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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Materials Pursuant to Section240.14a-11(c) or Section240.14a-12
ARM FINANCIAL GROUP, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO]
March 30, 1999
Dear Fellow Stockholder:
You are cordially invited to attend the ARM Financial Group, Inc. 1999
Annual Meeting of the Stockholders, which will be held on Friday, May 14, 1999,
in the Grand Ballroom of the Hyatt Regency Hotel, located at 320 West Jefferson
Street, Louisville, Kentucky. The meeting will begin at 9:00 a.m. local time.
Information relative to the matters to be voted upon at the meeting is in the
formal notice of the meeting and proxy statement on the following pages.
I hope that you will be able to attend the meeting, at which time we will
take action on the items described in the proxy statement. I will then present a
report on our operations and outlook for the future. Following the report,
stockholders will have an opportunity to comment on or to inquire about the
affairs of the Company that may be of general interest to stockholders.
Even if you own only a few shares, it is important that your shares be
represented and voted at the meeting. Therefore, I urge you to sign, date and
promptly return the accompanying proxy in the enclosed postage-paid envelope. If
you decide to attend the annual meeting and vote in person, you will of course
have that opportunity.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued support and interest in the Company.
Sincerely,
[SIGNATURE]
Martin H. Ruby
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
515 West Market Street
Louisville, Kentucky 40202-3319
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ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202-3319
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
March 30, 1999
ARM Financial Group, Inc., a Delaware corporation (the "Company"), will hold
the 1999 Annual Meeting of the Stockholders (the "Annual Meeting" or "Meeting")
on Friday, May 14, 1999, beginning at 9:00 a.m. local time, in the Grand
Ballroom of the Hyatt Regency Hotel, located at 320 West Jefferson Street,
Louisville, Kentucky, for the following purposes:
1. To elect three Directors, each for a term of three years; and
2. To transact such other business as may properly come before the
Meeting.
The Board of Directors has set the close of business on March 18, 1999, as
the record date for determining stockholders entitled to notice of, and to vote
at, the Annual Meeting and at any meeting following adjournment thereof. A list
of stockholders entitled to vote at this Meeting will be available for
inspection at the Company's executive offices, located at 515 West Market
Street, Louisville, Kentucky, between the hours of 9:00 a.m. and 4:00 p.m., for
ten (10) days prior to the date of the Meeting, and will also be available at
the Meeting.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE
ENCLOSED PROXY AND PROMPTLY MAIL IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE TO
ENSURE THAT YOUR VOTE WILL BE COUNTED.
By Order of the Board of Directors,
[SIGNATURE]
Patricia L. Tackett
SECRETARY
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ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202-3319
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PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 14, 1999
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GENERAL INFORMATION ABOUT THE MEETING
These proxy materials are being furnished in connection with the
solicitation by the Board of Directors of ARM Financial Group, Inc., a Delaware
corporation (the "Company"), of proxies to be voted at the Company's 1999 Annual
Meeting of the Stockholders (the "Annual Meeting" or "Meeting") and at any
meeting following adjournment thereof. The Annual Meeting will be held on
Friday, May 14, 1999, beginning at 9:00 a.m. local time, in the Grand Ballroom
of the Hyatt Regency Hotel, located at 320 West Jefferson Street, Louisville,
Kentucky. This Proxy Statement, Notice of Annual Meeting and accompanying form
of proxy card are first being mailed to holders of the Company's Class A
Convertible Common Stock (the "Common Stock") on or about March 30, 1999.
PURPOSE OF THE MEETING
At the Annual Meeting, stockholders will be asked to elect three Directors,
each for a term of three years, and to transact such other business as may
properly come before the Meeting and any adjournment thereof. Information about
each of the nominees for Director is provided on page 3.
STOCKHOLDERS ENTITLED TO VOTE
Holders of the Common Stock at the close of business on March 18, 1999 (the
"Record Date"), are entitled to receive this notice and to vote their shares at
the Annual Meeting. On the Record Date, there were 23,825,768 shares of the
Common Stock outstanding. Each share of the Common Stock is entitled to one vote
on each matter properly brought before the Meeting.
QUORUM
The presence, in person or by proxy, of the holders of a majority of the
Common Stock will constitute a quorum for the transaction of business at the
Meeting. Abstentions and broker "non-votes" are counted as present and entitled
to vote for purposes of determining a quorum. A broker "non-vote" occurs when a
nominee holding shares of the Common Stock for a beneficial owner does not vote
on a particular proposal because the nominee does not have discretionary voting
power with respect to that item and has not received instructions from the
beneficial owner.
REQUIRED VOTE
A plurality of the votes duly cast is required for the election of Directors
(i.e., the nominees receiving the greatest number of votes will be elected).
Abstentions and broker "non-votes" are not counted for purposes of the election
of Directors. The affirmative vote of the holders of a majority of the
outstanding shares of the Common Stock present in person or represented by proxy
and entitled to vote is required to approve all other matters which may properly
come before the Meeting.
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VOTING OF PROXIES
The vote of each stockholder is important. Since many stockholders are
unable to attend the Meeting in person, it is necessary that a large number be
represented by proxy. The submission of a signed proxy will not affect your
right to attend, or to vote in person at, the Annual Meeting. If your shares are
held in the name of a bank, broker or other holder of record, you must obtain a
proxy executed in your favor, from the holder of record, to be able to vote at
the Meeting.
All shares entitled to vote and represented by properly completed proxies
received prior to the Meeting and not revoked will be voted at the Meeting in
accordance with your instructions. IF NO INSTRUCTIONS ARE INDICATED ON A
PROPERLY COMPLETED PROXY, THE SHARES REPRESENTED BY THAT PROXY WILL BE VOTED AS
RECOMMENDED BY THE BOARD OF DIRECTORS. If any other matters are properly
presented at the Meeting for consideration, including, among other things, a
motion to adjourn the Meeting to another time or place, the persons named as
proxies and acting thereunder will have discretion to vote on those matters
according to their best judgment to the same extent as the person delivering the
proxy would be entitled to vote. At the time of the preparation of this Proxy
Statement, the Company did not anticipate that any other matters would be raised
at the Meeting.
PROXIES FOR SAVINGS PLAN PARTICIPANTS
If you participate in the ARM Financial Group, Inc. Savings Plan (i.e., the
Company's 401(k) plan), you may direct the voting of the share equivalents
credited to your account by instructing Fidelity Management Trust Company, the
Trustee of the plan, to vote in accordance with your duly executed voting
instruction card which is being mailed to plan participants with these proxy
materials. The Trustee will vote the proportional interest credited to your
account in accordance with your duly executed instructions. Under the terms of
the plan, if your instructions are not received by the Trustee before May 10,
1999, the share equivalents credited to your account will not be voted. Plan
participants who are also stockholders of record will receive a separate proxy
card for voting their stock holdings.
REVOCATION OF PROXIES
You may revoke your proxy at any time before it is exercised by writing to
the Corporate Secretary, by timely delivery of a properly executed, later-dated
proxy or by voting by ballot at the Meeting. By providing your voting
instructions promptly, you may save the Company the expense of a second mailing.
CONFIDENTIALITY
As a matter of Company practice, all proxies, ballots and tabulations that
identify the vote of individual stockholders are kept confidential. These items
are not seen by nor reported to the Company, except as necessary to meet legal
requirements, in a contested proxy solicitation or where stockholders submit
comments with their proxy.
COST OF PROXY SOLICITATION
The cost of soliciting proxies will be borne by the Company. Proxies may be
solicited on behalf of the Company by Directors, officers or employees of the
Company in person or by telephone, facsimile or other electronic means. The
Company will also reimburse brokerage firms and other custodians, nominees and
fiduciaries for their expenses incurred in sending proxies and proxy materials
to beneficial owners of the Common Stock.
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ELECTION OF DIRECTORS
The Board of Directors is divided into three classes, currently consisting
of three Directors each, whose terms expire at successive annual meetings. Three
Directors will be elected at the Annual Meeting to serve for a three-year term
expiring at the Company's annual meeting in the year 2002.
