Following such sale of the PARCO Interest by PARCO to the
APA Bank, the Aggregate Commitment shall be reduced to zero, and the Funding
Agent shall deliver the Face-Amount Certificate to the APA Bank, as assignee of
PARCO. Each of the parties hereto hereby consents to all of the prior actions of
the Issuer regarding sales of the Pledged Collateral and the use of proceeds
thereof to reduce permanently the Invested Amount following the occurrence of
the initial Amortization Event and/or Liquidation Event.
2
<PAGE>
2. FACE AMOUNT CERTIFICATE. Immediately following (and conditioned
upon the occurrence of) the actions specified in Section 1 above, the APA Bank
shall deliver the Face-Amount Certificate to the Issuer in exchange for receipt
by the APA Bank of an assignment, in substantially the form of Exhibit A hereto
(the "ASSIGNMENT"), of all of the Issuer's right, title and interest in, to and
under the Swap Agreement, duly executed and delivered by the Issuer and
Integrity Life. Following receipt of the Assignment by the APA Bank and delivery
of the Face-Amount Certificate to the Issuer, the APA Bank shall succeed to all
of the rights of the Issuer in, to and under the Swap Agreement, including,
without limitation, the right to receive the payments which Integrity Life is
required to make pursuant to the Swap Agreement (collectively, the "SWAP
PAYMENT"). The parties hereto hereby agree that the total amount of the Swap
Payment is [REDACTED].
3. TERMINATION OF THE SWAP AGREEMENT. Integrity Life and the APA Bank
hereby agree that, upon (and conditioned upon the occurrence of) satisfactory
completion of the actions specified in Sections 1 and 2 above, subject to the
following proviso, the Swap Agreement and all transactions thereunder are hereby
terminated, and all of the rights, obligations and liabilities of the APA Bank
and Integrity Life are hereby terminated and forever discharged; PROVIDED that,
in consideration for such termination, and as additional conditions thereto, the
APA Bank and Integrity Life hereby agree that (i) the "Net Termination Amount"
(as defined in the Termination Agreement) payable by the APA Bank to Integrity
Life shall be, and hereby is, offset against all amounts now due and owing by
Integrity Life to the APA Bank under the Swap Agreement (and, in furtherance of
such intent, Integrity Life hereby releases and forever discharges the APA Bank
from any and all claims, damages, liabilities, costs and expenses now existing
or hereafter arising under the Termination Agreement, including, without
limitation, the APA Bank's obligation thereunder to pay the "Net Termination
Amount" to Integrity Life) and (ii) the APA Bank shall have received from
Integrity Life a promissory note substantially in the form of Exhibit B hereto,
duly executed by Integrity Life (the "PROMISSORY NOTE"). Notwithstanding
anything to the contrary contained herein, the parties hereto agree and
acknowledge that upon payment in full of the Promissory Note, all obligations
and liabilities of Integrity Life and/or the Issuer under the Swap Agreement
and/or the Face-Amount Certificate, as applicable, shall be deemed immediately
terminated and forever discharged.
It is the intent of the parties hereto that the transactions described
in clause (i) of the foregoing paragraph (the "Chase/Integrity Offset/Release")
shall have
3
<PAGE>
and be given full force and effect irrespective of any other ineffectiveness,
voiding or recission of this Agreement or any of the other transactions
contemplated herein (including without limitation by virtue of the PROVISOS to
Section 5 or 6 hereof) if the APA Bank so elects by written notice to Integrity
within 10 business days after the occurrence of any such ineffectiveness,
voiding or rescission; PROVIDED that the amount of the Chase/Integrity
Offset/Release, as long as it continues to be given full force and effect, shall
reduce the amount of any claim which the APA Bank otherwise might have against
Integrity and/or the Issuer).
4. Each party hereto (each, a "PARTY") hereby represents and warrants
to the other Parties that:
(a) The execution, delivery and performance of each of this Agreement,
the Assignment and the Promissory Note to which such Party is a party (as to
each such Party, such Party's the "RELEVANT DOCUMENTS") by such Party, and the
consummation by such Party of the transactions provided for in such Party's
Relevant Documents, have been duly authorized by all necessary action on the
part of such Party, and each of such Party's Relevant Documents has been duly
executed and delivered on behalf of such Party. Each of such Party's Relevant
Documents constitutes the legal, valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms, except as may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other similar laws affecting creditors' rights generally, now or hereafter in
effect, and except as such enforceability may be limited by general principles
of equity (whether considered in a suit at law or in equity).