The persons named in the enclosed proxy intend to vote such proxy for the
election of each of the three nominees named below, unless you indicate that
your vote should be withheld from any or all of them. Each nominee elected as a
Director will continue in office until his successor has been duly elected and
qualified or until the earliest of his death, resignation or retirement.
The Board of Directors proposes that the following nominees, all of whom are
currently serving as Directors of the Company, be re-elected as Directors at the
Annual Meeting.
NOMINEES FOR TERMS EXPIRING AT THE ANNUAL MEETING TO BE HELD IN THE YEAR
2002:
EDWARD D. POWERS
COLIN F. RAYMOND
MARTIN H. RUBY
THE BOARD RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF EACH NOMINEE FOR
DIRECTOR.
The Company expects each nominee for election as a Director at the Annual
Meeting to be able to serve if elected. If any nominee is unable to serve,
proxies will be voted in favor of the remainder of those nominated.
Set forth below is the principal occupation and certain other information
about the nominees and other Directors whose terms of office will continue after
the Annual Meeting.
NOMINEES FOR TERMS EXPIRING IN 2002
EDWARD D. POWERS, age 66, has been a Director of the Company since September
1994. Mr. Powers has been Chairman and Chief Executive Officer of Powers Holding
Co., a holding company consisting of Curtis Electronics and Fire Brick
Engineers, since 1993. He served as Chairman and Chief Executive Officer of
Burnham Service Co. from 1989 through 1993. Prior to 1989, he served as Chairman
and Chief Executive Officer of The Mueller Co. Mr. Powers also serves on the
Board of Directors of Schneider National Inc. and Red Roof Inns Inc.
COLIN F. RAYMOND, age 28, has been a Director of the Company since January
1997. He has been a Vice President of Morgan Stanley & Co. Incorporated, a
financial services firm ("MS&Co."), since January 1999 and had been an Associate
since April 1996. Previously, Mr. Raymond was an Associate with Wolfensohn & Co.
from January 1995 to April 1996. Prior to that time, he had been an Associate in
J.P. Morgan & Co.'s corporate finance division. Mr. Raymond also serves on the
Board of several privately held companies.
MARTIN H. RUBY, age 48, was named Chairman of the Board and Chief Executive
Officer of the Company in February 1998. Prior to that time, he served as
Co-Chairman of the Board and Co-Chief Executive Officer of the Company since its
inception in July 1993. From March 1992 until November 1993, Mr. Ruby served as
Co-Chief Executive Officer of Analytical Risk Management, Ltd. From May 1990 to
January 1992, he was President and Managing Director of the ICH Capital
Management Group of ICH Corporation and President of Constitution Life Insurance
Company, the accumulation product subsidiary of ICH Corporation. From 1986 to
1989, Mr. Ruby was Chief Executive Officer and Managing Director of Capital
Initiatives Corporation, a subsidiary of the former Capital Holding
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Corporation. Mr. Ruby also held various other positions with Capital Holding
Corporation from 1980 until 1986.
DIRECTORS WHOSE TERMS EXPIRE IN 2000
MICHAEL F. HOLLAND, age 54, has been a Director of the Company since
September 1998. He has been Chairman of Holland & Co. L.L.C., a private
investment firm, since its founding in 1995. Prior to founding Holland & Co., he
served as General Partner of The Blackstone Group from 1994 to 1995. He served
as Vice Chairman of Oppenheimer & Co., Inc. from 1992 to 1994, and Chairman and
Chief Executive Officer of Salomon Brothers Asset Management, Inc. from 1989 to
1992. Mr. Holland also serves on the Board of The China Fund, Inc.
MARK V. KAMINSKI, age 43, has been a Director of the Company since September
1998. He has been President and Chief Executive Officer of Commonwealth
Industries, Inc. (formerly Commonwealth Aluminum Corporation), a leading
manufacturer of alloy aluminum products, since April 1991. He served as Vice
President and General Manager of Operations of Commonwealth Aluminum Corporation
from 1989 to 1991, and as Industry Marketing Manager from 1987 until 1989. Mr.
Kaminski also serves on the Board of Commonwealth Industries, Inc. and the
Indiana University Athletics Board.
IRWIN T. VANDERHOOF, age 71, has been a Director of the Company since
November 1993. Mr. Vanderhoof has been a Clinical Professor of Finance at the
Stern School of Business at New York University since 1989, and has been the
Principal of Actuarial Investment Consulting since 1987. Prior to 1987, Mr.
Vanderhoof was the Chief Actuary and Chief Investment Officer for the individual
lines of business of The Equitable Life Assurance Company of the United States.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
DAVID F. BABBEL, age 49, has been a Director of the Company since September
1998. He has been a Professor of Insurance, Risk Management and Finance at The
Wharton School, University of Pennsylvania since 1985. He has also served as a
Principal at Law and Economics Consulting Group, Inc., a leading economic
consulting firm, since 1993. From 1978 to 1985, Mr. Babbel was Assistant
Professor at The Haas School of Business, University of California, Berkeley. In
1995, he served as Senior Financial Economist in the Financial Sector
Development Department of the World Bank. He also served as a Strategist for
Frank Russell, Co. from 1993 to 1994 and an Insurance Strategist for Goldman,
Sachs & Co. from 1986 to 1992.
DUDLEY J. GODFREY, JR., age 73, has been a Director of the Company since
February 1994. He has been a Senior Shareholder in the law firm of Godfrey &
Kahn, S.C., Milwaukee, Wisconsin, since 1957. Mr. Godfrey serves on the Board of
Directors of Manpower, Inc., Clarcor, Inc. and other closely and privately held
corporations.
JOHN R. LINDHOLM, age 50, has been a Director of the Company since April
1998. He has served as President--Retail Business Division of the Company since
January 1997. He had been Executive Vice President and Chief Marketing Officer
of the Company since July 1993. Until November 1993, he served as the Chief
Marketing Officer of Analytical Risk Management, Ltd., a position he held since
March 1992. From June 1990 to February 1992, Mr. Lindholm was Chief Marketing
Officer and Managing Director of the ICH Capital Management Group of ICH
Corporation. From 1980 to 1990, he was employed by the former Capital Holding
Corporation, first as Vice President--Compensation and Benefits, then as Chief
Marketing Officer and Managing Director of its Accumulation and Investment
Group. Mr. Lindholm is also Chairman of the Board of The Legends Fund, Inc.
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GOVERNANCE OF THE COMPANY
BOARD OF DIRECTORS
The business, property and affairs of the Company are managed under the
direction of the Board of Directors. It establishes the overall policies and
standards for the Company and reviews the performance of management. The Board
of Directors meets on a regularly scheduled basis. In addition, management
confers frequently with the Directors apart from regularly scheduled Board and
committee meetings. During 1998, the Board met on six occasions, and the
committees held a total of ten meetings. Each Director attended at least 75% of
all Board and committee meetings held in 1998 during the period that he was a
Director and committee member.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three standing committees and has
assigned certain responsibilities to each.
AUDIT COMMITTEE. The Audit Committee is comprised of Directors who are
independent of the management of the Company and are free of any relationship
that, in the opinion of the Board, would interfere with their exercise of
independent judgment as committee members. The Audit Committee's primary
responsibilities are to (i) recommend the appointment of independent accountants
and approve independent audit fees; (ii) review the arrangements for and scope
of the audit by the independent accountants; (iii) review the Company's
quarterly and annual financial statements, audit results and reports, and review
any proposed corrective actions; (iv) review material changes in accounting
policies and financial reporting practices and material developments in
financial reporting standards; (v) consider the adequacy of the Company's system
of controls and policies, including those covering conflicts of interest and
business ethics; (vi) evaluate reports of actual or threatened litigation; and
(vii) examine improprieties or suspected improprieties, with the authority to
retain outside counsel or experts. Messrs. Babbel, Godfrey, Holland, Kaminski,
Powers and Vanderhoof are the current members of the Audit Committee, which met
five times during 1998.