(b) The execution and delivery of such Party's Relevant Documents, the
performance of the transactions contemplated by such Party's relevant Documents,
and fulfillment of the terms hereof and thereof, do not conflict with or violate
in any material respect any law or regulation applicable to such Party or
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,
the organizational documents of such Party or any indenture, mortgage, deed of
trust or other material contract, agreement or instrument to which such Party is
a party or by which it or its properties are bound.
(c) No authorization, consent, license, order or approval of,
registration or declaration with any governmental agency or other person or
entity is required
4
<PAGE>
to be obtained, effected or given by such Party hereto in connection with the
execution and delivery of such Party's Relevant Documents (other than those
which have been obtained and are in effect).
5. EFFECTIVENESS. This Agreement shall become effective on the first
day on which (i) each of the parties hereto shall have received an executed
counterpart of this Agreement and (ii) PARCO, the Funding Agent and the APA Bank
shall have received copies of a letter by the Department of Insurance of the
State of Ohio to Integrity Life approving the transactions contemplated by this
Agreement; PROVIDED that such effectiveness shall terminate, the parties hereto
shall be restored to their respective positions as if this Agreement had not
become effective, together with all of the rights, benefits, duties and
obligations associated therewith, if PARCO, the Funding Agent and the APA Bank
shall not have received an opinion of counsel to Integrity Life, in form and
substance reasonably acceptable to each of them, regarding corporate matters
pertaining to this Agreement and the Promissory Note by no later than October 1,
1999 (or such other date as to which PARCO, the Funding Agent and the APA Bank
shall have consented to in writing).
6. EXECUTION IN COUNTERPARTS; SEVERABILITY OF PROVISIONS. This
Agreement may be executed in any number of counterparts and by different parties
hereto on separate counterparts, each of which counterparts, when so executed
and delivered, shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same Agreement. Delivery of an
executed counterpart of a signature page of this Agreement by rapidfax or
telecopy shall be effective as delivery of a manually executed counterpart of
this Agreement. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction; PROVIDED that, to the extent that any of
the transactions set forth in Section 1 through 3, inclusive, hereof is voided
or rescinded by a court or regulatory or other governmental authority of
competent jurisdiction (or if any order or decree of any such court or
regulatory or governmental authority shall have substantially the same effect),
the parties hereto shall be restored to their respective positions as if this
Agreement had not become effective, together with all of the rights, benefits,
duties and obligations associated therewith.
5
<PAGE>
7. CONFIDENTIALITY. The Issuer and Integrity Life shall consult with
PARCO, the Funding Agent and the APA Bank prior to issuing any press release or
any other public disclosure of the transactions contemplated by this Agreement
and shall not so disclose [REDACTED] without the prior written consent of such
parties.
8. CONSENTS; BINDING EFFECT. The execution and delivery by each of the
parties hereto of this Agreement shall constitute the written consent and/or
approval of each of them to this Agreement and the transactions contemplated
hereby and a written waiver of any notice or other requirement with respect
thereto, to the extent any such consent, approval or waiver is or may be
required under any Transaction Document or otherwise. This Agreement shall be
binding upon, and inure to the benefit of, the parties hereto and their
respective successors and assigns.
9. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York.
10. CAPTIONS. The captions in this Agreement are for convenience of
reference only and shall not define or limit any of the terms or provisions
hereof.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
6
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Settlement
Agreement as of the date and year first above written.