COMPENSATION COMMITTEE. The Board of Directors has established a
Compensation Committee comprised of Directors who are not current or former
employees of the Company and who qualify as "non-employee directors" for
purposes of Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and "outside directors" for purposes of 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). The Compensation Committee is
responsible for making determinations with respect to salaries and bonuses
payable to the Company's executive officers and administering its incentive
compensation plans. The Compensation Committee has the authority to engage
independent compensation consultants to assist in developing and periodically
assessing the Company's executive compensation program. Messrs. Kaminski, Powers
and Raymond are the current members of the Compensation Committee. During 1998,
the Compensation Committee met four times.
NOMINATING COMMITTEE. The functions of the Nominating Committee include the
consideration of the size and composition of the Board, review and
recommendation of individuals for election as Directors of the Company, review
of criteria for selecting Directors, review and recommendation of the roles and
responsibilities of all committees of the Board, and recommendation of
candidates for membership on each of the committees. Nominees to the Board of
Directors are selected on the basis of recognized achievements and their ability
to bring various skills and experience to the deliberations of the Board. In
carrying out its responsibilities for recommending candidates to fill vacancies
on the Board and in recommending a slate of Directors for election by the
stockholders at
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the annual meetings, the Nominating Committee will consider candidates suggested
by other Directors, employees and stockholders. The current members of the
Nominating Committee are Messrs. Holland, Raymond and Vanderhoof. The Nominating
Committee held one meeting during 1998.
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of the Company or any of its
subsidiaries currently receive an annual retainer of $20,000 plus $1,000 per
Board meeting attended and reimbursement of meeting expenses. Non-employee
Directors who also serve as Directors of National Integrity Life Insurance
Company, an indirect subsidiary of the Company, receive $10,000 annually plus
$1,000 per Board meeting attended and the expenses of attendance (unless such
meeting is held on the same day as a Board meeting of the Company in which case
the non-employee Directors receive a total of $1,000, plus expenses of
attendance at the concurrent meetings.) Additionally, non-employee Directors
receive $1,000 for each committee meeting attended if the meeting is held on a
day other than the day of the respective Board meetings or other committee
meeting. Directors who are also employees of the Company receive no additional
compensation for serving on the Board.
In 1998, the Company's stockholders approved the 1998 Non-Employee Director
Stock Option Plan (the "Director Plan") to provide an equity component to the
Directors' annual compensation and thereby more closely align their interests
with those of the Company's stockholders. Under the Director Plan, each
non-employee Director is automatically awarded, upon his appointment to the
Board or on the date the Director becomes eligible to participate in the
Director Plan, a non-discretionary grant of 10,000 options at an exercise price
equal to the fair market value of the Company's Common Stock on the date of the
award. The options generally vest and become exercisable in equal installments
of 25% annually and have a ten-year term. Thereafter, at each annual meeting of
the stockholders, non-employee Directors who continue to serve after such annual
meeting (other than a Director who may have received an initial grant of 10,000
options at such meeting or during the period following the previous annual
meeting) will receive an additional option to purchase 2,000 shares of Common
Stock at the then current market price.
In order to compensate the non-employee Directors who were already serving
on the Board at the time the Director Plan was adopted, in 1998 Messrs. Godfrey,
Powers and Vanderhoof were each awarded an option to purchase 10,000 shares at
an exercise price equal to the fair market value on the date of grant. These
options are fully vested in recognition of their long tenure as Directors of the
Company.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
ROLE OF THE COMPENSATION COMMITTEE
The Compensation Committee is responsible for establishing the Company's
executive compensation principles and administering the policies and programs
that govern both annual compensation and stock ownership programs. This includes
each element described below, the measurements used to make payments of awards
under the Company's incentive plans and the overall effectiveness of the
program.
At least annually, the Committee meets to review the Company's prior year
performance against corporate goals set at the start of the year, to evaluate
executive compensation in light of performance against those objectives, to
assess competitive compensation levels, and to consider goals for the new year
in conjunction with the full Board of Directors. The Compensation Committee is
periodically advised by an external compensation consultant to ensure that the
executive compensation levels are competitive and consistent with industry
standards.
This report of the Compensation Committee addresses the components of the
Company's executive compensation program as applied during 1998 to the top seven
members of the senior leadership team including the Chief Executive Officer. All
actions and recommendations of the Compensation Committee during 1998 were
ratified or approved by the full Board of Directors where such action or
recommendation required Board approval.
EXECUTIVE COMPENSATION COMPONENTS
The key components of the Company's compensation program are base salary, a
performance based annual bonus and periodic grants of stock options. The goals
of the compensation program are (i) to attract and retain the best and most
experienced executives; (ii) to compensate executives based on both corporate
and individual performances; and (iii) to integrate executive and stockholder
interests by means of equity, risk-based compensation. This approach best serves
the interests of stockholders by ensuring that the members of the management
team who are essential to the Company's success are compensated in a manner that
advances both the short and long-term interests of stockholders. Thus,
compensation for the executive officers involves a high proportion of pay that
is at risk; i.e., the performance based annual bonus (which permits individual
performance to be recognized on an annual basis, and which is based, in part, on
an evaluation of the contribution made by the executive officer to Company
performance) and stock options (which directly correlates a significant portion
of the executive officer's long-term remuneration to stock price appreciation
realized by the Company's stockholders).
BASE SALARY
The purpose of base salary is to motivate and retain the key talent the
Company needs to be a market leader in a highly competitive industry by
providing a base level of income that recognizes the market value of the
position. The executive officers are paid salaries in line with their
responsibilities and market levels of compensation for comparable positions in
companies of relevant size and business profile. These salaries are targeted in
the middle range of the relevant market, with adjustments as appropriate to
reflect the individual's performance and experience. Each year, the Committee
reviews the base salary of the Chief Executive Officer, and in consultation with
the Chief Executive Officer, reviews the base salaries of the other executive
officers. Based on individual performance and impact on the Company's
performance, as well as competitive pay levels, the Committee determines whether
an adjustment to base salary is warranted for each executive in accordance with
the terms of their respective employment agreements.
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Salary increases for the executive officers generally range from 0% to 15%,
taking into account individual performance, competitive positioning, the salary
increase guidelines and the Chief Executive Officer's recommendations. The
results of the 1998 salary increases are reflected in the Summary Compensation
Table on page 11.
ANNUAL BONUS
The annual bonus component of incentive compensation is designed to reward
executive officers for achieving specific financial and strategic goals. To
implement this element of executive compensation, the Company adopted the
Incentive Compensation Plan (the "Incentive Compensation Plan") in June 1994,
which is a performance based compensation plan intended to further motivate and
award executive officers (as well as all other employees of the Company) by
directly linking cash bonuses to specific individual and Company performance
targets.
In 1998, the Company amended the Incentive Compensation Plan in order to
more directly tie the incentive compensation for the executives to the Company's
earnings on a GAAP basis. Previously, bonuses under the Incentive Compensation
Plan had been based on the Company's consolidated statutory after-tax operating
income.
Under the Incentive Compensation Plan, a targeted bonus pool is established
by the Board in the first quarter of each year. The general guidelines used to
calculate the bonus pool amount are based upon pre-determined targets for the
Company's return on average equity (expressed as percentages) multiplied by the
sum of all budgeted bonus amounts established for each employee of the Company
during the calendar year. Following year end, the Committee meets to determine
the exact amount of the bonus pool for the calendar year. In accordance with a
payout matrix adopted by the Board at the time the target bonus is established,
the target bonus pool is adjusted upward or downward depending upon the
Company's actual return on average equity. The Committee retains the discretion
to further reduce or increase the bonus pool amount taking into account such
qualitative factors as, among other things, quality of earnings, attaining
target profit margins on new business sold, and meeting sales projections as
outlined in the Company's annual business plan.