212 CERTIFICATE COMPANY, as Issuer
BY:
--------------------------------------
Name:
Title:
INTEGRITY LIFE INSURANCE COMPANY
BY:
--------------------------------------
Name:
Title:
PARK AVENUE RECEIVABLES
CORPORATION
BY:
--------------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, as
APA Bank
BY:
--------------------------------------
Name:
Title:
7
<PAGE>
THE CHASE MANHATTAN BANK, as
Funding Agent
BY:
--------------------------------------
Name:
Title:
8
<PAGE>
EXHIBIT A
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, in accordance with the Settlement Agreement
(defined below), 212 CERTIFICATE COMPANY, a Delaware corporation (the "ISSUER"),
does hereby assign, transfer and otherwise convey unto THE CHASE MANHATTAN BANK,
a New York banking corporation (including successors and assigns, "CHASE"), all
right, title and interest of the undersigned, whether now owned or hereafter
acquired, in, to and under the Swap Agreement and all transactions arising
thereunder and all present and future claims, demands, causes of action and
choses in action in respect of the foregoing and all payments on or under and
all proceeds of every kind and nature whatsoever in respect of the foregoing,
including all proceeds of the conversion thereof, voluntary or involuntary, into
cash or other liquid property, all cash proceeds, accounts, accounts receivable,
notes, drafts, acceptances, chattel paper, checks, deposit accounts, insurance
proceeds, condemnation awards, rights to payment of any and every kind and other
forms of obligations, instruments and other property which at any time
constitute all or part of, or are included in, the proceeds of any of the
foregoing (all of the foregoing, the "ASSIGNED PROPERTY"). Upon delivery of this
Assignment by the Issuer to Chase, Chase shall succeed to all of the rights of
the Issuer in, to and under the Assigned Property, and the rights of the Issuer
shall terminate.
This Assignment is made pursuant to and upon the representations,
warranties and agreements on the part of the undersigned contained in the
Settlement Agreement and is to be governed by the terms of the Settlement
Agreement.
This Assignment shall be governed by, and construed in accordance
with, the laws of the State of New York.
Capitalized terms used herein and not defined herein shall have the
meanings assigned to such terms in, or incorporated by reference into, that
certain Settlement Agreement, dated as of September 23, 1999 (the "SETTLEMENT
AGREEMENT"), by and among the Issuer, Integrity Life Insurance Company, an Ohio
insurance company, Park Avenue Receivables Corporation, a Delaware corporation,
and Chase.
A-1
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Assignment to be
duly executed and delivered as of September 23, 1999.
212 CERTIFICATE COMPANY
BY:
--------------------------------------
Name:
Title:
Consented and agreed to as of
the date above written:
INTEGRITY LIFE INSURANCE
COMPANY
By:
--------------------------------------
Name:
Title:
A-2
<PAGE>
EXHIBIT B
FORM OF PROMISSORY NOTE
[REDACTED] September 23, 1999
FOR VALUE RECEIVED, INTEGRITY LIFE INSURANCE COMPANY (together with
its permitted successors and assigns, the "PAYOR") hereby promises to pay to the
order of THE CHASE MANHATTAN BANK, at 270 Park Avenue, New York, New York 10017
(including successors and assigns, "CHASE"), the principal sum of [REDACTED], in
lawful money of the United States of America and in immediately available funds.
Such entire outstanding amount, together with all accrued and unpaid interest
thereon, shall be payable on the earlier of (i) [REDACTED] and (ii) the
effective date of a Transaction (defined below) (such date, the "PAYMENT DATE").
As used herein, the term "TRANSACTION" shall mean, whether in one or a series of
transactions, (a) any merger, consolidation, reorganization, joint venture or
other business combination pursuant to which any material business of the Payor
or any subsidiary [REDACTED] (collectively, the "SUBJECT COMPANIES") is combined
with that of any other person or entity (a "PURCHASER"), (b) the acquisition
directly or indirectly by a Purchaser by way of tender or exchange offer (which
shall be deemed to include any amendment, variation, revision or extension
thereof), negotiated purchase or other scheme or arrangement or any other means
of acquiring all or any portion of the then outstanding capital stock of any
Subject Company, other than in the ordinary course of business; and (c) the
acquisition by a Purchaser, directly or indirectly, through public or private
purchases or otherwise of all or any portion of the assets, properties and/or
businesses of, or any right to all or any portion of the revenues or income of,
any Subject Company by way of a negotiated purchase, lease, license, exchange,
joint venture, purchase of newly issued securities or any other means.
Interest in respect of the outstanding principal amount of this
Promissory Note shall accrue at a per annum rate of [REDACTED] payable on the
Payment Date (on past due amounts, at a per annum rate of [REDACTED] payable on
demand) to Chase at the address specified above.