The targeted bonus award for each executive is expressed as a percentage of
base salary (generally ranging from 60% to 85%) determined by the Committee at
the beginning of each year based upon the individual's position, the assessment
of such individual's contribution in such position and competitive pay. The
actual amount an executive receives depends on the Chief Executive Officer's
recommendation (for executives other than himself), the Committee's assessment
of the executive's performance during the year, the Company's return on average
equity and the qualitative factors described above.
Having achieved the Company's target for return on average equity, the bonus
pool for 1998 was fully funded. However, individual performances varied, and
bonuses were awarded at, above or below target levels accordingly, as reported
in the Summary Compensation Table.
STOCK OPTIONS
Stock option awards directly tied to the performance of the Company's stock
are a key element of the Company's compensation program. The Company's stock
option plans enable executives and other key employees to develop and maintain
an equity interest in the Company thereby creating a direct link between
executive compensation and stockholder return. Stock options have been granted
periodically to executives and key employees at all levels of the Company. The
specific number of options granted has been based upon evaluation of the
relative contribution or anticipated contribution of each eligible individual to
overall Company performance. The options become exercisable based on continued
employment with the Company and generally remain exercisable for a period of
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ten years. The ultimate value of the options, if any, depends on the extent to
which the Company's Common Stock appreciates in market value.
During 1998, options to purchase an aggregate of 475,750 shares of the
Common Stock were awarded to the Company's executive officers and to a large
number of key employees under the 1997 Equity Incentive Plan (the "Equity
Incentive Plan"). The awards for the executive officers were made after a review
of prior option grants, individual performance evaluations and relative
contributions. The stock options were granted at fair market value on the date
of grant and are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Code, to the extent permitted by law. The options
provide for vesting in equal installments of 25% annually and expire ten years
from the date of grant. The awards to the executive officers represented
approximately 47% of the total options granted in 1998 and approximately 1% of
the Common Stock outstanding at the end of 1998.
Historically, stock option awards were made pursuant to the Company's
Amended and Restated Stock Option Plan (the "Stock Option Plan"). Under the
Stock Option Plan, a maximum of 2,428,640 shares of Common Stock were reserved
for issuance upon the exercise of options. The Stock Option Plan was structured
such that upon completion of the Company's initial public offering of its Common
Stock in May 1997 (the "Initial Public Offering"), all options that had been
reserved for issuance under the Stock Option Plan, but not yet awarded were
allocated pro rata to the existing participants in the Stock Option Plan with
the exercise prices, vesting schedules and remaining terms of such options being
the average weighted exercise prices, vesting percentages and terms of the
options previously held by such participants. As a result of this allocation,
all options available for grant under the Stock Option Plan have been awarded
and, accordingly, there are no further options available for grant under this
plan. However, in the event that options expire or are surrendered or forfeited
by participants without being exercised (i.e., unvested or unexercised options
foregone following a participant's resignation or termination of employment with
the Company), the options are re-allocated in the manner described above. This
pro rata allocation of options occurs automatically without any other Board or
Compensation Committee action.
This feature of the Stock Option Plan was designed to reward those
executives and other employees of the Company who were instrumental during the
Company's start-up and for their contributions towards the successful completion
of the Initial Public Offering. The Compensation Committee does not consider
these allocations to be a part of the current components of the executive
compensation program. Although, the Committee recognizes that the allocations do
in fact further promote the alignment of management's financial interests with
long-term stockholder value. In 1998, a total of 55,723 options were allocated
to the executive officers as a result of options having been forfeited.
CHIEF EXECUTIVE OFFICER COMPENSATION
In 1998, the Company's most highly compensated officer was Martin H. Ruby,
Chairman of the Board and Chief Executive Officer. Mr. Ruby assumed the role of
Chairman of the Board and Chief Executive Officer in February 1998 following the
announcement of John Franco's retirement. Messrs. Ruby and Franco had served as
Co-Chairmen of the Board and Co-Chief Executive Officers of the Company since
the Company's inception in July 1993.
In March 1998, Mr. Ruby's base salary was increased from $416,000 to
$500,000 which represents a 20% increase from his 1997 salary. This change was
made in recognition of his new role as Chairman and Chief Executive Officer and
his assumption of additional responsibilities associated with managing a fully
independent public company. In determining the base salary increase, the
Committee considered salary information for the chief executive officers of
other companies in the insurance and annuity industries and companies of
comparable size and profile. Mr. Ruby's base
9
<PAGE>
salary, as adjusted, is consistent with the Company's salary guidelines and the
base salaries of chief executive officers in the comparison surveys.
In order to further recognize Mr. Ruby's new position and to provide him
with additional long-term incentives to improve the Company's financial
performance, Mr. Ruby was awarded 60,000 stock options. The options were awarded
in April 1998 at an exercise price of $22.53 per share representing the fair
market value of the Common Stock on the date of grant. The options vest in 25%
increments annually and have a ten-year term.
In determining Mr. Ruby's annual bonus for 1998, the Committee considered
his individual contribution towards the attainment of the Company's performance
objectives, including specified revenue and profit targets for the Company. This
review included a detailed analysis of the short and long-term financial results
as well as progress towards the Company's strategic objectives. In light of the
Committee's overall assessment of his performance, Mr. Ruby was paid a bonus in
the amount of $350,000.
As noted above, Mr. Franco was Co-Chairman of the Board and Co-Chief
Executive Officer of the Company until his retirement in February 1998. In 1998,
the Company made severance and other payments to Mr. Franco in accordance with a
negotiated retirement agreement. These amounts are fully discussed under the
heading "Employment Agreements and Change in Control Arrangements."
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Code, enacted in 1993 and applicable to the Company,
generally disallows a tax deduction to public companies for compensation over $1
million paid to the chief executive officer and four other most highly
compensated executive officers. Presently, because of the application of certain
transition rules applicable to a newly public company, the Company does not
expect any of the executive officers' compensation to be subject to the
deductibility limit. The Company's goal is to structure compensation awards for
covered executives that will be fully deductible where doing so will further the
purposes of the Company's executive compensation program to the extent deemed
appropriate.
CONCLUSION
Overall, the Compensation Committee believes the Company's executive
compensation program effectively serves the interests of the stockholders. The
components of the compensation program are appropriately balanced to provide
increased motivation for the executive officers to optimize the profitability
and growth of the Company, thereby enhancing the value of the Company for the
benefit of the stockholders.
THE COMPENSATION COMMITTEE
Mark V. Kaminski, CHAIRMAN
Edward D. Powers
Colin F. Raymond
THE PRECEDING "COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION"
SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY GENERAL STATEMENT
INCORPORATING THIS PROXY STATEMENT INTO ANY FILING UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE EXCHANGE ACT, EXCEPT TO
THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE,
AND SHALL NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, Messrs. Powers and Raymond served as the members of the
Compensation Committee, with Mr. Kaminski joining the Committee in December
1998. None of the members of the Compensation Committee were officers or
employees of the Company or had any relationship with the Company requiring
disclosure under the regulations promulgated by the Securities and Exchange
Commission (the "SEC").