B-1
<PAGE>
[REDACTED]
Following the Payment Date, or upon the occurrence of an Insolvency
Event (defined below) with respect to the Payor, all amounts due and owing under
this Promissory Note immediately shall become due and owing automatically
without the need for presentment, demand, protest or other notice of any kind,
all of which are hereby waived by the Payor. As used herein, "INSOLVENCY EVENT"
means the occurrence of any of the following events: (a) the Payor 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) the Payor (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) [REDACTED] to the appointment of a
receiver, trustee, assignee, custodian, liquidator or sequestrator (or other
similar official, including but not limited to the Superintendent of the
Department of Insurance for the State of Ohio as a result of an order of
rehabilitation or liquidation issued subsequent to the date hereof) over 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; (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; or (iv)
permits or suffers all or any substantial part of its properties or assets to be
sequestered or attached by court order.
The Payor shall pay all costs of collection of any amount due
hereunder when incurred including, without limitation, reasonable attorney's
fees and expenses, and including all costs and expenses actually incurred in
connection with the pursuit by Chase of any of its rights or remedies referred
to herein.
If Payor defaults on its obligations under this Promissory Note, or if
an Insolvency Event shall occur and be continuing, the claims of Chase under
this Promissory Note shall be entitled to the same rights and priority against
the assets of the Payor as the claims of 212 Certificate Company, a Delaware
corporation ("212
B-2
<PAGE>
CERTIFICATE COMPANY") against the Payor under that certain ISDA Master
Agreement dated as of September 15, 1998, together with the accompanying
Schedule and Confirmation, each dated as of September 15, 1998, between the
Payor and 212 Certificate Company (which claims and rights have been duly
assigned by 212 Certificate Company to Chase).
The Payor hereby waives presentment, notice of dishonor, protest and
other notice or formality with respect to this Promissory Note.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Promissory Note as of September 23, 1999.
INTEGRITY LIFE INSURANCE COMPANY
By:
--------------------------------------
Name:
Title:
B-3
<PAGE>
PROMISSORY NOTE
$16,400,000.00 September 23, 1999
FOR VALUE RECEIVED, INTEGRITY LIFE INSURANCE COMPANY (together with
its permitted successors and assigns, the "PAYOR") hereby promises to pay to the
order of THE CHASE MANHATTAN BANK, at 270 Park Avenue, New York, New York 10017
(including successors and assigns, "CHASE"), the principal sum of SIXTEEN
MILLION FOUR HUNDRED THOUSAND DOLLARS ($16,400,000.00), in lawful money of the
United States of America and in immediately available funds. Such entire
outstanding amount, together with all accrued and unpaid interest thereon, shall
be payable on the earlier of (i) March 31, 2000 and (ii) the effective date of a
Transaction (defined below) (such date, the "PAYMENT DATE"). As used herein, the
term "TRANSACTION" shall mean, whether in one or a series of transactions, (a)
any merger, consolidation, reorganization, joint venture or other business
combination pursuant to which any material business of the Payor or any
subsidiary (including without limitation National Integrity Life Insurance
Company, a New York insurance company) (collectively, the "SUBJECT COMPANIES")
is combined with that of any other person or entity (a "PURCHASER"), (b) the
acquisition directly or indirectly by a Purchaser by way of tender or exchange
offer (which shall be deemed to include any amendment, variation, revision or
extension thereof), negotiated purchase or other scheme or arrangement or any
other means of acquiring all or any portion of the then outstanding capital
stock of any Subject Company, other than in the ordinary course of business; and
(c) the acquisition by a Purchaser, directly or indirectly, through public or
private purchases or otherwise of all or any portion of the assets, properties
and/or businesses of, or any right to all or any portion of the revenues or
income of, any Subject Company by way of a negotiated purchase, lease, license,
exchange, joint venture, purchase of newly issued securities or any other means.
Interest in respect of the outstanding principal amount of this
Promissory Note shall accrue at a per annum rate of 6.1925% payable on the
Payment Date (on past due amounts, at a per annum rate of 10.0% payable on
demand) to Chase at the address specified above.
1
<PAGE>
Anything herein to the contrary notwithstanding, if the Payment Date
occurs prior to March 31, 2000 pursuant to clause (ii) of the definition
thereof, the Payor may satisfy in full its obligations hereunder by paying on
the Payment Date the reduced principal amount of TWELVE MILLION DOLLARS
($12,000,000.00), plus accrued interest to the Payment Date; PROVIDED that if
the Borrower fails to pay such reduced amount on the Payment Date it shall
remain obligated thereafter to pay the $16,400,000.00 initial principal amount
hereof (which amount will be deemed to have become due on such Payment Date).
Following the Payment Date, or upon the occurrence of an Insolvency
Event (defined below) with respect to the Payor, all amounts due and owing
under this Promissory Note immediately shall become due and owing automatically
without the need for presentment, demand, protest or other notice of any kind,
all of which are hereby waived by the Payor. As used herein, "INSOLVENCY EVENT"
means the occurrence of any of the following events: (a) the Payor 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) the Payor (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) (other than the current confidential
supervision order pursuant to Sections 3903.09 and 3903.10 of the Ohio Revised
Code) to the appointment of a receiver, trustee, assignee, custodian, liquidator
or sequestrator (or other similar official, including but not limited to the
Superintendent of the Department of Insurance for the State of Ohio as a result
of an order of rehabilitation or liquidation issued subsequent to the date
hereof) over 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; (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; or (iv) permits or suffers all or any substantial part of its
properties or assets to be sequestered or attached by court order.
The Payor shall pay all costs of collection of any amount due
hereunder when incurred including, without limitation, reasonable attorney's
fees and
2
<PAGE>
expenses, and including all costs and expenses actually incurred in connection
with the pursuit by Chase of any of its rights or remedies referred to herein.
If Payor defaults on its obligations under this Promissory Note, or if
an Insolvency Event shall ocurr and be continuing, the claims of Chase under
this Promissory Note shall be entitled to the same rights and priority against
the assets of the Payor as the claims of 212 Certificate Company, a Delaware
corporation ("212 CERTIFICATE COMPANY") against the Payor under that certain
ISDA Master Agreement dated as of September 15, 1998, together with the
accompanying Schedule and Confirmation, each dated as of September 15, 1998,
between the Payor and 212 Certificate Company (which claims and rights have been
duly assigned by 212 Certificate Company to Chase).
The Payor hereby waives presentment, notice of dishonor, protest and
other notice or formality with respect to this Promissory Note.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Promissory Note as of September 23, 1999.
INTEGRITY LIFE INSURANCE COMPANY
By:/s/ John R. McGeeney
-----------------------
Name: John R. McGeeney
Title: General Counsel
3
<PAGE>
[LOGO] NORTH AND LATIN
October 14, 1999 AMERICAN REGION
NEW YORK BRANCH
VIA FACSIMILE
Mr. John R. Lindholm
President
Integrity Life Insurance Company
515 West Market Street, 8th Floor
Louisville, Kentucky 40202-3319
Re: SEPARATE ACCOUNT FUNDING AGREEMENT ISSUED BY INTEGRITY LIFE
INSURANCE COMPANY ("INTEGRITY") TO BRAVO TRUST SERIES 1997-1
Dear Mr. Lindholm:
By your countersignature hereunder, you agree that the terms of the
Termination Letter Agreement between the parties hereto, dated as of October 8,
1999 (the "Termination Letter Agreement"), shall be extended to 3:00 p.m. New
York City time on October 15, 1999.
Sincerely,
BAYERISCHE LANDESBANK
GIROZENTRALE, ACTING
THROUGH ITS NEW YORK
BRANCH, AS TRUST'S AGENT
By:
--------------------------
Title: 1st Vice President
-----------------------
By:
--------------------------
Title: Sr. Vice President
-----------------------
READ AND AGREED:
INTEGRITY LIFE INSURANCE COMPANY
By:
--------------------------
Title: Exec. V.P.
-----------------------
<PAGE>
NOTE AND TERM LOAN AGREEMENT REVISION AGREEMENT
THIS AGREEMENT, dated as of the 29th day of October, 1999,
made by and between GENAMERICA CORPORATION, a Missouri corporation, as First
Party; and ARM FINANCIAL GROUP, INC., a Delaware corporation, as Second Party;
WITNESS:
WHEREAS, First Party is the owner and holder of a certain promissory
Note executed by Second Party as maker, payable to First Party dated August 3,
1999 in the original principal sum of $38,000,000.00, said indebtedness being
further evidenced by a Term Loan Agreement, dated evenly with said Note.