10
<PAGE>
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION SUMMARY TABLE
The following table sets forth information about the compensation of the
Chief Executive Officer, the former Co-Chief Executive Officer, and the four
other most highly compensated executive officers of the Company (collectively,
the "Named Executive Officers") for services rendered to the Company during the
years ended December 31, 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
------------------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) GRANTED (#)(2) COMPENSATION ($)(3)
- -------------------------------------------------- ---- ------------- --------- -------------- ----------------------
<S> <C> <C> <C> <C> <C>
Martin H. Ruby (4)................................ 1998 $486,000 $350,000 86,135 $ 24,300
Chairman of the Board and Chief 1997 $413,333 $314,000 205,015 $ 20,667
Executive Officer 1996 $400,000 $314,000 49,420 $ 20,000
John R. Lindholm.................................. 1998 $327,000 $225,000 57,342 $ 16,350
President--Retail Business Division 1997 $310,000 $234,000 102,430 $ 15,500
1996 $300,000 $185,000 14,120 $ 15,000
David E. Ferguson................................. 1998 $299,167 $210,000 37,636 $ 14,958
President--ARM Technology Group 1997 $288,250 $188,500 68,576 $ 14,412
1996 $279,500 $170,000 -- $ 13,975
Edward L. Zeman................................... 1998 $230,472 $125,000 23,059 $ 11,524
Executive Vice President and Chief 1997 $206,667 $124,800 13,743 $ 10,333
Financial Officer 1996 $200,000 $105,000 -- $ 75,151(5)
Dennis L. Carr.................................... 1998 $218,000 $160,000 14,644 $ 10,900
Executive Vice President and Chief 1997 $206,667 $120,000 32,858 $ 10,333
Actuary 1996 $200,000 $ 67,600 -- $ 10,000
John Franco (6)................................... 1998 $ 55,200 -- -- $1,501,712
Retired Co-Chairman of the Board and 1997 $413,333 $314,000 205,015 $ 20,667
Co-Chief Executive Officer 1996 $400,000 $314,000 49,420 $ 20,000
</TABLE>
- ------------------------------
FOOTNOTES
(1) Includes amounts contributed by each of the Named Executive Officers to the
Company's deferred compensation plans.
(2) All stock option awards are for shares of the Common Stock. The options
granted in 1997 and 1998 include options that were allocated under the terms
of the Stock Option Plan in connection with the Initial Public Offering or
allocated as a result of options having been surrendered or forfeited
without being exercised in full. These allocations are discussed in further
detail under the Compensation Committee Report on Executive Compensation.
(3) Except as otherwise noted, the amounts presented in this column for all
other compensation paid to the Named Executive Officers in 1998 represent
matching contributions made by the Company under the ARM Financial Group,
Inc. Savings Plan and the ARM Financial Group, Inc. Nonqualified Savings
Plan.
(4) Mr. Ruby was named Chairman of the Board and Chief Executive Officer in
February 1998, having served as Co-Chairman of the Board and Co-Chief
Executive Officer since July 1993.
(5) The amount shown includes $65,151 of reimbursement for certain relocation
expenses consistent with the Company's practice for similarly situated
employees.
(6) Mr. Franco retired as Co-Chairman of the Board and Co-Chief Executive
Officer of the Company in February 1998. The amounts shown represent certain
payments made to Mr. Franco in accordance with his retirement agreement.
Under the agreement, Mr. Franco received payment of $18,400 for accrued
vacation days, $3,312 in matching contributions made by the Company under
the deferred compensation plans, $832,000 representing an amount equal to
base salary for the period January 1, 1999 through the second anniversary of
his retirement date, and $648,000 representing potential bonus payments that
he would have otherwise earned during 1998 and 1999. Refer to the section
under "Employment Agreements and Change in Control Arrangements" for more
information on compensation paid to Mr. Franco upon his retirement.
11
<PAGE>
OPTION GRANTS
The following table shows all grants of options to the Named Executive
Officers in 1998 and the potential realizable value of such option grants:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)(2)
---------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE MARKET OPTION TERM (3)
OPTIONS EMPLOYEES PRICE PER PRICE PER EXPIRATION ------------------------------
NAME GRANTED (#) IN 1998 (%) SHARE ($) SHARE ($) DATE 0% ($) 5% ($) 10% ($)
- ------------------------------ ----------- ------------ --------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Martin H. Ruby................ 5,592(4) 1.01% $11.14 $19.375(5) 11/26/03 $ 46,050 $ 75,953 $ 112,249
15,844(4) 2.86% $12.18 $ 20.28(5) 6/14/05 $128,336 $259,112 $ 433,266
4,699(4) 0.85% $12.18 $ 20.28(5) 1/01/06 $ 38,062 $ 83,518 $ 147,080
60,000(6) 10.84% $22.53 $ 22.53 4/20/08 -- $850,282 $2,154,769
John R. Lindholm.............. 2,876(4) 0.52% $11.14 $19.375(5) 11/26/03 $ 23,684 $ 39,063 $ 57,730
8,124(4) 1.47% $12.20 $ 20.28(5) 6/14/05 $ 65,642 $132,697 $ 221,994
1,342(4) 0.24% $12.20 $ 20.28(5) 1/01/06 $ 10,843 $ 23,825 $ 41,978
45,000(6) 8.13% $22.53 $ 22.53 4/20/08 -- $637,712 $1,616,077
David E. Ferguson............. 1,997(4) 0.36% $11.14 $19.375(5) 11/26/03 $ 16,445 $ 27,124 $ 40,086
5,639(4) 1.02% $12.24 $ 20.28(5) 6/14/05 $ 45,338 $ 91,882 $ 153,864
30,000(6) 5.42% $22.53 $ 22.53 4/20/08 -- $425,141 $1,077,385
Edward L. Zeman............... 2,550(4) 0.46% $11.91 $ 20.28(5) 9/01/05 $ 21,344 $ 42,391 $ 70,420
509(4) 0.09% $11.91 $ 20.28(5) 1/01/07 $ 4,260 $ 9,948 $ 18,278
20,000(6) 3.61% $22.53 $ 22.53 4/20/08 -- $283,427 $ 718,256
Dennis L. Carr................ 959(4) 0.17% $11.14 $19.375(5) 11/26/03 $ 7,897 $ 13,026 $ 19,250
2,685(4) 0.49% $12.24 $ 20.28(5) 6/14/05 $ 21,587 $ 43,749 $ 73,262
11,000(6) 1.99% $22.53 $ 22.53 4/20/08 -- $155,885 $ 395,041
John Franco................... --
</TABLE>
- ------------------------------
FOOTNOTES
(1) With the consent of the Compensation Committee, options awarded pursuant to
the Stock Option Plan and Equity Incentive Plan (other than options that are
intended to qualify as "incentive stock options" pursuant to Section 422 of
the Code) may be transferred without value to a participant's family members
or to one or more trusts established for the benefit of such family members.
(2) Under the Stock Option Plan and Equity Incentive Plan, in the event a
participant's employment is terminated because of death or permanent
disability, the participant's options will become 50% vested if the options
were less than 50% vested at the time of such termination. All unvested
options will immediately vest upon termination of the participant's
employment for "good reason" or a "change in control" of the Company as
described herein under the heading "Employment Agreements and Change in
Control Arrangements."
(3) Amounts for the Named Executive Officers shown under the "Potential
Realizable Value" columns above have been calculated by multiplying the
market price of the Common Stock on the respective dates of grant by the
annual appreciation rates shown (compounded annually for the term of the
options), subtracting the exercise price per share and multiplying the gain
per share by the number of shares covered by the options. Such amounts are
calculated based on the requirements promulgated by the SEC and are not
intended to forecast future price appreciation of the Common Stock.
(4) These options were allocated in accordance with the terms of the Stock
Option Plan as a result of options having been surrendered or forfeited.
Under the Stock Option Plan, in the event that options expire or are
surrendered or forfeited by participants without being exercised, the
options are re-allocated pro rata to the remaining participants in the Stock
Option Plan. The exercise prices, vesting schedules and remaining option
terms applicable to allocated options are the average weighted exercise
prices, vesting percentages and option terms of the options previously held
by such participants.
(5) Represents the average weighted values of the market price of the Company's
Common Stock on the respective dates the options were allocated.
(6) This grant of options was made on April 20, 1998, pursuant to the Equity
Incentive Plan at an exercise price equal to the fair market value of the
Company's Common Stock on the date of the award. The options are intended to
qualify as "incentive stock options" within the meaning of Section 422 of
the Code, to the extent permitted by law. The options generally vest 25%
each year beginning on the first anniversary date of the grant date and have
a ten-year term.