WHEREAS, the parties hereto desire and intend by and through this
Agreement to effect a certain extension of the term of the said Note and Term
Loan Agreement.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in furtherance of the
above-expressed ends and intents, it is hereby agreed upon between the parties
hereto as follows:
1. The maturity date of said Note, which date is also referenced
in said Term Loan Agreement, is hereby extended, and said Note
and Term Loan Agreement are hereby amended to provide that the
maturity date of said Note is November 15, 1999.
2. All provisions and/or recitals of said Note and Term Loan
Agreement contrary to or inconsistent with any provisions of
this Agreement are hereby deemed amended to comport with the
provisions of this Agreement; but all provisions and/or
recitals thereof not contrary to or inconsistent with any
provisions of this Agreement shall remain in full force and
effect without amendment hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Note and Term
Loan Agreement Revision Agreement as of the date first herein entered.
FIRST PARTY:
GENAMERICA CORPORATION
By:/s/ Matthew P. McCauley
-------------------------------------
Vice President/Authorized Representative
Attest:/s/ Steven P. Traynor
---------------------------------
Assistant Secretary
SEE PAGE 2 FOR ADDITIONAL SIGNATURES.
<PAGE>
Page 2
SECOND PARTY:
ARM FINANCIAL GROUP, INC.
By:/s/ John McGeeney
--------------------------------
Name: John McGeeney
---------------------------
Title: General Counsel
--------------------------
Attest:/s/ Patricia L. Tackett
----------------------------
Name: Patricia L. Tackett
-----------------------
Title: Secretary
-----------------------
STATE OF MISSOURI )
) SS
CITY OF ST. LOUIS )
On this 29th day of October, 1999, before me, the undersigned
Notary Public, personally appeared Matthew P. McCauley and Steven P.
Traynor, known personally by me and known to me to be, respectively, the Vice
President and Assistant Secretary of GenAmerica Corporation, a Missouri
corporation and who acknowledged under oath that they each executed the within
instrument in such respective capacities as the free act and deed of GenAmerica
Corporation.
/s/ Suzanne C. Heinemann
------------------------
Notary Public
My Commission Expires: SUZANNE C. HEINEMANN
Notary Public - Notary Seal
STATE OF MISSOURI
ST. LOUIS COUNTY
MY COMMISSION EXP. JUNE 28, 2003
STATE OF Kentucky )
) SS
COUNTY OF Jefferson )
On this 1st day of November, 1999, before me, the undersigned
Notary Public, personally appeared John R McGeeney and Patty Tackett, known
personally by me and known to me to be respectively, the General Counsel and
Secretary of ARM Financial Group, Inc., a Delaware corporation, and who
acknowledged under oath that they executed the within instrument in such
respective capacities as the free act and deed of said corporation.
Pamela H. Shergur, Notary Public /s/ Pamela H. Shergur
State at Large, Kentucky -----------------------
My Commission Expires 4/7/2001 Notary Public
My Commission Expires:
<PAGE>
REVISION AGREEMENT
THIS REVISION AGREEMENT, dated as of the 15th day of November, 1999, made
by and between GENAMERICA CORPORATION, a Missouri corporation, as First Party;
and ARM FINANCIAL GROUP, INC., a Delaware corporation, as Second Party; WITNESS:
WHEREAS, First Party is the owner and holder of a certain promissory Note
executed by Second party as maker, payable to First Party dated August 3, 1999
in the original principal sum of $38,000,000.00, said indebtedness being further
evidenced by a Term Loan Agreement, dated evenly with said Note.
WHEREAS, the parties hereto did, by a certain Note and Term Loan Agreement
Revision Agreement, extend the term of the said Note and Term Loan Agreement
to November 15, 1999.
WHEREAS, the parties hereto desire and intend by and through this Revision
Agreement to effect an additional extension of the term of the said Note and
Term Loan Agreement.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
and in furtherance of the above-expressed ends and intents, it is hereby agreed
upon between the parties hereto as follows:
1. The maturity date of said Note, as previously revised, is hereby
extended, and said Note and Term Loan Agreement are hereby amended to
provide that the maturity date of said Note is November 30, 1999.
2. All provisions and/or recitals of said Note and Term Loan Agreement
contrary to or inconsistent with any provisions of this Revision
Agreement are hereby deemed amended to comport with the provisions of
this Revision Agreement; but all provisions and/or recitals thereof
not contrary to or inconsistent with any provisions of this Agreement
shall remain in full force and effect without amendment hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Revision
Agreement as of the date first herein entered.
FIRST PARTY:
GENAMERICA CORPORATION
By:/s/ Dona L. Barber
-----------------------------------------------
Vice President/Authorized Representative
Attest: /s/ Steven P. Traynor
-----------------------------------------------
Assistant Secretary
SEE PAGE 2 FOR ADDITIONAL SIGNATURES.
<PAGE>
Loan No. Page 2
---------
SECOND PARTY:
ARM FINANCIAL GROUP, INC.
By: /s/ John McGeeney
--------------------------------------------
Name: John McGeeney
--------------------------------------
Title: General Counsel
--------------------------------------
Attest: /s/ Patricia L. Tackett
----------------------------------------
Name: Patricia L. Tackett
--------------------------------------
Title: Secretary
---------------------------------------
STATE OF MISSOURI )
)SS
CITY OF ST. LOUIS )
On this 15TH day of NOVEMBER, 1999, before me, the undersigned Notary
Public, personally appeared DONA BARBER and STEVEN P. TRAYNOR, known
personally by me and known to me to be, respectively, the Vice President and
Assistant Secretary of GenAmerica Corporation, a Missouri corporation and who
acknowledged under oath that they each executed the within instrument in such
respective capacities as the free act and deed of GenAmerica Corporation.
Suzanne C. Heinemann
---------------------
Notary Public
My Commission Expires:
---------------------------------
SUZANNE C. HEINEMANN
NOTARY PUBLIC- NOTARY SEAL
STATE OF MISSOURI
ST. LOUIS COUNTY
MY COMMISSION EXP. JUNE 28, 2003
---------------------------------
SEE PAGE 3 FOR ADDITIONAL ACKNOWLEDGMENT.
<PAGE>
Loan No. Page 3
-------
STATE OF KENTUCKY )
)SS
COUNTY OF JEFFERSON )
On this 16TH day of NOVEMBER, 1999, before me, the undersigned Notary
Public, personally appeared JOHN R. MCGEENEY and PATRICIA TACKETT, known
personally by me and known to me to be respectively, the EXECUTIVE VICE
PRESIDENT, GENERAL COUNSEL and SECRETARY of ARM Financial Group, Inc., a
Delaware corporation, and who acknowledged under oath that they executed the
within instrument in such respective capacities as the free act and deed of said
corporation.
Pamela H. Shergur
-------------------
Notary Public
My Commission Expires: PAMELA H. SHERGUR, NOTARY PUBLIC
STATE AT LARGE KENTUCKY
MY COMMISSION EXP. ON APRIL 4, 2001
<PAGE>
STATE OF OHIO
DEPARTMENT OF INSURANCE
IN THE MATTER OF: :CONFIDENTIAL AMENDED SUPERVISION
:ORDER PURSUANT TO OHIO
INTEGRITY LIFE INSURANCE COMPANY :REVISED CODE SECTION 3903.11
Pursuant to Ohio Revised Code ("O.R.C.") Section 3903.09(B), the
Superintendent made the determination to supervise Integrity Life Insurance
Company (the "Company"), an Ohio life insurance legal reserve corporation, and
placed the Company under supervision by an Order issued August 20, 1999
("Supervision Order"). The Superintendent has determined to amend the
Supervision Order ("Amended Supervision Order"): the Amended Supervision Order
shall supercede the Supervision Order.
1. By copy of this Amended Supervision Order, (the "Company") is hereby
notified that it remains under supervision.
2. The Superintendent's requirement to abate the determination and
thereby be released from Supervision is that the Company shall attain
sufficient liquidity, surplus, and reserves necessary to exceed and
maintain company Action Level RBC, as defined in O.R.C. Section
3903.81.