12
<PAGE>
OPTION EXERCISES AND VALUES AT YEAR-END
The following table provides information on options exercised by each of the
Named Executive Officers during 1998, and the value of such officer's
unexercised options at year-end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT FISCAL
ACQUIRED ON OPTIONS AT FISCAL YEAR-END (#) YEAR-END ($)(2)
EXERCISE VALUE --------------------------------- ---------------------------------
NAME (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Martin H. Ruby........... -- -- 514,351 190,515 $5,511,676 $1,308,357
John R. Lindholm......... 50,000 $ 498,625 208,187 102,795 $2,217,446 $ 577,809
David E. Ferguson........ 50,000 $ 500,094 123,965 62,151 $1,316,456 $ 319,822
Edward L. Zeman.......... -- -- 23,268 40,362 $ 239,233 $ 209,120
Dennis L. Carr........... -- -- 83,320 26,310 $ 895,217 $ 152,296
John Franco.............. 497,374 $4,795,168 -- 121,357(3) -- $1,216,708
</TABLE>
- ------------------------------
FOOTNOTES
(1) The value realized represents the difference between the fair market value
of the Common Stock on the date of exercise and the exercise price of the
options, multiplied by the number of options exercised.
(2) In accordance with the SEC's rules, the value of unexercised in-the-money
options is calculated by subtracting the exercise price from the fair market
value of the underlying Common Stock. For purposes of this table, fair
market value is deemed to be $22.1875, the closing price of the Common Stock
as reported on the New York Stock Exchange (the "NYSE") on December 31,
1998. There is no assurance that the values of unexercised in-the-money
options reflected in this table will be realized.
(3) Following his retirement, Mr. Franco's unvested options continued to vest
and became exercisable in accordance with the terms of his retirement
agreement and the Stock Option Plan as more fully described herein under the
section on "Employment Agreements and Change in Control Arrangements."
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
EMPLOYMENT AGREEMENTS
In keeping with its philosophy of retaining key executives, on March 1,
1999, the Company entered into employment agreements with seven executive
officers, including Messrs. Ruby, Lindholm, Ferguson, Zeman and Carr. These
agreements terminate and replace all prior employment agreements and change in
control arrangements with the executives. The term of each agreement continues
through March 1, 2002, and is automatically extended for additional one-year
periods unless either party gives written notice of its intent to terminate the
agreement at least 180 days prior to the expiration of the then effective term.
Each employment agreement specifies an initial base salary level which may
be increased by the Compensation Committee at any time, but not decreased, and
provides for participation in the Company's bonus plan, employee benefits and
other perquisites available. The initial base salaries for Messrs. Ruby,
Lindholm, Ferguson, Zeman and Carr are $500,000, $330,000, $330,000, $235,000
and $230,000, respectively.
The benefits provided by the employment agreements include, to the extent
each executive is eligible, any plans, programs or arrangements of the Company
providing for retirement benefits, incentive compensation, profit sharing,
bonuses, disability benefits, health, dental and life insurance, or vacation and
paid holidays. The executives will also receive indemnification from the Company
to the fullest extent permitted by Delaware law and the Certificate of
Incorporation and By-Laws of the
13
<PAGE>
Company as currently in effect, and the Company will procure and maintain
insurance policies, to the extent reasonably available, for the benefit of its
Directors and officers, including the executives.
Generally, the employment agreements provide that, upon a termination or
non-renewal of the executive's employment by the Company without "cause" or a
resignation for "good reason," the executive will receive severance pay in an
amount equal to two times the sum of (A) the executive's base salary and (B) the
greater of (i) the percentage of the executive's actual earnings used to
calculate the bonus paid to the executive in the year preceding termination of
employment multiplied by the base salary or (ii) the average of the bonuses paid
to the executive over the last three years preceding the termination or
resignation. The executive will also be entitled to receive a pro rata portion
of any bonus paid for the year of termination equal to the greater of (i) the
percentage of the executive's actual earnings used to calculate the bonus paid
to the executive in the year preceding the termination of employment multiplied
by the base salary or (ii) the average of bonuses paid to the executive over the
last three years preceding the termination or resignation, multiplied by a
fraction where the numerator is the number of days during the year that the
executive was employed by the Company and the denominator is 365. Severance pay
will be subject to each executive's compliance with certain restrictive
covenants.
If a "change in control" of the Company occurs, the executive may terminate
his employment upon 30 days written notice during the 30-day period following
the 18-month period after the occurrence of the "change in control." In the
event of such a termination, the executive will be entitled to receive all of
the benefits described above.
In the event an executive's employment is terminated by the Company for
"cause" or the executive resigns without "good reason," he will only be entitled
to receive base salary through the relevant date of termination or resignation
of employment. If the executive dies or is permanently disabled, he (or his
beneficiary or estate in the event of his death) will be entitled to receive
base salary and benefits (including a pro rata cash bonus for the year of death
or disability) for the period ending on the date of death or, in the case of
disability, through the later of the date of termination or the date on which
the executive commences to receive disability benefits.
Under the employment agreements, "good reason" for leaving includes, among
other things, a termination by the executive following a material diminution of
the executive's responsibilities or position, reduction in the executive's base
salary, the failure of a successor to the Company to expressly assume
obligations under the agreements, or the failure to fully compensate the
executive for any increase in cost of living associated with the Company's
relocation of the executive's place of employment. Termination for "cause"
includes certain unlawful acts on the part of the executive or a material
violation of his responsibilities to the Company resulting in material injury to
the Company.
For purposes of the employment agreements, a "change in control" generally
will have occurred when (A) any person becomes the beneficial owner of 51% or
more of either (i) the then outstanding shares of the Common Stock or (ii) the
combined voting power of the Company's then outstanding voting securities, (B) a
change in the majority of the composition of the Board (unless approved by the
incumbent board), (C) the consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent at least 51% of the combined voting power
of the Company or such surviving entity or a parent thereof outstanding
immediately after such merger or consolidation, or (D) the stockholders of the
Company approve a plan of reorganization (other than a reorganization under the
United States Bankruptcy Code) or complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets.
14
<PAGE>
The Company formerly maintained an employment agreement with Mr. Franco. Mr.
Franco retired as Co-Chairman of the Board and Co-Chief Executive Officer of the
Company and as an employee of the Company in February 1998. The employment
agreement with Mr. Franco was superceded by an agreement pursuant to which Mr.
Franco received (i) $314,000 as a bonus for services rendered during 1997; (ii)
$416,000 in base salary for 1998, paid in accordance with the Company's standard
payroll practices; (iii) a lump sum of $832,000 on January 1, 1999, representing
an amount equal to base salary for the period January 1, 1999 to the second
anniversary of Mr. Franco's retirement date; (iv) $648,000 on January 1, 1999,
representing potential bonus payments that Mr. Franco would have otherwise
earned during fiscal years 1998 and 1999; (v) payment for accrued vacation days;
and (vi) accrued benefits under the Company's retirement plans. Options that had
been granted to Mr. Franco under the Stock Option Plan continued to vest and
were exercisable in accordance with the vesting schedule in his agreement and
the Stock Option Plan as if he had remained in the employ of the Company;
provided, that all options that were not vested on January 1, 1999, vested and
became exercisable on such date.
STOCK OPTION PLAN
Under the Stock Option Plan, the exercisability of the options will be
accelerated upon the occurrence of certain specified events, including, without
limitation, a "change in control" or a sale by the Company of all or
substantially all of its business to a third party. For purposes of the Stock
Option Plan, a "change in control" means the acquisition of equity securities of
the Company, directly or indirectly, through a merger or otherwise, in a single
transaction or a series of transactions, by a person, entity or group that is
not, directly or indirectly, in control of, controlled by, or under common
control with the Company, or certain private equity funds sponsored by MS&Co.
(the "Morgan Stanley Stockholders"), entitling such person, entity or group to
elect a majority of the members of the Board of Directors.