3. During the period of this Supervision, Michael F. Motil, Assistant
Chief Examiner, Office of Financial Regulation, remains Supervisor of
the Company. The Supervisor is directed to enforce additional orders
issued under O.R.C. Section 3903.09(A) or (B). During the period of
supervision, the Company is hereby ordered and shall not, without the
prior written consent of the Superintendent or the Supervisor:
a) Dispose of, convey or encumber any of its assets;
b) withdraw from any accounts, except for death benefits,
previously scheduled systematic withdrawals, previously
scheduled immediate annuity payments, variable annuities and
variable life payments that are maintained separately
pursuant to O.R.C Section 3907.15 and agent commission
payments;
c) lend any of its funds;
d) invest any of its funds except in investments expressly
permitted by O.R.C. Section 3907.14;
e) transfer any of its property;
f) incur any debt, obligation, or liability;
g) merge or consolidate with any other person;
h) enter into any new, modify, amend or cancel any existing
reinsurance contract or treaty; or
i) implement any action ratified at any meeting of the board of
directors, executive committee, or any other committee of the
Company.
4. The Superintendent may retain, at the Company's expense, such experts
(including, but not limited to, attorneys, actuaries, accountants and
investment advisors) not
<PAGE>
otherwise a part of the Superintendent's staff, as the Superintendent
reasonably believes is necessary to assist in the supervision of the
Company.
5. The Company shall immediately report any material changes to its
operations to the Department of Insurance.
6. The Company's board of directors shall provide a certified resolution
within ten (10) business-days to the Department stating that it has
received a copy of this Supervision Order.
7. This Amended Supervision Order shall remain in effect for 60 days.
Unless the Superintendent begins proceedings under O.R.C. Section
3903.12 or 3903.17 for the appointment of a rehabilitator or
liquidator, this Amended Supervision Order shall be extended for
successive 60-day periods automatically until written notice from the
Superintendent is given to the Company ending this Supervision.
8. The Company may, within 30 days of the date of service of this
Amended Supervision Order, request a hearing to review this
Order. If requested, such hearing will be held in Franklin
County, Ohio, and will be held privately unless the Company
requests a public hearing. At any such hearing, the Company may
appear via its officers or through counsel or other person
authorized to practice before the Department of Insurance, and
may present evidence and examine witnesses appearing before and
against it.
A copy of this Amended Supervision Order shall be served upon John R.
Lindholm, President, Integrity Life Insurance Company, 515 West Market
Street, Louisville, Kentucky 40202.
Date: August 31, 1999 /s/ J. Lee Covington II
----------------------- ----------------------------
J. Lee Covington II by [Illegible]
Deputy Director
CERTIFICATE OF SERVICE
The undersigned hereby certifies that a true copy of the foregoing Confidential
Amended Supervision Order was sent this 31st day of August, 1999, by certified
mail, return receipt requested, to John R. Lindholm, President, Integrity Life
Insurance Company, 515 West Market Street, Louisville, Kentucky 40202, and by
facsimile 502/582-7903 to Kevin Howard, Senior Vice President, ARM Financial
Group.
Certified Mail No. Z 395 347 548 Beverly A. Abbott
------------- -----------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET
AND STATEMENT OF INCOME OF ARM FINANCIAL GROUP, INC.'S ,FORM 10-Q FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 1,678,654
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,514
<MORTGAGE> 12,372
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,354,176
<CASH> 324,478
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 162,023
<TOTAL-ASSETS> 5,022,463
<POLICY-LOSSES> 2,360,511
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 62,222
0
75,000
<COMMON> 238
<OTHER-SE> (136,348)
<TOTAL-LIABILITY-AND-EQUITY> 5,022,463
0
<INVESTMENT-INCOME> 178,423
<INVESTMENT-GAINS> (28,428)
<OTHER-INCOME> 20,621
<BENEFITS> 128,045
<UNDERWRITING-AMORTIZATION> 16,796
<UNDERWRITING-OTHER> 31,739
<INCOME-PRETAX> (22,956)
<INCOME-TAX> 31,356
<INCOME-CONTINUING> (54,312)
<DISCONTINUED> (193,013)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (247,325)
<EPS-BASIC> (10.51)
<EPS-DILUTED> (10.51)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