EQUITY INCENTIVE PLAN
In the event of a "change in control" under the Equity Incentive Plan, and
except as the Compensation Committee (as constituted prior to such change in
control) may expressly provide otherwise, all stock options then outstanding
will become fully exercisable as of the date of the change in control, whether
or not then exercisable. In the case of a "change in control" involving a merger
of, or consolidation involving, the Company in which the Company is (A) not the
surviving corporation or (B) becomes a wholly owned subsidiary of the surviving
entity or a parent thereof, each outstanding stock option granted under the
Equity Incentive Plan and not exercised will be converted into an option to
acquire common stock of the surviving entity or its parent, which option will
have substantially the same terms and conditions as originally provided, with
appropriate adjustments as to the number and kind of shares and exercise prices.
Under the Equity Incentive Plan, a "change in control" is deemed to have
occurred upon the same events as described above under the section entitled
"Employment Agreements" provided, however, that for options granted before
February 22, 1999, a "change in control" will have occurred under such
definition if a person becomes the beneficial owner of 20% (rather than 51%) or
more of either (i) the then outstanding shares of the Common Stock or (ii) the
combined voting power of the Company's then outstanding voting securities.
15
<PAGE>
PERFORMANCE GRAPH
The graph below provides an indicator of cumulative total return for the
Company's Common Stock as compared with the S&P 500 Stock Index and the S&P 500
Insurance (Life/Health) Index weighted by market value at each measurement
point. This graph covers the period of time beginning June 19, 1997, when the
Company's Common Stock first began trading following its Initial Public
Offering, through December 31, 1998. The graph assumes an investment of $100 in
the Common Stock and in each Index on June 19, 1997, and the reinvestment of all
dividends. The line graph is not intended to be indicative of future stock
performance.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF CUMULATIVE TOTAL RETURN
<S> <C> <C> <C>
S&P 500
S&P 500 Insurance
ARM Financial Stock (Life/Health)
Group, Inc. Index Index
19Jun97 $100.00 $100.00 $100.00
Jun97 $101.27 $ 98.49 $ 96.00
Sep97 $120.69 $105.87 $ 98.62
Dec97 $133.81 $108.91 $ 98.45
Mar98 $116.79 $124.10 $112.07
Jun98 $112.57 $128.20 $105.55
Sep98 $ 90.56 $115.45 $128.28
Dec98 $113.41 $140.03 $151.30
</TABLE>
TOTAL RETURN INDEX
(QUARTER ENDING)
<TABLE>
<CAPTION>
BASE
PERIOD
COMPANY/INDEX 19JUN97 JUN97 SEP97 DEC97 MAR98 JUN98 SEP98 DEC98
- -------------------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ARM FINANCIAL GROUP, INC.......................... $100 $101.27 $120.69 $133.81 $116.79 $112.57 $ 90.56 $113.41
S&P 500 STOCK INDEX............................... $100 $ 98.49 $105.87 $108.91 $124.10 $128.20 $115.45 $140.03
S&P 500 INSURANCE (LIFE/HEALTH) INDEX............. $100 $ 96.00 $ 98.62 $ 98.45 $112.07 $105.55 $128.28 $151.30
</TABLE>
THE PRECEDING "PERFORMANCE GRAPH" AND RELATED DISCLOSURE SHALL NOT BE DEEMED
INCORPORATED BY REFERENCE BY ANY GENERAL STATEMENT INCORPORATING THIS PROXY
STATEMENT INTO ANY FILING UNDER THE SECURITIES ACT OR UNDER THE EXCHANGE ACT,
EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES THIS INFORMATION BY
REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
16
<PAGE>
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information as of the Record Date concerning
the beneficial ownership of the Company's Common Stock for (i) each incumbent
Director and each of the nominees for Director; (ii) the executive officers
named in the Summary Compensation Table; and (iii) all Directors and executive
officers of the Company as a group. Except as otherwise noted, each of the
stockholders has sole voting and investment power with respect to the shares
shown in the table, exercised solely by the named person or shared with a
spouse.
<TABLE>
<CAPTION>
OPTIONS
AMOUNT AND NATURE EXERCISABLE PERCENT OF
OF BENEFICIAL WITHIN SHARES
NAME OWNERSHIP (#)(1) 60 DAYS (2) OUTSTANDING (%)(3)
- ----------------------------------------------------------------- ----------------- ----------- ------------------
<S> <C> <C> <C>
Martin H. Ruby................................................... 225,582(4) 542,747 3.15%
John R. Lindholm................................................. 25,461 223,264 1.03%
David E. Ferguson................................................ -- 131,465 *
Dennis L. Carr................................................... 20,003 86,070 *
Edward L. Zeman.................................................. 11,000 29,722 *
David F. Babbel.................................................. -- -- *
Dudley J. Godfrey, Jr............................................ 35,843 10,000 *
Michael F. Holland............................................... 10,000 -- *
Mark V. Kaminski................................................. 2,000 -- *
Edward D. Powers................................................. 55,985 10,000 *
Colin F. Raymond................................................. -- -- *
Irwin T. Vanderhoof.............................................. 8,622 10,000 *
John Franco...................................................... 240,657 -- 1.01%
All Directors and executive officers as a group (17 persons)..... 680,326 1,152,818 7.61%
</TABLE>
- ------------------------
FOOTNOTES
(1) All shares of the Common Stock are held directly with the following
exceptions: 32,285 shares held by Mr. Ruby are indirectly owned through
Woodstone Ventures, LLC, a limited liability company the members of which
are Mr. Ruby's two daughters; and 92,000 shares are indirectly held through
Ruby Ventures, L.P., a limited partnership, of which Mr. Ruby's wife and two
daughters are the limited partners, and Mr. Ruby is the general partner with
sole investment control and voting power over such shares.
(2) Represents the number of shares that could be acquired upon the exercise of
options that are exercisable within 60 days after the Record Date under the
Company's Stock Option Plan and Equity Incentive Plan.
(3) Based on the number of shares outstanding at, or acquirable within 60 days
of, the Record Date.
(4) Includes 3,656 equivalent shares invested in the Company's unitized stock
fund under the ARM Financial Group, Inc. Savings Plan.
* Represents ownership of less than 1% of the Company's outstanding Common
Stock on the Record Date.
17
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information concerning each person or group
of persons known to the Company as of the Record Date to be the beneficial owner
of more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (#)(*) OUTSTANDING (%)
- ---------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
Firstar Corporation................................................... 1,443,400 6.10%
Firstar Investment Research & Management Company, LLC
777 E. Wisconsin Avenue
Milwaukee, Wisconsin 53202
</TABLE>
- ------------------------
FOOTNOTE
(*) Stock ownership information is based upon information set forth in Schedule
13G, as amended, filed with the SEC in which Firstar Corporation reported
that as of December 31, 1998, it had sole voting and dispositive power over
259,985 shares, shared voting power over 1,182,390 shares, and shared
dispositive power over 1,183,415 of the shares. These shares are also
reported as beneficially owned by Firstar Investment Research & Management
Company, LLC, a registered investment adviser, of which Firstar Corporation
is the parent holding company.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In May 1998, the Company completed a public offering of approximately 12.4
million shares of its Common Stock (the "Secondary Offering") held by the Morgan
Stanley Stockholders. Prior to the completion of the Secondary Offering, the
Morgan Stanley Stockholders owned approximately 53% of the Company's equity
securities. In 1998, MS&Co. served as lead underwriter of the Secondary Offering
for which it received underwriting fees of $4,667,000. MS&Co. also served as
lead underwriter of the Company's public offering of its Preferred Stock in July
1998 for which MS&Co. received underwriting fees of $407,000. In addition,
MS&Co. has performed financial advisory services for the Company in the past in
connection with specific transactions and may do so in the future. The Company
paid MS&Co. approximately $15,042 in 1998 for these and other miscellaneous
services.
From time to time, in the ordinary course of business, certain of the
Company's subsidiaries have purchased, and may in the future purchase,
securities in public offerings where MS&Co. was the sole, lead or co-manager or
underwriter. Based on transactions of similar size and nature, the Company
believes that the fees received by MS&Co. were no less favorable to the Company
than would be available from unaffiliated third parties.
During a portion of 1998, Alan E. Goldberg, Robert H. Niehaus and Frank V.
Sica served as Directors of the Company. Messrs. Goldberg and Niehaus are
Managing Directors of MS&Co. which controls the Morgan Stanley Stockholders, and
Mr. Sica was a Managing Director of MS&Co. from 1988 to 1998. Mr. Sica resigned
as a Director of the Company in February 1998, and Messrs. Goldberg and Niehaus
resigned from the Board following completion of the Secondary Offering. Mr.
Raymond, a Vice President of MS&Co., remains a Director of the Company.
18
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, requires the Company's Directors and
executive officers and persons who own greater than 10% of a registered class of
the Company's securities, to file reports of holdings and transactions in the
Company's securities with the SEC and the NYSE. Based on Company records and
other information, the Company believes that during 1998 all SEC filing
requirements applicable to its Directors and executive officers and greater than
10% stockholders were met, except that a Form 4 covering a single transaction
for Dennis L. Carr was inadvertently filed late. Upon discovery, this oversight
was promptly corrected.
RELATIONSHIP WITH INDEPENDENT AUDITORS
As recommended by the Audit Committee, the Board of Directors appointed
Ernst & Young LLP to audit the financial statements of the Company and its
subsidiaries for the fiscal year ended December 31, 1998. Ernst & Young LLP has
served continuously since 1993 as independent auditors for the Company.
Representatives of the firm will be present at the Annual Meeting. They will be
given an opportunity to make a statement if they desire to do so, and they will
be available to respond to appropriate questions.
OTHER MATTERS
As of the date of this Proxy Statement, management did not know of any other
matters to be brought before the Meeting other than those described in this
Proxy Statement. If any matters properly come before the Meeting that are not
specifically set forth on the proxy card and in this Proxy Statement, the
persons appointed as proxies will vote thereon in accordance with their best
judgment.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be included in next year's proxy materials
for presentation at the 2000 annual meeting of the stockholders must be
submitted in writing to the Secretary of the Company at 515 West Market Street,
Louisville, Kentucky 40202, no later than December 2, 1999. In addition, the
Company's By-laws provide that any stockholder wishing to nominate a candidate
for Director or propose other business at the annual meeting must give the
Company written notice not less than 60 days nor more than 90 days prior to the
anniversary date of the previous year's annual meeting, and the notice must give
certain other information as described in the By-laws. Copies of the By-laws are
available to stockholders free of charge upon request to the Company's
Secretary.
FINANCIAL STATEMENTS
The Company's 1998 Annual Report to Stockholders, containing financial
statements for the Company and its consolidated subsidiaries is included with
these proxy materials. If you would like more detailed information about the
Company, you may obtain a copy of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, as filed with the SEC, by writing to Investor
Relations, ARM Financial Group, Inc., 515 West Market Street, Louisville,
Kentucky 40202.
By Order of the Board of Directors,
[SIGNATURE]
Patricia L. Tackett
SECRETARY
Louisville, Kentucky
March 30, 1999
19
<PAGE>
- -------------------------------------------------------------------------------
PROXY PROXY
ARM FINANCIAL GROUP, INC.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202-3319
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ARM FINANCIAL GROUP, INC. ANNUAL MEETING OF THE
STOCKHOLDERS ON MAY 14, 1999
The undersigned hereby appoints John R. McGeeney, Peter S. Resnik and
Edward L. Zeman, and each of them, with full power of substitution, as
proxies to vote, in the manner designated on the reverse side of this form,
all shares which the undersigned would be entitled to vote if personally
present at the ARM Financial Group, Inc. Annual Meeting of the Stockholders
to be held in the Grand Ballroom of the Hyatt Regency Hotel, located at 320
West Jefferson Street, Louisville, Kentucky, on May 14, 1999, beginning at
9:00 a.m. local time, and at any meeting following adjournment thereof, upon
the following proposal and such other matters as may properly come before the
meeting.
ELECTION OF DIRECTORS: Nominees for Director are Edward D. Powers, Colin F.
Raymond and Martin H. Ruby
(CONTINUED AND TO BE VOTED AND SIGNED ON THE REVERSE SIDE.)
- -------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
<PAGE>
Please mark
your vote as /X/
indicated in
this example
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREON
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF THE THREE NOMINEES FOR DIRECTOR.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE ELECTION OF EACH NOMINEE
FOR DIRECTOR.
FOR WITHHELD
ELECTION OF DIRECTORS: / / / /
FOR, except vote withheld from the following nominee(s):
- -------------------------------------------------------------------------------
Nominees for Director: Edward D. Powers, Colin F. Raymond and Martin H. Ruby
Dated , 1999
-------------------------
- ------------------------------------
- ------------------------------------
IMPORTANT: Please sign exactly as name(s) appears on this proxy card. If
shares are held jointly or by two or more persons, each stockholder named
should sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation, please sign in
full corporate name by President or other authorized officer. If a
partnership, please sign in full partnership name by authorized persons.
NOTE: Please date, sign and promptly return this proxy in the enclosed envelope.
No postage is required for mailing in the United States.
- -------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
<PAGE>
ARM FINANCIAL GROUP, INC.
515 West Market Street
Louisville, Kentucky 40202-3319
CONFIDENTIAL VOTING INSTRUCTION CARD
ARM FINANCIAL GROUP, INC. SAVINGS PLAN
INSTRUCTIONS SOLICITED BY FIDELITY MANAGEMENT TRUST COMPANY
FOR THE ARM FINANCIAL GROUP, INC.
ANNUAL MEETING OF THE STOCKHOLDERS ON MAY 14, 1999
The undersigned hereby instructs Fidelity Management Trust Company, the
Trustee of the ARM Financial Group, Inc. Savings Plan, to vote, in the manner
designated on the reverse side of this card, all share equivalents credited
to the account of the undersigned under the Savings Plan, at the ARM
Financial Group, Inc. Annual Meeting of the Stockholders to be held in the
Grand Ballroom of the Hyatt Regency Hotel, located at 320 West Jefferson
Street, Louisville, Kentucky, on May 14, 1999, beginning at 9:00 a.m. local
time, and at any meeting following adjournment thereof, upon the following
proposal, and in its discretion, or such other matters as may properly come
before the meeting.
ELECTION OF DIRECTORS: Nominees for Director are Edward D. Powers, Colin F.
Raymond and Martin H. Ruby
(CONTINUED AND TO BE VOTED AND SIGNED ON THE REVERSE SIDE.)
FOLD AND DETACH HERE
<PAGE>
Please mark your vote as
indicated in this example /X/
THESE INSTRUCTIONS WHEN PROPERLY EXECUTED WILL BE VOTED BY THE TRUSTEE IN THE
MANNER DIRECTED HEREON BY THE UNDERSIGNED. IF THESE INSTRUCTIONS ARE NOT
RECEIVED BY THE TRUSTEE BEFORE MAY 10, 1999, THE INTEREST ATTRIBUTABLE TO THE
UNDERSIGNED UNDER THE SAVINGS PLAN WILL NOT BE VOTED. YOUR INSTRUCTIONS TO
THE TRUSTEE WILL BE TABULATED CONFIDENTIALLY, AND WILL NOT BE DIVULGED OR
REVEALED TO ANYONE AT ARM FINANCIAL GROUP, INC.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH NOMINEE FOR
DIRECTOR.
ELECTION OF DIRECTORS: FOR WITHHELD
/ / / /
FOR, except vote withheld from the following nominee(s):
________________________________________________
Nominees for Director: Edward D. Powers, Colin F. Raymond and Martin H. Ruby
DATED: ________________________, 1999
_____________________________________
_____________________________________
IMPORTANT: Please sign exactly as name(s) appears on this voting
instruction card. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
NOTE: Please date, sign and promptly return this card in the enclosed
envelope. No postage is required for mailing in the United States.
- ------------------------------------------------------------------------------
FOLD AND DETACH HERE
